The Transition to a Market Economy: Did Former Soviet Republics Fail?

This semester I am participating in a reading group with undergraduate students that focuses on the history and prospects for capitalism and socialism. Lately we have been reading Joseph Stiglitz, who has long argued that China’s transition to a market economy has gone much better than the former Soviet Union. Gradual transition is superior to “shock therapy,” according to Stiglitz.

There’s an extent to which this is true. If we just look at economic growth rates since, say, 1995, China has clearly outpaced Russia.

Source: Our World in Data

It’s hard to know exactly what year to start, since GDP figures for former planned economies immediately after transition aren’t reliable, but the start date is mostly irrelevant for everything I’ll say here (please play around with the start year in the charts to see if I’m cherry-picking years). 1995 seems a reasonable enough year to start for reliable post-transition starting point.

As we see above, while Russia has had a rough doubling of GDP per capita since 1995 (respectable, and yes, it’s all adjusted for inflation!), China has soared almost 600%. Wow! But this is something of a cheat. Despite all that growth, average income in China is still lower than Russia: only about 60% of Russia in 2020. China started from a much lower level, meaning that faster growth, while not guaranteed, is at least easier to achieve. In fact, if we go back to 1978, when China’s first reforms began, GDP per capita in the Former USSR was about 6 times as high as China (that’s according to the latest Maddison Project estimates, which will always be speculative for non-market economies, but are the best we have).

Furthermore, Russia hasn’t really transitioned to a democracy either. China clearly hasn’t, but no one doubts that. But despite having the outward symbols of democracy (elections, a legislature, etc.), Russia still scores low on most indexes of democracy and civil liberties. For example, Freedom House scores them at 19/100, a little better than China (9/100), but nothing like Western Europe.

So, did the quick transition to market economies fail? Not so fast. While it did fail in Russia, in most of Eastern Europe and the eastern part of the former USSR it seems to have been a major success. Take a look at this chart, which shows the former Soviet Republics in and near Europe (I exclude Central Asian FSRs).

Source: Our World in Data

Russia, along with Ukraine (hello, current events), have been by far the worst economic performers since 1995. While no one has quite matched China (note: none were as poor as China in 1995), the performance has been far superior to Russia.

The South Caucasus countries (Armenia, Azerbaijan, and Georgia), with the lowest incomes at the start, saw growth rates between 300% and 400% (again, these are adjusted for inflation). Not quite China levels, but not bad!

The Baltic countries (Estonia, Latvia, and Lithuania) started from the higher income levels, similar to Russia in 1995. But they have seen spectacular growth and are now much richer than Russia. In fact, according to the latest IMF estimates, in 2021 Estonia and Lithuania are now over $40,000 per person, putting them equal to Spain and closing in on Japan and Italy.

And speaking of the Baltic states, they also illustrate the simultaneous transition to democracy is also possible. Look again at the Freedom House map. They have scores right around 90/100, similar to France and Germany, and even beating the US! The transition to democracy has clearly not worked everywhere (Belarus and Azerbaijan, in addition to Russia), but it’s not self-evident that a fast transition can’t work. I think just about anyone today would pick Estonia over China. They are also all now full EU and NATO member states. Clearly a success story in the Baltics.

Finally, there are attempts to measure how market-oriented an economy is. This is a tricky thing to do, but I think the Fraser Institute does a very good job. What do they find? Among the 20 most market-oriented economies in the world, five are former Soviet Republics! The Baltic states, plus Georgia and Armenia (the competing index from Heritage doesn’t rank Armenia as high but agrees on the Baltic states). Of course, other former Soviet Republics rank much worse, with Ukraine near the bottom. Clearly, the transition to a market economy can go poorly too (though Ukraine has made decent progress on the democratic transition).

Now, in the end, Russia is important. It was the core nation of the former USSR, as well as the largest by both population and area. We can’t ignore Russia. But Russia’s transition to a kinda-sorta-market economy (Fraser ranks them in 100th place), for all its failures, does not seem to make the broader point that a fast transition for socialism is necessarily a bad idea.

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