Eastern Europe & Former Soviet Union: Class 4

Russian Federation

Largest of former Soviet republics (150M)

rich in natural resourcesno history of a market-based

institutional framework at beginning of transition

-45-40-35-30-25-20-15-10-505

1992* 1993 1994 1995 1997 1998

GDP

Industrial Production

Investment

Early Transition Period

Accumulated drop in GDP 1989-95 equals -52%.

Compare U.S. 1929-33 (-30.5%) And the Russian decline

followed a period of steady decline

clearly the decline has slowed but investment remains a major problem

And unlike Poland

0

10

20

30

40

50

60

1993* 1994 1995(Jan-Jun)

State

Local

Mixed

Private

Sources of Russian investment 1993-95

Why has the Russian transition been so

unsuccessful?

Yeager, Tim. 1998. Institutions, Transition Economies and Economic Development. Chapter 8: Poland and Russia in transition.

Yeager’s perspective

THESIS: A major key to their diverging performance lies in differences in their institutional frameworks.

Poland has managed to create an environment in which the rules of the game are adequately spelled out.

Russia’s economy is plagued by crime, corruption and high transaction costs

Far more “on-the-books”business start-ups in Polandevidence of faith in the system

much more informal activity in Russiacan only exist if government chooses

or is unable to stop its growthBut such firms are small and

invest littlelogical. Property rights are insecure

Russian mafia controls 40% of the total economy

some 9,000 organized groups employ about 100,000

pay no taxes; force legitimate businesses to pay protection1994: 70-80% of private

businesses paying extortion money.

Russian Inflation Rates, 1992-95(%)

1992 1993 1994 1995Annual average 1354 896 220 190End of year 2318 841 205 131

Hedlund and Sundstrom. 1996. The Russian economy after systemic change,

Europe-Asia Studies 48(6): 887-914.

FactorsMonetary policy in perestroika years. More

money printed than in previous 30 years combined

created a massive RUBLE OVERHANGRussians unleashed price inflation to

eliminate the overhang which became chronic.

Need austere monetary policy to turn off. Became impossible politically.

Consequences of chronic inflation

Shorten time horizons of economic actors---> investment decline

sharp reductions in real incomes of those on fixed incomes.

Increase in income inequalityIncrease in regional inequalityPRIMITIVIZATION of Russian

economy

Example 1 of primitivization:

Structural trendsThe higher the degree of processing

the greater the fall in outputthe relative importance of

extractive industries (natural gas, coal mining, electricity generation etc.) has increased

Has made Russia more dependent on world commodity prices

Example 2: Reversion to barter economy

PBS Lehrer Hour, October 27, 1998

Example 3: Russian morbidity and mortality

trends

Disease/health indicator % change 1992 % change 1993Typhoid/paratyphoid 13 66Salmonellosis 8 -15Bacterial dysentry -31 25Tuberculosis (first diagnosis) 5 11Diphtheria 109 290Whooping cough -22 63Measles -9 302Syphilis (first diagnosis) 86 141Gonorrhoea 32 25Proportion pregnant women anemic 31 NAProportion newly born ill 20 NA

Morbidity

Mortality

40

45

50

55

60

65

70

75

1979

-80

1981

-82

1983

-84

1985

-86

1987

1989

1991

1993

Men

Women

Life expectancy at birth

Russian life expectancy in international perspective,

1994

United States

France

Sweden

Portugal

China

Thailand

Brazil

0 20 40 60 80 100

Russia

Germany

United Kingdom

Spain

Japan

South Korea

Mexico

Male Female Difference

HypothesesGlasnost in statisticsinadequate financing for medical

systemfood and drinking water

contaminationecological problems (air pollution)

high rate of birth defectsIncreased homicides due to gang

wars and decline in public order

Problem with these explanations???

Why the large gender gap???One route to an explanation--focus

on trends in mortality causescardiovascular diseasesinjuries including (homicide, suicide,

alcohol poisoning)

One modelIMPOVERISHMENT

INSTABILITY

(POLITICAL, SOCIAL,

ECONOMIC)

BEHAVIORAL CONSEQUENCES

INCREASED MORTALITY

AND GENDER GAP