Stability and growth in centrally planned economies : theory and evidence

Abstract

Many academics believed that among the charms of a centrally planned economy were its stability relative to chaotic market economies and its capacity for sustained growth. The Soviet Union was seen as proof that central planning could take a backward peasant economy and transform it into a modern industrial power. Empiricists began to question these beliefs in the 1960s, but were hindered be the lack of reliable data. Studies performed in the 1980s demonstrated the existence of output and investment cycles in particular planned economies, but no comparisons were made with market-type economies. The relationship between investment and output in centrally planned economies was not explored. This dissertation presents a comparison of output stability in centrally planned and market-type economies. It uses data from the United Nations International Comparison Project which allow output to be compared across countries and across time. The results indicate that there was no statistically significant difference in output stability between the two types of economy. The analytical framework that predicts greater stability for centrally planned economies requires that investment be an important determinant of output; property rights approaches predict that output will determine investment. The relationship between investment and output is examined in this dissertation with two tests of causality, and it is found that investment does not determine output in centrally planned economies. In some cases output is found to weakly determine investment. The dissertation concludes with a comparison of mean growth rates in centrally planned and market-type economies. Again, no significant difference is found between the two groups. Possible reasons for this result are discussed.