Stanford, California - Political fragmentation early on exacerbated the post-communist economic transitions in the Soviet Union and Eastern Europe, new Stanford research shows.

In a new paper, Stanford sociology professor Andrew Walder says that the neoliberal economic policies introduced in those former communist countries did not cause their economic collapses. Neoliberal is a modified form of liberal policies tending to favor free-market capitalism.

In an interview, Walder said, "Policy choices mattered, but they did not create the initial problems that they were intended to solve."

Rather, the longer the decline of the communist system before regime change and the greater the uncertainty over state ownership of assets, the more likely the country fell into prolonged decline.

The lesson for surviving communist or socialist regimes is that future transitions will be less economically damaging if they are rapid and political certainty exists about the ownership of state-owned assets, wrote Walder and co-authors Andrew Isaacson and Qinglian Lu, both Stanford graduate students in sociology.

The worldwide transformation of state socialism during the 1990s saw many of those countries plunge into recession, usually far beyond initial expectations, he said. Most analysts originally expected short-run hardships as those societies and their economies were restructured. It did not happen that way.

"Sharp recessions in the first states to emerge from the revolutions of 1989 were followed by much deeper economic crises in new states that emerged from the breakup of the Soviet Union," said Walder, the Denise O'Leary and Kent Thiry Professor in the Humanities and Sciences and a senior fellow at the Freeman-Spogli Institute for International Studies.

The few surviving communist autocracies that retooled their economies avoided recessions and grew more rapidly, despite once being considered the least promising places for market reform. China and Vietnam are two examples.

Recessions and politics

The researchers examined economic and growth-rate data from 31 countries for the period from 1989 to 2007. They analyzed three competing explanations for post-socialist economic performance – policy choice, initial economic circumstances and reform-era political institutions.

They found that by far the largest differences in growth rates across some 31 transitioning economies were due to wide differences in the initial years of the 1990s. After these initial crises passed in the mid-1990s, growth rates were similar.

They studied those countries that experienced no regime change, like China; those that experienced rapid regime change, like Poland; and those that experienced a prolonged and deep deterioration of political institutions before their eventual collapse.

The initial recessions were a result of the political disruption that accompanies regime change, and state socialist economies were particularly vulnerable to the collapse of communist parties. The political nature of state socialism makes it unusually vulnerable to this problem, Walder said.

"Communist parties played a central role in defining and enforcing the state's property rights over assets – especially important because almost all assets were the property of the state," the authors wrote.

So, when a communist party's ability to perform this function declined for a prolonged period, the economy was undermined by uncertainty over ownership claims.

"This was a problem in all communist regimes that collapsed shortly after 1988, but the political decline of the Soviet Union in its final years was far more protracted and severe than in other communist regimes, where regime change was much more abrupt," they wrote.

The big picture

In the big picture, Walder noted that at the time of the collapse of many post-Soviet economies in the 1990s, everyone's attention was focused on "what is to be done," and this pitted proponents of Chinese style "gradualism" versus "big bang" reforms prescribed by many Western economists.

"It later led to charges that neoliberal policy advice led to the collapse of economies, and to counter-arguments that it was a failure to properly carry out these policies – or something about a country's fundamentals – that was actually the cause of economic collapse," according to Walder.

In retrospect, he said, the worst economic crises were well advanced before any of these policy approaches were carried out, and the real causes were political in nature and rooted in different patterns of decline of communist parties in the prior period, something that eluded the attention of those on both sides of these debates.

It also shows that the heated debates about privatization – its speed and extent – were of secondary importance during the initial years of post-communism.

Walder said, "What mattered most was the capacity of a state to define and enforce property rights of any kind. This is the root cause of the economic collapse in so many of the former Soviet republics."

And so, the alleged merits of Chinese-style "gradualism" were confused with the advantage of not having political institutions collapse, he added.

Soviet Union collapse

The Soviet decline was far more prolonged and pronounced than in all of the other states where communist parties eventually surrendered power, said Walder. Two factors contributed to this:

One was a set of ill-conceived economic reforms that undermined the communist party's control over state assets several years before the Soviet collapse. The other factor was the fall of the Soviet communist party-state. By 1989, the party was already disintegrating, so ownership claims over state assets became unclear, Walder said.

"When communist parties deteriorated deeply over the medium run – as in the USSR – it set off a struggle to control assets, leading to deep economic crises that were intensified in states that broke apart into new entities, which in turn often led to hyperinflation and armed warfare," said Walder.