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A Normal Country
Andrei Shleifer and Daniel Treisman
From Foreign Affairs, March/April 2004

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Summary:  Conventional wisdom in the West says that post-Cold War Russia has been a disastrous failure. The facts say otherwise. Aspects of Russia's performance over the last decade may have been disappointing, but the notion that the country has gone through an economic cataclysm and political relapse is wrong--more a comment on overblown expectations than on Russia's actual experience. Compared to other countries at a similar level of economic and political development, Russia looks more the norm than the exception.

  Andrei Shleifer is Whipple V.N. Jones Professor of Economics at Harvard University. Daniel Treisman is Associate Professor of Political Science at the University of California, Los Angeles. For full references and data sources see http://papers.nber.org/papers/w10057.

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[continued...]

DOWN, NOT OUT

Almost everyone believes that Russia's economy contracted catastrophically in the 1990s. A report prepared for the British House of Commons in 1998, for example, claimed that living standards in Russia had "fallen to levels not experienced since the immediate post-war years." According to Goskomstat, the state-controlled body that publishes Russia's official statistics, Russian GDP per capita fell about 24 percent in real terms between 1991 (when Mikhail Gorbachev left office) and 2001 (one year into Putin's presidency). From 1991 to 1998, before the recovery, it had dropped by 39 percent.

Yet there are three reasons to think that Russia's economic performance in the 1990s was actually better than these figures suggest. First, much of the Soviet Union's output consisted of military goods, unfinished construction projects, and shoddy consumer products, for which there was little or no demand after 1991. Under a market system, firms no longer had a reason to produce goods they could not sell. Although reducing wasteful production lowered GDP figures in the short run, it improved the overall efficiency of the Russian economy. Under the Soviet system, moreover, managers routinely inflated their production figures to obtain increased bonuses. With the end of central planning, managers wished to underreport output so as to reduce their tax bills. Thus Russia's pre-reform output was probably substantially lower than officially reported, and its subsequent decline correspondingly smaller.

Second, Russia's unofficial economy grew rapidly in the 1990s. Estimating the scale of unofficial activity is difficult, but (since even underground firms require power) one technique to measure the whole economy's output is to use electricity consumption. The figure below shows the trend in official real GDP between 1990 and 2001 along with figures for electricity consumption. Although official GDP fell 29 percent during this period, electricity consumption fell only about 19 percent, suggesting that Russia's decline in output was not as sharp as indicated by the official statistics. Since firms are likely to use electricity more sparingly under market conditions, the decline in electricity consumption probably still overstates the real drop in output.

Third, other statistics suggest that average living standards fell less dramatically, or even improved, during the 1990s. Goskomstat's figures for final household consumption, for example, fell just 4 percent (in constant prices) between 1990 and 2001. Retail trade actually rose 4 percent between 1990 and 2001. And average living space per person rose from 16 square meters in 1990 to 19 square meters in 2000. The shares of households with radios, televisions, tape recorders, refrigerators, washing machines, and electric vacuum cleaners all increased between 1991 and 2000. And private ownership of cars doubled, rising from 14 cars per 100 households in 1991 to 27 cars per 100 households in 2000. The number of Russians going abroad as tourists rose from 1.6 million in 1993 to 4.3 million in 2000.

Russia has, without doubt, experienced an increase in inequality, in both income and consumption. But indicators suggest that there has been improvement even at the bottom of the social pyramid. Since 1993 (the first year for which comprehensive figures exist), the percentage of Russia's housing with running water has increased from 66 percent to 73 percent; the share with hot water from 51 to 59 percent; and the percentage with central heating from 64 percent to 73 percent. Since 1990, the proportion of Russian apartments with telephones has increased from 30 percent to 49 percent.

A closer look at the figure above also casts doubt on some common arguments about Russia's recession. A popular theory holds that Russia's economic decline was caused by certain misguided government policies pursued in the 1990s. Particularly damaging, so the argument goes, were Yeltsin's privatization program and his "loans for shares" scheme. The privatization program, implemented between 1993 and 1994, transferred shares in most firms from the government to managers, workers, and the public. This meant that by mid-1994, almost 70 percent of the Russian economy was in private hands. The loans for shares scheme, inaugurated in 1995, provided for the transfer of shares in a few state-owned natural resource enterprises to major businessmen in exchange for loans to the government. It accelerated the consolidation of a few large financial groups, led by the so-called oligarchs, who subsequently enjoyed great political and economic influence.

However, as the figure makes clear, the effects of privatization and loans for shares could not have caused Russia's economic contraction. Most of the fall in both official GDP and electricity consumption occurred prior to 1994, before the significant part of the mass privatization program was completed and the loans for shares program was even contemplated. After 1994 -- when the effects of privatization could be felt -- Russia's economic decline actually slowed, with rapid growth starting in 1999.

Comparing Russia's performance in the 1990s to that of other postcommunist countries further weakens the claim that Russia's economic malaise was exceptional. Officially measured output fell in all the postcommunist economies of eastern Europe and the former Soviet Union. It declined in new democracies, such as Russia and Poland; in continuing dictatorships, such as Belarus and Tajikistan; in rapid reformers, such as the Czech Republic and Hungary; and in very slow reformers, such as Ukraine and Uzbekistan. The universality of the contraction suggests a common cause. One possibility is the decrease in military and economically useless activities that were previously counted as output. A second possibility is the temporary dislocation that all countries experienced as their planning systems disintegrated. Consistent with both these explanations, officially measured output began to recover almost everywhere after a few years.

The patterns of relative decline in the postcommunist countries challenge another common theory about Russia's output contraction. Some argue that excessively speedy reform exacerbated the decline and compare the "gradualism" of China's economic policies favorably with the "shock therapy" of Russia's. In fact, there is no obvious relationship between speed of reform and change in official output among the east European and former Soviet countries. The group of countries that contracted least, according to the official figures, includes both rapid reformers (such as Estonia, Poland, and the Czech Republic) and slow or nonreformers (such as Belarus and Uzbekistan). Those with the largest declines also include both nonreformers (Tajikistan, Turkmenistan) and some that tried to reform (Moldova).




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