Big Changes in Transition Countries: Lessons for Development Economics

September 18, 2015WIDER Anniversary conference

Vladimir Popov

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%

40

60

80

100

120

140

160

180

200

1989 1991 1993 1995 1997 1999 2001 2003

China

Vietnam

Central Europe

Uzbekistan

Mongolia

Turkmenistan

Kazakhstan

Russia

Kyrgyzstan

Tajikistan

Source: EBRD, World Bank.

Source: EBRD Transition Reports for various years.

Central Europe is the unweighted average for Czech

Republic, Hungary, Poland, Slovakia, and Slovenia.

25

45

65

85

105

125

145

165

185

205

225

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 (

fore

cast)

Turkmenistan

Uzbekistan

Azerbaijan

Kazakhstan

Belarus

Central Europe

Tajikistan

Estonia

Armenia

Lithuania

Latvia

Russia

Kyrgyzstan

Georgia

Ukraine

Moldova

Fig. 1. GDPchange in FSUeconomies, 1989= 100%

The share of private sector in GDP in some former Soviet republics, 1989-

2009, %

0

10

20

30

40

50

60

70

80

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

EST

AZ

GEORG

ARM

LITH

Kyrg

LAT

MOLD

RUS

Kaz

UKR

TADJ

UZB

Bel

TURKM

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 institutionsWorst performance: high distortions, weak institutions

INITIAL CONDITIONS (DISTORTIONS) AND INSTITUTIONS –

CLASSIFICATION OF COUNTRIES

DISTORTIONS

INSTITUTIONAL

CAPACITY

LOW HIGH

HIGH CHINA,

VIETNAM

EASTERN

EUROPE

LOW ALBANIA,

MONGOLIA

FSU

Size of government: post-communist economies

Fig. 8. Consolidated government revenues as a % of GDP

10

15

20

25

30

35

40

45

50

55

1989 1990 1991 1992 1993 1994 1995 1996

%

Central

European

countries

South East

Europe

countries

Baltic states

RUSSIA

Central Asian

countries

Caucasian

states

-China

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

0

10

20

30

40

50

60

1985 1989 1995 1978 1985 1994 1989 1996

Debt service

Defence

Subsidies

Investment

"Ordinary government"

CHINAUSSR/ RUSSIA

Source: (Popov, 2000).

Government spending collapsed in Russia in 1992-99 and did not recover even when economic growth started

20

30

40

50

60

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Consolidated government revenues and expenditure, % of GDP (source: EBRD Transition Report)

Revenues

Expenditure

Deficit

Surplus

Size of government: post-communist economies

Fig. 11. Change in government revenues and GDP

20

50

80

110

140

170

200

-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.

1996 G

DP

as a

% o

f 1989 G

DP

China (1979-86)

Vietnam

Armenia

Source: (Popov, 2000).

Murders per 100,000 inhabitants in 1987 and in 2002 (WHO statistics)

y = 1,2507e0,4158x

R2 = 0,6517

0

5

10

15

20

25

30

35

0 1 2 3 4 5 6 7 8

Murders per 100,000 inhabitants in 1987

Mu

rders

per

100,0

00 in

hab

itan

ts in

2002

45 degrees line

Russia

Belarus

Ukraine Estonia

Kazakhstan

Latvia Moldova

AlbaniaTajikistan

Lithuania

AzerbaijanGeorgia

Kyrgyzstan

Turkmenistan

Slovenia

Table. Number of deaths from external causes per 100,000 inhabitants in 2002 – countries with highest rates

Including deaths from Country/Indicator Deaths from

external causes,

total Accidents Suicides

Murders Other*

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

Source: Wringley, E. A. and R.S. Schofield (1981). The Population History of England, 1541 – 1871. A Reconstruction. – London, Edward Arnold, 1981.

20

25

30

35

40

45

156

6

158

6

160

6

162

6

164

6

166

6

168

6

170

6

172

6

174

6

176

6

178

6

180

6

182

6

184

6

186

6

Life Expectancy and Mortality Rates, England, 1566 - 1871

Life expectancy, years Crude death rate per 1000 inhabitants

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 + 19.8logYcap + 5.1TRANS

(-2.8) (25.3) (4.9)

• (N=147, R2 = 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

1

1.5

2

2.5

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

Murder rate in China per 100,0000 inhabitants

• 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 of

billionaires

Total

wealth

PPP

GDP,

2012

Number

per 1

trillion

PPP

GDP

Wealth of

billionaires

to PPP

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

R2 = 0,6811

-50

0

50

100

150

200

250

300

350

400

450

0 2 000 4 000 6 000 8 000 10 000 12 000

US

ChinaJapan

India

GermanyRussia

UK

Given the size of the country, inequalities in China are low

• Three Chinese provinces (Guangdong, Shandong, Henan) have population over 95 million, another 7 – over 50 million, i.e. bigger that most state, so China should be compared with multistate regions, like European Union or ASEAN, rather than with particular states.

• In EU 27, for instance the coefficient of income inequality around 2005 was about 40% with 23 p.p. coming from between the countries inequalities. In China (29 provinces) it was over 40% with 24 p.p. coming from between the provinces disparities.

• In the US, the inequality coefficient was similar (over 40%), but only 6 p.p. came from disparities in income between the states (Milanovic, 2012).

• If China will manage to reduce the income gap between its provinces (and EU – between countries) to the level close to disparities between US states, it general inequality between citizens will fall to quite a low level.

Big Changes in Transition Countries: Lessons for Development Economics

• LESSON 1: What happens in the middle income country when the state capacity collapses

• LESSON 2: What happens with life expectancy and mortality under stress

• LESSON 3: Fast/slow recovery of institutions