1997 Reports

Going Global: Transition from Plan to Market in the World Economy

Desai, Padma B.

This essay analyzes the continuing integration of several transition economies of Europe, the former Soviet Union (FSU) and Asia into the world trading and financial system in the period 1990-95. Suitable norms are developed in the essay for comparing and ranking the integration record of the countries and for addressing the critical issue of the transition debate, i.e. whether speedier reform has facilitated their faster entry into the world economy. Among the countries included for the comparative performance are Czech Republic, Hungary, and Poland in Central and East Europe; Estonia, Latvia and Lithuania in Northern Europe; Russia, Kazakhstan and Uzbekistan among the post-Soviet states; and China, Vietnam and India in Asia. Given the small sample, the conclusions are tentative but nevertheless interesting. Reform speed, as defined in the essay, appears to be significantly correlated with the GDP growth rate, with the emergence of a liberalized foreign exchange and trade regime by the end of the period studies, and also with positive globalization outcomes such as increased direct foreign investment flows (measured as their contribution to gross fixed investment when the period examined ends). It also correlates well with declining inflation rate over the period but somewhat poorly with the decline of inflation from its peak to the next year in the "shock therapy" mode. Speedy reform thus seems desirable, for its general economic results as for globalization. However, this conclusion must be tempered by the fact that speedy reform seems to be associated negatively with the unemployment rate, so that we may well be facing a short-run tradeoff between growth and globalization on the one hand, and unemployment, on the other. In practice, these short-run tradeoffs could mean that speedy reform may not be politically sustainable.