Transitions to a Market Economy in the Soviet Union: Part 1

(image by Jason Kuffer

by Timothy Planert 

Editor’s Note: This is the first part of a two-part blog post exploring the failures and successes of Soviet transitions to market economies. Part 2 will conclude on Wednesday. 

Why did some countries in Central and Eastern Europe and the former Soviet Union have smoother transitions from a centrally planned to a market economy than others? This is a crucial question for policymakers in these states, as the region’s economic issues cannot be solved without a thorough understanding of what factors drive successful economic transitions. Based on research I carried out in the summer of 2014, I will explore a few of them here.

The parameters I used to evaluate the “transition economies” are primarily related to the degree of corruption, rent-seeking, and state capture present in the political and economic decision-making processes of formerly Communist states. Corruption in this case is a broad term encompassing several categories of unscrupulous or illicit activity, following the framework laid out by Hellman, Jones, and Kaufmann in their 2000 paper “Seize the State, Seize the Day: State Capture, Corruption, and Influence in Transition.”[1] The first, administrative corruption, consists of “misuse of public office for private gain,” including bribes, kickbacks, nepotism, theft, unauthorized sale of state assets, and similar behavior on the part of politicians and civil servants.[2] State capture, the second category, involves firms manipulating the laws and regulations through cash payments or gifts to politicians. State capture is especially common in bidding for public procurement contracts, and also includes behaviors such as collusion between firms.[3] The final variety of corruption, influence, also involves firms “capturing” the state regulatory apparatus, but through social connections and market power rather than outright bribery. Influence can be legal (e.g. lobbying), but typically harms the economy, especially when firms engage in rent-seeking, which is the pursuit of rents created through government intervention into the economy, typically in the form of artificial monopolies.[4]

So, which countries in Eastern Europe and the former USSR have the most corruption? Generally, Central European countries such as Poland, the Czech Republic, Slovakia, Slovenia, and Hungary, along with the Baltic states, are the least corrupt, former Soviet states, particularly in Central Asia, the most corrupt, and other Eastern European countries, such as Romania, Albania, and the former Yugoslavia, are in between. Hellman, Jones, and Kaufmann, using the 1999-2000 Business Environment and Enterprise Performance Survey (BEEPS), constructed an index of state capture for the transition economies, given in percentages of firms engaged in either state capture or influence. Figures that were above average for the region are in bold, and countries are ranked by overall level of state capture. A more recent survey, the 2013 World Business Environment Survey (the successor to BEEPS), looks at how many firms in a given country had to pay a bribe to obtain basic services and infrastructure, business licenses, import permits, government contracts, and other rights or amenities.[5] A section of that survey data is provided in Table 2, which shows the percentage of firms reporting paying a bribe to obtain services such as electricity and running water. Finally, the 2013 Corruption Perceptions Index, published by Transparency International, measures the degree of perceived corruption in a country based on a composite of surveys of policy experts and businesspeople.[6] Table 3 shows the countries of the region ranked from least corrupt to most corrupt (the scores run from 0 to 100), as well as each country’s cumulative change from the initial index in 1995, providing a measure of countries’ progress in combatting corruption.

Now for the most important question: why do some countries in the region have substantially less corruption than others, and why have some countries, particularly the Baltics, been able to improve so dramatically since 2000?

Continued in Part 2, this Wednesday.

[1] Hellman, Joel S. and Jones, Geraint and Kaufmann, Daniel, Seize the State, Seize the Day: State Capture, Corruption and Influence in Transition (September 2000). World Bank Policy Research Working Paper No. 2444. Available at SSRN: http://ssrn.com/abstract=240555

[2] Kaufmann, Daniel. “Corruption: The Facts.” Foreign Policy, No. 107 (Summer, 1997), pp. 114-131 Published by: Washingtonpost.Newsweek Interactive, LLC Article DOI: 10.2307/1149337 Article Stable URL: http://www.jstor.org.proxy.wm.edu/stable/1149337

[3] Hellman, Jones, and Kaufmann 2000; Svensson, Jakob. 2005. “Eight Questions about Corruption.” Journal of Economic Perspectives, 19(3): 19-42.

[4] Hellman, Jones, and Kaufmann 2000; Ekelund, R., and Robert D. Tollison. Politicized Economies: Monarchy, Monopolies, and Mercantilism. College Station, TX: Texas A&M Press, 1997.

[5] EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20699364~pagePK:64214825~piPK:64214943~theSitePK:469382,00.html

[6] http://www.transparency.org/cpi2013

Timothy Planert is a Master’s Candidate in Public Policy at the College of William & Mary and an Associate Editor of the William & Mary Policy Review.

Editor’s Note: Comments may be moderated for content. 

One thought on “Transitions to a Market Economy in the Soviet Union: Part 1

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s