The Political Economy of Corruption and the Role of Economic Opportunities - Essay Example

? To what extent was the effectiveness of transition strategies dependent on the initial conditions of the transition economies? Introduction The changing economic landscape in the last century has brought with it considerable political and social change. In terms of theoretical and scholarly research some of the most prominent considerations have been in terms of the shift between developing, emerging, and first worlds. Within this context of understanding one recognizes that a central area of concern has been transition economies. Transition economies are those where a nation is shifting from a centrally planned economy to a free market. Within the modern world environment this has become a highly complex notion as nations such as China have seemingly transcended traditional bounds of the centrally planned economy and combined state-sponsored industries with aspects of the free market. Still, to a large degree the traditional structural boundaries of the transition economy still hold. This essay considers the extent that the effectiveness of transition strategies is dependent on the initial conditions of the transition economies. Russia While the subject of transition economy strategies is complex and multi-varied, one of the central understandings is that there has been considerable difference regarding success among these transition countries. One recognizes that while there may be no objective or prescriptive approach to successful transition, one of the most thematic elements has been that the most successful transition economies have been linked to the success of the initial conditions of the transition economy. This is a complex notion that demands deconstruction. One of the major considerations in these regards has been the Russian transition approach. While theorists disagree as to the original state of the Russian centrally controlled government, to a great degree the original conditions were stark. Following the Cold War with the United States and Western powers, Russian experienced a state of considerable economic decline. To a great degree it seems that many of the earlier challenges carried over to the post transition period. As one might expect countless literature has been written on Russia’s transition, still there are a number of notable considerations. Roland (2004) links one of the primary challenges to the lack of structure in Russia’s original socialist system. While one would consider that a centrally controlled system would have stringent controls, it appears that to a degree this didn’t occur in Russia’s socialist practice. It is noted that the government had only centrally planned for approximately 100 goods, when in reality there was over 12 million that needed to be accounted for (Roland 2004). The cumulative effect particularly in Russia, but also in many other socialist economies, was that there emerged a market where quality products were not a concern, because the market consistently had shortages. This structure extended to workers as the seller’s market ensured they were always well employed. When the transition period arose these issues came to the forefront, as entrenched enterprises and workers viewed the changes as a threat. Crime and Corruption One of the major problems that arose in transition economies, particularly in Russia, was organized crime. While the emergence of these crime institutions surely had a complex array of reasons, it seems fairly plausible that the dissonance created in the transition between the earlier seller’s market period and the later free market may have contributed to a higher propensity of individuals willing to participate in such activity. These occurrences attest to a level of carry over from dysfunctions in the pre-free market economy that would indicate that the original state of the economy has a direct impact on transition strategies. Boerner & Hainz (2009) support the notion that inefficient pre-liberalization economic states directly contribute to later era corruption practices. Specifically, “the missing political support for anti-corruption policies is due to a lack of economic and financial reform” (Boerner & Hainz, 2009, p. 1). While organized crime is a pressing concern, even more significant is the understanding that such institutional corruption extends into the realm of political leadership. Oftentimes in countries that do not have proper institutional controls in place during the transition period, such corruption emerges as officials find they can pay entry fees to lucrative positions. Perhaps the most central insight in these regards is that the lack of economic opportunities creates a situation where corruption is more likely. Ultimately, then this seems to indicate that the strength of the economy during pre-liberalization is a strong determinant on the effect of the later strength of the free market political regime. Macroeconomic State as a Potential Determining Element The notion of a country’s pre-liberalization macroeconomic state as directly impacting the success of transition strategies is a central thorough-put in much of the literature on the subject. As the overarching nature of the term ‘macroeconomic state’ extends into a variety of categories, it’s necessary to consider these notions in terms of specific economic instances. Elliot (2000) argued that the major challenge facing Russia’s President Putin was a lack of money that could contribute to the establishment of the free market system. The considerable recessionary period following the Cold War then is believed to have directly contributed to Russian challenges in transitioning to liberalization. Still, Elliot (2000) contends that one cannot simply think in terms of economic success versus economic failure; instead, deeper structural considerations must be taken into account. In addition to economic success one of the primary arguments is that the extent that the pre-liberalization period worked towards reform measures was a great determinant as to the success of the free market transition. In Russia there was a 70-year period of stringent central planning. During the time of this central planned economy the Tsars had only taken small steps towards liberal reforms. Elliot (2000) believes that this lack of reform also directly contributed to the state of Russia’s transition difficulties. China One considers that a contrasting experience to this process has been China where liberalization occurred at a moderate pace. Rather than immediately attempting to switch between the centrally planned economy and a free market system, the Chinese structure has built into it a series of informal checks and balances where state operated enterprises only privatize after the region can sufficiently support the firm, and the firm has adequate financial infrastructure. Additionally, the regionally determined nature of privatization has allowed China to discourage enterprises with high numbers of employees transitioning to the free market structure. The cumulative impact of such a process is an economic system that is closely aligned with social interests that also is flexible enough to allow for greater levels of moderation in transition. Ultimately this relates back to the initial insight that macroeconomic state directly contributes to the success of transition strategies, as it has been China’s robust economic growth that has allowed for the successful transition of certain SOEs to private enterprises. And for other industries of greater social importance, it has afforded them the opportunity to transition at a more moderate pace. Form of Central Organization Another major consideration in terms of transition economies is the nature of the pre-transition central organization. Not only in Russia, but also in nearly all-socialist economies with the exception of China and Yugoslavia, the socialist government was centrally located around functional principles of branch ministries (Turley & Luke, 2011). For instance, these would include the ministry of steel, ministry of coal, or the ministry of machine building industries. Conversely, China and Yugoslavia’s central planning was organized along regional lines. One questions the extent that these divisions contributed to the later success of the free market system. While the socialist seller’s market seemed to have a clear and distinct impact on transition success, the nature of central organization seemed to have less of an impact. One considers that while both China and Yugoslavia shared this central planning structure there were significant degrees of division between these countries’ success following this period. This is perhaps best understood in terms of differences of macroeconomic performance. When considering macroeconomic performance after liberalization one recognizes that China is the only country that experienced a truly smooth transition (Turley & Luke, 2011). Conversely, Yugoslavia has faced consistent challenges with stabilization. Specific Internal Strategies As China is undoubtedly the most central transition economy, it will be used as a means of deconstructing more internal transition strategies. Guo & Yang (2005) considered five hypothesis surrounding privatization in China during the 1995-2001 period. Although Yugoslavia shared with China a regionally organized planning structure, in China’s case it seems undeniable that this regional structure has not at least partially contributed to the Chinese successful transition. Guo & Yang (2005, p. 214) note that in terms of privatization “the local government is the decisive actor in the process as it is the owner of most SOEs”. This has resulted in a situation where there has been considerable resistance to privatize industries that have a high amount of employees as the risk of transitioning to the free market is that greater degrees of unemployment and social unrest occur. While it has traditionally been assumed that it is economic interests that drive cultural change, it seems that the challenges presented by the earlier Cultural Revolution, as well as a pressing need to avoid social unrest in a country of billions has instead influenced the levels of privatization such that the Chinese system has developed a strong internal mechanism of transition that is directly linked to the country’s collective conscious. Where the Chinese transition has failed, however, can also be linked to the conditions before privatization. It’s important to consider this point not simply in relation to occurrences in China, but for the larger insights it sheds on the process of successful transition strategies. As such Guo & Yang (2005) concluded that perhaps the most telling feature of whether an industry would privatize was the constraint hypothesis. This hypothesis argues that the propensity for an industry to privatize is contingent on excessive debts and worker redundancy in the SOEs. As noted earlier the socialist tendencies through Russia and similar economic structures where adequate central planning did not occur resulted in a seller’s market where considerable worker redundancy occurred. In these respects, it appears that economic efficiency and surplus in the pre-privatization stage could be a strong determinant of success as the country transitions to the free market. Even as Guo & Yang (2005) argue that such occurrences are not a direct determinant of privatization as regional conditions and hardened firm budgets are the main determining factors, it seems that there is a circular effect where a robust macro-economy directly contributes to increased levels of regional liberalization and hardened budgets. Conclusion In conclusion, this essay has considered the extent that the effectiveness of transition strategies is dependent on the initial conditions of the transition economies. This research has considered the issue from a variety of theoretical perspectives. From an overarching context the research established the understanding that there has undeniably been significant differences between the successes of transition strategies in certain countries. The research has then argued that the two major pre-liberalization factors that impact transition strategies are the countries’ macroeconomic state and the extent that steps were taken to achieve greater levels of privatization during the period of central control. Undeniably these factors contribute directly to the success of transition strategies. This is evidenced in the contrasting instances of Russia and China. In the instance of the former the rigid state controlled policies of the 70 years prior to liberalization, as well as a nearly bankrupt nation brought on by the Cold War resulted in a transition period that continues to experience challenges. Conversely, the Chinese system developed a hybrid approach to liberalization where SOEs only privatized after a series of informal state and public checks and balances. The question of which is more central to the transition stage – macroeconomic success or moderation – seems to be a chicken and egg equation, as one inevitably leads into the other. Ultimately, transition failure and success need be determined along a dynamic and evolving spectrum of inputs. References Boerner, K. Hainz, C. (2009) ‘The political economy of corruption and the role of economic opportunities.’ Economics of Transition Volume 17(2) 2009, 213–240 Elliot, L. (2000) ‘Russia in limbo.’ Guardian. Guo, K. Yang, Y. (2005). Causes of privatization in China. Economics of Transition. Volume 13 (2) 2005, 211–238 Roland, G (2004), Transition and Economics: Politics, Markets and Firms. MIT Press. Turley, G and P J Luke (2011), Transition Economics Two Decades On. Routledge. Read More