Transformation After Socialism*

January 2015

Leszek BalcerowiczWarsaw School of Economics

*I’m grateful to Magda Ciżkowicz, Aleksander Łaszek, Sonja Wap and Marek Tatała for their assistance in preparing this presentation.

1

Content:1. The institutional systems, policies, and outcomes

2. Socialism as an institutional system

3. The economic costs of socialism

4. The institutional trajectories after socialism

5. The economic outcomes after socialism

6. The non-economic outcomes after socialism

7. Explaining the differences in economic growth

2

1. The institutional systems, policies, and outcomes

3

Domestic Institutional SystemPropelling institutions

Constraining institutions

Economic Policy

Institutional(reforms)

Fiscal, monetary policies. Direct interventions

Other determinants of policies:- personality factors- political shocks, etc.

Long-run economic growth

External shocks

(1)

(3)(2)

(8)

(6)

(4)

(7)

(5)

4

- Policies – actions of public rulers- Non-institutional policies (institutions x personality

factors)- Constraining institutions:

- primary – the political system (checks and balances)- secondary (e.g. banking supervision, independent

central bank)- Propelling institutions:

- type and the level of protection of property rights- the extent of market competition- fiscal and regulatory burden

5

2. Socialism as an institutional system

6

2. Socialism as an institutional system

1. The monopoly of the non-private sector.2. Command economy

3. Non-democracy (the “democratic socialism” is impossible)4. A long list of “crimes against socialism” (as distinct from

crimes against other private persons)

Socialism was characterized by:

a) Weak propelling institutions: responsible for the declining rate of economic growth over a longer run (waste, low innovativeness)

b) Weak or non-existent constraining institutions: Responsible for the catastrophic policies which produced deep decline in GDP and sometimes in population (Stalinism, Maoism).

7

3. The economic costs of socialism

8

Per-capita GDP (in 1990 international dollars) in 1950 and 1990:

Poland vs. Spain Hungary vs. Austria.

12210

2447

5115

23972000

6000

10000

14000

1950 1990Poland Spain

2480

6471

16881

3706

2000

6000

10000

14000

18000

1950 1990

Hungary Austria

• Countries under socialism lost a lot of distance to Western European economies.

(102%) (98%)

(42%)

(239%)

(67%)

(149%)

(38%)

(261%)

Source: Maddison Database.

99

0%

5%

10%

15%

20%

25%

Source: Maddison Database.

Per-capita GDP (in 1990 international dollars) in 1950 and 2003:North Korea vs. South Korea Cuba vs. Chile

854 1127

15732

854

0

4000

8000

12000

16000

1950 2003

North Korea South Korea

20462569

10950

3670

0

4000

8000

12000

1950 2003

Cuba Chile

Per-capita GDP (in 1990 international dollars) in China (Western Europe=100).

(100%) (100%)

(1396%)

(7%)

(56%)

(179%)(23%)

(426%)

0%

5%

10%

15%

20%

25%

1010

4. The institutional trajectories after socialism

11

Czech

RepublicLa

tvia

Bulgaria

Estonia

Romania

Hungary

Lithuania

Poland

Slovak Republic

Slovenia

CEE average

Turkmenist

an

Uzbekist

an

Azerb

aijan

Belarus

Kazakhsta

n

Tajikist

an

Russian Fe

deration

Armenia

Georgia

Ukraine

Kyrgyzst

an

Moldova

CIS average

China

Vietnam

-10

-5

0

5

10

Political freedom 2012 (Polity IV)

-5> fully institutionalized autocracies

-5< mixed, or incoherent, authority regimes <5

-5< mixed, or incoherent, authority regimes <5

5< fully institutionalized democracies

12

Source: Polity IV Project

Turkmenistan

Belarus

Uzbekist

an

Tajikist

an

Ukraine

Kazakhsta

n

Moldova

Russian Fed.

Latvia

Romania

Slovenia

Bulgaria

Lithuania

Poland

Armenia

Azerb

aijan

Georgia

Kyrgyzstan

Albania

Mongolia

Czech

Republic

Estonia

Hungary

Slovak Republic0

10

20

30

40

50

60

70

80

90

Private sector share in GDP (%)1994

2010

Source: EBRD - Structural and institutional change indicators

13

Merchandise trade as a share of GDP is the sum of merchandise exports and imports divided by the value of GDP, all in current U.S. dollars. (WDI)

14

Russ

ian Fe

d.Uzb

ekist

anAr

men

iaGeo

rgia

Kaza

khst

anTa

jikist

anAz

erba

ijan

Turk

men

istan

Rom

ania

Polan

dUkr

aine

Kyrg

yzst

anLa

tvia

Mol

dova

Bulga

riaLit

huan

iaEs

toni

a

Czec

h Re

publ

icHun

gary

Slove

nia

Belar

us

Slova

k Rep

ublic

Braz

ilGre

ece

Spain

Turk

eyIta

lyPo

rtuga

lM

exico

Chile

Irelan

dKo

rea R

ep.

Singa

pore

Hong-

Kong

, Chi

na

0

20

40

60

80

100

120

140

160

180Trade openness (merchandise trade as % of GDP)

19942011

% ofGDP

Source: World Bank, World Development Indicators

out of scale

2010Sing:317%H-K:

376%

Observations

- Democracy was introduced and maintained in the countries which introduced capitalism (CEE)

- Non-democratic political systems co-exist with:- quasi-capitalist economies (e.g. Russia)- quasi-socialist economies (e.g. Belarus, Central Asia)

- Important questions regarding the variation of the economic systems after socialism include especially the differences between the capitalist systems in CEE and quasi-capitalist systems elsewhere

15

5. The economic outcomes after socialism

16

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

2000000

4000000

6000000

8000000

10000000

12000000

GDP levels

ChinaRussia

US $

, con

stan

t pric

es, c

onst

ant P

PPs,

OEC

D ba

se

year

, mill

ions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

GDP annual growth rates

ChinaRussia

Since 1990’s GDP has been growing more rapidly in China

Source: OECD

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

GDP per capita annual growth rate

ChinaRussia

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

2000

4000

6000

8000

10000

12000

14000

16000

1837

7402

China7844

14730

Russia

GDP per capita levels

Per h

ead,

US

$, co

nsta

nt p

rices

, con

stan

t PPP

s, O

ECD

base

yea

r

Source: OECD

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

Population growth rates

China Russia

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1213 mln

China

1353 mln

148 mln

Russia142 mln

Population levels

Population levels and growth rates in China are very high, especially in comparison to those observed in Russia.

Source: OECD

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20110.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

China

Russia

Fuels and mining products - export value in relation to GDP

% o

f GDP

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

3.1% China

72.3%Russia

Fuels and mining products export as percentage of total export

19941996

19982000

20022004

20062008

20102012

05

101520253035404550

Exports of goods and services (% of GDP)

ChinaRussia

% o

f GDP

Source: World Trade Organisation and OECD

Source: EBRD Transition Report 2008; WB WDI, IMF WEO

21

(GDP per capita growth in 2008 in relation to 1989

level)

22

Slove

nia

Esto

nia

Hunga

ryUkr

aine

Latv

ia

Czec

h Re

publ

icAr

men

iaRo

man

ia

Russ

ian

Fede

ratio

nBu

lgaria

Slova

k Re

publ

icLit

huan

iaM

oldo

vaGeo

rgia

Kaza

khst

anPo

land

Alba

nia

Greec

eIre

land Italy

Spai

nPo

rtuga

lM

exico

Singa

pore

Turk

ey

Hong K

ong S

AR, C

hina

Braz

ilKo

rea,

Rep

.Ch

ile

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

GDP per capita (constant US$) change between 2007 and 2012 (in %)

Source: World Bank, World Development Indicators

Source: The Conference Board Total Economy Database™ , GDP per capita in 2013 US$ (converted to 2013 price level with updated 2005 EKS PPPs)

6. The non-economic outcomes after socialism

24

25

Life expectancy at birth indicates the number of years a newborn infant would live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life.

Turk

men

istan

Tajik

istan

Uzbek

istan

Kaza

khsta

nRus

sian F

ed.

Mold

ova

Kyrg

yzsta

nBela

rus

Azerb

aijan

Ukrain

eGeo

rgia

Lithu

ania

Latv

iaArm

enia

Bulgar

iaRom

ania

Hunga

ry

Slova

k Rep

ublic

Esto

niaPo

land

Czec

h Rep

ublic

Slove

nia

Brazil

Turk

eyM

exico

Chile

Irelan

dPo

rtuga

lGre

ece

Kore

a Rep

.Sin

gapo

reIta

lySp

ain

Hong-K

ong,

China

60

65

70

75

80

85

63 63

6768 69

6768

71

65

70 7071

6968

72

70 6971

6971 71

73

66

63

71

7475

74

77

71

7677 77 77

65

6868

69 69 7071 71

73 74 74 74 74 75 7576 76 77

78

80

73 74

77

7980 81 81 81

82 82 8283

Life expectancy at birth, total (years)19902011

Source: World Bank, World Development Indicators

26

Under-five mortality rate is the probability per 1,000 that a newborn baby will die before reaching age five, if subject to current age-specific mortality rates. (WDI)

0

20

40

60

80

100

120 116

98

77

93

72

57

4755

37 37

2227

21 21 18 19 17 17 17 1421

10

49

59

80

19

813 11 9 10

158

63

5349

45

31 2821 18 16

13 12 12 10 8 8 6 6 6 6 4 4 3

16 16 159

5 4 4 4 4 3 3

Mortality rate, under-5 (per 1,000 live births)

19902011

Source: World Bank, World Development Indicators

7. Explaining the differences in economic growth

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Explaining the differences in economic outcomes

Two main determinants of long-term economic growth (see slide 4):

1. The propelling institutions

2. The negative shocks, which mostly depend on domestic policies which in turn are the product of personality factors of the policy-makers and the constraining institutions.

The economic growth after socialism was the stronger:

1. The more progress has been achieved in strengthening the propelling institutions (the extent of market reforms).

2. The less frequent were the strong negative shocks.

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• Finding no 1 is strongly supported by substantial empirical literature reviewing the experience of countries in

transition.Polanec, Saŝo (2004)

”(…) we find that in later stages of transition, measures of economic reforms matter for productivity growth, although with a lag, which is in our exercise equal to four years. This result confirms importance of reform efforts in enhancing the potential for growth.”

Krueger, Anne O. (2004)

”(…) it is worth noting that those transition countries that experienced the most rapid structural reforms have, by and large, experienced more rapid growth. This is true, for example, of the Baltic States. In recent years, Russia has also seen higher rates of growth – a result, in large measure, of reforms that were implemented in the 1990s.”

Fischer, Stanley; Sahay, Ratna(2004)

”The general conclusion was that the effect of initial conditions, while strong at the start of transition, wears off over time (…). Moreover, the importance of the fiscal policy variable (the budget balance) increases with the longer period data set. The coefficients on the reform indices (…) are significant throughout the period, irrespective of the time period considered.”

Falcetti, Elisabetta; Lysenko, Tatiana; Sanfey, Peter(2006)

”During transition, a positive correlation between progress in market-oriented reforms and cumulative growth is observed for most countries. This is reassuring to those who have promoted the virtues of reforms; is also serves as a warning of the dangers that arise when ‘reform fatigue’ set in, as it appears to have done in parts of some region (…) We find that the importance of initial conditions as a determinant of growth has declined over time, but that fiscal surpluses remain positively associated with higher growth.”

Aslund (2012) The Baltic States and Central Europe have accomplished the best results. They pursued all major reforms together in a comprehensive, early, and radical package. There reforms were deregulation, macroeconomic stabilization, privatization, institutional reform and democratization. Nothing suggests that it would be advantageous to intentionally hold back on any reform, whereas many reforms were technically complex and could not possibly be done very fast. (…)The slower reforms were, the grater was the danger that rent-seeking interests would become entrenched and block democratization and the combat of corruption, of which they were the main beneficiaries.”

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Why better economic results go hand in hand with better non-economic indicators (health, environment, etc.)?

Some crucial factors conducive to long-term economic growth are also conducive to environmental improvement and to favourable health-related developments, e.g.

• economic reforms

less waste

less environmental deterioration and less damage to healthhealthier foodstuffs become more available and relatively cheaper

• privatisation (separation of companies from the state)

• ecological regulations are more strictly observed

• stronger enforcement of laws

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• less frequent accidents on the job