Transcript ECONOMIC AND SOCIAL COSTS OF TRANSITION

SOCIAL COSTS OF
POST-COMMUNIST
TRANSITION
Was Gradual Better?
Oleh Havrylyshyn
(University of Toronto )
WIIW Mar.26,2007 O Havrylyshyn
CERES Seminar
Jan. 29, 2007
MOTIVATION
 Key reason behind
gradualist theory , to
mitigate social costs
 Mid-nineties studies
overwhelmingly
negative, social costs
huge, often blamed on
„shock therapy“
OBJECTIVE
 First years all felt
social costs: were they
less in gradualists?
 Have social costs
turned around since
1995? Differences by
type of reform
strategy?
OUTLINE
 I:BACKGROUND:expectations,




strategydebates, data, methodology
II:OVERALL WELL-BEING: unempl, poverty,
income dist,consumerism
III: HEALTH INDICATORS
IV:EDUCATION INDICATORS
V: SUMMARY ASSESSMENT
I:BACKGROUND




INITIAL EXPECTATIONS
GRADUALvs.BIG-BANG DEBATE
MID-NINETIES ASSESSMENTS
BIG PROBLEM IS HOW TO TAKE A HARD
LOOK AT SOFT FACTS
I
5
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
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)
I
8
WHY ARE THE FACTS SO SOFT?
 Usual data problems especially 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).
 Income ≠ access to goods.
SHORTCOMINGS OF EARLIER
ANALYSIS
 Premature analysis: mid-nineties low point
only covers half of transition cycle .
 Focused on worst cases (e.g. male life
expectancy in Russia) ignored good
performance of Central Europe
 Approach of some studies borders on
sensationalist journalism
DATA AVAILABILITY FOR UPDATE
 A lot of new data allow comparison from
about1989 to 2004, covers full transition
cycle of decline and recovery
 Use UNDP Human Development Report
data from 1990 to 2004 for most social.
Indicators; broadly consistent definitions and
not biased by big-bang philosophy.
Country Groups :Initial Strategy
I. ADVANCED-START/
STEADY PROGRESS
___________________
Croatia
Hungary
Slovenia
Czech Rep.
II. SUSTAINED BIG BANG
______________________
Estonia
Latvia
Lithuania
Poland
Slovakia
III. BIG-BANG/ABORTED
UNSUSTAINED
_____________________
Albania
Bulgaria
Macedonia
Kyrgyz Republic
Russia
IV. GRADUAL, DELAYED
OR UNSTEADY REFORMS
_______________________
Azerbaijan
Armenia
Georgia
Kazakstan
Moldova
Ukraine
Tajikistan
Romania
V. LIMITED OR REVERSED REFORMS
__________________________________
Belarus
Uzbekistan
Turkmenistan
EBRD TRANSITION PROGRESS
INDICATOR 2004
CE BALT SEE CISM CISL
Chart 2.1 EBRD TRANSITION PROGRESS INDICATOR 2004
4.5
4
3.5
2.5
Series1
2
1.5
1
0.5
COUNTRY BY GROUP
TURK
BEL
UZB
TAJ
AZE
MOL
UKR
KAZ
RUS
GEO
ARM
KYR
S&M
BiH
ALB
MAC
BUL
ROM
LITH
LVA
EST
SVN
SVK
CRO
POL
CZECH
0
HUN
TPI VALUE
3
GROUPINGS BY INITIAL STRATEGY
AND TPIO4 RANK VERY SIMILAR
Ranking 04
CE+BALT
SEE
CISM
CISL
Strategy
Type I +II
some III,some IV
IV + RUS+KYR
TypeV
DEMOCRACY AND MARKET
LIBERALIZATION
Figure 2.2: Constitutional liberalism and progress in transition
0.8
HUN
EST
SVN
Constitutional Liberalism, 2004
0.7
CZE
LTV, LTU
0.6
POL,SVK
YUG
BGR, HRV
0.5
MDA
UKR
BIH
0.4
TKM
0.3
AZE
TJK
ROM
GEO
ARM
KAZ
BLR
MKD
KGZ
RUS
ALB
UZB
0.2
y = 0.1988x - 0.1302
2
R = 0.7231
0.1
0.0
1.0
1.5
2.0
2.5
Transition Progress Indicator, 2004
3.0
3.5
4.0
II: WELL-BEING AND INCOME
DISTRIBUTION






OVERALL WELL-BEING(HDI of UNDP)
POVERTY RATIOS;GINI (UNDP,WB)
UNEMPLOYMENT( Various)
GOODS CONSUMPTION
HEALTH INDICATORS (UNDP HDR)
EDUCATION INDICATORS( HDR)
HDI VALUES BY COUNTRY GROUP:1990-2004
HDI 1990-2003 By Group
1
0.95
0.9
0.85
CE
HDI
BALT
0.8
SEE
CISM
CISL
0.75
0.7
0.65
0.6
1990
1995`
2000
Years
2003
HDI SHOWS GRADUAL CAUSES MORE PAIN
(UNDP: Highest Value Norway=0.944; Lowest Value Sierra Leone=0.275)
Country groups:
EBDR rank
Central Europe
(change from 1990)
Baltic
(change from 1990)
SEE
(change from 1990)
CISM
(change from 1990)
CISL
(change from 1990)
1990
.815
.812
.752
.772
.767
1995
.821
(+.006)
.779
(-.033)
.749
(-.003)
.721
(-.051)
.743
(-.024)
2000
.861
(+.046)
.789
(-.023)
.713
(-.039)
.663
(-.109)
.704
(-.063)
2003
.864
(+.049)
.847
(+.035)
.793
(+.041)
.730
(-.042)
.739
(-.028)
SHORT-TERM:DELHDI90-95xTPI94
delHDI95 TPI94
0.03
0.02
0.01
0
0
0.5
1
1.5
2
2.5
y = 0.0217x - 0.0735
R2 = 0.3415
3
3.5
4
delHDI95
-0.01
-0.02
Series1
Linear (Series1)
-0.03
-0.04
-0.05
-0.06
-0.07
-0.08
TPI94
MEDIUM-TERM:
DELHDI90-00xTPI94
del HDI00 TPI 94
0.06
0.04
y = 0.0293x - 0.0717
R2 = 0.4192
del HDI00
0.02
0
0
0.5
1
1.5
2
2.5
3
3.5
4
Series1
Linear (Series1)
-0.02
-0.04
-0.06
-0.08
TPI 94
CHANGE HDI
by STRATEGY TYPE
Country Group
by type of
Reform Strategy
1995-01
1990-01
+.027
+.030
+.010
-.016
+.023
+.043
+.030
+.027
-.028
+.014
-.014
IV. Gradual
-.044
+.016
-.028
V. Limited
-.024
+.024
0
I. Advanced Start and
Steady Progress
II. Rapid & sustained
CE
BALT
1990-95
+.003
III. Aborted Big-Bang
UNEMPLOYMENT RATES 1996-2005
by country groups
Unemployment rates
40
35
30
25
CEUR
BALT
BG+RO
20
SEE
CISM
CISL
15
10
5
0
1996
2000
2005
UNEMPLOYMENT RATES 2000-05
by country
UNEMPLOYMENT RATES--LFS
25,00
BG
20,00
CZ
EE
HU
LV
15,00
LT
PL
RO
SVK
SLV
10,00
AL
CR
RU
S&M
5,00
UKR
0,00
2000
2003
2004
2005
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
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)
CONSUMPTION
SELECTED GOODS





MEAT
FRUITS
VEGETABLES
TELEPHONES ( LAND*MOBILE)
AUTOMOBILES
MEAT-KG/PERSON
MEAT /PERSON KG:
70
60
50
40
1990
1995
2000
2005
30
20
10
0
CEUR
SEE
CISM
FRUITS KG/PERSON
FRUITS/PERSON-KG
80
70
60
50
1990
1995
40
2000
2005
30
20
10
0
CEUR
SEE
CISM
VEGETABLES KG/PERSON
VEGETABLES/PERSON-KG
120
100
80
1990
1995
60
2000
2005
40
20
0
CEUR
SEE
CISM
TELEPHONES PER 1,000
ALL TELEPHONES PER 1,000
1200
1000
800
1990
1995
600
2000
2005
400
200
0
CE
BALT
SEE
CISM
CISL
AUTOS PER 1,000
AUTOS PER 1,000 pop.
350
300
250
200
1990
1995
2000
2005
150
100
50
0
CEUR
SEE
RU+UKR
OCISM
III. HEALTH INDICATORS
LIFE EXPECTANCY CE,BALT,SEE
CE Life Exp.
BALT Life exp
78
73
76
72
74
71
HUN
POL
72
SVK
Year
Year
CZECH
EST
70
LVT
LITH
CRO
SVN
70
69
68
68
66
67
1989
1995
2000
2003
1989
Life exp
SEE Life exp.
74
73
Life Exp
72
BUL
ROM
MAC
71
ALB
BiH
S&M
70
69
68
67
1995
2000
Year
2000
Life exp
75
1989
1995
2003
2003
LIFE EXPECTANCY CISM, CISL
CISM Life Exp
CISL Life exp.
76
74
74
72
72
70
70
KYR
68
ARM
GEO
RUS
66
KAZ
UKR
Life exp
Life exp
68
66
UZB
BEL
TURK
64
MOL
64
AZE
TAJ
62
62
60
60
58
58
56
56
1989
1995
2000
Year
2003
1989
1995
2000
Year
2003
DOCTORS PER 10K POPULATION
CE,BALT,SEE
BALT Doctors per Pop. 1990-2005
450
400
350
Doctors per 1000
300
CE Doctor per pop. 1990-2005
600
250
EST
LVT
LITH
200
150
100
500
50
0
1990
1991
1992
1993
1994
1995
1996
1997
HUN
1998
1999
2000
2001
2002
2003
2004
2005
Year
CZECH
POL
300
SVK
CRO
SEE Doctors per pop. 1990-2005
SVN
200
800
700
100
600
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
1999
2000
2001
2002
2003
2004
2005
Doctors per 1000
Doctors per 1000
400
500
BUL
ROM
MAC
400
ALB
BiH
S&M
300
200
100
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
Years
1999
2000
2001
2002
2003
2004
2005
DOCTORS PER 10K POPULATION
CISM,CISL
CISM Doctors per pop. 1990-2006
CISL Doctors per pop. 1990-2004
600
500
450
500
400
ARM
GEO
RUS
300
KAZ
UKR
MOL
Docotrs per 1000
Docotrs per 1000
350
KYR
400
300
UZB
250
BEL
TURK
200
AZE
200
TAJ
150
100
100
50
0
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
1999
2000
2001
2002
2003
2004
2005
1990
1991
1992
1993
1994
1995
1996
1997
1998
Year
1999
2000
2001
2002
2003
2004
2005
IV: EDUCATION INDICATORS
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
EDUCATION EXPENDITURE % GDP:CE
CE EDUGDP
0.2
0.18
0.16
0.14
HUN
0.12
Year
CZECH
POL
0.1
SVK
CRO
0.08
SVN
0.06
0.04
0.02
0
1990
1995
2000
EDUGDP
2005
EDUCATION EXPENDITURE %GDP:BALTICS
BALT EDUGDP
0.45
0.4
0.35
0.3
0.25
Year
EST
LVT
LITH
0.2
0.15
0.1
0.05
0
1990
1995
2000
EDUGDP
2005
EDUCATION EXPENDITURE %GDP: SEE
SEE EDUGDP
0.16
0.14
0.12
0.1
BUL
Year
ROM
MAC
0.08
ALB
BiH
S&M
0.06
0.04
0.02
0
1990
1995
2000
EDUGDP
2005
EDUCATIONEXPENDITURE %GDP: CISM
CISM EDUGDP
0.4
0.35
0.3
KYR
ARM
0.25
Year
GEO
RUS
0.2
KAZ
UKR
MOL
0.15
AZE
TAJ
0.1
0.05
0
1990
1995
2000
EDUGDP
2005
EDUCATION EXPENDITURE %GDP: CISL
CISL EDUGDP
0.45
0.4
0.35
0.3
0.25
Year
UZB
BEL
TURK
0.2
0.15
0.1
0.05
0
1990
1995
2000
EDUGDP
2005
V. OVERALL ASSESSMENT
 Mid-90’s studies too early to reflect recovery
many ignored good performance of Central
Europe and Baltics
 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
 From 95: in ALL countries SOCIND turnaround;decline reversed in CEB by 2000,
CISM&L still not reversed by 2003-4
COMPARATIVE ASSESSMENT
CISM WORST
 CISM:cumulative output loss historically
unique, social well-being deteriorated
markedly, recovery not yet complete, most
losers uncompensated
 CISL:output officially much better but
questions of validity, sustainability; also
SOCIND performance only marginally
better,TRKM perhaps worse
POLICY LESSONS
 Expected widening of income distribution
not excessive;even partial reformers less
than many DC`s , China.
 Despite high unemployment, rapid
reformers suffered far less social cost on all
measures than gradual reformers
 GRADUAL SEEMED BETTER IN THEORY
WAS WORSE IN PRACTICE
SOCIAL INDICATORS PUZZLES
 PUZZLE 1: IS BELARUS EXAMPLE
OF SUCCESSFUL GRADUALISM OR
EXCEPTION TO THE RULE ?
 PUZZLE 2: UNEMPLOYMENT
APPEARS WORSE IN RAPID
REFORMERS BUT SOCIAL
INDICATORS BETTER-WHY?
FUTURE RESEARCH HYPOTHESES:
WHY GRADUAL NOT BETTER?
 Mechanically: delayed reforms,delayed
adjustment,delayed recovery, delayed
improvement
 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
MAR:26 APPENDIX-
WHY GRADUAL WORSE IN
PRACTICE ?
III: EVOLUTION OF OLIGARCHS:
THE NAVIGATION MODEL
-Uncharted waters: Debate and delay cause slow
and partial reforms, postpone adjustment
-Pirate raids: Rent-seeking stronger if reforms are
slow and partial, capital accumulation rapid,
concentration into oligarch power
-Safe havens: integration in global institutions
disciplines reform and ensures steady progress;
most powerful was EU membership
III
50
VICIOUS CIRCLE OF DELAYED REFORM
AND OLIGARCHIC DEVELOPMENT
Against Competition,
Prefer Status-Quo,
Prefer Non-transparent
Procedures
Captures State Policy
For Self-Interest
Oligarchy Develops
Fear EU Membership
Discipline
New Entrants SME’s
Face Difficulties
Creates Rent-Seeking
Opportunities / Old
Elite Revived
Weak Rule-of-Law
START
Delayed Reform
Weak Support for EU
Membership
EU Membership
Offer (Weak)
EU Membership
Desire (Weak)
III
51
State Capture Index, 1999
Hungary
Poland
Czech Republic
Slovakia
Croatia
0.10
0.17
0.16
0.34
0.43
Central
Europe
0.20
Estonia
Latvia
Lithuania
Baltics
Bulgaria
Romania
Macedonia
Albania
BosniaHerzegovina
SerbiaMontenegro
South-East
Europe
0.14
(0.22)
0.17
0.18
0.40
0.30
(0.35)
(0.35)
(0.40)
Armenia
Georgia
Kazakhstan
Russia
Kyrgyz Republic
Moldova
Ukraine
0.11
0.34
0.18
0.45
0.41
0.52
0.45
Azerbaijan
Tajikistan
0.58
--
CISM
0.38
Uzbekistan
Belarus
Turkmenistan
0.08
0.12
--
CISL
0.10
(0.50)
0.35 (0.38)
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.
III
52
State Capture Higher the Longer Delay
in Stabilization
Figure 6.4: State capture and delay in stabilization
0.7
AZE
0.6
State Capture Index, 1999
MDA
0.5
RUS
KGZ
BGR
0.4
ALB
UKR
MKD
GEO
ROM
0.3
KAZ
SVK
ARM
HRV
0.2
POL
CZE
0.1
LTU
y = 0.0057x + 0.143
R2 = 0.4882
EST
HUN
SVN
0
0
5
10
15
20
25
30
35
40
Months to 5% / Month Inflation
III
45
50
55
60
53
State Capture Lower the More
Rapid Reforms
Figure 6.5: State capture and delay in reform progress
0.7
AZE
0.6
MDA
0.5
State Capture Index, 1999
UKR
RUS
KGZ
BGR
0.4
ALB
GEO
MKD
y = -0.2306x + 0.9239
R2 = 0.4545
ROM
0.3
ARM
KAZ
SVK
HRV
0.2
CZE
POL, LTU
EST
SVN
0.1
HUN
0
1.5
2
2.5
3
3.5
4
Transition Progress Indicator after 4 years
III
54
REGIME TYPES: 15 yrs. Later
 Liberal societies with “capitalism for all”,
open markets (CE, BALT [Bg; Cr;
Ro;marginal])
 Still-undetermined polities but progressing.
(Some SEE)
 Oligarch societies, with “capitalism for the
few” non-competitive markets (most CISM)
 Unreformed polities, still very soviet-like
(CISL)
CAPITALIST ELITES IN HISTORY
 Rent-seeking and Oligarch resistance to liberalism not unique to PostCommunist economies;
 “Elite Entrenchment” = Resistance to liberal markets (see article by
Morck et al, Journ.of.Econ.Lit., September 2005).
 Elite, or Incumbent Capitalist lobbies against competition (e.g. GlassSteagall Act.,1934, USA: see Rajan and Zingales (2003) Saving
Capitalism from Capitalists.
 Successful Rent-Seeking rewarded by shareholders: Lee Iacocca of
Chrysler and US “quotas” on Japanese automobiles 1982.
 Oligarchs NOT equivalent to US Robber Barons or Chaebol in Korea:
no prior value added; degree and speed of oligarch creation unique in
history.
IV
56
IV: RECAPTURING STATES
 BB v. GRAD Debate is history; new debate “Transition
Inevitable”(TI) vs. “Transition Frozen” (TF)
 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)
 TF counter-argument:if rents exceed value of property
rights oligarchs prefer status-quo [Havr-95&06;Hellman98;Polischuk&Savateev-04;Sonin-03.
IV
57
State Capture Leads to Frozen Transition
Figure 8.1: State capture leads to frozen transition
4.5
HUN
4
EST CZE
Transition Progress Indicator, 2004
POL
3.5
SVN
SVK
BGR
LTU
HRV
3
ARM
ROM
GEO
KAZ
MKD
KGZ
ALB
RUS
MDA
UKR
AZE
BIH
YUG
2.5
2
1.5
y = -2.4736x + 3.9725
2
R = 0.7201
1
0.5
0
0
0.1
0.2
0.3
0.4
0.5
0.6
State Capture Index, 1999
IV
58
Concentration of Forbes Billionaires
No. of
Billionaires
2006
%
of Billionaires
%
of World GDP
2005
Ratio of % of
Billionaires to
World GDP
%Bill> %GDP
Kazakhstan
Russia
Ukraine
USA
Sweden
Germany
Canada
2
34
3
371
8
55
21
0.3
4.2
0.4
46.7
1.0
6.9
2.6
0.1
1.7
0.2
28.1
0.8
6.2
2.5
3
2.4
2
1.7
1.2
1.1
1.04
3
10
24
10
14
0.4
1.2
3
1.2
1.7
0.5
1.7
4.9
2.5
4.7
0.8
0.7
0.6
0.5
0.4
%Bill<%GDP
Poland
Mexico
UK
Spain
France
OLIGARCHS, MINI-GARCHS AND
LOBBYISTS
 Important to define terms here-oligarch not simply=
capitalism private ownership
 Lobbyists:capitalists who try to influence govt laws to
favour their firm/industry ( Iacocca, Can. auto industry,
Bombardier)
 Oligarchs: capitalists with enough power to capture state,
determine election results, broad policy lines ; no
demarcation possible, but $ Bil+ seems minimum
 Mini-garchs: those big enough to aspire to oligarchy
RENT-SEEKING,GRAND CORRUPTION
AND PETTY CORRUPTION
 Rent seeking: lobby for gov. privileges ( e.g:export
license,subsidised energy ) to increase profits -the extra
profits from lobbying =rents
 Grand Corruption: large scale bribing of high-level officials
by rent-seekers; includes major campaign funding for
friendly politicians—the domain of oligarchs and minigarchs
 Petty Corruption: small bribes to police, health inspectors ,
tax inspectors – the domain of individuals, SME’s
 IN A CAPTURED STATE ANTI-CORRUPTION
CAMPAIGNS FOCUS ON PETTY CORRUPTION
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.
IV
62
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