On the Transition from a Supply to a Demand-Constrained Economic Sytem: The East European Experience

Abstract

The transition from a supply - to a demand-constrained economy implies a fall in demand below potential supply. However, the process of transition in Eastern Europe and the former Soviet Union has led to a steep drop in both aggregate supply and demand, causing dramatic falls in output not experienced since the Great Depression. The thrust of the argument of this paper is that the bulk of the observed output declines could have been avoided. Such declines were the product of misguided macroeconomic stabilisation policies that were ill-suited for the economic conditions and institutions of economies in transition. Paradoxically, the paper contends that effective demand should have been allocated a role, at least, equal to that of supply. This is because once central planning is discarded much of the excessive demand and shortages would disappear, and hence there would be no need for further contractionary policies.