Wednesday February 9, 2005

Should we resurrect the old development model?

Alazar K.

Alazarke2000@yahoo.com

Much of the current global debate on development is focused on ways to spur economic growth in poor countries. But as World Bank economist Charles Kenny argues, income growth is supposed to be a means to an end - the improved quality of life of citizens in developing countries. And that goal is frequently not met through economic growth - as the Soviet example proves.

Eight countries in the world managed to more than quadruple their per capita GDP between 1929 and 1988. They are Japan, Taiwan, South Korea, Italy, Norway, Finland, Bulgaria  and the USSR.  Evidently, the most surprising entrants here are Bulgaria and the USSR. Based on those data, should we resurrect communism as a successful development model? Of course not.

But the communist experience does teach two important lessons about our understanding of economic growth - and, much more importantly, what economic growth has to do with development. Back in 1913, Russia produced only about 8.3% of Germany’s iron output and 8.1% of its horsepower on a per capita basis. World War I and the Bolshevik revolution that followed on its heels then destroyed most of Russia’s already limited industrial base.

By 1920, output in the Soviet Union’s large-scale industry was estimated to have been only 12.8% of its meager 1913 level. In fact, the country did not return to its pre-World War I level of production until 1927. But after the end of its civil war that followed the October 1917 revolution, Soviet growth exploded.

The period between 1928 and 1937 during which farms were brutally collectivized, a man-made famine killed as many as ten million people in Ukraine and Stalin’s great terror was unleashed  the Soviet Union was the fastest growing country in the world.

Or, at least, it was the fastest growing out of the 40 major countries for which the OECD has data. Between 1937 and 1950, the Soviet Union was the ninth-fastest in economic growth out of the same 40 countries. This accomplishment came despite losing 20 million people and the destruction of a large proportion of its productive capacity in World War II. After the war, between 1950 and 1970, the USSR was the 16th-fastest growing country.

And while the USSR did drop down to seventh-slowest in the 1970-88 period, this still saw the country grow faster than New Zealand, Switzerland, Argentina, Chile, Peru and Venezuela. Looking more broadly at the experience of Eastern Europe as a whole under communism, other countries in the region did even better than the Soviet Union. Over the 1937-88 period, Romania was the 16th-fastest out of 40 in terms of growth.

This compares to the United States in 20th place and the USSR in 21st. Bulgaria for its part was 11th-fastest ahead of Brazil, France, Sweden and Germany. And Yugoslavia was seventh-fastest just ahead of South Korea.

After World War II, many in the development arena recognized this solid performance. According to Paul Krugman, in the 1950s, the general view amongst economists of Soviet planning was that “it might be brutal, and might not do a very good job of providing consumer goods, but it was very effective at promoting industrial growth.” An early economics textbook, Alfred Bonne’s “Studies in Economic Development,” published in 1957, suggested that “the price paid in the Soviet model in terms of either human cost or wasted capital investment does not frighten political leaders in underdeveloped countries whose choice for improvement of marginal conditions of human existence is very limited.”

Yet, more recent texts on economic growth have remarkably little positive to say about the Soviet economic model over the longer term. David Landes, in his otherwise magisterial ‘The Wealth and Poverty of Nations’ published in 1998, argues that the post-war record suggests, “among the heaviest losers in this period of record-breaking economic growth and technological advance were the countries of the communist-socialist bloc: the Soviet Union at the bottom of the barrel.”

As we have seen, the evidence just doesn’t support him here. Most econometricians looking at ‘the causes of economic growth’ over the last few years have also ignored the record of Soviet growth, although using a different approach. They just remove Eastern Europe from their statistical samples. Why the change from grim acceptance of the sometime economic success of communist models to active ignorance?

Most modern growth theoreticians now see liberal political and economic systems and openness as the central force in the growth and development process. Obviously, the Soviet Union is a pretty clear exception to this theory it is hard to think of a less politically liberal or economically open country than the USSR in the 1930s.

Nonetheless, if Eastern Europe in the post-war period was the only exception to the new orthodoxy on what causes economic growth, that orthodoxy would remain fairly persuasive. After all, the communist economic model’s success was in an earlier time, it collapsed in the end  and from a social, political and environmental point of view, it was an appalling mistake.

Sadly, however, Eastern Europe’s post-war experience is not the exception that proves the rule of the new growth orthodoxy. A second good example is the post-communist experience of the former Soviet Union. Russia, moving sporadically towards a more liberal economy, has seen its per capita income almost halve since the end of the Cold War.

To be continued…