The Varieties of Capitalism Dichotomy (and Beyond) in Post-Communist States

The dissolution of the Soviet Union in 1991 gave rise to fifteen independent states, as well as a challenge for those who study national political economies. Until the time when the USSR disintegrated, its diverse fifteen constituent republics were tightly bound into the framework of a centrally planned, integrated, socialist economy. When the Soviet flag was lowered over the Kremlin for the last time and market capitalism suddenly entered the picture, they all found themselves confronting the same economic question: what next?

The ways in which the successor states answered this question vary widely, as does the available literature published in response to their actions. In this paper, I will primarily utilize the Hall and Soskice interpretation of the Varieties of Capitalism (VoC) construction to address several questions: Why did the various post-communist states choose their particular variants of capitalism? What factors were involved? Furthermore, can we effectively categorize the post-communist states using the Hall and Soskice dichotomy, or are they (and transitional economies in general) not open to this interpretation?

Two former republics, Kazakhstan and Estonia, will be used as case studies. These two nations are quite different from each other in many respects. Kazakhstan, for instance, is itself larger than Western Europe. Bordering two important trade partners, Russia and China, it is Central Asia’s dominant economy due to resource wealth and, in large part, to government support of the country’s private sector. Estonia, on the other hand, is smaller than Vermont and New Hampshire combined. It joined NATO and the European Union in 2004 and the OECD in December 2010, and today boasts the highest GDP per capita of the ex-USSR republics.[1] Furthermore, this success was attained quickly and largely without the natural resources that benefitted other countries such as Kazakhstan.

This paper will analyze the efficacy of utilizing VoC in the context of these post-communist nations, before exploring other factors not covered by VoC that could help to explain their post-communist economic trajectories.

I. The Varieties of Capitalism Framework

Since its publication ten years ago, Hall and Soskice’s An Introduction to Varieties of Capitalism has become one of the most influential and highly cited studies of the subject. It focuses on the problem of coordination: how do firms coordinate their actions, both internal (with their own employees) and external (with trade unions, suppliers, clients, shareholders, governments, etc.)? To counter coordination problems – shirking, moral hazard, and other issues of game theory – firms try to establish a comprehensive system of relationships. These relationships, according to Hall and Soskice, are developed in five main areas: the national financial system, the internal structure of the firm, industrial relations, education and training systems, and inter-company relations.[2] Based on the predominate types of relationships, national economies can then be grouped into two categories: liberal market economies (LMEs) and coordinated market economies (CMEs).

LMEs include the US, Canada, and the UK, and tend to feature firms that coordinate based on a system of hierarchies in the realm of competitive markets; their relations with each other are largely shaped by market forces. These firms are generally more agile in responding to market forces, making them fast-moving and significant actors in the modern era of globalization. Executives in LMEs have a larger capacity for unilateral action, and can often decide strategy without, for example, consulting shareholders, conducting market research, or seeking approval from labor unions. In addition, they have stronger control over company resources like human and financial capital, which are by and large fluid and can often be redirected by executive order, and they are usually better at developing radical innovation strategies. However, LMEs often have higher levels of income inequality, lower levels of coordination between the firm and unionized labor (which can lead to problematic labor relations), and lower levels of employment safety. The market is the main instrument of economic coordination, and through it, firms seek to resolve coordination problems with both internal and external actors.

CMEs include Germany, Japan, and the Scandinavian nations. Most relationship networks there are not based in the market, but rather are dependent upon high levels of economic coordination and cooperation. Firms in CMEs usually have some sort of tripartite arrangement between firms, labor, and government that regulates and normalizes economic relations. While these firms may still compete with each other, their relationships tend to be built more upon collaboration. Moreover, this coordination among companies, combined with the powerful influence of labor unions on equalizing wages at various firms across a given industry, often means that firms can offer employees strong, trade-oriented educations with little fear of poaching. Firms in CMEs often strategically coordinate their actions through non-market institutions.[3] While not as well suited for revolutionary innovation, CME firms tend to excel at incremental innovation in goods and services.

To understand how Estonia and Kazakhstan might fit into this categorization, both countries must be examined with respect to the five salient spheres identified by Hall and Soskice: the financial system, internal firm structure, education and training, industrial relations, and inter-firm relations.

II. Financial Systems

Kazakhstan’s post-Soviet financial system displays tendencies befitting both LMEs and CMEs, but with an emphasis on the former. Privatization programs were implemented as early as 1991, and by 1995, only 40% of enterprises were state-owned, a figure that was much lower (3%) in the agricultural sector.[4] This process continued throughout the 1990s, as noted by then-First Deputy Prime Minister Oraz Jandosov:

…Destatization and privatization proceeded vigorously, the country’s financial institutions were strengthened, and the necessary legislative, normative and regulatory framework for development of the Kazakhstan economy’s private sector was established.”[5]

The move to floating exchange rates was completed in 1999, while price liberalization was initiated in the early 1990s. Kazakhstan eliminated state-administered prices in the country’s Consumer Price Index (CPI); by comparison, in 2004, administered prices made up 13% of the Russian CPI and 10.9% in the Czech Republic.[6]

Consistent with an LME emphasis on the rule of financial institutions and the prerogative of shareholders, key legislative improvements that increased shareholders’ rights and access to corporate information have been made, and rules regarding accounting and financial reporting have been brought more closely in line with international standards for shareholders’ benefit.[7] By government decree, the Regional Financial Center of Almaty (RFCA) was created in the nation’s largest city in 2007, with expectations of becoming the financial hub of Central Asia. RFCA aims to develop the securities market in Kazakhstan and further integrate it with international capital markets, create and develop long-term financial institutions, and generally act as a conduit for the international markets in Kazakhstan and for Kazakh investments on the global financial stage.[8]

While the macroeconomic framework put in place for the Kazakh financial system might suggest that it belongs in the LME category, there are a few important caveats. As noted by Charman, the extent to which the liberalizing legislative changes are enforced is questionable, and corporate governance, for instance, remains an issue for international investors considering Kazakhstan.[9] In addition, market-oriented reforms were somewhat derailed following the 2008 financial crisis, when state ownership of assets skyrocketed (assets under the control of the National Welfare Fund alone approached 50% of GDP). The crisis, however, could turn out to be a bump in the road, as the government is planning a “People’s IPO” next year, a massive, three-year privatization scheme involving $500 million in state assets.[10]

While Kazakhstan has moved considerably towards the LME category, especially in comparison to its regional peers, it is not yet widely considered an LME. Although Kazakhstan’s autocratic president is unlikely to relinquish political control anytime soon, and his extended family controls many of the country’s largest firms, the political and economic situation in the country is nonetheless better than that of its neighbors; it does not have the political turmoil of nearby Kyrgyzstan or the dysfunctional dictatorship of Turkmenistan, and its broad wealth of natural resources ensure that enough funds will be flowing into the country to finance its economic growth. Indeed, provided that the quality of governance remains at a sufficient level, the lack of executive turnover in Kazakhstan’s halls of power can be viewed as a benefit, especially given the country’s place in the midst of a volatile region, but the state’s strong hand in private business cannot be considered a development towards the LME model. Economist Ken Charman notes that the country’s powerful executive often takes the place of the market; “the state itself, led by the Presidential Administration, was undertaking a coordinating role, overseeing the introduction of laws and institutions intended to support a market economy.”[11] Martha Olcott, senior associate with the Carnegie Endowment for International Peace, writes that

[t]he Nazarbayev family has become the dominant economic force in the country, with tentacles that reach into every part of the economy… [I]n many important respects, economic power is more restricted today than it was before, although it is a local elite that dominates – not one sent from Moscow.[12]

Thus, in the words of Charman, the country would most likely be designated a “state-led LME”[13] rather than simply an LME by VoC standards. “Patronage and successful entrepreneurial activism are not only closely entwined” in Kazakhstan, according to political scientist Bhavna Dave, “but operate together in a mutually enforcing relationship.”[14] A. Koshanov, an academician from the Kazakh National Academy of Sciences, wrote that “Kazakhstan, which combines the traditions and norms of Eastern and Western civilizations, requires a special model of a market economy.”[15] As we have seen, this “special model” has been relatively close to the LME model, but with significant differences. In the second part of this paper, I will examine the reasons for these distinctions.

Estonia, meanwhile, has maintained a relatively “hands-off” approach to managing its economy. Political scientist Magnus Feldmann views it as “a prime example of a classical liberal economy regime,” citing a 26% flat income tax, a unilateral free trade policy with zero tariffs, and a government legally bound to maintain a balanced budget.[16] Stock market capitalization has fluctuated between a third and half of GDP from 2000 to 2006, and investment fund assets as a percentage of GDP increased from 1.7% to 13.3% during the same time.[17] The country has been a major target for foreign direct investment, with the banking and finance sectors as the main targets for those inflows; indeed, they are, in the words of political economist Fredrik Erixon, “now almost totally owned by foreigners and have facilitated one of the most competitive financial markets in Europe.”[18] Estonia, therefore, falls firmly into the LME category when it comes to the financial system.

High exposure to international markets and the government’s laissez-faire policies and relatively lax regulation of the financial sector, however, meant that Estonia was hit hard during the 2008-09 recession. GDP contracted by a whopping 16.2% year over year, and economic output dropped 5.1% in 2008 and a further 13% in the following year.[19] Estonia’s reliance on the market as a source of capital meant that it was better poised to take full advantage of the boom times, but the bust times were equally severe. Political economists Martin Myant and Jan Drahokoupil write, “The Baltic republics seemed to have reached a dead end in their growth strategies, as the speculative boom was not likely to be repeated in the region in the foreseeable future.”[20] Given this, it remains to be seen whether the recession will initiate a paring down of LME-style policies in Estonia.

III. Firm Structure

Of VoC’s five main areas, firm structure suffers most from a lack of available contemporary information. However, it is possible to arrive at some basic conclusions about the nature of the average firm in the two countries. A notable feature of many important firms in Estonia is the very high level of foreign ownership of assets; in the banking industry alone, 98.7% of assets were owned by non-Estonian interests in 2007.[21] Estonian firms tend to have a two-tier management board structure composed of management and a supervisory board, as introduced with the 1995 Commercial Code, based on the German Aktiengesellschaft model. While this is a CME characteristic and contrasts with the single-tier management board model usually found in the UK, it should be noted that “representation of workers and other interested groups” on this supervisory board “is not compulsory and generally does not occur,” as it is often “perceived as overly bureaucratic.”[22]  This is not the case in Germany, for example, where many firms are subject to codetermination laws that mandate a certain amount of labor representation on boards.[23] Buchen persuasively argues that Estonia sits somewhere on the fence between LME and CME in this regard, as “the Estonian model seems to be neither a pure shareholder nor a perfect stakeholder approach.”[24]

The corporate power vertical is alive and well in Kazakhstan, which seems to fit fairly well into the LME model in terms of firm structure. Communicaid, a business communication and culture consultancy, notes that Kazakh “business culture dictates a strict hierarchical structure where leaders separate themselves from the group and power is distributed from the top.” Furthermore, decision-making capabilities are typically vested in the highest-ranking senior executive.[25] The collaborative nature of governance and leadership at CME-based firms is, by and large, not to be found in Kazakhstan. This may have to do with the relatively immature institutions in place regarding trust and the delegation of corporate powers – while these institutions are developing, they are not yet “ready.” In this regard, Kazakhstan is similar to China, where, as INSEAD’s Michael Witt writes, “the absence of a reliable legal system means that it remains virtually impossible to hold others accountable if they abuse the trust implicit in delegation.”[26] In addition, the deep ties between many principal Kazakh firms and the government would suggest a further reluctance to include those not connected to the state in significant power delegation.

IV. Education and Training

Charman argues that a “general education” – one that is not entirely suited towards a particular vocation – is implemented along LME lines in Kazakhstan.[27] However, while this may be the preeminent policy, the percentage of firms offering formal training for their permanent, full-time employees is 40.9% – seven percentage points higher than the regional average and on par with the high-income OECD average of 41.1%.[28] Moreover, Article 143 of Kazakhstan’s labor code[29] stipulates that employees are “entitled to vocational training, retraining and advanced training, including training for new professions and specialties.” Towards this end, those employees undergoing training are permitted to work on a part-time basis (or even take time off), a practice that implies a fair amount of coordination, and thus Kazakhstan could be considered a CME in this respect.

Until 1998, Estonia’s system of vocational training was firmly grounded in the Soviet tradition, whereby “large state-controlled firms cooperated with state-run technical schools.”[30] The result was a CME-like system; vocational skills tended to be rather specific and tied to specific sectors. After 1998, vocational education was partitioned into secondary and higher education branches. “The explicit goal,” writes Buchen,

was to prepare apprentices for more general tasks which could be applied more broadly. This meant a fundamental change of the system of education and vocational training, and at the same time a shift towards an emphasis on general skills.”[31]

The significance placed on a general education is in line with most educational policies of LMEs.

V. Industrial Relations

Union membership in Estonia has declined dramatically since the introduction of market-based reforms. In 1990, 93% of workers in Estonia were unionized, but that number had plummeted to only 14% in 2000; the Estonian Employers’ Confederation (ETTK), meanwhile, only represents around 4% of firms.[32] Of the post-communist countries that have joined the European Union, Estonia has the lowest union membership rate.[33] Tripartite (state, unions, and employers) and bipartite (unions and employers) agreements were in place in the early 2000s and dealt primarily with general working conditions and minimum wage policies. However, they affected only 28% of workers as of 2003.[34] Wage negotiations, it seems, are usually left to the individual and employer, with minimal influence by either unions or employers’ organizations, and wages are usually determined at the firm level.[35] In addition, the average job tenure in Estonia in 1999 was 6.9 years – one of the shortest figures among post-communist countries.[36] As such, the decentralized system implies that industrial relations in Estonia are firmly in the LME category.[37]

Kazakhstan had a strong independent labor movement at the onset of sovereignty. This was mostly thanks to the Karaganda coal miners’ strikes in 1989-1991;[38] tens of thousands of striking miners loosened the grasp of Soviet power in the Kazakh SSR. However, most strike actions of the 1990s were largely insignificant. The government further weakened the influence of the unions by “concentrat[ing] less on satisfying workers’ demands than… wooing the independent union leaders, pressuring them to support various government ‘national reconciliation’ efforts.”[39] In 2005, 25 main branch unions of the Federation of Trade Unions of Kazakhstan existed in the country, with membership hovering around two million, a far cry from the 7.5 million in 1990.[40] On the corporate side, the Confederation of Employers of the Republic of Kazakhstan (KRRK), created in December 1999, encompasses 27 employers’ organizations, with small and medium business represented by its smaller counterpart, KPK. A tripartite general labor agreement was signed in July 1994 between the government, the Federation of Trade Unions and the precursor to the KRRK, but the state has remained the dominant entity in this relationship.[41]

A labor law introduced in 2000 reduced redundancy compensation pay, while maternity leave was slashed from three years to one; furthermore, the law dictated that “all conflicts between employer and employee [were] to be resolved through the courts,” effectively sidelining the unions.[42] Unions made somewhat of a comeback during the middle of the decade; at union insistence, the minimum wage increased to 116% of the subsistence minimum, while the state promised to allocate hundreds of billions of tenge (one billion tenge is between 6.5 and 7 million USD) for social programs.[43] Nonetheless, while employers have the stronger hand in the firm-employee relationship, the government retains the trump card and is capable of playing it however Astana sees fit.

VI. Inter-Firm Relations

Little information is available regarding inter-firm relations in Estonia and Kazakhstan, and thus classifying either remains difficult in this sphere.

A general consensus seems to be that the CME version of inter-company relations – basically, that firms move personnel and resources between companies through a network of connections – is a rare occurrence in the post-Soviet sphere,[44] by virtue of the fact that “comparable kinds of intercompany relations” in socialist countries did not exist “due to strong state control.”[45] The central planning authorities in Moscow coordinated and directed technological resources to advance economic goals. Hall and Soskice note that “repeated historical experience builds up a set of common expectations that allows the actors to coordinate effectively with each other,”[46] but the historical lack of inter-firm cooperation in post-communist states means that firms have been slow to develop such relationships. This process may eventually occur, but as suggested by Hall and Soskice, it might take some time.

While specifically classifying Estonia remains essentially impossible based on publically available information, some progress can be made on this issue regarding Kazakhstan by looking at the issue of state involvement in Kazakhstan’s five largest corporations by market capitalization: Eurasian Natural Resources Corporation, KazMunaiGas, Kazakhmys, Halyk Savings Bank, and Kazkommertsbank, all of which operate in the financial or energy sectors. Importantly, many of these companies are owned or controlled, either directly or indirectly, by the state or by state actors. The government, either through its National Wealth Fund or other holdings, owns around a fifth of Kazkommertsbank,[47] a quarter of Kazakhmys[48] and a substantial amount of preferred shares in Halyk.[49] It should be noted that the stakes held by the National Wealth Fund in major banks are a result of the Fund’s support of the destabilized financial sector following the 2008-09 recession, and the Fund (which holds over $70 billion in assets) is seeking to divest some of its holdings in order to modernize the economy.[50] Clearly, inter-firm relations in Kazakhstan do not closely resemble those usually found in LME nations; however, the country could not be placed in the CME category, either.

VII. Criticisms of the Hall and Soskice Approach

According to the VoC typology and the available data, Estonia is considered a true LME, with liberal markets and a successful innovation system that produces major new inventions (Skype, for example). Kazakhstan could be considered an “almost-LME” – an LME with strings attached, with the Presidential Administration in Astana pulling them. While these countries happen to fall into the same category, more or less, it is clear that the choices they made arose from two very different sets of circumstances, and their economies today, while sharing some characteristics, are nonetheless quite different from each other. Does it make sense, then, to group them both loosely into the same category? This section of the paper will review some of the existing literature critical of the VoC paradigm as it relates to transition economies, before examining some other factors that could better explain the paths that Estonia and Kazakhstan took following communism.

In using VoC to understand transition economies, Feldmann believes that

[t]he VOC perspective may help us understand why… divergent reform trajectories have been successful. If transition is a process leading to a particular variety of capitalism – rather than capitalism writ large – different policy packages may be consistent with economic success, for example, in terms of high growth and low inflation… The application of VOC analysis to former communist countries can deepen our understanding of the transition process and enrich comparative studies of capitalist institutions more generally.[51]

In other words, it might be useful to look at those transition economies that are considered successful performers and sort them into the categories provided by the VoC model to see if one has the upper hand over the other. It should be pointed out that Hall and Soskice maintain that a key tenet of their model is that both the LME and CME halves perform equally well over the long term.[52]

As noted by Myant and Drahokoupil, the dependent variable in the VoC model is international competitiveness, often linked to the independent variable of “comparative institutional advantage.”[53] Myant and Drahokoupil further point out that factors such as “the role of the state in leading economic development and the extent and forms of welfare provision” have been explored by others as alternative differentiating traits among advanced capitalist countries, but argue that “these are not the key factors in distinguishing the kinds of capitalism in transition economies.”[54]

Myant and Drahokoupil’s critique is borne out across a few factors, the first being the dependent variable; Hall and Soskice put a disproportionately large emphasis on international competitiveness, and Myant and Drahokoupil argue that this is an unfair expectation to foist upon transition economies – no transition economy has been able to become a Germany or a United States, and it will be quite some time before one does.[55] Secondly, the Hall and Soskice model takes for granted certain basic institutions – the rule of law, a clear delineation between business and politics, state capacity, and so on – that might have been put in place long ago in advanced market economies, but not yet in certain transition economies.[56] Informal laws and institutions still play a huge role in certain countries (Russia is a prime example), but these are largely left out of the VoC framework. Lastly, “applying the varieties of capitalism framework to transition economies… is built on an assumption of long-term continuity and the permanence of relationships.”[57] While Kazakhstan is a relatively stable transition country, and Estonia, recent crisis notwithstanding, has also been fairly steady, transition countries are still just that – in transition. Some changes will turn out to be enduring while others will be more fleeting, and it is still too early to categorize these with any great deal of accuracy.[58]

UCSD political economist Stephan Haggard provides a different critique, writing that “institutions are seen through the lens of their effects, and it is only a short distance to the genetic fallacy that institutions arose to solve the problems they do.”[59] From whence did these institutions and complementarities emerge? Hall and Soskice seem to imply that they have been around forever; Haggard states that

A related problem is the equilibrium nature of the analysis and the question of the stickiness of institutional complexes. If institutions hang together in these very complex ways, where precisely is the source of the enormous change we have witnessed over the last decade?[60]

The radical change that was experienced by nearly all aspects of society in post-communist states is poorly explained by VoC, which stresses a continuity that is simply contradicted by empirical evidence.[61] A major problem, therefore, with VoC is that it largely ignores relevant political and historical aspects. In post-communist states, of course, such an omission is dangerous, considering the radical changes that have taken place. While Hall and Soskice pay lip service to the “role of culture, informal rules, and history,”[62] they never manage to empirically flesh out these concepts. The result is an analysis that seems a bit sterile, something that can be applied only in a laboratory when these factors have already been accounted for, and as a result, the real-world utility of their approach is diminished. As political scientist Colin Crouch writes,

[c]onventional economics and game theory make the single assumption of the maximization of gain as a goal, and take consistency in decision making for granted. This enables these approaches to make extraordinary progress at the level of theory-construction, but at the expense of becoming remote from reality.[63]

British sociologist Ronald Dore shares this evaluation of the Hall and Soskice approach as not relevant enough to reality:

…The economy, or rather the economics, tail-wags the political economy dog… The authors’ avowed attempt to formulate their generalizations in the game-theoretic terms of ‘strategic’ interaction focuses attention on the self-interested rationality of choices at the expense of other motivations.[64]

Dore’s further criticisms are particularly keen; he writes that this VoC variant values “performance” – growth, global market share,  and so on – too highly while largely ignoring quality of life, a particularly important, if often-overlooked, indicator of economic success in a transition economy. Additionally, the VoC ignores “ideology as an explanatory factor,”[65] a cause that will be examined in the following section.

VIII. The Role of Ideology and Cultural Legacy

What are some of the aspects, ignored by Hall and Soskice, which can be applied to Estonia and Kazakhstan? A major factor is the role of history and the Soviet legacy. “An assumption of many reformers,” notes Cambridge sociologist David Lane, “was that the Soviet Union and other state socialist societies were politically and ideologically bankrupt and presented a tabula rasa on which an advanced form of capitalism could be created.”[66] Many had indeed assumed that the slate had been wiped clean of communism and all of those associated economic actions that were antithetical to the free market, and the transition to capitalism would be the logical next step. However, post-communist countries had to grapple with the legacy of the centrally planned economic system and inherited the infrastructure, institutions, and relationships on which the communist economy was founded. The communist economic system was “expressly designed to integrate individual union republics into a unitary Soviet state and counteract any attempts by local elites to assert political sovereignty vis-à-vis Moscow.”[67]

Not only did the newly independent states have to deal with the transition from a planned to a market economy, but they were also “required to transform what were in effect largely provincial economies into ones befitting independent countries operating in a globalised market environment.”[68] Before, the focus had been on figuring out how best to please Moscow; now, the focus suddenly shifted to satisfying the needs of a newly independent domestic market while simultaneously figuring out how to integrate into the larger global economy. While many nations were eager to embark on this pathway, it could not be accomplished overnight. As Koshanov noted, “The transition to a market economy is not a short-term action. It means the gradual reorganization of the [country’s] entire economic structure and social relations.”[69]

The sociological aspect – national attitudes and beliefs – cannot be overlooked, either. This is a particularly powerful factor in Estonia. The halcyon days of the interwar period, when Estonia enjoyed complete sovereignty, saw the country develop economically on a level close to that of its neighbors, including Finland.[70] After Estonia was annexed by the USSR in 1940, relations with Moscow were always particularly contentious. As Gorbachev ushered in social and economic reform during the latter half of the 1980s, deeply-rooted animosity towards Russia manifested itself in the form of calls for full secession from the Union. The Estonian Supreme Soviet made a declaration of sovereignty in November 1988, a full three years before the downfall of the USSR, and the republic declared its complete independence in August 1991, receiving it in September of that year. In Estonia, then, as in the other two Baltic republics, the process of economic transformation started “as a political liberalization movement,”[71] and the republic even adopted free-market policies before declaring independence.

In this sense, Estonia was a standout among the rest of the republics; a survey carried out in 1990 regarding non-state economic activity revealed that 30% of Estonians had a “positive attitude” towards free-market reforms, compared with 22% of Latvians, 15% of Lithuanians, and 15% of citizens of the entire USSR.[72] “The higher degree of market-oriented values in Estonia,” writes Niels Mygind, an economist at the Copenhagen Business School, “can also be connected to influences from the surrounding world,” noting that the Estonian language’s close similarity to Finnish gave Estonians access to TV and radio broadcasts from Finland.[73] This illegal yet commonly accessed source of foreign information could very well have planted additional seeds of resentment among Estonians by showing them that the grass was indeed greener on the other side of the Baltic Sea. While Estonia and Finland developed basic economic parity with each other prior to World War II, Soviet rule acted as a detrimental force on the economy; per capita consumption in Finland was greater than that in Estonia by a factor of ten around the time of Soviet collapse.[74]

Furthermore, an examination of the issue of trade unions as they pertain to the Estonian and Soviet historical experience is particularly rewarding. Trade unions were “perceived as part of the regime” in Estonia,[75] and while they had a near-universal participation rate, membership was treated as an obligation and the “reputation of unions [in Estonia]” was therefore “generally bad.”[76] Many actions by the Soviet government, both economic and otherwise – the imposition of the Russian language, ignorance of local customs, and most of all, the outright annexation of Estonian territory – caused resentment among Estonians.[77] Thus, Estonia’s path towards the antipode of a centrally planned economy and its embrace of the LME model was in many respects ideologically driven: a visceral rejection of Soviet rule and everything that it embodied. People, projects, and policies that smacked of the ancien régime were discredited and lambasted, and even today, relations between Tallinn and Moscow are still sour.

Kazakhstan has had a decidedly different relationship with its Soviet past. Outbursts against Moscow did occur during the late Soviet period (most notably, the December 1986 Jeltoqsan riots in Alma-Ata), and calls for independence, as in the other republics, were hardly quiescent during this time. Yet when the matter of preserving the Soviet Union was put to an all-Union referendum in March 1991, the overwhelming majority – 94 percent – voted for its continuation,[78] and the Kazakh SSR was the last constituent republic of the Soviet Union to formally declare independence. Furthermore, ethnic Russians constituted a plurality in the Kazakh SSR from the 1930s until the 1989 census[79] and continued to comprise a sizable minority thereafter, so anti-Russian sentiment would not likely factor into the choice between LME and CME paths, as it did in the Baltic states. If Estonians were quick to embrace LME-style policies partially as a means of channeling resentment against their erstwhile Soviet rulers, a general lack of such animosity in independent Kazakhstan could help explain why LME policies were pursued with less initial fervor.

Furthermore, Kazakhstan’s cultural history might play a role in influencing the top-down firm structure described in Section III. The emergence of the Kazakh Khanate in the fifteenth century also marked the arrival of hierarchical social and political traditions that featured a “dual authority structure”: the clan-based system of authority was topped by a ruling class of khans and sultans (“sub-khans”).[80] Political scientist Edward Schatz notes that “each khan ruled by virtue of charismatic authority,” and the khans that managed to unify the Kazakh clans did so by virtue of their authority, which “was vested in a single khan whose personalistic rule succeeded in commanding respect.”[81] Kazakhs were ranked within a complex “genealogical order of clans and clan agglomerations,” which resulted in a “cult of seniority” during the time of the Khanate.[82] This emphasis on the executive would suggest a proclivity towards an increased managerial scope for action, with much attention paid to the executive’s reputation – a trait common in LME firms.[83] Additionally, Nazarbaev’s manipulation of clan networks, which were active within the Kazakh Communist Party, proved to be instrumental in his attainment and prolongation of power,[84] and his system of patronage is a hallmark of Kazakhstan’s “almost-LME” status.

IX. Geographical and Geological Realities

Geography and natural resources play a fundamental role in the pathway choice of capitalist development. In a country as large and sprawling as the former Soviet Union, it would not have been unreasonable to presume that following its collapse and dissolution, some former republics would inherit more natural wealth than others. The relative stability in Kazakhstan, as compared to neighboring Kyrgyzstan, for example, can be chalked up to many geographic factors. Kazakhstan’s large size means that its territory is likely to encompass more natural resources than a smaller country, of course. However, the quantity of natural resources is far from the sole determining factor; the form in which those resources exist is equally important. Oil, oil products, and ferrous metals comprise nearly 80% of Kazakh exports,[85] and despite the immense wealth that they can bring, improved technological expertise is often needed in order to extract them in a cost-effective manner. For nearly 70 years under Soviet power, Kazakh industrial policy was determined by Moscow, and the technology used in resource extraction was endogenous to the Soviet bloc. The collapse of the USSR, of course, finally made possible the importation of foreign technology. As Koshanov wrote in 1994:

Large contracts are being concluded with foreign transnational corporations to develop rich oil and gas resources, to construct and reconstruct enterprises in metallurgy and machine building… Joint ventures with mixed capital and free enterprise zones with a system of preferences and most favored treatment for foreign investors are being created.[86]

Therefore, the country would be likely to pursue a path of development that emphasizes an open economy and the promotion of foreign investment. Indeed, Kazakhstan has understood that in order for this international technological expertise to flow in – for example, in the form of joint ventures and agreements with foreign energy firms – a robust legal framework and institutions must be put in place, and this would encourage the development of a liberal market approach.

For Estonia, the reality of the post-Soviet economic situation hit even more quickly, and once again, it necessitated a rapid shift away from the communist legacy of the former system. The fact that this small nation was bequeathed relatively limited amounts of natural resources, except for some oil shale deposits in the country’s north-east that accounted for half of its energy needs, created a twofold problem. This scarcity had ramifications in terms of imports, since Estonia depended upon Russia for natural gas and petroleum. Additionally, its exports sector was poorly developed, a condition that was even more critical considering the “small size of the domestic market.”[87]

X. Conclusion

This paper has attempted to accomplish three main tasks. The first is an application of the Hall and Soskice VoC framework to Kazakhstan and Estonia; the second, a review of some of the existing criticism of this framework; and finally, a look at three additional factors (historical legacy and cultural values, politics, and geography) that are particularly important. It is possible to classify nearly any nation using the Hall and Soskice typology, and this is a valuable exercise, since much information about their economic positions and strategies vis-à-vis each other can be gleaned. However, their categorization as either LME or CME also shows that this VoC model is not well-suited for transition economies, as it often overlooks factors that are especially crucial for post-communist states. The current economic institutions in Kazakhstan and Estonia did not develop in a vacuum, but were highly influenced by a host of often-intangible factors not accounted for by Hall and Soskice. VoC is incomplete with respect to economies in transition, and while this short text has not devised a comprehensive solution to the problem, it has demonstrated that improvements to the model which take a more holistic approach towards differentiating between these economies would result in a more thorough and ultimately more relevant framework.

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[1] “GDP Per Capita (constant 2000 US$) Data,” World Bank, accessed December 1, 2011,
[2] Peter Hall and David Soskice, “An Introduction to Varieties of Capitalism,” in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, ed. Peter Hall and David Soskice. (Oxford: Oxford University Press, 2001), 6-7.

[3] Hall and Soskice, “An Introduction to Varieties of Capitalism,” 8, 19.

[4] Marat Rysbekov, “Privatization in Kazakhstan,” Comparative Economic Studies 37, no. 3 (1995): 2.

[5] Oraz Jandosov, “Development, Prospects and Challenges of the Financial System in Kazakhstan.” (paper presented at an IMF Conference, “Challenges to Economies in Transition,” Bishkek, Kyrgyzstan, May 1998).

[6] Ken Charman, “Kazakhstan: A State-led Liberalized Market Economy?” In Varieties of Capitalism in Post-Communist Countries, ed. David Lane and Martin Myant (New York: Palgrave Macmillan, 2007), 166.

[7] Ibid., 168.

[8] “About Us.” Regional Financial Center of the City of Almaty, accessed November 30, 2011,

[9] Charman, “Kazakhstan: A State-Led Liberalized Market Economy?” 168.

[10] European Bank for Reconstruction and Development, Transition Report 2011. Crisis and Transition: The People’s Perspective, accessed December 3, 2011,

[11] Charman, “Kazakhstan: A State-Led Liberalized Market Economy?” 179.

[12] Martha Brill Olcott, Kazakhstan: Unfulfilled Promise (Washington: Carnegie Endowment for International Peace, 2002), 216-217.

[13] Charman, “Kazakhstan: A State-Led Liberalized Market Economy?” 181.

[14] Bhavna Dave, Kazakhstan: Ethnicity, Language and Power (London: Routledge, 2007), 148.

[15] А. Koshanov, “Problems of Market Transformation of the Kazakh Economy,” Problems of Economic Transition 37, no. 10 (1995): 10.

[16] Magnus Feldmann, “Emerging Varieties of Capitalism in Transition Countries: Industrial Relations and Wage Bargaining in Estonia and Slovenia,” Comparative Political Studies 39, no. 7 (2006): 846.

[17] Robert Holzmann, Landis MacKellar, and Jana Repanšek, Pension Reform in Southeastern Europe: Linking to Labor and Financial Market Reform (Washington: World Bank, 2009), 236.

[18] Fredrik Erixon, “The Baltic Tiger: The Political Economy of Estonia’s Transition from Plan to Market” (working paper, European Center for International Political Economy, November 2008).

[19] Council for European Investment Security, “Trials of a Baltic Tiger: Estonia’s Economic Landscape Since the Fall of Communism,” accessed December 2, 2011,

[20] Martin Myant and Jan Drahokupil, Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia (Hoboken: Wiley, 2011), 330.

[21] EBRD data in Martin Myant and Jan Drahokupil, Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia, 262.

[22] Clemens Buchen, “Estonia and Slovenia as Antipodes,” in Varieties of Capitalism in Post-Communist Countries, ed. David Lane and Martin Myant (New York: Palgrave Macmillan, 2007), 72-74.

[23] Larry Fauver and Michael E. Fuerst, “Does Good Corporate Governance Include Employee Representation? Evidence from German Corporate Boards,” May 2004, EFA 2004 Maastricht Meetings Paper No. 1171.

[24] Ibid., 75.

[25] Cora Malinak, “Doing Business in Kazakhstan: Kazakh Social and Business Culture.” Communicaid report, accessed December 10, 2011,


[26] Michael A. Witt, “China: What Variety of Capitalism?” (INSEAD Working Paper, 2010), 7,

[27] Charman, “Kazakhstan: A State-Led Liberalized Market Economy?” 175.

[28] Kazakhstan workforce data, World Bank Enterprise Surveys, 2009, accessed November 28, 2011,

[29] Labor Code of the Republic of Kazakhstan, accessed December 1, 2011,

[30] Buchen, “Estonia and Slovenia as Antipodes,” 79.

[31] Ibid., 79.

[32] Buchen, “Estonia and Slovenia as Antipodes,” 68.

[33] Feldmann, “Emerging Varieties of Capitalism in Transition Countries,” 838.

[34] Buchen, “Estonia and Slovenia as Antipodes,” 68.

[35] Ibid., 69.

[36] Feldmann, “Emerging Varieties of Capitalism in Transition Countries,” 841.

[37] Ibid.

[38] Olcott, Kazakhstan: Unfulfilled Promise, 200.

[39] Ibid.

[40] Kazakhstan summary report in English, INTAS Workshop (workshop paper, Moscow, April 2005),

[41] Ibid.

[42] Ibid.

[43] D. Shubin, “Kazakhstan: Final Report,” INTAS Final Seminar on best practices of primary trade union organizations in CIS countries, Moscow, March 2007,

[44] Buchen, “Estonia and Slovenia as Antipodes,” 75.

[45] Ibid., 75.

[46] Hall and Soskice, “An Introduction to Varieties of Capitalism,” 13.

[47] “Shareholder structure,” Kazkommertsbank, accessed December 5, 2011,

[48] “About us – facts & figures,” Kazakhmys, accessed December 5, 2011,

[49] “Ownership structure,” Halyk Bank, accessed December 5, 2011,

[50] Ben Judah and Katya Golubkova, “Kazakhstan prepares for major privatizations,” Reuters, June 21, 2010,

[51] Feldmann, “Emerging Varieties of Capitalism in Transition Countries,” 831; 850.

[52] Hall and Soskice, “An Introduction to Varieties of Capitalism,” 21.

[53] Myant and Drahokupil, Transition Economies, 300.

[54] Ibid.

[55] Ibid.

[56] Ibid., 301.

[57] Ibid.

[58] Ibid.

[59] Stephan Haggard, review of Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, by Peter Hall and David Soskice, ed., The Business History Review77, no. 2 (Summer 2003): 354.

[60] Ibid.

[61] Stefan Kesting and Klaus Nielsen, “Varieties of Capitalism: Theoretical Critique and Empirical Observations,” in Varieties of Capitalism and New Institutional Deals: Regulation, Welfare and the New Economy, ed. Wolfram Elsner and Hardy Hanappi (Northampton: Edward Elgar, 2008), 28.

[62] Hall and Soskice, “An Introduction to Varieties of Capitalism,” 12.

[63] Colin Crouch, Capitalist Diversity and Change. (Oxford: Oxford University Press, 2005), 19-20, quoted in Kesting and Nielsen, “Varieties of Capitalism: Theoretical Critique and Empirical Observations,” 30.

[64] Ronald Dore, review of Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, by Peter Hall and David Soskice, ed., British Journal of Industrial Relations 41, no. 2 (June 2003): 359.

[65] Ibid., 360.

[66] David Lane, “Post-State Socialism: A Diversity of Capitalisms?” in Varieties of Capitalism in Post-Communist Countries, ed. David Lane and Martin Myant (New York: Palgrave Macmillan, 2007), 21.

[67] David Smith, Estonia: Independence and European Integration (London: Routledge, 2002), 113.

[68] Ibid.

[69] Koshanov, “Problems of Market Transformation of the Kazakh Economy,” 6.

[70] Feldmann, “Emerging Varieties of Capitalism in Transition Countries,” 844.

[71] Tarmo Haavisto, introduction to The Transition to a Market Economy: Transformation and Reform in the Baltic States, ed. Tarmo Haavisto (Cheltenham: Edward Elgar, 1997), 2.

[72] Niels Mygind, “A Comparative Analysis of the Economic Transition in the Baltic Countries – Barriers, Strategies, Perspectives,” in The Transition to a Market Economy: Transformation and Reform in the Baltic States, ed. Tarmo Haavisto (Cheltenham: Edward Elgar, 1997), 22.

[73] Ibid.

[74] Feldmann, “Emerging Varieties of Capitalism in Transition Countries,” 844.

[75] Buchen, “Estonia and Slovenia as Antipodes,” 67-68.

[76] Ibid., 68.

[77] Rein Taagepera, Estonia: Return to Independence (Boulder: Westview Press, 1993), 103.

[78] Gregory Gleason, “Prospects for Kazakhstan’s Asian Liberalism,” Demokratizatsiya 5, no. 3 (1997): 380.

[79] Olcott, Kazakhstan: Unfulfilled Promise, 174.

[80] Martha Brill Olcott, The Kazakhs (Stanford: Hoover Institution Press, 1987), 13.

[81] Edward Schatz, Modern Clan Politics: The Power of “Blood” in Kazakhstan and Beyond(Seattle: University of Washington Press, 2004), 31.

[82] Dave, Kazakhstan: Ethnicity, Language and Power, 33.

[83] Hall and Soskice, “An Introduction to Varieties of Capitalism,” 29.

[84] Dave, Kazakhstan: Ethnicity, Language and Power, 89.

[85] CIA World Factbook entry on Kazakhstan, accessed 5 December 2011,

[86] Koshanov, “Problems of Market Transformation of the Kazakh Economy,” 5-6.

[87] Smith, Estonia: Independence and European Integration, 114.

About the Author

Thomas Luly

Thomas Luly has recently graduated from Hobart and William Smith Colleges with a double major in Russian Area Studies and Political Science. He has interned at Carnegie Moscow Center and published a paper there about Skolkovo and Russia’s general prospects for innovation and economic modernization. After graduation, he hopes to work in Russia before pursuing graduate studies in Russian Studies or Political Science.

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