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The transition from communism : a diagrammatic exposition of obstacles to the demand for the rule of law

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  • Hoff, Karla
  • Stiglitz, Joseph E.

Abstract

In an earlier paper, the authors presented a mathematical exposition of a theory that demonstrated that mass privatization without institutions to limit asset-stripping may not lead to a demand for the rule of law ["After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies,"American Economic Review 94(3), June 2004, pages 753-63]. This report makes the same argument in terms of simple diagrams. The central idea is that economic actions (to build value or strip assets) and political positions of individuals are interdependent."Big bang"privatization may give individuals an interest in taking what they can quickly, rather than waiting for the establishment of property rights protection that would permit them to build more valuable assets. Asset stripping gives some of these individuals an interest in prolonging the absence of the rule of law so that they can enjoy the fruits of stripping without the constraint of government enforcement of property rights. Each individual, in attempting to influence society's choice of the environment, focuses on the impact on himself, not the impact on others. In choosing their economic actions, individuals ignore the effect of their economic decisions on how they themselves vote, how other people believe the system will evolve, and thus how others invest and vote. Thus, two distortions of individual behavior are associated with the public good nature of votes. The authors use this framework to make one further point. Because of the interdependence between individuals'economic and political choices, demand for and opposition to the rule of law cannot be separated from macroeconomic policy. A too stringent macroeconomic policy can lower the returns to building value relative to stripping assets and thereby weaken the equilibrium demand for the rule of law. Macroeconomic policies and institutional evolution are not independent issues.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3352.

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Date of creation: 01 Jun 2004
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Handle: RePEc:wbk:wbrwps:3352

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Related research

Keywords: Corruption&Anitcorruption Law; Environmental Economics&Policies; Legal Products; Labor Policies; Economic Theory&Research; Environmental Economics&Policies; Legal Products; Economic Theory&Research; Corruption&Anitcorruption Law; Public Sector Corruption&Anticorruption Measures;

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  1. Konstantin Sonin, 2002. "Why the Rich May Favor Poor Protection of Property Rights," William Davidson Institute Working Papers Series 544, William Davidson Institute at the University of Michigan.
  2. Douglass C. North & Robert Paul Thomas, 1970. "An Economic Theory of the Growth of the Western World," Economic History Review, Economic History Society, vol. 23(1), pages 1-17, 04.
  3. Hoff, Karla, 2008. "Joseph E. Stiglitz," Policy Research Working Paper Series 4478, The World Bank.
  4. Lerner, Abba P, 1972. "The Economics and Politics of Consumer Sovereignty," American Economic Review, American Economic Association, vol. 62(2), pages 258-66, May.
  5. Prakash Loungani & Paolo Mauro, 2001. "Capital Flight from Russia," The World Economy, Wiley Blackwell, vol. 24(5), pages 689-706, 05.
  6. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-14, May.
  7. Maxim Boycko & Andrei Shleifer & Robert W. Vishny, 1993. "Privatizing Russia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 139-192.
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Cited by:
  1. Tanja A. Börzel, 2010. "The Transformative Power of Europe Reloaded - The Limits of External Europeanization," KFG Working Papers p0011, Free University Berlin.
  2. Alexander Libman, 2006. "Government-Business Relations and Catching Up Reforms in the CIS," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 3(2), pages 263-288, December.
  3. Tanja A. Börzel & Yasemin Pamuk, 2011. "Europeanization Subverted? The European Union’s Promotion of Good Governance and the Fight against Corruption in the Southern Caucasus," KFG Working Papers p0026, Free University Berlin.

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