Transitions to a Market Economy in the Soviet Union: Part 2

(image by Udo Kempen

by Timothy Planert 

Editor’s Note: This is the second part of a two-part blog post exploring the failures and successes of Soviet transitions to market economies. Part 1 appeared on Monday. 

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? There are many factors driving these discrepancies, including historical, cultural, geographical, and political factors. In the interest of brevity, I will focus particularly on two of them: the length of time a country spent under Communism and the manner in which the Communist regime fell.  

Countries that spent longer periods of time under Communist rule (such as the former Soviet Union) were more corrupt than countries that only adopted Communism after World War II (Central Europe). Communism increases corruption through two major channels: economic and cultural. The nature of centrally planned economies, with continual coordination problems and shortages, output quotas that had to be met at all costs, and lack of official answerability to citizens and enterprises, required frequent use of black markets by households and firms to obtain necessities and bribes and kickbacks by firms to induce bureaucrats to channel resources to them.[1] Communist countries in the region also focused disproportionately on developing heavy industry and centralization, meaning wealth and resources were concentrated heavily in the industrial sector.[2] Therefore, whoever obtained control of major industrial enterprises during privatization would have the lion’s share of wealth and influence in the post-Communist era, engendering fierce competition among party insiders to obtain the rights to these enterprises.[3] After transition, these elites could quickly entrench themselves at the top of the political and socioeconomic pyramid and manipulate the economy to their own benefit. The longer countries spent under centralization, the greater the entrenchment of corruption as a means of doing business and the greater the concentration of capital and resources in the industrial sector, thus worsening corruption. Communism also led to greater cultural tolerance of corruption by the public, as paying bribes was often necessary to get by (there was a saying that “he who does not steal from the state is stealing from his family”)[4] and its ubiquity dulled people’s sense of outrage while making it more socially acceptable to steal from the state.

The second crucial factor in determining a post-Communist country’s level of corruption is the process of regime change. Countries in which a popularly-backed democratic movement forced the old regime completely from power fared much better than countries where the regime collapsed due to internal pressure, leading to a change of political leadership but leaving the bureaucracy and lower level officials in place. In Poland, Czechoslovakia, and Hungary, as well as the Baltic[5] states, popular protest movements forced the ruling Communist regime to hold elections in which pro-reform, pro-market, and pro-democracy parties, dedicated to the public interest, came to power and swept out the “insiders” from the previous regime.[6] This made it difficult to impossible for insiders to rig the privatization process and establish a base from which to manipulate policy. These transition governments, which were backed by and accountable to voters, were able to navigate the privatization process far more effectively and equitably than countries in the former Soviet Union where the Communist administrative and bureaucratic apparatus remained intact, with deposed leaders being replaced by other insiders with vested interests.[7] The lack of well connected firms or industries with disproportionate influence on political leadership, as well as greater popular support for liberal democratic institutions and lower tolerance for corruption, combined to give Central European countries a major edge in reducing corruption.

There are many avenues for further research on this topic, especially the use of empirical data to sort out the relative weight of different historical, institutional, and political factors in determining a country’s level of corruption. Hopefully the trends I have highlighted here provide a good starting point.

 

[1] Sandholtz, Wayne, and Rein Taagepera. “Corruption, Culture, and Communism”. International Review of Sociology Vol. 15, No. 1, March 2005, pp. 109-131; Nowak, R., 2001. Corruption and transition economies. Economic Analysis Division, United Nations Economic Commission for Europe.; Holmes, L. (1993) The End of Communist Power: Anti-corruption campaigns and legitimation crisis, Polity Press, Cambridge.

[2] Sonin, Konstantin, 2008. “State Capture and Corruption in Transition Economies”. The New Palgrave Dictionary of Economics ed. Steven N. Durlauf and Lawrence E. Blume, Second Edition, 2008.

[3] Yakovlev, Andrei. “Interaction of Interest Groups and Their Impact on Economic Reform in Contemporary Russia.” Working Papers of the Research Center for East European Studies, Bremen. November, 2003.

[4] Nowak, R., 2001. Corruption and transition economies. Economic Analysis Division, United Nations Economic Commission for Europe.

[5] Despite being part of the Soviet Union, the Baltic states were not incorporated into the USSR until 1940, and had always resented Communism as a foreign imposition. Thus, there was sufficient popular support for and experience of markets and democracy for a mass-based independence movement to emerge in the Baltic states, resulting in their secession from the Soviet Union in 1989-1990. Thus, while years of harsh Soviet rule resulted in high initial distortions and levels of corruption, the Baltic states’ post-Communist leaders devoted considerable effort to fighting corruption, with substantial success, as shown in Table 3.

[6] It also helped that all of these countries had previous experience with both democracy and market economies, meaning there was no need to create new institutions from scratch. See Kolodko, Grzegorz W. (2002): From shock to therapy: the political economy of post-socialist transformation. Oxford etc.: Oxford University Press.

[7] Sonin, Konstantin, 2003. “Why the rich may favor poor protection of property rights,” Journal of Comparative Economics, Elsevier, vol. 31(4), pages 715-731, December; Sonin notes that the beneficiaries of “insider privatization” used their ill-gotten wealth and influence to block further reforms that would reduce corruption and state capture.

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. 

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