Developing a perspective on transition economies as complex systems
Dr. Viktorija Mano
Lecturer in Business and Economics, University of Roehampton
Please cite the paper as:
Dr. Viktorija Mano, (2017), Developing a perspective on transition economies as complex systems, World Economics Association (WEA) Conferences, No. 2 2017, Economic Philosophy, Complexities in Economics
Decades of blindly following mainstream economic policy has opened a new potentiality of research, especially since most of the phenomena that occur around us are caused by and interact with many other parts within a complex globalised world. The objective of this article is to give complexity theory the central place it deserves in development economics and policy research. The goal is to critique the mainstream economic position of neo-liberal institutions, such as the IMF, in their one size fits all approach, and to highlight the use of complexity theory in better understanding the economic systems. My intention is to provide an understanding of the applicability of this theory in the specific context from a qualitative analytical approach.
I analyse the relevant literature particularly relating to complex economic systems and the elements that comprise them. The main complexity characteristics are identified through this paper and applied in the context of the Macedonian transition economy. The choice of context is based on two reasons. The first one relates to the IMF’s frequent emphasis on Macedonia’s transition as a success story. The second reason relates to the prolonged transition escalating into the most serious economic and political crisis that the country has experienced recently (EUROPP, 2016). It seems confusing that such a successful transitional economy in the 90’s, after nearly three decades of reforms, could not reach economic and political stability.
Therefore, I am looking at the role of the IMF during Macedonia’s transition and critiquing the linear perception that the institution adopts from the mainstream economic theory and deliberate the benefits of using complexity theory instead, in uncovering the systems complexities. This paper contends that the neo-liberal policies implemented during the Macedonian transition have been imposed by following mainstream economic theory and neglecting the complex nature of the context.
Excellent Paper. Bringing complexity theory into development economics and policy research should be the way forward.
It is hard times that we acknowledge the variance taking place in the macroeconomic environment thus making mainstream economic theory unreliable to solve some of the many problems in the economy. Fresh memories is manifested in the Global Financial Crisis when the transition mechanism fail to be a reality by just using interest rate to stimulate demand to get economies out of recession did not work, thus the discovery of quantitative easing. Developing a perspective on transition economies as complex systems could be another step forward to address changes in the economic space and maintain macroeconomic growth and stability.
The conclusions by Dr. V. Mano – ” non-linear interactions of agents cause random and unpredictable effects on the macroeconomic stability and growth of the country ” – are also valid for Ukraine. An example of this is the results of voucher privatization of state property (1995-1998). It was found out that the mass voucher privatization performed within a short period of time had negatively affected the financial provision of enterprises’ modernization and the investment potential as a whole.
For Ukraine, the theory of complexity should be applied when carrying out economic reforms and transformation of the financial interaction between the state and enterprises.
Mano opened an important field of transition economies to complexity economics. As I observed, transition experiments can serve the testing ground of competing schools in economics.
First lesson, the Arrow-Debru model of general equilibrium predicted a stable and unique equilibrium based on private exchange economy, but shock therapy guided by western mainstream economics failed greatly during transition economies. Why? Because neoclassical model assume fixed products with INFINITE product life, but in reality, LIFE CYCLE of infrastructure investment is much longer than agriculture product. That is why China’s DUAL-TRACK approach in market reform have better innovation and stability than East European and former Soviet Union countries adopted the liberalization policy of shock therapy.
Second lesson, neoclassical model of optimization is a closed system without uncertainty and history. However, open market is exposed to tremendous uncertainty and unequal competition. China’s special economic zone (SEZ) succeeded by SELECTIVE OPENING with FIRE WALL that provides a window opportunity for domestic firms in learning and adaption, while unilateral open market of East Europe under IMF directive suffered greatly from asymmetric opening and unequal competition.
Third lesson, HISTORY MATTERS in policy decision. For example, China and Poland were more prudent during transition state, since they had historical lessons in high inflation, while Russia and Ukraine had no similar experiences. That is why China and Poland leaders were more pragmatic in monetary and privatization policy than other transition economies.
Transition economies provided a good example about the complexity thinking in economic policy without mathematical modeling.
The critical lessons here are not abstract idea of evolution and complexity, but trade-off between complexity and stability,
and essential difference between open system with unpredictable uncertainty under historical trajectory (characterized by NON-EQUILIBRIUM or MULTIPLE EQUILIBRIUM) and close system with predictable risk (say, ergotic movements with Gaussian distribution), which can be characterized by UNIQUE & STABLE EQUILIBRIUM.
That is why complexity economics more like a physician, who should examine the patient first, then provide specific diagnosis. Every patient is different in their structure and history. There is no such thing of one recipe (liberalization or privatization) could cure all disease. See: Ping Chen, “Market Instability and Economic Complexity: Theoretical Lessons from Transition Experiments”, in Yao and Yueh, Globalization and Economic Growth in China, World Scientific, Singapore (2006); Ping Chen, Economic Complexity and Equilibrium Illusion, Rutledge (2010).