Guriev: "shooting the elephant", unfair inequality and democratic transitions

Talking about post-Soviet countries is a necessary step in exploring the relationship between economic scenarios and the rise of populism in politics. Though often referred to as a bloc, there are considerable differences among them, but one element they have in common: the transition to market economy. A journey which has been by no means straight and painless.

Sergei Guriev’s presentation at SDA Bocconi’s Full-Time MBA “Populism and the Economy” series has started from this premise. Professor of Economics at the Paris Institute of Political Studies, Chief Economist at the European Bank for Reconstruction and Development up to this year, and former Dean of the New Economic School in Moscow, Sergei Guriev is among the most qualified insiders to observe this transition and its anomalies. His independent and critical eye is certainly not appreciated by the present Russian establishment.

“To understand the current populist wave in Western Europe you need to look at its direct precursors, the populist movements that developed in several Eastern Europe countries after the Iron Curtain collapsed”, says Guriev. There is a substantial difference though between the two phenomena: “Today’s populism originates mainly in the economic crisis while in Eastern Europe it dates back to the transition’s wrong reforms that generated inequality”. According to the Russian economist, in many countries the ruling classes did not manage (or want) to provide the new-born democracy with an actual system of checks and balances to guarantee a sound management of political power, nor implement market liberalization with redistributive policies that would allow to equally allocate the transition’s (underestimated) costs.

The first key word to understanding the difficult post-Soviet transition is therefore (unfair) inequality. “Many of these countries moved away from unfair equality – where you don’t get paid more even if you work hard – to an unfair inequality, where the burden of reforms has been disproportionately borne by the poorest and less-skilled”, says Guriev. This is confirmed when looking at the Milanovic’s “Elephant Curve”, which measures income growth for the various population segments in years 1989 to 2016: “In Russia, for instance, the most affluent decile’s income has doubled while all the others’ are above average growth rate. Today Russia is the most unequal country in the world”. And while the “fair” component of inequality is positively correlated with support for markets and democracy, the “unfair” one, that results from inequality of opportunities, reduces that support.

This scenario reveals a second key word: corruption. “Without democratic institutions, countries end up with crony capitalism”. Guriev describes this process in detail: “It is the oligarchs’ vicious circle, where economic power intertwines with political power: tycoons invest their profits in lobbying, hence they outperform firms without political connections, and politicians use oligarchs’ contributions to deter political competition”. The fallout is heavy and “systemic”, for corruption undermines economic development and trust in institutions. And “many post-Communist populist and oligarchic regimes morph into ‘informational autocracies’: in order to preserve themselves they use money and the media rather than ideology and repression”.

This discouraging bottom line can nonetheless teach us some political and economic lessons: first of all, in economic transitions “you need to compensate losers right away because the ‘short-term pain, long-term gain’ scenario may fail”. Secondly, “in order to prevent crony capitalism you have to defend political checks and balances and reinforce competition”. Strategies that can successfully prevent the spreading and rooting of populism in our countries.

SDA Bocconi School of Management