The Structural Barrier to Transition Hidden in Input-Output Tables of Centrally Planned Economies

One legacy of the Soviet-type economy is the highly inefficient, and sometimes value-destroying, structure of factor use and economic interaction [Hughes and Hare (1994)]. This structure was sustainable only by virtue of distorted prices, hiding true costs, and by the force of command that maintained interactions necessary to the continued operation of the economic system. Yet, as the paper illustrates, input-output tables could be drawn up, displaying sectoral average-cost covering and hiding this economic irrationality. When liberalization frees prices and renders agents responsible for their own survival, the non-viability of the inherited structure of production is revealed through a breakdown of economic interaction, and spiralling price increases. These price increases derive from agent attempts at cost recovery in the face of the inability to cover full costs. This generates structural inflation that can only be dealt with by substantial restructuring at both the firm and industry levels, requiring an investable surplus which the inherited structure of production cannot produce