Structural Change and Output Decline in Transition Economies

The paper discusses the factors which explain the spread of the output decline across various industries of the Former Soviet Union. Russia and Ukraine are compared on the period 1990-95. Several traditional explanations, such as the move away from military oriented production, the replacement of the planner's preferences by consumer preferences, the disruption of the intransoviet trade relations, the change in the relative price of products when countries opened to foreign trade, and the change in factor endowments due to the split of the FSU, are all examined. Although some of these factors do have an influence on the relative growth (decline) of various industries ikn both countries, they fail to explain most of the variance of this growth (decline). Another explanatory factor is thus envisaged, namely the quality content of each industry. Quality is measured by two characteristics, the diversity (number of products made by a given industry) and the variety (Grubel-Lloyd ratio or degree of intra-industry trade), both indicators beeing measured for a typical western economy. The tests show that both Ukraine and Russia are weak at producing high quality complex goods and relatively better off producing standard homogenous commodities. The quality shock thus appears more important than the price shock to explain the dramatic decline of some ex-soviet industries.