China and Russia

|Peter Boettke|

Paul Gregory is one of the most insightful comparative systems economists.  He is the co-author (with Robert Stuart) of one of the leading textbooks on the Soviet economy, as well as many of the most penetrating works in the field utilizing the archives after the collapse of the Soviet Union.  Gregory's work on Soviet bureaucracy used ideas from New Institutional Economics and Public Choice, his history of the 20th century economic debate over the efficiency of socialism pays close attention to Mises and Hayek, and his work on Stalinism also uses ideas from Mises, Hayek and public choice to explain the origins and operation of the Stalinist system.

In the recent issue of the Hoover Institution's Policy Review, Gregory with Kate Zhao attempt to answer the question "How China Won and Russia Lost."

I have often argued that (a) the language of shock therapy versus gradualism is confused because it tends to gloss over the important distinction between de facto and de jure in fundamental institutions, and (b) because of the confusion there is a misunderstanding of how which Russia has had much "de jure" reform, they have not had that much "de facto" reform, whereas China is the opposite.

BTW, Gregory has a wonderful book on Nikolai Bukharin (economic architect of both War Communism and NEP) and his wife Anna Larina -- Politics, Love and Murden in Stalin's Kremlin -- is due out in April.  I have long been fascinated by Bukharin (who wrote his book The Economic Theory of the Leisure Class after studying in Vienna and attending Bohm-Bawerk's seminar, and who after his disillusionment with War Communism made the argument for the New Economic Policy in an essay where he explicitly said that Mises was "the most learned critic of communism").  I cannot wait to read Gregory's book.

Comments

[Daniel J. D'Amico]

Economics of Forced Labor!!! I just bought the hell out of that book.

[Bill Stepp]

Have you read the one he co-edited about The Lost Politboro Transcripts?

[Nikolaj]

Problem with Russian "shock therapy" was that it never existed. Even de jure. When you compare Russian model of transition with that of Poland and Czech Republic (and especially of Estonia or Lithuania) you will see that Russian model was a classical gradualism. They delayed and "moderated" reforms, or better to say ,the opponents of reforms managed to stop them or slow down significantly. There was not Russian shock therapy in the first place. What Mart Laar did in Estonia was a real shock therapy, but critics would never mention Estonia (because it had growth rates in the last 20 years that sometimes exceeded China's).

[anon]

Lovely post. As I think you know Gregory and Bukharin are also my favorites. I have all his recent books and his textbook but I had missed "Restructuring the Soviet Economic Bureaucracy" somehow, which sounds great - so I just bought that :)

[liberty]

Sorry, that was me, not someone anonymous. Also, Pete: do you have a cite for where Bukharin said that about Mises?

[Barkley Rosser]

Nikolaj,

You are badly off on various things here. The only thing that was "shock" in the therapy of Poland was the macro part, which was also done in Russia. Of course Poland already had a much more developed market economy than Russia (or the Czech Republic) and so did not need to do much on the ending central command planning side. However, Poland was very slow to privatize, with Russia actually moving more rapidly on that front, a mistake that led to corruption and some eventual renationalization. This is a lot more complicated than you let on.

Estonia did very well for a while, but had the third worst performance in the EU last year on GDP, -13.7% GDP growth, with only Latvia and Lithuania worse (both down around 18%).

One fact that should be kept in mind when comparing China with any member of the Soviet bloc is that it was much more agricultural in 1979 than any Soviet bloc country in 1989. So, reforms in agriculture had a much bigger impact on the whole economy, and that was where the Dengist reforms indeed started.

[Pietro M.]

Rosser: I've read of years of the Baltic republics' successes as the result of the flat tax. I looked at their monetary data and had some very strong doubt. However, in my opinion last year's performance of the Baltic republics has little to do with desocialization or market reforms (or the flat tax): it's just money and credit. More like Iceland, Ireland and Spain than Russia or North Corea.

[Peter Boettke]

Liberty,

Yes, in his 1925 paper --- the same paper that he says to the peasants as well as to the NEPmen "enrich yourselves".

There is an English translation of his works put out by ME Sharpe that contains this essay.

Pete

[Barkley Rosser]

Pietro,

Russia also got a flat tax shortly after Putin took over, probably the last serious reform measure done there. It improved their revenue performance and aided what were several good years of growth there, although the price of oil has been more important recently.

Regarding Estonia, I do not disagree. But there should be a warning on that label, a completely open capital market can lead to this sort of collapse. Of course, many of the formerly socialist countries in middle and eastern Europe that borrowed from abroad a lot have been hit hard, but the Baltics have been hit the hardest. OTOH, China with its tightly closed capital market has not been hit hard at all.

[Pietro M.]

Rosser: I agree, I didn't want to criticize the flat tax, just wanted to highlight that a meaningful comparison should take lots of things into account. Estonia's troubles are unlikely due to partial desocialization: free economies are more prone to instability than heavily regulated ones (the US more than the EU, Ireland more than Austria, Spain more than Italy), probably because market entrepreneurs must rely on prices and monetary policies distort them systematically.

For what concerns China, besides, I would add that it can rely upon a very high saving rate. Between open markets and low savings rate (high trade deficits), I would consider the latter factor more important in causing crises, but I haven't read empirical works recently and, my Tirole enamorement being one-year old, I forgot a lot.

[Nikolaj]

Barkley
first, calm down please.You dismissive tone will not make your arguments any better.

Second, your portrayal of the Eastern Europe is distorted. Russia did not suffer the rise of corruption because of fast, but because of insider privatization. Czech Republic also had a fast privatization but via vouchers, not to insiders. Estonia had also very fast privatization (mostly by selling enterprises to highest bidder), but without the corruption. So, the problem in Russia was not the speed, but the method of privatization.

Further, what critics of "shock-therapy" almost always have in mind are exactly the macroeconomic things you are talking about. For example, they bitterly criticized Gaidar's "failure" stemming from his unsuccessful attempt to liberalize 10%-15% of all prices. However, when Balcerowitch liberalized 95% of all prices (successfully) they called that "gradualism". The same thing is with free trade.

Estonia quickly (not slowly) privatized all state-owned enterprises, abolished all subsidies, abolished all tariffs (yes, unilateral free trade), introduced low flat tax. If anything was "shock-therapy" in the world that was Estonian model. Compare their growth rates with any other country in the Europe over 20 years, and not just 1 year. One year means nothing.

My argument still holds; Russian model was very limited reform, compared with most other countries in the Eastern Europe. And problems there were associated with the reluctance of the politicians to continue with liberalization, not with the effects of "shock therapy".

[Nikolaj]

"Regarding Estonia, I do not disagree. But there should be a warning on that label, a completely open capital market can lead to this sort of collapse. Of course, many of the formerly socialist countries in middle and eastern Europe that borrowed from abroad a lot have e been hit hard, but the Baltics have been hit the hardest. OTOH, China with its tightly closed capital market has not been hit hard at all."

Excellent. Everyone in the world should introduce a capital control as a way of preventing crises. The USA in the first place, as a biggest capital importer in the world.

[Barkley Rosser]

Nikolaj,

Much of this is a matter of size, both the good, the bad, and the ugly. It is a lot easier to privatize rapidly and to do so in an across the board reform if one is dealing with a small country than a much larger one. It is also the smaller countries that are more likely to experience distruptions from large changes in foreign capital flows.

Poland already had lots of its prices liberalized, and the Czech Republic had problems with its privatization scheme that Poland did not.

My point about the flat tax in Russia was that it did indeed carry out many of the privatizations that you recommmended based on Estonia that were not done in other countries. It has gone much further than quite a few other former Soviet bloc countries (think Belarus). Of course you are right that there is a major corruption problem there, along with a lot of other complicating factors.

It should also be kept in mind regarding Estonia that it always had the highest real per capita income of any of the Soviet republics and retained close relations with Finland throughout the period of Soviet rule.

[Barkley Rosser]

Nikolaj,

Just for the record, I am not knocking Estonia. They have done very well. Just pointing out that things are more complicated than you originally pointed out, and that you at least partially mischaracterized the situation in Poland, which triggered my more snide remarks (I have actually met Balcerowicz). As of 2008, several of the Eastern European countries were still ahead of Estonia in real per capita GDP, and this recent sharp decline on its part moves it down the list a bit.

The one on top, which has been one of the least affected by the recent problems because it has very little foreign bank ownership in it, is Slovenia, which also has a number of other peculiar characteristics, some of them holdovers of the peculiar system that used to exist in Yugoslavia, which failed spectacularly for Yugoslavia as a whole, but did not do so badly in Slovenia. Slovenia's lead over Estonia and the others has been reinforced by recent events.

[Barkley Rosser]

This thread may have stopped dead, but I would like to add that there is another aspect of the size of the private sector in these economies that is much more important than the speed or method by which state-owned enterprises were privatized. This is the matter of encouraging entrepreneurship and the formation of new businesses. Poland, China, and Estonia have all been good at this, although in China it has been partly a matter of different regions having different policies and outcomes at different times. Russia has been terrible, with this being one of the most important negative aspects of the deep corruption going on there.

[Nikolaj]

Barkley,

Slovenia's growth rate since the early 1990s was much lower than Estonia's and the initial gap that has been enormous between the two countries, closed to a large extent by the early 2000s (I was born in former Yugoslavia, and I know that my ex country was by far the richest one in the Eastern Europe, and that Slovenia was twice as rich as Yugoslavia's average). It is correct that Slovenian GDP per capita is still higher than Estonian, but the gap is closing very quickly, as a consequence of a much faster liberalization in Estonia. We hardly have any evidence of the superiority of Slovenian mixed-model compared to radical Estonian.

As for the GDP contraction last year, Estonia is a small and open country and it is not surprising at all that its GDP contracted sharply when international trade contracted. Once global recession passes, Estonian growth will probably resume at a much higher rate than in other countries whose GDP declined less.

On the other hand, Russian GDP in 2009, as far as I remember the figures, fell even more than Estonian.

[Barkley Rosser]

Nikolaj,

There certainly have been quite a few years in the late 1990s and since 2000 when Estonia had higher growth rates than Slovenia. But there have also been years when the opposite was true, quite aside from Estonia's much steeper decline during the current recession than Slovenia. Thus, Estonia fell much more deeply in the early 1990s than did Slovenia, which had one of the best performances of all the European transition economies, despite its main trading partners in the former Yugoslavia experiencing massive economic collapses as they descended into vicious warfare.

For an overall comparison of the "catchup" you claim, let us compare 1991 with 2009.

In 1991 real per capita GDP (PPP) of Estonia was US $3659 while that of Slovenia was US $6331. The ratio of Slovenia's to Estonia's was 1.73.

In September 2009 (latest available figures, estimates), Estonia's real per capita GDP was US $13,509 while Slovenia's was US $28,524, for a ratio of 2.11.

Even if one uses the 2008 figures, the ratio will still not show 1991 higher than 2008, although they would be much closer. In short, your account of "catchup" is not all that convincing.

[Barkley Rosser]

BTW, differences between Estonia and Slovenia (in favor of Slovenia) cannot be reasonably attributed to Estonia's size. While it is smaller in population than Slovenia, they are of the same order of magnitude, Estonia about 1.3 million to Slovenia's just over 2 million.

Size differences matter when comparing with Russia, but Russia is deeply flawed on economic, political, and social grounds. While I have not seen the book, I would imagine that Paul Gregory would do a good job of covering those problems.