Transition: Changes After Socialism* November 2014 Leszek Balcerowicz Warsaw 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
(1) Domestic Institutional System Propelling Constraining institutions institutions (2) (4) (3) Long-run economic growth (5) Institutional (reforms) Economic Policy Fiscal, monetary policies. Direct interventions (6) (8) External shocks (7) Other determinants of policies: - personality factors - political shocks, etc. 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
Countries under socialism lost a lot of distance to Western European economies. Per-capita GDP (in 1990 international dollars) in 1950 and 1990: 14000 Poland vs. Spain (239%) 12210 18000 Hungary vs. Austria. (261%) 16881 10000 14000 6000 2000 (102%) (98%) 2447 2397 (42%) 5115 10000 6000 2000 (67%) 2480 (149%) 3706 (38%) 6471 1950 1990 Poland Spain 1950 1990 Hungary Austria Source: Maddison Database. 9
Per-capita GDP (in 1990 international dollars) in 1950 and 2003: North Korea vs. South Korea Cuba vs. Chile 16000 (1396%) 15732 12000 (426%) 10950 12000 8000 8000 4000 0 854 854 1127 (100%) (100%) (7%) 4000 0 2046 (56%) (179%) 3670 2569 (23%) 1950 2003 North Korea South Korea 1950 2003 Cuba Chile Per-capita GDP (in 1990 international dollars) in China (Western Europe=100). 25% 20% 15% 10% 5% 0% Source: Maddison Database. 1950 1950 1953 1953 1956 1956 1959 1959 1962 1962 1965 1965 1968 1968 1971 1971 1974 1974 1977 1977 1980 1980 1983 1983 1986 1986 1989 1989 1992 1992 1995 1995 1998 1998 2001 2001 10
4. The institutional trajectories after socialism 11
10 Political freedom 2012 (Polity IV) 5 5< fully institutionalized democracies -5< mixed, or incoherent, authority regimes <5 0-5 -5< mixed, or incoherent, authority regimes <5-5> fully institutionalized autocracies -10 Source: Polity IV Project 12
90 80 70 60 50 40 30 20 10 0 1994 2010 Private sector share in GDP (%) Source: EBRD - Structural and institutional change indicators 13
180 160 140 120 100 % of GDP Trade openness (merchandise trade as % of GDP) 1994 2011 80 60 40 20 0 out of scale 2010 Sing: 317% H-K: 376% Source: World Bank, World Development Indicators 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
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
US $, constant prices, constant PPPs, OECD base year, millions 20.00% GDP annual growth rates 15.00% 10.00% 5.00% 0.00% -5.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China Russia -10.00% 12000000 GDP levels 10000000 8000000 Since 1990 s GDP has been growing more rapidly in China 6000000 4000000 China Russia 2000000 0 Source: OECD 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Per head, US $, constant prices, constant PPPs, OECD base year GDP per capita annual growth rate 15.00% 10.00% 5.00% 0.00% -5.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China Russia -10.00% 16000 14000 12000 10000 GDP per capita levels 14730 Russia 8000 6000 4000 7844 China 7402 2000 0 Source: OECD 1837 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Population growth rates 1.2 1 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1600000 1400000 China Russia Population levels China 1200000 1000000 1213 mln 1353 mln 800000 600000 400000 200000 0 Source: OECD 148 mln Population levels and growth rates in China are very high, especially in comparison to those observed in Russia. 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Russia 142 mln
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % of GDP % of GDP Fuels and mining products export as percentage of total export 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 72.3% 3.1% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Russia China 50 45 Exports of goods and services (% of GDP) 14.00% Fuels and mining products - export value in relation to GDP 40 35 30 25 20 15 10 China Russia 12.00% 10.00% 8.00% 6.00% 4.00% Russia 5 0 2.00% 0.00% China Source: World Trade Organisation and OECD
(GDP per capita growth in 2008 in relation to 1989 level) Source: EBRD Transition Report 2008; WB WDI, IMF WEO 21
25% 20% GDP per capita (constant US$) change between 2007 and 2012 (in %) 15% 10% 5% 0% -5% -10% -15% -20% -25% Source: World Bank, World Development Indicators 22
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
Life expectancy at birth, total (years) 85 80 75 70 65 65 63 63 1990 2011 68 68 67 68 69 69 69 70 68 67 71 80 78 77 76 76 74 74 74 74 75 75 73 73 71 72 71 71 71 71 71 70 70 69 70 69 69 68 65 83 82 82 82 80 81 81 81 79 77 77 77 77 77 76 75 73 74 74 74 71 71 66 63 60 Source: World Bank, World Development Indicators 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. 25
120 100 116 98 93 Mortality rate, under-5 (per 1,000 live births) 1990 2011 80 60 40 63 77 53 49 45 72 57 47 55 37 37 49 59 80 31 28 21 20 22 27 21 21 18 19 21 18 16 17 17 17 13 12 12 14 10 8 8 10 6 6 6 6 4 4 3 16 19 16 15 9 8 13 11 9 10 15 5 8 4 4 4 4 3 3 0 Source: World Bank, World Development Indicators 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) 26
7. Explaining the differences in economic growth 27
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. 28
Finding no 1 is strongly supported by substantial empirical literature reviewing the experience of countries in transition. Polanec, Saŝo (2004) Krueger, Anne O. (2004) Fischer, Stanley; Sahay, Ratna (2004) Falcetti, Elisabetta; Lysenko, Tatiana; Sanfey, Peter (2006) Aslund (2012) ( ) 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. ( ) 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. 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. 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. 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. 29
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. less waste economic reforms less environmental deterioration and less damage to health healthier foodstuffs become more available and relatively cheaper stronger enforcement of laws privatisation (separation of companies from the state) ecological regulations are more strictly observed less frequent accidents on the job 30