What is a transitional economy? We use this term to characterize former socialist economies engaged in the process of establishing market institutions, but it may also distinguish any economy, which attempts to expand the roles of private ownership, investment, and entrepreneurship and to provide market-supporting governmental and legal institutions. Transitional economies are characterized by rapid and significant changes in institutional arrangements. Members of the society face changes in relative prices and in the structure of economic activity combined with high risk and uncertainty.
The Twentieth Century was an era in which, briefly, almost half of the world’s population was governed by Marxist states. These states transferred the ownership of land, resources, and physical capital stocks to the government and established centralized administrative mechanisms for managing production. Today, most of these Soviet-style economic systems are gone as major economic reform programs evolve in dozens of formerly command economies to put in place institutions underpinning what their policy-makers define as a “normal economy.” By “normal”, they mean a system in which independent individuals may enjoy private ownership of land, housing, and assets and are free to establish independent enterprises. Individuals may enter into voluntary, mutual exchange in markets at market-determined prices and enjoy the benefits of investing in productive assets and activities.
After twenty years of experience, there is great variation in the institutions of public governance in these countries and in their economic performance. What can we learn from this mammoth social experiment? How did some transitional economies embark on a path of rising growth and welfare while others suffer stagnation and poverty? To understand the role of institutions in economic performance, we look at the incentive features of administrative and market institutions and the effects of economic arrangements, focusing on macroeconomic stabilization, market liberalization, property rights, enterprise governance, and the role of the state in providing public infrastructure and rule of law.
1. Applied Goals
The goal of the course is to survey the historical experience of a sample of economies undergoing rapid institutional change. We apply microeconomic principles to an understanding of the choices and constraints policy-makers face and the performance outcomes they experience.
Explore how institutional choices of policy-makers impact economic growth, poverty, and welfare and how economic performance influences formation of institutions.
Understand how administrative decision-makers collect information and make decisions in non-market environments and how individuals and firms make choices subject to market constraints.
Understand how government policies affect the allocation of resources in a command economy and in a market economy.
Understand how prices in a market system inform the decisions about what to produce, how to produce it, and who gets it.
2. Problem-Solving Goals
Apply microeconomic theory to an understanding of the role of institutions in a variety of administrative and market systems.
Understand how economic arrangements influence the behavior of decision-makers, focusing on incentives, constraints, and sources of uncertainty.
Understand how institutional constraints and incentives impact the economic environment faced by individuals.
Use game theory to explain the strategic choices of individuals when outcomes depend on the strategic actions of more than one player.
Use the theory of risk to understand how individuals respond to uncertain economic outcomes.
Understand how market structure influences the allocation of resources.