edinburgh.ppt

A QUARTER CENTURY OF ECONOMIC TRANSFORMATION:

Who Leads , Who Lags, and What are the Consequences ?

Oleh HavrylyshynThe George Washington University &

University of TorontoPresentation to Edinburgh School of Business

Kyiv, July 21, 2014

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OUTLINE

I. MOTIVATION AND PURPOSE II. CONCLUSIONS REACHED IN EARLIER REVIEWS

OF TRANSITION PROGRESSIII. UPDATE TO 2014. TRANSITION INDICATORS

AND ECONOMIC PERFORMANCEIV. MAIN CONCLUSIONS BASED ON QUARTER

CENTURY OF EVIDENCEV. KEY LESSONS FOR UKRAINE POST-MAIDAN

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I. MOTIVATION AND PURPOSE

• From the beginning many debates on how best to do transition : gradual (GRAD) ,or rapid/ big-bang (BB )? what to do first–build institutions? liberalise economy ?, privatise?

• After 25 years in 25+ countries, there is a lot of experience and statistical data to seek ex post answers

• AIM OF THIS STUDY IS TO SHOW WHAT HAPPENED , WHICH COUNTRIES MOVED FASTER, WHICH PERFORMED BEST.

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II. CONCLUSIONS OF EARLY STUDIES • Studies before 2000 raised concerns that BB reforms caused

huge social pain , building market institutions was being ignored,etc. ( Murrell, Roland, Nobelist J. Stiglitz WB Chief Economist)

• Svejnar (2001) agreed on concerns but suggested less problem in Central Europe and Baltics ( CEB) which did do BB reforms, and were performing much better than FSU countries. Balcerowicz (2003 ) argued categorically that BB cases doing much better.

• Havrylyshyn ( 2006, 2007 ) :nineties studies came too early , and that looking at 15 years of experience pointed to opposite conclusion: countries doing early and rapid reforms had best results

• {{ OH 2007 published in Ukrainian as “ KAPITALIZM DLYA VSIH CHE KAPITALIZM DLYA OBRANYH, “ KYIV-Mohyla press}}

III. UPDATE TO 2014 OF MAIN QUANTITATIVE INDICATORS

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TABLE 1. EBRD INDICATOR 1995 COUNTRY GROUPS

COUNTRY GROUP EBRD : LIBERALIZATION EBRD : INSTITUTIONS

CENTRAL EUROPE 3.7 2.7

BALTICS 3.7 2.3

FSUREFORMERS 2.2 1.4

FSULAGGARDS__________________

NOTE.- FSULAGGARDS= BEL,TRKM,UZB// FSUREFORMERS=OTHER 9 excl BALTICS

1.9______________-

NOTE: -- EBRD INDEX VALUES: 1.0 –NO MARKET REFORMS;; 3.5 = WELL-FUNCTIONING BUT STILL PARTIAL MARKET ;; 4.3= FULLY FUNCTIONING MARKET, COMPLETED TRANSITION

1.4

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FIGURE 1.EBRD INDICATOR OF PROGRESS TO MARKET ECONOMY

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FIGURE 2: Countries by Group and Rank Ordered By TPI in 2013

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FIGURE 3: GDP per capita by Country Groups

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TABLE 2: Average Cumulative FDI Inflows per capita 1989-2012 by Country Groups (US$)

Country Groups Average Cumulative FDI Inflowsper capita 1989-2012 (US$)

Central Europe 5,671.66

Baltic Countries 7,011.72

FSUREF 1,878.88{{ ukr~~ 800-900 $)

FSULAG 1,888.17

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FIGURE 4: Freedom Rating by Country Groups (1990-2013)

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TABLE 3: HDI Averages by Country GroupsCountry groups:

EBDR rank 1990 1995 2000 2003

Central Europe(change from 1990) .815 .821

(+.006).861

(+.046).864

(+.049)

Baltic(change from 1990) .812 .779

(-.033).789

(-.023).847

(+.035)

SEE(change from 1990) .752 .749

(-.003).713

(-.039).793

(+.041)

FSUREF(change from 1990)

UKRAINE

.772

.795

.721(-.051)

,745(-.050)

.663(-.109)

.748(-.047))

.730(-.042)

.766(-.029)

FSULAG(change from 1990) .767 .743

(-.024).704

(-.063).739

(-.028)

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TABLE 4: Trends in GINI by Country Group

1988-92 1993-6 2002-3CE 22 29 28

BALT 25 35 36SEE(3) 21 27 33CISM 27 42 38CISL 25 Na 33

OECD (low) DNMRK 25(high) USA 40

DEVPG (low) INDNSIA 30(high) COLOMB 49

CHINA Rural 36Urban 32

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FIGURE 5: Actual Trend of Sequencing Liberalization and Institutional Development

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FIGURE 7: Rule-of-Law Score (WB) New Member States

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FIGURE 8: Rule of Law - FSU.9

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FIGURE 9: Rule-of-Law - East Asia

IV. MAIN CONCLUSIONS AFTER QUARTER CENTURY OF

EVIDENCE

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SUMMARY BY 2014• THE EARLIER STAB,LIB, THE FASTER RECOVERY AND

GREATEST GDP CATCH-UP TO EU• FDI FAR GREATER FOR EARLY REFORMERS : FDI

IMPORTANTLY : SURGE BEGAN WELL BEFORE EU ACCESSION IN 2004.

• EARLIER STAB /LIB,-- LEAST S0CIAL PAIN ; BEST MEASURE FOR THIS =HDI ; CE SAW VERY LITTLE DECLINE IN HDI 1990-1995 AND BY 2000 SURPASSED 1990 VALUES. BALTICS GREATER INITIAL DECLINE, BUT BY 2000 FULLY CAUGHT UP TO CE

• LONGEST AND DEEPEST DECLINE OF HDI CAME IN FSU12; i.e.-GREATEST SOCIAL PAIN IN GRADUAL REFORMERS

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DIFFERENCE SINCE MID-2000 STUDIES • CONCLUSIONS LARGELY UNCHANGED FROM

MID-2000’s – CEB FAR AHEAD OF OTHERS, CLOSE TO COMPLETING TRANSITION –IN BRIEF: TRANSITION PATH ESTABLISHED EARLY, BY END OF FIRST DECADE OR SO

• SOME EXCEPTIONS: SEVERAL FSU9 PARTIALLY CAUGHT UP –esp. GEORGIA, TO LESSER DEGREE MOLD. –UNEVENLY,ON SOME INDICATORS, UKRAINE

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DEMOCRATIZATION PATHS DIFFERED SIGNIFICANTLY

• EARLY ECONOMIC REFORMERS [CEB] ALSO ACHIEVED EARLY AND SUBSTANTIAL DEMOCRATIZATION

• IN DELAYED/GRADUAL ECON. REFORMERS (FSUREF,FSULAG) SOME LIMITED DEMOCRATIZATION TOOK PLACE AT START BUT MUCH LESS THAN CEB

• WORSE :MOST FSU REVERSED ABOUT 2000-2005 TO RE-SOLIDIFY AUTHORITARIANISM

• EXCEPTIONS –GEORGIA SIGNIFICANTLY MORE DEMOCRATIC SINCE 2002, UKR IN CYCLES OF PEOPLE REVOLUTIONS (ORANGE, EURO MAIDAN ); MOL QUIETLY WITHOUT COLOUR WITHOUT REVOLUTION , STEADILY IMPROVED .

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NEW CONCLUSIONS ON INSTITUTIONS

• EARLY MARKET LIB DID NOT PREVENT OR POSTPONE GOOD INSTITUTIONS – INDEED COUNTRIES WITH EARLY STAB&LIB WERE ALSO FASTEST ON INST.

• WHY SO ?- LUSTRATION ENSURED LEADERS STRONGLY COMMITTED TO REFORM , TOOK QUICK ACTIONB ON STABILISATION OF FINANCES/BUDGET, & MARKET LIB; HAD STRONG DESIRES FOR “EU” ( common refrain early ‘90’s : “RETURN TO EUROPE “) –

• BEST PUT BY MARTI LAAR, 1ST Pres. Of Estonia, in book The Little Country that Could :

GOOD BYE LENIN , AND JUST DO IT !!

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MORE ON INSTITUTIONS ….• LEADERS PROCLAIMING INTENT TO DELAY MARKET LIB IN ORDER TO

DEVELOP GOOD INSTITUTIONS FIRST, –DID NOT DO THIS ; [NOT ASINGLE CASE OF INST PRECEDING LIB. EXISTS!] . IN FACT THEY WERE EVEN SLOWER ON INSTITUITONS THAN CEB:

• LAST FACT RAISES SUSPICION THAT THESE LEADERS WERE EITHER IGNORANT OR INSINCERE : MAYBE THEY WERE NOT AT ALL COMMITTED TO REFORMS , BUT PURSUED RENT-SEEKING SELF INTERESTS?

• GRADUALIST THEORY WAS NOT WRONG- BUT IT MAY HAVE PROVIDED ANTI-REFORM INTERESTS A “SCIENTIFIC “ JUSTIFICATION FOR DELAYS , GRADUAL REFORMS –WHICH GAVE THEM TIME TO BECOEM THE NEW CAPITALISTS , THE FEW

• AS A RESULT , SOCIAL WELL-BEING OF POPULACE , ITS WELFARE , SUFFERED , AND AN OLIGARCHIC RULING CLASS EVOLVED.

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INSTITUTIONAL REFORMS STALLED IN NEW MEMBERS?

• OFTEN SAID THAT INST. REFORMS IN CEB, NEW EU MEMBERS SLOWED, STAGNATED, AFTER2004 ACCESSION ( e.g. EBRD TR 2013)

• NOT ENTIRELY CORRECT – ONLY TRUE IN ABSOLUTE MEASURE OF CHANGE OF TPI. YES, ANNUAL INCREASES OF TPI MUCH LESS IN 2005-2014 THAN IN FIRST FIFTEEN YEARS – BUT THIS IS NOT A GOOD MEASURE OF SPEED OF CHJANGE IN CASE OF AN ASYMPOTIC CURVE!!

• TECHNICALLY, TPI CURVE APPROACHES ASYMPTOTE = 4.3, HENCE AS IN MANY PHYSICAL AN SOCIAL PHENOMENA, BY DEFINITION THE ABSOLUTE ANNUAL CHANGE (1st derivative) DECLINES.

• FURTHER THE REAL SOCIAL POLITICAL PROCESS OF TRANSITION STARTS WITH “LOW-HANGING FRUIT” {STAB /LIB} WHICH CAN BE DONE QUICKLY, THEN MORE SLOWLY GOES ONTO THE COMPLEX, POLITICALLY DIFFICULT “ 2ND GENERATION REFORMS “

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WASHINTON CONSENSUS FAILED ?

• NUMEROUS CRITICS SINCE 2000 CONTEND WASHINGTON CONSENSUS FAILED, INSTITUIONS MATTER MORE THAN BASIC STABILISATION AND MARKET LIBERALISATION

• CONSIDER FIRST EXACTLY WC STATES , AS OPPOSED TO CARICATURE BY CRITICS…….. Next slide

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FIGURE 10: 1992 Statement of Washington Consensus

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THE HISTORICAL FACTS ON SEQUENCING OF INSTITUTIONS AND LIBERALIZATION

• I AM SORRY TO BRING THIS NEWS TO CRITICS OF THE WASHINGTON CONSENSUS, BUT THE ACTUAL PATTERN FOR LEADING REFORMERS (also the BEST PERFORMERS) IS QUITE SIMILAR TO THE CONCEPTUAL CHART OF THE WC (Fischer.Gelb, 1992) !!

• ALL NEW INDICATORS OF INST DEV. ( LIKE WBWGI

GOVERNANCE INDICATORS, WB EASEOF DOING BUSINESS) SUGGEST CEB COMPARES VERY WELL TO ASIAN TIGERS – I WOULD CONCLUDE THEY ARE THUS MORE OR LESS WHERE THEY SHOULD BE – INCOMPLETE YES, BUT VERY ADVANCED

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V. LESSONS FOR UKRAINE POST-MAIDAN.1

• BEST RESULTS, BEST OUTCOME FOR SOCIETY AND FOR POPULATION COMES THROUGH EARLY AND RAPID REFORMS

• VESTED INTERESTS WHO BENEFIT FROM UNREFORMED ECONOMY NEVER SAY MARKET REFORMS ARE BAD, BUT SUGGEST NEED TO AVOID SOCIAL PAIN, TAKE TIME TO STUDY SPECIAL CIRCUMSTANCES OF UKRAINE,etc.

• UKRAINIAN POPULACE SHOULD KNOW BETTER –WE HEARD THAT ALREADY IN 1992-94, AND REPEATEDLY AFTER THAT. ( PM FOKIN ,1992 “ Lyude ne hotovyi na rynok”– should have been understood correctly as “ “Lydery ne hotovyi na rynok !!)

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LESSONS FOR UKRAINE .2• NOT A COINCIDENCE THAT CEB (plus some Balkan cases :

Bulgaria, Romania, Croatia ) PERFORMED MUCH BETTER THANUKRAINE BECAUSE FOF EFFORTS TO BECOME EU MEMBERS , TO ACCEPT THE EU ANCHOR REQUIREMENTS.-- AND PRES. POROSHENKO IS RIGHT TO INSIST PUBLICLY THAT THE EVENTUAL GOAL IS ACCESSION , NOT JUST ASSOCIATION

• TURN TO EU DOES NOT MEAN TRADE WITH RUSSIA DECLINES !! RUSSIA WILL ALWAYS BE NATURAL, LARGE PARTNER : viz. POLAND EXPORTS TO RUSSIA BOOM AFTER MEMBERSHIP IN 2004 ( cause of current decline in Russia exports ? Russian restrictions that may be violations of WTO principles – but that’s another lecture !)

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AS KOTLYAREVSKYI MIGHT SAY :A TEPER ,NA LATYNKU :

THREE LATIN PRINCIPLES FOR POST MAIDAN ACTIONS BY LEADERS AND POPULATION 1. CARPE DIEM 2. FESTINA LENTE3. OBLITI PRIVATE, PUBLICA CURATE ( this inscription on the entrance of the Rector’s Palace in Medieaval Ragusa/Dubrovnik was directed at the ruling nobility and means: “set aside private concerns, and take care of public matters. “ Ragusa was considered a great economic success , rivalling mighty Venice in Mediaeval period. )

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DYAKUYUTHANK YOU!