The Causes of Post-Communist Economic Decline

WASHINGTON D.C.: Economies fail when governments seize too much control. So you would expect a burst of growth in the post-communist world, as new markets emerged and governments retreated. Instead, many economies followed communism itself into collapse.

Why did this happen? Transition from one economic order to another is usually seen as a cause of decline. It is no such thing. Deng's reforms in China generated vast increases in wealth. When German and Japanese dictatorships were defeated in WWII, it was assumed that recovery would take decades. Both countries soon enjoyed economic miracles. For all its brutality, even the Soviet imposed transition to communism in the immediate postwar years did not incite a protracted fall in output.

So what made the post-communist transition different? Although there are signs of improvement, economic performance has been poor in many countries because thriving markets are not conjured out of thin air. Markets require institutions that most countries lack. Prosperous countries have them, but take them for granted.

The nature of these institutions is evident in discussions about privatization. What privatization means is clear in developed market democracies. Such societies have well-defined property rights and elaborate systems for protecting them. When firms or individuals contract with each other, agreements will be enforced (coercively, if necessary) by governments, and disputes will be settled by impartial judges. When private rights are defined and secure, a government enterprise can be unequivocally privatized.