Bleany M. Investment Cycles in Socialist Economies

8/8/2019 Bleany M. Investment Cycles in Socialist Economies

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Oxford Economic Papers 43 (1991), 515-527IN V E S T M E N T C Y C L E S IN S O C IA L IS TE C O N O M I E S : A R E C O N S I D E R A T I O N *

By MICHAEL BLEANEY

1. IntroductionTHE theory of investment cycles in socialist economies has had a chequeredhistory. Since the idea was first formulated in the late 1950s it has always hadsome enthusiastic adherents, whilst many other analysts have remainedprofoundly sceptical of its value. Moreover the experience of Soviet-typeeconomies has been such as to maintain this balance nicely, with investmentappearing to follow a cyclical pattern at some periods in some countries, butnot universally.A proper assessment of investment cycle theory has been hampered by a lackof sufficient rigour in theoretical formulations (Ickes (1986)) and by weakempirical work, which has relied almost exclusively on graphical techniquesand descriptive statistics that do not explicitly test the maintained hypothesisagainst alternatives (Bajt (1971); Bauer (1978, 1988)). In this paper we attem ptto pull together the separate strands of this rather diverse literature and toformulate a model which can be tested against published data. The results aremixed, but some tentative conclusions can be drawn.The theory which is developed here is explicitly based on the objectives ofthe political leadership of a one-party state, and to this extent its relevance toEastern Europe and the Soviet Union has declined sharply since the middle of1989, because of the political changes that have taken place there. Neverthelessthe issues raised remain of interest, not only from the viewpoint of understandingthe history of these countries, but also because the theory may be of continuedrelevance in some non-European countries.

The plan of the paper is as follows. In Section 2 investment cycle theoriesare surveyed and the main lines of argument identified. In Section 3 a formalmodel is presented, and in Section 4 it is tested on empirical data fromthe USSR and five east European countries. Conclusions are presented inSection 5.2. The theory of investment cycles

Investment cycle theory may be divided, both logically and chronologically,into two phases: an earlier period, in which the emphasis was on the planners'desire to maximize the rate of investment, and a later period, in whichmicroeconomic pressures towards over-investment have come to the fore. The The author gratefully acknowledges the research assistance of Christine Green and the helpfulcomments of two anonymous referees on a previous version of this article. Any errors that remainare of course the author's responsibility.

& Oxford Unimrity Prcn 1991


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516 INVEST ME NT CYCLESlatter theory is associated particularly with Hungarian writers, such as Bauer(1988) and K orn ai (1980). We shall discuss the earlier, 'ma croec ono m ic' theoriesfirst.

In the original theories of the investment cycle it was assumed that thegovernment had a preference for investment over consumption. Goldmann andK ou ba (1969, p. 44) attributed this preference to 'certain subjectivist tendenciestowards maximising the rate of growth'. Oliveira (1960) discusses it at somelength, arguing that the planners have a lower rate of time preference thanconsumers, partly because of the latters' tendency towards myopia and partlybecause of the socialisation of investment risk. Bauer (1978) cites as forcespro m otin g a high rate of investme nt the amb ition to end econ om icbac kw ardn ess, the need to strengthen defence poten tial and the desire to increasethe prestige of the national power elite.

Des pite this emp hasis on political preferences, non e of these autho rs explicitlyrelates these tendencies to political institutions. Do these preferences result fromthe collective owne rship of the mea ns of pro du ctio n per se or from the monolithicstr uc tur e of the political system, do m in ate d by a single party officially desig natedas the leading organ of society? This issue cannot be resolved empirically, sinceinvestment cycles have only been observed in collectivised economies with aSoviet type of political system.Oliveira's line of argument would seem to imply that socialist planners wouldinvest more than would be chosen by consumers whatever the institutionalstructure of the political system. However this is open to the objection that itis politicians rather than professional planners who take the strategic decisionsabout the economy, and therefore it is the incentives built into the politicalsystem that are decisive. The most relevant difference between one-party statesand parliamentary democracies would seem to be that politicians do not runthe risk of being thrown out of office by the electors at prescribed intervals. Asa result, they do not face the need to produce a sense of well-being amongstthe popu latio n at these m om ents there is no equivalent to the 'political businesscycle'.1 Perhaps mainly for this reason, political leaders enjoy considerablelongevity. Both Kadar of Hungary and Zhivkov of Bulgaria lasted more thanthree de cades in the highest par ty p ost, and stints of m or e than a decad e h avebeen commonplace. Thus both the party and individual leaders are in a positionto tak e a long-ter m view, an d a re likely to have a low (and quite possiblynegative) discount rate.In principle this could express itself in various waysfor example in awillingness to undertake structural reforms despite set-up costs. In practice,however, ideological considerations work against experimentation in theeconomic field; the main stumbling block has been the requirement thateconomic arrangements should not serve to undermine the leading role of theparty. This has normally been satisfied by the centralization of economic power

1 It has been suggested to me that there may be a political cycle of a different kind in So viet-typeeconomies, in so far as new leaders have tended to begin with a consumption boom.


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M. F. BLEAN EY 517in the planning bureaucracy. With institutional change ruled out, investmenthas been regarded as the main policy variable influencing the rate of growth,on the implicit assumption that much technical progress is embodied in newcapital equipment. Thus the low discount rate reflects itself in a desire for ahigh rate of investment.The constraints on the desire to maximise investment have been listed byKornai (1980, vol. 1, pp. 212-3) as follows:(1) Physical constraints and bottlenecks leading to interruptions in production.(2) Popular dissatisfaction at the diversion of resources from consumption toinvestment.(3) The state of the balance of payments and the volume of foreign deb tThe first two might be classified as the 'internal' o r 'closed economy' constraints.The third, 'external' constraint is more subtle and complex, since it can alsooperate as a source offlexibility n the short run, allowing the internal constraintsto be bypassed. It is essentially a long-run constraint, within which the plannersmay choose to finance additional present investment at the expense of a higherstock of external debt, the servicing of which will be a future burden on theeconomy.Previous writers have examined these constraints in the context of thedeceleration phase of the investment cycle, and have differed in what they regardas the binding constraint Goldmann and Kouba emphasise disproportions andbottlenecks brought about by the investment boom. This may well be a goodanalysis of the Soviet First Five-Year Plan, but its relevance to later experienceis more doubtful (Nove (1969)). As the economy develops consumers learn tobecome more sceptical of planners' forecasts, and it becomes less acceptable toresort to direct repression of discontent, so that consumer resistance is likelyto replace physical bottlenecks as the binding constraint. It was Oliveira whofirst stressed the consumption constraint, arguing that 'generalized socialdisapproval will subject the planning authority to increasing pressure, urginga change in its allocation criteria; and .. . such pressure, if disregarded, will finallybecome an element in the internal competition for social control' (Oliveira(1960, p. 245)). It is reasonable to assume that the consumption standards whichthe population is prepared to accept rise with economic development. To takeaccount of this, the consumption constraint is probably best formulated as ashare of output below which consumption cannot be reduced w ithout provokingsignificant unrest.Up to 1970 the theory of investment cycles was developed largely within aclosed-economy framework. However it is clear that external relations mayexert a profound influence on the investment cycle in an open economy in atleast two ways. First it may be possible to increase investment by foreignborrowing, without reducing consumption. Such a strategy implies anexpectation that the external debt can be repaid without too much difficultyout of future exports (Poland in the period 1972-5 is the case which springsobviously to mind). Secondly, a permanent change in the terms of trade will


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518 INVESTM ENT CYCLEShave the effect of tightening or loosening the consumption constraint. Aterms-of-trade deterioration forces the authorities to allow domestic absorptionto grow more slowly than domestic output until adjustment is achieved, soeither the consumption or the investment ratio must fall. If the authorities feelthat the consumption constraint is tight, they are likely to make investmentbear the brunt of the adjustment. Conversely, a terms-of-trade improvementrepresents an opportunity to raise the investment ratio. Effects similar to aterms-of-trade deterioration may result from a weakening of demand in exportmarkets, loss of export competitiveness or a rise in protectionism abroad.

A major weakness of early investment cycle theory was its failure to examinesystematically under what conditions the planners' desire to maximize the rateof investment w ould give rise to cycles. Given th at the au tho rities are con straine dby balance-of-payments considerations and a popular desire for highercon sum ptio n, cycles can arise in one of tw o possible way s: (a) cyclical variationin the tightness of the constraints; or (b) misperceptions of the constraints forwhich the authorities are subsequently obliged to correct. It is difficult to seewhy the tightness of the constraints should vary in cyclical fashion, and I knowof no author who has proposed such a theory. The universally adoptedexplanation of cycle rests on the propensity of the planners to overshoot thesustainable investment ratio.Why does such overshooting occur? The political drawbacks of pushing theconsumers beyond endurance can be substantial, both in terms of loss of facefor the party and possible demotion of individual leaders who have to besacrificed to calm public opinion. Thus an optimal strategy would seem to beto push investm ent to a level just co nsistent with the con strain ts, but n ot totransgress them. If the authorities correctly identified the position of theconstraints this would lead, not to cycles, but to the smooth evolution (andpossibly the constancy) of the consumption ratio through time. If however theauthorities misperceive the constraints, they may unwittingly transgress them,only to be forced to backtrack later. This is what is implicitly assumed to occurin the usual investment cycle model, although it has not previously beenformulated in this way. It follows that if the authorities are capable of learningfrom experience, such transgressions should become less serious and less frequentover time. Investment cycles should diminish in significance as experience ofcentral planning is accumulated. Some empirical tests of this proposition areprovided in Section 4.In the last 15 years there has developed a new approach to investment cycleswhich owes much to the microeconomic analysis of Soviet-type economiesexp oun ded by Ko rna i (1980). The ap plication of these ideas to investm ent cyclesis due m ainly to Ba uer (1978, 1988). Th is is wh at ha s been referred to a bo veas the Hungarian school. The emphasis here is on the game that is playedbetween investment claimants and allocators. As Kornai stresses, there is a softbudget constraint on investment expenditure, so that if the funds requested areinsufficient to complete a project, in practice more funds are almost invariablyallocated. This gives claimants a powerful incentive to underestimate the true


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M. F. BLEAN EY 519cost of an investment projectnot only is this not penalized, but it increasesthe chance of acceptance by raising the apparent rate of return. In effectinvestment authorizations are authorizations to start a project, not to spend aspecified sum of money.

Cost underestimation leads to excess demand in the investment sector, withconsequent delays and cost overruns. The planners enter the next period withan unexpectedly large overhang of uncompleted investment projects, to whichthey can adjust in one of three ways: by enlarging the investment budget, byreducing the number of new projects started, or by accepting a 'scattering' ofinvestment funds amongst the unfinished projects and the originally plannednumber of new ones. Bauer (1988) discusses the way in which an investmentcycle can develop out of this situation.The novel elements in the Hungarian model boil down essentially to this:(1) the planners do not control the volume of investment as closely as previouslythoughtin effect the policy variable is the number of new projects startedrather than total investment, and (2) because of this the volume of unfinishedinvestment left over from the previous period represents an additional constrainton planners' investment decisions. This tends to suggest that (a) the investmentcycle cannot be eliminated altogether, because cost underestimation is difficultto forecast, and (b) in addition to the variables already mentioned, the volumeof unfinished investment should be positively correlated with total investment.

3. A simple modelInvestment plans are formulated simultaneously with plans for output,absorption and consumption. Out-turns for all these variables will, in general,differ from planned values. A complete model would seek to explain plannedvalues and the plan/out-turn relationship separately. However, the data set issimply not large enough to discriminate between the great variety of possiblemodel specifications, so to avoid data-mining we simplify by assuming that as

a share of output all variables are at the values the planners would have chosen,given the out-turns for the other variables. This allows us to ignore the distinctionbetween plan and out-turn, provided we work in output shares.Define variables as follows (all as a share of output):/ -gross fixed investmentC -consumptionZ -dom estic absorptionU-gross fixed investment committed to unfinished projects started in earlier

periodsS -investment in stockbuilding and work in progressBy definition we have

Z = C + 1 + S (1)


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5 20 I N V E S T M E N T C Y C L E SIn a closed economy model Z = 1 and if we treat S as a random error we obtaina negative correlation between / and C. Such a negative correlation does notnecessarily imply a cyclical relationship: one of these variables could beincreasing sm ooth ly at the expense of the oth er. A simple way to distinguishbetween trends and cycles is to carry out a regression such as:

/ = a + bt + dC + v (2)where t represent time, v a rando m error and a, b and d are parameters to beestimated (since consumption and investment are simultaneously determined,there is no particular reason to make investment rather than consumption thedependent variable; the precise formulation becomes critical as more variablesare added, and some regression results with consumption as the dependentvariable are presented in Section 4). Any time trend in / will tend to be pickedup in b, wh ereas sudde n shifts of resources between investm ent and con sum ptionwill be reflected in d. A possible alternative would be to regress / on past valuesof itself lagged at least two periods, so as to derive a difference equation whichcould then be examined for cyclical solutions. However, this latter approachseems inferior because it assumes a degree of regularity to investment cycleswhich the proponents of the theory have never asserted.

How could the learning hypothesis be tested within this framework? It isinsufficient just to test for a reduction in d over time, because this does notaccurately capture the implications of the hypothesis. As the planners learnabout the consumption constraint, this is likely to be reflected as much in thevariance of C as in the value of d. It is more appropriate to look at the amountof investment fluctuation which is estimated to take place at the expense ofconsumption, which could be measured by var(dC).

In an o pen econ om y we would need to ad d a term in Z to (2): 2I = a +bt + dC + eZ + v (3)

By comparing var(dC) with var(eZ) one obtains an estimate of the relativesignificance of consumption and the balance of payments in offsetting theinvestment cycle. The learning hypothesis would tend to suggest that Z wouldbecome relatively more important with experience. One might wish to consider,as an alternative to (3), the first-difference version

A/ = a' + d'AC + e'AZ + v' (4 )2 A referee has questioned whether the absorption ratio is a more appropriate variable than thetrade balance here. The difference is critical in the presence of terms-of-trade movements, whichhave been substantial over the period under consideration. If the terms of trade deteriorate, a givenvolume of exports pays for fewer imports, so if the trade balance remains the same, the absorptionratio falls. This must be reflected in a squeeze on domestic consumption or investment. In short,in the presence of movements in the terms of trade, the trade balance is not necessarily a goodindicator of the volume of resources available for domestic use, because it is influenced by bothvolume and price effects. If correctly calculated, the absorption ratio should incorporate only volumeeffects, which makes it the appropriate variable for this study, which is based on constant-pricemeasures of the consumption and investment ratios.


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M. F. BLEAN EY 521In the absence of serial correlation the choice between (3) and (4) can be basedon minimising the residual sum of squares (Harvey (1980)).A formulation such as (3) obscures the relationship between consum ption andabsorption. Investment cycle theory would suggest tha t the correlation betweenthem would be rather low, especially once planners felt confident that they hadhit the consumption constraint, since they would be unwilling to penaliseconsumption when absorption fell and would wish to use the additionalresources for investment when absorption rose. This can be tested by rearranging(3) to make C the dependent variable.If the Hungarian model is correct, we would expect that / would be pushedup by a large overhang of unfinished investments, because the planners wouldbe unwilling to depress new starts too far. Thus the ability of this model toexplain investment behaviour could be tested by adding a term in U to (3),yielding:3 I = a + bt + dC + eZ+fU + v (5)In the next section we report estimates of equations (3) to (5) for the USSRand five East European economies.4. Empirical evidence

Estimates of equation (3) for six countries over the period 1969-86 are givenin Table 1 (data sources are given in the Appendix). These data were all derivedfrom the same source in which there had been a conscious effort to achieveconsistency. For at least some of the countries figures from before 1969 wereavailable, but there would have been difficulties in achieving a consistent seriescovering the entire period. In fact data back to 1950 were obtained for twocountries (Hungary and Poland), as is discussed below, but not in a fullyconsistent specification, so that it was decided to use the earlier data in aseparate regression.For Czechoslovakia the equation was estimated with a break in the timetrend at 1980/81, because a Chow test revealed evidence of param eter instabilitywhich was largely accounted for by the time trend. The Durbin-W atson statisticfor Poland, at 1.08, is low but above the lower .05 significance level of 0.93.Estimation with an AR(1) error term for Poland results in very similar pointestimates of the coefficients.A significant negative coefficient on consumption, as suggested by thetraditional closed-economy model, appears only for Hungary and Poland (bothsignificant at the .01 level). These were also the two countries with the most3 It could be objected here that since U does not appear in (IX it should not be included in (5)

in addition to the other variables, since if U forces a change in /, the other variables will need toadjust to reflect thatso there is double-counting. This argument does indeed suggest that somecollinearity may appear between U and the other variables, but the Hungarian model does notdeny the possibility of other forms of investment cycle, so that a proper test requires us to seewhether it can explain some of the investment fluctuation not explained by a simpler model. Forthis V must be included alongside the other explanatory variables.


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522 IN V E S T M E N T C Y C LE STABLE 1

Investment equa tions for six countries 1969-86Dependent variableEst imation method:

constanttimeT8186I n Z

I n CR 2sDurb in-Watson

: I n /OLSBulgaria

.023(1.59)

.0062(1.30)

.67(2.44)

.06(0.12)0.40

.0311.91

Czech.- . 0 0 8 9(0.93)

019(6.01)- . 0 3 5(6.43)

1.11(5.94)

.05(0.13)0.96.0151 99

GDR- . 0 0 6 7(0.44)

.00091(0.45)

.38(1.00)

1.90(3.47)0.97.0272.06

Hungary.028

(1.36).0034

(1 17)

1.49(7.46)

- 1 . 1 6(3.34)0.90

.0332.16

Poland- . 0 4 4(1.90)

.017(6.36)

2 34(6.71)

- 1 . 2 6(5.65)0.93

.0391.08

USSR*.014

(0.68).0034

(0.87)

.63(.82)

- . 5 4(1.51)0 2 1

.0211.75

1969-83./ gross fixe d invcitm cnt/net material product.T8I86- time trend for 1981-86 only.Z net material product used/net material product.C. consumption/net material product.5 standard error of the regressionFigures in brackets are t-statistics.

volatile investment ratios, as me asured by the stan da rd dev iation of year-on-yea rchanges. The USSR was the only other country which emerged with a negativeconsumption coefficient, but it was not significant even at the .10 level. For theG D R the co ns um ptio n coefficient is, surprisingly, strongly po sitive. Th is resultis probably related to the particular path followed by the GDR investmentratio, which was very stable up to 1980, and then fell steadily and quitesubstan tially. This path is no t well captured by a linear time trend , and this mayexplain the relatively good performance of the first-difference version for theGDR (discussed below).

Turning to the absorption coefficient, we find that it is significantly positivefor four of the five east European countries, but not the USSR and the GDR.In the first-difference version (resu lts not rep orted to save spac e), the ab so rpt ioncoefficient was positive in all countries and significant at the .05 level in allexcept the USSR. The consumption coefficient was significantly negative onlyfor Poland. Only in the case of the GDR, however, was the residual sum ofsquares less than in the levels version, and then only marginally so, whichimplies that, according to Harvey's (1980) test, the levels version is generallyto be preferred. The first-difference results do, however, emphasise thesignificance of the investment-absorption relationship in eastern Europe inrecent years.


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M. F. BLEANE Y 523It is striking that the model works very poorly for the USSR, with allcoefficients insignificant and a very low R 2 (the standard error of the regressionis also low, which suggests that, as also in the case of Bulgaria, there was lessvolatility in the investment ratio to be explained). This negative result confirms

thefindingsof previous investigators, who have also failed to find any evidenceof investment cycles in the Soviet Union in the post-war period (Bajt (1971);Bauer (1988)).The results of rearranging equation (3) so as to make consumption thedependent variable are shown in table 2. The Durbin-Watson statistics are lowfor Bulgaria and Poland. Estimation with an AR(1) error term reduces theestimated In Z coefficient for Bulgaria to 0.06, but otherwise m akes very littledifference to the point estimates. In all cases the coefficient of In Z is positive,but is significant at the .05 level only for the GDR, Hungary and Poland. For

allfiveEast European countries (but not the USSR, where both are insignificant),the coefficient of ln Z is smaller than in Table 1, indicating tha t investment isproportionately more strongly correlated with changes in the absorption ratiothan is consumptiona result which is consistent with the predictions ofinvestment cycle theory. In the first-d ifference version of the consumptionequations (not shown), all coefficients were insignificant except in the case ofPoland, where the absorption coefficient was significantly positive andconsumption coefficient significantly negative.TABLE 2

Consumption equations for six countries 1969-86Dependent variable:Estimation method:

constanttimeT8186l n ZIn/R2sDurbin-Watson

l n CO L SBulgaria

.0061(0.73)- . 0 0 7 9(5.04)

.28(1.83)

.02(0.12)0.94

.0160.85

Czech.- . 0 0 9 1(1.47)- . 0 0 7 1(1.94).011(1.52)

.17(0.72)

.02(0.13)0.93

.0102.22

GDR- . 0 0 5 7(1.08)

.0004(0.52)

.26(2-13)

.24(3.47)0.98

.0082.79

Hungary.011

(0.90)- . 0 0 0 5(0.30)

.53(2.51)- . 3 8(3.34)0.59

.0191.48

Poland- . 0 3 1( 2 0 0 )

.011(7.14)

1.01(2.62)- . 5 5(5.65)0.91

.0261.02

USSR*- . 0 1 9(1.22)

.0033(1.09)

.85(1.55)- . 5 4(1.51)0.37

.0161.96

1969-83./: gross fiied investm ent/oet material p rodu ctTS1S6: time trend for 1981-86 only.Z: net miterial product used/n et material prod uctC: consumption/net material producti: standard error of the regression.Figures in brackets are t-statisttcs.


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524 INVESTMENT CYCLESTABLE 3

Investment equations for Hungary and Poland 1950-70

Dependent variable: In /Estimation method: OLSCountryHungary

Poland

const- 0 8 6(1.83)

R2 = 0.766.84

(3.02)R2 = 0.86

time

.0097(2.59)s = .097

.010(4.77)s = .041

D1957-.52(3.77)

DW= 2.65

DW= 1.55

TB-.012

(196)

-0026(.88)

lnC-.87(2.98)

-108(255)

/ gross fixed investment/net material productD1957 dummay variable = 1 in 1957, zero otherwiseTB trade balance/net material product.C consumption/net material product5 standard error of the regressionDW Durbin-Watson statisticFigures in brackets arc t-statistics.

For Hungary and Poland we were able toestimate similar equations for the1950-70 period, using the trade balance divided by national income in placeof the absorption ratio, which was unavailable. The results are shown in Table3. In both cases there is a significant upward time trend, and the trade balanceand consumption coefficients areof the expected sign, but with only the latterconsistently significant. Some evidence on the relative importance of consumptionand absorption in explaining investment ratios in the two periods is presentedin Table 4. Forboth countries consumption was relatively more important inthe earlier period, as predicted by the learning hypothesis.

T A B L E 4Comparisons of explanatory power of consumption and

absorption in two periods for Hungary and Poland% of investment variance explained by:

1950 70 TB C5479

2353

HungaryPoland1969-86HungaryPoland

4621Z7747

Estimated from equations in Table* 1 and 3. Percentage ofvariance explained calculated as (estimated coefficient)2 timesvariance ofexplanatory variable.TB: trade balance/net material product.C' comuraption/net material product.Z net material product used/net material product


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M. F. BLEA NEY 525TABLE 5

The impa ct of unfinished investm ent pro jects, four countries,1969-83

Dependent variable: In /est imation method: OLSCountry Coeff. t-stat. F-stat.BulgariaCzechoslovakiaHungaryUSSR

- . 1 4.0083.2824

- . 8 4.191.721.83

.042.963.37

Figures refer to the addition of In U to equations reported inTable 1. F-statistic (for restriction that coefficient of In U is zero)omitted for Bulgaria where coefficient was not of expected sign.Critical value at the .10 level for F( 1,1 0) - 3.29.U: stock of unfinished inve stm entj /net material product.

For four countries data were available on the stock of unfinished investments.There is some doubt about the accuracy of these data and whether theycorrespond exactly to the theoretical concept, but at present they constitute thebest data available. Estimates of equation (5) for these four countries are reportedin Table 5. There is mild support for the hypothesis of a positive influence of thestock of unfinished projects on investment ratios in Hungary and the USSR(though in neither case does the coefficient reach the .05 level of significance),but not in Bulgaria and Czechoslovakia.5. Conclusions

From the review of investment cycle theories presented above, it would appearthat the fundamental premises (political preference for investment overconsum ption; bargaining games between enterprises and planners) are relativelyuncontroversial, and broadly accepted by analysts of Soviet-type economies.What is in dispute is whether these phenomena will giverise o systematic cyclesin investment ratios. This is fundamentally an empirical question, which inprinciple could be resolved if investment cycle theories could be condensed intoa series of testable hypotheses. Hitherto, rather little progress has been madein this direction.Early theories of the investment cycle, based essentially on closed-economymodels, are vulnerable to the criticism that if socialist planners are capable oflearning from experience to what level the share of consumption in output canbe sustainably depressed, they will learn to set plans that respect this constraint,so that the investment cycle will tend to disappear with time, or at least tobecome more closely correlated with movements in the absorption ratio. Theempirical results presented here lend some support to this hypothesis. InHungary and Poland consumption has declined in importance relative to


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5 26 I N V E S T M E N T C Y C L E Sabsorption in explaining investment fluctuations, whilst in the other countriesthere has been no significant negative relationship between consumption andinvestment shares since 1969. All East European countries exhibited a strongpositive relationship between investment and absorption, and a weaker one (inthe sense of a lower elasticity) between consumption and absorption. Thestronger association of variations in absorption with investment than withconsumption is consistent with the predictions of investment cycle theory. Ashas been found by previous investigators, the investment cycle model fits thepost-war experience of the Soviet Union much less well than that of the EastEuropean count r ies .

The 'Hungarian' model of the investment cycle, which emphasises theoverhang of uncompleted investment projects as an additional constraint oncurrent decisions, was also tested. The results suggested that this model mayhave some validity for Hungary and the USSR, but not for Bulgaria andCzechoslovakia.

The empirical strategy followed here has been to estimate simple models thatcan allow for irregular cyclical patterns. Experimentation by the author suggeststhat results tend to be sensitive to model specification, and because of this (andalso reservations about data quality) it was felt that the development of morecomplex models, although in principle desirable, was not justified at the presentstage. Conclusions are necessarily tentative, but they suggest that furtherempirical research along these lines could be rewarding.University of Nottingham

APPENDIXData Sources

Th e data used in Tables 1 and 2 are derived from the data base ma intained by the U nitedN atio ns Econ om ic Comm ission for Eu rop e as published in Section B of the Appendix Tab les ofEconomic Survey of Europe in 1987-88 (New York. 1988). The path of the log of the investmentratio is derived from data on gross investme nt and net material product (T ables B8 and B lrespectively). D ata on domestic con sum ptio n an d abso rption (net material prod uct used forconsu mp tion and accum ulation) are drawn from Table B2. Da ta used in Table 3 are drawn fromStatistical Pocket B ook of Hunga ry 1973, pp. 12-14, 30; and from Rocznik Statystyczny 1972, Tables91 , 105, 117 and 538. D at a on the stock of unfinished inve stm ents are from J. Wimecki (1988,Tab le 1.6, p. 28). In estimation all variables w ere in log arithm s; this permitted calculation of outp utshares directly from volume indices of the individual variables.

R E F E R E N C E SBAJT, A. (1971), 'Investment cycles in European socialist economies: a review article', Journal of

Economic Literature, vol. 9, pp. 5 3 - 6 3 .BAUER, T. (1978), 'Investm ent cycles in planne d ec onom ies' , Ada Oeconomica, vol. 21, pp. 243-6 0.BAUER, T (1988 ), 'F ro m cycles to crisis?1, Eastern European Economics, vol. 27, pp. 5-44.GOLDMANN, J. and KOUBA, K. (1969), Economic Growth in Czechoslovakia, White Plains, N.Y.


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M. F. BLEA NEY 527HARVEY, A. C. (19 80), "On comp aring regression m odels in levels a nd first differences', International

Economic Review, vol. 21, pp. 707-20 .ICKES, B. W. (19 86), 'Cyclical fluctuations in centrally planned econ om ies: a critique of the literature',

Soviet Studies, vol. 38, pp. 36-52.K ORNAI, J. (1980), Economics of Shortage 2 vols^ Amsterdam, 1980.NOVE, A. (1969), 'Cyclical fluctuations under socialism', in M . Bronfenbrenner (ed.), Is the BusinessCycle Obsolete! New York.OUVETRA, J. H. G. (I96 0), 'Cyclical econo mic grow th under collectivism', Kyklos, voL 13, pp. 2 2 9 - 5 4 .WINIECKJ, J. (1988), The Distorted World of Soviet-Type Econo mies, London.

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Bleany M. Investment Cycles in Socialist Economies