april 19, 20011 what happened in russia, 1991-2001, and why? (and what are the implications?) simon...
TRANSCRIPT
April 19, 2001 1
What Happened in Russia, 1991-2001,
and Why?(And what are the implications?)
Simon Johnson, MIT Sloan
http://web.mit.edu/sjohnson/www/research.htm
April 19, 2001 2
What happened in Russia, through August 1998?
April 19, 2001 3
What happened in Russia, in August 1998?
April 19, 2001 4
What happened in Russia, since August 1998?
April 19, 2001 5
Explaining divergence in transition
• Convergence across Eastern Europe and the former Soviet Union in stabilization, liberalization and privatization
• No convergence in economic outcomes: most of the former Soviet Union trapped with high unofficial economy and low tax revenues/few public goods
What explains this divergence?
Extent of “institutional reform” (EBRD 1999 measures: e.g., regulatory burden, corruption)
see also micro surveys of entrepreneurs
April 19, 2001 6
Solutions: to protect entrepreneurs(1) Reform of bureaucracy and regulation
• control of corruption is key (Daniel Kaufmann)
• reduce and simplify regulations
(2) Need local government to support development
• fiscal reform helpful (Shleifer and Treisman)
• lessons from China
(3) Stronger constraints on arbitrary executive action
• improve functioning of court system
• oversight and transparency from legislature (Poland)
April 19, 2001 7
Conclusion: institutions are a first-order macroeconomic issue
1) Protect entrepreneurs against expropriation • Essential for investment and growth• Helpful for registration of activity/payment of taxes• Need effective constraints on the executive
2) Protect outside investors (against entrepreneurs!)• Rapid growth is possible with weak outside investor
protection, tending to favor large incumbents/powerful families
• But crises are larger and more persistent when outside investors are more vulnerable
• New rules are essential, new regulators are helpful, new markets are possible almost everywhere
April 19, 2001 8
Short-term prospects
• August 1998 crisis: a blessing in disguise?
• Output and export boosted by devaluation
• Real exchange rate steady
• Inflation under control, for now
• GDP recovery, hard to sustain
BUT
important problems are not being resolved
April 19, 2001 9
Four Trends
• Better managed firms consume the weak
• Successful firms are tied to local government
• Local/regional governments delay restructuring
• No serious pressure for protectionism
April 19, 2001 10
How normal is Russia?
Normal aspects
• response to devaluation
• firms make money
• capital is leaving
April 19, 2001 11
Unusual features
• low revenues for federal government relative to spending
• large firms and banks do not go bankrupt
• incredible system of barter (the most effective corruption in the world?)
• bank credit doesn’t matter
April 19, 2001 12
Four scenarios (to 2005)
#1: Leap to a liberal market economy
(like Poland)
• local governments like control not free entry
• large firms prey on small firms
• who will dismantle the political barriers to entry/growth for new small firms?
April 19, 2001 13
#2: Strong business groups + government
(like Malaysia or Korea or Mexico)
• already evident in Moscow (e.g., Sistema)
• could grow at 2-5% per year and attract capital inflows
• but vulnerable to collapse: confidence is fragile with weak institutions (see Asia)
April 19, 2001 14
#3: “Roving bandits”
• continual fighting for control of assets
• gradual decline of physical assets
• increase in emigration
• high level of violence
April 19, 2001 15
#4: Russia turns inward
(like Belarus)
• large protectionist barriers
• would have to defeat the large enterprises
• could have an initial boom, followed by decline and even collapse
April 19, 2001 16
One summary picture
• Weak institutions (corruption/rule of law)
do NOT necessarily prevent growth
(see Indonesia)
• but they do create fragility
• capital comes in when a boom is expected
• and then runs if a slight downturn
management and government theft
is endogenous
April 19, 2001 17
Fat tails in Russia’s Future
Pre-Crisis
Post-CrisisOops...
Our View
Pre and PostCrisis
Conventional models