Dialogue  April-June, 2010, Volume 11 No. 4

Theoretical Vector in Study of the Transformation of the National Economy

 Ayupov Asylbek Nurgazievich*

The basic conditions which are specific to the transformation of economy continue to define the new relations between former system and the new one.

      It is possible to ennumerate three groups of social-economic problems which have become relevant since the breakdown of the command and administration economy around which current discussions are carried on. Firstly the interlinked problems of liberalization and macroeconomic stabilization. The crisis of the system in most of the countries concurred with a financial-budget (macroeconomic) crisis, and a problem of the transformation to the market economy (liberalization) to combat inflation.

    Secondly, the challenge of the concept of "private property", to the existing of “national” monopoly. Lot of ambiguities in theory as well as in practice remain unresolved. And the answers to that or other model of development related to the appropriate and optimal way of privatization may settle only with experience in post-socialist transformation. Certain discussions about this problem have been carried on since the mid-eighties of the last century, without any concrete conclusions. According to the opinion of I.G. Minervin1, the famous “Theorem of Ronald Coase” that is described in his article, “The Problem of Social Cost” (1960) “it is not of great importance how the property is divided as long the ownership rights were clearly defined”2.

     However, the experience has shown that only legitimation of right to property for creation of property relations appeared to be insufficient.  In our opinion, in the current case, specific difficulties of the privatization process, in the former socialistic countries, including Kyrgyzstan, for  known historical reasons should also be taken into account. Problems of the competitive atmosphere, without which the privatization can not be effective, are not considered here.

     Thirdly, possibilities and perspectives of the economic growth remained separate problems. These include necessity of the alterations of the economic structure of the post-socialistic societies, ways of adaptation of the industrial economies to the post-industrial requirements as well as ability of one or another post-socialistic country, in course of time, to get to the level of the economic growth and the community welfare norms of the developed countries.

     Contradictory points of view on some principal issues are visible within the framework of the transitional economy. For example, it is practically common thesis that liberalization of the structure of society underlies a post-socialistic transition. However, contrary view points refer to the famous experience of Chile. The theory of the post-socialistic transition by a “great leap forward” method (or, the same as “shock therapy”) is opposed by the followers of the evolutionary transformation of economy from state-controlled to market one as exemplified by  Uzbekistan and Belorussia. However, it appears that common references to the experience of China and Vietnam, where socialistic development has been realized so far basically by evolutionary way, are not sound arguments. Market relations have followed significant social and political changes in these countries, but, doubtless, these have developed under substantial influence of the change in global ecomony and internal factors of the national economy transformation.

   However the internal evolutionary as well as external factors of transformation are not in synch and are a matter of great concern.

   Ten years after, precipitate transformation of countries with centralized planning into countries with market economy has had uneven progress in different countries. Some of the countries are nearing completion of the process, while others are stuck on the way, and some have hardly gotten under the way. Most of the countries of the Central and Eastern Europe as well as Baltic states became full-fledged members of the European Union. In many countries of the CIS including the Kyrgyz Republic the progress was uneven and the perspectives remain cloudy.

      Centuries-long Kyrgyz history, where the Soviet period holds a special place, is a primary to such a position. In contradistinction from many other CIS countries (Eastland, Russia, Ukraine etc.) and European socialistic countries, the Kyrgyz nation transited from feudalism to socialism, and only then to capitalism. The question about what the Kyrgyz economy would be, viz, the last century socialism or capitalism is still open. The period of development of socialistic society of Kyrgyzstan, deserves critical  appraisal, the negative as well as positive consequences.

       Optimism during the first years of the transformation, when it seemed that “correct” western theoretical and methodological approaches supported by high macroeconomic rates achieved by the western countries were tempered by more sober estimate of the chances of these approaches to influence the transformation process. Besides, we are talking about the adequacy of the accumulated analytical potential of the transformation performance targets and about what views from the variety of existing views and concepts may be the best for the transforming economies.

   It is of prime importance, when we face deep social-economic transformations, it is essential to conceptualize about the necessity of transformation and the ways of its realization.

    Interpretation of the results achieved during the reforms predetermines the following steps into their realization where market liberalization intimately connected with import of the western tools is a fundamental principle. Indeed, liberalization of the economic relations allows to get  persistent free of deficit and government failure, and, encourages the tools of the market economy including entrepreneurship, innovative activity and investment ability. However, this transformation process in terms of the market tools represents assertions of the new economic relations in the sphere of production, exchange, acquisition and consumption.

    It ought to be noted, that methodological and theoretical limitations specific to transition economies, namely a commitment to equilibrium approach, micro macro theory gap, disregard of information, institutional and evolutionary aspects, are part of the transformation process approach. However, the economic theory giving us flexibility to understand, revise and overcome of the limitations associated with these principles, become foremost when we are talking about the analysis of the different economic systems and their transformation.

   Referring to discussions on development of socialism, world famous economists of the Swedish School, O. Lange, A. Lorner, drew significant attention in their researches to comparison of two systems to the possibility of presence of market relations in socialist economies, described by them as market socialism.3

    From the methodological point of view O. Lange and A. Lorner showed, based on the equilibrium model and later based on the main theories of the theory of welfare, that even where the state is  producer of goods, wherein yield on capital is totally withdrawn in favor of the state, a model of the economy, social-advantageous Pareto-optimal condition is attained, in other words, efficient allocation of resources is achieved and opportunity for reallocation of resources according to social priorities is created. They also conceded that the role of the abstract market tool (stock and securities markets etc), which determined an equilibrium price vector, may be assigned to the abstract but real organization – State Planning Committee that is able to adjust price with due consideration of public preferences.

    However, the critics of the model of market socialism, the Austrian School (FA Hayek, L. von Mises, and others) put forward two, sufficiently reasoned objections - motivation and information. The essence of the first objection: there is no reason to believe that the managers of enterprises will actually aspire to solve the optimization problem of the companies, and the problem of ownership and control. The essence of the second objection boiled down to the fact that no organization, in that case, the State Planning Commission, can objectively serve the function of price calculation. As it is a physical impossibility to carry out huge calculations, which is easier in a decentralized market system.

    In the course of discussion about the market socialism future framework for the analysis of the two systems at the level of both theoretical and practical (soviet) studies were raised. And the planned and market system were viewed as their institutional structure expressed, first of all, as form of ownership. And quite in the spirit of orthodox Marxism, the form of ownership appeared to be the main and the only difference between models of socialism and capitalism. Just at that point in our view, ultimately the origins of ideas about the transformation of the economy as a result of the rapid change of ownership are vital, whether it is the nationalization or privatization.

     When the task of transforming a socialist planned economy into a market is set, it is not expected to implement the speculative ideal, but the establishment of the system, existing in several countries.4 The point at issue, therefore, is not about construction, but borrowing, and the latter, in contrast to utopian social engineering does not preclude a positive perspective, but also does not mean that the path is clear to achieve a goal (the nature, sequence and speed changes, etc.).

     If we assume that the transformation involves changing the stereotype of behavior of economic agents, and this, in our opinion, of course, is the case, and then the use of macroeconomic dependencies in the analysis of transformation processes requires special care. And not only because the reliability of macroeconomic relations is an issue, but also because their interpretation can create complications.  And the core of the problem here is in the changes taking place at level of institutions that are not accounted for by traditional models of transition economies.

   When the market is studied as an area of the rationalization of economic activities of the society on the principles of globalization, there is a risk of narrowing the scope of the market, and hence the scope for rationalisation. For example, in the context of Kyrgyzstan, an idea of “small economy”, an industrial potential created under socialism remains an issue. Definition of “small” can be attributed to the country whose economy is based on agriculture or service sector, which has no historical memory of the industrial economy. It is doubtful whether it is suitable to modern Kyrgyzstan.

    The idea of “small economy” is not acceptable to assess the prospects for economic growth from the standpoint of macroeconomics. Macroeconomics significantly raises the bar of industrialization the acceptable level maintaining the overall market equilibrium (capital – GDP – income), as the market’s ability to absorb the factors of economic growth increases linearly with the transition from the productive capacity factor of microeconomics to demanding which is inherent to monetary capital and the first strategic level (short-term strategy) of the macroeconomics. And then – to the structural-institutional (synergistic) potential for economic growth, which is realized under the influence of the formation of system of the financial capital relations, and the second strategic level (long-term strategy) of the market.

      We believe that the market transformation of socialism in our country (Kyrgyz) began with the formation of financial capital rather than current market.

      If we consider existing approaches to the transformation in terms of their theoretical and methodological foundations, it is found that there is not much differences between them. Despite the existing variety of positions, we propose to consider a set of ideas that could be called a broad approach to the transformation as a multistage process of change that connects the major problems to be solved in the process of transformation and modernization of the national economy:

    ·   how to combine the transformational reforms and the resolution of real problems of national economic development, whether to wait for a favorable investment climate, or to act?;

    ·   what should be the balance of economic structures and competition policies, market mechanisms?;

    ·   how should transformation of ownership proceed through mergers and bankruptcies, monopolization?;

    ·   what is the reduction scale of state role in economic activities while strengthening regulation, how to reduce the bureaucratic burden on business?;

    ·   how to ensure economic growth and competitiveness (to attract investment in innovative activities).

       All of these problems are discussed in a given setting, but we must recognize that they entail a fairly complicated set of decisions which is characteristic of the transforming economies of developing countries. These issues arise due dependence on technology of the reforms, decisions and the events of previous years and the duration of their decisions as well.

      Differences in approach are primarily in the hierarchy of objectives, emphasis, and combinations of activities of each of the parties and expressed in response to a number of issues: the causes of macroeconomic instability (including inflation), the role of the state (efficiency, scope and nature of the intervention) and the market, the place of social orientations in the hierarchy of policy objectives, the sequence and pace of the changes.

      Depending on the answers to these questions by theoretical (and to some extent the socio-philosophical) positions that determine these responses to a large degree of conditionality, we can distinguish the following approaches: “reformist radicalism” (“monetarism” and “shock therapy”), “social democratic reformism”, “moderate reformism” and “transformism”. We emphasize that, despite the different answers to the questions above, and quite different positions on the practical aspects, in terms of methodology, the first three approaches are very similar: they are based on equilibrium approach, the distinction between the theory of micro-and macro elements, consideration of the institutional changes beyond basic models.

   Today, in our opinion, one of the central problems of the transformation problem is the problem of impact of new market institutions on the economic system that determines the strategic direction of its transformation, which gives the options of implementation and coordination of economic interests and, consequently, determine the formal and not formal institutional boundaries for subjects of the economic system.

       It should also take into account, the fact that all the subjects of the economic relations are interested in promotion of the transformation processes and, therefore, institutional changes are closely linked with the mechanisms and methods of reforms implementation, since interests in formal institutions are sold through them, which leads to a qualitative change in the functioning of the national economy.5 

     The interpretation of the results of the reforms determines the next steps for their implementation, where the market liberalization connected with the import of the recommendations of the Western financial institutions is a fundamental principle. Indeed, the liberalization of economic relations allows us to get rid of a chronic shortage of goods and services, and inefficient government intervention in the transformation processes and, ultimately, the main advantages of a market economy including entrepreneurship, innovation activity and investment mobility to appear.


1 Minervin I.G.. “Foreign Researchers about the Ways of Transformation of the Russian Economy: Variety of Approaches, Similarity of Conclusions”.// Russia and Contemporary World. – M., 2006. - # 4.

2 Coase, Ronald H “The Problem of Social Cost”// Journal of Law and Economics, 3 (1960), p.25. 

3 Keynes J.M. General Theory of Employment, Interest and Money. // EKSMO. M., 2007, 960 p.

4 Olsim M. The Logic of Collective Action. Cambridge, 1965

 5 The Emergence of Market Economies in Eastern Europe. Cambridge, 1992. Institutions and Economic Development. Baltimore, 1997. Buchanan J. Post-Socialist Political Economy Edward Elgar. Cheltenhamlyme, 1997.  Stiglitz J. Whither Socialism.  Cambridge-London, 1994. 

Dialogue (A quarterly journal of Astha Bharati)

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