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The Soviet economic decline : historical and republican data

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  • Easterly, William
  • Fischer, Stanley
  • DEC

Abstract

Soviet growth for 1960-89 was the worst in the world, after controlling for investment and human capital. And relative performance worsens over time. The authors explain the declining Soviet growth rate from 1950 to 1987 by the declining marginal product of capital. The rate of total factor productivity growth is roughly constant over that period. Although the Soviet slowdown has conventionally been attributed to extensive growth (rising capital-to-output ratios), extensive growth is also a feature of market-oriented economies like Japan and Korea. One message from the authors'results could be that Soviet-style stagnation awaits other countries that have relied on extensive growth. The Soviet experience can be read as a particularly extreme dramatization of the long-run consequences of extensive growth. What led to the relative Soviet decline was a low elasticity of substitution between capital and labor, which caused diminishing returns to capital to be especially acute. (The natural question to ask is why Soviet capital-labor substitution was more difficult than in Western market economies, and whether this difficulty was related to the Soviets'planned economic systems.) Tentative evidence indicates that the burden of defense spending also contributed to the Soviet debacle. Differences in growth performance between the Soviet republics are explained by the same factors that figure in the empirical cross-section growth literature: initial income, human capital population growth, and the degree of sectoral distortions. The results the authors got with the Soviet Union in the international cross-section itself was disastrous for long-run economic growth in the Soviet Union. This point may now seem obvious but was not so apparent in the halcyon days of the 1950s, when the Soviet case was often cited as support for the neoclassical model's prediction that distortions do not have steady state growth effects. Since a heavy degree of planning and government intervention exists in many countries, especially developing countries, the ill-fated Soviet experience continues to be of interest.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1284.

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Date of creation: 30 Apr 1994
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Handle: RePEc:wbk:wbrwps:1284

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Keywords: Economic Growth; Economic Theory&Research; Achieving Shared Growth; Governance Indicators; Health Monitoring&Evaluation;

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Cited by:
  1. Brainerd, Elizabeth, 2006. "Reassessing the Standard of Living in the Soviet Union: An Analysis Using Archival and Anthropometric Data," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5525, C.E.P.R. Discussion Papers.
  2. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos, 1998. "How far is Eastern Europe from Brussels?," MPRA Paper 20059, University Library of Munich, Germany.
  3. Noland, Marcus & Robinson, Sherman & Wang, Tao, 2000. "Rigorous Speculation: The Collapse and Revival of the North Korean Economy," World Development, Elsevier, Elsevier, vol. 28(10), pages 1767-1787, October.
  4. Debdulal Mallick, 2007. "The Role of Elasticity of Substitution in Economic Growth: A Cross-Country Test of the La Grandville Hypothesis," Economics Series 2007_04, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  5. Jeanet Sinding Bentzen & Nicolai Kaarsen & Asger Moll Wingender, 2013. "The Timing of Industrialization across Countries," Discussion Papers, University of Copenhagen. Department of Economics 13-17, University of Copenhagen. Department of Economics.
  6. Kim, Byung-Yeon & Kim, Suk Jin & Lee, Keun, 2007. "Assessing the economic performance of North Korea, 1954-1989: Estimates and growth accounting analysis," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 564-582, September.
  7. Cevdet Denizer & Holger C. Wolf, 2000. "The Saving Collapse during the Transition in Eastern Europe," World Bank Economic Review, World Bank Group, World Bank Group, vol. 14(3), pages 445-455, September.
  8. Anatoliy G. Goncharuk, 2006. "Economic Efficiency in Transition: The Case of Ukraine," Managing Global Transitions, University of Primorska, Faculty of Management Koper, University of Primorska, Faculty of Management Koper, vol. 4(2), pages 129-143.
  9. Martin Raiser & Mark Schaffer & Johannes Schuchhardt, 2003. "Benchmarking structural change in transition," Working Papers, European Bank for Reconstruction and Development, Office of the Chief Economist 79, European Bank for Reconstruction and Development, Office of the Chief Economist.
  10. Laurent Weill, 2008. "On the inefficiency of European socialist economies," Journal of Productivity Analysis, Springer, Springer, vol. 29(2), pages 79-89, April.
  11. Treier, Volker, 2001. "Steuerwettbewerb in Mittel- und Osteuropa: Eine Einschätzung anhand der Messung effektiver Grenzsteuersätze," BERG Working Paper Series, Bamberg University, Bamberg Economic Research Group 36, Bamberg University, Bamberg Economic Research Group.
  12. Fischer, Stanley & Sahay, Ratna & Vegh, Carlos, 1998. "From transition to market: Evidence and growth prospects," MPRA Paper 20615, University Library of Munich, Germany.
  13. Brooks, Karen & Lerman, Zvi, 1995. "Restructuring of traditional farms and new land relations in Russia," Agricultural Economics, Blackwell, Blackwell, vol. 13(1), pages 11-25, October.
  14. Debdulal Mallick, 2012. "Education Briefing: The role of capital-labour substitution in economic growth," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 5(1), pages 89-101, April.
  15. Mallick, Debdulal, 2012. "The role of the elasticity of substitution in economic growth: A cross-country investigation," Labour Economics, Elsevier, Elsevier, vol. 19(5), pages 682-694.

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