http://www.cam.ac.uk/research/news/a-policy-of-mass-destruction/
A new study reveals how a radical economic
policy devised by western economists put former Soviet states on a road
to bankruptcy and corruption.
A new analysis showing how the radical policies advocated by
western economists helped to bankrupt Russia and other former Soviet
countries after the Cold War has been released by researchers.
The study, led by academics at the University of Cambridge, is the
first to trace a direct link between the mass privatisation programmes
adopted by several former Soviet states, and the economic failure and
corruption that followed.
Devised principally by western economists, mass privatisation was a
radical policy to privatise rapidly large parts of the economies of
countries such as Russia during the early 1990s. the policy was pushed
heavily by the International Monetary Fund, the World Bank and the
European Bank for Reconstruction and Development (EBRD). Its aim was to
guarantee a swift transition to capitalism, before Soviet sympathisers
could seize back the reins of power.
Instead of the predicted economic boom, what followed in many
ex-Communist countries was a severe recession, on a par with the Great
Depression of the United States and Europe in the 1930s. The reasons for
economic collapse and skyrocketing poverty in Eastern Europe, however,
have never been fully understood. Nor have researchers been able to
explain why this happened in some countries, like Russia, but not in
others, such as Estonia.
Some economists argue that mass privatisation would have worked if it
had been implemented even more rapidly and extensively. Conversely,
others argue that although mass privatisation was the right policy, the
initial conditions were not met to make it work well. Further still,
some scholars suggest that the real problem had more to do with
political reform.
Writing in the new, April issue of the
American Sociological Review,
Lawrence King and David Stuckler from the University of Cambridge and
Patrick Hamm, from Harvard University, test for the first time the idea
that implementing mass privatisation was linked to worsening economic
outcomes, both for individual firms, and entire economies. The more
faithfully countries adopted the policy, the more they endured economic
crime, corruption and economic failure. This happened, the study argues,
because the policy itself undermined the state’s functioning and
exposed swathes of the economy to corruption.
The report also carries a warning for the modern age: “Rapid and
extensive privatisation is being promoted by some economists to resolve
the current debt crises in the West and to help achieve reform in Middle
Eastern and North African economies,” said King. “This paper shows that
the most radical privatisation programme 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 privatisation was adopted in about half of former Communist
countries after the Soviet Union’s collapse. Sometimes known as “coupon
privatisation”, 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 25 former Communist countries, among
them states that mass-privatised and others that did not. World Bank
survey data of managers from more than 3,500 firms in 24 post-communist
countries was also examined.
The results show a direct and consistent link between mass
privatisation, declining state fiscal revenues, and worse economic
growth. Between 1990 and 2000, government spending was about 20% lower
in mass privatising 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 privatising states experienced an average dip in GDP
per capita more than 16% above that of non mass-privatising countries
after the programme was implemented.
The analysis of individual firms revealed that among mass-privatising
countries, firms privatised to domestic owners had greater risks of
economic corruption. Private domestic companies in these countries were
78% 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 privatised.
The study also revealed that such privatised 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. However, firms that
were privatised 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.”