Modelling the transition from a socialist to capitalist economic system

Modelling the transition from a socialist to capitalist economic system Ivan O. Kitov Abstract The transition of several East and Central European countries and the countries of the Former Soviet Union from the socialist economic system to the capitalist one is studied. A recently developed microeconomic model for the personal income distribution and its evolution and a simple functional relationship between the rate of the per capita GDP growth and the attained level of the per capita GDP are used to describe the transition process. The developed transition model contains only three defining parameters and describes the process of real GDP per capita evolution during the last 15 years. It is found that the transition process finished in the Central European countries several years ago and their economic evolution is defined by pure capitalist rules. In the long run, this means that the future of these countries has to follow the same path, i.e. dependence on the per capita GDP growth rate of the per capita GDP itself, as the developed countries have had in the past. If the best GDP evolution scenario occurs for the studied countries, they will be able to maintain the absolute lag in per capita GDP relative to most developed countries including the USA. But they will never catch the advanced countries if they follow the same rules of development. In Russia and some countries of the Former Soviet Union the transition process is still far from complete.

Key words: socialism, capitalism, transition, economic modelling, GDP per capita

JEL Classification: O12, P10, P27

Introduction A microeconomic model for the personal income distribution and its evolution in time is developed in [1]. When aggregated over the population above 15 years of age, the model transforms into a macroeconomic model describing evolution of GDP and per capita GDP in the USA. The model characterizes the capitalist system which has no formal limit to personal income. The limitation on personal income is a characteristic feature of the socialist system and explains its relatively lower GDP growth rate compared to that of the capitalist system [2].
The socialist system has undergone disintegration during the last 15 years (since 1989). This period is often called the transition from socialism to capitalism. There are some specific features that are different from those observed in a pure socialist or pure capitalist system characterizing the period. At any moment between the start of the process and its end the economic state is, supposedly, not just a mechanical sum of the socialist and capitalist fractions. Analogously, such a simple mixture of two states is observed in phase transition processes (like ice/water phase transition at 0Co) as determined by physical laws of mass and energy conservation. There must be, however, some interaction between the processes of the socialist system disintegration and the capitalism build-up. Some features of capitalism attract increasing number of people still living under the socialist system of income earning to jump into the free market. On the other hand, some obvious social guarantees and benefits provided by the old socialist system often

1 prevail in this psychological struggle, and some people are very reluctant to drop out of the system of social care. One can thus expect a variety of different types of individual and social behaviour.
The new specific features and relationships created by the unique process of the socialist/capitalist system transition are a big challenge to economics as a science. One has to describe the observed processes and to introduce new terms and relationships, if necessary. The principal question is - Whether it is possible to describe the transition process in a functional form or whether the process is stochastic and can be described only in statistical terms?
The goal of this study is to develop a model for the transition based on some simple assumptions about the economic state during the transition period and to predict behaviour of some objective and measured economic parameters during the last 15 years and in the future while the transition period has not yet complete. We are here not referring to any other study of the process but concentrate only on the description of the model and results. The only sources used are statistical agencies and databases providing original data on population and GDP.

1. Per capita GDP in the former socialist countries 1950-1989 Several Central and East European countries joined the EU in 2004 and some more will join it in
2. These countries had an almost 40 year history of economic development governed by rules of the socialist system. The countries of the Former Soviet Union (FSU) had an even longer period of socialism reigning in economic life. It is of interest to understand in economic terms what happened during these socialist years and during the peri

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