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:
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:
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’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.