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SELF-EMPLOYMENT IN POST-
COMMUNIST ECONOMIES
a b c
Kasia Karpinska , Ineke Maas & Wim Jansen
a
Department of Law, Economics and Governance ,
Utrecht University , Utrecht , The Netherlands
b
Department of Sociology/ICS , Utrecht University ,
Utrecht , The Netherlands
c
Department of Methodology & Statistics , Utrecht
University , Utrecht , The Netherlands
Published online: 06 Sep 2012.
To cite this article: Kasia Karpinska , Ineke Maas & Wim Jansen (2012) SELF-
EMPLOYMENT IN POST-COMMUNIST ECONOMIES, European Societies, 14:5, 684-703, DOI:
10.1080/14616696.2012.721890
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European Societies
14(5) 2012: 684703
2012
Taylor & Francis
ISSN
1461-6696 print
1469-8307 online
SELF-EMPLOYMENT IN
POST-COMMUNIST ECONOMIES
A cross-country comparison, 19962005
Kasia Karpinska
Department of Law, Economics and Governance, Utrecht University, Utrecht,
The Netherlands
Ineke Maas
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Wim Jansen
Department of Methodology & Statistics, Utrecht University, Utrecht, The Netherlands
1. Introduction
684 http://dx.doi.org/10.1080/14616696.2012.721890
Self-employment in post-communist economies KARPINSKA ET AL.
Robert and Bukodi 2000, 2004). Exceptions are the studies of Gerber (2001,
2004) and Gerber and Hout (1998), who showed that entry into self-
employment is higher in regions with higher unemployment rates, lower
crime rates and a bigger service sector. Yet their studies apply to Russia
only.
This limited focus on macro factors is surprising considering major
theoretical contribution in the field of entrepreneurship in post communist
studies. The market transition theory, the main theory on the transition
from state socialism to a market oriented economy (Nee 1989, 1991),
predicts an interplay between structural and individual characteristics. The
emergence of a market-oriented economy promotes human capital,
entrepreneurship and employment in private/hybrid sectors as the means
of economic success, while political credentials loose their beneficial
influence (Gerber and Hout 1998; Earle and Sakova 1999, 2000; Gerber
2001, 2004). Post-communist states differed with respect to the starting
conditions as well as the speed and shape of the transition. A cross-country
comparison of the development of self-employment can therefore sig-
nificantly increase our understanding both of general determinants of self-
employment and more specifically of the impact of the transition.
The aim of the paper is two-fold. Firstly, we extend market transition
theory with additional hypotheses on the impact of structural conditions on
the odds of being self-employed and on the applicability of individual
assets. Secondly, we empirically study the determinants of self-employment
in a cross-national manner, comparing four post-communist societies
(Bulgaria, Estonia, Hungary and Russia) at two time points (1996 and
2005). The number of countries does not allow the estimation of the effects
of country-level variables using hierarchical models. Instead we will
develop and test hypotheses on difference between the countries based
on the combined effect of their characteristics.
685
EUROPEAN SOCIETIES
2. Theory
Individuals on the labour market face three employment options: (i) self-
employment, (ii) wage employment, and (iii) unemployment. According to
the economic approach toward human behaviour, individuals choose the
alternative that is most beneficial to them. This approach of employment
choices is advocated by many scholars of self-employment (Rees and Shah
1986; Pfeiffer and Reize 2000; Osborn and Slomczynski 2005).
Unemployment is probably always less attractive than the other two
options. With respect to self-employment and wage employment, the
preferred order is less clear. Self-employment is generally regarded to be
more risky. If the business fails, individuals may loose their job, savings and
home. Self-employment also allows individuals to set their own schedule,
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to work whenever they like to, and it may even offer a way to become rich
(Blanchflower 2000). Given the ups and downs of self-employment, who
decides to enter this form of employment will depend on both individual
and structural characteristics. Furthermore, the impact of individual
characteristics is likely to depend on the structural context. Previous
research focused extensively on the impact of individual characteristics on
the entry into self-employment. This will therefore not be the focus of this
study, but we nevertheless start with a short overview of the findings in
previous research in order to be able to formulate hypotheses on differential
effects of human capital in different contexts.
686
Self-employment in post-communist economies KARPINSKA ET AL.
1. To our knowledge there are no datasets including several countries at more than one
point in time, with more extensive information on individual predictors of self-
employment.
687
EUROPEAN SOCIETIES
688
Self-employment in post-communist economies KARPINSKA ET AL.
The main hypothesis from market transition theory is that human capital
becomes more important for economic success as the transformation
proceeds (Nee 1989). During communism economic success depended
strongly on political loyalty, but during and after the transformation, with
increasing privatisation, individual assets became the main determinants
of economic success. Such interplay between macro conditions and micro
characteristics is likely also important for the explanation of entrepreneur-
ship in general.
In line with the market transition theory, we assume that as privatisation
proceeds, human capital becomes a more important predictor of self-
employment. With respect to the effect of human capital, the post-
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689
EUROPEAN SOCIETIES
our study is too low to test these hypotheses directly with the use of
hierarchical models. To estimate the effect of one country characteristics
at least 15 countries, and preferably more, are needed. We will therefore
apply an alternative strategy. We will compare the countries with respect
to the combination of the three macro conditions and investigate whether
the odds of self-employment and the impact of human capital vary in the
predicted way.
Privatisation in post-communist societies started between 1992 and
1995 (Bennet et al. 2004). At later stages of the transformation process all
countries began privatising their assets. Some modes of privatisation were
more favourable for self-employment than others (Bennet et al. 2004).
Bennet et al. distinguished three forms of privatisation: mass, full and
mixed. Mass privatisation means that firms were sold by giving vouchers
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690
Self-employment in post-communist economies KARPINSKA ET AL.
In the same period the level of corruption dropped a little in Estonia (to a
score of 6.4) and considerably in Bulgaria (to 4.0).
Bulgaria thus faced the most severe obstacles towards self-employment,
especially in 1996, but to a lesser extent also in 2005. Estonia, Hungary
and Russia all show favourable scores on two of the three macro
conditions. Estonia and Hungary have relatively low unemployment and
relatively little corruption. However, they combine this with a less
favourable privatisation type. Unemployment in Russia is also relatively
low, and mass privatisation is expected to have a positive effect on self-
employment, however, corruption levels are high. From these macro
differences and the general hypotheses 1 and 2, we derive the expectation
that in Bulgaria (1) the odds of self-employment were lower, and (2) the
effect of human capital on self-employment was weaker than in the other
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three countries.
Over time, privatisation increased in all countries and unemployment
declined. In Bulgaria also the level of corruption was considerably lower in
2005 than in 1996. From the general hypotheses we derive the expectation
that: (1) the odds of self-employment will be higher in 2005 than in 1996
in all countries, and especially in Bulgaria, and (2) that the effect of human
capital on self-employment became stronger over time in all countries, and
especially in Bulgaria.
3. Methods
3.1 Data
The data we use in this study come from the International Social Justice
Project (ISJP) and the Generations and Gender Survey (GGS). The ISJP
dataset consists of a cross-sectional survey fielded in six post-communist
countries in 1996. The GGS is a panel study that also includes six post-
communist countries in its first wave in 2005. For our analysis of self-
employment we selected post-communist countries that participated in
both studies: Bulgaria, Estonia, Hungary and Russia.
The ISJP used a three stage random sampling scheme for most of
the countries and a two-stage random sampling scheme for Bulgaria. The
response rates varied between 67 and 95% (for a detailed overview of the
sampling procedure per country and the response rate see http://www.
butler.edu/isjp/intro.html). In each country around 1500 respondents
participated in an hour-long face-to-face interview.
The GGS is a panel survey of a nationally representative sample of the
1879-year-old resident population in each participating country. In each
691
EUROPEAN SOCIETIES
3.2 Measurement
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692
Self-employment in post-communist economies KARPINSKA ET AL.
children
Estonia 569 4647
Self-employment 0 1 0.083 0 1 0.087
Education
Less than 0 1 0.141 0 1 0.109
secondary
Secondary 0 1 0.605 0 1 0.541
Tertiary 0 1 0.255 0 1 0.350
Age 19 63 38.888 11.027 20 63 40.101 11.001
Male 0 1 0.508 0 1 0.384
Married 0 1 0.580 0 1 0.505
Number of 0 4 0.991 0.954 0 6 1.064 1.032
children
Hungary 371 7243
Self-employment 0 1 0.097 0 1 0.102
Education
Less than 0 1 0.472 0 1 0.118
secondary
Secondary 0 1 0.321 0 1 0.670
Tertiary 0 1 0.205 0 1 0.212
Age 18 60 38.881 10.223 18 63 37.982 10.405
Male 0 1 0.520 0 1 0.494
Married 0 1 0.663 0 1 0.592
Number of 0 5 1.146 1.022 0 7 1.108 1.074
children
Russia 776 6062
Self-employment 0 1 0.053 0 1 0.052
Education
Less than 0 1 0.089 0 1 0.048
secondary
Secondary 0 1 0.383 0 1 0.479
High 0 1 0.528 0 1 0.469
Age 18 60 38.679 9.994 18 60 38.571 10.401
Male 0 1 0.541 0 1 0.426
Married 0 1 0.656 0 1 0.560
Number of 0 4 1.035 0.906 0 7 0.974 0.864
children
693
EUROPEAN SOCIETIES
4. Results
694
TABLE 2. Logistic regression of being self-employed on individual characteristics, countries, and time (coefficients, standard errors, and odds
ratios)
Level of education
Less than
secondary (ref)
Secondary 0.394*** 0.081 1.484 0.369*** 0.081 1.446 0.374*** 0.082 1.453
Tertiary 0.527*** 0.085 1.693 0.611*** 0.085 1.842 0.616*** 0.086 1.852
Age 0.161*** 0.020 1.174 0.175*** 0.020 1.191 0.175*** 0.020 1.191
Age2 0.002*** 0.000 0.998 0.002*** 0.000 0.998 0.002*** 0.000 0.998
Male 0.770*** 0.047 2.159 0.771*** 0.047 2.162 0.771*** 0.000 2.162
Married 0.005 0.054 1.005 0.013 0.055 1.013 0.013 0.055 1.013
Number of children 0.057* 0.027 1.058 0.034 0.027 1.035 0.034 0.027 1.035
Countries
Russia (ref)
Bulgaria 0.540*** 0.070 1.716 0.542*** 0.074 1.719
Hungary 0.774*** 0.068 2.168 0.768*** 0.072 2.155
Estonia 0.620*** 0.075 1.858 0.618*** 0.079 1.855
Year
1996 0.090 0.084 0.914 0.106 0.172 0.899
2005 (ref)
Countries 1996
Russia (ref)
KARPINSKA ET AL.
Bulgaria 0.032 0.231 0.968
Hungary 0.110 0.251 1.116
Estonia 0.016 0.236 1.016
N 27044 27044 27044
Constant 6.645 0.376 0.001 7.417 0.389 0.001 7.417 0.389 0.001
695
higher than in the reference category, while in Bulgaria they were 1.7
times higher. We expected Bulgaria to have the lowest odds of self-
employment, because the macro conditions in Bulgaria were more adverse
to self-employment than in the other three countries. Instead we find that
Russia is the outlier with clearly lower levels of self-employment than the
other countries. Compared to Hungary, however, in Bulgaria the odds of
self-employment are significantly lower.
Model 2 also includes a dummy variable distinguishing 1996 from 2005.
Our hypothesis that self-employment became more common when the
transformation proceeded, is not supported; the odds of self-employment
in 1996 were not significantly different from those in 2005.
In Model 3 we investigate country specific trends in self-employment.
We expected that especially in Bulgaria there would be an increase of self-
employment, because both unemployment and corruption dropped.
However, none of the countries deviates from the general pattern. In all
countries the odds of self-employment in 2005 are the same as the odds in
1996.
Table 3 shows the results of models including interactions between
education and the countries and time. We do not present the interactions
themselves but instead the country and year specific effects of education.
For example the effect of secondary education in Bulgaria (Model 5) is
0.502. This means that in Bulgaria the odds of self-employment for
individuals with secondary education were 2.65 times the odds of those
with less education. The effect was calculated by adding the main effect
(0.217, the effect for Russia) and the interaction effect for Bulgaria
(0.719, not presented in the table).
In Model 4 we observe that the effect of education did not significantly
increase over time. Increasing privatisation, somewhat lower levels of
unemployment, and lower corruption albeit not in all countries did
696
TABLE 3. Logistic regression of being self-employed: country and period specific effects of education (coefficients, significance levels, and
odds ratios)
Less than
secondary (ref)
Secondary 0.345 1.412 *** 0.451 1.570
Tertiary 0.561 1.752 *** 0.973 2.646
Model 5 Russia (ref.) Bulgaria Hungary Estonia
Level of education
Less than
secondary (ref)
Secondary 0.217 0.805 0.502 1.652 ** 1.063 2.895 *** 0.322 0.725
Tertiary 0.033 1.034 0.664 1.943 ** 1.218 3.380 *** 0.213 1.237
Model 6 Russia 2005 (ref.) Bulgaria 2005 Hungary 2005 Estonia 2005
Level of education
Less than
secondary (ref)
Secondary 0.184 0.832 0.478 1.613 ** 1.019 2.770 *** 0.317 0.728
Tertiary 0.037 0.964 0.639 1.895 ** 1.189 3.284 *** 0.166 1.181
Model 6 continued Russia 1996 Bulgaria 1996 Hungary 1996 Estonia 1996
Level of education
Less than
KARPINSKA ET AL.
secondary (ref)
Secondary 0.600 0.549 0.710 2.034 ** 1.626 5.083 *** 0.434 0.648
Tertiary 0.490 1.632 0.858 2.358 1.310 3.706 0.564 1.758
*p B 0.05; **p B 0.01; ***p B 0.001: for Russia and 2005 (the reference categories) the significance refers to the main effect of education, for all other
countries and for 1996 the significance refers to the difference between the educational effect in this country or year and the educational effects in the reference
697
category.
All models include the following main effects: age, age2, male, married, number of children, country, year.
Model fit Model 4: x2 597.10, df 13; model fit Model 5: x2 645.16, df 17; model fit Model 6: x2 656.25, df 25.
EUROPEAN SOCIETIES
capital for the likelihood of being self-employed has already been refuted
by the results of Model 4. Model 6 shows that single countries do not
show the expected trend either. If any change occurred, than it was in the
opposite direction: effects of education were stronger in 1996 than in 2005
(only significant in Hungary).
In this study we investigated which factors affected the odds of being self-
employed during the transition from a planned to a market economy in
post communist societies. The focus of our analyses was on the structural
context in which individual decisions to become and stay self-employed
were embedded. In line with our expectations, individuals take the
decision to enter self-employment or to stay self-employed not only on the
basis of their individual resources, but their decisions are shaped by
structural possibilities and obstacles.
We hypothesised that higher levels of (mass) privatisation create more
possibilities for entrepreneurship, not only because of the transfer of
public property to the private sector, but also because at the beginning of
the transition, the legal systems were often inadequate to guarantee private
proprietorship and individual commercial autonomy. Moreover, we
expected that a lower level of corruption would stimulate private economic
activity, by lowering the operating costs. And we expected that in countries
with a low unemployment rate, more individuals would choose to become
self-employed. We were not able to directly test the influence of macro
conditions, but a careful examination of the empirical results indicates
which conditions played a more important role than others.
With respect to the likelihood of self-employment, we find a clear
divide between Russia and the other three countries. The main reason why
698
Self-employment in post-communist economies KARPINSKA ET AL.
we did not expect this divide is that Russia was characterised by mass
privatisation. This type of privatisation was thought to be favourable for
self-employment, because (parts) of firms were directly transferred to the
population. It may be that mass privatisation was successful on the short
term, but its effect is not visible in 1996 or 2005. Instead, the high
corruption in Russia may be the main barrier towards self-employment.
Aidis and Adachi (2006) already indicated that Russia faced severe
structural obstacles towards entrepreneurship (high corruption, entry and
exit barriers, and lack of rules of law).
The self-employment level in Bulgaria, on the other side, is
unexpectedly high given the unfavourable conditions for self-employment
in this country. But this finding is also less surprising if the effect of mass
privatisation would be weak or non-existent. Both unemployment and
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corruption dropped in Bulgaria over the years, making this country more
equal to Hungary and Estonia, the countries with the highest levels of self-
employment in our study.
Furthermore, our results suggest that after the first years of the
transition had passed, the mechanisms steering self-employment in post-
communist economies and market-oriented economies are not becoming
more similar. This result points again to the importance of corruption.
With corruption scores around 5 (and even worse for Russia), the countries
in our study score still much lower than the scores of Western European
countries that are 8 and 9. And with the exception of Bulgaria, corruption
levels did not drop significantly between 1996 and 2005. The development
of propriety rights and clear rules of law are a necessary starting point, not
only to weaken the entry barriers into self-employment, but also to increase
the influence of human capital on exactly that entry process (Arum et al.
2000; Hinz 2000; Pfeiffer and Reize 2000; Barbieri 2001).
The most puzzling finding of our study is the very weak to non-existent
effect of education on self-employment in Estonia. In this respect Estonia
does not differ much from Russia. However, with respect to corruption,
type of privatisation and level of self-employment Estonia is much more
similar to the three other countries. Future research could investigate
whether this similarity has cultural reasons. Dinello (1998, 1999) suggests
that Russian culture is opposite to the homo economicus which might
hamper the transition to a market economy. Estonia has a large Russian
minority.
Although our findings shed more light on the determinants of self-
employment, we need to be careful with drawing more general conclusions
based upon these results. The number of countries was too small to
estimate hierarchical models including country characteristics as variables.
Our solution was to compare individual countries. If data on more
post-communist economies would be available, entering the country
699
EUROPEAN SOCIETIES
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