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The Soviet economic decline : historical and republican data

  • Easterly, William
  • Fischer, Stanley
  • DEC

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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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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