Wednesday, December 10, 2014

What Were The Ideas That Justified Rapid Privatization In Russia?

Russia is one of the most unequal nations in the world.  The economic advisers who engineered the transition to private ownership of industrial assets were driven by three ideas which turned out to have been wrong.  They started with the assumption that it was a good idea to strike while the iron is hot.  It was better to move quickly than it was to spend a lot of time developing a good process.  Moreover, they understood that any process would be corrupted by political connections with those in power. 

The second bad idea involved the maldistribution of productive assets.  The advisers knew that the new owners would not be efficient operators of those assets.  They reasoned, however, that market forces would lead to a better distribution of assets as the poorly suited new owners sold their assets to more efficient operators.  The assumption is that markets forces will overcome the problem of maldistribution and lead to an efficient use of industrial resources.  That was a terribly wrong assumption.

The third bad idea was based upon methodological nationalism.  The more efficient new owners would want to protect their property rights.  Therefore, they would demand the rule of law which would protect their ownership interests.  It turned out that there was no need for the rule of law to protect property rights.  Capital can be easily moved to locations which protect property rights with little regard for how those asset were acquired.  Property booms in London, New York, Miami and other locations are being driven by Russian oligarchs who are moving their cash to safe havens. They understand that their assets can be taken away by political leaders and redistributed to their political allies.  They have no need for the rule of law to develop in Russia or in other privatized states that were part of the USSR.

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