City Research Online

Abstract

It has been widely accepted that aggregate output measures in transition economies were likely to be biased. The conventional view holds that GDP and industrial output indices understated growth. The major aim of this study is to investigate in more detail the causes and likely effects of the bias on aggregate output data during transition. The analysis of bias in aggregate output measures is important for ascertaining the relative performance of these economies; this then has consequences for economic studies of these countries’ development, as well as for policy-making in the region.

This work concerns the effect on index numbers of profound structural change. Focussing on three countries, Hungary, Poland and Romania, the discontinuity caused by the changing nature of price determination is investigated. Central to this study is the relevance of Gerschenkron’s work on index number relativity during periods of structural transformation. His methodology for assessing the extent and direction of bias in industrial output indices is applied here; the percentage deviations between the industrial output indices and output of individual commodities in physical terms are calculated for the three countries. The results show that industrial output indices understate the extent of decline; these aggregate measures are biased upwards.

The conceptual problems of using index numbers during transition are also explored. Looking at the criteria for Laspeyres and Paasche indices to act as bounds to the actual productive potential of an economy, the effects on these bounds of changing relative prices and structures of production are discussed. It is shown that as the use of aggregate output measures assumes competitive markets, which may be absent during transition, the core assumptions underlying aggregation are violated.

The bias to aggregative measures of output has generated misleading pictures of how these economies operate. Economic analysis, dependent on GDP measures, has presented distorted prospects. This is illustrated by the regression analysis of service sector shares of national output prior to and during transition. The catch-up effect expected from the growth of services during transition is disputed here. Data that has been adjusted for the low relative prices of services in these countries shows that there is limited, or no, scope for catch-up.

Although concentrating on statistical measurement, this study has implications for the way transition is viewed. It implies that our understanding of how these economies are changing has been biased by the measures used in the economic analysis of transition. Standing apart from aggregative measures of output provides a different assessment of these countries’ progress.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs > Economics School of Policy & Global Affairs > School of Policy & Global Affairs Doctoral Theses Doctoral Theses

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