Bryan Caplan  

Eastern European Economic Statistics Made Fun (Really!)

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Tim Worstall provides some entertaining insight into the neverland of Communist and post-Communist economic statistics. It's gotten rather trendy to say that former Communist countries are worse off than they were in 1989 or 1991. The main problem with these claims is that they take the original numbers at face value.

Simple example: If the East German Mark had been valued at the market exchange rate instead of the official 1:1 rate subsidized by the West, estimates of East German GDP under Communism would have been far less:

We could even look at unification Ostmarks were exchanged at 1:1 with D Marks, one of the things that is still causing huge problems in the East. But even responsible economists thought that 2:1 would have been we think that 4:1 would have been about right. What this means is that in 1989 we were overvaluing the GDP of East Germany by a whole 100%.

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COMMENTS (3 to date)
Jon writes:

Trendy? I have not observed this trend at all and hardly think one article makes this trend! Can someone document this trend?

Sounds more like someone looking for a strawman to burn down.

dsquared writes:

Worstall was indeed looking for a strawman; the article he was responding to was making specific and detailed points about the particular countries Hungary and Poland.

By the way, the excerpt that Bryan has posted is flat out wrong. The issue of the correct exchange rate to unify two economies is, at base, determined by the relative labour productivity of the two economies, since we assume that we are interested in equalising the price of the variable factor of production. However, this would be completely irrelevant if we were wanting to simply compare the sizes of the two economies, for which a PPP rate would be the relevant comparison. Worstall's suggested exchange rate convention would, surely, underestimate the GDP of labour-intensive economies.

The rest of his rant is also pretty weird. Russia and the other Soviet bloc economies did produce GDP numbers, and to try to ignore "population growth and resource extraction" as not being the sorts of things that might have an effect on GDP is bizarre.

Finally, I'd note that Neil Clark's base year for comparison is 1989, in Hungray and Poland. These two countries were both quite substantial borrowers in 1989, and nobody in the international capital markets thought that there was a serious problem with their economic statistics. Soviet statistics were extremely unreliable for most of the Stalinist period, but Hungary and Poland were not Soviet countries and 1989 was not during the Stalinist period.

spencer writes:

the problem of the German exchange rate is much more complex. I believe Germany's created major economic problems because they use this bad exchange rate to integrate the East & West. If they had picked a more realistic exchange rate both the old East and West Germany would probably be a lot better off today.

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