Why did the transition from socialism to capitalism result in improved growth in some countries and significant economic decline in others? Three main arguments have been advanced: (1) successful countries rapidly implemented neoliberal policies; (2) failures were not due to policies but to poor institutional environments; and (3) policies were counterproductive because they damaged the state. We present a state-centered theory, and empirically demonstrate for the first time one of several possible mechanisms linking neoliberal policies to poor economic performance: mass privatization programs, where implemented, created a massive fiscal shock for post-communist governments, thereby undermining the development of private sector governance institutions and severely exacerbating the transformational recession. We perform cross-national panel regressions for a sample of 30 post-communist countries between 1990 and 2000, and find that mass privatization programs negatively affected economic growth, state capacity, and property rights protection. These findings are corroborated with firm-level data from a representative survey of managers in 3,890 companies operating in 24 post-communist countries. We show that within countries which implemented mass-privatized programs, newly privatized firms were substantially less likely to engage in industrial restructuring but considerably more likely to use barter and accumulate tax arrears than their state-owned counterparts.3 Between 1989 and 1991, the Soviet empire disintegrated. Western-trained neoliberal economists provided the blueprint for constructing capitalism amidst the ruins of state socialism, advocating "shock therapy": rapid privatization, liberalization of prices and trade, and fiscal and monetary austerity (UNDP 1999). Although sociologists and economists critiqued these policies and their pace (e.g. Stark 1992; Burawoy and Krotov 1992; Kornai 1990 Kornai , 1995, a group of neoclassical economists at Harvard believed that they were necessary; this perspective was also dominant among economists working for international financial institutions (Cohen 2001;Wedel 2001). 1 As Lawrence Summers put it, "Despite economists' reputation for never being able to agree on anything, there is a striking degree of unanimity in the advice that has been provided to the nations of Eastern Europe and the former Soviet Union. ... [P]rivatization, stabilization, and liberalization ... must all be completed as soon as possible " (1994: 252-253). Most postcommunist countries implemented versions of the shock therapy package. Of the three major policies, privatization proved to be the most difficult to implement and yielded the greatest variance in outcomes.Despite initial optimism, economic performance was disastrous in most post-communist countries, as shown in Figure 1. Between 1990 and 1996, per [Insert Figure 1 here]To evaluate the competing explanations of this variation, we first review the initial theories of transition and the leading 'post-mortem' explanations ...

During the transition to capitalism, the postcommunist countries have experienced devastating rises in mortality, although there has been considerable variation within and between countries and regions. Much of this population-level variation remains unexplained, but alcohol and psychological stress are found to be major proximal causes of rising mortality rates. The authors show that implementation of neoliberal-inspired rapid, large-scale privatization programs ("mass privatization") was associated with significant declines in life expectancy, as well as with greater alcohol-related deaths, heart disease, and suicide rates. The authors interpret these findings as evidence that rapid organizational reform created excess psychosocial stress, which, consistent with the public health literature, increases risk of death at the individual level. However, they also find that rapid privatization modestly contributed to a decline in health care resources, such as the number of physicians, dentists, and hospital beds per capita, although there is weak evidence that these reductions in health system capacity explain substantial differences in mortality at the country level.

Economists have used cross-national regression analysis to argue that postcommunist economic failure is the result of inadequate adherence liberal economic policies. Sociologists have relied on case study data to show that postcommunist economic failure is the outcome of too close adherence to liberal policy recommendations, which has led to an erosion of state effectiveness, and thus produced poor economic performance. The present paper advances a version of this statist theory based on a quantitative analysis of mass privatization programs in the postcommunist world. We argue that rapid large-scale privatization creates severe supply and demand shocks for enterprises, thereby inducing firm failure. The resulting erosion of tax revenues leads to a fiscal crisis for the state, and severely weakens its capacity and bureaucratic character. This, in turn, reacts back on the enterprise sector, as the state can no longer support the institutions necessary for the effective functioning of a modern economy, thus resulting in deindustrialization. Using cross-national regression techniques we find that the implementation of mass privatization programs negatively impacts measures of economic growth, state capacity and the security of property rights.