Did the Fall of the Berlin Wall Hurt Economic Growth?By
A quarter-century since the fall of Berlin Wall, recent events in Ukraine are evidence enough that conflict between Russia and the West didn’t disappear with the end of the Cold War. But that isn’t the only way that the optimism of 1989 has been disappointed. The early 1990s were filled with hope that the economies of Eastern Europe and Central Asia would boom once they were freed from the shackles of state control. In fact, the economic performance of the former Eastern bloc has been pretty grim—for some countries, worse than under communism. That’s a lesson in the messiness of change, but it also highlights why economic growth is only a partial measure of progress.
According to World Bank figures, the low and middle-income countries of Eastern Europe and Central Asia as a region have increased their average GDP per capita 43 percent since 1990. That’s slightly better than Sub-Saharan Africa but worse than South and East Asia, Latin America, or the Middle East and North Africa. For 25 countries in the former Eastern bloc, the per-capita GDPs of 13 (containing most of the region’s population) have expanded more slowly since 1990 than the global average. Of the 165 countries for which the World Bank has data, Russia’s GDP per capita (measured in purchasing power parity) was 33rd highest in 1990 and 42nd highest in 2013. Ukraine dropped from 55th to 93rd. Bulgaria and Latvia dropped one spot, Romania four, and Hungary eight. Poland did manage to climb 16 spots, to 45th richest, but it was very much in the minority. While Albania, Poland, Belarus, and Armenia have more than doubled their income per capita since 1990, six countries in the region are poorer than they were that year, including Ukraine and Georgia.
It isn’t just compared with countries in the rest of the world that growth rates across much of the former communist bloc are disappointing—it’s compared with their performance under communism. The Maddison project has historical data for 46 economies covering 1939, 1989, and 2010. That includes Bulgaria, Hungary, the former Yugoslavia and its successor states, and the former USSR and its successor states. In 1939, Bulgaria was the 36th richest of the 46 countries. It climbed to 31st richest by 1989 and reached 30th richest by 2010. The USSR was in 27th place in 1939. It reached 26th place by 1989, before the successor states as a group fell back to 34th by 2010.
From 1939 to 1989, the average growth rate in Bulgaria outstripped the U.S. and average growth in the former USSR outpaced Holland. Similarly, Yugoslavia and successor states got relatively richer under communism and poorer again after 1989. Hungary was a partial exception in that it got relatively poorer under communism, but it also kept dropping down the income rankings thereafter.
Alfred Bonne’s Studies in Economic Development, a textbook on economic growth published in 1957, suggested that the Soviet model was seen by some leaders as one to emulate on the grounds of its success: “The price paid … does not frighten political leaders in underdeveloped countries whose choice for improvement of marginal conditions of human existence is very limited.” Slower regional growth in the 1970s and 1980s, followed by the Soviet Union’s collapse, has made a lot of people forget that communist economies once performed pretty well.
This reflects changing theories on the driving force behind economic growth. In the post-World War II years, high investment was seen as the secret to economic expansion—and the countries of Eastern Europe fit the model well. In the period after 1980, when economists favored openness, liberalization, and deregulation as drivers of growth, the idea that communism could be anything but an economic catastrophe became anathema.
The trouble for such theories is that as a group, post-Communist countries have performed badly—and some of the countries that have adopted the most liberal policies have seen the weakest growth. It’s true that Poland introduced stronger reforms than nearly all other former communist states and has since fared much better in economic performance. But Georgia has also been a darling of the international community for the strength of its reform program; the World Bank’s Doing Business report, which purports to measure the quality of regulation surrounding starting and operating a business, suggests Georgia’s regulatory environment is better than Canada’s, Taiwan’s, or that of the Netherlands. Yet the country (wracked by Russian interventionism) remains poorer than it was at independence.
Sluggish economic growth is only one of many problems that plague post-communist societies. In 1988, the top fifth of Russia’s population controlled 34 percent of the country’s income. The most recent number is a 47 percent share. The country’s life expectancy has only recently recovered its level in the last years of communism. If the past 75 years of Eastern Europe’s history have a lesson for growth theory, it’s that self-declared socialist states have no monopoly on inefficiency, inequity, and corruption.
Even so, for all the economic problems of Eastern Europe and Central Asia today, it would be a ludicrous obscenity to suggest reviving the communist model of the former USSR. That’s because of the immense human cost it carried: the millions who died in Stalin’s purges and famines, the gulags and the security states, the denial of basic rights and freedoms. GDP growth rates alone are an incredibly partial measure of human progress. That’s why, for all the failed reforms and failures of reform, there is no going back.