On Transition: Theory and Empirical Evidence for the Former Soviet Union

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On Transition Theory and Empirical Evidence for
the Former Soviet Union

• Ernesto Hernández-Catá
• School of Advanced International Studies
• The University of Johns Hopkins

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Reform Begins

• The economy includes 2 sectors
• A sector producing old goods or Type 2 goods
  producing under state orders and/or with state
  subsidies In most countries this sector initially
  accounts for the bulk of production.
• A sector producing new goods or Type 1 goods.
  Firms in that sector produce without state
  subsidies and sell in free markets under
  competitive conditions. Subsequently the groth of
  this sector will result from (i) privatization
  of state enterprises and (ii) emergence of new
  private firms.

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Principal Assumptions

• For convenience, enterprises are identified
  according to their status of ownership
• Producers of New goods are identified with
  private or non-state (cooperative) enterprises
• Producers of Old goods are identified with
  state owned enterprises.

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Objectives and policies of the new government

• The reforming government confronts the task of
  transforming the structure of output by replacing
  (more or less rapidly) type-2 producers into
  type-1 producers. Sooner or later, this will
  require several measures including
• Price decontrol
• External trade and exchange rate liberalization
• Privatization and/or restructuring of (and
  discipline in) state enterprises
• Macro-stabilization (monetary fiscal in tandem)

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The Experience in the Former USSR

• As a rough characterization there are four types
  of countries
• Strong (fast) reformers (e.g., Estonia, Latvia)
• Intermediate reformers (e.g., Russia, Kazakhstan)
• Weak (slow) reformers (e.g., Ukraine,
  Turkmenistan)
• War countries (e.g., Armenia, Azerbaijan,
  Georgia)
• Weird countries (Belarus, Uzbekistan).

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Fig. 1 Real GDP by Type of Reformer
Strong reformer
Intermediate reformer
Weak reformer
Georgia
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Fig. 2 Output of New goods
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Fig. 3 Output of Old Goods.
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Fig. 4. Output in Countries Affected by War
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The Evolving Structure of Output during the
Transition Strong Reformers

• Output of old goods falls sharply from the
  beginning.
• Output in the new goods sector begins to rise
  early, but with a lag.
• Total output falls for 2-3 years then recovers
  and reaches its initial level after 5-6 years

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Evolving Structure of Output During the
Transition Intermediate Reformers

• Overall pattern similar to those of strong
  reformers, but
• growth in the New goods sector is slower and
• Aggregate production keeps falling

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Russia does not show up a a strong reformer in
spite of and an early big push on privatization
and price and exchange rate liberalization.

• Why ? perhaps because
• Russia was the cradle of bolshevism and central
  planning. Command institutions were ingrained in
  society for more than 80 years.
• Initially a very high budget deficit resulting in
  part from the need to subsidize certain large
  enterprises, the Far North and other friends.
• Owing largely to the fiscal problem, monetary
  policy was bad from the start (high inflation
  later a fixed exchange rate and its usual
  terrible consequences).
• Difficult relations with other former Soviet
  republics, notably as regards the Ruble Area
• A foreign debt of more than 80 billion (a
  generous bequest from Michael Gorbachev)

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The Evolving Structure of Output Weak Reformers

• Output of old goods-producing state enterprises
  falls continuously
• Output growth in the privatized sector is very
  small or nil
• Aggregate output falls continuously

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A Weird Case Belarus

• A weak reformer, Belarus nevertheless experiences
  a recovery of aggregate GDP five years into the
  period.
• But this recovery is results almost fully from a
  recovery in the output of state enterprises

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Possible explanations of the Belarusian puzzle

• Belarus is the largest provider of state
  subsidies to enterprises (see chart on the right)
• The government of Belarus has been able to impose
  discipline on the enterprises, limiting asset
  striping and tunneling. Belarus score in the
  2004 Transparency International Corruption
  Perception Index is 3.3, worst than Estonias 6
  but much better than Russias 2.8, Kazakhstan and
  Ukraines 2.2, and Turkmenistans 1.9.

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Some preliminary regression results
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In Conclusion Victor Chernomyrdins Contribution
to the Reform of the Russian Economy.

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