Oxford Economic Papers 43 (1991), 515-527

INVESTMENT CYCLES IN SOCIALIST

ECONOMIES: A RECONSIDERATION*
By MICHAEL BLEANEY

1. Introduction
THE theory of investment cycles in socialist economies has had a chequered
history. Since the idea was first formulated in the late 1950s it has always had
some enthusiastic adherents, whilst many other analysts have remained
profoundly sceptical of its value. Moreover the experience of Soviet-type
economies has been such as to maintain this balance nicely, with investment
appearing to follow a cyclical pattern at some periods in some countries, but
not universally.
A proper assessment of investment cycle theory has been hampered by a lack
of sufficient rigour in theoretical formulations (Ickes (1986)) and by weak
empirical work, which has relied almost exclusively on graphical techniques
and descriptive statistics that do not explicitly test the maintained hypothesis
against alternatives (Bajt (1971); Bauer (1978, 1988)). In this paper we attempt
to pull together the separate strands of this rather diverse literature and to
formulate a model which can be tested against published data. The results are
mixed, but some tentative conclusions can be drawn.
The theory which is developed here is explicitly based on the objectives of
the political leadership of a one-party state, and to this extent its relevance to
Eastern Europe and the Soviet Union has declined sharply since the middle of
1989, because of the political changes that have taken place there. Nevertheless
the issues raised remain of interest, not only from the viewpoint of understanding
the history of these countries, but also because the theory may be of continued
relevance in some non-European countries.
The plan of the paper is as follows. In Section 2 investment cycle theories
are surveyed and the main lines of argument identified. In Section 3 a formal
model is presented, and in Section 4 it is tested on empirical data from
the USSR and five east European countries. Conclusions are presented in
Section 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 which
microeconomic pressures towards over-investment have come to the fore. The

• The author gratefully acknowledges the research assistance of Christine Green and the helpful
comments of two anonymous referees on a previous version of this article. Any errors that remain
are of course the author's responsibility.

& Oxford Unimrity Prcn 1991

516 INVESTMENT CYCLES

latter theory is associated particularly with Hungarian writers, such as Bauer

(1988) and Kornai (1980). We shall discuss the earlier, 'macroeconomic' theories
first.
In the original theories of the investment cycle it was assumed that the
government had a preference for investment over consumption. Goldmann and
Kouba (1969, p. 44) attributed this preference to 'certain subjectivist tendencies
towards maximising the rate of growth'. Oliveira (1960) discusses it at some
length, arguing that the planners have a lower rate of time preference than
consumers, partly because of the latters' tendency towards myopia and partly
because of the socialisation of investment risk. Bauer (1978) cites as forces
promoting a high rate of investment the ambition to end economic
backwardness, the need to strengthen defence potential and the desire to increase
the prestige of the national power elite.
Despite this emphasis on political preferences, none of these authors explicitly
relates these tendencies to political institutions. Do these preferences result from
the collective ownership of the means of production per se or from the monolithic
structure of the political system, dominated by a single party officially designated
as the leading organ of society? This issue cannot be resolved empirically, since
investment cycles have only been observed in collectivised economies with a
Soviet type of political system.
Oliveira's line of argument would seem to imply that socialist planners would
invest more than would be chosen by consumers whatever the institutional
structure of the political system. However this is open to the objection that it
is politicians rather than professional planners who take the strategic decisions
about the economy, and therefore it is the incentives built into the political
system that are decisive. The most relevant difference between one-party states
and parliamentary democracies would seem to be that politicians do not run
the risk of being thrown out of office by the electors at prescribed intervals. As
a result, they do not face the need to produce a sense of well-being amongst
the population at these moments—there is no equivalent to the 'political business
cycle'.1 Perhaps mainly for this reason, political leaders enjoy considerable
longevity. Both Kadar of Hungary and Zhivkov of Bulgaria lasted more than
three decades in the highest party post, and stints of more than a decade have
been commonplace. Thus both the party and individual leaders are in a position
to take a long-term view, and are likely to have a low (and quite possibly
negative) discount rate.
In principle this could express itself in various ways—for example in a
willingness to undertake structural reforms despite set-up costs. In practice,
however, ideological considerations work against experimentation in the
economic field; the main stumbling block has been the requirement that
economic arrangements should not serve to undermine the leading role of the
party. 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 Soviet-type
economies, in so far as new leaders have tended to begin with a consumption boom.
 M. F. BLEANEY 517

in the planning bureaucracy. With institutional change ruled out, investment

has been regarded as the main policy variable influencing the rate of growth,
on the implicit assumption that much technical progress is embodied in new
capital equipment. Thus the low discount rate reflects itself in a desire for a
high rate of investment.
The constraints on the desire to maximise investment have been listed by
Kornai (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 to
investment.
(3) The state of the balance of payments and the volume of foreign debt
The first two might be classified as the 'internal' or 'closed economy' constraints.
The third, 'external' constraint is more subtle and complex, since it can also
operate as a source offlexibilityin the short run, allowing the internal constraints
to be bypassed. It is essentially a long-run constraint, within which the planners
may choose to finance additional present investment at the expense of a higher
stock of external debt, the servicing of which will be a future burden on the
economy.
Previous writers have examined these constraints in the context of the
deceleration phase of the investment cycle, and have differed in what they regard
as the binding constraint Goldmann and Kouba emphasise disproportions and
bottlenecks brought about by the investment boom. This may well be a good
analysis of the Soviet First Five-Year Plan, but its relevance to later experience
is more doubtful (Nove (1969)). As the economy develops consumers learn to
become more sceptical of planners' forecasts, and it becomes less acceptable to
resort to direct repression of discontent, so that consumer resistance is likely
to replace physical bottlenecks as the binding constraint. It was Oliveira who
first stressed the consumption constraint, arguing that 'generalized social
disapproval will subject the planning authority to increasing pressure, urging
a change in its allocation criteria; and... such pressure, if disregarded, will finally
become an element in the internal competition for social control' (Oliveira
(1960, p. 245)). It is reasonable to assume that the consumption standards which
the population is prepared to accept rise with economic development. To take
account of this, the consumption constraint is probably best formulated as a
share of output below which consumption cannot be reduced without provoking
significant unrest.
Up to 1970 the theory of investment cycles was developed largely within a
closed-economy framework. However it is clear that external relations may
exert a profound influence on the investment cycle in an open economy in at
least two ways. First it may be possible to increase investment by foreign
borrowing, without reducing consumption. Such a strategy implies an
expectation that the external debt can be repaid without too much difficulty
out of future exports (Poland in the period 1972-5 is the case which springs
obviously to mind). Secondly, a permanent change in the terms of trade will
518 INVESTMENT CYCLES

have the effect of tightening or loosening the consumption constraint. A

terms-of-trade deterioration forces the authorities to allow domestic absorption
to grow more slowly than domestic output until adjustment is achieved, so
either the consumption or the investment ratio must fall. If the authorities feel
that the consumption constraint is tight, they are likely to make investment
bear the brunt of the adjustment. Conversely, a terms-of-trade improvement
represents an opportunity to raise the investment ratio. Effects similar to a
terms-of-trade deterioration may result from a weakening of demand in export
markets, loss of export competitiveness or a rise in protectionism abroad.
A major weakness of early investment cycle theory was its failure to examine
systematically under what conditions the planners' desire to maximize the rate
of investment would give rise to cycles. Given that the authorities are constrained
by balance-of-payments considerations and a popular desire for higher
consumption, cycles can arise in one of two possible ways: (a) cyclical variation
in the tightness of the constraints; or (b) misperceptions of the constraints for
which the authorities are subsequently obliged to correct. It is difficult to see
why the tightness of the constraints should vary in cyclical fashion, and I know
of no author who has proposed such a theory. The universally adopted
explanation of cycle rests on the propensity of the planners to overshoot the
sustainable investment ratio.
Why does such overshooting occur? The political drawbacks of pushing the
consumers beyond endurance can be substantial, both in terms of loss of face
for the party and possible demotion of individual leaders who have to be
sacrificed to calm public opinion. Thus an optimal strategy would seem to be
to push investment to a level just consistent with the constraints, but not to
transgress them. If the authorities correctly identified the position of the
constraints this would lead, not to cycles, but to the smooth evolution (and
possibly the constancy) of the consumption ratio through time. If however the
authorities misperceive the constraints, they may unwittingly transgress them,
only to be forced to backtrack later. This is what is implicitly assumed to occur
in the usual investment cycle model, although it has not previously been
formulated in this way. It follows that if the authorities are capable of learning
from experience, such transgressions should become less serious and less frequent
over time. Investment cycles should diminish in significance as experience of
central planning is accumulated. Some empirical tests of this proposition are
provided in Section 4.
In the last 15 years there has developed a new approach to investment cycles
which owes much to the microeconomic analysis of Soviet-type economies
expounded by Kornai (1980). The application of these ideas to investment cycles
is due mainly to Bauer (1978, 1988). This is what has been referred to above
as the Hungarian school. The emphasis here is on the game that is played
between investment claimants and allocators. As Kornai stresses, there is a soft
budget constraint on investment expenditure, so that if the funds requested are
insufficient to complete a project, in practice more funds are almost invariably
allocated. This gives claimants a powerful incentive to underestimate the true
 M. F. BLEANEY 519

cost of an investment project—not only is this not penalized, but it increases

the chance of acceptance by raising the apparent rate of return. In effect
investment authorizations are authorizations to start a project, not to spend a
specified sum of money.
Cost underestimation leads to excess demand in the investment sector, with
consequent delays and cost overruns. The planners enter the next period with
an unexpectedly large overhang of uncompleted investment projects, to which
they can adjust in one of three ways: by enlarging the investment budget, by
reducing the number of new projects started, or by accepting a 'scattering' of
investment funds amongst the unfinished projects and the originally planned
number of new ones. Bauer (1988) discusses the way in which an investment
cycle 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 previously
thought—in effect the policy variable is the number of new projects started
rather than total investment, and (2) because of this the volume of unfinished
investment left over from the previous period represents an additional constraint
on planners' investment decisions. This tends to suggest that (a) the investment
cycle cannot be eliminated altogether, because cost underestimation is difficult
to forecast, and (b) in addition to the variables already mentioned, the volume
of unfinished investment should be positively correlated with total investment.

3. A simple model
Investment 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 planned
values and the plan/out-turn relationship separately. However, the data set is
simply not large enough to discriminate between the great variety of possible
model 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 distinction
between plan and out-turn, provided we work in output shares.
Define variables as follows (all as a share of output):
/ -gross fixed investment
C -consumption
Z -domestic absorption
U-gross fixed investment committed to unfinished projects started in earlier
periods
S -investment in stockbuilding and work in progress
By definition we have

Z = C+ 1+S (1)
520 INVESTMENT CYCLES

In a closed economy model Z = 1 and if we treat S as a random error we obtain

a negative correlation between / and C. Such a negative correlation does not
necessarily imply a cyclical relationship: one of these variables could be
increasing smoothly at the expense of the other. A simple way to distinguish
between trends and cycles is to carry out a regression such as:
/ = a + bt + dC + v (2)
where t represent time, v a random error and a, b and d are parameters to be
estimated (since consumption and investment are simultaneously determined,
there is no particular reason to make investment rather than consumption the
dependent variable; the precise formulation becomes critical as more variables
are added, and some regression results with consumption as the dependent
variable are presented in Section 4). Any time trend in / will tend to be picked
up in b, whereas sudden shifts of resources between investment and consumption
will be reflected in d. A possible alternative would be to regress / on past values
of itself lagged at least two periods, so as to derive a difference equation which
could then be examined for cyclical solutions. However, this latter approach
seems inferior because it assumes a degree of regularity to investment cycles
which the proponents of the theory have never asserted.
How could the learning hypothesis be tested within this framework? It is
insufficient just to test for a reduction in d over time, because this does not
accurately capture the implications of the hypothesis. As the planners learn
about the consumption constraint, this is likely to be reflected as much in the
variance of C as in the value of d. It is more appropriate to look at the amount
of investment fluctuation which is estimated to take place at the expense of
consumption, which could be measured by var(dC).
In an open economy we would need to add a term in Z to (2): 2
I = a +bt + dC + eZ + v (3)
By comparing var(dC) with var(eZ) one obtains an estimate of the relative
significance of consumption and the balance of payments in offsetting the
investment cycle. The learning hypothesis would tend to suggest that Z would
become 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 the
trade balance here. The difference is critical in the presence of terms-of-trade movements, which
have been substantial over the period under consideration. If the terms of trade deteriorate, a given
volume of exports pays for fewer imports, so if the trade balance remains the same, the absorption
ratio 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 good
indicator of the volume of resources available for domestic use, because it is influenced by both
volume and price effects. If correctly calculated, the absorption ratio should incorporate only volume
effects, which makes it the appropriate variable for this study, which is based on constant-price
measures of the consumption and investment ratios.
 M. F. BLEANEY 521

In the absence of serial correlation the choice between (3) and (4) can be based
on minimising the residual sum of squares (Harvey (1980)).
A formulation such as (3) obscures the relationship between consumption and
absorption. Investment cycle theory would suggest that the correlation between
them would be rather low, especially once planners felt confident that they had
hit the consumption constraint, since they would be unwilling to penalise
consumption when absorption fell and would wish to use the additional
resources 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 pushed
up by a large overhang of unfinished investments, because the planners would
be unwilling to depress new starts too far. Thus the ability of this model to
explain 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 USSR
and five East European economies.

4. Empirical evidence
Estimates of equation (3) for six countries over the period 1969-86 are given
in Table 1 (data sources are given in the Appendix). These data were all derived
from the same source in which there had been a conscious effort to achieve
consistency. For at least some of the countries figures from before 1969 were
available, but there would have been difficulties in achieving a consistent series
covering the entire period. In fact data back to 1950 were obtained for two
countries (Hungary and Poland), as is discussed below, but not in a fully
consistent specification, so that it was decided to use the earlier data in a
separate regression.
For Czechoslovakia the equation was estimated with a break in the time
trend at 1980/81, because a Chow test revealed evidence of parameter instability
which was largely accounted for by the time trend. The Durbin-Watson statistic
for 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 point
estimates of the coefficients.
A significant negative coefficient on consumption, as suggested by the
traditional closed-economy model, appears only for Hungary and Poland (both
significant at the .01 level). These were also the two countries with the most
3
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 to
adjust to reflect that—so there is double-counting. This argument does indeed suggest that some
collinearity may appear between U and the other variables, but the Hungarian model does not
deny the possibility of other forms of investment cycle, so that a proper test requires us to see
whether it can explain some of the investment fluctuation not explained by a simpler model. For
this V must be included alongside the other explanatory variables.
522 INVESTMENT CYCLES

TABLE 1
Investment equations for six countries 1969-86

Dependent variable : I n /
Estimation method: OLS

Bulgaria Czech. GDR Hungary Poland USSR*

constant .023 -.0089 -.0067 .028 -.044 .014

(1.59) (0.93) (0.44) (1.36) (1.90) (0.68)
time .0062 019 .00091 .0034 .017 .0034
(1.30) (6.01) (0.45) (1 17) (6.36) (0.87)
T8186 -.035
(6.43)
InZ .67 1.11 .38 1.49 2 34 .63
(2.44) (5.94) (1.00) (7.46) (6.71) (.82)
InC .06 .05 1.90 -1.16 -1.26 -.54
(0.12) (0.13) (3.47) (3.34) (5.65) (1.51)
R2 0.40 0.96 0.97 0.90 0.93 021
s .031 .015 .027 .033 .039 .021
Durbin-Watson 1.91 1 99 2.06 2.16 1.08 1.75

• 1969-83.
/ gross fixed invcitmcnt/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 regression
Figures in brackets are t-statistics.

volatile investment ratios, as measured by the standard deviation of year-on-year

changes. The USSR was the only other country which emerged with a negative
consumption coefficient, but it was not significant even at the .10 level. For the
GDR the consumption coefficient is, surprisingly, strongly positive. This result
is probably related to the particular path followed by the GDR investment
ratio, which was very stable up to 1980, and then fell steadily and quite
substantially. This path is not well captured by a linear time trend, and this may
explain the relatively good performance of the first-difference version for the
GDR (discussed below).
Turning to the absorption coefficient, we find that it is significantly positive
for four of the five east European countries, but not the USSR and the GDR.
In the first-difference version (results not reported to save space), the absorption
coefficient was positive in all countries and significant at the .05 level in all
except the USSR. The consumption coefficient was significantly negative only
for Poland. Only in the case of the GDR, however, was the residual sum of
squares less than in the levels version, and then only marginally so, which
implies that, according to Harvey's (1980) test, the levels version is generally
to be preferred. The first-difference results do, however, emphasise the
significance of the investment-absorption relationship in eastern Europe in
recent years.
 M. F. BLEANEY 523

It is striking that the model works very poorly for the USSR, with all
coefficients insignificant and a very low R2 (the standard error of the regression
is also low, which suggests that, as also in the case of Bulgaria, there was less
volatility in the investment ratio to be explained). This negative result confirms
thefindingsof previous investigators, who have also failed to find any evidence
of 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 the
dependent variable are shown in table 2. The Durbin-Watson statistics are low
for Bulgaria and Poland. Estimation with an AR(1) error term reduces the
estimated In Z coefficient for Bulgaria to 0.06, but otherwise makes very little
difference 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 lnZ is smaller than in Table 1, indicating that investment is
proportionately more strongly correlated with changes in the absorption ratio
than is consumption—a result which is consistent with the predictions of
investment cycle theory. In the first-difference version of the consumption
equations (not shown), all coefficients were insignificant except in the case of
Poland, where the absorption coefficient was significantly positive and
consumption coefficient significantly negative.

TABLE 2
Consumption equations for six countries 1969-86

Dependent variable: lnC

Estimation method: OLS

Bulgaria Czech. GDR Hungary Poland USSR*

constant .0061 -.0091 -.0057 .011 -.031 -.019

(0.73) (1.47) (1.08) (0.90) (200) (1.22)
time -.0079 -.0071 .0004 -.0005 .011 .0033
(5.04) (1.94) (0.52) (0.30) (7.14) (1.09)
T8186 .011
(1.52)
lnZ .28 .17 .26 .53 1.01 .85
(1.83) (0.72) (2-13) (2.51) (2.62) (1.55)
In/ .02 .02 .24 -.38 -.55 -.54
(0.12) (0.13) (3.47) (3.34) (5.65) (1.51)
R2 0.94 0.93 0.98 0.59 0.91 0.37
s .016 .010 .008 .019 .026 .016
Durbin-Watson 0.85 2.22 2.79 1.48 1.02 1.96

• 1969-83.
/: gross fiied investment/oet material product
TS1S6: time trend for 1981-86 only.
Z: net miterial product used/net material product
C: consumption/net material product
i: standard error of the regression.
Figures in brackets are t-statisttcs.
524 INVESTMENT CYCLES

TABLE 3
Investment equations for Hungary and Poland 1950-70

Dependent variable: In /
Estimation method: OLS

Country const time D1957 TB lnC

Hungary -086 .0097 -.52 -.012 -.87

(1.83) (2.59) (3.77) (196) (2.98)
R2 = 0.76 s = .097 DW= 2.65
Poland 6.84 .010 -0026 -108
(3.02) (4.77) (.88) (255)
R2 = 0.86 s = .041 DW= 1.55

/ gross fixed investment/net material product

D1957 dummay variable = 1 in 1957, zero otherwise
TB trade balance/net material product.
C consumption/net material product
5 standard error of the regression
DW Durbin-Watson statistic
Figures in brackets arc t-statistics.

For Hungary and Poland we were able to estimate similar equations for the
1950-70 period, using the trade balance divided by national income in place
of the absorption ratio, which was unavailable. The results are shown in Table
3. In both cases there is a significant upward time trend, and the trade balance
and consumption coefficients are of the expected sign, but with only the latter
consistently significant. Some evidence on the relative importance of consumption
and absorption in explaining investment ratios in the two periods is presented
in Table 4. For both countries consumption was relatively more important in
the earlier period, as predicted by the learning hypothesis.

TABLE 4
Comparisons of explanatory power of consumption and
absorption in two periods for Hungary and Poland

% of investment variance explained by:

1950 70 TB C

Hungary 46 54
Poland 21 79

1969-86 Z

Hungary 77 23
Poland 47 53

Estimated from equations in Table* 1 and 3. Percentage of

variance explained calculated as (estimated coefficient)2 times
variance of explanatory variable.
TB: trade balance/net material product.
C' comuraption/net material product.
Z net material product used/net material product
 M. F. BLEANEY 525

TABLE 5
The impact of unfinished investment projects, four countries,
1969-83

Dependent variable: In /
estimation method: OLS

Country Coeff. t-stat. F-stat.

Bulgaria -.14 -.84 —

Czechoslovakia .0083 .19 .04
Hungary .28 1.72 2.96
USSR 24 1.83 3.37

Figures refer to the addition of In U to equations reported in

Table 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( 1,10) - 3.29.
U: stock of unfinished investmentj/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 they
correspond exactly to the theoretical concept, but at present they constitute the
best data available. Estimates of equation (5) for these four countries are reported
in Table 5. There is mild support for the hypothesis of a positive influence of the
stock 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 appear
that the fundamental premises (political preference for investment over
consumption; bargaining games between enterprises and planners) are relatively
uncontroversial, and broadly accepted by analysts of Soviet-type economies.
What is in dispute is whether these phenomena will giveriseto systematic cycles
in investment ratios. This is fundamentally an empirical question, which in
principle could be resolved if investment cycle theories could be condensed into
a series of testable hypotheses. Hitherto, rather little progress has been made
in this direction.
Early theories of the investment cycle, based essentially on closed-economy
models, are vulnerable to the criticism that if socialist planners are capable of
learning from experience to what level the share of consumption in output can
be 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 to
become more closely correlated with movements in the absorption ratio. The
empirical results presented here lend some support to this hypothesis. In
Hungary and Poland consumption has declined in importance relative to
526 INVESTMENT CYCLES

absorption in explaining investment fluctuations, whilst in the other countries

there has been no significant negative relationship between consumption and
investment shares since 1969. All East European countries exhibited a strong
positive relationship between investment and absorption, and a weaker one (in
the sense of a lower elasticity) between consumption and absorption. The
stronger association of variations in absorption with investment than with
consumption is consistent with the predictions of investment cycle theory. As
has been found by previous investigators, the investment cycle model fits the
post-war experience of the Soviet Union much less well than that of the East
European countries.
The 'Hungarian' model of the investment cycle, which emphasises the
overhang of uncompleted investment projects as an additional constraint on
current decisions, was also tested. The results suggested that this model may
have some validity for Hungary and the USSR, but not for Bulgaria and
Czechoslovakia.
The empirical strategy followed here has been to estimate simple models that
can allow for irregular cyclical patterns. Experimentation by the author suggests
that results tend to be sensitive to model specification, and because of this (and
also reservations about data quality) it was felt that the development of more
complex models, although in principle desirable, was not justified at the present
stage. Conclusions are necessarily tentative, but they suggest that further
empirical research along these lines could be rewarding.

University of Nottingham

APPENDIX

Data Sources

The data used in Tables 1 and 2 are derived from the data base maintained by the United
Nations Economic Commission for Europe as published in Section B of the Appendix Tables of
Economic Survey of Europe in 1987-88 (New York. 1988). The path of the log of the investment
ratio is derived from data on gross investment and net material product (Tables B8 and Bl
respectively). Data on domestic consumption and absorption (net material product used for
consumption and accumulation) are drawn from Table B2. Data used in Table 3 are drawn from
Statistical Pocket Book of Hungary 1973, pp. 12-14, 30; and from Rocznik Statystyczny 1972, Tables
91, 105, 117 and 538. Data on the stock of unfinished investments are from J. Wimecki (1988,
Table 1.6, p. 28). In estimation all variables were in logarithms; this permitted calculation of output
shares directly from volume indices of the individual variables.

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BAJT, A. (1971), 'Investment cycles in European socialist economies: a review article', Journal of
Economic Literature, vol. 9, pp. 53-63.
BAUER, T. (1978), 'Investment cycles in planned economies', Ada Oeconomica, vol. 21, pp. 243-60.
BAUER, T (1988), 'From cycles to crisis?1, Eastern European Economics, vol. 27, pp. 5-44.
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