Transforming a Socialist Economy: Currency Unification, Banking Reform and Capital Markets

Abstract

Transforming an economic system means a radical change of its basic institutional principles: its property rights structure and its information and coordination structure. Traditionally the socialist economy is a centrally planned economy of the Soviet type. The structure of property rights (property rights order) is characterized by the overwhelming dominance of state ownership of the means of production. The essential characteristic of the coordination structure (planning order) is the detailed allocation by a centralized hierarchy of goods and services among producing and distributing organizations. This entails that the allocating bureaucracy issues binding plan targets to each organization for outputs and inputs. To secure plan fulfillment, the economic units are motivated by a system of premiums and bonus payments and monitored by central administrations.