Czechs line up in January 1993 to trade in their share booklets in state companies slated for privatization under the ‘coupon privatization’ program
The aim was to guarantee a swift — and irreversible — transition to capitalism for the countries formerly behind the Iron Curtain. But rather than ushering in a new era of prosperity, the mass privatization programs advocated by an army of Western-trained neoliberal economists — and backed by local fans such as former Czech finance minister, prime minister, and curent head of state Václav Klaus — helped bankrupt Russia and other former Soviet bloc countries.
So say sociologists from the University of Cambridge and Harvard University who have published a study that they claim is the first to trace a “direct link” between the mass privatization programs of the early 1990s — adopted by approximately half the post-communist countries after the collapse of the Soviet Union — and the “economic failure and corruption that followed.”
Based on their comparisons of the fortunes of 25 post-communist countries (between 1990 and 2000) and World Bank survey data of managers from more than 3,500 firms within 24 of them, the researchers say they have compelling evidence that the more faithfully countries adopted the mass privatization policy advocated by Western economics and international financial institutions, the worse off they became: Mass privatizing states experienced an average dip in GDP per capita of more than 16 percent after implementation above those of states that didn’t follow the policy.
“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,” write Lawrence King and David Stuckler of the University of Cambridge, and Patrick Hamm, a doctoral candidate at Harvard University, in the study, “Mass Privatization, State Capacity, and Economic Growth in Post-Communist Countries,” published in the April issue of the American Sociological Review. ‘This paper shows the most radical privatization in history failed the countries it was meant to help.’
The researchers say that their work, which is “directly at odds with neoliberal explanations,” builds on the findings a decade ago of a “small group of scholars who criticized mass privatization for its potential to obstruct governance,” including Gerald A. McDermott of the University of Pennsylvania, but while “consistent with institutionalist corruption-centered perspectives goes beyond them by arguing that mass privatization itself damaged existing state institutions and increased corruption.”
Apart from documenting the past, the study also carries a warning for the modern age: As recently as 2008, Egypt considered implementing a mass privatization program, distributing public company shares to some 40 million Egyptian citizens. Morocco and Tunisia contemplated similar policies following the 2011 Arab Spring and invited the European Bank for Reconstruction and Development (EBRD) to consult on the process.
“Rapid and extensive privatization is being promoted by some economists to resolve the current debt crisis in the West and to achieve reform in Middle Eastern and North African economies,” King said in a press statement, calling for the safeguarding of government revenues and state capacity to be a priority. “This paper shows the most radical privatization in history failed the countries it was meant to help.”
‘Shock therapy’ a bitter pill – and no cure
Among the champions of “shock therapy” prescription for the post-communist world — those calling for rapid mass privatization, liberalization of prices and trade, and fiscal and monetary austerity — was American economist Jeffrey Sachs, who advised a number of post-communists countries on implementing reforms. “The need to accelerate privatization is the paramount economic policy issue facing Eastern Europe,” Sachs wrote in 1992. “If there is no breakthrough in the privatization of large enterprises in the near future, the entire process could be stalled for years to come.”
One of the youngest economics professors in the history of Harvard University, Sachs became known for his role as an adviser to Eastern European governments
Neoliberals like Sachs advanced a rationale of political expediency for radical change because “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 layoffs and other social costs,” King, Stuckler, and Hamm write.
They also believed, of course, that shock therapy was the correct treatment, though a bitter pill to swallow. The EBRD 1999 Transition Report summarizes the consensus of foreign advisors and post-communist elites at the start of the transition:
“Private ownership would ensure profit-oriented corporate governance, while liberalization of trade and prices would set free the competitive market forces that reward profitable activities. Firms would have therefore both internal and external incentives to restructure.”
From the beginning, however, gradualist voices stressed the importance of state-guided institutional reform, arguing that in the absence of a supportive institutional environment, “radical reforms would be damaging: privatization might lead to asset-stripping rather than investment, and rapid reforms might create economic winners who would subsequently engage in predatory behavior,” King, Stuckler, and Hamm note.
Nonetheless, shock policy advocates won the policy debate in most countries. As Lawrence Summers put it in 1994, after stepping down as World Bank chief economist, “Despite economists’ reputation for never being able to agree on anything, there is a striking degree of unanimity in the advice that has been provided to the nations of Eastern Europe and the former Soviet Union. … [P]rivatization, stabilization, and liberalization … must all be completed as soon as possible.”