1. Eastern Europe & Former Soviet Union: Class 4

2. Russian Federation q Largest of former Soviet republics (150M) q rich in natural resources q no history of a market-based institutional framework at beginning of transition

3. Early Transition Period

4. q Accumulated drop in GDP 1989-95 equals -52%. q Compare U.S. 1929-33 (-30.5%) q And the Russian decline followed a period of steady decline q clearly the decline has slowed but investment remains a major problem

5. And unlike Poland Sources of Russian investment 1993-95

6. Why has the Russian transition been so unsuccessful? Yeager, Tim. 1998. Institutions, Transition Economies and Economic Development. Chapter 8: Poland and Russia in transition.

7. Yeager’s perspective q THESIS: A major key to their diverging performance lies in differences in their institutional frameworks. q Poland has managed to create an environment in which the rules of the game are adequately spelled out. q Russia’s economy is plagued by crime, corruption and high transaction costs

8. q Far more “on-the-books”business start-ups in Poland q evidence of faith in the system q much more informal activity in Russia q can only exist if government chooses or is unable to stop its growth q But such firms are small and invest little q logical. Property rights are insecure

9. q Russian mafia controls 40% of the total economy q some 9,000 organized groups employ about 100,000 q pay no taxes; force legitimate businesses to pay protection q 1994: 70-80% of private businesses paying extortion money.

10. Hedlund and Sundstrom. 1996. The Russian economy after systemic change, Europe-Asia Studies 48(6): 887-914.

11. Factors q Monetary policy in perestroika years. More money printed than in previous 30 years combined q created a massive RUBLE OVERHANG q Russians unleashed price inflation to eliminate the overhang which became chronic. q Need austere monetary policy to turn off. Became impossible politically.

12. Consequences of chronic inflation q Shorten time horizons of economic actors---> investment decline q sharp reductions in real incomes of those on fixed incomes. q Increase in income inequality q Increase in regional inequality q PRIMITIVIZATION of Russian economy

13. Example 1 of primitivization: Structural trends q The higher the degree of processing the greater the fall in output q the relative importance of extractive industries (natural gas, coal mining, electricity generation etc.) has increased q Has made Russia more dependent on world commodity prices

14. Example 2: Reversion to barter economy q PBS Lehrer Hour, October 27, 1998

15. Example 3: Russian morbidity and mortality trends

16. Morbidity

17. Mortality Life expectancy at birth

18. Russian life expectancy in international perspective, 1994 United States France Sweden Portugal China Thailand Brazil

19. Hypotheses q Glasnost in statistics q inadequate financing for medical system q food and drinking water contamination q ecological problems (air pollution) q high rate of birth defects q Increased homicides due to gang wars and decline in public order

20. Problem with these explanations??? q Why the large gender gap??? q One route to an explanation--focus on trends in mortality causes q cardiovascular diseases q injuries including (homicide, suicide, alcohol poisoning)

21. One model IMPOVERISHMENT INSTABILITY (POLITICAL, SOCIAL, ECONOMIC) BEHAVIORAL CONSEQUENCES INCREASED MORTALITY AND GENDER GAP