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After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies

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dc.contributor.authorHoff, Karla
dc.contributor.authorStiglitz, Joseph E.
dc.date.accessioned2014-08-01T17:35:29Z
dc.date.available2014-08-01T17:35:29Z
dc.date.issued2002-12
dc.description.abstractWith the collapse of communism in Eastern Europe and the Soviet Union in 1989-91, many economic reformers supported "Big Bang" privatization-the rapid transfer of state-owned enterprises to private individuals. It was hoped that Big Bang privatization would create the conditions for a demand-led evolution of legal institutions. But there was no theory to explain how this process of institutional evolution, including a legal framework for the protection of investors, would occur and, in fact, it has not yet occurred in Russia, in other former Soviet Union countries, in the Czech Republic, and elsewhere. A central reason for that, according to many scholars, is the weakness of the political demand for the rule of law. To shed light on this puzzle, the authors consider a model where the conditions for the emergence of the rule of law might be interpreted as highly favorable. Individuals with control rights over privatized assets can collectively bring about the rule of law simply by voting for it. These individuals are concerned with the wealth they can obtain from the privatized assets, and have two alternative strategies: building value and stripping assets. Building value under the rule of law yields higher benefits to a majority than stripping assets under no rule of law. But uncertainty about when the rule of law will be established may lead some individuals to choose an economic strategy-stripping assets, including converting corporate assets to private use-that gives them an interest in postponing the establishment of the rule of law. And therefore in the succeeding period, the rule of law may again not be in place, and so again individuals may strip assets. If they do, some of them may again have an interest in postponing the establishment of the rule of law. And so a weak demand for the rule of law can persist. The contribution of the paper is to show that the view that once stripping has occurred, the strippers will say "enough" and by supporting the rule of law seek public protection of their gains, is flawed. By abstracting from the obvious problem that strippers who obtain great wealth can buy special favored treatment from the state, the model highlights two less obvious flaws in the optimistic view about the Big Bang: First, that the asset-strippers can remove the assets from exposure to further stealing, and in that case they do not care about public protection for their gains. And second, that the perceived justice of a system is important to gaining the cooperation of those involved in the process of producing the rule of law (judges, regulators, jurors, potential offenders). Accordingly, state protection of asset strippers may be infeasible, even under an ostensible rule of law. Knowing this, strippers will be less supportive of the rule of law. The model makes one further point: what is at issue is how fast the rule of law will emerge. The presumption of the Big Bang strategy was that the faster state property was turned over to private hands, the faster a true market economy, including the rule of law, would be established. The analysis shows that, even if eventually a rule of law is established, the Big Bang may put into play forces that delay the establishment of the rule of law. The tortoise once again may beat the hare! Finally, the authors analyze the impact of certain policies, such as the particular structure of privatization and monetary policy. Policies that enhance the returns to investment and wealth creation rather than asset stripping not only serve to strengthen the economy in the short run, but enhance political support for the rule of law and thus put it in a position for stronger long-term growth.en
dc.identifierhttp://documents.worldbank.org/curated/en/2002/12/2107993/after-big-bang-obstacles-emergence-rule-law-post-communist-societies
dc.identifier.urihttps://hdl.handle.net/10986/19199
dc.languageEnglish
dc.language.isoen_US
dc.publisherWorld Bank, Washington, DC
dc.relation.ispartofseriesPolicy Research Working Paper;No. 2934
dc.rightsCC BY 3.0 IGO
dc.rights.urihttp://creativecommons.org/licenses/by/3.0/igo/
dc.subjectRULE OF LAW
dc.subjectTRANSITION ECONOMIES
dc.subjectECONOMIC REFORM
dc.subjectLAW & ECONOMICS
dc.subjectPRIVATIZATION
dc.subjectSTATE-OWNED ENTERPRISES
dc.subjectINSTITUTIONAL FRAMEWORK
dc.subjectLEGAL FRAMEWORK
dc.subjectINVESTOR PROTECTION
dc.subjectPOLITICAL ACCOUNTABILITY
dc.subjectVALUE SYSTEMS
dc.subjectASSET DIVESTITURE
dc.subjectCORPORATE CULTURE
dc.subjectMONETARY POLICY
dc.subjectINVESTMENT RETURNS
dc.subjectECONOMIC GROWTH ACTIONS
dc.subjectACTS
dc.subjectADVERSE EFFECTS
dc.subjectAGGREGATE DEMAND
dc.subjectAGGREGATE SUPPLY
dc.subjectASSETS
dc.subjectBANKRUPTCY
dc.subjectCAPITAL FLIGHT
dc.subjectCAPITAL FORMATION
dc.subjectCAPITAL MARKET
dc.subjectCAPITAL MARKETS
dc.subjectCIVIL SOCIETY
dc.subjectCODES
dc.subjectCOMMUNISM
dc.subjectCONSTANT RETURNS TO SCALE
dc.subjectCORRUPTION
dc.subjectDEBT
dc.subjectDEVELOPMENT ECONOMICS
dc.subjectDISCRETION
dc.subjectECONOMIC EFFICIENCY
dc.subjectECONOMIC OUTCOMES
dc.subjectECONOMIC STRATEGIES
dc.subjectECONOMISTS
dc.subjectEFFECTIVE STRATEGY
dc.subjectEQUILIBRIUM
dc.subjectEXPECTED VALUE
dc.subjectEXPORTS
dc.subjectEXTERNALITIES
dc.subjectEXTERNALITY
dc.subjectFREE ELECTIONS
dc.subjectGDP
dc.subjectINCOME
dc.subjectINSTITUTIONAL CHANGE
dc.subjectINSURANCE
dc.subjectINTERMEDIATE GOODS
dc.subjectJUDGES
dc.subjectJUSTICE
dc.subjectLAWS
dc.subjectLEGAL FRAMEWORK
dc.subjectLEGAL INSTITUTIONS
dc.subjectLOBBYISTS
dc.subjectMEDIA
dc.subjectMETALS
dc.subjectMONETARY POLICY
dc.subjectNASH EQUILIBRIUM
dc.subjectNATURAL RESOURCES
dc.subjectNATURAL] RESOURCES
dc.subjectOIL
dc.subjectPAYOFFS
dc.subjectPOLITICAL ECONOMY
dc.subjectPOLITICAL PARTIES
dc.subjectPRIVATE PROPERTY
dc.subjectPRIVATIZATION
dc.subjectPROFESSIONALS
dc.subjectPROPERTY RIGHTS
dc.subjectPUBLIC GOOD
dc.subjectRULE OF LAW
dc.subjectSAVINGS
dc.subjectSECURITIES
dc.subjectSOCIAL INSURANCE
dc.subjectSTEALING
dc.subjectSTOCK COMPANIES
dc.subjectTRANSITION ECONOMIES
dc.subjectUTILITIES
dc.subjectVOTERS
dc.subjectVOTING
dc.subjectWEALTH
dc.subjectWEALTH CREATION
dc.titleAfter the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societiesen
dspace.entity.typePublication
okr.crosscuttingsolutionareaJobs
okr.date.disclosure2002-12-31
okr.doctypePublications & Research::Policy Research Working Paper
okr.doctypePublications & Research
okr.docurlhttp://documents.worldbank.org/curated/en/2002/12/2107993/after-big-bang-obstacles-emergence-rule-law-post-communist-societies
okr.globalpracticeSocial Protection and Labor
okr.globalpracticeGovernance
okr.guid143211468749725052
okr.identifier.doi10.1596/1813-9450-2934
okr.identifier.externaldocumentum000094946_03011404054433
okr.identifier.internaldocumentum2107993
okr.identifier.reportWPS2934
okr.language.supporteden
okr.pdfurlhttp://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2003/03/14/000094946_03011404054433/Rendered/PDF/multi0page.pdfen
okr.region.administrativeEurope and Central Asia
okr.sectorPublic Administration, Law, and Justice :: Law and justice
okr.topicLaw and Development::Judicial System Reform
okr.topicEconomic Theory and Research
okr.topicLaw and Development::Legal Products
okr.topicCorruption and Anticorruption Law
okr.topicEnvironmental Economics and Policies
okr.topicSocial Protections and Labor::Labor Policies
okr.unitInvestment Climate Team, Development Research Group
okr.volume1
relation.isSeriesOfPublication26e071dc-b0bf-409c-b982-df2970295c87
relation.isSeriesOfPublication.latestForDiscovery26e071dc-b0bf-409c-b982-df2970295c87
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