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SOCIAL COSTS OF POST-COMMUNIST TRANSITION Was Gradual Better?. May 22,2007 Univ.of Vienna, Economics Department Oleh Havrylyshyn. O Havrylyshyn CERES Seminar Jan. 29, 2007. One key rationale of gradualism :to mitigate social costs - PowerPoint PPT Presentation
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SOCIAL COSTS OFSOCIAL COSTS OF POST-COMMUNIST POST-COMMUNIST
TRANSITIONTRANSITIONWas Gradual Better?Was Gradual Better?
May 22,2007 Univ.of Vienna, May 22,2007 Univ.of Vienna, Economics Department Economics Department
Oleh HavrylyshynOleh Havrylyshyn O Havrylyshyn
CERES Seminar
Jan. 29, 2007
22
MOTIVATION HYPOTHESIS MOTIVATION HYPOTHESIS
1.1. One key rationale of One key rationale of gradualism :to gradualism :to mitigate social costs mitigate social costs
2.2. Mid-nineties studies Mid-nineties studies largely negative: largely negative: social costs huge, social costs huge, due to „shock due to „shock therapy“therapy“
1.1. Were social costs Were social costs 1990-95 less for 1990-95 less for gradual reformers?gradual reformers?
2.2. Did social costs Did social costs reverse after 1995?reverse after 1995?
3.3. By 2005 who had By 2005 who had better performance? better performance? gradual?rapid?gradual?rapid?
33
OUTLINEOUTLINE I:BACKGROUND:expectations, debates,
data, methodology II.EVOLUTION OF SOCIAL INDICATORS:
general (HDI), poverty, income dist, health, educ, goods consumption
III. COMPARATIVE ASSESSMENT IV. WHY GRADUAL NOT BETTER
44
55
66
RATIONALE OF GRADUALISMRATIONALE OF GRADUALISM
““Restructuring involves large parts of population…[hence] Restructuring involves large parts of population…[hence] gradualism can prove less costly. In the case of full reform gradualism can prove less costly. In the case of full reform a majority will be less well-off during the transition” a majority will be less well-off during the transition” Dewatripont and Roland (1992)Dewatripont and Roland (1992)
““Simplistic capitalist experiment has incurred high social Simplistic capitalist experiment has incurred high social costs” Amsden/Kochanowicz/Taylor (1994)costs” Amsden/Kochanowicz/Taylor (1994)
““Gradual [school of thought] argued there were large social Gradual [school of thought] argued there were large social costs associated with very rapid adjustments” Gordoy costs associated with very rapid adjustments” Gordoy &Stiglitz(2006)&Stiglitz(2006)
Przeworski(1991)democracy and market in conflict-reforms Przeworski(1991)democracy and market in conflict-reforms cause pain, anti-reformers win elections, reforms reversedcause pain, anti-reformers win elections, reforms reversed
77
MID-NINETIES ASSESSMENTSMID-NINETIES ASSESSMENTS
“The most acute poverty and welfare reversal in the world” (UNDP, Poverty in Transition (1998)).
“Output loss…higher and more persistent than during the great depression” (Grun and Klasen, Economy of Transition (2001)).
“Massive dislocations…have had huge social costs” (Milanović (1998)).
“We need to reform slowly to avoid social pain” (PM Yekhanurov,UKR, Sep.2005)
88
FACTS VERY “SOFT”-WHY?FACTS VERY “SOFT”-WHY?
Usual data problems for poverty and GINI (Different samples, locations, definitions, income vs. consumption, insufficient time series).
Problem of comparability between Soviet period and market:GDP vs. NMP;Social data unavailable or biased (unemployment, poverty “do not occur” in socialism); priviliged access to goods
Mid-nineties studies “premature”-half cycle only
99
DATA AVAILABILITY FOR UPDATEDATA AVAILABILITY FOR UPDATE
A lot of new data allow comparison from about1989 to 2004, covers full transition cycle of decline and recovery
UNDP Human Development Report has data from 1990 to 2005 for most Social Indicators; broadly consistent definitions and not biased by big-bang philosophy.
1010
EBRD TRANSITION PROGRESS EBRD TRANSITION PROGRESS INDICATOR 2004INDICATOR 2004
CE BALT SEE CISM CISLCE BALT SEE CISM CISLChart 2.1 EBRD TRANSITION PROGRESS INDICATOR 2004
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
HU
N
CZE
CH
POL
SVK
CR
O
SVN
EST
LVA
LITH BU
L
RO
M
MA
C
ALB BiH
S&M
KY
R
AR
M
GEO RU
S
KA
Z
UK
R
MO
L
AZE TA
J
UZB
BEL
TUR
K
COUNTRY BY GROUP
TPI
VA
LU
E
Series1
1111
GROUPINGS BY INITIAL STRATEGY GROUPINGS BY INITIAL STRATEGY AND TPI RANK VERY SIMILARAND TPI RANK VERY SIMILAR
Ranking TPI Ranking TPI ReformStrategyReformStrategyCE+BALTCE+BALT Big-Bang or Steady Big-Bang or Steady
ProgressProgressSEESEE Some gradual,someSome gradual,some
Aborted Big-Bang Aborted Big-Bang CISMCISM Most gradual, Most gradual,
RU/KYR/ Aborted BBRU/KYR/ Aborted BB
CISLCISL Very limited reformsVery limited reforms
1212
DEMOCRACY AND MARKET DEMOCRACY AND MARKET LIBERALIZATIONLIBERALIZATION
Figure 2.2: Constitutional liberalism and progress in transition
LTV, LTU
SVN
BGR, HRV
ROMMKD
KAZ
MDA
AZE
BIH
YUG
TJKUZB
TKM
BLR
ALB
UKRRUS
GEOARM
KGZ
POL,SVK
CZE
HUN
y = 0.1988x - 0.1302R2 = 0.7231
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
1.0 1.5 2.0 2.5 3.0 3.5 4.0
EST
Transition Progress Indicator, 2004
Con
stitu
tiona
l Lib
eral
ism
, 200
4
1313
II. EVOLUTION OF SOCIAL II. EVOLUTION OF SOCIAL INDICATORS 1990-2005INDICATORS 1990-2005BY COUNTRY GROUPBY COUNTRY GROUP
1414
HDI VALUES BY COUNTRY GROUP:1990-2004HDI VALUES BY COUNTRY GROUP:1990-2004
HDI 1990-2003 By Group
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
1990 1995` 2000 2003
Years
HD
I
CE
BALT
SEE
CISM
CISL
1515
EARLY “PAIN” AND REFORM START: EARLY “PAIN” AND REFORM START: DELHDI90-95xTPI94DELHDI90-95xTPI94
delHDI95 TPI94
y = 0.0217x - 0.0735R2 = 0.3415
-0.08
-0.07
-0.06
-0.05
-0.04
-0.03
-0.02
-0.01
0
0.01
0.02
0.03
0 0.5 1 1.5 2 2.5 3 3.5 4
TPI94
delH
DI95 Series1
Linear (Series1)
1616
--2000 WELL-BEING AND REFORM 2000 WELL-BEING AND REFORM START :DELHDI90-00xTPI94 START :DELHDI90-00xTPI94
del HDI00 TPI 94
y = 0.0293x - 0.0717R2 = 0.4192
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0 0.5 1 1.5 2 2.5 3 3.5 4
TPI 94
del H
DI00 Series1
Linear (Series1)
1717
GINI VALUES IN TRANSITIONGINI VALUES IN TRANSITION1988-921988-92 1993-61993-6 2002-32002-3
CECE 2222 2929 2828
BALTBALT 2525 3535 3636
SEE(3)SEE(3) 2121 2727 3333
CISMCISM 2727 4242 3838
CISLCISL 2525 NaNa 3333
OECDOECD (low)(low) DNMRKDNMRK 2525
(high)(high) USAUSA 4040
DEVPGDEVPG (low)(low) INDNSIAINDNSIA 3030
(high)(high) COLOMBCOLOMB 4949
CHINACHINA RuralRuralUrbanUrban
36363232
1818
RANGE OF POVERTY RATIOSRANGE OF POVERTY RATIOSBY COUNTRY GROUP AND PERIODBY COUNTRY GROUP AND PERIOD
Pre-transition Mid-transition Most recent
C.E. 0-13 1-25 0-7
Baltics 1 22-46 3-5
SEE 2-6 15-45 4-24
CISM 2-30 (51 Tajik..) 12-96(Taj) 1-74 (Taj.)
CISL 1-24 22-63 2(Bel)-47(Uzb)
1919
LIFE EXPECTANCY CE,BALT,SEELIFE EXPECTANCY CE,BALT,SEE
CE Life Exp.
66
68
70
72
74
76
78
1989 1995 2000 2003
Life exp
Year
HUNCZECHPOL
SVK
CROSVN
BALT Life exp
67
68
69
70
71
72
73
1989 1995 2000 2003
Life exp
Year
EST
LVTLITH
SEE Life exp.
67
68
69
70
71
72
73
74
75
1989 1995 2000 2003
Year
Life
Exp
BULROM
MACALB
BiHS&M
2020
LIFE EXPECTANCY CISM, CISLLIFE EXPECTANCY CISM, CISL
CISM Life Exp
56
58
60
62
64
66
68
70
72
74
76
1989 1995 2000 2003
Year
Life
exp
KYR
ARM
GEO
RUS
KAZ
UKR
MOL
AZE
TAJ
CISL Life exp.
56
58
60
62
64
66
68
70
72
74
1989 1995 2000 2003
Year
Life
exp UZB
BEL
TURK
2121
GROSS EDUCATIONAL GROSS EDUCATIONAL ENROLLMENT RATIOS (%)ENROLLMENT RATIOS (%)
1990 1995 2001
CE 71 72 78
Baltics 70 71 86
SEE 66 64 67
CISM 80 73 72
CISL [84] [78] [81]
CIS (EBRD) 66 60 62
2222
MEAT-KG/PERSONMEAT-KG/PERSONMEAT /PERSON KG:
0
10
20
30
40
50
60
70
CEUR SEE CISM
1990
1995
2000
2005
2323
FRUITS KG/PERSONFRUITS KG/PERSONFRUITS/PERSON-KG
0
10
20
30
40
50
60
70
80
CEUR SEE CISM
1990
1995
2000
2005
2424
TELEPHONES PER 1,000TELEPHONES PER 1,000ALL TELEPHONES PER 1,000
0
200
400
600
800
1000
1200
CE BALT SEE CISM CISL
19901995
2000
2005
2525
AUTOS PER 1,000AUTOS PER 1,000AUTOS PER 1,000 pop.
0
50
100
150
200
250
300
350
CEUR SEE RU+UKR OCISM
1990
1995
2000
2005
2626
III. ASSESSMENT-OVERALLIII. ASSESSMENT-OVERALL Mid-90’s studies too early to reflect recovery
many ignored good performance of CEB To 95: in ALL countries unemployment, poverty
worsen, Gini rises, BUT health,edu,cons:no deterioration in CE,small
in Balt, very large in CISM After 95: in ALL countries SOCIND turn-
around;decline reversed in CEB by 2000, CISM&L still not reversed by 2005
CONCLUSION? Gradual reformers more pain
2727
ASSESSMENT CISM -CISL ASSESSMENT CISM -CISL
CISM:cumulative output decline historically CISM:cumulative output decline historically unique, social well-being deteriorated unique, social well-being deteriorated markedly, recovery not yet complete,markedly, recovery not yet complete, most most losers uncompensatedlosers uncompensated
CISL:”official”output much better but CISL:”official”output much better but questions of validity, sustainability; also questions of validity, sustainability; also SOCIND performance better in Belarus, and SOCIND performance better in Belarus, and only marginally betteronly marginally better
2828
IV. WHY GRADUAL NOT BETTER?IV. WHY GRADUAL NOT BETTER? Economics:Economics: delayed reforms,delayed delayed reforms,delayed
adjustment,delayed recovery, delayed adjustment,delayed recovery, delayed improvement, longer (and greater?) painimprovement, longer (and greater?) pain
Political economy:Political economy: delayed reforms cause delayed reforms cause vicious circle of rent-seeking,oligarchy,state-vicious circle of rent-seeking,oligarchy,state-capture,frozen transition, delayed capture,frozen transition, delayed recovery,barriers to SME,budget bias to big recovery,barriers to SME,budget bias to big business, greater poverty, inequalitybusiness, greater poverty, inequality
2929
VICIOUS CIRCLE OF DELAYED REFORM VICIOUS CIRCLE OF DELAYED REFORM AND OLIGARCHIC DEVELOPMENTAND OLIGARCHIC DEVELOPMENT
Creates Rent-Seeking Opportunities / Old
Elite Revived
Delayed Reform
EU Membership Offer (Weak) EU Membership
Desire (Weak)
START
Captures State Policy For Self-Interest
Oligarchy Develops
New Entrants SME’s Face Difficulties
Weak Rule-of-Law
Weak Support for EU Membership
Against Competition, Prefer Status-Quo,
Prefer Non-transparent Procedures
Fear EU Membership Discipline
3030
State Capture Index, 1999State Capture Index, 1999
Source: Author’s calculations averaging two concepts of state capture, pervasiveness and concentration,
as reported in Figure 3 of Hellmann and Schankermann (2000). For bracketed cases, no values are reported in the 1999 study; 1999 values are pro-rated using a 2003 World Bank study of ‘crony bias’ (a related but different concept), Hellmann and Kaufmann (2002)), Chart 2.
Hungary
0.10
Armenia
0.11
Poland 0.17 Georgia 0.34 Czech Republic 0.16 Kazakhstan 0.18 Slovakia 0.34 Russia 0.45 Croatia 0.43 Kyrgyz Republic 0.41 Central Europe
0.20
Moldova Ukraine
0.52 0.45
Estonia
0.14
Azerbaijan Tajikistan
0.58 --
Latvia (0.22) Lithuania 0.17 CISM 0.38 Baltics
0.18
Uzbekistan Belarus
0.08 0.12
Bulgaria 0.40 Turkmenistan -- Romania 0.30 Macedonia (0.35) CISL 0.10 Albania (0.35) Bosnia-Herzegovina
(0.40)
Serbia-Montenegro
(0.50)
South-East Europe
0.35 (0.38)
3131
Concentration of Forbes BillionairesConcentration of Forbes Billionaires No. of
Billionaires 2006
% of Billionaires
% of World GDP
2005
Ratio of % of Billionaires to World GDP
%Bill> %GDP
Kazakhstan 2 0.3 0.1 3 Russia 34 4.2 1.7 2.4 Ukraine 3 0.4 0.2 2 USA 371 46.7 28.1 1.7 Sweden 8 1.0 0.8 1.2 Germany 55 6.9 6.2 1.1 Canada 21 2.6 2.5 1.04 %Bill<%GDP
Poland 3 0.4 0.5 0.8 Mexico 10 1.2 1.7 0.7 UK 24 3 4.9 0.6 Spain 10 1.2 2.5 0.5 France 14 1.7 4.7 0.4
3232
State Capture Higher the Longer Delay State Capture Higher the Longer Delay in Stabilizationin Stabilization
Figure 6.4: State capture and delay in stabilization
y = 0.0057x + 0.143R2 = 0.4882
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0 5 10 15 20 25 30 35 40 45 50 55 60
Sta
te C
aptu
re In
dex,
199
9
Months to 5% / Month Inflation
HUN
CZE
SVK
SVN
LTU
POL
EST
HRV
ALB MKD
KGZ
MDA
AZE
RUS
BGR
ROM
UKR
ARMKAZ
GEO
3333
State Capture Lower the More State Capture Lower the More Rapid ReformsRapid Reforms
Figure 6.5: State capture and delay in reform progress
y = -0.2306x + 0.9239R2 = 0.4545
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
1.5 2 2.5 3 3.5 4
Transition Progress Indicator after 4 years
AZE
ALB
MDA
RUS
KGZ
UKR
ROM
ARMKAZ
BGR
MKD GEO
HRV
SVN
SVK
POL, LTU
HUN
EST
CZE
Sta
te C
aptu
re In
dex,
199
9
3434
CAPITALIST ELITES IN HISTORYCAPITALIST ELITES IN HISTORY
Rent-seeking and Oligarch resistance to liberalism not unique to Post-Rent-seeking and Oligarch resistance to liberalism not unique to Post-Communist economies;Communist economies;
““Elite Entrenchment” = Resistance to liberal markets (see article by Elite Entrenchment” = Resistance to liberal markets (see article by Morck et al, Morck et al, Journ.of.Econ.Lit.Journ.of.Econ.Lit., September 2005)., September 2005).
Elite, or Incumbent Capitalist lobbies against competition (e.g. Glass-Elite, or Incumbent Capitalist lobbies against competition (e.g. Glass-Steagall Act.,1934, USA: see Rajan and Zingales (2003) Steagall Act.,1934, USA: see Rajan and Zingales (2003) Saving Saving Capitalism from Capitalists.Capitalism from Capitalists.
Successful Rent-Seeking rewarded by shareholders: Lee Iacocca of Successful Rent-Seeking rewarded by shareholders: Lee Iacocca of Chrysler and US “quotas” on Japanese automobiles 1982.Chrysler and US “quotas” on Japanese automobiles 1982.
Oligarchs NOT equivalent to US Robber Barons or Chaebol in Korea: Oligarchs NOT equivalent to US Robber Barons or Chaebol in Korea: no prior value added; degree and speed of oligarch creation unique in no prior value added; degree and speed of oligarch creation unique in history.history.
3535
RECAPTURING STATESRECAPTURING STATES
BB v. GRAD Debate is history; new debate BB v. GRAD Debate is history; new debate “Transition “Transition Inevitable”(TI) vs. “Transition Frozen” (TF)Inevitable”(TI) vs. “Transition Frozen” (TF)
TI argument: high degree of ownership eventually leads TI argument: high degree of ownership eventually leads even oligarchs to seek security of property rights [Coase even oligarchs to seek security of property rights [Coase Theorem: in market any demand, including for institutions, Theorem: in market any demand, including for institutions, will generate supply: Schleifer (1995) Aslund (1997); : will generate supply: Schleifer (1995) Aslund (1997); : “Yesterday’s thief is the staunchest defender of property “Yesterday’s thief is the staunchest defender of property rights” :Buiter (2000)rights” :Buiter (2000)
TF counter-argument:if rents exceed value of property TF counter-argument:if rents exceed value of property rights oligarchs prefer status-quo [Havr-95&06;Hellman-rights oligarchs prefer status-quo [Havr-95&06;Hellman-98;Polischuk&Savateev-04;Sonin-03.98;Polischuk&Savateev-04;Sonin-03.
3636
State Capture Leads to Frozen TransitionState Capture Leads to Frozen Transition
Figure 8.1: State capture leads to frozen transition
y = -2.4736x + 3.9725R2 = 0.7201
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
0 0.1 0.2 0.3 0.4 0.5 0.6
Tran
sitio
n P
rogr
ess
Indi
cato
r, 20
04
State Capture Index, 1999
HUN
SVN
EST CZE
LTU
POLSVK
HRV ARM
KAZ
ROM
GEOALB
MKDKGZ
BGR
BIHUKR
RUS
YUG
MDAAZE
3737
REDUCING POWER OF OLIGARCHSREDUCING POWER OF OLIGARCHS
Create open and environment for small Create open and environment for small business, ”level playing field”business, ”level playing field”
Transparent and equal application of tax Transparent and equal application of tax licensing, tender, other government actions.licensing, tender, other government actions.
Very judiciousVery judicious use of re-privatization,1-2 use of re-privatization,1-2 cases to signal new transparency-and cases to signal new transparency-and onlyonly if clean legal case made. if clean legal case made.
3838
COLOUR REVOLUTIONSCOLOUR REVOLUTIONS Reflects view of Reflects view of the demosthe demos ( (“ENOUGH –“ENOUGH –Mc Faul )Mc Faul ) Shows Shows the demosthe demos can be very powerful; does this suffice to can be very powerful; does this suffice to
change oligarchs?change oligarchs? History clearly shows entrenched elites do not give up History clearly shows entrenched elites do not give up
power easily (see: Morck et.al. 2005)power easily (see: Morck et.al. 2005) Frozen transition arguments and evidence, suggest similar Frozen transition arguments and evidence, suggest similar
entrenchment taking place entrenchment taking place e.g.e.g. Ukraine: bitter fight of Dec.04 election ; Mar. 06 results Ukraine: bitter fight of Dec.04 election ; Mar. 06 results
“suggest elites not giving up”(Wilson-2006); new coalition “suggest elites not giving up”(Wilson-2006); new coalition Yuschenko-Yanukovich suggests oligarchs back in powerYuschenko-Yanukovich suggests oligarchs back in power