Changes After Socialism* - Balcerowicz · Changes After Socialism* March 2016 Leszek Balcerowicz *I’m grateful to Magda Ciżkowicz, Aleksander Łaszek, Sonja Wap, Marek Tatała

Changes After Socialism* March 2016

Leszek Balcerowicz

*I’m grateful to Magda Ciżkowicz, Aleksander Łaszek, Sonja Wap, Marek Tatała and Tomasz Dróżdż for their assistance in preparing this presentation.

1

Content:

The institutional systems, policies, and outcomes; socialism as an institutional system.

The economic costs of socialism.

The institutional trajectories after socialism.

The economic outcomes after socialism.

The non-economic outcomes after socialism.

Explaining the differences in economic growth.

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Content:







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Dimensions and types of Institutional Systems Dimensions Types

Democracy (D) non-Democracy (non D)

Rule of Law (RL) Civil Rights (CR)

Economic freedom Examples

1. Socialism (communism)

Non-D. V. low RL CR banned

None; Command Economy North Korea, Cuba

2. Quasi-socialism Non-D. V. low RL CR banned

Dominance of SOE’s. A little private sector

Belarus, Central Asia, Venezuela

3. Free Market Capitalism Usually D.

High RL Extensive CR

Wide Hongkong, Switzerland, Ireland

4. Crony capitalism Usually non-D. Low RL Limited CR

Limited due to uneven protection of property rights

Russia, Ukraine

5. Overregulated and/or fiscaly unstable capitalism

D. or non-D. Limited RL- due to arbitrary regulations CR rather high

Limited due to overregulation and/or fiscal instability

Italy, France

Examples of available measures

Polity IV index Freedom of the press (Freedom House), Rule of Law (BTI Index) Civil Liberties (Freedom House)

Private Property (Heritage Foundation), Economic Freedom in the world (Fraser Institute),

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Content:

The institutional systems, policies, and outcome; socialism as an institutional system.






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0

5 000

10 000

15 000

1950 1990

Spain Poland

Countries under socialism lost a lot of distance to Western European economies. GDP per capita (in 1990 international dollars) in 1950 and 1990 (2005 for Koreas, Chile and Cuba).

Source: The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

0

10 000

20 000

30 000

1950 1990

Austria Hungary

0

10000

20000

1950 2005

South Korea North Korea

0

5 000

10 000

15 000

1950 2005

Chile Cuba

6

The economic costs of socialism. Countries under socialism lost a lot of distance to Western European economies.

GDP per capita in China 1950-2010.

GDP per capita (in 1990 international dollars) - Western Europe=100%

Source: The Maddison-Project, http://www.ggdc.net/maddison/maddison-project/home.htm, 2013 version.

0%

5%

10%

15%

20%

25%

30%

35%

40%

19

50

19

52

19

54

19

56

19

58

19

60

19

62

19

64

19

66

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

7

Content:







8

-10

-8

-6

-4

-2

0

2

4

6

8

10

The institutional trajectories after socialism. Political Freedom 2014 (Polity IV).

„Polity Score" is determined which ranges from -10 to +10, with -10 to -6 corresponding to autocracies, -5 to 5 corresponding to anocracies, and 6 to 10 to democracies.

Source: Polity IV Project 9

POST-COMMUNIST COUNTRIES


Freedom of the Press 2015 (Freedom House). Degree of pressure placed on the flow of objective information and the ability of media platforms to operate freely and without fear of repercussions.

Source: Freedom House Freedom of the Press 2015 report , https://freedomhouse.org/report-types/freedom-world 10


0

20

40

60

80

100

120

Esto

nia

Cze

ch R

epu

blic

Slo

vaki

a

Lith

uan

ia

Slo

ven

ia

Pola

nd

Latv

ia

Hu

nga

ry

Bu

lgar

ia

Cro

atia

Ro

man

ia

Ukr

ain

e

Swed

en

Ge

rman

y

Can

ada

Un

ited

Sta

tes

Fran

ce

Un

ited

Kin

gdo

m

Taiw

an

Ital

y

Sou

th K

ore

a

Ho

ng

Kon

g

Mex

ico

Sin

gap

ore

Zim

bab

we

Ru

ssia

Ch

ina

Cu

ba

Be

laru

s

No

rth

Ko

rea


The institutional trajectories after socialism. Rule of Law (Transformation Index BTI 2014).

Evaluation of the rule of law with an eye to the Separation of powers, Independent judiciary, Prosecution of office abuse, Civil rights

Source: Transformation Index BTI 2014, http://www.bti-project.org/downloads/bti-2014/ 11

0

1

2

3

4

5

6

7

8

9

10 POST-COMMUNIST COUNTRIES

The institutional trajectories after socialism. Civil Liberties 2014 (Freedom House).

Each country is assigned a numerical rating—from 1 to 7—for civil liberties, with 1 representing the most free and 7 the least free.

Source: Freedom House 2015 report, https://freedomhouse.org/report-types/freedom-world 12

0

1

2

3

4

5

6

7

Cze

ch R

epu

blic

Es

ton

ia

Po

lan

d

Slo

vaki

a Sl

ove

nia

B

ulg

aria

C

roat

ia

Hu

nga

ry

Latv

ia

Ro

man

ia

Alb

ania

G

eorg

ia

Mac

edo

nia

M

old

ova

U

krai

ne

Arm

enia

K

azak

hst

an

Kyrg

yzst

an

Aze

rbai

jan

B

elar

us

Ru

ssia

Ta

jikis

tan

Tu

rkm

enis

tan

U

zbek

ista

n

Au

stra

lia

Au

stri

a C

hile

G

erm

any

Irel

and

N

ew Z

eala

nd

U

nit

ed S

tate

s B

razi

l So

uth

Ko

rea

Taiw

an

Ind

ia

Mex

ico

Si

nga

po

re

Turk

ey

Egyp

t N

iger

ia

Thai

lan

d

Ven

ezu

ela

Vie

tnam

C

hin

a C

ub

a Zi

mb

abw

e

No

rth

Ko

rea


The institutional trajectories after socialism. Protection of property rights 2014 (Heritage Foundation).

Measures the degree to which a country’s laws protect private property rights and the extent to which those laws are respected. Each country’s property rights are scored from 0 to 100.

Source: Heritage Foundation Index of Economic Freedom 2015 report 13

0

10

20

30

40

50

60

70

80

90

100

Esto

nia

Cze

ch R

epu

blic

Lith

uan

ia

Pola

nd

Slo

ven

ia

Hu

nga

ry

Latv

ia

Slo

vaki

a

Cro

atia

Ro

man

ia

Bu

lgar

ia

Be

laru

s

Ru

ssia

Ukr

ain

e

Can

ada

Ge

rman

y

Ho

ng

Kon

g

Sin

gap

ore

Swed

en

Un

ited

Kin

gdo

m

Fran

ce

Un

ited

Sta

tes

Sou

th K

ore

a

Taiw

an

Ital

y

Mex

ico

Ch

ina

Cu

ba

Zim

bab

we

No

rth

Ko

rea


The institutional trajectories after socialism. Economic Freedom of the World 2013 (Fraser Institute).

Measures the degree to which the policies and institutions of countries are supportive of economic freedom.

Source: Economic Freedom of the World, Fraser Institute 2015, http://www.freetheworld.com/release.html 14

0

1

2

3

4

5

6

7

8

9

10

Ukr

ain

e

Ru

ssia

Slo

ven

ia

Lith

uan

ia

Latv

ia

Cro

atia

Alb

ania

Bu

lgar

ia

Pola

nd

Slo

vak

Rep

Ro

man

ia

Cze

ch R

ep.

Esto

nia

Ven

ezu

ela

Arg

enti

na

Zim

bab

we

Ch

ina

Bra

zil

Ind

ia

Mex

ico

Ital

y

Fran

ce

Ko

rea,

…

Spai

n

Swed

en

Jap

an

Ger

man

y

Un

ited

…

Taiw

an

Ch

ile

Au

stra

lia

Swit

zerl

and

New

…

Sin

gap

ore

Ho

ng

Ko

ng


The institutional trajectories after socialism. Private sector share in % of GDP (1991 and 2010).

Source:*The “private sector shares” of GDP in 1991 represent rough EBRD estimates, based on available statistics from both official (government) sources and unofficial sources;

Transition Report 2000; www.ebrd.com/downloads/research/economics/sci.xls

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1991 2010

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The institutional trajectories after socialism. Trade openness (merchandise trade as % of GDP) Merchandise trade as a share of GDP is the sum of merchandise exports and imports divided by the value of GDP, all in current U.S. dollars.

Source: World Bank, World Development Indicators

0% 50%

100% 150% 200% 250% 300% 350% 400% 450%

Aze

rbai

jan

Arm

enia

Kaz

akh

stan

Turk

men

ista

n

Tajik

ista

n

Geo

rgia

Ro

man

ia

Pola

nd

Kyrg

yz R

epu

blic

Mo

ldo

va

Latv

ia

Bel

aru

s

Bu

lgar

ia

Esto

nia

Slo

ven

ia

Hu

nga

ry

Cze

ch R

epu

blic

Slo

vak

Rep

ub

lic

Bra

zil

Gre

ece

Ital

y

Spai

n

Turk

ey

Ch

ile

Port

uga

l

Mex

ico

Irel

and

Ko

rea,

Rep

.

Sin

gap

ore

Ho

ng

Ko

ng

SAR

, …

1995 2014

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Observations:

Democracy was introduced and maintained in the countries which introduced

capitalism (CEE)

Non-democratic political systems co-exist with:

quasi-capitalist economies (e.g. Russia)

quasi-socialist economies (e.g. Belarus, Central Asia)

Important questions regarding the variation of the economic systems after

socialism include especially the differences between the capitalist systems in

CEE and quasi-capitalist systems elsewhere

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Content:







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‹#›

‹#›

‹#›

Content:







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‹#›

60

65

70

75

80

85

1989 2013

The non-economic outcomes after socialism. Life expectancy at birth, total (years). .


Life expectancy at birth indicates the number of years a newborn infant would live if prevailing patterns of mortality at the time of its birth were to stay the same throughout its life.

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0 20 40 60 80

100 120 140 160

1989 2015

The non-economic outcomes after socialism. Mortality rate, under-5 (per 1,000 live births).


Under-five mortality rate is the probability per 1,000 that a newborn baby will die before reaching age five, if subject to current age-specific mortality rates.

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The non-economic outcomes after socialism. Improvement in social indicators in Poland have reached even higher level than that of economic growth. .

■ 39th place in terms of the UNDP Human Development Index

■ 47th place in terms of income per capita

■ Index takes into account the results of education and life expectancy

■ Polish students achieved very good results in international OECD PISA competency tests:

13th place in mathematics

9 in life sciences

10 in reading comprehension

■ In terms of the OECD Better Life Index Poland ranks 24th among 34 OECD countries

■ In terms of income per capita occupies 29th place among OECD countries

Human Development Indicator

Education Improving overall

satisfaction

■ Since 1996 the Gini coefficient remained stable at around 33%

■ And remains below the average for OECD countries and the EU

Moderate Inequalities

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Content:







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Two main determinants of long-term economic growth:

1. The propelling institutions

2. The negative shocks, which mostly depend on domestic policies which in turn are the product of personality factors of the policy-makers and the constraining institutions.

The economic growth after socialism was the stronger:

1. The more progress has been achieved in strengthening the propelling institutions (the extent of market reforms).

2. The less frequent were the strong negative shocks.

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Polanec, Saŝo (2004) ”(…) we find that in later stages of transition, measures of economic reforms matter for productivity growth, although with a lag, which is in our exercise equal to four years. This result confirms importance of reform efforts in enhancing the potential for growth.”

Krueger, Anne O. (2004)

”(…) it is worth noting that those transition countries that experienced the most rapid structural reforms have, by and large, experienced more rapid growth. This is true, for example, of the Baltic States. In recent years, Russia has also seen higher rates of growth – a result, in large measure, of reforms that were implemented in the 1990s.”

Fischer, Stanley; Sahay, Ratna (2004)

”The general conclusion was that the effect of initial conditions, while strong at the start of transition, wears off over time (…). Moreover, the importance of the fiscal policy variable (the budget balance) increases with the longer period data set. The coefficients on the reform indices (…) are significant throughout the period, irrespective of the time period considered.”

Falcetti, Elisabetta; Lysenko, Tatiana; Sanfey, Peter (2006)

”During transition, a positive correlation between progress in market-oriented reforms and cumulative growth is observed for most countries. This is reassuring to those who have promoted the virtues of reforms; is also serves as a warning of the dangers that arise when ‘reform fatigue’ set in, as it appears to have done in parts of some region (…) We find that the importance of initial conditions as a determinant of growth has declined over time, but that fiscal surpluses remain positively associated with higher growth.”

Aslund (2012) The Baltic States and Central Europe have accomplished the best results. They pursued all major reforms together in a comprehensive, early, and radical package. There reforms were deregulation, macroeconomic stabilization, privatization, institutional reform and democratization. Nothing suggests that it would be advantageous to intentionally hold back on any reform, whereas many reforms were technically complex and could not possibly be done very fast. (…) The slower reforms were, the grater was the danger that rent-seeking interests would become entrenched and block democratization and the combat of corruption, of which they were the main beneficiaries.”

Christopher Hartwell (2014) Institutional Barriers in the Transition to Market. Examining Performance and Divergence in Transition Economics - Palgrave 2014

Finding no 1 is strongly supported by substantial empirical literature reviewing the experience of countries in transition.

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Some crucial factors conducive to long-term economic growth are also conducive to environmental improvement and to favourable health-related developments, e.g.

economic reforms

less waste

less environmental deterioration and less damage to health

healthier foodstuffs become more available and relatively cheaper

privatisation (separation of companies from the state)

ecological regulations are more strictly observed

stronger enforcement of laws

less frequent accidents on the job

Why better economic results go hand in hand with better non-economic indicators (health, environment, etc.)? .

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Changes After Socialism* - Balcerowicz · Changes After Socialism* March 2016 Leszek Balcerowicz *I’m grateful to Magda Ciżkowicz, Aleksander Łaszek, Sonja Wap, Marek Tatała

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