Mass Privatization, State Capacity, and Economic Growth in Post-Communist Countries

Patrick Hamm,Lawrence P King,David Stuckler

doi:10.1177/0003122412441354

Patrick Hamm, Lawrence P King + Show 1 more

Open Access

https://doi.org/10.1177/0003122412441354

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Abstract

Why did the transition from socialism to capitalism result in improved growth in some countries and significant economic decline in others? Scholars have advanced three main arguments: (1) successful countries rapidly implemented neoliberal policies; (2) failures were not due to policies but to poor institutional environments; and (3) policies were counterproductive because they damaged the state. We present a state-centered theory and empirically demonstrate for the first time one of several possible mechanisms linking neoliberal policies to poor economic performance: mass privatization programs, where implemented, created a massive fiscal shock for post-communist governments, thereby undermining the development of private-sector governance institutions and severely exacerbating the transformational recession. We performed cross-national panel regressions for a sample of 25 post-communist countries between 1990 and 2000 and found that mass privatization programs negatively affected economic growth, state capacity, and property rights protection. We further tested these findings with firm-level data from a representative survey of managers in 3,550 companies operating in 24 post-communist countries. Within countries that implemented mass-privatized programs, newly privatized firms were substantially less likely to engage in industrial restructuring but considerably more likely to use barter and accumulate tax arrears than their state-owned counterparts.

Highlights

We found that the aggregated survey respondents from countries undertaking mass privatization were more likely to believe that the government was inefficient (Model 1), would not protect property rights or contracts (Model 2), and would be more prone to rely on unofficial payments to public officials (Model 3). [Insert Table 3 here] Comparing Satellite and Core countries of the Former Soviet Union
When holding constant trends in government spending, effectively blocking the mass privatization-state capacity-growth channel, we found no effect of mass privatization on growth among former Soviet Union (FSU) countries (β=-5.01, p=0.24; full results not reported)
Enterprises privatized to domestic owners in countries that implemented mass privatization programs were 78% more likely to engage in barter than state-owned firms (Model 22), and 56% more likely to have overdue taxes (Model 30)

Summary

Introduction

INITIAL THEORIES OF ECONOMIC TRANSITION Neoliberal policy recommendations were grounded in the notion that economic development could be achieved by relying on the power of market forces and private property, unleashed by a radical curtailment of the state. Neoliberals advanced a rationale of political expediency: they believed that a period of “extraordinary politics” following the collapse of communism gave elites a brief window of opportunity to implement reforms, after which managers and workers of state-owned enterprises might seek to halt, or even roll back, privatization and liberalization efforts in order to prevent lay-offs (Lipton and Sachs 1990b: 298; see Blanchard et al 1991: xiv; Frydman, Rapaczynski, and Turkowitz 1997: 84). Ira Lieberman, senior official at the World Bank’s mass privatization advisory program, stated that “There was a concern by Russian reformers, above all, that the communists might soon take control again; their desire, was to move as rapidly as possible, i.e., to create ‘facts on the ground’ that made a market economy irreversible” (Lieberman, Kessides and Gobbo 2008: 61)

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