Article Summary: “Imposed Institutions and Preferences for Redistribution”, Alberto Chong and Mark Gradstein

Summary of JOIE article “Imposed Institutions and Preferences for Redistribution”, by Alberto Chong (Georgia State University, USA) and Mark Gradstein (Ben Gurion University of the Negev, Israel). The full article is available on the JOIE website.

In two contrasting classical views – Neoclassical, and Marxist and Weberian traditions – it is strongly argued that institutional characteristics are important factors that contribute to economic outcomes. There is, however, an important distinction between these two schools of thought. While the Neoclassical tradition argues that exogenously determined preferences determine institutions and economic outcomes, the Marxist and Weberian traditions hold the reverse view arguing that the imposition of institutions shape preferences, thereby affecting economic outcomes. Using an arguable exogenous experiment in institution imposition between Finland, a capitalist economy, and the Baltic States, ex-communist countries, this paper investigates the latter hypothesis of whether the imposition, or transplantation, of economic institutions shapes individual preferences, and hence contributing to the durability of such institutional change.

Recent studies have found mixed evidence on the durability of institutional changes on individual preferences and economic outcomes. Corneo and Gruner (2002) and Alesina and Fuchs-Schuendeln (2005) study the attitudes toward the role of the state in the 1990s between West European market economies and East European former communist countries; their findings show that individuals in ex-communist economies tend to favor state ownership. Some argue that this is evidence of the durability and indoctrination of the previously imposed communist regime. On the other hand, a series of historical events also provide support for the contrary argument that some institutional paradigms may be weak and temporary. In particular, the absolution of the Soviet Union, followed by a number of nations transitioning into market economic systems, show that previously held communist institutions did not endure. Therefore, changes in preferences toward egalitarian distribution of resources, among other policies, did not persist over time; on the contrary, there was a shift in preferences which led to the transition toward capitalism of about a third of the world’s nations.  This paper contributes to the literature studying the determinants of institutional quality, and institutional persistence through changes in individual preferences.

The main question that is addressed in this paper is to what extent imposed institutions are durable, within the context of transition economies from the former communist bloc. In particular, the focus is on inequality and competition as economic drivers, as well as state involvement in the ownership of assets. Historical circumstances allow for the investigation of this question by comparing preferences among individuals in Finland and the Baltic States, the latter composed of Estonia, Latvia, and Lithuania. All of these countries were once part of Imperial Russia until the time of the Russian revolution of 1917, which serves as basis for a common historical, economic, and social background. Upon their independence from Russia, there was a rapid establishment of national governments, and unique institutions to form respective identities. All countries adopted a democratic form of government, and developed their economies from mostly agricultural trade to a more diversified industry. In 1940, as the Soviet Union gained geopolitical momentum, it re-acquired governance over the Baltic states through an agreement with Germany. Therefore, two sets of countries which shared common democratic values and market-oriented economies during most of the first half of the 20th century, experienced a sharp divergence in institutional frameworks. The “experiment” of the imposition of communist institutions in the Baltic states, followed by the dissolution which came about with the end of the Soviet Union in the early 90s, is the underlying premise that is used to study differences in institutional preferences between Finland and the Baltic states.

The main sources of data for this study are the European and World Values Survey (WVS), two worldwide surveys conducted by the Inter-University Consortium for Political and Social Research (ICPSR). These surveys collect information on topics including the economy, politics, and identity, and also socio-economic background information of participants. This individual, cross-national survey has been conducted for 4 rounds, or waves, during the years 1981 (Wave 1), 1990-1993 (Wave 2), 1995-1997 (Wave 3), and 1999-2001 (Wave 4). Data is collected from face-to-face interviews from a representative sample of the adult population, ages 18 to 83, from developed and developing countries. Overall, there are more than 267,000 individual responses, or approximately 66,000 participants per survey. The main questions of interest elicited information about the attitudes toward the following topics: income redistribution and its role as an economic incentive, competition and how it may be used to promote innovation, and state ownership of business and industry. As stated above, the main study uses data from Finland and the Baltic states, although more general country groupings are also used for robustness checks.

Preliminary examination of the data by survey waves shows a positive correlation between length of exposure to communist institutions and approval of inequality and competition, as well as lower acceptance of private ownership. These general results are confirmed by the main empirical estimation, which focuses on the Baltic states and Finland. Estimates from ordered Probit regressions show that survey respondents from the Baltic states are more likely to approve of large income differences, and agree that competition is good. In addition, results show that individuals from the Baltic states have a lower probability of approving the increase of private ownership. Further time trend examinations of these differences show a constant deviation in preferences over time. However, individuals in the Baltic states show stronger approval during the transitional decade of the 90s. Moreover, and consistent with earlier findings, results suggest that individuals who are young, employed, highly educated, male, and employed in white-collar occupations, tend to favor capitalist institutions, namely inequality, competition, and private ownership.

The role of trust and confidence in government are explored in an effort to explain the seemingly contradictory findings of higher approval of competition and inequality in the Baltic states, coupled with lower sentiments towards private ownership. Results from these estimations show that these institutional characteristics are associated with pro-capitalist preferences. However, they do not fully account for the differences between respondents from the Baltic states and Finland.

This paper studies whether the imposition of institutions has a durable impact on individual preferences. In particular, it investigates the attitude differences between the Baltic states, former communist countries, and Finland, a capitalist economy. Results show that, compared to the Finnish, respondents from the Baltic states favor competition and income inequality as economic incentives. However, they are reluctant to abandon ideals of public ownership of assets.

Alberto Chong (Georgia State University, USA) and Mark Gradstein (Ben Gurion University of the Negev, Israel)

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