The Permanent Income Hypothesis: A Test on Czech Privatisation

Since the late eighties, economists have been regarding the transition from command to market economies in Central and Eastern Europe with intense interest. In addition to studying the transition per se, they have begun using the region as a testing ground on which to investigate the validity of certain classic economic propositions. In his research, comprising three articles written in English and totalling 40 pages, Mr. Hanousek uses the so-called "Czech national experiment" (voucher privatisation scheme) to test the permanent income hypothesis (PIH). He took as his inspiration Kreinin's recommendation: "Since data concerning the behaviour of windfall income recipients is relatively scanty, and since such data can constitute an important test of the permanent income hypothesis, it is of interest to bring to bear on the hypothesis whatever information is available". Mr. Hanousek argues that, since the transfer of property to Czech citizens from 1992 to 1994 through the voucher scheme was not anticipated, it can be regarded as windfall income. The average size of the windfall was more than three month's salary and over 60 percent of the Czech population received this unexpected income. Furthermore, there are other reasons for conducting such an analysis in the Czech Republic. Firstly, the privatisation process took place quickly. Secondly, both the economy and consumer behaviour have been very stable. Thirdly, out of a total population of 10 million Czech citizens, an astonishing 6 million, that is, virtually every household, participated in the scheme. Thus Czech voucher privatisation provides a sample for testing the PIH almost equivalent to a full population, thus avoiding problems with the distribution of windfalls. Compare this, for instance with the fact that only 4% of the Israeli urban population received personal restitution from Germany, while the number of veterans who received the National Service Life Insurance Dividends amounted to less than 9% of the US population and were concentrated in certain age groups. But to begin with, Mr. Hanousek considers the question of whether the public percieves the transfer from the state to individual as an increase in net wealth. It can be argued that the state is only divesting itself of assets that would otherwise provide a future source of transfers. According to this argument, assigning these assets to individuals creates an offsetting change in the present value of potential future transfers so that individuals are no better off after the transfer. Mr. Hanousek disagrees with this approach. He points out that a change in the ownership of inefficient state-owned enterprises should lead to higher efficiency, which alone increases the value of enterprises and creates a windfall increase in citizens' portfolios. More importantly, the state and individuals had very different preferences during the transition. Despite government propaganda, it is doubtful that citizens of former communist countries viewed government-owned enterprises as being operated in the citizens' best interest. Moreover, it is unlikely that the public fully comprehended the sophisticated links between the state budget, state-owned enterprises, and transfers to individuals. Finally, the transfers were not equal across the population. Mr. Hanousek conducted a survey on 1263 individuals, dividing them into four monthly earnings categories. After determining whether the respondent had participated in the voucher process, he asked those who had how much of what they received from voucher privatisation had been (a) spent on goods and services, (b) invested elsewhere, (c) transferred to newly emerging pension funds, (d) given to a family member, and (e) retained in their original form as an investment. Both the mean and the variance of the windfall rise with income. He obtained similar results with respect to education, where the mean (median) windfall for those with a basic school education was 13,600 Czech Crowns (CZK), a figure that increased to 15,000 CZK for those with a high school education without exams, 19,900 CZK for high school graduates with exams, and 24,600 CZK for university graduates. Mr. Hanousek concludes that it can be argued that higher income (and better educated) groups allocated their vouchers or timed the disposition of their shares better. He turns next to an analysis of how respondents reported using their windfalls. The key result is that only a relatively small number of individuals reported spending on goods. Overall, the results provide strong support for the permanent income hypothesis, the only apparent deviation being the fact that both men and women aged 26 to 35 apparently consume more than they should if the windfall were annuitised. This finding is still fully consistent with the PIH, however, if this group is at a stage in their life-cycle where, without the windfall, they would be borrowing to finance consumption associated with family formation etc. Indeed, the PIH predicts that individuals who would otherwise borrow to finance consumption would consume the windfall up to the level equal to the annuitised fraction of the increase in lifetime income plus the full amount of the previously planned borrowing for consumption. Greater consumption would then be financed, not from investing the windfall, but from avoidance of future repayment obligations for debts that would have been incurred without the windfall.

Value Choice of Russia in the Reform Process: The Sociological Aspect

The transition in Central and Eastern Europe since the late 1980s has provided a testing ground for classic propositions. This project looked at the impact of privatisation on private consumption, using the Czech experiment of voucher privatisation to test the permanent income hypothesis. This form of privatisation moved state assets to individuals and represented an unexpected windfall gain for participants in the scheme. Whether the windfall was consumed or saved offers a clear test of the permanent income hypothesis. Of a total population of 10 million, 6 million Czechs, i.e. virtually every household, participated in the scheme,. In a January 1996 survey, 1263 individuals were interviewed , 75% of whom had taken part. The data obtained suggests that only a small quantity of transferred assets were cashed in and spent on consumption, providing support for the permanent income hypothesis. The fraction of the windfall consumed grows with age, as would be predicted from the lower life expectancy of older consumers. The most interesting deviation was for people aged 26 to 35, who apparently consumed more that they would if the windfall were annuitised. As these people are at the stage in their lives when they would otherwise be borrowing to cover consumption related to establishing a family, etc., this is however consistent with the permanent income hypothesis, which predicts that individuals who would otherwise borrow money would use the windfall to avoid doing so.

Economic and Social Changes in Czech Society after 1989: an Alternative View

The group presents an analysis of the development of the Czech society and economy during the 1990s. They believe that the Czech neo-liberal strategy of transformation led to a partial and uneven modernisation and that this strategy is unable to provide a firm basis for a complex process of modernisation. The increasing developmental problems encountered during 1996-1999 can be seen as empirical evidence of the inadequacy of the neo-liberal transformation strategy. These problems are connected to institutional shortcomings due to the excessive speed of privatisation, its form with certain important Czech innovations (particularly the voucher method and an attempt to resuscitate the Czech national capital) and with the overlooking of the importance of the legal framework and its enforcement. The overly hasty privatisation has created a type of 'recombinant property' which lacks the economic order necessary to stimulate efficiency in an atmosphere of prevailing social justice. A second reason for the present difficulties is the long-term lag behind the civilisation and cultural standards typical of the advanced European countries. The first steps of the Czech transformation concentrated mainly on changes in the institutions important for the distribution of power and wealth and largely neglected the necessity of deep-reaching modernisation of Czech society and the economy. The neo-liberal strategy created conditions conducive to predatory and speculative behaviour at the expense of creative behaviour. Inherited principles of egalitarianism combined with undeserved economic privileges survived and were reinforced by important new developments in the same direction. This situation hinders the assertion of meritocratic motivations. The group advocates the development and implementation of a complex strategy of modernisation based on deliberate reforms, institutional changes and restructuring on the basis of strategic planning, and structural and regional policies which stress the role of cultivation of the institutional order and of the most important factors of economic growth and development.