Transcript lecture 5 - Nuffield College

Capitalism &
Communism
in Russia/USSR
Bob Allen
Nuffield College
2008
This book undertakes a reassessment of Soviet
economic history:
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What institutions and policies worked?
Which failed?
Why?
What lessons does Soviet history have to teach?
The reassessment is based on three axes:
• Repositioning the debate on Soviet performance in a world
historical context.
• Recalculation of national income from 1928 to 1940 including,
in particular, the growth in consumption.
• The use of simulation models to explore historical and policy
counter factual trajectories
– What was the effect of investment strategy and
collectivization on industrialization and living standards in
the 1930s?
– What was the effect of famine, world war, and fertility on
population growth?
This inquiry leads to a more favourable assessment of
Soviet performance than is usually reached.
It is not an unqualified endorsement of the Soviet
system:
• Dictatorship was a political model to be avoided
• Collectivization and political repression were human
catastrophes that brought meagre economic returns.
• The strength of central planning also contained the seeds of its
undoing, for it required a planner. When plan objectives were
misguided, as in the Brezhnev period, the system stagnated.
I will examine the following issues:
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Soviet growth in a world historical context
Growth in the late imperial economy
The standard of living, 1928-40
Causes of rapid growth, 1928-40
Soviet demographic history
The Soviet growth slowdown
Part I
Soviet Growth
in World-Historical Perspective
The main facts about economic growth include:
• Income per head has gone up in almost all countries.
• Among the rich countries of the OECD, there has been a
convergence of income as poor countries have grown faster
than rich countries.
• The reverse, however, is generally true: The countries that
were poor in 1800, 1900, or whenever, have grown less rapidly
than the rich countries.
• As a result, incomes have diverged around the world.
By many indicators, 19th century Russia was
among the poor countries.
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Income per head
Share of the labour force in agriculture
High fertility demographic system
Capriciousness of the law
Authoritarianism of the state.
If the normal pattern applied, Russia would have remained poor
throughout the twentieth century.
The remarkable feature of the Soviet period is
that Russia bucked the trend.
• Japan was the most successful economy—one of the few poor
countries that became rich.
• The USSR was the second most successful poor country.
• More recently, South Korea and Taiwan have joined the club.
• But these few are exceptions to the general pattern.
USSR did better than most countries that were poor in
1928 and beat the OECD catch-up regression line.
Question:
Why did the USSR perform so much better than
so many poor countries?
This is not the usual question about the Soviet economy!
Part II
The late Imperial economy,
1870-1917
Per capita income rose in many countries 18701913 including Russia. Key questions:
• What caused the economic growth?
• Would it have continued in the twentieth century and closed
the gap with the West?
• Did the pattern of growth play a role in the revolutions of 1905
and 1917?
Agricultural expansion was the main cause of growth in
the late Imperial economy.
After 1896, wheat prices rose world-wide and wheat
exports fuelled growth in Canada, Australia, Argentina,
India, and Russia.
Without industrial tariffs, Russia would have become
more agricultural. State promotion of industry was a
secondary cause of growth.
Would Russian growth have continued in 20th
century and closed the gap with the West?
• Only one country—Japan—did that.
• Russian growth would have had to be at the top of the world
league table.
• The causes of Imperial expansion did not continue
– World wheat price collapsed in 1920s
– No more railroads to build (and they wouldn’t have been
profitable)
– Other wheat exporters stagnated or declined for half a
century.
• Only by changing the bases of growth could the economy have
continued to develop. Would Tsarist Russia have had the
institutional revolution of Japan?
Russian economic growth was not fast enough to
benefit all Russians.
• Real wages stagnated.
• Extra income accrued to capital and land.
• In western Europe, growth was fast enough to raise wages
giving workers a stake in the system. This underlay their
conversion to social democracy.
• In Russia and other peripheral parts of Europe (e.g. Spain),
growth was not rapid enough to benefit workers, and the polity
cracked.
Russian growth was not fast enough to create a
high wage economy.
• Output per worker in industry rose by a factor of 2.4,
• while real wages were constant:
In the countryside, peasant incomes rose as grain
prices and productivity increased.
Real wages were again constant.
• The rise in income accrued to land.
• Rising land values were common on the wheat frontier around
the world.
• Land ownership, therefore, was the dominant economic issue
in the countryside.
• Increasing returns to scale in agriculture meant that the society
of small farmers was not in equilibrium and explains the
appeal of the equal division of the (increasingly valuable) land.
The character of Tsarist development:
• A one-off natural resource boom souped up with some tariff
induced industrialization.
• The wheat boom would not have continued through the
twentieth century.
• Further growth required ‘doing a Japan’. Was the Tsar flexible
enough to restructure the whole society?
• Growth was feeble enough so that labour markets were slack,
and the gains did not trickle down to the working class.
• Rising inequality and disputes about the ownership of land, an
asset increasing in value, underpinned radical politics and
political instability.
Part III
Standard of Living, 1928-40
GDP grew rapidly 1928-40. Investment soared.
Did the standard of living rise?
Four indicators:
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Food consumption per head
anthropometrics
Consumption per person
Real wages
These indicators show that the standard of living increased.
Calorie consumption per head
Anthropometrics
• Life expectancy of men increased by 3 years and women by 5
years in the 1930s.
• Army recruitment data indicate that the average heights of men
in the late 1940s (172 cm) were considerably higher than their
counterparts in 1910 (165 cm).
Consumption per head rose
Real earnings rose
for those who moved
from the country to
the city.
That’s most city
residents in the
late 1930s.
Conclusion:
Soviet growth 1928-40 included rising
consumption as well as soaring investment.
This was a remarkable achievement.
How was it accomplished?
Part IV
Causes of rapid growth and rising
living standards, 1928-39
Explaining Soviet growth must begin with agriculture,
which was the largest sector of the economy in the
1920s.
Detailed comparisons of European Russia with the
Canadian prairies and US northern plains shows:
• Little difference in biological efficiency (crop and animal
yields).
• Great difference in efficiency in employment and labour
productivity.
There was a great difference in employment and
labour productivity.
• The average north American farm was 84 hectares, while the
average Russian farm was 11 hectares.
• Differences in mechanization played a big role.
• Even without mechanization, the Russian farm labour force
was larger than necessary for cultivation.
Russia was a classic labour surplus economy. The development
problem was increasing the capital stock to provide jobs for
everyone.
Increasing employment was the secret to raising
investment and consumption concurrently.
How is this diagram related to history?
Movement from D to E to F involved:
• The concentration of investment on heavy industry to rapidly
increase the industrial capital stock and provide industrial jobs.
• The collectivization of agriculture to feed the industrial
workers, to provide them with raw materials, and to push them
out of the countryside.
• Plan targets and soft-budget constraints to guide business
output and to ensure full employment.
The movement of labour from farm to factory was the motor
of Soviet growth, and these were the processes that accelerated
that movement.
I use a multi-sector simulation model to measure the
importance of these factors.
• Model tracks population and accumulates capital from one
year to the next.
• 50 equations describe the main sectors of the economy, and
they can be altered to explore counterfactuals.
Counterfactual thought experiment:
What explains the rise in GDP?
e is the fraction of producer goods output reinvested in that sector.
Causes of growth in GDP
• Raising e from .07 to .23 added 50 billion rubles to 1939 GDP.
• Soft budgets instead of hard budgets added 60 billion rubles.
• Collectivizing agriculture only added 20 billion rubles.
Similar conclusions hold if we analyze
consumption per head:
Causes of growth in consumption per head
• Raising e from .07 to .23 added 100 rubles to 1939
consumption per person.
• Soft budgets instead of hard budgets added 200 rubles.
• Collectivizing agriculture added 80 rubles.
This graph contrasts the effects of institutions on
industrialization:
Note: e = .23 in all simulations.
Overall conclusions:
• Expanding heavy industry and industrial employment via soft
budgets were the keys to rapid growth.
• Collectivization made a positive—but small—contribution to
economic growth.
• Most of the output gains of Soviet industrialization could have
been achieved by the planned management of industry within
the framework of the NEP.
Part V
Soviet Demographic History
There are two ways to raise GDP per head:
• Increasing GDP
• Reducing the number of heads
Was the rise in GDP per head due to high mortality from
Stalinist repression, collectivization, and the Second World War?
A slowly growing population was a significant
feature of Soviet history.
• On constant territory, the Soviet population grew 70% between
1928 and 1989.
• Over the same period, populations in developing countries
grew three to five times.
• In the 1920s, the USSR had a high fertility population like
those in less developed countries.
• Why did the USSR not experience a similar population
explosion? Why did the population not reach 1 billion?
The impact of collectivization and World War II
was studied with a simulation model.
• Both events increased mortality and also reduced fertility by
changing the age and sex distribution of the population.
• Both events caused permanent and persistent reductions in the
size of the population.
• Neither of these reductions was large enough to explain why
the USSR did not have a population explosion.
The reason that the USSR did not have a population
explosion was the rapid fall in the fertility rate.
If fertility had remained high, the Soviet
population would have approached 1 billion.
Why did the fertility rate fall?
• Fertility model estimated from Russian/Soviet censuses of
1897, 1939, and 1959.
• Results very similar to models estimated for third world
countries in late twentieth century.
• The key variables explaining fertility decline were the
education of women and higher incomes.
• Educating women and higher living standards were important
features of Soviet policy, and they had a major demographic
pay-off.
Part VI
The Soviet growth slowdown:
If the system was so good, why did it
fail?
The Soviet economy grew rapidly until the
1970s when growth slowed:
The growth slowdown was concurrent with the end of
‘surplus labour’. Weitzman has offered an elegant
analysis linking the two:
The Soviet isoquant was close to a right angle,
and the economy turned the corner in the 1960s:
A simple macro model simulates Soviet growth
slowdown.
• CES production function
– Y = A(hK-ρ + (1-h)L-ρ)-1/ρ
– Elasticity of substitution = 0.4
• 1941-47 left out, so 1948 followed 1940.
• Population L grows exogenously
– Interpolated 1930-48
• Investment: It = sYt
– historical series for s.
• Capital stock K accumulated by perpetual inventory
– Kt = Kt-1 + It + δ Kt-1
• No technical progress
Simulations of this growth model replicate
Soviet history:
The Soviet economy acted ‘as if’ investment suddenly
ran into diminishing returns when full employment was
reached, but the appearance is illusory.
• The real problem was two changes in investment policy:
– Modernization of old factories rather than the construction of
new ones.
– Depletion of old oil fields and mining districts led to massive
redirection of investment from Europe to Siberia.
• It was ‘as if’ the USA tried to rebuild the rust belt and supply it
with Canadian raw materials rather than shutting it down and
reconstructing the economy.
• The accumulation of unproductive capital created the statistical
illusion of an almost right angle isoquant.
The Cold War also reduced the growth of the
Soviet economy.
• The allocation of R&D resources to the military in the 1970s
and 1980s cut innovation in the civilian economy.
• Half of the decline in the growth rate was a decline in
productivity growth.
• This decrease provides an upper bound to the impact of the
arms race with the United States.
This interpretation of the Soviet decline is the
reverse of those that emphasize incentives.
• Planning worked well in its own terms: Shifting the energy
base from coal to oil to gas was an impressive achievement.
• The problem was that this was not the best approach to energy
problems.
• The problem was not that managers failed to follow the plan.
• The problem was that the plans did not make sense.
The early strength of the Soviet system became its great weakness
as the economy stopped growing because of the failure of
imagination at the top.
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