 Thank you so much. Thank you for... I would like to thank the chair and everyone who came today and decided to lend us your ears for another maybe one and a half hours. Now the theme of the conference is what are the lessons for development economics. And I was asked to talk about transition economies and this is a very peculiar case in development economics but I think it is very much linked to development economics. I was going to talk about three lessons. To link it to the general theme of the conference, Joe Stiglitz was talking today saying that development economists were basically failing quite a number of times with the Washington Consensus, he said, and with quite a number of other things. In fact, if you look at the whole post-war period, unfortunately, development economists cannot take credit for any success story in development. Success stories in development that happened mostly in East Asia, not only but mostly in East Asia were happening with the experimentation of strong hand politicians. Development economists previously were developing the theories of the big push and input substitution which basically failed in Latin America and maybe in India. Then they were experimenting with the Washington Consensus, so they are pretty much responsible for the failures. But unfortunately, not really responsible for successes. When successes occurred, everyone had a different reason why they occurred. They were saying that it proves our theories, everyone who is anyone was saying this is something that proves our theories. Unfortunately, in transition area, the story is pretty much the same, even worse. Nobody was able to predict what is going to happen in transition. This was a major experiment which was staged by history itself. We cannot stage big experiments in social sciences, but this was an experiment what happens in a middle-income country when you cut the state in half. I wouldn't say eliminate the state completely, but you weaken the state dramatically. The state institutions, the state capacity, institutional capacity is being defined for the purposes of this kind of conversation as the ability of the government to enforce rules and regulations. It doesn't matter what are the rules and what are the regulations, but think about the shadow economy. The government has a monopoly on collecting taxes. If you are not paying taxes, then you are not complying with the government regulations. The government has a monopoly on violence. If you are doing the crime, if you are saying the murder rate would be a very good indicator, not the crime rate because crimes are registered differently in different countries. But the murder rate would be a very good indicator of the institutional capacity of the state. Maybe the laws are unfair, maybe you put people to jail for crimes that are not considered crimes in different countries, like entrepreneurship and things like that, but the ability of the government to enforce rules and regulations, this is something very basic. Once this ability decreases, then what happens in a middle-income country is a recession which is greater than the Great Depression. Just to remind you, in East European countries, the reduction of output was 20 to 30% and it continued in the course of... Here is the line for Central Europe. It continued in the course of say two or three years and some countries more, but no less than two or three years. And the only countries which were able to escape this transformational recession is China and Vietnam. And in former Soviet Union, the record was even worse, it was greater than the Great Depression. The Great Depression was from 29 to 32, 30% reduction in GDP in the United States in different countries, a little bit more, a little bit less, but here it continued for nearly 10 years as a rule of thumb for 10 years and the output was going down for 10 years. Then it was recovering for another 10 years, so 20 years were taken away from the economic development of those countries just like that. This is the Central European line. You can see that most of the former Soviet republics are below this Central European line, so the recession was deeper and the recession was longer. The reduction of output by 50% is greater than the Great Depression. And the story that used to be the story in 1990s and even today, they discussed the story in terms of gradualism and shock therapy. This was not the major story. Today it's pretty much obvious, even Joe Stiglitz today referred that there was a gradualism in China and there was shock therapy in East European countries and perhaps in former Soviet Union. This was not the major story in transition. The major story in transition was whether you are able to retain the institutional capacity of the state institutions or you are not able to retain. Countries that were able to retain this institutional capacity are very different in other respects. Central European countries on the one hand, democratic and authoritarian regimes like China and Vietnam. These are exactly the countries that retain the state institutional capacity and they either avoided transformational recession altogether or the transformational recession was not that pronounced. If you look at countries at this chart, this is the pace of privatization. Countries that didn't privatize much of their assets, this is the share of output, the share of GDP created at private enterprises. Turkmenistan, Belarus and Uzbekistan, they privatized less than 50% of their assets and these are exactly the countries that are doing better than the others, better than East European countries, better than Central European countries today. Today, if you evaluate the growth rates from 1989, then today things look very different from what they looked. These countries were called procrastinators of authoritarian regimes, Belarus is the last dictatorship in Europe, but today things look very different. They proceeded with a gradual transition and gradual transition is better than shock therapy but this is not the major story. The major story, Vietnam did shock therapy, Vietnam deregulated, nobody knows that. But in 1986, Vietnam enacted Doi Moe cause for three years which was kind of gradual Gorbachev type reforms, but in 1989, before Poland, Vietnam deregulated all the prices and there was some reduction of output in manufacturing but oil industry was growing up, agriculture was growing up and overall there was no even declining growth rates. So Vietnam was growing previously at 5% then after transition, 6% and 7% in China, previously 5% then 10%. This was a transition in Asian countries that retained strong state institutions. So basically, I have quite a number of articles, basically the story of transition is this one. There were two factors that were impacting transformational recession. The first one was distortions. Distortions is the supply side shock. It's like conversion of defense industry. Some industries were overdeveloped in Central Atlantic one. It's like machine building for instance. And this industry collapsed. Once you allow the markets to be in charge of the allocation of resources, there was a reallocation of resources from non-competitive industries to competitive. And there was a recession associated with that, like with the conversion of defense industry in all the countries after the Second World War. But this was not even the major story. The major story was the supply side shock caused by poor institutional capacity, deterioration of institutional capacity, previously, constraints and property rights and law and order in general were enforced. Then they are suddenly not enforced. The crime rates, the murder rates went up two times, three times. And this caused, because businesses had to protect their own contracts and property rights and everything else, this caused the increase in costs, right? It was like the increase in energy costs. And this caused the supply curve to move to the left and upwards. And this was the transformation of recession, the story of transformation of recession. If you look at the expenditure of the government or revenues of the government as a percentage of GDP, you see that in Central Europe there was a small reduction, even though the governments for countries of this level of development were very large in Central Europe, right? But there was a small reduction of the expenditure in Central Europe and there was a small reduction in China. In other countries, there was a lot of... If your Central Europe is a non-transition economy, this is your benchmark, right? No, no, it's a transition economy. Central Europe, five countries. Czech Republic, Slovak Republic, Poland, Slovenia and Hungary. Five countries, this is called Central Europe. And they were most successful in transition, right? Now, if you do some adjustment and you separate ordinary government from something which was the government in Central European economies, this is not associated with the institutional capacity of the state. Your debt service, your defense, your subsidies, your investment. So the ordinary government story is even worse. The ordinary government story is such that in China there was no decline in ordinary government. In Poland there was no decline in ordinary government, but in Russia there was a considerable decline in ordinary government and this contributed to the decline in institutional capacity. I can go through this story, but I'm afraid I will run out of time. The reduction of state expenditure was dramatic, right? This is the share of state expenditure in GDP. It used to be, excuse me, over 60% it went down while the GDP itself was also going down. So in real terms, the government spending declined by two-thirds. So when you have three policemen to guard the law and order, now you have one policeman. Or you have three, but you don't pay them. You pay the salary of one. So the policemen try to replenish their salary by the means they have. If you look at the, I rent those regressions. If you look at the reduction of government revenues with GDP, this is an important explanatory variable that determines the dynamics of output during transition. And I'll skip. These are some indicators of the murder rates and of the crimes, just to show you how institutional capacity declined. At one point Russia and other transition economies, these are 10 countries with a high rate of the death from external causes. And death from external causes are deaths from three causes. Suicides, accidents, and murders, right? And at one point among 10 economies with the highest death from external causes, the year is 2002. At this point, out of 10 economies, five were transition economies, from Russia to Belarus to Estonia to Kazakhstan to Ukraine. Now things change today. And let me come to the second lesson. The second lesson is the very interesting story of the increase in mortality. This is the third mortality crisis in the history of humanity. And Wider did quite a bit on the issue. Wider was the first institute to issue the book, which was called Matality Crisis and Transition Economist. Giovanni Andreconi, Renato Ponicce, these are the editors of this book. Now they explain this mortality crisis, sudden increase in mortality, by stress. Not material factors, by stress factors. The first mortality crisis happened during the transition from paleolithic age to neolithic age. 5000 years before Christ, 5000-7000 years ago. Now the second mortality crisis happened right before the industrialization in Britain. It was the enclosure policy in Britain. Life expectancy at that time went down from 1560, 40 years to 1760, 1680, so 1700, nearly 30 years. What was, there are different explanations, but the fact is, five minutes, thank you, it's okay, but the fact is that this mortality crisis occurred without any epidemics and sudden decline in life expectancy, without epidemics, without eruption of volcanoes, without tsunamis. There are just so many cases in history of this large mortality crisis, right? There are two explanations. First, the change in the diet because it was industrialization, which was coming so the people were moving to the cities, so some material factors. The second is the stress factors. So in transition economists, this was exactly the impact of stress. In just five years, the life expectancy went from 70 years, this is the right scale, from 70 years to 64 years, in just five years, right? So this was a huge reduction, there was no epidemic at that time, there was no cholera, there was nothing like the tsunami or the eruption of volcano or some kind of other natural disaster. And there were no deterioration in the diet. On the contrary, the major increase in deaths occurred from cardiovascular diseases and the change in the diet from meat and milk products to cheaper vegetables and to cheaper pasta and other products was actually good for your heart, so at least you cannot explain that you were dying from the heart disease. The reasons for this mortality crisis, and this was documented, sorry, it was factors of stress. If you take the increase in unemployment, the increase in labor turnover, the number of hiring and firing, the increase in migration, the increase in divorces, the increase in inequalities, and they are all correlated, so there is a multi-coloniality problem, but if you make a stress index out of it, they explain 70% of the changes in mortality and changes in life expectancy because life expectancy is a better indicator because mortality depends on the age structure, but life expectancy does not. So then they explain a considerable portion of decline in life expectancy. If you look at the old transition economies of Eastern Europe and former Soviet Union and also if you look at the regions of Russia, there are 80 regions in Russia approximately, so if you do, I did a paper on the regions of Russia, it explains a lot. Now, before I come to lesson three, let me just tell you that, you know, economists usually, I have two minutes, right? Maybe you could concentrate on the conclusions. Yeah, we will come to the conclusions. Yes, this is inevitable, right? Now, if we look at these changes in mortality and life expectancy, then basically the lesson is that, you know, the transition, first it's a speed of transition. You cannot take too much shock. Journals like Lancet, the medical journals, they publish one article after the other. Economists somehow are not interested, but for the physicians, this is a big thing. This is a very big thing that tells you how the humans can do in the situation of shocks. Now, the third lesson is this one. There is a recovery taking place in the indicators of institutional capacity, very rapid recovery everywhere. The crime rate is going down. The murder rate is going down. The mortality returns to the previous level. It happened just in, you know, ten years after 2000. So the worst point in Russia was 2002, 2003. After that, the recovery of institutions is extremely rapid. So there are two views. One is that the communist past is something that is lasting. You cannot throw it away just very easily. Because in the communist past, the institutions were very strong. If you look at the life expectancy in, say, 1960s, life expectancy in Russia was only two years less than in the United States. At that time, Russia had a GDP per capita of 20% to 30% of the US level. So if you predict life expectancy based on GDP per capita, you'll get much worse results, right? But in all former economies that had the communist past, the life expectancy is higher. Even for the year 2000, for the year 2000, if you run a simple regression of life expectancy on GDP per capita and you add a dummy variable, which is a communist past, you will get five years more. You will get the coefficient in front of this transition variable would be five years more. So one theory is that communist past is something that lingers on, that doesn't disappear, and that's countries. Now, restore their institutions and they would be much better in future economic growth than, say, Latin American countries. Of this point of comparison, Latin American countries, the same level of development. Now, Russia has the lower crime rate than Latin American countries. The second theory, and these are the very last words that I have to say. The second theory is a pessimistic view. So I am arguing with myself. And the pessimistic view is in the recent book. The recent book says that institutions are determined at the trajectory of several hundred years. And Chinese institutions are very different from the Russian institutions. Russian institutions are basically Western institutions, which were imported since at least 1600. And these institutions are high inequality country with poor institutional capacity. And the attempt of the communists to change the course of history is not very successful, so it gets to the Latin American track. And China, the westernization in China continued after the war, for only a hundred years. And the restoration of the, after the liberation, it was like a restoration of the traditional Chinese development. Strong institutions, low inequalities. And if you think that inequalities in China are high, I have the arguments to tell you that inequalities in China actually low because billionaires, there are much less billionaires in China. And also because China is a big country, if you consider inter-provincial inequalities, then it turns out that Chinese inequalities are very low. Thank you so much.