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SOCIAL COSTS OF POST-COMMUNIST TRANSITION Was Gradual Better?

SOCIAL COSTS OF POST-COMMUNIST TRANSITION Was Gradual Better?. Oleh Havrylyshyn (University of Toronto ) WIIW Mar.26,2007. O Havrylyshyn CERES Seminar Jan. 29, 2007. Key reason behind gradualist theory , 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? Oleh Havrylyshyn (University of Toronto ) WIIW Mar.26,2007 O Havrylyshyn CERES Seminar Jan. 29, 2007

  2. Key reason behind gradualist theory , to mitigate social costs Mid-nineties studies overwhelmingly negative, social costs huge, often blamed on „shock therapy“ First years all felt social costs: were they less in gradualists? Have social costs turned around since 1995? Differences by type of reform strategy? MOTIVATION OBJECTIVE

  3. OUTLINE • I:BACKGROUND:expectations, strategydebates, data, methodology • II:OVERALL WELL-BEING: unempl, poverty, income dist,consumerism • III: HEALTH INDICATORS • IV:EDUCATION INDICATORS • V: SUMMARY ASSESSMENT

  4. I:BACKGROUND • INITIAL EXPECTATIONS • GRADUALvs.BIG-BANG DEBATE • MID-NINETIES ASSESSMENTS • BIG PROBLEM IS HOW TO TAKE A HARD LOOK AT SOFT FACTS

  5. I

  6. 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

  7. 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)

  8. I

  9. WHY ARE THE FACTS SO SOFT? • Usual data problems especially 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). • Income ≠ access to goods.

  10. SHORTCOMINGS OF EARLIER ANALYSIS • Premature analysis: mid-nineties low point only covers half of transition cycle . • Focused on worst cases (e.g. male life expectancy in Russia) ignored good performance of Central Europe • Approach of some studies borders on sensationalist journalism

  11. DATA AVAILABILITY FOR UPDATE • A lot of new data allow comparison from about1989 to 2004, covers full transition cycle of decline and recovery • Use UNDP Human Development Report data from 1990 to 2004 for most social. Indicators; broadly consistent definitions and not biased by big-bang philosophy.

  12. Country Groups :Initial Strategy I. ADVANCED-START/ III. BIG-BANG/ABORTED IV. GRADUAL, DELAYED STEADY PROGRESS UNSUSTAINED OR UNSTEADY REFORMS ___________________ _____________________ _______________________ Croatia Albania Azerbaijan Hungary Bulgaria Armenia Slovenia Macedonia Georgia Czech Rep. Kyrgyz Republic Kazakstan Russia Moldova Ukraine Tajikistan Romania II. SUSTAINED BIG BANG V. LIMITED OR REVERSED REFORMS ______________________ __________________________________ Estonia Belarus Latvia Uzbekistan Lithuania Turkmenistan Poland Slovakia

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

  14. GROUPINGS BY INITIAL STRATEGY AND TPIO4 RANK VERY SIMILAR Ranking 04 Strategy CE+BALT Type I +II SEE some III,some IV CISM IV + RUS+KYR CISL TypeV

  15. DEMOCRACY AND MARKET LIBERALIZATION

  16. II: WELL-BEING AND INCOME DISTRIBUTION • OVERALL WELL-BEING(HDI of UNDP) • POVERTY RATIOS;GINI (UNDP,WB) • UNEMPLOYMENT( Various) • GOODS CONSUMPTION • HEALTH INDICATORS (UNDP HDR) • EDUCATION INDICATORS( HDR)

  17. HDI VALUES BY COUNTRY GROUP:1990-2004

  18. HDI SHOWS GRADUAL CAUSES MORE PAIN(UNDP: Highest Value Norway=0.944; Lowest Value Sierra Leone=0.275)

  19. SHORT-TERM:DELHDI90-95xTPI94

  20. - MEDIUM-TERM:DELHDI90-00xTPI94

  21. CHANGE HDI by STRATEGY TYPE

  22. UNEMPLOYMENT RATES 1996-2005by country groups

  23. UNEMPLOYMENT RATES 2000-05by country

  24. GINI VALUES IN TRANSITION

  25. RANGE OF POVERTY RATIOSBY COUNTRY GROUP AND PERIOD

  26. CONSUMPTIONSELECTED GOODS • MEAT • FRUITS • VEGETABLES • TELEPHONES ( LAND*MOBILE) • AUTOMOBILES

  27. MEAT-KG/PERSON

  28. FRUITS KG/PERSON

  29. VEGETABLES KG/PERSON

  30. TELEPHONES PER 1,000

  31. AUTOS PER 1,000

  32. III. HEALTH INDICATORS

  33. LIFE EXPECTANCY CE,BALT,SEE

  34. LIFE EXPECTANCY CISM, CISL

  35. DOCTORS PER 10K POPULATIONCE,BALT,SEE

  36. DOCTORS PER 10K POPULATIONCISM,CISL

  37. IV: EDUCATION INDICATORS

  38. GROSS EDUCATIONAL ENROLLMENT RATIOS (%)

  39. EDUCATION EXPENDITURE % GDP:CE

  40. EDUCATION EXPENDITURE %GDP:BALTICS

  41. EDUCATION EXPENDITURE %GDP: SEE

  42. EDUCATIONEXPENDITURE %GDP: CISM

  43. EDUCATION EXPENDITURE %GDP: CISL

  44. V. OVERALL ASSESSMENT • Mid-90’s studies too early to reflect recovery many ignored good performance of Central Europe and Baltics • 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 • From 95: in ALL countries SOCIND turn-around;decline reversed in CEB by 2000, CISM&L still not reversed by 2003-4

  45. COMPARATIVE ASSESSMENT CISM WORST • CISM:cumulative output loss historically unique, social well-being deteriorated markedly, recovery not yet complete,most losers uncompensated • CISL:output officially much better but questions of validity, sustainability; also SOCIND performance only marginally better,TRKM perhaps worse

  46. POLICY LESSONS • Expected widening of income distribution not excessive;even partial reformers less than many DC`s , China. • Despite high unemployment, rapid reformers suffered far less social cost on all measures than gradual reformers • GRADUAL SEEMED BETTER IN THEORY WAS WORSE IN PRACTICE

  47. SOCIAL INDICATORS PUZZLES • PUZZLE 1: IS BELARUS EXAMPLE OF SUCCESSFUL GRADUALISM OR EXCEPTION TO THE RULE ? • PUZZLE 2: UNEMPLOYMENT APPEARS WORSE IN RAPID REFORMERS BUT SOCIAL INDICATORS BETTER-WHY?

  48. FUTURE RESEARCH HYPOTHESES:WHY GRADUAL NOT BETTER? • Mechanically: delayed reforms,delayed adjustment,delayed recovery, delayed improvement • 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

  49. MAR:26 APPENDIX-WHY GRADUAL WORSE IN PRACTICE ?

  50. III: EVOLUTION OF OLIGARCHS:THE NAVIGATION MODEL -Uncharted waters: Debate and delay cause slow and partial reforms, postpone adjustment -Pirate raids: Rent-seeking stronger if reforms are slow and partial, capital accumulation rapid, concentration into oligarch power -Safe havens: integration in global institutions disciplines reform and ensures steady progress; most powerful was EU membership III

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