Comparative economic performance, inequality and the market-led remaking of Europe1 Michael Dunford School of Social Sciences and Cultural Studies University of Sussex, Falmer, Brighton BN1 9QN Tel : (44) (0)1273 606755 Email :
[email protected]
Abstract The economic integration of Europe, the collapse of Communism, and the rise of three rival economic blocs in North America, East Asia and Europe have significantly reconfigured the world, as has the struggle for hegemony most strikingly reflected in the neo-Conservative United States project for the expansion of American imperial influence. At the same time globalization, economic transformation and integration have been profoundly shaped by the ascendancy of neo-liberal economic ideologies not least through their impact on the relative weight of convergence/equalising and divergence/unequalising tendencies. The aim of this paper is to consider some of the implications of these developments for the new Europe extending from the Atlantic to Russia. Essentially it will deal with three issues. First it will ask whether Europe has lost economic momentum relative to its trans-Atlantic rival qualifying the earlier view that Rhine capitalism was superior to Anglo-American capitalism. Second, it will pay brief attention to internal development disparities within the European Union and ask whether the European Union is a catch-up machine in a world in which inequalities are frequently widening. Third it will consider in some detail the territorial and social impacts of transition in Eastern and Central Europe. Throughout attention will be paid to the impact of market-led models of development on growth and inequality, and the way in which a subjection of different parts of Europe to similar economic mechanisms, while in some senses making different parts of the continent more similar, also produces profoundly differentiated economic and social geographies.
Keywords comparative economic development, convergence, divergence, varieties of capitalism, transition, inequality
1 Introduction Just over ten years ago Albert argued in 'Capitalism against capitalism' (Albert, 1993) that there are important distinctions between 'neo-American' and 'Rhine' models of capitalism, that the social foundations of capitalism play a major part in determining comparative economic performance and, justifiably, it seemed, in the early 1990s, that the Rhine model was economically and socially superior. As the 1990s advanced however it was Anglo-American economies that outperformed continental European economies. These differences in economic 1
performance led to arguments concerning the superiority of the Anglo-American 'outsider' model of corporate control with large equity markets, dispersed ownership and active markets for corporate control as compared with the 'insider' continental European model with a smaller number of quoted companies, more concentrated share ownership and a relatively small amount of takeover activity (for a discussion of these arguments, see Streeck, 2001).2 Japan's dismal economic record in the 1990s gave further support to this conclusion. At the same time system competition and increased integration and globalization were leading to a convergence in institutional structures and organisational models towards common market-driven models. In particular Anglo-American market-driven models were instrumental in shaping the transition strategies of the economies of Eastern and Central Europe (ECE) and the former Soviet Union (FSU) embarking on a transition from Communism to capitalism. At the end of the decade, however, the collapse of the stock market on the one hand and the unexpectedly weak results of many mergers and takeovers on the other undermined the view that the Anglo-American model was an efficient way of allocating resources, organising economic life and disciplining companies. Admittedly the economies of the United States (US) and the United Kingdom (UK) continued to perform somewhat better than those of continental Europe, where Germany was in recession, and where growth was elsewhere virtually at a standstill. In the US and UK however continued growth was due in no small measure to the accumulation of debt which cannot continue indefinitely. A reduction of US debt will imply a decline in the value of the dollar and a weakening of consumer demand. Adaptations of this kind will however also have an adverse effect on the export performance of Europe which has been one of its few sources of strength. It is in this context that this paper seeks to identify some of the major features of the relative economic development of Europe and its national and regional economies. Attention will be concentrated on disparities in wealth creation, on their determinants and on the distribution of wealth and income in the new Europe on the one hand and the question of the role of marketdriven models in shaping the relative trajectories of different parts of Europe on the other. Any assessment of Europe's transformation cannot however ignore its position relative to the North American trade bloc and to a lesser extent that of East Asia. Accordingly the first part of the paper will consider the fortunes of Europe's developed market economies essentially through the lens of trans-Atlantic comparisons. The second part will briefly identify some of the differentials in development mainly within the European Union (EU) and will ask whether the EU is a catch-up machine. The third part will concentrate on some of the major repercussions of neo-liberal transition strategies in ECE/FSU. The conclusions will identify some of the implications of the sharply contrasting trajectories of different parts of Europe for the continent, for its role in the world and for the assessment of the impact of market-led models of development.
2
2 Trans-Atlantic contrasts: the relative strengths and weaknesses of the continental European and Anglo-American economies In the last two years the economic performance of the major continental EU15 countries has been dismal. Over the longer run however it compares favourably with that of the United States. Continental Europe still lags behind the US, as do the UK and Japan. As the comparisons of GDP per capita at purchasing power standards recorded in Table 1 show, the EU11 (which includes the UK) lay nearly 30 per cent beneath the US level, as did the UK and Japan.3 In the case of the EU11, however, this gap is due in no small measure to the facts that a smaller percentage of the population works (94 per cent of the US level) and that those who do work spend fewer hours at work than their US counterparts.4 Insofar as these differences reflect the preferences of Europeans for leisure rather than work, the resulting differences in GDP per head do not matter in welfare terms. Differences in productivity also play a role with EU11 productivity standing at 92 per cent of the US level, but this difference is much smaller than the GDP per capita differential. Indeed the smallness of this differential suggests that the neoliberal criticisms of the continental European economies requires considerable qualification. In the UK on the other hand productivity is particularly weak, while the employment rate and the average number of hours worked are much closer to the US figures. In the UK relatively more people work for longer hours but less productively than their EU11 counterparts. Drawing in part on work by Gordon that entails comparing US and European patterns of expenditure Boltho (1993) goes further and argues that the US-European GDP per capita difference is also in part a consequence of four factors that raise relative US expenditure and GDP by some 7 to 8 per cent but do not add to relative US welfare: central heating and air conditioning to cope with more adverse climatic conditions; car journeys due to the lack of public transport; security due to higher US crime rates; and litigation due to a relative lack in the US of trust-based relationships. Table 1 Comparative development in the EU, Japan and the US in 2002 (shares of the comparative figure for the US) Source: elaborated from Groningen Growth and Development Centre, 2003
EU11 C4 UK Japan
GDP per head 0.71 0.55 0.72 0.73
GDP per hour 0.92 0.65 0.81 0.72
Employment rate 0.94 0.89 1.01 1.07
Annual hours worked per person employed 0.82 0.96 0.88 0.95
If the gap in development is smaller than it at first seems, it remains the case that the economic record of the 10 richer continental EU Member States has been particularly weak over the last economic cycle when compared with the US and UK. Table 2 records the growth rates of output and of population and employment across three sets of economic cycles.5 It shows that the 3
4
1950-73 EU11 C4 UK USA Japan 1973-89 EU11 C4 UK USA Japan 1989-02 EU11 C4 UK USA Japan 4.58 6.23 2.89 3.86 8.89 2.35 2.66 2.07 2.99 3.59 1.91 2.88 2.06 2.76 1.36
1.78 1.93 1.94 2.02 2.81
1.55 2.58 1.72 1.60 1.12
Real GDP growth (in PPS)
3.83 5.50 2.41 2.42 7.75
GDP per head growth
3.54 2.95 3.35 11.62 2.43
5.73 7.31 1.25 9.66 7.81
7.51 7.26 4.79 14.37 11.42
Midyear population growth
0.40 1.62 0.49 1.04 0.24
0.92 0.27 0.46 1.88 1.04
0.71 0.39 0.49 1.49 1.69
Civilian employment growth
1.89 1.43 1.84 1.51 1.97
2.26 2.96 2.30 1.28 2.72
4.51 6.11 2.81 2.98 7.02
GDP per hour growth
-0.38 -0.17 -0.27 0.20 -0.85
-0.83 -0.57 -0.70 -0.18 -0.17
-0.64 -0.28 -0.42 -0.61 0.18
Annual hours worked per person employed growth
0.04 1.33 0.16 -0.12 -0.00
0.35 -0.46 0.34 0.92 0.26
-0.04 -0.33 0.01 0.05 0.54
Employment rate growth
Table 2 Comparative development: a decomposition of per capita GDP growth in the EU, the US and Japan, 1951-2002 Source: elaborated from Groningen Growth and Development Centre, 2003
EU11 achieved significantly lower rates of growth of output, population and employment in the 1990s than the US, although it also shows that growth in the 1990s fell far short of Golden Age (1950-73) rates of growth. What Table 1 also shows however is that per capita growth rates differed far less: EU11 rates of growth (0.16 per cent per year) matched those of the US (0.16 per cent per year) and the UK (0.17 per cent per year), while the Cohesion countries (Greece, Ireland, Portugal and Spain) grew faster than the US. Similarly EU11 rates of productivity growth (see Table 2) equalled those of the United States. Clearly the economic performance of the EU11 compared less adversely with the US than is often implied, although there is a suggestion that the average for the period conceals a decline across the period as a whole. It nonetheless remains the case that its economic record was very weak. Several factors were at work. First a set of restrictive financially orthodox macroeconomic measures designed to guarantee price stability and fiscal responsibility (the cautious monetary policy of the European Central Bank, and the fiscal deflation imposed by by Maastricht convergence criteria for Economic and Monetary Union along with fiscal policy constraints associated with the EU's Stability Pact) acted as a constraint on growth. Second, German unification involved far higher costs than were anticipated for what was formerly Europe's economic powerhouse. Third, the microeconomic crusade in favour of deregulation and privatization encouraged employment growth in services in which productivity growth is slower. Finally, globalization and increased imports of manufactured goods contributed to a decline in the share of manufacturing jobs where potential productivity growth is greater. As indicated earlier, the service oriented US economy fared no better, except that, as it achieved a higher rate of GDP growth, it could reconcile the same rate of productivity growth with a faster growth of employment. Accumulation and growth depend on the rate of profit (see Figure 1 and also Duménil and Levy, 2003 who first raised the issues examined in the next three paragraphs). In the case of the US it was the ascent of neo-liberalism in the early 1980s that reversed an earlier decline in profitability6 and created the conditions for the growth of the 1990s. (The fundamental aims of neo-liberalism were to raise profitability and increase elite incomes). In the US this increase in profitability reflected mainly an increase in the efficiency of capital, although the share of profits in income also increased until the late 1990s when the profit rate declined and a growth slow down should have been expected.7 8 In continental Europe there was a similar yet less striking increase in profitability. In this case however the efficiency of capital fell, offset by a fall in the relative price of capital goods, reflecting the relatively greater importance of industrial sectors relative to services in continental Europe (see Table 3). In Germany, France and Italy the profitability turnround was largely due to a sharp increase permitted by marketfriendly reforms in the share of profits in income.
5
6
1929
1939
1949
Profit share 1959
0.1
1
10
100
1929
1969
1939
1949
1969
1979
1989
1999
1979
0.05
0.09
1989
1999
0.0
0.2
0.4
0.6
Efficiency of capital
Efficiency of capital
USA (Whole economy)
1959
Productivity of labour
Capital per full-time equivalent employee
Productivity of labour/Capital per employee
0.3
0.4
0.13
0.5
Efficiency of capital
0.17
Profit rate
0.21
Profit rate 0.25
0.6
0.7
Efficiency of capital/Profit share 0.8
1970
1975
Price of GDP/ price of capital goods
0.30
0.35
1985
1990
1995
France, Germany and Italy (Business sector)
1980
2000
0.4
0.5
0.6 Efficiency of capital
0.40
0.9
1.0
1.1
0.7
Profit share (corrected for self employment)
1975
2000
0.45
1970
1995
0.8
1965
1990
Relative price of GDP and capital goods 1.2
1985
0.50
0.55
0.60
0.65
1980
Profit rate
Profit share/Efficiency of capital 0.70
0.16
0.18
0.20
0.22
0.24
0.26
1965
Profit rate 0.28
7
Grand total Agriculture, hunting, forestry and fishing Mining and quarrying Total manufacturing ...Textiles, textile products, leather and footwear ...Wood and products of wood and cork ...Chemical, rubber, plastics and fuel products ......Pharmaceuticals ...Other non-metallic mineral products ...Basic metals and fabricated metal products ...Machinery and equipment ......Radio, television and communication equipment ...Transport equipment ...Manufacturing nec Electricity, gas and water supply Construction Wholesale and retail trade; restaurants and hotels Transport and storage and communication Finance, insurance, real estate and business services ...Financial intermediation Community social and personal services
France 100.0 2.8 18.0 0.8 0.3 3.5 0.7 0.8 2.3 3.5 0.6 2.2 0.7 2.0 4.6 13.0 6.2 30.3 5.0 23.1
Germany 100.0 1.2 0.3 22.2 0.5 0.4 3.5 0.5 0.8 2.9 6.6 0.6 3.0 0.7 1.8 5.1 12.6 5.9 29.7 4.5 21.3
Italy 100.0 2.8 0.5 20.6 2.8 0.6 2.8 0.0 1.4 2.8 4.4 0.0 1.4 1.0 2.1 4.8 16.7 7.2 26.1 6.2 19.1
Japan 100.0 1.3 0.1 21.1 0.7 0.2 3.2 0.6 0.7 2.4 6.3 2.4 2.2 1.3 3.6 7.1 13.2 6.1 25.9 5.9 21.6
Table 3 Value added by sector in 2000 Source: elaborated from OECD (2003) STAN database, Paris: OECD United Kingdom 100.0 1.0 2.9 17.5 0.8 0.3 3.0 0.6 0.6 1.9 3.9 0.9 1.8 0.7 1.8 5.0 14.9 7.9 27.4 5.2 21.6
United States 100.0 1.4 1.4 15.5 0.5 0.4 2.7 0.7 0.4 1.6 4.1 1.4 1.9. 0.6 2.2 4.7 18.3 6.7 30.0 8.7 21.3
The fact that growth in the US continued into the late 1990s was largely due to increases in the indebtedness of US households and of the US economy. In the case of the US economy the hegemonic position of the US and the role of the dollar as the leading world currency (which the rise of the Euro potentially challenges) enabled the US to attract a large net inflow of financial resources. This stream of income sustained aggregate demand and enabled the US to run a large trade deficit. The size and nature of these flows are indicated in Figure 2. Figure 2A records the dramatic growth of US financial assets and liabilities since the early 1980s. In 2001 US assets stood at 38.6 per cent of GDP, liabilities at a remarkable 71.6 per cent and the net worth of the rest of the world at 33 per cent of US GDP. Figure 2B records the annual earnings of these assets. For the US annual earnings were equal to 3.9 per cent of GDP whereas US payments to the rest of the world were smaller at 3.7 per cent of GDP. Earnings were similar for one reason: the apparent rate of return on US holdings in the rest of the world (6.7 per cent in 2001) substantially exceeds the earnings of the rest of the world on US holdings (3.8 per cent) (see Figure 2C). These remarkable asymmetries enabled the US to run a large trade deficit, to consume more than it earned, and to profit from differential earnings on assets, helping explain growth differentials. (Other asymmetries relate to the relative prices of exports and imports of goods and services and in particular of raw materials). In other countries a sustained trade deficit would provoke a capital outflow and structural adjustment.
8
Figure 2 Asymmetric transfers of wealth between the US and the rest of the world, 1945-2002 and the changing sources of corporate profits, 1948-2003 Source: elaborated from Federal Reserve System (2003) for 3A-C and US Department of Commerce Bureau of Economic Analysis, 2003 for 3D
9
'Net worth' of rest of world
Total US liabilities of the rest of the world
Total US financial assets of the rest of the world
-1 1929
0
1
2
3
1939
1949
1959
1969
1989
1999
Net payments to USA
Payments to the rest of the world
1979
Receipts from the rest of the world
Receipts from/payments to/net receipts from rest of the world as per cent of GDP 4
-10 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
0
10
20
30
40
50
60
70
Assets/liabilities as per cent of GDP 80
Apparent rate of return on assets in US
Financial
Rest of the world
Manufacturing
0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003
10
20
30
40
50
60
Share of corporate profits with inventory valuation adjustment by sector (per cent)
0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
2
4
6
8
10
12
14
Apparent rate of return (per cent) 16 Apparent rate of return on US assets in the rest if the world
Figure 2D shows that in 2002 22.3 per cent of the profits of the US corporate sector were made up of the net flow of profits on US direct investments abroad and foreigners direct investments in the United States. The US financial sector accounted for another 25.7 per cent, growing dramatically after 1985, while US manufacturing accounted for just 12.4 per cent compared with more than 50 per cent in the early 1950s. In continental Europe the degree of dependence of corporate profits on global operations and financial activities is smaller not least as there are strong differences in the degree of specialisation in industrial activities and in the composition of the industrial sector (see Table 3).
3 Differential development in the EU15 (and its neighbours) In the last section I argued that while the growth record of continental European economies was poor in the 1990s, slow output and demographic growth were associated with productivity growth records that were comparable with those of the US, and that differences in welfare are far smaller than differences in GDP per head suggest. Slow growth and demographic stagnation are not however without their own costs, with in particular the consequent ageing of the population reducing participation and savings rates and creating strong potential intergenerational tensions. If moreover these diferences endure, they will permit a further widening of the gap in economic and demographic potential between Europe and the US and will perhaps lead to a further reinforcement of the latter's superpower status (see Boltho, 2003). At present, however, the EU15 and the demographically small, high income EFTA countries remain one of the largest markets in the world, with in 2001 330 million inhabitants (just over 5 per cent of the world's population), and just over 17 per cent of world GDP, measured at PPS. Within this part of Europe however there are wide gaps in development between the core highincome countries with a GDP per capita, measured at Purchasing Power Standards (PPS), of more than 300 per cent of the world average (see Figure 3B, which records GDP per head on the horizontal axis, and population on the vertical axis, and where therefore the volume of national GDP is represented by the area of each horizontal bar) and the three southern Cohesion Countries (Greece, Spain and Portugal). Ireland was formerly a member of this group. Nearby however are several peripheries. To the north-east lies a group of 27 countries that have emerged as a result of the political fragmentation sometimes into very small countries of 7 formerly Communist states. At one end of the spectrum lie a group of EU Candidate Countries with a GDP per head (excluding Slovenia) of 50 to 150 per cent of the world average. Included are the Visegrad Four, comprising Poland, the Czech Republic, Slovakia, and Hungary which are due to join the EU in 2004 together with the three small Baltic States, that were formerly part of the Soviet Union, and Slovenia. Slovenia, which borders Italy, was the first of the republics of the former Yugoslavia to break away, has just 1.93 million inhabitants and is an exception in this group of Candidate Countries in that its per capita GDP lies close to that of the high income EU Member States. Also included in the ranks of the Accession Countries are Bulgaria and Romania although their accession is further off. Further north-east lie the countries 10
Cumulative population (millions)
Cumulative population (millions)
1600
1600 Norway Switzerland Iceland
1400
1400
1200
1200
1000
1000 Czechoslovakia
800
Yugoslavia
600
800
600 Soviet Union
400
400
200
0
200
0
50 100 150 200 250 300 350 400 GDP per head at PPS in 1989 (Index numbers, World=100)
0 450 0
Denmark Ireland Netherlands Bel-Lux Sweden France Finland Austria UK Italy Germany Spain Portugal Greece
Czech Republic Poland Hungary Slovakia Bulgaria Romania
Cyprus Gibraltar Malta
Estonia Latvia Lithuania
Slovenia Croatia Macedonia Albania Serbia-Montenegro Bosnia-Hercegovina
Belarus Russia Kazakhstan Armenia Turkmenistan Ukraine Uzbekistan Azerbaïdjan Kirghizistan Georgia Moldavia Tadjikistan Tunisia Libya Egypt Morocco Algeria Israel Turkey Lebanon Syria Jordan Yemen Palestinian Authority
Kuwait Qatar Oman UAE Bahrain Saudi Arabia Iran 50 100 150 200 250 300 350 400 Iraq GDP per head at PPS in 2001 (Index numbers, World=100)
Figure 3 Economic potential in the EU 15 and its neighbours in 1989 and 2001: GDP at Purchasing Power standards and 1990 prices, GDP per head (world=100) and population Source: elaborated from CEPII, CHELEM database 11
that emerged out of the break-up of the former Soviet Union, while to the east lie the adjacent Balkan countries ravaged by the civil wars of the 1990s. All of these countries are economically weak, due in part to the dramatic collapse of economic output that accompanied the transition to capitalism. The degree of change since 1989 is evident from a comparison of Figure 3A and 3B. In 1989 the degree of asymmetry between the rich core and the rest was smaller. In 1989-2001 there was strong relative demographic growth in Europe's Arab neighbours yet a fall in their relative GDP per head. The Accession Countries have made little net progress, especially is allowance is made for initial economic decline, while the economic potential of the FSU has declined remarkably. Inside the EU15 disparities in development between Member States have diminished in recent years due to the relatively fast growth of the economically less developed Cohesion Countries (see Figure 4A). The evident catch-up of these four countries often leads to the claim the the EU is a catch-up machine, though it is not clear to what extent this catch-up is due to the relatively weak performance of the economically more developed parts of the EU15, the fact that in the latest phase of economic integration centrifugal forces have outweighed centripetal forces or the existence of Structural and Cohesion policies that contributed 1.4 and 2.0 per cent to the GDP of the Cohesion Countries in 1989-93 and 1994-9 respectively (see Table 4). Table 4 Economic effects of the Structural and Cohesion Funds: commitment data up to 1999; forecasts for 2000-2006 Source: Commission of the European Communities, 2001 % GDP Greece Ireland 1989-93 2.6 2.5 1994-99 3.0 1.9 2000-06 2.8 0.6 % Gross fixed capital formation 1989-93 11.8 15.0 1994-99 14.6 9.6 2000-06 12.3 2.6
12
Spain 0.7 1.5 1.3
Portugal 3.0 3.3 2.9
COH4 1.4 2.0 1.6
2.9 6.7 5.5
12.4 14.2 11.4
5.5 8.9 6.9
W MAD / MEAN, WSD / MEAN × 100
WMAD × 100
Theil coef ficient × 1000
40
50
35
40
30
30
Theil coefficient × 1000
40
60
Theil 35
25
20
50
30
Theil
40 WMAD
20
10 WSD/MEAN
15
0
25
30
20
20
WMAD/MEAN 10
-10
5
-20
0
-30 1951 1956 1961 1965 1970 1975 1980 1985 1990 1995 2000
15 1951
A National disparities in per capita real GDP at purchasing power standards (in ECU/Euros: EU15=100)
WMAD × 100
1981
WMAD × 100
20
19
1971
1991
10 2001
B Disparities in regional GDP per resident in Italy 1970-2000
Theil coefficient × 1000
20
1961
18 16
17
14
16
12
9
13
Theil 18
Theil coefficient × 1000
14
8 Theil
12
7
11
6 WMAD
15
10
10
5
9
4
8
3
7
2
WMAD 14
8
13
6
12
4
11
2
10
0 1970
1975
1980
1985
1990
1995
6
2000
1 1970
C Disparities in regional employment rates in Italy 1970-2000
1975
1980
1985
1990
1995
2000
D Disparities in regional GDP per full-time equivalent worker in Italy 1970-2000
Figure 4 Evolution of national disparities in the EU and regional disparities in Italy Sources; elaborated from CEPII, 2002 and Dunford and Greco, forthcoming While there is clear evidence of recent national convergence, it is also evident that catch-up was far faster at the end of the Golden Age when the Cohesion Countries had not yet joined the EU, and that national convergence has gone hand in hand with greater divergence within most Member States. To take just one example divergence was a fundamental feature of the relative performance of Italy's regional economies from the mid-1970s until the mid- 1990s (see Figure 4B).9 In the Italian case divergence was associated with apparent productivity convergence (Figure 4C), and employment rate divergence (Figure 4D). Essentially economic growth was not sufficiently fast/distribution of employment was not sufficiently equitable to ensure reemployment of labour in a context of structural change that raised productivity faster in less 13
developed areas than in more developed areas. Once growth did accelerate in the late 1990s, employment rates started to converge, although it was limited by a polarisation in the distribution of wages that also generated labour shortages in jobs that did not pay an adequate wage. Alongside these microeconomic mechanisms economic integration and the collapse of Communism created the conditions for a remaking of the territorial division of labour in Europe as different but complementary parts of value chains were located in different locational contexts with different costs, skills, supporting services and research infrastructures. An important result is the creation of new complementarities in which: knowledge-intensive research and development, product definition, marketing and advanced services requiring highly skilled white collar workers are concentrated in core countries and regions; less skilled manufacturing, including jobs not suited to the institutional setting of existing EU Member States, is located in areas and countries that are less developed, as are some technology and skill intensive parts of manufacturing, radically altering the types of firm, occupational structure and skill profile of the west, and raising strategic industrial redeployment issues in those parts of southern Europe that were formerly major attractors of inward industrial investment. In growth regions in eastern and central Europe (ECE), new performance plants lead to product and process upgrading, but in a wider social environment in which inequalities are increasing, while in the cores alongside knowledge-intensive export oriented activities there emerges a raft of personal services associated with relatively low incomes and contributing to strong intraregional inequality. As implied in the last paragraph these increases in regional inequality were associated with changes in income inequality. Figure 5 records Gini coefficients for a number of advanced countries. At this aggregate level there are some marked national contrasts: in Germany and France the Gini coefficients have changed little, whereas in the United Kingdom and United States they have increased sharply to reach .345 in 1999 and .368 in 2000 respectively. Sweden in which inequality remains lower has also seen an increase in inequality in 1980s and 1990s.
14
Gini coefficient 0.38 U.S. 0.36 0.34 0.32 U.K. 0.30 France 0.28 Germany
0.26 0.24 0.22 Sweden 0.20 0.18 1965
1970
1975
1980
1985
1990
1995
2000
Figure 5 Gini coefficients in the France, Germany, Sweden, the UK and the US Source: elaborated from data from Luxembourg Income Study, 2003 What is more striking is some of the more detailed characterstics of the distribution of income and in particular changes in the share of the richest sections of the population (see Figure 6). In the US for example there was a strong increase in the share of the top 10 per cent from the late 1970s onwards after some 30 years in which its share averaged around 32 per cent. In the 1990s the share of the richest 10 per cent crossed the 40 per cent mark to get close to its pre-war levels. Over 80 per cent of the gains in the share of the top 10 percent of taxpayers went to the top 1 percent with 1998 incomes of $230,200 or more, more than 45 per cent went to the top 0.1 percent with more than $790,400, and over 21 per cent went to the top 0.01 per cent made up of a mere13,100 taxpayers with a minimum annual income of more than $3.6 million, an average income of nearly $10 million and 3 percent of all income (300 times as much as the average family) compared with 'just' 0.7 per cent of total income in 1970 (Piketty and Saez, 2003). Strikingly this strong reinforcement of the position of the richest is not found in the French case, whereas in the case of the UK it is even if it is less pronounced than in the US (see Figure 6).
15
Top income share excluding capital gains (in percentages) 50
45
United States (10%) 40
35
30 France (10%)
25
20
United States (1%) 15
France (1%) 10
United States (0.1%) 5
United Kingdom (0.1%)
France (0.1%)
0
1913
1923
1933
1943
1953
1963
1973
1983
1993
Figure 6 Top fractile income shares in France, the UK and the US Source: elaborated from data in Piketty and Saez, 2003 The main explanations of the growth in inequality are closely related to explanations of the growth in territorial inequality implicit in the arguments set out in the penultimate paragrah: the hypothesis that growing inequality is due to downward pressure on employment and wages of manual workers resulting from globalization and employment relocation, to skill upgrading 16
technologies that increased the demand for skilled and educated workers and to the related superstar thesis. As Krugman (2002) notes however these hypotheses are insufficient: Globalization can explain part of the relative decline in blue-collar wages, but it can't explain the 2,500 percent rise in Chief Executive Officer incomes. Technology may explain why the salary premium associated with a college education has risen, but it's hard to match up with the huge increase in inequality among the college-educated, with little progress for many but gigantic gains at the top. The superstar theory works for Jay Leno, but not for the thousands of people who have become awesomely rich without going on TV.10 A possible explanation, he suggests, is that social norms set limits to inequality, and that the norms of relative equality in pay that persisted for more than 30 years after the Second World war unravelled with the rise of neo-liberalism. The evidence presented in this section suggests strongly that social norms that limit inequality unravelled at an accelerating rate in the US and in the UK but remained far stronger in continental Europe.
4 Transition and inequality The integration of ECE into a European division of labour is a result of the fact that in 1989-91 the societies of ECE and the FSU embarked on a series of transitions to capitalism. At that stage the expectation of western advisers and their eastern disciples was that the adoption of a threepinned strategy of economic stabilisation, implying cuts in subsidies and state expenditure, economic liberalization, entailing a removal of controls on prices and an opening up of their economies to foreign goods and foreign investment, and privatization of state enterprises would result in a great surge of economic growth and increased per capita incomes. The results of these years of transition differ in a number of ways from the ones that were anticipated at the outset, and differ from one country to another. Everywhere there are of course instances of dramatic change and examples of economic progress often in 'islands of modernization'. A number of economies (principally the four Visegrad countries and Slovenia) have made sufficient progress to stand on the verge of EU membership which itself is seen as a way of accelerating economic catch-up (on the grounds, considered earlier, that other less developed Member States have closed the gap on the richer core countries). The wider picture is however far less positive, and the rose garden that the peoples of the former Communist countries were told to expect has for too many proved to be a bed of thorns. In most of these countries overall growth has not yet occurred, so that per capita incomes remain beneath their 1989 levels. As territorial and social inequality have increased sharply, a substantial share of the population is worse off than it was 15 years ago, while many depend for their livelihoods on a growing hidden economy. The aim of this section is to outline some of the ways in which reform has not worked as promised, concentrating on the decline in output, demographic decline, increased inequality, poverty and the growth of the unrecorded economy, and to ask why? More specifically, I shall start by summarising and explaining the impact of transition on the growth of output showing how many economies remain well beneath their 1989 levels. As however 17
demographic growth has declined, itself reflecting marked social changes associated with transition, the effect of output decline on per capita incomes is moderated. Transition has however been accompanied by sharp increases in inequality. To survive people whose incomes have declined must seek informal sources of income. The final part of this section outlines some recent work on the size of this informal economy and its implications for the measurement of wealth and income. A transitional slump In 1989-91 the societies of ECE and the FSU embarked on a series of transitions involving the replacement of the political rule by their Communist parties by representative democracies and their command economies by capitalist (and not simply market) economic systems. At the same time these domestic transitions entail the integration of the former Communist economies and societies into a new international political and economic order characterized by the increasing influence of a number of global institutions, closely dependent on the US, and a subdivision of the world into a small number of powerful and competing economic blocs in North America, Europe and East Asia. After ten years the results of this great transformation differ sharply, first, from the initial expectations of western advisers and, second, from one country and region to another. In the case of Russia, for example, Boyer (2001) was able to argue that: Dix ans plus tard, il est devenu clair ... que la maffia avait supplanté le marché comme mécanisme de coordination économique, que l’entrepreneur de type schumpétérien avait été étouffé par la stratégie opportuniste des spéculateurs, que les rentiers l’emportaient sur les industriels et finalement que l’accaparement et non pas la création de richesse étaient la conséquence directe de l’effondrement du cadre juridique et institutionnel. Ten years later it has become clear ... that the mafia has replaced the market as a mechanism of economic co-ordination, that the Schumpeterian-type of entrepreneur has been suffocated by the opportunism of speculators, that rent-seekers have won out over industrialists and finally that appropriation and not the creation of wealth was the direct consequence of the collapse of the legal and institutional system (Author's translation) According to market fundamentalists market systems give rise to processes of catch-up as less developed countries and areas grow more quickly than more developed areas. Empirical evidence does not lend a great deal of support to this thesis, nor indeed do recent developments in convergence theory (see Dunford, 2003). While there are examples of catch-up, there are also examples of divergence, and, where catch-up does occur, it is often extremely slow. In the light of this evidence, market fundamentalists have more recently sought to add a qualifying argument suggesting, that catch-up will only occur if there is 'good governance'. While good governance often functions as an ad hoc hypothesis to justify the failure of economic liberalism and the non-achievement of satisfactory growth rates, the one merit of this hypothesis is that the 18
market is seen not so much as a universal mechanism as as a mechanism that presupposes the establishment, legitimation and enforcement of specific legal, accounting and financial (credit) conditions. (The difficulty with this thesis is that there are many examples of situations in which a bad governance thesis cannot easily be defended where there is divergence and vice-versa). The market fundamentalist was not just proved empirically wrong but is also deeply misleading as it misidentifies the causes of the negative features of eastern transformation. What happened in ECE and the FSU is in fact closely connected with mechanisms of primitive accumulation involved in the creation of capitalism (the concentration of private property, and the creation of a mobile workforce separated from the enterprises that provided social protection). The creation of market systems and their subsequent functioning generate unequalising as well as equalising tendencies. the actual outcome will depend on their relative importance which can vary from place to place and time to time. Similarly politics which involves the pursuit of partial economic interests can also contribute to unequalising as well as equalising tendencies. It is these factors that provide the starting point for explanations of the actual experience of the transition economies. Figure 7 identifies the trends in GDP growth of all of the Central, East European and Central Asian transition economies since 1989. What this figure shows is that the Visegrad Four, Slovenia and the former German Democratic Republic (GDR) have regained their former levels of GDP after sharp slumps and substantial foregone income. Poland was the first in 1995, followed by Slovenia in 1998. Of the rest Albania in the Balkans in 2000 and two Central Asian republics (Turkmenistan and Uzbekistan) in 2001 regained their former levels of GDP. Elsewhere the picture is much more bleak.
19
Real GDP/NMP in Eastern Europe, the Baltic States and the CIS (Indices, 1989=100) 130 Poland Real GDP/NMP in Eastern Europe, the Baltic States and the CIS (Indices, 1989=100)
120 Slovenia 110
105 100 95
100
Czech Republic
Estonia
90 85
90 Hungary
80
80
75
Slovakia
Latvia 70
70 Former GDR
65
60 1989
1991
1993
1995
1997
1999
2001
Lithuania
60 55 50 1989
1991
1993
1995
1997
1999
2001
Real GDP/NMP in Eastern Europe, the Baltic States and the CIS (Indices, 1989=100) 100 Belarus Real GDP/NMP in Eastern Europe, the Baltic States and the CIS (Indices, 1989=100)
90
120 Albania
80
110 Russian Federation
70
100
60
90
50
80
Romania
Macedonia
Ukraine 40
Republic of Moldova
70 Croatia
60 30 1989
1991
1993
1995
1997
1999
2001
Bulgaria
Yugoslavia and Montenegro 50 40 1989
1991
1993
1995
1997
1999
2001
Real GDP/NMP in Eastern Europe, the Baltic States and the CIS (Indices, 1989=100) 100 90
Real GDP/NMP in Eastern Europe, the Baltic States and the CIS (Indices, 1989=100) 110
80
Uzbekistan Armenia
100
70 90 60
80 Turkmenistan
50
70
Azerbaijan 40
Kazakhstan
60 Georgia
Kyrgyzstan
50
30
Tajikistan 40
20 1989
1991
1993
1995
1997
1999
2001
30 20 1989
1991
1993
1995
1997
1999
2001
Figure 7 GDP growth and transition, 1989-2002 Source: derived from United Nations Economic Commission for Europe (2003) 20
In the case of Russia for example, the drop in output was about 42 percent, a far steeper fall than was registered during the Great Depression in the United States in the early 1930s. To this fall in output should be added several further disturbing factors. Most industrial plant, equipment, and infrastructure are obsolete or obsolescent, while investment has declined faster than output and continues to fall. In 1998 investment in productive capital stood at less than 20 percent of the 1991 level in constant prices. According to Bush (2001) this exceptionally low rate of investment is a result of 'the low rate of private saving, the budget deficit that absorbs too many investible resources, disincentives provided by the onerous and opaque tax code and legal system, capital flight, and the understandable unwillingness of banks to invest in the real economy when they have been able to earn up to 180 percent on an annualized basis from government bonds.' Capital flight alone is dramatic, as is indicated in Table 5, and contributes to the resource flows to rich countries examined in the first section.11 Table 5 Net outflow of capital from Russia, 1994-2001 (million $US) Source: Nekiplov (2001) Net outflow ($US million) Net outflow as % of GDP
1994 -27389 -9.9
1995 -15786 -4.7
1996 -28945 -6.9
1997 -8553 -2.0
1998 -22483
1999 -26435 -13.9
2000 -32394 -12.6
Of course the decline in output is related to the fact that the diversion of resources to provide consumer goods and services rather than plan outputs has not been sufficiently rapid to replace declining sectors such as the defence industry which in 1996 stood at just 22.9 percent of the 1991 level. A loss of output is also however a loss of income, and a loss of income reduces the effective demand for consumer goods. At the same time restructuring enabled a group of socalled oligarchs to acquire the assets of the Soviet state for a fraction of their real value. Most important were the assets of the fuel and energy sectors on which Russia's economy depends. These assets generate super profits, yet the Russian government is unable to tax them effectively. Instead the revenues fund inflated salaries and in no small measure are channelled offshore. With a federal budget of US$40 billion in 2000 and US$ 54.5 in 2001 the state is unable to sustain services and incomes. Demographic transition The impact of the decline in output on living standards has in a proximate sense been moderated by the profound demographic transformation that has accompanied transition. A slowdown in rates of population had growth was evident in the final years of Communism. Transition however saw sharp reductions in population growth rates with decline setting in in many countries (see Table 6).
21
Table 6 Population trends in the transition economies Source: derived from CEPII 1970-89 0.89 0.30 0.44 0.03 0.82 0.64 -0.20 2.09 0.65
Former USSR Bulgaria Former Czechoslovakia Hungary Poland Romania Former GDR Albania Former Yugoslavia
1989-2002 0.08 -1.26 0.06 -0.24 0.13 -0.18 0.80 0.19
Some of the most dramatic changes occurred in the FSU. Everywhere in the Commonwealth of Independent States there was a sharp decline in birth rates, an increase in death rates, and sharp falls in the rate of natural increase. In the case of Russia births declined by one half between 1987 and 1994 (see Figure 8 which represents the so-called Russian cross), while fertility rates are just over one-half of the level required for the population to reproduce itself. At the same time life expectancy has declined, especially for men where it dropped from 64 years in 1990 to 60 in 1999, and mortality increased exceeding births in 1992 (see Figure 8). The increase in mortality in Russia which was unprecedented for an industrialised country that is not at war coincided with transition, declining in the mid-1990s before another increase after the 1998 economic crisis. Several sets of factors explain this trend. The first is the decline in the ability of the Russian health system to control both modern diseases, such as cardiovascular disease, and older diseases that were once under control, such as tuberculosis which is spreading rapidly again. One factor at work is the lack of public expenditure on health infrastructure, services and the very low wages of health sector workers. The second is related to lifestyle issues (alcohol consumption and diet) as well as the rise in poverty. In 1991 to 2001 deaths exceeded births by 6.7 million (see Table 7) leading Glaziev (1997, cited in Tretyak, 2002) to argue that the people of Russia were the subject of genocide as the interests of population were sacrificed on the altar of reform. Only a net migration of population of nearly 4 million (including 400,000 refugees from the war in Chechnya) prevented dramatic overall population decline (see Table 7). Geographically depopulation was greatest in Siberia and the Far East (with the exception of Tyumen which accounted in 2000 for 66 per cent of national oil production and 90.8 per cent of gas in 2000) . Since the death of Stalin the population of these areas was sustained as a result of a set of material and ideological incentives, federal government programmes to support life (Severny Zavoz) in remote areas and cross-subsidisation by state enterprises. With transition and with cuts in public expenditure the so-called northern deliveries were eroded, while only the most profitable privatised enterprises provided working and living conditions capable of retaining a working population. So great was the decline tat in 2001 it was recognised as a threat to national security.
22
Births and deaths in the Russian Federation (in thousands) 2,500 2,300
Deaths
2,100 1,900 1,700 1,500 Births 1,300 1,100 1987
1989
1991
1993
1995
1997
1999
Figure 8 Russia: from natural increase to natural decrease Source: derived from Goskomstat Table 7 Population trends in the CIS Source: derived from Goskomstat
Azerbaijan Armenia Belarus Georgia Kazakhstan Kyrgyzstan Moldova Russia Tajikistan Turkmenistan Uzbekistan Ukraine CIS
Resident population at start of year in millions
Natural increase in thousands
Net inter-state migration in thousands
1991 7.2 3.6 10.2 5.4 16.4 4.4 4.4 148.2 5.3 3.8 20.6 51.7 281.2
1991-2000 980 264 -254 150 1196 775 84 -6726 1214 838 4945 -2511 955
1991-2000 -118 -67 212 ... -1967 -355 -100 3985 -330 -70 -600 -246
2001 8.1 3.8 10.0 4.9 14.8 4.9 3.6 144.8 6.2 4.8 24.9 49.0 280.6
Share of 0-14 year olds in total population at start of year per cent 1989 2001 33 32 30 24 23 18 25 20 32 29 37 35 28 24 23 18 43 42 41 38 41 38 22 18 25 22
The trends towards lower birth rates were present before 1991, while the number of deaths has been increasing since 1960 (Davanzo and Grammich, 2001). The dramatic fall in births after 1987, and the transition-related increase in deaths are unprecedented, while the rate of natural population loss is exceeded only in Bulgaria, Latvia and the Ukraine. Other nations currently experiencing natural population loss are Belarus, Bulgaria, the Czech Republic, Estonia, Georgia, Germany, Hungary, Italy, Latvia, Lithuania, the Isle of Man, Monaco, Romania, Slovenia, Sweden, and the Ukraine (Davanzo and Grammich, 2001). 23
Inequality One of the most striking consequences of transition is a sharp increase in inequality. Slovakia is alone as a country in which the distribution of income has not changed much. In a number of economies startling increases in inequality have occurred with Gini coefficients approximately doubling. These increases in income inequality have coincided with declines in total output and income to raise poverty rates sharply. As changes in output and income vary sharply geographically, the impact on poverty is also geographically as well as socially differentiated. Table 8 records Gini coefficients for the transition economies, Figure 9 records the impact of transition on income distribution, Table 9 records the impact of transition on measures of poverty and Table 10 records the longer-term evolution of poverty in Russia. Increased poverty is one of the most important consequences of the decline in income and the increase in inequality. The measured incidence of absolute poverty depends on three factors: average real household income or expenditure, the distribution of real income or expenditure and the poverty standard. Table 9 uses an absolute poverty criterion, as does the official data for Russia recorded in Table 10. The World Bank criterion suggests that poverty was low in ECE and the FSU in the late 1980s. Other studies suggest that at that date 10 per cent of the Russian population fell beneath the minimum subsistence level. At the end of a decade of transition, official statistics show the poverty rate standing at close to 30 per cent. These figures however conceal the impact of a change in the poverty standard. As Shorrocks and Kolenikov (2001) point out: 'a new methodology adopted in 1991 replaced the minimum material security budget (the MMS budget), which functioned as a quasi-poverty line in the Soviet era, with new minimum subsistence levels for various household types, based on the methodology used by the World Bank in other countries ... . Deflated by the CPI, this change of methodology reduced the poverty standard in the 1990s by about one third compared to that applied before 1991, offsetting the impact of the fall in average incomes'.
24
Table 8 Inequality and transition: Gini coefficients Source: derived from UNDP/SEPED and UNU/WIDER WIID database Gini coefficients 1987 1988 1989 1993 1994 1995 1996 1997 1998 1999 Central Europe and Slovenia Czech Republic Hungary 21.0 Slovak Republic Slovenia 21.5 South East Europe Bulgaria Romania Poland 25.6 Baltic states Estonia Latvia Lithuania Slavic republics Belarus Moldova Russian Federation Ukraine Central Asia Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan Caucausus Azerbaijan Georgia Armenia Balkans Bosnia and Herzegovina Croatia Macedonia, FYR Yugoslavia, FR Albania
19.4
26.6 22.6 18.3 25.1
19.5 23.3 23.3
25.3 24.0 26.1
34.3
32.3 28.6
28.4 23.0 22.5 22.5
31.3
31.9
35.4 31.0 37.3 36.5 48.0
25.7 26.0
32.7 55.3
26.6
28.2
31.0
30.5
28.1
31.1
36.8 31.4
35.4
39.9 47.4
26.4
31.1
33.9 28.6
24.1 23.8 23.3
32.9
35.8 33.3
40.0
54.6 62.6 33.8 29.9
25
Table 9 Poverty and transition Source: constructed from Milanovic (1998) and World Bank (2002) Poverty headcount: Total number of % of population poor people (millions) under $4 (PPP) per day 1987-88 1993-95 1987-88 1993-95 Central Europe and Slovenia Czech Republic 0.0
