Thursday, May 21, 2009

How Normal Is Russia Now?

This is a Guest Post contributed by Professor Vladimir V. Popov, of the New Economic School, Moscow.

From 1989 to 1998 Russia experienced the transformational recession – GDP fell to 55% of the pre-recession 1989 level. In 1999-2008 the Russian economy was recovering at a rate of about 7% a year and nearly reached the pre-recession peak of 1989. But in 2009 due to the collapse of oil prices and the outflow of capital caused by world recession Russian GDP is expected to fall by 5-10%. Now, with some luck, the pre-recession level of GDP is to be surpassed only in 2010-12. For two decades there was no improvement in living standards for most of the Russians.

In 2004-05 Andrew Schleifer and Daniel Treisman published various articles claiming that Russia was A Normal Country (for instance, in Foreign Affairs, March-April 2004). They compared Russia with Brazil, China, India, Turkey and other developing countries and argued that in terms of crime, income inequalities, corruption, macroeconomic instability, and other typical curses of the third world Russia is by far not the worst – somewhere in the middle of the list, better than Nigeria, worse than China. In short – a normal developing country.

The USSR was an abnormal developing country. The Soviet Union put the first man into space, had about 20 Nobel Prize winners in science and literature, with universal free health care and education – the best among developing countries – low income inequalities and relatively low crime and corruption. By 1965 Soviet life expectancy increased to 70 years – only 2 years less that in the US even though per capita income was only 20-25% of the US level.

The transition to the market economy in the 1990s brought about the dismantling of the state – the provision of all public goods from health care to law and order fell dramatically. The shadow economy, which the most generous estimates place at 10-15% of the GDP under Brezhnev, grew to 50% of GDP by the mid 1990s. In 1980-85, the Soviet Union was placed in the middle of a list of 54 countries rated according to their level of corruption, with a bureaucracy cleaner than that of Italy, Greece, Portugal, South Korea and practically all the developing countries. In 1996, after the establishment of a market economy and the victory of democracy, Russia came in 48th in the same 54-country list, between India and Venezuela.

Income inequalities increased greatly – the Gini coefficient (ranging from 0 to 100%, the higher, the higher are inequalities) increased from 26% in 1986 to 40% in 2000 and 42% in 2007. The decile coefficient – ratio of incomes of the wealthiest 10% of the population to incomes of the poorest 10% – increased from 8 in 1992 to 14 in 2000 to 17 in 2007. But the inequalities at the very top increased much faster: in 1995 there was no person in Russia worth over $1 billion, in 2007, according to Forbes, Russia had 53 billionaires, which propelled the country to the second/third place in the world after US (415) and Germany (55) - Russia had 2 billionaires fewer than Germany, but they were worth $282 billion ($37 billion more than Germany's richest). In 2008 the number of billionaires in Russia increased to 86 with a total worth of over $500 billion – 1/3 of GDP.

Worse of all, the criminalization of the Russian society grew dramatically in the 1990s. Crime was rising gradually in the Soviet Union from the mid 1960s, but after the collapse of the USSR there was an unprecedented surge – in just several years in the early 1990s crime and murder rates doubled and reached one of the highest levels in the world. By the mid 1990s the murder rate stood at over 30 people per 100,000 of inhabitants against 1-2 persons in Western and Eastern Europe, Canada, China, Japan, Mauritius and Israel. Only two countries in the world (not counting some war-torn collapsed states in developing countries, where there are no reliable statistics anyway) had higher murder rates – South Africa and Colombia, whereas in countries like Brazil or Mexico this rate is two times lower. Even the US murder rate, the highest in developed world – 6-7 people per 100,000 inhabitants – pales in comparison with the Russian one.

The Russian death rate from external causes (accidents, murders and suicides) by the beginning of the twenty-first century had skyrocketed to 245 per 100,000 inhabitants. This was higher than in any of the 187 countries covered by WHO estimates in 2002. It was equivalent to 2.45 deaths per 1,000 a year, or 159 per 1,000 over 65 years, which was the average life expectancy in Russia in 2002. Put differently, if these rates continue to hold, 1 out of 6 Russians born in 2002 will have an ‘unnatural’ death. To be sure, in the 1980s murder, suicide and accidental death rates were quite high in Russia, Ukraine, Belarus, Latvia, Estonia, Moldova and Kazakhstan—several times higher than in other former Soviet republics and in East European countries. However, they were roughly comparable to those of other countries with the same level of development. In the 1990s these rates rapidly increased, far outstripping those in the rest of the world.

The mortality rate grew from 10 per mille in 1990 to 16 in 1994, and stayed at a level of 14 to 16 per mille thereafter. This was a true mortality crisis, a unique case in history, when mortality rates increased by 60% in just 5 years without wars, epidemics or volcanic eruptions. Never in the postwar period had Russia such high mortality rate as in the 1990s. Even in 1950-53, during the last years of the Stalin’s regime with high death rate in the labor camps and consequences of the war time malnutrition and wounds, the mortality rate was only 9-10 per mille as compared to 14-16 in 1994-2008.

Russia became a typical “petrostate”. Few specialists would call the USSR a resource-based economy, but Russian industrial structure changed a lot after the transition to the market. Basically, the 1990s were the period of rapid deindustrialization and “resource-lization” of the Russian economy, and the growth of world fuel prices since 1999 seems to have reinforced this trend. The share of output of major resource industries (fuel, energy, metals) in total industrial output increased from about 25% to over 50% by the mid 1990s and stayed at this high level thereafter. Partly this was the result of changing price ratios (greater price increases in resource industries), but also the real growth rates of output were lower in the non-resource sector. The share of mineral products, metals and diamonds in Russian exports increased from 52% in 1990 (USSR) to 67% in 1995 and to 81% in 2007, whereas the share of machinery and equipment in exports fell from 18% in 1990 (USSR) to 10% in 1995 and to below 6% in 2007. The share of R&D spending in GDP was 3.5% in the late 1980s in the USSR, but fell to 1.3% in Russia today (China – 1.3%, US, Korea, Japan – 2-3%, Finland – 4%, Israel – 5%). So today Russia really looks like a “normal resource abundant developing country”.

To understand Russia now one has evaluate the record of the last 20 years. In the late 1980s, during Gorbachev’s perestroika, the Soviet Union was aspiring to join the club of rich democratic nations, but instead degraded in the next decade to the position of a normal developing country that is not considered either democratic or capable of engineering a growth miracle. For some outsiders a “normal developing country” may look better than that of an ominous superpower posing a threat to Western values. Those on the inside however feel differently. Most Russians want to find a way to modernize the country so as to make it prosperous and democratic. But they also feel that something went very wrong during the transition; the policies and political leaders of the 1990s are totally discredited. And so we find ourselves with Putin-Medvedev’s policy getting 50% plus approval rate even in the midst of economic recession.


D. Mario Nuti said...

Russian “realised” transition certainly was a terrible let down compared with the vision of perestroika. Not unnaturally Valadimir Popov regards Russia’s move from an above normal developing country to a normal developing country as a demotion. But Russian transition, at least seen from a distance by a European observer, is both better and worse than Vladimir suggests.

Russia was, as Vladimir argues, an above normal developing country for its achievements in space, science and literature, health and education, income equality and low incidence of crime and corruption. But Russia was irredeemably sub-normal in other respects.

First, it had endemic shortages, queues and black markets. Prices were much lower than necessary for market-clearing, therefore there was excess money in the hands of both households and firms. The rouble was like a lottery ticket. A shortage economy on that scale was an aberration, responsible for the failure of many attempted reforms.

Second, there was the inability – by an otherwise above-normal country – to identify and satisfy the simplest, most elementary needs of the population. Not to speak of local near-famine conditions just before transition.

Third, Soviet living standards were not sustainable. Economic decline started well before the transition began and therefore cannot be attributed entirely to it. Post-transition decline cannot be compared with pre-transition above-normality but only with the downhill course that the country would have taken without transition.

Having said this, Shleifer and Treisman (2004) as well as Vladimir may be somewhat overgenerous in considering Russia today as entirely normal.

The statement that “compared to other countries at a similar level of economic and political development, Russia looks more and more the norm than the exception” (Shleifer and Treisman, 2004) does not amount to much. By definition, any comparable country will look like the norm, for otherwise it would not be comparable. But the questions remain open of whether economic performance is in line with potential and whether standards of political development are satisfactory.

That Russia is not a normal country is well known to anybody who has to obtain a Russian visa. A spirited rebuttal of the “normality” thesis is found in Stephen Rosefelde ("Russia: an Abnormal Country", The European Journal of Comparative Economics, 2005, 2:1, 3-16), who reminds us of Shleifer’s stake in the issue, as Yeltsin’s former economic advisor and US AID backed promoter of voucher privatisation, as well as having been instrumental in the Spring 1992 cancellation of state contracts that slashed the market value of state enterprises slated for privatisation.

In Rosefelde’s view: “A nation that has no independent judiciary, no independent parliament, no parliamentary control over the secret services, no politically important independent media and a public sector ruled by the state … cannot be democratic, no matter how closely it approximates other development norms. Likewise, a country where a rent-granting autocrat creates and manipulates economic agents with market power for his own purposes, in the name of lofty social purposes, cannot be workably consumer sovereign. Outcomes necessarily violate the western requirements that it is the people’s preferences which completely govern supply, not those of the authorities” (Rosefelde 2005, p.13). Unfortunately it must be recognised that the same propositions apply today to a great extent to the cradle of market democracy, the UK, under Gordon Brown.

D. Mario Nuti said...

Readers should not interpret Vladimir Popov ’s silence as acquiescence. Vladimir is busy and travelling and will comment in due course. Meanwhile he e-mailed me saying:

“Very interesting and provocative, although I cannot agree on everything. Would you exchange five years of your life for the privilege to live without shortages, queues and black markets? Economic decline started in 1989, the transition began in 1987. "Near-famine conditions just before transition" is a myth. Consumption (including consumption of major food products) was growing until the late 1980s. And with respect to democracy, the relationship is more nuanced than Rosefield suggests (See Popov and Polterovich,”

My reply: “I cannot agree that the transition began in 1987. Transition cannot be deemed to have begun before markets clear, which they did in Russia in 1992. The loss of five years life expectancy would not have been there if Gorbachev had been a better economist, (as I have argued in my paper on counterfactual perestroika Near famine? I said "LOCAL near famine conditions", and I am aware that there were problems with food distribution rather than total food supply, but that is part of the system. I know your paper with Polterovich, but that applies to Rosefelde(2005) rather than me.”

Popov: “Maybe we do not differ that much, we need to talk more to come to "destiny-determining consensus" (as Gorbachev used to say). For one thing, life expectancy increased under Gorbachev (due to anti-alcoholic campaign and euphoria), but it fell under Yeltsin.

More when Vladimir Popov will re-emerge from Moscow.