Thread by @sgehlbach

Hard to disagree with @paulkrugman that the economic collapse after Gorbachev helped to set the stage for Putin. But on the details, I think we know a bit more than he suggests.

A short 🧵 on Russian economic reform. 1/

nytimes.com/2022/09/02/opi…

As Krugman notes, output collapsed in Russia during the 1990s. It was bad everywhere in the former Soviet empire, but it was especially bad in Russia. Here, from a 2002 JEP paper by @Jan_Svejnar. 2/

aeaweb.org/articles?id=10…

What caused the output collapse? Krugman suggests four possible explanations, each related in some way to #privatization, by far the most visible and controversial transition policy. 3/

I confess I am sympathetic to one of these stories👇. Russia was notoriously slow to create institutions complementary to private economic activity. 4/

And local bureaucrats often had little interest in supporting private enterprise. Where the inherited bureaucracy was small—relative to OECD countries, it was on average quite small—bureaucrats had holdup power, and privatization performed worse. 5/

scottgehlbach.net/wp-content/upl…

Whatever the reason, it just took longer than anyone expected for Russian privatization to have a positive impact on firm performance. Here, from my Oxford Handbook chapter with Brown and Earle. 6/

papers.ssrn.com/sol3/papers.cf…

In short, Russia's transition to private economic activity did not proceed...according to plan.

This plausibly lengthened Russia's "transition depression."

But is privatization itself the cause of Russia's output collapse? 7/

A bit of history: Privatization was just one of three big transition policies.

Everyone sing together: liberalization, stabilization, privatization. 8/

Privatization we have discussed.

#Stabilization we know, though getting inflation under control is trickier when the central bank is in the business of making loans to state enterprises. @dstreisman has the story. 9/ cambridge.org/core/journals/…

#Liberalization is probably not what you think it is. Liberalization of foreign trade, yes, but also of internal trade—the right of sellers to sell to whom they want, and of buyers to buy from whom they want, for a mutually agreed price, previous plan be dammed. 10/

Sounds great, right? I mean, we know that the plan was riddled with inefficiencies. It's the raison d'être for the "tolkach"—the sleazy but essential black marketeer, vividly portrayed as Chekuskin in Francis Spufford's magnificent Red Plenty. 11/ amazon.com/Red-Plenty-Fra…

Alas, and completely counter to expectations, liberalization had a large NEGATIVE effect on output in the short run. 12/

There are two versions of the basic story. The first, by @ojblanchard1 and Kremer, emphasizes bargaining inefficiences when economic relations are highly specific—when a supplier, say, produces the input precisely one other firm needs. 13/

academic.oup.com/qje/article-ab…

The other, by @gerardrolanducb and Verdier, also assumes specificity, though here the focus is on search frictions rather than bargaining inefficiencies. 14/

onlinelibrary.wiley.com/doi/abs/10.111…

In each case, the basic idea is that liberalization creates opportunities for firms outside of the plan. In BK, that can cause bargaining to break down. In RV, that discourages investment as firms look around for new partners. 15/

These are transition effects.

In the long run, reputation, vertical integration, and other mechanisms reduce bargaining inefficiencies. In the long run, firms settle on new partners and invest in those relationships.

In the short run, output collapses. 16/

Notably, neither story requires privatization to work, so long as state-owned enterprises are freed from the plan.

Liberalization, not privatization, caused the output collapse. 17/

One more thing: Krugman points to the large decline in life expectancy in Russia during the transition period.

It is easy—too easy—to ascribe this to "deaths of despair," the collateral damage of economic reform.

I've tweeted about this before. 18/

https://twitter.com/sgehlbach/status/1250526465369800706

TL;DR:

When the (relative) price of vodka goes down, vodka consumption goes up. 19/

Again, no disagreement on the big picture. After a decade of economic dislocation, the stage was set for authoritarian reversal.

But it is important to understand the causes of that dislocation, if for no other reason than to understand how unpredictable reform can be. /Fin