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 |
| id |
okr-10986-19199 |
|---|---|
| recordtype |
oai_dc |
| repository_type |
Digital Repository |
| institution_category |
Foreign Institution |
| institution |
Digital Repositories |
| building |
World Bank Open Knowledge Repository |
| collection |
World Bank |
| language |
English en_US |
| topic |
RULE OF LAW TRANSITION ECONOMIES ECONOMIC REFORM LAW & ECONOMICS PRIVATIZATION STATE-OWNED ENTERPRISES INSTITUTIONAL FRAMEWORK LEGAL FRAMEWORK INVESTOR PROTECTION POLITICAL ACCOUNTABILITY VALUE SYSTEMS ASSET DIVESTITURE CORPORATE CULTURE MONETARY POLICY INVESTMENT RETURNS ECONOMIC GROWTH ACTIONS ACTS ADVERSE EFFECTS AGGREGATE DEMAND AGGREGATE SUPPLY ASSETS BANKRUPTCY CAPITAL FLIGHT CAPITAL FORMATION CAPITAL MARKET CAPITAL MARKETS CIVIL SOCIETY CODES COMMUNISM CONSTANT RETURNS TO SCALE CORRUPTION DEBT DEVELOPMENT ECONOMICS DISCRETION ECONOMIC EFFICIENCY ECONOMIC OUTCOMES ECONOMIC STRATEGIES ECONOMISTS EFFECTIVE STRATEGY EQUILIBRIUM EXPECTED VALUE EXPORTS EXTERNALITIES EXTERNALITY FREE ELECTIONS GDP INCOME INSTITUTIONAL CHANGE INSURANCE INTERMEDIATE GOODS JUDGES JUSTICE LAWS LEGAL FRAMEWORK LEGAL INSTITUTIONS LOBBYISTS MEDIA METALS MONETARY POLICY NASH EQUILIBRIUM NATURAL RESOURCES NATURAL] RESOURCES OIL PAYOFFS POLITICAL ECONOMY POLITICAL PARTIES PRIVATE PROPERTY PRIVATIZATION PROFESSIONALS PROPERTY RIGHTS PUBLIC GOOD RULE OF LAW SAVINGS SECURITIES SOCIAL INSURANCE STEALING STOCK COMPANIES TRANSITION ECONOMIES UTILITIES VOTERS VOTING WEALTH WEALTH CREATION |
| spellingShingle |
RULE OF LAW TRANSITION ECONOMIES ECONOMIC REFORM LAW & ECONOMICS PRIVATIZATION STATE-OWNED ENTERPRISES INSTITUTIONAL FRAMEWORK LEGAL FRAMEWORK INVESTOR PROTECTION POLITICAL ACCOUNTABILITY VALUE SYSTEMS ASSET DIVESTITURE CORPORATE CULTURE MONETARY POLICY INVESTMENT RETURNS ECONOMIC GROWTH ACTIONS ACTS ADVERSE EFFECTS AGGREGATE DEMAND AGGREGATE SUPPLY ASSETS BANKRUPTCY CAPITAL FLIGHT CAPITAL FORMATION CAPITAL MARKET CAPITAL MARKETS CIVIL SOCIETY CODES COMMUNISM CONSTANT RETURNS TO SCALE CORRUPTION DEBT DEVELOPMENT ECONOMICS DISCRETION ECONOMIC EFFICIENCY ECONOMIC OUTCOMES ECONOMIC STRATEGIES ECONOMISTS EFFECTIVE STRATEGY EQUILIBRIUM EXPECTED VALUE EXPORTS EXTERNALITIES EXTERNALITY FREE ELECTIONS GDP INCOME INSTITUTIONAL CHANGE INSURANCE INTERMEDIATE GOODS JUDGES JUSTICE LAWS LEGAL FRAMEWORK LEGAL INSTITUTIONS LOBBYISTS MEDIA METALS MONETARY POLICY NASH EQUILIBRIUM NATURAL RESOURCES NATURAL] RESOURCES OIL PAYOFFS POLITICAL ECONOMY POLITICAL PARTIES PRIVATE PROPERTY PRIVATIZATION PROFESSIONALS PROPERTY RIGHTS PUBLIC GOOD RULE OF LAW SAVINGS SECURITIES SOCIAL INSURANCE STEALING STOCK COMPANIES TRANSITION ECONOMIES UTILITIES VOTERS VOTING WEALTH WEALTH CREATION Hoff, Karla Stiglitz, Joseph E. After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies |
| geographic_facet |
Europe and Central Asia |
| relation |
Policy Research Working Paper;No. 2934 |
| description |
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. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Hoff, Karla Stiglitz, Joseph E. |
| author_facet |
Hoff, Karla Stiglitz, Joseph E. |
| author_sort |
Hoff, Karla |
| title |
After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies |
| title_short |
After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies |
| title_full |
After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies |
| title_fullStr |
After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies |
| title_full_unstemmed |
After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies |
| title_sort |
after the big bang? obstacles to the emergence of the rule of law in post-communist societies |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
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 |
| _version_ |
1764439740208119808 |
| spelling |
okr-10986-191992021-04-23T14:03:43Z After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies Hoff, Karla Stiglitz, Joseph E. RULE OF LAW TRANSITION ECONOMIES ECONOMIC REFORM LAW & ECONOMICS PRIVATIZATION STATE-OWNED ENTERPRISES INSTITUTIONAL FRAMEWORK LEGAL FRAMEWORK INVESTOR PROTECTION POLITICAL ACCOUNTABILITY VALUE SYSTEMS ASSET DIVESTITURE CORPORATE CULTURE MONETARY POLICY INVESTMENT RETURNS ECONOMIC GROWTH ACTIONS ACTS ADVERSE EFFECTS AGGREGATE DEMAND AGGREGATE SUPPLY ASSETS BANKRUPTCY CAPITAL FLIGHT CAPITAL FORMATION CAPITAL MARKET CAPITAL MARKETS CIVIL SOCIETY CODES COMMUNISM CONSTANT RETURNS TO SCALE CORRUPTION DEBT DEVELOPMENT ECONOMICS DISCRETION ECONOMIC EFFICIENCY ECONOMIC OUTCOMES ECONOMIC STRATEGIES ECONOMISTS EFFECTIVE STRATEGY EQUILIBRIUM EXPECTED VALUE EXPORTS EXTERNALITIES EXTERNALITY FREE ELECTIONS GDP INCOME INSTITUTIONAL CHANGE INSURANCE INTERMEDIATE GOODS JUDGES JUSTICE LAWS LEGAL FRAMEWORK LEGAL INSTITUTIONS LOBBYISTS MEDIA METALS MONETARY POLICY NASH EQUILIBRIUM NATURAL RESOURCES NATURAL] RESOURCES OIL PAYOFFS POLITICAL ECONOMY POLITICAL PARTIES PRIVATE PROPERTY PRIVATIZATION PROFESSIONALS PROPERTY RIGHTS PUBLIC GOOD RULE OF LAW SAVINGS SECURITIES SOCIAL INSURANCE STEALING STOCK COMPANIES TRANSITION ECONOMIES UTILITIES VOTERS VOTING WEALTH WEALTH CREATION 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. 2014-08-01T17:35:29Z 2014-08-01T17:35:29Z 2002-12 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 English en_US Policy Research Working Paper;No. 2934 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research Europe and Central Asia |