By Vladimir Popov
BERLIN, Sep 6 2021 (IPS)

The main contradiction of the modern era, and indeed of all human history, is not between capitalism and socialism, and not even between authoritarianism and democracy, but between individualism and collectivism, between public and personal interests. Countries that are getting ahead in the economic race allow themselves the luxury of individualism, prioritizing human rights, which ultimately undermines their political and economic power and causes their decline and the rise of more collectivist civilizations. It is literally the story that is as old, as the world itself…

Vladimir Popov

“Asian values” is the priority of the interests of the community (village, enterprise, nation, world community) over the interests of the individual. As a matter of fact, what is today called “Asian values”, before the 16th century Protestantism, was a universal principle of all mankind — there was no primacy of the interests of the individual over the interests of society before that time.

Collectivist values are often juxtaposed to Western liberal values, which stress the primacy of human rights that cannot be alienated from the individual under any circumstances, even for the sake of achieving the highest public good. John Rawls, political philosopher and an authority on the issue, formulated the principle of precedence of democratic values and human rights: according to him, human rights, including political rights, “are not subject to political bargaining or to the calculus of social interests.” Defenders of “Asian values”, whose roots are often sought in Confucianism, believe that, in principle, the political rights of individuals can be sacrificed for the highest public good, for example, for the sake of achieving sustained high rates of growth and social equality.

Values, of course, is largely a vague and subjective concept. Economists like to operate with something more tangible – objective and measurable categories, but there are those as well. Social harmony is based on low income and wealth inequality, which are perfectly measurable: in China and East Asia today it is lower than in other countries, if only the comparisons are made properly – adjusted for country size and level of development. And “oligarch-intensity” (the ratio of the wealth of billionaires to GDP), which measures inequality at the very top of the property pyramid, is lower in China than in most other countries.

The share of the state in the economy (government consumption as a percentage of GDP, to be precise) is higher than in states with similar characteristics, the number of violations of law and order and criminal penalties (the crime rate, murder rate and incarceration rate) is lower¹. There are other measurable objective indicators – lifetime employment and unemployment rate, the ratio of bank credit to the stock market, concentration of control over corporations, etc. There are also differences in subjective preferencesmeasured by the World Value Survey and other polls – the degree of trust in the government, the willingness to defend one’s country, the importance of family ties, and so on².

But the most important thing, of course, is the mass understanding that the country and society as a whole are more important than any individual, even the most important. For example, the one child policy, practiced in China since the beginning of reforms in 1979 and until recently, is traditionally considered in the West as a violation of the “inalienable” reproductive rights of citizens, but in China it was supported by the overwhelming majority of the population and did not raise questions.

“Ask not what your country can do for you –ask what you can do for your country,” – this famous phrase of John F. Kennedy made a strong impression in the United States and in the West, but not in China. “As if it could be otherwise” – my Chinese friend plainly noticed.

Competition of civilizations

There was a time, when it seemed that the West’s bet on personal freedom and human rights was paying off as the West overtook all other civilizations both economically and militarily. The universal feeling was that “the Rest” could only imitate the West in order to achieve the same success. However, the rise of East Asia in the post-war period, and especially the rise of its central state — China, makes one think that the “end of history” is postponed, and it is too early to end the debate on the competition of civilizations. China (and earlier — other East Asian countries based on Chinese culture — Japan, Korea, Taiwan, ASEAN countries) in the postwar period managed to raise growth rates to 7-10% and maintain these growth rates for several decades. As a result, East Asia in the second half of the 20th century became, in fact, the only large region that managed to narrow the gap in the levels of economic development with the West.

Neither Latin America, nor the Middle East, nor South Asia, nor Africa, nor the former USSR and Eastern Europe have succeeded in doing this. True, in the 1950s and 1970s, the USSR and Eastern Europe, as well as Latin America, narrowed the gap with the West. But then their model of import-substituting development ran into the dead end: Latin America after the debt crisis of the early 1980s experienced a “lost decade”, Eastern Europe in the 1990s had a transformational recession comparable only to the Great Depression of the 1930s. years.

As a matter of fact, only in East Asia there are countries that have been able to transform themselves from developing into developed – Japan, South Korea, Taiwan, Singapore, Hong Kong. There are no other states in the world that have managed to catch up with the West due to high growth rates (and not due to higher prices for resources). The last two cases can be attributed to small scales — these are cities, not countries, but there is no way to denounce thefirst three cases. Especially now, when China is following in the footsteps of these countries with a fifth of the world’s population.

The significance of this growth today is difficult to overestimate, and not only because China is the largest country in the world, but also because for the first time in modern history we are dealing with successful catch-up development based on illiberal, if not anti-liberal principles —on “Asian values ”, collectivist in their essence institutions. After the collapse of the USSR, the Chinese, or rather, East Asian, development model is gaining more and more adherents in developing countries — from Brazil to Fiji. Geopolitics and military potential matter a great deal, of course, but in the end it will be the countries with the highest economic efficiency that will dominate. “’In the last analysis, productivity of labor is the most important, the principal thing for the victory of the new social system” (Lenin).

Comparative economic and social dynamics during the COVID-19 pandemic in 2020-21 is another proof of the advantages of the collectivist model, if such proof is still needed. In China, Japan, South Korea, there was practically no increase in mortality compared to the previous period (2015-19), and life expectancy did not decrease. Of the Western countries, only Australia, Iceland, New Zealand and Norway showed such a result, while in the United States the mortality rate increased roughly by 25% on an annual basis, life expectancy decreased by one and a half years – from 78.8 in 2019 to 77.3 years in 2020. This year, 2021, life expectancy in the United States will probably decrease even more, while in China it will increase, so that China canovertake the United States in longevity.

And at the same time, China is leading in economic growth: GDP growth rates in 2020 only slowed down slightly (from 6% in 2019 to 2% in 2020; 8-9% is expected in 2021 to compensate for the previous slowdown), whereas in all other G-20 countries, except for Turkey, there was a drop in production, sometimes significant – from 5 to 10% in 2020³.

Forecast

Russia stands between East and West for almost its entire history. The modern Russian socio-economic model is partly liberal, but partly collectivist, especially after overcoming the chaos of the 90s.

Losing in the competition with the Chinese economic and social model in many ways, the West will probably try to create a united front of states, regardless of whether these states are liberal and democratic or not, to contain the rise of China and the proliferation of the collectivist model. It can be assumed that all countries that the West considers today authoritarian, from Venezuela to North Korea, will receive an indulgence for the alleged violations of human rights and democracy if only they join the anti-Chinese coalition. The West will probably try to seduce Russia with the lifting of sanctions and even the possibility of joining the Western club of “civilized countries”.

If Russia and other countries that the West considers authoritarian agree to such a compromise, the rise of China and the spread of the East Asian model may be slowed down, but not stopped. But if Russia ties its fate to China and the new collectivist model, the decline of the West could happen faster than expected.

¹ Popov, Vladimir. Why Europe looks so much like China: Big government and low income inequalities. MPRA Paper No. 106326, March 2021.

² Keun Lee and Vladimir Popov (Eds.) Re-thinking East Asian Model of Economic Development After the Covid-19. – Special Issue of Seoul Journal of Economics, 2020, Vol. 33;

Popov, Vladimir. Which economic model is more competitive? The West and the South after the Covid-19 pandemic. –Seoul Journal of Economics 2020, Vol. 33, No. 4, pp. 505-538;

Covid-19 pandemic and long-term development trajectories of East Asian and Western economic models. – Pathways to Peace and Security (Пути к миру и безопасности), 2020, №2 (59).

³ Popov, Vladimir. Global health care system after coronavirus: Who has responsibility to protect. MPRA Paper No. 100542, May 2020;

Popov, Vladimir. How to Deal with a Coronavirus Economic Recession? MPRA Paper No. 100485, May 2020.

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Excerpt:

Industrial policy – or the promotion of particular investments, technologies, industries, regions and enterprises – has been practiced by a variety of governments to try to accelerate economic growth and transformation.

The ascendance of the Washington Consensus, inspired by the neoliberal counter-revolution in economics, focused on alleged national macroeconomic mismanagement in developing countries and later, transition economies. This was typically blamed on ‘soft budget constraints’ (SBCs) in socialist states and enterprises, macroeconomic populism and industrial policy.

Vladimir Popov

While such selective support may or may not have been successful in promoting targeted industries, industrial policy has been wrongly, and sometimesdeliberately blamed for both enterprise and national level fiscal SBCs. Fiscal SBCs have been wrongly blamed on enterprise-level SBCs in socialist states, macroeconomic populism and industrial policy.

But contrary to many economists’ presumptions, in most economies, including many centrally planned ‘socialist’ ones, few enterprises were exempted from budgetary discipline. SBCs were therefore the very rare exception, not the rule, to promote desired new economic activities.

Enterprise-level SBCs did not “permeate all organizations” in socialist countries, as often claimed and assumed, but were instead quite selective, i.e., subsidies were provided to some enterprises, industries or regions, typically at the expense of others.

All centrally planned economies had both explicit and implicit subsidies. In most Eastern European and Soviet countries during 1989-1992, on the eve of transition, direct subsidies in the government budget amounted to 10-15% of national income.

In addition to direct subsidies for public utilities, housing and food, there were implicit price subsidies, particularly for users of fuel, energy and raw materials. Besides explicit subsidies from government budgets, rents from unsustainable, non-renewable resource extraction were shared with industries and consumers via lower prices.

Jomo Kwame Sundaram

Such import-substituting industrialization (ISI) typically created industries which rarely became internationally competitive and viable. There have been all too many examples of failed ISI requiring ongoing subsidization of ‘infant industries’ incapable of ever becoming internationally uncompetitive.

These industries were exposed as unviable and unsustainable with trade liberalization and the end of Soviet era trade arrangements in the 1990s. Soviet industrialization from the 1930s had survived before that due to its insulated economic environment, with the ratio of Soviet exports to GDP not rising until fuel sales abroad rose with higher prices from the 1970s.

Perestroika reforms, initiated by reformist Soviet leader Gorbachev after the mid-1980s, failed to accelerate needed enterprise reforms or economic growth, but instead led to the ‘transformational recession’ of the 1990s, greatly exacerbated by the reforms during Boris Yeltsin’s first presidential term.

Many other enterprises – mainly in heavy industries, and often relying on Soviet technology, advice and aid – in other ‘socialist’ economies and developing countries subject to Soviet influence, experienced similar fates.

Thus, nations which tried to challenge Western hegemony met similar fates despite trying to make a virtue of ‘self-reliance’ compelled by the need to cope with Western-led trade and investment sanctions.

Successful industrial policy
Most countries trying to industrialize or to accelerate industrialization started with ISI, with effective protection enabling new enterprises to produce for domestic markets by keeping out imported foreign substitutes with prohibitively high tariffs and non-tariff trade barriers.

But many IS enterprises continued to survive, even profit from such supposedly temporary tariff protection and other government support, never becoming internationally competitive as promised by the ISI strategy.

In more successful ‘late developing’ economies, government support was conditional on meeting performance criteria which effectively attracted private investments. Such investors sought more handsome ‘rents’ by accelerating technological progress, productivitand international competitiveness.

Thus, for example, ‘effective protection conditional on export promotion’ enabled the emergence of internationally competitive enterprises in some East Asian economies. Export orientation has been especially important in improving output quality to meet internationally competitive product quality and performance standards while achieving cost competitiveness.

Without more effective means for disciplining enterprises to accelerate development, export-orientation – promoted by government policy, incentives and other support – has contributed to successful catch-up growth. East Asian economies subsidized competitive export-oriented industries which accelerated economic growth and transformation, some more successfully than others.

In China, for instance, exports compared to GDP increased from 5% in 1978 to 35% in 2006, before declining to 20% in 2018, while its GDP grew at an average of 10% annually, with its population rising slower than in most other developing countries due its ‘one child’ policy.

Appropriate industrial policy needed
Budget constraints in socialist economies were generally stronger than in developing countries and no less strict than in developed countries on average. SBCs in socialist economies were never pervasive, as widely believed, but selective, i.e., subsidizing some enterprises or industries at the expense of others.

Such selective support, while typical of industrial policy, may or may not successfully promote internationally competitive enterprises, but certainly provides no empirical support for the claim of pervasive SBCs in ‘socialist’ economies.

With state-owned enterprises, strict fiscal and enterprise-level discipline, including budget constraints, have led to restructuring, and more rarely, closures. But even when budget constraints have been less than strict, they have not been pervasive, as fiscally disciplined ‘socialist’ economies could not afford otherwise.

National-level macroeconomic mismanagement in developing countries and transition economies has all too often by ideologically defined by neoliberal economics. In so far as macroeconomic challenges are real and demand pragmatic policy attention, they should not be defined by distracting neoliberal chimera of alleged SBCs variously blamed on socialism, populism and industrial policy.

Unfortunately, the mythology surrounding SBCs has been used to throw the industrial policy baby out with the bathwater of ISI cul de sacs. Much more appropriate, yet pragmatic industrial policy is needed for developing countries and transition economies to ‘catch up’, as achieved by some East Asian and other economies.

‘Ethno-populism’ has emerged and spread in recent decades in response to the mixed consequences of neoliberal globalization. It appropriates nationalist rhetoric for narrow ethnic, religious, cultural or other communal ends, typically with a chauvinist, jingoist rejection of selected Others as politically expedient.

Vladimir Popov

Politics of macroeconomic policy
Most elected governments in the world typically rely on the political support of coalitions among different interest groups, including classes. Hence, unsurprisingly, most political platforms involve what are essentially populist coalitions, within a political party or among several such groupings, seeking popular electoral support.

Mancur Olson’s notion of ‘distributional coalitions’ — i.e., political alliances cooperating to secure shared, complementary, not conflicting demands — presumed that such populist regimes typically have to raise enough tax revenue for redistribution in response to demands and pressures from interest groups.

Thus, fiscal mechanisms became central for such redistribution by determining not only the sources of state revenue, especially taxation, but also the beneficiaries and consequences of government expenditure.

Alleged ‘macroeconomic populism’ in Latin America has been used to explain its 1980s’ ‘lost decade’ as due to irresponsible fiscal policy. Other factors, such as abuse of the ‘non-system’ after US President Nixon ended the Bretton Woods system, are ignored in this narrative.

Thus, macroeconomic mismanagement, especially fiscal indiscipline, was blamed for the developing country debt dilemmas of the 1980s and the transitional economies’ problems of the 1990s.

Retrospectively, the problems of communist party-run states were misleadingly blamed on both enterprise and national level ‘soft budget constraints’ (SBCs) when, in fact, these were much more pervasive during the problematic 1990s’ transitions of ‘post-socialist’ economies.

Coping with fiscal deficits
Constrained by the unwillingness and inability to raise enough tax revenue, and the desire to redistribute in favour of particular interest groups to remain in power, governments are left with four options to indirectly finance subsidies.

Jomo Kwame Sundaram

The first is to maintain control over particular prices, i.e., selective price controls. But controls over the prices of non-resource goods still require budgetary subsidies to companies producing the goods and services.

By contrast, price controls for fuel, energy and other resource commodities can redistribute resource rents to consumers. This option, only available to resource rich countries, thus contributes to the popular ‘resource curse’ story.

A second mode of subsidization, when funds are not available, is inflationary government budget financing. The government is said to cause inflation by spending beyond its (revenue) means, i.e., the tax revenue shortfall supposedly causes inflation, i.e., ostensibly ‘imposing an inflation tax’ on everyone.

A third option is debt financing, using either domestic or external borrowings. Debt financing buys some time to maintain subsidies, but debt servicing imposes an additional burden on the government budget to service the debt with payments for both the principal and interest.

A fourth option has been to maintain an overvalued exchange rate, effectively favouring consumers over producers, importers against exporters, and consumption at the expense of savings. Rising consumption, associated with increased imports financed by external borrowings or foreign exchange reserves, can only temporarily ‘kick the can down the road’, before balance of payments problems come home to roost.

There has long been a near consensus that persistent exchange rate overvaluation is detrimental for economic growth and transformation in developing countries. Needless to say, exchange rate overvaluation is favoured by governments collecting taxes in domestic currency having to service external debt in foreign currencies, and import lobbies, i.e., those earning at home and spending abroad.

Macroeconomic populism and deficit budgets
There seem to be two ways to deal with demands for populist redistribution and to ensure macroeconomic stability. First, by eliminating demands for redistribution by reducing inequalities, especially to maintain political support for the ruling distributional coalition.

Second, those leading the ruling distributional coalition in power can redistribute income explicitly via direct subsidies, rather than indirectly. They can also try to reduce the costs of preserving political support by other means.

Research on Latin American and other countries suggests that ‘transitional democracies’ are less effective than either authoritarian regimes or well-established democratic regimes in resisting macroeconomic populism. Hence, some populist distributional coalitions have proved more politically stable and less wasteful than others.

Contrary to prevailing economic mythology, fiscal constraints in socialist economies were harder than in developing countries and no less hard than in most developed countries. SBCs in socialist economies were not pervasive, as widely presumed, but selective, i.e., involving subsidization of some enterprises or industries at the expense of others.

Such selective subsidization is typically part of industrial policy, whether successful or otherwise, but is neither an intrinsic feature of centrally planned socialist economies, nor of fiscal constraints. In many countries, especially in East Asia, such selective subsidies, not pervasive SBCs, have been successfully used to promote export oriented and high technology industries.

With democratization, small and well-organized lobbies, e.g., for resource and military interests, have been able to influence public policies far more successfully than the far more numerous, but typically poorly organized consumers, producers and others amorphously constituting the public interest.

The generally weak post-socialist states were generally unable to resist pressures from influential interest groups. Thus, subsidies and other policies supporting such industries and enterprises increasingly undermined the strict national fiscal constraints under socialism.

Fiscal indiscipline myth
Thus, increasingly widespread enterprise-level SBCs engendered deficit financing, which became associated with permanent government budget deficits, debt accumulation and other macroeconomic imbalances, resulting in high inflation, in turn worsening macroeconomic instability during such transitions.

The combination of weak states and competing powerful interest groups thus caused governments to ‘kick the can down the road’ by accumulating deficits and debt, ‘printing money’ (inflationary financing), keeping domestic fuel and energy prices below world levels and maintaining an overvalued exchange rate.

Deficit spending is just one possible ‘populist’ macroeconomic policy. This was actually rare in socialist countries, but widespread in transition economies, especially the former Soviet republics, and also common to many developing countries, especially in Latin America and Sub-Saharan Africa.

The recent and ongoing rise and consolidation of ethno-populist regimes underscore the need for more rigorous understanding of the socio-economic bases for new distributional coalitions, the conditions enabling their emergence and sustenance, as well as their likely implications.

In recent decades, many contemporary macroeconomic and financial problems have been blamed on ‘soft budget constraints’ (SBCs), with the term becoming quite popular in the economics lexicon, financial media and political discourse.

Soft budget constraints
Originally coined four decades ago to purportedly describe the economic roots of problems in centrally planned ‘socialist’ economies, it was soon also invoked for ostensibly dirigiste developing countries accused of ‘macroeconomic populism’ and ‘industrial policy’.

Vladimir Popov

It has since assumed a double life, invoked on one (microeconomic) hand to discipline large enterprises not maximising shareholder value by investing too much for the medium and long-term, and on the other (macroeconomic) hand to control ‘irresponsible’ governments running budget deficits.

First formulated by Harvard economist Janos Kornai from Hungary to explain economic behaviour in ‘socialist’ economies said to be characterised by shortage, the term was soon widely used in the literature on economic transitions from centrally planned ‘socialism’ to market capitalism.

The original claim was that state-owned enterprises (SOEs) in socialist countries were not allowed to fail even when unprofitable. According to him, such SOEs were almost always bailed out with financial subsidies or by other means. True, SOEs in socialist economies never went out of business as there were no bankruptcies.

But although such legal bankruptcy provisions were undoubtedly lacking, SOEs were often disciplined by other means in such ‘centrally planned’ economies: national budget provisioning under central planning was almost always strictly limited, managements could be changed, or enterprises required to reform.

Nevertheless, poor enterprise management and losses were blamed on SBCs. With enterprise losses assumed to result in national level budgetary indiscipline, SBCs at both levels were presumed to be related.

Hence, permanent government budget deficits, debt accumulation, high inflation and other macroeconomic imbalances were presumed to be associated with pervasive enterprise level SBCs and losses.

Global neoliberal economic ascendance from the 1980s increasingly invoked SBCs to explain economic problems at both micro and macro levels in non-socialist economies, such as the financial difficulties of US auto giant Chrysler in the 1980s and various macro-financial crises since.

Shortages and SBCs
The SBC notion was directly linked by Kornai to the ‘shortage economy’, another notion associated with him from the 1980s, with both portrayed as characteristic of centrally planned socialist economies.

Jomo Kwame Sundaram

When a government covers the losses of all unprofitable SOEs with a national fiscal SBC — a practice presumed to be widespread — both wages and profits exceed the value of output, causing both consumer and investment demand to exceed supply in such ‘shortage’ economies.

As enterprises are not constrained from increasing demand for resources, shortages emerge. Shortages are inevitable if prices are controlled and cannot rise to clear markets. But SBCs do not inevitably lead to shortages as market price increases can eliminate them.

Due to SBCs, enterprises are presumed to increase investment and production until they encounter non-financial resource constraints in the form of shortages. But no explanations have been offered as to why these should necessarily occur, either in theory or in practice.

Rather, this claim is based on the presumption that SOE managers are primarily, if not solely interested in maximizing output or growth rates. This presumption is widely believed by economists to be realistic, although there is no systematic evidence that this was indeed the case.

Selective industrial policy
Enterprise level losses over several years were also presumed to be due to SBCs, rather than the result of a deliberate policy of selective encouragement of and support for particular sectors, technological initiatives and enterprises.

In fact, such support for strategic industries and enterprises was not widespread, let alone pervasive, and did not cause major government budget deficits. Such selective industrial policy is thus easily, but misleadingly depicted as a classic cause of enterprise-level SBCs.

Such selective subsidization may or may not succeed in accelerating progressive structural transformation, but was certainly neither an intrinsic or pervasive feature of centrally planned socialist economies, and even more misleadingly, a major cause of pervasive SBCs.

In East Asia, promotion of export-oriented manufacturing and new high-tech industries contributed to successful catch-up growth and structural transformation. But such targeted subsidization conditional on meeting performance criteria did not involve national level or macroeconomic SBCs.

The problem in the USSR and East European countries was not subsidization per se, but rather, indefinite, even increasing protection through higher domestic prices for manufactures — as part of import substituting industrialization policy — perpetually protecting manufacturing SOEs not effectively compelled to become more competitive.

Budget constraints in ‘socialist’ economies
In the Soviet Union after the Second World War, from the 1947 monetary reform until the 1987 Gorbachev perestroika reforms, budget deficits and debt were kept low and transparent. Open and hidden annual inflation rates remained in the single digits, often lower than in Western countries.

In fact, budget constraints in ‘socialist’ economies were ‘stricter’ than in most developing countries, and no less ‘hard’ than in many developed countries. SBCs in ‘socialist’ economies were not all-pervasive, as often claimed, but selective, e.g., involving subsidization of some enterprises or industries at the expense of others.

Budget constraints under central planning were mostly much stricter than in market economies at similar levels of development. SOE losses could contribute to government budget deficits, but were mostly modest under ‘socialism’, with both open and hidden inflation relatively low.

Various political factors shaped macroeconomic policy choices during the 1990s’ transitions. Previously ‘hard’ budget constraints ‘softened’ dramatically in many East European countries and former Soviet republics, resulting in fast growing budget deficits and high inflation.

The new combination of weak states facing rivalrous powerful interest groups caused governments to ‘kick the can down the road’, with deficits, debt, inflationary financing, overvalued exchange rates as well as domestic fuel and energy prices below world levels.

Hence, SBCs were just one type of economic policy, rare in ‘socialist’ countries, but found in many developing countries, especially in Latin America and Sub-Saharan Africa, and ironically, in transition economies, especially in the former USSR, from the 1990s.

GDP has been increasingly challenged on many grounds as a measure of economic and social progress. Clearly, GDP does not take account of other dimensions of wellbeing, natural resource depletion or environmental damage.

What increases GDP?
There is a humourous economic fable instructive about money-metric measures of economic progress. Two economic professors find a dead rat while on a long stroll. In disgust, the older don dares his younger colleague: “if you eat it, I’ll pay you $10,000”. The younger economist makes a quick cost-benefit analysis in his head, then accepts the challenge, to his colleague’s surprise.

Vladimir Popov

Sometime later, realizing the enormity of his financial loss, the older man offers to reciprocate to get his money back. Feeling ashamed of being the only one to eat a dead rat, his younger colleague quickly agrees.

A few days later, feeling quite foolish about what happened, the younger don laments: “Looks like we both ate dead rats for nothing”. The more senior professor reassures him, “Yes, but remember we increased GDP by $20,000”.

Did gross domestic product (GDP) really increase? From a national income accounting perspective, the two ‘meals’, requested and paid for by the other, constitute paid services unlike, say, much care work by family members which goes unremunerated.

Indeed, there are many other controversies over measuring GDP.

Lower GDP better?
At the end of the 20th century, similar arguments were made regarding ‘transformational recessions’, i.e., the deep and protracted GDP contractions with the transition in former communist countries from largely collectively owned, centrally planned to much more privately-owned market economies in the 1990s.

The sharp declines were unprecedented in peacetime. The recessions lasted several years, and output fell by more than half in some countries!

‘Shock therapy’ was said to be necessary to overcome interrelated obstacles to progress in one fell swoop. Slogans such as ‘no pain, no gain’ were bandied around to justify and explain the hardship caused.

Jomo Kwame Sundaram

However, for some economists in the West, such falling ‘redundant output’, e.g., of tanks and Lenin statues, did not adversely affect the populations’ welfare.

If only such redundant output was excluded from GDP measures, it could be shown that welfare did not decline.

Thus, for Åslund, the actual output decline was much less as “Socialism was a system of waste. Soviet production usually needed three times more inputs than a Western factory since costs were irrelevant to managers. Some of these losses represented inefficiency, others theft … The investment that was sheer waste should preferably be deducted from GDP”.

Similarly, Gaddy and Ickes insisted that “value added can rise…even as domestic consumption, investment, and standards of living appear to decline”. They argued that “measured GDP” in transition economies should, but do not accurately reflect “true value produced in the economy”.

Military spending, armaments production
Åslund dismissed the recorded output contractions during the transformational recessions as “a myth”, partly due to the unusually high share of defence spending in many ‘socialist’ countries (estimated at 15~17% of Soviet GDP in the 1980s), and its reduction during the transitions.

With the transitions, these shares were brought down closer to the “internationally normal level of about 3 percent of GDP”. Åslund therefore recommended deducting 10% of GDP from statistical output losses due to transformational recessions.

For Gaddy and Ickes, less measured output due to lower defence spending represents a welfare gain, not loss, at least in such ‘communist’ economies: “This is an output fall, but welfare is certainly higher with lower defence production”.

Åslund invokes a variant of this logic to recommend deducting the excess over “the internationally normal level of about 3 percent of GDP” from total output.

As these methodologies are quite arbitrary, one may well ask why not zero or the newly recommended 2% of GDP threshold for NATO member countries? And what about military spending and armaments production in other economies?

Defence spending has long been counted as part of GDP. Defence expenditure’s share of GDP in the US was 40% in 1945 at the end of the Second World War, 15% in 1953 during the Korean War, and 10% in 1968 during the Vietnam War.

Arbitrary criteria
Soviet production may well have been inefficient, but so is most protected economic activity throughout the world. Soviet monuments may be dismissed as value subtracting, but what about those erected elsewhere, whether or not politically controversial?

Such arguments also largely ignore evidence of welfare declines due to such transformational recessions, e.g., of much reduced life expectancy.

Also, unlike much else produced in the former Soviet Union, armaments were among the few internationally competitive exports, bringing in valuable foreign exchange.

Excluding some economic activities, but not others, when calculating a country’s national income is also problematic as it is difficult to agree on what economic activities should be included to enhance welfare.

Clearly, setting criteria for what to include or exclude when calculating national income is typically a quite arbitrary exercise.

Measuring progress
Unsurprisingly, there is now a large and growing literature on the shortcomings of national income accounting, proposing many alternative indicators of economic and social progress.

Interestingly, US and European statistical offices only started national income accounts after the Second World War using Simon Kuznets’ pioneering work for the Roosevelt administration.

The Soviet Union had introduced an accounting system in the 1920s to compute its national income. This differed from GDP, e.g., by not recognizing value added by services, or by not depreciating fixed capital stock, but otherwise included data needed for computing GDP.

Undoubtedly, GDP related measures have long been criticized, and we should strive to do better to measure and improve human progress. After all, as Robert F. Kennedy famously quipped over half a century ago, GDP “measures everything, except that which makes life worthwhile”.

The world economic contraction so far this year is largely due to measures, especially at the national or local level, to contain or prevent Covid-19 contagion, particularly those restricting business operations, thus reducing economic activity, output, incomes and spending.

Vladimir Popov

Lower business and worker incomes have reduced spending, for both consumption and investment, and thus overall or aggregate demand. While there has indeed been much novel ‘financial folly’ in the last decade, responsible for its dreary ‘recovery’, and financial circumstances will retard recovery, the cruel public health dilemma posed by the viral pandemic is surely its immediate cause.

To be sure, recent economic performance in much of the world had been quite lacklustre, with no strong recovery since the 2008-09 global financial crisis and Great Recession despite the unexpected impact of ‘unconventional monetary measures’, especially in the north Atlantic economies.

Recessions and recessions
The recessions have been quite uneven, due to different circumstances and responses. Various aspects may bear some resemblance to other supply-side recessions, e.g., those caused or worsened by post-war conversion of armaments industries, oil price shocks (e.g., in 1973, 1979, 2007) and ‘shock therapy’-induced ‘transformational recessions’ in ‘post-communist’ and other economies in the 1990s.

A general recession typically involves declines in many, if not most industries, sectors and regions. Such output contraction typically implies underutilized production capacities, raising unemployment unevenly during a general recession.

In contrast, a structural recession refers to falling output in one or a few related industries, sectors or regions, not sufficiently offset by other rises. However, not all supply side recessions necessarily involve structural transformation, especially if not deliberately induced by government.

Really different this time?
A structural transformation – with unviable activities declining as more ‘competitive’ alternatives grow – may not involve overall economic contraction if resource transfers – from declining activities to rising ones – are easy, rapid and low cost.

Jomo Kwame Sundaram

Such resource transfers typically require ‘repurposing’ labour as well as plant, equipment and other ‘fixed capital’ stock. Typically, unplanned structural transformations result in supply-side recessions as resources are withdrawn without being redeployed for alternative productive ends.

Some examples include post-war recessions when converting military industries to peacetime non-military purposes after wars end. After the Second World War, US output declined for three years, and was 13% lower in 1947 compared to 1944.

The 1990s’ recessions in many post-communist economies were similarly due to poor management of structural transformations with declining agriculture and manufacturing, often despite more resource extraction, with some contractions deeper than the 1930s’ Great Depression.

In market economies, such adjustments typically increase unemployment as industries become unprofitable – e.g., due to cost spikes – and lay off workers. Growing unemployment lowers wages, while the conventional wisdom claims that cheaper labour costs will induce new investments.

Market resolution of such unexpected, massive disruptions is likely to be poorly coordinated, slow and painful, with high unemployment for years. Alternatively, governments can guide, facilitate and accelerate desired changes with appropriate relief and industrial policy measures.

Keynes needed, but not sufficient
Slumps in travel, tourism, mass entertainment, public events, sit-down eateries, hotels, hospitality, catering, classrooms, personal services and other such activities have been due to physical distancing and other containment requirements.

Such collapses will not be overcome with support, relief and stimulus measures as most such activities cannot fully resume soon, even in the medium term. Expansionary Keynesian fiscal and monetary policies to address collapses in aggregate demand have limited relevance in addressing government-mandated restrictions intended to contain contagion.

Furthermore, as Nobel economics laureate Paul Romer and Alan Garber note, “loan guarantees and direct cash transfers will stave off bankruptcy and default on debt, but these measures cannot restore the output that is lost when social distancing keeps people from producing goods and services”.

Of course, relief measures for those losing incomes can help mitigate the effects of the adverse supply and demand shocks involved, but much depends not only on direct, but also indirect, second or even third order effects, partly reflected in Keynes’ ‘multiplier’ muted by other government measures.

A necessary precondition for the multiplier to accelerate broader economic recovery is the prior existence of underutilized productive capacities. Otherwise, increasing demand will simply raise prices when output and efficiency cannot be quickly increased profitably.

One size does not fit all
Newly restructured economies will inevitably emerge from the pandemic, but some will do better than others. There is and will be greater need and demand for new as well as modified goods and services such as medical supplies, health facilities, care services, distance learning and web entertainment.

Economies trying to adjust to the new post-contagion context should use industrial policy or selective investment and technology promotion to expedite restructuring by directing scare resources from unviable, declining, sunset industries to more feasible, emerging, sunrise activities.

Enabling, incentivizing or even requiring needed resource reallocations can help overcome supply bottlenecks. China and other East Asian countries have already had some early successes in thus addressing their Covid-19 downturns.

All workplaces adversely affected by precautionary requirements will need to be safely reconfigured or repurposed accordingly. Structural unemployment problems, due to skill shortages not coinciding with available labour skill supplies, can be better addressed by appropriate government-employer coordination to appropriately identify and meet skill requirements.

Government policies, e.g., using official incentives, can thus encourage or induce adoption of desirable new practices, such as ‘clean investments’ for ‘green’ restructuring, e.g., by using renewable energy and energy saving technologies. Without such inducements, stimuli and support for desirable new investments, desired structural shifts may be much more difficult, painful and costly.

Thus, the ongoing Covid-19 crisis should be seen as an opportunity to make much needed, if not long overdue investments in desirable sunrise industries, services and enterprises, including personnel retraining and capability enhancement as well as workplace repurposing.

Vladimir Popov is a Research Director in the Dialogue of Civilizations Research Institute in Berlin and author of How to Deal with a Coronavirus Economic Recession?

In public health discussions, it is generally recognized that the social returns to health care investments are greater than the private returns, and much of such investments should be financed by the state.

Also, global benefits from national health care spending are greater than just the national benefits, while the costs of underinvestment in national health care are borne not only by the country in question, but also by the rest of the world.

Vladimir Popov

Extending life expectancy
First, governments have a responsibility to increase the life expectancy of their citizens, at least commensurate with their level of economic development, typically proxied by per capita income. Available evidence suggests life expectancy is strongly correlated with per capita income, but some countries are clearly doing better than others.

China, Japan and many European countries have higher life expectancies than their per capita incomes would suggest, whereas the converse is true of South Africa, Russia, Saudi Arabia and the US, even when comparing purchasing power parity (PPP) per capita national income, probably due to their greater inequalities in incomes and healthcare access.

Income inequalities were low and access to health care was free and universal in the ‘communist’ countries. In the 1960s, life expectancy in the Soviet Union reached 70 years – nearly the level of much richer developed countries.

But the early 1990s’ mortality crisis, following the abrupt neoliberal reforms during Yeltsin’s first term, caused average life expectancy to fall by over five years! Even after this, life expectancy in former communist countries was, on average, five years higher than for other countries at the same per capita income level.

Universal access to health care in China before the 1979 market liberalization reforms weakened over the next two decades. However, things improved thereafter with the creation of a national health care insurance system, and especially with more progressive reforms after the 2003 severe acute respiratory syndrome (SARS) epidemic.

Jomo Kwame Sundaram

Third, national governments have a responsibility to ensure a certain level of health care access for all, irrespective of personal means. The government share of total (public and private) health care spending has increased with per capita income.

But private financing shares in India, Brazil, South Korea, Saudi Arabia and the US were higher than in other countries with similar average incomes. Despite some notably exceptional less unequal countries, e.g., South Korea, greater reliance on private financing generally reduced life expectancy, implying that even high government health care spending is not enough to counter the negative impact of greater inequality.

South Africa, with one of the most unequal income distributions in the world, and its Gini coefficient inequality measure exceeding 60%, is a case in point. Over half of its relatively high (8% of GDP) health care spending comes from government. It is a higher proportion than in other countries at similar income levels, but has not raised mean life expectancy (64 years) to that of other countries at the same income level, such as Indonesia, with an average life expectancy of 71 years.

Coping with epidemics
Finally, fourth, national governments should be able to isolate and quarantine infected individuals in the event of an epidemic. Preliminary statistics for the Covid-19 pandemic suggest very varied death rates among countries.

These differences are partly explained by statistical variations: the higher the level of testing, the greater the number of infections and deaths attributable to Covid-19. As developed countries can generally afford far more testing, they may appear to have higher infection and death rates than developing countries, everything else being equal.

However, another likely explanation is East Asian governments’ early ‘symptomatic tracking’ (without testing) and isolation measures. In this regard, East Asian, Middle Eastern and North African countries have performed much better than most developed countries, where strict tracing, isolation, quarantine and ‘lockdown’ measures may be seen as draconian.

China trumps US
On all four counts, China has performed much better than the US: its life expectancy is higher than in most countries with similar levels of average income and health care spending as a share of GDP.

China’s government health care spending is higher than in other countries at a similar level of development, while its ability to contain epidemics via symptomatic tracking and isolation has been impressive.

China would thus come out well in such comparisons with the US whose health care performance indicators were generally considered poor even before the Covid-19 crisis underscored such differences, which have even larger implications in a US election year.

Vladimir Popov is a Research Director at the Dialogue of Civilizations Research Institute in Berlin.
This article is based on a longer paper with figures on the DoCRI website.

It is now clear that most East Asian government responses to novel coronavirus or Covid-19 outbreaks have been effective. In Hong Kong, Japan, Singapore and Taiwan, the number infected have remained relatively low despite their proximity and vulnerability, while containment in China and South Korea has been impressive.

Vladimir Popov

Structural recession?
The contraction is largely due to the government lockdowns to ensure ‘social distancing’ to check the spread of the virus. Mainstream economists call this a structural or supply side recession, to be overcome by expansionary fiscal and monetary policy, predicted to trigger higher inflation.

Less work has reduced incomes and hence demand. To make matters worse, share price collapses have also reduced wealth income. The crisis also offers an opportunity to reallocate resources, among industries and services, or even spatially, from one region to another.

While the pandemic has hit some activities far more than others, e.g., travel, tourism, retail, events, restaurants, entertainment, schools, universities, etc., the crisis offers an opportunity to shift resources to activities of the future, e.g., renewable energy and care work, besides the urgent need to cope with public health emergencies and order.

But a quicker and more efficient solution is elimination of supply constraints by expediting or even mandatorily reallocating labour and finance. One analogy is the transition from manufacturing gramophone records to producing tape-recorders, CDs, DVDs, i-pods, and smart phones with better techniques. Another is the conversion of energy intensive industries into much more energy efficient operations.

Such structural changes are happening all the time, and should not cause recessions if gradual and small scale. But sudden, large scale structural shifts may be more disruptive as time and effort are needed to reallocate resources. Thus, output drops in declining industries are not immediately compensated by production increases in the emerging new industries.

Jomo Kwame Sundaram

Without government assistance to retrain laid off workers and encourage new investments, adjustment will be more painful, lengthy and costly. The recessions in Western countries following the oil price rises in 1973, 1979 and 2007 were due to poorly managed ‘structural shifts’.

Transformational recessions in post-communist economies in the 1990s also exemplify poor management of such structural shifts. In many countries, output reductions during such transitions were greater than in the US Great Depression of the 1930s.

Coping with recession
Managing structural shifts was generally more successful in East Asia as costs and benefits were generally better shared and governments have been less reluctant to intervene in markets and direct investment finance accordingly.

In China, production of protective masks increased from 15 million daily in early February to over 100 million every day by the end of month! Over 3000 enterprises that previously had nothing to do with health products started producing masks, special protective suits, sanitizers and hygiene goods.

The South Korean company Seegene developed a Covid-19 test kit in three weeks and started mass production with its 395 employees dropping all their other work to focus on making kits. Production of the company’s fifty or so other products temporarily ceased for two weeks. Molecular biologists with PhDs stopped research and development to work on the kit assembly line, as senior scientists packaged the kits.

In Western countries, similar examples can be seen in the conversion of industries to defence production during war. In most countries, state assistance has eased and accelerated such transitions. Increased defence procurement caused US economic growth to speed up after the 1937-38 recession to 17-20% annually during 1941-43.

Centrally planned economies were even better at quickly achieving structural shifts while maintaining full employment. In the late 1930s and early 1940s, just before and during the Second World War, the Soviet Union moved considerable resources from agriculture to industry, and from light to heavy industry, especially for defence.

In 1940, Germany produced twice as much steel and more armaments than the Soviet Union, but by 1943, the USSR had surpassed Germany in producing tanks, aircrafts and artillery, decisively changing the course of the war.

Eight decades later, Professor Jamie Galbraith has argued that there is “no acceptable alternative” to the US government covering the full costs of testing and treating Covid-19 cases, without exception and legal risk; to be effective, care should be universal and free of cost.

If the Covid-19 epidemic continues to spread quickly, the ability of countries to quickly redeploy resources will be crucial, not only for fighting the pandemic, but also to overcome the likely recession.

During the 2008-09 Great Recession, China’s huge fiscal stimulus package mitigated the economic slowdown. Its growth rate dropped from 14% in 2007 to 9% in 2009, as some other countries experienced their deepest post-war recessions, even contractions.

Betting only on market forces to do the necessary is not only slow, but also dangerous. The capacity to cope with the inevitable forthcoming slowdown will depend crucially on how governments manage resources to guide structural transitions.

This opinion draws on an earlier paper by Popov which can be read at:
https://doc-research.org/2020/03/how-to-deal-with-the-coronavirus-economic-recession-social-solidarity-and-state-intervention/

Vladimir Popov is a Research Director in the Dialogue of Civilizations Research Institute in Berlin.

One mercantilist view is that exchange rate undervaluation – e.g., via accumulation of foreign exchange reserves in China’s case – is ‘industrial policy’ to promote export-led growth, benefiting producers of exports while discouraging imports.

Taxes and subsidies are tools of selective industrial policy for which an efficient and clean bureaucracy is needed to successfully use them for growth-promotion.

Vladimir Popov

By discouraging imports and promoting exports, exchange rate undervaluation enhances cost competitiveness, e.g., by keeping wage costs down. Currency undervaluation is equivalent to import duties on all tradables and export subsidies.

But exchange rate undervaluation automatically boosts all production and export of ‘tradables’ without being selective. It is a blunt, non-selective instrument that can even work in highly corrupt environments or where the requisite competence is not available. Such promotion of export production avoids potentially corruptible, discretionary selection of beneficiaries.

Forex reserves accumulation as industrial policy?
Polterovich and Popov’s cross-country regressions for 1960-1999 suggest that foreign exchange (forex) reserves accumulation contributes to developing countries’ economic growth by increasing both capital productivity and the investment/GDP ratio.

For them, forex reserves accumulation causes expansionary real exchange rate (RER) undervaluation in the short run. RER undervaluation enables taking greater advantage of export externalities, boosting export-led growth. Accumulating forex reserves attracts foreign direct investment by raising government credibility and lowering dollar costs. Undervaluation may even improve wealth and social welfare.

Hence, they argue that forex reserves accumulation has been growth promoting by enabling exchange rate underpricing. In fact, however, there has been considerable variation in both exchange rate underpricing and forex reserves accumulation over the last four decades.

Jomo Kwame Sundaram

If a country manages to become internationally competitive – whether via higher productivity, lower wages, or a weak exchange rate – it will export more than it imports, developing a trade surplus. If this surplus is kept as forex reserves, the exchange rate depreciates and the trade surplus may grow.

The decade-long strong yen (endaka) period after the 1985 Plaza Accord may thus have helped end the post-war Japanese economic miracle. Arguably, the endaka contributed to its financial ‘big bang’ and subsequent stagnation in the 1990s and its lacklustre growth thereafter.

By contrast, Chancellor Helmut Kohl avoided a similar fate for the Deutschemark by ‘hiding’ behind the common European monetary zone currency (euro) and lowering the national wage rate by accelerating ‘reunification’ of West with East Germany.

Capital flowing uphill
Countries achieving high growth have mostly been net creditors, not net borrowers, i.e., they have saved more than they have invested. Even controlling for level of development, the relationship between the current account surplus and growth remains positive and significant.

This high correlation between domestic savings and investment, even in economies with relatively open capital accounts, is contrary to the popular presumption that capital would flow to countries with better investment climates and rates of return to investment.

High domestic savings rates have often, but not always supported high investment rates, which usually, if not always, leads to faster growth.

Krugman noted that although there were at least three large waves of capital flows to developing countries around the turn of the century, but none had led to growth miracles: “… the point is that there’s no striking evidence that capital flows have been a major source of economic success.”

Hence, many developing countries’ apparent policy preference to rely on external financing is ironic as economists puzzle over why ‘capital is flowing uphill’, from developing to developed countries.

As protectionist policies have been increasingly constrained by developed countries promoted free trade mantra, exchange rate undervaluation is one of the few available tools for promoting catch-up development.

The main analytical argument against exchange rate undervaluation is “if all developing countries were to pursue this policy, there would be a ‘beggar thy neighbour’ ‘race to the bottom’”.

Undervaluation without reserves accumulation?
Many in developing countries consider the policy of forex reserves accumulation to be wrongheaded. Forex reserves are a share of national savings not invested in the national economy as they are exported out of the country for low returns, usually deployed to finance consumption and investment elsewhere.

Forex reserves generally yield low returns if invested in safe instruments, such as US Treasury bills and similar debt obligations of other Western governments. Investing these savings inside the country would yield higher returns.

China’s gross domestic product (GDP) grew by 14%. Since then, its growth rate has declined by more than half to 6.6% in 2018. The five-year moving average growth rate is at its lowest since reforms began in 1978, although annual growth briefly fell lower during 1989, the year of the Tian An Men incident.

China’s growth slowdown
Economists have suggested various factors slowing China’s growth, including its lower population growth and ageing population. These demographic factors are real, but their significance has been exaggerated.

Vladimir Popov

Also, the advantages of economic backwardness have been exhausted: it is easier to catch up from a low base, while growth tends to slow in fast-growing economies approaching the technological frontier, especially as cutting-edge innovation is more difficult and costly than copying existing technologies, whether for free, or even by buying patents and copyrights.

Is rapid growth sustainable?
Developed economies rarely grew for extended periods at the pace of the East Asian ‘miracle’ economies ‘catching up’. After all, only five economies have successfully gone from ‘developing’ (i.e., less than a fifth of US per capita income) to ‘developed’ (over half the US level) status.

These were Japan and the first-generation newly industrialized economies (NIEs) during the 1950s-1980s, namely South Korea, Taiwan, Hong Kong (HK) and Singapore, although HK’s limited industrialization is moot and clearly past.

Marked growth slowdowns have only occurred in Japan and HK, after their per capita incomes were over half the US level, whereas the other ‘tigers’ have continued to grow, eluding the supposed ‘middle-income trap’.

As China’s per capita GDP (at purchasing power parity, i.e., even in comparable prices) is still under a quarter of the US level, a similar growth slowdown in China may still be a couple of decades away.

Exchange rate competitiveness
China’s growth slowdown also appears to be due to political choices. Many argue that its growth for four decades has been due to deliberate exchange rate depreciation, promoting exports and discouraging imports, thus rapidly accumulating foreign exchange (forex) reserves.

Jomo Kwame Sundaram

But as China’s rapid export-oriented growth with low wages was also due to rapid forex accumulation, keeping its exchange rate low, and raising exports, savings and investment. From around 2005, however, China gave in to US-led international pressures to let the RMB appreciate.

The real exchange rate of China’s RMB – the ratio of Chinese to international prices, as measured by the ratio of its dollar GDP at the official exchange rate to its purchasing power parity GDP – rose during 2003-2013, especially in 2006-2011, except for a brief re-peg right after the 2008 financial crisis started.

The People’s Bank of China (PBoC) tried in August 2015 to move towards a floating exchange rate regime, precipitating a 3% fall in three days against the US dollar. China’s central bank quickly abandoned the attempt, spending over a trillion dollars of forex reserves over the next two years alone to prop up the RMB.

Ironically, the August 2019 PBoC decision to let its currency sink below the RMB7/USD ‘psychological threshold’, consistent with greater exchange rate flexibility, has been portrayed by the Trump administration as currency manipulation although it does not meet US Treasury criteria.

Source: World Development Indicators

Improving wellbeing, not growth
The US – long dominant in the International Monetary Fund (IMF), the World Bank, the G7 and the G20 – accused China of ‘currency manipulation’ to gain ‘unfair’ advantage in international trade, causing ‘global imbalances’, including the huge US current account deficit with China.

China’s exports as a share of GDP peaked at 35% in 2005, before beginning to fall. The 2008-2009 Great Recession saw RMB appreciation suspended briefly as China opted for a large domestic stimulus package, which accelerated the transition to greater domestic consumption and lower savings as wages rose with high employment and labour force utilization rates.

As the world experienced strong contractionary tendencies, China’s growth slowed from 14% in 2007 to a still high 9% in 2009. As domestic consumption rose, savings, investments and growth inevitably declined. The investment share of GDP peaked at 45% in 2013, before declining.

China also slowed forex accumulation, before stopping completely in 2010, resuming RMB appreciation. Its real exchange rate appreciated fastest during 2006-2011, ‘over-shooting’ and causing RMB over-valuation until its recent depreciation in response to US trade belligerence.

Hence, China has stopped relying on exchange rate competitiveness and low real wages for rapid export-oriented growth for well over a decade, resulting in rising real wages, higher domestic consumption, and perhaps slower growth.

This article draws upon: Slowdown of growth in China: Circumstances or choice? published by the Dialogue of Civilizations Research Institute, Berlin.

Any balanced assessment of the so-called Chinese economic miracle will recognize that it was extremely successful, not only during the reform period from 1979, but also since Liberation in 1949 despite the setbacks of the Great Leap Forward and the Cultural Revolution.

The Chinese economy grew at about 5% on average during 1949-1979 and at almost 10% in 1979-2019. Five percent growth was impressive, higher than in most countries of the world at that time, but ten percent growth over the last four decades is quite unprecedented.

Vladimir Popov

In Latin America, the so-called Washington Consensus, implemented after the debt crises of the early 1980s, led to economic stagnation, the ‘lost decade’ of the 1980s. Sub-Saharan Africa lost a quarter century to such policies, while the former Soviet Union and much of Eastern Europe lost real and potential output in the 1990s on a scale greater than in the Great Depression of the 1930s.

Why did economic liberalization seem to work in China, but not in other regions? Reforms needed to accelerate growth depend on historical and other conditions, which are necessarily varied at different times for countries with various backgrounds.

Growth acceleration conditional
Rapid economic growth can only materialize if enough minimal conditions are met. Growth acceleration is complicated, requiring several crucial inputs—which may include infrastructure, human resources, enabling state institutions, and economic stimuli, among other things.

Without some crucial necessary ingredients, a growth acceleration may not start, or cannot be sustained. Some economists invoke ‘growth diagnostics’ to identify ‘binding constraints’ holding back economic growth.

In some cases, these constraints may be due to lack of market liberalization, e.g., when inappropriate regulation or state interventions deter productive investments and technological progress. In others, inappropriate liberalization may frustrate and block such progress.

Jomo Kwame Sundaram

Liberation and developmental governance
So, why did liberalization work in China, but not in Africa and Latin America? In China, the pre-conditions for the last four decades were mostly created in the preceding 1949-1979 period.

Without the progress and achievements of the Mao era, the market-oriented reforms since 1979 would not have had the same impressive results. Needed ingredients, most importantly, people or human resources, had already been prepared in the previous period.

Market reforms from 1979 accelerated economic growth because China already had capable governance created by the state, including the ruling communist party, after Liberation in 1949; the country had lacked such developmental governance for centuries.

Through party structures at all levels, including every village, China’s communist party-led government has been able to enforce rules and regulations all over the country more efficiently than any emperor, not to mention the infamously corrupt Kuomintang (KMT) regime of 1912-1949.

In the late nineteenth century, central government revenues were equivalent to only 3 percent of GDP compared to 12 percent in Japan right after the Meiji Restoration. Under the KMT government, this increased to only 5 percent of GDP.

Mao’s economic legacy
The Mao government left the Deng reform regime with revenues equivalent to a fifth of GDP. China’s crime rate in the 1970s was among the lowest in the world; a Chinese black market or shadow economy was virtually non-existent, and corruption was estimated by Transparency International to be the lowest in the developing world in 1985.

Literacy rates in China increased from 28 percent in 1949 to 65 percent at the end of the 1970s (compared to 41 percent in India). Chinese life expectancy almost doubled to 65 years in the mid-1970s from 35 years in 1950 while India’s rose from 35 to 52 years over the same period.

In short, without the foundations established during the Mao period following Liberation seven decades ago, the selective economic liberalization of the last four decades could well have been ruinous. Liberation also allowed the Chinese authorities to chart their own course without being subject to policy conditionalities imposed by foreign powers.

Vladimir Popov is Research Director at the Dialogue of Civilizations Research Institute in Berlin and author of Mixed Fortunes: An Economic History of China, Russia and the West. Oxford University Press, New York, 2014.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

Economic recovery efforts since the 2008-2009 global financial crisis have mainly depended on unconventional monetary policies. As fears rise of yet another international financial crisis, there are growing concerns about the increased possibility of large-scale military conflict.

Jomo Kwame Sundaram

More worryingly, in the current political landscape, prolonged economic crisis, combined with rising economic inequality, chauvinistic ethno-populism as well as aggressive jingoist rhetoric, including threats, could easily spin out of control and ‘morph’ into military conflict, and worse, world war.

Crisis responses limited
The 2008-2009 global financial crisis almost ‘bankrupted’ governments and caused systemic collapse. Policymakers managed to pull the world economy from the brink, but soon switched from counter-cyclical fiscal efforts to unconventional monetary measures, primarily ‘quantitative easing’ and very low, if not negative real interest rates.

But while these monetary interventions averted realization of the worst fears at the time by turning the US economy around, they did little to address underlying economic weaknesses, largely due to the ascendance of finance in recent decades at the expense of the real economy. Since then, despite promising to do so, policymakers have not seriously pursued, let alone achieved, such needed reforms.

Instead, ostensible structural reformers have taken advantage of the crisis to pursue largely irrelevant efforts to further ‘casualize’ labour markets. This lack of structural reform has meant that the unprecedented liquidity central banks injected into economies has not been well allocated to stimulate resurgence of the real economy.

From bust to bubble
Instead, easy credit raised asset prices to levels even higher than those prevailing before 2008. US house prices are now 8% more than at the peak of the property bubble in 2006, while its price-to-earnings ratio in late 2018 was even higher than in 2008 and in 1929, when the Wall Street Crash precipitated the Great Depression.

As monetary tightening checks asset price bubbles, another economic crisis — possibly more severe than the last, as the economy has become less responsive to such blunt monetary interventions — is considered likely. A decade of such unconventional monetary policies, with very low interest rates, has greatly depleted their ability to revive the economy.

Vladimir Popov

The implications beyond the economy of such developments and policy responses are already being seen. Prolonged economic distress has worsened public antipathy towards the culturally alien — not only abroad, but also within. Thus, another round of economic stress is deemed likely to foment unrest, conflict, even war as it is blamed on the foreign.

International trade shrank by two-thirds within half a decade after the US passed the Smoot-Hawley Tariff Act in 1930, at the start of the Great Depression, ostensibly to protect American workers and farmers from foreign competition!

Liberalization’s discontents
Rising economic insecurity, inequalities and deprivation are expected to strengthen ethno-populist and jingoistic nationalist sentiments, and increase social tensions and turmoil, especially among the growing precariat and others who feel vulnerable or threatened.

Thus, ethno-populist inspired chauvinistic nationalism may exacerbate tensions, leading to conflicts and tensions among countries, as in the 1930s. Opportunistic leaders have been blaming such misfortunes on outsiders and may seek to reverse policies associated with the perceived causes, such as ‘globalist’ economic liberalization.

Policies which successfully check such problems may reduce social tensions, as well as the likelihood of social turmoil and conflict, including among countries. However, these may also inadvertently exacerbate problems. The recent spread of anti-globalization sentiment appears correlated to slow, if not negative per capita income growth and increased economic inequality.

To be sure, globalization and liberalization are statistically associated with growing economic inequality and rising ethno-populism. Declining real incomes and growing economic insecurity have apparently strengthened ethno-populism and nationalistic chauvinism, threatening economic liberalization itself, both within and among countries.

Insecurity, populism, conflict
Thomas Piketty has argued that a sudden increase in income inequality is often followed by a great crisis. Although causality is difficult to prove, with wealth and income inequality now at historical highs, this should give cause for concern.

Of course, other factors also contribute to or exacerbate civil and international tensions, with some due to policies intended for other purposes. Nevertheless, even if unintended, such developments could inadvertently catalyse future crises and conflicts.

Publics often have good reason to be restless, if not angry, but the emotional appeals of ethno-populism and jingoistic nationalism are leading to chauvinistic policy measures which only make things worse.

At the international level, despite the world’s unprecedented and still growing interconnectedness, multilateralism is increasingly being eschewed as the US increasingly resorts to unilateral, sovereigntist policies without bothering to even build coalitions with its usual allies.

Avoiding Thucydides’ iceberg
Thus, protracted economic distress, economic conflicts or another financial crisis could lead to military confrontation by the protagonists, even if unintended. Less than a decade after the Great Depression started, the Second World War had begun as the Axis powers challenged the earlier entrenched colonial powers.

They patently ignored Thucydides’ warning, in chronicling the Peloponnesian wars over two millennia before, when the rise of Athens threatened the established dominance of Sparta!

Anticipating and addressing such possibilities may well serve to help avoid otherwise imminent disasters by undertaking pre-emptive collective action, as difficult as that may be.

The international community has no excuse for being like the owners and captain of the Titanic, conceitedly convinced that no iceberg could possibly sink the great ship.

Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
Vladimir Popov, a former senior economics researcher in the Soviet Union, Russia and the United Nations Secretariat, is now Research Director at the Dialogue of Civilizations Research Institute in Berlin

Although initially obscured by The Economist, among others, the sudden and unprecedented increase in Russian adult male mortality during 1992-1994 is no longer denied. Instead, the debate is now over why?

Having advocated ‘shock therapy’, a ‘big bang’, ‘sudden’ or rapid post-Soviet transition, Jeffrey Sachs and others have claimed that the sudden collapse in Russian adult male life expectancy was due to a sudden increase in alcohol consumption, playing into popular foreign images of vodka-binging Russian men.

In Russia, vodka is a killer. Credit: Pavol Stracansky/IPS

In fact, the transition to the market economy and democracy in Eastern Europe and former Soviet republics dramatically reduced life expectancy owing to greater stress exacerbated by the nature and impact of the early post-Soviet transition under Boris Yeltsin, especially during his first term.

Did post-Soviet Russians drink much more vodka?

While alcohol consumption did increase greatly after Gorbachev’s anti-alcoholism campaign (1985-1987) ended, it never reached the highest Soviet level in 1984.

While there has been a strong correlation between alcohol consumption and the adult male mortality rate, there have been several periods when per capita alcohol consumption levels and death rates moved in opposing directions. In 2002-2007, for example, death rates from deliberately inflicted (‘external’) causes, including murder, suicide and poisoning, fell despite rising alcohol consumption.

Similarly, from 1960 to 1970, alcohol consumption increased from 4.6 to 8.5 litres per capita, according to official statistics (and from 9.8 to 12 litres, according to other estimates), whereas life expectancy did not change much, rising from 69 years in 1960 to 70 in 1965, and then falling back to 69 again in 1970.

How did much poorer Russians afford more vodka?

Not surprisingly, claims of strong correlations between lower alcohol prices, higher alcohol consumption and adult male mortality focus on the price effect without considering the income effect. While increased alcohol intake has been attributed to the lower relative prices of spirits in the early 1990s, it ignores the fact that real incomes fell even more sharply.

In fact, Russian vodka consumption has fallen sharply, by more than half, in recent decades, from over 200 billion litres in the early 1980s and 1990s, to about 100 billion litres in 2015. Meanwhile, the wine and beer shares of alcohol consumption have increased markedly.

Some studies claim that at least 30 per cent of alcohol consumption in Russia is unrecorded, and official figures understate drinking low cost alcohol with high toxicity. But this claim has no empirical support, even if only indirect.

Thus, the impact of increased alcohol intake on cardio-vascular diseases remains moot, with per capita alcohol consumption and death rates moving in opposite directions at times. Death rates due to deliberately inflicted (‘external’) causes, including murder, suicide and poisoning, fell despite rising alcohol consumption during 2002-2007.

How does vodka kill?

Some Western observers attributed as much as a third of total deaths in Russia to alcohol related causes. These are the highest estimates available, but are doubted by most other experts.

This very high share is much greater than official statistics which suggest that less than four per cent of deaths were due to alcohol consumption, i.e., alcohol poisoning, liver cirrhosis, alcoholism, and alcoholic psychosis. Some independent researchers have an intermediate position, attributing about 12 per cent of all deaths to alcohol-related causes.

Other observers argue that average alcohol consumption levels are not necessarily a good indicator of health risks. One such argument is that not all consumption of alcohol, but only of hard spirits, particularly vodka in the case of Russia, is responsible for the increased mortality.

Why did Russian life expectancy fall after Gorbachev?

Russia has long had extensive post-mortem causes of death data, having done autopsies for more than 60 per cent of all deaths, i.e., more than anywhere else. Some public health experts argue that while cardiovascular disease was the main cause of death, much of this was due to lethal levels of alcoholism.

Deaths from alcohol poisoning are widely regarded as the better indicator of excessive alcohol consumption compared to official production figures as liquor may be produced illegally within a country or smuggled into it.

Deaths from alcohol poisoning increased from 10 per 100,000 inhabitants in 1990-1991 to nearly 40 in 1994, exceeding the number due to suicide and murder. By 2007, however, such alcohol related deaths had fallen to late Soviet levels, even though the overall mortality rate remained well above the rate from those times.

Stress kills

There is growing evidence that stress kills, using extensive data on earlier declines in life expectancy among men in all former Soviet republics and East European countries. In Georgia, Armenia and Eastern Europe, mortality increased, lowering life expectancy, without increased drinking.

Only a few causes of male deaths during 1980–2013 were alcohol-related, e.g., accidental poisoning by alcohol, liver cirrhosis, ischemic heart diseases, stroke, travel accidents, and other ‘external’ causes.

The continuous decline in adult male mortality in Belarus and Russia cannot be fully explained by anti-alcohol policies, although such interventions probably contributed to the large mortality falls in both countries during 2005–2006, and in Belarus in 2012. These mortality declines coincided with and probably accelerated to already declining alcohol-related mortality.

All statistics and estimates agree that per capita alcohol consumption in the 1990s was equal to or lower than in the early 1980s, while deaths due to ‘external’ causes doubled, and the total death rate increased by half.

Thus, simultaneous increases in the total death rate, the death rate due to external causes and to alcohol consumption were all probably due to another factor, namely stress.

Jomo Kwame Sundaram, a former economics professor, was assistant director-general for Economic and Social Development, Food and Agriculture Organisation, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

Vladimir Popov is Research Director at the Dialogue of Civilizations Research Institute in Berlin

By Vladimir Popov
BERLIN, Aug 9 2017 (IPS)

Even before the imposition of new sanctions on Russia by Donald Trump and the ongoing fuss over Russian hackers undermining US democracy, Russian-American relations had deteriorated to a level not seen since the 1950s. Why?

Vladimir Popov

Bilateral economic relations have taken a similar turn for the worse. Soviet-US trade expanded rapidly in the 1960s and 1970s, nominally increasing nearly a hundred-fold in two decades, before plateauing in the 1980s. There was some growth in the 1990s and 2000s after the USSR fell apart, but after peaking in 2011, trade has been falling.

Why did the fastest expansion of bilateral trade occur in the 1960s and 1970s? After all, the USSR was not a market economy, and also ‘communist’. By contrast, US trade growth with post-Soviet, capitalist and democratic Russia over the next two decades was modest, before actually shrinking in the last half decade.

Geopolitics?
One popular explanation is geopolitical considerations. It is argued that when a hostile power tries to expand its influence, the US, the rest of the West and hence, NATO respond strongly.

Examples cited include the Cold War in the 1950s and 1960s, and sanctions against the Soviet Union after it invaded Afghanistan in 1979. The same could be said about more recent Western sanctions in response to Russian advances in Crimea, Eastern Ukraine and Syria.

But the 1970s contradicts this argument. After all, the USSR was gaining ground at US expense in Indochina, the former Portuguese colonies, Nicaragua and other developing countries. Why then did détente and trade grow in the 1970s?

US as #1
The US position is not primarily determined by either ideology or geopolitics, but rather, by the changing US establishment view of the balance of power. After the devastation of the Second World War, the USSR was hardly a superpower, so the US expected to press the USSR, its erstwhile ally, into submission through the Cold War.

But the Soviet Union began closing the gap with the United States in terms of productivity, per capita income and military strength in the 1950s and 1960s. Even though its economy slowed from the mid-1960s, the USSR had caught up in many respects, enough to qualify as the other superpower. The result was détente. Although the USSR had been offering rapprochement after the Second World War, the US only accepted detente in the 1970s, as the military gap closed.

Today, the US establishment knows that the Russian economy have fallen far behind since the 1980s while its military is getting more obsolete. The strategic conclusion appears to be that Russia can be contained via direct pressure and sanctions, something unthinkable against the communist USSR in the 1970s or China today, even though China is less democratic than Russia and still led by a communist party.

Playing with fire
Economically and militarily, Russia is undoubtedly relatively much weaker today than the USSR was. But its capacity has recovered considerably in the new century from the 1990s, with modest growth reversing the economic devastation of the Yeltsin presidency.

And even if it is true that the US is now an unchallenged ‘number one’, and will remain dominant in the foreseeable future, while Russia is not only weak, but also getting relatively weaker, the current effort of pressing Russia into submission has risks.

US pressure on Russia can result in a stand-off comparable to the 1962 Cuban missile crisis, which the USSR was willing to risk at that time, even though its military capability was well behind that of the US. Eventually, not only were Soviet missiles withdrawn from Cuba, a return to the status quo ante, but the US also promised not only not to invade Cuba, but also to withdraw its medium range missiles from Turkey.

True, Russia is relatively weaker today, but it still has tremendous destructive capacity. One only has to remember that North Korea, with much less military capacity, has successfully withstood US pressure for decades. However, as US economic dominance in the world has been eroding since the Second World War, and its military superiority is the main source of US advantage, the temptation will remain to use this superiority before it is eroded as well.

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In Russia, the simultaneous increase in the total death rate, deaths due to external causes, and alcohol consumption were all driven by stress. Credit: Pavol Stracansky/IPS

By Vladimir Popov and Jomo Kwame Sundaram
MOSCOW and KUALA LUMPUR, Jul 25 2017 (IPS)

The steep upsurge in mortality and sudden fall in life expectancy in Russia in the early 1990s were the highest ever registered anywhere in recorded human history in the absence of catastrophes, such as wars, plague or famine. The shock economic reforms in the former Soviet economies after 1991 precipitated this unprecedented increase in mortality, shortening life expectancy, especially among middle-aged males.

Shock therapy
During 1987-1994, the Russian mortality rate increased by more than half, from 1.0% to 1.6%, as life expectancy fell from 70 to 64 years! Economic output fell by almost half during 1989-1998 as wealth and income inequalities as well as crime, murder and suicide rates soared.

The dramatic increase in mortality – most pronounced for middle-aged men, mostly due to cardiovascular diseases – has been explained in terms of various factors like falling real incomes, poorer nutrition, environmental degradation, the collapse of Soviet health care, and surges in alcoholism and smoking.

However, dietary changes – less meat and dairy products, yet more bread and potatoes – could not have quickly increased cardiovascular diseases.

Deterioration of health care, smoking and changes in diet would require much more time to increase mortality by so much, while increased pollution is not an acceptable explanation due to the collapse of industrial output.

While deterioration of the Russian diet, the collapse of its health care system as well as increased deaths due to accidents, murders and suicides undoubtedly contributed to increased mortality in Russia, they cannot explain the sudden magnitude of the increase. This leaves two major competing explanations for the mortality crisis – either increased alcohol consumption or heightened stress factors.

Alcoholism
The major explanation popular in the West, as it absolves the West of responsibility, attributes the mortality spike to increased alcohol consumption in the late 1980s and early 1990s after Gorbachev’s anti-alcoholism campaign.

Deaths due to alcohol poisoning are generally considered a better indicator of actual alcohol consumption as some alcohol consumed is produced illegally or smuggled into the country. Such deaths per 100,000 inhabitants increased from 10 in 1990-1991 to nearly 40 in 1994, exceeding the number of deaths due to suicide and murders.

The increased intake of alcohol can, in turn, be attributed to the lower prices of spirits in the early 1990s. But this alcohol explanation does not stand up to critical scrutiny. After all, as with most other goods, demand for alcohol is inversely related to price and positively to personal income and spending capacity.

First, during some periods, per capita alcohol consumption and death rates moved in opposite directions, e.g., alcohol consumption rose or remained stable during 2002-2009, while death rates – also due to external causes, accidents, murders, suicides and poisoning – fell.

Second, per capita alcohol consumption levels in the 1990s were equal to or lower than in the early 1980s, whereas the total death rate increased by over half and deaths due to external causes doubled!

Although strongly correlated with the mortality rate, higher alcohol consumption was not an important independent cause, but also exacerbated by the same stress factors as the mortality rate itself.

The simultaneous increase in the total death rate, deaths due to external causes, and alcohol consumption were thus all driven by another factor, namely stress.

Stress
What were these sources of increased stress and why did they increase premature deaths? Stress factors due to the economic ‘shock therapy’ following the demise of the Soviet Union are associated with the rise in unemployment, labour mobility, migration, divorce, wealth, and income inequalities.

A stress index incorporating these variables turns out to be a surprisingly good predictor of changes in life expectancy in post-communist economies, especially in the Russian Federation.

The evidence shows that many men in their 40s and 50s – who had lost their jobs or had to move to another job and/or another region, or experienced increases in inequalities in their country/region, or had divorced their wives – were more likely to die prematurely in the 1990s.

To reiterate, the Russian mortality crisis of the 1990s was mainly due to the shock economic reforms that led to mass, especially labour dislocations, much greater personal and family economic insecurity and sharp increases in inequalities. The resulting dramatic rise in stress factors was therefore mostly responsible for the sharp rise in mortality.

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The Russian mortality crisis underscores the impact of stress on life expectancy. Credit: Alexey Yakushechkin/IPS

By Vladimir Popov and Jomo Kwame Sundaram
MOSCOW and KUALA LUMPUR, Jul 20 2017 (IPS)

The transition to market economy and democracy in the Russian Federation in the early 1990s dramatically increased mortality and shortened life expectancy. The steep upsurge in mortality and the decline in life expectancy in Russia are the largest ever recorded anywhere in peacetime in the absence of catastrophes such as war, plague or famine.

During 1987-1994, the Russian mortality rate increased by 60%, from 1.0% to 1.6%, while life expectancy went down from 70 to 64 years. Although life expectancy declined from 1987, when Mikhail Gorbachev was still in charge, its fall was sharpest during 1991-1994, i.e., during Boris Yeltsin’s early years.

In fact, mortality increased to levels never observed during the 1950s to the 1980s, i.e., for at least four decades. Even in the last years of Stalin’s rule (1950-1953), mortality rates were nearly half what they were in the first half of the 1990s.

Economic output fell by 45% during 1989-1998, while negative social indicators, such as the crime rate, murder rate, suicide rate and income inequalities, rose sharply as well, but even these alone cannot adequately explain the unprecedented mortality spike.

Distress
This Russian mortality crisis underscores the impact of stress on life expectancy. Anne Case and Angus Deaton have linked deteriorating American white male real incomes to various distress indicators since the turn of the century. Their careful work helps us better understand the election of US President Trump, thanks to the electoral majorities he secured in the ‘rust belt’ states, so crucial in the American ‘electoral college’ system.

During the Enclosure movement and the Industrial Revolution in Britain from the 16th to the 18th century, mortality increased and life expectancy fell by about a decade – from about 40 to slightly over 30 – due to lifestyle changes, increased income inequalities and mass impoverishment.

Other instances of life expectancy reduction due to social changes – without wars, epidemics and natural disasters – are very few and never involved a fall in life expectancy by five years, from 69 to 64 years, in the three years from 1991 to 1994 for the entire population of a large country like Russia!

This dramatic fall has been obscured in much of the Western media coverage, although some academic research has been more accurate. Thus, the Economist implied that the fall was greater during Gorbachev’s final years (1987-1992) compared to Yeltsin’s early years (1992-1997).

Why premature death?
What kinds of stress did the transition induce, and why did they lead to premature death? Stress is correlated to the rise in unemployment, labour mobility, migration, divorce, and income inequalities.

These stress indicators turn out to be good predictors of changes in life expectancy in Russia during the ‘post-Soviet’ transition. Men in their forties and fifties who had lost their jobs, or had to move to another job and/or region, or lived in regions with greater inequality or higher divorce rates, were more likely to die prematurely in the 1990s.

The major popular alternative ‘explanation’ is increased alcoholism, which does not stand up to closer critical scrutiny for several reasons. First, during some periods, per capita alcohol consumption and death rates moved in opposite directions, e.g., during 2002-2007, death rates due to external causes – including murders, suicides and poisoning – fell as alcohol consumption rose.

Second, according to both official statistics and independent estimates, per capita alcohol consumption levels in the 1990s were equal to or lower than in the early 1980s, whereas death rates due to external causes doubled, and the total death rate increased by half. This simultaneous increase in indicators (total death rate, death rate due to external causes, and alcohol consumption) appear to be driven by another factor, namely stress.

Post-communist transitions varied
But not all post-communist transitions had equally traumatic consequences. Countries which proceeded more gradually – such as China, Uzbekistan and Belarus – managed to preserve institutional capacities and capabilities, thus avoiding or at least mitigating the output collapse and the sudden, dramatic increase in socio-economic stress indicators.

China and Vietnam did not experience any recession during their transitions, while life expectancy in both these countries continued to rise, although more slowly in China compared to before the 1980s, and to other countries with similar per capita GDPs and life expectancy levels.

In the case of Cuba, the 40% output reduction during 1989-1994 did not result in a mortality crisis. Instead, life expectancy in Cuba increased from 75 years in the late 1980s to 78 years in 2006.

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Was the post-Soviet transition the greatest 'man-made' economic disaster ever?. Credit: IPS

By Vladimir Popov and Jomo Kwame Sundaram
MOSCOW and KUALA LUMPUR, Jun 6 2017 (IPS)

Wide-ranging economic reforms following the demise of the Soviet Union at the end of December 1991 mainly resulted in economic collapse in most successor states. By the mid-1990s, output had fallen by about half compared to 1989.

Meanwhile, income inequalities rose sharply as real incomes declined dramatically for most, while death rates increased by over half as life expectancy declined dramatically.

In Russia, output fell by 45% during 1989-1998, as death rates increased from 1% in the 1980s to over 1.5% in 1994, equivalent to over 700,000 additional deaths annually. In some former Soviet states embroiled in military conflicts, such as Armenia, Azerbaijan, Georgia, Moldova, Russia and Tajikistan, GDP in 2000 was 30-50% of pre-transition levels! Even without military conflict, Ukraine’s GDP fell by nearly two thirds. In Eastern European countries, output fell less, averaging 20-30% over 2-4 years, whereas growth accelerated in China and Vietnam following reforms.

The huge collapses in output, living standards and life expectancy in the former Soviet Union during the 1990s without war, epidemic or natural disaster was unprecedented. During the Great Depression, GDP in Western countries fell by some 30% on average in 1929-1933, but then recovered to pre-recession levels by the end of the 1930s.

Transition debate
Why was the decline in output and incomes in the former Soviet Union so deep and protracted? To what extent was it due to ‘initial conditions’, and to what extent was it due to poor economic policy choices? If the latter was mainly responsible, the post-Soviet transition was the greatest ‘man-made’ economic disaster ever.

Many believe that “things went terribly wrong”, and that it would have been possible to avoid the fate of the former Soviet republics in the 1990s with different policies. After all, most other transition economies did better than them, and no Russian seriously believes that the exceptional length and depth of its post-Soviet recession was inevitable.

The question of the most appropriate post-Soviet economic transition policies is the subject of considerable debate, not least between those who advocate comprehensive ‘shock therapy’ and others who believe that pragmatic, gradual, piecemeal reforms, rather than policies driven by ideological dogmas, would have had much better consequences.

World Bank policy advice
The World Bank’s 1996 World Development Report (WDR), From Plan to Market, argued that differences in economic performance were mostly associated with ‘good’ or ‘bad’ policies, particularly in terms of economic liberalization and macroeconomic stabilization. “Consistent policies, combining liberalization of markets, trade, and new business entry with reasonable price stability, can achieve a great deal even in countries lacking clear property rights and strong market institutions”.

However, contrary to mainstream Western coverage, there is no evidence that rapid economic liberalization and macroeconomic stabilization would have improved post-Soviet economic performance. The apparent link between liberalization and performance is due to the greater depth of the recession in the former Soviet republics compared to Eastern Europe.

Attempts to correlate differences in output changes during transition to the cumulative liberalization index and to inflation rates have no explanatory value. Once a number of ‘initial conditions’ are taken into consideration, the liberalization index becomes insignificant. Although the Chinese index of ‘economic freedom’, as measured by the Heritage Foundation, has been about the same as Russia’s in recent years, the economic performance of the two countries have differed markedly.

Deep recessions
The depth of the recession was mainly due to three sets of factors. First, greater distortions in industrial structure and external trade on the eve of transition. Second, the collapse of state and non-state institutions in the late 1980s and early 1990s which resulted in chaotic transformation. Third, poor policies worsening macroeconomic instability.

The post-Soviet economic recessions were due to the high costs of the distortions – including excessive militarization and over-industrialization, ‘perverted’ trade flows among the former Soviet republics and with Eastern European countries, excessively large industrial enterprises and agricultural farm sizes – as well as efforts to correct them. In most cases, Soviet distortions were more pronounced than in Eastern Europe. Apparently, the larger the distortions, the greater the output reduction.

The greater collapse of state institutions also explains the severity of post-Soviet recessions. Differences in the depth of transformational recessions between Eastern Europe and the former Soviet republics appear to be due to their greater institutional collapses. Poorer government ability to collect taxes, check the shadow economy, and uphold ‘law and order’, e.g., by enforcing contracts, undermined creation of a business climate conducive to investment and growth.

Post-Soviet transitions (except in Uzbekistan, Belarus and Estonia) involved unfavourable initial conditions, institutional degradation, and poor economic policies, which were less problematic in Eastern Europe. Thus, the Gorbachev reforms of 1985-1991 failed, not because they were gradual, but due to weakened state institutional capacity. However, the Yeltsin reforms had catastrophic consequences due to inappropriate policy reforms for the Russian transition after Gorbachev.

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Cairo, aerial view with Nile river - Credit: Bigstock

By Jomo Kwame Sundaram and Vladimir Popov
Aug 29 2016 (IPS)

Why do some countries grow faster than others? How do we engineer an economic miracle? Some economists believe that manufacturing growth is like cooking a good dish—all  the needed ingredients should be in the right proportion; if only one is under- or overrepresented, the ‘chemistry of growth’ will be sub-optimal. Rapid economic growth can only happen if several necessary conditions are met at the same time.

Rapid growth is a complicated process requiring a number of crucial inputs— infrastructure, human resources, relatively low economic inequalities, effective state institutions and economic stimuli among others. As ‘binding constraints’ may hold back economic growth, ‘growth diagnostics’ seek to identify the most binding constraints in order to accelerate growth. In some cases, these constraints are associated with the absence of markets; in others, with weak state capacities or capabilities, or even critical human resources or infrastructure.

Contrary to popular prejudice, the Middle East and North African (MENA) countries have quite a number of ingredients needed for growth. Inequalities in the region are lower than in other countries at similar levels of economic development. Controlling for size, population density, per capita income, urbanization, democracy, transition from a ‘communist’ past and government effectiveness, on average, Organization of Islamic Cooperation (OIC) Muslim countries had income distribution Gini coefficients five percentage points lower than other countries.

Murders bad for growth

But an important advantage of many MENA countries often lacking in other parts of the developing world may be the strength of their state institutions – crucial for stable and strong economic growth. State institutional capacity refers to the state’s ability to enforce rules and regulations. Subjective measures of state capacity – indices of government effectiveness, rule of law, corruption, etc. – have many shortcomings, but some objective indicators – such as the crime rate, murder rate, share of the unregistered ‘shadow’ economy – reflect a state’s ability to enforce monopolies on violence and taxation.

Unexpectedly for many, the murder rate and the share of the shadow economy – both objective indicators of the institutional capacity of the state – seem to be among the best institutional predictors of long term growth rates of GDP per capita. Poor state institutional capacity is reflected in the murder rate and the share of the shadow economy, negatively correlating with the growth rate. And countries with high income and wealth inequalities usually also have higher murder rates and larger shadow economies. Strong institutional capacity reflects, but also contributes to economic performance, more rapid increases in life expectancy and educational attainment, especially without war or civil conflict.

Variations in long term growth among countries correlate strongly, but negatively with the murder rate and the shadow economy, i.e., the higher the murder rate and the shadow economy share, the lower is growth. East Asia is ahead in terms of growth, followed by South Asia and MENA, while Latin America, Sub-Saharan Africa and the former Soviet Union are falling behind.

MENA, East Asian, South Asian and developed countries generally have murder rates of 1-10 murders per 100,000 inhabitants, and shadow economies of less than 30 per cent of GDP. In MENA countries, peacetime murder rates were ordinarily between one to five for every 100,000 inhabitants, and below 1.5 in Algeria, Tunisia, Egypt, Qatar, Oman and Bahrain. However, the murder rates in Sub-Saharan Africa, Latin America and some former Soviet republics (the Baltics, Belarus, Kazakhstan, Moldova, Russia, Ukraine) are higher (10-100 murders per 100,000), with the shadow economy accounting for well over 30 per cent of GDP.

In the postwar period, for over half a century before the Arab Spring, per capita GDP growth rates in MENA countries were certainly well below those in East Asia, and a little below South Asia, but higher than in other regions of the global South – Sub- Saharan Africa, Latin America, and former Soviet Union. Besides Israel, Oman and Tunisia in the region were among the twenty fastest growing countries in the world during 1950-2010.

Social progress

In terms of education and life expectancy, MENA achievements have been even more spectacular. Many MENA countries increased their life expectancy greatly in 1960-2010, with most of them now exceeding 70 years. The Human Development Index  (HDI) increased by 65% in Arab countries in 1970-2010, more than in any other region of the world except for East Asia (96%) and South Asia (72%). Increases in life expectancy in Arab countries during 1970-2010 were the highest in the world, whereas the increase in school enrolment and literacy was higher than in all other regions except for Sub-Saharan Africa that started at a very low base level.

Of the 22 countries that increased their HDI most in 1980-2010, six are Arab, seven are in MENA and 11 are considered Muslim. Among ten countries with the greatest HDI increase in 1970-2010, Oman, Saudi Arabia, Tunisia, Algeria and Morocco are in MENA. Oman, Saudi Arabia, Libya, Algeria, Tunisia and Iran are the six from MENA of the ten countries leading globally in improving non-income HDI (education and life expectancy).

Hence, MENA countries in 1950-2010 were not leaders in terms of economic progress, but also not laggards. They were somewhere between rapidly growing East and South Asia and more slowly growing Sub-Saharan African, Latin American, OECD and the former Soviet countries. But in terms of social progress, the MENA region did better than all other regions of the developing world over the four decades (1970-2010) before the Arab Spring.

Looking ahead, MENA countries definitely have many crucial ingredients for economic growth – natural resources, human resources, low inequalities and strong state institutions, ensuring low murder and shadow economy ratios. They made rapid economic and social progress in 1960-2010 and have many of the needed pre-conditions to accelerate growth in future, provided that ethnic, religious and sectarian conflicts ends and peace prevails.

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By Vladimir Popov and Jomo Kwame Sundaram
KUALA LUMPUR, Malaysia, May 13 2016 (IPS)

Since the 1980s, the world has been moving once again to the greatest level of national level income inequalities observed in recorded human history. A study by the Credit Suisse Research Institute suggested that the income share of the rich has increased at the expense of the ‘middle class’ in most of the world.

Although economic inequality within societies has been with us for a very long time, inequalities among regions are more recent. According to the late economic historian Angus Maddison, such inequalities increased from about half a millennium ago, before accelerating greatly about two centuries ago with the Industrial Revolution.

With colonialism abroad, new forms of economic hegemony accelerated wealth and income inequalities among and within many societies. In England, Holland and Spain in the eighteenth century, the Gini measure of income inequality was around 50 to 60 percent — much higher than today.

Modern Western inequalities
Traditional communal, cooperative and collectivist institutions in Europe were eroded during the sixteenth to nineteenth centuries, e.g. by the ‘enclosure movement’ in England.

Economic inequality in the United States at the time of American independence in the late 18th century (excluding slaves) was initially lower than in Europe due to the absence of large inherited fortunes and the availability of abundant land at low cost in the New World. But inequalities increased greatly after the mid-19th century despite the end of slavery, peaking during the Gilded Age in the 1920s.

In the US, the ratio of the largest fortunes to the median wealth of households increased from about 1000 in 1790 to 1,250,000 in 1912 (John D. Rockefeller’s fortune of $1 billion), falling to 60,000 in 1982, before rising again to 1,416,000 in 1999 (Bill Gates’ $85 billion fortune)!

Comparison of the wealth of the richest men in various countries in different epochs gives different numbers, but points to a similar conclusion: compared to the average income in the US, Bill Gates was relatively richer than Carnegie and Rockefeller. However, Russian tycoon Mikhail Khodorkovsky was relatively richer in 2003 — compared to Russian average income — than all of them, including Gates!

Short 20th century
National inequalities peaked in Western societies in the early 20th century, before declining from the 1920s to the 1970s, during historian Eric Hobsbawm’s ‘short 20th century’, before rising again since. This reversal was probably due to the greater egalitarianism of the socialist countries, with Gini inequality measures averaging 25-30%, following the Bolshevik Revolution, the checks to increasing inequalities with the rise of labour, socialist and other egalitarian movements, as well as the growth of the welfare state, wealth and income taxation as well as other reforms and changes discussed by Karl Polanyi.

Counter-revolution
But as Soviet ‘socialism’ lost its dynamism from the 1970s and posed less of a threat, a conservative ‘counter-revolution’ ensued — first in the Anglophone West, led by Margaret Thatcher and Ronald Reagan in the 1980s — weakening workers’ movements, undermining state capacities and legitimacy, and strengthening the rich and powerful’s claims to more and new types of income.

The income shares accruing to capital and property increased, at the expense of labour, with rentier incomes, including those accruing to finance or ‘intellectual property’, growing much more than the real economy.

The collapse of the Berlin Wall in 1989 and the USSR in 1991 were among the high points of this ‘counter-revolution’, also resulting in the de-legitimization of Keynesian and development economics.

Government expenditure, especially social spending, stopped growing, with many social programs cut, as unemployment rose to levels not seen since the 1930s. Meanwhile, trade unions were defeated in critical industrial actions (coal miners in the UK, air traffic controllers in the US), causing union strength and membership to decline in the aftermath. The top income tax rates, higher than 50% in the US, UK, Germany and France during 1940-80, have dropped significantly since.

Generally, high profit periods enabled some income and other transfers, lowering earlier inequalities during the 1950s and 1960s. However, the increase in the share of profits in national income since the 1980s has contributed to the rising inequality of recent decades.

The conservative Thatcher-Reagan counterrevolution was undoubtedly successful on a global scale. Today, capitalism is the only ‘show in town’, with communist parties involved in managing capitalism to gain national advantage. The main choice for national regimes today is among varieties of capitalism, with the nature of state involvement being the subject of fierce debates.

Reference: Jomo Kwame Sundaram and Vladimir Popov. Income Inequalities in Perspective. ESS Document No. 46, Initiative For Policy Dialogue (IPD), Columbia University, International Labour Office, Geneva, April 2015.

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