September 19, 2012

A Bad Bargain

Writing about web page http://blogs.spectator.co.uk/coffeehouse/2012/09/a-bad-bargain-we-should-give-up-nationwide-pay-bargaining-for-public-employees/

A thought experiment: Imagine what would happen to the Greek economy if a European trade union managed to secure the same salaries for Greece’s public employees as for their German counterparts. If that sounds like a bad idea to you, then consider the fact that in Britain we already have this arrangement across our country's regions.

Nationwide pay bargaining imposes a limited salary range for all public sector jobs of a given type across our country, so that local pay cannot vary to reflect local conditions. Think about the North East. This is our "Greece," a region where house prices and private-sector wages are lower than elsewhere. The national bargain means that in the North East public employees will be relatively overpaid. In contrast, the South East is our "Germany." There, house prices and private-sector wages are relatively high, so the same job for the same nominal pay will be underpaid. It sounds like the effects should balance out across the country as a whole, but the available research shows that they don’t. On balance, we lose.

In the North East the public sector can easily attract employees. At the same time the private sector is blighted: on the evidence of Giulia Faggio and Henry Overman, firms that could sell to the national or international market and would otherwise have the potential to grow are squeezed because they cannot attract workers away from high-wage public employment. On average, Jack Britton, Carol Propper, and John van Reenan have shown, the residents of the North East get good schools and good health care. But the average does not apply to everyone; as Alison Wolf has argued, the gains go primarily to the pockets of affluence; schools and hospitals in particularly deprived areas within the region still struggle to recruit competent staff.

In the South East, the same research shows, hospitals and schools have struggled to recruit because public employees are relatively underpaid. They rely excessively on agency staff and teaching assistants. The education of children and the health of residents have suffered. Within the South East the losses bear more heavily on more deprived communities, because better-off families can turn to private education and health care.

Do the gains balance the losses? No. Carol Propper and her co-authors have shown that the health and educational losses in regions where public employees are relatively underpaid exceed the gains where the converse applies. It doesn’t all balance out. As a result, our country as a whole is left worse off.

Who gains? Apparently, two minorities. One minority is the public employees in the low house-price, low private-wage regions, who gain real income. Another minority is the national trade union officials who have gained status and power from national bargaining. They achieve this by siphoning influence away from their own grass roots – and money out of the Treasury.

National pay bargaining in the public sector is a mechanism that benefits a few and leaves the community worse off. It demands reform. Individual wage bargaining in the public sector would move the public and private sectors towards a level footing in each region. The overwhelming majority of our citizens would gain. Proposals for individual bargaining are sensible, and this is why I support them.

The Evidence

  • Britton, Jack, and Carol Propper. 2012. “Centralized Pay Regulation of Teachers and School Performance.” University of Bristol, Imperial College London, and the Centre for Economic Policy Research. Working Paper. Abstract: “Teacher wages are commonly subject to centralised wage bargaining resulting in flat teacher wages across heterogenous labour markets. Consequently teacher wages will be relatively worse in areas where local labour market wages are high. The implications are that teacher output will be lower in high outside wage areas. This paper investigates whether this relationship between local labour market wages and school performance exists. We exploit the centralised wage regulation of teachers in the England and use data on over 3000 schools containing around 200,000 teachers who educate around half a million children per year. We find that regulation decreases educational output. Schools add less value to their pupils in areas where the outside option for teachers is higher and this is not offset by gains in lower outside wage areas.” Available at: http://www.bristol.ac.uk/cmpo/events/2012/doctoralconference/britton.pdf.
  • Faggio, Giulia, and Henry G. Overman. 2012. “The Effect of Public Sector Employment on Local Labour Markets.” London School of Economics, Spatial Economics Research Centre Discussion Paper no. 111. Abstract: “This paper considers the impact of public sector employment on local labour markets. Using English data at the Local Authority level for 2003 to 2007 we find that public sector employment has no identifiable effect on total private sector employment. However, public sector employment does affect the sectoral composition of the private sector. Specifically, each additional public sector job creates 0.5 jobs in the nontradable sector (construction and services) while crowding out 0.4 jobs in the tradable sector (manufacturing). When using data for a longer time period (1999 to 2007) we find no multiplier effect for nontradables, stronger crowding out for tradables and, consistent with this, crowding out for total private sector employment.” Available at http://www.spatialeconomics.ac.uk/textonly/serc/publications/download/sercdp0111.pdf.
  • Giordano, Raffaela, Domenico Depalo, Manuel Coutinho Pereira, Bruno Eugène, Evangelia Papapetrou, Javier J. Perez, Lukas Reiss, and Mojca Roter. 2011. The Public Sector Pay Gap in a Selection of Euro Area Countries. European Central bank Working Paper no. 1406. Abstract: Abstract: “We investigate the public/private wage differentials in ten euro area countries (Austria, Belgium, France, Germany, Greece, Ireland, Italy, Portugal, Slovenia and Spain). To account for differences in employment characteristics between the two sectors, we focus on micro data taken from EU-SILC. The results point to a conditional pay differential in favour of the public sector that is generally higher for women, at the low tail of the wage distribution, in the Education and the Public administration sectors rather than in the Health sector. Notable differences emerge across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries. Available at http://www.ecb.int/pub/pdf/scpwps/ecbwp1406.pdf.
  • Propper, Carol, and John Van Reenan. 2010. “Can Pay Regulation Kill? Panel Data Evidence on the Effect of Labor Markets on Hospital Performance.” Journal of Political Economy 118:2, pp. 222-273. Abstract: “In many sectors, pay is regulated to be equal across heterogeneous geographical labor markets. When the competitive outside wage is higher than the regulated wage, there are likely to be falls in quality. We exploit panel data from the population of English hospitals in which regulated pay for nurses is essentially flat across the country. Higher outside wages significantly worsen hospital quality as measured by hospital deaths for emergency heart attacks. A 10 percent increase in the outside wage is associated with a 7 percent increase in death rates. Furthermore, the regulation increases aggregate death rates in the public health care system.” Repec handle: http://ideas.repec.org/a/ucp/jpolec/v118y2010i2p222-273.html.
  • Wolf, Alison. 2010. More than We Bargained For: The Social and Economic Costs of National Wage Bargaining. CentreForum: London. Executive summary: “Britain’s centralised wage bargaining systems are bad for the country and getting more so. They create enormous barriers to the improvement of public services, and to rational decision making at a time of fiscal crisis. They penalise our poorest regions, by distorting their labour markets and standing in the way of economic growth. They do not need to be the way they are; and they do need to be changed. […] Britain needs to rid itself of rigid centralised wage bargaining. These systems are economically harmful, undermine quality in the public services, and perpetuate disadvantage. Swedish experience shows that individual contracts are popular and successful and Britain, too, should make that change.” Available at http://www.centreforum.org/assets/pubs/more-than-we-bargained-for.pdf.

August 27, 2012

Prince Harry and The Rules

Writing about web page http://www.sps.ru/?id=213821

What happened in Vegas should have stayed there, but somehow it was allowed out and got away.

Back home, the nation is divided. Some think Prince Harry let us down. Others think he was doing what comes naturally to a healthy twenty-something with more money than sense -- and good luck to him.

The first lot apparently includes the senior members of the royal family. A source told a Mirror journalist:

This situation [the prince's partying in a Vegas hotel] has been embarrassing for the royals and particularly disappointing since they had been successfully building Harry’s image as a serious royal and ambassador for the Queen.

Prince Charles probably wishes he could put the same kind of armlock on his younger son that the Soviet state put onto every Soviet citizen that was send abroad. Recently I looked up the rules that were issued to all Soviet tourists before they were allowed to leave the country. These rules were approved from time to time by the communist party leadership.

I've pasted the version approved in August 1979 below (scroll down to the end). These rules were published a few years ago in a book of Soviet-era documents. It's not my translation. I put the Russian text through Google translate and corrected the preamble. The result is a bit rough but the spirit is clear enough.

There were 25 rules. They covered everything from not leaving government documents in your hotel room to what to do if a strange woman entered your sleeping compartment on the night train.

Here is some context that might help:

  • No Soviet citizen could travel abroad on their own initiative, whether for tourism or for any other purpose. You had to get permission, which meant entering into a multi-stage process of examination and disclosure of all aspects of your life, thoughts, and habits. This examination took weeks or months; you could fail the inspection at any stage and never know why.
  • Only if you passed the process would they trust you with knowledge of the rules. For the rules were a government secret, which you were shown and had to sign for on the eve of departure.
  • On successfully obtaining permission, you did not then "go" abroad; the government was "sending" you. As the rules below conclude (this is my translation):

The state, party, and social organizations of the Soviet Union sending Soviet citizens abroad are showing great trust in them. Soviet people are obligated to justify this trust by fulfilling their administrative duties and by irreproachable behaviour. Failure to comply with the rules of conduct abroad should be considered as a breach of public duty and of state discipline.

  • If you went, you did not go alone. Every Soviet tourist group and delegation included one or more KGB officers and informers, travelling under cover; their job was to keep an eye on the others.
  • If you misbehaved while out of the country, there would be consequences. On your return, you would be reported and interviewed. Most likely, you'd never be allowed out of the country again. There was one escape route: Rule 20 states:

The Soviet citizen who makes an individual mistake in work or conduct must not conceal it and is obligated immediately to report the incident to his supervisor.

In other words, if you made an honest mistake that was not too serious, and you owned up and helped to mitigate its consequences, there was a slim chance you'd be let off the hook.

  • One thing not in the rules: if you tried to escape the consequences of breaking the rules by taking refuge in a foreign country, you became a traitor, so your family would become the family of a traitor. They would have to disown you or share the price of your treason. Either way, you lost them forever.

If Prince Harry had known the rules, and been frightened enough to stick to them, nothing would have happened in Vegas. Specifically:

  • Harry would have known it was not "his" trip; while travelling, it was his job to promote his country's foreign policy (Rule 1).
  • He'd have known that the enemy is always planning to eavesdrop, engage in secret surveillance, and use the results to deceive and discredit (Rule 4).
  • He'd have known that you can't trust "guides and interpreters, doctors, teachers, tailors, vendors, taxi drivers, waiters, hairdressers and other service personnel" (including hotel staff) (Rule 4), any of whom are likely to be working for the enemy (the press in this case).
  • He'd have known that he should match his expenditure with his means, not incur obligations to others by accepting hospitality or gifts from them (Rule 13), and specifically avoid gambling and casinos (Rule 14).

But the history of Soviet tourism tells us that rules alone are not enough to guarantee good behaviour; fear of consequences was the key. Sometimes even fear was not enough, because Soviet tourists did sometimes give in to temptation.

In this case Prince Harry is third in line to the British throne; can we credibly threaten to consign him to oblivion if he misbehaves? Can we sanction his father or brother if he overstays his leave?

To conclude: you can send people far away and still control their conduct by terrifying them with the consequences of misbehaviour. It's hard to do it any other way. The price of living in a free society is that some young men will go abroad and behave badly.

You can criticise the House of Windsor for its privilege and lack of morals, but it looks like Harry will have fun, fun, fun 'till his Daddy takes the T-bird away.

* * *

Here are the rules that were adopted by the Communist Party of the Soviet Union central committee on August 17, 1979, courtesy of Google translate:

Secret

Appendix to item 3s [secret], draft resolution № 167

BASIC RULES of conduct of Soviet citizens visiting the capitalist and developing countries

Soviet citizens who migrate to capitalist and developing countries should be guided by:

1. Soviet foreign policy aims to create favorable international conditions for the building of communism, to strengthen the unity and cohesion of the socialist countries, to support the people's struggle for national and social liberation and to fully cooperate with the newly independent states, consistently the principles of peaceful coexistence between countries with different social systems, to deliver humanity of global thermonuclear war. Soviet citizens while abroad, must be an active proponent of the foreign policy of the Soviet Union.

Soviet man, remember that high moral and political qualities, great love for the Soviet motherland, faithful to the principles of proletarian internationalism, the constant vigilance during their stay abroad will contribute to the successful implementation of its objectives, to protect it from enemy provocations and intrigues.

2. While abroad in any part of the work entrusted to him, a Soviet citizen must uphold the honor and dignity of citizens of the USSR, in strict moral code of the builder of communism, faithfully perform their duties and assignments to be un-blameworthy in their personal behavior, consistently defend the political, economic and other interests of the Soviet Union, strictly to keep state secrets.

3. During his stay abroad Soviet nationals, using the opportunities and explain the peaceful foreign policy of the Soviet state to the Soviet-achieving people in the development of economy, science, culture and other areas of building communism.

Soviet citizens should actively use their facilities for the study of international experience, and all that could be useful for the development of the economy of the Soviet Union.

4. While abroad, constant political vigilance, remember that the intelligence agencies of the capitalist countries and their agents seeking from Soviet citizens interested in their information, compromise the Soviet man, when it suits them, up to the inducement to treason. For this purpose, intelligence imperialist countries, using modern techniques, methods of eavesdropping, secret surveillance and photography, as well as methods of deception, blackmail, fraud and intimidation. Capitalist intelligence agents are often under the guise of guides and interpreters, doctors, teachers, tailors, vendors, taxi drivers, waiters, hairdressers and other service personnel.

Intelligence agencies in capitalist countries tend to exploit such weaknesses and individuals, as a tendency to alcohol, for easy communication with women, gambling, purchase of various things, and the inability to live within our means, and carelessness, indiscretion, carelessness and negligence in the storage official and personal documents.

To avoid possible provocations in the case of attempts on the part of anyone else to offer information, supposedly of interest to the Soviet Union, or attempting to engage in obtaining such information to exercise due restraint, not to accept any proposals and report to the head of the Soviet establishment.

In order to protect the citizens of the Soviet secret service possible provocations in a number of capitalist countries have sovposolstv Assistant Ambassador for safety. Must promptly inform the Assistant Ambassador on his contacts with foreigners, whose actions are unfriendly toward our country in nature, as well as other facts hostility to the Soviet Union and the case for action to ensure the safety of overseas Soviet people.

Given all this, the Soviet citizens should behave in such a way as not to give occasion to use foreign intelligence itself in its interests. At the same time, Soviet citizens who are abroad, do not have to stay closed and arrogant towards the citizens of the country. Reasonable sociability of the Soviet people, combined with high political vigilance is necessary for the proper conduct of Soviet citizens abroad.

5. Before the departure of the Soviet Union abroad should:

well understand the goals and objectives of the mission and get the necessary instructions to the sending organization on issues of the work;

acquainted with the basic facts about the country: its political and state system, domestic and foreign policy, relations with the Soviet Union;

more familiar with the route to the place of destination;

get a passport, see for yourself, there is sufficient period of validity, whether it entry and transit visas to remember their validity;

receive payment-certificate, permission to currency export and, where necessary medical certification standard pattern stamped on vaccinations.

When going abroad for a period of three months to hand over to the appropriate organization of the Party, Komsomol and trade union fees. Get the adhesive stamps and on arrival in the country to stand up to the party, Komsomol and trade union in the Soviet foreign office records. Not to bring personal documents, except those required to travel to your destination. All private and non-public documents and materials required to work abroad, to surrender to the sending organization to send them to the destination. Unclassified documents, office supplies and other materials needed to work abroad, you can take it only with permission of the sending organization.

Should have with addresses and phone numbers of embassies and consulates of the Soviet Union, along the way, so that, if necessary, you can refer to these institutions for advice, and if necessary - for assistance and adequate protection. If seconded sent to a country where there is no embassy, consulate or other representative of the USSR, he should have the address and phone numbers of the embassy, mission or consulate of a State representing the interests of the Soviet Union in the country.

6. Before traveling abroad should be familiar to the ministry, department or central office, through which the trips abroad, the customs regulations of the USSR, and strictly abide by them.

When you move the boundaries of foreign countries, as well as in transit through their territory to the destination comply with relevant laws and regulations of the border control, health and customs authorities. At the request of representatives of the border to bring your passport for verification. Before leaving the checkpoint does not forget to get your passport back.

At the request of the representatives of Customs show things, baggage, without giving a reason for the charge of concealing anything in particular to bring foreign currency. If the inspection of luggage will be asked to pay customs duty, it must be paid, and for this currency priotsutstvii take a receipt for the items left in the customs, without entering into a dispute.

In the case of personal search border or customs authorities, without conflict, to declare verbal protest. During the search to make sure that does not have thrown any documents or materials in the provocation. In all cases, the seizure of objects when viewed from demand of act or issue a receipt showing where, when and by whom were made inspection and seizure of objects.

If verification of documents and examination of things and luggage representatives of border and customs authorities will allow offensive, politically hostile attacks and other actions should be required to immediately stop them, drawing attention to the inadmissibility of such behavior by the authorities.

At the first opportunity of the facts the search, seizure of objects, abusive behavior on the part of foreign border and customs authorities should inform the nearest embassy, consulate or the Ministry of Foreign Affairs of the USSR, just stating the time and place of the facts occurred, and, if possible, the names, positions, or what , or other signs of the perpetrators of such acts.

Currency exchanges are made only in Soviet organizations or with the assistance of Soviet foreign institutions in the banking institutions of the host country.

Note. According to paragraph 6 of the rights of Soviet citizens traveling abroad with a diplomatic passport, are guided by specific instructions, the Soviet Foreign Ministry.

7. In route to the destination on the train, by boat or plane with strangers satellites should stay politely and correctly, showing to them the necessary vigilance. If the sleeping compartment (cabin) will be one outside person of the opposite sex, you need to request a transfer to another compartment.

Do not be distracted towards his things and do not rely on strangers satellites. Money, passport and other documents to keep always with you in a safe place. Do not leave your passport and other documents in the hotel rooms, cabins, compartments and other places even for a short time.

Do not give a casual acquaintance of his address, phone number, etc.

For every kind of trip ticket inquiries and seek advice to officials.

In the case of an unexpected delay in the way, resulting in the visa may be overdue, the passport shall be left at the nearest embassy or consulate of the Soviet Union to extend the visa.

In transit through the countries with which the USSR has no diplomatic relations, it is forbidden to go to stop the train, ship or go to the airport.

8. Upon arrival to your destination seconded required to register at the Soviet embassy or consulate, and on leaving the country home - struck off the register. If it is not possible to appear in person at the embassy or consulate, you must inform them of their arrival in the country and out of it over the phone or by letter.

The embassy or consulate should be familiar with the established in this country by the laws and rules governing the rights and duties of foreigners, and strictly comply with them. With respect to the customs and traditions of the peoples of the national of the host country, so as not to give rise to local authorities and hostile to the Soviet Union of the Soviet citizen accused elements in "hostile acts", in the "interference in internal affairs" or "indecent acts" in relation to a given country or its citizens.

It is also necessary to obtain clarification on the situation in the country, the Council on the device in the hotel, on the order of registration of residence in respect of medical care, food and all other emerging issues.

Seconded must keep in mind that staying permit in private homes and take in hiring foreigners for personal services shall be permitted only in exceptional circumstances with the permission of the Embassy or Consulate of the USSR.

9. At a hotel or a private apartment is prohibited:

a) to arrange official meetings on matters not subject to disclosure, and make telephone calls on these issues, discuss the characteristics and behavior of Soviet people. Production meetings should be held at the embassy, consulate or trade mission to other devices for these purposes;

b) maintain official documents or notes;

c) to keep foreign communist literature and newspapers (in those countries where there is no free sale of literature and newspapers).

If the country of residence of Soviet literature and newspapers in the free market are not available, these publications can be sent to local citizens on request only with the permission of the head of the Soviet establishment.

10. All correspondence with the ministries and departments of the USSR, as well as letters to relatives and friends should be sent through the embassy or consulate of the USSR. Since all correspondence is usually seen bodies-eign intelligence and data of these letters can be used to the detriment of our country and the very sender, sending telegrams and letters through the postal agency of the host country is not recommended and can be made only in exceptional cases.

11. Remembering that the intelligence agencies of the capitalist countries often use international conferences and meetings, conferences and scientific symposia, talks on issues of trade, economic, scientific, cultural and other ties to scouting secret information, Soviet citizens should exercise caution and report with the permission of the head of delegation (tour group), only the data that the circumstances of the case or provide guidance.

12. Soviet citizens who are abroad on business, need to continue to work on improving their ideological and political level, and business skills, be aware of the events and the life of our country, to participate actively in the social life of the Soviet team, learn a foreign language. You must also be aware of the internal and foreign policy of the government of the host country and its relations with the Soviet Union.

13. Soviet citizens during the stay abroad must be carefully and continuously monitor their appearance, always be neat and tidy, keep good clean accommodation.

In everyday life, and culturally Soviet citizens abroad must be exemplary and modest. Should strictly match their costs with get paid to avoid debt, not to buy anything on credit or in installments. At the same time, do not be excessive savings worsening living conditions, food, etc.

Should avoid accepting gifts, no matter under what pretext they were presented either. If circumstances force to accept the gift, then report this to his superiors.

14. Soviet citizens abroad categorically prohibits:

to talk on the phone in public places, hotels, places of residence, in cars with other Soviet citizens on the nature of the work, the personnel of the Soviet institutions abroad, departmental affiliation of employees, their personal and professional qualities, the internal order, location and security of missions ;

used cars for trips and other vehicles (except taxis) owned by unfamiliar individuals;

visit night clubs, cinemas, that demonstrate the anti-Soviet or pornographic films, and other places of questionable entertainment, as well as participate in games of chance;

visit areas inhabited by immigrants or other groups hostile to the Soviet Union, cafes or restaurants that are going to members of any immigrant, reactionary and other organizations, and to participate in demonstrations, rallies and meetings, including the [ organized] Communist Party, if it is not the task of travel;

visit areas of the host country, declared closed to foreigners without proper permission from the authorities of that country;

establish and maintain, directly or through other persons due to foreigners, if it is not caused by business need (for each case to establish contacts with foreigners to report the head of the Soviet missions abroad, and if necessary, as provided in paragraph 4 of these rules - even after having on security);

take when returning home parcels and letters from Soviet citizens and foreigners for those living in the USSR;

abuse of alcohol, to appear in public places and on the street drunk;

store their personal cash savings in foreign banks (but not the Soviet citizens who are paid in checks) and to participate in lotteries, collecting donations, and other similar activities;

Soviet money to exchange for foreign currency, unless there is proper authorization;

sell or trade personal items;

acquire and bring to the Soviet Union literature, films, tapes, cards and other printed matter and anti-Soviet pornographic content.

15. In the period of stay abroad is strictly forbidden to enter the oral or written agreements for works or perform any activity, paid or free, and the public to speak at meetings, rallies, radio and television, in the press, cinema, concerts, participate in professional and so on if it is not provided-trip mission. Of all the proposals of this kind, Soviet citizens are obliged to inform their supervisor or the embassy and to act in accordance with their recommendations.

16. Upon returning from trips abroad Soviet citizens must, within two weeks to surrender all they have received at the public expense in foreign government, private and personal files documentaries send them to ministries, departments or agencies that send these materials to the relevant archives. On this kind of material, free or purchased personal funds should inform these ministries, departments or agencies, which, depending on the character and historic value of the materials, decide to transfer them to state custody.

17. All kinds of patrols by the host country on business and personal matters only with the approval of the Embassy or Consulate. Driving a car in the host country can only Soviet people with the appropriate local or international driver's license and permission from the ambassador, consul or manager.

Be careful when photographing, filming amateur, strictly within established rules in the country.

18. Soviet citizens residing abroad must proceed from the fact that the Soviet ambassador to the country is a representative of the Soviet state, and on it the control of the activity of all of the country of residence of Soviet institutions, delegations and officials.

Soviet citizens who are abroad, in their official and social activities, and personal behavior should strictly and unswervingly follow the orders and instructions of the ambassador or a substitute person.

19. In the performance, behavior and relationships with foreign agencies, organizations and their representatives must strictly follow the instructions and guidelines of the leaders of the Soviet establishment.

Soviet citizens who entered the country on temporary assignment in the delegations, art groups, sports teams and other groups, are required in all of its offices and public affairs and personal conduct strictly obey the orders and instructions of the head of delegation, team or group that informs the embassy plans stay in the country and the results of work during trips abroad.

20. In the case of the Soviet people difficult issues at work, at home, in relationships with foreigners, and to call the police or any other foreign institution should immediately report this to your supervisor, the consul or ambassador and act only in accordance with their instructions .

Assuming an error in personal or behavior, the Soviet citizen should not hide it, and shall immediately report the incident to your supervisor.

21. In the case of the detention and the police drive the Soviet people, avoiding confusion, should require a call representative of the Soviet embassy or consulate. Without a representative of the Soviet embassy or consulate not to answer questions, not to sign any papers and reports, not to succumb to threats and intimidation.

In case of accident, which occurred outside the apartment or the Soviet office space, resulting in a board-sky people admitted to hospital, he shall as soon as possible by any means to inform the Embassy or Consulate of the USSR.

22. Of all the facts attacks and insults directed against the Soviet Union or the Soviet institutions, regardless of where it occurred (in the street, in shops, theater, cinema or other places), should be reported immediately to the manager or senior to the Soviet embassy (consulate). If such attacks and insults will be permitted with the direct address to the Soviet citizen, he should, avoiding temper, take them, and if necessary, to protest and also to inform the senior manager or to the Soviet embassy (consulate).

23. In the Soviet citizens abroad must always remember that they are under the protection of the Soviet state. If, due to unforeseen circumstances prevailing Soviet citizen would be in a difficult situation for him and promptly declare it to representatives of Soviet power, he will always find help and support from the institutions representing our country abroad.

24. Living abroad, the Soviet citizen must not only personally to comply strictly with all the requirements of these rules and guidance of leaders but also alert and keep your family from misconduct abroad.

25. Soviet citizens who migrate to capitalist and developing countries as members of the family (wife, parents, adult children) are also required to comply strictly with the relevant paragraphs of the rules and keep in mind the following:

at home to behave modestly, not to be curious for their working relatives in the family circle to avoid quarrels and family domestic turmoil. Modest, polite and dignified behavior among foreigners, particularly when visiting the shops and stores, markets and other public places, do not go for casual dating, no exercise of gab, having in mind that among the foreigners around the Soviet people in public places may always be people who know Russian, and other languages of the Soviet Union.

***

State, party and social organizations of the Soviet Union, directing Soviet citizens abroad and provide them with great confidence. This trust is the Soviet people must live exemplary performance and the impeccable behavior.

Failure to comply with the Rules of Conduct abroad should be considered a breach of duty and discipline of the state.

TsKhSD, f. 89, op. 31, 7, ll. 9-22. [This is the archival reference of the document.]


July 29, 2012

The China Deal: Why China's economic success is fragile

Writing about web page http://ideas.repec.org/p/cge/warwcg/91.html

Why has China succeeded where Russia failed?

The explanation that is most widely shared is that the Chinese rulers kept political control and used it to reform the economy gradually. They pursued Deng Xiaoping's "four modernizations" (of agriculture, industry, defence, and science and technology) but rejected calls for the so-called "fifth modernization" (democracy). In the Soviet Union at the same time, in contrast, Mikhail Gorbachev abandoned the levers of totalitarian control. He allowed the Berlin Wall to be pushed over. The Soviet communist party imploded; insiders "stole the state." The Soviet Union collapsed and Russia entered a decade of near anarchy.

This explanation has obvious appeal but is incomplete on closer inspection. It is widely believed that the Soviet leaders did not try the China solution of gradual economic reform without political reform. The historical record shows, however, that this is untrue. Over a period of many years, while their system of one-party rule was completely intact, the Soviet leaders tried all the reforms that the Chinese communists followed to revitalize their economy. This included several experiments with a household responsibility system, the so-called zveno, in agriculture (1933, 1947, and 1966); a regional decentralization (from 1957 to 1965); and several rounds of public sector reform (beginning in 1965), culminating in new laws to reduce the compulsory obligations on state-owned enterprises, allowing them to supply the market directly at higher prices (1987), and to permit private enterprise (1988).

In other words, rash political reforms are not the factor that decided why communism failed in Russia. The collapse of Soviet rule came only after the gradual economic reform initiatives that worked in China failed in Russia.

We must look somewhere else, therefore, to explain China's success. In a survey of Communism and Modernization, I suggest that the answer must begin with China's capacity for continuous policy reform. To break out of relative poverty and catch up with the world technological leader, an economy must undergo continuous reform of its policies and instutions. Continuous policy reform is fragile. The reason for its fragility is that, as the economy undergoes successive stages of modernization, policy reform at each stage must infringe upon the vested interests formed in the previous stage. Where continuous reform becomes blocked (as in Italy, for example), the economy will lag and fall behind. From the 1970s, the Chinese economy institutionalized a capacity for continuous policy reform. This is what has enabled China's spectacular rise.

Continuous policy reform was a by-product of China's system of "regionally decentralized authoritarianism" (described by Xu 2011). This system set China's 31 provincial leaders to compete with each other economically and also gave them considerable freedom to choose how to do so. Those leaders who could make their provincial economy grow faster, if necessary by attracting labour from neighbouring provinces, would rise politically; the laggards would fall. Such incentives were very strong.

Deng Xiaoping allowed the provincial bosses to strike a "China deal" that created new space for private business to come out of the cold and thrive within market socialism. This opening of markets to private entrepreneurs, modest at first, became much more radical than the limited "deals" struck in the Soviet Union and Eastern Europe. Economic reforms under European communism gave legitimacy, at most, to low-powered, short-term profit-based incentives, insider lobbies, and shady sideline trading networks.

In China the main limit that was placed on market access was political: China's new business class must continuously demonstrate its loyalty to the one-party state. The best way to prove loyalty was through political and family connections to the regime. This raised the danger of the new business class exploiting their personal links to power to grow rich without economic effort. One answer, but an imperfect one as we see today, was to expose them to foreign competition. In fact, there was more product market competition in export markets than across China's internal provincial borders.

A crucial and completely accidental advantage on China's side was its size. The Chinese population was so large that its 31 provinces each formed an economic region with tens of millions of people -- the size of a large Western European country. In contrast, the Soviet Union decentralized economic management across a much larger number of much smaller provinces, averaging little more than a million people each. Unlike a Chinese province, the typical Soviet province was highly dependent on its neighbours. The danger was that a Soviet provincial boss could gain more by sabotaging his neighbours than by honest effort within his own limited sphere. In the Soviet Union regional rivalry turned out to carry high costs and few if any benefits.

If regional rivalry was not productive within the Soviet Union, why did it not work across Eastern Europe as a whole? After all, each East European country had considerable freedom to experiment with national economic models, and was more like a Chinese province in size and diversity than a Soviet province. Nonetheless, international competition did not work any better than interprovincial rivalry. Most likely, East European communist leaders had too much job security and tenure, did not depend on doing better than their neighbours to keep their jobs, could not be promoted to Moscow, and, even if they succeeded economically, could not build on success to attract labour from their neighbours because international borders, even within the communist brotherhood of nations, were rigidly sealed.

It may also have been a factor that East European and Soviet leaders just did not "get" continuous policy reform. They thought catching-up growth could be achieved by one-off reforms or interventions. It is also a good question whether Chinese leaders "got" continuous policy reform, or whether they stumbled across a design for it by accident.

Either way, the result was this: The recipe that happened to make communism work in China was tried and did not work in Europe. That raises a question of vast proportions: Will the same recipe continue to work in China's future?

Here we come back to the fragility of continuous policy reform. China's level of output per head has multiplied several times over the level of the 1970s. It must multiply several more times before China can approach the level of the world's richest countries. This is a very long haul. For China to maintain the continuity of policy reform over the distance is beyond unlikely. At some point, some coalition of interests is bound to form that will be strong enough to block it, at least for a time. At that time China's oligarchy must be willing to intervene on the side of movement, not stability. If not, the China deal will come unstuck.

References:

Harrison, Mark. 2012. Communism and Economic Modernization. CAGE Working Papers no. 92. University of Warwick. Repec handle http://ideas.repec.org/p/cge/warwcg/91.html.

Xu, Chenggang. 2011. The Fundamental Institutions of China's Reforms and Development. Journal of Economic Literature 49:4, pp. 1076-1151. Repec handle http://ideas.repec.org/a/aea/jeclit/v49y2011i4p1076-1151.html.


June 29, 2012

Passing the Parcel: Who Will End Up Holding Europe's Democratic Deficit?

Writing about web page http://www2.warwick.ac.uk/knowledge/business/eurodead

It is widely thought that Europe has a democratic deficit (Follesdal and Hix 2006; The Economist 2012). This means that the European Commission and European Parliament exercise powers in the name of a European community and identity that do not really exist. In reality, these bodies are accountable only to national electorates. There are no true European parties, and national electorates make their choices on national, not European calculations. As a result, European institutions hold powers that are neither accountable nor legitimate. This is one source of the current crisis.

Since the Euro is unworkable in its current form, it must change. An interesting question is what will happen then to the existing democratic deficit. Whatever changes, the democratic deficit will not go away. Instead, it will be redistributed across the terrain of the Eurozone. Different upheavals will pass it around in different ways. Two scenarios illustrate the point.

  • Scenario 1

If current proposals for a fiscal union across the present Eurozone are adopted, member states will lose much of their already limited sovereignty over public spending and taxes. Their remaining sovereignty will be pooled in Brussels and Strasbourg. Thus, the democratic deficit will continue to be Europe-wide.

Many citizens will get the feeling that the democratic deficit has widened, but this will be more apparent than real. The democratic deficit will be felt more, because its true scale will have been formalized in new unaccountable powers, whereas in the past the deficit was merely implicit in powers that were often deployed ineffectively. This feeling, however, will be particularly acute in the two poles of the Eurozone, Germany and Greece. This is because German voters will contribute most to the new fiscal transfers against their will, and because Greek voters will lose most sovereignty to new fiscal controls.

  • Scenario 2

Suppose instead that one or more Club Med countries are ejected from the Eurozone, as may still happen. Provided the Euro itself survives, in the Eurozone core the democratic deficit should then shrink for two reasons. First, the required severity of new fiscal controls and the scale of new fiscal transfers within the Eurozone will be less, so Brussels and Strasbourg will acquire fewer new powers. Second, the sense of a shared European identity among the core countries may well be greater than at present, because the national electorates that remain will be those that feel more affinity with Germany.

Under this scenario the democratic deficit may shrink in the core of the Eurozone but expand in the countries that exit. Again there are several reasons. In theory, the exiting countries will regain sovereignty over their own affairs. In practice they will have less sovereignty even than now, because their financial systems and their international credit will have been wrecked in the process. As a result, their voters will face few, if any, good choices. In the face of national humiliation, the voters may well turn to anti-system, anti-democratic parties that will steal power first from the discredited democratic leaders, and then from the voters themselves.

In short, there do not seem to be any easy ways to make good the democratic deficit that has been built into European institutions. At best, all we can do is pass it round.

References

Economist, The. 2012. The Euro Crisis: An Ever Deeper Democratic Deficit. The Economist, May 26. Weblink: http://www.economist.com/node/21555927.

Follesdal, Andreas, and Simon Hix. 2006. Why There is a Democratic Deficit in the EU: A Response to Majone and Moravcsik. Journal of Common Market Studies 44:3. pp. 533-562. Repec handle: http://ideas.repec.org/p/erp/eurogo/p0002.html.


May 28, 2012

Seventy Years Ago: The Week the Tide Began to Turn

Writing about web page http://www.history.navy.mil/photos/events/wwii-pac/midway/midway.htm

Seventy years ago this week, the world looked unspeakably grim.

By the end of May 1942, Germany had occupied France, Belgium, Netherlands, and Luxemburg; all of Eastern Europe not already under control of its allies Bulgaria, Hungary, and Romania, including the Baltic, the Ukraine, and a large chunk of Russia; Greece and Yugoslavia; and the former Italian colonies of North Africa. Italy wasn't helping much, but in the Far East Japan had occupied much of China, all of Indochina, Indonesia, Malaya (including Singapore), the Philippines, and part of Burma. German bombers were battering Britain's cities; German submarines were sinking Allied shipping at half a million tons a month. In Russia and Ukraine the German Army was launchng new offensives; at Khar'kov, in a battle that ended seventy years ago today, the Red Army lost a quarter of a million men. Across Europe and East Asia, millions of non-combatants were being machine-gunned, gassed, starved, and worked to death.

At this very moment, beneath the surface of these terrible events, the tide of the war was beginning to turn. Up to that time, Axis forces were advancing on all fronts. Within a few months they were in retreat everywhere.

In 1942 the war was fought in three main theatres: the Pacific, the Mediterrean, and the Eastern front. In each theatre the turning point of the war was marked by a decisive battle. These were the Battles of Midway (June 4 to 7), the seventieth anniversary of which we are about to mark; El Alamein (July 1 to 30 and October 23 to November 4); and Stalingrad (September 13 to February 2, 1943).

In obvious ways these battles could not have been more different: Midway in the remote northern Pacific, Alamein in the desert sands of Egypt, and Stalingrad in the smoking ruins of a great city on the Volga river. These battles differed also in the orders of magnitude of the forces involved. Japanese losses in four days at Midway were five ships, 250 aircraft, and 3,000 men. German losses in two weeks at the second battle of Alamein were 800 tanks and guns and 30,000 men, and in five months at Stalingrad 7,500 tanks and guns and three quarters of a million men killed or missing. Red Army losses at Stalingrad alone were half a million; do not forget these figures if you want to understand how powerfully the war continues to stir national feeling in Russia.

In other respects, these battles had important common features. Each began with an enemy offensive. The Japanese planned to use Midway Island as a launching pad from which to invade Hawaii. The Germans planned to drive the British out of North Africa; if the Mediterranean could not be an Italian lake, then let it be a German one. From Stalingrad the Germans planned to seal off the Caucasian oilfields and turn north to take Moscow from the rear.

After the offensive came the counter-offensive, which in each case took the enemy by surprise. After the successful surprise attack on the U.S. Pacific fleet at Pearl Harbor in December 1941, the Japanese believed they had finished American naval power. Just six months later, in the summer of 1942, the U.S. Navy was already three times the size of the previous year. Such was the speed of mobilization of America's industrial power, and the resilience of American national feeling, both of which had been entirely discounted in Tokyo and Berlin. The same underestimation of Allied reserves was present in the calculations of the Axis commanders at Alamein and Stalingrad.

The Allied victories of 1942/43 were no accident. Underlying them was the translation of Allied economic power into fighting power. In 1941 the Axis Powers were poised for victory. But victory would be theirs only if they exploited the advantage of the aggressor to the full. With a potential coalition of economically more powerful enemies ranged against them, they had to win every campaign quickly and avoid a stalemate at all costs. Had they done so, the war would have been over and they would have won.

Economic mobilization, the translation of economic power into fighting power, takes time. The Allies bought this time with "blood and treasure." First came the British refusal to surrender in the summer of 1940, followed by the Battle of Britain. Next came the U.S. Lend Lease Act of March 1941 which offered American aid to the British (and a few months later to the Soviet Union). The third thing was the unexpected -- in German eyes, often senseless -- resistance of the Red Army in the summer and autumn 1941, which led through appalling losses to the failure of the German invaders to take Leningrad and Moscow before the end of the year.

three_battles.jpg

Source: Harrison (1998, pp. 15-16).

Having bought time, the Allies used it to mobilize their economies. The chart shows the production of combat aircraft by the main powers year by year through the war. It illustrates how, during 1942, Allied -- and especially American -- mobilization rapidly tilted the military-economic balance against the Axis. The Allies began to outproduce Germany and Japan in aircraft, and also in munitions generally, by a substantial multiple. This advantage persisted through the end of the war, despite belated mobilization of the German and Japanese war economies. In 1942, however, the grit and bloody determination of Allied soldiers, sailors, and airmen was still required to turn material predominance into victory on the battlefield. Midway, Alamein, and Stalingrad were the signals that this had been achieved.

Why was the struggle so much, much more intense on the Eastern front? From mid-1941 through mid-1944 this was where 90 percent of German fighting power was focused. To occupy the territory of Ukraine and European Russia, kill the Jews, decimate the Slavic population, and resettle this vast landmass as a German colony, was Hitler's prime objective. The Soviet economy, although large, remained poor and industrially less developed, so that it was on the Eastern front that German resources were most evenly matched. The Allies' material advantages were much greater elsewhere. If the Axis could not win in Russia, it would not win anywhere else. On the Eastern front a war of mutual annihilation developed, in which both sides threw everything they had and more into the scales. As I discussed in a paper entitled "Why Didn't the Soviet Economy Collapse in 1942?" (Harrison 2005), Hitler had every right to expect final victory. The Soviet Union only just managed to retain a critical advantage over Germany, based on mass production, colossal sacrifice, and utter ruthlessness.

Up to the summer of 1942, the forces of the Axis were advancing everywhere; from the beginning of 1943 they retreated on all fronts. After this it was no longer possible for the Axis powers to win the war against the economically more developed, more mobilized, and more powerful Allies. One of the most horrifying faces of the war is seen in the fact that, despite this, years of intense fighting still lay ahead. Through 1943, 1944, and into 1945 the German and Japanese Armies and Navies retreated continuously, killing and being killed every day and every inch of the way, maintaining discipline and cohesion, not giving up until the last possible moment. Every day of those years their governments persisted in genocidal policies that destroyed millions of lives through famine, overwork, and systematic mass killing.

Without Midway, Alamein, and Stalingrad our world today would be far different from the one we know. The Axis powers might have ended the war victoriously, with consequences that we can only guess at. Alternatively, the war would have been dragged out in some other way, but there would have been no Allied victory in 1945. Or perhaps there could still have been victory in 1945, but the evolution of events would have been entirely different. Regardless of events on the battlefield, by the summer of 1945 the Americans would have had the atomic bomb. If the war still raged in Europe, the first victims of atomic warfare would more likely have been German than Japanese.

References

  • Harrison, Mark. 1998. Economic Mobilization for World War II: an Overview. In The Economics of World War II: Six Great Powers in International Comparison, pp. 1-42. Edited by Mark Harrison. Cambridge: Cambridge University Press.
  • Harrison, Mark. 2005. Why Didn't the Soviet Economy Collapse in 1942? In A World at Total War: Global Conflict and the Politics of Destruction, 1939-1945, pp. 137-156. Edited by Roger Chickering, Stig Förster, and Bernd Greiner. Cambridge: Cambridge University Press. RePEc handle: http://ideas.repec.org/p/wrk/warwec/603.html

May 23, 2012

Greece: Can’t Pay/Won’t Pay?

Writing about web page http://www.erim.eur.nl/ERIM/Research/Centres/Business_History/News/News_Detail?p_item_id=7362016&p_pg_id=

How much can one country squeeze out of another? I was prompted to think about this on Monday, when I spoke in Rotterdam at the launch of a major new book: Occupied Economies: An Economic History of Nazi-Occupied Europe, 1939-1945, by Hein Klemann (a Dutch historian) and Sergei Kudryashov (a Russian historian).

The main story of the book is how Germany extracted resources from occupied Europe that paid for one third of its war costs – and the consequences for the countries that paid. When you read history, it’s natural also to think about the present: what has changed, and what is the same. So, I thought about Greece.

Seventy years ago, Greece was under German occupation. Between 1942 and 1944, according to Klemann and Kudryashov, Germany took from Greece goods and services worth 3.5 billion Reichsmarks. Per head of the Greek population, this was between RM500 and RM600 per head, which was about the average for Germany’s occupied territories.

That sounds like a lot, but what did it mean to Greece? The back of my envelope shows the following calculation. In 1942, Germany imported external resources worth about 15 per cent of its national income. Klemann and Kudryashov show that Greeks were average contributors. Before the war, Greece’s national income per head of its population was about half Germany’s. So, a sum that in wartime was worth 15 per cent to Germans was worth at least 30 per cent to Greeks. Given Germany's wartime economic expansion, and the likely economic decline of Greece, I guess the upper limit could easily have been half of Greece’s national income in 1942 and 1943.

The point is that Germany’s wartime exploitation of occupied Europe was a very big deal, and Greece was no exception.

Now roll the clock forward seven decades. Look how the scenery has changed. The world is relatively peaceful and world markets are open for business. In Greece, average real incomes are six times the level of 1938. But Greeks are smarting under the national humiliation of being expected to pay for their public debt. Eighty per cent of that debt is held abroad, a large share of it by Germany. But the debt is an obligation that Greece assumed completely voluntarily. The Greeks are not under duress of any kind; the creditors have placed no landing craft on Greek beaches; in Kefalonia, no villagers are held hostage, and no Athenian commuters must show their papers at military checkpoints.

Still, the Greek sense of victimhood is so strong that they are not actually repaying anything at all. Instead, their government is continuing to borrow on the basis of being granted partial forgiveness. The fact that eighty per cent of Greek debt is held abroad implies that Greece should be exporting more than it imports if it wants just to cover the interest on the debt that remains. This year Greece's current account deficit is expected to be 5 per cent of its GDP, so that Greek foreign liabilities are rising, not falling. Meanwhile there is a political stalemate, and the anti-bailout parties (which together form a majority) argue they can slow or reverse the fiscal consolidation required to reduce the rate of new borrowing while keeping the creditors and the European Commission on board and disagreeing with each other about everything else.

Economic history suggests that it is exceptionally difficult to persuade a country to hand over a significant fraction of its national income to foreigners over any sustained period of time. Naked force will do the trick, but nothing less will do.

Today Germany is Europe's creditor. Writing in the Financial Times, my Warwick colleagues Marcus Miller and Robert Skidelsky recently (2012) drew a parallel with Germany's own experience after the 1919 Treaty of Versailles. Victorious in the Great War, the Allies imposed a large war indemnity upon Germany. This was mainly counterproductive, arousing German national feeling and resistance to the peace with regrettable consequences.

How much did the Allies actually extract from the German economy under the reparations imposed at Versailles? The accounting comes from a classic paper by Sally Marks (1978). The treaty’s headline figure was 132 billion gold marks, around two and a half times Germany's prewar national income. Of the 132 billion total the Allies themselves never expected to get more than 50 billion (the so-called A and B bonds). Germany paid a first instalment right away by handing over state properties valued at 8 billion; today's analogue might be the transfer of a few Greek islands. Germany paid the next billion in 1921 to get the Allies out of customs posts and an area around Dusseldorf that they continued to occupy. Then, the repayments stopped. In response the French occupied the Ruhr valley in 1923, netting another billion in compulsory deliveries of coal and other stocks. When the French moved out, payments fell away again and were repeatedly rescheduled. At their termination by the Lausanne Convention in 1932, Germany had paid barely 20 billion marks in total. In practice, most of that sum was borrowed from the United States, creating new debts on which Hitler later defaulted. Marks concluded:

The tangled history of reparations remains to confound the historian and also to demonstrate the futility of imposing large payments on nations which are either destitute or resentful and sufficiently powerful to translate that resentment into effective resistance.

Note the terminology, which we'll come back to. "Destitute" = "Can't pay." "Resentful and ... powerful" = "Won't pay."

By modern standards, the Allied occupation of Germany's revenue offices and valuable territories after the Great War looks like an intolerable infringement of national sovereignty. In fact there were many precedents for this, which the Allies merely followed. A recent paper by Kris Mitchener and Marc Weidenmier (2010) analyses 43 such cases from the nineteenth century. Today Greek opinion is inflamed by the idea of a European Commission representative in its budget office; Athens last came under foreign financial supervision in 1898, having defaulted on an indemnity arising from war with Turkey the previous year.

Based on this and other cases, Mitchener and Weidenmeier show that "supersanctions," when the creditor countries applied direct military pressure or directly supervised the debtor's fiscal offices, generally sufficed to restore the debtor's credit by enough to reduce bond yields and allow access to fresh borrowing.

What creates the power of sovereigns to resist their creditors, if direct force is not applied? Writing during the last major international debt crisis, Simon Bulow and Ken Rogoff (1989) argued that sovereign debtors are able to play on their creditors' impatience and desire to rescue something from the situation; faced with the threat of complete default and the need to apply draconian penalties, the creditors will be satisfied with partial compliance. The debtors will pay just enough to keep open their access to fresh borrowing.

The result is the phenomenon of continual rescheduling clearly visible in recent renegotiation of the Greek debt. Indeed it would seem that no one has read Bulow and Rogoff more carefully than Alexis Tsipras, leader of Greece's largest anti-bailout faction, the left-wing Syriza Party.

Despite partial default and bailout, Greece remains insolvent. Strictly interpreted, insolvency means that the debtor cannot pay. But the history of sovereign debt and default tells us that “Won’t pay” and “Can’t pay” are hard to tell apart, and it is in the debtor’s interest to make them look the same.

Allied failure to predict and manage this after World War I helped to poison Germany’s international relations and domestic politics in the 1920s. Miller and Skidelsky argue that Germany, which suffered so much after 1919, should not do the same to Greece today. I agree. But a far sighted reconciliation does not look likely, and might not even by welcomed by those Greek politicians who are now happily reinventing the tradition of Greece as a victim of foreign exploiters.

References


May 14, 2012

The Dam Busters: Their Place in (Economic) History

Writing about web page http://www2.warwick.ac.uk/knowledge/culture/dambusters

Written for Warwick's Knowledge Centre in preparation for Wednesday night's sixty ninth anniversary of the dam raids.

The dams of Germany’s industrialized Ruhr valley were an obvious target for the Royal Air Force Bomber Command in World War II. The dams supplied hydroelectric power and water for cities, steel making, and canal transport. In turn, these provided the means to supply Germany with the tanks, aircraft, guns, shells, and ships required for Hitler’s war.

Operation Chastise, the Dam Busters’ raid, took place on the night of May 16/17, 1943. Tactically, it was a partial success. The Möhne and Eder dams collapsed, but the Eder reservoir was of secondary importance and the dam on the Sorpe was not seriously damaged. Some small towns and industrial facilities were flooded, and some roads were washed away. There was a temporary loss of water production and electric power. At least 1,300 civilians died; more than half were Ukrainian forced labourers. Eight of the 19 aircraft were lost and 53 of the 133 aircrew killed.

What were the effects of the dam raids on Germany’s war economy? From the beginning of 1942 through May 1943, German war production expanded at about 5 per cent a month. At the time of the dam raids it was already more than twice the level of two years previously when Germany had been about to launch the greatest land invasion of all time, its attack on the Soviet Union. In the month of the dam raids, however, the increase of German war production was halted and the German economic mobilization marked time for nearly a year.

How much of this was due to the Dam Busters? In 1943 British and American bombers dropped 130,000 tons of bombs on German cities and factories, and ten times that quantity in 1944 (Zilbert 1981). Up to a million German civilians lost their lives (Falk 1995). In this context the dam raids were a pinprick. Thus, while the raid was mounted at an important moment, it would be hard to identify any particular effect of the Dam Busters’ skill and heroism on the German war effort.

The dams were quickly rebuilt and water supplies were restored. Were these indirect costs important? Albert Speer, the minister of armament, had to divert 7,000 forced labourers from building German fortifications in occupied France and Netherlands to rebuild the dams (Speer 1970, p. 281). It has been suggested that this contributed to Allied success in the 1944 D-Day landings (McKinstry 2009), but the claim seems far-fetched. In May 1943 the Germans still had a year to complete their coastal fortifications. Much more important to Allied success on D-Day were numbers, surprise, and the German lack of air cover.

When Operation Chastise was planned, RAF Bomber Command did not take into account either D-Day or the indirect cost to Germany of diverting scarce labour from the fortification of occupied Europe. In fact, the RAF hoped to bomb Germany into defeat before D-Day became necessary. In this way, the operation expressed the persistent belief in a powerful knock-out blow that would somehow disable the German war economy and deprive its armed forces of the means to fight. Somewhere, they thought, if only it could be found and attacked, was a critical weak point of the German war economy that could cause it to collapse. Perhaps the dams were such a weak point.

Speer later suggested that the direct effects of the raid would have been greater if the RAF had organized follow-up raids to disrupt the rebuilding. But the lack of follow-up also expressed the mistaken belief of the time in the efficacy of a single knock-out blow. Two centuries of experience of economic warfare and sanctions (summed up by Olson 1963) have taught us that this belief is generally unfounded.

Bombing Germany did not win the war, but it did bring forward the moment of German defeat. Bombing was highly disruptive and made mobilization ever more costly (see Overy 1994 and Tooze 2006). For a long period the German leaders were able to restrict the consequences to the civilian economy, so that conditions of life, consumption, and work deteriorated but war production could still expand. Civilian life was maintained by the human capacity for adaptation to difficulties and habituation to fear. Disaffection was kept in check by an effective police state, growing hatred of the Allied bombers, increasing awareness of Germany’s own war crimes, and rising fear of the possible consequences of defeat. Requisitioning food and slave labourers from the occupied territories also helped. That was the basis on which Germany was able to fight on against economically more powerful enemies for years.

Only when German territory was directly attacked did the war economy finally unwind. The indirect effects of Allied bombing also helped to bring that moment nearer. Allied bombing weakened the German ground forces because it distracted German air power away from the Eastern Front (against the Red Army) and France (against the 1944 Allied landings). Defending against air attack was very costly for Germany. At the peak of war mobilization, one third of German war production took the form of night fighters, anti-aircraft guns, searchlights, and radar.

Bombing Germany was costly to both sides. On one side the German economy was disrupted and a million civilians died. On the other side 18,000 Allied bombers were lost, along with 100,000 highly trained and educated aircrew.

The Dam Busters were one small element of a total war. They did not provide a breakthrough, but they added to the slowly growing burdens on the German economy, which arose through channels that were largely unintended and unforeseen. The Dam Busters also boosted Allied morale and Churchill’s status with the Americans and the Russians. Without them, the book (Brickhill 1951) and the film of the book could not have been made. These gave a sense of heroism and past glory to many a British schoolboy. I don’t know what the girls thought; we never asked them.

References

  • Brickhill, Paul. 1951. The Dam Busters. London: Evans.
  • Falk, Stanley L. 1995. Strategic Air Offensives. In The Oxford Companion to the Second World War, pp. 1067-1079. Edited by I. C. B. Dear. Oxford: Oxford University Press.
  • Milward, Alan S. 1965. The German Economy at War. London: Athlone.
  • McKinstry, Leo. 2009. “Bomber Harris thought the Dambusters’ attacks on Germany ‘achieved nothing’.” The Telegraph, August 15.
  • Overy, Richard J. 1994. War and Economy in the Third Reich. Oxford: Oxford University Press.
  • Speer, Albert. 1970. Inside the Third Reich. London: Macmillan.
  • Olson, Mancur. 1963. The Economics of the Wartime Shortage. Durham, NC: Duke University Press.
  • Tooze, Adam. 2006. The Wages of Destruction: The Making and the Breaking of the Nazi Economy. London: Allen Lane.
  • Zilbert, Edward R. 1981. Albert Speer and the Nazi Ministry of Arms: Economic Institutions and Industrial Production in the German War Economy. London: Associated University Presses.

May 04, 2012

Taxing the Rich: Redistribution Versus Citizenship

Writing about web page http://www.ft.com/cms/s/0/30177568-61fa-11e1-807f-00144feabdc0.html#axzz1tpB8SkZF

Always a hot potato, the top rate of tax is getting hotter. George Osborne is under fire for cutting taxes on incomes over £150,000 from 50p to 45p (this rises to 56p in the pound if you include payroll taxes). In the United States the marginal rate on incomes over $388,000 is 35 cents (rising to 42.5 percent with Medicare and payroll taxes) but many allowances mean it's not always paid. Barack Obama wants to put in place a "Buffet tax" to ensure those earning more than a million dollars pay at least 30 percent on average. François Hollande, likely winner of the French presidential election, wants to set a 75 percent tax rate on incomes above a million euros.

One way to understand the issues at stake is to recognize and reflect on two conflcting purposes of taxation in a democracy. In one view, taxes go along with citizenship. In the other, taxes help to re-engineer society. Where should we strike the balance?

  • Taxation in a democracy

Many journalists and some economists write about taxes as if the optimum rate should be the one that maximizes the revenue from it. As a general principle, that can't be right. To understand why not, ask yourself what rate a coolly rational totalitarian dictator would set who treated the public finances as his personal housekeeping money and cared nothing for social welfare. This ruler would set taxes to maximize his revenue -- would he not?

What level would that be? Even for a dictator, the optimal tax rate is not 100 percent. The reason is that all taxes are in some degree "distorting," that is, they are a disincentive to engage in the activity that is taxed, so that the economy becomes less efficient and less is produced. Think of taxes as a proportion t of income, so if T is the revenue and Y is the income then T = tY. Because taxes are distorting, as you push up t, Y falls. When t = 100 percent, the disincentive to produce is so overwhelming that Y is zero and so is tY. Reduce t; Y will grow and so will tY up to a point. At some point, the product of t and Y is maximized.

Actually, a farsighted ruler might set today's taxes below even this level, and forego some of the revenue available today for the sake of more revenue tomorrow. Why's that? He would be aware that higher taxes may cause lower growth (Heady et al. 2008; Arnold et al. 2011). If so, the dictator who maximizes his revenue today will encounter lower revenue tomorrow. Given this, a dictator might well choose to hold back today and encourage the economy to grow so that he will be able to levy taxes from a larger base in the future.

If we take the dictator as a benchmark, how should a well-meaning democratic leader set taxes, having internalized the welfare of society? As Mançur Olson (1993) pointed out, the dictator values only his own welfare; the democratic leader values the welfare of society, which includes private income as well as public revenues. In the same spirit, the dictator seeks to avoid the distortions associated with taxation only to the extent that they undermine his own revenue, and will be indifferent to private losses; the democratic leader will set some value on the private losses too.

For these reasons the democratic leader should set income taxes at much less than the rate that a dictator would set. If even a dictator should go below the rate that maximizes revenue in the short term, the democratic leader should go some way below that.

Summary: maximizing revenue is not a legitimate purpose of taxation in a democracy.

  • Taxing top incomes

Why then do some economists advocate setting the upper rate of income tax at the revenue-maximizing rate? In a recent paper Peter Diamond and Emmanuel Saez (2011) argue that the optimal rate that should be levied on the top 1 percent of U.S. incomes is more than 70 percent. They find this to be optimal because it would extract the maximum revenue from upper income recipients, taking into account the fact that they will probably reduce their taxable income in response. For given revenue needs, extracting the maximum out of the richest in society would then minimize the burden on taxpayers with lower incomes.

The underlying logic is diminishing marginal utility. The social benefit of a dollar consumed by the rich, Diamond and Saez argue, is much less than that of a dollar consumed by the poor. For example, if the benefit of consumption increases in proportion to the logarithm of income, then each doubling of income would increase well being by a given amount. They estimate that a dollar of consumption when income is at the top-1-percent margin in 2007 (around $1.4m) is worth less than 4 percent of a dollar when income is at the median ($53k) in the same year. One way of improving social welfare, they conclude, is take dollars from the rich family (which hardly misses them) and give them to the poor family (to whom it means a lot). On this argument, the result of putting up taxes on top incomes and reducing taxes on middle incomes is that well-being will rise on average.

Where do you stop? Because 4 percent is close to zero, Diamond and Saez summarize, the value of marginal income to the very rich is so low that we can ignore it. It follows that the tax rate on upper incomes that maximizes social welfare is pretty much the same as the tax rate that maximizes the revenue from the tax -- and this turns out to be around 73 percent.

Summary: Diamond and Saez make a case for maximizing revenues from top incomes -- even in a democracy. Since this is pretty much textbook stuff, what is there to disagree with? I'll set out two views of taxation. In one view, taxes are an instrument for redistribution. In the other, taxes go with citizenship. Both views can be taken to an extreme. I'll argue that both extremes are undesirable, but it's important to acknowledge the link from taxes to citizenship. There is no such link in Diamond and Saez.

  • Taxation for redistribution

In this debate, Diamond and Saez are extremists for social engineering. That is, they subordinate all other considerations to distributing welfare as evenly as possible. Before I go on to the other view, I'm going to say why I think this is economically misconceived. There are several reasons.

First, the Diamond-Saez framework presumes that everyone maps income onto personal well being at the same rate at each income level. I've explained the average relationship. But people are not all average. An example can give the intuition. Suppose my income is $1.4m. (It's not, and never will be. I make this clear for those readers that don't easily get the difference between a working assumption and a tax declaration.) To repeat, suppose my income is $1.4m. At that point, I may well value a dollar of consumption at less than 4 percent of a dollar when my income falls to $53k. It does not follow that I will value a dollar of my consumption at less than 4 percent of the value the next guy puts on a dollar when his income is at $53k.

Think about it: If my income was 30 times his, was I luckier, or better connected, or more talented than him, or did I just want money more than he did? A new paper by Eugenio Proto and Aldo Rusticchini (2012) suggests that the slope of the relationshp between income and life satisfaction differs systematically for people with different personality traits, so this is not an abstract possibility. If so, taking money from me, given that I have more because I value it more highly, and giving it to him, when he has less because he values it less, is not an obvious way to improve average well being.

[Now for a short digression. Some readers might stop short here and ask: "Why ever not? That's exactly what I want to happen!" Maybe you'd get personal satisfaction from taking money away from me, precisely because I value it. I understand that; if so, however, your preference is likely to be rooted in a dislike of rich people and high consumption. Some people who take this line dislike bankers, neglecting the simple fact that many people with high incomes have nothing to do with finance. Others do not think anyone should receive an income 30 times the median on principle -- even though their own consumption may well be 30 times what was the median in their own country just 200 years ago, or 30 times the median income of some other country just 2,000 miles away. All these people are expressing a third view of taxation, namely taxing people because you don't like their values and want to punish them. That's enough about that.]

The same issue has a more general form. It is about giving the government the authority to treat everyone as an average citizen with average abilities and average preferences, to discount entirely the welfare of some of them at the margin, and radically to re-engineer the distribution of income, motivated by the wrong assumption that we are all the same (or if we're not that's too bad). It's egalitarian, certainly; but not, perhaps, in a good way.

If you followed the logic of taxes as social engineering to the limit, you'd want the government to set everyone an individual personal tax schedule, based on knowing deeply each person's individual capabilities, endowments, and preference map. That way lies a dystopian nightmare. We should neither pretend to have this information nor expect to be able to gather it. The collection of such knowledge in one place woujld be more consistent with a totalitarian state than with a decentralized, free market economy.

Finally, we all pay an economic price for social engineering. On top of the other evidence linking higher taxes to lower growth, Arnold et al. (2012) also show that a higher top rate of personal income tax is damaging specifically to productivity growth in industries that have high rates of firm entry. They suggest this arises because new firms have to take more risks and are also less likely to be incorporated. In other words, there is a channel through which raising taxes on top incomes is likely to make the market economy less dynamic. That matters too.

Summary: I've given several reasons not to follow the logic of taxation for redistribution to the limit.

  • Taxation and citizenship

The alternative view can be summed up as "no representation without taxation." In a democracy, taxes are a membership due, or a moral obligation on the citizens to share society's burdens as well as benefits. Our democracy needs most families to pay their dues and so, when they vote, to have a stake, however small, in how (and how much) public money is raised. This view is also widely held, although it pops out most commonly when people react against tax loopholes for the rich and tax allowances for charitable giving. Shouldn't these people pay their taxes first?

The logic here is that you pay because you're an citizen. Equal citizens should contribute equally. Again, this is not something to take to extremes. Why not? The logic of taxes as membership dues is that everyone pays. To my British readers I'll say: Remember the poll tax. For others, the poll tax was Margaret Thatcher's attempt to fund local government through a level tax on all householders, and it arguably destroyed her premiership. In fact, not everyone can pay; their ability to pay is not equal. Many regular clubs and societies recognize ability to pay through concessionary rates for the young, the old, the sick, and those out of work. Just about all tax systems recognize ability to pay through income tax thresholds and marginal rates that rise with income. In this way, they modify the citizenship concept with a necessary nod to redistribution.

Diamond and Saez call their paper "The Case for a Progressive Tax." As far as I'm concerned, the case for income tax to be progressive was already made. I didn't need convincing. Given unequal ability to pay, the rich should pay more than the poor in proportion to their incomes. But the case Diamond and Saez make goes far beyond that: they advocate a tax system that completely confiscates the marginal social benefit of consumption from top incomes in order to minimize the burdens lower down. In their framework the middle and lower income families become clients of the state, not citizens. There is no acknowledgement that citizens have obligations, or that voters should have a private stake in how public revenue is raised. They push redistribution to an extreme, diminish citizenship, give the government too much power, and threaten long term damage to the market economy.

Summary: While remaining progressive, our fiscal system should leave room for an element of tax-paying as an attribute of citizenship. Everyone who can should pay something; only the neediest should pay nothing. The rich should pay at a rate higher than that on the middle and poor, but taxes on upper incomes should not aspire to confiscate all the gains from effort, enterprise, and talent. (And, if we leave untaxed a signficant share of the returns to effort, enterprise, and talent, we'll also have to accept that we leave undisturbed some part of the gains to connections and luck.)

In British terms, if the poorest pay nothing, and the middle pay 20 percent, then the rich can clearly pay 40 percent. That seems fine. The rest is politics.

References

  • Arnold, Jens Matthias, Bert Brys, Christopher Heady, Åsa Johansson, Cyrille Schwellnus, and Laura Vartia. 2012. Tax Policy for Recovery and Growth. Economic Journal 121:550, pp. F59-F90. Available at http://ideas.repec.org/p/ukc/ukcedp/0925.html
  • Johansson, Åsa, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia. 2008. Tax and Economic Growth. OECD Economics Department Working Paper No. 620. Available at http://ideas.repec.org/p/oec/ecoaaa/620-en.html
  • Olson, Mançur. 1993. Dictatorship, Democracy, and Development. American Political Science Review 87:3, pp. 567-576.
  • Diamond, Peter, and Emmanuel Saez. 2011. The Case for a Progressive Tax: From Basic Research to Policy Recommendations. Journal of Economic Perspectives 25:4, pp. 165–190. Available at http://ideas.repec.org/a/aea/jecper/v25y2011i4p165-90.html.
  • Proto, Eugenio, and Aldo Rustichini. 2012. Life Satisfaction, Household Income and Personality Traits. The Warwick Economic Research Papers no. 988. Available at http://ideas.repec.org/p/wrk/warwec/988.html

April 24, 2012

Political Costs of the Great Recession

Writing about web page http://www.ft.com/cms/s/0/5b1b5556-8d1d-11e1-9798-00144feab49a.html#axzz1styV0LMT

Monday's Financial Times recorded the dismal showing of Nicolas Sarkozy in the French Presidential first-round election, the record vote for France's far-right National Front, and the openings to the right of Sarkozy and François Hollande, who remain in the contest, as they compete to sweep up the votes of the eliminated candidates.

It reminded me of a recent NBER working paper by Alan de Bromhead, Barry Eichengreen, and Kevin O'Rourke on Right-wing Political Extremism in the Great Depression. (There's a non-technical summary on VOXeu.) What these authors show is that the rise of right wing extremism in the Great Depression was not just a German phenomenon. They define extremist parties as those that campaigned to change not just policy but the system of government. They look at 171 elections in 28 countries spread across Europe, the Americas, and Australasia between 1919 and 1939. They find that a swing to right-wing "anti-system" parties was more likely where the depression was more prolonged, where there was a shorter history of democracy, and where fascist parties were already represented in the national parliament. In short, de Bromhead and co-authors conclude, the Depression was "good for fascists."

I don't mean to imply that either Sarkozy or Hollande are fascists. They aren't. Neither of them wants to replace electoral democracy by authoritarian rule. But they are responding to the protest vote in their own country by proposing "solutions" to the problems of the already weakened French market economy that will weaken it further by increasing government entitlement spending, government regulation, and tax rates.

Where does the protest vote come from? There is anger and pessimism. There is a search for alternatives to free-market capitalism and representative democracy. The problem is that all the alternatives are worse. But none of the candidates (perhaps with the exception of François Bayrou, who did badly) has been willing to say this.

How do we know that all the alternatives are worse? We know it from history.

The chart below shows the total real GDPs of twelve major market economies from 1870 to 2008 (the countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, United Kingdom, and United States; data are by the late Angus Maddison at http://www.ggdc.net/maddison/). The vertical scale is logarithmic, so the slope of the line measures its rate of growth.


140 years of economic growth


You can see two things. One is the steadiness of economic growth in the West over 140 years up to the recent financial crisis. The other is that two World Wars and the Great Depression were no more than temporary deviations. They are just blips in the data. For many people they were hell to live through (and sometimes these were the lucky ones), but in the long run the economic consequences went away. In fact, recent work by the economic historian Alexander J. Field has shown that the depressed 1930s were technologically the most dynamic period of American history.

One conclusion might be that the economic consequences of the current recession are not the ones that we should fear most. I don't mean that the economic losses arising from reduced incomes and unemployment are trivial; life today is unexpectedly hard for millions of people, young and old. Young people, even if they will not be a "lost" generation, will suffer and be scarred by the experience. If you're old enough, you could be dead before better times come round again. At the same time, the kind of pessimism that says that our children will be never be as well off as we were is groundless. The economic losses associated with the recession will eventually evaporate, just as the economic losses of the Great Depression went away in the long run.

We should be more afraid of the lasting political consequences. The effects of the Great Depression on politics were very deep and very persistent. World War I ended with the breakup of the German, Austro-Hungarian, Romanov, and Ottoman Empires. In the 1920s, most of the new countries that were formed became democracies. Then, we had the Great Depression. Across Europe there was anger, pessimism, and a search for alternatives to free-market capitalism and representative democracy. By the end of the 1930s Europe had recovered economically from the depression but most of the new democracies had fallen under dictators. That led to World War II, in which as many as 60 million people were killed. Fascism was defeated, but then Europe was divided by communism and that led to the Cold War.

It took until 1989 for the average of democracy scores of European countries (measured from the Polity IV database) to return to the previous high point, which was in 1919.

In short, the Great Depression stimulated a search for alternatives to liberal capitalism. This search was extremely costly and completely pointless. For a while in various quarters there was admiration for Hitler, Mussolini, or Stalin, their great public works, their capacity to inspire and to mobilize, and their rebuilding of the nation. But both fascism and communism turned out to be terrible mistakes.

Memories are short. Today's politicians want your vote. And many voters want to hear that some radical politician or authority figure has a quick fix for capitalism. It seems like we may have to learn from our mistakes all over again. Let's hope that the lesson is less costly this time round.


April 02, 2012

Russia's Great War, Civil War, and Recovery

Writing about web page http://www2.warwick.ac.uk/fac/soc/economics/news/?newsItem=094d43a2365e99f001366436ff461cde

Tomorrow I'm flying to Moscow to collect a prize, which I will share with my coauthor Andrei Markevich. This is the Russian national prize for applied economics, which was announced last week. The prize, sponsored by a consortium of Russian universities, research institutes, and business media, is awarded every second year. The award is for our paper "Great War, Civil War, and Recovery: Russia’s National Income, 1913 to 1928," published in the Journal of Economic History 71:3 (2011), pp. 672-703. A postprint is available here.

The spirit of the paper is as follows. In 1914 Russia joined in World War I. In 1917 there was a revolution, and Russia’s part in that war came to an end. A civil war began, that petered out in 1920. It was followed immediately by a famine in 1921. We calculate that by the end of all this Russia had suffered 13 million premature deaths, nearly one in ten of the population living within future Soviet borders in 1913. After that, the Russian economy recovered, but was soon swept up in Stalin's five-year plans to "catch up and overtake" the West.

We calculate Russia’s real national income year by year from 1913 to 1928; this has never been done before on a consistent GDP basis. National income can be measured three ways, which ought to give the same answer (but rarely do): income (wages, profits, ...), expenditure (consumption, investment, ...), and output (of industry, agriculture, ...). We measure output. Data are plentiful, but of uneven quality and coverage. The whole thing is complicated by boundary changes. Between 1913 and 1922 Russia gave up three per cent of its territory, mainly in the densely settled western borderlands; this meant the departure of one fifth of its prewar population. The demographic accounting is complicated not only by border changes but also by prewar and wartime migrations, war deaths, and statistical double counting.

Our paper looks first at the impact of World War I, in which Russia went to war with Germany and Austria-Hungary. Initially the war went went well for Russia, because Germany found itself unexpectedly tied down on the western front. Even so, Germany quickly turned back the Russian offensive and would have defeated Russia altogether but for its inability to concentrate forces there.

During the war nearly all the major European economies declined (Britain was an exception). The main reason was that the strains of mobilization began to pull them apart, with the industrialized cities going in one direction and the countryside going in another. In that context, we find that Russia’s economic performance up to 1917 was better than has been thought. Our study shows that until the year of the 1917 revolution Russia’s economy was declining, but by no more than any other continental power. While wartime economic trends shed some light on the causes of the Russian revolution, they certainly do not support an economically deterministic story; if anything, our account leaves more room for political agency than previous studies.

In the two years following the Russian revolution, there was an economic catastrophe. By 1919 average incomes in Soviet Russia had fallen to less than half the level of 1913. This level is seen today only in the very poorest countries of the world, and had not been seen in eastern Europe since the seventeenth century. Worse was to come. After a run of disastrous harvests, famine conditions began to appear in the summer of 1920 (in some regions perhaps as early as 1919). In Petrograd in the spring of 1919 an average worker’s daily intake was below 1,600 calories, about half the level before the war. Spreading hunger coincided with a wave of deaths from typhus, typhoid, dysentery and cholera. In 1921 the grain harvest collapsed further, particularly in the southern and eastern grain-farming regions. More than five million people may have died in Russia at this time from the combination of hunger and disease.

Because we have shown that the level of the Russian economy in 1917 was higher than previously thought, we find that the subsequent collapse was correspondingly deeper. What explains this collapse? The obvious cause was the Russian civil war, which is conventionally dated from 1918 to 1920. However, we doubt that this is a sufficient explanation. First, the timing is awkward, because the economic decline was most rapid in 1918 and this was before the most widespread fighting. Second, there are signs that Bolshevik policies of economic mobilization and class warfare were an independent factor spreading chaos and decline. These policies were continued and even intensified for a year after the civil war ended and clearly contributed to the disastrous famine of 1921.

Because of the famine, economic recovery did not begin until 1922. At first recovery was very rapid, promoted by pro-market reforms, but it slowed markedly as the Soviet government began to revert to mobilization policies of the civil-war type. We show that as of 1928 the Russian recovery was delayed by international standards. The result was that, when Stalin launched the first five year plan for rapid forced ndustrialization, the Soviet economy's recovery from the Civil War was not complete. By implication, some of the economic growth achieved under the five-year plans should be attributed to delayed restoration of pre-revolutionary economic capacity.

In concluding the paper, we reflect on the state in the history of modern Russia. It seems important for economic development that the state has the right amount of "capacity," not too little and not too much. When the state has the right amount of capacity there is honest administration within the law; the state regulates and also protects private property and the freedom of contract. When the state has too little capacity it cannot prevent outbreaks of deadly violence, and security ends up being privatized by gangs and warlords. When the state has too much capacity it can starve and kill without restraint. In Russian history the state has usually had too little capacity or too much. In World War I the state had too little capacity to regulate the war economy and it was eventually pulled apart by competing factions. Millions died. In the Civil War, the state acquired too much capacity; more millions died.

Andrei Markevich and I have many debts. Our first thanks go, of course, to the sponsors of the prize. After that, we are conscious of owing a huge amount to our predecessors, many of whom should be better known than they are, but I'm going to leave the history of the subject to those interested enough to consult the paper. A number of people helped us generously, especially Paul Gregory, Andrei Poletaev, Stephen Wheatcroft, and the journal editors and referees. Of course, I'm personally grateful to Andrei. It’s hard to say which of us did what (between May 2009 and January 2011 our paper went through exactly 50 revisions), but you’ll see that Andrei is named as first author.

Beyond any personal feelings, I'm thrilled by the recognition of economic history. When he announced the award, the jury chairman Professor Andrei Yakovlev was asked if this wasn't an "unexpected" outcome for an award in applied economics. Yakovlev described it as an "important precedent," recognizing that "explanations of many of the processes that we have seen in Russia in the last twenty years lie in history." He pointed out that most western countries have historical national accounts going back through the nineteenth century (and England's now go back through the thirteenth). Such data help us to understand the here and now, by showing how we got here.


I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).



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