NCPA - National Center for Policy Analysis

Viable Legal System Crucial In Transition From Communism To Capitalism

March 29, 2001

The economic downturn in Central and Eastern European countries that followed the introduction of markets and privatization in former Soviet bloc countries took economists by surprise. Permitting free markets to allocate goods and services was supposed to improve productive efficiency -- not lead to depressions, as it often did in those early years.

What went wrong?

Scholars say most countries moved too slowly to overhaul legal and regulatory institutions.

  • Rather than instituting clear protection of property rights, many countries adopted portions of their pre-Communist civil law codes.
  • In the Czech Republic, for example, until recently borrowers had the right to control a bank's disposition of their collateral if they defaulted.
  • Some economists argue that it was necessary to privatize state assets rapidly before beginning legal and institutional reforms so as to make the process irreversible and prevent the Communists from seizing power again.
  • But quick privatization often led to a class of inside managers who stripped assets and blocked reforms.

After plunging in the early 1990s, output is recovering in such countries as Poland and Hungary. But in Russia, it is still 40 percent lower than at the time of Communism's fall.

Source: Alan B. Krueger (Princeton University), "Economic Scene: Legal Reform Is What the Old Soviet Bloc Needs to Put it on the Path to Growth," New York Times, March 29, 2001.


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