CPEs
In defence of macroeconomics

Conventional wisdom suggests that the household sector of centrally planned economies (CPEs) has been subject to sustained repressed inflation since the inception of central planning. This argument has since been elaborated and defended by Kornai, who has characterised CPEs as 'shortage economies', and has gained currency from the worsening macroeconomic disequilibria in some CPEs (especially Poland) since the early 1970s. But it distorts the evidence available over the whole period since the early 1950s and thereby reinforces confused and incorrect theorizing, inaccurate forecasts and unjustified policy conclusions, argues CEPR Director Richard Portes in Discussion Paper No. 91.

It is important to get the macroeconomics of these countries right, Portes contends. Macroeconomic developments heavily conditioned the evolution of the Hungarian microeconomic reforms. Proper understanding of internal and external balance and the macroeconomic bases of trade and foreign borrowing was essential in foreseeing and interpreting CPE external debt problems and the Polish crisis. Those who took the conventional view of consumption as a 'buffer' would have misunderstood CPE macroeconomic adjustment in the early 1980s.

The macroeconomic analysis of CPEs has attracted more than its share of unsupported assertions, purely a priori reasoning, and 'stylized facts' not based on the data, argues Portes. This is no longer acceptable, since reasonably long and fairly reliable macroeconomic time series for several CPEs have been available for some time. Assertions about the behaviour of households, planners, enterprises or markets in CPEs should not be taken seriously unless they are supported by the data, and disagreements over empirical issues should be resolved only by testing well-defined hypotheses.

In his Discussion Paper, Portes compares alternative approaches to the macroeconomics of CPEs. He describes his own research on CPE macroeconomics, designed to elucidate the general problem of macroeconomic equilibrium and to evaluate the evidence for repressed inflation in the Soviet-type economies of Eastern Europe. A prerequisite was to clarify the appropriate concept of 'equilibrium'. An equilibrium with quantity rationing is a state in which markets do not clear, but the economy is at rest. Similarly, Kornai has discussed a self-reproducing equilibrium state of an economy characterized by pervasive shortages. Portes argues that we can in principle measure the magnitude of 'disequilibrium' in terms of the distance from a market-clearing allocation or price vector.

Portes defends the explicitly aggregative and macroeconomic approach in theory, institutional relationships and measurement. This approach, he argues, has offered a fresh, coherent framework for the analysis of many CPE phenomena and has opened up a range of possibilities for empirical investigation. It has also generated several important spin-offs: work on planners' behaviour; insights into CPE policy problems of the 1970s and early 1980s, which centred on macroeconomic equilibrium and threats to it; and some developments in macro theory and econometrics applicable to market economies as well.

Portes first discusses theoretical issues which underlie CPE macroeconomics. He distinguishes between hidden and repressed inflation, as well as between flow excess demands and excess holdings of asset stocks (the difference corresponds to that between 'forced saving' and 'monetary overhang'). Portes also considers the theory of the 'supply multiplier', i.e., the effect of excess demand for consumption goods on the supply of labour in CPEs.

It is often argued that the deeply distorted price systems in CPEs make aggregate macroeconomic analysis impossible. Portes considers the aggregation problem in CPEs, arguing that macroeconomic concepts like aggregate excess demand are useful despite forced substitution and the simultaneous existence of excess demands and supplies at a disaggregated level. He also provides a brief survey of macroeconomic models for CPEs, focussing on attempts to model the behaviour of households and planners.

Portes argues for the use of disequilibrium econometric methods on CPE data and notes that this empirical work has led to the rejection of the hypothesis that from the mid-1950s to the mid- 1970s CPEs suffered from sustained repressed inflation in the market for consumption goods and services. This challenge to conventional wisdom, he contends, has been misrepresented but nowhere refuted, and it is consistent with evidence from many other studies of these economies.


The Theory and Measurement of Macroeconomic Disequilibrium in Centrally Planned Economies
Richard Portes

Discussion Paper No. 91, January 1986 (IM)