How Large Was the the Output Collapse in Russia? Alternative Estimates and Welfare Implications


WP/94/154-EA
How Large Was the Output Collapse in Russia? Alternative
Estimates and Welfare Implications by Evgeny Gavrilenkov and Vincent Koen

While production has indeed collapsed in many sectors of the Russian
economy since the late 1980s, the official figures seem to exaggerate the
size of the fall in aggregate output that has occurred so far in the course
of the transition. In addition to strong anecdotal evidence, this
presumption is based on the recognition by the statistical authorities
themselves that, as in other transition economies, the tools at their
disposal fail to capture a significant component of economic activity; on
the relative resilience of household consumption and electricity use; and on
discrepancies between financial and production indicators.

Official real GDP data in Russia are derived only from the production
side. Real GDP is re-estimated here from the demand side using a set of
very conservative assumptions that deliberately minimize the size of the
revision. A lower bound for real GDP is thus computed. In cumulative
terms, it turns out that real GDP declined by no more than one third between
1989 and 1994, rather than by one half as implied by the official data.

For a number of reasons, the severe depression in output did not have a
commensurate negative impact on household welfare. First, investment
declined much more than consumption, partly as a reflection of prior
overaccumulation of capital. Second, much of the consumer goods that are no
longer produced were not desired by consumers. Third, price liberalization
reduced searching and queuing costs and improved the variety and quality of
supply. Last, the demise of central planning and the gradual hardening of
budget constraints on enterprises cut down on waste and other forms of
inefficient resource use.