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Stiglitz: Transition has failed in FSU

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Joseph Stiglitz, Professor at Columbia University and Nobel Prize Laureate.

Joseph Stiglitz.

The transition of communist countries to the market economy was “one of the great economic experiments of the last century” but while China and Vietnam have done well as a result, says Nobel Laureate Joseph Stiglitz, the outcome in the former Soviet Union (FSU) has been disappointing.

Transition in the FSU “should have led to unprecedented prosperity”, Professor Stiglitz said in delivering the Jacques de Larosière lecture during the EBRD’s 2006 annual meeting today.

“Instead, it led to unprecedented increases in poverty and inequality,” the former Chair of the US Council of Economic Advisors told a packed room in London. “Most countries are barely better off than they were 15 years ago; many are worse off.”

This compares with the more successful transition of central Europe and the Baltic states which, he said, have realised impressive institutional transformation related to joining the EU in 2004 and they have enjoyed a rapid increase in exports.

China, Vietnam do better

However, he pointed out, China and Vietnam did not have the prospect of EU membership to encourage their shift from central planning, and yet they have enjoyed unprecedented growth and poverty reduction.

Two problems he highlighted in arguing his case regarding the failure, to date, of transition in the FSU are the failure to establish the rule of law, and botched privatisation. With a big push from the western institutions, some FSU countries pushed reforms too quickly and sloppily. “Those countries that did well early on, did poorly later. It’s the old Aesop fable about the tortoise and the hare.”

Privatisation in particular was, in many instances, ill-planned, with assets acquired in quasi-legal or clearly criminal ways. State assets were privatised to establish property rights in former communist countries but in fact undermined those rights, encouraged asset stripping and generally undermined faith in the market economy, Professor Stiglitz argued.

Asset strippers moved fast

“If you got $1-$2 billion in assets through illegal privatisation, you’d fear the next government in power would take it back so the best thing to do is not to reinvest in the country but to take it out as fast as you can.” By moving assets to western countries, he said, oligarchs enjoyed the best of two worlds: “They had property rights protected abroad and weak rule of law at home.”

Among the reasons he cited for China’s successful transition relative to that of the FSU is “it ignored ideology. It had a kind of pragmatism.” For example, in getting rid of state price controls, introducing the profit motive and shedding jobs in state industry, it did so gradually rather than using shock therapy. Town and village enterprises, while state-controlled, were run by local officials accountable to local people and so benefits remained in the municipalities and provinces. Instead of basing transition efforts at the macro-economic scale, China brought in micro-economic advisors from abroad to build the market economy at the local level.

According to Professor Stiglitz, people in the FSU have suffered a double-whammy, with the shock of the end of the socialist system compounded by the failure on many fronts of transition. The answer is not to reverse the illegitimate privatizations of the past, he said, as that would “substitute one set of oligarchs, friends of the government, with another”. Rather, he said, taxes on windfall profits and excess capital gains could partially rectify some of the wrongs of the past.

“It’s important to do these things quickly and draw a line both under the end of communism and the failure of transition,” he said.

Written by EBRD Senior Writer Kate Dunn.

22 May 2006