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Old Capital vs. New Investment in Post-Soviet Economies: Conceptual Issues and Estimates


The paper evaluates levels and trends in capital accumulation in countries of the Commonwealth of Independent States (CIS) since the start of market reforms. Based on certain assumptions about the survival rate of the old Soviet era capital and perpetual inventory method to account for new investments, we estimate the amount of ‘market-quality’ capital accumulated in the CIS economies in the 1992–2005 period. Over the period of observation, in Russia the losses of the 1990s were largely restored while most other countries saw a decline in capital stock. Russia remains the highest capitalised CIS country with capital–labour ratio (K/L) of about $40,000 per worker. The lowest capitalised countries have K/L's from $10 to $13,000. Growth accounting using market-quality capital stock shows that the key factor of GDP changes was the dynamics of total factor productivity.

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  1. Individual studies are reviewed in the following section.

  2. In the early 1990s in many TE, in particular in the CIS, asset stripping had reached, in words of some observers, the level of ‘national sport’ (Brown and Earle, 2002).

  3. In this and later works Khanin and his colleagues maintain that official Russian data for fixed capital stock, even after periodical revisions, do not correctly reflect its current replacement value (Khanin, 2006; Khanin and Fomin, 2006). However, in their own estimates they use a very broad definition of fixed capital including in it all assets that are kept on the books of enterprises, regardless of their age, condition and usability (Khanin and Fomin, 2006, p. 17). Such an approach leads to a very high estimate of Russian capital stock, surpassing the official one by about 10 times, in 2001, for example, 206.5 trillion versus 20.2 trillion rubles. Taken at face value, this estimate implies a capital-output ratio of 23, and annual depreciation, even computed by the authors at a low 2% rate, reaching almost one-half of GDP. While trying to account for all assets recorded on balance sheets of enterprises might be a legitimate approach, in our study the goal is different as we aim to estimate only the ‘market-worthy’ part of capital that remained usable after the transition. On Soviet capital stock estimation, see also Kontorovich (1989).

  4. Not included in the study were Tajikistan and Turkmenistan.

  5. During the Soviet period, by some estimates, the K/L ratio in the economy was increasing rapidly: 7.4% a year in the 1950s, 5.4% in the 1960s, 5.0% in the 1970s and 4% in the 1980s (Easterly and Fischer (1995)). However, these estimates probably overstate the actual growth of the K/L as they use official data for capital, not fully adjusted for the impact of inflation and depreciation (Nove, 1981; Kontorovich, 1989, 2001; Khanin, 2003).

  6. Measurement of capacity utilisation in post-Soviet economies is further complicated by the issue of the so-called ‘mobilisation capacities.’ Since Soviet times many industrial enterprises in the CIS are obligated to keep on reserve but not use a part of their capacities in case they are needed in a war situation or other national emergency. In some surveys, these are excluded from the totals while in others they are included.

  7. The allowed depreciation rates in this period were even higher but had little meaning in an environment of severe inflation. In a detailed study of depreciation in Russian industry, Linz (1999) reported that between 1992 and 1995 just 5% of enterprises used annual depreciation rate of 10% or less, while at least a quarter of enterprises used rates above 50% and 3% used rates above 75%. However in the same period, market prices for capital goods increased much faster than the officially allowed revaluation, making these depreciation rates irrelevant to actual replacement of the capital stock, with or without market adjustment. For example, in 1992 the official revaluation of capital stock increased its value by nearly five times, while 1992 prices of construction and equipment increased by 15–18 times (Goskomstat, 2006, p. 644).

  8. The lower estimate is based on assumption that residential capital was not affected by the market transition. This, of course, is a simplification, as some of the Soviet housing stock was tied to industries and locations that would become non-viable under the market. This includes one-company-towns, military bases, settlements in the Far North where residential housing had to be abandoned.

  9. Geometric pattern of depreciation and depreciation rate of 5% are chosen based on review of recent studies of the investment accounting literature (see: Fraumeni, 1997; Katz and Herman, 1997; Larson et al., 2000; Bohm et al., 2002; World Bank, 2006).

  10. The data for the Soviet-era GDP remain a subject of a debate. Numerous estimates continue to circulate in the literature, especially since the discussion of the CIA worked on this topic in the early 1990s. The World Bank numbers on the Soviet GDP in PPP dollars for 1989–1991 that we use in this study match one of the more authoritative of these estimates, coming from the International Comparison Project and cited favourably in a review article by Bergson (1997). The official ruble-denominated data for the same period from Goskomstat are closely correlated with estimates by at least some of the individual researchers (see, eg, Rosefielde and Kuboniwa, 2003). However, we acknowledge the existence of alternative estimates (see, eg, Kontorovich, 2001; Khanin, 2006).

  11. Following Kushnirsky (2001), capital stock for individual republics is assumed to have the same allocation between residential and non-residential assets.

  12. Data for the 1990–1991 investment by republic are taken from World Bank (2007) and Kushnirsky (2001).

  13. Another reason for using labour force rather than employment data is that some of the CIS countries provide unrealistically low number of unemployed counting among them only those officially registered as such with employment agencies. However, even labour force data can be imprecise as it may not adequately account for some categories of workers, such as illegals. It is well known that illegal migration is becoming an increasingly important part of labour force in some of the CIS countries, in particularly in Russia.

  14. Turkmenistan is not included in the computations as data for new capital formation for Turkmenistan is not available for all years.

  15. In the original sources, the capital stock is presented on per capita basis measured in constant PPP dollars of 1980 and 1996. Conversions were made using US deflators for fixed investment.

  16. A note of caution: the existing labour force data may not fully reflect the dynamics of illegal labour flows and its impact on the size labour force in other CIS countries including the labour abundant countries in Central Asian region.

  17. The choice of α=0.4 is based on computation of average share of profit-type incomes in the national income of Russia in 1995–2005. The alternative value of α=0.3 was also used. The differences were not important, and the results are available from the authors.

  18. Among the better-known alternative estimates of GDP growth in the post-transition period are those provided for Russia by Gregory Khanin and his colleagues (Khanin and Suslov, 1999; Khanin, 2006; Khanin and Fomin, 2006). However, in revising the official GDP figures, Khanin and his co-authors rely heavily on coefficients of elasticity between GDP growth and electricity consumption and rail freight volume derived from the US experience in 1970–1975 (see eg Khanin, 2006, pp. 153–159). Assuming that such coefficients, especially coming from the relatively short and atypical period in the US economic history, the beginning of the energy crisis, would hold for Russia in the 1990s may not be very realistic. On the quality of macroeconomic data in the CIS, see also Koen (1996), Kontorovich (2001) and Rosefielde and Kuboniwa (2003).


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A recent World Bank (2006) publication, Measuring Capital for the 21st Century, provides capital stock data for several transition economies for the year 2000 compiled using the perpetual inventory method. It includes capital estimates for three countries of the CIS group: Georgia, Moldova and Russia. However, the focus of that study is on the dynamics of various components of broadly defined national wealth in individual countries. To convert national currency-based data on capital accumulation into dollars, it uses market rather than PPP exchange rates (see World Bank, 2006, p. 17). The resulting estimates of fixed capital stock are not, strictly speaking, suitable for international comparisons of K/L ratios. This is illustrated by the data in Table A1, compiled from the World Bank study. From the table, the reported per capita level of capital stock in Georgia is just $595 compared to $4,338 for Moldova and $12,593 for Russia. Taken at face value, these numbers indicate that in Georgia, the capital stock per capita and by implication per worker, was seven times below than that in Moldova. As estimated, it is also lower than that in such countries as Bangladesh ($817), Burkina Fasso ($821) and Ghana ($686). For reference, at the end of the Soviet period, the K/L ratio in Georgia was higher than that in Moldova and only 1.5 times below than that in Russia (Narkhoz SSSR, 1989, pp. 277–278).

Table a1 Per capita stock of fixed capital and capital–output ratios in three CIS countries in 2000 (capital and GDP valued in US$ at market exchange rates)

The unsuitability of estimates of capital stock based on market exchange rates for international comparisons can also be illustrated by the computation of capital–output ratios. Using market exchange rates based capital stock and GDP estimates for transition economies generates unrealistically wide disparities in K/Y ratios, from 1.0 in Georgia to 9.0 for Russia and 14.4 for Moldova (see Table A1).


Investment price-adjustment coefficients are used to correct the shares of fixed investment provided in the World Development Indicators (2007) database, where these shares are based on nominal prices. Compared to similar shares valued in real terms, nominal shares are overestimated due to relatively faster growth of prices on investment goods and services compared to other components of the GDP. To estimate the degree of overstatement, one has to know by how much prices of investment goods surpass these of all GDP components. The adjustment coefficients are calculated assuming that on average one-third of investment is spent on internationally tradable components (such as equipment), priced at market exchange rate and two-thirds – on domestic components (such as construction), priced at levels close to the general price level for the GDP (Table B1).

Table b1 Investment price adjustment coefficients for CIS countries, 1992–2005


Table C1

Table c1 Fixed capital stock of CIS countries adjusted for market transition (Bil $PPP 2000): 1991–2005


Table D1

Table d1 Labour force in CIS countries (million people): 1991–2005


Table E1

Table e1 Capital–output (K/Y) ratios in CIS countries, 1992–2005

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Izyumov, A., Vahaly, J. Old Capital vs. New Investment in Post-Soviet Economies: Conceptual Issues and Estimates. Comp Econ Stud 50, 79–110 (2008).

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  • Capital stock
  • capital accumulation
  • investment
  • transition economies
  • economic growth
  • total factor productivity

JEL Classifications

  • P21
  • P27