Monthly Archives: August 2017

Most Russians are poorer now than under Communism in 1989

A few months ago, I had an article in the Mandarin arguing that the Commonwealth budget should contain distributional analysis. This is because the economic welfare of a community cannot be understood just through averages like income per capita. Clearly it makes a difference who gets what.

It’s hard to imagine something illustrating the point more powerfully than distributional data contained in a working paper on inequality in Russia from 1905-2016 (h/t Matt Bruenig). The paper is co-authored by Novokmet and Piketty of the Paris School of Economics and Zucman of Berkeley.

To analyse inequality in Russia 1905-2016, the paper follows “a common methodology that involves combining national accounts, surveys, and fiscal data in a consistent manner to produce ‘distributional national accounts’.”

Such analysis is not straightforward because taxation statistics and, in particular, survey data tend to understate the level of inequality. Surprisingly enough billionaire oligarchs are not in the habit of answering income and assets questionnaires or reporting their Swiss bank accounts to the taxation department

The paper contains lots of interesting data, but one chart stands out as shocking. It shows that the majority of Russians are poorer than they were under Communism in 1989:

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Look closely at that chart and you can see that cumulative income growth from 1989 to 2016 is negative until just beyond the fiftieth income percentile (at the 55th percentile according to the source data).

The story is slightly clearer in the annual real growth by percentile chart:

russia2.png

Extraordinary. After everything we’ve heard about the economic disaster zone of Soviet Communism, it delivered steady income growth for most the population, only for this to turn negative with the notoriously abrupt introduction of capitalism.

To be sure, it is only a slight majority who are absolutely worse off, but this is nonetheless shocking considering the income growth that would normally be expected over such a period. Compared to 1956-1989, annual income growth was worse for everyone up to the 93rd income percentile.

That most the population are worse off despite per capita income growth of around 40% underscores the limitations of averages as a measure of a community’s economic welfare.

It’s not hard to see where the income has gone:

russia top 1

russia top 10.png

 

Russia’s shocking upward redistribution is in large part a failure of policy-makers and advisers to consider distributional issues when building the nation’s capitalist institutions during the post-Communist transition.

In the wisdom of Western and domestic liberal economic advisers, a conscious decision was made to set aside equity considerations, even to the point of overlooking extreme corruption, in order to boost efficiency through rapid privatisation of the economy.

Branko Milanovic, former head research economist at the World Bank and renowned inequality scholar, describes the economic reasoning for this in his magisterial Global Inequality:

At the time, a key argument for the benefit of fast privatisation, even if unjust or corrupt, was that, from the point of view of efficiency, it does not really matter to whom assets are sold and at what prices. Surely, the argument went, there will be distributional consequences regarding who benefits from cheap assets (some people will become immensely rich, while many others will get nothing), but there will not be longer-term implications for economic efficiency. Why not? Because if assets are given practically for free to people who do not know what to do with them, those people will have an incentive to sell the assets quickly to “real” entrepreneurs who know how to manage them.  This argument was consistent with the Coase Theorem, which states that we can separate matters of economic efficiency from matters of distributional justice, essentially by relegating the latter to an area outside economic policy.

Moreover, even before the new tycoons sell the assets – that is, as soon as they have been gifted with them – they will have an incentive to push hard for the rule of law. This conclusion seemed self-evident. Even if privatisation was done in the most lawless and nontransparent fashion, the new millionaires would, like the robber barons in the United States, demand the rule of law and property rights in order to protect their newly acquired wealth.

Some of the smartest economists in the world were convinced that mass plundering of community resources by corrupt plutocrats was good, because it would promote efficiency and… the rule of law. The story is another cautionary tale about deriving policy from narrow theories about efficiency (see also Greece and Indonesia).

While incomes fell for most the population, life expectancy deteriorated also, plummeting nearly five years for men between 1990 and 2000, driven by factors such as cardiovascular disease, alcoholism and suicide. By examining differences in the pace of privatisation across Russian regions, analysis in the Lancet concludes that there is “strong evidence for the hypothesis that rapid privatisation contributed to raised working-age male mortality”.

None of this is to exonerate Soviet Russia, which was an economic basket case and dreadful on basic freedoms and human rights.

But it does draw into focus the scale of the social and economic disaster that is post-Communist Russia, and the critical imperative of considering distributional issues in economic analysis.

Australia should criminalise citizens promoting tobacco in developing countries

Many people around the world were disturbed when a video emerged of a two-year-old Indonesian smoking baby, but this notorious anecdote alludes to a systemic problem.

Growing rates of smoking are a public health crisis in many developing countries. In Indonesia the problem is severe, with the male smoking rate increasing by around 20 percentage points in 15 years, from 56.2 in 2000 to 76.2 in 2015 – now the highest rate in the world.

The growth in smoking is in part due to concerted advertising from the tobacco giants. Advertisements for tobacco are everywhere. In one town I’ve visited, they were on every second telegraph poll.

The ads target poor people and school children, deliberately setting up near schools. They are spruiking the myth that smoking is associated with a life of freedom and self-creation.

The tobacco companies give venders gifts such as refrigerators and microwaves based on how many ads they put up and how many boxes they sell.

What can we do about this global public health disaster?

One thing Australians can feel genuine pride in was our government’s decision in 2011 to take on the tobacco companies over plain packaging.

Legal threats are the tobacco companies’ tool of choice for bullying developing countries into doing what they want. These countries often do not have the financial or institutional strength to sustain costly legal disputes.

By setting a legal precedent against the tobacco companies, Australia contributed to a global health public good.

But we can do more.

I propose making it a criminal offence for an Australian to promote tobacco in a developing country.

According to 80,000 Hours, a research group on career impact based at Oxford University, the number one most harmful career is marketing or R&D for companies that exploit compulsive behaviours such as smoking. It singled out the promotion of smoking in developing countries as particularly destructive, given low levels of information about smoking’s harm within those countries.

When someone works in such a role, it means their talent and hard work is going towards killing people.

Australians should not be permitted to participate in this human destruction.

What good would the change do? First, it’s morally correct. Second, it will slightly reduce the employment pool for tobacco companies. If an Australian has such a job, they were probably chosen because they were the best person for the job, meaning their replacement will be slightly less effective, thereby saving lives. But third, and most important, it’s a signal to the rest of the world, and other countries may follow – as we saw with plain packaging.

Western Sydney Wonk: reboot

It’s been a long time – nearly a year – since posting on this blog. I put it aside to focus on pressing commitments relating to family, study and work.

For those who don’t know me, I am based in Jakarta but have spent much of the past year travelling back and forth from here to Sydney.

My background is in economic and social policy: including as an analyst in Commonwealth Treasury and Finance Departments, and as a Parliamentary staffer. I have degrees in sociology and economics, and am nearly finished a Masters in Economics. My main policy interests are in the area of poverty and inequality, particularly as it relates to welfare economics and benefit-cost analysis (my dissertation), governance practices (my public service history), politics (my staffer history) and health (a side interest relating to my family experience).

Part of what draws me back to Sydney is an Australia-based research component of my Masters, as well as some family issues that needed my attention.

I’m also working in Jakarta, and doing nearly full-time coursework.

So I’ve tried to avoid distractions.

Nevertheless, I did write a piece for the Mandarin arguing for distributional analysis in the budget papers. My take was picked up by Jessica Irvine in a good article for the Sydney Morning Herald. (In another Herald citation that month Jewel Topsfield described me as a “Twitter wag” – one for the business card.)

When I started the blog, I found it helpful for working through my ideas, engaging with others and practicing my writing. But a blog also takes up time and focus. If you write 3,000 words of decently drafted and referenced original material, the obvious question is why a personal blog rather than submit it for publication? Other the other hand, the benefits of a personal blog are that writers can have greater control, informality and spontaneity.

How to find the balance that gains most of the benefits while limiting the costs?

I’ve decided the answer to this is to try shorter, faster and less ironed out pieces. The objective is to get the ideas down, and open a discussion. Many of my favourite bloggers write in this style – John Quiggin springs to mind. Sure random thoughts on Quiggin’s mind while he eats his cereal or cuts his toenails are probably smarter than even our smartest thoughts, but I digress. It’s a good approach.