WASHINGTON D.C.: Economies fail when governments seize too much control. So you would expect a burst of growth in the post-communist world, as new markets emerged and governments retreated. Instead, many economies followed communism itself into collapse.
Why did this happen? Transition from one economic order to another is usually seen as a cause of decline. It is no such thing. Deng's reforms in China generated vast increases in wealth. When German and Japanese dictatorships were defeated in WWII, it was assumed that recovery would take decades. Both countries soon enjoyed economic miracles. For all its brutality, even the Soviet imposed transition to communism in the immediate postwar years did not incite a protracted fall in output.
So what made the post-communist transition different? Although there are signs of improvement, economic performance has been poor in many countries because thriving markets are not conjured out of thin air. Markets require institutions that most countries lack. Prosperous countries have them, but take them for granted.
The nature of these institutions is evident in discussions about privatization. What privatization means is clear in developed market democracies. Such societies have well-defined property rights and elaborate systems for protecting them. When firms or individuals contract with each other, agreements will be enforced (coercively, if necessary) by governments, and disputes will be settled by impartial judges. When private rights are defined and secure, a government enterprise can be unequivocally privatized.
But when they are not, the consequences of privatization are murky. It is often (rightly) stressed that property is not secure unless government cannot deprive a person of it without due process of law, and compensation. Contracts are not secure unless opponents of any current political leadership (as well as foreign firms) receive equal treatment under law. But government is not just a potential enemy of private property. It is also its prime defender. In an anarchy, individuals may own property, as a dog owns a bone. But there can be no real rights without government.
Individual property rights and contracts scarcely existed under communism. After communism, even in some of the more advanced post-communist countries they remained insecure and ill-defined. Such uncertainty meant that markets often could not generate the new income needed to offset the collapse of production in state-owned enterprises. Output fell for the simple reason that democracy could not extract as much production from state enterprises as ruthless totalitarianism once did.
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Consider Stalin after WWII. Totalitarian control was so complete that he had the same interest in productivity of the Soviet Union as a property owner does. If output increased, he and his the party could use this increase to improve the army, gain international influence, etc. Stalin thus had powerful incentives to make the domain he "owned" productive. Although the hyper centralized Stalinist state could not supervise most aspects of enterprise managers' work, their performance could be measured by comparing how much output was produced relative to the resources each had to manage. Subordinates were made to compete with one another: those who produced more were rewarded; those who did less were punished.
Rot set in when terror subsided and subordinates took advantage of their monopoly of information about production. Collusion replaced competition as managers rigged the political center's expectations about what was possible to produce. It took years for subordinates in an industry or locality to succeed in this de-facto conspiracy at the expense of their masters, but succeed they did. As this spread, production declined because managerial subordinates gained nothing from adding to output. This "new class" became more privileged, and the center became progressively enfeebled. The economy became sclerotic.
When communism collapsed, the center disappeared altogether. Output in state industries fell even more. Governments were weak, but state enterprises remained strong. Indeed, by permitting them to lobby more openly, democracy made them stronger. No force could impose coherent plans or extract improved output, so performance fell through the floor.
Conventional wisdom held that quick privatization would reverse this process. Wrong. Even aside from the insecurity of new property rights, the gains of privatization are often uncertain at best. The problem lies in the assumption that most state enterprises have value. Even in the more favorable conditions prevailing in the West, large state (and many private) firms often need be broken up, restructured, merged, or shut. In former communist countries, many (sometimes most) big firms were misbegotten from the start. In the last years of communism investment was almost totally guided by self-serving enterprise bureaucracies. So debate about privatization should have been transformed into a debate about liquidation.
Today's task, made harder by the lobbying power of industrial dinosaurs, is to avoid protecting and subsidizing enterprises that waste resources, and to redirect society's compassion to individuals. Everyone gains by denying handouts to "needy" enterprises and helping needy people by improving the social safety net. Only where subsidies were drastically curtailed, and the market unleashed, has production started to revive as new businesses began to pick up the slack. Combine this with a burgeoning institutional infrastructure for private property rights, and an improved standard of living cannot be long in coming.
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US President Donald Trump’s import tariffs have triggered a wave of retaliatory measures, setting off a trade war with key partners and raising fears of a global downturn. But while Trump’s protectionism and erratic policy shifts could have far-reaching implications, the greatest victim is likely to be the United States itself.
warns that the new administration’s protectionism resembles the strategy many developing countries once tried.
It took a pandemic and the threat of war to get Germany to dispense with the two taboos – against debt and monetary financing of budgets – that have strangled its governments for decades. Now, it must join the rest of Europe in offering a positive vision of self-sufficiency and an “anti-fascist economic policy.”
welcomes the apparent departure from two policy taboos that have strangled the country's investment.
WASHINGTON D.C.: Economies fail when governments seize too much control. So you would expect a burst of growth in the post-communist world, as new markets emerged and governments retreated. Instead, many economies followed communism itself into collapse.
Why did this happen? Transition from one economic order to another is usually seen as a cause of decline. It is no such thing. Deng's reforms in China generated vast increases in wealth. When German and Japanese dictatorships were defeated in WWII, it was assumed that recovery would take decades. Both countries soon enjoyed economic miracles. For all its brutality, even the Soviet imposed transition to communism in the immediate postwar years did not incite a protracted fall in output.
So what made the post-communist transition different? Although there are signs of improvement, economic performance has been poor in many countries because thriving markets are not conjured out of thin air. Markets require institutions that most countries lack. Prosperous countries have them, but take them for granted.
The nature of these institutions is evident in discussions about privatization. What privatization means is clear in developed market democracies. Such societies have well-defined property rights and elaborate systems for protecting them. When firms or individuals contract with each other, agreements will be enforced (coercively, if necessary) by governments, and disputes will be settled by impartial judges. When private rights are defined and secure, a government enterprise can be unequivocally privatized.
But when they are not, the consequences of privatization are murky. It is often (rightly) stressed that property is not secure unless government cannot deprive a person of it without due process of law, and compensation. Contracts are not secure unless opponents of any current political leadership (as well as foreign firms) receive equal treatment under law. But government is not just a potential enemy of private property. It is also its prime defender. In an anarchy, individuals may own property, as a dog owns a bone. But there can be no real rights without government.
Individual property rights and contracts scarcely existed under communism. After communism, even in some of the more advanced post-communist countries they remained insecure and ill-defined. Such uncertainty meant that markets often could not generate the new income needed to offset the collapse of production in state-owned enterprises. Output fell for the simple reason that democracy could not extract as much production from state enterprises as ruthless totalitarianism once did.
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At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
Consider Stalin after WWII. Totalitarian control was so complete that he had the same interest in productivity of the Soviet Union as a property owner does. If output increased, he and his the party could use this increase to improve the army, gain international influence, etc. Stalin thus had powerful incentives to make the domain he "owned" productive. Although the hyper centralized Stalinist state could not supervise most aspects of enterprise managers' work, their performance could be measured by comparing how much output was produced relative to the resources each had to manage. Subordinates were made to compete with one another: those who produced more were rewarded; those who did less were punished.
Rot set in when terror subsided and subordinates took advantage of their monopoly of information about production. Collusion replaced competition as managers rigged the political center's expectations about what was possible to produce. It took years for subordinates in an industry or locality to succeed in this de-facto conspiracy at the expense of their masters, but succeed they did. As this spread, production declined because managerial subordinates gained nothing from adding to output. This "new class" became more privileged, and the center became progressively enfeebled. The economy became sclerotic.
When communism collapsed, the center disappeared altogether. Output in state industries fell even more. Governments were weak, but state enterprises remained strong. Indeed, by permitting them to lobby more openly, democracy made them stronger. No force could impose coherent plans or extract improved output, so performance fell through the floor.
Conventional wisdom held that quick privatization would reverse this process. Wrong. Even aside from the insecurity of new property rights, the gains of privatization are often uncertain at best. The problem lies in the assumption that most state enterprises have value. Even in the more favorable conditions prevailing in the West, large state (and many private) firms often need be broken up, restructured, merged, or shut. In former communist countries, many (sometimes most) big firms were misbegotten from the start. In the last years of communism investment was almost totally guided by self-serving enterprise bureaucracies. So debate about privatization should have been transformed into a debate about liquidation.
Today's task, made harder by the lobbying power of industrial dinosaurs, is to avoid protecting and subsidizing enterprises that waste resources, and to redirect society's compassion to individuals. Everyone gains by denying handouts to "needy" enterprises and helping needy people by improving the social safety net. Only where subsidies were drastically curtailed, and the market unleashed, has production started to revive as new businesses began to pick up the slack. Combine this with a burgeoning institutional infrastructure for private property rights, and an improved standard of living cannot be long in coming.