Deindustrialisation and Structural Change During Post-Communist Transition
Tomasz Mickiewicz, University College Of London, and Anna Zalewska, Maastricht University
The aim of this paper is to discuss the evolution of employment structure in post-Communist economies in the broader context of deindustrialisation.
The paper builds on the three-sector model of structural change developed by Rowthorn and Wells (1987). Subsequently, formal analysis is complemented by empirical section.
The Communist economies have been characterised by an exceptionally high share of industry. Economic reforms, which had came as a consequence of the “regime switch” imposed structural changes leading to an immediate decrease of industry share. However, growth of the service sector is not the common case. In this respect, the post-Soviet block is highly heterogeneous. There are countries (i.e. the Czech Republic, Hungary, Poland), which seem to be restructuring their economies successfully. Those counties are characterised by a decrease of industry share in favour of services. At the same time, countries like Bulgaria, Romania, and Russia, experienced an initial increase in an agricultural share as a consequence of a decrease of employment in the industry sector and at the same time the growth of their service sector was slow. Those countries are also classified as less successful in terms of reforms and economic growth.
Using the formal model, we distinguish two development paths, the efficient one, which we call “horizontal”, and the inefficient one called “vertical”. We demonstrate that the phenomenon of rapid deindustrialisation and of expansion of the agriculture, observed in countries classified as “less consistent” in the reforms implementation, can be described by the model (“vertical” case).
The model demonstrates, that part of the decrease in GDP brought by transition is not equivalent to a real welfare loss. The welfare actually increases, as there was initial inconsistency between preferences and structures of both production and employment in the communist system. On the other hand, the real part of the decrease in GDP may result from productivity losses, induced by the inefficient reallocation process (‘vertical path’).
Comparison between ineffcient (vertical) scenario and efficient (horizontal) in the model demonstrates that:
- In the ‘inefficient’ case, the aggregate production level (GDP) is always lower immediately after the transition,
- The share of industry in employment is lower in the ‘ineffcient’ scenario; it is equivalent to say that the deindustrialisation process induced by transition is more radical,
- Employment in agriculture is higher in the ‘inefficient’ case, as implied by lower productivity, given the same level of demand.
Empirical data on the three-sector level is consistent with the model. First, the large initial share of industry implies relatively larger shift in demand parameters after transition, and therefore a greater slump in GDP. Second, inconsistent reforms are directly linked to the lower efficiency of restructuring. In this case, not only the slump in GDP is more dramatic, but also less employment is reallocated towards services (‘horizontally’) and more towards agriculture (‘vertically’).
Further evidence is provided by more disaggregated data on employment structures (ISIC 3, i.e. 23 categories of employment). Here, we interpret ‘horizontal’ (efficient) adjustment in terms of convergence towards comparator structures of employment outside the communist block. Taking per capita income as control, we show that the convergence in employment structures is linked to the quality of the reform process as measured by the EBRD indicators. We also have the tentative evidence that privatisation and corporate governance reform may be most important in terms of positive structural effects. Thus, we argue that an inefficient process of labour reallocation, which is empirically linked to inadequate transition reforms, causes ‘vertical’ adjustment.