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Eastern Europe & Former Soviet Union: Class 4 Russian Federation Largest of former Soviet republics (150M) rich in natural resources no history of a market-based institutional framework at beginning of transition Early Transition Period 5 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 GDP Industrial Production Investment 1992* 1993 1994 1995 1997 1998 Accumulated drop in GDP 1989-95 equals -52%. Compare U.S. 1929-33 (-30.5%) And the Russian decline followed a period of steady decline clearly the decline has slowed but investment remains a major problem And unlike Poland Sources of Russian investment 1993-95 60 50 40 State 30 Local 20 Mixed Private 10 0 1993* 1994 1995(Jan-Jun) Why has the Russian transition been so unsuccessful? Yeager, Tim. 1998. Institutions, Transition Economies and Economic Development. Chapter 8: Poland and Russia in transition. Yeager’s perspective THESIS: A major key to their diverging performance lies in differences in their institutional frameworks. Poland has managed to create an environment in which the rules of the game are adequately spelled out. Russia’s economy is plagued by crime, corruption and high transaction costs Far more “on-the-books”business start-ups in Poland evidence of faith in the system much more informal activity in Russia can only exist if government chooses or is unable to stop its growth But such firms are small and invest little logical. Property rights are insecure Russian mafia controls 40% of the total economy some 9,000 organized groups employ about 100,000 pay no taxes; force legitimate businesses to pay protection 1994: 70-80% of private businesses paying extortion money. Hedlund and Sundstrom. 1996. The Russian economy after systemic change, Europe-Asia Studies 48(6): 887-914. Russian Inflation Rates, 1992-95(%) Annual average End of year 1992 1354 2318 1993 896 841 1994 220 205 1995 190 131 Factors Monetary policy in perestroika years. More money printed than in previous 30 years combined created a massive RUBLE OVERHANG Russians unleashed price inflation to eliminate the overhang which became chronic. Need austere monetary policy to turn off. Became impossible politically. Consequences of chronic inflation Shorten time horizons of economic actors---> investment decline sharp reductions in real incomes of those on fixed incomes. Increase in income inequality Increase in regional inequality PRIMITIVIZATION of Russian economy Example 1 of primitivization: Structural trends The higher the degree of processing the greater the fall in output the relative importance of extractive industries (natural gas, coal mining, electricity generation etc.) has increased Has made Russia more dependent on world commodity prices Example 2: Reversion to barter economy PBS Lehrer Hour, October 27, 1998 Example 3: Russian morbidity and mortality trends Morbidity Disease/health indicator Typhoid/paratyphoid Salmonellosis Bacterial dysentry Tuberculosis (first diagnosis) Diphtheria Whooping cough Measles Syphilis (first diagnosis) Gonorrhoea Proportion pregnant women anemic Proportion newly born ill % change 1992 13 8 -31 5 109 -22 -9 86 32 31 20 % change 1993 66 -15 25 11 290 63 302 141 25 NA NA Mortality Life expectancy at birth 75 70 65 60 55 50 Men Women 1993 1991 1989 1987 1985-86 1983-84 1981-82 40 1979-80 45 Russian life expectancy in international perspective, 1994 Brazil Mexico Thailand South Korea China Japan Portugal Spain Sweden United Kingdom France Germany United States Russia 0 20 Male 40 Female 60 80 100 Difference Hypotheses Glasnost in statistics inadequate financing for medical system food and drinking water contamination ecological problems (air pollution) high rate of birth defects Increased homicides due to gang wars and decline in public order Problem with these explanations??? Why the large gender gap??? One route to an explanation--focus on trends in mortality causes cardiovascular diseases injuries including (homicide, suicide, alcohol poisoning) One model IMPOVERISHMENT INSTABILITY (POLITICAL, SOCIAL, ECONOMIC) BEHAVIORAL CONSEQUENCES INCREASED MORTALITY AND GENDER GAP