Pasquale Tridico Ass. Professor Dept. of Economics - University Roma Tre tridico@uniroma3.it

1. Paper to be presented at the University of Perugia, 11 marzo 2013 Socio-economic development in transition economies after the fall of Berlin wall(Institutions, Human Development and Economic Growth in Transition Economies, Palgrave 2011) Pasquale Tridico Ass. ProfessorDept. of Economics - University Roma Tre tridico@uniroma3.it

2. 9 November 1989…the main symbol

3. 20 years after, the financial crisis The end of a dream?

4. Aim of the paper • To analyze the development paths of Transition economies (i.e. East European Countries and Former Soviet Republics) which experienced a transformation from planned economies to market economies since the fall of Berlin wall in 1989. • Developing an interconnected analysis of varieties of capitalism which takes into consideration: • Institutional change • Economic growth • Human development

5. Main hypothesis • Appropriate (political) institutions and socio-economic variables such as education and health expenditure improve the endowment of people capabilities and lead to better human development. • In turn, an improvement in human development variables such as education level and life expectancy causes an acceleration process in economic growth. Institutions  human development  growth The reverse of the neoclassical paradigm.

6. How – methodology • Econometric exercises to test the causality hp (OLS for 28 countries) • Following the Varieties of Capitalism literature (Amable, 2003; Jessop 2002; Amoroso 2003; Brenner 2005), countries will be classified by taking into consideration their main macroeconomic characteristics and institutional variables withdrawn from the EBRD such as: • Enterprise and Privatisation • Market & Competition • Trade & Openess • Financial System • Wage Nexus • Social Investments (health and education)

7. How – methodology (2) • Following this classification, I found, among former communist economies, 5 types of socio-economic models, i.e.: • competitive capitalist model • corporatist model • dirigiste model • hybrid model • state capitalist model. I tried to test whether the type of system has an impact on the path of development of the country, considering both economic growth and human development.

8. Communist states in Eastern Europe and the Soviet Union, 1989

9. Background and history of transition • 70s and 80s: Lower performance and inefficiencies. ↑ gap East-West • 1980s: Gorbachev’s Perestrojka ; Solidarnosc • June 1989 Semi-free election in Poland and first non-communist gvmnt (Sept. 1989) • October-November 1989 Berlin events • Debate on three routes for transformation: • Social democracy (third way) • Anglo-Saxon model ASAP (Shock therapy)  WC • Eur Continental model Corporatist (German)/ Dirigiste (French)

10. Literature and debate… • Shock therapy vs Gradualism (Sachs 1991; Balcerowicz 1993; Nuti, 1999; Kolodko 1997; Aslund 2001) • Institutional change, path dependency and evolutionary theory (Matzner and Kregel, 1992, Murrel, 1992; Rodrik, 1999; Lin 2004) • Sequence of policies and institutions (Stiglitz 1998; Svejnar 2002; Rodrik 2004) • International integration, Eu integration, IMF and WB constraints; FDI (Mundell 1997, Baldwin 1993; Lavigne, 1999; EBRD) New consensus  Institutions matter

11. Economic performance and social costs in TEs • As Kornai said (2006, p.37): the transformation has been unique: 1) it took place peacefully and it was an astonishingly fast process towards western mode of development. 2) it was characterised by deep economic troubles. •  successes and failures and ≠among countries.

12. Gradualism vs Shock therapy -15%/-20% cumulate -20%/-50% cumulate

13. Delayed unstable with shock (no) therapy -50%/-60% cumulate twice during 1990s -60%/-65% cumulate during a long period in 1990s

14. Level of real GDP in 2004 and in 2008 (1989=100)

15. 2009. Another 1989? With the crisis, Avg GDP 2009 = Avg GDP 1989.

16. The current economic crisis • The 20° anniversary similar slump as in 1989-90. • The Baltic States, open and small economies, are the most hit (Compet. Cap). • Turkmenistan and Uzbekistan, (State Capitalist economies) have high GDP rates of growth. • Poland (1%), Albania (+1.2%), Azerbaijan (+3%), Tajikistan and Kyrgyzstan (+0,5%) managed relatively better the recession. • Average rate of recession in TEs is -5.2%. In 1990, the first year of transition for almost all TEs, recession was about -4.6%

17. Social & political problems social problems: increase in poverty, inequality, corruption, gender discrimination, unemployment, migration, poverty among farmers and workers, and income divergences between regions within the same country. KOWALIK (2008)

18. Freedom house (Political rights and Civil liberties) 2008

19. Russia Russia is not an electoral democracy. In the presidential election of March 2008, state dominance of the media was on full display, debate was absent, and incumbent Vladimir Putin was able to pass the office to his handpicked successor, Dmitry Medvedev. A similar issue in 2012 Vladimir Putin &Dmitry Medvedev Source: Freedom House 2009

20. Autocracts: ruling presidents • Tajikistan: President Emomali Rahmon (Rakhmonov), 1994-present • Kazakhstan: PresidentNazarbayev, 1990-present • Azerbaijan: PresidentHeydar Aliyev, 1993-2003 (died);President Ilham Aliyev, 2003-present • Kyrgyzstan: President Akayev, 1991-2005 (resigned); President Bakiyev 2005-present and civil war in 2009-10 • Uzbekistan: President Karimov, 1991-present • Turkmenistan: President Saparmurat Niyazov, 1992-2006 (died); President Berdymukhammedov, 2006-present • Belarus: Lukashenko • Ukraine: Yanukovich

21. Institutions matter, but which ones? • institutions and development: EBRD, WB and Freedom House indicators are used. • political institutions such as Freedom index (political rights and civil liberties); and Voice&Accountability index associated with socio-economic variables such as education and health expenditure lead to human development, which in turn improves GDP.

22. EBRD Market economy institutions matter? • EBRD indexes rank between 1 and 4+. These indexes concern the following variables: • Enterprise restructuring, • Small and Large Scale Privatisation, • Price liberalisation, • Foreign Trade, • Competition, • Banking and Financial Institutions • Infrastructures.

23. An interesting paradox…

24. Scatter EBRD index 2009 and GDP growth 1989-2009

25. An interesting paradox: 3 groups of countries • the most advanced countries in terms of EBRD index, having also the highest levels of GDP, considering 100 the level of GDP in 1989. • countries which never started a process of reforms or are very slow reformers with a relatively high GDP level

26. The third group as in a trap • Between Azerbaijan (A) and Slovenia (S) on the horizontal axis, are all the countries with low-to middle level of reforms. These countries are also characterised by low-to-middle GDP levels.  GDP growth, among TEs, is not connected with market economy reforms, which are the ones suggested by EBRD.

27. This is confirmed by a simple regression model GDP (cumulative growth) vs EBRD indexes

28. Varieties of capitalism • EBRD institutions are not correlate with growth. What about the type of socio-economic model? • Amoroso (2003) and Jessop (2002), identified 4 types of economic systems, such as the Anglo-Saxon model, the Corporatist model, the Dirigiste model, and the Social-Democratic model. Plus Socialist Markets • Amable (2003) found similar stories, with 5 types of capitalisms, taking into consideration 5 institutional forms (competition, wage nexus, financial sector, social protection and education)

29. My contribution for TEs (28 c.) • Competitive capitalism • Corporatist capitalism • Dirigiste capitalism • Hybrid capitalism • State capitalism

30. My contribution for TEs

32. History and path dependency • The majority of CEECs adopted Corpor and Comp models, Austro-Hungarian Empire, German and Anglo-Saxon influence. • The Hybrid model: countries with a very mixed historical and political background such as Bosnia-Her., Romania and Bulgaria unstable transition. (Limited Poland) . • CIS: almost all of them adopted Dirigiste capitalism and State capitalism models. far away from the French one. Here is linked to semi-authoritarian regimes “State leaders” or parties or families or oligarchs. • The tradition and the development of liberal values play also a role. In CIS democracy and freedom are restricted

34. An overall and comparative socio-economic development rank Corporative capitalism: medium to high level of privatisation, wage regulation, high level of Social investment. Freedom and democratic institutions Some mix: Fdi control, trade Tariff revenue, Foreign owned bank, State owned bank, stock market capitalisation

35. Type of models and growth • Variables which identify a competitive capitalist model such as competition, high levels of trade (or similarly, high share of foreign-owned banks), a developed private sector, and advanced reforms towards a market economy (high EBRD index), are not significant for economic growth nor for the per capita GDP

36. GDP and growth vs competitive capitalist model

37. GDP and HDI vs Corporatist capitalist model • On the contrary GDP and HDI in particular are correlated with 1) higher levels of public expenditure in health and education and 2) democratic political rights and civil liberties. • These two variables identify better a corporative capitalist type of socio-economic model.

38. Estonia Slovak Czech Rep 1 Latvia Lithuania Poland Hungary Bulgaria Croatia Romania Slovenia Bosnia H Kyrgyz Rep Macedonia Albania Montenegro Georgia Ukraine Armenia Serbia 0 Kazakhstan Moldova Tajikistan Russia -1 Azerbajan Uzbekistan Belarus -2 Turkmenistan -2 -1 0 1 2 Scores for factor 2 Scatter for Factor 1 and 2 Scores for factor 1 Source: own elaboration

39. Factor analysis • Hungary and Slovenia have higher levels of Factor 2, which characterizes better a Corporative model, • Slovak and Estonia have higher levels of Factor 1 which characterizes a Competitive capitalist model. • CIS are scattered close to each others, identifying the Dirigiste model, and Turkmenistan, Belarus and Uzbekistan, staying in another corner of the figure, are captured in the State capitalist model. • A Hybrid model brings together Romania and Bulgaria.

40. GDP and HDI vs relevant variables for the Corporatist capitalist model

41. From institutions to development through capability • Main assumption: countries which experienced ↑ in HD  economic growth: consequence of an expansion of people capabilities. • appropriate institutions + investments socio-economic dim.  better level of capability endowment: Institutions  Capabilities & HD  Growth (with Development)

42. What is an institution • institutions are rules and social norms which structure social interaction. They can effectively enlarge/diminish capabilities, by the way in which they affect political rights (freedom, democracy, participation) and social rights (public resources for collective purposes).

43. The link between institutions & capabilitiesA country with democracy & freedom people capabilities (because of collective lobbying) +than a country where these rights are restricted. Public choices  collective benefits

44. Testing hp: from institutions to human development

45. From human development to economic growth Test for 2002 Test for 2008

46. There can be EG without HD but if there is HD, then there will definitely be economic growth. HD: sufficient condition

47. Path of development and democracy (0) middle class and social capital create democratic institutions (1); then democracy, social capital and middle cl. bring about human development and economic growth (2). the middle class, and social capital are reinforced by the human development and growth (3) (top down process).

48. Final remarks 2 • Dirigiste capitalist economies perform worst: growth without development; voice without social opportunities • State capitalist economies had growth without voice do not enjoy pluralism and democracy • Poverty and inequality in the majority of countries. CEECs better than CIS and former Yugoslav. A common thing  in the life expectancy • The worst situation can be found in Russia, Ukraine, Moldova, Tajikistan, Kyrgyzstan and Georgia, where both the levels of HDI and of GDP are still lower today than in 1989-90. • Higher HDI is always associated with democracy and semi-democracy regimes rather than authoritarian regimes.

49. Competitive vs Corporatist model of Capitalism • EBRD market oriented reforms are not significant for growth. • Competitive capitalist model var. (competition, +trade/foreign-owned banks, +private sector, +reforms toward a market economy) are not significant for economic growth nor for the per capita GDP • Corporatist capitalist model var (+levels of public expenditure in health and education and democratic political rights and civil liberties) cause a higher HDI and GDP per capita.

50. Final Remarks on Variety of capitalism • Freedom and social rights: the corporative model is able to guarantee a better combination! As a good soc.team wt 11 • Countries of the corporative model show always better socio-economic var.: inequality, poverty, Voice & Accountability, HDI. Countries of the Dirigiste model show worse indicators. • A better institutional framework improves the level of HD: institutional framework  human development  economic growth