Vladimir Popov Big Changes in Transition Countries: Lessons for - - PowerPoint PPT Presentation

Big Changes in Transition Countries: Lessons for Development Economics

September 18, 2015 WIDER 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 (forecast)

Turkmenistan Uzbekistan Azerbaijan Kazakhstan Belarus Central Europe Tajikistan Estonia Armenia Lithuania Latvia Russia Kyrgyzstan Georgia Ukraine Moldova

Fig. 1. GDP change in FSU economies, 1989 = 100%

The share of private sector in GDP in some former Soviet republics, 1989- 2009, % 10 20 30 40 50 60 70 80 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

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 institutions Worst 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

10 20 30 40 50 60 1985 1989 1995 1978 1985 1994 1989 1996 Debt service Defence Subsidies Investment "Ordinary government" CHINA USSR/ 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

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 GDP as a % of 1989 GDP 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 5 10 15 20 25 30 35 1 2 3 4 5 6 7 8 Murders per 100,000 inhabitants in 1987 Murders per 100,000 inhabitants in 2002 45 degrees line Russia Belarus Ukraine Estonia Kazakhstan Latvia Moldova Albania Tajikistan Lithuania Azerbaijan Georgia 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 Estonia 168 124 29 15 Kazakhstan 157 100 37 20 Ukraine 151 100 36 15 Cote D’Ivoire 148 86 11 27 24 Colombia 134 36 6 72 19 Niger 133 113 6 14

*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 1566 1586 1606 1626 1646 1666 1686 1706 1726 1746 1766 1786 1806 1826 1846 1866 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 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

50 100 150 200 250 300 350 400 450 2 000 4 000 6 000 8 000 10 000 12 000 US China Japan India Germany Russia UK

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

• Three Chinese provinces (Guangdong, Shandong, Henan) have population
• ver 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