Resource Misallocation and Strain: Expanding Shocks in Post-Command Economies

Daniel Daianu

No 96, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: A fundamental tenet in economic theory - which was confirmed by reality - is that a command system allocates resources poorly because of the impossibility of economic calculation'. Therefore, once prices are freed and start to operate at quasi-equilibrium (market-clearing) levels, the hidden inefficiencies come into the open and a massive resource reallocation would have to take place - from low to high productivity areas. More precisely, the issue refers to the possible and probable intensity of resource reallocation in view of constraints such as: the balance between exit and entry in the labor market, the size of the budget deficit and the means for its non-inflationary financing, social and political stability, etc. This paper argues that the magnitude of the required resource reallocation - the imbalance between exit and entry - brings about tremendous strain in the system. It also submits that when the expansion of the private sector is slow, the foreign support is insufficient, the external (negative) shocks are powerful, and the underground economy is not effective enough in absorbing the labor shed by the official economy, the strain in the system can lead to its growing destabilization. By looking at post-command economies, mainly, this study makes an attempt to show why strain emerges within an economic system and what are implications for stabilization policy. A formalized expression of strain is suggested and illustrated for both closed and open economy cases. The distributional struggle, as a consequence of resource reallocation, is highlighted. Taken as an example it is argued that inter-enterprise arrears are a symptom of strain. The line of reasoning espoused herein can help in explaining shocks in post-command economies.

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Date: 1997-11-01
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