“Russia is the home of not one, but two lost empires: The Russian Empire and the Soviet Union.” So writes our guest, Sergei Guriev, in a sweeping survey of recent research on Russian Economic History. Join Sergei and our host, Steven Davis, for a spirited conversation on Russian economic developments in the 19th and 20th centuries, the failures of central planning, and the ongoing reverberations.
>> Steven Davis: Empires matter long after they disappear, and Russia is the home of not one, but two lost the Russian empire and the Soviet Union. So writes our guest, Sergey Gureyev, in a recently scholarly article on the new Russian economic history.
>> Steven Davis: My name is Stephen Davis, and this is economics Applied, a podcast sponsored by the Hoover Institution.
Sergey Gureyev is a distinguished economist with wide interest in development economics, political economy, and contract theory. Currently, he is provost and professor at C Po in Paris, from 2014 to 2013, he headed the new economic school in Moscow. And from 2016 to 2019, he was the chief economist at the European bank for Reconstruction and Development.
Welcome, Sergey, it's a real pleasure to have you on the show.
>> Sergei Guriev: Thank you very much, Stephen, for inviting me.
>> Steven Davis: So I also understand that you're gonna become the next dean at the London business school starting in July, is that right?
>> Sergei Guriev: That's correct, Steve, thank you.
Yes, I'm taking a five year leave of absence from San-Sepo, and I will served for at least five years as a dean of the London business school, which is a very exciting development.
>> Steven Davis: Okay well, yes, yes, that is exciting, congratulations on that, and clearly, you're a man of considerable capacities.
All right, so I started by quoting your remark that empires matter long after they disappear. So help us motivate this conversation, give us a little sense of, well, how they matter and why, both broadly speaking, but also in the Russian case in particular.
>> Sergei Guriev: Thank you, Steve, this is indeed a joint paper with Ekaterina Zurowski and Andrei Markiewicz which just came out in the Journal of Economic Literature, and Journal of Economic Literature involves a long process of writing and submitting papers and then publishing papers.
And this particular phrase was actually written before February 2022, before Russian full scale invasion in Ukraine. After February 2022, Nobody is asking this question, right? Because this is an imperial war of a former empire against a former colony, and this is exactly why empires matter, because you can use post-imperial nostalgia for sticking to power, for holding power, like Mister Putin is doing.
Mister Putin is not unique in that respect, there are other post-imperial countries which use post-imperial nostalgia, and in that sense, this is the time where we live in the age of post empires, where empires still matter. And this is the idea of the survey where we work, we look at various recent papers, various recent studies in Economic history of Soviet empire and Russian empire of.
We mostly look at 19th century, this is a recent literature which told us a lot of things about the impact of Imperial past on today's preferences, attitudes, therefore political changes, and therefore economic processes. So many of the things which are happening in Russia and neighboring countries today can be traced back to Imperial past, either Soviet imperial past or cyrist imperial past, And to the economic aspects of the imperial past in particular, Orlando.
>> Steven Davis: Yes, articles about Russian economic history. So you must see some connection between Russian economic history and this imperial impulse.
>> Sergei Guriev: Yes, absolutely, so Yukaterina Zurawski, my co author, she is both political economist and economic Historian, and more of a political economist, Andrey Markovich is more of economic historian.
So for us, all these things are connected, so indeed, economic outcomes depend on political institutions, on how political constraints function. And the political constraints, of course, are chosen by either Non democratic leaders who take into account what people think, what people don't like, or in democratic countries, simply directly by voters, and in that sense, politics, economics are all directly linked.
But here, of course, we talk about economic implications of imperial policies or imperial political institutions. We talked, for example, about serfdom, which was only eliminated in mid 19th century, in 1861. We talk about how costly served them was for Russian economic development. We talked about another institution, Commune, which was actually created to reduce mobility from farm to factory, from villages to cities, and how costly it was for structural change and transformation of the tsarist empire.
We talk about the economic outcomes due to Stalin's forced industrialization, we also talked about lack of antitrust policies in Tsarist empire. So lots of these things are political and economic at the same time.
>> Steven Davis: Right, right point taken So, but just, I wanna get into most of what you just covered in your remarks, but just as background for our audience, not all of whom may be familiar with Russian economic history, let me just put on the table a couple of understandings.
If they're wrong, you can tell me or if we can elaborate on them. But I think it's important to understand that throughout the 19th, 20th and 21st century, Russian economic development has lagged notably behind that of the leading edge economic powers of the day. Okay, and so that's part of the economic backdrop and perhaps part of the imperial part of the backdrop to the imperial impulse, that there's a sense that we're behind and that we need to catch up somehow.
And in many respects, Russia has often been at the forefront of military power, even when it wasn't Russia or its, or the Soviet Union, even when it wasn't as an economic power. So first of all, I kind of got that right, that I should think about Russia as always, in some sense being considerably behind in terms of economic development and living standards, what things were like in the leading economic powers of the day, is that a correct summary?
>> Sergei Guriev: That's a correct summary, and we actually open our survey by those facts that you just mentioned talking about the gap between the leading economies of the time, which are still the leading economies, US, UK, other European economies and Russia. And basically the debate about Russia was always centered on this, Alexander Gershonkron has written about Russian empire, about how lagging behind may actually create an advantage of backwardness.
So you catch up faster, but this is not what happened in Russia. Russia continued to lag behind, and basically, if you think about this, Russia has always been at 25 35% of US level in terms of per capita GDP. And so this is almost like a global constant, which is still the case, and this convergence has not actually happened.
>> Steven Davis: Okay, so now let's go back to some of the things, I think we're gonna go back to some of the things you mentioned before. What is your preferred explanation for why. Russia, in its various incarnations has consistently lagged behind Western European powers, North American powers in more recent times, behind Japan and East Asian success stories.
Why is that? I wanna hear your explanation for that.
>> Sergei Guriev: Right, this central question and our story is inefficient political institutions. Which resulted in those things that I mentioned served them, which sounds like a good idea, right? The United States also used slave labor, and there were people who were extremely happy about that.
The people who were slave owners said, we have free labor, what's not to like? This is an inefficient institution which of course, undermines productivity growth. And the paper of my co-authors, Ekaterina Zhuraskaya, Andrei Markevich, which came out in American Economic Review, showed how costly that was. So they basically look at what happened after abolition of serfs in 1861.
And they look at various provinces which had more serfs, fewer serfs, and they look at how productivity growth caught up in places which used to have more serfdom. And they show how important that was, not just in economic terms but also in the measure like height. Humans, if they have higher quality of life, their adult height is higher, they are taller.
And so they show that serfdom cost Russians about one and a half centimeter of height which is a huge, huge number. And so when you think about those issues, the question is, why won't serfdom be eliminated before like it was in European countries? And then you start talking about other things.
Why wouldn't Russia catch up in terms of human capital? And we also talk about political preferences of the elites which were happy with the status quo, did not invest in human capital. And so when you start talking about those issues, every time when we talk about poor governance, when we talk about inefficient political institutions.
It all goes back to a very simple political economy question, which is elites wanted to keep to stay in power. And that of course, ended up not well. The Russian empire fell apart with the revolution and Soviet Union as well.
>> Steven Davis: Right, so many European countries, and you referenced slavery in the US, and we took a civil war to get to abolish that institution.
But many European countries had some version of serfdom, they got rid of it at some point. It didn't seem to permanently reduce their capacity to approach the frontier of economic development at least in many cases, but it did in Russia. So serfdom was limited in 1861, you said.
But then, as you also said, even though it had some perhaps short-term favorable consequences, the long-term development trajectory in Russia remained. Let's say disappointing relative to what seemed possible and relative to what was happening elsewhere in the world. So why is that? How is it that the elites managed to sustain these inefficient institutions more so in Russia than in other parts of Europe and North America?
>> Sergei Guriev: Indeed, one of the examples that we give, and this is coming from my own work with Anton Cheremukhin and Mikhail Golosov and Aleh Tysyvinsk, we look at barriers to competition. And that was pretty intentional. So in the US, you had robber barons, but you already started to have antitrust.
In Russia, government actually encouraged trusts, and government actually did not allow registration of joint-stock companies. Every joint-stock company had to be approved by the Tsar personally. And various potential reformers, various finance ministers proposed to change that. So you want to create a joint-stock company? Why not? But the elite said, we need to check that these are not Jewish owners, these are not German owners, these are not Polish owners.
We want our own Russian owners. We don't want foreigners who own important parts of Russian economy. And this xenophobia, which was probably more ideological, but also it was in the interest of the incumbents, right? This policy of course, undermined productivity growth and there are many papers that show that these barriers actually created a slowdown in productivity growth.
And limited the possibility to converge to catch up with advanced economies. And this is a typical, typical policy just to protect the incumbents count on their support for the elites and that's exactly what happened. This is what we document.
>> Steven Davis: Yes, elites protecting their economic privileges is a theme that runs throughout much of economic history, and it's hardly absent in the United States.
But I'm still struggling to understand why the elites were more successful in Tsarist Russia, or later in suppressing competition then elites were elsewhere. What am I missing?
>> Sergei Guriev: So that depends on your point of comparison, right? You compare Russia to UK or Germany, but we also talk about Brazil, we also talk about China, India.
If you think about South America, there is famous work of Ingram and Sokolov, which raises the same question for South America and North America. And basically, their explanation is because of different composition of agriculture, you had farms which were one family farm. So you had middle class in North America, and you had huge plantations in South America.
So inequality and extractive institutions.
>> Steven Davis: Yeah, I take that point, and you can correct me if I'm wrong, but my understanding is the imperial elites in Russia looked to the rest of Europe as their kind of benchmark and- Thats correct. Desire to catch up. They didn't look to Brazil, so they looked to Europe.
But either they failed to draw the right lessons about what stimulates economic development, or they said, no, we don't wanna do it anyway.
>> Sergei Guriev: So they didn't want to install inclusive institutions. They wanted to import technology from the west, but not political institutions. They didn't want to import Magna Carta, they didn't want to import human rights from France.
Actually, one of the longest ruling czarinas, Catherine the Great. She was talking to French enlightenment philosophers, but then at some point she stopped talking about this. So she wanted to liberate at least some parts of the society but then she decided it's too dangerous for her own power.
And the same happened in the 19th century as well. And the reforms did start when I mentioned abolition of serfs. This reform was partial, but still it did happen, why? Because finally Russian elite understood that it is a dead end. Indeed, Russia lost the Crimean War in mid 1850s to the UK and France, and Russia understood that without reforms you fall behind even in technological sense, not just in political sense.
And that was very clear. And this is what drove the reforms. And some of these reforms as I mentioned, did contribute to economic growth. Both, even if they were half hearted and not sufficient. Some of them were good and we talk about their impact, but some were half hearted.
>> Steven Davis: So, we focused a lot on elite motivations and intentions so far, and economic interests. But something else which is also stressed in your article, is that serfdom took a more extreme form in imperial Russia. And was more prevalent in imperial Russia than most other places where serfdom had emerged, and it lasted longer.
So the point I'm getting to it's partly about the elites, but it's also perhaps the attitudes towards human capital development and just what the proper role of the state is in the populace at large. These things tend to get transmitted intergenerationally. So to what extent is a part of the story about Russia's slow emergence in terms of economic development.
But also, from our perspective in the west, what looks to us like a politically backward system? To what extent has that prevailed into the 20th and 21st century. As a consequence of the way average people in Russia and the Soviet Union, thought about the role of the state and their relationship to the state?
Is that a part of the story?
>> Sergei Guriev: That is a part of the story. And when we started talking about why empires matter, some of these things actually persist to this day. So there are attitudes and beliefs that you can trace back to the past, for example, observed them.
Where places which had more serfs have different political beliefs and attitudes today, this is, again, not unique to Russia. My co-authors also worked on Poland. Poland, as you know, was partitioned into several empires. And to this day, you can see differences between what used to be part of Russian empire and part of Austria-Hungarian empire.
These were very different governance systems, as you mentioned. And to this day, we see people voting differently. To this day, we see major cultural differences between those places. So, these things are not unique to Russia. But as you rightly said, Russia was particularly top down, particularly brutal, and serfdom was more widespread.
Part of the explanation also talked about origins of serfdom. And that was also an interesting deal, that TSARs wanted to protect its borders against, say, Tatars or Crimean Tatars, and they would make this deal with the elites. They would say, look, I give you Serbs and you are an officer who protects this piece of the border.
So it was also part of the geopolitics. Which you may also trace to this day when Putin says, we need to stick to our traditional, centralized, top down, non democratic model because there are external threats. These were the issues. But at some point, these models of governance went bankrupt, it was in Crimean war in mid-19th century, like it was in World War I.
And so in the end of the Soviet Union.
>> Steven Davis: No, but it's an important point. And top down centralized systems, even when they're relatively ineffective in economic terms, may be relatively successful in marshaling societal resources for defense purposes. That's certainly been the history of the Soviet Union and Russia today.
It's kind of extraordinary how much of the economic resources are marshaled towards militaristic ends. So, we've talked about things in general now. Of course, things did come to a head in a cataclysmic way in the Russian revolution of 1917. The old regime was swept away. So in some sense, these economic and political tensions that we've been describing did explode.
So can you talk a little bit more, I guess, about what role economic factors played in the 1917 revolution? Or if you think they didn't, you can say that too. But, can you give us some understanding, or your understanding, at least, of the forces that led up to the, and precipitated the 1917 revolution?
>> Sergei Guriev: Yes, we do have a section in the paper talking exactly about this Soviet literature which shows that, yes, all these inefficiencies and injustices have contributed to the revolution. We show, for example, how people voted. Russia in 20th century did have one free election in 1917, there was an election for constitutional assembly.
Some people say this is one single free election in Russian history period. Some other people would say in 1995, 1996 election could be considered as free as well. But anyway, in that election, we can actually use voting data and we can show that impoverished workers, industrial workers, voted for Bolsheviks ,why?
Because of that very same issue that I already mentioned. Because the industrialists were exploiting not just consumers, but also their workers. They were monopsonists and they used their market power to exploit the workers, to reduce the living standards of the workers. And this was also one of the factors contributing to the revolution.
But of course, another thing was World War I. And again, Russia entered World War I with the understanding that it would be a victor. But it didn't work out quite well, as you could see. And that also contributed we also show that as well. So that was a very, very costly few years.
And one of my co-authors, Andrea Markovic, actually was the first one to build a GDP series between 1913 and 1928. And basically by the end of World War I, at the worst moment of civil war in 1918, Russian GDP was 40% below 1913 level. So it was a catastrophic impact of the war.
And you can imagine that things like this result in revolution. But pre-1913 policies also have contributed not raising living standards.
>> Steven Davis: That's what I want to get to it, I understand that the combination of world War I but the civil war itself led to a cataclysmic drop in output in living standards.
>> Sergei Guriev: Absolutely.
>> Steven Davis: It strikes me as an observer that it's a bit puzzling as to why the revolution happened. Because economic development in the years leading up to 1913 by Russian standards was not particularly bad. So part of the question is why 1917 if that kind of economic disappointment was the primary source of the revolution then could have happened many times.
But is it just because the war happened to come along and it was the combination of the war and dissatisfaction with economic performance that led to the revolution in your view?
>> Sergei Guriev: Yes, and inequality as well as I mentioned they were particularly unhappy parts of Russian society such as industrial workers who lived in the city and revolutions happened in the city.
And Bolshevik party was very capable of using this dissatisfaction in the cities and well, it's not like the workers. Prospered under Soviet regime. And as you rightly said, civil war was also catastrophic for everybody in Russia. But yet the dissatisfaction with the tsarist model was concentrated in the cities, and that was one of the issues.
Indeed, living standards were rising, but not as fast. Inequality was high, and that also resulted in dissatisfaction, also incompetence of Tsarist government, which is, again, not a bug but a feature of non democratic regimes. If you have repression and not political opposition, if you don't have checks and balances, you grow overconfident and you make mistakes, such as participation in World War I, which has also, as I mentioned, which has also contributed.
>> Steven Davis: Okay, so let's move on to the Soviet era and the early Soviet era. So in the interest of you educating me, I'm gonna make some claims and you can tell me if they're wrong. Claim one is that Soviet economic performance was pretty middling even in the early decades of Stalin's regime.
And that's especially true when you think more in terms of consumption and living standards rather than GDP. Because an enormous share of the GDP was devoted to defense, military and the repressive apparatus, which I think economists sometimes overemphasize GDP per capita, where it's often a useful indicator. But in this indicator, perhaps overstating the success of the soviet economic model in the early decades.
Is that aligned with your view that despite all this big push, industrialization effort and the, I would say many intellectuals in the west were enamored of Soviet Union and its economic possibilities in the early decades? In the Stalinist era, that, looking back, it's proper to regard that as just at best amid lean economic performance.
Is that your view? Is that a correct assessment?
>> Sergei Guriev: Well, if it was just one sentence to respond to your question, we won't need a paper of 70 pages, right? So the answer is nuanced. In general, you're right, but indeed we had different periods. So, interestingly, there was a Russian economic, soviet economic miracle, which was the new economic policy of 1920s.
In many ways, Russia was at that point at the level that China was in 78. And in many ways, you can compare new economic policy, which was partially from market policy, was still the economy where government controlled the commanding heights. But there was a space for private initiative, and on the margin, private entrepreneurs could actually make money.
So that policy created some incentives. But again, that was politically dangerous for Stalin. So in 28 and 1928, he said, sorry, we need to turn left. And this is something which is comparable to China in 78 with denser bin, who launched the same policy which worked very well.
>> Steven Davis: But it's also comparable in the sense that you're starting at the bottom.
>> Sergei Guriev: That's correct.
>> Steven Davis: You just made the point earlier that output per capita contracted by 40% as a consequence of the war and the civil war and so on. So yeah, there was a period of rapid economic performance, as there was after 78 in China.
But you start from such a messed up economic and social situation, and any kind of semblance of economic order is likely to involve considerably economic progress. That's the sense of which I'm not really sold on, that this was somehow a particularly successful economic model.
>> Sergei Guriev: I agree. That's true.
And by 28, Russia just came back to 1913 level. That's correct. But this growth was actually quite fast anyway. And then Stalin decided to do this top down forced industrialization. And that's actually a very interesting question, because if you think about an economy which consists of inefficient agriculture and a small part of an more efficient, more productive urban industry.
So just moving resources from unproductive to productive, you already can achieve a lot of growth in per capita incomes. And that's what Asimoglo and Robinson, the book why nation fails tells you the story of every country, including Russia, including Soviet Union, who actually say that this structural change from farm to factory was a brutal but an effective way to accelerate economic development.
But what we talk about in this paper, and also in the paper with Anton Cheromov and Michael Goloselekinski. We also show that to be consistent with what you've just said, unfortunately, that was also accompanied by destruction of incentives in both agriculture and industry. Because command economy is not very good in creating incentives for innovation and productivity growth.
>> Steven Davis: Exactly, so I think we're on the same page that economic development in countries around the world is typically, at least the early phases of it, has typically been associated with a massive urbanization process, a movement away from agriculture to industry. The Soviet approach was to do it in a command and control brutal fashion, as you described, but market based incentives, often in other settings, did the same.
So again, the central planning mindset is if the central planners don't do it, it won't happen. But we know that's not right from many economic examples. So here again, it strikes me that a very brutalist approach was taken to achieve. Rather imperfectly is the point you just made about incentives within the agricultural and industrial sector were somewhat screwed up by this effort.
But there were more effective ways to make this happen that were also less brutal. So they're more effective economically and less brutal, is that- Yes, exactly, and one of the good benchmarks is Japan.
>> Sergei Guriev: Japan was not Jeffersonian democracy at that point, yet it was not a planned economy.
And so Japan, before the revolution, was developing pretty much at the same speed as Russia, and the level was also similar. And then if you compare the trajectories of Russia and Japan later, you see as Japan is really, really getting ahead of Russia, while Russia is going through this middling experience.
Yes, you can identify periods in 1930s when development was actually quite fast and sterilization was quite fast, but that was also at a huge human cost. I mentioned the productivity impact, that productivity in agriculture was destroyed. So, of course, in industry, productivity could have grown faster. But if you look at Japan, Japan has done much better.
>> Steven Davis: So, yeah, I think the Japanese comparison is a very useful one, and I'm very much on board with that. Now, you also alluded, we've been talking about the brutal nature of the regime and the Stalinist years in particular. But one of the things that I liked about your article in the Journal of Economic Literature is that he put front and center in effort to assess some of the human costs of the Stalinist model.
Which economists don't always do when they get through their narrow economic lens. And so, So that was also a part of this economic transformation process. So just elaborate on that, give us your sense of the scale of the human suffering and brutality during the Stalinist years, as best we understand it.
>> Sergei Guriev: Right, so there is a table one in the paper, and we think that this is the most important table, even though there is no regression in this table and there is no sophisticated model behind that. We just go source by source and we try to identify what we know now, what we didn't know about 20 years ago, 40 years ago, about the human cost of Stalinist industrialization.
And I should say that at Hoover, you have Paul Gregory, who is a giant of this literature, who read this article and told us that he thinks that's a great table and it will be very much cited- Hoover is also a home of Robert Conquest, who was- Absolutely.
>> Steven Davis: Historian, who was writing about the horrors and stuff- The great terror, yes.
>> Sergei Guriev: And most of our data is coming-. I should say that this paper is written because in the last 20 years, we had an explosion of very good economic history and political history studies of Russian and Soviet period.
So the previous paper on this subject in Journal of Economic Literature was actually Gregory and Harrison published in 2005. And since that 2005 paper, so many papers have appeared and so much data has been published. So we thought that it's a good time to summarize what we learned.
Most of our data comes from Memorial, which is a Nobel Prize winner. That's a research and advocacy institute, which works exactly on this issue. And so we collect data from Memorial from other places. Basically, if we just walk through this table, we estimate the whole political terror in terms of death in 1937, 1938, but also outside of this year, by about million people.
Out of which three quarters of a million were just in this year, 37, 38. The other human cost was, of course, people who just disappeared in Gulag. So they were not sentenced to death, but they died in Gulag, that's another million and a half. And then famine, there were two very important famines, a smaller one, which nobody talks about in 1946, which is small in relative terms, but it costs more than a million lives.
And then there is a huge famine of 1932, 1933, where the midpoint estimate is 8 million deaths. So we are talking about enormous numbers, and these are just deaths. We can also talk about deportations, where-
>> Steven Davis: Much of it's in Ukraine.
>> Sergei Guriev: Yeah, this famine much of that is in Ukraine.
>> Steven Davis: Right and, well, I'm not sure how well understood-, my understanding is that much of it was a deliberate consequence. There's grain shortages, where do we want them to be? We want them to be in Ukraine, not elsewhere in the Russian empire or the Soviet empire, is that correct?
>> Sergei Guriev: There are two things. First, Stalin's industrialization policy was to expropriate the peasants to take away their grain, sell it to the west, and buy industrial machines. That was a consistent, intentional policy. But on top of that, that was also anti-Ukrainian policy, it was not just Ukraine, it was also Kazakhstan.
In terms of share of population, Kazakhstan lost even more people, they lost quarter of their population, right? But in Ukraine, it was also a conscious policy and we cite a very, very recent paper. The first paper on this issue is the paper by, again, one of my co-authors, Andrei Markovich, Natalia Naomi, and Nancy Chan.
Who just wrote a paper collecting disaggregated data on mortality during this famine, showing that Ukrainians suffered disproportionately. So it was not just Stalin who didn't like peasants, it's also Stalin who didn't like Ukrainian peasants. And so that is an important part of this cost. So in that sense, it then says, yes, we now have evidence on this.
And it's not just any total evidence, it's quantitative, econometric evidence that shows that.
>> Steven Davis: Right, so I realize there's a lot of nuance and you've been drawing it out, but I do think it's important for the world at large to have an understanding of what happened during the Stalinist regime and to appreciate it.
My bottom line summary is it was not particularly successful economically relative to the alternatives, and it came with massive human suffering. That's my bottom line summary is that basically right?
>> Sergei Guriev: That's basically right, with one or two caveats. So, first and foremost, I didn't arrive to the bottom line of table one.
Basically, I talked about death. But if you just count all the sentences, all the people who went through Gulag, we talk about 48 million people, right? And that is like a third of a population. And that, of course, also has very important long-term implications. We talk later on how people who live near former Gulag camps think differently now than before, things like this.
These things have transformed Russian culture for decades to come, so that matters. And the second issue you mentioned the economic performance. One of the things which is important, why Western intellectuals liked top down industrialization because Stalin was on the winning side of the World War II, and that is important.
So as they say in Russian, saying, victors are not judged. So if you win the war, that justifies all the means, the end justifies the means. And for many people, that shows that Stalin has been successful industrializer. And people usually under appreciate the role of lend lease, how much equipment and money the allies have sent to Stalin.
And without that, probably the outcome of the war would be different. But still, we need to remember that Stalin was one of the victors in World War II, which changed the way people in 1950s and 60s thought about Stalin's industrialization.
>> Steven Davis: Yeah, I see, that's an interesting point.
This is, I don't think, topic in your article, but I wanna ask you anyway. Do you think that economists were slow to recognize the human costs of the Soviet economic model, and that they overestimated for a long time the performance and the potential of that model?
>> Sergei Guriev: Yes, I think so.
But again, it was related to the fact not everyone, not everyone, that's true. And these data were not immediately available. A lot of this data came to public view only after the end of the Soviet Union, when archives were declassified. And actually, Hoover played a very important role in this.
So it's much easier to get detailed data on Stalin's terror, on Russian repression in Hoover, than in Russia proper. Because Hoover researchers photographed the open archives. And now the archive in Hoover is a much more important source of information on Russian repression than archives in Russia, which are less accessible.
>> Steven Davis: Yeah, that's a testament to Herbert Hoover's original vision for the archives at Hoover, is that it would become Become a repository for materials like that, not just in Russia, but around the world. And there is a remarkable archive at Hoover. And so it's just worth. I thank you for touting that.
I think it's a very worthwhile thing to do, and it remains a very important source for historians of many stripes to come and study. Let's roll forward to the period, the run up to the collapse of the Soviet Union and the economic factors in play there. Can you describe your interpretation of how and why the Soviet Union collapsed as both an economic model and, I think as a political model, at least for some period?
>> Sergei Guriev: Right, this is the same story. It's a non democratic political system, so incentives are not there. It's a planned economy. So it's actually much worse than, say, China under den Xiapin, or early Soviet Union under new economic policy. So you have no incentives to innovate. And that eventually slows down economic growth and results in lagging behind United States.
And so this is very important. We also surveyed recent literature on how Soviet Union tried to compete in export markets interestingly, Russia started to import grain in late Soviet Union times. That was unimaginable even in all the inefficient years of Tsars and Stalin. But agricultural productivity was lagging behind so much that Russia started to import grain.
The other thing which we look at is what Soviet Union tried to export in the high value added manufacturing goods. Mostly these were weapons, but these were weapons sold to friendly regimes, which pretty much didn't pay. And the other issue there was the quality of these goods. I would tell an anecdote in one of the books that we survey.
There was a story that African dictators would buy western planes and Russian planes. And the rule of thumb was to get one functioning plane, you need to buy one English plane and eight soviet planes. That was the ratio. So in terms of quantity in GDP, that was great, right?
You produce a planes, the government has paid for this GDP has gone up, but it just doesn't work. The same, of course, applied to tanks. Unfortunately, some of these tanks are now being used in the war in Ukraine. But Soviet Union out produced pretty much the cold west by producing tanks.
So that added to GDP, but did not add to live in standards. And this is something that, as you rightly said, economists are not very good in remembering. The GDP in the planned economy is not a good measure. And then besides certain things, like for example, I mentioned height already one of the papers that we signed by Liz Brainerd looks at height of Moscow boys and boys in other Russian cities.
So until 1970s, Russian boys were getting taller and taller parallel to American boys. But once the potential for economic growth was exhausted, the productivity growth slowed down, the stagnation kicked in. And actually there was a growing gap between the height of Americans and heights of Russians born in late 60s, early 70s.
So I was born in 71 and I'm actually, my generation is taller than people who were born before me and after me. Which shows you that even if GDP was still stagnating or growing a bit, the quality of life was actually going down and not up.
>> Steven Davis: So it strikes me, listening to you and the evident experience of the Russian and soviet models, economic models and many other models, that central planning, top down approaches repeatedly fail.
And yet it hasn't appealed to many because they think that things need to be run and planned. Here I'm sounding like Hayek, I guess. And it can have an obvious appeal to those who are in positions of power, because centralization of economic power often can be used to entrenched political power.
But if you had to give a short synopsis of why central planning approaches don't work as a matter of economics, what would it be? You mentioned incentives, but economists understand what we mean by incentives. Give me an explanation that the average person who reads a newspaper or used to read a newspaper, I guess people get their news otherwise, give me your short synopsis.
Make that case.
>> Sergei Guriev: Well, the case is very clear. So if you're a farmer, you produce grain and the government takes away this grain, you have no incentives to work hard. If you are an entrepreneur and if you have a firm and you know that you have to sell at a fixed price, which is actually the essence of the command economy, you know that quality doesn't matter.
You know that innovation doesn't matter because the price is fixed, you will not be able to sell a better product at a higher price. And so that creates disincentive to think about innovation, think about quality, invest in anything, and the only investment comes from the top. And of course, governments are not very good in determining what to invest in.
>> Steven Davis: Yeah.
>> Sergei Guriev: Military, at certain stage of development, military industry, you can imagine that we copy a model of a tank from another country, of a plane from another country, of a car in another country. We reproduce but then you have this middle income trap. When you move from low income to middle income, you can copy stuff from others, you can reproduce, you don't need to innovate as much.
But once you need to move further, you need to innovate, because copying is no longer a good strategy. You're too close to productivity frontier, and also your labor is no longer cheap. So this is the near Schumpeterian. You may mention Hayek, but we can also mention Schumpeter. My co author, Filippa Guillaume has developed this neo Schumpeterian framework which talks exactly about their stages of growth.
In the first stage you can copy, and for that matter, probably top down model works okay. But for the later stage, post industrial growth is built on incentives, on competition, on innovation, and for that you need the market economy and democratic political system. And actually with Philippe we show that this is what happened, for example, in South Korea, where the model was of course, not a planned economy, not a command economy.
But it was based on big financial industrial conglomerates, Cheboil. And this system went bankrupt in 1990s because also it could not produce economic growth anymore, and it was indebted. The growth was fueled by piling up debt, and this debt could not be repaid because conglomerates could not innovate anymore.
And this bankruptcy of that model actually freed up the reforms. And after the reforms of late 1990s, Korea has regained this module. I'm sorry for this word of post industrial knowledge base growth. And this is exactly the debate about middle income trap. Democracies usually are better in getting out of middle income.
This is not guaranteed, but at least there is this. Impetus that can take you out of this trend.
>> Steven Davis: Sure, in terms of the examples and arguments you gave, the one about the farmer, where we governments take away some of the earnings generated by your labor efforts in democratic countries, too.
But the point you made is about fixed prices, I think is really important. That is a very clear distinction between centrally planned economies and market oriented economies. With fixed prices, why innovate? Why even bother with quality? So that rings quite true to me as an explanation of why the soviet model failed to innovate successfully and why quality was habitually so poor.
The latter parts of your comments are more about incentives, like making the right decision. I mean, the thing in here that we're back to Hayek, maybe back to Schumpeter. There's just a million decisions to be made in an economy, and many of the most complex decisions involve whether and how to innovate and when to stop trying to innovate in one direction and when to move in another direction.
And to imagine that happening by any particular central planner, or individual, or organization, just doesn't work very well. So markets don't necessarily do it perfectly, they just do it better than the alternatives.
>> Sergei Guriev: I fully agree with that, and that's exactly Hayeks argument, right, the information aggregation. And still in the center of Moscow, there is a huge building which is a building of gospel.
Now, it's a building of russian parliament. And they thought that we can actually collect this information and plan input, output. We can invert input out of output matrices, that's doable. And if not, we'll have a more powerful computer, more powerful computer.
>> Sergei Guriev: There are issues related to the fact that, I'm sorry, but there are many more goods, as you rightly said, any computer can process, because each good today and tomorrow are different goods.
Each good here in Paris and there in Palo Alto, these are different goods. And so, and on top of that, of course, there is Hayek's argument about information. Why should I tell ghost plan how much I value this particular good? I don't want to and there is no way to elicit preferences in a reliable way.
You need to design mechanisms, but that requires markets. And so this is the argument which actually condemns the planning model, the price controls. I think this is why we wrote this article. We have said in the beginning that Russian economic history has so many experiments, and one of them is indeed the experiment with command economy, which showed that that doesn't work.
>> Steven Davis: So you just ran through, and we've been talking about the classic Hayekian argument about information aggregation. But there's another piece to it that maybe gets attention in Hayek's work, but it's at least not as prominent, which even if you could somehow solve the information aggregation problem and you can actually get all the information in the heads of some individual or some central committee.
What incentive do they have to act in the interests of everybody in society? They don't. Their incentives are themselves in their position of power. And that, I think, is a second line of argument that says why this Utopian vision of a central planner managing the economy in an effective way, it's an hallucination.
And it's partly because of the information aggregation problem, but it's partly because of the absolute power corrupts absolutely idea.
>> Sergei Guriev: That's absolutely true and this is what we already talked about. Political economy issues are front and center here. Now, we should say that the research on political economy of non-democratic regimes is more recent than political economy of democratic regimes.
And again, while Italian scholars have contributed a lot to political economy. Of democracies.
>> Steven Davis: Yeah.
>> Sergei Guriev: And imperfect democracies. Russians, actually, if you look what Russian economists are doing, many of them are working exactly in political economy of non-democracies, including my co-authors. But also, if you look at the recent paper in the Journal of Economic Literature, there is a paper, a survey of political economy of non-democracies by two formerly Russian economists, Konstantin Sonin and Georgy Egorov.
So this is something that Russian economists really like to work on, because we've seen that. The issue that you raised is front and center in Russian economic history.
>> Steven Davis: So, right, so let's turn another thing you do in your article, besides what we've talked about before, another theme that runs throughout much of the article, is that kind of a long shadow of history in Russia's current and recent past economic performance.
So we don't have time to cover that topic in full, but let's start with your favorite example of that sort. Tell us what it is, and tell us how it is that you and other researchers draw the conclusion about how things in the distant past are manifesting themselves as economic outcomes today.
>> Sergei Guriev: Indeed, there is a whole section in the paper, which gives you different examples, how departation affected today's preferences and cultural traits, how human capital investment still affect economic outcomes today's, how being closer to gulag camps affects economic development.
>> Steven Davis: Let's drill down on one of them. Let's drill.
>> Sergei Guriev: Let's do it.
>> Steven Davis: I think I want to explain not just what we know, but how we came to that conclusion. How do you figure out that some development 150 years ago is still having an effect today?
>> Sergei Guriev: Yeah, so I would give an example of ethnic deportations.
This is quite unique, so Stalin deported millions of ethnicities just because of ethnic origins, right? He took Volga Germans and moved them to Kazakhstan. He took Chechens and Ingushis from Caucasus, North Caucasus, and moved them to Kazakhstan, and they could not come back until the end of the Soviet Union, right?
But then, of course, they did come back. And there is a paper, which we cite again by my co-author, Ekaterina Zhuravskaya, who says, okay, they were people in Kazakhstan who were living next to Germans, and there were people in Kazakhstan who were living next to Chechens. Today, there are neither Chechens nor Germans.
They have come back. Germans, most of them have actually moved to Germany and Chechens went back to Chechen. But Kazakhs, the local residents who lived side by side with different deportees, learned different things from the departees. And, of course, Chechens and Volga Germans had different gender attitudes. And today, we actually see different attitudes to gender equality in places where Volga Germans were sent to and Chechens were sent to.
And, of course, outcomes like this matter a lot for labor force participation of women, which is a very important part of economic performance, right? And so issues like this are still there just because Stalin made this crazy decision to move hundreds of thousands of people from Volga and from Chechnya.
And so these are the examples.
>> Steven Davis: So, yeah, there's a good example. There's at least two distinct lessons there, as I understand it. Lesson one is that attitudes are influenced by those around us, okay? And lesson two is that attitudes are very sticky, they take a long time to adjust.
Even across generations, they're sticky.
>> Sergei Guriev: Absolutely.
>> Steven Davis: Yeah, okay, great this has been an excellent conversation. I wanna recommend to those who are interested in your article, because we've only scratched the surface of some of it. It's a super interesting piece of research and summarizes up what I think is a very exciting literature, kind of the intersection of economics, history, and political economy.
So congrats on writing it, and thank you for appearing on the show. It's been pleasuring. And good luck to you at LBS. Thank you so much, Steve, for this exciting conversation.
>> Sergei Guriev: And indeed, there is much more in the survey, in the paper, and I recommend everybody to read it.
And I would like to thank, again, colleagues at Hoover, who made this field advance so much before us.
>> Steven Davis: Yes, and we will post a link to your article on the Hoover website for this podcast. So if you're seeing this somewhere other than the Hoover site, go to the Hoover site.
And you'll find a link to Sergey's article and other cool stuff that he's done, okay?
>> Sergei Guriev: All right- Thank you so much, Steve.
>> Steven Davis: Thanks so much. Take care, bye bye.
>> Sergei Guriev: Thank you, bye bye.
ABOUT THE SPEAKERS:
Sergei Guriev joined Sciences Po as a tenured professor of economics in 2013 after running the New Economic School in Moscow from 2004-13. From 2016-19, he took leave from Sciences Po to serve as Chief Economist of the European Bank for Reconstruction and Development (EBRD). In 2022, he was appointed Provost of Sciences Po. He will be the next dean of the London Business School, effective July 2024. Guriev is noted for his outstanding academic record, publishing research in the top economic journals in Europe and the United States. His research interests include political economics, development economics, labor mobility, and contract theory. With policy-making experience at the EBRD and in Russia, Professor Guriev is widely recognized for his thought leadership and insight, contributing numerous columns to leading European and US newspapers.
Steven J. Davis is the Thomas W. and Susan B. Ford Senior Fellow at the Hoover Institution and senior fellow at the Stanford Institute for Economic Policy Research. He is a research associate with the National Bureau of Economic Research, consultant to the Federal Reserve Bank of Atlanta, advisor to the Monetary Authority of Singapore, past editor of the American Economic Journal: Macroeconomics, and an elected fellow of the Society of Labor Economists. He co-founded the Economic Policy Uncertainty project, the US Survey of Working Arrangements and Attitudes, the Global Survey of Working Arrangements, the Survey of Business Uncertainty, and the Stock Market Jumps project. He co-organizes the Asian Monetary Policy Forum, held annually in Singapore. Previously, Davis was on the faculty at the University of Chicago Booth School of Business, serving as both distinguished service professor and deputy dean of the faculty.
RELATED RESOURCES:
- New Russian Economic History
- The Economic Effects of the Abolition of Serfdom: Evidence from the Russian Empire
- Allocation under Dictatorship: Research in Stalin’s Archives
- The Great Terror
- Memorial (Russian: Мемориал, IPA:[mʲɪmərʲɪˈaɫ]), an organization founded to study human rights violations under Joseph Stalin dictatorship.
- Reassessing the Standard of Living in the Soviet Union: An Analysis Using Archival and Anthropometric Data