The objective of this project is to analyze the current Russian decline in economic growth and consumption by comparing it with the great depression in the USA in the early 1930s. This analysis is to provide help in assessing the depth of the Russian eco nomic decline and the prospects for its recovery. It also sheds light on the differences in the consumption patterns between the two countries and the effects of the depression on these patterns.
Initial numerical results of a comparative analysis are shown in figures 1-10 (and the corresponding tables).
Figures 1-3 (Fig. 1, Fig. 2, and Fig. 3) and tables 1-3 (Table 1, Table 2, and Table 3,) illustrate the depth of the Russian depression and its effect on consumption. Between 1989 and 1995, both total GNP and total consumption declined by almost a half. The level of consumption per capita in 1995 in Russia has declined to that of 1973.
The data on specific consumer goods help in understanding the underlying processes. The comparison of income and consumption trends at the national level leads to the identification of different categories of consumer goods in Russia:
1. Inferior goods. Bread and potatoes belong to this group. Their income elasticity is low; between 1986 and 1994 their consumption did not change significantly and remained at a relatively high level, between 80 and 100 kilograms. Between 1986 and 1989, a growth in income (GNP) was accompanied by a slight decline in consumption of potatoes, after 1989, a decline in income has been accompanied by a growth in consumption of both bread and potatoes. One can suspect that, during certain periods of time, these two consumption items in low income families may have possessed all the features of the so-called Giffen goods. A Giffen good is defined in economics as an inferior good for which the negative income effect outweighs the substitution effect, i.e., an increase in its price may stimulate its consumption. This commodity has an upward sloped demand curve. Bread and/or potatoes are dietary stap les for many households in Russia. A rise in their prices generated a signi ficant decrease in households' re al incomes and led to an increased consumption of these staples. The occurr ence of this phenomenon is worthwhile to be noticed since, according to t he economics textbooks, Giffen goods are believed to be an extinct category in the modern developed world.
2. Normal goods - necessities. The consumption of sugar and meat tends to change in the same direction as income. For the 1986-88 it increased to gether with GNP, for the 1990-94 it decreased together with GNP. Income elas ticity for sugar was roughly un itary; income elasticity for meat remained below one most of the time.
3. Normal goods - luxuries. Goods in this group tend to manifest a high i nc ome elasticity. Examples of such goods are presented in Fig. 3. and Table 3. Paradoxi cally, soap appears to be a luxury par excellence. Before 1990, the consump tion of soap grew faster than incomes; after 1990 it declined faster than incomes. TV sets behaved more like necessities before 1990, but "turned into” luxuries after 1990. New cars and washers also belonged to the luxury category--their income elasticiti es remained relatively high.
Figures 4-7 (Fig. 4, Fig. 5, Fig. 6, and Fig. 7) and tables 4-7 (Table 4, Table 5, Table 6, and Table 7,) present changes in GNP and consumption in the USA before, during , and after the great depression. Between 1929 and 1933, the decline in GNP was about 30% while the decline in total consumption was less than 20%.
As shown in Figures 5-7 (Fig. 5, Fig. 6, and Fig. 7) and tables 5-7 (Table 5, Table 6 and Table 7) , pork was the only good that, between 1930 and 1935, behaved like an inferior commodity. Otherwise, all the remaining commodities included in the figures were normal goods: most of the time income elasticiti es for foods (fish, egg s, and vegetables) and gasoline were less than one (necessities), while t hose for clothing, furniture, and cars were more than one (luxuries).
Figures 1,4,8,9( Fig. 1, Fig. 4, Fig. 8, and Fig. 9) and Tables 1,4,8, and 9 ( Table 1, Table 4, Table 8, and Table 9) demonstrate that the economic decline in Russia was about twice as severe as that in the USA in the 1930s. The difference betwe en the highest pre-depression level of GNP and the lowest level of GNP dur ing the depression (with the latter set to 100) amounts to 44 for the USA and 83 for Russia. The decline took four years in the USA (1930-33) and is expected to take six years in R ussia (1990-1995). As concerns total consumption levels, the difference betw een the best pre-depression level and the worst level (again the worst set to 100) amounted 23 in the US A and about 70 in Russia. Measured in years, the Russian depression is also about twice as severe as the American one. The levels of GNP and con sumption during the worst year w ere comparable with those 11 years back in time for the USA and 23 for Russ ia. Losses in consumption were relatively much greater in Russia than in th e USA. During 1930-33 the rate of decline of American GNP was almost twi ce as fast as that of American consumption. [Also after 1933, the rate of growth of GNP was twice as fast as that for consumption.] So far, the decline in the Russian consumption h as been almost the same as that of the Russian GNP. It is also interesting t o note, that the decline in Russian freight traffic was roughly the same as that of Russian GNP, while the decline of American traffic was greater than that of American GNP (Fig. 10 and Table 10).
A note of caution is necessary. The lack of a market economy in the former Soviet Union, and consequent absence of market clearing prices that would reflect "true" scarcities, as well as the existence of multiple ruble-to-d ollar exchange rates make a mea ningful analysis of the Russian economic decline very difficult if feasible a t all.
There is a good chance that the Russian GNP figures presented above provide an accurate description of the actual processes. In purely accounting term s, the Russian "physical" national product may have decreased by half. How ever, the utility losses asso ciated with this decline may actually have been much smaller. The Soviet e conomy was often referred to as an input-input system, rather than a usual in put-output one. The structure of the Soviet economy was gravely distorted. It was dominated by such s ectors as primitive mining and a huge heavy industry (energy, construction materials, metals and machinery). A very large proportion of its final prod uct was swallowed by the extensive bureaucracy, internal security apparatus, defense sector and foreign policy activities. According to some estimates about a half of the Soviet economy was directly or indirectly working for the needs of the defense sector. The industries producing consumer goods and services were underdeveloped and malfunctioning. Becau se of a weak trade and distribution activities a significant proportion of consumer goods were never delivered to final consumers (especially, a large proportion of agricultural products were spoiled in storage, transportation, a nd distribution and never consumed by people). There is plenty of evidence to make one believe that this "useless" part of Russian output shrunk much more than its "useful" part.
There are many fundamental problems with measuring changes in real consumpti on, including such difficulties as:
the accounting for dramatic changes in the relative prices and those in t he consumption baskets
changes in the quality and accessibility of consumer goods and services
changes in their distribution among different income groups
the extent of the "gray" and "black" market production and consumption activ ities that are not accounted for by the official statistics.
Several economists (including Jeffrey Sachs, Jan Winiecki, and Jan Vanous) ha ve been arguing that the "true" economic decline in Central and Eastern Europe (at least in some countries) was significantly smaller than the officially reported decline and tha t the current recovery is much stronger than officially reported. Also the levels of the pre-1989 Soviet and Central/East European GNPs tended to b e gravely overestimated. The "true" depth of the decline of Russian con sumption must remain an open questi on to which a correct answer may never be found.