DP9003 | Soviet power plus electrification: what is the long-run legacy of communism?

Publication Date

03/06/2012

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Abstract

Two decades after the end of central planning, we investigate the extent to which the advantages bequeathed by planning in terms of high investment in physical infrastructure and human capital compensated for the costs in allocative inefficiency and weak incentives for innovation. We assemble and analyse three separate types of evidence. First, we find that countries that were initially relatively poor prior to planning benefited more, as measured by long-run GDP per capita levels, from infrastructure and human capital than they suffered from weak market incentives. For initially relatively rich countries the opposite is true. Second, using various measures of physical stocks of infrastructure and human capital we show that at the end of planning, transition countries had substantially different endowments from their contemporaneous non-transition counterparts. However, these differences were much more important for poor than for rich countries. Finally, we use firm-level data to measure the cost of a wide range of constraints on firm performance, and we show that after more than a decade of transition in 2002-05, poor transition economies differ much more from their non-transition counterparts, in respect to both good and bad aspects of the planning legacy, than do relatively rich transition countries. However, the persistent beneficial legacy effects disappeared under the pressure of strong growth in transition economies in the run-up to the global financial crisis.