Top Marx: Ex Communist States Great For Business

Courtesy of The Financial Times, a look at the economic growth of former Communist countries:

Business leaders and stock market investors tend not, as a rule, to be staunch supporters of hardline communism. But are there beneficial legacies of Marxism that the financial community should, perhaps, be thankful for?

It turns out that there may well be, with post-communist states outstripping comparable peers in areas such as education and power provision.

Most leftfield of all, the west’s former cold war nemeses turn out to be surprisingly good places to do business, outstripping a host of long-term capitalist countries in this regard.

There is, quite literally, a price to pay, however: post-communist states are unusually prone to corruption, with some animals, seemingly, more equal than others.

These, at least, are the findings of Charles Robertson, global chief economist at Renaissance Capital, a Moscow-based investment bank.

Mr Robertson, a long-time observer of post-communist eastern Europe and sub-Saharan Africa, was intrigued on a recent trip to Vietnam: still officially a Socialist Republic ruled by a Communist party that cleaves to the hammer and sickle, and yet the country with the most pro-free market populace in the world, according to the Washington-based Pew Research Centre.

“Vietnam was the most successful frontier market in attracting foreign direct investment in 2014, while its financial markets remain un-transparent and rule-bound,” he says.

Some of Mr Robertson’s conclusions are largely anecdotal, informed by his experiences on the ground.

Vietnam, for example, has far higher secondary school enrolment levels than other frontier market countries such as Nigeria, Kenya, Pakistan and Bangladesh, which never came under the Soviet yoke, according to data from Unesco, the UN’s education arm.

“We suspect this is a legacy of communism, which has tended to deliver broad education even at low per capita GDP,” says Mr Robertson.

Even Ethiopia’s communist government claimed to have increased primary school enrolment from 1m to 2.5m between 1975 and 1986, while Soviet education helped deliver a disproportionate number of scientific Nobel Prizes to Russia

“Even Ethiopia’s communist government claimed to have increased primary school enrolment from 1m to 2.5m between 1975 and 1986, while Soviet education helped deliver a disproportionate number of scientific Nobel Prizes to Russia.”

When it comes to the rollout of nationwide power networks, still a major problem in much of sub-Saharan Africa and elsewhere, he notes that Lenin proclaimed in 1920 that “communism is Soviet government plus the electrification of the whole country”. Without the latter, the Soviet Union would remain a “small peasant economy”.

Mr Robertson confesses to being surprised that Vietnam more than tripled its electricity supply between 2004 and 2014, bringing supply up to the level that Turkey reached in 2004.

Given that Turkey, with a population 85 per cent of Vietnam’s but with eight times the latter’s GDP per head, is the world’s 18th largest economy, he argues it is “remarkable that Vietnam [the 56th largest economy] already has the electricity supply of a G20 economy just a decade ago”.

“Vietnam has better human capital and infrastructure capital than many frontier [market] peers,” he adds.

His other findings are more data driven. When it comes to friendliness towards nasty, brutish capitalist countries, formerly communist states appear to excel, and even nominally still communist ones such as Vietnam are not too shabby.

Based on the Ease of Doing Business rankings compiled by the World Bank, former anti-capitalist emerging market states such as Poland, the Czech Republic and Hungary score highly.

Even Russia, despite its meddlesome government, is better than long-time western allies such as Colombia, Turkey, Greece and South Africa, as the first chart shows.

Admittedly China is further down the list, but is still ahead of the likes of the Philippines, Brazil and India.

Among frontier markets, the divergence is starker still, with ex-communist Estonia, Lithuania, Slovenia, Romania, Bulgaria, Croatia, Kazakhstan and Serbia all being more business-friendly than every other country in the MSCI frontier market index bar Mauritius.

Vietnam is less impressive, but still better on this measure than countries such as Kuwait, Kenya, Argentina, Nigeria and Bangladesh.

Even below the MSCI frontier market threshold there are ex-commies cuddling up to capitalists: Georgia was ranked the ninth best country in the world to do business in during 2014, while Mr Robertson lauds the progress even Belarus, often described as Europe’s last dictatorship, has made in “taking the axe to regulation”.

He believes that post-communist countries’ ability to produce decent education, power supply and a business-friendly environment all stem from the same source: an established bureaucracy that historically controlled everything.

“This structure was effective enough to rollout universal education and infrastructure projects,” he says.

“When you get a new generation of technocrats [who want a more pro-business environment] the bureaucracy is developed enough to follow the orders quite efficiently and put in place the new policies.”

There may be a dark side to this historic legacy, however, in the form of widespread corruption.

“The bureaucrats also learnt that they had tremendous power, untrammelled by either market or democratic forces,” Mr Robertson argues.

“Rent-seeking behaviour is very easy when you have a monopoly on power. The granting of favours, for personal or financial gain, became a key part of the system.

“Indeed, communism proved so inefficient as an economic system, that it might be argued that it was only because of bureaucrats bending rules that anything got done at all.”

The evidence would appear to back this up. Globally, there is a strong correlation between a country’s ranking in the ease of doing business survey and its ranking for corruption, as determined by Transparency International, a Berlin-based non-governmental organisation. Business-friendly countries are less corrupt.

Yet, out of 29 ex-communist countries, 25 of them score worse for corruption than for their business environment, as the second chart shows.

The likes of Russia, Belarus, Kyrgyzstan, Vietnam and Armenia are particularly far from the trendline, while even the quartet of former communist states that are less corrupt than expected — Ethiopia, Mozambique, Tajikistan and Angola — and are only marginally so.

In contrast, India and Brazil, two non historically communist states with poor business environments, are markedly less corrupt than would be expected.

Mr Robertson refers back to the old Soviet joke: “They pretend to pay us, and we pretend to work.”

“Perhaps the state was, and still is, seen as an entity that it is justified to steal from,” he concludes.


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