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

CZ

EC

H

POL

SVK

CR

O

SVN

EST

LV

A

LIT

H

BU

L

RO

M

MA

C

AL

B

BiH

S&M

KY

R

AR

M

GE

O

RU

S

KA

Z

UK

R

MO

L

AZ

E

TA

J

UZ

B

BE

L

TU

RK

COUNTRY BY GROUP

TP

I V

AL

UE

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

TJK

UZB

TKM

BLR

ALB

UKRRUS

GEOARM

KGZ

POL,SVK

CZE

HUN

y = 0.1988x - 0.1302

R2 = 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

Co

nst

itutio

na

l Lib

era

lism

, 2

00

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 - 0.0735

R2 = 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

del

HD

I95

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 - 0.0717

R2 = 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

DI0

0

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 RuralRural

UrbanUrban

3636

3232

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

Yea

r

HUN

CZECH

POL

SVK

CRO

SVN

BALT Life exp

67

68

69

70

71

72

73

1989 1995 2000 2003

Life exp

Yea

r

EST

LVT

LITH

SEE Life exp.

67

68

69

70

71

72

73

74

75

1989 1995 2000 2003

Year

Lif

e E

xp

BUL

ROM

MAC

ALB

BiH

S&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

Lif

e ex

p

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

Lif

e ex

p 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/PERSON

MEAT /PERSON KG:

0

10

20

30

40

50

60

70

CEUR SEE CISM

1990

1995

2000

2005

2323

FRUITS KG/PERSONFRUITS KG/PERSON

FRUITS/PERSON-KG

0

10

20

30

40

50

60

70

80

CEUR SEE CISM

1990

1995

2000

2005

2424

TELEPHONES PER 1,000TELEPHONES PER 1,000

ALL TELEPHONES PER 1,000

0

200

400

600

800

1000

1200

CE BALT SEE CISM CISL

1990

1995

2000

2005

2525

AUTOS PER 1,000AUTOS PER 1,000

AUTOS 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 + 0.143

R2 = 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 I

ndex

, 19

99

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 + 0.9239

R2 = 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

MKDGEO

HRV

SVN

SVK

POL, LTU

HUN

EST

CZE

Sta

te C

aptu

re I

ndex

, 19

99

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 + 3.9725

R2 = 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

Tra

nsiti

on P

rogr

ess

Indi

cato

r, 2

004

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