Socio-economic development in transition economies after the fall of Berlin wall (Institutions, Human Development and Economic Growth in Transition Economies,

Socio-economic development in transition economies after the

fall of Berlin wall

(Institutions, Human Development and Economic Growth in Transition Economies, Palgrave 2011)

Pasquale TridicoAss. Professor

Dept. of Economics - University Roma [email protected]

Paper to be presented at the University of Perugia, 11 marzo 2013

9 November 1989…the main symbol

20 years after, the financial crisis The end of a dream?

Aim of the paper

• To analyze the development paths of Transition economies (i.e. East European Countries and Former Soviet Republics) which experienced a transformation from planned economies to market economies since the fall of Berlin wall in 1989.

• Developing an interconnected analysis of varieties of capitalism which takes into consideration:– Institutional change– Economic growth– Human development

Main hypothesis

• Appropriate (political) institutions and socio-economic variables such as education and health expenditure improve the endowment of people capabilities and lead to better human development.

• In turn, an improvement in human development variables such as education level and life expectancy causes an acceleration process in economic growth.

Institutions human development growth

The reverse of the neoclassical paradigm.

How – methodology

• Econometric exercises to test the causality hp (OLS for 28 countries)

• Following the Varieties of Capitalism literature (Amable, 2003; Jessop 2002; Amoroso 2003; Brenner 2005), countries will be classified by taking into consideration their main macroeconomic characteristics and institutional variables withdrawn from the EBRD such as:– Enterprise and Privatisation – Market & Competition – Trade & Openess – Financial System – Wage Nexus– Social Investments (health and education)

How – methodology (2)

• Following this classification, I found, among former communist economies, 5 types of socio-economic models, i.e.: – competitive capitalist model– corporatist model– dirigiste model– hybrid model– state capitalist model.

I tried to test whether the type of system has an impact on the path of development of the country, considering both economic growth and human development.

Communist states in Eastern Europe and the Soviet Union, 1989

Background and history of transition

• 70s and 80s: Lower performance and inefficiencies. ↑ gap East-West

• 1980s: Gorbachev’s Perestrojka ; Solidarnosc • June 1989 Semi-free election in Poland and first

non-communist gvmnt (Sept. 1989) • October-November 1989 Berlin events• Debate on three routes for transformation:

– Social democracy (third way)– Anglo-Saxon model ASAP (Shock therapy) WC– Eur Continental model Corporatist (German)/ Dirigiste

(French)

Literature and debate…

• Shock therapy vs Gradualism (Sachs 1991; Balcerowicz 1993; Nuti, 1999; Kolodko 1997; Aslund 2001)

• Institutional change, path dependency and evolutionary theory (Matzner and Kregel, 1992, Murrel, 1992; Rodrik, 1999; Lin 2004)

• Sequence of policies and institutions (Stiglitz 1998; Svejnar 2002; Rodrik 2004)

• International integration, Eu integration, IMF and WB constraints; FDI (Mundell 1997, Baldwin 1993; Lavigne, 1999; EBRD)

New consensus Institutions matter

Economic performance and social costs in TEs

• As Kornai said (2006, p.37): the transformation has been unique: 1) it took place peacefully and it was an astonishingly fast process towards western mode of development. 2) it was characterised by deep economic troubles.

successes and failures and ≠among countries.

Gradual therapy: Hungary and Slovenia

-14,0

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0 Hungary Slovenia

GDP growth in shock therapy countries 1989-2004

-40,0

-35,0

-30,0

-25,0

-20,0

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

Poland Czech RepublicSlovakia LithuaniaLatvia Estonia

Gradualism vs Shock therapy

-20%/-50% cumulate

-15%/-20% cumulate

-15,0

-10,0

-5,0

0,0

5,0

10,0Romania Bulgaria

Delayed reforms/shock therapy/unstable/uncoordinated/corrupted

GDP growth in the Commonwealth of Indipendent States with troubles & conflicts, badly managed, unstable shock (or no) therapy

-25

-20

-15

-10

-5

0

5

10CIS

Delayed unstable with shock (no) therapy

-50%/-60% cumulate twice during 1990s

-60%/-65% cumulate during a long period in 1990s

CEECs, Baltics, Balkans (B&B)

Level 2004

Level 2008

CIS Level 2004

Level 2008

Slovenia 120 136,5 Russia 77 97,0

Czech Republic 108 126,7 Belarus 100 134,5

Estonia 102 113,7 Ukraine 51 60,7

Poland 135 156,5 Kazakhstan 94 124,5

Hungary 115 119,6 Armenia 89 131,3

Lithuania 84 99,8 Turkmenistan 105 160,3

Slovakia 114 142,4 Azerbaijan 71 163,0

Croatia 91 104,8 Georgia 41 73,5

Latvia 83 98,0 Uzbekistan 107 144,8

Albania 129 154,5 Kyrgyzstan 75 94,2

Bosnia & Herzegovin 57 78,9 Moldova 41 57,5

Serbia 60 81,1 Tajikistan 62 91,9

Montenegro 72 101,1 CIS 76 111

Romania 92 113,2 CEECs-5 (the most advanced)

116 131

Macedonia 78 95,7 Other CEECs and B&B

86 107

Bulgaria 84 105,7 CEECs + B&B 96 119

All TEs 94,7 117

Level of real GDP in 2004 and in 2008 (1989=100)

2009. Another 1989?GDP changes in 2009 (in %). Projections for TEs

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

With the crisis, Avg GDP 2009 = Avg GDP 1989.

The current economic crisis

• The 20° anniversary similar slump as in 1989-90. • The Baltic States, open and small economies, are

the most hit (Compet. Cap). • Turkmenistan and Uzbekistan, (State Capitalist

economies) have high GDP rates of growth. • Poland (1%), Albania (+1.2%), Azerbaijan (+3%),

Tajikistan and Kyrgyzstan (+0,5%) managed relatively better the recession.

• Average rate of recession in TEs is -5.2%. In 1990, the first year of transition for almost all TEs, recession was about -4.6%

social problems: increase in poverty, inequality, corruption, gender discrimination, unemployment, migration, poverty among farmers and workers, and income divergences between regions within the same country. KOWALIK (2008)

CEECS 5+

CEECS 5- Balkans CIS

Poverty level 2008 (% pop with $4 day)

13,8 27,2 25,2 52,4

Gini coefficient 2008 30,2 32,2 33,0 35,0 life expectancy in years, 2008 73,6 70,8 72,2 66,9 Voice & Accountability avg 00-08

1,04 0,84 0,10 -0,94

Political Stability avg 00-08 0,78 0,64 -0,49 -0,59 Freedom index 2000-08 3,0 3,0 2,5 1,4 Unemployment rate 08 14,8 11,0 22,0 6,4

Social & political problems

Freedom house (Political rights and Civil liberties) 2008

Free (Democracies) Partly Free (Defective democracies/Semi-

authoritarian regimes)

Not Free (Authoritarian regimes)

Czech Republic Estonia Hungary Lithuania Poland Slovakia Slovenia Latvia Bulgaria Croatia Romania Serbia

Albania Macedonia Montenegro Bosnia-Herzegovina Georgia Moldova Kyrgykistan ArmeniaUkraine

Azerbaijan Kazakhstan RussiaTajikistan Belarus Turkmenistan Uzbekistan

13 countries 8 countries 7 countries

HDI 2008 0,859 0,776 0,757

Per capita GDP in ppp 2008

15284 5563 6795

Russia

Russia is not an electoral democracy.

In the presidential election of March 2008, state dominance of the media was on full display, debate was absent, and incumbent Vladimir Putin was able to pass the office to his handpicked successor, Dmitry Medvedev. A similar issue in 2012

Vladimir Putin &Dmitry Medvedev

Source: Freedom House 2009

Autocracts: ruling presidents

• Tajikistan: President Emomali Rahmon (Rakhmonov), 1994-present

• Kazakhstan: President Nazarbayev, 1990-present• Azerbaijan: President Heydar Aliyev, 1993-2003 (died);

President Ilham Aliyev, 2003-present• Kyrgyzstan: President Akayev, 1991-2005 (resigned);

President Bakiyev 2005-present and civil war in 2009-10• Uzbekistan: President Karimov, 1991-present• Turkmenistan: President Saparmurat Niyazov, 1992-2006

(died); President Berdymukhammedov, 2006-present• Belarus: Lukashenko• Ukraine: Yanukovich

Institutions matter, but which ones?

• institutions and development: EBRD, WB and Freedom House indicators are used.

• political institutions such as Freedom index (political rights and civil liberties); and Voice&Accountability index associated with socio-economic variables such as education and health expenditure lead to human development, which in turn improves GDP.

EBRD Market economy institutions matter?

• EBRD indexes rank between 1 and 4+. These indexes concern the following variables: – Enterprise restructuring, – Small and Large Scale Privatisation, – Price liberalisation, – Foreign Trade, – Competition, – Banking and Financial Institutions – Infrastructures.

An interesting paradox…

GDP level 1989=100 vs EBRD indexes

Turkmenistan (160) Slovenia (136) Belarus (134) Czech Rep (126) Uzbekistan (144) Poland (156) Azerbaijan (163) Hungary (124)

GDP level 2009 T B U A S C P H

Average EBRD indexes ( from 1 to 4,25)

Albania

Armenia

Azerbajan

Belarus

Bosnia-Herz

BulgariaCroatia

Czech Rep

Estonia

Georgia

Hungary

Kazakhstan

Kyrgyz Rep

LatviaLithuania

Macedonia

Moldova

Montenegro

Poland

Romania

Russia

Serbia

SlovakSlovenia

Tajikistan

Turkmenistan

Ukraine

Uzbekistan

-20

24

68

grow

th_8

9_09

1.5 2 2.5 3 3.5 4ebrd_ind_avg_09

Scatter EBRD index 2009 and GDP growth 1989-2009

An interesting paradox: 3 groups of countries

1. the most advanced countries in terms of EBRD index, having also the highest levels of GDP, considering 100 the level of GDP in 1989.

2. countries which never started a process of reforms or are very slow reformers with a relatively high GDP level

The third group as in a trap

3.Between Azerbaijan (A) and Slovenia (S) on the horizontal axis, are all the countries with low-to middle level of reforms. These countries are also characterised by low-to-middle GDP levels.

GDP growth, among TEs, is not connected with market economy reforms, which are the ones suggested by EBRD.

This is confirmed by a simple regression modelGDP (cumulative growth) vs EBRD indexes

Model: OLS. Obs: 28;Dependent variable: level of GDP in 2009 (1989=100)

Coef. Std. Err. P>t

Ebrd index 2009

-5.211364 9.338431 0.582

cons 128.4521 28.42034 0.000

R-squared 0.0118; Adj R-squared -0.0262

Prob > F = 0.31

Varieties of capitalism• EBRD institutions are not correlate with growth.

What about the type of socio-economic model?

• Amoroso (2003) and Jessop (2002), identified 4 types of economic systems, such as the Anglo-Saxon model, the Corporatist model, the Dirigiste model, and the Social-Democratic model. Plus Socialist Markets

• Amable (2003) found similar stories, with 5 types of capitalisms, taking into consideration 5 institutional forms (competition, wage nexus, financial sector, social protection and education)

My contribution for TEs (28 c.)• Competitive capitalism

• Corporatist capitalism

• Dirigiste capitalism

• Hybrid capitalism

• State capitalism

My contribution for TEsEnterprise and Market & Competition

Trade & Openess

Financial sector

Wage and Social Inv.

Private Sect

Subsidies f

Price administ

fdico.

trade

Tarif

Fore bank

StateBanks

Stok mkt

Wagregul

Eduhealt

Competitive capit

++ _ _ _ _ _ + _ + _ + _ _ _

_ +

Corporative capit

+ _ + _ + _ + + ++

Dirigiste capit

+ _ ++ ++ _ + ++ _ +

Hybrid capit

_ +

State capit

_ _ ++

++ _ + ++ _ _ + ++

State Capitalism

Hybrid Capitalism

Dirigiste Capitalism

Corporative Capitalism

Competitive Capitalism

Turkmenistan Belarus Uzbekistan

Romania Bulgaria Bosnia Herzegow. With dirigiste tendency Ukraine With dirigiste tendency

Azerbajan Kyrgyz Rep Moldova Russia Tajikistan Montenegro with corpo. tendency Serbia With corporative tendency

Hungary Slovenia Croatia with compe. tendency Macedonia with compe. tendency Czech Rep with compe. tendency Poland with hybrid tendency

Estonia Slovak Albania with dirigiste tendency Armenia with dirigiste tendency Georgia with dirigiste tendency Kazakhstan with dirigiste tendency Latvia with corpo. tendency Lithuania with corpo. tendency

History and path dependency

• The majority of CEECs adopted Corpor and Comp models, Austro-Hungarian Empire, German and Anglo-Saxon influence.

• The Hybrid model: countries with a very mixed historical and political background such as Bosnia-Her., Romania and Bulgaria unstable transition. (Limited Poland) .

• CIS: almost all of them adopted Dirigiste capitalism and State capitalism models. far away from the French one. Here is linked to semi-authoritarian regimes “State leaders” or parties or families or oligarchs.

• The tradition and the development of liberal values play also a role. In CIS democracy and freedom are restricted

Competi capitalis

Corporta capitalis

Dirig capit

Hybrid capitalis

State Capitalism

Poverty, 2008 (%pop 4$ day)

45,0 6,1 54,4 37,7 30,7

Gini coefficient, 2009

32,1 27,5 37,2 34,2 35,7

Voice& Account. 00-09

0,050 0,893 -0,763 0,437 -1,157

Fredom Index (avg 2001-09)

2,20 2,80 1,29 2,76 1,00

Unemployme 09 10,2 14,5 12,2 13,0 4,0 GDP growth average 1989-2009

2,36 1,05 0,37 1,20 2,75

Level GDP 2008 (1989=100)

133,3 116,7 98,0 98,3 146,5

GDP per capita, 2009

10254 17641 4909 8766 3403

HDI 2009 0,814 0,869 0,761 0,822 0,760 HDI 1990 0,759 0,807 0,756 0,799 0,785 Life expectancy in years, 1995

70,7 73,0 68,0 71,0 67,0

Life expectancy in years, 2009

70,5 73,0 65,6 71,9 65,7

Life expe growth 95-09

-0,24 0,0 -3,60 1,36 -2,02

EBRD average indexes (2008)

3,253 3,437 2,646 3,281 1,763

An overall and comparative socio-economic development rankModels Total

score (+/-14)

Standardized

value

Corportatist capitalism

+9 1.26

Hybrid capitalism

+1 0.14

Competitive capitalism

0 0

State Capitalism -4 -0.56

Dirigiste capitalism

-6 -0.84

Corporative capitalism: medium to high level of privatisation, wage regulation, high level of Social investment. Freedom and democratic institutions

Some mix: Fdi control, trade Tariff revenue, Foreign owned bank, State owned bank, stock market capitalisation

Type of models and growth

• Variables which identify a competitive capitalist model such as competition, high levels of trade (or similarly, high share of foreign-owned banks), a developed private sector, and advanced reforms towards a market economy (high EBRD index), are not significant for economic growth nor for the per capita GDP

GDP and growth vs competitive capitalist model

Model: OLS. Obs: 28;Dependent variable: level of GDP per capita

2008

Model: OLS. Obs: 28;Dependent variable: GDP growth

1989-2009

var Coef. Std. Err. P>t Coef. Std. Err. P>t

competition 3766.3294252.645

0.385 .9780798 1.623979 0.553

priv_sec-194.0288

154.7295

0.222 -.0028262 .0590873 0.962

ebrd_index 9347.726521.848

0.165 -1.684986 2.490531 0.505

foreign_bank-40.30874

42.20938

0.350 .0084233 .0161187 0.606

_cons-12507.37

5900.486

0.045 3.686458 2.253249 0.115

R-squared 0.5487; Adj R-squared 0.4702 R-squared 0.0511; Adj R-squared -0.1139

Prob > F = 0.0008 Prob > F = 0.8686

GDP and HDI vs Corporatist capitalist model

• On the contrary GDP and HDI in particular are correlated with 1) higher levels of public expenditure in health and education and 2) democratic political rights and civil liberties.

• These two variables identify better a corporative capitalist type of socio-economic model.

Albania

Armenia

Azerbajan

Bulgaria Croatia

Czech Rep

Estonia

Georgia

Hungary

Kazakhstan

Kyrgyz Rep

Latvia Lithuania

Poland

Romania

Russia

Slovak

Slovenia

Tajikistan

Turkmenistan

Ukraine

Uzbekistan

-2-1

01

-2 -1 0 1 2

Scores for factor 2

Belarus

Montenegro

Macedonia

Serbia

Bosnia H

Moldova

Scores for factor 1

Scatter for Factor 1 and 2

Source: own elaboration

Factor analysis

• Hungary and Slovenia have higher levels of Factor 2, which characterizes better a Corporative model,

• Slovak and Estonia have higher levels of Factor 1 which characterizes a Competitive capitalist model.

• CIS are scattered close to each others, identifying the Dirigiste model, and Turkmenistan, Belarus and Uzbekistan, staying in another corner of the figure, are captured in the State capitalist model.

• A Hybrid model brings together Romania and Bulgaria.

GDP and HDI vs relevant variables for the Corporatist capitalist model

Model: OLS. Obs: 28;Dependent variable: HDI 2007

Model: OLS. Obs: 28;Dependent variable: GDP per cap

2008

Var Coef. Std. Err. P>t Coef. Std. Err. P>t

Pol Rig & Civ Lib

-.02383

.003890.000

-2081.45

538.0074

0.001

Exp edu&healt

.006712

.003130.044

1124.628

432.4085

0.017

cons.836691

.034930.000

7341.524

4825.683

0.143

R-squared 0.7629; Adj R-squared 0.7403

R-squared 0.6478; Adj R-squared 0.6143;

Prob > F = 0.0000 Prob > F = 0.0000

From institutions to development through capability

• Main assumption: countries which experienced ↑ in HD economic growth: consequence of an expansion of people capabilities.

• appropriate institutions + investments socio-economic dim. better level of capability endowment:

Institutions Capabilities & HD Growth (with Development)

What is an institution

• institutions are rules and social norms which structure social interaction. They can effectively enlarge/diminish capabilities, by the way in which they affect political rights (freedom, democracy, participation) and social rights (public resources for collective purposes).

The link between institutions & capabilities

A country with democracy & freedom people capabilities (because of collective lobbying) +than a country where these

rights are restricted. Public choices collective benefits

Institutions: freedom, participation, democracy, social rights

HDI & Capabilities

the Capability curve

DEs B

C

A

ETEs

AEs

Testing hp: from institutions to human development

OLS model - Obs 28

Dependent Variable: HD (average LEI and EI) 2007 I Regression with education and

V&A II Regression with interaction VA

and Edu Variables Coeff. Variables Coeff.

Health expenditure .0066548**

(.0031919) Health expenditure .0052873** (.0027672)

Freedom

0096823* (.0030409)

Freedom

. 0122228* (.0025019)

Education expenditure (Edu)

-.0017852 (.0063819)

VA_Edu

0000709** (.0000377)

Voice & Accountablity (VA)

.0010574 (.001026

5)

Constant

.780512* (.0182849)

Constant . 7685463* (.0093681)

R-squared 0. 7792= Adj R-square 0. 7240

R-squared 0. 7940 Adj R-square 0. 8221

Mean dependent var 0.8467 Mean dependent var 0.8467 Prob(F-statistic) 0.000000 Prob(F-statistic) 0.000000 Significance level at * = 1%, ** = 5%; *** = 10%.

EduionParticipatFreedomHealthExpHD &321

From human development to economic growthDependent Variable: GDP per Capita (US$,

PPP) Method: Least Squares

Included observations: 26 Variable Coefficient Std. Error P-Value

Life Expectancy index

1.661743 0.414746 0.0006*

Education index 2.127335 0.538301 0.0006* Constant -2.563643 0.627456 0.0005*

Adjusted R-squared 0.545264 Log likelihood 26.54466

Durbin-Watson stat 1.193667 Prob(F-statistic) 0.000116

Dependent Variable: GDP per Capita 2008 (US$,

PPP) Method: Least Squares

Included observations: 28 Variable Coefficient Std. Error P-Value

Life Expectancy index

53177.6 0.414746 0.000*

Education index 127157.2 0.538301 0.000* Constant -148035.4 0.627456 0.000*

R-squared 0.7491 Adjusted R-squared 0.7290 Prob(F-statistic) = 0.0000

iEILEIC

GDPppp

21

Test for 2008

Test for 2002

There can be EG without HD but if there is HD, then there will definitely be economic growth.

HD: sufficient condition

Pairwise Granger Causality TestsIncluded observations 26

Null Hypothesis: F-Statistic

Probability

Hp

EDUCATION does not Granger Cause GDP

0.073

91

0.929

02

Rejected

GDP does not Granger Cause EDUCATION

5.174

97

0.01607*

Accepted

LIFE does not Granger Cause GDP 0.252

66

0.779

30

Rejected

GDP does not Granger Cause LIFE 3.703

01

0.04385*

Accepted

(2) HDI/Eco. Growth with distribution

(1) Democracy (3)

(0) Social Capital & Middle class

Path of development and democracy

(0) middle class and social capital create democratic institutions (1); then democracy, social capital and middle cl. bring about human development and economic growth (2). the middle class, and social capital are reinforced by the human development and growth (3) (top down process).

Final remarks 2

1. Dirigiste capitalist economies perform worst: growth without development; voice without social opportunities

2. State capitalist economies had growth without voice do not enjoy pluralism and democracy

3. Poverty and inequality in the majority of countries. CEECs better than CIS and former Yugoslav. A common thing in the life expectancy

4. The worst situation can be found in Russia, Ukraine, Moldova,

Tajikistan, Kyrgyzstan and Georgia, where both the levels of HDI and of GDP are still lower today than in 1989-90.

4. Higher HDI is always associated with democracy and semi-

democracy regimes rather than authoritarian regimes.

Competitive vs Corporatist model of Capitalism

• EBRD market oriented reforms are not significant for growth.

• Competitive capitalist model var. (competition, +trade/foreign-owned banks, +private sector, +reforms toward a market economy) are not significant for economic growth nor for the per capita GDP

• Corporatist capitalist model var (+levels of public expenditure in health and education and democratic political rights and civil liberties) cause a higher HDI and GDP per capita.

Final Remarks on Variety of capitalism

• Freedom and social rights: the corporative model is able to guarantee a better combination! As a good soc.team wt 11

• Countries of the corporative model show always better socio-economic var.: inequality, poverty, Voice & Accountability, HDI. Countries of the Dirigiste model show worse indicators.

• A better institutional framework improves the level of HD:

institutional framework human development economic growth