Transcript economic and social costs of transition

SOCIAL COSTS OF
POST-COMMUNIST
TRANSITION
Was Gradual Better?
May 22,2007 Univ.of Vienna,
Economics Department
Oleh Havrylyshyn O Havrylyshyn
CERES Seminar
Jan. 29, 2007
MOTIVATION
HYPOTHESIS
1. One key rationale of
gradualism :to
mitigate social costs
2. Mid-nineties studies
largely negative:
social costs huge,
due to „shock
therapy“
1. Were social costs
1990-95 less for
gradual reformers?
2. Did social costs
reverse after 1995?
3. By 2005 who had
better performance?
gradual?rapid?
2
OUTLINE
 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
3
4
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
6
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)
7
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
8
DATA 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.
9
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
10
GROUPINGS BY INITIAL STRATEGY
AND TPI RANK VERY SIMILAR
Ranking TPI
ReformStrategy
CE+BALT
Big-Bang or Steady
Progress
Some gradual,some
Aborted Big-Bang
Most gradual,
RU/KYR/ Aborted BB
SEE
CISM
CISL
Very limited reforms
11
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
3.0
3.5
4.0
Transition Progress Indicator, 2004
12
II. EVOLUTION OF SOCIAL
INDICATORS 1990-2005
BY COUNTRY GROUP
13
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
2003
Years
14
EARLY “PAIN” AND REFORM START:
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
15
2000 WELL-BEING
- AND REFORM
START :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
16
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
17
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)
18
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
1995
2000
2003
Life exp
SEE Life exp.
75
74
73
Life Exp
72
BUL
ROM
MAC
71
ALB
BiH
S&M
70
69
68
67
1989
1995
2000
2003
Year
19
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
2003
Year
20
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
21
MEAT-KG/PERSON
MEAT /PERSON KG:
70
60
50
40
1990
1995
2000
2005
30
20
10
0
CEUR
SEE
CISM
22
FRUITS KG/PERSON
FRUITS/PERSON-KG
80
70
60
50
1990
1995
40
2000
2005
30
20
10
0
CEUR
SEE
CISM
23
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
24
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
25
III. 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 turnaround;decline reversed in CEB by 2000,
CISM&L still not reversed by 2005
 CONCLUSION? Gradual reformers more pain
26
ASSESSMENT CISM -CISL
 CISM:cumulative output decline historically
unique, social well-being deteriorated
markedly, recovery not yet complete, most
losers uncompensated
 CISL:”official”output much better but
questions of validity, sustainability; also
SOCIND performance better in Belarus, and
only marginally better
27
IV. WHY GRADUAL NOT BETTER?
 Economics: delayed reforms,delayed
adjustment,delayed recovery, delayed
improvement, longer (and greater?) pain
 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
28
VICIOUS CIRCLE OF DELAYED REFORM
AND OLIGARCHIC DEVELOPMENT
Captures State Policy
For Self-Interest
Against Competition,
Prefer Status-Quo,
Prefer Non-transparent
Procedures
Oligarchy Develops
Fear EU Membership
Discipline
Creates Rent-Seeking
Opportunities / Old
Elite Revived
New Entrants SME’s
Face Difficulties
Weak Rule-of-Law
START
Delayed Reform
Weak Support for EU
Membership
EU Membership
Offer (Weak)
EU Membership
Desire (Weak)
29
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.
30
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
31
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
45
50
55
60
32
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
33
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.
34
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.
35
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
36
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.
37
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
38