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

Domestic Institutional System

Propelling institutions

Constraining institutions

Economic Policy

Institutional (reforms)

Fiscal, monetary policies. Direct interventions

Other determinants of policies: - personality factors - political shocks, etc.

Long-run economic growth

External shocks

(1)

(3)

(2)

(8)

(6)

(4)

(7)

(5)

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

Per-capita GDP (in 1990 international dollars) in 1950 and 1990:

Poland vs. Spain Hungary vs. Austria.

12210

2447

5115

23972000

6000

10000

14000

1950 1990

Poland Spain

2480

6471

16881

3706

2000

6000

10000

14000

18000

1950 1990

Hungary Austria

• Countries under socialism lost a lot of distance to Western European

economies.

(102%) (98%)

(42%)

(239%)

(67%)

(149%)

(38%)

(261%)

Source: Maddison Database.

9 9

0%

5%

10%

15%

20%

25%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001Source: Maddison Database.

Per-capita GDP (in 1990 international dollars) in 1950 and 2003:

North Korea vs. South Korea Cuba vs. Chile

854 1127

15732

854

0

4000

8000

12000

16000

1950 2003

North Korea South Korea

20462569

10950

3670

0

4000

8000

12000

1950 2003

Cuba Chile

Per-capita GDP (in 1990 international dollars) in China (Western Europe=100).

(100%) (100%)

(1396%)

(7%)

(56%)

(179%)

(23%)

(426%)

0%

5%

10%

15%

20%

25%

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

10 10

4. The institutional trajectories after socialism

11

-10

-5

0

5

10

Political freedom 2012 (Polity IV)

-5> fully institutionalized autocracies

-5< mixed, or incoherent, authority regimes <5

-5< mixed, or incoherent, authority regimes <5

5< fully institutionalized democracies

12

Source: Polity IV Project

0

10

20

30

40

50

60

70

80

90

Private sector share in GDP (%) 1994

2010

Source: EBRD - Structural and institutional change indicators

13

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

0

20

40

60

80

100

120

140

160

180% of GDP

Trade openness (merchandise trade as % of GDP)

1994

2011

Source: World Bank, World Development Indicators

out of scale

2010 Sing: 317% H-K:

376%

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

0

2000000

4000000

6000000

8000000

10000000

12000000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US

$, c

on

stan

t p

rice

s, c

on

stan

t P

PP

s, O

ECD

bas

e

year

, mill

ion

s

GDP levels

China

Russia

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GDP annual growth rates

China

Russia

Since 1990’s GDP has been growing

more rapidly in China

Source: OECD

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

GDP per capita annual growth rate

China

Russia

1837

7402

China 7844

14730

Russia

0

2000

4000

6000

8000

10000

12000

14000

16000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Pe

r h

ead

, US

$, c

on

stan

t p

rice

s, c

on

stan

t P

PP

s,

OEC

D b

ase

ye

ar

GDP per capita levels

Source: OECD

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Population growth rates

China Russia

1213 mln

China

1353 mln

148 mln

Russia

142 mln 0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Population levels

Population levels and growth rates in China

are very high, especially in comparison to

those observed in Russia.

Source: OECD

China

Russia

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

% o

f G

DP

Fuels and mining products - export value in relation to GDP

3.1% China

72.3% Russia

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Fuels and mining products export as percentage of total export

0

5

10

15

20

25

30

35

40

45

50

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

% o

f G

DP

Exports of goods and services (% of GDP)

China

Russia

Source: World Trade Organisation and OECD

Source: EBRD Transition Report 2008; WB WDI, IMF WEO

21

(GDP per capita growth in

2008 in relation to 1989 level)

22

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25% GDP per capita (constant US$) change between 2007 and 2012 (in %)

Source: World Bank, World Development Indicators

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

25

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.

63 63

67

68 69

67 68

71

65

70 70 71

69

68

72

70 69

71

69

71 71

73

66

63

71

74 75

74

77

71

76 77 77

77

65

68 68

69 69 70 71 71

73 74 74 74 74 75 75

76 76 77

78

80

73 74

77

79

80 81 81 81 82 82 82

83

60

65

70

75

80

85

Life expectancy at birth, total (years)

1990

2011

Source: World Bank, World Development Indicators

26

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)

116

98

77

93

72

57

47

55

37 37

22 27

21 21 18 19 17 17 17 14 21

10

49

59

80

19

8 13 11 9 10

15 8

63

53 49

45

31 28

21 18 16 13 12 12 10 8 8 6 6 6 6 4 4 3

16 16 15 9

5 4 4 4 4 3 3

0

20

40

60

80

100

120Mortality rate, under-5 (per 1,000 live births)

1990

2011

Source: World Bank, World Development Indicators

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.

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• Finding no 1 is strongly supported by substantial empirical

literature reviewing the experience of countries in transition.

Polanec, Saŝo (2004)

”(…) 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.”

Krueger, Anne O. (2004)

”(…) 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.”

Fischer, Stanley; Sahay, Ratna (2004)

”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.”

Falcetti, Elisabetta; Lysenko, Tatiana; Sanfey, Peter (2006)

”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.”

Aslund (2012) 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.

• economic reforms

less waste

less environmental deterioration

and less damage to health

healthier foodstuffs become more

available and relatively cheaper

• privatisation (separation

of companies from the state)

• ecological regulations are

more strictly observed

• stronger enforcement of

laws

30

• less frequent accidents

on the job