The Structural Barrier to Transition: A Note on Input- Output Tables of Centrally Planned Economies

Abstract:     
The paper argues that a key legacy of the Soviet-type command economy is the highly inefficient, often value- destroying, structure of factor use and economic interaction. This structure was sustainable only by virtue of distorted prices and the force of command that maintained interactions necessary to its continued operation, but was as far from mutually beneficial for the agents involved. Yet, as illustrated in examples, Input-Output tables could be drawn up displaying sectoral average-cost covering in those prices, thereby hiding economic irrationality of the interactions.When liberalization frees prices and renders agents responsible for their own survival, the non-viability of the inherited structure of production is revealed, forcing a breakdown of economic interaction and spiralling price increases as each agent tries to cover true costs despite the inability of the technological structure to produce output valued above those costs, as again illustrated in a series of examples.This generates a cost-push inflation that can only be dealt with by substantial restructuring at both the firm and industry level, requiring an investable surplus which the inherited structure of production cannot produce.

JEL Classification: C67, D46, E31, P21, P22

working papers series