Working Paper No. 9
An Introduction of the Market Mechanism
into the CIS Economy
by
Katsuhiro Miyamoto
Faculty of Economics
Osaka Prefectural University
April 1992
Department of Research Cooperation
Economic Research Institute
Economic Planninig Agency
Tokyo, Japan
Any opinions expressed here are those of the author and not those of the institution to
which the author belongs.
An Introduction of the Market Mechanism
into the CIS Economy
Osaka Prefectural University
Katsuhiro Miyamoto
Economic Planning Agency
March 1992
Table of Contents
Page
Chapter 1 Collapse of The Ex-Soviet Economy
1
1. Introduction
1
2. Reasons of the Ex-Soviet Economic Collapse
1
3. Recommendable Economic Policies for the CIS
8
4. Economic Forecast about the Russian Federation in 1992
10
Chapter 2 Introduction of the Market Mechanism into the Command Economy
11
1. Introduction
11
2. Partial Market Mechanism
13
3. Enterprise Behaviors in the Partial Market System
15
4. Concluding Remarks of this Chapter
20
Chapter 1 Collapse of The Ex-Soviet Economy
1. Introduction
At the end of the year 1991, the history of the Soviet Union was over and the Commonwealth
of Independent States was born in the catastrophic condition. In January 1992, the Russian
Federation introduced the free price system and many other Republics of CIS followed that
economic reform. At the beginning of the year 1991, no one could forecast the collapse of the
Ex-Soviet Union at the end of that year. A lot of economic, political, social, religious, and
cultural reasons about the collapse of the Ex-Soviet Union were debated. This paper will
concentrate to analyze the economic aspects about the Ex-Soviet Union and the CIS. The main
purposes of this paper are as follows,
1) to point out the reasons of the Ex-Soviet economic downfall,
2) to forecast the CIS economy in 1992,
3) to analyze theoretically about the introduction of the market mechanism into the CIS
command economy.
2. Reasons of the Ex-Soviet Economic Collapse
In March 1985, Mr. Mikhail Gorvachev came into political power in the Soviet Union. He
adopted his new political, economic and social policies. All of them were communistic and
conservative policies, for example, attaching importance to the munitions industries,
strengthening penal regulations against the illegal economic activities, introducing the
abstinence law and so on. These Gorbachev policies succeeded to the old and conservative USSR
policies.
But, after about 10 months, Mr. Gorbachev changed from his old and conservative policies to
his liberal and decentralized policies. They were, what we called, "Perestroika". Why Mr.
Gorbachev changed his policy at this point. It was because, Mr. Gorbachev realized that the
Soviet Union was behind the Western Countries about the technological progress and the
nations standards of living. Mr. Gorbachev was one of the most intelligent politicians who were
the men of international sense in the Soviet Union. He thought, the best way for improving the
Soviet technological and economic situations was to introduce the new economic system, that
is, market mechanism, decentralization, liberalization, opening information to the public and
so on.
-1-
Table 1 The USSR Basic Economic Data (billion rubles)
1980
85
86
87
88
89
90
91
Nominal GNP
619
777
799
825
875
924
970
1800
NI Produced
462
579
587
600
631
657
695
1200
I Product
672
802
837
869
905
921
980
1938
A Product
188
209
220
219
222
225
220
193
B Investment
151
180
194
205
218
229
185
132
TF Trade
94
142
131
129
132
141
131
82
Money M1
－
293
307
364
380
381
418
796
NI Produced = National Income Produced, I Product = Industrial Product,
A Product = Agricultural Product, B Investment = Basic Investment,
TF Trade = Total Foreign Trade.
Table 2 Annual Growth Rate of GNP (%)
1950－59
1960－69
1970－79
1981－85
86
87
88
89
90
91
10.5
7.0
5.3
3.7
3.3
2.9
5.5
3.0
－2.3
－17.0
90
91
Table 3 Growth Rate of Main Economic Performance (%)
1976－80 1981－85
85
86
87
88
89
NI Produced
4.3
3.2
1.6
2.3
1.6
4.4
2.4
－4.0
－15.0
I product
4.4
3.7
3.4
4.4
3.8
3.9
1.7
－1.2
－7.8
A Product
1.7
1.0
0.2
5.3
－0.6
1.7
1.3
－2.3
－7.0
B Investment
3.7
3.7
3.0
8.4
5.6
6.2
4.7
－0.6
－16.0
TF Trade
5.3
3.9
－0.4
2.3
0.6
4.5
－6.9
－7.2
－38.5
－
－
－
5.0
18.0
4.0
0.2
9.5
90.0
M1
-2-
Table 4 Central Government Budget (billion rubles)
1970
75
80
85
86
87
88
89
90
91
Revenue
157
219
303
373
372
378
379
402
452
527
Expenditure
155
215
294
387
417
431
460
483
510
767
Table 5 Oil, Natural Gas and Coal Products
1975
80
85
86
87
88
89
90
91
Oil (million t)
491
603
595
615
624
624
607
570
427
N Gas (billion m)
289
435
643
686
727
770
796
815
798
Coal (million t)
701
716
726
751
76
772
740
703
620
Table 6 Grain Product (million t)
1966－70
1971－75
1976－80
1981－85
average
average
average
average
168
182
205
189
1986
87
88
89
90
91
210
211
195
211
215
155
Table 7 Inflation Rate (%)
1981－84
85
86
87
88
89
90
91
1.0
0.7
1.8
1.6
1.5
7.5
19.0
186.0
(The data in table 1 to 7 are the Ex-Soviet and the CIS official data)
-3-
Table 8 Foreign Trade (billion rubles)
Total
Export
Import
Balance
1946
1.3
0.6
0.7
－0.1
1950
2.9
1.6
1.3
0.3
1955
5.8
3.1
2.7
0.4
1960
10.1
5.0
5.1
－0.1
1965
14.6
7.4
7.2
0.2
1970
22.1
11.5
10.6
0.9
1975
50.7
24.0
26.7
－2.7
1980
94.1
49.6
44.5
5.1
1981
109.7
57.1
52.6
4.5
1982
119.6
63.2
56.4
6.8
1983
127.5
67.9
59.6
8.3
1984
139.8
74.4
65.4
9.0
1985
142.1
72.7
69.4
3.3
1986
130.9
68.3
62.6
5.7
1987
128.9
68.2
60.7
7.5
1988
132.1
67.1
65.0
2.1
1989
140.9
68.8
72.1
－3.3
1990
131.2
60.6
70.5
－10.0
1991
81.5
43.5
38.0
5.5
(Source: Monthly Bulletin on Trade with USSR & East Europe, Jan.1980－
Jan.1992 )
-4-
First, the Soviet economic situation in 80's was analyzed. The economic development in the
USSR since 1970 was characterized by the reduction of the rate of economic growth. According
to the table 2, the real growth rate in 1950's was excellent and one in 60's was good. In 50's the
official average annual growth rate was more than 10% and in 60's it was more than 7.0%. But
the real growth rate in 70's became to fall down a little bit. In 80's the Ex-Soviet economy was
getting worse. In 1990 the Ex-Soviet Union, for the first time, went through the minus growth
rate since the 2nd World War. And, in 1991, the Soviet economic growth rate was minus 12
percent. According to the United Nations report of April 5th 1992, the Ex-USSR real growth
rate was minus 17 percent. That was a terrible figure.
The growth rate of industrial output had a tendency of decreasing in 80's. In 1990, it had the
first time minus figure. But the agricultural output was in the worst situation in 80's. The
annual growth rate of agricultural output was nearly zero percent in 80's except the year of
1986. It brought the food shortage in the Ex-USSR. The falling down in the basic investment
in 1991 was very serious. The minus 16% investment will bring a serious decreasing of GNP in
the future. It may bring the catastrophic production condition. The dropping of foreign trade is
serious, too. In 1991, the export dropped for 30%, mainly because of decreasing of the export of
energy. The import in 1991 dropped for 46%. The reduction of import negatively influenced on
the light industries, that is, food production and chemistry, highly dependent on the deliveries
of the foreign raw materials and equipment.
The government budget deficit was tremendous in 1991. It was 180 billion rubles. It was
nearly 20% of GNP. The Soviet government printed the paper money in order to cover the
government deficit. It brought a hyperinflation.
-5-
-6-
Up to the present, a lot of scholars discussed about the reasons of the collapse of the ExSoviet economy. In this paper, the reasons of the collapse of the Ex-Soviet economy will be
analyzed by using the chart 1. In chart 1, the elements on the first stage are the most important
and most fundamental factors for the collapse of the Ex-Soviet economy. They are
inconvertibility of ruble, priority on the munitions industries, inefficiency of the planned
economy, closing information and the racial problems. The problem of racial opposing includes
an opposing the Ex-Soviet Union and each republics. The elements on the second stage are the
phenomena of growing worse about production sectors, transportation sectors and
infrastructure. These phenomena are drawn from the elements on the first stage. The elements
on the third stage are the phenomena of the slump of the Ex-Soviet macroeconomic level. They
are from all the elements on the first and the second stages. The elements on the fourth stage
are the economic slump phenomena which are attacking against the civil living. They are from
all the elements on the first, the second and the third stages. The long lines of citizens in front
of the state shops are showing the shortage of consumption goods. The hyperinflation in
January 1992 was nearly 400.0 －500.0% and attacked to the citizens' living. The income
differentials among citizens is increasing. All pensioners are suffering from the hyperinflation.
On the other hand, some citizens are gainning a lot of money from the underground economy.
The unemployment was about 3 million people in the Ex-USSR 1990. But, some US institute
estimated more than 30 million unemployment in the CIS at the end of 1992. The Ex-Soviet
citizens did never experienced the inflation, an unemployment and an increasing income
differentials.
As the economy is an organic system, every element in chart 1 is connected with each other.
The arrows which come from each element show the law of cause and effect. For example,
inefficiency of the planned economy caused defective infrastructure, timeworn productive
equipment, decreasing in labor's volition on the second stage, increasing of trade deficit,
downfall of productivity in all industries, increasing government deficit on the third stage. They
brought all elements on the fourth stage, shortage of consumption goods, hyperinflation,
increasing income differentials which attacked to the Ex-Soviet citizen's living.
Thus, the Commonwealth of Independent States is drifting in the sea of crisis. The CIS
government is planning to amend the phenomena of economic collapse which attack to the
citizen's living, that is, shortage of consumption goods, hyperinflation and unemployment. It is
because that the CIS citizen is complaining against these economic phenomena. But the
economic phenomena on the fourth stage are only the superficial phenomena of the CIS
economic collapse. Therefore, the amendment of the phenomena on the fourth stage is not the
intrinsic medical treatment for the CIS economy. The essential medical treatment for the CIS
economy is the amendment to every element on the first stage in chart 1. The most important
amendment for the CIS economy is the revision of an inefficiency of the planned economy.
-7-
3. Recommendable Economic Policies for the CIS
The economic policies to solve all economic phenomena on the fourth stage in chart 1 is as
good as a first aid for a serious illness. As above-mentioned, the best amendment policy for the
collapsed CIS economy is to solve all economic problems on the first stage. The elements with
a lot of arrows in chart 1 are the important factors which cause and have influence on the
downfall of the CIS economy. Therefore, the most effective and urgent amendment for the CIS
economy is to solve the problems on the first stage which have a lot of arrows in chart 1.
The recommendable economic policies for solving all economic problems on the first stage are
as follows.
(1)
The best economic policy to amend an inefficiency of the planned economy is to
introduce the market mechanism. The CIS introduced the free price system. But, an
introduction of the market mechanism means not only the free price system, but also
privatization, increasing the production units, competitive system and so on.
In the Ex-Soviet Union, the economic structure was a system of a one-state enterprise
of one industry in one district. Therefore, without increasing the production units, a
privatization policy, that is, changing from a state enterprise system to a private
enterprise system will only bring a change from a state monopoly to a private
monopolistic system. Without increasing the production units, a free price system brings
hyperinflation which attacks to the citizen's living. According to a standard economic
textbook, the free competitive system needs many suppliers and demanders in one
market. In the Ex-Soviet Union, all producers disregarded of needs of the demanders.
There was no consumer's sovereignty. It brought an inefficiency of production. Therefore,
the most important economic policy is a creating policy of production units with the free
price system and privatization.
An introduction of foreign capital and foreign enterprises into the CIS is also important
to an increasing policy of production units.
The government has to carry out the economic policies to increase the private farmers,
to finance to the private enterprises, to change from a state firm system to a private firm
system, to fix up transportation structure and so on.
(2)
The foreign economic relations of the Ex-Soviet Union entered at the end of 1980's into
a stage of serious deep crises, that is, an export falling down and a fast growth of the
state external debt.
In 1989 and 1990, the Ex-Soviet Union had a foreign trade deficits and especially in
1990 that was 10 billion rubles. In 1991, the export fell down minus 28.2% and the import
-8-
was minus 46.1%. A falldown in export brings a decreasing in GNP and a falldown in
import causes to grow worse in citizen's living. In order to increase the foreign trade of
the CIS, the convertibility of rubles has to be guaranteed.
Generally speaking, in order that the convertibility of one nation's currency is
guaranteed by all foreign countries, that nations economic power has to be accepted by
all foreign countries. The present condition of the CIS economy has no economic power
to guarantee the convertibility of rubles. Therefore, the Western Countries are planning
to create the foreign exchange stabilization fund for ruble.
The creating of that fund will be a help to guarantee the convertibility of ruble a little
bit. But without real economic power, a makeshift convertibility of ruble will not have a
real power of convertibility.
(3)
It is not a simple problem for the CIS to change from the munitions industries to the
civilian industries. The priority on the munitions industries brought a shortage of
consumption goods, an inefficiency in the consumption industries, an increasing of
government deficits, a monopolistic ownership by the munitions industries of
information about technological and economic data, a monopolistic use by the munitions
industries of natural resources and so on. This problem is connected not only with the
CIS economy, but also with the world peace.
Therefore, the CIS government and the western countries has to give an economic help
for changing the economic structure from the munitions to the consumption industries.
(4)
The opening information to the public is developing in all field, that is, economy, politics,
culture, science, diplomacy and so on. The most successful policy which Mr. Gorbachev
adopted in Perestroika, was the opening information to the public. This is an important
factor to introduce successfully the market mechanism into the command economy. The
CIS government has to develop this opening information policy to the public. The
Western Counties have to support this CIS policy.
(5)
The conflict between the Ex-Soviet Union and the Republics disappeared. But the
conflict among the Republics lasts in the CIS. The conflict above mentioned was one of
factors which caused the Ex-Soviet economic collapse.
If each republic has own independent economic policies, the CIS economic condition
will get worse. The prohibition or the limitation of an export of the domestic products in
each republic, an issue of an independent currency of each republic, a creating an
independent military power of each republic will bring a worse economic situation. EC is
going to be a unity, but on the other hand, many republics of the CIS are going to be
separated.
-9-
The cooperation of each republic in the CIS is indispensable for amendment of the CIS
economy.
4. Economic Forecast about the Russian Federation in 1992
The economic performance of the Ex-Soviet Union in 1991 was the worst since World War II.
A lot of prospects for economic development of the CIS and the Russian Federation in 1992 are
discussed. Almost of them are pessimistic. A very few are optimistic.
In this section, according to many publications about the prospects for economic development
in 1992, the economic forecast of the Russian Federation in 1992 will be analyzed.
Even though the economic growth rate in 1992 will be estimated to be minus, the decreasing
trend of the growth rate may stop. The growth rate of GNP is estimated to be －9.8% in the
most optimistic case, and －17.0% is the most pessimistic case. Many economists estimate that
the growth rate of GNP of the Russian Federation in 1992 will be about －12%. If it will be
realized, then the decreasing trend will be stopped. According to the report of the United
Nations, the real growth rate of the CIS was minus 17% in 1991.
Economic Growth Forecast of the Russian Federation in 1992
(%)
GNP
－9.8 ～ －15.0
National Income produced
－10.6 ～ －17.0
Industrial production
－9.0 ～ －15.0
Agricultural production
－10.3 ～ －18.0
Capital Investments
－9.9 ～ －39.0
Production Investments
－35.0 ～ －38.0
Trade
－5.3 ～ －15.0
Export
－12.0 ～ －20.0
Import
－10.0 ～
+5.0
800.0 ～ 1000.0
Inflation
Government Budget (1992, billion rubles)
Revenues
Expenditures
1862.0
2104.0
(Defense Expenditure)
384.0
-10-
Growth Rate of Energy Production in 1992
(%)
Oil
－13.2
Natural gas
－0.5
Coal
－7.9
Next each production sector will be estimated.
The light industries, the food industries will be in a more favorable position from the view
point of increasing of retail prices and attracting financial resources for investment. The energy
sector will also stop the decreasing trend of production. The growth rate of natural gas will be
estimated to be －0.5%. The growth rate of oil and coal will be forecasted to be －7.9% (－12.0%
in 1991) and －13.2% (－9.9% in 1991). But the heavy industries, the machines building
industries and so on will have the same serious decreasing trend of production in 1992. The
growth rate of production investment is estimated to be －35.0 ～ －38.0% in 1992. The
agricultural sector will have serious condition in the official statistics (estimated －10.3 ～ －
18.0%), but the real output in the agricultural sector may increase in 1992. The agricultural
output in the private plots will keep the good condition. It is not recorded in the official statistics.
The foreign trade will stop the decreasing tendency in 1992. Even though the export will have
a bad situation by a stagnation of production of natural resources, the import may increase
with the foreign economic help. The government budget may grow worse in 1992. In 1991 the
government deficit was 180 billion rubles. In 1992, the tax revenue will seriously decrease and
on the other hand, the expenditure will increase to pay the pensions, the wage, the
compensation for inflation and so on. The government deficit may bring the hyperinflation
again.
In conclusion, the Russian economy will continue the condition of crisis in 1992. But if the
balanced government budget will be maintained, the hyperinflation will be calmed down, and
the productivity of the light industries and the energy industries will be increase, then the
economy of Russia will have a chance to get out of the state of crisis in 1993.
Chapter 2 Introduction of the Market Mechanism
into the Command Economy
1. Introduction
-11-
On the 19th of October 1990, the Soviet Union decided to adopt the new economic plan. This
new economic plan had many kinds of economic reform policies, introducing the market
mechanism, non-nationalization, decreasing of the government deficit, pursuing of economic
efficiency, financial reforms, and so on.
In spite of "Perestroika" since 1987, the Soviet economy has not improved. The Soviet
economy is bothered with the shortage of food and consumption goods, high inflation,
unemployment, government deficit, high defense cost, income differentials and so on. Then it
seems that the adoption of the new economic plan in 1990 was the last economic policy to
improve the Ex-Soviet economy for Mr. Gorbachev. The main purpose of this new economic plan
is the introduction of the market mechanism. President Yeltsin succeed to this economic reform
of introducing the market mechanism. But, because of the pressure from the conservative party,
it seems that the CIS government is thinking that the market mechanism which it is planning
to introduce is not a perfect market mechanism, but a partial one. That is, the CIS government
want to control the industries of energy, information, defense, cosmos, transportation and so on.
On the 4th June of 1990, the Ex-Soviet government enacted "The New Enterprise Law". It
said that many kinds of enterprises, that is, state enterprise, republic enterprise, selfgovernment enterprise, private enterprise, cooperative enterprise, family enterprise and so on,
were recognized in the Ex-Soviet Union. These enterprises have to function in economic
activities under the system of partial market mechanism which stand side by side with the
command economy.
On the 2nd January of 1992, President Yeltsin introduced the free price system except some
consumption goods and some fuel products.
The purposes of this introduction of the free market system were,
(1) to increase the consumption and production goods in the official market,
(2) to cut down the subsidies to the loss state enterprises in order to decrease the
government deficits,
(3) to stop the inflow of goods into the black market from the official market,
(4) to absorb the overissue of printed money.
But, this introduction of the free market system unfortunately brought the hyperinflation. It
was because, that the government did not put into operation of increasing the production units.
The Commonwealth of Independent States introduced many free market policies, that is, free
price system, privatization, liberalization, decentralization and so on. In this paper, we call the
economic system in which the market mechanism and the planning economy are both
functioning at the same time," the partial market economy."
In this paper, first, we will prove that the partial market mechanism system will not always
-12-
guarantee the Pareto Optimum. Secondly, we will analyze how the CIS enterprises will function
under the partial market mechanism in the short period. Finally, we will consider the balanced
growth path in the long period under the system of the partial market mechanism.
2. Partial Market Mechanism
In this section, first it is proved that the partial market mechanism is not always guarantee
the Pareto Optimum and the efficient production. It is supposed that two kinds of goods are
produced, 𝑌1 and 𝑌2 . We also suppose, the society employs two kinds of resources, capital (K)
and labor (L) and the total amounts of these resources are given K and L.
The social production function is given as follows,
f(𝑌1 , 𝑌2 , 𝐾, 𝐿) = 0
(1)
Under the condition of the given total amount of capital (K) and labor (L), the social
production possibility frontier is drawn in figure 1. It is concave to the origin.
The social welfare function is a function of two kinds of goods, 𝑌1 and 𝑌2 .
𝑈 = 𝑈(𝑌1 , 𝑌2 )
(2)
The social indifference curve which depends on the above social welfare function is drawn
in figure 1. It is convex against the origin.
-13-
In figure 1, under the perfect competition, on point E where the social indifference curve is
tangent to the social production possibility frontier, the Pareto Optimum is guaranteed. The
slope of tangency on point E is the equilibrium relative price ratio (𝑃∗ 1/𝑃 ∗ 2), and 𝑌 ∗1 and 𝑌 ∗ 2
are the optimal products, as everybody knows.
Next, we analyze the case of the partial market mechanism, that is the adjustment
mechanism in which the market mechanism is side by side with the command economy.
Suppose that the CIS government controls the first production sector and commands the prior
production order 𝑌̅1 to all productive subjects. These productive subjects have to produce that
̅ and 𝐿̅ respectively in order to produce 𝑌̅1 . Then the
production order 𝑌̅1 and employ 𝐾
̅ and 𝐿 − 𝐿̅ in order to produce two kinds of goods in the free
society has to employ 𝐾 − 𝐾
market.
The social production function is,
f(𝑌1 , 𝑌2 , 𝐾 − 𝐾, 𝐿 − 𝐿 ) = 0
(3)
The social production possibility frontier based on the equation (3), is shown in figure 2. It is
smaller than the one based on the equation (1).
The equilibrium point in figure 2 is E' where the social indifference curve is tangent to the
social production possibility frontier based on the social production function (3). In the market
the amount of two kinds of goods 𝑌′1 and 𝑌′2 are produced respectively. The equilibrium price
in the partial market system is the slope of tangency on point E' that is 𝑃′1 /𝑃′2 . Then this
-14-
society has the total amount of products 𝑌̅1 + 𝑌′1 of the first goods and 𝑌′2 of the second goods.
In the perfect competitive market system, the total amount of products and 𝑌 ∗1 and 𝑌 ∗ 2 are
the equilibrium outputs and guarantee the Pareto Optimum and the effective production. On
the other hand, in the partial market system the equilibrium total outputs are 𝑌̅ + 𝑌′1 and 𝑌′2
respectively.
Then we will consider the reasons why the total outputs, 𝑌̅1 + 𝑌′1 and 𝑌′2 in the partial
market system, do not necessarily guarantee the Pareto Optimum and the effective production.
First, the equilibrium relative price in the partial market system (𝑃′1 /𝑃′2 ) based on the
equations (2) and (3) is not always equal to the equilibrium relative price in the perfect
competitive system (𝑃∗1 /𝑃∗ 2) based on the equations (1) and (2). That is, the following inequality
may be held.
𝑃′1 𝑃 ∗1
≠
𝑃′2 𝑃 ∗ 2
Secondly, the equilibrium outputs 𝑌̅1 + 𝑌′1 and 𝑌′2 based on the equations (2) and (3) are
not always equal to 𝑌 ∗1 and 𝑌 ∗ 2 which guarantee the Pareto Optimum and the effective
production. That is, there is the possibility that the following inequalities are held.
𝑌1 + 𝑌′1 ≠ 𝑌 ∗1
𝑌′2 ≠ 𝑌 ∗ 2
Finally, there is the possibility that the production order of the CIS government (𝑌̅1) exceeds
the optimal output 𝑌 ∗1 . For example, if the first goods is a weapon, we can easily suppose that
possibility. In that case, the following inequality is held.
𝑌1 + 𝑌′1 > 𝑌 ∗1
The case is shown in figure 3.
In these cases, the outputs 𝑌̅1 + 𝑌′1 and 𝑌′2 are not equal to 𝑌 ∗1 and 𝑌 ∗ 2 respectively. Then
the equilibrium in the partial market system does not always guarantee the Pareto Optimum
and the effective production.
3. Enterprise Behaviors in the Partial Market System
In this section, we analyze the CIS enterprise behaviors in the system of partial market
mechanism in which the market mechanism stands side by side with the command economy.
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[1] Economic Model
It is supposed that one enterprise has two production sectors, the first sector is commanded
by the government and the second is the private sector in which the enterprise can produce the
second goods freely. 𝑌1 is the output of the first sector. We assume that the production function
of 𝑌1 is the following Leontief type function.
𝑌 = 𝑎𝐿1
(4)
𝐿1 is a production resource, 𝑎 is a production coefficient of 𝐿1 . The government commands the
production order 𝑌̅1 and buys it from each enterprise directly by the government price 𝑃̅1 .
Each enterprise can sell the production remainder of the first goods 𝑌1 − 𝑌̅1 in the free market.
It is assumed that the production function of the second goods, which each enterprise can
produce and sell freely, is the Neoclassical production function.
𝑌2 = f(𝐿2 )
(5)
In the short period, the total amount of production resource given (L).
(6)
𝐿 = 𝐿1 + 𝐿2
Each enterprise maximizes its profit. The profit function is,
𝛱 = 𝑃1 (𝑌1 − 𝑌̅1 ) + 𝑃̅1 𝑌̅1 + 𝑃2 𝑌2 − (𝑤1 𝐿1 + 𝑤2 𝐿2 )
(7)
𝑤1 is the official price of the resource which the government supplies to each enterprise in
proportion to the government production order. 𝑤2 is the market price of the production
resource. 𝑃1 and 𝑃2 are the market prices of the first and the second goods in the free market,
respectively.
It is assumed that each enterprise produces the amount of first goods more than the
government order 𝑌̅1 , and the official price 𝑃̅1 is lower than the market price 𝑃1 .
𝑌1 > 𝑌̅1
𝑃1 > 𝑃̅1
[2] Equilibrium Condition
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The equilibrium condition of each enterprise is as follows,
p1 𝑎 − w1 =p2 f ' − w2
(8)
This means that the marginal profit of the resource in the first sector is equal to one of the
second sector.
The necessary condition of existence of the equilibrium solution is,
min f '<
p1 𝑎-w1+w2
< max
p2
f′
(9)
The second sufficient condition of profit maximization is that the Bordered Hessian is positive,
and we stand for it by D.
0
0
-1
| 0 P2 f" -1| = 𝐷 > 0
-1 -1
0
[3] Comparative Statics
(1) Change of the market price of the first goods
𝜕𝐿1 𝑎
= >0
𝜕𝑃1 𝐷
𝜕𝐿2 −𝑎
=
<0
𝜕𝑃1
𝐷
An increase of the market price of the first goods increases the production of the first goods and
decreases the one of the second goods, and vice versa.
(2) Change of the price of the second goods
𝜕𝐿1 −f '
=
<0
𝜕𝑃2
𝐷
𝜕𝐿2 f '
= >0
𝜕𝑃2 𝐷
When the demand for the second goods increases in the free market and the price of the second
goods goes up, then the production of the second goods increases, and vice versa.
(3) Change of the production efficiency in the first sector
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𝜕𝐿1 𝑃1
= >0
𝜕𝑎
𝐷
𝜕𝐿2 𝑃1
= <0
𝜕𝑎
𝐷
When the production efficiency in the first sector goes up, each enterprise wants to increase the
output of the first sector and the amount of the second goods in the market decreases, and vice
versa.
(4) Change of the official price of resource
𝜕𝐿1 −1
=
<0
𝜕𝑊1
𝐷
𝜕𝐿2
1
= >0
𝜕𝑊1 𝐷
An increase of the official price of resource naturally decreases the output of the first goods and
increases the one of the second goods, and vice versa.
(5) Change of the market price of resource
𝜕𝐿1
1
= >0
𝜕𝑊2 𝐷
𝜕𝐿2 −1
=
<0
𝜕𝑊2
𝐷
When the price of resource in the wholesale market goes up, each enterprise decreases the
output of the second goods and increases the one of the first goods, and vice versa.
According to the above comparative static analysis, the behaviors of each enterprise are
understandable for us. When one parameter change has the possibility to increase the profit of
the first sector, then each enterprise increases the output of the first sector and decreases the
one of the second sector, and vice versa.
[4] Balanced Growth Path
In this part, we will analyze the balanced growth in the long period. y stands for the ratio of
two kinds of goods, 𝑌2 and 𝑌1.
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𝑦=
𝑌2
𝑌1
(11)
𝑦̇ stands for the differential of 𝑦 by time and l2 stands for the resource ratio (𝐿2 /𝐿).
l2 =
𝐿2
𝐿
(12)
From the calculation of the equation (11), the following equation is obtained.
𝑦̇
f ' (l2 )
1
= l̇2 (
−
)
𝑦
f(l2 ) l2 − 1
(13)
l2 * which satisfies the equation (14), guarantees the existence of balanced growth path.
f ' (l2 )
1
=
f(l2 ) l2 − 1
(14)
When l2 =l2 *, then the first and the second goods grow up at the same rate.
If l2 >l2 *, then the second goods grow up at the higher rate than the first goods.
If l2 <l2 *, then the second goods grow up at the lower rate than the first goods.
It supposed that the first production sector is a munitions industry and the second is a
consumption industry. In the Ex-Soviet economy, the priority of the first sector was very large,
then l2 was smaller than l* 2 . In that case, from the above differential equation, the
equilibrium l* 2 has never achieved with lapse of time. Therefore, the Ex-Soviet had a lot of
weapons and a shortage of the consumption goods.
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4. Concluding Remarks of this Chapter
This chapter analyzed the introduction of the market mechanism into the Ex-Soviet type
command economy. Then, this paper proved the following results. First, the partial market
system, in which the market mechanism is side by side with the command economy, does not
always guarantee the Pareto Optimum and the production efficiency. Secondly, the existence of
the equilibrium solution of enterprise analysis and the comparative static analysis in the
partial market system, were analyzed. Finally, it is proved that there is the possibility in which
the balanced growth path is existent.
Each CIS enterprise which is in the face of introducing the market mechanism, has to solve
the following problems,
(1) how to set the price of each product which covers the marginal cost,
(2) how to produce the high quality goods which have the international competitive power,
(3) how to manage each enterprise without the government financial help,
(4) how to employ the production resources from the wholesale market,
(5) how to employ the high quality labor and to fire the low quality labor,
(6) how to sell the products in the competitive market.
It is a serious and a difficult problem for the CIS to introduce the market mechanism in a
short period.
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экономическая
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