Academic journal article Economic Inquiry

Why Economic Reforms Fail in the Soviet System - a Property Rights-Based Approach

Academic journal article Economic Inquiry

Why Economic Reforms Fail in the Soviet System - a Property Rights-Based Approach

Article excerpt


Why do economic reforms fail in Soviet-type systems despite the obvious interest of ruling groups in improving the performance of their ailing economies? The author applies a property rights-based analysis stressing modes of rent-maximization by ruling groups as a crucial explanatory variable. Party apparatchiks and economic bureaucrats particularly benefit from persistent interference in the economic sphere and consequently are most interested in maintaining the status quo. The author surveys the impact of these motivations on the content of economic reforms, outlines the strategies of counterreformers and predicts the future of reforms in Soviet-type economies.


In analyzing the disequilibrium characteristics of contemporary Western economies, Mancur Olson [1982; 1984a; 1984b] agrees with the neoclassical macroeconomists in finding that, given the tendencies of markets to clear and given the rational expectations of economic agents, any disequilibrium indicates that all mutually advantageous transactions have not been consummated. Having made this point, however, he asks what can make agents ignore the potential gains from unconsummated transactions and turns his attention toward the structure of incentives, and thus of institutions and policies. Olson insists, and rightly so, that a satisfactory static and dynamic macroeconomic theory has to explain who, among key actors, has the incentive to generate economic growth and equilibrate the economy and who does not. Furthermore, no government, even an authoritarian one, has an incentive to generate serious recessions or disequilibria. Olson [1984a, 637] writes that even in dictatorial systems, the dictator has an incentive to make the economy of the country he controls work better, since this will generate more tax receipts he can use as he pleases and usually also reduce dissent."

Olson's arguments about incentives, institutions, and disequilibria offer an ideal basis for an inquiry into why reforms fail in Soviet-type economies (STEs). In Olson's theories of incentives, the old Roman principle of criminal law cui prodest (who gained) is applied to modem economies, and the results suggest that, contrary to widespread opinion, it is not necessarily the "small but powerful group of high and highest leaders" that stands to gain most in terms of power and privilege from "the preservation of the existing order." A powerful political elite could satisfy its desires for both power and privilege through an alternative undemocratic system, one which involves authoritarian "don'ts" rather than totalitarian "do's." In that perspective, the inefficient system of economic control typical in STEs, involving centrally planned production goals and input rationing, would not be a condition sine qua non of an authoritarian solution. Since totalitarian command and control systems persist, however, one must seek groups other than the powerful and privileged few which have incentives to resist reforms and keep the economy inefficient.

The following sections identify the membership and motives of groups having strong incentives to keep the STEs inefficient and prevent successful (i.e., market-oriented) reforms. We show how those groups operate, and analyze their effects on the economic performance of their countries. First the incentives for these groups to prevent decentralized management in the state sector are spelled out. Then, their incentives to prevent the expansion of the more efficient private sector are outlined. Third, having identified who benefits from the status quo and why, the paper discusses when and how market-oriented reforms are aborted, limited or reversed by those who stand to gain from the reforms' failure. The last two sections consider the prospects of current attempts at economic reform in three specific countries: Poland, the USSR, and China and the prospects for economic reform in STEs more generally. …

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