FINAL REPORT T O NATIONAL COUNCIL FOR SOVIET AND EAST EUROPEAN RESEARC H TITLE : PATTERNS OF ECONOMI C DEVELOPMENT UNDE R SOCIALIS M AUTHOR : Professor Marvin R . Jackso n Department of Economic s Arizona State Universit y CONTRACTOR : Arizona State Universit y PRINCIPAL INVESTIGATOR : Professor Marvin R . Jackso n COUNCIL CONTRACT NUMBER : 800-1 2 DATE : April 198 9 The work leading to this report was supported by funds provided b y the National Council for Soviet and East European Research . Th e analysis and interpretations contained in the report are those o f the author . EXECUTIVE SUMMARY A . Introductio n The research in this project has sought answers to three questions : 1) In the time period 1950 to 1985, have patterns of economic developmen t in the communist-ruled countries of Eastern Europe differed from those i n capitalist countries ? 2) Have the patterns of two less developed communist-ruled countries , Bulgaria and Romania, differed from the common experience of that group ? 3) Have Bulgaria and Romania exhibited any significant variations tha t might suggest the limits to policy under the common institutiona l framework of communist political arrangements and socialist economi c institutions ? The research findings are compiled in a 400 page manuscript now bein g edited for publication . This final report includes the introductory chapte r and summaries of the nine substantive chapters of the manuscript . The chapte r titles are : II. Bulgaria and Romania : Past and Politics . III. Growth Patterns of National Product . IV. The Sources of Growth . V. Investments and Capital Accumulation . VI. Labor Force and Consumption . VII. Industrialization Patterns . VIII. The Contributions of Agriculture . IX. Foreign Trade and The CMEA . X. Challenges of World Markets . B . Some Concepts and Theory . The designation, "communist-ruled countries" has been chosen in place o f "socialist countries" because it is really communist rule that determines an d restricts choices of institutions and policy . What is more important is tha t the inquiry, mostly concerned with facts and their meanings, be directe d according to the existing body of theoretical-conceptual literature on th e expected economic effects of communist rule . These are discussed in Chapter I (enclosed) and again at the beginning of each chapter of the report . There is also a question of whether there are theoretical grounds fo r expecting the impact of communist rule to be different in Bulgaria and Romania , proxies for less developed countries . As will be explained shortly, being mor e or less developed has an impact on the development process which is independen t of institutional arrangements . Are there effects dependent on communist rule ? This question and a related one, are there conceptual or theoretica l grounds for expecting a different impact of communist rule on two seemingl y iii similar countries like Bulgaria and Romania, are discussed in Chapter II . The term, "development pattern", means the characteristics of economi c growth, including its sources and sectoral composition, and the main structura l changes taking place in a national economy over a period of time . If develop- ment patterns are representative of economic systems, they must be measured o n the basis of sufficient samples . In the project, the capitalist countries ar e usually taken to be the members of OECD, plus some East Asian and Latin American developing countries . At times the sample shrinks to the Wester n European and even only the Southern European countries . The sample for the communist-ruled countries nearly always includes th e six East European members of CMEA, often also the Soviet Union, and less ofte n Yugoslavia . A major research problem is how to decide if development patterns ar e "different" . Differences are sometimes presented as arithmetic averages acros s sample countries in each group . However, as often as has been possible , statistical tests are used to address the problem that nearly every importan t development pattern varies systematically with the level of GNP per capita an d sometimes with other factors such as country size (in the case of foreig n trade) . For example, growth rates of GNP tend to decline as the level of GN P per capita rises . So it would be biased to conclude that communist-rule d countries tend to grow faster merely on the grounds that average growth i s higher than for capitalist countries . Whenever possible the research employs a statistical regression t o "normalize" data for differences in the level of GNP before drawing conclusion s about system differences . This involves estimating an equation of the for m INDICATORi = an + b n* YCAP i + c n* POP i + d n* DUM j + e n , where INDICATOR is the nth pattern, a growth rate or a structural statistic , for the ith country, YCAP is national product per capita, POP is country siz e in terms of population, DUM is a dummy variable for the jth system or countr y group, and e is an error term . Differences in systems or country groups ar e estimated by the value and significance of the coefficient, d . A major part of the project is devoted to collection of a data set t o test differences . Data cover about 40 countries and more than 30 variables fo r the period from 1950 to 1985 . In order to manipulate data more easily, the y have been reduced to average values for five year periods (1950 to 1955, 195 5 to 1960, etc) . The usual sample set for testing differences between communist - ruled and capitalist countries is 256 observations . This sample is sometime s used to test differences between Bulgaria and Romania, and the other communist - ruled countries . When data unique to communist-ruled countries is used, test s are made with a 50 observation sample only for the communist-ruled countries . Comparisons of growth rates involving communist-ruled and capitalis t countries are always based on western estimates of GNP, industrial output, an d iv agricultural output for the former countries and official statistics for th e latter . When Bulgaria and Romania are compared with other communist-rule d countries, primary use is made of official statistics of net material produc t (NMP), gross industrial output (GIO), and gross agricultural output (GAO) . Some comparisons are also made with western estimates, and are always s o designated . C . Principal Finding s Summary Table 1 provides an overview of the main quantitative evidenc e generated and explored in the research . The major finding is that from 1950 t o 1985 communist-ruled countries grew less rapidly than capitalist countries a t any given level of income, a result attibutable to a combination of lowe r growth of productivity, labor force, and investment) This was despite greate r shifts of labor out of agriculture and higher rates of investment, highe r participation rates, and higher education rates . There was no difference i n growth rates of exports and imports . A second major finding is that communist-ruled countries have been "over - industrialized" . Shares of investment and labor force in industry, particu- larly heavy branches, have been larger than for a typical capitalist country a t the same level of income, while shares in services have been smaller . Other major findings concern the comparison of Bulgaria and Romania wit h the other communist-ruled countries . Bulgaria and Romania grew faster at a given level of income per capita than the others, exhibiting higher growth o f productivity, investments, exports and imports (but not labor force), an d greater shift of labor out of agriculture . 2 At the same time, neither in- dustrial output nor agricultural output grew faster in Bulgaria and Romani a than in the other countries . This suggests that the faster growth in Bulgaria and Romania was derived from the effects of shifting resources from agricultur e to industry (and perhaps was connected to relative pricing in the two sectors) . A second major finding in the case of Bulgaria and Romania is that mos t of their margin of faster growth compared to the other communist-ruled coun- tries was generated in the earlier years of communist rule . In 1976-80 and 1981-85 their behavior is more typical . This is consistent with the view tha t higher performance is connected to the (diminishing) possibilities of shiftin g resources from agriculture to industry . Many other minor findings and numerous qualifications in the methods, th e data, and the results are reported below . 1 This conclusion is based on western estimates of GNP for communist-rule d countries and corrected growth rates of investment, as explained in the body o f the report . 2Similar results are obtained when growth is measured in both GNP and NMP . Bulgarian and Romanian data in the two cases show no unusual deviations unti l the 1980s in the case of Romania . v Summary Table 1 DIFFERENCES IN GROWTH AND STRUCTURE : COMMUNIST-RULED VS CAPITALIST COUNTRIES AN D BULGARIA/ROMANIA VS OTHER COMMUNIST-RULED COUNTRIE S ----------------------------------------------------------------------------- - Communist - Ruled Bulgaria/Romani a Period versus versus Com - or Year Capitalist Growth or Development Pattern munist-Rule d ----------------------------------------------------------------------------- - 1950-85 lower 1) Growth of gross national product highe r 1950-79 same la) Stability of GNP 1950-79 same lb) Retardation of growt h 1950-85 lower 2) Growth of productivity (GNP) higher - converged * 1950-85 3) Growth of net material product highe