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Did Markets Fail in Post-Soviet Economies?

According to Prof. Pavel Yakovlev, several post-Soviet economies have struggled to obtain prosperity since the breakup of the Soviet Union. Many argue that this is a failure of capitalism. To Prof. Yakovlev, this has not been a failure of capitalism, but rather, has been a failure to create the conditions necessary for capitalism.

To see whether or not this is true, Prof. Yakovlev looks for differences in GDP growth rates between post-Soviet countries. He finds that Azerbaijan and Poland have performed well, with average GDP growth rates of over 4% per year. These countries, in comparison to the other post-Soviet countries, have more economic and political freedoms, lower levels of corruption and inflation, and more transparent institutions. They also happen to be located on the outer edge of the soviet bloc, where corrupt Soviet style institutions did not take root.
Other post-Soviet countries like Russia, Ukraine, Belarus, Uzbekistan, and Turkmenistan have experienced dismal economic performance because they have failed to create a market friendly environment. They also, in comparison to the top performing post-Soviet economies, have high rates of corruption and inflation, low economic and political freedoms, and poorly defined and enforced property rights.
Markets did not fail in poorly performing post-Soviet economies, but rather, were never actually given a chance to succeed.

Did Markets Fail in Post-Soviet Economies?

In the last 20 years since the breakup of the Soviet Union, many post-Soviet economies like my home country Russia have struggled to reach economic prosperity. This has led some people to question the virtues of free-market capitalism. I would argue that it has not been a failure of free-market capitalism but rather a failure to create the right conditions where capitalism could prosper. Therefore the right question we should be asking is: Why did some post-Soviet economies grow so much faster than others?

The more successful transition economies are countries like Azerbaijan and Poland, with average GDP growth rates of over 4 percent. These transition economies also tend to be located on the outer edge of the Soviet bloc where corrupt Soviet-style institutions did not take root.

The more successful countries also tend to have more economic and political freedoms, lower levels of corruption and inflation, and more transparent government institutions. All these features help capitalism to succeed. Conversely, countries with relatively dismal economic performance, like Russia, Ukraine, Belarus, and some Central Asian states, have not grown this fast because they have not created a market-friendly environment. These poorly performing states tend to have high levels of corruption and inflation, low levels of economic and political freedoms, and poorly defined or enforced property rights.

All of these problems make capitalism less successful. In addition to that, oil revenues tend to mask the economic problems these nations face and make their governments more reluctant to reform. While many post-Soviet economies now have large private markets, they are still a long way from having a true market economy. In essence, the dismal economic performance of countries like Russia is the result of inadequate reforms rather than a failure of capitalism.

Free-market capitalism never had a chance to succeed in countries like Russia and it never will unless the market reforms are implemented.

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