Economic Growth after Socialism*

March 2014

Leszek Balcerowicz
Warsaw School of Economics
*Im grateful to Magda Cikowicz, Aleksander aszek, Sonja Wap and Marek Tataa for their assistance in preparing this presentation.

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

1. The institutional systems, policies, and outcomes

(1)

Domestic Institutional System Propelling Constraining institutions institutions Long-run economic growth

(3) (2) (4) (5)

Institutional (reforms)

Fiscal, monetary policies. Direct interventions

(8) (6)

External shocks

Economic Policy
(7)

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

- 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
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2. Socialism as an institutional system

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

 Countries under socialism lost a lot of distance to Western European economies.

Per-capita GDP (in 1990 international dollars) in 1950 and 1990: Poland vs. Spain
14000
(239%)

Hungary vs. Austria.

12210
18000 14000 16881
(261%)

10000
(42%)

10000 6000 2000 2480 1950 Hungary 1990 Austria

(67%)

6000
(102%) (98%)

5115
(149%)

6471 3706

(38%)

2000

2447 2397 1950 Poland 1990 Spain

Source: Maddison Database.

Per-capita GDP (in 1990 international dollars) in 1950 and 2003: North Korea vs. South Korea Cuba vs. Chile
(1396%) (426%)

16000 12000 8000 4000 0 1950

15732

12000

10950

8000
(179%)

4000
(100%) (100%) (7%)

2046 0

(56%)

3670

(23%)

2569

854

854

1127 2003

1950

2003

North Korea

South Korea

Cuba

Chile

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

25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0%

Source: Maddison Database.

19 50 19 53 19 56 6 19 59 19 62 19 65 19 68 19 71 19 74 19 77 19 80 19 83 19 86 19 89 19 92 19 95 19 98 2 2 00 1

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4. The insitutional trajectories after socialism

11

Political freedom 2012 (Polity IV)

10

5< fully institutionalized democracies 5 -5< mixed, or incoherent, authority regimes <5

-5

-5< mixed, or incoherent, authority regimes <5 -5> fully institutionalized autocracies

-10
Source: Polity IV Project

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Private sector share in GDP (%)

90 80 70 60 50 40 30 20 10 0 1994 2010

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 14 by the value of GDP, all in current U.S. dollars. (WDI)

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
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5. The economic outcomes after socialism

16

GDP annual growth rates

20.00% 15.00% 10.00% 5.00% 0.00% 1996 -5.00% -10.00% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China Russia

GDP levels
US $, constant prices, constant PPPs, OECD base year, millions 12000000

10000000

Since 1990s GDP has been growing more rapidly in China

8000000

6000000

China Russia

4000000

2000000

0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: OECD

GDP per capita annual growth rate

15.00% 10.00%

5.00%

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

0.00%

-5.00%

-10.00%

GDP per capita levels

Per head, US $, constant prices, constant PPPs, OECD base year 16000 14000

Russia
14730

12000
10000 8000 7844 6000 4000 2000 1837 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

China
7402

Source: OECD

Population growth rates

1.2

1
0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 China Russia 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1600000
1400000 1200000 1213 mln 1000000 800000 600000 400000 200000 0 148 mln 1995 Source: OECD 1996 1997 1998 1999 2000

Population levels
China
1353 mln

Population levels and growth rates in China are very high, especially in comparison to those observed in Russia.

Russia
142 mln
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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%
3.1% 72.3%

Russia

China

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

Exports of goods and services (% of GDP)

50 45 40 35 30 25 20 15 10 5 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 value in relation to GDP

14.00% 12.00% 10.00% % of GDP China Russia 8.00% 6.00% 4.00% 2.00% 0.00% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 China 2011 Russia

% of GDP

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

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25% 20% 15%

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

10%
5% 0% -5% -10% -15% -20% -25%
Source: World Bank, World Development Indicators

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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 1990 2011 80
78 76 76 77 77 77 76 77 77 80 79 77 80 81 81 81 82 82 82 83

75
73

75 74 75 74 74 74 72 69 68 70 69

75
73 73 74 74

74 71

70
68 65 63 63 68 68 67

69 69 69
67

70 68

71 71 71 71 70 70

71
69

71

71

71

66 65 63

65

60

Source: World Bank, World Development Indicators

Life expectancy at birth indicates the number of years a newborn infant would live if 25 prevailing patterns of mortality at the time of its birth were to stay the same throughout its life.

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

120 116 1990 100 98 93 77 72 63 60 53 57 49 45 31 28 20 21 18 16 22 47 37 37 27 21 21 18 19 17 17 17 21 14 55 49 59 80 2011

80

40

13 12 12 10 10 8 8 6 6 6 6 4 4 3

16 16 15

19

15 13 11 10 9 9 8 8 5 4 4 4 4 3 3

Source: World Bank, World Development Indicators

Under-five mortality rate is the probability per 1,000 that a newborn baby will die before reaching 26 age five, if subject to current age-specific mortality rates. (WDI)

7. Explaining the differences in economic growth

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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, Sao (2004)
Krueger, Anne O. (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.
() 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.

Fischer, Stanley; Sahay, Ratna (2004)

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

Aslund (2012)

The Baltic States and Central Europe have accomplished the best results.They purused all major reforms together in a comprehensive, early, and radical package. There reforms were deregulation, macroeconomic stabilization, privatization, instututional 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

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