Vladimir Shevchenko*
University of Kiev, Kiev, Ukraine
9.1 Introduction
The microeconomic issues of stabilization policies in the economies in transition acquire greater relevance once the overall macroeconomic situation and, more specifically, the inflation rate and financial system become more stable. Such a suggestion is based on two major preconditions.
The first of these preconditions relates to the necessity of creating structural conditions for microeconomic optimization. In the former Soviet Union, the so- called national economic complex was structured and developed as a single system and the optimization criteria were derived from national economic efficiency. In reality this was only quasi-efficiency due to the impact of over-centralized distribu- tion of resources (mainly in physical terms), centrally fixed prices, evaluating the results of enterprises' activities as a percentage of plan fulfillment (formal relation number), and absence of real budget constraints for investments and costs. As a result, the macroeconomic quasi-equilibrium did not infer economic reality because of depressed demand, insufficient supply, constantly growing deficit of resources, hidden inflation, and concealed unemployment.
Associate Professor of Economics, Director of the Center for Research, Management and Education.
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Shevchenko The single centralized economy could not really account for microeconomic efficiency. The constant losses of some industrial branches and enterprises were covered by budget financing or through different means of redistribution of en- terprises' profits. Thus, there was insufficient economic incentives to lower costs, effectively utilize resources and better satisfy customers. At the same time the single economy was diversified in a specific centrally planned way, with extensive spe- cialization and directly managed inter-enterprise relations. The price liberalization and market forces applied to such a structure have destroyed or completely changed the existing ties between enterprises. The persisting inertia of the former structure have created inflexibility to changing demand, self-crediting of enterprises, as well as maintenance of unprofitable ones. Under such conditions, declining output has actually become attractive for various enterprises from the economic point of view.The possibilities for development and modernization are still insufficient in the Ukraine due to the macroeconomic situation - especially the high inflation and interest rates.
The second precondition are well-designed microeconomic policies, which secure flexibility in response to market forces and enterprises' incentives to effec- tively utilize resources. The growing importance of microeconomic policies has become a priority, as stressed by the Ukrainian Prime Minister Kuchma in 1993.
He disclosed that detailed analysis of the industrial output decline in the Ukraine has revealed that 35% of the decline was caused by macroeconomic factors, such as: disrupting inter-enterprises links, inefficient financial transactions, and so forth.
The remaining 65% of the decline was caused by the lack of effective manage- ment, poor technological discipline, monopolistic egoism, and other factors on the enterprise level.[l]
The limitations of strong microeconomic policies are caused by instability characteristic of the economy in transition and related changes and adjustments of economic and especially macroeconomic regulations. These economies in transi- tion are dominated by at least five groups of factors, including:
a continuous economic crisis and weak recovery prospects;
a changing institutional structure and governmental regulations;
a economic liberalization and emergence of market forces;
r economic restructuring and modernization; and,
a market reorientation towards foreign markets and growing integration into the world economy.
Each country in transition possesses its own policy precipitated by a specific combination of these factors and its own concept of economic reforms. Therefore, the transformation style and the type of economy in transition must be studied on the
Microeconomic Preconditions for Macroeconomic (In)Stability 171 basis of both concepts of the economic transformation or transitional development theory, and as an analysis of key trends. The application of such an approach to the experience of the Ukraine also shows the necessity of comparative analysis with both East European countries and new independent states (NIS) of the former Soviet Union. In the latter case, the political, national, cultural, and regional problems specifically influenced economic reforms and created remarkable trends.
The macroeconomic instability in the Ukraine is a result of the interaction of a variety of these factors, so that the movement towards a consolidated situation presents a complicated problem. The macroeconomic policy tends to be based only on monetary approaches rather than on the creation of macroeconomic precondi- tions of microeconomic policies. At the same time, microeconomic processes are mainly a reflection of the inertia of economic structures and incentives, which are naturally only in a process of adjusting to new market conditions and forces.
Solely monetary oriented policy decisions could not be effective from the point of view of a policy background because of the lack of an appropriate and competi- tive market structure. However, strict monetary policy is simultaneously required to achieve financial stabilization and creation of a functioning monetary system.
As a consequence, it seems that microeconomic policies in transitional economies must be based on the principles of supply-side economics. High inflation, steep economic decline, and shortages of basic industrial and agricultural products would be long-lasting without economic incentives for effective utilization and distribu- tion of resources. The problem is that price liberalization in the absence of effective microeconomic policies will lead to the conservation of stagflation or hyperinfla- tion. Also, the transition from centralized to market distribution of resources would increase production and efficiency if:
the emerging of markets would be structured and based on processes of corpo- ratization and privatization as the fundamental institutional changes required to create the desired market structure, environment, and incentives; and, the microeconomic policies are based on enforcement of incentives for increas- ing supply and quality of products and more effective resource utilization.
In terms of short and long-term microeconomic policies, the combination of microeconomic stabilization and market structure optimization must be achieved.
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