The Consequences of the Russian Transformation on the Third World

Satoshi MizobataInstitute of Economic Research, Kyoto

University, Japanmizobata@kier.kyoto-u.ac.jp

3-5 April 2007, SU-HSE, Russia

Aims of the paper The meaning of the Russian transformation from

the experiences of the Third World The transformation in the Third World compared

with the Russian transformation The transformation in Russia was deeply

connected with the changes in the Third World. The changes of the Third World have Influenced

the Russian transformation.

Key moments of changes in the Third World and the socialist system Key moments: energy, technology and markets external debt problem and polarization The debt crisis worsened the position of the

socialist system and the developing countries. The debt crisis changed the actors of development

policy making. IMF and the World Bank, structural adjustment policy based on neo-liberalism has lead the development and the transformation.

Debts of developing economies (fluctuating interest, World Development Report, 1986, p.79)

The long term interest increased during 1970-1984 in USA. 1970-1974: 0.7%, 1975-1979: 0.3%, 1980-1984: 4.9%, 1983: 8.1%, 1984: 8.2% (Bank for International Settlements)

1973 1975 1977 1979 1980 1981 1982 1983

The share of debts with fluctuating interest (%)

6.4 9.4 11.8 15.5 17.3 19.0 20.2 21.6

LIBOR (%) 9.2 11.0 5.6 8.7 14.4 16.5 13.1 9.6

F ig u r e 1 T h e Im p a c t o f T r a n s fo r m a tio n o n th e T h ir d W o r ld

Globalization

Liberalization, Stabilization, Privatization P o lic y Ⅰ

Default on financial obligations

Transformation in Socialist System

R e g im e C h a n g e a n d P o lic y C h a n g e in D e v e lo p m e n t S ta te s

Conditionality by IMF and WB

R e g io n a l In te g ra tio n , F o re ig n T ra d e , In te rd e p en d e n c e In te rn a tio n a l D iv is io n o f L a b o r Ⅲ

Democratization, Elites Change R e g im e Ⅱ

Figure 2 The catch-up (flying geese) model in East Asia

Authoritarian Regime for development

Japan

China

ASEAN

NIEs

Vietnam

Laos, Cambodia Myanmar

Graduation

Availability of the flying geese model

In 1950s-1990s, the model can explain the successive development in Asian countries, from Japan to Vietnam.

Telescoping process and innovative combination played an important role.

Change of the model ：

Impact of the Transformation in Asia The flying geese model The transformation did not so noticeably affect

developing Asian countries. Prior to the Russian transformation, many countries had accepted reform package (economic conditionality) with the financial aid, and the Soviet model had already been abandoned.

Virtuous circle for the development

Developmentalism and Asian industrialization USA changed the external policy to the

developing economies, and nationalism from above brought about the developmentalism and the growth ideology.

Neo-developmental market economy after 1980s in Asia: promotion of export industry, the growth ideology using the centralized mobilization of resources (state intervention)

The growth ideology has been preserved and harmonized with liberalism ideology and new international division of labour. Developmentalism can survive in Asia.

The Path of Three “socialist countries”

1) India failure of import substitute industrialization Assistance from USA liberalization in 1980s with the financing

from the IMF and the World bank, and the FDI

2) Vietnam Dependence on USSR and ChinaIn 1980-1990s, improved foreign trade relation with the west

and an inflow of foreign capital offset the shock. 1980-1990: ruble denominated foreign trade increased in 2.5 times, dollar

denominated foreign trade increased in 4.1 times.

1986, Doi Moi (socialist oriented market economy): acceptance of the IMF policy and the IMF financing, and the high growth of FDI and the foreign aid.

The reform absorbed the shock of the collapse of the Soviet Union and the Russian transformation.

Table 1Vietnamese Economic Performance

1986 1991 1996 2003

Annual Economic Growth (%) 3.4 6.0 9.38 7.24

Budget Deficit per GDP (%) 6.2 3.7 0.5 1.8

Exports (billion US $) 0.494 2.042 6.800 19.88

Imports (billion US $) 1.121 2.105 10.200 25.00

FDI (billion US $) ― 0.22 8.54 1.51

ODA (billion US $) ― 0.110 2.4 1.77

Source) Oanh, 2003, p.98, UNDP, Human Development Report 2006,The Japanese Embassy in Vietnam, March 2006 Report.

3) North Korea Remarkable shock from heavy dependence

on the Soviet Union Closed economy but the specific path Asian case, why1) Liberalized by themselves, 2) IMF, World

Bank, USA and Japan, 3) export oriented and interdependence within the Asia-Pacific Area

Impact of the Transformation in Africa Democratization or political changes in 1980s – domestic

changes, influence of the end of the cold war and the collapse of the Soviet Union

Economic conditionality and political conditionality (democratization) which are similar to the Russian path

Dependence on ODA (in Tanzania, ODA occupied 40% of GDP), and distorted distribution by the elite.

Vicious circle The transformation was to be carried out inline with

development strategy.

percapita

2003 2003 2003 1990 2003 1980 1993

Developing countries 5,022.4 T 1,414 9.7 2.7 3.0 - -East Asia and the Pacific 1,928.1 T 1,512 3.4 1.0 0.5 - -Vietnam 82.0 482 21.8 2.9 4.5 - -India 1,070.8 564 0.9 0.4 0.2 13.2 16.9

Sub-Saharan Africa 674.2 T 633 32.9 12.0 18.6 - -Madagascar 17.6 324 31.9 12.9 9.9 - 16.1Cameroon 15.7 776 55.0 4.0 7.1 15.5 18.3Kenya 32.7 450 15.2 13.9 3.4 26.1 28.9Guinea 9.0 459 30.0 10.4 6.5 - 21.9Senegal 11.1 634 44.7 14.4 6.9 23.9 -Rwanda 8.8 195 40.2 11.3 20.3 14.3 31.9Cote d'lvoire 17.6 816 15.0 6.4 1.8 33.3 -Tanzania,U.Rep.of 36.9 287 46.5 27.5 16.2 28.8 -Zambia 11.3 417 53.8 14.6 12.9 40.0 -Mozambique 19.1 230 55.0 40.7 23.9 - -Mali 12.7 371 45.3 19.9 12.2 21.6 -Niger 13.1 232 38.5 16.0 16.6 18.7 -

Source) The World Bank, World Development Report 1995, UNDP, Human Development Report 2006.

Table 2 Asian and African EconomyOfficial development

assistance(ODA) received

As % of GDP

Totalexpenditure(% of GNP)

Totalpopulati

on(millions

GDPper

capita

Figure 3 Asian Virtuous Circle

Increase of Population

Innovation, Institutional Changes

Infrastructure of Agriculture, R&D and Human Development

Green Revolution

Resource Transfer to Industry

Relative Success of Industrialization

Development of Formal Sector

Public Goods

Agricultural State

Source) Takahashi, 1998, p.40.

Figure 4 African Vicious Circle

Rapid Increase of Population Lack of Innovation, Institutional Changes

Undevelopment Infrastructure, Lack of R&D and Human Development

Stagnant Agriculture

Stagnant Transfer to Industry

Failure of Industrialization

U n d e ve lop m e n t o f F o rm a l S e c to r , In fo r m aliz a t io n

Private Goods

Tribalism State

Source) Takahashi, 1998, p.41.

Some Lessons of the Transformation in the Third World

Meanings of the impact: 1) success story of the Asian countries with

local-oriented measures and selective adoption of soft conditionality

2) inefficient transformation in Africa with the severe conditionality, similar to the Russian transformation (hard conditionality)

Lessons of the Transformation1) Authoritarian regimes weakened or survived.2) Debt crisis caused the policy and system changes.3) Initial conditions are strong. Informal sector and social

capital4) Local society embedded habitual institutions created the

Asian model, based on Japanese and Korean model5) The state failure and good governance6) Laissez-faire is not fit to the newly created taxation

system.7) The transformation does not simply means

marketization. –Dual transformation or Triple transformation

Dual or Triple Transformation1) Modernization: II and III sectors / I sector2) Marketization or privatization: non-state sector /

state sector3) Maturity : Social expenditure and social welfareChina: modernization – marketizationVietnam: marketization and moderate modernizationThe Asian transformation went in the same

direction but followed different paths.

Figure 5 The Transformation in China and Vietnam

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0 0.2 0.4 0.6 0.8 1.0 1.2

modern ／ tradition

market ／ plan

Vietnam

China

１９８６

１９７８１９８６

２００１

２００１

１９９４

Note) Non-state includes the collective. The employees in 1994 and 1995 are not continuous.Source) Kato, 2005. original from Statistical Yearbook in China, World Bank(1994, 1998, 2003)

How about the Russian path? Modernization before the transformation Radical marketization Regional gaps: concentrated (isolated)

modernization and stagnant or declining modernization, regional gaps in marketization

The evolution of the transformation is different.

Figure 6 The Transformation in Russia

19901980

1994

1999

2004

0.0

0.5

1.0

1.5

2.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

modern ／tradition

market ／plan

Source) Rosstat, Trud i zanyatost v Rossii, 1999, 2001, 2003, 2005, Rosstat, Rossiiskii statisticheskii ejegodnik..

Figure 7 The Transformation in the Russian Regions

0.00

0.50

1.00

1.50

2.00

2.50

0.00 5.00 10.00 15.00 20.00

Market ／ plan

Modern ／ tradition

Source) Rosstat, Trud i zanyatost v Rossii, 1999, 2001, 2003, 2005, Goskomstat, Regionyi Rossii, 1997

Table 3 Dual Transformation In Moscow and St.Petersburg

1990 1995 1996 1997 1998 1999 2000 2002 2004

Moscow 296 3761.39

315 4391.61

6081.82

251 5291.92

6372.01

8042.53

St.Petersburg 199 1991.21

186 1841.58

1801.64

116 1161.82

1321.96

1611.99

Note) Upper figure is II+III/I, and lower figure is non-state/state in employment.Source) Rosstat, Trud i zanyatost v Rossii, 1999, 2001, 2003, 2005, Goskomstat, Regionyi Rossii, 1997

Transformation as social changes From the socialist welfare state to the market

welfare state Transfer of the social functions from the enterprise

to the local communities and societies Evolution of social responsibility: state-enterprise-

region Therefore, the transformation goes with the

change of the regional structure.

Table 4 Comparison of social indicator: prevalence of child malnutrition % of children under 5, The World Bank, World Development Report 2007

1989-1994 2000-2004Russian Federation 4 6China 17 8

Vietnam 45 28

Table 5 Comparison of social indicator: Human Development Index Trends, UNDP, Human Development Report 2001, 2006

1980 1985 1990 1995 2000 2004

1.Norway 0.875 0.887 0.912 0.936 0.956 0.965

7.Japan 0.876 0.891 0.914 0.927 0.939 0.949

65.RF 0.809 0.826 0.818 0.771 0.785 0.797

81.China 0.553 0.590 0.628 0.685 0.730 0.768

109.Vietnam - 0.581 0.618 0.661 0.696 0.709

International division of labour, Economic integration, and the Transformation

Transformation under the second wave of regionalism and globalization: common values and policy convergence

Spill-over effects of the regional integration and chain reaction : APEC

FDI and multinationals in East Asia and close network: intra-regional foreign trade in East Asia

The external framework and the economic integration must be regarded as a key transition indicator. Four-fold transformation

Table 6Share of intra-regional exports in total merchandise exports of regions, 1986-91(Percentage)

1986 1987 1988 1989 1990 1991a

North America 39.1 37.8 35.4 34.2 34.3 33.0Latin America 14.0 13.8 13.4 14.1 13.4 16.0Western Europe 68.4 70.5 70.6 70.7 72.2 72.4C./E. Europe and f. USSR 53.3 52.7 52.0 48.5 42.8 22.4Africa 5.9 6.7 7.0 6.6 5.9 6.6Middle East 7.7 6.9 6.9 6.3 5.8 5.1Asia 37.0 38.8 41.8 44.1 44.8 46.7

a Intra-regional shares are affected by the unification of Germany and major changes in the valuation of the trade of Central and Eastern Europe and former USSR.

Table 7 Intra-regional trade (%)

1980export import

1990export import

1995export import

2000export import

2002export import

Japan,China, and Korea

15.8 12.8 13.9 15.8 18.7 21.8 18.7 22.9 20.1 24.5

ASEAN+3 31.7 33.5 36.7 33.0 44.9 45.7 42.6 48.4 44.8 49.2NAFTA 33.6 33.9 41.4 33.3 46.2 37.7 55.7 39.8 56.7 38.2MERCOSUR 15.9 11.9 11.8 18.3 23.2 20.8 23.5 24.2 16.5 22.5EU 52.5 47.4 58.5 56.4 62.3 60.9 62.3 58.0 61.5 51.5

Figure 8 Export combination index of Japan (1999 , 2000) ASEAN 3.07 1.79 USA 2.42 NIEs Export combination index to Japan (2000) ASEAN 2.84 1.73 NIEs Note: Japan’s export to the destination country/ the total export of Japan ÷ the total import of the destination country/ the total import of the world

Source: White paper of Trade and Commerce, Government of Japan, 2002.

Russia 0.16

Japan

1.86 China

Russia 0.92

Japan

2.91 China

Figure 9 Export combination index of Japan (2001) Export combination index to Japan (2001) Note: Japan’s export to the destination country/ the total export of Japan ÷ the total import of the destinatio n country/ the total import of the world

Source: White paper of Trade and Commerce, Government of Japan, 2003.

2.91 ASEAN4

China 2.02

2.46 NIEs

Japan

2.96 ASEAN4

Japan

China 3.10

1.57 NIEs

Figure 10

Intensity of Trade in Russia (2003) 1 0.54

0.78 0.37

0.26

21.8 12.4 0.22

0.16

0.11

Note: Intensity = (Xij/Xi)／(Mj/W) Source: IMF, Direction of Trade Statistics, September 2004.

Russia EU

CIS ASEAN4

NIEs

Japan and China

Conclusion The Third World has different ways. Dual or triple Transformation in Asia Liberalization prior to the Transformation External yardsticks of the transformation Gradual and local-oriented model different

from the Anglo-American model New regional integration in Asia

Figure 11 Transformation in Developing

Capitalism

0

-

+

lo w

S ta te ro le

h ig h

Globalization

Domestic factors

Integration, Asian model

Developing Capitalism

G lo b al e c on o m ic ru le s