Privileged Privatization

It's a dirty job, but somebody's got to do it.


On March 22, I met with Soviet economist Stanislav Shatalin, co-author of the 500-Day Plan to move the economy to a market base that Mikhail Gorbachev first endorsed and then dropped. Shatalin was pessimistic about the Soviet economic outlook and said he would not be surprised if output fell 30 percent this year. Shatalin's guess is as good as anyone's. There is little doubt that official Soviet output is declining, as de facto privatizations divert more state resources into unofficial channels, or that costs in the private sector are high due to bribery and extortion.

Although the near-term outlook is dismal, fundamental changes have occurred. Politically, communism has been discredited and, in addition, Kremlin rule (whatever its political hue) over the republics has been called into question. It is hard to see how there can be both a Russian government and a Soviet government.

Economically, a process similar to the enclosures, which created private property and exchange rights out of European feudalism, is under way. The feudal lords of the manor controlled property they did not own—that was not, in fact, owned by anyone. They were therefore able to make land private simply by claiming the right to sell it and forcibly evicting the peasants who occupied it. A similarly rough process of making unowned resources private is taking place in the Soviet Union.

The de facto privatizations, which have long characterized a system in which people who control resources and budgets succeed in diverting them from official purposes, have been accelerated by glasnost and perestroika. Elements of the old order are plundering the system, while the center loses control and goods disappear from state stores.

The private sector is growing. Reforms, such as leasing and the right to establish cooperatives, have enabled well-placed individuals to use various devices to convert state property to their own. Cooperatives are created that have parasitic relationships with state enterprises, enabling them to divert state property to the cooperatives' owners. Other state properties disappear by being converted into joint stock companies that, in turn, create a bank that purchases the holdings, thus disguising the transfer of ownership to local power brokers.

Economic reformers complain about these de facto privatizations and accuse Gorbachev of dragging his feet on real reform in order to let his Communist cronies grab economically what they are losing politically. At the moment, there seems little to constrain this process. Effective government intervention is difficult because of the unresolved competing claims of the Kremlin and the republics. Even though the new democratic politicians realize that the de facto privatizations make them look politically ineffective, they rationalize their inaction on the grounds that "communists are turning into capitalists," which is all for the good.

The growing diversion of resources has meant that even managers who continue to operate within the official economy have to scramble to obtain inputs by increasing their connections to the informal economy. One wonders if the coal strike will be settled when the miners are privately approached to sell the resources that they control.

The longer the de facto privatizations continue, the more difficult they will be to reverse, short of a civil war that defeats the new owners. Until the question of political power is resolved, government lacks the ability to institute a sweeping de jure treatment of property. Moreover, the new owners seem prepared to back whichever government prevails.

Competing governments and autarkic developments make a fertile ground for the enclosures, and we may witness the transformation of the Soviet Union largely through unofficial means. The ability of officials to establish their economic independence is enhanced by the absence of a rule of law. Lenin himself sowed the seeds for the decline of centralized Kremlin control when he created the totalitarian Communist Party "not limited by any laws nor by any absolute rules." Apparatchiks discovered that the absence of a rule of law meant there was no institutionalized process for holding them accountable when they used their positions for personal enrichment and created personal fiefdoms. As they learned that they could dive and rechannel state resources, they created khanates, satrapies, a robber baronies that feudalized the Soviet Union and established an alternative distribution system.

A goal of Gorbachev's policy was to recentralize the power usurped over the years by the system's officials—a difficult task, as the unofficial fiefdoms often overlap official structures. But the economic reforms did not go far enough to be effective and succeeded mainly in accelerating the diversion of resources from official channels. Similarly, Gorbachev's political reforms resulted in the republics' making claims at the expense of the Kremlin. People in a position to do so are taking advantage of confusion and chaos to grab property. Thus, the Soviet Union is being privatized as a result, in large part, of governmental failure and paralysis. Our own interventionists will find the result distasteful, but it is not an outcome that should surprise or distress libertarians.

Former Assistant Treasury Secretary Paul Craig Roberts is the William E. Simon Fellow in Political Economy at the Center for Strategic & International Studies in Washington, D.C.