Economic Reforms Versus Central Planning and Monoparty Control

After almost fifty years of existence (or in the case of the Soviet Union seventy years, a period long enough for a new economic system to demonstrate its advantages), socialist economies have run into serious trouble. While both the high foreign debt and galloping inflation experienced by Yugoslavia are shared by a number of capitalist economies, low efficiency and the resulting comparatively low standards of living appear to be specific features of socialist economies. As shown by Bergson (1987), net labour productivity in the main East European socialist countries is about 30 per cent lower after adjusting for the variation in capital intensiveness compared with capitalist economies. My own estimates of the efficiency of investment for Yugoslavia in Bajt (1987) roughly agree with this. A gap of 30 per cent does not appear excessive. Yet, if it persists long enough, it causes the actual gross domestic product (GDP) to lag far behind the potential. In the case of Yugoslavia in the period after 1950, my estimates show that by 1980 the former fell more than 50 per cent behind the latter. This identifies socialist economies as poverty economies, as opposed to Kornai’s (1979) shortage economies.