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Transforming Post-Communist Political Economies
through corruption. The rents have been conditioned by state regulations that have effectively favored parts of the old elite.
Privatization implied some rent seeking, but much less than is commonly believed. A variety of financial flows caused a much larger transfer of resources from the state to managers than did privatization. Even so, privatization tends to be criticized much more than do other forms of rent seeking. The explanation is probably that privatization is a very visible, relatively transparent process, and people tend to blame what they can see. Moreover, rent seeking implied that managers benefited far more from unproductive transactions and manipulations than from production or enterprise profits. The managers' focus on rent seeking implied that they cared little about output or the utilization of the factories they managed, and a natural consequence was that output fell sharply. Privatization, on the other hand, often led to new enterprise behavior, making managers focus on profits rather than rents. Hence, privatization often initiated the ouster of corrupt and inept managers and the beginning of enterprise restructuring. Privatization, then, was actually a way of limiting rent seeking.
Ironically, it was technically easy to stop the main rent seeking. Export rents were abolished with the liberalization of exports and raw material prices, which occurred in many small steps in Russia. Import subsidies were eliminated by the government by the end of 1993 as the exchange rate was unified, and subsidized credits were abolished in late 1993. These four measures were all part of the radical reform agenda; they were undertaken in most of Central and Eastern Europe much earlier, but in the former Soviet Union, the reformers were too weak to impose their policies. In hindsight, it is obvious that this implied a great loss to society. Not only did much of the elite indulge in unproductive redistribution of wealth to their benefit at the cost of society at large, but they also neglected ordinary work, ranging from production to elementary government services. Hence, the greater the rent seeking, the more income differentials grew, and the more output fell.
There was far less rent seeking in Central and Eastern Europe than in the NIS, and the degree of rent seeking can explain much of the difference in the results of post-communist transformation between these two regions. Central and Eastern Europe benefited from fewer economic distortions, more economic and legal norms, a better-functioning state, and a stronger civil society than existed the former Soviet Union, where the old elite had been and remained amazingly free of social controls.
Rent seeking can also explain the strong correlation between the nature of economic reform and the political regime. Radical reform—defined as a certain degree of deregulation and a certain effort at financial stabilization measured ex post—was undertaken by five countries: Poland, Czechoslovakia, Albania, Estonia, and Latvia. All initially had liberal, nonsocialist governments. All the remaining socialist governments, on the other hand, under-