After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies
With the collapse of communism in Eastern Europe and the Soviet Union in 1989-91, many economic reformers supported "Big Bang" privatization-the rapid transfer of state-owned enterprises to private individuals. It was hoped that Big Bang...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/12/2107993/after-big-bang-obstacles-emergence-rule-law-post-communist-societies http://hdl.handle.net/10986/19199 |
| Summary: | With the collapse of communism in
Eastern Europe and the Soviet Union in 1989-91, many
economic reformers supported "Big Bang"
privatization-the rapid transfer of state-owned enterprises
to private individuals. It was hoped that Big Bang
privatization would create the conditions for a demand-led
evolution of legal institutions. But there was no theory to
explain how this process of institutional evolution,
including a legal framework for the protection of investors,
would occur and, in fact, it has not yet occurred in Russia,
in other former Soviet Union countries, in the Czech
Republic, and elsewhere. A central reason for that,
according to many scholars, is the weakness of the political
demand for the rule of law. To shed light on this puzzle,
the authors consider a model where the conditions for the
emergence of the rule of law might be interpreted as highly
favorable. Individuals with control rights over privatized
assets can collectively bring about the rule of law simply
by voting for it. These individuals are concerned with the
wealth they can obtain from the privatized assets, and have
two alternative strategies: building value and stripping
assets. Building value under the rule of law yields higher
benefits to a majority than stripping assets under no rule
of law. But uncertainty about when the rule of law will be
established may lead some individuals to choose an economic
strategy-stripping assets, including converting corporate
assets to private use-that gives them an interest in
postponing the establishment of the rule of law. And
therefore in the succeeding period, the rule of law may
again not be in place, and so again individuals may strip
assets. If they do, some of them may again have an interest
in postponing the establishment of the rule of law. And so a
weak demand for the rule of law can persist. The
contribution of the paper is to show that the view that once
stripping has occurred, the strippers will say
"enough" and by supporting the rule of law seek
public protection of their gains, is flawed. By abstracting
from the obvious problem that strippers who obtain great
wealth can buy special favored treatment from the state, the
model highlights two less obvious flaws in the optimistic
view about the Big Bang: First, that the asset-strippers can
remove the assets from exposure to further stealing, and in
that case they do not care about public protection for their
gains. And second, that the perceived justice of a system is
important to gaining the cooperation of those involved in
the process of producing the rule of law (judges,
regulators, jurors, potential offenders). Accordingly, state
protection of asset strippers may be infeasible, even under
an ostensible rule of law. Knowing this, strippers will be
less supportive of the rule of law. The model makes one
further point: what is at issue is how fast the rule of law
will emerge. The presumption of the Big Bang strategy was
that the faster state property was turned over to private
hands, the faster a true market economy, including the rule
of law, would be established. The analysis shows that, even
if eventually a rule of law is established, the Big Bang may
put into play forces that delay the establishment of the
rule of law. The tortoise once again may beat the hare!
Finally, the authors analyze the impact of certain policies,
such as the particular structure of privatization and
monetary policy. Policies that enhance the returns to
investment and wealth creation rather than asset stripping
not only serve to strengthen the economy in the short run,
but enhance political support for the rule of law and thus
put it in a position for stronger long-term growth. |
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