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The Politics of Privatization: Wealth and Power in Postcommunist Europe

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The Politics of Privatization:  Wealth and Power in Postcommunist Europe
by John A. Gould
(Boulder: Lynne Rienner Publishers, 2011)
247 pp
US $22.50

Communism is fast fading into the realm of “history.” More and more Americans were either not alive or too young to appreciate its enormous dimensions and seeming permanence.  And, in formerly communist countries, a kind of nostalgia has occasionally arisen for the alleged humanity and also national prestige that accompanied the communist era.  Along the same lines, the now 20-plus-year-old transition from communism to freer societies in the former Soviet Bloc nations has also become a matter of history, which is to say it is becoming forgotten or shrouded in myth.  For some, this transition was an unmistakable tragedy that elevated crude “oligarchs” and unleashed the worst of western decadence.  For others, it was an unalloyed good, an order of magnitude preferable to the alternative.

Careful study of both eras continues to be important for practical reasons that implicate the current global economic crisis. In the western world, which is to say North America and Western Europe, the absence of communist regimes renders the rhetoric and goals of domestic socializers more widespread and popular than when such plans were perceived as echoes of failed and authoritarian systems whose defects were manifest.  Equally important, as societies in the Middle East do away with decades-long autocratic rule and as nominally communist China continues its upward ascent, it is worth reflecting upon the moral and economic lessons surrounding the transition of economies and politics in the formerly communist regimes of Central and Eastern Europe.

John Gould’s contribution to this literature is useful and concise.  His focus is privatization of state owned property and business enterprises.  Economists and historians have long observed that free markets and strong protection for private property are inseparable.  In addition to its grandiose rhetoric and the use of political violence, one of the chief defining features of communism was government ownership of the “means of production.” By contrast, a robust system of private property has defined and vouchsafed the western world’s historical freedoms by providing a counterweight to government authority, even where the welfare state and intrusive regulation have become widespread.  Gould details the differing approaches to (and pace of) liberalization with a particular focus on the privatization of industry and property in formerly communist regimes in Central and Eastern Europe.

Gould reminds us of the main two approaches to privatization in the postcommunist era:  one involved swift privatization, versus a slower approach that tried to avoid corruption, structural unemployment, and overly rapid change.  While the transitions in Poland and the Czech Republic may be characterized as swift processes that to some extent empowered former communist regime officials, Ukraine and Slovakia both moved more slowly, but, as a consequence, saw smaller levels of economic growth in the 1990s and 2000s. Gould notes that the relative popularity of regime officials often had more to do with their enrichment as individual than merely the pace of change.  The swift but largely successful transition in the Czech Republic is Gould’s chief example of a transition that occurred quickly but did not lead to mass disaffection and corruption.  Gould’s study of multiple regimes—ranging from the Czechs and Slovaks to Azerbaijan and Ukraine—details how the well meaning “gradualists” did not on the whole achieve their stated goals, because even in gradual systems of privatization, former regime officials often retained both economic and political power and used the privatization process to enrich themselves at the expense of the common good.  Gould notes that the attenuation of civil society, law, and the absence of well developed financial regulatory infrastructure in postcommunist regimes made any transition more-likely-than-not to favor the well-organized and well-heeled former regime officials.

Gould also details another dimension of the transition:  communists turned industry owners, like their counterparts in more free market economies, sometimes used democratic political processes to shore up their economic and political power. While advocates of speedy liberalization argued that private owners—even former communist regime officials—would support the rule of law and greater liberalization over time, in practice the results were more mixed. In addition to enriching themselves directly, this use of political power to punish rival enterprises tended to discredit democracy and privatization in the eyes of less connected former subjects of communist systems, particularly in poorly functioning economies such as those of Ukraine in the 1990s.  This phenomenon, which is addressed in great depth by the “public choice” school of economics, knows no easy antidote even in the West.  The best defense appears to be a system of widespread and reasonably equal property ownership, which in turn creates a broad class with a stake in legal neutrality.

The crony capitalism of the former communist regimes finds an ominous parallel in the increasingly melded regimes in the West, whose large bank bailouts and government sponsored enterprises can hardly be characterized as examples of truly free markets defined by the rule of law.  Indeed, the longstanding and inconsistent enrichment of connected political enterprises in the West suggests the same naïveté among economists abroad as at home, a naïveté characterized by downplaying how all “capitalist” regimes are in fact mixed, often have various exceptions to free market functioning, and these gaps often occur at the intersection of the economic and political power.

In addition to “political rent seeking,” the thrusting of property upon those raised in the communist regimes often proved tragic, with well connected former communist party officials, as well as individuals with connections to foreign lenders, often buying shares in formerly government owned business enterprises for a song.  Here too, deeper historical insight into the West’s own history—such as the tragic and often well-meaning attempts to help freed slaves in the American period of Reconstruction—would have proven useful, but here too abstract economic theory and its indifference to the “distribution of wealth” counseled a “come what may” approach to privatization, because, after all, privately owned enterprises must compete and thus would (the theory goes) behave and think like good capitalists once they owned the “means of production.” In practice, privatization often enriched the very clique that were supposed to have been displaced by the end of communism and, like the worst of “good capitalists” at home, owners of large corporate enterprises in former communist regimes often proved poor stewards of free market principles.

Gould’s central insight is a useful one in the tradition of Edmund Burke and Hilaire Belloc; namely, that economics is only part of the puzzle of privatization in the transition from a communist to a free and “capitalist” society.  Culture, law, financial regulation, and the manner and depth of private property rights define how such regimes function in practice.  Abroad, as well as at home, an excessive confidence by economists in a narrowly defined predictive framework is often tragic, because, in both cases, political power can be affected by the distribution of wealth insofar as large concentrations of economic power often undermine the rule of law and free market principles, even in regimes otherwise liberal and democratic. The West’s well-meaning proponents of economic liberalization underestimated the same factors that they underestimate at home:  political rent-seeking by economic actors that pursue their own narrow economic interest in politics as well as in markets.  In both the western and the eastern cases, what is needed is not merely “enlightened self interest” or the devolution of state owned enterprises to the private sector, but, rather, a broader commitment by the business class to free markets in general, both as a matter of self interest but also as a question of honor.  And in both the West and the former communist regimes of Central and Eastern Europe, such a commitment is often fragile and easily dissipated when it is not reinforced by a broad middle class, education in the principles of a free society, a strong civil society, a widespread commitment to small government, legal support for entrepreneurship, and the broad distribution of private property.

Posted in: Common Core
Christopher A. Roach

About the Author:

Christopher A. Roach is an attorney in private practice at the law firm of Adams and Reese in Tampa, Florida. He has been a trial lawyer since 2001, beginning his private practice in Texas, after serving as a law clerk to the Honorable Sidney A. Fitzwater of the United States District Court, Northern District of Texas. Mr. Roach is admitted to The Florida Bar and the State Bar of Texas, as well as, the United States District Courts for the Southern and Middle Districts of Florida, and the United States District Courts for the Southern, Northern, and Eastern Districts of Texas. In the community he received the Are You Safe Foundation’s 2012 Lawyer of the Year award for representing victims of domestic violence. Chris has also volunteered his time to assist veterans seeking employment as a Co-Chair of the Military Workforce and Retention Committee of the Chamber of Commerce’s Military Affairs Council. Chris earned his J.D. from the University of Chicago Law School in 2000, where he received the Karl Llewellyn Award for Excellence in Appellate Advocacy and also was awarded the Bradley Fellowship in Law and Government. He received his Bachelor of Arts degree from the University of Chicago in 1996, where he graduated with general and special honors.

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