The Financial Economics of Privatization

By William L. Megginson | Go to book overview

5
Empirical Evidence on
Privatization in Transition
Economies

In the middle years of the twenty-first century’s first decade, it is hard to remember how fundamentally different the world was prior to the collapse of communism in Europe and North Asia a mere 15 years ago. As noted by Fischer (2001), at its peak, nearly half the world lived in economies describing themselves as centrally planned, and the economic and political system of communism was implacably hostile to private ownership and to allowing market forces to allocate economic resources and rewards. The production-oriented communist system was based on strict orders from a central authority, executed through state-owned firms operating in monopolist industries, and funded by credits from state-controlled banks. Outside of a few, narrowly proscribed areas, private ownership was illegal and consumer demand was ignored. Furthermore, the entire system was militarized, in the sense that the production and resource allocation decisions of an integrated economic union (COMECON) were made principally to support a military alliance (the Warsaw Pact) covering one-sixth of the world’s land mass.

The economic system that emerged under communism was so wealth destroying and wasteful that it could be maintained only by pervasive repression. Since rational economic incentives were suppressed whenever these conflicted with Marxist ideology, or the political dominance of the Communist party, people could be induced to comply with the system’s demands only through coercion. By the late 1980s, it was obvious that the economic system of communism had failed abjectly, and that only increasingly repressive measures would suffice to maintain the communist political and military system. At critical moments in one country after another, the breaking point was reached when civilized European leaders— even communist ones—simply stopped being willing to kill their own citizens to support a failed ideology. Though communism had been economically bankrupt for many years before the Berlin Wall fell in November 1989, the political collapse this event represented signaled that the people of central and eastern Europe were at last free to rejoin the West, and that the heterogeneous peoples of the former Soviet Union were free to begin a new history. Then what?

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