ASRXXX10.1177/0003122414568649American Sociological ReviewWalder et al. 5686492015 American Sociological Review 2015, Vol. 80(2) 444 –468 After State Socialism: © American Sociological Association 2015 DOI: 10.1177/0003122414568649 The Political Origins of http://asr.sagepub.com Transitional Recessions Andrew G. Walder,a Andrew Isaacson,a and Qinglian Lua Abstract Transitions from state socialism created a startling range of initial economic outcomes, from renewed growth to deep economic crises. Debates about the causes have largely ignored the political disruptions due to regime change that coincided with sudden initial recessions, and they have defined the problem as relative growth rates over time rather than abrupt short-run collapse. Political disruptions were severe when states broke apart into newly independent units, leading to hyperinflation, armed warfare, or both. Even absent these disruptions, the disintegration of communist parties inherently undermined economic activity by creating uncertainty about the ownership of state assets. The protracted deterioration of the party- state prior to the breakup of the Soviet Union generated widespread conflict over control of assets, which crippled economic activity across the Soviet successor states. A more rapid path to regime change was less disruptive in other post-communist states, and the problem was absent in surviving communist regimes. Comparative accounts of regime change frame an analysis of panel data from 31 countries after 1989 that distinguishes the early 1990s from subsequent years. A wide range of variables associated with alternative explanations have little evident impact in accounting for the onset and severity of the early 1990s recessions. Keywords regime change, state socialism, transitional economies, post-communism, market transition The worldwide transformation of state social- depth of these recessions usually went far ism during the 1990s yielded a series of sur- beyond prior expectations (Ericson 1998; prises, generating widespread controversy Hanson 1998). Sharp recessions in the first and an enduring intellectual puzzle. The dis- states to emerge from the revolutions of 1989 tortions typical of Soviet-style economies led were followed by much deeper economic most analysts to expect short-run hardship as crises in new states that emerged from the manufacturing was restructured to correct decades of overinvestment in heavy industry, and as a shift to market pricing in economies aStanford University of shortage led to price inflation and lowered living standards (Clague 1992; Kornai 1994; Corresponding Author: Andrew G. Walder, Department of Sociology, Leitzel 1995; Winiecki 1991). All but one of Building 120, Stanford University, Stanford, CA 28 post-communist nations suffered immedi- 94305-2047 ate economic downturns, but the severity and E-mail: [email protected] Downloaded from asr.sagepub.com at Stanford University Libraries on March 24, 2015 Walder et al. 445 breakup of the Soviet Union. In contrast, the causes occurred after the worst recessions had few surviving communist autocracies that already passed. restructured their economies avoided reces- We argue that initial recessions are a direct sions and grew more rapidly, despite once expression of the political disruption that being considered the least promising setting accompanies regime change, and that state for market reform. socialist economies were particularly vulner- Among more than 30 transitional econo- able to the collapse of communist parties. The mies there are two groups of outliers. The most obvious disruptions occur when a first is the three surviving communist auto- national state breaks up into newly independ- cracies (China, Laos, and Vietnam), which ent units—often leading to hyperinflation and doubled their real per capita gross domestic at times to civil war or armed conflict over product (GDP) from 1990 to 2007. The sec- national borders. Our primary interest, how- ond group is the 15 successor states of the ever, is in a feature of state socialism whose former Soviet Union, whose economies col- implications are less obvious. The political lapsed in the early 1990s, finally regaining organization of state socialism made its econ- prior levels of GDP per capita in 2005. omies unusually vulnerable to regime change. Between these two extremes is a diverse Communist parties played a central role in group of post-communist states that suffered defining and enforcing the state’s property shorter and less severe recessions, regaining rights over assets—especially important 1990 levels of GDP per capita by 1999 (World because almost all assets were the property of Bank 2012). the state. When a communist party’s capacity An extensive literature has reached little to perform this role declined for a prolonged consensus about why these three groups period before its eventual collapse, economic diverged so dramatically (Orenstein 2009). activity was undermined by economy-wide There are three competing explanations. The uncertainty over ownership claims. This was first is policy choice—the extent, timing, and a problem in all communist regimes that col- pace of foreign trade, and price liberalization, lapsed shortly after 1988, but the political financial deregulation, and privatization—and decline of the Soviet Union in its final years there are strong disagreements about the was far more protracted and severe than in impact of different approaches. A second con- other communist regimes, where regime cerns initial economic circumstances: basic change was much more abrupt. economic endowments, regional location, ini- Our explanation reorients efforts to under- tial levels of urbanization and industrialization, stand these initial outcomes in several ways. and accumulated distortions due to socialist It shifts attention from the course of market development. A third centers on political insti- reform to developments in the immediately tutions: the evolving features of new govern- prior period; from initial economic conditions ments and their capacities to formulate and to prior political developments; and from enforce effective economic policies. questions about the speed and extent of pri- We propose a new explanation that draws vatization to the more fundamental question a sharp distinction—rarely made in the litera- of a state’s capacity to enforce property rights ture—between the causes of higher or lower of any kind. growth over time and the causes of early reces- sions. Most explanations for post-socialist eco- nomic performance are about conditions SPECIFYING THE PROBLEM favorable to higher growth rates over time, or To appreciate the importance of distinguish- recovery from initial recessions, rather than ing the determinants of growth over time explanations for initial economic crises. In from the causes of immediate and sharp eco- many cases—particularly policy choice and nomic downturns, we make clear the timing new political institutions—the proposed and magnitude of initial recessions. Figure 1 Downloaded from asr.sagepub.com at Stanford University Libraries on March 24, 2015 446 American Sociological Review 80(2) .1 .05 0 −.05 −.1 Annual Growth Rate −.15 −.2 −.25 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year Surviving regimes (n=3) Former USSR (n=15) Other Post−communist (n=13) Figure 1. Annual Percent Change in Real Per Capita GDP, by Country Group, 1989 to 2007 Source: World Bank (2012) and European Bank (1999). displays the annual change in real GDP per due to the magnitude of the pre-1996 reces- capita in these three groups of countries. sions. Efforts to explain the differences across Growth rates in surviving communist states these three groups should therefore focus on dipped on two occasions but they never went understanding the causes of these recessions. into recession. Almost all of the post-communist states, by contrast, experienced sharp contrac- tions that coincided closely with regime THREE POLITICAL change.1 The decline began in 1990 in the TRAJECTORIES Soviet Union and worsened in its successor The fact that steep economic declines coin- states until 1992, when the economies of the cided closely with regime change suggests entire group shrank by over 20 percent in a one should look for their causes in events that single year. These economies finally began to coincided closely in time with the onset of grow again in 1996, but not before their out- regime change. Retrospective histories of the put had shrunk by an average of 50.3 percent decline of the Soviet Union highlight two (World Bank 2012). Economic crises in the features of that state’s deterioration that stand other post-communist states began at the in marked contrast with all other states that same time and reached their low point two experienced regime change. The first feature years earlier. By 1994, these states were is a set of ill-conceived economic reforms growing once again, but not before their that undermined the communist party’s con- economies had contracted by an average of trol over state assets several years before the 20.1 percent (World Bank 2012). After 1996, regime’s collapse. A reform decree in early growth rates rapidly converged, and after 1988, designed to overcome bureaucratic 2000 the highest growth rates were in the resistance, withdrew party organizations from former Soviet republics. The large differences oversight of state enterprises and their man- in cumulative trends are almost exclusively agers.