Vladimir Popov Big Changes in Transition Countries: Lessons for Development Economics September 18, 2015 WIDER Anniversary conference
LESSON 1: What happens in the middle income country when the state capacity collapses • Unique natural experiment staged by history • State capacity – the ability of the government to enforce rules and regulations • Decline in institutional capacity => increase in crime, lawlessness, poor enforcement of property and contract rights => adverse supply shock (increase in costs) => recession • Other phenomena resulting from the collapse of state institutions • Demonetization, • Barter transaction, • Trade arrears • Monetary substitutes
GDP change in Asian transition economies, 1989=100% Fig. 1b. GDP change in Asian transition economies, 1989 = 100% 200 China 180 Vietnam 160 Central Europe 140 Uzbekistan Mongolia 120 Turkmenistan 100 Kazakhstan 80 Russia 60 Kyrgyzstan 40 Tajikistan 1989 1991 1993 1995 1997 1999 2001 2003 Source: EBRD, World Bank.
225 Fig. 1. GDP Turkmenistan change in FSU Uzbekistan 205 economies, 1989 Azerbaijan = 100% Kazakhstan 185 Belarus 165 Central Europe Tajikistan 145 Estonia Armenia 125 Lithuania Latvia 105 Russia 85 Kyrgyzstan Georgia Source: EBRD Transition 65 Reports for various years. Ukraine Central Europe is the unweighted average for Czech Moldova Republic, Hungary, Poland, 45 Slovakia, and Slovenia. 25 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (forecast)
The share of private sector in GDP in some former Soviet republics, 1989- 2009, % 80 EST AZ 70 GEORG ARM 60 LITH Kyrg 50 LAT MOLD 40 RUS Kaz 30 UKR 20 TADJ UZB 10 Bel TURKM 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
PAPERS EXPLAINING DIFFEREING PERFORMANCE OF TRANSITION ECONOMIES • Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms. Comparative Economic Studies, 2007,. Vol. 49, Issue 1, March 2007, pp. 1-31. • Reform Strategies and Economic Performance of Russia’s Regions. – World Development , Vol. 29, No 5, 2001, pp. 865-86. • Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession). – Comparative Economic Studies , Vol. 42, Spring, 2000, No. 1, pp. 1-57.
Best performance: low distortions, strong institutions Worst performance: high distortions, weak institutions INITIAL CONDITIONS (DISTORTIONS) AND INSTITUTIONS – CLASSIFICATION OF COUNTRIES DISTORTIONS LOW HIGH INSTITUTIONAL CAPACITY HIGH CHINA, EASTERN VIETNAM EUROPE LOW ALBANIA, FSU MONGOLIA
Size of government: post-communist economies Central Fig. 8. Consolidated government revenues as a % of GDP European countries South East 55 Europe 50 countries Baltic states 45 40 RUSSIA 35 % 30 Central Asian countries 25 Caucasian 20 states 15 -China 10 1989 1990 1991 1992 1993 1994 1995 1996 Source: (Popov, 2000).
Size of government: post-communist economies: the expenditure for the “ordinary government” did not fall in China and in Poland Fig. 9. Government expenditure, % of GDP 60 USSR/ RUSSIA CHINA 50 Debt service 40 Defence Subsidies 30 Investment "Ordinary government" 20 10 0 1985 1989 1995 1978 1985 1994 1989 1996 Source: (Popov, 2000).
Government spending collapsed in Russia in 1992-99 and did not recover even when economic growth started Consolidated government revenues and expenditure, % of GDP (source: EBRD Transition Report) 70 60 50 Expenditure 40 Deficit Surplus Revenues 30 20 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Size of government: post-communist economies Fig. 11. Change in government revenues and GDP China (1979-86) 1996 GDP as a % of 1989 GDP 200 170 Vietnam 140 110 80 Armenia 50 20 -10 -5 0 5 10 15 20 25 30 35 Decrease in the share of government revenues in GDP from 1989-91 to 1993-96, p.p. Source: (Popov, 2000).
Murders per 100,000 inhabitants in 1987 and in 2002 (WHO statistics) 35 Russia 30 y = 1,2507e 0,4158x Murders per 100,000 inhabitants in 2002 R 2 = 0,6517 25 Kazakhstan 20 Ukraine Estonia 15 Belarus Latvia Moldova Turkmenistan 10 Kyrgyzstan Tajikistan Albania Georgia 45 degrees line 5 Azerbaijan Lithuania Slovenia 0 0 1 2 3 4 5 6 7 8 Murders per 100,000 inhabitants in 1987
Table. Number of deaths from external causes per 100,000 inhabitants in 2002 – countries with highest rates Country/Indicator Deaths from Including deaths from external causes, Accidents Suicides Murders Other* total Russia 245 158 41 33 11 Sierra-Leone 215 148 10 50 7 Burundi 213 64 7 18 124 Angola 191 131 8 40 13 Belarus 172 120 38 13 0 Estonia 168 124 29 15 0 Kazakhstan 157 100 37 20 0 Ukraine 151 100 36 15 0 Cote D’Ivoire 148 86 11 27 24 Colombia 134 36 6 72 19 Niger 133 113 6 14 0 *Deaths due to unidentified external causes, wars, police operations, executions. Totals may differ slightly from the sum of components due to rounding. Source: WHO (http://www.who.int/entity/healthinfo/statistics/bodgbddeathdalyestimates.xls )
Fig. 12. Death rate from external causes (per 100,000 of inhabitants) - Russian Empire, RSFSR, RF, 1870-2000 (log scale) Source: Demoscope, № 31 -32. August 27- Sept. 9, 2001 http://demoscope.ru/weekly/031/img/nomer31.jpg). 1- all external causes, 2 - accidents, 3- suicides, 4- murders, 5-unknown, 6 – work related accidents.
LESSON 2: What happens with life expectancy and mortality under stress • WIDER Project: Cornia, Paniccia, Eds., 2000. Mortality Crisis in Transition Economies. • Mortality increased due to stress, rise in: • unemployment, • labor turnover, • Migration, • divorces, • Inequalities • Third big mortality crisis in human history • Transition from Paleolithic to Neolithic Age • Enclosure policy in Britain (pre- industrialization) • Transition to market and democracy
Life Expectancy and Mortality Rates, England, 1566 - 1871 45 40 35 30 25 20 1566 1586 1606 1626 1646 1666 1686 1706 1726 1746 1766 1786 1806 1826 1846 1866 Life expectancy, years Crude death rate per 1000 inhabitants Source: Wringley, E. A. and R.S. Schofield (1981). The Population History of England, 1541 – 1871. A Reconstruction. – London, Edward Arnold, 1981.
Mortality and life expectancy in Russia
LESSON 3: Fast/slow recovery of institutions • Optimistic view – extremely fast recovery of the institutions • Murder and crime rates are down to pre-transition levels • Life expectancy in transition economies in 2000 was 5 years higher than per capita GDP suggested • LE2000 = -8.5 + 19.8 log Ycap + 5.1 TRANS (-2.8) (25.3) (4.9) (N=147, R 2 = 0.72, robust estimates, T-statistics in brackets) • • LE – life expectancy in 2000, years • Ycap - PPP GDP per capita in 1999, • TRANS – dummy, equal to 1 if a country was communist in the past,
Life expectancy at birth in Russia and in the US in 1966-2013, total (years)
Optimistic view – extremely fast recovery of the institutions Socialist heritage of strong state institutions cannot be ruined that easily Murder rate in China per 100,0000 inhabitants 2.5 2 1.5 1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
• Pessimistic view: institutional capacity depends on long term institutional trajectory • Westernization of China (mid 19-th century Opium wars – 1949 Liberation) – deviation from trend; PRC – return to the trend • 1991 transition to capitalism – return to the Westernization that was temporarily interrupted in 1917-91
Table. Billionaires in former USSR, Eastern Europe China, and Vietnam Number per 1 Wealth of PPP trillion billionaires Number of Total GDP, PPP to PPP billionaires wealth 2012 GDP GDP, % China 122 260.9 12471 9.8 2.1 Russia 110 403.8 3380 32.5 11.9 Ukraine 10 31.3 338.2 29.6 9.3 Kazakhstan 5 9.2 233 21.5 3.9 Czech Republic 4 14.0 277.9 14.4 5.0 Poland 4 9.8 844.2 4.7 1.2 Georgia 1 5.3 26.6 37.6 19.9 Vietnam 1 1.5 322.7 3.1 0.5 Romania 1 1.1 352.3 2.8 0.3 Uzbekistan 0 0 107 0.0 0.0 Source: Forbes billionaires list (http://www.forbes.com/billionaires/#page:1_sort:0_direction:asc_search:_filter:All%2 0industries_filter:All%20countries_filter:All%20states); WDI.
Number of billionaires in 2007 and PPP GDP in 2005 (billion $) by country 450 US 400 350 300 R 2 = 0,6811 250 200 150 100 Germany Russia 50 India UK China Japan 0 0 2 000 4 000 6 000 8 000 10 000 12 000 -50
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