Perestroyka and its implications for European socialist countries

Bela Balassa

No 428, Policy Research Working Paper Series from The World Bank

Abstract: Perestroyka, introduced in the Soviet Union to reform the economy after the"period of stagnation"under Brezhnev, involves combining centralized planning with elements of a market economy. For it to succeed, certain micro and macro conditions need to be fulfilled. As far as micro conditions are concerned, the interdependence of rational prices, decentralization, profit maximization, incentives, and competition should be emphasized. For commodities produced domestically, the establishment of rational prices requires that prices equate demand and supply. This, in turn, necessitates the decentralization of decision-making and profit maximization by the firm. At the same time, managers will have to be provided with appropriate incentives in order to ensure that firms maximize profits. Finally, there is need for competition to guarantee that profit maximization does not lead to the exploitation of monopoly positions and inflation. Various macroeconomic conditions also need to be fulfilled for perestroyka to succeed. The government should aim at realistic growth rates, establish a balance between investment and consumption, eliminate the overhand in the market for consumer goods and services, and drastically reduce the budget deficit.

Keywords: Environmental Economics&Policies; Economic Theory&Research; Access to Markets; Markets and Market Access; Banks&Banking Reform (search for similar items in EconPapers)
Date: 1990-05-31
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