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The Governance Grenade: Mass Privatization, State Capacity and Economic Growth in Post-communist Countries

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  • Patrick Hamm
  • David Stuckler
  • Lawrence King
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    Abstract

    Why did the transitions from state socialism to capitalism result in improved growth in some countries but significant economic declines in others? Three main arguments have been advanced: (1) the most successful countries rapidly implemented privatization, liberalization, and stabilization policies; (2) failures were unrelated to economic policies but occurred because of a poor institutional environment; and (3) the policies were counterproductive because they damaged the state. We present a state-centered theory which argues that the more radical the privatization program, the worse the subsequent performance. We agree with the second account, that institutions matter, but demonstrate that it was radical privatization itself which was a major determinant of institutional weakness. In addition, our account holds that privatization was in fact a crucial determinant of institutional failure, operating primarily through the creation of a massive shock to state revenues. We perform cross-national regressions for a sample of 30 countries between 1990 and 2000, and find that mass privatization programs negatively impacted economic growth, state capacity and property rights protection. These findings are corroborated with data from a random sample of 4,000 firms from 26 post-communist countries. We show that in countries which implemented sizable mass-privatized programs, privatized firms were substantially less likely to engage in successful industrial restructuring but considerably more likely to engage in barter and have tax arrears than their state owned counterparts.

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    Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp222.

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    Date of creation: 2010
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    Handle: RePEc:uma:periwp:wp222

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    1. Vladimir Popov, 2000. "Shock Therapy Versus Gradualism: The End Of The Debate (Explaining The Magnitude Of Transformational Recession)," Comparative Economic Studies, Palgrave Macmillan, vol. 42(1), pages 1-57, April.
    2. John Bennett & Saul Estrin & Giovanni Urga, 2007. "Methods of privatization and economic growth in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 15, pages 661-683, October.
    3. Campos, Nauro F. & Nugent, Jeffrey B., 1999. "Development Performance and the Institutions of Governance: Evidence from East Asia and Latin America," World Development, Elsevier, vol. 27(3), pages 439-452, March.
    4. Sergio Godoy & Joseph Stiglitz, 2006. "Growth, Initial Conditions, Law and Speed of Privatization in Transition Countries: 11 Years Later," NBER Working Papers 11992, National Bureau of Economic Research, Inc.
    5. de Melo, Martha & Denizer, Cevdet & Gelb, Alan, 1996. "From plan to market : patterns of transition," Policy Research Working Paper Series 1564, The World Bank.
    6. John King, 2011. "Foreign Direct Investment and Pollution Havens," Journal of Economics and Econometrics, Economics and Econometrics Research Institute (EERI), Brussels, vol. 54(1), pages 39-47.
    7. Stanley Fischer & Alan Gelb, 1991. "The Process of Socialist Economic Transformation," Journal of Economic Perspectives, American Economic Association, vol. 5(4), pages 91-105, Fall.
    8. Victor Nee, 2000. "The Role of the State in Making a Market Economy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 156(1), pages 64-, March.
    9. David Stuckler & Lawrence King & Greg Patton, 2009. "The Social Construction of Successful Market Reforms," Working Papers wp199, Political Economy Research Institute, University of Massachusetts at Amherst.
    10. Burawoy, Michael, 1996. "The state and economic involution: Russia through a China lens," World Development, Elsevier, vol. 24(6), pages 1105-1117, June.
    11. Olivier Jean Blanchard & Maxim Boycko & Marek Dabrowski & Rudiger Dornbusch & Richard Layard & Andrei Shleifer, 1993. "Post-Communist Reform: Pain and Progress," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262023628, December.
    12. de Melo, Martha & Denizer, Cevdet & Gelb, Alan & Tenev, Stoyan, 1997. "Circumstance and choice : the role of initial conditions and policies in transition economies," Policy Research Working Paper Series 1866, The World Bank.
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