Path Dependence, Transformation and Convergence- A Mathematical Model of Transition to Market
Keene State University
Southern New Hampshire University
Computer Futures, Inc.
Last modified: May 10, 2006
In this paper we examine the transition of the countries of Central and Eastern Europe from socialist, centrally planned economies to more open, market driven economies. We isolate three key dimensions of the transition: path-dependence, transformation and convergence. Next, we present a new typology designed to explain both differences and similarities encountered across these seventeen countries. Using this typology, we argue for a normative view of transition that expresses in functional form not only the numerical evidence of transition (e.g. macroeconomic indicators, amount of foreign direct investment, etc.) but also the more qualitative aspects of path dependence and convergence. In order to develop this view, we employ probability theory to characterize the transition to market as an iterative process of sequential improvements/deterioration. Following the work of W. Brian Arthur, we then develop a generalized polya process for the progression to market. In addition to the standard terms specifying initial conditions and system perturbation we introduce a novel third term designed to incorporate the effects of convergence to European Union norms. We then use the model to explain the interaction of various subsystems in the CEE countries, to explore their linkages to Western markets, and to compare their relative economic performance over the past fifteen years. We conclude by identifying three distinct levels of progress as characterized by economic and political performance and attempt to explain the factors responsible for these differences across the region.