THE CASE FOR REDISTRIBUTIVE LIBERALISM
in the Journal Economic Systems, March 1998
by the Osteuropa Institut,
Any policy mixing market liberalization with egalitarian redistribution may seem unbalanced, even self-contradictory. In fact, there is an important tradition of "redistributive liberalism" associated with the growth of capitalist relations, going back at least to the redistribution of lands in the English Civil War and French Revolution (Schmidt 1997).
In the mid-19th century, John
Stuart Mill, a founder of the Liberal Party in
Every full grown man or woman ... would be secured in the unfettered use and disposal of his or her bodily and mental faculties; and the instruments of production, the land and tools, would be divided fairly among them, so that all might start, in respect to outward appliances, on equal terms.†††††††††††††††††††††††† (Book II, Chapter 1, "On Property")
So while the question of "the least growth inhibiting redistribution" posits a tradeoff between equality and growth, Mill, Bentham, and other liberals considered an egalitarian distribution of wealth important for justice and for growth in what we now call "human capital." (Mill did not argue, however, for the equalization of incomes ex post.) This theme is consistent throughout what became, for the English-speaking world, the standard economic textbook of the late 19th century (Riley 1994, xviii).
††††††††† The neoclassical model of the 20th century pointed to a quite different policy, one of distributional indifference. Assuming (i) convex preferences and production, and (ii) perfect information, efficiency is unaffected by the initial distribution of wealth. In the absence of such nice assumptions, of course, efficiency may well be affected.
With imperfect information, financial assets usually determine oneís access to credit. In a new international data set compiled for the World Bank by Deininger and Squire (1996, 1997), an initial inequality of land holdings is found to be a major barrier to growth. Of the 15 developing countries with Gini coefficients on land in excess of 70 percent, the authors find that only two grew at an annual rate of more than 2.5 percent over the period from 1960 to 1992.
The "contradiction" between
economic growth and redistribution, therefore, is often a conflict between
political interests, not a self-contradictory economic logic. The forces for
redistribution of land are usually hostile to free markets, as in the failed
Mexican ejidos or Soviet kolkhozes. The
elites favoring liberalization, on the other hand, can usually block any
substantial redistribution of wealth, as in the tepid land reforms of the
The transitional regimes in
The success of these reforms is well-known:
Most Western economists concentrate on getting the domestic prices "right" and see distributional issues primarily as a political constraint, with a shadow price that should be minimized. In this, of course, they have consistently applied neoclassical theory. The Chinese and Vietnamese reformers, by contrast, had neither neoclassical nor Marxist theory to guide their transition. As Benziger (forthcoming) puts it, they were wise enough to realize that they did not know what they were doing. Even the dramatic Chinese agricultural reforms were not really a "big bang", but a series of piecemeal measures stretching out over nearly a decade. They were, in the Chinese phrase, "crossing the stream by reaching for the next stone."
It will be objected that the new governments
of CEE-FSU did not have political of such a slow inductive approach, and it is
true that the absence of a strong state has hurt the coherence of any
transition. But it is those countries of CEE with the strongest democratic movements pre-1989 that have built the most coherent states
post-1989, and this legacy could have been strengthened. The new governments of
CEE-FSU were in a position to deny compensation to the old "owners"
of land and capital, and thrown their economies open to the populationís
enthusiastic, if naive, free market embrace. And like the post-communist
Instead, most of the new political leaders chose the quieter, more familiar, and more personally lucrative path of "insider" privatization, ceding assets to existing management and workers. Vaclav Klaus, the recently fallen Czech prime minister, stood virtually alone in his bold mix of redistribution with laissez-faire. Klausís stance recalled an earlier, heroic period of bourgeois virtue, one for which many, East and West, seemed nostalgic. His "capital reform", the mass distribution of equity through vouchers, was the closest approximation to the East Asian land reforms. Klaus (1995) explicitly justified this redistribution as creating mass support for privatization.
But the redistribution of equity is not so simple as the redistribution of land, and Klaus was not so austerely liberal as he seemed. State banks controlled the mutual funds in which most Czechs placed their newly minted vouchers, and these proved reluctant to liquidate "their" former state industries. An unsustainable current account deficit, insider-trading, and banking scandals were the result, and these finally brought down the Klaus government. Many analysts now blame Klausís debacle on his egalitarian distribution of Czech vouchers.
There is no doubt that a broader distribution
of capital assets makes oversight and control more difficult. But this is an
issue that is far from settled within the mature market economies, as is clear
from debates around the power of institutional investors in the
Any review of Czech voucherization must first of all acknowledge the impressive gains in political stability. Earle et. al. (1997) use a 1996 survey to show that the majority of Czech citizens who retained and reinvested their original voucher shares were far more likely to express "strong support" for the economic reforms, and overwhelmingly more likely to oppose price controls, than the minority who had sold their vouchers immediately for cash. One must question the direction of causality here, but the broad appeal of the Czech voucher scheme makes it unsuitable as a screening device for committed liberals. Over 80 percent of citizens were still holding some of their original vouchers by early 1996, and over 50 percent still held them all (Earle et. al. 1997, p. 44).
This broad political legitimacy, and what was
the longest-surviving government in CEE until its recent fall, made the
But in addition to this remarkable support for reform, the Czech share redistribution has been accompanied by (i) admirable growth, (ii) low unemployment by OECD standards, and (iii) astonishingly low inequality.
Growth: GDP per capita growth rates adjusted for purchasing
power are available from the CIA (1996) for 1993 through 1995. Czech growth
averaged 3.7 percent in these years, with
Unemployment: The projected unemployment of the
Inequality:††† The World
Bank inequality data of Deininger and Squiles (1996) show the
Ranking income distributions simply in terms
of Gini coefficients cannot be justified in terms of
any concave welfare function, as is well-known (Atkinson 1970). Nevertheless,
the relatively slow rise of the Czech Gini, when
combined with its steady economic growth, means that the overwhelming majority
Although Czech growth is likely to fall in 1998, the performance of the past four years is impressive. Whether this momentum can be regained is now very much in question. But in any case, the goals of Czech macroeconomic policy -- restructuring without the demand shock of mass unemployment Ė are probably impossible without their corollary, the massive redistribution of assets.
Why should macroeconomic success be linked to redistribution? In addition to the broader access to credit made possible by broadly distributed financial assets, as in developing country land reform, there are other issues specific to "capital reform." The problems of oversight have been mentioned, but there are also efficiency gains from diversification and liquidity. Capital markets need the risk-reduction and liquidity that can only be achieved by portfolios that are both diversified and widely held, as opposed to holdings that are highly concentrated and limited to a few insider owners.
While failing enterprises were propped up for
too long in the
That market imperfections determine the most efficient distribution of rights and liabilities is the starting point for the microeconomic analysis of property rights. The Law and Economics school has seen the common law as "an attempt to increase the value of [a] resource by assigning property rights to those parties ... in whose hands the rights are most valuable" when transactions costs preclude their efficient transfer (Posner 1972, pp. 17-18). A similar research program has, until recently, not been directed at the most fundamental fact of property, the distribution of wealth itself. If financial markets are assumed to have no serious transaction costs, then the question of an efficient distribution of wealth never arises.
Classic liberals like Jeremy Bentham and John Stuart Mill knew better: distribution matters. Real markets "care" about the distribution of assets, risks, and information. In the laboratory of capitalismís most recent revolutions, Millís proposition is being tested: for liberal property relations to flourish, property is best distributed liberally.
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