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Note
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Reference no. UVA-BP-0459
Authors: Wei Li
Published by: Darden Business Publishing
Originally published in: 2002
Version: 03.2005

Abstract

The rise and fall of central planning rank among the most significant events in the twentieth century. For much of the century, central planning, which had catapulted Russia from a backward country in 1921 to a world-class superpower in the 1960s, was looked upon as a viable model of economic development for many developing countries. By the 1980s, however, the limitations of central planning had become apparent. Countries in the Soviet Bloc were stagnant and appeared to be falling further behind Western countries in economic and technological development. In contrast, countries in Asia and South America that undertook market-oriented reforms had experienced rapid economic growth. Since the fall of the Berlin Wall in 1989, most formerly communist economies have engaged in a historical transition process to market economies. Despite its initial success, central planning as a system of organizing and directing a national economy had proven to be less efficient than the market system. Why this is so is the focus of this note. After a brief historical account of the rise of central planning, this note offers a conceptual framework for understanding how the centrally planned economy is organized and how central planning works, or rather how it doesn’t work.

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Abstract

The rise and fall of central planning rank among the most significant events in the twentieth century. For much of the century, central planning, which had catapulted Russia from a backward country in 1921 to a world-class superpower in the 1960s, was looked upon as a viable model of economic development for many developing countries. By the 1980s, however, the limitations of central planning had become apparent. Countries in the Soviet Bloc were stagnant and appeared to be falling further behind Western countries in economic and technological development. In contrast, countries in Asia and South America that undertook market-oriented reforms had experienced rapid economic growth. Since the fall of the Berlin Wall in 1989, most formerly communist economies have engaged in a historical transition process to market economies. Despite its initial success, central planning as a system of organizing and directing a national economy had proven to be less efficient than the market system. Why this is so is the focus of this note. After a brief historical account of the rise of central planning, this note offers a conceptual framework for understanding how the centrally planned economy is organized and how central planning works, or rather how it doesn’t work.

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