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SOCIAL COSTS OF POST-COMMUNIST TRANSITION Was Gradual Better?

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. One key rationale of gradualism :to mitigate social costs

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SOCIAL COSTS OF POST-COMMUNIST TRANSITION Was Gradual Better?

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  1. SOCIAL COSTS OF POST-COMMUNIST TRANSITIONWas Gradual Better? May 22,2007 Univ.of Vienna, Economics Department Oleh Havrylyshyn O Havrylyshyn CERES Seminar Jan. 29, 2007

  2. One key rationale of gradualism :to mitigate social costs Mid-nineties studies largely negative: social costs huge, due to „shock therapy“ Were social costs 1990-95 less for gradual reformers? Did social costs reverse after 1995? By 2005 who had better performance? gradual?rapid? MOTIVATION HYPOTHESIS

  3. 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

  4. 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

  5. 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)

  6. 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

  7. 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.

  8. EBRD TRANSITION PROGRESS INDICATOR 2004CE BALT SEE CISM CISL

  9. GROUPINGS BY INITIAL STRATEGY AND TPI RANK VERY SIMILAR Ranking TPI ReformStrategy CE+BALT Big-Bang or Steady Progress SEE Some gradual,some Aborted Big-Bang CISM Most gradual, RU/KYR/ Aborted BB CISL Very limited reforms

  10. DEMOCRACY AND MARKET LIBERALIZATION

  11. II. EVOLUTION OF SOCIAL INDICATORS 1990-2005BY COUNTRY GROUP

  12. HDI VALUES BY COUNTRY GROUP:1990-2004

  13. EARLY “PAIN” AND REFORM START: DELHDI90-95xTPI94

  14. - 2000 WELL-BEING AND REFORM START :DELHDI90-00xTPI94

  15. GINI VALUES IN TRANSITION

  16. RANGE OF POVERTY RATIOSBY COUNTRY GROUP AND PERIOD

  17. LIFE EXPECTANCY CE,BALT,SEE

  18. LIFE EXPECTANCY CISM, CISL

  19. GROSS EDUCATIONAL ENROLLMENT RATIOS (%)

  20. MEAT-KG/PERSON

  21. FRUITS KG/PERSON

  22. TELEPHONES PER 1,000

  23. AUTOS PER 1,000

  24. 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 turn-around;decline reversed in CEB by 2000, CISM&L still not reversed by 2005 • CONCLUSION? Gradual reformers more pain

  25. 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

  26. 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,state-capture,frozen transition, delayed recovery,barriers to SME,budget bias to big business, greater poverty, inequality

  27. Against Competition, Prefer Status-Quo, Prefer Non-transparent Procedures Fear EU Membership Discipline Captures State Policy For Self-Interest Oligarchy Develops New Entrants SME’s Face Difficulties Weak Rule-of-Law Weak Support for EU Membership Creates Rent-Seeking Opportunities / Old Elite Revived Delayed Reform START EU Membership Offer (Weak) EU Membership Desire (Weak) VICIOUS CIRCLE OF DELAYED REFORM AND OLIGARCHIC DEVELOPMENT

  28. State Capture Index, 1999

  29. Concentration of Forbes Billionaires

  30. State Capture Higher the Longer Delay in Stabilization

  31. State Capture Lower the More Rapid Reforms

  32. CAPITALIST ELITES IN HISTORY • Rent-seeking and Oligarch resistance to liberalism not unique to Post-Communist 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. Glass-Steagall 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.

  33. 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;Hellman-98;Polischuk&Savateev-04;Sonin-03.

  34. State Capture Leads to Frozen Transition

  35. 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.

  36. 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

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