The Real Sector Dimension

Abstract

The benefits of market economies over centrally-planned economies stem from economic agents freely responding to prices that better reflect real social costs. The liberalization of prices to reflect true economic scarcity is a top priority for policy-makers in the previously centrally-planned economies (PCPEs) for two reasons. First, rents were one of the most distorted of all prices, owing to the status of housing as a social (as opposed to economic) good.¹ Increasing rents will generate substantial efficiency gains in reallocating the existing stock (Daniel and Semjen, 1987 and Tolley, 1991). Second, well-functioning housing markets are an essential precondition for developing a market-based economy. For example, labor-market efficiency would be enhanced through vastly improved household mobility (Blanchard et al., 1991), and the efficiency of capital accumulation and allocation would be improved by funding entrepreneurial effort via borrowing against the largest simple form of wealth—homeowner equity (Newberry, 1992).