A nice paper by Dalibor Rohac of King’s College London. In typical Why nations fail style he picks on the case of Czech and Slovakia. Though does not refer to works of A/R duo at all which is surprising.
The case is similar to WNF readers. You have two countries with very similar culture, institutional environment, same boundaries etc etc. And then they split. Why one performs better than the other?
In this case better is Czech and worse is Slovakia. Till 1993 they shared the same boundaries etc and then split post USSR collapse. However, Czech republic had better growth prospects over Slovakia. Why? It seems Slovaks had a higher anti-market bias:
In this paper, we analyze survey data from Czechoslovakia in the early 1990s and demonstrate that significant differences existed between the policy preferences of Czechs and Slovaks – in spite of living in a common state and being subjected to essentially the same policy shocks, the same institutional environment, and a shared culture over a period of 75 years. The Czechs were much more accommodative of the rapid transition towards the market economy, whereas the Slovaks retained a strong “anti-market bias.” The differences in policy preferences between Czechs and Slovaks do not go away even after controlling for socio-economic status and other individual-specific observables.
The existence of bias is puzzling because of common cultures etc:
The existence of a Slovak “anti-market bias” is puzzling. After all, the two Central European countries are alike in their culture, history and current problems, and a look at the current surveys of public opinion does not suggest a marked divergence of views on matters related to public policy. In 2009, for example, the average views on economic policy-related issues were closely aligned in the two countries, with Slovaks holding slightly more pro-market attitudes than the Czechs on most margins.
We assess several hypotheses that could explain the systematic differences in policy preferences: collective memory of the pre-communist era, extent of the market in the pre-communist era, religiosity and also the immediate structural characteristics of the early 1990s. It turns out that the economic conditions of the early 1990s have a much stronger explanatory power than the deeper historical characteristics of the two countries. Religiosity, for instance, does not seem to play a major role in explaining the variation in policy preferences across districts, although the share of protestant population is significant in some specifications. However, the inclusion of the 1994, district-level, unemployment rate reduces the Slovak “anti-market bias” by up to one half. This is consistent with the conjecture that the apparent bias might have been a result of the fact that Slovaks expected to be losers in the transition process.
Why were these economic conditions different? It is perhaps because of political institutions:
Did policy preferences matter in the context of the Czechoslovak transition? Given the identification issues this entails, we do not provide a definitive answer to that question. However, it is worth noting that the early stages of the economic and political transition in Czechoslovakia were marked by very different political developments in the two parts of the country. In the Czech Republic, Václav Klaus and his pro-shock-therapy, pro-market platform quickly became the leading political force in the country.
Simultaneously, in Slovakia, a political movement led by Vladimír Mečiar, who ascended to power quickly, displayed a much more cautious attitude towards markets and liberalization. The differences in opinions about the desirable form of federalism within Czechoslovakia, together with divergent views of specific policy matters, led to the split of 1993. For most of the 1990s, the two countries followed very different paths, both in terms of economic performance and policymaking.
The simultaneous occurrence of anti-market attitudes and anti-market policies in Slovakia does not establish a causal relationship, but it can be indicative of an intuitively plausible link between policy preferences and policy outcomes. After all, beliefs are seen by an increasing number of researchers as the key factor affecting the institutional choices made by different societies (Eggertsson 2005, Denzau and North 1994), including countries in transitions (Pejovich 2003).
Hence as the post title says it seems A/R duo are right. It is the differences in political instis which perhaps mattered. Czech followed a market path based on beliefs of political leaders whereas Slovakia went the other way. The author points both had different institutions during transition:
The Czech Republic and Slovakia emerged as two sovereign countries on 1 January 1993, and followed different trajectories in the aftermath of the separation. These differences are striking as the two countries had shared structural characteristics
and a legal system, and had both been subjected to the same initial reform package at the beginning of the 1990s. The output slump in Slovakia was deeper than in the Czech Republic, and the two countries also differed in the policies and institutions they adopted. For example, in the Czech Republic rapid and mass privatization, including voucher privatization, was an important component of the reform process.
In Slovakia, direct sales to domestic investors were the dominant privatization method and they were used as a tool to build political support among potential party donors. (Haughton 2001, p. 749). Thus, by 1995, the inward stock of FDI in
Slovakia was close to just one sixth5 of that in the Czech Republic.
Things turned around for Slovakia as politics got thing right:
Although the Slovak governing coalition, displaying anti-market and authoritarian tendencies, enjoyed public support, a broad group of opposition forces was able to replace it in the general election of 1998. The new political representation later reclaimed Slovakia’s place in the accession talks and proceeded with many overdue economic reforms – bank restructuring and privatization, bankruptcy law, and eventually the daring flat tax plan7 which would turn Slovakia into a premier destination for foreign investors.
The author uses a survey to show this anti-market bias in Slovaks:
Our data come from the survey Economic Expectations and Attitudes, run by the Institute of Sociology at the Czechoslovak Academy of Sciences from 1990 until 1998. The early waves of the survey (until 1993) covered both republics, after the split the survey provided data only for the Czech Republic. The survey covered a representative sample of the Czechoslovak – and later Czech – population,9 asking a variety of questions related to people’s perceptions of the changes the country was undergoing, their views on different economic policies, and broader questions about social justice and the role of the government in the economy.
Well not sure why the survey was really needed. The reason for Slovak decline is all there in the literature explained before. It looks like a case of mainly political institutions…However, as author does not have straight forward data to test it, he looks at the survey:
anecdotal evidence suggests that Slovak nationalism played an important role in the divergent policy preferences in the two countries. The leading reform proposals articulated by Slovak politicians and economists reflected the belief that different economic reforms were needed to address Slovak specificities, and that the issue of economic transition was secondary to the problem of the constitutional arrangement of Czechoslovakia.12 Unfortunately, with the available data, we do not have a straightforward way of testing for this mechanism, which, at its surface, sounds intuitive and plausible. However, the general insight implied by our findings is that the divergence in beliefs seems to be more a result of the immediate economic, structural and political conditions of the late early 1990s, rather than of deeply entrenched cultural or historical differences between the Czechs and the Slovaks.
Superb…
Looking at the contents of WNF book, it seems that case of Czech and Slovakia has not been discussed. I have not read the book and so not sure at all. If not in the book, may be the awesome A/R duo can look at this example as well…
September 6, 2012 at 11:46 pm |
Fascinating work, but I so wish there could be more experimental work in political econ, a la Ostrom and List. Sweeping ideas are all very well, but experiments ultimately carry the day.