Dualism and growth in transition economies: a two-sector model with efficient and subsidized enterprises

We develop a two-sector growth model distinguishing between a private sector consisting of profit-making firms and a state-controlled sector consisting of subsidized firms. Both sectors produce the same good. The private sector generates learning-by-doing and technological spillovers, while the state-controlled one is technologically obsolete and ‘stagnant’. This distinction allows tracing the dual-economy stage of development observed in transition economies. While in some of them the period in which profit-making and loss-making enterprises coexist was rather brief, some continue to display this pattern because of their industrial legacies and politicoideological preferences. The model predicts that—ceteris paribus—the larger is the initial fraction of the workforce employed in the obsolete sector and the stronger is the degree of ideological hostility towards market forces, the lower is the speed at which a transition economy will converge to the income level of the most advanced countries.Dual economy, endogenous growth, transitional economies

Essays on Growth and Development in Post-Socialist Countries

This dissertation seeks to contribute to the ongoing debate on the variety of post-socialist developmental trajectories by analyzing specific country cases and factors. The origins of distinct development paths are traced to early policy decisions, formation of tax regimes, and the shifting balance between demand for, and supply of, redistribution. An important feature of the transition economies is the varying propensity of policy-makers to control the speed of market reforms. Policy discretion has been restricted by self-imposed economic transnationalization, i.e., the opening of the financial and production sectors to the penetration of foreign capital. Post-socialist economies have varied with respect to the timing of their transnationalization and to the strength of the associated monetary and financial discipline, which have far-reaching implications for their competitiveness. The examination of existing cases of delayed reforms, such as in Belarus, further uncovers the nuances of formation of divergent post-socialist trajectories. This process is riddled with an inescapable conflict between backward and advanced sectors. Domestic social forces are often unable to reach a negotiated, consensual solution to this conflict, thus opening an avenue for transnationalization. If this conflict is left unresolved, dual economies tend to emerge, and are characterized by the coexistence of a sector of subsidized enterprises with a sector of profit-making and more efficient companies. In order to trace the dynamics of dual economies, the dissertation develops two analytical models encapsulating the factors behind the inter-sectoral conflict and the policy instruments, including taxation and financial repression in the form of directed lending. A continuous use of these policy instruments has clear-cut implications for investment and economic growth over the long run. A case is made to show the conditions under which dual economies are sustained over prolonged periods, but do not necessarily become more efficient and stable. The first model predicts that – ceteris paribus – the speed at which dual economies converge to the income level of the most advanced countries is reduced by the legacies of industrial employment and ideological hostilities towards reforms. The second model, which captures some important properties of the Chinese economy, demonstrates that in dual economies financial repression can lead to economic growth, but it occurs at the expense of savers’ well-being