Download By how much did socialist economies underperform? A cross

By how much did socialist economies underperform? A crosscountry investigation
By TAMÁS VONYÓ*
This paper applies panel econometrics with country-fixed effects for 16 West and 9 East European
countries to isolate the differential in growth rates of per capita GDP between socialist and nonsocialist economies from supply-side determinants of relative growth performance in the post-war
period. Vonyó (2008) developed a model that explains economic growth in the OECD between
1950 and 1990 by convergence, labour-force growth, and the temporary output gap reflecting
wartime destruction and post-war dislocation. All three factors were significant drivers of growth,
with the effect of the post-war output gap gradually weakening over time. I apply this framework
with some modification. Controlling for catch-up potential, labour-supply flexibility and the postwar output gap with a linearly declining time-trend, being a command economy still had a large
significant negative effect on annual growth rates: almost three percentage points between the
1950s and the 1970s, and approximately 4.5 percentage points in the 1980s.
Why are some countries rich while others are poor? Diverging development in the global economy has
long been a prime interest of economists and historians alike, and both attribute an instrumental role to
political and economic institutions. Perhaps nowhere has this consensus been demonstrated more
convincingly than in post-1945 Europe, where two fundamentally different growth strategies had
developed, one of which has since clearly failed. The falling behind of Eastern Europe in income per
head and productivity during the period of state socialism has been subject to a myriad of studies.
Most blamed it on the intrinsic inefficiencies of central command and the shortage economy.1
Particular emphasis was laid on the growing technological lag vis-à-vis advanced western
nations and on the lack of technological adaptability. Planned economies achieved ‘a satisfactory
productivity performance in the era of mass production, but could not adapt to the requirements of
flexible production technology during the 1980s’.2 The rate of economic growth in Eastern Europe
was indeed falling sharply after the early 1970s and its relative underperformance compared to the
western half of the continent became increasingly more difficult to refute.3
Figure 1 about here
As shown in Figure 1, growth rates in real GDP per capita were particularly modest in contrast
with the record achieved by countries in Southern Europe that were at a similar level of development
after World War II. In this comparison, command economies seem to have started to perform poorly
already during the 1960s, and the gap in annual growth rates between the two peripheral regions of
Europe remained close to two percentage points until the collapse of the communist bloc. However, it
has not been shown how large the relative underperformance of socialist economies actually was.
* Author affiliation: Tamás Vonyó, London School of Economics.
1
See Eichengreen, The European Economy, chapter 5, Kornai, The socialist system, and Kalecki, Socialism, among
others.
2
Broadberry and Klein, ‘When and why’, p. 37.
3
Berend, Central and Eastern Europe
1
A simple eyeballing of comparative national-income estimates for different parts of Europe, or
of growth rates derived from them, is insufficient because it ignores the substantial variation in initial
conditions and system-independent supply side determinants of growth. Similarly, the handful of
growth-accounting exercises comparing Eastern and Western European economies at similar levels of
development only differentiate between the contributions from proximate sources of growth across
space and over time.4 To mount an adequate answer to the question by how much socialist economies
underperformed we need a quantitative model that captures the gap between the exogenously
determined growth potential of a country and its actual growth record.
This paper applies panel econometrics with country-fixed effects to isolate the differential in
growth rates of per capita GDP between socialist and non-socialist economies from supply side factors
that influenced relative growth performance during the post-war period on both sides of the Iron
Curtain. Controlling for convergence, labour-supply flexibility, and the gradually diminishing role of
post-war reconstruction, I demonstrate that being a command economy still had a large significant
negative effect on annual growth rates, which increased substantially only between the 1970s and the
1980s. Although the primary aim of the paper is to measure, not to explain, the underperformance of
Eastern Europe, the econometric findings also suggest that the region could not exploit its potential for
reconstruction growth in the early post-war decades. This outcome, at least in part, resulted from
labour-supply constraints due to large population losses during the 1940s.
The paper is structured as follows. Section I reviews the existing literature on the determinants
of post-war growth in Europe and develops the analytical model. In Section II, I discuss the sources of
data and explain the necessary revisions. Section III presents the econometric results and makes a
preliminary attempt at locating the potential causes behind the size and evolution of the gap between
socialist and non-socialist economies in their pace of development. Section IV discusses further
implications and avenues of research to explore. Section V concludes.
I.
Modelling post-war growth
There is a vast literature on the economic development of post-war Europe. To explain the rapid
growth of continental economies in the 1950s and 1960s and their sudden slowdown thereafter has
long been a primary concern for economists and economic historians alike. It is a widely shared notion
that pent-up demand for consumer products in domestic markets and booming exports following the
liberalisation of international trade gave a strong boost to investment and through that productivity
growth. In the unique context of the post-war settlement, it combined with wage moderation to
facilitate full employment and sustained growth.5
Demand-side theories, however, failed to explain the marked differences in average rates of
economic growth amongst industrialised nations. In the mainstream literature, post-war growth has
been explained primarily by supply-side factors. Convergence is the most commonly stressed of them
all. The presence of a large transatlantic productivity gap at the end of World War II together with
trade liberalisation, fixed exchange rates and domestic market reforms allowed European economies to
achieve rapid growth by adopting American technology.6 Dennison pointed out that fast growth in
productivity was also supported by an extensive scope for structural change driven by the reallocation
4
Balassa and Bertrand, ‘Growth performance’; Van Ark, ‘Convergence’; Sleifer, Planning ahead
Lámfalussy, The United Kingdom and the Six; Eichengreen, ‘Institutions’
6
Baumol, ‘Productivity’; Abramovitz, ‘Catching-up’; Nelson and Wright, ‘Rise and fall’; Crafts, ‘The golden age’
5
2
of low-productivity labour from agriculture to manufacturing and services.7 Kaldor specifically argued
that the growth of national income was led by industrial expansion which, in turn, relied on increasing
industrial employment. Industrial investment enjoyed increasing returns to scale, and thus labour
expansion lead to faster growth in productivity and output.8 Kindleberger developed a similar
hypothesis, in which labour-supply flexibility stemming from underemployment in agriculture,
increased labour participation, or immigration, limited the growth of real wages, making investment
more profitable. Investment in new technology, in turn, acted to enhance labour productivity, which
further increased the profitability of investment.9
Structural modernisation and conditional convergence are both relevant to the history of
command economies as well. The Solow model or extensions thereof suggest that, conditional upon
the rate of investment and population growth, countries with initially lower capital-labour ratios can
achieve relatively faster growth in labour productivity due to high marginal returns to capital.10 Under
the rule of diminishing returns, socialist industrialisation was also expected to face an eventual
slowdown in economic growth.11 The ability to rely on idle labour reserves in agriculture in the
process of industrialisation was also critical for underdeveloped countries.12 Allen demonstrated that
the forced reallocation of labour and resources from agriculture to heavy industry made a very
substantial contribution to high income growth in the USSR both prior to and after World War II.
Investment-led growth could be sustained as long as the rural labour surplus was not absorbed.13
The role of labour-supply flexibility secured by other factors such as increased participation or
population growth is less prominent in the existing literature on socialist economies. Although the
rising rate of female employment received strong emphasis, it has been mentioned more in the context
of social policy and rarely recognised as a response to labour-supply constraints. The notion that postwar growth was largely a reflection of a reconstruction effect that propelled war-shattered economies
back to their long-run productive potential has been similarly neglected.14 Although Jánossy himself
witnessed and studied post-war economic development from the eastern side of the Iron Curtain, his
theory was applied predominantly in the western literature, particularly in the context of the West
German growth miracle after 1948.15 By contrast, his views, radically at odds with the prevailing
Marxist orthodoxy, were swiftly rejected by leading economists in his native Hungary, and were only
recently acknowledged as relevant in a socialist context.16
Beginning with the seminal article of Dumke, cliometric investigations tested the relative
explanatory power of these alternative supply-side theories in the context of post-war growth in
Western Europe.17 Both Dumke and Temin employed simple cross-country models regressing the
average annual growth rate of real GDP per capita on initial income levels to account for convergence,
7
Denison, Why growth rates differ
Kaldor, Causes
9
Kindleberger, Europe’s postwar growth
10
See Mankiw et al, ‘A conntribution’, among others.
11
Horvat, Towards a theory
12
Nurkse, Problems of capital formation; Lewis, ‘Development’
13
Allen, ‘Capital accumulation’, Idem, Farm to Factory
14
Jánossy, The end of the economic miracle
15
Manz, Stagnation und Aufschwung; Abelshauser, Wirtschaft in Westdeutschland; Idem, Wirtschaftsgeschichte;
Borchardt, Perspectives; Eichengreen and Ritschl, ‘Understanding’
16
See Vonyó, Socialist industrialisation. The Hungarian Economic Review (Közgazdasági Szemle) published three
influential articles by Tibor Erdős, Zoltán Román, and Ferenc Molnár in its 1967 volume that all laid a barrage of
criticism on the Jánossy thesis.
17
Dumke, ‘Reasessing the Wirtschaftswunder’; Wolf, ‘Post-war Germany’; Temin, ‘The golden age’
8
3
the share of agriculture in the labour force to measure lags in structural development, and the
difference between real GDP per capita in 1938 and 1948 to reflect wartime dislocation. Vonyó
developed a more sophisticated framework with panel regressions estimating country-fixed effects.18
He also showed that a conditional convergence model becomes over-specified with the inclusion of
variables accounting for structural development that strongly correlate with differences in income
levels. Instead, his model includes labour-force growth to account for labour-supply flexibility. The
effect of the post-war output gap is estimated at two stages. The first stage separates the time-constant
component from an interaction term that includes a linear time trend. In the second stage, the countryfixed effects are regressed on the values of the output gap measured in 1948.
This paper applies a revised version of this model with four decadal intervals between 1950 and
1990 for an extended sample that includes 16 Western and 9 Eastern European countries (see notes to
Figure 1). The only additional explanatory variable is a dummy for socialist economies. Since this
distinction yields time-constant values, its effect is modelled in essentially the same way as that of the
post-war output gap.
Growthit = α + β1 Incomeit + β 2 Labgrowthit + δ1GAP* Time − δ 2 Socialist* 60s −
δ 3 Socialist* 70s − δ 4 Socialist* 80s + ui + xt + ε it
u = a − β 3 GAP − β 4 Socialist + e
[1]
[2]
The only difference is that the variable is interacted with period-fixed effects, instead of a time
trend. Unlike in the case of the output gap, we cannot a priory assume a gradual increase or decline of
the effect of institutional divergence over time. Period-fixed effects are estimated separately, in order
to isolate period-specific unobserved characteristics from the trajectory of socialist underperformance.
The dependent variable is the average annual logarithmic growth rate of GDP per capita measured at
constant prices. Income denotes the log ratio between the USA and country i in per capita GDP at the
start of each decade. This modified specification turns the coefficient on convergence positive and
gives a direct interpretation to the period-fixed effects as measures of relative growth performance.19
To account for the post-war output gap I take the average annual logarithmic growth rate of GDP per
capita between 1938 and 1950 (between 1934 and 1950 for Portugal and Spain to reflect the impact of
the Spanish Civil War).20 Hence the negative sign before the coefficient ß3. The positive sign before
the δ coefficient indicates that the negative effect of wartime growth is assumed to gradually diminish
over time. To estimate the impact of the output gap on post-war growth, we need to add δ1 to ß3 once
for the 1950s, twice for the 1960s, three times for the 1970s and four times for the 1980s. The δ
coefficients for the interactions of the socialist dummy with period-fixed effects measure if and to what
extent the relative underperformance of command economies worsened compared to the 1950s.
Labour-force growth is measured as the average annual logarithmic rate of increase in the size
of the total economically active population as defined by the ILO: the number of those aged 15 and
18
Vonyó, ‘Post-war reconstruction’
19
The typical specification of using initial income levels instead of distance to the frontier yields very large
negative coefficients for convergence and large positive coefficients on dummies for subsequent periods since
income levels increase over time across the whole sample. It also yields very large values for the intercept.
20
The more sophisticated specification used by Vonyó (2008) that tries to account for lost growth during the war years
cannot be applied to this extended sample because GDP data for Eastern European countries in the interwar period is
scarce and often of very poor quality. For the same reason, the gap cannot be measured before 1950.
4
above who supply their labour at a given point in time. This definition assures that the variable is not
endogenous to economic growth. It does not automatically increase with employment because it
includes the unemployed, too. It depends strongly on factors such as enrolment in higher education, or
the retirement age. However, in the post-war period cross-country differences in labour-force expansion
reflected above all differential rates of population growth that, in turn, can be explained mostly by
international migration patterns. The size and direction of immigrant flows are determined primarily
by international differences in income levels, not growth rates.21 In the post-war era, the western
offshoots had the largest number of immigrants and also the smallest growth rates of GDP per capita
among advanced nations. Furthermore, as the cases of colonial repatriates in France, the UK or the
Netherlands and East German refugees in West Germany demonstrate clearly, immigration into
European countries after 1950 was often driven by non-economic factors.
II.
Data
Levels of both GDP per capita and population are derived from the most recent versions of the
Maddison series. The contributors of the Maddison Project, a collaborative international initiative to
update and extend comparative historical national accounts, provide estimates for most countries
represented in my dataset.22 Data for East and West Germany separately, consistent with the Maddison
series, are reported in the Total Economy Database of the Conference Board.23 Labour-force statistics,
both for the total economically active population and its occupational structure, are drawn from the
online database of the ILO for 1980-90, and from an ILO compendium for 1950-70.24
Any study of socialist economic development needs to treat data on national income with more
than a modicum of suspicion. Official statistics were distorted to a large but non-quantifiable extent
through several factors. Whereas physical output series are considered comparatively trustworthy,
aggregates expressed in value terms reflect unrealistic producer prices, incorrect weighting inasmuch
as industry was always attributed a higher than actual share in net material product, and inappropriate
methods employed in the computation of index numbers.25 Estimates for the 1950s were particularly
inflated as political leaders frequently required an upward correction of figures to support official
propaganda. Thankfully, independent western research on East European economies established
alternative national income series of superior quality. They relied on physical output indicators
published in official sources, but computed index numbers by extrapolation from independently
constructed benchmarks, and applied western national accounting standards.
The most substantial work was carried out by the CIA and the U.S. Congress Joint Economic
Committee for the U.S.S.R. and by the Research Project on National Income in East Central Europe
(Research Project) under the leadership of Thad P Alton at Columbia University and the Riverside
Research Institute in New York. In a long series of publications, the latter reported GNP estimates for
Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and Yugoslavia, which constitute the
foundation of the Maddison data, besides the earlier work published in the pioneering Income and
21
Borjas, Economic research
Bolt and Van Zanden, ‘Maddison Project’, data available online at: http://www.ggdc.net/maddison/maddisonproject/home.htm
23
Available online at: http://www.conference-board.org/data/economydatabase/
24
LABORSTA Internet: http://www.laborsta.ilo.org; ILO, Labour-force estimates
25
Net Material Product was the national accounting concept used by CMEA countries. It is conceptually similar to
GDP, but excludes services deemed unproductive, especially housing and the government.
22
5
Wealth series edited by Simon Kuznets.26 Although these alternative estimates have not been accepted
without controversy, they remain widely acknowledged as the best available. The most heated debate
surrounded the national accounts of the U.S.S.R. for the 1970s and 1980s. After the seminal paper of
Khanin and Seliunin, several scholars claimed that even CIA figures overstated Soviet growth.27
However, serious doubts have been raised about the reliability of these radical re-estimates. There
remains a lack of clarity concerning some of the sources and methods Khanin and Seliunin had used,
which made some of their results non-replicable. Furthermore, they seem to have neglected serious
index-number problems when estimating hidden inflation that formed a core foundation of their
arguments.28 Therefore, most western academics have continued to adhere to the CIA figures, which
have been repeatedly refined over the 1980s and early 1990s.29
The country with the weakest GDP data in East Europe is undoubtedly Albania. National
accounts were poorly constructed, especially for the 1950s, and there is hardly any statistical evidence
on output for the interwar years. Gaps were filled by Maddison with crude estimates constructed by
averaging the growth rates of neighbouring countries. One way of controlling for the weakness of the
Albanian data is to exclude them from the analysis. Another is to include a dummy variable, additional
to the one accounting for the difference between socialist and non-socialist countries in the size of the
country-fixed effects. The coefficients we thus obtain can be interpreted in two ways: (i) that we
provide a purified measure for the underperformance of command economies that does not depend on
inaccurate estimates, and (ii) that Albania had a unique growth experience even in comparison with
other command economies. It remained effectively the only developing country in Europe, reflected
both in low income levels and remarkably high rates of population growth by western standards.
Albania was also governed throughout the post-war era by an autarchic Stalinist regime that showed
more resemblance with North Korea than with other East European communist states.
One additional country for which the Maddison data are highly questionable is East Germany.
Levels reported in the Total Economy Database are derived from the work of Sleifer. The Federal
Statistical Office constructed a benchmark for East and West German national income after
reunification, which put the former GDR at 31 percent of the West German level in both GDP per
capita and labour productivity in 1991. Sleifer computed an index of East German GDP for 1950-90,
building on sectoral data reported by both the Research Project and the German Institute of Economic
Research (DIW), and also by other West German publications.30 The time series can be considered
reliable for the period after 1960, for which they correspond well, at least in terms of growth rates,
with the more conservative estimates of Merkel and Wahl.31 However, between 1950 and 1960, the
index numbers of Sleifer suggest much higher growth rates than what we can derive from the GDP
levels computed by Ritschl and Spoerer based on the work of Merkel and Wahl.32 Furthermore, both
series yield levels of GDP per capita for 1950 that are far too low to be acceptable, if one trusts the
comparative literature on East and West German growth across World War II and the immediate postwar years. Grünig estimated East German GDP per capita in 1936 at 103 percent of West Germany.33
We can confirm this figure precisely with regional income levels published by the governing body of
26
For details see Maddison, World Economy, pp. 469-471.
Åslund, ‘How small’; Ericson, ‘Soviet statistical debate’
28
Harrison, ‘Soviet growth’, p. 159.
29
See Ellman and Kontorovich, Disintegration.
30
For details see Sleifer, Falling behind, p. 17 and pp. 176-178.
31
Merkel and Wahl, Das geplünderte Deutschland
32
Sleifer, Falling behind, p. 176; Ritschl and Spoerer, p. 26.
33
Grünig, ‘Volkswirtschaftliche Bilanzen’
27
6
the U.S. occupation zone.34 However, if we extrapolate from the official 1991 benchmark both the
Maddison data for West Germany and the index numbers of Sleifer for East Germany, then GDP per
capita in the GDR in 1950 comes out to only 52 percent of the corresponding western level. This
benchmark would suggest a much larger decline in East German national income between 1936 and
1950 than the most widely accepted estimate of Barthel.35
Instead of using weak output data from the early 1950s, I compute an East-West benchmark for
GDP per capita in 1950 by accepting both the 1936 benchmark of Grünig and the estimated growth
rate in net national income for 1936-50 by Barthel. This approach puts East German GDP per capita at
65 percent of the West German level in 1950 and yields more reasonable growth rates for the 1950s.36
For the period 1936-39, the growth rate of GDP per capita for the later GDR and Germany as a whole
are assumed to be identical. Levels between 1960 and 1990 are determined by backward projection
from the 1991 benchmark, using the GDP series of Sleifer and official population statistics.37
III.
Empirical results
The main regression results are summarised in Table 1. As shown in columns I and II, convergence as
a principal driver of post-war growth is equally prominent regardless whether we estimate the model
on the full sample, or only on Western Europe. The main quantitative effect of extending the analysis
to command economies is that the coefficient on the post-war output gap becomes insignificant. We
only obtain a statistically significant result, if the Socialist dummy is included in the model. Column
III suggests that over the period, on average, Eastern European countries grew three percentage points
slower annually than they should have based on the predictions of the supply-side model. However,
this relative underperformance was not time constant. Once we include the interaction terms with
period fixed effects, it becomes clear that the relative growth perfomrance of command economies
worsened substantially and significantly only after the 1970s. We do not see the gradual deterioration
stressed by previous scholarship or suggested by a simple glance at the regional growth differentials
presented in Figure 1. If anything, the Eastern European growth record improved in the 1960s,
following the experience of western economies. The 1980s represent a clear climacteric.
Table 1 about here
If we account for this factor, the combined effect of convergence and labour-supply flexibility
appears even stronger than what we estimate for the group of western countries only. As shown in
Figure 2, the structural dynamic of catch-up growth was also remarkably similar in Eastern and
Western Europe. At the start of the post-war era, European economies present an almost perfect
correlation between the share of agriculture in the labour force and their distance to the world
productivity frontier. Furthermore, the correlation coefficient remains practically the same (r = 0.902),
if calculated for a pooled sample over the entire period 1950-90. However, the potential for
reconstruction growth becomes significantly smaller. A one percent annual decline in GDP per capita
during the 1940s raised the growth rate in the following decade by 0.22 percentage points in Western
34
Länderrat des Amerikanischen Besatzungsgebiets, Statistisches Handbuch, pp. 600-601. I divided Berlin between
the eastern and western sectors using the population shares according to the 1939 census.
35
Barthel, Ausgangsbedingungen, Table 61.
36
This benchmark is also very close to the estimates of Stolper and of Ritschl and Vonyó for comparative industrial
labour productivity. For details, see Ritschl and Vonyó, ’The roots of economic failure’, Appendix: Table A3.
37
Statistisches Bundesamt, Bevölkerungsstatistische Übersichten, p. 24.
7
Europe but only by 0.18 percentage points in Europe as a whole, even after we control for socialism.
This result accords with the earlier finding of Vonyó that the reconstruction dynamic was stronger for
core western industrialised nations than for semi-peripheral countries.38
Figure 2 about here
The results also show that the distinction between socialist and non-socialist economies makes
an important contribution to our understanding of the European growth trajectory between 1950 and
1990. Whereas improved performance in the 1960s was a continent-wide phenomenon, driven by
increased economic openness, domestic reforms and political rapprochement between the rival
ideological blocs, the substantial underperformance during the 1980s is predominantly an Eastern
European story. The growth deceleration in the West can almost entirely be explained by the fact that
the core countries exploited their catch-up potential and that the growth-enhancing effect of the postwar output gap had long vanished. The relative underperformance of socialist economies remained
uniform between the 1950s and late 1970s and only worsened significantly after 1980.
Finally, column VI confirms that under the Stalinist dictatorship of Enver Hoxha, Albania had a
dismal growth record even in comparison with other command economies in Eastern Europe. The
inclusion of the dummy variable for Albania in the regression explaining the country-fixed effects
does not alter the coefficient on the post-war output gap. Also, the trajectory of growth rates in
Albania looked very similar to other members of the Soviet bloc, with a slowdown in the 1970s and
virtual stagnation after 1980. The relative underperformance of other socialist countries in GDP per
capita growth averaged 2.9 percent between 1950 and 1980 and 4.4 percent in the 1980s. This
substantial gap comes across vividly on the scatter diagram in Figure 3. Eastern Europe was a world
apart from the convergence club that emerged in the West between 1950 and 1990. The growth record
of Albania was the most disappointing, but Poland and Romania also grew much slower than what
would have been predicted by their initial conditions.
Figure 3 about here
What the diagram doesn’t show is an even more crucial fact behind the astonishingly large
negative coefficient for the Albanian dummy: modest growth in GDP per capita despite exceptional
labour-supply flexibility. Albania was not only economically, but also socially underdeveloped in a
European context. This was reflected in the remarkably high rate of population growth that averaged
2.5 percent annually over the whole period, and which almost tripled the labour force. The post-war
experience of Albania exemplified that of a Lewis-type developing country with unlimited supply of
labour, where the vast reserves of underemployed workers in the primary sector alone would have
sufficed to facilitate industrialisation. Any further expansion in the labour force acted to enhance the
denominator in GDP per capita, and thereby slowed down economic growth. As in other developing
nations, excessive population growth only conserved the dominance of agriculture in the economy,
which still harboured 54 percent of all job seekers in the country in 1990.
Table 2 about here
38
See Vonyó, ‘Post-war reconstruction’, pp. 231-233. Econometrically, the impact of the post-war output gap is
reduced by the period-fixed effects, as the latter reflect the extent to which Europe as a whole rebounded from weak
growth in the 1940s. Without the period dummies, the growth-enhancing effect of the output gap in the 1950s comes
out to 0.34 percent p.a. for Western Europe and 0.28 percent for the full sample.
8
In order to trace the very substantial relative underperformance of Eastern Europe further, I reestimate the main regressions for a limited sample that includes only the 9 socialist economies. The
results are reported in Table 2. Column I confirms that convergence was also a dominant aspect of
post-war growth under central planning, as argued in Section I; if anything, even more important than
in western countries. Although the limited sample does not allow us to use regression analysis to
explain the country-fixed effects, it becomes clear from the results that reconstruction growth did not
play a prominent role on the eastern side of the Iron Curtain. If the growth potential derived from the
post-war output gap did not significantly decline over time, then this potential could not have been
significant in the first place.
The period-fixed effects further reduce the coefficient on the interaction term. They also turn the
seemingly substantial impact of labour-force growth negligible and statistically insignificant. The
decadal dummies make it clear that the growth record of socialist economies improved significantly
between the 1950s and the 1960s, and deteriorated sharply in the 1980s. The 1970s only saw the
reversal of the improvements of the previous decade. This result stands regardless whether the sample
includes Albania or not. The most successful period for Eastern Europe in terms of economic growth
was between 1960 and early 1970s. Socialist economic development was relatively most disappointing
during the first and last decades of the period under investigation.
For the latter, the explanation is well established and hard to refute. Analogous to the experience
of developing regions, the 1980s were a period of deep structural crisis in most command economies.
The oil shocks and the emergence of flexible production technology rendered their industries
uncompetitive and generated large balance-of-trade deficits. Rising interest rates introduced to combat
inflation in creditor nations meant that the cost of debt servicing after the substantial loans opened
during the 1970s became much more expensive. With falling export revenue, the only way to avert a
crushing balance-of-payments crisis was to limit imports and avoid additional borrowing, which lead
to austerity and through that a contraction in aggregate demand. The three countries with reasonable
growth rates after 1980 represented exceptions from this pattern. The USSR was one of the world’s
main exporters of hydrocarbons, and thus enjoyed growth in export revenue. Czechoslovakia did not
borrow extensively in the 1970s and thus did not need to tighten the belts. Hungary would have had to,
but it joined the IMF in 1982, which secured its position as a debtor.
Why the growth performance of the region during the 1950s was also much weaker than what
would have been warranted by supply-side conditions is harder to explain. Both Marxian orthodoxy
and neoclassical growth theory predict investment-led growth to be most successful at the early stages
of planned industrialisation characterised by the lowest levels of capital intensity. Furthermore, the
massive scale of wartime destruction and post-war dislocation attributed an enormous growth potential
to Eastern European economies during the reconstruction period. However, the regression results
indicate that the reconstruction dynamic was weak in socialist economies. As argued by Jánossy and
confirmed econometrically by Vonyó, reconstruction growth was conditional upon adequate labour
supply, upon which the long-run productive potential of the economy depended.39
This is the key concept to solving the puzzle. Whereas in Western Europe, World War II was
mostly a war of destruction and dislocation, along the Eastern front, it was above all a war of
extermination. This resulted in comparatively much larger population losses during the 1940s: thanks
to colossal wartime casualties, both military and civilian; the Holocaust that affected most severely the
39
Jánossy, The end of the economic miracle; Vonyó, ‘Post-war reconstruction’
9
countries where the European Jewry had been concentrated; and lastly the expulsion of minority
Germans from East and Central European states and the former eastern provinces of Germany that
were ceded to Poland and the USSR, in accordance with the Potsdam Agreement, after 1945. While
the latter featured prominently in the literature of the West German economy, it has been largely
overlooked in the economic history of Eastern Europe.40 As a means of collective punishment for the
crimes of Nazi Germany, sixteen million Germans were uprooted between 1945 and 1951: two million
deported to remote regions of the USSR, twelve million forcefully re-settled to Germany and Austria,
with around two million fallen during the process or gone missing. The largest German minorities
lived in post-war Poland and Czechoslovakia, which, as a result, also hit hard by the Holocaust,
recorded the highest rates of decline in their resident population between 1939 and 1950. By contrast,
the population of East Germany increased by ten percent over the same period, precisely due to the
influx of German expellees.41
Figure 4 about here
Due to the large variation across countries in population growth during the 1940s, labour-force
expansion in the subsequent decade was not the determining factor of labour-supply flexibility. Hence
the insignificant coefficients obtained on labour-force growth after controlling for period-fixed effects
reported in Table 2. As shown in Figure 4, there was, if anything, a negative correlation between
labour-force growth and the growth of GDP per capita during the 1950s. Theoretically, this could be
explained with the possibility of labour reallocated from agriculture fuelling industrialisation in the
early post-war period. However, since collectivisation was a long drawn-out process in several
countries (Hungary, GDR), or did not take place at all (Poland, Yugoslavia), the farming sector had a
limited capacity to release labour during the 1950s.
Figure 5 about here
The truth was that countries which recorded strong labour-force growth in the 1950s typically
suffered the heaviest population losses during the 1940s. Thus their potential for reconstruction growth
was constrained by severe labour scarcity at the onset of post-war recovery. The main exception was
the GDR which could rebound strongly after 1950, despite a constant outflow of dissidents to West
Germany, because the earlier influx of expellees had made its labour supply sufficiently flexible.
Figure 5 correspondingly indicates a strong positive relationship between the growth of GDP per
capita during the 1950s and population growth in the 1940s, with Albania once more the only outlier.
IV.
Further implications
There are three main alternative explanations for the growth trajectory of the socialist economies in
Eastern Europe that we can discuss briefly. The fact that this trajectory showed considerable
improvement in the 1960s and early 1970s compared to the 1950s may be a reflection of: increased
economic openness, increased political openness and with that a diminishing defense burden, and
structural shifts in the composition of investment.
40
Ambrosius, ‘Der Beitrag der Vertriebenen’; Vonyó, ‘Bombing of Germany’; Braun and Mahmoud, ‘Employment
effects’
41
Reichling, Die deutschen Vertriebenen
10
Amidst rising Cold-War tensions and in response to the Marshal Plan, the members of the
Soviet Bloc established the Council of Mutual Economic Assistance (or as it was known in the West
the COMECON) in 1949. During the first ten year of its existence, it advocated a policy of national
autarchy, which meant that there was very little trade even between member states. First the shift to
‘bloc autarchy’ in 1959 and later a gradual opening up to capitalist and developing markets increased
both the export and import intensity of COMECON economies sharply until the early 1970s. Détente
also brought with it opportunities for technological co-operation between eastern and western
companies, that were particularly successful in car manufacturing. Increased openness might have led
to a temporary improvement in the relative growth performance of command economies.
However, this hypothesis is difficult to test in the present framework. The empirical literature
has experimented with different measures of openness and several of them might have affected
socialist development contemporaneously. Furthermore, the inclusion of any measure of openness in
the present model would be problematic because, after controlling for size, most of the variation
would be across the socialist-non socialist divide. Therefore, openness would strongly correlate with
the Socialist dummy and thus the coefficients would reflect the effect of other unobserved factors.
This is something we can exploit to test for the lack of openness as a significant limiting factor of
post-war growth in Eastern Europe. As all socialist countries lagged behind other nations at a similar
developmental stage in openness, theory would predict that this should have limited the growth
potential of the smallest countries the most. Large, complex economies, such as the USSR, but even
Poland or Yugoslavia, were able to exploit economies of scale and concentrate resources within
national borders, and thus were less dependent on foreign trade. However, as shown in Figure 6, we
can only observe weak and statistically insignificant correlations between population size and relative
growth performance among socialist economies.
Figure 6 about here
The era of Détente that gave rise to the strategic concept of peaceful coexistence, codified in the
Helsinki Accords of 1975, might have improved conditions for economic growth east of the Iron
Curtain through another channel instead. When tensions between the nuclear superpowers were tense,
Eastern European economies carried a comparatively large defense burden. As the latter diminished
after the early 1960s, more resources could be allocated to productive use, like investment in new
machinery and plant. During the 1980s, this process was reversed as the Cold War intensified once
again. While this argument is very convincing, it requires further data to explore. Estimating the
defense burden is a difficult and laborious task, which has only been carried out for the USSR and
mainly for the 1970s and 1980s. As a first attempt, cross-country data could be collected to construct
consistent estimates on the share of national income devoted to military spending.
Finally, conditions for growth might have improved in the 1960s and worsened in the 1980s due
to structural shifts in investment activity. At times of great structural transformation, when production
moves from agriculture to industry or from the latter to services (as in the 1950s and 1980s in both
Eastern and Western Europe), economies need to allocate substantial resources to build new
infrastructure. Once, the new buildings stand, investment shifts from structures to equipment, as the
latter are exposed to a much higher rate of depreciation. Equipment investment, in turn, is seen as a
prime determinant of long-run growth in endogenous growth models and empirical research built on
11
them.42 The implication of this insight is that even at constant rates of investment, socialist economies
might have spent a substantially higher proportion of national income on productive machinery during
the 1960s and early 1970s than they did in the 1950s and 1980s. To test this hypothesis requires
detailed statistics that allow us to construct reliable series of investment disaggregated into different
types of capital, methodologically consistent both across countries and over time. For early years, this
is only possible for a few Central European countries with sufficiently good data, and thus it cannot be
incorporated into the cross-country analysis presented in this paper.43
V.
Conclusions
The falling behind of command economies in Eastern Europe during the post-war era has inspired
economists and historians alike and featured prominently in the literature on comparative economic
development. Much effort has been invested into defining the causes of this relative underperformance,
but the question by how much socialist economies actually underperformed compared to other nations
at a similar developmental stage and facing similar supply-side conditions has not been answered. In
this paper, I applied a model with country-fixed effects to isolate the differential in growth rates of per
capita GDP between socialist and non-socialist economies from supply-side factors that influenced
relative growth performance during the post-war period.
Controlling for convergence, labour-supply flexibility, and the gradually diminishing effect of
the temporary output gap caused by wartime destruction and war-induced dislocation, being a
command economy still reduced annual growth rates by a significant margin. Given their growth
potential, and controlling for period-fixed effect, socialist countries lagged behind western growth
rates by almost three percentage points annually between the 1950s and the 1970s. This already wide
gap increased to 4.5 percentage points in the 1980s. Europe’s only developing country, Albania, which
yoked under an autarchic Stalinist regime, compared very poorly even with other command economies.
Although the primary aim of the paper was to measure, not to explain, the underperformance of
Eastern Europe, the econometric findings suggest that several countries in the region could not exploit
their potential for reconstruction growth in the early post-war decades. This, at least partly, resulted
from labour-supply constraints stemming from large population losses suffered during the 1940s. By
contrast, the lack of economic openness does not appear to have been a strong limiting factor in
socialist growth, but further research is needed, if we wish to provide a comprehensive explanation of
the growth trajectory that Eastern European economies established in the era of state socialism.
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14
Table 1 Regressions explaining economic growth in 25 European countries
I
II
III
IV
V
VI
Initial income
3.2639***
(3.86)
3.3983***
(4.75)
3.3983***
(4.75)
3.7686***
(5.77)
4.1206***
(9.74)
4.1569***
(9.83)
Labour-force growth
0.3120*
(1.84)
0.5078***
(3.38)
0.5078***
(3.38)
0.2850*
(1.96)
0.2870**
(2.14)
0.2869**
(2.14)
Output gap * Time
0.1332**
(2.01)
0.9952***
(3.17)
-0.3009
(-0.66)
-0.7816
(1.52)
0.1294***
(2.95)
0.7474***
(2.82)
-0.5232
(-1.50)
-1.3683***
(-3.64)
0.1294***
(2.95)
0.7474***
(2.82)
-0.5232
(-1.50)
-1.3683***
(-3.64)
0.0888**
(2.19)
1.1407***
(4.13)
-0.0265
(-0.07)
-0.4474
(-1.12)
0.0852**
(2.28)
1.1618***
(5.80)
0.0852**
(2.28)
1.0254***
(6.34)
-0.3475
(-1.51)
Socialist * 60s
-0.6680*
(-1.73)
-0.3832
(-1.15)
Socialist * 70s
-0.5253
(-1.32)
Socialist * 80s
-1.8415***
(-4.37)
-1.5879***
(-4.57)
-1.4614***
(-4.42)
-0.3494
(-0.50)
-0.7701*
(-1.79)
-0.8027*
(-1.86)
100
48.96
0.83
100
56.64
0.83
1960s
1970s
1980s
(constant)
0.9085
(1.38)
N
F
R2
64
22.50
0.76
Output gap
-0.0916
(-0.12)
-0.0916
(-0.12)
100
100
100
43.34
43.34
38.65
0.79
0.79
0.84
Regressions explaining country-fixed effects
-0.3526**
(-2.54)
-0.1861
(-0.74)
Socialist
-0.4103**
(-2.65)
-0.2780*
(-1.72)
-0.2598
(-1.48)
-0.2652**
(-2.12)
-3.2342***
(-6.49)
-2.7274***
(-5.27)
-3.2643***
(-5.77)
-2.9144***
(-6.66)
Albania
(constant)
N
F
R2
-0.3850*
(-1.69)
-4.5877***
(-4.38)
0.3111
(1.45)
0.1669
(0.46)
16
6.48
0.32
25
0.54
0.02
1.4208***
(4.41)
25
21.84
0.67
1.1556***
(3.45)
25
14.03
0.56
1.3376***
(3.66)
25
16.69
0.60
1.3985***
(5.13)
25
28.31
0.80
Note: The dependent variable in the fixed-effects regressions is the logarithmic annual growth rate in GDP per
capita averaged over a decade. The superscripts *, ** and *** indicate significance at the 10, 5 and 1 percent
levels respectively. Model (I) is estimated for 16 non-socialist countries only. Models II and III only differ in the
regression explaining the country-fixed effects.
15
Table 2 Regressions explaining economic growth in 9 East European countries
I
II
III
IV
V
Initial income
6.6435***
(5.82)
4.5555***
(3.98)
5.0055***
(7.27)
6.1959***
(5.72)
4.8435***
(6.63)
Labour-force growth
1.0293**
(2.34)
0.1170
(0.41)
0.0829
(0.31)
1.4226***
(3.22)
0.2071
(0.59)
Output gap * Time
0.0783
(0.81)
0.0523
(0.99)
0.0476
(0.93)
0.1057
(1.18)
0.0550
(1.01)
1960s
1970s
19 80s
(constant)
Albania included
N
F
R2
-6.9866***
(-4.62)
YES
36
15.35
0.66
0.6861*
(1.67)
-0.2437
(-0.50)
-2.0518***
(-3.90)
-3.0585*
(-1.70)
YES
36
37.23
0.91
0.8447***
(3.30)
0.8057***
(2.89)
-1.8518***
(-5.56)
-3.7807***
(-3.64)
-1.8358***
(-4.30)
YES
36
46.21
0.91
-5.7933***
(-4.42)
NO
32
19.04
0.73
-3.1523***
(-2.97)
NO
32
40.33
0.91
Note: The dependent variable in the fixed-effects regressions is the logarithmic annual growth rate in GDP per
capita averaged over a decade. The superscripts *, ** and *** indicate significance at the 10, 5 and 1 percent
levels respectively.
16
Average annual growth rate in GDP p.c. (%)
6
West
5
South
4
East
3
2
1
0
1950s
1960s
1970s
1980s
West: Austria, Belgium, Denmark, Finland, France, Germany (West), Ireland, the Netherlands, Norway,
Sweden, Switzerland, and the United Kingdom. South: Greece, Italy, Portugal and Spain. East: Albania,
Bulgaria, Czechoslovakia, Germany (East), Hungary, Poland, Romania, the USSR and Yugoslavia.
Figure 1 Economic growth in Europe 1950-1990
Source: Total Economy Database (GDP measured in 1990 Garry Khamis dollars)
17
2.5
ROM
2
r = 0.925
YUG
BUL
1.5
GRE
POR
ESP
HUN POL
1
GDR
GER
NOR
.5
BEL
USSR
AUT
FIN
CZ
IRL ITA
FRA
NL
SWE DK
UK
CH
0
Income gap relative to the USA (ln ratio)
ALB
0
20
40
60
80
Share of agriculture in the labour force (%)
Figure 2 Structural underdevelopment in Europe in 1950
18
4
ITA
AUT
FRG
3.5
YUG
BUL
FIN
3
ROM
IRL
GDR
BEL
HUN
USSRCZ
2.5
FRA
NOR
NL
DK
SWE
ALB
UK
CH
2
POL
1.5
Annual growth rate in GDP p.c. 1950-90 (log%)
GRE
ESP
POR
0
2000
4000
6000
8000
10000
GDP per capita in 1950 in 1990 GK dollars
Actual values
Fitted values*
* The regression line is fitted to the actual values of 16 West European countries
Figure 3 Economic growth and convergence in Europe 1950-1990
19
5.5
5
GDR
4.5
YUG
4
ROM
CZ
HUN
3.5
USSR
ALB
3
Annaul rate of growth in GDP per capita (log%)
BUL
POL
-.5
0
.5
1
1.5
Annual rate of labour-force growth (log%)
Figure 4 Socialist economic growth and labour-force expansion in the 1950s
20
5.5
5
GDR
4.5
YUG
4
ROM
CZ
HUN
3.5
USSR
ALB
3
Annual growth rate in GDP p.c. 1950-60 (log%)
BUL
POL
-2
-1
0
1
2
Annual rate of population growth 1939-50 (log%)
Figure 5 Demographic constraints and socialist economic growth in the 1950s
21
4
3.5
3
BUL
ROM
GDR
HUN
2.5
Annual growth rate of GDP p.c (log%)
YUG
CZ
ALB
2
POL
0
10
20
30
CZ
BUL HUN
0
YUG
POL
-2
ROM
ALB
-4
Annual growth rate country FE (log%)
2
GDR
0
10
20
30
Average population size 1950-90 (million)
Country-fixed effects derived from column III in Table 2.
Figure 6 The impact of size on relative growth performance 1950-90
22