Andrei Shleifer on What He Learned From the Transition Experience

|Peter Boettke|

Andrei Shleifer is in my opinion the most important economic thinker of his generation, and he happened to be part of a generation that had to wrestle with the collapse of communism and the transition to a market economy.  He was an ideal person to tackle these issues as a Russian-born, but US trained economist of tremendous talent.  So he was involved both as observer and participant from the beginning.

He was recently asked to summarize what he had learned from the 20 year history of the transition from communism experience, and these are presented in his "Seven Things I Learned About Transition From Communism."  Well worth reading, thinking about hard, and talking both passionately and soberly with your colleagues about for many hours, days, months, and perhaps years to come.  It is vital we get the narrative of this history correct.  I'd also suggest comparing with Stiglitz and others, who have grappled with these issues, including myself.  Also see the paper I co-authored with Chris, Pete and Fred entitled "The New Comparative Political Economy."

HT: Tyler Cowen for alerting me to the Shleifer piece.

 

Addendum: 

From Richard Ebeling

What the twenty years since the fall of the Soviet Union should have
reinforced in economists -- including Austrian Economics -- is the
danger of the "pretense of knowledge" and that history is the "results
of human action, but not of human design."

Shliefer, indeed, is saying this in his own words.

I know that I when was traveling in the former Soviet Union in
1990-1991 doing consulting work on privatization and market reform
(with the emerging democratic government in Lithuania and a bit with
the Moscow city government), I presumed more than I should have.

Shliefer's point on human nature -- that we become set in our
attitudes, beliefs, and our responses to changing circumstances -- and
that this includes the difficulty of "teaching old dogs new tricks,"
was probably neglected by the vast majority of us.

We easily fell back into our textbook microeconomic mindset that,
given people's preferences, all that needed to happen was to change
the institutional rules and the trade-off set (the relative prices),
and people would "rationally" and fairly rapidly adjust to the new
social conditions.

We forgot to remember our Austrian theory of capital that capital is
heterogeneous and comes into existence with certain original
production purposes in mind.

With people's "human capital" (knowledge, attitudes, value and belief
systems) this has its own variation on the same theme. People are not
remold-able clay any more than physical capital.

How and where an individual, with his unique "human capital" content
and history, will be able to fit into a new social setting and a new
niche in the emerging new system and structure of division of labor
will be a time-consuming and difficult task. Especially in the type of
situation in which "the system" is moving from a "command" to a more
market-based arrangement.

I think we also forgot or downplayed the relevance of "history." Yes,
at one level we are all the same as people (praxologically, choosers
of ends and creative discoverers and appliers of means).

But we live in specific historical times, in particular cultural,
political, ideological and religious institutional circumstances. To
use Alfred Schutz's phrase, we are born into and live in "structures
of intersubjective meaning." These define and influence how we see and
believe we can act within a world of objects, relationships, and
ideas.

The "objective" conditions for reform and transition in former
Soviet-bloc counties, and especially Russia, itself, was not the same
as the "subjective" conditions (people's states of mind -- states of
mind that do not change as rapidly as the potential "objective"
circumstances).

This represented another aspect to that pretense of knowledge, even
for those of us who are classical liberal/libertarians.

How often have we been critical of those who wish to politically and
militarily intervene in other parts of the world, pointing out that it
is a dangerous hubris to think that another society with its own
history and institutions can rapidly or easily be transformed into a
"democracy" from a dictatorship through the imposed guiding hand of
the foreign social engineer?

Yet, I now realize that some of us from "the West" came to give our
advise and recommendations too easily, believing that the history and
institutions of the market-based West could be transplanted into
places like Russia with little resistance or fraction.

I only learned this slowly when I started to travel in the Soviet
Union. I considered myself fairly knowledgeable about the history and
institutions, and workings of the Soviet society, having tried to do a
lot of reading over many years.

But this was different that traveling, interacting, and slowly getting
a "feel" for the reality of "how things worked" and how people
thought, a richer understanding that could only be acquired by living
in that society, even in a limited way.

The entire episode has many lessons to teach us.

Richard Ebeling

Comments

[Nathadale]

The important thing to consider when you are doing the transition not only political but for everythiing is to have adequate experience on how to handle the different angle and aspect that might arise in later stage if you never consider or lack of knowledge the project what maybe happening in the future. In this case proper coordination in different types of government body and intelligent individual is a must for timely and less problem transistion.

[Rafe Champion]

How about no 8: When you destroy both the moral AND the legal framework of a society for more than a generation (so nobody remembers what it was like before the revolution) you will really struggle to establish the rule of law, property rights, civil society and the market order. So the European satellite states rebounded quicker.

[Richard Ebeling]

What the twenty years since the fall of the Soviet Union should have reinforced in economists -- including Austrian Economics -- is the danger of the "pretense of knowledge" and that history is the "results of human action, but not of human design."

Shliefer, indeed, is saying this in his own words.

I know that I when was traveling in the former Soviet Union in 1990-1991 doing consulting work on privatization and market reform (with the emerging democratic government in Lithuania and a bit with the Moscow city government) I presumed more than I should have.

Shliefer's point on human nature -- that we become set in our attitudes, beliefs, and our responses to changing circumstances -- and that this includes the difficulty of "teaching old dogs new tricks," was probably neglected by the vast majority of us.

We easily fell back into our textbook microeconomic mindset that, given people's preferences, all that needed to happen was to change the institutional rules and the trade-off set (the relative prices), and people would "rationally" and fairly rapidly adjust to the new social conditions.

We forgot to remember our Austrian theory of capital that capital is heterogeneous and comes into existence with certain original production purposes in mind.

With people's "human capital" (knowledge, attitudes, value and belief systems) this has its own variation on the same theme. People are not remold-able clay any more than physical capital.

How and where an individual, with his unique "human capital" content and history, will be able to fit into a new social setting and a new niche in the emerging new system and structure of division of labor will be a time-consuming and difficult task. Especially in the type of situation in which "the system" is moving from a "command" to a more market-based arrangement.

I think we also forgot or downplayed the relevance of "history." Yes, at one level we are all the same as people (praxologically, choosers of ends and creative discoverers and appliers of means).

But we live in specific historical times, in particular cultural, political, ideological and religious institutional circumstances. To use Alfred Schutz's phrase, we are born into and live in "structures of intersubjective meaning." These define and influence how we see and believe we can act within a world of objects, relationships, and ideas.

The "objective" conditions for reform and transition in former Soviet-bloc counties, and especially Russia, itself, was not the same as the "subjective" conditions (people's states of mind -- states of mind that do not change as rapidly as the potential "objective" circumstances).

This represented another aspect to that pretense of knowledge, even for those of us who are classical liberal/libertarians.

How often have we been critical of those who wish to politically and militarily intervene in other parts of the world, pointing out that it is a dangerous hubris to think that another society with its own history and institutions can rapidly or easily be transformed into a "democracy" from a dictatorship through the imposed guiding hand of the foreign social engineer?

Yet, I now realize that some of us from "the West" came to give our advise and recommendations too easily, believing that the history and institutions of the market-based West could be transplanted into places like Russia with little resistance or fraction.

I only learned this slowly when I started to travel in the Soviet Union. I considered myself fairly knowledgeable about the history and institutions, and workings of the Soviet society, having tried to do a lot of reading over many years.

But this was different that traveling, interacting, and slowly getting a "feel" for the reality of "how things worked" and how people thought, a richer understanding that could only be acquired by living in that society, even in a limited way.

The entire episode has many lessons to teach us.

Richard Ebeling

[McKinney]

Reminds me again of McCloskey's books on bourgeois values. If people don't value property and the rule of law, institutions and law will reflect that.

And as De Soto wrote, Latin American nations have the decorations of a system that protects freedom and property, but the lack of bourgeois values undermine and overwhelm them.

[Brad]

This is also related to number 8. In the early '90s, I graded exams for a class on property rights that Doug North and John Drobak taught at the Business School in Prague. It was taught in english to students from a number of East Bloc countries. One of the students mentioned the old saying "He who does not steal steals from his family." I had never heard that old saying before.

[Barkley Rosser]

As coauthor of a critique of the paper by Pete et al on The New Comparative Economics it should not be surprising that I am less of a fan of Shleifer than Pete is. I will note only two points.

One is that Shleifer now dismisses the debates over the various ways of privatizing. In fact, we know that there were important differences and that takeovers by corrupt oligarchs were more likely in the quickly done voucher privatizations than in the ones that were carried out in a more deliberate manner through full value sales or some other methods.

The other is his claim that except for Belarus, Uzbekistan, and Turkmenistan, the others are all pretty much similar now. This is nonsense. One matter they differ greatly on, and this emerged during the transition process as they started out quite similar, is income distribution. Some have become wildly unequal, notably Russia, with others have only become mildly more unequal. The latter tend to be among the better governed ones in Central Europe, such as Czech Republic, Slovakia, and Slovenia (although Belarus also is fairly equal, holdover of the old system as it is), whereas the ones that are much more unequal tend to be much more authoritarian and corrupt.

I shall not go on at length about how it is sort of funny that these issues are ones that Shleifer is somehow missing on, expert that he supposedly is in so many ways, although those who come from Russia are all to aware of his problems in this area and do not have favorable things to say about him by and large.

[Barkley Rosser]

On the matter of corruption and inequality, one sign of this is the robust result that in the transition economies there has been a very strong relationship between the size of the underground economy and the degree of income inequality. This result was first reported in a much cited paper in 2000 in the Journal of Comparative Economics by me with Marina V. Rosser and Ehsan Ahmed, and is now widely accepted as a stylized fact (btw, the relationship holds more globally, although more dramatically in the transition economies).

[Gonif]

http://janinewedel.info/harvardinvestigative_InstInvestorMag.pdf

Shleifer's sure a great role model.

[Barkley Rosser]

Curious timing on your link, Gonif. Summers was forced to step down as Harvard president shortly after the article was published. While many think it was his imbroglio over women in science that did him in, it was his lying to the Harvard faculty about protecting Shleifer that was the prime cause behind his fall. The article in effect documents what was going on just before his fall, when important senior faculty turned against him over this issue.

BTW, Yegor Gaidar has since died.

[Barkley Rosser]

BTW, I recognize that the scandal aspect of Shleifer's career does not itself invalidate his intelletual arguments. It can be argued that "it takes one to know one." However, I note that some of the lacunae in his seven points that I noted do have to do with the issue of corruption and his downplaying of how different strategies of privatization affected outcomes, precisely the matters regarding which he got into trouble regarding.

[Barkley Rosser]

Oh, a bone for Shleifer's fans. According to RePEc, or at least the last time I checked, Shleifer has the highest h-index of any living economist.

[Peter Boettke]

Barkley,

Even David Warsh has moved on and as he has put, closed the books on that issue. Lets talk about Shleifer's contributions to economics. I am not a fan of the hermeneutics of suspicion on anyone, from Marx to Mises -- all of whom have been unfairly tarred and feathered by this or that group.

Shleifer's contributions, including his work in comparative, but also in the field of behavioral finance is what qualifies him as the unquestionable leading economist of his generation. What he did, or didn't do, in Russia, isn't the issue. What he wrote, and what insight he has to offer for the practicing economist is what we have to talk about.

And that is what those RePEc ratings are reflecting. End of story as far as I am concerned about.

[Jerry O'Driscoll]

Bill Easterly has documented that top-down reforms do not work, while bottom-up reforms can work. Attempts to introduce the rule of law by injecting "model codes" into exisiting legal structures are particularly prone to failure.

From the Magna Carta to parliamentary supremacy took England roughly 5 centuries. The idea that this transformation can be accomplished in a few years in alien political cultures is the product of hubris.

The Washington consensus is wrong. It is wrong not because the goal, free markets, is wrong, but because the means, rule by experts, is deeply flawed.

[Jim Rose]

why does everyone assume that the transition that Shleifer analysed was to capitalism?

The USSR broke apart as the result of an internal power struggle within a new generation of leaders who grew up in a climate of corruption and high living.

More freedom was a by-product of a constitutional struggle over who would control the rules under which the economy prospered (or failed to prosper) and, in particular, who shared in the rents within the elite.

The fall of soviet communism led to a drawn out (and economically destablising) struggle for access to patronage and state monopolies and a new, more decentalised but better paid manifestation of the old mercantilism but ex-KGB owned and run under Putin and his cronies.

Russia is like Latin American crony capitalism.

To quote Becker: “Crony capitalism is a system where companies with close connections to the government gain economic power not by competing better, but by using the government to get favoured and protected positions.

These favours include monopolies over telecommunications, exclusive licenses to import different goods, and other sizeable economic advantages.

Some cronyism is found in all countries, but Mexico and other Latin countries have often taken the influence of political connections to extremes.”

[Peter Boettke]

Jim,

This is the point of Shleifer's "normal country" thesis --- Russia is a 'normal country' -- a normal middle income country that is, and all that goes with that. Which includes all the stuff you just discussed. I recommend looking at his papers on "normal country".

At Barkley --- Shleifer did fundamental work on corruption and rent-seeking both at the start state and during the process of reform, so I think it is inaccurate to say that he ignored the points you are making. Again, I think if you read privatizing Russia, the recognition of the political problems with transition were paramount to his analysis.

As a comment to Richard Ebeling's post I put up, I would say that the lesson Richard talks about learning is one that we all learned. In my Calculation and Coordination book I have a chapter "Why Culture Matters", which was originally written in 1993 after my stay at the Russian Academy of Sciences in Moscow, where I was a research fellow. The argument in this paper was refined and developed with subsequent applications to worn torn states with Chris and Pete and published as a paper on "The New Development Economics and Institutional Stickiness". It is also an argument one can read very forcefully developed by Steve Pejovich, starting with his "Its the Culture Stupid".

But I don't think any of those arguments derail either (a) the Shliefer analysis of attenuated property rights structures in former communist economies, or (b) the argument for 'shock therapy' properly understood (see my discussion of Shock Therapy in Why Perestroika Failed).

The argument about the cultural constraint is vitally important, but it is not as most people think --- the laws of economics still apply!!! BTW, I think Eric Jones's Cultures Merging is an important book in this regard; see my review in Economic Development and Cultural Change.

We do indeed have a lot to learn from the past decades of transition experience.

[Barkley Rosser]

Pete,

Fair enough, although I do not see you addressing very strongly the actual substantive points I made that were based on the speech by Shleifer that you linked to and praised, not his earlier work. Also, I only got into saying anything substantive (and not much at that) about his problems after Gonif posted his link, with my comments mostly clarifying that, other than my remark that it is ironical that some of the problematic statements in his speech do seem to relate to areas related to where he got into trouble.

So, sure, Shleifer was aware of the issues about different paths to privatization in his earlier work, but now he says that debating such matters seems "quaint." How nice, except that we do see rather large differences between firms and their governance and levels of corruption in Russia and in some other countries, with some of those differences being arguably tied to how they privatized, although culture and history are also certainly involved.

I also see no response at all by you, and not a single word by Shleifer, regarding the matter of different outcomes regarding income distribution (which differ greatly, btw, Ginis varying from the mid 20s to the mid 40s in the former CMEA zone), much less the link between these differences and problems with corruption and governance. Frankly, I find Shleifer's lacuna on this matter serious and damning. How dare he talk about outcomes being the same (except for the odd exceptions he allowed for)? And why are you going along with this, Peter? You know better or should.

Finally, I shall add one more problem in Shleifer's speech, his item #3, not noted by me earlier, but somewhat linked to these other issues. This is the claim that there were no populist uprisings or outcomes but rather takeovers by corrupt and oligarchic elites (see unhappiness by protesters in Russia over the ruling "Party of Crooks and Thieves"). In fact we did see at least mild outbursts of "populism" and still do in some of these countries, with some of this being tied to nationalism and protectionism and even political repression as appears to be going on currently in Hungary.

However, in some countries this populist reaction took the form of protecting previously existing welfare state provisions against strong reform moves that wished to dismantle them, with in some cases the preservation of these systems partly reducing the redistributionist pattern and ultimately providing political support for a less corrupt system and the reforms that were put in place. The obvious example of this would be Poland, which had a semi-populist government come to power in 1993 over precisely the matter of cutting or preserving pensions, viewed by many outside advisers as excessive. As it is, Poland has long been viewed as the model of "shock therapy" a la Balcerowicz, although it carried out a gradual and non-corrupt privatization while preserving much of the social safety net. It still has a Gini coefficient less than 30 (barely, last time I checked) and was the only nation in Europe not to go into recession during the recent period, in short, doing very well, thank you.

Ironically I remember attending a major session of the AEA at the beginning of 1994 where one of Poland's advisers, Jeffrey Sachs, was whining about the Polish elections. He basically said that their pensions were excessive and that the voters were a bunch of spoiled brats. That this does not sound like him today, well, I leave that to others to contemplate, although I note that there has been a not loudly made change to the "Washington Consensus" where it is now noted that it is unwise to engage in too much dismantling of social safety nets due to this potentially undermining democratic support for needed reforms in regulatory and macro policies and so forth in many countries. Hmmmm.

[Barkley Rosser]

Thought I put up a long post, but not here. So, an attempted repeat, maybe a bit shorter.

Pete,

You have not really responded to my points, which have been largely focused on things in Shleifer's speech that you linked to. I am fine with saying the past is past on Shleifer's problems, although it does remain a bit odd that some of the things in his speech that look off happen to connect to some extent with those matters. However...

So, I repeat, Shleifer off on privatization strategies. He says that these arguments now sound "quaint." Well, maybe, except that the countries with more carefully carried out strategies ended up with less corruption. Poland looks a lot better than Russia on this.

Nobody has responded to my point about income distribution outcomes, much less their link to the size of underground economies and levels of corruption, and of course Shleifer said a big fat zero about this. So, he says there are no major differences between these economies (except for the holdouts of the old system). Really? Ginis in those countries now vary from the mid-20s to the mid-40s. That is a huge variation, and the latter are the more corrupt ones with the larger underground economies. After all, in Russia the protesters are against the ruling party of "Crooks and Thieves."

All this leads me to add one more question, his point #3, So, no populist revolts? Well, not as extreme as some feared, but some have had populist parties and governments, some of them not so pretty with high levels of nationalism and protectionism, and currently in Hungary with incipient political repression as well.

However, in Poland 1993 a populist party took party to protest demanded cuts in pensions and the social safety net. Outside advisers, including Jeffrey Sachs, complained at the time that the Polish voters were a bunch of spoiled brats. But in fact it is now understood by many that avoiding completely shredding that social safety net provided support for democracy and the many reforms that were implemented. Indeed, Poland was viewed as the home of "shock therapy," despite holding back on cuting pensions and also having a more gradual and less corrupt pattern of privatization. Poland was the only nation in Europe not to go into recession since 2008. Not too bad. But Shleifer's comments pretty much miss out on certain important aspects of what happened there.

[Greg Ransom]

Let's do so comparative institutional analysis:

Why has transformation come so fast to China, but not to Russia?

[Greg Ransom]

I'm out of the loop on this.

Pete, what are the grounds for saying this?

"Andrei Shleifer is .. the most important economic thinker of his generation."

What is it that we've learned from Shleifer. (I simply don't know his work.)

[Greg Ransom]

"Shleifer has the highest h-index of any living economist."

Why?

What doesn't one understand if one doesn't know the insight contributed by Shleifer.

[Barkley Rosser]

Greg,

I think it is not productive to discuss the matter of Shleifer's high h-index on RePEc. While I accept that Shleifer is a very important, intelligent, and influential economist, I will simply say that there are a lot of problems with the RePEc site along with some other issues that are not relevant here.

However, he certainly has published quite a few influential papers that have been cited a lot. That he is indeed the most influential economist of his generation may be true if one defines "his generation" narrowly enough, even if that does not mean that he deserves to be it. As is probably clear from my comments, I think he is somewhat overrated (and I know see that my second post did show up after all), with the speech that Pete linked to not exactly confirming the claim made about him.

I await a response from anybody to the points I have made about his speech, btw, which I think are pretty serious.

[Barkley Rosser]

BTW, Greg, Pete might disagree that it is the most important, but a paper that he likes a lot by Shleifer (with Glaeser) is the one on "Legal Origins" in the QJE, I think from 2005. It has been massively cited, enormously influential, although it has been criticized on some points by some parties, myself included. It is arguably foundational to his "new comparative economics" approach, and many of its arguments are valid, if overstated.

[K Sralla]

Looking back, why should anyone here truly have been surprised by how things are turning out in Russia?

If we have learned anything, it is that limited access societies stay limited access societies not because of the lack of good ideas in designing new institutions, but because the newly designed institutions are incompatible with the long-lived undesigned ones. The latter usually wins out in the end. The clash of institutions leads to a breakdown in the rule of law, then productivty inevitably declines, and the nation gets poorer.

It surpises me that of all folks, political economists inspired by Hayek and Buchanan would not have recognized that the liberalization of Russia had at best a long shot chance in the long run. And from what I have been told by many Russians, Jim Rose has completely nailed down the situation that developed with the overthrow of Gorbachev. The fall of the Soviet Union never really involved any significant organic grass roots groundswell concerned in the least with economic liberalization.

Unlike some of you, my travels through the former Soviet Union have only begun recently, but from my recent vantage point, what appears to be taking place east of Poland is very sad. Poland indeed is the shining star, followed by the Czech Republic (a more distant second). But most Russian's seem to view these two countries as very "western" by comparison, with old institutions that have evolved in a different strain from the 9th Century.

[Barkley Rosser]

Since it looks like Pete is not going to respond to my comments, let me make a positive observation. The things in the speech I did not criticize I agree with, and I think that Shleifer, Pete, and I all agree on a lot of this, such as that history and culture and institutions, including legal systems and other stuff, all matter in these processes. Shleifer made these points well, even if I have some disagreements with some of his arguments.

Also, while now some of the points in the speech sort of seem obvious, that is because we are now more or less used to much of it. But not all of it was at all obvious upfront. Thus, almost nobody, certainly not me (nor Shleifer and I think not Pete either) forecast the sharp output declines that hit those economies during the transition (to various depths with varying times for recovery). Most of us kind of expected the opposite, thinking of the example of the German Wirtschaftswunder after WW II. But the socialist system had been in place much longer than the Nazi system in Germany, and the changes were deeper and harder to make.

Also, Greg, regarding China vs Russia (and the rest of the Soviet bloc) this is not a simple matter. However, I shall note two points aside from the complicated matter of culture and history.

So, one is that China had a much less developed/more agriculturally based system than the CMEA countries, including being poorer, and also had a much more decentralized system, with local planning predominant over centralized planning (which did exist). So, reforms in ag had a huge positive impact on the economy, much more than was possible in the largely industrialized nations of the Soviet bloc, and also the decentralized structures provided the base for the later Town and Village Enterprises (TVEs) that have served as the foundation of the development of the Chinese economy in recent decades.

[Niko]

@Rosser:
About the sharp output drop, there are two possibilities:
1. The big output never existed, it was a lie.
2. They still kept the big output, but now properly priced it had little value

There is also the possibility of a sharp drop because of most of those countries didn't want to transition at all, but the political institutions which kept the output flowing collapsed, so trade was impeded, so no output without input etc.

But I think no. 1 is correct.

About the example with the German miracle: the Nazis didn't directly destroy the notion of private property. Much was still, although formally, privately owned. They had a much sounder base to start from. They also accepted lots of Turkish immigrants who did those messy jobs Germans didn't want to do.

In the Eastern block many people left, inflation destroyed what ever little capital people had and most politicians wanted to keep communism under a form of democratic socialism. Oh, and the western economist couldn't help at all, most of them probably said "everything you are doing is great, we are sorry we cannot implement what you are doing here. But soon we will have your haven too."

[Barkley Rosser]

Niko,

Sorry, but the decline in output was real and resulted in steep rises in unemployment in most places. One can sneer at the output that ceased, but some of it was simply lower quality goods that got outcompeted with production shutting down when the doors to competition with the higher quality goods from outsidewere opened. It took some time for those declines in real output and employment to be overcome.

An obvious example would be the Trabant car in the former East Germany. It was a crappy little polluting vehicle, although some there now drive them around out of nostalgia. But production of it rapidly ceased after East and West Germany were reunited. One can argue that the cars that people started buying instead, those who could afford them, were much better, which is certainly true. But the Trabants were not some illusionary product that did not ontologically exist, or which we were fooled into thinking they existed by some epistemological trick of the commie central planners. They really did exist, crappy as they were, and when production shut down, the workers were laid off.

Now, what is true is that the decline in real output was less than what was reported, just as real output was exaggerated by the official statistics (and even such western observers as the CIA, which thought real per capita income in East Germany was nearly equal to that in West Germany, until the crappiness of the goods was revealed and a revaluation put it at more like one third of that in West Germany). However, what partly offset that was the rise in the size of the underground economy, which was not sufficient to offset the declines in real economic output anywhere. As noted above, the degree of that rise was highly correlated with such matters as the degree of income inequality, the pattern of which massively diverged during the transition process as first observed and reported on publicly by yours truly.

Regarding the Wirtschaftswunder, the key period for this basically ended by the mid-50s, whereas Turkish gastarbeiters did not start showing up until the 60s. They were not at all a factor.

Finally, do not overstate the role of inflation in the transition. Yes, many places had it, with Ukraine's rate exceeding 10,000 % in its max year for this. However, other countries had much lower rates with it not being much of a problem, low double digits for a couple of years at the worst, such as in the Czech Republic. Again, very diverse outcomes, and I can report that the max rate of annual inflation was the other significant variable besides income inequality that was significantly correlated with the size (and increase) of the underground economy in the transition countries.

[Barkley Rosser]

Correction. It was real PER CAPITA output that was thought to be nearly equal in 1989 by the CIA and other observers, not "real output." The FRG was simply much larger in population than the former GDR, which the former absorbed into itself.

Also, while there was a lot of migration from the former East into the former West Germany, in other former Soviet bloc countries migration was relatively minor, except for some extreme cases such as Moldova, now the poorest country in Europe in real per capita terms, having fallen behind Albania, the former champ on that score.

[Niko]

@Rosser:
So I was wrong about the Turks :).

I think the big surprise should not be the fall in output, but how crappy the products were, which actually caused the big drop in output. If trabant was a good car, there would be no drop in output.

Production for the sake of output is only waste.

Also income inequality was a lot bigger in communism than in a free market, but since you didn't have a proper market, it was very hard to be put in a statistic.

Low digits inflation is a lot of inflation, and that was in a country considered with low inflation. By the way, do not understate the role of inflation.

And yes, there was an underground economy, probably that's what killed communism, that pesky, ugly underground economy. By the way, what is your point with the underground economy, you keep throwing these words, but I can not find place for them in your argument, except that it was bad and it existed. For most people it was the only way not to starve to death, just to starve.

Emigration was a big problem. Many of those who emigrated were young, and no, most never returned. The results were long term: Romania just found out it has 3 million people less than 10 years ago.

But I want out of this debate.

[Barkley Rosser]

Niko,

Hmmm, probably should not waste my time given that you "want out of this debate," but do feel the need to set the record straight.

Certainly a substantial part of the officially measured decline in output was a matter of repricing crappy stuff. But a lot of it was also the cessation of producing that stuff. One can say, "zero value," but if the only kind of car you can get is a Trabant, well, it was better than no car for plenty of people.

Also, almost certainly not all of the worthless crappy stuff has stopped being produced. I bet Russia is still producing a lot of unneeded crappy tanks, spacibo.

It is simply false, and by a long shot, that inequality was greater under the ancien regimes than now, much as that may go against the grain of many here. Yes, the old inequality then was understated in that elites got perks that were not reported as income. But there is not a single formerly communist-ruled state where inequality has not risen, not a single one, although there are some where the increase has been very small, e.g. ones I mentioned in an earlier post (Slovakia and Slovenia particularly, if you can keep those two straight, :-)).

I do not understate the role of inflation, indeed made it clear that it was important in the rise of corruption and underground economies. But its impact varied widely across countries, with it not being all that important in some of them, the ones where the rates never got all that high.

No, the underground economies not only did not kill communism anywhere, they increased in almost all those places after communism fell. The ones where they increased the least tended to be those with the least increases in inflation and inequality, such as the previously noted S and S.

Emigration has largely been a problem with respect to highly educated young people, not a mass phenomenon, although there are few cases of the latter, even if not a general problem for most of the transition economies.

Regarding the matter of inflation, I shall add a further poke at Shleifer's overly praised speech that Pete linked to. He barely mentions inflation and makes it sound like the output paths of the post-Soviet transition economies were pretty similar: output fell, then went back up again. Yes, that latter is what happened, but there was also wide variation of how that happened. Some only went down a small amount and recovered quickly, moving on to do much better than previously quite quickly. Others went down much further, even accounting for the offset from increased unreported underground economic activity, and then stayed down much longer. There are several of these that only got back up to their 1989 real per capita income level pretty recently, although all have now.

Unsurprisingly a major factor in this wide variation of output performance paths was the widely varying rates of inflation experienced in these countries. Thus, low inflation Czech Republic did not decline much and recovered quickly, whereas high inflation Ukraine took a long time to get back to where it was in 1991 (when the USSR broke up).

Do, really, Shleifer could have done a lot better in this speech than he did. He left a lot out and oversimplified a lot that he talked about.

[Niko]

@Rosser:
I don't like the Andrei guy. Nothing of value from him so far, a lot of quotations, but he is an economist, quoted by economists, so not a lot of trust should be offered.

"It is simply false, and by a long shot, that inequality was greater under the ancien regimes than now, much as that may go against the grain of many here."

I guess I should trust your word. You lived it, you know everything about it. Ofcourse it is simply false that inequality wasn't greater under the ancient regime (socialism) than now, much as that may go against the grain of most economists everywhere.

"No, the underground economies not only did not kill communism anywhere, they increased in almost all those places after communism fell."
No, they existed before, just that, after the fall, the underground economy was recognized. It was a very simple act: the officials recognized that people traded. You see, in a socialist society people don't trade, they share ...

I am tired. I often wonder what do economists do, until I read this kind of posts ( from the likes of Acemoglu, Shleifer, Stiglitz, Krugman, Lucas, Becker): they justify killing people for a greater good. Usually their good.

OK, I'm out, I'll be back in an month or two.

[Barkley Rosser]

Regarding the underground economies, of course they existed under the old regimes. Indeed, those regimes were unable to function without them. In the old USSR those who handled the needed transactions to obtain inputs for firms were known as "tolkachi," usually translated as "fixers." They were the crucial market capitalists in the interstices of the old system who made it function, such as it did, obtaining the needed stuff on the black market for the firms to meet their production quotas.

Many of these people would surface into the later legal markets, given their prior experience with markets, while others would expand in the growing underground sector. Indeed, some have argued that it was this long experience of operating illegally in markets with the associated bribery that cast a shadow on markets when the system changed, putting this expectation that one must bribe and steal and so on, which is so prevalent particularly in the modern Russian economy.

[Senior Planning Services]

Great Article! Really helps the beginner blogger, like myself, choose a direction that isn’t either too simplistic nor complicated.