Semi-Daily Journal

It sounds like they forgot about vertical monopolies. As a transition step from a command economy to a capitalist economy, the command can be broken into progresively smaller units that ensure a smooth transition. Going from one big command unit to only small unlinked units is a recipe for chaos. By going through vertical monopolies with expiration dates, it would allow restructuring to take place under a safety umbrella. No capitalist business would eliminate its internal supply chain until reliable alternatives were identified that improved the bottom line. Why should transitions from command economies be different? The guiding principles are similar.

Because free market is perfect?

It was ideology that propped up central planning, it was ideology that put it down, a swell transition did not matter to those who called for the changes. Probably they had not to live there.

DSW

I apologize in advance for the long post, but I'm thinking about a possible research idea as I go along.

Has anyone done a good breakdown as to how much of the output decline in these countries was due to the following things:

1. A reduction in forced saving? Investment in Soviet Russia was something like 30% of GDP, or double that of US investment. Presumably the Russians were well above any optimal balanced growth path in terms of capital stock, so as production shifted into consumption after 1989, consumption would rise and the capital stock would collapse at least for a while.

This illustrates the dangers of confusing GDP with welfare, for the simple reason that in a command economy GDP and consumption might be inversely related. I think that an interesting historical question was why did the Soviet leaders force such high savings?

2. A reallocation of investment? If capital used for manufacturing and for services/consumer goods are not perfect substitutes, there would be a big hit in terms of transition costs. Retooling, reallocating human capital, and the like, from producing lots of "goods" that nobody wanted to what people actually want. Less toilet paper with splinters in it, more cell phones.

3. More accurate reporting leading to a fall in reported numbers but not actual numbers? We all know that the Soviet numbers were padded, but by how much compared with the Post-Soviet ones? And what about the underground economy? B&K mention this as explaining maybe a third of the reported decline.

4. The institutional firm-level things that Blanchard and Kremer talk about. This seems to be a hard thing to measure but I'd like to see if anyone has any ideas as to how to go about this. My guess is that they matter but not as much as the other things. I'd like to see if I'm wrong.

There's an interesting paper by Andrei Shleifer and Daniel Treisman on the NBER working papers site that talks a little about this.

My own view is that performance in these countries has been mixed economically--Russia finally seems to be a solidly middle-income country (It sure feels like one when visiting--a little grubby and chaotic, certainly corrupt, but not a cesspit of humanity either.); central Europe and the Baltics have been successful; and places like the Ukraine and some of the outlying republics have been a disaster.

People who expected miracles have been disappointed. But the Dark Ages haven't returned to that part of the world either. And as someone told me in St. Petersburg, "At least Putin isn't that evil." In Russia that's an accomplishment.

A couple of points to consider:

1) The abrupt dissolution of Comecon, the Soviet trade association. Not to be mourned in the long run, but it amounted to a sudden severing of industrial market links between the economy of the former Soviet Union and Eastern European formerly satellite countries. Now, not to talk out of school, but economics is not, in the first instance, national, nor global, but regional, and if there had been no October Revolution, would not many of these countries been Russia's natural trading partners? At any rate some degree of linkage had been created between these countries' economies and would there not have been some residual value in these links qua markets for these countries' products that did not exist elsewhere, obviously because low quality couldn't trump low price? Low cost goods and continued employment could have eased the inevitable pains of transition.

2) The economic decline of the Soviet Union began under Gorbachev. His "reforms" sought to improve central planning by decentralizing it somewhat, but in the process sought to rein in local factory managers. Yet it was these latter who actually kept the system running and actually knew what was really going on, through a "secondary" informal economy, which amounted to an industrial barter economy. Obviously the official statistics were garbage; to the extent that they were not simply lies, they nonetheless systematically misrepresented the actual sources of demand and cost-effective production. Figuring out where these were and how to bring them to the fore would have been fiendishly difficult in the absence of monetary measures and a legal-regulatory framework, but it would have been the first step of any genuine and realistic program of reform aimed at preserving and realizing what residual value there was in this system amidst its general bankruptcy.

3) Theory, by its very nature, tends to underestimate the actual density of reality in contrast to actual practical experience and tends to understand and evaluate differently, given its position, the notion of consequentiality. (Its value is brought to fruition precisely when these two are brought into contact to inform each other.) I often wonder what the Finns would have had to say about these matters and whether anyone thought to ask them. The Finns have done well, nonetheless, with Nokia and all, but they must have had, given their position, extensive dealings with the Soviet system and incurred some losses from its collapse.

Chris, the life expectancy for males fell by about ten years. Alcoholism and suicide rates went through the roof. Forty percent of Russians didn't have enough food to eat. You can't fake that sort of thing.

Finaland suffered a major recession in the early 1990s as a direct consequence of the loss of Russian markets. Unemployment went way above 10% (I think it actually hit 20% at one point) This was a massive shock to a country which had Nordic social democtratic country in the mould of Sweeden. well worth reading up on (even do a search through Economist archives for the main story)

However just as interesting is the Finnish ability to adapt - Joining the EU (and eventually the Euro) reorientation of economy. One thing to remembner about Nokia is just how much it changed. In 1998 for example Nokia was the largest manufacturer of toilet paper in Ireland. Needless to say this was abandoned as a non core activity when the concentration began on Mobile communications.

Chris, you have probably done this but a good start to the research might be to look at the intellectual development of Jeffrey Sachs who saw it happen at close quarters and is quite frank about what he saw.

"Alcoholism and suicide rates went through the roof."

Increasing alchoholism was already a problem in the 1980s, and one reason for Gorbachev's deep unpopularity was his crusade against excessive drinking. An increase in personal freedom sometimes means people using said freedom to their own detriment; would you call freedom a bad thing for that reason?

Wouldn't the collapse in defense spending play a role?

Life expectancy plummeted once verifiable data became available. I strongly suspect that the life expectancy figures of the pre-Gorbachev era are nothing more than bad science fiction.

I've been in the process of starting a business this summer and fall. It involves a lot of meethings. Lots. And eating at restaurants to talk things over. I could be glib, right now, and remark that I don't see how an economy can be run without good restaurants for business people to meet in. But of course, in Communist societies, I'm sure they found other "third place" meeting spots. Perhaps local Party Headquarters was used this way. Perhaps the cafeteria's inside of existing factories. I have that impression about China, though not about Russia. My impression, not fed by much, is that Russia was always more centrally controlled than China. China had some village autonomy.

But during a transition, I imagine these "third place" meeting areas all have their status questioned as meeting places. And then how can one meet to work things out? I realize that these were command economies, especially Russia, so "side to side" negotiating among peer companies was banned, but at some level, high up, someone somewhere must have been negotiating something, if only because no one human being can hold all the information about an economy in their head. But if suddenly their authority to give orders was questioned, then those lower down would suddenly need to brush up on their negotiating skills. And where would they meet, when suddenly, for the first time, side to side negotiating, direct negotiating between businesses, became allowed? Then they'd need their own places to meet, and they'd need other people, the people they wanted to negotiate with, to realize it too.

My point being that changes in the decision making authority brings changes to where people need to meet.

I really don't see what is new about this?

bakho, in the absense of reactionary Communists seeking a return to the "good ole days" of the command economy, such a process may well have seemed a tenable goal to Russia's reformers.

Chris, the jury is still out on Putin. He appears to be headed down a very dark path.

Here is one Jeffrey Sachs link I thought I had posted earlier:

http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/int_jeffreysachs.html

Chris wrote: "My own view is that performance in these countries has been mixed economically--Russia finally seems to be a solidly middle-income country (It sure feels like one when visiting--a little grubby and chaotic, certainly corrupt, but not a cesspit of humanity either.);..."

Dsquared responded, "Chris, the life expectancy for males fell by about ten years. Alcoholism and suicide rates went through the roof. Forty percent of Russians didn't have enough food to eat. You can't fake that sort of thing."

To quote from some folks who have actually studied this issue:

"Between 1987 and 1994, life expectancy in Russia declined substantially. Between 1994 and 1998, this trend reversed, and mortality rates returned to those of the early 1980s. Although the decline in life expectancy has been examined previously, much less is known about the subsequent improvement in mortality rates. We used recently published cause-specific mortality data up to 1998 to clarify this issue."

http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=Retrieve&db=PubMed&list_uids=11289348&dopt=Abstract

Tell you what...why don't we ask the Cubans and North Koreans whether they would trade less than a decade of alcoholism and hunger for their present situation...which is alcoholism and hunger for their remaining dreary lives?

Of course, we can't ask the Cubans and North Koreans what they would prefer, because they aren't allowed to vote...at least not for opposition parties.

Old Soviet joke: "The Soviet Union will always be a one-party state. If two parties were allowed, everyone would be in the Opposition." ;-)

Mark: Do you really think the only two possible outcomes were a) what happened, or b) sticking with the old Soviet command economy totally unchanged?

Brad,

Whither Socialism?

If you're competing against yourself, it's always possible to win if you make a point of starting out badly. Mark speaks of a return to Soviet levels of mortality as though it were a capitalist triumph.

Oddly enough, Mark (and Abiola), a lot of Soviets did not think of an increased death rate and increased rate of alcoholism as a small price to pay for freedom. They actually thought that life would get better under freedom! Silly them. They lack objectivity, of course, because they're the ones at risk of dying.

To my knowledge no one here is saying that Communism was a good thing. They're just pointing out that the gangster cartels which replaced Communism weren't very good either.

Lawrence Krubner: I've read that there's a multi-billion-dollar restaurant industry in Beijing which is primarily devoted to big feasts used to bribe public officials.

dsquared: You're certainly right in pointing out that not every change has been entirely good for everyone--pensioners in particular have had a hard time. And life expectancy statistics did take a huge dive, although I wonder if gulag victims and the like were included in the earlier statistics. I think that we'll both agree that the transition had a lot of innocent losers and that this bit is a human tragedy, which is one thing that Russia is good at producing.

What we do know for sure is that there has been an increase in income inequality, a u-shaped trajectory of income, and increasing consumption in the aggregate. I was talking about the latter two things although the former is certainly relevant to a research idea and maybe should be included. Thanks for the point.

What I think is that people overestimate the state of conditions in Russia pre-1991. We're talking about a lower-middle-income country that has had an awful political history and terrible economic management, including a large slave labor sector. Not much unintentional starvation, but I honestly have nothing else nice to say about the system. How do you unscramble an omelet?

I don't think that we should be comparing Russia to, say, Finland or the US, but to countries like Paraguay or Argentina. I'm no defender of Putin, but he's no Stroessner either. Let's be honest about that fact. By Russian standards the man is a saint. By our standards he's a gangster.

We should remember the common complaints about Russia being a riddle wrapped in an enigma wrapped in bacon and topped with sour cream....that is, everything that happens there is so darned complicated and indigestible. Am I pessimistic or optimistic about Russia? Yes. I'm worried that the rule of law is not strong under Putin. But slipping? Slipping from what?

Bakho hits upon a good point along my lines of thinking.

I don't think "slave labor" as an economic, as opposed to a politically repressive, factor was a significant issue in the latter days of the Soviet Union.

The decline in military sending is to be considered, but 1) I don't think, given the set-up, that we could assume anything like the multipliers involved in Western capitalist industrial economies, and 2) given that much may have been exported to support an absurd and hopeless arms race, the decline in military spending may have been a plus, though it would factor in industrial transition problems.

Stan,

Claiming that Communist recidivism was an immanent
threat is re-cycling an old Yeltsin canard, which his cohort used to great effect, since, in the end, it was about the only thing the Russian electorate agreed with him upon. In fact, Yeltsin used armed force against the then Russian parliment, in sharp contrast to his heroics defending the same while Gorbachev was still in power, in order to force his drastic program through, with abject acquiescence from the "democratic" West. It is likely that, under a more gradual and reasonable program of reform, the Communist Party would have split up between a neo-Stalinist faction and a quasi-social-democratic faction. Zhuganov (?), the latter-day leader of the Communists, a former mathematics professor, would have headed the latter faction. Economic reductionism applied to politics is no more attractive when practiced by anti-communists than when practiced by communists.

Call me a moronic idealist, if you will, but a 50% drop in production is not an amusing, nor trivial outcome. Russians are people, too; a forteriori, those non-Russians who history associated with their fate. If such an eventuality were to occur in the U.S.A., we would all be aghast and at a loss as to how to deal with its effects on our social networks. But we would all be much better off in material terms than the inhabitants of the former Soviet Union.

Did freedom defeat Communism or did the U.S. defeat the Russians? Were the Russians liberated, or were they merely neutralized as a a military and ideological threat? Until the Russians are better off, these questions will be hard to answer.

Lack of starvation wasn't the only good thing about the old system. They also had pretty good support of scholarship, science, and education, and fairly decent medical care. All these are worse now.

Speaking of a lowered life expectancy and lowered production as incidental to the real story sounds odd.