Ideological Determinants of Liberal Economic Reform

Ideological Determinants of Liberal Economic Reform: The Case of Privatization

Introduction

Following the collapse of communist regimes in Eastern Europe, privatization became a priority for reform governments. Policymakers designed programs to transfer state property to private hands, often using mass distribution programs supplemented by piecemeal sales. These programs had varying distributional consequences, benefiting different groups (citizens, elites, managers, labor) in different ways. For example, the Czech Republic aimed for a program without special privileges, while Russia initially mirrored the Czech model but later added privileges for employees.

Privatization Programs in Eastern Europe

Czech Republic: Voucher program accessible to all adult citizens, without privileges for specific groups. Foreigners were excluded.
Albania and Hungary: Similar avoidance of privileges for domestic groups. Hungary favored foreign participation.
Russia: Initially like the Czech program, but later included significant privileges for employees. In 72.5% of enterprises, 51% of shares were reserved for employees.
Other States: Bulgaria (20% of shares at 50% discount), Lithuania (50% of shares at a discount for managers/workers), Ukraine (leasing program transferring shares to worker cooperatives).

The academic literature explains these distributive benefits based on material interests and power, largely ignoring ideological and cognitive factors.

Standard Approaches to Property Rights Change

Studies of post-communist privatization often emphasize the power of political and economic groups. The distribution of power explains how groups acquire special ownership benefits. This aligns with broader theories of property rights development, where the state advances economic interests or constructs power hierarchies, constrained by societal interests and power distribution.

For example, the inclusion of employee ownership in Russian privatization and its absence in the Czech Republic should be explained by the power and interests of managers and labor relative to each state. However, similar pre-privatization structures in Russia and the Czech Republic means that managers and labor should have had similar lobbying positions. Since this was not the case, analyzing ideology and legitimacy are crucial. A crucial shortcoming of standard materialist and power-based analyses becomes especially apparent in comparative analysis; that is, it makes no attempt to capture the forces (1) shaping how preferences form and (2) determining how the distribution of power is perceived. At best the preferences and power of various groups are assumed from the outcomes.

The Problem with Materialist and Power-Based Analyses

Material interests and power are often treated as "black boxes." There is inattention to:

The formation of preferences that shape political lobbying and group demands.
The reasons behind the relative power of groups and the potency of their political pressure.

In a revolutionary setting, preference formation is complex due to rapid political and economic transformations. Identifying self-interests is difficult for leaders and stakeholders, rendering problematic approaches that externalize preference formation. Similarly, power-based theories ignore how actors' positions depend on shifting resources and subjective perceptions of legitimacy. Power is constantly negotiated, and perceptions of power affect privatization demands and governmental responses. Self-interest is hard to identify and pursue in post-revolutionary environments. Therefore, analysis must consider how economic interests/preferences form and how power is perceived during transitions. This paper aims to show how ideology shapes preference formation and power hierarchies, which in turn shape post-communist ownership regimes.

Ideology and Policy Design

To understand why privatization policies favor certain groups, a theoretical framework that incorporates ideology is necessary. This paper compares Czech and Russian experiences.
Despite different economies, the political similarities, and equivalent policy starting points make them well suited for comparison. Liberal academic economists in government developed similar transformative mechanisms. Russian reformers acknowledged benefiting from the Czech experience. Both began reforms in similar international contexts, with similar conditions. Both implemented voucher-based mass privatization programs distributing property nearly for free. Unlike Hungary, Poland, East Germany, and Ukraine, privatization in Russia and the Czech Republic occurred quickly. The most interesting questions stem from the differences in actual (vs. proposed) programs, specifically, varied privileges to economic and regional actors/groups. This article uses ideology to answer this question, elucidating what determines new property rights regimes.

The term "ideology" is controversial. This article defines ideology as a system of collectively held normative and factual ideas, beliefs, and attitudes advocating social relationships and arrangements, aimed at justifying conduct proponents seek to promote/maintain. Ideologies interpret the world and prescribe formulas for change. "Ideology" is preferable to "ideas" because the article aims to identify mechanisms through which ideologies shape property reform. The article adopts a Hayekian, neutral notion of ideology, where ideology refers to a belief system without negative connotations. Ideology refers to ideas shared by many, such as liberalism, nationalism, etc., not individual beliefs.

Theoretical Framework

Ideological factors determine privatization programs and property rights systems in four primary ways:

Ideological foundations of theories: Ideology determines how privatization programs are drafted.
Ideological context: The ideological context shapes the definition of interests and the distribution of power in society.
Ideological foundations of compliance: Ideas influence how leaders attempt to gain support for and compliance with a new property rights system.
Ideological compatibility of programs and peoples: The compatibility between the ideas underpinning privatization policies and ideas and beliefs in society affects the ease of implementation and the distortion of privatization programs over time.

Elaborating the Theoretical Frameworks

Ideological Foundations of Theories

Ideology shapes program design. Economic liberalism shaped policymakers' decisions to base the new property system on private ownership. Ideas in liberal economic theories (private property leads to efficient resource use) influence regime change. Economic ideas identify broad approaches and also shape policies in technical sense. These ideas recommend that the state find mechanisms to advance the transformative process as quickly as possible. Normative conceptions of justice also determine policy designs.

Ideological Context

Ideological context shapes interests and power. It influences the legitimacy and strength of potential opponents of government programs. The sum of ideas held by elite and mass groups, expressed in political discourse and formal institutions, shapes how groups define interests. It determines key groups' power to pressure the government to accommodate their interests. The Czech anticommunist context weakened groups' power to revise privatization legislation. Organized labor and the industrial nomenklatura were especially affected. Anticommunism aggravated the managerial class's professional insecurity, who were reluctant to obstruct property reform. Many top managers were dismissed. Those remaining prioritized protecting their positions and chose not to reap greater benefits from privatization. Czech labor organizations were unable to forge alliances to influence economic reform. Many parliamentarians viewed trade unions as remnants of the past and refused to support labor's legislation. The weakness of labor is underscored by the workers’ inability to acquire rights to even the legal amount allotted to them.

Post-Soviet Russia didn't experience formalized anticommunism. The legislature elected under communism and the absence of screening laws ensured the professional security of power holders. The implementation of Russian privatization was confounded by the absence of formal mechanisms that could mute the parochial demands of the former nomenklatura or complicate the formation of antigovernment or antiliberal alliances. Because parliamentarians and managers were less troubled by professional insecurity, they made bolder claims for property. The privatization team confronted enormous political pressures and responded by seeking political support in exchange for granting widespread exemptions and special privileges to sectoral and factoral groups. The ability of Russian privatization officials to build support became dependent on enormous transfers to potential supporters within the industrial and financial elite, peaking with the 1995 loans for shares program.

Ideological Foundations of Compliance

Ideas influence how leaders try to gain support for and compliance with the new system. States can employ coercive, remunerative, and normative mechanisms to elicit compliance. Coercive mechanisms (threats of force) aren't particularly helpful. Remunerative mechanisms rely on economic benefits and special privileges. The transfer of enterprise shares through vouchers is a utilitarian compliance mechanism. Ideological reinforcement is important. Affected groups support programs because they consider it legitimate, fair, or appropriate. Leaders' ideological beliefs determine which reinforcing mechanisms they employ. This can affect resistance strength and program content. Czech leaders used anticommunist and pro-European ideas to develop reinforcing mechanisms. Throughout the privatization program, Klaus recognized the need to maintain his support base. Klaus would present his program as the most liberal approach, restructuring the economy according to “European” economic principles. It would return the country to its rightful place as a member of the Western or European community. In line with this, he emphasized the appropriateness of the approach. Russian reformers did little to promote the mass privatization process on ideological grounds. Officials relied on material incentives and eschewed campaigning. Instead, they directed their efforts toward limiting worker shares. They bought popular support with employee benefits and co-opted powerful groups by granting numerous concessions, privileges, and exemptions.

Ideological Compatibility

A lack of compatibility between a program's ideological basis and the ideas of elite and mass groups increases the cost of political reinforcement, and depending on the will and skill of leaders, this incompatibility can determine the extent to which liberal reform is distorted. The less the ideas underpinning a program fit with the ideas of different groups, the greater the cost of developing reinforcing mechanisms. In the Czech Republic, reformers strengthened privatization by portraying it as anticommunist and pro-European, thus essentially Czech. It was relatively easy to argue this due to communist system being imposed from without and needing to be replaced by a more Czech (European) system. This pro-Europe/Czech campaign wasn't limited to Klaus. This idea resonated with current popular notions of history and perceptions of geographical spheres, and with cultural and religious divides. By including the work "return," prevailing conceptions of geopolitical divisions were reaffirmed. Klaus also sought to link the programd to a widespread desire to differentiate the country from the eastern bloc. He also implied that those less committed to the free market would hold the country back, keeping it in the communist era.

A similar strategy would have been more complicated in Russia. Since the inception of market reforms, there has been some resistance to the rejection of the communist past in favor of a new Western liberal orientation, as it can be perceived as self-rejection and demeaning. A persuasive case in Russia that adopting capitalism was a return to a former self would require a substantial effort. Promoting such a campaign would have required not only willingness but also sufficient charisma and skill.

The malleability of social norms raises questions about ideas. How does the ideological context contrain structures? When there is no resonance when the ideas behind privitization and the ideas of major groups in society, and when political enterpreneurs can't construct effective ideological reinforcing mechanisms, then the incompatibility between the ideas of a program and the ideological context has a generative effect on policy, by altering and hindering the realization of the new property regime.

Through the development of this ideological legitimating campaign, the Czech reformers were able to bolster the privatization process, with Klaus using this to promote the building of what had been repressed. On the contrary, in post-Soviet Russian society could be easily portrayed as Western

Concluding Thoughts and Theoretical Applications

The prevailing ideological context might be described in cultural or political-cultural terms, if not for that fact that “political culture” traditionally con- notes a deep-rooted persistence of behavioral patterns. Unlike political culture, analyzing in ideological terms allows a larger role for leadership. Studying the ideological context is identifiable only when a particular ideology finds formal expression in public debates and in tangible institutions.

Schull's approach is useful, since it is hard to prove sincerity, but there nevertheless problematic because individual digressions from professed don't serve as evidence of insincerity. However, the liberal economic beliefs of Klaus etc. are understood as genuine, even if not always consistently applied to policy.
Ideology and Explanation
Ideological factors have received little attention because property rights analysis builds upon the techniques and the central assumptions of the dominant paradigm in economics. Later analyses of property rights formation by political economists, such as Gary Libecap, William Riker, Itai Sened, and David Weimer, extended but without breaking with the foundations of its earlier contributions. The lack of attention given to ideological factors is also characteristic of much of the literature in political economy. Some of the gaps in understanding political and economic phenomena are narrowed through a greater appreciation of the role of ideology.