SOCIAL COSTS OF POSTCOMMUNIST TRANSITION Was Gradual Better
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
MOTIVATION HYPOTHESIS 1. One key rationale of gradualism : to mitigate social costs 2. Mid-nineties studies largely negative: social costs huge, due to „shock therapy“ 1. Were social costs 1990 -95 less for gradual reformers? 2. Did social costs reverse after 1995? 3. By 2005 who had better performance? gradual? rapid? 2
OUTLINE § 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 3
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RATIONALE OF GRADUALISM § “Restructuring involves large parts of population…[hence] gradualism can prove less costly. In the case of full reform a majority will be less well-off during the transition” Dewatripont and Roland (1992) § “Simplistic capitalist experiment has incurred high social costs” Amsden/Kochanowicz/Taylor (1994) § “Gradual [school of thought] argued there were large social costs associated with very rapid adjustments” Gordoy &Stiglitz(2006) § Przeworski(1991)democracy and market in conflict-reforms cause pain, anti-reformers win elections, reforms reversed 6
MID-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) 7
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 8
DATA AVAILABILITY FOR UPDATE § A lot of new data allow comparison from about 1989 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. 9
EBRD TRANSITION PROGRESS INDICATOR 2004 CE BALT SEE CISM CISL 10
GROUPINGS BY INITIAL STRATEGY AND TPI RANK VERY SIMILAR Ranking TPI Reform. Strategy CE+BALT Big-Bang or Steady Progress Some gradual, some Aborted Big-Bang Most gradual, RU/KYR/ Aborted BB SEE CISM CISL Very limited reforms 11
DEMOCRACY AND MARKET LIBERALIZATION 12
II. EVOLUTION OF SOCIAL INDICATORS 1990 -2005 BY COUNTRY GROUP 13
HDI VALUES BY COUNTRY GROUP: 1990 -2004 14
EARLY “PAIN” AND REFORM START: DELHDI 90 -95 x. TPI 94 15
2000 WELL-BEING - AND REFORM START : DELHDI 90 -00 x. TPI 94 16
GINI VALUES IN TRANSITION 1988 -92 1993 -6 2002 -3 CE 22 29 28 BALT 25 35 36 SEE(3) 21 27 33 CISM 27 42 38 CISL 25 Na 33 OECD (low) DNMRK 25 (high) USA 40 (low) INDNSIA 30 (high) COLOMB 49 DEVPG CHINA Rural Urban 36 32 17
RANGE OF POVERTY RATIOS BY 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) 18
LIFE EXPECTANCY CE, BALT, SEE 19
LIFE EXPECTANCY CISM, CISL 20
GROSS EDUCATIONAL 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] 60 62 CIS (EBRD) 66 21
MEAT-KG/PERSON 22
FRUITS KG/PERSON 23
TELEPHONES PER 1, 000 24
AUTOS PER 1, 000 25
III. 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 turnaround; decline reversed in CEB by 2000, CISM&L still not reversed by 2005 § CONCLUSION? Gradual reformers more pain 26
ASSESSMENT CISM -CISL § CISM: cumulative output decline historically unique, social well-being deteriorated markedly, recovery not yet complete, most losers uncompensated § CISL: ”official”output much better but questions of validity, sustainability; also SOCIND performance better in Belarus, and only marginally better 27
IV. WHY GRADUAL NOT BETTER? § Economics: delayed reforms, delayed adjustment, delayed recovery, delayed improvement, longer (and greater? ) pain § Political economy: delayed reforms cause vicious circle of rent-seeking, oligarchy, statecapture, frozen transition, delayed recovery, barriers to SME, budget bias to big business, greater poverty, inequality 28
VICIOUS CIRCLE OF DELAYED REFORM AND OLIGARCHIC DEVELOPMENT Captures State Policy For Self-Interest Against Competition, Prefer Status-Quo, Prefer Non-transparent Procedures Oligarchy Develops Fear EU Membership Discipline Creates Rent-Seeking Opportunities / Old Elite Revived New Entrants SME’s Face Difficulties Weak Rule-of-Law START Delayed Reform Weak Support for EU Membership Offer (Weak) EU Membership Desire (Weak) 29
State Capture Index, 1999 30
Concentration of Forbes Billionaires 31
State Capture Higher the Longer Delay in Stabilization 32
State Capture Lower the More Rapid Reforms 33
CAPITALIST ELITES IN HISTORY Ø Rent-seeking and Oligarch resistance to liberalism not unique to Post. Communist economies; Ø “Elite Entrenchment” = Resistance to liberal markets (see article by Morck et al, Journ. of. Econ. Lit. , September 2005). Ø Elite, or Incumbent Capitalist lobbies against competition (e. g. Glass. Steagall Act. , 1934, USA: see Rajan and Zingales (2003) Saving Capitalism from Capitalists. Ø Successful Rent-Seeking rewarded by shareholders: Lee Iacocca of Chrysler and US “quotas” on Japanese automobiles 1982. Ø Oligarchs NOT equivalent to US Robber Barons or Chaebol in Korea: no prior value added; degree and speed of oligarch creation unique in history. 34
RECAPTURING STATES Ø BB v. GRAD Debate is history; new debate “Transition Inevitable”(TI) vs. “Transition Frozen” (TF) Ø TI argument: high degree of ownership eventually leads even oligarchs to seek security of property rights [Coase Theorem: in market any demand, including for institutions, will generate supply: Schleifer (1995) Aslund (1997); : “Yesterday’s thief is the staunchest defender of property rights” : Buiter (2000) Ø TF counter-argument: if rents exceed value of property rights oligarchs prefer status-quo [Havr-95&06; Hellman 98; Polischuk&Savateev-04; Sonin-03. 35
State Capture Leads to Frozen Transition 36
REDUCING POWER OF OLIGARCHS § Create open and environment for small business, ”level playing field” § Transparent and equal application of tax licensing, tender, other government actions. § Very judicious use of re-privatization, 1 -2 cases to signal new transparency-and only if clean legal case made. 37
COLOUR REVOLUTIONS § Reflects view of the demos (“ENOUGH –Mc Faul ) § Shows the demos can be very powerful; does this suffice to change oligarchs? § History clearly shows entrenched elites do not give up power easily (see: Morck et. al. 2005) § Frozen transition arguments and evidence, suggest similar entrenchment taking place § e. g. Ukraine: bitter fight of Dec. 04 election ; Mar. 06 results “suggest elites not giving up”(Wilson-2006); new coalition Yuschenko-Yanukovich suggests oligarchs back in power 38
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