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What art dealers can teach world bank economists about transitioning? Two tales one of change from Russia to Art Market

What art dealers can teach world bank economists about transitioning? Two tales one of change from Russia to Art Market

Mind The Graph(s)

Hi There,

Russia is a large country but once upon a time, it used to be the epicentre of a much larger political project called the USSR. Sometime between 1989 and 1991, the political project struggled and finally collapsed under its weight. The Russian Federation was born, and the free market folks could not wait for Russia to join them. Many reports, books, and conferences happened on how soon the economy could start its boom to the GDP stratosphere.

Russia is the largest country in the world, it has eleven time zones, and is largely run from Moscow.

Such rapid economic growth had a cost, reduced male life expectancy. In 1990, the Russian Republic of Soviet Union, which was good at keeping records, estimated the population at 147 million people. In 1990 and 1991, the population grew by 0.3 per cent, almost as much as the United Kingdom. In 1992 the number of people begin to drop; one good account of this research uses the term vanishing population.

What happened? The USSR economy was primarily planned and one of the innovations that had propelled the economy in the first four decades was the creation of mono industrial settlements or mono-gorods. Mono gorods were highly specialised and revolved around one factory. Such as Kadyckchan deep within the Magdan region of Siberia was a giant coal mine it had schools, and hospitals to provide for those working within the settlement. The exact number of mono-gorods was not easily verifiable as some of them were military establishments, but they were one of the primary units of town planning so would have numbered quite high with populations ranging from 10,000 to 100,000 and more.

Sticking to Kadykchan the 1970's census recorded its population at 11,000. The last USSR census recorded it at 6,000. In 2000 Russian demographers recorded only 1,000 people and mostly they were young, and old women, and children, with very few men.

A view of Kadykchan after the Post Soviet Crisis, credit Atlas Obscura.
Male life expectancy dip in Soviet Russia (Stuckler & Basu, 2008, Revised 2017)

The Russian demographic crisis as it turns out was largely due to economic policy choices related to transitioning to free-market capitalism. During the transition, the Russian GDP fell to the level of the USA in 1897. The official figures for poverty shot up to as high as 40% in 1995. The US Census projection that the Soviet workforce would rise from 149 million in 1985 to 164 million in 1998, was to be proved wrong when an estimate pegged the workforce came below the 1985 numbers to 144 million. The average life expectancy is generally expected to grow, a decline in it is always alarming. The life expectancy of men in Russia dropped from 64 to 57 between 1991, and 1994.

Was it a disease outbreak? It turns out no, as most of the people who were dying were very young, working-age men who were dying due to alcohol-related conditions, especially heart attacks. Social stress and alcoholism have a history in Russia. The tsars encouraged the consumption of excessive alcohol to manage dissent. With the collapse of the economy, alcohol consumption had a boom, and different varieties of hooch were available for people who could barely afford them. A survey found that one out of every twelve young men was drinking them. Although only five per cent of young men who were employed were drinking twelve per cent of unemployed were in a perpetual alcoholic stupor or the Russian word used by the report zapoi.

These results were borne out by the Russian Longitudinal Monitoring Survey (1994-2006) one study by Stuckler, and Basu looked at 6586 men who had jobs in 1994. There were 593 mortalities, most of the deaths were recorded among the technicians and factory workers. There was a huge gap in the deaths of managers and workers. The people at the bottom of the pillar had a three times higher chance of dying than those with higher social standing, something that a study from Whitehall would also conclude sometime later.

The nature of jobs in the USSR was not very different from Russia, so what could explain it. Soviet mono-gorods were places where there was some level of job security, free health care, free education and a fairly low-stress job environment. The pay was less but the social support programs were a boost. When USSR collapsed so did these perks, and nothing came to replace them in these far-flung towns. The race to accept capitalism might have pushed the socially disadvantaged in a more precarious situation than they were already in.

Privatisation of state owned enterprises in Russia, and Belarus

The reason this is interesting and worth analysing even three decades later is what was happening around Russia. The former USSR bloc countries were not doing this poorly. For example, the Russian and Polish death rates were similar in 1991, three years later Russian death rate had risen by 35% and the Polish death rate had fallen by 10%. Belarus, Slovenia, and the Czech Republic followed Poland's pattern but Kazakhstan, Latvia, and Estonia followed the Russian pattern.

What could explain this? There is mounting evidence that it has to do with the quality of Privatisation that these countries decided to go in for. Post-1991 breakup of the USSR there were two ideas on the pace of reform. The ones favouring shock therapy and the other favouring gradual reform. Shock therapy was to be a rapid and radical free-market reform, it meant huge liberalisation and massive privatisation. Nothing new in that, countries ranging from the UK to India were or had implemented these in different measures within the same decade. What was interesting about this and what created the problem was how the reforms were implemented. The Indian economy started the process in 1991 and in some measures, it is still a work in progress. The UK PM Margaret Thatcher who is often billed as the great market reformer privatised 20 state utility companies and approximately around 50 companies in her tenure of 11 years. The World Bank transition team with people like Jeffrey Sachs, and Lawrence Summers, advocated and planned to privatise 200,000 Soviet enterprises in around 500 days lest Communism makes a comeback!

The result of the rapid privatisation was a decline in living standards, a sky-rocketing of poverty as alluded to above but it lead to a massive loss in health outcomes. The argument from the policy people proposing accelerated privatisation was that it would make better health outcomes but results from Russia and Belarus defied that. Male suicide increased by five per 100,000, heart disease by 21 per 100,000 and alcohol-related deaths by 41 per 100,000. Also, there was a massive drop in life expectancy as alluded to above.

The countries that had gone for much-controlled privatisation had better health outcomes, and also the growth there has stabilised. The economies of Poland, and the Czech Republic is in better shape and much more resilient.

The Russian experience of transitioning to capitalism has taught a few hard lessons to those who help make policy decisions. Was there a better way to manage it? We need to have a diversity of opinions in teams that offer advice that can alter lives.

The impact of the mortality crisis still continues to be felt in the villages, towns, and cities of Russia. The disappearance of workplace clinics meant that infectious diseases of all kinds suddenly made a come back in Central Asia and specifically Russia. TB disease of the past started registering a rise in 1992 and continues till now, Russia has the 11th largest burden of the disease today. Though it has come down in the last few years.

The findings from behavioural economics, health economics and policy people looking at austerity, and the transition is clear. When the government cut its spending during a recession, it ends up creating a long term economic recession with direct negative impact on health outcomes, life expectancy, and other social determinants that make a working democracy.

It was best summed up by the greatest exponent of free market capitalism Milton Friedman analysing the travesty of Russian capitalism,"In the immediate aftermath of the fall of the Soviet Union, I kept being asked what the Russians should do. I said, 'Privatise, privatise, privatise.' I was wrong. Joseph Stiglitz was right.'

The creation of the Russian state currently being lead by Vladimir Putin it can be argued was a creation of the massive shifting wealth from the state to individuals. These individuals known globally as the Oligarchs, created a veritable system which was a perfect black-box of governance. The economy grew, wealth grew, but so did despondence.



The Art & BS!

The price of work of art is pure irrational desire. What else would explain the strange prices that modern art market demands? Perhaps there is something that the purveyors of art that is the art dealers know that behaviour economists can learn from.

It turns out there is, the pricing heuristic that art dealers have perfected over the last few centuries is an interesting paradigm of psychology, and desire. The art market is largely understood to be a small part of the super-luxury market. In 2022 the art market crossed the pre-pandemic levels and reached 65.1 Billion USD.

This is a staggering number but well short of what the super luxury market largely is. Art dealing as it turns out is about selling not just a skill, but what is being sold is intangible, immeasurable. The value proposition of art is in selling the infinitely desirable – genius.

However, it was not always so, the records of the ancient art market are noteworthy for valuing art pieces by their weight. Imagine the price of paintings by Turner by this estimation. The perception of art started changing in a massive way from Renaissance onwards, but sometime in the 19th century the art dealers made themselves the representative of genius and genius in turn became the value multiplier that accelerated the art market. The art dealers were able to cement the ideas of social proof, and loss aversion together to create novel forms of experience and selling.

The art market subtly shifts to accommodate the tastes of its users, for example now that most wealth is owned by people who work for it rather than inherit it the great art houses have moved towards a common mass participation theme by using art fairs. Art fairs one can argue are shaped by the same market pressures that create multi-day festivals such as JLF Literary Festival, music festivals, and elite events such as Davos and TED global conference.

Marc Spiegler of Art Basel, describes the evolution of art fairs as such,

“The reason that art fairs have become so important has to do with the shifting demographics of wealth,” says Marc Spiegler, the global director of Art Basel. “Wealth is more and more in the hands of people who are working, rather than those who've inherited it.” While previous generations might have had the time to travel the world looking for choice paintings and objets, current collectors “are actively building their fortunes,” Spiegler says. An art fair, with hundreds of galleries in a single space that's in, or close to, collectors' homes “allows patrons today to discover a lot of galleries and artists in a concentrated way.”

The art market is fascinating study of how consuming expensive products provide a halo effect. The reason this is fascinating is that this sure-shot loss aversion tactic long employed by art dealers has made its way to financial markets. There is a new website that allows people to invest in art with the premise of art market beating S&P 500 by 180% from 2000 to 2018. Art is apparently a 1.7 Trillion asset class.

There is a lot that art markets, art dealers, policy makers can learn from each other, and the behavioural economists can facilitate the conversation.

For me I would just stare at a Mondrian!


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