Markets, States, and Democracy: The Political Economy of Post-Communist Transformation

By Beverly Crawford | Go to book overview

9
Political Economy of Privatization in Eastern Europe

KAZIMIERZ Z. POZNANSKI

The most critical decisions to be made in the economic transition from state planning to market capitalism in Eastern Europe are in the content and timing of institutional changes, including privatization. These choices can be said to be of an economic nature in that they involve optimization of resource allocation within a certain time frame. As such, they should be subject to cost-benefit calculus. Building new institutions as well as scrapping existing ones (to make room for the new institutions) consumes economic inputs--hopefully to be recovered through related efficiency gains. This is so because, by determining the incentive structure--the payoff matrix--for individual agents, institutions affect the efficiency of resource utilization as well.

The question of selecting the optimal path for reintroducing private property and voluntary contracting is typically framed as a choice between a radical (shock therapy) and a gradual approach. A number of economists trained in neoclassical theory have developed arguments in support of radical privatization, such as the elaborations offered by Sachs ( 1992), Blanchard ( 1991), and Brada ( 1993) (for further discussion of this point, see the Appendix. Theoretical support of the gradual privatization program has been developed by Kornai ( 1990), Murrell ( 1992), and Poznanski ( 1992a), all of whom make frequent references to the broader body of evolutionary economics (as outlined by Hayek, 1988, and Mises, 1920).

Given the long-term consequences of privatization methods for economic structure, I posit in this chapter that the optimal approach is one that contains sufficient flexibility in terms of multiple choices and reversibility. Following this postulate, I argue that a gradual approach to privatization--measured in pace and proceeding largely from the bottom up--is the most appropriate as it allows for greater adaptation to change. The initial choice of many post-communist re-

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