Modelling the transition from a socialist to capitalist economic system

TL;DR

This paper models the transition from socialist to capitalist economies in Eastern Europe and the former Soviet Union, using a simple microeconomic model to describe GDP growth and income distribution evolution over 15 years.

Contribution

It introduces a three-parameter transition model that captures real GDP per capita evolution during economic reforms in post-socialist countries.

Findings

Central European countries completed transition years ago.

Future growth depends on current GDP levels, following capitalist development rules.

Russia and some FSU countries still undergoing transition.

Abstract

The transition of several East and Central European countries and the countries of the Former Soviet Union from the socialist economic system to the capitalist one is studied. A recently developed microeconomic model for the personal income distribution and its evolution and a simple functional relationship between the rate of the per capita GDP growth and the attained level of the per capita GDP are used to describe the transition process. The developed transition model contains only three defining parameters and describes the process of real GDP per capita evolution during the last 15 years. It is found that the transition process finished in the Central European countries several years ago and their economic evolution is defined by pure capitalist rules. In the long run, this means that the future of these countries has to follow the same path, i.e. dependence on the per capita GDP growth rate of the per capita GDP itself, as the developed countries have had in the past. If the best GDP evolution scenario occurs for the studied countries, they will be able to maintain the absolute lag in per capita GDP relative to most developed countries including the USA. But they will never catch the advanced countries if they follow the same rules of development. In Russia and some countries of the Former Soviet Union the transition process is still far from complete.