Annals of Derp: The Fear of Legacy

A possible reason for Poland's remarkable prosperity is the increasing number of sculpted gnomes in the streets of Wrocław since 2001. Wikipedia.

So the economist Branko Milanović, on his way back to New York from Berlin a week before the 25th anniversary of the fall of the Wall, wrote an extremely interesting blog post laying out an assessment of the economic progress made in the countries that once constituted the Soviet Union and its satellites, in terms of long-term annual growth rates, in four groups:

• Total failures, Tajikistan, Moldova, Ukraine, Kyrgyzstan, Georgia, Bosnia, and Serbia, whose economies have an average annual growth of zero or less since 1990;
• Relative failures, Macedonia, Croatia, Russia, and Hungary, with average growth rates under 1%;
• Countries that are treading water, not falling further behind, with growth rates from 1.7 to 1.9%, Czech Republic, Slovenia, Turkmenistan, Lithuania, and Romania; and
• Succcesses, with growth rates of 2% and up: Uzbekistan and Latvia (2%), Bulgaria (2.2%), Slovakia and Kazakhstan (2.4%), Azerbaijan, Estonia, Mongolia, and Armenia (around 3%), Belarus (3.5%), Poland (3.7%), and Albania (3.9%)

Milanović doesn't attempt to explore the reasons for these differences in any depth; as he says in response to a comment,

I wish I could do it, but I have been away from the topic so long (10 ys I guess) and am so busy with other things. It just struck me when I was in Berlin and I had 8 hrs on the plane (with my laptop) to think and write.

But that isn't an obstacle for our own Mr. Facile Explanation David Brooks, who has never studied the topic at all but comes up with a full account between his postprandial stroll on Monday afternoon and drinkies time, and issues it in this morning's Times. Only of course all it takes is a little Googling to demonstrate that it's entirely wrong.

The first factor, for Brooks, is Thatcherism, where the governments that implemented a more or less 1980s Tory economic approach did better than those that did not:

leaders in some countries simply made better political decisions. Most of these countries enacted economic reforms, like deregulating prices and privatizing nationalized companies. Some nations like Estonia and Poland enacted reforms radically and quickly, while others tried to do them gradually or barely at all — with expensive security blankets for protected interests. 

But of the eight countries that made the transition to the market economy quickly and seriously enough to achieve entry into the European Union in 2004, just four are successes by Milanović's criterion—Estonia, Latvia, Poland, and Slovakia; while three are in the just-surviving category—Czech Republic, Lithuania, and Slovenia—and one, Hungary, is a failure. Moreover, Bulgaria, one of two late-transition countries that joined the EU in 2007, is also a success, while the other, Romania, is in the iffy group.

Belarus, Russia, and Ukraine, in contrast, all handled the economic transition very poorly, and yet with completely different results: basket-case Ukraine, modest failure Russia, and successful Belarus, though failure Russia had vast mineral wealth that could have made a difference (as it did with successful Azerbaijan, Uzbekistan, and Kazakhstan). Belarus? Really?

And Albania had two restructurings, one beginning 1995 that practically destroyed the country and another in 1997 that is doing extremely well. One thing I think Poland and Albania have in common is very high rates of workers migrating to western Europe and its very high wages, which takes pressure off their local job markets in times of austerity, keeping unemployment rates relatively lower, and provides them with tons of foreign currency in the form of remittances as well: the chart below, which covers only EU members and hence not Albania, shows enormous difference on this between relatively successful Poland, Romania, Bulgaria, and Lithuania and relatively unsuccessful Slovenia, Hungary, and Czech Republic:

Via epp.eurostat, which informs me that without remittances, Bulgaria's current account deficit would be 158% higher than it is. Per Wikipedia, annual remittances from expatriate workers to Albania make up 15% of the little country's GDP.

While in China, where the transition to "socialism with Chinese characteristics" would certainly count as a success by any criterion (average annual growth 9.9% between 1979 and 2010),  we're still waiting for that privatization to get started (any day now! they promised!).

So no, that really doesn't explain very much, although if I were really trying to figure stuff out I'd look first at the possibility that Hungary's catastrophe could be rooted in excessive Thatcherism, an austerity so severe as to cause permanent damage (growth in Hungary has improved since this 2010 paper by Tamás Marva argued along those lines).

There's not much more to say, as there's not much more content to say it about. Brooksy's second factor is

the level of institutions. Many Western advisers focused on the headline reforms — writing new constitutions and creating stock markets. But Larry Lawson, an economist who worked with the Poles and Ukrainians, points out that these nations lacked the basic building blocks we take for granted. Before you have a stock market, for example, you have to have publicly available data about companies, credit records and accounting systems.

To which the only answer is Belarus? Really? Albania? Armenia? And if that's an important factor and Poland and Ukraine are your examples how come Poland would be doing so well while Ukraine is doing so badly? And who is Larry Lawson when he's at home?

And then finally, the "legacy of fear":

The Poles had a keen desire to initiate reforms on their own. Poles also had a clear sense of justice and injustice, since they had seen the Russians do things the wrong way on their own territory. They placed a high value on education and social mobility. Other countries lacked this cultural brew. Worse, life was marked by fear, by arbitrary power, by suspicion that people are watching you, by distrust. People raised in this atmosphere of distrust have trouble forming companies and associations.

How does this stew of truisms, stereotypes, and vacuities differentiate Poland and Albania from Hungary and Croatia, or Estonia from Lithuania? To say nothing of China (where there has been plenty of fear over the last 3000 years, not to mention from 1954 to 1979, and also plenty of entrepreneurship)? It contains no false or at least falsifiable statements, but as argument it's purest bullshit, of the kind you can get away with on television; it simply has no meaning.

And it's really impossible to know what Brooks even had in mind with this piece, other than just a novel mounting for the usual warning that we all need to tighten our budgets and deregulate.

I'll tell you who Larry Lawson is, though: a professor of finance who retired from Missouri Western State University, St. Joseph, a couple of years ago, and now lives in the mountains outside Fort Collins/Boulder/Denver doing I don't know what; but he spent a couple of years in Wrocław 25 years ago, and a highlight of his bibliography was a paper on Bank Management During Financial and Economic Reform in Central and Eastern Europe, which was published in the Proceedings of the Ukrainian Business Outlook Conference, October 1993. I'll bet that was a fun conference.

In my fantasy, old Larry is a little bit cranky and spends a lot of time on the Internet, caught the Milanović post, and was outraged: "This man says nothing whatever about the role of bank management in Eastern European economic reform! He's an impostor!" And then let's say he actually knows Brooks in a way; met the famous author at Aspen one year, and clung to him through a post-lecture cocktail hour, chatting about the economies of Poland and Ukraine ("Fascinating!" lied Brooks, looking around desperately for someone to escape to), and obtained his email address. In the emotion of seeing someone writing about a topic he and Brooks had shared in this unforgettable moment, he popped his friend a note, and this—so little does Brooks have to write about these days—is the upshot. You have a better theory?