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

  • Hoff, Karla
  • Stiglitz, Joseph E.

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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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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  1. Boycko, Maxim & Shleifer, Andrei & Vishny, Robert W., 1997. "Privatizing Russia," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522284, June.
  2. Prakash Loungani & Paolo Mauro, 2000. "Capital Flight from Russia," IMF Policy Discussion Papers 00/6, International Monetary Fund.
  3. 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.
  4. Konstantin Sonin, 2003. "Why the Rich May Favor Poor Protection of Property Rights," Working Papers w0022, Center for Economic and Financial Research (CEFIR).
  5. Hoff, Karla, 2008. "Joseph E. Stiglitz," Policy Research Working Paper Series 4478, The World Bank.
  6. 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.
  7. Lerner, Abba P, 1972. "The Economics and Politics of Consumer Sovereignty," American Economic Review, American Economic Association, vol. 62(2), pages 258-66, May.
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