Post-communist depression
shows that the most radical privatization program in history failed the countries it was meant to help. The lessons of unintended consequences in Russia suggest we should proceed with great caution when implementing untested economic reforms.”
Mass privatization was adopted in about half of former communist countries after the Soviet Union’s collapse. Sometimes known as “coupon privatization”, it involved distributing vouchers to ordinary citizens which could then be redeemed as shares in national enterprises. In practice, few people understood the policy and most were desperately poor, so they sold their vouchers as quickly as possible. In countries like Russia, this enabled profiteers to buy up shares and take over large parts of the new private sector.
The researchers argue that mass privatization failed for two main reasons. First, it undermined the state by removing its revenue base – the profits from state-owned enterprises that had existed under Soviet rule – and its ability to regulate the emerging market economy. Second, mass privatization created enterprises devoid of strategic ownership and guidance by opening them up to corrupt owners who stripped assets and failed to develop their firms. “The result was a vicious cycle of a failing state and economy,” King said.
To test this hypothesis, King, Stuckler, and Hamm compared the fortunes between 1990 and 2000 of twenty-five former communist countries, among them states that mass-privatized and others that did not. World Bank survey data of managers from more than 3,500 firms in twenty-four post-communist countries was also examined.
The results show a direct and consistent link between mass privatization, declining state fiscal revenues, and worse economic growth. Between 1990 and 2000, government spending was about 20 percent lower in mass privatizing countries than in those which underwent a steadier form of change. This was the case even after the researchers adjusted for political reforms, other economic reforms, the presence of oil, and other initial transition conditions.
Similarly, mass privatizing states experienced an average dip in GDP per capita more than 16 percent above that of non mass-privatizing countries after the program was implemented.
The analysis of individual firms revealed that among mass-privatizing countries, firms privatized to domestic owners had greater risks of economic corruption. Private domestic companies in these countries were 78 percent more likely than state-owned companies to resort to barter rather than monetary transactions. This was revealed to be the case after the researchers had corrected the data for firm, market and sector characteristics, as well as the possibility that the worst performing firms were the ones privatized.
The study also revealed that such privatized firms were less likely to pay taxes — a critical factor in ensuring the failure of the policy, which western economists predicted would generate private wealth that could be taxed and ploughed back into the state. Firms that were privatized to foreign owners were much less likely to engage in barter and accumulate tax arrears.
“Our analysis suggests that when designing economic reforms, especially aiming to develop the private sector, safeguarding government revenues and state capacity should be a priority,” the authors add. “Counting on a future burst of productivity from a restructured, private economy to compensate for declining revenues is a risky proposition.”
— Read more in Patrick Hamm et al., “Mass Privatization, State Capacity, and Economic Growth in Post-Communist Countries,” American Sociological Review 77, no. 2 (April 2012): 295-324 (doi: 10.1177/0003122412441354)
