I agree that the similarities between the Russian Plan and the Iraq Plan are pretty striking---and downright sickening.
While this is an approach that obviously does not work, one could call it "capitalism gone insane", it raises the question---"How could one successfully transition from an economy of total control?"
I think the Chinese have a good answer, and some of the magic is revealed in the paper referenced in this journal entry of mine:
How Reform Worked in China (The "miracle" explained)
Posted by nodular in Economy
Fri Dec 29th 2006, 03:22 PM
This is an amazing, highly recommended research paper. It explains how the Chinese achieved their phenomenal economic growth when so many others have failed. The key idea (from my quick take, I'll admit I haven't yet finished the whole paper) is that because Chinese reforms benefited those in political power and were carefully designed in small steps, they worked.
The paper analyzes the many flaws of the conventional, World Bank-type approaches to economic development---basically seeing that Western economies are productive and trying to copy western societies.
A key implied idea (as I interpret it) is that when you don't have the constellation of Western institutions and you take power away from existing institutions, it is very difficult to transition the whole shebang. The Chinese planned a series of small steps. But importantly, during each small step, economic development benefited those in power.
This paper is the most powerful explanation I have yet seen of how the Chinese did it. Only a small part quoted here.
THE WILLIAM DAVIDSON INSTITUTE
AT THE UNIVERSITY OF MICHIGAN BUSINESS SCHOOL
How Reform Worked in China
http://www.wdi.umich.edu/files/Publication..."Compared to the developed economies, the backwardness resulting from the initial institutional conditions in transition and developing economies can be both disadvantageous and advantageous for growth. On the one hand, the immediate effects of the initial institutional conditions are generally not hospitable to growth in most transition and developing economies. Moreover, although these countries can take advantage of being latecomers to shorten the time of change, they may not be able to make and complete all the changes in a short period of time. This is disadvantageous for growth. On the other hand, however, because the adverse initial institutions created myriads of distortions, these economies usually enjoy great growth potential once institutions are changed to remove these distortions. In this regard the most striking examples are former centrally planned economies. These economies started reform from an extremely inefficient status quo. They operated not only far away from the Pareto frontier due to the enormous allocative distortions, but also deep inside the production possibility set because of poor incentives. Huge room existed for efficiency improvement, which might generate great growth opportunity not seen in the developed economies. Thus the central question for many transition and developing countries is how to make institutional changes to realize the great growth potential when the initial condition has myriads of distortions.
"Underlying China’s reform is a serial of institutional changes in the novel form of transitional institutions. These institutions work because they achieve two objectives at the same time -- they improve economic efficiency on the one hand, and make the reform a win-win game and interest compatible for those in power on the other. And they take into consideration of China’s specific initial conditions. At one level, one could argue that China’s transitional institutions merely unleashed the standard forces of incentives, hard budget constraints, and competition. This is true, but such an economic rationale is not enough. The transitional institutions are not created solely for increasing the size of a pie, they are also created to reflect the distributional concerns of how the enlarged pie is divided and the political concerns of how the interests of those in power are served. Rudimentary political logic readily predicts the existence of inefficiency, but it has difficulties in explaining why inefficient institutions are replaced by more efficient ones. China’s reform shows that when the growth potential is large, with intelligence and will, reformers can devise efficiency improving institutional reforms to benefit all, including and especially those in power. There is apparently a larger room than we thought for institutional innovations to simultaneously address both the economic and political concerns, that is, to make a reform efficiency improving and interest compatible for those in power.
"The general principle of efficiency-improving and interest-compatible institutional change is simple, but the specific forms and mechanisms of transitional institutions often are not. Successful institutional reforms usually are not a straightforward copy of best practice institutions. They need not be and sometimes should not be. They need not be because huge room exists for efficiency improvement that does not require fine-tuning at the beginning. They should not be because many dimensions of the initial conditions are country and context specific that require special arrangements to accommodate. Therefore, inevitably, transitional institutions display a variety of non-standard forms. Furthermore, because these institutions are often responses to the initial institutional distortions, the mechanisms of their functioning can be intricate. Understanding these mechanisms sometimes needs to appeal to the seemingly counterintuitive “second-best argument,” which states that removing one distortion may be counterproductive in the presence of another distortion. For all these reasons, studying institutions in transition requires careful, and sometimes imaginative, analysis....
...In the case of local government ownership it is the local government who has the control rights and receives unobservable revenue. When the local government runs a business, ownership and control rights interact with government activities and generate two effects that are absent under private ownership. First, the local government would have higher incentives in providing local public goods because its ownership rights give it access to the future revenue in a credible way. Second, anticipating this, the national government would leave bigger budget to the local government and thus optimally prey less on TVEs than on private enterprises. This in turn makes the local government less worried about revenue confiscation and reduces TVE revenue hiding. Both effects improve efficiency."
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