Thursday, October 29, 2009

Last Rites

On 2 October the IMF General Director Dominique Strauss-Kahn, in Istanbul ahead of the 2009 Annual Meetings of the World Bank Group and IMF, gave a speech at the Central Bank of Turkey entitled “Making the Most of a Historic Opportunity”. “Countries are diverse, but civilization is one, and it is necessary to participate in this single civilization for the progress of the nation”, he said, quoting a magnificent but very ambiguous sentence uttered 75 years ago by Kemal Atatürk, the founder of the Republic of Turkey. One could argue that civilization's progress is the result of different countries and cultures sorting out their differences in peaceful dialogue, and that the best path for civilization can only be assessed afterwards by results.

In his speech, Strauss-Kahn takes – rightly – a positive view of the global macroeconomic policy response to the current crisis, and outlines “three principles that can frame our efforts to re-shape the post-crisis world…: First, international policy collaboration is essential. Second, financial stability demands better regulation and supervision. And third, the international monetary system must be more stable, and anchored by a global lender of last resort.” No question about the soundness of the first two principles. The third principle – which naturally envisages the IMF taking on the expanded role of “International Lender of Last Resort”, is so sketchy as not to mean very much at all.

Traditionally a National Central Bank acts as a Lender of Last resort by providing unlimited liquidity on demand, in the currency it manages, to banks within its currency area, at a penal rate against good quality financial assets. Thus for instance on Black Monday (19 October 1987) the Fed immediately announced its readiness to act in that capacity. Or, the Bank of England made the same announcement in July 1991 at the time of the BCCI (Bank of Credit and Commerce International) collapse. The statements alone were sufficient to calm down financial markets.

More recently the Governor of the Bank of England, Mervyn King, in his letter to the Treasury Committee on 12 September 2007, discussed the rescue of Northern Rock in these terms:

“Central banks, in their traditional lender of last resort (LOLR) role, can lend “against good collateral at a penalty rate” to an individual bank facing temporary liquidity problems, but that is otherwise regarded as solvent. The rationale would be that the failure of such a bank would lead to serious economic damage, including to the customers of the bank. The moral hazard of an increase in risk-taking resulting from the provision of LOLR lending is reduced by making liquidity available only at a penalty rate. Such operations in this country are covered by the tripartite arrangements set out in the MOU [Memorandum of Understanding] between the Treasury, Financial Services Authority and the Bank of England. Because they are made to individual institutions, they are flexible with respect to type of collateral and term of the facility. LOLR operations remain in the armoury of all central banks.”

It should be immediately clear that “Lender of Last Resort” is an inappropriate label for any role that the IMF might take in providing global liquidity in a crisis. Presumably it would provide finance denominated in the currency basket known as Special Drawing Rights. But to whom? To commercial banks throughout the world (as the label suggests), including investment banks, and hedge funds, or only Central Banks, and/or governments? And against what? Government paper, illiquid but marketable assets, toxic assets, or in the form of an unsecured loan? If against nothing, on what scale? At what interest rates and, above all, subject to what conditionality? Clearly before even beginning to talk about an international lender of last resort there is a very great deal of detail that need to be considered and settled. As we all know “The devil is in the detail.”

Saturday, October 17, 2009

Transition economies: a worse nosedive than anticipated

“At the start of this year, the global economic crisis was hitting central and eastern Europe with unimaginable force. Any illusion that this region was somehow immune from the “western” credit crunch and the subsequent financial squeeze was definitively quashed. Output was declining at startling rates that would only become apparent much later in the Spring.”
“But the danger signs were everywhere. There was real risk of a genuine emerging market crisis – that financial systems in a number of countries would collapse entirely, that currencies would run out of control, that there could be sovereign defaults.” (Anthony Williams, EBRD Head of Media Relations, The road to a fragile recovery, 16 October 2009)

Now they tell us

I don’t remember the EBRD ever signaling any such danger. Slowdown, yes, in their forecasts for 2009 and 2010, that from optimistic growth expected in May 2008 got progressively worse to insignificant growth in January 2009 and an average 5.2% contraction for the 29 countries of EBRD operation in May 2009. I suppose it is part of the institutional duties of the EBRD not to encourage pessimistic expectations that may become self-fulfilling, but then we should note this for future reference and remember that, when the EBRD forecasts a significant slowdown, what they really mean is an impending disaster.

How was the disaster averted? “That this horror scenario didn’t happen – Anthony Williams continues – was a result partly of unprecedented international support, with the EU and organizations like the IMF providing huge macroeconomic packages that were flexible and tailored to specific country needs [to Latvia, as well as Hungary, Ukraine, Romania and other CEE]. Other IFIs, including the EBRD, stepped in to provide micro support to banking groups and corporates with little or no access to liquidity. Crucially western banks, a dominant force in financial sectors in many countries in central and eastern Europe, did not retrench as feared. The authorities in eastern Europe responded with policies aimed at dealing promptly and effectively with the crisis, even though those responses were in some cases immensely painful and politically unpopular.”

At least in Latvia, it is not at all clear that a systemic crisis has been averted. And evidence that western banks “did not retrench as feared” has not been provided by the EBRD; perhaps they will in due course, in their Transition Report 2009 due in November 2009 or elsewhere. Did western banks really not retrench at all, or on average? Did they retrench less than feared, and how much were they feared to retrench and by whom? Certainly not by the EBRD. And recently Swedbank, the largest Swedish lender in the Baltic region, “has threatened to scale back its presence in crisis-hit Latvia if the country goes ahead with controversial plans to limit the amount lenders can collect from mortgage-holders” (Stefan Wagstyl, 28 September 2009).

Otherwise, is everything fine now in transition economies? It might be in the Czech economy, which has been taken off the list of EBRD countries of operation because it no longer needs its credit – the first to deserve this upgrade – and, most annoyingly, off EBRD statistics. Not fine at all in the 28 EBRD remaining client countries (including Turkey since last year), where the average nosedive now expected for 2009 turns out to be more pronounced than the Bank anticipated in May 2009: a contraction of 6.3% instead of 5.2%, with Estonia, Latvia, Lithuania, Armenia and Ukraine expected to decline by well over 10%.

“Signs of positive growth in the third quarter of 2009 suggest that the recession is now bottoming out in many countries of the EBRD region. However, any upturn in 2010 is likely to be fragile and patchy.” (EBRD press report, 15 October 2009) For 2010 the EBRD now forecasts an average growth for the region of about 2.5%, which is 1% higher than it forecast in May 2009, but since it starts from a level which is now 1.1% lower than it was expected then, the higher growth forecast for 2010 actually masks a lower absolute level of GDP than previously anticipated. And “There are likely to be significant cross-country differences in output growth in 2010”, with Latvia, Lithuania, Hungary and Bulgaria expected to continue to contract until 2011. “It is also clear that the social costs of the global economic crisis are only likely to be felt in earnest next year, when corporate bankruptcies and unemployment will continue to rise”, said EBRD Chief Economist Erik Berglof (Ibidem)
The same factors that transmitted the global crisis to transition economies – the contraction in world trade and tight credit conditions – are now causing its continuation. “The Institute for International Finance, a bankers’ group, estimates that in 2007 $382bn – more than 40 per cent of the financial flows into all emerging markets – went into CEE. The IIF forecast in June that even with all the extra support the IMF, the EU and the EBRD are putting into the region, this year’s figure would be about zero” (Stefan Wagstyl, FT, 28 September 2009).


Transition countries with a fixed exchange rate regime – excluding euro-zone members but including Bulgaria, Latvia or Lithuania – are facing a slower and more painful adjustment, the burden of which falls on wages and prices and therefore ultimately demand and employment. Other factors explaining country heterogeneity are the differences in their fiscal positions, the weakness of banking systems, and dependence on commodity exports. The full set of the EBRD October forecasts is reproduced below, or can be downloaded from the EBRD website ).

“Russia’s economy is expected to shrink by 8.5 per cent on a year-on-year basis in 2009, followed by a rebound in late 2009 and growth of about 3 per cent in 2010 year-on-year. Kazakhstan will suffer a much milder output decline this year (of about 1.5 per cent) but the recovery is expected to be weak, in the order of +1.5 per cent.”

“Relatively faster 2010 growth, in the order of between about 2 and 5 per cent is expected in some internationally competitive countries with relatively sound pre-crisis banking systems, such as Albania, Poland, Slovakia, and Slovenia.”

“Some commodity rich countries including Azerbaijan, Mongolia, Turkmenistan, and Uzbekistan, whose financial systems were smaller and less affected by the crisis, and whose growth is mostly driven by commodities, are also expected to grow faster in 2010, in the order of 5 per cent or more.”

“In Hungary, which was hit particularly hard at the start of the crisis, the crisis has been contained thanks to strong international support as well as sound domestic policies. However, its growth is expected to remain slow in 2010 due to necessary fiscal adjustment and a continued credit crunch. It is expected to show slightly negative growth next year, driven by a weak economy in late 2009 and early 2010” (EBRD press report, 15 October 2009, cited above).


The crisis spells – at least temporarily – a reversal in the convergence process that had accompanied EU enlargement. In 1999-2008 income per head in the EU (15) grew at an average yearly rate of 1.41%, and in the Euro-zone at 1.47%, while in the new member states it grew at 2.00% (Poland) or more (from 2.29% in Hungary to 4.17 in Romania). “Growth over the medium term in the EBRD region is also likely to be below the trend experienced over the last decade” (Erik Berglof, quoted). The crisis is reinforcing the heterogeneity of national performances among transition economies and within the EU.

It is true that some of the factors making for vulnerability to external shocks – such as trade openness, economic and financial integration – are also factors that will reinforce recovery trends in an upturn. But there are other vulnerability factors – such as weak banking systems, fiscal over-stretching, or high private and public indebtedness made worse by mismatching of assets and liabilities – that need tackling before the global upturn can be expected to pull national economies out of recession or stagnation. And membership of a single currency area can make countries more resilient to a downturn but cannot be a cure after the event: a rush to a precipitous euro-zone enlargement today – necessarily preceded by a devaluation – apart from being against the Maastricht rules would not make any sense.

EBRD capital increase

Before the crisis the EBRD was confronted with demands from the US, its largest shareholder, to reduce the scale of its activities in transition economies. Now, as anticipated last May, the Bank is seeking a 50 per cent capital increase, an extra €10bn, from its shareholders – some 60 governments, including European Union members, the US and Japan – to compensate for the decline and reversal of capital inflows into the area. Thomas Mirow, the EBRD president, in a letter to shareholders warns that working with its current €20bn capital, the Bank would have to limit its annual lending to about €8bn in 2009-10 and reduce it to €6bn thereafter. “Activity would shrink while the recovery is still precarious,” while “raising the capital by €10bn to allow the bank [would] commit €9bn-€10bn annually, or €20bn in total extra funding in 2010-15. By mobilizing extra capital from private investors, the total additional funds raised could reach €60bn” (Stefan Wagstyl, FT, 28 September 2009). A final decision will be taken at the EBRD’s next annual meeting in Zagreb, in May 2010.

Mr Mirow states that “The region will need to change its growth model – away from reliance on easy finance and commodities, and towards the development of domestic financial markets, strong institutions and a diversified production base.” If conditions improve “further and faster than is currently expected”, the extra capital might not be needed and could be returned after a review in 2015. Not a chance, regardless.

Tuesday, October 13, 2009

Markets can be expensive

In Central Eastern Europe and the Former Soviet Union the transition to an open market economy was accompanied by the rise and persistence of unemployment, the rise of inequality and of poverty. These phenomena were particularly serious because they meant a drastic reversal of earlier conditions of full employment, greater equality and low poverty incidence. Moreover higher inequality could not be justified as the reward for efficiency, as in normal market economies, but – particularly in Russia – was mostly the result of unrestrained pillage by privileged operators.

Before the Fall

The traditional, pre-Transition, Soviet-type system was characterized by full employment of labour, indeed by over-full employment: excess demand for labour at the prevailing wage rate. While full employment was obviously desirable, it was not the result of a specific policy but the by-product of persistent repressed inflation, i.e. excess demand for commodities at artificially low prices below equilibrium, which translated into excess demand for labour. Of course there was nothing positive about over-full employment, which was only a cause of high labour turnover and inflationary wage drift, which in turn contributed to the perpetuation of a state of excess demand for goods.

Wealth was almost entirely in public hands (in Albania even private ownership of cars was forbidden); the little that remained private was a source of direct satisfaction rather than income. By itself, this made distribution of income among the population more equal than in a market economy where income is derived also from private wealth (which is always more unequally distributed than labour incomes). There were also factors making for greater equality across Soviet republics and countries within the bloc: the emphasis on industrial development in every country, regardless of efficiency considerations; the socialization of enterprise profits and their re-distribution via the state budget; large scale subsidies via the All-Union Soviet budget, and via the under-pricing of raw materials and oil within the USSR and Comecon.

By World Bank standards of poverty – equivalent to $2.15 per head per day at 1996 Purchasing Power – in the socialist countries of Europe and Central Asia in 1988 on average fewer than 4% of the population lived in such absolute poverty.[1]


The initial prolonged recession of the early 1990s was naturally accompanied by shrinking employment and the rapid emergence of labour unemployment, converging to similar average values and dispersion typical of European Union countries. The many queues for goods typical of the old, typical shortage economy were replaced by a single but much longer queue for jobs. In the CIS, however, there were lower rates of job loss and limited job creation, leading to an increase in under-employment and reductions in real wages.[2]

Table 1 provides data for unemployment rates and employment ratios for 1998–2006. While unemployment remained high in Central and Eastern Europe, it tended to decrease in the rest of the area. Employment ratios did not have a clear trend, with several countries remaining under 60% and only a few being close to the Lisbon target of 70% for the EU member states. Employment rates tended to be higher in the CIS countries than in CEE countries, but this partly reflect higher under-employment and lower unemployment benefits.
The global economic crisis of 2008–2009 has already raised unemployment and reduced demand for migrant labour.

Table 1. Unemployment rates and employment ratios in CEE/CIS

Source: UNICEF (2006), TransMONEE data bank, updated 2009, Florence.
Note: Results from national Labour Force Surveys, except for Albania, Belarus, Armenia, Azerbaijan, Kazakhstan (2004 and 2005), Kyrgyzstan, Tajikistan and Uzbekistan, which are official data. The different sources may use different criteria, for example for registering unemployment, working activities in the informal sectors, temporary jobs.


Egalitarian ideals associated with socialist ideology should not be exaggerated. First, there was significant residual real inequality due not so much to monetary income differentials but to privileged access to goods for the Party nomenklatura: this was no small matter, as it affected access to housing, motorcars, holiday facilities, health and education, foreign travel, imported and luxury goods as well as simple items of daily consumption which were in scarce supply for the ordinary citizen. Second, in 1931 Josef Stalin in person had condemned the “leftist leveling of wages” (uravnilovka), and urged the introduction of sharp wages differentials between skilled and unskilled and between difficult and easy jobs. And there were prizes for managers for plan-fulfilment and over-fulfilment, discretionary prizes for workers, money to be made by mediators (tolkach) in the informal semi-legal exchange of materials among enterprises, in the black and grey markets among consumers, the reliance on "pull" (blat’) through "acquaintances" (znakomstvo) to obtain scarce goods and services; a few legal markets, such as kolkhozian food markets and flea markets (barakholki). Bribes and large gifts (prinoshenie) were also common. All these factors distorted the significance of the degree of inequality as measured through official monetary incomes.

Subject to these qualifications, pre-transition measures of inequality, such as the Gini coefficient (=0 for absolute equality; 1 for absolute inequality, a situation in which one subject takes all) were impressively low in the Soviet Union and Central Eastern Europe, about 0.25-0.30. From 1989 to 2004 Gini coefficients increased significantly nearly everywhere in the transition, to around 0.35-0.40. Indeed, in many countries especially in the CIS they soon surpassed the degree of income inequality normally found in western market economies. The exceptions are the Czech Republic, where the Gini coefficient was and still is lower, though rising from 0.198 to 0.235; Belarus, with a similar trend; and Slovenia where it fell slightly from 0.265 to 0.243 between 1991 and 2004 (see UNICEF 2006).

“In recent years inequality has either increased at a much slower rate, or – in some cases – even declined. For example, in those CIS countries, where levels shot up in the mid-to-late 1990s, there have been signs of reductions; while in the Central European countries, where levels increased less dramatically in the 1990s, rates of increase have continued to be slow but steady. However, in most of the region, levels of inequality have remained high in the period of economic recovery, suggesting that growth has not always been inclusive in nature” (UNICEF, 2009).

An apparently similar degree of income inequality – Russia in 2007 had a Gini coefficient of 42%, i.e. a more equal income distribution than China’s 47% – can conceal a profound diversity. In China, and in “normal” capitalism, income inequality depends mostly on entrepreneurial success and is the price to be paid for efficiency; in Russia it depends primarily on the pillage of national resources during the transition and therefore it is a form of inefficient inequality.

Table 2. Trends in disposable income inequality, selected countries, 1989-2006

Figure 1. Gini coefficient of income distribution in China and Russia, 1978-2006[3]
Source: Popov (2009).


Post-socialist transition, by itself and together with the associated deep and protracted recession, brought about a drastic increase in poverty. By 1998 it was estimated that, in the transition countries of Europe and Central Asia, one out of every five people survived on less than $2.15 per day (at 1996 Purchasing Power), whereas a decade earlier “fewer than one out of twenty-five lived in such absolute poverty” (World Bank, 2000). “There is little doubt that poverty has increased dramatically in the region. Moreover, the increase in poverty is much larger and more persistent than many would have expected at the start of the process.” By 1998 the people living in poverty had reached 20%. Poverty began to fall after 1998, with the generalized resumption of economic growth; by 2003 the poor represented only 12% of the population.[4]

With respect to the predicament of the poor in developing countries, the material hardship associated with poverty in the transition was made much worse by the drop from earlier achieved levels and expectations, and the loss of security. Sudden large scale unemployment, prolonged nonpayment of salaries, unpaid or decimated pensions, hyperinflation and loss of savings, the loss of free or subsidized social services “made people feel unusually vulnerable, powerless, and unable to plan for the future.” For most of the new poor, transition brought “the destruction of "normal" life and accustomed social patterns.”[5]

“The highest levels of absolute poverty are in poor countries of Central Asia”: Tajikistan (70 percent), and the South Caucasus (with Georgia with a poverty rate of 50 percent in 2003). “Yet most of the poor and vulnerable in the transition countries of the Region are in large middle-income countries such as Kazakhstan, Poland, Russia, and Ukraine.” Those most at risk are “the young, residents in rural areas and in secondary cities. The unemployed, people with little education, and those belonging to underprivileged minorities, such as the Roma are also at great risk. Most of the poor are working poor”.[6]

Russian $-Billionaires

Conversely, in the early 2000s Russia saw a spectacular increase in the number of dollar billionaires. In the Soviet era there might have been, at most, a dozen dollar-millionaires in the shadow economy. In 1995 there were no billionaires in Russia. In 2007, according to Forbes, Russia had 53 dollar-billionaires, in third place after the US (415) and Germany (55), but in second place in terms of their wealth, which in Russia totaled $282 billion ($37 billion more than Germany’s billionaires). In 2008 the number of billionaires in Russia increased to 86, with a total wealth of over $500 billion, corresponding to one third of a year’s GDP. Russia’s “primitive accumulation” took the form of privileged access to natural resources at prices lower than in the world market, to subsidized credit and to privatized assets also on privileged terms.

Trends in the current recession

In a recession such as that of 2008-2009 it is plausible to conjecture that initially inequality falls – because the rich lose proportionally more than those who have less to lose – and poverty rises because the poor cannot afford to lose what they have (viceversa in a boom). This is probably what has been happening in transition economies, though it is too early to tell. If the crisis lasts, losses among the poor – primarily through unemployment – become more substantial, and inequality as well as poverty may increase.

Lack of markets can be expensive. But so can the operation of markets. Is this an integral part of the human condition?

[1] World Bank (2000), Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia, Washington D.C.
[2] UNICEF (2009), Innocenti Social Monitor 2009, Florence.
[3] Popov Vladimir (2009), “The long road to normalcy: where Russia now stands”, Conference Paper, UNU-WIDER, Helsinki, 18-19 September 2009.
[4] Alam Asad, Mamta Murthi, Ruslan Yemtsov, Edmundo Murrugarra, Nora Dudwick, Ellen Hamilton, and Erwin Tiongson (2005), Growth, poverty and inequality – Eastern Europe and the FSU, World Bank, Washington.
[5] World Bank 2000.
[6] Alam et al., 2005.

Monday, October 5, 2009

Plans and Markets: A Matter of Life and Death

The twentieth anniversary of the Fall of the Berlin Wall on 9 November 1989 has generated a mushrooming of conferences on the subject on the run-up to that date, often taking place in parallel. On 18-19 September 2009 in Helsinki, WIDER – the World Institute for Development Economics Research, United Nations University – organized a major international conference: “Reflections on Transition: Twenty Years after the Fall of the Berlin Wall”. One of the most exciting papers was presented there by Elizabeth Brainerd (Brandeis University), on “The Demographic Transformation of Post-Socialist Countries: Causes, Consequences and Questions” [still password protected until the end of the month; I will provide a link anyway in the near future]. This excellent paper really drives home the fact that plans and markets are a matter of life and death. In the past twenty years transition countries have experienced spectacular demographic changes, remarkable both in scope and speed, in many ways converging towards Western Europe.

Fertility, marriage, childbearing

“The formerly socialist countries were characterized by a distinct pattern of fertility and family formation: marriage and childbearing took place at relatively young ages (compared with Western Europe) and were near-universal”. Rates of childlessness were near the biological limit of about 5 per cent; in 1965-1989 the Soviet fertility rate had stabilized at about the replacement level of fertility of 2.1 children per woman. Abortion rates were high.

In contrast, “Virtually every country in Eastern Europe and the Former Soviet Union [FSU] experienced a steep decline in fertility beginning in the late 1980s or early 1990s”, as illustrated in Figure 1. Bulgaria and Ukraine fell below the lowest fertility level ever recorded in a European country during peacetime. The abortion rate actually fell (in Russia it plummeted from over 100 per 1000 women aged 15-49 in 1990 to 50 in 2000; in the early 1990s Poland introduced a near-ban on abortion). The decline in birth-rates was due to contraceptives being better and more readily available and to the rapid increase in the financial cost of abortion.

There was a rapid shift towards later (first) childbearing throughout Eastern Europe (see Figure 2); former Soviet republics continued early and near universal first births, with the postponement of second and higher-order births, but are generally moving in the same direction.

Figure 1. Total Fertility Rate. Selected Countries.

Figure 2. Age at first birth. Eastern Europe and France, 1970-2007.

The connection between this trend and the post-socialist transition process is confirmed by these changes being slower in the transition laggards like Belarus. Age at first marriage has also increased, approaching that of Western Europe (Figure 3).

“The share of extramarital birth increased across the region beginning in the early-to-mid-1990s; the highest rate is in Estonia (nearly 60% of all births) which rivals the out-of-wedlock birth rates of Scandinavian countries.” In Russia – and probably elsewhere – the increase in extra-marital births reflects to a large extent a shift from registered marriage to cohabitation.

Figure 3. Age at first marriage, women, 1970-2007

Figure 4. Percentage of births out of wedlock. 1970-2007

A most disturbing development is the “striking upward trend in the sex ratio [of males to females] of children age 0 to 4 in all three Caucasian republics”: Armenia, Azerbaijan and Georgia, where it has risen above the biological norm of 1.05, matching the ratios prevailing in India and China. This may reflect selective abortion, due to wider availability of sex detection before birth, and/or an actual or perceived deterioration in the condition of women.

Income, Education, Uncertainty

Traditional economic theory (exemplified by Gary Becker’s A Treatise on the Family, 1981) predicts an inverse relationship between income and fertility: while children are a ‘normal good’ (“when income increases couples desire more children”), the time-intensive nature of their rearing represents a significant opportunity cost, and its increase holds births down. Brainerd notes that “women’s relative wages have increased on many East European countries” after the transition, thus validating this theory. The trouble is that, for all or most of the ‘nineties throughout the area income per head actually fell, by more than could have been compensated for women by the rise in their relative wages. Thus, pace Becker, the impact of income on fertility that he predicts should have had the opposite sign.

A related explanation offered by Brainerd is “the increase in the [rate of] return to education which has occurred across nearly all transition countries, in turn inducing large increase in tertiary enrollment rates”. Empirical studies “indicate a negative relationship between education levels and the timing of the first birth, and … the strength of this education effect has increased significantly since the start of transition. Women with more education are also more likely to be childless than women with less education”.

But there is a much more convincing argument. “In the context of the transition countries … it seems likely that the uncertainty surrounding the change from a socialist system to a capitalist one would influence a couple’s decision to have children”. Investment theory predicts that “for investment decisions which are irreversible (e.g. children) and which can be postponed, there is an option value in waiting to make the investment”. The role of economic uncertainty is confirmed by a number of empirical studies (showing, for instance, the impact of unemployment uncertainty especially for women on the probability of childbirth in Germany 1992-2002).

There are additional factors: “One of these is the decrease in the number of state-supported nurseries and pre-school facilities and the near-disappearance of daycare facilities provided at enterprises.” Another “simply the decrease in the number of middle-aged men” due to the dramatic increase in mortality rates among men aged 25 - 54 in the 1990s (discussed below); “if women are reluctant to raise a child as a single mother, this too would be expected to account for at least part of the decline in fertility over the period.”

On lower fertility rates, later marriages and childbearing, high and rising extra-marital births, transition countries have come to look more and more like Western Europe.


Mortality trends diverged sharply in the FSU and in Eastern Europe. After a rise in life expectancy in the late 1980s, undoubtedly due to Gorbachev’s anti-alcohol campaign, “between 1990 and 1994 the death rate among working age men in Russia increased by 70 percent, from 759.2 to 1323.7 deaths per 100,000 population. Male life expectancy at birth fell from 63.7 years to 57.4 years during that period, while female life expectancy at birth fell from 74.3 years to 71.1 years. A similar increase in mortality rates occurred in many other countries of the former Soviet Union in the early 1990s, in particular in Belarus, Ukraine, and the three Baltic countries.“ Some of these declines were reversed in the late 1990s but their size and large and erratic swings are unprecedented in European countries in peace time and the absence of famines or epidemics.

These mortality trends coincided with the process of transition to a market economy, but the same process was accompanied by opposite trends in Eastern Europe, where “mortality rates fell and life expectancy rose throughout the region”, in spite of similar – though milder and less protracted – trends in GDP losses and unemployment. In particular, “The unprecedented increase in cardiovascular mortality in the former Soviet Union in the early 1990s was nearly matched by an unprecedented decrease in cardiovascular mortality in Eastern Europe.” The difference between the two groups is summarized in Figures 5 and 6.

Figure 5. Male life expectancy at birth. Selected FSU countries

Figure 6. Male life expectancy at birth. Eastern Europe

In the 1990s infant and child mortality declined almost everywhere in the region; the traditionally vulnerable groups, children and the aged, avoided significantly higher mortality during the transition. In the FSU the mortality crisis affected primarily middle-aged men. “In Estonia and Russia (and many other former Soviet countries), the increase in death rates for men age 25 to 54 between 1989 and 1994 was astonishing. In Estonia, for example, the death rate for men aged 40 to 44 increased from 5.93 deaths per 1,000 men in this age group in 1989 to 13.19 deaths per 1,000 in 1994, an increase of 122 percent. Over the entire transition period …, the increase in death rates among middle-aged men remained high in Russia, but had begun to decline in Estonia and the other Baltic republics.” An initial deterioration in life expectancy at birth occurred at the very beginning of the transition in other countries, especially Hungary, but the “pattern of large declines in mortality rates across most age groups by 2007 is similar for all East European countries for which data are available, including the Czech Republic, Poland and Romania”.

The mortality crisis among middle-aged men in the FSU republics was primarily caused by a tremendous increase in deaths due to circulatory diseases (heart disease and strokes; also rising in Bulgaria and Romania in 1989-94) and due to external causes (including suicides and homicides). After the mid-nineties these death rates declined but remained at least as high as before the transition. In the other East European countries, deaths due to circulatory diseases for men in the age-group 25-54 declined substantially between 1989 and 2007; among other things, because of improved diet and better medical care. “… the speed and magnitude of the [mortality] decline in Eastern Europe may be unprecedented”.

“Did Russians drink themselves to death?”

“Most analysts believe that alcohol consumption is one of the major causes of the large swings in mortality in the western former Soviet Union in the 1990s,” together with stress and possibly diet as contributory factors. Stress has been associated with unemployment, increase in inequality, migration and divorce. Artificially low prices for food, especially meat and fats, and scarcity of fruits and vegetables, made for a bad diet. Otherwise, other risk factors – smoking, hypertension and high cholesterol levels – in the FSU were lower than in western countries and mildly improving over the 1990s. Individual alcohol consumption is virtually impossible to estimate; probably two factors raised the impact of alcohol, namely binge drinking (leading to increased arrhythmias and heart attacks) and the consumption of “surrogate” alcohol. Surrogates, all untaxed and cheaper than vodka in alcoholic content, include homemade alcohol (samogon), and “non-beverage” alcohol, such as after-shave, anti-freeze and lighter fluid, all characterized by high content of ethanol and other toxic ingredients ”… Autopsy studies and surrogate alcohol studies provide persuasive evidence that alcohol consumption played an even more important role than previously thought in the increase in deaths due to both cardiovascular and external causes in Russia”.

Brainerd stresses that there remain unanswered questions. “Does alcohol consumption also explain the large swings in mortality in the other countries of the former Soviet Union besides Russia? … Why did drinking become so lethal in the 1990s? … Did alcohol consumption increase a great deal, or the frequency of binge drinking?” We know for certain that the price of food relative to the price of alcohol rose dramatically in the early years of transition in Russia, by a factor of three. The problem is that we do not know the price and income elasticity of demand for alcohol, nor the cross elasticity of demand for alcohol and its surrogates.

Population decline

The arithmetic of falling fertility, plus mortality rising above fertility, leads inexorably to a falling population, and indeed in the last two decades there were significant population decreases in most FSU countries. In Russia the population fell from 147 million in 1989 to 142 million by 2008. The loss, of 3.4 per cent, is much more dramatic if one excludes the substantial migration inflows of over 6 million (net) immigrants into Russia, between 1989 and 2008 – a fall of 11 million in the native Russian population. Table 7 shows that the Russian population decline is much smaller than that of other FSU countries: 20 percent in Moldova and Georgia, nearly 15 percent in Estonia and Latvia, 4 to 10 percent in Kazakhstan, Armenia, Lithuania and Ukraine. Similar declines occurred in Bulgaria and Romania. In the same period populations grew in the Central Asian republics (except Kazakhstan), Azerbaijan and Hungary.

Table 7. Population change 1989-2008

“Population declines are likely to continue in many countries due to the much smaller cohorts of women entering their childbearing years” – a factor which is nearly impossible to offset by the hypothetical increase in fertility that might occur thanks to Putin’s fertility ‘bonus’. Increasing life expectancy and higher immigration may make a more significant contribution to reduce population decline. But it is no accident that Goskomstat forecasts the Russian population to decrease from 142 million in 2008 to 137.5 million in 2025.


Elizabeth Brainard sees an immediate benefit from population decline, namely the “Solow effect” of raising the average capital/labour ratio and therefore, presumably, labour productivity. This effect is unlikely to materialize: existing capital equipment almost invariably embodies a technique designed for employing a given amount of labour per machine. The scope of ex-post substitutability between capital and labour is bound to be much lower than that ex-ante. Higher capital per man and higher productivity may happen only as a result of new accumulation, but this takes time. It may take twenty years for the higher investment per man (and the higher productivity of labour associated to it) to be diffused throughout the economy. In the meantime, lower capital utilization is more likely to occur than higher labour productivity on old equipment – while in the longer run the population ageing effect of demographic decline will still be operational. Demographic decline also leads to some destruction of human capital. Therefore population decline is bad for economic growth on all counts, in the short as in the medium and the long term.

Economic Determinism?

Elizabeth Brainerd’s riveting study is an eye-opener. It reveals how much our lives are influenced by the policies and institutions of the economic system in which we live, and how rapidly we can adapt to the transition from one system to another. It is frightening to see how much our individual decisions, literally on matters of life and death, are governed by economic incentives. When the state takes care of people from cradle to grave, there are simply more cradles but there may be a faster route to graves.