A policy of mass destruction

A policy of mass destruction
Czech privatisation voucher. Credit: Rios via Wikimedia Commons.

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 , 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 of the United States and Europe in the 1930s. The reasons for 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 , 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 , 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 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.”


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Citation: A policy of mass destruction (2012, March 29) retrieved 20 June 2019 from https://phys.org/news/2012-03-policy-mass-destruction.html
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Mar 29, 2012
The problem is, the free-market economy works only in the stable environment of strong legal support, which must be built carefully for years. From AWT model follows, primitive communism society is dual to "laissez-faire" capitalism, they're indistinguishable by the same way like fermion and bosons inside of graviton quantum foam. Free market economy can exist just under strong incubator of government, which carefully removes all weak or strong mutations (a monopolies, for example). Just under these artificial situations market can remain freely driven by supply-demand equilibrium. Nevertheless, despite of its "mass desctruction" effects, the economy of Czech Republic is now in better shape, than the economy of many "traditional" western countries, because we never learned how to spend money in irresponsible way, being poor and frugal all the time.

Mar 29, 2012
..to pay taxes is a critical factor .. which ... would generate private wealth that could be taxed and ploughed back into the state..
It brings the perpeetuum mobile on my mind. Not to say, that the paying taxes is the main drain of money for every private wealth.... The authors of this study are apparently the convinced Keynesians..

Mar 29, 2012
"safeguarding government revenues and state capacity should be a priority, the authors add." "designing economic reforms,"
Russia has no culture of private property rights. They went from being serfs to Soviets, which was no different.
Russians who emigrate to places that do protect individual property rights seem to do quite well.
But it should not be a surprise that the authors would not consider private property rights a factor nor the central planners who 'designed' the economic reforms.

Mar 30, 2012
The fall of Eastern European economies was most probably the very intent of those who advised those countries, esp. the IMF and WB. At the time East Europe was a conglomerate of megacorporation-states which were competing with the West in developing countries' markets. They could have done it even better with some restructuring. The right transition that would have worked well for easterners was a Chinese model transition: slow and under state supervision. It worked in China, it would have worked in Eastern Europe too. But that would have made East Europe an economical power to the detriment of other powers.

After communist economies fell, another process started: the externalisation of western economies towards China. This was again politically driven esp. by WTO, to the ruin of West. Why? A good question everyone should ask. Watch your back.

Roj
Mar 30, 2012
The Cambridge study shows a State without revenue that couldn't regulate against corruption, and economic crime prevents capitalism from succeeding.

Corruption between the US Fed and big banks also followed economic collapse shortly after George W. Bush eviscerated the US Attorney General, and office of Inspector General. By firing its investigators & special prosecutors, the last whistle blower or regulator was silenced.

By tolerating corruption, the Bush legacy succeeds in protecting Wallstreet from regulatory oversight; the same way it protects Enron, Worldcom, and all future executives, who with a simple bankrupty filing, may now pillage their employees 401k retirement accounts.

RitchieGuy: they don't tolerate corruption in any form. Measure of success.
Maybe Baltic counties can regulate corruption with national pride, but the west must protect its special prosecutors from branches of Gov. that legislate corruption tolerance.

Mar 30, 2012
At times, I really hate being American.

Mar 30, 2012
The problem is that the Beast is the Conservative party and the oligarchs who wish to destroy America and Americans. All power to the greedy!

Mar 30, 2012

... and there is "True Capitalist Economics" which has yet to be put in practice on a wide scale...


How would you stop collusive behavior in such a system?

Mar 30, 2012

... and there is "True Capitalist Economics" which has yet to be put in practice on a wide scale...


How would you stop collusive behavior in such a system?

Why would you want to stop if it produced a quality product at lower prices?
There are risks in a free market system for any group trying to fix prices. The best example is OPEC. They collude but they can't force any member or non-member to abide by their quotas.
Only when a govt can interfere and pass laws to protect the colluders, can collusion persist. This occurs with many commodities where the govt fixes prices.

Mar 30, 2012

Why would you want to stop if it produced a quality product at lower prices?

Because it would do the exact opposite. the incentive is to increase profit! low quality plus high prices = more profit

There are risks in a free market system for any group trying to fix prices. The best example is OPEC. They collude but they can't force any member or non-member to abide by their quotas.

the OPEC members are accountable only to themselves with no law to stop them. so they collude openly.
the US uses their puppet Saudi Arabia to keep prices low. if it would not, prices would explode.

Mar 30, 2012
As i grew up in an ex communist state, born during totalitarian regime, saw the revolution when i was 5 and the great economic decline that followed, i can say: democracy and the free market have to be "earned" not given. If you give free market to people who lived in communism, you get mass corruption, poverty. Such transitions have to be slow.

Mar 30, 2012
Because it would do the exact opposite. the incentive is to increase profit! low quality plus high prices = more profit

Not with competition.
Competition prevents collusion.
"Historically, attempts to secure lasting monopolies and sustain monopoly prices through purely market means (price "wars," buying out competitors, colluding to fix prices, assigning market territories, advertising, etc.) ultimately backfired. Because of the lure of greater profits, there was always the temptation by some firms to cheat on collusion arrangements, undercutting the agreed-upon price."
http://www.laisse...poly.htm
As I said, OPEC is a great example. Except now we have the Obama regime trying to limit production to force up the price of oil.

Mar 30, 2012
"After five years of trying to reverse the drop in oil prices, the Organization of Petroleum Exporting Countries said today that the effort had failed and that it had to search for ''a new approach'' or face the possibility of another collapse of prices next year."

http://www.nytime...p;src=pm

It takes govt regulations restricting product and inflation to force the up the price of oil.
The collusion is by the watermelons and socialists.

Mar 30, 2012
"And Belkacem Nabi, Algeria's oil minister, said: ''We have problems of discipline, of quotas, and we must absolutely address them in a fundamental way. It is a situation that makes absolutely no sense. We had designed a system of pricing and production in London in 1983 that has not worked and since then there has been no stability within OPEC.''"
"Nordine Ait-Laoussine, an Algerian oil expert and director of a Geneva-based consulting firm, Nalcosa, said the annoucement was ''an admission that they can no longer defend the $18 anymore,'' referring to the organization's official price. That price is widely ignored by its members, which price their output competitively in attempts to increase their market share."
http://www.nytime...p;src=pm

Mar 30, 2012
"But for Secretary of Energy Stephen Chu, those steep prices arent even a concern. In fact, he says his goal is not to get the price of gasoline to go down.

Chu delivered those stunning remarks in testimony before Congress yesterday. When Rep. Alan Nunnelee (R-Miss.) asked Chu whether its his overall goal to get our price of gasoline lower, Chu said, No, the overall goal is to decrease our dependency on oil, to build and strengthen our economy.

As shocking as his remarks are, they shouldnt come as a surprise. Chu has a long record of advocating for higher gas prices. "
http://blog.herit...es-high/
The govt HAS the power to collude.

Apr 01, 2012
Nothing makes me happier on this posting board than to give Venditard a 1-star for his ridiculous statements. I am always amazed at his failure to understand a topic in any sort of rational way.

Apr 01, 2012
BS. The soviet system was corrupt, dysfunctional and bankrupt long before the west got involved. The west sold Eastern Europe food for virtually the entire duration of the Soviet Era, without which millions of those living under communism would have starved. But apparently, the authors long for the good old days.

Apr 01, 2012
And don't forget the NYTimes and the Pulitzer committee awarding a prize for Stalin's propagandist, Walter Duranty.

"AT LONG LAST a Pulitzer Prize committee is looking into the possibility that the Pulitzer awarded to Walter Duranty, the New York Times Moscow correspondent whose dispatches covered up Stalin's infamies, might be revoked."
http://www.weekly...wuaz.asp

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