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Case: Ownership and Resource Use
Even die-hard socialist countries like Cuba are promoting some
free-market activities, including private, foreign investment, and
are turning to the Internet for help. Visit "Cubaweb," an informational site about Cuban society, culture, and business, supported by various private and public institutions in Cuba.
Theodore W. Schultz, in his Nobel lecture, discussed the general results of research on economic development he and others conducted over the course of forty years. He concluded that the poor are just as concerned about improving their position as other people are, but that wealthier people have a difficult time understanding the choices the poor make. Schultz argues that economists have made two errors in their approach to the problems of economic development. The first error is to assume that standard economic analysis does not apply to poor countries. The second error, Schultz argues, is that economists tend to neglect economic history. Since all developed nations were developing nations at one time, an understanding of the way developed nations actually developed can help our understanding of the problems faced by developing nations today.
Schultz also argued that land is often overrated and the quality of human beings is underrated in assessing the prospects of poor nations. Japan has poor land and yet is highly developed, whereas India has good land and is poor. Schultz pointed out that labor productivity can increase when the population becomes healthier and better educated. Further, he argued that the policies of many developing nations encourage industrialization, which encourages migration to urban areas and neglects the agricultural sector. The result is reduced agricultural production, which makes it more difficult to feed the population. He urged an approach that does not distort the incentives that farmers have to grow more food. (See Theodore W. Schultz, "The Economics of Being Poor," Journal of Political Economy 88, August 1979: 639–651.)
Question to Think About: What effect would longer life expectancies have on decisions concerning the number of years spent in obtaining an education?
What Is the Optimal Speed of Adjustment?
There is a great deal of uncertainty about the optimal speed of adjustment to a market economy. Alfred Kahn was head of the U.S. Civil Aeronautics Board when the government deregulated the airlines. Initially, Kahn favored a policy of gradualism, but later he changed his views and advocated a very short transition. The main reason for his change in views was that the long transition created some perverse incentives that made the adjustment more difficult. Does this imply that Russia and other formerly socialist countries should aim for a rapid transition? Not necessarily. There are many important differences between deregulating one industry and deregulating an entire economy. One important difference is that the institutions associated with capitalism were in place in the United States, and the deregulation only involved one segment of the economy. Just because a rapid transition involving one industry in the United States is optimal does not imply that a rapid transition to a market economy is optimal for an entire economy.
Question to Think About: Would a gradual transition to a market economy likely create perverse incentives that would make the transition more difficult?
Once the ruble was allowed to float, its value quickly dropped relative to the dollar. Panicky Russians stormed banks trying to withdraw their rubles-either to spend them before prices increased more or to convert them into dollars. The spike in demand cleared store shelves of goods, particularly durable goods. One automobile factory ran out of cars. Some stores, frustrated about the what price to charge, simply closed their doors.
Russia's road to a market economy has been rocky but now seems to be winding aimlessly. Seventy years of Communism suppressed two necessary features of a market economy-private property and entrepreneurship. Even after reforms legalized private businesses, local governments imposed licensing rules and other restrictions that choked the life out of most new firms. Since mid-1994 the number of enterprises in Russia has remained flat. The Russian system not only stifled new business, it helps large, bankrupt businesses survive. Some inefficient Russian factories, many of which employ more than 10,000 workers, continue to make stuff nobody wants, such as steel, even though these firms can't pay wages or taxes. These dinosaurs stay in business through a complicated and inefficient barter system-what has become known as Russia's "virtual economy." Russia is now ruled largely by an oligarchy-a small group of wealthy individuals exercising control in their own interest.
Even before the banking and ruble crisis, the International Monetary Fund had agreed to provide Russia $23 billion in aid. In return for the relief package, Russia agreed to IMF demands that the government begin collecting taxes, clean up the banks, and push market reforms. Russia's recent actions may have violated the terms of that agreement and further payments could be jeopardized. (Updated 9/2/98)