Transcript The Asian/World Financial Crisis

What Happened in Russia, 1991-2001,
and Why?
(And what are the implications?)
Simon Johnson, MIT Sloan
[email protected]
http://web.mit.edu/sjohnson/www/research.htm
April 19, 2001
1
What happened in Russia,
through August 1998?
April 19, 2001
2
What happened in Russia,
in August 1998?
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3
What happened in Russia,
since August 1998?
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4
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
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5
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)
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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
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7
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
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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
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How normal is Russia?
Normal aspects
• response to devaluation
• firms make money
• capital is leaving
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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
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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?
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#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)
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#3: “Roving bandits”
• continual fighting for control of assets
• gradual decline of physical assets
• increase in emigration
• high level of violence
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#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
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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
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Fat tails in Russia’s Future
Conventional models
Our View
Pre-Crisis
Oops...
April 19, 2001
Pre and Post
Crisis
Post-Crisis
17