Debate On The Transition of Post-Communist Economies To A Market Economy

DEBATE ON THE TRANSITION OF POST-COMMUNIST ECONOMIES TO A MARKET ECONOMY
Author(s): WLADIMIR ANDREFF, ANDERS SLUND, ALEKSANDER BAJT, JOZEF M. VAN

BRABANT, ANDRS BRDY, ELLEN COMISSO, BLA CSIKS-NAGY, MAREK DABROWSKI,
BRUNO DALLAGO, STANISLAV GOMULKA, PHILIP HANSON, ARYE L. HILLMAN, BRANKO
HORVAT, BLA KDR, MICHAEL KEREN, PETER KNIRSCH, JNOS MTYS KOVCS,
FERENC KOZMA, HELMUT KRAMER, LSZL LENGYEL, SILVANA MALLE, PTER MIHLYI,
ALEC NOVE, ALFRED SCHLLER, DIRK WENTZEL, MRTON TARDOS, DM TRK, ...
Source: Acta Oeconomica, Vol. 44, No. 3/4 (1992), pp. 219-378
Published by: Akadmiai Kiad
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Acta Oeconomica,Vol. 44 (8-4), pp. 219-37S (1992)
DEBATE ON THE TRANSITION OF POST-COMMUNIST

ECONOMIES TO A MARKET ECONOMY
This is the secondtimethat Acta Oeconomicahas carriedout an inquiry
and domesticscientific
of the international
community.
involving
leadingfigures
In 1988-89our questionaskedwhethera socialisteconomycould be reformed,
bothfromHungaryand
and we soughttheopinionsofrespectedsocialscientists
abroad. Then,thefirstquestioncentredupon the extentto whichthe socialist
withinit;
ofpublicproperty
systemcouldbe reformed,
giventhe preponderance
thesecondquestionaskedtheexpertto identify
thelimitsto reform.
answerto thoseearlierquestions,forsince
Historyhas provideda striking
thatfirstinquirythesocialisteconomicsystemhas collapsedin a dozencountries.
in
to ponderoverthe chancesof reform
Today it seemsto be an anachronism
socialisteconomies.What is interesting
forus todayis transition:namely,the
fora democratic
ofinstitutions
legalstate
necessary
up andstrengthening
building
and marketeconomy.
thattransition
In 1989optimism
wasoverwhelming
andpeoplewereconfident
has receded.
wouldbe relatively
rapidand easy. As timehas passedenthusiasm
Nowtheopinionprevails
thatthenewcountries
arisingfromtheashesoftheSoviet
empirewillgo througha deep crisis,and recessionwillbe longerthanexpected.
Thereis a strongtemptation
to declaretheregiona crisiszonewhichwillonlyclose
with
the
of
up
developedpart theworldin theremotefuture.Withourquestions
debateof
the aim has been to rekindleand channelthishiddenand fluctuating
and
optimists pessimists.
- amongthem
socialscientists
We putto somesixtyHungarianand foreign
somewhoparticipated
in the 1989inquiry thefollowing
questions:
to a market
1. What do youregardas the mainbarriersof the transition
in
the
countries?
economy
post-communist
2. Whatmeasuresand techniques
do yousuggestto acceleratethetransition
process?
answersreachedtheedsomethirty
fromeverybody:
Wedidnotgetanswers
are arranged
itorialoffice.
the
volume
and
are
in
this
respondents
They published
in alphabetical
order.Let us thankWladimirAndreff
, Andersslund,Aleksander
Bajt, AndrsBrdy,JozefM. van Brabant,Ellen Comisso,Bela Csiks-Nagy,
MarekDabrowski,
BrunoDallago,StanislavGomulka,PhilipHanson,AryeHillman,BrankoHorvat,Bela Kdr, MichaelKeren,PeterKnirsch,JnosMtys
Kovcs, FerencKozma, HelmutKramer,Lszl Lengyel,Silvana Malle, Pter
Mihlyi,Alec Nove,AlfredSchllerand Dirk Wenizel,MrtonTardos,Adam
forsendJan Winiecki
Trk,Lszl Urban,JzsefVeress,Hans-JrgenWagener,
ingin theiranswers.
1
Acta Oeconomica44, 1992

AkadmiaiKiad, Budapest

220
DEBATE: WLADIMIR ANDREFF
Not all respondents

stuckto the originalquestions,and readerswillfind
accuratescientific
filledwithpersonalemotions.It would
analysesand comments
be wrongto complainaboutthisdiversity.
In one ofourfuturenumberswe will
publishan analysisofthedifferent
opinions.
Manyauthorsdid notgivetitleto theirpapersso forthesakeof a unified
formtheoriginaltitlesare putintothefootnotes.
WLADIMIR ANDREFF*
The answeronemaygiveto yourquestionsreliesheavilyon whatis supposed
to be the targetof the transition
economies(PCEs). Saying
in post-communist
thatthetransition
aimsat implementing
is nota well-specified
a marketeconomy
statement
insofaras marketsocialism,a self-management
system,welfarestate
a
market
and
capitalism, "pure"
capitalism a mixedeconomy
economy,
monopoly
well
fit
the
a
definition
of
market
Whatever
myownviewofwhat
might
economy.
thatthe
thetransition
outcomecouldbe, I shalltakeit forgrantedin whatfollows
the
of
the
as
as
soon
transition
in
is
to
reach
PCEs
target
process
possible state
ofa capitalist-type
i.e.
marketeconomy,
and a "modern"
something
one, excluding
likeprimitive
capitalismas it firstspreadthroughWesternEuropein previous
centuries.The transition
shouldnot (and fortunately
cannot)be a returnto this
latterkindofpre-communist
we
haveto keepin mindthat
In
addition
economy.
in Europeand
centuries
a
taken
modern
has
market
capitalist
economy
developing
suchas South
NorthAmerica,and at leastfourdecadesin "latecomer"countries
Koreaor Taiwan.Therefore
in thePCEs thehigherwill
thequickerthetransition
be thecost. In myanswerI shallassumethatpeopleare to someextentreadyto
towards
bearthiscost,especially
ifit is balancedbysmoothand sustainedprogress
a capitalistmarketeconomy.Peoplewouldregardanyprocrastination,
anystop
andgo,anyturning
reforms.
Onlya "ratchet"
back,as onemorefailureofeconomic
transition
can be a success.A bumpyroadto marketcapitalismwouldbe a dead
end.
Question1
ofeachPCE,
Barriers
totransition
aredeeplyrootedinthedomestic
economy
the
PCEs are
and
world
but severalhindrances
the
from
way
economy
originate
externalconstraints.
inserted
intoit. Let mecall thesehindrances
*Universit
PierreMendes-Francede Grenoble
Ada Oeconomica44, 1992

221
DEBATE:WLADIMIRANDREFF
I shall sketchfirstthe main domesticbarriersto transition.Aftera fifteenand Lavigne 1987), followedsince 1988yeareconomiccrisis(Andreff1985; Andreff
the
wide transformation,
89 by the unavoidablebreakdownlinked to any systemeconomyhas definitelybeen destabilizedin Central and Eastern Europe and the
USSR. Price deregulationhas turned increasingdisequilibriaand shortagesinto
open inflationary
pressuresand even hyperinflation
(Poland, Bulgaria,Russia); and
- of
thenan increasinglack ofconfidencein the smeltingvalue- and even usefulness
domesticcurrencyhas triggereda "dollarization"of the economy,i.e. an extensive
flightof people fromdomesticcurrencyto hard currencycash. Such a destabilized
erodes savings
and inflationary
economyhindersdomesticand foreigninvestment,
and (fortunately)evaporates the currencyoverhang;hence it deprivespeople of
any possiblepurchasingpowerwhenassets are on sale, and it underminesany mass
privatizationprogramme.
With or withoutthe IMF's sponsorship,a harsh stabilizationpolicy then
becomes a necessity.It is based on subsidy cuts, restrictedcredit,a positivereal
rate of interest,and wage control.It is usually combinedwiththe freeingof most
prices,thisbeinga necessarymeasureforthe removalof the pricesysteminherited
fromthe shortageeconomy. Whetherit is successfulor not in puttinga brake
on inflation,this austeritypolicy has some unavoidablebuilt-indrawbacksin any
countrywhere it is at work, includingPCEs. First of all it causes a demandpulled collapse in the GNP rate of growth(which may even fall below zero), and
of the
consequentlyan increasingrate of unemploymentand an impoverishment
mostdestitutesocial strata (retiredpeople, youth,unskilledworkers,etc.). Beyond
a certainthreshold,recessionand unemployment
stand up as crucial barriersto
transitionand pave the wayforpeople's discontentconcerningthe path, or at least
the agenda, of economictransformation.
This does not mean that the barriersof recessionand unemploymentare
raisedonlyby the cutsin demand. On the supplyside, not all enterprisesare accustomedor willingto adjust productionto freeand flexibleprices,or to put a ceiling
on wages and to lay offredundantworkers.This is despite the fact theirbudget
constraint(followingthe meaninggivenby Kornai) has been hardenedby subsidy
cuts and higherinterestrates. As a result,severalgoods and manyservicesremain
in shortagewhileothers,now too expensive,are out of reach formany consumer
incomes. Unemployment
is kept withinlimitsbecause enterprisesdo not give up
theirbehaviourof "boarding"labour, but an expansionof unemployment
may be
a
success
to
be
were
if
the
and
of
the
expected
economy
privatization
restructuring
this
risk
A
stabilization
aversion;
feeling
policystrengthensenterprise
(see below).
is even exacerbated by shorterand (for the firsttime) more uncertainoutletsthus investmentdiminishes.This factoradds to the above-mentionedbarriersto
transition.Moreoverdepressedinvestmentsustainsrecessionand unemployment.
Except in the fiercestprimitivecapitalism- and characteristicof its early
age increasingpovertyand unemploymentcannot stay unregulated. Today so1*

222
- must be conceived
ciai safetynets- as they are called in the IMF's watchwords
and implemented:namely,a minimumwage, some kindof wage indexation,unemploymentbenefits,lay-offcompensationand pensionrevaluation.We would stress
that in some respect the safetynets themselvesmake up additional barriersto
transition.First, theycontrastwith the stabilizationpolicy in increasingbudget
expendituresand in alleviatingdemand cuts. Second, theyfuel two kinds of behaviourwhichrecall the communistregime:state paternalism(towardsconsumers
have struggled
here) and the people's habit ofreceivingstate assistance. Reformers
steadilyagainstsuch cornerstonesof the communistsocial order,and theyhardly
considertheseotherwisetoday,whatevernecessarysafetynets are called now. Anyway,withoutsocial safetynets people's support fortransitionmightwell weaken
sharplybeforestabilizationis achieved.
A last built-indrawbackof stabilizationpolicy deservessome commentand
concernssaving. This latteris eroded firstby inflationand then by a decrease in
real wagesinsofaras moneywages are now indexedat a rate lowerthan 100% ofthe
inflationrate in all PCEs. Consumersare impelledto spend a largerpart of their
incomeon more expensiveconsumergoods, especiallyforconsumerdurables and
servicesassociated withthe pictureof a genuinemarketeconomy.As savers,they
cannotbe expectedto rushin and buy newlyissued sharesor othersecuritiesin the
framework
of a privatizationprogrammewhile theirsavingssmelt and theirbasic
needs are hardlysatisfied.In general,the "marginalutility"of shares (Filatotchev
1991) is still low in PCEs. Mass privatizationseems to be impossibleon the basis
of domesticsavingalone. Justa happy fewmightbe interestedin buyingassets or
shares; theyare those savers who concentratethe major part of theirsavings: in
the USSR, 2 millionpeople withthe highestincomesheld 53,8% of total savingsin
1990, the next 9 millionhighestincomesheld 15%1.
Who were these big severs? No doubt most of them were formercommunist leaders,managersholdingjobs on the nomenklaturalisting,operatorsin the
second economyand mafia members,i.e. championsin bargaining,briberyand
speculation and not professionalsin contracting,marketingand industrialrisktaking. This evidence raises two other barriersto transition. On the one hand,
new PCEs leaders and many citizensconsiderit to be politicallyunacceptablefor
formerleaders to become new ownersof state assets, and morallyunbearablethat
theymay be speculatorsor mafiosi;such a standpointthrowslighton whythe socalled "spontaneous"privatizationwas doomed to failurein Hungary,Poland and
Czechoslovakia.The purchaseofstate-runenterprisesby theirformermanagershas
soon been prohibitedor controlled.On the otherhand, formerleaders and mafia
are the richestsocial stratain the PCEs, and thustheyare the onlyones who could
financea significant
part of privatization.Political and moralfeelingsaside, ifthey
were allowed to buy state assets, it would appear throughtheir behaviour that
Calculated fromEKO (1990).

223
- an entrepreneurial
PCEs areshortofa genuinesocialstratum
upperclass- eager
to maximize
itswealthbyearningprofits
and marketbusiindustrial
fromcurrent
ness. In otherwords,PCEs lacka wealthycapitalistclassinvolvedin production,
exchangeand finance.Suchan economicclassusuallyformsduringtheprimitive
accumulation
ofcapital. Anotherabsentstratumis a middleclass (peculiarlyan
uppermiddleclass) ofwould-beentrepreneurs
readyto makemoneyand to come
intobusiness.Sucha socialstratumis neededforreshuffling
theupperclass and
ofthemiddleclassto
it undercompetitive
keeping
pressure.The strongincentive
At
investin businessis a permanent
entrepreneurs.
challengeforwell-established
for
anyrate,it willtakemanyyears,probablydecadesor at least a generation,
thesenewsocialstratato emergein PCEs.
It is quiteastonishing
thatnewpoliticalleadersin PCEs havebeenso overis concerned.
over
the last twoyearsas farprivatization
optimistic
(or naive?)
Withoutinadequatesavingsand entrepreneurship,
howcouldwe imaginethesuccessofbigprivatization?
Indeed,therealprivatization
processis laggingfarbehind
thescheduled
One
privatization
programmes. mayspelloutseveraladditionalbarthe trickyissueof
riersto privatization
in PCEs: the size of state enterprises,
still
a
state
the
of
institutional
absence
underdeveloped
investors,
assets,
valuating
it
two-tier
a
market
too
tinycapital
bankingsystem,
(where exists),inaccurate
I do notwantto elabobusinesstaxesand,ofcourse,a stilldestabilized
economy.
ratehereontrendsthatarecoveredintheavailableliterature
1991;1992a;
(Andreff
I
would
however
focus
on
three
impliedbythesehinlogicalconsequences
1992b).
a chanceof being
have
drancesto privatization.
that
the
First, onlyenterprises
will
a
are
the
most
successfully
privatized
profitable:potentialbuyer add a riskpremiumto expectedprofit,
theeconomicturmoilin the PCEs. Second,
considering
- at leastin itsfirststage- to a
theextentofbigprivatization
limited
is obviously
and comsmallsampleofstaterunenterprises
thosewhichare profitable
; namely,
industries
in
ducks"
"lame
world
standards.
Industrial
market
heavy
petitiveby
of big privatization
cannotbe privatized
easily. Third,becausethe acceleration
is notworkable,
well-known
Westerneconomicadvisers(Sachs 1991; Blanchard,
measuressuchas
Dornbush,
Krugman,
Layardand Summers1991)havesuggested
or municworkers
to
state
assets
or
for
free
citizens,
givingaway
(shares vouchers)
or
as
mutual
funds,pensionfunds,
out,
ipalities,
franchising,
leasing,contracting
trustsand equityholdings.Noneof
employee-stock
ownership
plans,investment
if we regardthe
theseschemeswouldachievemorethan a pseudo-privatization
and holdings
trusts
transfer
ofproperty
if
investment
on
assets.
Moreover,
rights
wereto be state-run
we can say that almostnothingwouldchangein termsof
on thispoint,see Andreff
1991;1992a;1992b).
property
rights(foran elaboration
ofPCEs'
The otherbarriers
arelinkedto a strongconcentration
to transition
Concentrated
institutions.
in
to
lack
of
market
state
trusts
and
a
industry big
industrial
evenamongnewlyprivatized
structure
impedestheriseof competition
thatare
these
latter
As
a
result
of
enjoyextra-profits
concentration,
enterprises.
Ada Oeconomica44> 1992

224
linkedto a monopolisticor oligopolisticsupply side. Enterpriseand industryrestructurationis a pre-conditionformakingstate trustsprofitable,forgettingrid

of "lame ducks", and for dismantlingmonopolies. Of course, all PCEs have attemptedin recentyearsto establishmarketinstitutionssuch as commercialbanks,
stock exchanges,brokers,auditingoffices,accountants,business lawyers,real estate agents, advertisingand marketingagencies, export managementcompanies
and commercialcourts. New legislationand regulationofteninclude a company
law, a new accountingsystem,a bankrupcylaw, anti-monopolyregulation,laws
securingprivateownership,land ownershipand contractingrights.Contraryto the
most liberal trendof thought,realityshows that a marketeconomycannot work
withouta whole set of institutionsand regulations.As these marketinefficiently
stitutionsmatureovera longerperiod of time this last barrierto transitionshould
thenvanishin PCEs.
In additionto domesticbarriers,transitionsuffers
fromexternalconstraints.
The internationalspecialisationof PCEs and product quality were heavilydeterminedby tradewithintheformerCMEA and theyhave turnedout to be inadequate
forcopingwithcompetitionin Westernmarkets.Restructuring
is again a keyissue
here. Moreover,formerEasternoutletshave collapsed due to the internationaldisintegrationof the CMEA and the USSR (whichhas split into independentstates);
decreasingtrade flowsamong formerCMEA membershave not yet been balanced
by an increasein trade withthe West- up to now,increasescan only be noticedin
Hungary,Poland and Czechoslovakia(Economic ... 1991; Andreff1992c). Shrinking foreigntrade exacerbatesthe slowdownin economicgrowth. Trade deficitin
hard currencyhampersthe stabilizationpolicyby worseningconditionsforstabilizing the rate of exchange(usually taken as the nominalanchor),and also raises the
dangerof inflation.Unbalancedtrade does not improveforeigndebt management,
especiallywhen foreignbanks are less keen to loan new creditsto PCEs and are
anxious about having theirpreviousloans repaid. All in all, it can be seen that
internationalbankershave not reassessedthe different
PCEs.
risksof the different
Therefore,the major part of the transitioncost will not be coveredby a net inflow
of foreigncapital.
A highriskcountry,along with a destabilizedeconomy,resultsin an investmentclimate not so welcomingforforeigninvestors.Capital is a shy deer which
runs away fromcountriesbearingpolitical and economicinstability,and looks for
fiscalhavens,freetradeareas and "social paradises" (areas grantingminimallabour
trade unions,etc.). Comparingthe numberof new joint venture
rights,forbidding
projectsstartedin Hungaryand in the USSR in 1991,one reachesthe obvious conclusionthatforeigndirectinvestmentwillonlyaccrueto the less unstablePCEs. In
thesecountriesforeigncapital willbe ofsome help forbig privatization,althoughit
willfillthe gap betweendomesticsaving and the financialrequirementofmass privatization.OtherPCEs willdepend,to some extent,on internationaleconomicaid.
This latteris at the momentratherlimitedcomparedwiththe needs of transition

225
and privatization,but aid is heavilyadvertisedin the West and this has stirredup
increasingnationalfeelingsin PCEs. National prideand the feelingof dependency
may put a brakeon the new insertionof PCEs into the worldeconomy.
Question 2
Accordingto my personal assessment,there are so many barriersto transition that acceleratingits momentumwould endangerthe whole process. If too
many drawbacks(resultingfromstabilization,increasedcompetitionand privatization) wereto accumulatein a shortperiod of time,theywould destroythe social
consensussupportingthe transitionprocess in PCEs. Hence, the firsttechnique
I suggestforany purpose linkedto transitionis: "Do not rush". Transitionto a
capitalistmarketeconomyrequirestwo or threedecades, not less. Any attemptat
shorteningthe wayout oftransitionis doomed to failurebecause PCEs would then
reacha kindof distortedeconomicsystem,instead of an efficient
capitalistmarket
but they
economy.By sayingthis I am aware that I am hurtingmany reformers,
shouldnot forgetwhat accelerationhas meantin countrieswhereindustrialization,
collectivization,nationalizationand even economicreformshave been accelerated
... and failed beforebeing abandoned (includingGorbachev's firstwatchwordof
uskorenie). Put in a nutshell: better is a therapywithoutshock than a shock
withouttherapy.Insofaras stabilisationpolicy is concernedI suggestsome kindof
gradualism;and whereinstitutionsand economicstructuresare concerneda "big
bang" seems to me worsethan a more evolutionaryapproach to change. Frankly
speaking,Hungaryand maybe Slovakia and Romania are moreillustrativeof what
I would advise than the momentumof transitionimposed by Polish, Czech and
Russian shock therapists.I like to recall what Mr. Pter Akos Bod, the President
ofthe NationalBank ofHungarysaid at an IMF meetingin February1992 (Bulletin
it
1992): "If the transitionis swiftand implementedin a democraticframework,
mustbe financedfromabroad. If,forlack of such finance,the countryhas to rely
on its own resources,a swifttransitionmust be secured by a strongand authoritariangovernment.Finally,a pacificand self-financed
transitionwill necessarily
taketime". Hungaryexemplifies,
morethan any otherPCE, the last sentence,with
whichI completelyagree.
I thinkthat competitionand competitivebehaviourcan only be fuelledinto
PCEs fromabroad, given my assessmentof industrialconcentrationand existing
social strata. Consequently,I would focus firston measureslikelyto improveinternationalspecialisationand the competitivenessof each PCE and its insertionin
the worldeconomy:
1. A unified,stable and adjustable rate of exchange,neitherfixed,nor flexible, must be backed with a stabilizationfund in hard currenciesobtained from

226
therate
international
aid. In case ofa lastingbalanceofpayments
disequilibrium,
ofexchange
withina Cenwouldbe re-adjusted
withothercountries
afteragreement
tralEasternEuropeanunionofpayments
(see below),in orderto avoid "beggarpolicies. Some of thesePCEs have not yetunifiedtheirrateof
my-neighbour"
had an unstable
exchange(Romania,the former
USSR) and somehaverecently
rate (Bulgaria). Innermarketpriceswouldthenreflect
international
pricesand
competitive
pressures.
2. Aneconomy
trademustbe basedonthemostfavoured
fullyopentoforeign
nationagreement
and theabsenceofquantiwithall partners,
GATT-typetariffs
tativerestrictions
to trade.Combinedwiththefirstmeasureall thiswillto some
at leastwhenviewedfromabroad.
degreemakePCEs' markets
competitive,
3. International
economic
frommeasures1 and2 willsoon
pressures
resulting
showwhichenterprises
are efficient
and competitive
standards,
by international
whichonescan surviveafterbeingreshuffled,
whichonesneedto be restructured
and re-specialized
"lame
on international
and whichones are definitely
markets,
ducks"to be closeddownand liquidated.A partofthisselectionprocessmightbe
achievedbyforeign
ifmeasureslistedunder6 belowwereat work.
competitors
4. It is a crucialand urgenttaskto stopthecollapseoftradeamongformer
CMEA members.A newkindof agreement,
ifnot union,amongthemis necessary. Let me call it a CentralEasternEuropeanUnionofPayments(CEEUP),
recollections
oftheEuropeanUnionofPayments
callingforth
(EUP) ofthefifties.
subwouldbe optional,but we can thinkin termsof thefollowing
Membership
set ofcountries:Poland,Czechand SlovakFederalRepublic,Hungary,
Romania,
Bulgaria,Russia,Belarus,Ukraine,Moldaviaand Slovenia(the questionofmemfromtheUSSR breakdown
Statesresulting
obviously
bershipofAsianIndependent
remainsopen). The CEEUP populationwouldthenreachalmostthatoftheEC
and theEFTA takentogether.
CEEUP couldbe morethantenseparatedmarkets
ifmeasures1 and 2 wereimplemented
in each ofthemand if,in a firstand short
in a commoncurtrade
balances
were
stage,foreign
compensated
amongmembers
wouldbe mutually
rency(whynotthe Ecu?); in a secondstage,theircurrencies
convertible
wouldbe achieved,
andin a thirdstageconvertibility
inhardcurrencies
and stathesamepathas EUP countries.Rateofexchangeadjustments
following
and notonly
bilization
withotherCEEUP members,
policieswouldbe negotiated
withtheIMF, the EC and the G-24. Moreover,
theCEEUP mightbe a channel
towardsEC membership
forsomecountries,
yetprobablyno earlierthantheyear
2000 in anyof the PCEs; CEEUP could at least attemptreachto a freetrade
withtheEC and theEFTA.
agreement
5. Withouta newheavyburdenofforeign
debttowardsotherCEEUP coundebtwiththeWestin
tries,eachofthemwouldhaveto manageitshardcurrency
theharshest
Western
manner.Payinginterest
debtwouldstrengthen
and repaying
confidence
and aftera whilewouldattracttradeand capital;thisinflowofhard
currencies
wouldbe a pre-condition
PCEs
forreaching
thetargetofconvertibility.

227
leadersmusthardenthebudgetconstraint
offoreign
on thestate'smanagement
and a
Debt rescheduling
to do it forenterprises.
debt,just as theyare attempting
aid in
moratorium
ofthePolish-type,
forinstance,are ofcoursea formofforeign
theshortrun,butdo notimprove
climate.Anincrease
thebusinessandinvestment
butit
in Western
and international
aid obviously
has to be achievedbybargaining
instituof
market
shouldfinance
and
the
development
privatization
restructuring,
tionsas a priority.
as a cornerstone
aid shouldnotbe considered
Anyway
foreign
forthesuccessoftransition,
whichmustand can onlybe a domesticachievement
first.
wouldcomprise
in theworldeconomy
6. A comprehensive
policyofinsertion
the least restrictive
direct
on
inflows
of
investment,
including
foreign
regulation
labourlegfiscalholidays,
freetradeareasor specialzoneswiththemostflexible
islation,and lowwages(whichwouldbe reachedby thestabilization
policy).No
who
noenterprise,
directinvestors,
no assetmustbe keptclosedtoforeign
industry,
evento the extent
shouldbe allowedto participate
in privatization
programmes,
ofthe
ofbuyinga 100%sharein a privatized
enterprise.No doubt,exploitation
labourforce(as it wassaidbefore)wouldbe thebillto be paidforattracting
skills,
No
to
PCEs.
and
from
multinational
efficient
corporations
technology
management
all
like
in
some
to
would
be
at
held
extent,
just
doubt,economic
bay
independence
whenbuildingcapitalcountries
wellintegrated
intotheworldeconomy.However,
ismthequestionaddressedto capitalis not "whereare youfrom?"
; it is "whatis
thanthe
beenmoreefficient
to be done?".Foreigncapital'sanswerhas frequently
onegivenbyLenin.
whichdo notaim at acceleratI suggestmeasuresforthedomesticeconomy
thatthebarriers
convinced
as
I
am
a
insofar
transition
as
first
rank
priority,
ing
and in
to transition
are too numerous,
too deeplyrootedin economicstructures
or
a
short
or
to
be
removed
therapy,
shocking
people'sminds,
overnight through
in a rush.
not. All measuresareofcourseurgent,
buttheycannotbe implemented
thewhole
to consolidate
Anylistedmeasuremustentailitsratcheteffect
byhelping
The
a
success.
transition
measure
to
be
This
each
listingbelow
process.
requires
is nota sequencing;
to thelengthoftheperiodof
measuresare rankedaccording
timerequired
fortheirsuccess.
will
theeconomy
willremainforlongthefirsttask. Austerity
7. Stabilizing
Yet
last tenyearsor more,notthethreeyearsas scheduledin IMF agreements.
it
would
otherwise
be
a
of
cannot
too
harsh
over
such
austerity
longperiod time,
twothreats:one is a self-destroying
stopand go policy(austerity-recovery
trigger
of
and so on) in orderto cope withpopulardiscontent;
the otheris a slowdown
strikes
and
if
not
its
face
of
discontent
dead
in
the
possible
transition,
end,
popular
or riots. A continuous
shouldbe maintained,
austerity
gradualand bearablefor
on classicalmeasuressuchas cuttingsubsidies,balancingthestate
people,relying
witha stable
a tax on profits
the tax system(introducing
budget,modernizing
and
and uniform
a
a
income
rate,VAT, personal
tax, property
tax), restricting
Ada Oeconomica44$ 1992

228
credit,and tightening
controlling
everyone'sbelt exceptthat of new privatecapital
investors. Free marketprices, linked to internationalprices, would be the rule,
but 10 to 15% of all prices could be regulatedas in developed marketeconomies,
includingprices of a small basket of basic foods and other goods coveringbasic
needs.
8. Some auxiliarymeasuresshould go withthe stabilizationpolicy. Bargainfiscalcontrolson
ing and speculativebehaviourmust be brokenby implementing
highpersonalincomesand an extra-taxationmust be applied to personalrevenues
originatingfromspeculativeor unclear businesses. New incentivesto work,aiming at efficient
workingproceduresand fast growthin productivity,have to be
and
implemented. "Positive" incentiveslike bonuses, extra-wages,profit-sharing
distributionof shares are not to be neglected,althoughtwo drawbacksare builtin: a loose allocationof these benefitswould again fuelinflationon the one hand,
and on the otherhand manyof these incentiveshave displayedtheirinefficiency
in
the communistregimes.Therefore"negative"incentivesare needed: the ceilingof
any wage increasemustbe the rate of productivitygrowth;individualinequalities
amongwage earnersmustbe promoted,not as a threatofrelativeimpoverishment,
but as a rewardforbetter,more intensiveand productivework;the threatof unemploymentmightbe of some help for imposinga new economic and capitalist
disciplineon workers.All measuresmustconvergein creatinga new employee-boss
relationshipwithinenterprises,in whichbosses are "the only mastersafterGod",
and new social wage earnerrelationsworklike a stick and a carrot. Instead of
Stalin's stick: "whoeverdoes not work,does not eat" (1936 Soviet Constitution),
the new stickshould be "whoeverdoes not workis laid off'. The carrotshould be
a new social consensussummarizedin the followingphrase: "mass consumption
and an affluent
societyas a rewardforhard and industriouswork", instead of the
communist
consensus: "weak effort
grantedby workersforshortagesand
(implicit)
low qualityin consumption"
.
9. Measures listed under 6, 7 and 8 require,as a counterpart,safetynets.
AlthoughI have already presentedthe safetynet issue, I would still point to two
necessarymeasures. The minimumwage should coverstrictlydefinedbasic needs
and must be indexedon a basket of commoditiesincludingsome goods with regulated prices (see 7 above). A wide gap ought to be maintainedbetween(lower)
benefitand the minimumwage, as an incentiveforthe unemployed
unemployment
to look fora new job. The new employee-bossrelationshipneeds of course some
powerto preventthe fiercest"exploitation"of the labour force. A
countervailing
regulatedrightto strike,industrialtribunalsand strongtrade unions (independentfrompoliticalpartiesand fromthe government
should balance the increasing
"powerof capital" in PCEs.
10. Restructuring
would be implementedaccordingto the guidelinesdrawn
fromthe new assessmentof internationalcompetitivenessof domesticenterprises
enterprises,unable to survive,again
(see 1, 2 and 3 above). Concerninginefficient

229
DEBATE:WLADIMIRANDREFF
a rushin close-downsand liquidationsmightbe unwise,consideringthe necessary

supportneeded fromthe people forthe whole transitionprocess. The bankruptcy
law mustnot be too sharp and worklike an instantchopper. (Are decisionstaken
in Hungaryin May 1992 wise? A strictimplementationof the bankruptcylaw is
expected to cause about 350 enterpriseclose-downsand 1,5 millionlay-offs).The
anti-monopoly
regulationmustbe utilizedcarefullyon a domesticmarketcompetitiveforgoods fromabroad. The main push whichwilldissolvedomesticmonopolies
will come fromforeigncompetitors.Breakingup fromthe verybeginningall state
trustsmightnot be feasiblebecause of eithernatural monopoliesor economiesof
scale and economiesof scope. Moreover,an innovativeproducer(domesticor foreign) alwaysstartswitha monopolisticposition,at least fora while,whenhis new
product is launched on the market. Anti-trust regulationshould not discourage
domesticinnovatorsand new privateownersinvolvedin primitiveaccumulationof
capital,even thoughtheybenefitfromtheirtemporarymonopolyand the accruing
extra-profits.
11. Willy-nilly,
thefactis that a largescale restructuring
can onlybe achieved
and
the
state.
In
for
is
a
by
addition, restructuring
pre-condition profitability
it.
to
undertake
owners
its
cost
would
not
attract
competitiveness; heavy
private
to
be
for
state
which
are
still
Except
ought
enterprises
profitable,restructuring
completedbeforesellingan enterpriseto privatestakes. Hence privatizationwillbe
slow. Meanwhilethe great bulk of big enterpriseswill be kept in the hands of the
state. Underthethreatofredundancytheirmanagersshouldhave newmanagement
criteriaimposed upon them, such as making profit(or at firstreducinglosses),
maximizingsales, reducingturnover,exportingin hard currencies;on the other
hand, the boss of a state trustwill be given large autonomyin decision-making,
especiallydecisionsconcerningprices,supplies,outlets,wages, and the hiringand
firingof employees. This new managementof state enterprisesmightsucceed if
marketinstitutionsdevelop continuouslyand increasinglyshape the everydaylife
of economicbehaviour.
12. Privatizationtechniqueshave to be based on sales. I have suggested
elsewhere(Andreff1991; 1992a; 1992b) that thereshould be a mix of techniques,
includingthe sales of shares,tenderprice offers,directacquisitionsand take overs
ofstate enterprises
by privatefirms.The crucialissue is how to gathera stable hard
core of monitoringshareholders,because small holdersusually behave as sleeping
partnersand neithercan nor will disciplinemanagers and workers. Any other
ofsharesor vouchers
techniquewilllead to a pseudo-privatization.Freedistribution
should only act as an incentiveto work. A capitalistmarketeconomy- everybody
knows- operates accordingto the watchword"nothingfor free": firstof all, no
ownershipshare forfree!
13. Income inequalities,increasingwealth forthe happy few,restructuring,
privatizationand primitiveaccumulationpreparethe groundfora new social stratum to come to the forein PCEs. However,the consolidationof a genuineenActa Oeconomica44, 1902

230
trepreneurialclass, and a middle class as well, will neverthelesstake decades.

Meanwhilevocationaltrainingand new teachingmighthelp to providenecessary
managementskills and thus change economic behaviourso that they can be fitted into a capitalistmarketeconomy. The suggestedtrainingand teachingmust
be concentratednamelyon enterprisemanagement,accounting,marketing,advertising,contracting,bankingand finance,tax systems,business law, foreigntrade
techniques,and economicanalysis. In myview,beyondfinancialaid, Westerncountriesand internationalorganizationsare undera moralobligationto provideheavy
aid in trainingand teachingof that kind. All the more so, because this aid will
be the most efficient
in adaptating the people of the PCEs verycontentious,very
debatable,veryproblematicto the comingcapitalistmarketeconomy.
I would make two remarksin conclusion. I supporta slow transitionwhich
has real chanceofsuccessbecause failurewouldlead PCEs to a veryuncomfortable
situationthatI have called a congruencebetweeneconomicsystem(Andreff1992d).
In short,this lattercan be definedas a mixtureof the worstfeaturesof capitalism
and offormer"existingsocialism" (or shortageeconomy);it would probablybe the
worstperforming
systemof the 21st century.My second remarkis that the leaders
and intelligentsia
of PCEs should not confusecapitalismwitheithereconomicand
political liberalismor the "pure and perfectcompetition"that is found in textbooks (or perfectlycompetitivemarkets). Capitalism always impliessome degree
of monopoly,at least as a resultof innovation,oftenas the outcome of corporate
growth.Capitalist developmentis oftena ratherfierceprocesswhose worsteffects,
to be made bearable, call foreithera strongpolitical and social consensusor an
authoritarianpolitical regime. Here again I join the veryaccurate statementby
Mr. Pter Akos Bod that I quoted above. The most liberal thinkersare probably
wrong:politicaldemocracyand marketeconomyare not twinsisters.
References
.
W. 1985. "The externalconstraintin the economiccrisisof East Europeancountries"
Andreff,
In: Zarembka,P. and Ferguson,T. (eds) 1985. Researchin politicaleconomy.Vol. 8.
Greenwich.
Connecticut:JaiPress Inc.
W. 1991. "A franda privatizlastanulsgai Kelet-Europa szmra". Klgazdasig,
Andreff,
XXXV/9and 10.
W. 1992a "Les dilemmesde la privatisation
dans la Communautd'Etats Indpendants
Andreff,
(ex-URSS)". Lettremensuellede conjoncture,CentredObservationEconomiquede la
Chambrede Commercede Paris,No. 333,janvier.
W. 1992b "Frenchprivatization
Andreff,
techniquesand experience:a modelforCentral-Eastern
Europe?" In: Targetti,F. (d.) 1992. Privatizationprocessesand the role of thepublic
sector. Recenttrendsin CentralEastern and WesternEurope. Dartmouth:Aldershot.
Forthcoming.
W. 1992c "La dsintgration
de l'Europede l'Est" In: "RgioAndreff,
conomiqueinternationale
nalisationet mondialisation",
colloquedu CNRS, Martinique,mai.

231
DEBATE: ANDERS SLUND
W. 1992d "Convergence
orcongruence
betweenEasternand Westerneconomicsystems"
Andreff,
In: Dallago, B., Brezinski,H. and Andreff,
and systemchange:the
W. (eds) Convergence
Aldershot.
in thelightoftransition
in EasternEurope. Dartmouth,
convergence
hypothesis
Forthcoming.
W. and Lavigne,M. 1987. "A wayout of the crisisforthe CMEA economies?"Soviet
Andreff,
and EasternEuropeanforeign
trade.XXIII, No. 3, Fall.
Blanchard,O., Dornbush,Ft.,Krugman,P., Layard,R. and Summers,L. 1991. Reformin EasternEurope.The MIT Press.
Economicbulletin
forEurope, 1991. Vol. 43, November.
EKO. 1990. Ekonomikai organizatsiya
No. 3.
promyshlennogo
proizvodstva,
I. 1991. "Privatization
in the USSR: economicand social problems". Communist
Filatotchev,
economiesand economictransformation,
Vol. 3, No. 4.
La Hongrie:pourone rforme
1992.
graduelle.Bulletindu FMI, 10 fvrier
on
in EasternEurope. WorldBank annualconference
Sachs,J. 1991. Accelerating
privatization
economics.Washington,
D. C.
development
ANDERS SLUND*
intoa market
1. Whatdo youregardas themainbarriersto thetransition
economies?
in
the
socialist
economy
formerly
For
The formerly
socialisteconomieshavebecomeevermoredifferentiated.
one
as
treated
mostpurposes,Hungary,
can
be
and Poland
Czechoslovakia
group,
in Polandare moredifficult.
thoughtheconditions
In all the formerly
socialistcountries
the absenceof secureproperty
rights
little
constitutes
a keyproblem.As longas property
rightshavenotbeendefined,
investment
can be undertaken
and the housingstockwillnotbe improved
signifinto
of property
icantly.The finalsolutionto thisproblemmustbe the transfer
issue
is themostcontentious
privatehands,buthowthatshouldbe accomplished
in thediscussion
on transition.
A problem
thatis peculiarto Hungaryis theveryhightax burden.Together
withSweden,Hungaryhas the highesttaxesin theworld.Swedenin nowtrying
to reducethetax burdenbecausethedisincentives
to workhavebecomeexcessive,
andHungary
wouldbe welladvisedto do thesame. The wayto getoutofrecession
- taxesthanthose
- nothigher
and promoterestructuring
mustbe throughlower
levelscommonplace
in theWest.
The category
of labourthatis in shortestsupplyis lawyers.It has many
The solutionoflegalproblemsand disputestakesa longtime;the
consequences.
*StockhohnInstituteofRussianand East
EuropeanEconomics

232
qualityoflaws tendsto be poor and the adoptionof manylaws is delayed;complex

deals are tardy;the qualityof courtjudgementstends to be low.
The combinationof poor legislationand uncertainpropertyrightsprovides
fertilegroundfor corruption,in particularat the level of local authorities.These
are involvedin the sales of real estate, and this includes sales to foreignerswho
may be preparedto pay substantialsums underthe table.
Statisticsare becomingworseratherthan better,as new privateenterprises
escape registrationand ratherless public moneyis being devotedto statistics.As
a consequenceof exaggeratedbeliefin the fall of production,governmentshave
tendedto apply too lax monetaryand fiscalpolicies in the misperceptionthat the
economyneeds to be stimulated.
One of the functionsof capitalism that has taken a long time to develop is
that of bankingand along with it, financialservices. Even in Hungary,all foreign businessmenseem to complainabout the poor standardsof bankingand this
remainsa major impedimentto economicactivityaftersuccessfulliberalization.
All theseproblemsare also presentin the countriesthat have not gone so far
on theroad towardsa marketeconomy,but forthemthereare also moreelementary
problems.
The most vital issue is to constructa politicalsystemthat is adequate fora
tendto be neglectedbyeconomists.
changeofeconomicsystem.These requirements
No decisivesystemicchangetook place beforedemocratization.Decisions are hard
to carryout withouta proper constitution,and once this is in place it should
be adopted swiftly.Its absence may cause protractedpolitical strife(such as in
Poland) and hamperthe introductionof necessaryeconomicchanges. Clear border
lines should be drawn between executive and legislativepowers. Typically,the
legislativestend to look upon all executivepowers as illicit. An electoralsystem
should be adopted that limitsthe numberof parties that can enterparliamentor
at least settinga thresholdrequiringpartiesto have a minimumof 5 percentof the
votes. Parliamentaryelectionsshould be carriedout as soon as the constitutional
base has been laid.
In all formerly
socialist countries,apart fromHungaryand Czechoslovakia,
rampantinflationhas prevailedsince the exit of communism.The prime aim of
economicpolicies must be to defeatinflation.The means are well known. Before
that has been accomplished,no restructuring
is likely,little investmentwill occur,and productionis bound to plummet.In one countryafterthe other,populist
politiciansemerge,sometimesdrapedin Keynesianflags,arguingin favourof "stimulation" of the economyby means of budget deficitsand loose monetarypolicies.
In effect,such demandsare likelyto providea prolongeddeclineand stagnation.
Bankruptcyis too oftenseen as an entirelydestructivetool, when in fact
it can frequently
of enterprisescontainingvaluable
be a key to the reconstruction
assets. Little structuralchange can occur beforebankruptciesbecome effective.
Moreover,chronicalproblemswitharrearscan onlybe amendedbystiffbankruptcy

233
regulations. To impose bankruptcymeans to forceenterprisesto take financial

fortheiractions.
responsibility
The fearof unemployment
is invariablyexaggeratedat the outsetof systemic
to develop,
changes. In fact,it has takena relativelylong time forunemployment
and its slow emergencehas retardedstructuralchangesthat will raise the standard
rate
of livingof the nation as a whole. In the 1980s, Spain had an unemployment
of 20-25 percent,but this period is one that is now perceivedas an extraordinary
economicsuccess,because the highunemployment
facilitatedbadly needed restrucThe
main
issues
be
effects
on
the
should
the
economyas a whole and the
turing.
assuranceof reasonableeconomicstandardsforthose who lose theirprioremployment. Restructuring
is both necessaryand vital foreconomicrecovery.Similarly,
the worriesabout social explosionshave been prettyexaggeratedto judge fromthe
experiencesto date. The issue is to pursue correcteconomicpolicies ratherthan
make a sufficient
numberof politicalcompromises.
The earlyreformers
had exaggeratedexpectationsand thiswas a severeproblem. As the systemicchangeshave provedcomplexand costly,people in "latecoming" countrieshave realizedthat theyare in fora hard ride,and theirexpectations
have provedto be morerealistic,thus facilitatingsocial peace.
Misconceptionsabout systemicchanges are dangerousbarriersto economic
reform.It is vital that people understandwhat the systemicchange implies. In
all countriesexcept Czechoslovakia,informationand popular education about the
systemicchangeshave been poor. One explanationis that the new economicpolicymakerstend to be elitistacademic technocratswithlittleregardforpopular sentiments. Politiciansmustbe reasonablyhonestto the populationto maintaincredibilityand confidence.People must understandthe implicationsof the systemic
changesso that theycan be convincedwhichof theirdemandswould be unreasonable. It is importantthat people understandthe costs of transitionand what the
aims are iftheyare to accept the transitionpolitically.
Liberalizationis relativelyeasy since it is a questionofabolishingratherthan
creatingregulations. However,it is vital to accomplishsomethingconcrete. All
licencingshould be abolished, with veryfew exceptions. Whereverliberalization
has not gone farenough,corruptionflourishes.This is also true in Poland, where
liberalizationhas been relativelyextensive.
Littleforeigninvestment
willoccur beforea currencyis reasonablyconvertible
and stable. As soon as thecrucialhurdlehas beenjumped, substantialforeigndirect
investments
tend to be forthcoming.
A generalconclusionthatwe may alreadydrawfromtheattemptsat changing
an economicsystemis that the worsethemess is in an economybeforethesystemic
change,the greaterthe costs of transitionwill be. This is easy to understandon
several grounds. The higheran inflationis, the more deflationaryis the policy
neededto bringit to a halt. The moredistortedan economicstructurehas become
undercommunism,the greaterare the structuralchangesrequiredto put it right.
Acta Oeconmica44* 1992

234
DEBATE: ANDERS ASLUND
The fewerthemarket-conforming
it will
institutions
thatexist,themoredifficult
be to developthem.
2. What measuresand techniquesdo you suggestto accelerate the transition
process?
1. Property
shouldbe
established
in law,and conflicts
rightsmustbe firmly
solvedbytheeasiestpossibleregulations.
This is a strongargument
againstrestiit shouldbe limitedto a certainperiodand
tution;thelatteris politically
enforced,
taketheformoffinancial
ratherthanphysicalrestitution
preferably
compensation
ofproperty.
2. The totaltax burdenshouldbe broughtdownto less than40 percentof
theGNP,whichis theaveragein WesternEurope.In particular,
personalincome
tax and profit
taxesshould,preferably,
notbe allowedto risemuchabove40 and
30 percent,
respectively.
3. Theshortage
oflawyers
cannotbe solvedintheshortrunbutwillbe a longtermproblem.Legislation
can be made as simpleas possible,and limitedto the
mostimportant
aspects;theworkofcourtscan be limitedbyvariousconventions.
The maintask,however,
willbe to educatea largenumber
oflawyers
domestically,
becauseknowledge
bothof the nativelanguageand the laws of the countryis
necessary.
Laws
4. A largenumber
to limitcorruption:
ofmeasuresmustbe undertaken
shouldbe fewbut comprehensive
mustbe extensiveso
and lucid; liberalization
thatcivilservants
havelittleto sell;thesizeofthepublicsectorshouldbe reduced
severely;civilservantsshouldbe welltrainedin the rulesof the new societyin
orderto providea basis fornewethics;civilservantsshouldbe reasonablywell
at all levelsofsocietyshouldbe
theirloyalty;corruption
paid in orderto reinforce
and
effectively
prosecuted severely
punished.
to
5. In orderto improve
shouldbe encouraged
statistics,
privateenterprises
in returnforlowertaxes. Morepublicfunding
providemoreaccurateinformation
shouldbe givento statistics.Even so, the awarenessof howbad the statistics
so thatpoliciesare notdesignedon thebasisof
actuallyare mustbe emphasized,
facts.
wrong
6. Bankingcannotbe developedquickly.Standardadvicewouldbe to esand givescopeto domesticas
tablishgoodlegalregulation
and bankinginspection
wellas foreign
competition.
a newdemocratic
7. To laythepoliticalfoundations
forthesystemic
changes,
constitution
shouldbe adoptedswiftly,
withan electoral
systemwhichdiscriminates
electionsshouldbe heldsoon afterthe
againstsmallparties;also, parliamentary
changeofsystemhas beenlaunched.

235
DEBATE: ALEKSANDER BAJT
8. The mainaim of initialeconomicpoliciesshouldbe to defeatinflation.

Forthispurposetheorthodoxcures,suchas a balancedbudget,strictmonetary
policies,a wagefreezeand a peggedexchangerateshouldbe used.
and effective
9. An earlyandsimplebankruptcy
law is required,
bankruptcy
shouldbe introduced
withoutdelay(wheretheyarestillmissing).
procedures
10. The attitudeto unemployment
shouldbe to acceptit, caterfortheunand retrainthem.
employed
bothbefore
11. Ourknowledge
to datesuggeststhatthecostsofcommunism
it is
and afterits demiseare muchgreaterthanpreviously
understood.Therefore
vitalto bringdownpopularexpectationsto a realisticleveland encouragethe
populationto workfora medium-term
recovery.
ofsystemic
12. Massivepopulareducationabouttheimplications
changesis
ifpeopleare to go alongwiththeradicalshifts.
necessary,
as partofthesystemic
13. Alllicencing
shouldbe abolishedinstantly
change.
14. A convertible
on current
account,withsomekindofpeggingof
currency
thecurrency,
shouldbe accomplished
as earlyas possible.
6 June1992
ALEKSANDER BAJT*
1. My firstreactionto the questionof whatmaybe the mainbarriersto
thetransition
ofpost-communist
societiesintomarketeconomiesis thatno such
barriers
existat all. Oncea societybecomes"post-communist"
, thatis,transformed
is inevitableand
intoa politicallypluralistic
one, the processof marketization
cannotbe stopped.The onlyquestionsthatremainconcernthe speed at which
marketization
and theimpliedprivatization
willproceedand when,and at what
successful
levelof marketization
and privatization
willthe processbe considered
and the economy(re)integrated
intothe existingmarketeconomies.Indeed,in
the mostsuccessful
withregardto economicefficiency,
spiteof theirsimilarities
marketeconomies
market
to
of
the
underdeveloped
economies)display
(not speak
different
and variablemarketand property
structures.
in theSovietUnion,political
Withthebreak-down
control
ofthemono-party
- in fact,an irreversible
liberalization
in EasternEuropeis an irreversible
process
ofpoliticalliberalism
a historicchange.Institutionalization
goodwhichrepresents
and moreso its ingraining
intothe people'sbehaviour,and the democratization
*Economic
Institute,Ljubljana,Slovenia
"Do Not Hurryto MoveFast"
2

236
of individual and public life,will take decades. However,the shiftfrommonopartypoliticalcontrolto political pluralism,in the sense of a multi-party
system,
is a once and forall breakthrough.The systemsimplyis, or is not, a multi-party
one. There is nothingin between,no transitionperiod fromthe one to the other.
Consequently,the processesof marketizationand privatizationare also irreversible.
There is no ambiguityas to whetheror not they will be interrupted,as was the
case with the 1952 introductionof self-managedfirmsin Yugoslavia and the new
economicmechanismthat was introducedin Hungaryin 1968.
2. People and professionals,particularlyin the West, appear to be not too
confidentabout all this. Tryingto minimizethe risksof any reversal,they press
forradical changesin the legal ownershipstructure.Unfortunately,
this is a non
of the political and economicprosequitur,not only because of the irreversibility
cesses of liberalization;if transitionis conceivedas a process wherebyefficiency
is
- thoughneeded
improvedin an optimumway,changesin the ownershipstructure
- are farfromsufficient
in the sense of necessaryconditions
to achieve this. As a
real process,transitionis a changein economicrelationsratherthan in legal forms,
and forthis reason it cannot be achieved with a single strokeof the pen. The
onlyovernightchange,and needed fromthe verybeginningat that,is the givingof
fullfreedomto legal ownershipforms.In fact,even in the most efficient
capitalist
economiesprivateownershipis not the exclusiveownershipformand even within
privateownershipit variessubstantially.
That transitionis a process,and a time consumingone, can be adequately
demonstrated.On an abstract level, economicefficiency
depends on the quantity
and qualityoffactorsand theirrespectiveproportions.The natureofthe economic
The socialsystem,whichincludesthe propertystructure,is decisiveforefficiency.
ist systemnot only significantly
loweredfactorinputs into productionprocesses:
with the socialized personal factorprices ( "uravnilovka"
) and non-economicpromotioncriteriait fatallydeterioratedfactorquality,most typicallyby preventing
the creationof many top level factors. Much highlyskilledlabour, generallyprofessionaland managerial,is virtuallymissingin such a system. While intensityof
labour may be improvedover relativelyshortperiods,improvement
in qualitywill
take decades and generations.
This can be betterunderstoodif we recall that withthe above (and similar)
institutionsthe socialist system- "under the banner of planned productionand
- economicallynationalized all factorsof production,most obviously
distribution"
skilledand professional
labour (the innovatorsand managersin thefirstplace) (Bajt
1974). If the propertystructureof socialist (and ex-socialist)societiessignificantly
deviates fromthe privateownershippropertystructure,therebyfatallydamaging
it does it by these measuresratherthan by the legal nationalizationof
efficiency,
the meansofproduction,and the transformation
ofthe privateownershipofcapital
Ada Oeconomica44 1992

237
intostate (or social) ownership1.Separationof managementand ownership,which

is executionof the ownershipfunctionby managementand whichhas been known
since the times of Berle and Means, minimizesthe impact of the legal ownership
formson efficiency
in capitalisteconomiesas well.
Therefore,ifwe agreewithprivatization,we primarilyhave in mindeconomic
denationalizationofthe personalfactorsofproduction,i.e. ofpeople's skillsand capacities. In thissense,privatizationcan mosteasilybe achievedby (re)introduction
of marketevaluationof goods and primaryfactors.This seems to be most urgently
needed in the processof transition.People have to be put in conditionsin which
theywould be allowedto appropriatethe fullmarketvalue of the productsof their
economicactivity,becometheexclusiveownersofthoseproducts,and also be aware
that outside theirown economicactivitythere is no other way of appropriation.
Of course, neitherthe need for taxation nor social securityis ignored by these
postulates.
The above has stilldeeperimplications.With the nationalizationofpersonal
factorsthe socialist systemnot only loweredthe quantityand quality of people's
human capital but handicapped people's material propertycreation and capital
accumulationas well. Here I am overlookingthe fact that privatesavings were
necessitatedby shortageratherthan motivatedby capital creation. Much more
relevantis pointthat people lost sightof the factsthat propertygets createdonly
throughproductionand accumulatedthroughthrift,and that these activitiesdivert a considerableproportionof theirenergiesfromproductionto distribution.
With the marketevaluation of productiveeffortspeople would then be induced
to propertycreation,and only in this functionare they able to become economic
ownerscapable of makingownershipa productivefunction.
ofall state propertyto
Comparedwiththis,the widelyadvocated distribution
the population,in the formof capital sharesin investment
fundsor individualfirms
directly,not onlyperpetuatessocialistappropriationvia distributionas opposed to
Due
to efficiency.
production,it also consequentlyminimizesits directcontribution
to the factthat it nourisheshopes that formalprivatizationis the decisivestep in
the transitionprocess,it implicitlyminimizesthe motivationto bringabout both
factorcreationand inputto production.Instead, theefforts
ofmostentrepreneurial
will
be
ofpropertyforyears,
redistribution
in
the
and
distribution
people
entangled
withvirtuallyzero contributionto efficiency.
Thus to repeat what has been said above: the prioritiesin the transition
processare markets,of both productsand primaryfactors,and consequently,independententerprises;appropriationon the basis of marketevaluation;and freedom
and enforcement
of contracts,togetherwithfullfreedomofownershipforms.They
willfreethe productivecapacitiesof people and make transitionboth fastand successful.Legal privateownershipin productivecapital will resultfromall this,but
1On thedifference
betweeneconomicand legal ownership
see Bajt 1993.
2*

238
only on the conditionthat it takes a formwhichmaximizesefficiency.In other

words,in our viewthe commonwisdomthat marketizationpresupposes(legal) privatizationtellsless truththan the oppositestatementthat (economic)privatization
presupposesmarketization.
3. With almost full employment,high even in the case of Yugoslavia, low
qualityinputspresupposean autarchiceconomyshelteredfromforeigncompetition.
Economistswho favourshock treatmentto speed up transitionurge the exposure
of the domesticeconomyto worldmarkets.A radical lowering,if not elimination,
oftariffs
and exportsubsidies,and the liftingofotherimportcontrols,formpart of
the usual recipe. This will bringabout the adjustmentof domesticquality,design,
marketing,and timelydeliverynecessaryforfacingforeigncompetition.
in the qualityof labour inputs,the adjustSince, as with the improvements
mentof productqualityto internationalstandards also takes time (in some cases
quite long periodsof time), this is a second non sequitur. By demolishingthe existingprotection,a traditionallyshelteredproductionunit loses its marketsand is
bound to go bankruptand to disappear and/or become prey forforeigncapital.
This is accentuatedby tightmoneypolicy,whichis unavoidableifthe initialprice
liberalizationis not to turninto hyperinflation.
A protractedperiod of excessively
is implied and this is likelyto make the ensuingsocial and
high unemployment
political problemsuntractable. It is not only the social and political effects,but
also the economicreasonsthat are likelyto make this unacceptable.
This problemhas been addressedbefore.Instead of an abrupt demolitionof
which
protection,a basic policyinvolvinga slightlyundervalueddomesticcurrency,
is able to adequatelybridgethe gaps in the averagenationalproductivities(forthis
reasonalone, monetarysystemsof the currencyboard brand are ruledout), should
be supplementedby policy suitablytailoredforthe protectionof domesticindustrialproduction.Schemesshould be designed,preferably
by makingcontractswith
the firmsin question,for a gradual tearingdown of protection. Thus the transition process would be integratedinto the overall effortsto lowerthe degree of
protectionismin the modernworld. When the most powerfulnational economy,
the U.S., promisesto progressively
increasethe textileimportquotas in threesuccessivethree-year
stages,and ifdevelopedcountrieswithno importsof agricultural
at the levelof some 3 percentof domesproductsare to make access commitments
tic production(DFA 1991), some similarschemeswould possiblybe acceptable in
the case of low developedand autarchicex-socialistcountries.The moreso since,
unlikein the highlydeveloped countrieswhichare well integratedinto the world
economy,a radical and generaldismantlingof protectionwould provokeacute depressionalongsidestabilizationpolicies, push firmsdeeper into the red, and thus
practicallyforestallany real adjustment. Consequently,it would expose firmsto
predatorytake-overs,both domesticand foreign,and particularlyto acquisitions
forthe purpose of resale. Since the issue has been addressed before(McKinnon
1991), we do not have to dwellon this.

239
4. In concludingwe may say the following:whateverthe quality of their

of theirinvestment),socialist countrieswere able to
products(and the efficiency
satisfythebasic needsoftheirpopulations,fullemployment
included,and to export
large quantitiesof goods. In most cases, rightup to the 1980s theywerealso able
to maintain a permanentrise in living standards. It was external shocks, the
two oil pricerevolutions,the strongerdollar, and the rocketinginterestrates that
broughtthemtrouble.Withall thesenow gone,what keepsthemin such deplorable
conditions? For all of them the performancesof the pre-80sremainunattainable
achievements.
The Gorbatchev'slong-drawntalkingabout reforms,
thusnourishingpeople's
expectationsof a betterlife,no doubt deservesa top place in the adverse factor
ranking.The relevanceof the unificationof the two Germaniessimilarlydeserves
considerableemphasis. The unavoidablebreakingup ofthe "bigbrotherconstraint"
precipitateddevelopmentin all othersocialist countries.Politiciansand economic
policy makerssimplylost direction. Also, the most radical and frequentlynonsensical advice comingfromthe West has gained groundwithlittledifficulty.
However,whilethis helps in the understandingof the existingdepressionin
ex-socialistcountries,the main causes of thesedepressionseem to be the uncritical
forlegislationand economicradicalism.The massiveformaltransformapreference
tion of state (social) propertyinto privateproperty(or the yearsspent discussing
projectsto do it) and the generalliftingof activityprotectionare cases in point.
While the formerdistractedthe interestof policy-makersfromthe reallyrelevant
measures(introductionof marketevaluationofproductiveinputs) and truemarket
solutions(sellingof social propertyat marketprices2),the latter,in conjunction
withtightmoney,unmistakablydepressedeconomicactivity,makingadjustments
to internationalqualitystandardsimpossible.
So, if at the end we turnto the initial question,I would venturethe answer
thatone ofthe main barriersto fastertransitionseemsto be preciselythe insistence
on spectacular radical moves. These, by their very nature, are limited to legal
formsand therefore
are onlycapable of facilitatingand not bringingabout the real
marketization
and privatizationprocesses. Consequentlytheylead to disappointing
economicresults.
2In Slovenia,forinstance,sociallyownedapartmentsare beingsold to tenantsforone sixth

of the cost price,althoughthesevia verylow rentshave foryearsbeen pocketinghighincomes
in kind.The oncenationalizedreal estateis to be reprivatized
regardlessofits liabilitystructure
whoby optingforlower
on theeve ofnationalization.On theotherhand,workers
(indebtedness)
firms,are going
wagesduringthe socialistera accumulatedcapital withtheirownself-managed
to be offered
sharesin thatcapitalat marketprices- thoughwitha highdiscount.It is easy to
see that it is the politicalpowerstructureratherthan the marketthat is at the rootsof such
redistribution
processes.
Ada O econmica44, 1992

240
DEBATE: JOZEF M. VAN BRABANT
References
Bajt, A. "Managementin Yugoslavia"in: Bornstein,M. (ed.) 1974. Comparativeeconomic
systems,modelsand cases. Homewood,DL: RichardD. Irwin,Inc. pp. 193-200.
Rethemissinglink?> " The International
Bajt, A. "Property
rights:<Is economicownership
viewofLaw and Economics.Forthcoming
in 1993.
DFA. 1991. DraftFinal Act ofthe UruguayRoundof GATT negotiations.December20.
Financial controlin thetransition
McKinnon,R. I. 1991. The orderof economicliberalization.
to a marketeconomy.Baltimoreand London: JohnsHopkinsUniversity
Press.
JOZEF M. VAN BRABANT*

I am doubtful
the mainbarin abstracto
one can usefully
whether
identify
riersto the transition
to market-driven
economicsystemsin the easternpartof
as the plannedeconomiesin transition
thesecountries
Europe. I liketo identify
no
But
more
pun intended).
(PETs
generalissuesof designand policymaking
can be addressedas distinctfromthe moretechnicalaspectson howto pursue
issueshere,
thetransformation
in anyparticular
PET. I deal onlywiththeformer
to
the
remit
for
this
note.
owing
assigned
In lookingat moregeneralstatements
applicableto mostPETs threerealitiesare critical.One is comingto gripswiththe entirelegacyofthe communist
and heedingthepositive
in termsofinstitutions
and humanattitudes,
experience
and negativetransition
to
experiences
gathered date,notablyin theCentralEuroit is thatsocietyis
countries.
ofwhatprecisely
Another
is
the
determination
pean
consensus
the
and
able
to
bear
and
how
best
to
maintain
socio-political
willing
assison sharingthe burdenof the transition.Finally,the roleof international
tancein conceptualizing
and movingalongthe best- i.e. least costlyand most
- path to transition
Let me take up these
effective
deservesto be reconfigured.
themesin sequence,althoughI shallfocusmainlyon the apparenterrorsin the
transition
whatcouldbe doneto remedythe
policiespursuedto date and identify
situationwithoutprejudicing
ofthe twootheridentified
theinherent
importance
clusters.
oftheUnitedNations
*StaffmemberoftheDepartment
forEconomicand Social Development
Secretariat
in NewYork.The viewsreflected
herearetheauthor'sand do notnecessarily
represent
thosethatmaybe heldby the UnitedNationsSecretariat.
"The Transition
and Its Sequencing"

241
The legaciesoftheanciens regimes

I neednotdelveintoall thedetailsofwhatwentwrongwiththecommunistrunsocietiesto gain concurrence
on severalcriticalfacets. Arguablyof central
is
was
that
at
their
significance
inceptionthe PETs' peculiareconomicstructure
inefficient
in termsofdelivering
in
and
services
to
supportsteadygains per
goods
in worldmarkets,and theyhad
capitaincomes,theywerenot verycompetitive
mostresources
to shift
committed
to undertakings
thatweremuchtoo inflexible
toward
services.
the
and
of
"new"
expeditiously
competitive
production
goods
The inflexibility
of the tranof supplydeservesspecialmention,
regardless
sitionpoliciesembraced,and this shouldformone criticalelementin thinking
about the comprehensiveness,
of the transition.Without
speed,and sequencing
firmactionto influence
thetransithemicroeconomic
sphere,notablyproduction,
tionsimplycannotbe advancedbeyondthemeasuresthatcurbabsorption.With
suchdemand-management
at anyactivpoliciesto regainmacroeconomic
stability
itylevel,a sharpcutbackin effective
absorptive
capacityis inevitable.In several
PETs, thismayin factamountto a low-level
trapfromwhichmanequilibrium
entrusted
willfindit verydifficult
theeconomies
to extricate
agersofthetransition
to theircare. Surely,domesticmarketsare betterprovisioned
and the proverbial queueshavegone;externalbalancehas improved
in manycases
considerably,
aremushand neweconomicactivities
sharpexportgainsinnewmarkets;
through
withsubstantialcapacity
rooming.But all thisis takingplace in an environment
underutilization,
shakybudgets,and a stillveryhighpace of(residual?)inflation.
The latter,however,
accelerates
is required,
regardless
everytimebudgetfinancing
of the underlying
causes. It is compressed
demandthatis feedingthislow-level
and a firm
to changethisstateof
platform,
jolt on thesupplysidewillbe required
affairs.
To changesupply,pro-active
policymeasuresneedto ensurenot onlythat
but also that new capital,
existingfirmsare transformed
throughprivatization,
fromdomestic
as wellas foreign
in thebestwaycircumstances
sources,be invested
allow. Transition
countedtoo muchon sizableinflows
policiesin the beginning
offoreign
for
capitalto reviveand restructure
supply.This has notmaterialized
the
for
only
good reasons.Foreigndirectinvestment
purposes,
practical
(FDI)
- is
sourceofexternalprivatecapitalthatcan be tappedunderthecircumstances
and
understandably
leeryabout movingen masse intoeconomically,
politically,
in
concessions
sociallyunstablesituations.It is also likelyto seek considerable
termsof tax holidays,protection
and
competition,
againstdomesticand foreign
otherbenefits
ofFDI forPETs ratherdubious.
that,at times,renderthebenefits
Whatshouldreformers
at theoutset
do? Clearly,incaseofsevereimbalances
ofthetransition,
economicstabilization
is a mustbeforeanyseriousrestructuring
ofeconomic
and behaviourcan be contemplated
policies,institutions,
instruments,
in earnest. This encompassesat the veryleast substantialpriceliberalization,

242
stringent
monetaryand fiscalpolicies,de factowipingout ofthe monetaryoverhang
ifmonetaryreformmustbe shunnedforpoliticalreasons,liberalizingthe enterprise
sphere,breakingthe bond created by the lifetimejob-guaranteesysteminherited
fromthe past, looseningup access to foreignexchange and foreignmarkets,and
holdingfirmsand banks responsiblefortheirown results. But stabilizationshould
not be seen as an end in itself,howeverusefulit undoubtedlywill be. It should
certainlynot be taken as a signal to take advantageof realitiesand simply"loosen
up" as many economicvariables as possible withoutmakingfirmallowances for
withstructuralreform.The latteris on the wholenot a macroeconomic
progressing
but a veryfundamentalmicroeconomicsupply problem. That is to say, successful
transitionrequireslayingas rapidlyas possible the microeconomicfoundationsfor
macroeconomicstabilityand sustained progresstowardeconomicprosperity.
tie-inof stabilizationand structuralreformis througha more
My preferred
transition
than the abrupt shock treatmentchampionedby many. If
evolutionary
timeis available,the Hungarianpath firstlaid undercommunismcould be trodden.
But thisis unlikelyto be a feasibleoptionformostotherPETs. The immediateaim
shouldbe the beheadingofthe partyand industrialministries,
includingall of their
are
rents
also
it
that
needs
to
be
ensured
simplynot transpolitical
appendages;
ferredto those now favouredby the changed political circumstances;and a solid
environment
needs to be createdwithinwhicheconomicagentscan operateon their
own account. This requiresan unambiguouslegal infrastructure
,(hence makingeffectiveprogresswiththe institutionof the Rechtsstaat),and solid macroeconomic
policies (at least monetaryand fiscal,and in my view also price and incomespolimust hold forall agents and be enforceable.There is no
cies). That environment
in
fiscal
reformswhile at the same time authoritiesare unablepoint introducing
- to enforcethe ruleson new privatebusinessesforfearof discouraging
or unwilling
them,let alone on FDI forfearof scaringoffthe prevailingtrickle.
In thisconnection,I should liketo addressfiveareas wheremanagersof most
transitionshave made criticalerrorsby omissionor commission:(1) liberalizingthe
and weak protection;(2) ignoring
foreignsector,includingcurrencyconvertibility
for
out
the
opportunities graduallyphasing
heavyrelianceon intragrouptrade and
and seekingto replace it quickly
in
the
context
transferable-rouble
payments
(TR)
trade diversion;(3) not
with "worldmarketconditions"and/ornear-instantaneous
puttingunambiguouspropertyrightsin place quicklyenoughand exploringalternativemechanismsforeffectively
them,regardlessofownershipstructure;
enforcing
rather
wastefulbickeringover privatizain
(4) engaging unnecessarilyportracted,
tion whilethe main tasks of movingforwardwithbuildingthe marketeconomyare
being placed on the back burner;and (5) delayingradical reformsin the financial
infrastructure
that is so vital forthe effectiveintermediationbetweensavers and
investors.
First,fromthe inceptionofthe transition,it wouldhave been desirableto set
a clear legal framework,
enforceablein the courts,on all propertyrights.In most

243
DEBATE:JOZEFM. VANBRABANT
- at least,not givenits due attention.

PETs thissimpleimperative
was ignored
Withoutunambiguous
property
rightsit is simplyimpossibleto build a viable
overproperty
market
thatis,handing
For
the
latter's
essence
is exchange,
economy.
inproperty
from
one
a
to
at
rights
party another,
possibly positiveprice.Ambiguity
as
such
did
not
from
denied
stem
confiscation,
through
solely
property
rights
rights,
but also fromextremely
lax monitoring
ofstateproperty
duringthe latterphase
ofcommunism.
This gaveriseto variouskindsofproperty
rights'claimsand the
newauthorities
havefoundit verydifficult
to tacklethesehead-on.
demarcation
structures
Second,becauseproperty
providedthe best-known
assets has been
betweensocialismand capitalism,privatization
of state-owned
debatesin socialand politon thepolicyagenda.In spiteofprotracted
prominent
thananother,
ical forums
schemeto privatize
and theentertainment
ofonefancier
in thefast
even
achieved
been
on
little
had
by mid-1992, balance,comparatively
thus
near
in
the
and
the
outlook
for
an
acceleration
term,
improving
PETs,
moving
Poland,
capitalresourceallocation,(thoughpromisednotablyin Czechoslovakia,
and Russia)is nonetoo bright.
thedebatessincethe
As faras theeconomics
is concerned,
ofprivatization
ofexto thedivestment
revolutions
of 1989havesimplypaid too muchattention
received
have
should
That
istingassets,mostnotablyof the largestate firms.
couldbe advancedwiththedilittleattention.Once bold progress
comparatively
vestment
ofsmallassets(however
policymakersshouldhavefocusedon
defined),
of smalland medium-sized
twopriorities.One shouldhave been the promotion
newundertakings
financed
firms,
privateand publicgrosssavpreferably
through
assetsto establish
ofstate-owned
ings.The othershouldhavebeenthemonitoring
ofthestateas rapidlyas possible
and thedivesting
rights
(again)residualproperty
firms.The
of the usufruct
and commercializing
of theseassetsby corporatizing
and thevariousinterest
firstwouldpermitgreaterdistancebetweenpolicy-makers
and givethe firma legalstatutethrough
groupsinvolvedwitheconomicaffairs,
theulwhichit can seekto operatewithsomedegreeofindependence,
excepting
boththose
timatedisposition
ofassets.The othershouldhaveplacedstatefirms,
to be soldoffas wellas thoseto be keptin thepublicsector,on a comeventually
not
mercialbasis. Neitherpriority
was givenmuchattention.It wouldcertainly
ofprophavebeenan easytaskto implement
either,giventheshakymonitoring
ertyrightsbythestateoverseveraldecadeswhichenabledmanagersand workers
to assumefullownership
eventhoughthosehad remained
quiteimplicit.
functions,
Third,a marketthriveson mediatedexchange,includingin intertemporal
it will
assets. Withouteffectively
of saversand investors,
meshingthe interests
ofnewsmalland mediumto bringabouttheso vitalconstruction
provedifficult
- willcarrythetransizedfirms
ofstatefirms
that- ratherthantheprivatization
sitionprocessoverthe mediumterm. Withoutendowingthe economywithan
effective
twotierbankingsystem,in absenceof cleaningup the balancesheetsof
non-performing
to a trustresolution
loans(whichcouldbe entrusted
agency),and

244
could
intermediation
failingto put in place supervisorymechanisms,this effective
not beginto form.In some countries,movingtoo rapidlywithina loose supervisory
as in Poland, invitedall kindsof crisesthat could have been avoided.
framework,
Fourth,it is unrealisticto expect the foreignsectorto be morethan an auxof the domesticeconomy. Direct
iliarymechanismfacilitatingthe transformation
competitionfromabroad can influencerelativeprices,in the firstinstance,onlyfor
tradedgoods, whichin some PETs is a small share of the market.This is particularlyso ifallowanceis made forthe distortedpricesemergingfrommanaged global
trade. Even in goods' markets,its salutary effectsshould not be exaggerated,if
only because of the contractionin demand resultingfromthe sharplyincreased
cost of foreignexchangeand incomes. Changes in relativefactorprices are likely
to come about ratherslowly,especiallyduringthe initialphases of the transition,
when foreigncompetitioncould contributemost to the creationof effectivemarkets. Yet the macroeconomicstance is rigidlyanti-inflationary.
That is to say,
trade liberalizationis a necessary,but by no means a sufficient
conditionto foster
greatercompetitionin domesticmarketsin the PETs. The changeswill primarily
have to be broughtabout throughdomesticeconomicpolicies.
The desirabletransformation
of the trade and paymentsystemsof the PETs
has been one of the most widely debated questions of designingcomprehensive,
speedy,and properlysequenced transitionpolicies. There has been littledisagreementabout the need to disengagefromthe inheritedtrade and paymentsystems
and integratethe PETs rapidlyinto the global economy. Equally unanimoushas
been the advice to open up the PETs and expose them to internationalcompetition to usher in the necessarycompetitivediscipline. Trade liberalizationhas
been advocated on the basis of the incontestablecredentialsof trade theory.But
theirpracticalrealizationwill not be self-evident
untilthe liberalizingeconomyhas
achievedan environment
conduciveto comparativelyflexibleadjustmentsto shifts
in demand and supply- that is, aftererectingan ambientmarketenvironment.
Early duringthe transition,foreigncompetitionmay indeed eliminatedomestic
withoutthe freed-upresourcesbeing mobilized
production,perhaps prematurely,
forgrowth-promoting
activities. The outcome may then be a markedcutback in
aggregateactivity,whichcannot but compresssustainablelevelsof welfare.
This orthodoxcase fortrade liberalizationcalls forrelativelylow protection
withan exchangerate thatshouldhelp maintainequilibriumin the currentaccount,
at least overthe mediumrun. Because the gap betweenpre-transition
and "world"
is
the need
considerable
no
will
obviate
of
the
rate
variation
prices
single
exchange
to adjust demandand/orsupply. And because futureexportand importschedules
are unknown,it is unclearby how much the home currencyshould be devalued in
orderto enable policy-markers
to sustainexternalbalances at near-fullemployment.
Yet the questionsrelatingto the size of the devaluationand the degree at which
the nominalexchangerate is fixed,perhaps to functionproperlyas a key anchor

245
forthe designof transitionalpolicies,have been prominentin the debate on those

policies.
thereare no unambiguousanswersto thesequestions. The fact
Unfortunately,
is that the majorityof PETs have opted foran undervaluedfixedrate and a limited
formof current-account
Undervaluationhas been suggestedmoreby
convertibility.
concernabout infusingsome anchoredcertaintyintoan exceedinglyvolatilesocioeconomic and political situation,ratherthan by solid economic arguments. The
choice is bad economics,but it may be wise political economyprovided it does
not become a fetish,as in some PETs. Convertibility
aftera massive devaluation
and at a low level of employmenthas been comparativelyeasy to arrange. However,this hardlybenefitsthe PETs. Foreignassistance can help in amassing the
reserves. But its capacity to prop up comparativelyhigh levels of employment,
let alone contributingto the restructuring
of production,is in doubt. For that,
domesticeconomicforcesmust be sufficiently
competitive.In all this, insufficient
attentionhas been allottedto the potentiallydestabilizingeffectsof a fluctuating
real exchangerate, whichadds to the hazards- notablyof trade-ledrestructuring.
I have no problemwiththe promotionof fast and far-reaching
liberalization
ofaccess to foreignexchangeoversome periodoftime(monthsratherthan years,of
overnight.This can be accomplished
course),as distinctfromseekingconvertibility
auctions
accessible
to
all
authorized
throughopen
duly
agents. This is a distinct
in
PETs
without
much
with
option
auctions, and that are still
priorexperience
such
those
"monitored"
auctions
governable. Through
managing the transition
can obtain a moresolid graspof the properequilibriumexchangerate in the short
to mediumrun, while safeguardingthe procurementof essentials. This requires
that theymust confidently
be able to set a reasonableexchangerate and, barring
untowardevents,maintainit over some period of time (perhaps 6 to 12 months)
withoutbeingpressuredby the quick erosionof the chosenlevel due to differential
pricemovements.Also, the authoritiesmusthave in place adequate institutionsand
to manage the exchangeregime,preferably
policyinstruments
througha "crawling
or
an
otherwise
peg"
adjustable exchangerate.
With regardto the natureofprotection,I am in sympathywiththosearguing
barforthe case of a low ad valorem, relativelyuniformtariffwithfew non-tariff
riers. Whereas some protectionof existingeconomicstructurescould usefullybe
entertainedunderpreciselydefinedconditions,formidabletrade barrierswould be
to alforthe PETs. Certainly,this would permitpolicy-makers
counterproductive
tereconomicstructuresgradually,hence avoidingsudden dislocationswithall their
attendantconsequences.But it would also inhibitcompetitionand the transferof
an effective
systemof relativepricesfortraded goods.
in view of the weak centralactors in the PETs, credibilityfor
Furthermore,
the phasing-outof barrierswould be elusive. Temporaryincometransferspermittingsectorspotentiallythreatenedby bankruptcyto operate below real cost would
be preferable.At least, it would not saddle the governmentwith full unemployActa Oeconomica44f 1992

246
mentclaimsand valuableassetscouldsurvivetherigoursof thetransition.This

wouldrequirea credibleindustrial
roleon the partof
policyand a moreforceful
thestate- bothunnecessarily
in thetransition
policies.
neglected
ofprevioustrade
is therepudiation
Finally,a shareditemofthe transition
and payment
be it anchoredto therouble,thedinar,or thetransferable
regimes,
rouble.The rationaleis thatsuchtradeshouldbe dispensedwithas quicklyas
as wellas policyreasons. As a matter
possible. This is wrongfortheoretical
of tradetheory,
it maybe desirablein the shortrunforPETs to maintainat
least part of the traditional
be displaced. As a
turnover
that mustultimately
matterof politicaleconomy,
of trade,henceof
a veryrapid,forcedcompression
ofwhatmayin theend haveto disappearmaystopa reform
production,
process
coldinitstracks,as therecentexperience
has amplydemonstrated.
And,ofcourse,
tradewarranted
in anycase.
on economicgroundsdeservesto be accommodated
a
this
move
is
not
to
"world
which
market
realistic,
quick
Barring
conditions",
could be achievedonlythrougha substantialdegreeof cooperationamongthe
PETs themselves,
such
and supervisory
assistance,
perhapswithexternalfinancial
as througha payments
union. This has been categorically
rejectedby the PET
andothersonrather
notably
leadership
flimsy
grounds.The questionhasresurfaced
inthecaseofmaintaining
thereciprocity
roubletrade,forwhichtheoutlookis none
too bright.It is ofparamount
trade.
to reviveintragroup
importance
The adjustmentcost and socio-politicalconsensus
there
ofthepoliciesthatmaybe embracedduringthetransition,
Regardless
wouldnowseemto be littledoubtthatchangecannotbe broughtabout without
considerable
costs.This can be digestedonlywhenthereis a tacitor
adjustment
overtconsensuson the magnitude
of the cost thatsocietyat largeis willingto
on thetimeperiodduringwhichthatcostwillhaveto be borne,and on
shoulder,
thedistribution
oftheadjustment
burdenoversociety.One policymistakewas to
for
of the westernwelfarestate
that the benefits
go
populistslogans,intimating
wouldquicklybe emulatedin the PETs, once communism
had foundered.This
one.
forfar-reaching
tenuous
but
a
provideda consensus
reform,
highly
Evenwheninitially
it shouldbe bornein mind
therewas sucha consensus,
thatexpectations
as to the
on thepartofbroadlayersofsocietywereoptimistic
that
the
transition
would
while
the
gratifications
delivery
capacityremains
bring
ratherweak. The resultis frustration
withweak
and apathythat,in conjunction
can onlyrupturethe initialconsensus.Thus theremaybe a
politicalstructures,
call forpoliticalcompromises
thatmayend up in stalemate.In otherwords,the
itselfis an
politicalsetupofthePETs, however
democratic,
duringthetransition
obstacleto moving
economicsystems
forward
withtheimplanting
ofmarket-based

247
in a pluralistic
forexample,in
environment.
This has important
consequences,
termsof the fiscalreform
that can be broughtabout througha parliamentary
neededto helpshouldertheburdenoftheadjustment,
system.Yet,it is urgently
which
the
traditional
sourcesof fiscalrevenuesare dryingup becauseof
during
economicrecessionand the lethargy
in state enterprises.At the same timethe
demandsforfiscaloutlays,evenwhenpricesubsidiesare beingeliminated,
might
to
becauseofall theadjustment
coststhatare beingtransferred
explodeprecisely
thestateat a timeofitsseverely
weakenedcapacityto collecttax revenues.
Rethinkingthe transitionand Westernassistance
Western
assistancewasoriginally
envisagedto ease theburdenofadjustment
or
wasinvolved
inthePETs through
variouschannels.To theextentthatfinancing
havecalledforoutlays
technical
assistancewasforthcoming,
whichwouldotherwise
This
constraint.
bythePETs, thenetresultwasan easingoftheforeign-exchange
in
or
was notablythe case in accommodating
debt-service
removing
obligations
obstaclesto the access marketsin WesternEurope,forexample. Much of the
used
assistancehas beeninvaluable.But a considerable
parthas notbeenproperly
has yetto be
forlack of adequatecoordination.And muchof the commitment
disbursed.
are
fundsdonorcountries
is requiredto ensurethatwhatever
Coordination
of
in
terms
effective
to
the
most
for
the
PETs
are
utilized
in
way
willing appropriate
donors
from
what
the
transition.
to
it
must
be
clear
That
is
funding
say,
assisting
willbe availableand in whatforms.Equallyimperative
is a clearconceptofthe
transition
in thepotentialrecipient
countries.Then,it is largelya technicaland
task
to
ensure
that
the
diplomatic
greatestbangforthe "buck"or ecu is extracted.
Thereare twoflawsin the approachof westernassistancethat,withsome
on demandmanagecouldhavebeenremedied.One is theoveremphasis
goodwill,
on eachPET havingin
mentbymakingthedisbursement
ofassistancecontingent
on adjustment
placean arrangement
policywiththeIMF. Notonlydoes thisbias
butit also tendsto guide
transitional
toward
demand
policymaking
management,
thatdemandmanagement
too muchby whatis requiredforthe current-account
balance.This is undoubtedly
wheretheexternal
But in countries
veryimportant.
sectoris small,or willbecomesmallbecauseoftheadjustment
pains,it wouldnot
seemparticularly
usefulto explorewaysand meansof havingthe "tail wag the
dog".
18 May 1992
Ada Oeconomica44* 1992

248
DEBATE: ANDRS BRDY
ANDRS BRDY*
redtape,both
formilitary
predilection
potentialand voluminous
Hungarian
since
inherited
fromtheHabsburg
havebeengrowing
incessantly thattime.
empire,
demands
Ourhistorical
statistics
confirm
welookup themonopolistic
this,whether
forgoodsandservices
andpoliciesthat
ortheeverincreasing
number
ofinstitutions
restrict
thefreedom
ofmarkets
frommanyangles.
We preparedforWorldWarII withan elaboratesystemofcompulsory
agriculturaldeliveries,
ofrentsand
thefixing
an administrative
allocationofmaterials,
housingregulations.Rationingof foodand clothingdid not boost the markets
was
either.An OfficeforMaterialsand Priceswas established,
currency
foreign
were
and thenblocked"bythecentralised
state", and finally
enterprises
regulated
command.
placedundermilitary
Alltheseinstitutional
pavedthewayforthepowerofthepostarrangements
war SupremeEconomicCouncil. Cateringforthe needsof the Red Armydid
of
not givemuchrespitefromthe war economy.Thereafter
the nationalization
theomnipotence
of the PlanningOfficeand the Ministries.
enterprises
prompted
The processofnationalization
thefinallegalnegationof
itselfin factrepresented
and markets,
feebleand toothless
whichin practicehad been rendered
property
longbefore.
The further
inroadsintoour everydaylifehave becomethe ordealof the
we havebeen presented
presentgeneration.Witheverystep of apparentreform
liferemains
withneworders,
To thisdayeconomic
andinstitutions.
rules,sanctions
witheverymovebeingactuallypunishable
overdetermined,
bysomeominousregulation.
The questionariseswhether
it is possibleat all to halt thisself-generating
process.Someofthedoubtsare certainly
justified.In theWest,whereeconomic
andpoliticalcircumstances
aremorerelaxed,thesameprocessofstateproliferation
couldnotbe stoppedat a muchlowerlevel.
One shouldnotbe takenin by whatcan be seenon thesurface:thewider
choiceof goods (whichcan be afforded
by less and less), the incipientease of
commerce,
exportsand smuggling
(whichcan be revokedanytime). The deeper
showno signsofchanging:thetax-free
tradein armsand weapons,the
problems
chronicincreaseof the budgetalongwithits separated,secret,sometimes
illegal
and denieddeficits.
funds,and its confessed
Our internal
marketsand thepurchasing
powersofthepopulationare danThe tax office
alreadyfacesseriousproblemsand has started
gerously
shrinking.
to consider
somemedievalformsoftax collection.
InstituteofEconomicsoftheHungarianAcademyofSciences,Budapest

249
DEBATE: ELLEN COMISSO
The privatizationdrivehas turnedout to be onlythe finaland logical step of

nationalization.Beingunable to use, modernizeand makeprofitablethe confiscated
assets, the State now is thrownback to the last propertyright:that of alienation.
It is sellingto make up forthe missingincome.
If now the Governmentspeaks about markets,at the same time it dreams
about tax incomesand shrewdfinancialmanoeuvres.Its monopoliesare staunchly
overpricedindusguardedand we cannotsee a shredofevidencethat the manifestly
trialgoods are goingto sellforless,that depressedreal wagesmightstartrecovering,
or that the supplyof servicesis goingto growor its qualityimprove.These would
be the observabletendencieson a real market,given the knownmisallocationof
resources.
The slumberingofthe marketforcescan be tracedback to the rigideconomic
policywhichbegan to developfiftyyears or moreearlier. Governmentshave built
the public, military,administrativespheres to the detrimentof
up and fortified
the civilian spheres. Only a radical reversalof this misallocationwill bringthe
possibilityof democracy,markets,and an upturnof the economy.
Yet neitherthe inheritedbureaucracynor the feebleforcesof the marketwill
pull us out of the trap we are caughtin. This would necessitateanalysis,planning,
purposeand action. Politicianswitha broadergrasp of the issues and of a greater
calibrewould be needed- and even the best of them could be easily thwartedby
the mammothState machinery,
conjuredup by fortyyearsof so-calledsocialism.
ELLEN COMISSO*
I assume is meant (a) a politBy the term "transition"or "transformation"

the "rule
ical ordercharacterizedby competitiveelectionswithuniversalsuffrage,
of law," and constitutionally
guaranteedand enforcedcivil liberties;and (b) an
economicordercharacterizedby relativelycompetitivemarketsin goods, services,
and factorsof productionin whichthe dominantshare of GNP is realized in the
privatesector. Bear in mind that the foregoingsignifiesa "minimalist"definition of "transition;"a "maximalist"definitionmightwell containmanyadditional
social serviceproattributesregardingpoliticalparticipation,incomedistribution,
vision,employment,
inflation,and growthrates, etc. But since thereseems to be
oftransitionis, it is solely
generalconsensusonlyon what the minimalistdefinition
to this conceptthat myresponsewill be addressed.
I would beginby notingthat the barriersto even the minimalisttransformation are by no means uniformin Eastern Europe (let alone Eastern Europe and
ofCalifornia,
San Diego
University

250
the formerSoviet Union). Outside of Hungary,it seems to me that the failureto

successfullyresolvepolitical-institutional
questionssatisfactorilyhas made it impossible to make much headway on dealing with the economicaspects of regime
change. In Czechoslovakia,thereis still (May 1992) much uncertaintyas to how
and even if
authoritywillbe dividedbetweenthe federaland republicgovernments
therewill continueto be a singlestate in the area. In a contextin whichthe ability
of the state to make crediblecommitmentsis subject to question,economicpolicy
can at best be a set of stopgap, temporizingmeasures,no matterhow dramatic
and determinedtheymay appear to be on the surface.
In Poland, the combinationof a strong,directlyelected presidentand multipartyismin the legislatureis revealingitselfto be as unstable an institutional
mix thereas it has been everywhere
else (chieflyLatin America) it has been tried.
At the same time,the failureof any party to capture more than 20% of the vote
in the last parliamentaryelection(a phenomenondue in part to the electorallaw
coalitionconsisting
adopted by the outgoingparliament)has meant a government
of so many parties that it is extremelydifficultforit to move decisivelyon key
economicissues. In Romania, the commitmentof the governmentto the political
transformation
itselfis open to some question,and the tragedyconsumingthe former Yugoslavia needs no furthercomment. Even in relativelypeaceful Slovenia,
the fact that electionsoccurredwithinthe constitutionalorderof the old system
has meant that partisandisagreementsover economicpolicy directionshave been
magnifiedby institutionaldisagreementsbetweenchambersof a tricamerallegislature. The firstcasualty was the Peterle government,
whose collapse was followed
a
coalition
four-month
hiatus
after
a
seven
which
by
governmentwith a
(!) party
razor-thinparliamentary
was
cobbled
majority
finaly
together hardlya recipefor
economic
reform.
major
Here we arriveat the small, centralEuropean oasis of Hungary. More precisely,thanksto a varietyof ad hoc factorssurroundingthe collapse of socialism,
problemsthat beset the
Hungarydoes not sufferfromthe political-institutional
states
in
the
Insofar
as
the
presidencyis neithera popularly
neighboring
region.
elected officenor endowed with major policy-makingpowers,initiativein policy
formulationlies where it should be: in an executive that has a reliable base of
the evidenceon the fewcases of successful
supportin the legislature.Significantly,
economicreformwe have suggeststhat exercisingfiscalrestraintrequiresa transfer
of powerfromthe spendingto the non-spendingbranchesof government,
typically,
fromthe legislatureto the executive,and withinit, to the non-spendingministries
like Finance. The smoothestway this can be accomplishedunderdemocraticconditionsis withina pure parliamentary
system,such as the one adopted in Hungary.
the electoralformulaselected in Hungaryis biased in favourof the
Furthermore,
largerpartiesin the allocationof seats in the legislature;in effect,the electorallaw
itself"manufactures"legislativemajorities. It thus providesa basis forcoalition
governmentwith a limitednumberof parties withinit. As implied above in the
Acta Oeconomica44 1992

251
DEBATE:ELLEN COMISSO
discussionofPoland and Slovenia,the smallerthe numberofpartisanintereststhat

must be accommodatedin the policy-makingprocess,the easier it is forpolicy to
be made consistentlyin a varietyof areas.
Unicameralismin thelegislaturewas perhapsanotherwiseinstitutionalchoice,
althoughherethebalance is a mixedone. On the one hand, the absence of a second
chambermeans thereis no special institutionalprivilegegrantedto relativelynarrowsectoralinterests,be theyregionsor branchesof theeconomy(forexample,it is
no accidentthat the FrenchSenat has been dubbed "the Chamberof Agriculture"
due to the systematicoverrepresentation
of small townswithinit). On the other
the
unicameral
format
means
that
hand,
virtuallyall interestconflictsmust be
out
as
played
partisancontests,therebyexacerbatingtensionsbetweengovernment
and oppositionparties and placing interestsnot associated with the government
partiesin a highlydisadvantageousposition. Equally important,the combination
of unicameralism,a parliamentary
and a unisystemwitha majoritygovernment,
state
of
the
central
concentrates
enormous
in
the
hands
tary
power
government.
The national government
thus has plentyof powerto act; however,if it failsto do
so or takes inappropriatemeasures,thereare fewinstitutionalvehiclesavailable to
counterit with.
Finally,the early establishmentof a ConstitutionalCourt was anotherfortunate institutionalinnovation. Given the extremelywide sphere for action the
structuralfeaturesof the political order concentratein the hands of the government,the importanceof a non-partisan,independentcheckon its decisionscannot
be exaggerated. Particularlyin the sphere of clarifyingpropertyrights,the need
forsuch an institutionis critical,and the active role played by the Court in this
area in the past two yearsis ample testimonyto its indispensability.
Hungaryis thus an interestingcase because it is the one instancein Eastern
cannot be blamed on
Europe in whichthe absence of a completedtransformation
thespecificactions
in
either
institutions
as
such.
the
cause
must
lie
political
Rather,
ofthegovernment
that
it
has
utilized
its
powersunwisely,substitutingpolitical
(i.e.,
rationalityforeconomicrationality),the nature of the situation (i.e., that factors
or some combination
beyondits controlare blockingmore rapid transformation),
of the two.
oferrorson the part
Whilehardlydenyingthat one can make a longinventory
ofthe government,
I myselfwouldtend to stressthe natureof the currenteconomic
- as being at the root of the problem. I say
situation- domesticand international
to sothis partlyas one who always feltthat the visionof a rapid transformation
calledmoderncapitalismwas illusoryto startwith. I say it also as one whofeelsthat
it is equallyillusoryto expect a government
electedin competitiveelectionsto select
without
for
their
policies
political repercussions.Economicpolicy need not
regard
be "optimal"in the textbooksense; ratherit needs to be viable, and to be viable,
it must be politicallysustainable. The long historyof failed IMF stabilization
programsis evidence at one extreme,as is the experienceof "populist" policies
3

252
at theother.Neitherprovedviablebecauseneitherweresustainable.Hence,the
be a
factthatpoliciesmaybe selectedon politicalgroundsshouldnotnecessarily
ofthe
thequestionis whattheconcrete
economiceffects
signoftheirirrationality;
policywere.
Infact,itseemstomethatthe"transformation
ofa number
consists
problem"
of "traps"or "viciouscircles,"and it is by no meansclearhowone breaksout of
themrapidly.Privatization
is a case in point.Here,it seemsto methatthemajor
reasonforthestate'sinability
to divestitsassetsmorerapidlyis a simpleone: the
buyersarenotthere.The reasonsforthisaremany,and bureaucratic
footdragging
on the partof the SPA or the government
is surelyone of them. But farmore
is rationalreluctance
on the partof potentialinvestors:givenfuture
important
in
ofgrowth,
thelikelihood
thata largeportionoftheassetscurrently
projections
thestate'sportfolio
willgeneratefutureincomestreamslargeenoughto outweigh
thecostsofacquiring
and modernizing
themis simplytoo smallto attractbuyers.
in orderto
Thus,one arrivesat thefirstprivatization
trap:one needsto privatize
butone needsan expanding
in orderto privatize.
generate
growth,
economy
The secondprivatization
offiscalbalance. Here,
trapis relatedto problems
one oftheprimary
reasonswhygovernments
all overtheworldare seekingto sell
as
assetsis becausetheyare in debt.Yet it is turning
out thatinsofar
productive
thestatesectoris a keysourceofrevenueforthegovernment,
could
privatization
havethecounterproductive
at leastin the
effect
ofincreasing
deficits,
government
shortrun. Thus, added to the rationalreluctance
of the buyersis the rational
reluctance
oftheseller.Moreover,
to thedegreethedebtis financed
by domestic
it raisesinterest
ratesand makesit moredifficult
forpotentialinvestors
borrowing,
to mobilizelocal capital.Thus,one needsto privatize
in orderto reducethedebt,
but one needsto bringgovernment
debt downto manageablelevelsin orderto
privatize.
The thirdprivatization
thelegaland administrative
procedures
trapconcerns
is thatit allows
forstate-controlled
employed.The mainargument
privatization
the processto be moretransparent
and forthe publicinterestto be protected.
Yet the moretransparent
it
encumbered
the processis, the moreprocedurally
itis,thesmallerthecircleofinterested
encumbered
becomes;themoreprocedurally
buyersbecomes.In theend,theveryprocedures
designedto protectthepublic's
ofthe
interest
workto weakenthestate'sbargaining
powerand theattractiveness
its
assetsit seeksto market,
to
meet
the
state's
fiduciary
ability
thereby
impairing
to thepublic.
obligations
A finalprivatization
trapconcernsits partisanconsequences.On the one
forprivatization
is thatit willinsulateeconomicdecisions
hand,a majorargument
fromdirectpoliticalcontrol. At the same time,it is difficult
to imaginehow
a massivetransfer
can be accomplished
of property
rightsto privateindividuals
it is
consensus.On theotherhand,however,
excepton thebasisofa non-partisan
to imaginewhya government
electedon partisanlineswouldwish
equallydifficult

253
to moveaggressivelyto sell state assets ifdoingso would not help it electorally.In

short,a privatizationstrategybased on strictlynon-partisanconsiderationsis not in
the interestof the government
whichhas to adopt it, whilea privatizationstrategy
based on partisaninterestsreproducesmany of the more questionablepracticesof
the socialistsystemand lacks widerlegitimacy.
The foregoingis only a partial list of the various "traps" militatingagainst
a rapid transitionto a marketeconomyin the currentconjuncture. Underlying
themis perhaps the most centraltrap of all: governmentscan create institutions
essentialforthe operationof competitivemarkets(froma commercialcode to secure propertyrights),but they cannot create a marketitself. The latter results
fromthe decentralizedactions of individualeconomicentitiesrespondingto economic incentivesonly partiallyprovidedby institutionalstructures. As a result,
the microeconomic
structureof a marketeconomycan onlyevolvegradually.
Fromthisperspective,theoptimisticscenariosees thestate sectordiminishing
graduallyvia sales and bankruptciesand the private sector growingslowly via
accumulationand selectiveacquisitionsof state sectorassets. In this scenario,the
fact that private venturesare currentlysmall and concentratedin services and
trade is predictable,and expansioninto the manufacturing
sectorcan be expected
to occur withthe passage of time. Likewise,the fact that muchthat is claimed to
be "privatization"in the state sector consistsof mixed organizationalforms(the
joint venture,the kft. spinoffservicingthe still state-ownedlargerenterprise,the
partiallystate-ownedRt., etc.) probably should be viewed less as a subversion
of the marketeconomyideal than as rational adaptation to economicuncertainty,
in productionwhile reducingrisk. That such arrangements
facilitatingflexibility
reflectthe "interests"of thosewho engage in themand that theycan provehighly
lucrativeis not necessarilya reasonforcondemningthem. Whilesuch venturesmay
have the immediateeffectofprolongingthe state's rolein productiveactivities,they
may also proveto be a keymeans of easing its departureover time.
The major problemin even the optimisticscenariois whetherthe declineof
the state sector will be matched by an expansion of the private sector, both in
termsof its contributionto the state budget and to its job-creationcapacities. If
budgetaryrevenuesfromthe state sectorcannot be made up by taxationfromthe
privatesector and/or if individualscurrentlyworkingin the state sector cannot
findalternativeemploymentin the private sector, governmentswill be strongly
temptedto call a halt to the wholeprocess,baling out the state firmsto save jobs
and runningdeficitsor heavilytaxingthe privatesectorto providethe revenues.
Unfortunately,
acceleratingprivatizationvia artificialmeans neitheravoids
this problemnor escapes the "traps" noted above. The currentcrisisin agriculture,createdin part by "instant"privatizationwithoutthe creationof a financial
and commercialinfrastructure
able to support it is a good example of what can
is a partial solution,but ultimatelya sucinvestment
happen. Attractingforeign
cessfultransitionwill depend on the mobilizationof domesticcapital, both human
3*

254
and financial. Factor marketsin both appear to be rathersticky,the formerdue

to the almost total absence of a viable labour marketpolicy and the latterdue to
a still monopolisticand inflexiblebankingsystemheavilybiased in favourof large
lenders.Infrastructure
in all areas- transport,communications,
finance,education,
environment
etc. is badly in need of modernizationas well.
It is here where the role of the OECD states can be important. At least
some of the aid whichis nowself-serving
(e.g., creditstied to the importofwestern
goods) ought to be put to purposes of debt reduction(e.g., westerngovernments
can purchasethe debt fromprivatecreditorsat a discount). This would relievethe
state budgetsomewhatand possiblyallow interestrates to fallto a level wherethe
returnon investmentcan at least match the returnto bank deposits,stimulating
the expansionof the privatesector.
Meanwhile,I thinkit is importantto realize that the process of transition
to a marketeconomydoes not simplyinvolvereducingthe role of the state in the
economy;rather,it requireschangingit. Public investmentdoes not disappear in
moderncapitalism. But ratherthan being devoted to steel plants and chemical
industries,it is put intoinfrastructure
projectsthat have multipliereffectsand into
human capital that raises both the quality of labour and life. From this point of
is not simplya sourceofsocial tensionsand of individual
view,highunemployment
tragedies,it is a real waste of resources. Preciselybecause the state sector is
- financedpreferablythroughbond issues ratherthan
declining,public investment
- in social servicesand infrastructure
out of directbudgetaryexpenditure
should
increaseof the privatesectoritself.
My generalimpressionis that the transitionprocessin Hungaryis goingon as
a seriesofindividualadaptationsto specificcircumstancesand opportunities,which
is essentiallythe only way it can go on. As such, it can probablybe accelerated
only marginally,and the wisest role forgovernmentto play in the process is to
refrainfromgranddesignsand fromforcingthe processin favourof concentrating
its activitiesin areas that facilitatethat adaptation processon the part of as broad
a portionof the population as possible. For this reason, I stress infrastructural
and human capital investmentso heavily. At this point, the danger is not that
the process moves slowly,but simply that it does not come to a halt entirely.
Cushioningthe cost of the transitionin a mannerthat can yieldpositiveeconomic
resultsseems to me to be criticalin this regard.
Acta Oeconmica44, 1992

255
DEBATE: BELA CSIKS-NAGY
BELA CSIKS-NAGY*
As partofthe1992meeting
ofthHungarian
AcademyofSciences,theEconomicsand Law Department
helditsmeetingon May7thto discussthequestions
ofsocialandeconomicchange.I readoneofthefourpapersthatprovidethebasis
forthediscussion:"The economicsituationand thechancesofrecovery".
I think
- whichI
thebest wayto complywiththe requestof Acta Oeconmica'
s editors
- willbe to givea summary
consider
an honour
ofthatpaper.
Whatcan sciencegive?
Economics
wasunprepared
fortheradicalsocio-economic
changethatis now
for
relevant
No research
takingplacein theCentraland East Europeancountries.
thepost-communist
theHarvardProfescoutrieshad beenundertaken.
Therefore
sorJeffrey
Sachs' recommendation
of a shocktherapycame as a surprise:it was
to
suggestedas a meansthatcouldlead fromsocialistplannedeconomydirectly
social marketeconomy.Deliberations
shocktherapybroughtliberalconcerning
of
and convertibility
offinances,
ization,restrictive
monetary
policy,rehabilitation
and comcurrencies
to thefocusofattention.At thesametime,thefundamental
lostimportance.
and economicreorganization
plicatedquestionsofinstitutional
exactform
to transplant
a model- albeitnotin an entirely
Sachsintended
had no similarities
adoptedin LatinAmerica(despitethefactthatthetworegions
and Russia
Poland
and
his
recommendations,
accepted
Yugoslavia
whatsoever).
is experimenting
meritof Hungarian
withthem. It maybe the mostimportant
economicpolicyto haveavoidedthistrap,eventhoughsomeof its elementsdid
showup in thelate 1980sand therelevantdisputewenton evenafterthechange
ofthepoliticalsystem.
interThe reference
madeto theunpreparedness
ofsciencemustbe correctly
in developing
has ofcoursemadeconsiderable
politicopreted.Economics
progress
and describing
economiclogic,revealing
materialand financial
interdependencies,
orientation
as
useful
therationally
that
serves
institutional
order.
All
functioning
underthe
forthepost-communist
societiesinsolvingquestionsofdetail.However,
conditions
of the changeof the economicsystem,emphasismustbe laid on the
innerlogicalconnections
of thousandsof issues. Thingshavetheirlogicalorder
and ifthisorderis notadheredto, theymaytakea turnin thewrongdirection.
Forthe timebeing,no suchconception
existswhichwouldshowthe complexity
*
HungarianEconomicSociety,Budapest
"The CrucialPointsofthe Changeofthe System"

256
ofproblems
whichnowexin thelightoftheinterdependencies.
The programmes
istonlyformulate
thebasicprinciples
ofthechangeofsystem,and thusrepresent
in a muchlargerbook. At leasttheyquantify
someoftheobjectives.This
chapters
butthemainissueremains:whatare
maybe usefulfora government
programme,
thecriteria
forlayingdownan objective?
The lackofa scientific
ofsocialand economic
fortheprogramme
foundation
exampleof
changeis the weakestpointof the economicpolicy. A conspicuous
thistodayis themassofwinding-up
initiated.The
and bankruptcy
proceedings
act couldhavebeenpasseda yearago, but in no wayshouldit have
bankruptcy
beenappliedwithouta seriesofpreceding
measures.Anyoneacquaintedwiththis
are extremely
questionknowsverywell that bankruptcy
expensive
proceedings
and shouldbe resortedto onlyif theywillsurelyclearthe economy.However,
thousandsof liquidations
shouldnot be initiatedif
and bankruptcy
proceedings
theythencreatea burdenfortheeconomy.
The socialcostofthechangeofthesystem
In assessingthepresentsituationoftheeconomy,
one shouldstartfromthe
social cost of the changeof the system. It is a veryseriousmistaketo believe
thata substantial
degreeofchangehad alreadybeenmadeunderthecommunist
regimeor at leasthad beenpreparedto suchan extentthat,afterthedemocratic
transformation,
onlythefinaltouchesneededto be added. The realweightofthe
is feltin Germany,
whiththe
wheretheone-time
GDR is beingintegrated
problem
one-time
GFR. The social costof the processhas cometo nearly$100 thousand
millionso far,and it is nowhere
nearbeingfinished.
reorsourcesinstitutional,
The socialcostofthechangearisesfromdifferent
and financial.
ganizational,
overfroma centrally
plannedeconomyto a marketeconomy
a) Switching
as a matterof course,the reduction
of the old institutional
system
necessitates,
and thebuildingup ofa newone in conformity
withmarketconditions.
The costsofthisin Hungaryare muchlowerthanin therestoftheformer
inCMEA countries,
due to the 1968economicreform.Thanksto thatreform,
flationin Hungaryhas not prevailed,managersare betterpreparedforworking
in themarketeconomy,
costofthetransand supplyis better.The institutional
formation
focussednotonlyon
couldhavebeenevenlowerhad the 1968reform
butalso on themonetization
oftheeconomy.
decentralization,
falloftheGDP.
The
a considerable
cost
of
the
arises
from
reorganization
b)
the rateof uneployment
In 1991GDP fellby 16-18percent.As a consequence,
roseto nearly10 percentand realwagesfellby morethan10 percent.
Ada Oeconmica44, 1992

257
and
GDR, Czechoslovakia
c) Financiallossesare substantial.The former
in theirtradewiththeSoviteUnion,which
enjoyedmonopolistic
Hungary
profits
was due to therelatively
on theone
advencedindustries
of thesethreecountries
CMEA on theother.Theyhad a
hand,and to theautarkicnatureoftheformer
haveceased,yet
positionin theSovietmarket.Nowmonopolistic
privileged
profits
debtburdenremainsas a graveheritage.
foreign
The positivefeaturesoftheeconomy
The post-communist
societiesaretackling
outlinedaboveindiftheproblems
ferent
of
As
for
the
situation,
waysand withdifferent
Hungarian
degrees efficiency.
thepositivefeatures
seemto be predominant
in at leastsix fields.
1. Good progress
of economic
has been made in settingup theframework
law forthetransition
a sound
to a marketeconomy.Relyingon thisframework,
and companytransformation
is goingon,eventhoughnot
processofprivatization
at therequired
rate.The situationis especiallyfavourable
forsmallenterprises.
2. A radicalchangehas occurredin householdsavings.Since1990,therate
rate
of householdsavingshas been over 10 percent,whichis the characteristic
ofthe Europeanmarketeconomies.Thus households'savingshaveregainedthe
whichtheyoncehad undertheAustro-Hungarian
positionin capitalaccumulation
Monarchy.
- whichwas
3. Thereis smoothsupply.The shortageeconomyis no more
inconceivable
just a fewyearsago. Parallelwiththisprocess,theblackmarketrate
All
oftheforint
has disappeared,
whichis important
fortheplannedconvertibility.
thishas takenplacewitha constantrevaluation
it has been
oftheforint
currency:
devaluedlessthantherateofinflation
overtheperiodinwhich
wouldhavejustified
thedevaluations
havebeenmade.
4. The country
The WorldBank
hasbeenableto keepitsfinancial
credibility.
shifted
over
even
to
the
list
of
indebted
countries,
thougha few
Hungary
moderately
the
a
crisis
of
of
because
was
for
This
is
forecast
1992.
maturity
yearsago
payment
structure
oftheforeign
debtstock:forinstance,the Hungariandebtservicewill
surpass$4 thousandmillionthisyear.
5. On theinternational
is on thewholefavourably
scene,thecountry
judged,
as
well
as
is
This
politically
indicated,amongotherthings,by the
economically.
factthat$1.5 thousandmillionflowedintothecountry
in 1991.
has been successfully
6. Inflation
held betweentolerablelimitsand, what
thedangeroftheprice-wage
mayproveto be evenmoreimportant,
spiralhas been
avoided.Inflation
as
fall
to
around
in
25
1992
may
percent
against37 percentin
1991.

258
that
Thesearesignificant
evenifit has to be takenintoconsideration
results,
the secondeconomyhas played,and continuesto play an important
rolein the
achievements
ofHungarian
economicpolicy.This couldnothavebeenotherwise,
becauseprimitive
accumulation
is an integral
partofeverychangeofsystem.Also,
underthecommunist
financial
sourcesintheprivatespherecouldonlycome
regime,
fromillegalacts. Thus newsourceswerecreatedby "smuggling"
in theproperty
sphere,and bytax evasion.
The negativefeaturesoftheeconomy
Thereare also negativephenomenain the Hungarianeconomy.The most
onesaresummedup in thethreeparagraphs
below.
important
is shrinking;
1. Thesphereoftradeis widening,
whilethesphereofproduction
thisis naturally
ifthewidening
concomitant
withthechangeofsystem.However,
of the tradesphereand the shrinking
of the production
spherecontinuesat the
presentfastrate,theprocessmayreacha pointwhereit disturbstheequilibrium
ofeconomy.
2. Investments
ofindustrial
remainat a lowlevel.Whatis worse,thereserves
arestillthe
reorientation
arerunning
actorsofrestructuring
out,and theprimary
smallenterprises.
Apartfromone or twocases,thereis no signofmultinational
network.
intotheirinternational
Capital
companies
industry
integrating
Hungarian
inflow
is substantial
and it is to be hopedthatthiswillcontinue.However,
only
a partof it is forrestructuring.
Capital broughtin so as to acquirea sharein
- rather,it servesto improvethestatusofthe
does notfeedproduction
property
NationalBank.
Hungarian
and sinkingreal wageshave increasedtensions:
3. Risingunemployment
societyis nearingthelimitsofitstolerance.
The government's
motiveinsettingtheobjectiveofthesoonestpossibleturn
inproduction
research
canbesthelpeconomic
is thusquiteclear.Scientific
recovery
- maycounteract
- ifignored
orat least
ifitpointsouttheinterdependencies
which
as themaintasksto be solved:
delayit. In thisrespect,I proposethefollowing
- theelimination
in theshortrun,
in agriculture
ofthecrisissymptoms
- thebuildingup ofa well-functioning
capitalmarketin themediumrun,
- andbudgetreform:
in thelong
thatis to sayitssuccessful
implementation
run.

259
Eliminationof crisisphenomenain agriculture
The imminent
is goingto be diverted
is thatattention
dangerin agriculture
fromproduction.
Ifan urgent
is
not
made
in
policy,a situation
change
agricultural
arise
in
which
even
smooth
is worse,the
food
becomes
difficult.
What
may
supply
thousand
million
be
$2.5-3
stock
will
not
yearly
available,even
exportcommodity
it
is
a
condition
sine
consolidation.
non
of
economic
and
though
qua
recovery
This problemhas its rootsin the years1990 and 1991. In 1991 Hungary
reapedoneofitslargestcorncrops:67 ql maizeand 52 ql wheatperhectare.This
- but is was not. Instead,it was
shouldhavebeenappreciated
as a greatsuccess
as
a
crisis
of
such
excellent
With
qualified
results,theagricultural
overproduction.
balanceshoweda deficit
ofFt 15thousandmillion.Thisshouldnothavehappened.
As forfoodeconomy,
1992is a criticalyearevenapartfromthat:theactsof
tranformation
theexisting
and cooperation
havealreadyaggravated
compensation,
socialconflicts
in agriculture.
Puttingthe capital marketon a sound basis
theworstconflict
ofthepresent
situation
Possibly,
maybe thatwhilerestrucis
withgrave
the
is struggling
investment
market
turing highlycapital-intensive,
functional
troubles.Investments
do notreacheven10 percentofGDP at present.
The problemcan be tracedbackto the introduction
oftheSoviet-type
economy:
thecapitalmarketwaseliminated
as thestatecentralized
all capitalin thebudget.
The difficulties
thatarosefromthishavenotyetbeenovercome.
a
stir
was madeby the Ministerof Finance'sannouncement,
shortly
Quite
would
aftertherelevant
whichstatedthatthe1992deficit
discussions,
Parliamentry
not be Ft70 thousandmillionas earlierapproved,but mayreach110 thousand
million.This is, however,
notthemainissue:sucha deficit
is stillunder5 percent
oftheGDP. A number
ofcapitalistcountries
a
sound
economywithsuch
operate
a deficit.The troubleis thattheHungariandeficitis coupledwithreceiptswhich
ofthe
drawoutcapitalwhichis indispensable
forthefunctioning
characteristically
economy.1
In 1992a fewimportant
measureswitha viewto therecovery
processhave
beentaken. Actsdealingwithaccountancy,
havebeen
and
banking, bankruptcy
not draw
A
must
the
of
these
acts
is
that
passed. possibleinterpretation
budget
out fromthe economynon-existent
or non-realizedprofit,that it shouldenable
the
modernization
and that it shouldconfirm
throughaccelerateddepreciation,
financial
foundations
ofthebankingsystem.
1
to thelatestestimationthe deficitmightbe Ft2OOthousandmillion.
According

260
If consistently
put intoeffect,these laws willof coursereducethe revenuesof
the budget.
The formerare, however,only the initial steps in the building up of the
capital market.The nextquestionto be asked is: what happened to the centralized
capital? A part of it has been absorbed: forexample, in the formof commercial
capital. What happened is that in 1951, withthe intoductionof the socialist price
system,the commercialpricegap was considerablynarrowed,and the tax included
in the price was raised. Thus the commercialcapital enlargedthe financialbases
of public consumption. The capital of insurancecompanies and pensions offices
were deformed.Under a universalwarranty,the state centralizedcapital: it then
determinedits insuranceand pensionspolicy,not accordingto autonomousand selfregulatingmechanismsbut on the basis of a generalwelfarepolicy,livingstandards
policy,and otherconsiderations.Some of the industrialcapital was redistributed
withinindustry.The greaterpart was, however,drawnout fromthe economyin
orderto financepublic consumptionas well.
This accounts forthe fact that Hungarianindustrialcompanies today lack
sufficient
fixedassets; theyhave to use active capital crediteven when the raising
of the fixedassets would be justified: and all this in a situation in which bank
creditshave exceedinglyhighinterestrates. Queues, outstandingtaxes and customs
duties,etc. are a forcedway out of the problem. Liquiditytroublesface even such
companieswhichare otherwiseviable and can face internationalcompetition.
The functionaltroublesof the capital markethave been furtheraggravated
by the so-called inflationary
gap, which is the consequenceof the average yearly
10 percentrisein producers'pricesand of the considerablyhigherrise in consumer
prices. This is completelyunknownin the West, and is the result of the fast
eliminationof price subsidies fromthe budget. Since nowadaysdomesticcapital
accumulationhas its main- ifnotits only- sourcein householdsavings,theinterest
on moneyborrowedforinvestmentis itselfregulatedby deposit rates. Because of
the inflationary
gap, capital had to turnover3.5 timesin 1991,so that creditcould
be reasonablyraised, and in 1992 it will have to turnover 2.5 times. Upon such
grounds,banks can do littleto financeeconomicrestructuring.
The inflationary
policy of currencyrevaluationmay
gap and the conforming
be the biggeststumbling-block
in the way of an economicallywell-foundedprivatization process, and may also discourage multinationalcompanies frommaking
investmentsin Hungary. Reducing interestrates by a few percentwould not do
muchto improvethe situation.The importantthingis to releasecapital policyand
pricepolicyfromthe gripof a fiscalpolicy whichis fraughtwithinnerconflicts.

261
DEBATE: MAREK DABROWSKI
Reformof the budget
Of thelong-range
is ofcentralimportance.It has
objective,budgetreform
to be understood
as a long-range
linkedup with
since
it is organically
objective,
an overhaulof the humaninfrastructure.
that
used to be
Distributive
systems
have
to
be
back
to
and
life
decentralized,
organized
autonomously
parallel
brought
withcessationofthebudget'sincomeredistributing
roleor at leastthereduction
ofthatroleto a minimum.
Withthisreform
or ratherseriesofreform
measures,
caremustbe takennotto prejudiceestablishedrights.In so doing,we willpass
fromold to newwaysslowlyand gradually.
In scheduling
thebudgetreform,
it is important
to ensurethatcapitalconinduced
the
to
starts
decrease
as
sumption
by
earlyas possible.Otherwise,
budget
thecapitalindispensable
forrestructuring
willnotbe madeavailable.
MAREK D4BR0WSKI*
The transition
froma plannedeconomyto a marketeconomyin Central
and EasternEuropeis provingto be farmoredifficult
thanmostpoliticiansand
economists
in our regionexpectedthreeor fouryearsago. The deep and long
slowenterprise
recession,
political
adjustment,
risingsocial tensionsand growing
all
areevidentsignalsofthesedifficulties.
concerns
The abovestatement
instability
thecountries,
eventhose(likeformer
Yugoslavia,Hungaryand Poland) in which
advancedmarketreforms
had alreadytakenplace beforethecollapseofthecommunistregimes.
Whatare themainbarriers
to thetransformation
process?One can distinof
theconcerns
andsocio-political
to specify
factors.It is necessary
guisheconomic
thefirst
macroeconomic
socialobstaclesagainstliberaligroup:chronic
instability,
sation(especially
ofthe
in attitudeto pricederegulation),
theabsolutedomination
statesector,thelackofmarketinstitutions,
microeconomic
structural
distortions,
behaviour
ofenterprises,
andthecollapseoftheCMEA and theUSSR. Amongthe
we can pointout the absenceofa middleclass,strongeconomic
politicalbarriers
and social interests
connectedwiththe former
economicsystem,the problemof
educationand thementality
instainherited
fromthe centrally
plannedeconomy,
and nationalconnflicts.
NowI wouldliketo
bilityofyoungdemocratic
systems,
describesomeofthesefactorsin moredetail.
*CenterforSocial and Economic
Research,Warsaw
"MainBarriersto the EconomicTransformation
in EasternEurope"
Ada Oeconomica44t 1992

262
DEBATE: MAREK D^BROWSKI
1. Macroeconomicdisequilibrium
can be
The lackofmacroeconomic
bothdomesticand external,
equilibrium,
seen as a standardfeatureof the typicalcentrally
plannedeconomy.Of course,
therewerecountries
withrelatively
betterbalancedeconomies(Czechoslovakia,
in
GDR and Hungary)and countries
whichpernamently
suffered
strongdifficulties
thisrespect.The sourceofa structural
withthe
wasconnected
imbalance
monetary
in thecentral
priority
givento outputgrowthand otherphysicaltargetsspecified
plan. Financialflowswereonlyintendedto "follow"
physicaltargets.
This factorplus total pricecontrolcontributed
to the repressedinflation
and forcedsavings,whichseemedto be quitenormalphenomena
in a traditional
extentby
commandeconomy.The monetary
to
some
was
neutralised
overhang
in
theinternal
of
the
domestic
especially
currency,
inconvertibility
(or commodity)
theenterprise
in
I
have
mind
the
total
sphere.
system(administrative
rationing
allocationofmaterial
resources
andofinvestment
goods)as wellas therigidcontrol
of different
kindsofspendingof state ownedenterprises
(wagefund,investment
moneyetc.)
Economicreforms
that triedto makethe communist
(socialist)economic
In
did notimprove
themacroeconomic
systemmoremarket-oriented
equilibrium.
did
cases
in
central
the
"reformed"
socialist
the
system
many
planning
economy
coordinotworkas a mechanism
and macroeconomic
ofmicroeconomic
discipline
role.
We
taken
this
even
not
the
new
had
also
market
mechanism
nation,
though
had a typicalsyndrome
ofnon-plannned
and non-market
economywithoutsufficientmicroeconomic
to achieveelementary
motivation
and withoutthepossibility
hadalreadylost
macroeconomic
which
weak
equilibrium.
Moreover, governments
thepowerassociatedwithpoliticaldictatorship
and whichdidnothave
and terror
- werereadyto buytemporary
socialpeace in
in thesociety
politicallegitimation
for
Poland
in
It
was
the
case
in
1987-1989,Romania
exchange inflationary
money.
afterthecollapseofNicolaeCeausescu'sdictatorship,
Bulgaria,Albaniaandin the
former
USSR in 1989-1991.
increasedthe levelof
The above-mentioned
partialeconomicliberalisation
astheirfinancial
internalconvertibility,
to
use
more
flexibly
allowingenterprises
it increasedmoneyvelocity.The statebudgetstartedto losesome
sets;therefore,
and
ofenterprise
traditional
sourcesofrevenue(e.g. individualcontribution
profit)
at thesametimeexpenditures
rosesharplydue to continuing
pricecontroland due
to thedevelopment
thepurposeofwhichwereto "buy"
ofsomesocialprogrammes
social acceptance.The risingbudgetdeficit,
financed
by creditfrom
exclusively
At firstthiswas
thecentralbank,led to hyperinflation
or almosthyperinflation.
it becameopen.
hidden,and thenafterpriceliberalisation
To stabilisesuchan economyat the beginning
of the transition
processis
and this
notan easytask. First,it needsradicalelimination
ofthebudgetdeficit,
withprice
mustbe connected
ofsubsidiesand consequently
withsharpreduction

263
DEBATE: MAREK DABROWSKI
liberalisation
it is also necessaryto changeradically
(see nextpoint). Secondly,
froma philosophy
to one
in whichmonetary
policyis extremely
accommodating
in whichit is restrictive.Third,the social coalitionin favourof macroeconomic
stabilityis usuallynot verystrong.It seemsto be affected
by the lack (or the
a
and ofrather
of
a
the
lack
of
financial
market
sector,
private
private
weakness)
limitedprivatesavings.
In thelaterstagesoftransformation
macroeconomic
is seenbymany
stability
East Europeaneconomists
andpoliticians
as a competitive
for
target outputgrowth
forlimiting
outputdecline).Yet thisis not truebecause
(or rathera possibility
thesourcesofrecession
arefarmorecomplicated
(see point4).
2. Price liberalisation
Thisis probably
themostdifficult
andpolitically
mostpainfuldecisionwhich
has to be takenat the verybeginning
of the transformation
process. The price
structure
inherited
froma centrally
plannedsystemis usuallyverydistorted.Liberalisation
combined
withtheremovalofpricesubsidiesmeans,in thissituation,
a significant
in
thishas forincome
change relativepriceswithall theimplications
stratification
ofdifferent
socialgroups.Moreover,
iftheextensive
pricecontrolis
connectedwitha macroeconomic
and
monetary
overhangthe
disequilibrium big
overalldeclineof "real"incomeis unavoidable.I put quotationmarksaroundthe
word"real"to emphasizeitsformal,
statisticalsence.In realitythe "real"income
levelis notrealbecauseit does nothaveits productequivalenton the consumer
market.Thus statisticaldeclineof "real"incomescannotbe connectedwiththe
oflivingstandards.
decreaseofrealconsumption
and withworsening
proportional
socialperception
can differ
fromthispointofviewand createrealpolitHowever,
ical constraints
forpricederegulation.
This is thereasonwhymanygovernments
tryto postponethisoperationor to makeit step-by-step.
about
Withoutrealpriceliberalisation,
it is hardto thinkseriously
however,
elimconsistent
ofthecommand
of
market
elimination
restoration
balance,
system,
inationofthebudgetdeficit,
The
often
and
predemonopolisation privatisation.
senteddemantto demonopolise
and privatisethe economyfirst,and onlyafter
thatto liberalisepricesseemsunrealforat least tworeasons. First,liberalisationofpricesis usuallynecessary
ofsignificant
muchsoonerthanis thepossibility
withdemonopolisation
and privatisation.
Second,it is hardto imagine
progress
- seen as the mostsignificant
a real development
factorof
of the privatesector
internal
underconditions
in whichthecontrolofpricesis omdemonopolisation
of prices
of avoidingderegulation
nipresent.So thereis no practicalpossibility
and
beforethemonopolistic
structures
ofthedomesticmarkethavebeenremoved
theeconomy
has beenmademorecompetitive.
Acta Oeconmica44$ 992

264
DEBATE: MAREK D4BR0WSKI
3. Externalliberalisation
The needforliberalisation
ofa convertible
offoreign
tradeand introduction
seemto be inseparable
of the
elementsaccompanying
the liberalisation
currency
domesticmarketand deregulation
ofdomesticprices.That notonlymeansallowintothemonopolised
domesticmarketbut also makingit
ingforeign
competition
ofpricesin the
ofdomesticpricesto thestructure
possibleto adjustthestructure
international
market.In thatwaytherealreallocation
baseduponthe
ofresources
criteriaoftheworldmarketcan be initiatedand comparative
advantagesforthe
frominternational
tradecan be achieved.Also themarketvaluationof
economy
startsto be feasibleand thisprovidesrationalgroundforprivatisation
enterprises
and investment.
Ifthegeneralnecessity
to question,
ofexternalliberalisation
is ratherdifficult
therateand thelevelofopeningthedomesticmarketto theoutsideis thesubject
of hot controversies.
Transition
fromthe multipleexchangerate regimeto the
unified
rateis connected
earlier
witha strongpriceshock,thuseliminating
exchange
distortions.
This createsproblems
similarto thoseconnected
withdomesticprice
deregulation.
crisesin
createsfearsaboutbalanceofpayments
Foreigntradeliberalisation
theearlystagesoftransformation
whenmonetary
and foreign
exchangepolicyare
notcredibleenough.Later,attemptsto protectdomesticindustry
and agriculture
becomethe main argumentagainstfreetrade. Of
againstforeign
competition
in post-communist
economiesare not onlyunprofitable
course,manyindustries
in termsofworldmarketpricesbut veryoftenrepresent
eventhenegativevalue
added. Afteropeningthedomesticmarkettheyare notable to survive.However,
themfromcollapsemeansacceptingeconomicfiction
and ofreallosses
preventing
in GNP.Withouttradeliberalisation
it is difficult
to thinkaboutrealrestructuring
bothon themacroand microlevel. Externalliberalisation
also providesroomto
new
and
services.
develop
sectors,especiallytrade,transport
trade
In dealingwithbarriers
to external
liberalisation
onemustalsomention
for
barriers
in industrially
limited
countries
exportpossibilities
developed
causing
and
economic
and
therefore
their
post-communist
countries,
restructuring
retarding
outputrecovery.
in
Another
barrierto restructuring
withthepoliticalresistance
is connected
somecountries
investment.
againstforeign
4. Structural
behaviour
distortions
and microeconomic
withnegative
In thepreviouspointI mentioned
theexistenceofindustries
and
valueadded. Generally,
overindustrialisation
communist
economiessuffered

265
DEBATE:MAREKD^BROWSKI
ofthe tradeand servicesectors. Many industriescould exist due

underdevelopment
to almostunlimiteddomesticdemand (an effectof the shortageeconomy)and due
to the similartypeof marketin the wholeofthe formerCMEA. The eliminationof
a shortageeconomyby priceliberalisationand macroeconomicstabilisation,as well
as the collapse of CMEA, dealt a seriousblow to manyindustriesand enterprises.
- like external liberalisation(see above), the end of the
Some additional factors
Cold War (affectingthe militaryindustry)and the internalpolitical crisis (in the
case of formerYugoslavia and formerUSSR) - should be also taken into account.
What concernsa microlevel the collapse of the formermotivationsystemin
state-ownedenterprises,and difficulties
in findinga new one, must be seen as the
main sourcesof slow adjustmentand the ratherpassive behaviourof this sector.
The startingof the privatisationprocess also creates new problems. First, many
active managerswith real entrepreneurial
spiritpreferto go to the privatesector
ratherthan to continuetheircareersin state enterprises.This representsa process
ofnegativepersonalselectionin the public sector. Second,mostofthe privatisation
level create a negativemotivationin state
proceduresinitiatedat the government
- the worsethe economicpositionof the enterprisebeforeprivatization,
enterprises
theeasierit is forthemanagementand theemployeesto buyit out at a low price. To
solve this dilemmait is probablynecessaryto create strongincentivesforinsiders
(managers and employees)which would link the privilegedparticipationin the
privatizationprocesswiththeeconomicresultofthe enterprisebeforeprivatization.
Some countries(like Poland) have strongtrade unionswhichcan be seen as a
social and politicalforcetryingto protectineffective
economicstructures.In other
countries(like Russia) the strongindustriallobby plays a similarrole.
5. Economicmentalityand intellectualopposition
Generalcriticismofthe socialisteconomicmodel does not implythat thereis
a consensusoverthe directionsoftransformation.
In all the countrieswhichstarted
to go rapidlytowards an authenticmarketeconomythis decision met immense
resistancefromintellectualand political elites, includingeven people who earlier
had a reputationas advocates of radical reformsand who struggledforthem for
manyyears. This interesting
phenomenonshould be explained in more detail.
First,one can say that thisattitude,foundamonga significant
proportionof
political and intellectualelites reflectsthe expected huge social costs of economic
transformation:
costs whichappeared in realityto be even moreserious. It is true,
however,that theoppositeinfluenceshould also be takenintoconsideration.Public
countriesis veryfragileand unstable. One can observe
opinionin post-communist
its heavydependenceon theopinionspresentedpubliclyby popularpoliticalleaders
and intellectuals.

266
DEBATE: MAREK D^BROWSKI
thelackofpoliticalcultureanddemocratic
Secondly,
plusfrequent
experience
electionsstimulatesocial demagogy,
politicaland economicpopulismand even
cynicism.
Third,societywas taughtformorethan40 yearsto distrustand showprejudicetowardsthelawsofthemarketand principles
ofprivatebusiness.Unfortu- eventhose(maybe theyarein
thesameconcerns
economists
nately,
professional
thefrontline) withhighacademicstatusand whowereengagedformanyyears
in thepoliticaleconomy
is connected
ofsocialism.Extremeprofessional
ignorance
mainlywithmacroeconomics.
variantsof "marketsocialism"or "thirdway" concepts
Fourth,different
formanyyears,theintellectual
modelofeconomicreforms.
formed,
Manyformer
in acceptingthe
havediffeculties
reformers,
especiallyfromtheoldergeneration,
radicalbreakout
fromtheseideasand thetransformation
towardsa realcapitalist
economy.
6. Howto removebarriers?
Let me givesomespecificsuggestions
howto acceleratethetransformation
processand howto removeor to weakensomeofbarriers.
to use,optimally,
First,it is important
policyand
politicalcreditfora reform
timewhichis usuallygivenonlyto thefirstpost-communist
and fora
government
limitedperiodoftime. It impliesshocktherapyratherthana gradualapproach,
especiallyin cases whenit is necessaryto removeextensivepricecontroland to
makeseriousmacroeconomic
pointofviewit
adjustment.Fromthepsychological
is muchbetterto concentrate
moston the painfuldecisionsin the firstdecisive
stabilisation
and liberalisation
packagethanto makea lot ofshocksovera longer
transformation
periodof time. The successful
policyalso needsa consequential,
Too frequent
orientation.
comprehensive
approachand long-term
changesandconofthe
centration
on selectedshort-term
theeffectiveness
solutionscan undermine
transition
process.
a quickprivatisation
Secondly,
processplaysa crucialrolein speedingup the
answerabouthow
transformation.
Untilnowtherehas beenno definite
systemic
showspositive
to privatise
East Germanand Polishexperience
quickly.Hungarian,
A multi-way
attitudeto privatisation.
aspectsof the pragmatic,
non-ideological
seems
witha significant
rolefordecentralised
schemesofdecision-taking,
approach,
to guarantee
fasterprivatisation.
it is necessary
to underline
theimportance
ofan adequatediagnosisof
Third,
current
economic
events.Mistaken
can leadto thetotalcollapseofa
interpretation
in
ofrecession
transformation
policy.It concerns,
amongothers,theinterpretation
aftercollapse
EasternEurope.Hitherto,
has shownthatdeeprecession
experiance
Ada Oeconmica44t 1992

267
DEBATE:BRUNODALLAGO
of a communist
economicsystemis unavoidableeven withoutstabilisationand
and inflation.
externalliberalisation.
Thereis no trade-off
betweenrecession
Deep
institutional
seemto be theonlywayout froma
changesand quickprivatisation
transformation
thesedo not producethe immediateresults.
however,
depression;
to postponestabilisation
or to relaxmacroeconomic
policyafterthefirst
Attempts
stabilisation
outputdecline,
successes,withthepurposeofavoidingor to limiting
and to an evenlargercollapseofoutputin future.
usuallylead to hyperinflation
massiveand populareconomiceducationcan be anotherinstrument
Fourth,
andintellectual
forspeeding
transformation
andsoftening
up systemic
psychological
barriers
is noteasy. East European
againstradicalchanges.This task,however,
fundamental
reformers
are usuallyengagedin preparingand monitoring
policy
and theydo nothavetimeto be active
changesandin solvingday-to-day
problems
universities
inpublicrelations
andeducational
mass-media,
campaignes.Moreover,
and academicinstitutes
and veryoftenrepresent
also needseriousrestructuring
resistance
ratherthansupportforradicalchanges.
Fiflh,thetransformation
processneedsa politicalumbrella.I havein mind
a politicalmovement
behindthe transor partywhichwouldstandconsistently
formation
course.However,
untilnowthisproblemhas notbeen solved,in most
of EasternEuropeancountries.Apartfromthe Citizen'sDemocraticParty(ObcianskaDemocraticka
thereare no cases ofsuccessful
Strana)in Czecho-Slovakia
The electionsuccreatedaroundleadersofeconomicreforms.
politicalmovements
cessofODS was,however,
to Czechlands.In 1990Polandlostits unique
confined
thepoliticalconsensusaroundeconomicand political
politicalchanceto preserve
ofthe "Solidarity"
reforms
as an effect
ofthe"Waron theTop" and decomposition
movement.
BRUNO DALLAGO*
1. Introduction
themselves
modified
economicsystemshaveconstantly
history,
Throughout
to them,
external
in responseto newchallenges
environment
from
the
originating
to them.Change
andto theactionsanddecisions
andgroupsinternal
ofindividuals
notconsciously
ofthewillofsocietyas a setofresponses
maycomeaboutregardless
decideduponor programmed,
or elseit maybe structured.
oneofthe
The countries
ofCentralEasternEuropearecurrently
undergoing
it
mostrapidandstructured
cured
in
has
ever
oc
that
Nevertheless,
history.
changes
*
Department of Economics, Universityof Trento.
"Transition in Post-Socialist Economies: Can the Barriers to Change Be Overcome?"
4
Ada Oeconomica 44, 1992

268
DEBATE: BRUNO DALLAGO
is bynowevidentthata leadingrolehas beenplayedbyunexpected

consequences,
ofnon-planned
takenbecauseofunderestimation
behaviour,
bythe
bybad decisions
effective
reactionofvariouscomponents
oftheeconomicsystem,
bythecontinued
oftheWest.
oftheold system,
and bytheinterests
and realintentions
functioning
of
formulation
Thesefactors,
alongwiththeoftenpoorand in anycase simplistic
and deterministic
withtherevivalofa monolithic
fortransformation,
programmes
visionofthe economicsystemand the wayit works(thistimeby the dominant
neo-liberal
in the outsideworld,have
ideology),and certainobjectivedifficulties
led in twoyearsto the failureof initialexpectations.The crisishas provedto
be moreprofound
and morelong-lasting
thanwas thought,and changesto the
- havebeen
- andhenceto theeconomicsystemas a setofinstitutions
institutions
muchmorelimitedthanwas anticipated.
In thispaperI shallseekto illustrate
themainobstaclesto changeand the
alternatives
nowto handby whichtransition
can be satisfactorily
accomplished.
My analysiswill centremainlyon threecountriesof CentralEurope- Poland,
- giventhatthesewerethefirstcountries
to setoffon
Czechoslovakia
and Hungary
the roadto transition
and are therefore
thosethathave accumulatedthelargest
amountofexperience.
2. The obstaclesto transition
forms.Theyvary
The obstaclesto transition
arenumerous
andtakedifferent
fromcountry
to country,
residein theabsoluteand
althoughthemajordifferences
relativeweights
ofindividual
obstaclesratherthanin theirpresenceor otherwise.
A possibleclassification
oftheseobstaclesis thefollowing.
1. Obstaclesdue to the characteristics
of the previoussystemand to the
situation.These in turncan be dividedintofivesubgroups.The first
contingent
oftheoldSovietincludesallthosefactors
as theresilience
whichcanbe defined
type
of
consists
and therefore
system.Aneconomic
systemis constituted
byinstitutions
a setofnorms,
rulesofbehaviour,
waysofthinking
habits,roles,and deeply-rooted
and
and actingwhichforma stableand enduring
ofsocialrelationships
structure
inducetheindividuals
theformation
ofpreferences,
belonging
which,byinfluencing
manner.Now,
to a givensocietyto behavein a uniform
and therefore
predictable
withtransition,
havebeenabolishedor transformed,
manyoftheold institutions
butwilltaketimebeforethebehaviourunderlying
themis also radicallychanged.
thenewsystemby
Indeedit is probablethattheold institutions
willundermine
In additionto this,mention
somehow
andshapingthenewinstitutions.
influencing
has to be madeofthe drawbacks
associatedwiththefundamental
organizational
relativeto therafeatures
oftheprevious
industrial
structure,
system:itsdistorted
and themonopolistic
tionalindustrial
structure
ofa marketeconomy,
organization
oftheeconomy.

269
DEBATE:BRUNODALLAGO
The second componentin this firstgroup involvesthe well-knownlack of

the institutionsand social figurestypicalof a marketeconomy,the entrepreneur
in particular. Building the operational structureof a marketeconomytakes a
considerableamountof time.
The thirdcomponentcomprisesvarious technicalproblemsleft behind by
the old systemwhichcannot be dealt with rapidlybecause theyrequiretime and
hugeamountsof capital. They includethe oftendisatrousstate ofphysicalcapital,
the underdevelopment
of infrastructures,
oftenbackwardtechnologywhichwastes
resourcesand producespoor qualitygoods, and disorganizationin factories.
There mayexist,as the fourthcomponent,structureswhichdeliberatelyseek
to delay transitionbecause it damages theirinterestsor even threatenstheirexistence. I referhereto the previouspowerstructurein enterprises(formermanagers
and trade unions) and the undergroundeconomy.These structurescan be partly
eliminatedor transformed
or can change spontaneously,but many formsof behaviourand interestsstillsurviveto delay and deviate the transformation
process.
to
more
there
a
due
are
number
of
These
are
factors.
Finally,
contingent
the progressivebreakdownof the old system during the 1970s and 1980s, and
to its opening to the West, than to characteristicsintrinsicto the Soviet-type
system.Chiefamongthesefactorsthat characterizethe Central-Eastern European
countriesare the severeforeignindebtednessand the high propensityto consume
goods importedfromWesterncountries.
of the transi2. The secondgroupofobstacles derivefromthe characteristics
tionprocessitself.The mostimportantof thesecan be dividedintofourcategories.
- whichinFirst of all, thereare problemscreated by the complexityof transition
volves various processes,not only economic but also political, social, legal and
international.These processesmust somehowbe coordinated,since they presuppose each other and are mutuallyinfluential. Moreover,they require a certain
amountof time to be activatedand to achieve the criticalmass that rendersthem
irreversible.
A furtherobstacle to transitionstems fromthe inexperienceof the new governinggroupswhichhave emergedin these countriessince the overthrowof the old
system.
Thirdly,there are various technicalproblems,partlystill unresolved,that
mustbe dealt withbeforetransitoncan effectively
get underway. The main problems includethe coordination,sequencing,speed of introductionand radicalityof
measures;also, decisionsshould be made on the futurerole of the state and who
shouldundertakethenecessaryrestructuring
oftheeconomicapparatus,and estabhow
and
ofthe economyshould be tackled.
whom
the
stabilization
by
lishingwhen,
Other crucial decisionsconcernthe valuation of the enterprisesto be privatized,
and
the objectivesof privatization(the pace of privatization,increasedefficiency
social
one
to
state
whether
to
group
priority
revenues,
give
restructuring,
boosting
ratherthan another)and its scope; theyalso concernthe techniquesto use and the
4*

270
selectionofthe new owners(whetherand howto restorepropertyto its formerowners, whetherto restrictor give incentivesto foreigncapital, whetherto encourage
or accept the concentration
ofownershipor whethera diffused
patternofownership
should be established). There is, finally,the major problemof constructingand
financinga social securitynet in orderto defendand retrainthose that have been
expelledfromthe productiveprocessbecause of the transition.
Lastly,thereis what can be called the paradox of privatization,namelythat
whenthe enterpriseis put up forsale in
privatizationis muchmorestraightforward
good productiveand financialcondition.For thisto be possible,however,managers
and workersmust cooperate to achieve this end. An unlikelyoutcome is that,
because privatizationputs manyjobs at risk,it oftenthreatensthe mass expulsion
of the formermanagers,and means substantial increases in disciplineand work
rhythmswithinthe enterprise.One can therefore
expect the resistance,sometimes
strongand not merelypassive, by workersand managersin firmsto be privatized;
resistancewhichmaybe manifestin the worseningofproductionquality,in blocked
investments,in risingabsenteeism,in the use of financialresourcesto increase
salaries and wages, and in many other ways. The situationof the enterprisewill
deterioraterapidly,so that it is less attractiveto potentialbuyersand so that its
or even impossible.
privatizationbecomes difficult
A thirdgroupof obstacles to transitionderivefrommeasurestaken and the
policies implemented.Some of these consequenceshave been sought after,others
are thesecondaryand inevitableresultofmeasurestakento solveproblemsbelieved
to be more important,and yet othersare the unwantedand unexpectedoutcome
of these measures,or of badly calibrated policies. Among decisions taken consciously,thoughoftenwithscant regardforall theirimplications,mentionshould
be made of the decisionto base transitionon a stronglycentralizedand complex
plan (this, paradoxically,groundedin liberal principles). The inevitableslowness
of the privatizationprocess has placed controlof the economyin the hands of a
small groupof people, oftenlackingin expertiseand with insufficient
means, and
has opened up a serious cleavage betweenthe centreand the state-ownedenterdecisionshave been the rejectionof any industrial
prises. Otherdeliberately-taken
and the lack of
and structuralpolicy,acceptanceofrapidlygrowingunemployment,
supportfornew privatefirms(so-called "ground-up"privatization).By exacerbating the depressedstate of the marketand by heighteninguncertaintyamong new
these decisionshave restrictedthe chancesof entryby new firms.
entrepreneurs,
Other obstacles to transitionhave been the inevitableconsequenceof decisions takento achievewhat are deemed to be priorityobjectives. The most significant of these are the uncertaintyover propertyrightsthat has spread throughout
theeconomysincethe decisionto restorepropertyconfiscatedafterWorldWar II to
itsformerowners,and theuncertainty
generatedin state-sectorfirms(overproperty
rightsand overexpectationsof futuredevelopmentsin the situationof individual
enterprises)by the decisionto centralizethe managementof privatization.

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DEBATE:BRUNODALLAGO
A thirdsetofobstaclesin thisgrouphavebeencreatedbyerrorscommitted
in economicpolicywithunwantedor unforeseen
consequences.Apartfromthe
ofeconomic
andprovisions
policy,
uncertainty
provoked
bychangesin thedirections
ofthe
shouldbe madeofthenegativeconsequences
fortransition
specialmention
trade
ofmacroeconomic
offoreign
andfortheliberalization
stabilization
programme
of
firms'
and the convertibility
both
of currency
in
terms
all
in
Poland,
(above
reactions
and ofeconomicdepression
and inflation.
4. The fourth
in origin,and derivefromthree
groupofobstaclesare foreign
The first
factorsoverwhichthecountries
in questionhaveno influence.
principal
oftheseis thecollapseofthemarketin theEast. The secondis theslowand small
inflowof foreign
practisedin the
capital. The thirdfactoris the protectionism
of Central-Eastern
West,especiallyin themarketsmostcrucialforthe countries
markets.
Europe,namelyagricultural
in nature
5. Thereare,finally,
a seriesofobstaclesthatare non-economic
but nonethe less of majorimportance
foreconomictransition.Those obstacles
administrathatare internal
to thesecountries
are politicaland ethnicinstability,
social
tivedisorganization,
a certainideologicalrigidity
in the newgovernments,
discontend
and apathy,the resurgence
of populismand oppositionto the inflow
the most
offoreign
undoubtedly,
capital,and legislative
Externally,
uncertainty.
warthe
with
factor
is
the
of
nationalist
consequent
conflicts,
significant
explosion
of
individual
fareand tensions
the
reluctance
and
thatwearepresently
witnessing,
countries
to cooperate.
3. Dilemmas and possible solutions
The processoftransition
and manyofitscomponents
is objectively
difficult,
theperiod
can onlybe satisfactorily
in thelongterm.Nevertheless,
accomplished
and
itshould
sincetransition
first
and
has
been
fruitful
instructive,
extremely
began
of
theway
reassessment
and ingenuity,
induce,aftertheinitialenthusiasm
general
in whichtransition
has beenhandled.BelowI examinethesevenprincipalkinds
ofdilemmaraisedbytransition
fromthepointofviewofthecentralgovernment.
Threeofthemarein factfalsedilemmas,
whilstanotherthreerequireappropriate
decisionsand measures.The seventhdilemmacan onlybe resolvedwiththehelp
oftherestoftheworld.
and generalapproach
1. The firstdilemmasumsup the wholephilosophy
oftransition.It is the dilemmaof the stickand the carrot:is it betterto force
thedecisionsthatfavour
economic
agentsto assumethebehaviourand implement
or is it betterto seek fortheiractivecooperation?This is a false
transition,
workforwithout
theactivecollaboration
ofeconomic
dilemma,
agents(enterprises,
willto
based on theirdirectinterest
and on theirunconstrained
ers,consumers),
Ada Oeconmica44t 992

272
cooperate- this being the veryessence of the marketeconomy- transitioncannot

succeed. This is not to say that the gevernmentcannot and must not sometimes
resortto coerciveinstrumentsin orderto change agents' behaviourand decisions,
but it should do so only when it proves impossibleto use indirectinstruments.
The governments
of the countriesin transitionhave so far made too generaland
too frequentuse of coerciveinstruments
in theirdealingswiththe state-ownedenterprises,imposingdecisionswhichhave hamperedthe developmentof the market
behaviourconduciveto privatization.
2. A second false dilemmaconsistsof the contrapositionbetweenrapid and
violentpolicies('shock therapy')and gradual policies. The falsenessof thiscontrapositionlies in the fact that certainmeasurescan onlybe introduced'at a stroke',
whileotherscan only be implementedgradually.Stabilization,forexample, must
necessarilybe rapid. However,great care mustbe taken over the degreeof restriction imposedby certainmeasures(money and creditrestrictions,
forexample), so
that the economyis not depressedand the realizationof otherobjectives (forexample,the birthof new privateenterprises)is not impeded. Experiencehas shown
that it is also importantto combinestabilizationmeasures with others designed
to change microeconomicbehaviour (see below). If this is not done, and if only
stabilizationmeasuresare used to achieve this effect,the consequencesin termsof
recessionwill probablybe severeand enduring,and in any case thereremainsthe
dangerthat politicaland social pressuresforrelaunchingthe economywill succeed
beforemicroeconomicbehaviourhas been changed. If this happens, an essential
part of the old systemwill be revived,but now under greatlydeterioratedeconomic conditions. Lastly, it makes no sense to talk of accelerated privatization.
Accelerationhereshouldinstead apply to the creationof the institutionaland legal
framework
requiredforprivatization:by issuingthe necessarylaws and rules,by
propertyrightsalso in thestate sector,by decidingthe legitimacyor otherdefining
wise ofthe restitutionof property(possiblyto a limitedextentand in non-physical
form),by definingthe techniquesand formsof privatization,and by buildinga
creditsystemwhichprincipallyfavoursthe birthof new enterprises.The actual
sale offirmsand the construction
of a new,stable structureofpropertyrightstakes
a considerableperiod of timeto accomplish.
3. The thirdfalse dilemmais that betweenliberalizationand protectionism
and betweencompetitionand the maintenanceof a monopolisticstructure. The
rapid broad-gaugeliberalizationof economicrelationshipswithothercountriesincludingconvertibility,
mayworsenthe situationoftheeconomyratherthanimprove
it or at least increasethe costs of transition.On the otherhand, thereis no denying the importanceof openingup these economiesto providefurtherstimulusfor
competition.There is, therefore,
onlyone approachby whichthe advantagesof liberalizationcan be securedwith risksand costs reducedto the minimumpossible:
the government
and differentiate
mustliberalizethe economyprogressively
among
industries,takingaccount of differing
degreesof competitivenessand workingon

273
the basis of a pre-establishedor publicizedplan in orderto forestallcollusionbe- such collusionbeing aimed at maintainingthe
tweengovernment
and enterprises
protectionof individualmarkets. Gradually decreasingprotectionwill enable enthemselvesand to prepareforthe challengeof international
terprisesto restructure
- progressively
the stimulusof competition.It is much
competition
strengthening
betterto beginslowlyand thenaccelerate,than to be forcedto retraceone's steps,
therebyanti-monopoly
policymanagedby the centrehas by now revealedits weaknesses (forexample in Poland, but in othercountriesas well). The anti-monopoly
officesand the government
lack the means to take wise decisionsand are even less
able to implementthem. It is muchbetterto decentralizethis task, placingit with
the market. This will encouragethe birth and growthof new, especiallyprivate,
firmsto the maximumextentand will use the progressiveliberalizationof trade,
i.e. foreigncompetition,forthe purpose. Moreover,as regardsthe medium-small
sized countriesof Central and South-East Europe, and in view of the progressive
openingof markets,domesticmonopoliesmay be firmswhichare relativelysmall
on a worldscale and whichshould not always be split up.
4. The next threedilemmasinstead requirepolitical decisionsfortheirsolution. The fourthdilemmaconcernsthe manneritselfin whichtransitionshould be
conducted: should it be rigorouslystructuredand regulatedby a centralplan, or
should it involvea set of processesdecentralizedand managed pragmaticallyand
flexibly?The firstapproach has been triedin almost all the countriesof CentralEasternEurope, withthe partialexceptionof Hungary,and has yieldedratherdisresults. It is based on the convictionthat
appointingand oftencounterproductive
marketforcescan be introducedfromabove by means of special measures which
forcethe situation,especially as regards privatization. Afterthis initial phase,
however,the state must withdrawalmost entirelyfromthe directmanagementof
the economyand severelyrestrictthe economicpolicy interventions.The second
solution,advocated by the presentwriterand already adopted to some extentin
Hungary,maintainsthat marketforcescannot help but developspontaneously,and
that the task of the state is to defineall the institutions,includingthe laws and
rules,necessaryforthe efficient
functioningof a marketeconomy.In addition,as
the ownerof a large part of the means of production,the state must act as a good
owner,as discussedin the next point. During transitionthe state should have a
- role in the supply of capital to the economy
substantial- but possiblyindirect
and in economicpolicy,therebycomplementingregionalpolicy. For instance,the
state could financethe economyon a marketbasis throughthe establishmentof a
numberof public (or mixed) financialcompanieswhichcould contributeto capital
fundingand the investmentof new or already establishedcompanies.
Knowledge of the historicalprocesses of development,the nature of the
Soviet-typesystem,and the experienceso faraccumulatedduringtransitionshould
induce the adoption of the most pragmatic,decentralizedand flexibleapproach
possible;namely,one whichencouragesall economicagents- includingthe present

274
- to makean activecontribution
develto thebottom-up
state-owned
enterprises
opmentofa marketeconomy.
and
ofprivatization
dilemmaconcernsthestrategy
5. A further
important
state
or permanently,
themanagement
ofthefirmsthatwillremain,temporarily
To date,it is obviousthatpriority
has beengivento the privatization
property.
ofthestatesectorratherthanto the birthand growthof privatefirms(groundThe newprivatefirmsand thosethatexistedearlierhavenot
up privatization).
in orderto counterthe depressive
receivedserioussupportfromanygovernment
ofthe
take-off
theeconomic
effects
ofthegeneralcrisisoftheeconomy
and to foster
sector.This is a graveerrorofstrategy,
becauseit is aboveall newprivatefirms
to thegrowthof
contribute
thatcan generateentrepreneurship
and substantially
thenewfirms
oftheeconomy.
andto therestructuring
Consequently,
competition
in number,
but generally
ofverysmallsize and oftenexistingonlyon
significant
and yielding
intosectorswithlowcapitalintensity
paper- havebeenconcentrated
have had a
quickreturns(mainlyshopsand restaurants).These developments
certainpositiveimpacton the qualityof consumption
goods,but havenot done
muchfortheprocessofeconomicgrowth.
has
ofstate-owned
The priority
enterprises
givento the rapidprivatization
to
thestateis largelyindifferent
had another,
effect:
perhapsevenmoredamaging,
itsenterprises,
abouttheirsale. Thishas createdgraveconfuapartfrombringing
- whichhavereacted
in firms
sionoverproperty
uncertainty
rightsand generalized
indebtedness.
and increasing
in a rationalmanner
to thesituationbydecapitalizing
statecontroloverfirms
The strategy
adoptedbythestatehas beento strengthen
this
forprivatization.
via stateagenciesor specially-created
ministries
However,
and has creatednewones.
decisionhas notsolvedtheproblems
can inpartbe avoidedbyadoptinga morepragThesenegative
consequences
thestatesectorwitha view
maticand flexible
approach,aboveall byreorganizing
to sellingit whollyor in part,based on businessdecisions.This reorganization
thefunccan probablybe best undertaken
by assigningto the stateexclusively
is delegatedto specially-created
tionofowner,whilecontrolofenterprises
holding
oftheseenterafterthetransformation
companies(possiblyin mixedownership)
that such holdingcompanies
prisesintojoint-stock
companies.It is important
conto avertthedangerofexcessivemonopolistic
shouldbe in sufficient
numbers
ofthe
in theirmanagement
autonomous
centrations.
Theyshouldbe completely
firmsand therefore
fortheirresults,and theyshouldonlybe able to
responsible
outofthestatebudget
via themarket.That is to say,financing
finance
themselves
bodiesshouldsell their
shouldbe prohibited,
and if necessarythe management
ownsharesor raisetheirowncapital.This wouldbringtheprogressive
privatizationoftheeconomy,
dictatedbytherulesofthemarketand notbyinterventions
bodiesshouldsell theirownsharesor raise
fromthecentre,and themanagement
oftheeconomy,
theirowncapital.This wouldbringtheprogressive
privatization
fromthecentre,and
dictatedbytherulesofthemarketand notbyinterventions

275
It
themanagement
ofthestate(nowmixed)sectorshouldimprove
substantially.
wouldalso generaterevenues
forthestatebudgetwhichcouldbe made available
to the
to thenewprivatefirms.However,
thissolutionshouldnotbe generalized
wholeoftheeconomy,
otherwise
therewouldarisetheabovementioned
dangerthat
of monopolymayform.Otherapproachesthat
excessively
strongconcentrations
investment
couldbe adoptedsimultaneously
arewellknown:institutional
investors,
vouchers
and employee
schemes,sales to privateentities(including
participation
shouldnot
thatprivatization
and liquidation.It is advisable,however,
foreigners),
whichit can putto
be cost-free,
bothin ordernotto deprivethestateofresources
is
gooduse,and also notto instiltheidea in thepopulationthatpublicproperty
stillfree.
oftransition
theconsequences
6. A decisionshouldalso be takenconcerning
thegovernon thelabourmarketand on thedistribution
ofincomes.Specifically,
mentshoulddecidewhether
to implement
a policydesignedto curbunemployment
and createnewjobs, or whether
fromtakintmeasuresto attenit shouldrefrain
stateenterprises
uate therisingunemployment
offormer
causedby privatization
it mustdefine
and economicdepression.If thegovernment
decidesto intervene,
the aim should
the meansand end ofsuchintervention.
It mustdecidewhether
be thesafeguarding
it shouldbe thecreationof
ofalreadyexisting
jobs, whether
ofpublicworks,by
newones(in thepublicadministration,
a programme
through
it shouldsimply
or whether
theexpansionofthenewprivatefirms),
encouraging
schemes.As reconsistoftheprovision
ofunemployment
benefitand retraining
to accept
mustdecidewhether
ofincomes,thegovernment
gardsthedistribution
taxation
incomegaps or whether
it shouldintervene
progressive
widening
(whith
moral
are
not
or a transfer
stake
here
to
At
reduce
these
just
disparities.
policy)
and inand socialissues,but theincentive
ofemployment
effect
and demoralising
comesredistribution
on workers
and firms.If one acceptstheidea- sustainedby
- thata substantial
part
manyand backedbyempirical
analysisoftheseeconomies
it is
of unemployment
bothnowand in the nearfutureis by naturestructural,
forunemevidentthatthestatemustmakea majoreffort
to provideretraining
combatedby encouraging
can also be effectively
ployedworkers.Unemployment
the birthand growthofprivatefirms.Moreover,
in orderto narrowthe rapidly
it maybe advisableto adopt wageregrowing
regionalgaps in thesecountries,
straints
andemployment
subsidies(in theformofstatesubsidiesforsocialsecurity
in discontributions
or similar)whichlightenthe wageburdenoffirmsinvesting
has
or backwardareas. Eventhougha certainlevelofunemployment
advantaged
or
effort
an educationaleffect
on workers
themto greaterproductive
by spurring
of
therestructuring
and eventhoughit facilitates
by imposing
greaterdiscipline,
as wellas
theeconomy,
excessiveunemployment
economicdepression,
exacerbates
beingthesourceofgravesocialproblems.The sameappliesto wagegaps,in that
and
theexcessive
fromworkers
ofincomesmaytakeawaytheincentive
polarization
Ada Oeconomica44f 1992

276
reduce demand forconsumptiongoods produced in the country,to the advantage

of demandforluxurygoods, oftenimported.
7. The finaldilemmaconcernsthe role of the restof the worldin the transitionprocess,and is therefore
largelybeyondthe controlofthe countriesin question.
There are threeaspects to considerhere. The firstis the role of the West, specifically in termsof whetherit should resortto a massiveaid plan or to moreselective
been
measures. Althoughthe danger of a new 'Marshall Plan' has, fortunately,
largelysuperseded,it needs stressingonce again that this solution representsa
colossal waste of money,that it gives renewedvigourto old formsof behaviour,
and that it blockstransformation
of the economicsystem.Much moresuitable are
selectivemeasuresaimed at specificsectors(in particularthe developmentofinfrastructures)and at specificactivities(forexample,by providingaid forthe retraining
of technicalcadres in firmsand in the financialsector). Moreover,of fundamen- but much more difficultto implementbecause of oppositionby
tal importance
the West is the non-discriminatory
openingof Westernmarketsto exportsfrom
the countriesof Central-EasternEurope. The second componentto this dilemma
is the mannerand pace with whichthese countriesare to be integratedinto the
internationalorganizations,above all the European Community.The answerhere
depends largelyon the objective situation: the gap betweenthe economicsystem
of the countriesin transitionand that of the Westerncountriesis stillso wide that
any idea of acceleratedintegrationis pure fantasy.It was instead important,from
a politialand economicpointof view, to associate the countriesof Central Europe
with the Community.This link must now be strengthened,spelling out to the
countriesconcernedwhat theirnext steps should be and givingthemthe technical
and financialaid needed to take these steps. Finally,carefulconsiderationshould
be made of whetherto continuetheirintegrationwith the other countriesin the
region. Aftertheirinitialreluctance,the countriesof Central Europe have finally
with
set up a schemeforregionalcooperation,whichtheydo not see as conflicting
I
beit.
towards
into
but
an
intermediate
as
Western
stage
integration
Europe,
lieve this is the correctoption to choose, and that these countriesshould seek the
concretecooperationof the Communityas theypursue it.
4. Conclusions
The firstyears of transitionhave broughta wealth of experienceswhich,
forthe countries
althoughoftendisappointing,should providevaluable information
of CentralEurope to adjust theirsights. Progresshas been made along the road of
some of the decisionstaken by these countries
transition,althoughunfortunately
have led themastray,damagingeconomicresourcesand sapping the enduranceof
theircitizens.

277
DEBATE: STANISLAV GOMULKA
Ofcourse,anydecisiontakento changetheeconomic
is a stepforward.
system
thefinaloutcome(theobjectiveeffectively
Nevertheless,
pursued)and thepriceto
it (in economic,
social and politicalterms)mayvarygreatly.If
pay in achieving
- fortransition
theobjectiveis transition
to a purely
to a modernmixedeconomy
- not
marketeconomyis an illusionunderthesecountries'presentcircumstances
all solutions
and decisionsare equivalent.
It is stillnottoolateforthecountries
ofCentralEuropeto achievethisobjec- inPolandconsiderably
tive,eventhoughthepricetheyhavealreadypaidis higher
in orderto attaina mixedeconomyand,
higher thantheyexpected.However,
wherepossible,acceleratetransition
morepragmatic
towardsit,a lessideological,
and decentralized
is required.
approachto transition
STANISLAVGOMULKA*
Table 1
GrossNationalProduct(GDP) and GrossInvestment
(I), 1989=100
GDP actual
1989 1990
Bulgaria
Czechoslovakia
E. Germany
Hungary
Poland
Romania
USSR (CIS)
Yugoslavia
100
101
98
98
100
92
102
101
88
101
84
95
89
78
98
90
GDP expected
1992
1991
68
85
58
87
81
67
81
72
64
78
65
87
81
63
70(?)
65(?)
I
1991
57
76
89
83
52
91
74
Sources:Nationalofficial
Data in Table1 indicatethata reform-induced

recessionlasts about 2 to 3
years.Following
this,the East Europeaneconomiesshouldentera consolidation
phasewhichshouldevolvegraduallyintoa recovery
phase. In the consolidation
is high
thelevelofactivity
is stable,inflation
phasewewouldexpectthefollowing:
but declining,
and
and unemployment
is highand increasing;
choice,accessability
*The LondonSchoolofEconomicsand PoliticalScience
"On the DesignofEconomicPolicy:The ChallengeofEasternEurope"
The author'scontribution
is part of a paper invitedforand presentedat the Kiel Week
June20-25,1992.
Conference,

278
offoreign
thereadjustment
qualityofgoodsand servicesare all muchimproved;
thequality
tradeawayfromtheformer
CMEA overto theEC area,is completed;
reserves
of the pricesystemis closeto EC standards;the levelsof international
at unified
aresufficient
to supportcurrent
oflocalcurrencies
accountconvertibility
andfairly
betweena quarter
stablerates;a substantial
shareoftheGDP- typically
and a half is producedbytheprivatesector,and thesharecontinues
to increase
rapidly.
How to initiaterecovery
Whatis neededis to initiatea positivecyclewhereby

savingsfinance
existing
newinnovations,
demand.If thesecan
thusreducing
unitcostsand/orincreasing
be achievedtherewouldbe an increasein profits
bybankloans,
which,augmented
could be used to financefurther
investment.For this to happenthesesavings
shouldbe availableto therightinvestors,
andtheyshouldbe substantial.The right
to undertake
investors
shouldbe numerous
and theyshouldhavestrongincentives
theeffort
to searchforinnovations
investment
and implement
projects,despitethe
associatedrisks.
a stable
The typicalwaysforpolicy-makers
to assisttheprocessis bycreating
macroeconomic
lowdirecttaxationofpersonal
and byimplementing
environment,
in EasternEurope.
incomesand profits.These,I think,are also veryimportant
in larger
investment
Lownominalinterest
ratesare,in fact,essentialto stimulate
investment
projects.Theyare also neededto createdemandforprivatehousing.
to
a majorstimulus
Increasedhousingconstruction
has thepotentialforproviding
of
fall
an overallrecovery.
themainproblemis thefactthatdue to the
However,
and theshrinkage
totalsavingsarerathersmall.Moreover,
oftheeconomy,
profits
inthepost-reform
a significant
economy
partofthesesavingsis (orwillbe) usedto
- effectively
To stimulate
financegovernment
publicconsumption.
budgetdeficit
to thesavers.In order
be encouraging
ratesshouldtherefore
savings,realinterest
muststriveto restrict
to safeguard
purposes,theauthorities
savingsforinvestment
to a levelwhichcan be financed
publicconsumption
bytaxesalone.
is low,and thisin turn
Nominalinterest
ratescan onlybe low ifinflation
is relatedto the growthof wagesand the size of the budgetdeficit.A restricand a prudentfiscalpolicy
tive,tax-basedwagepolicyin state-owned
enterprises
rates. The policyshould
are therefore
to achievelow nominalinterest
necessary
forrestructuring
also helpthemanagements
to makeprofits
of theseenterprises
natureofthepolicycan be reducedwiththe
purposes.The scopeand restrictive
andtheincrease
ofcommercialization
ofstateenterprises
andprivatization
progress
ofunemployment.

279
A veryimportantmacro instrumentto be used forthe purpose of initiating

recoveryis, of course,the exchangerate. Initially,the exchangerate is typicallyset
at a highlydepreciatedlevel. During the liberalizationand stabilizationphases of
transition,the dollar wage increasesrapidly,stimulatingimportsof manufactured
consumergoods. In Poland, forexample, these importsincreasedabout threefold
during1990-91 alone, causing a reductionof industrialoutput by some ten percent. The fixedexhangerate servesas a nominalanchorduringthe initialpart of
this period,and thereis a strongtemptationforpolicy makers(and the IMF) to
overburdenthe rate withthat role, whichwas the case forPoland in 1991.
The temptationshould be resisted. The primenominal anchorsshould be
the wage policyand the supplyof money,while the exchangerate should be used
primarilyto achievea desiredoutcomein the balance ofpayments.Eastern Europe
is not and should not be expected to be placed yet, nor fora considerablewhile,
underthestrictdisciplineofthe ExchangeRate Mechanism.Liberalizationoftrade
is likelyto lead to an increaseof both export to, and importsfromareas having
convertiblecurrencies. However,exhange rate policy should strive to achieve a
sizeable trade surplus,in line with the export-ledgrowthstrategy. The surplus
wouldbe a reflection
of the currentrecession(low importsof intermediateinputs),
would limit the depth of recession,and would be needed to build and maintain
adequate internationalreservesin the regionwhileservicingits large foreigndebt.
The experienceof WesternEurope, Germanyin particular,suggeststhat the
success of the transformation
may hinge on a rapid expansion of the sector comprisingsmall- and medium-sizedfirms.There are already hundredsof thousands
of such firmsin Central Europe, most of them in the privatesector. They form
the testinggroundfor a wide spectrumof innovations. The most successfulof
thesefirmscould become the basis forthe flexibility
and dynamismof the region's
economies.
The problemseems to be that, so far, "the growthis mostlyin verysmall
firms,mostlyin non-tradeables,and mostly outside manufacturing"(Berg and
Blanchard1992,p. 28). One implicationof this is that "privatesectorgrowthcanof state firms"
not, in the shortor mediumterm,substituteforthe restructuring
sector
of
"as
the
reasons
is
that
the
non-tradeable
One
p.
growsand
(op.cit. 28).
the tradeablesectorstagnatesor shrinks,pressurefroma growingtrade deficitwill
requireeithersteady real depreciation,or a furthercontraction",(op.cit. p. 28).
have their
One shouldrecognise,however,that privatizationand restructuring
own sequencing.They occur firstin the sectors,such as trade and construction,in
whichthe transactioncost ofprivatizationis small and wherethe investmentcost of
is manageableforthe (new) privateowner. In Poland, thisphase has
restructuring
nearlybeen completedin the firsttwo years of reform.The trade sectorbecomes
then a major innovativeforceforthe entireeconomy.Private tradersidentifythe
to domesticproducers.
productswhichare in demandand transmitthisinformation
They also importhigherqualitygoods, therebyputtingpressureon domesticfirms,

280
most of whichare still state-owned,to upgrade theirown productsand stand up

to externalcompetition.In the second phase, therefore,
many state-ownedfirms
also begin wake up, startingto restructureand innovate. In Poland this phase, it
seems,has recentlybegunin keyconsumersectors- such as foodprocessing,leather
productsand textiles. This has led to a considerablerecoveryin these sectorsin
termsofoutputand financialindicators,as well as to a strongexportperformance.
In the meantimethe privatizationprocess continues,and it has begun to embrace
medium-sizedstate enterprises,
througheitheremployeeand/ormanagementbuyoutsor theliquidationand sale ofassets. To use the Polishexampleagain, thisroute
was themainchannelofprivatizationin 1991,involvingabout 1000enterprises.The
total pool of enterprisesin this categoryis still about 6000, out of a total of about
8000.
Anotherpotentialproblemis the behaviourof banks in their choice of the
firmsand investment
banks
projectstheyare willingto support. Profit-maximizing
may have a perverseincentiveto financethe less-efficient
projects of firmswhich
are in debt, as opposed to the more efficient
projectsof debt-freeprivateor state
firms.The reason is that the banks calculate that new moneyto old firmsshould
also improvethe chance of recoveringsome or all of the under-or non-performing
old debt, while if they lend to debt-freefirmsthis additional potential benefit
is absent (Peroiti 1992, develops a formalmodel that leads to this proposition).
Banks also show a limitedwillingnessto lend to new entrepreneurs
withno proven
reputationof businesssuccess and limitedcollateral. In this situation,as Svejnar
to
(1991, p. 133) suggests,"thereis strongeconomicjustificationfora government
step-inand providecreditinsuranceor other measuresto stimulatebank lending
to this sector".
The bad debt problemis one of the most seriousmattersto be addressedin
the consolidationphase. (In Russia and other formerSoviet republics,the debt
of the enterprisesector was already large at the start of the liberalizationand a
near hyperinflation
duringthis phase, coupled withhighernegativeinterestrates,
is assistingin reducingits real value). As reformprogresses,profitability
tends to
declineand the proportionof state enterpriseswhichare loss-makingand therefore
no longercreditworthy,
increases. In Poland this proportionreached a maximum
of about 50 percentin early 1992. The reformers
have respondedby implementing
programmeswhichinvolvethe closure of some of the state enterprises,compensation of some bank losses by the Treasury,and greaterparticipationof banks.
of those enterprisesstill reThey have also acquired shares in the restructuring
garded as viable. The financialpositionof state enterprisesdepends on the ability
of managementsto withstandpressureto increasewages. Commercialization,incomes policy,and the credibilityof the threatof closure are the key instruments
to strengthen
that ability.If these instrumentsare strongand work,thenlowering
externalcompetitionby devaluationmay also be used to improveprofitability.

281
Howto sustainrecovery
Thereare variousimportant
'structural'
whichthepost-communist
reforms
countries
havestartedto implement
much
and withwhichtheyneedto progress
further
in orderto developa solidbasisfora sustainedgrowth.The programme
of
thesereforms
includesaboveall privatization
and producoffinancial
institutions
tionenterprises,
and privatization
ofthehousingstockin orderto increaselabour
one
sensitivearea whichrequiresdetermined
mobility.
However, politically
policy
actionis publicfinance.
Someof thecountries
ensuchas Czechoslovakia
and Hungary,
concerned,
teredthetransition
withtotalpublicexpenditure
more
than
50
percent
claiming
ofGDP. As we notedearlierreform
keptdirecttaxationlowin order
governments
to havean incentive
effort.Forthe same reasonwelfare
systemthatencourages
benefits
and pensionsshouldnotbe highin relationto wages.The fullwageindexationofthesebenefits
The
and pensionscannotbe maintained
duringtransition.
reasonis thattherevenueofthesocial security
of
is
a
system proportion wages,
andthenumber
ofwageearnersis declining
ofpensioners
sharplywhilethenumber
and unemployed
has increased
The
reform
may,howsharply. present
governments
inertiafuelledbythepoliticalpressure
ofinterest
ever,fallvictimto thelegislative
In
the
number
from6.8
of
and
increased
groups. Poland,
pensioners unemployed
millionin 1989to 10.7millionin 1992,whilenon-agricultural
declined
employment
from12.6 millionto 11.0 millionin the same period. The totalexpenditure
on
increasedfrom9.1% of GDP in 1989to 15.8%of GDP in
pensionsand benefits
have
1991,and is expectedto reach20.9% ofGDP in 1992. These developments
had a devastating
on
of
a
diversion
impact publicfinances,
governforcing sharp
mentexpenditure
frominvestments
on infrastructure
of pensions
to thefunding
in particular,
and therefore
to consumption.A largefallof revenuefromprofit
taxesis also causingtheCentralEuropeangovernments
on
to reduceexpenditure
research
and development,
educationand investment
on restructuring.
it seemsthata greatermobilization
of savingsthanat present
Therefore,
willbe necessary
forsustaining
at
a
recovery
growthratecompatiblewith'full
.
employment"
At themoment,
thesize ofthesavingsdeficiency
to estimate.In
is difficult
theimmediate
aftermath
ofthereform,
thesavingsratiois likelyto rangebetween
of
15 and 20 percentofGDP, depending
on the country.If post-1950experience
Western
ratio
should
is
to
be
a
this
model
to
follow
for
Central
Europe
Europenow,
be between25 and 30 percent.

282
DEBATE: PHILIP HANSON
References
Berg,A. and Blanchard,. . 1992. "Stabilizationand transition:Poland 1990-1991". MIT,
February.Mimeo.
and LondonSchool
economics"
Perotti,E. C. 1992. "Banklendingin transition
, BostonUniversity
ofEconomics.April.Mimeo.
issues in the transitionto a marketeconomy". Journalof
Svejnar,J. 1991. "Microeconomic
EconomicPerspectives,
Vol. 5(4), Fall, pp. 123-138.
PHILIP HANSON*
1. Barriers.I'd liketo postponea directanswerfortwoparagraphs,
and try
to put thequestionin context.Thereare enormous
abouttheattempt
difficulties
to covertheeconomiesofex-communist
countries
intoeffective
capitalistmarket
economics.Liberalization
andforeign
to
ofprices;openingtheeconomy
up imports
directinvestment;
macro-economic
stabilization;
privatization;
de-monopolization;
- all are problematic.
thedevelopment
ofmarketinstitutions
Economicshas beenable to say whatshould,in verybroadterms,be done.
But in the absenceof anysimilarexperiencein the past, therehas been no basis whatever
forproviding
on the time-lags.Therefore
guidanceto policymakers
can
the
human
and
nobody
confidently
politicalcostsinvolvedin these
predict
The
sad
economic
truth
is
that
and
analysisbetweenthem
changes.
political
can provideno assurancethat the attemptedchangesin any one of thesemutanteconomies
willdeliverin firstyearor tenyearsor twenty
yearsan effectivelythatit is not
I
mean
market
economy.By "effectively
functioning
functioning"
most
which
but
one
in
as
a
mixed
market
peopleare
onlyrecognisable
economy,
experiencing
risingprosperity.
transofattempted
We do nowhave,however,
aboutthreeyears'experience
formation
in severalcountries.Myimpression
from(mainly)Russian,Hungarian,
Polishand Czechexperience
is thatthe mainbarriersare in thedevelopment
of
institutions
and
skills.
appropriate
I meana widerangeofaccepted,operational
rules,proceBy "institutions"
duresand organizations,
frominter-bank
banking
through
clearingarrangements
to thelegalbasisofcontract,
loansecurity,
etc,and frommodliability,
regulation
both
ernaccounting
firms
to tax inspectorate.
By "skills"I meantheknowledge,
and procedures.I
theoretical
and practical,requiredto operatetheseinstitutions
do notmeanentrepreneurship.
ofopportunism,
Likeotherforms
entrepreneurship
whatthe
determines
is notin shortsupply.The economicenvironment,
however,
do.
entrepreneurs
*CREES,
ofBirmingham
and ResearchInstitute,RFE/RL, Munich
University

283
DEBATE: PHILIP HANSON
The reason whyinstitutionsand skills are especiallyimportantis this: they

cannotbe providedout of thinair by the decisionsof the most enlightenedpolicymakers,but at the same timetheydeterminethe practicalresultsofthose decisions
that reforming
policymakerscan make.
This can be illustratedfromexperiencein the ReformTriangle. In Poland,
initial
effortsstartedfromdifferent
Hungaryand Czechoslovakia,transformation
situationsat different
times,and have been made with differing
degreesof coherence. Poland embarkedon rapid liberalizationand stabilizationin 1990 froma
positionof extremeinternaland externalimbalance. Czechoslovakiabegan a year
later froma position of near-macro-balancedomestically,and with little foreign
debt. Hungary,by contrast,had a long historyof pre-"transformation"
reformeffortsdatingback to 1967. By mid-1992the situationsin the threecountriesdiffered
in waysthat reflecttheirdiffering
recenthistories;but in all of themthe continued
- especiallybanking,capital marketand tax
absence (effectively)
ofkeyinstitutions
institutions remainsa crucialproblem.
In particular,the prevalenceof bad debt in the bankingsystemand between
enterprisesthreatens,even in Czechoslovakia,to underminethe effectsof serious
stabilizationefforts
by government;so do weaknessesin tax collection;and weaknessesin both legislationand capital-marketinstitutionshave the effectthat clear,
decisivechangesin the property-rights
regimeare still not guaranteed.
In otherwordsreformgovernments
can abolish past controls;theycan, with
luck and determination,cut state expenditureand introduceprivatizationprogrammes. But these actions then operate throughinstitutionsthat are eitherilladapted to stabilization,liberalizationand privatizationor wherethey are appropriate,are weak,under-developedand not appropriatelystaffed.
Hungary,forall its problems(and Hungarians'propensityto stressthe problookinginflow
lems), has been the firstex-communistcountryto attracta healthyof foreigninvestment.This is surelynot a reflectionof superiortransformation
of appropriateinstitutionsand
policies,but of the somewhatstrongerenvironment
skillsthat has developedover a quarterof a centuryof partial reformand relative
opennessto the West.
2. Acceleratingthetransition.If the weaknessof institutionsand skillsis the
in the medium term,then a more
bindingconstrainton effectivetransformation
countrieswho have the
rapidgrowthin the numbersofpeople in the ex-communist
relevantskillsand knowledgeis especiallyimportant.(It is temptingto recommend
specifictechnicalsolutionssuch as currencyboards, but myguess is that technical
fixeswon'tfixanythingwithouta reasonablebasis ofotherinstitutionsand skills.)
This growthcan come about in fourways: throughtechnicalassistancefrom
Westerngovernments
and internationalorganizations,fundedby Westerntaxpayers; throughforeigndirect investmentinto ex-communistcountries; more indirectlyand less reliably,as a by-productof foreigndirectinvestmentfromthe excommunistcountries(not, of course,pure "capital flight";but how betterto learn
5

284
DEBATE:PHILIP HANSON
about operatingin a developed marketeconomythan by doing so?); and as a

by-productof temporaryemigrationto the West.
There are plentyof examples: Hungarian (and to a lesser extent Russian)
accountantsby
bankingexpertiseacquiredabroad; the trainingoflocally-recruited
Westernaccountingfirmsoperatingin the region,and so on. Expertise does not
necessarilycomefromthe developedWest above- witnessthe Kazakh government's
use of Middle Eastern expertisein its now-completednegotiationswith Chevron
overthe Tengizfield,or internationalaccountingfirms'deploymentof Latin American staffto Eastern Europe to use theirskillsin copingwithaccountingproblems
generatedby highinflation.
So faras Westernstate-fundedassistanceis concerned,provisionofknow-how
has been less controversial
than otherformsof aid. There are good reasonsforthis:
not just the primarynature of the need forskills that I have been arguing,but
- our fashionable,
also- giventhat otherformsof aid entailmorestate intervention
but well-founded,
of state intervention.
scepticismabout the effectiveness
however,does not
Scepticismabout the state as the agent of transformation,
justifythe current,rigid Anglo-Americandoctrinethat all assistance should be
targetted whollyor largelyat the private sector. It is obvious that in most excommunistcountriesthereare some crucial weaknessesof skillsand institutionsin
state or quasi-state activitieslike tax collection,centralbanking,the draftingof
legislationand the provisionof economicstatistics.
So myprioritywouldbe foranythingthat acceleratedthe build-upofmodern
economic institutionsand the skills and knowledgeto run them. This is longtermprocessin whichWesterngovernments
and taxpayershave a role, but where
that role entailsnext to no directintervention
in the workingsof the mutant,excommunisteconomies. My guess is that know-howand trainingare the formsof
assistancewhereresourcesare least likelywasted. That isn't sayingmuch,but it's
something.
The questionsyou have asked are verybroad, and I can't give a nice precise
answerto them. The only obvious policy implicationof what I have said is that
Westerngovernmentsshould be aiming at a high resourceallocation (relative to
otherformsof aid) to technicaland trainingassistance,should sustain this over a
numberof yearsand, preferably,
increaseit over time.
In pickingout institutionsand skills,I do not want to suggestthat all the
otheringredientsin the recipeforcapitalismare unimportant.Tryingto turnthe
formercommunisteconomiesinto viable capitalist economiesis, paradoxically,a
grandiose,Utopianprojectof the sortthat usuallyturnsout badly. In otherwords,
thereis no end of ways in whichthe recipe can go wrong.The developmentof the
necessaryskills and institutionsis simplythe elementin the whole attemptthat
seems a shade morefundamentalthan all the others.

DEBATE: ARYE L. HILLMAN
285
ARYE L. HILLMAN*
For manyquestions,economicsprovidesanswersthatare bothsimpleand

elegant.The simpleelegantanswerto the question,"howcan we carryout the
transition
fromsocialism?"is to declarea marketeconomy,
and to letthemarket,
guidedby theinvisiblehandofAdam Smith,facilitatethe transition.To follow
thisadvice,the democratically
electedgovernment
declaresthatthe marketwill
fromnowdetermine
theincomesthatpeopleearnand the pricesoftheproducts
thattheybuy.
afterthepronouncement
that "wehaveabandonedtheold system
However,
andmovedto a market
inhibitions
to transition
remain.So thequestions
economy,"
- whatare thebarriers
raisedaretheonesthathavebeenposedhere
to transition
whentheintention
to makethetransition
is present,and howcan thesebarriers
be overcome
in orderto acceleratethetransition?
It is, to beginwith,wellunderstood
thatthemarketwillnotliveup to the
wehaveforitwithout
A clearspecification
transformation.
expectations
ownership
ofproperty
is required
to ensurethatthesellerhas therightto sell,andthat
rights
afterpayment
has beenmadethegoodsbelongto thepurchaser.Forproductive
to maximizevalue. This role
assets,property
providethe incentive
rightsfurther
ofprivatization
in achieving
ofmarketsis supplemented
by therelation
efficiency
betweenprivatization
and therequisites
stabilization
ofan effective
policy(Hinds
1992).
The policyannouncement
of a government
cognizantof the centralroleof
willtherefore
be: "Thegovernment
thestate's
hasdecidedto privatize
privatization
to
assets,to establishthe privateproperty
rightsthatfacilitatemarketactivity,
incentives
tomaximize
valueofproductive
provide
assets,andtolaythefoundations
foreffective
conductofstabilization
policy".
whilethereis consensus
valuemaxiofmarkets,
thattheefficiency
However,
andpolicyeffectiveness
of
effects
aredesirableobjectives,
thedistributive
mization,
caremore
privatization
are,in general,controversial.
Peoplemay,understandably,
abouttheirabsoluteincomesthanthevalueofthetotalnationalincomeavailable
to be shared.Privatization
intentions
therefore
giveriseto concernbyindividuals
thattheassetsofsocietyaresharedor allocatedin a waythatis "fair"to them.It
is thedifferent
ofwhatis "fair"thatmakesprivatization
conceptions
proposalsconand whichleadspeopleto attemptto influence
takes
howprivatization
troversial,
and monitor
allocatedto activitiesneededto influence
place. The timeand effort
*AryeL. Hillmanis GittesProfessorof International
Economics,Departmentof Economics,
Bar-IlanUniversity,
Israel. He is also a Consultantto the WorldBank on issuesrelatingto the
transition
fromsocialism.The viewsexpressedhereare his own.
"Barriersto Transition"
5*

286
distributionare howeverat the expense of activitythat generatesnew incomeand

wealth. It is neverthelessrational for the individual to allocate time and effort
to ensurea distributionaldecisionin his or her favour,even thoughfromsociety's
ofredistributive
pointofviewredistributive
activityis non-productive.A reflection
activityat the expense of productiveactivityis a moderatedsupply of responses
whenpricesare liberalized.
There are various means of designatingownershipof the state's assetsmeans (fora reviewofthe different
means,see Milanovic
perhapstoo manydifferent
werethe only concern,the assignmentof ownership
(1992). Of course,ifefficiency
would not matter.Via the market,the state's assets ultimatelyfindtheirway into
the hands of those who value themthe most highly.
A procedurewhichavoids incentivesto engage in the activityof influencing
assignmentofownership,and ensuresthat assets are immediatelyassignedto those
who can use themmost productively,
is to sell to the highestbidder. By thismeans
of privatization,the state also maximizesthe value of its property.
Selling to the highestbidder may howeverentail sale to a foreigner.The
communistswere in generalquite successfulin ensuringthat no one accumulated
excessivewealth,at least not legally.Since socialistequalitymade everybodypoor,
have an advantagein being able to outbid citizensin acquiringthe large
foreigners
may value an enterprisemorehighly
enterprises.It is also the case that foreigners
than "domestic"citizens,because it can complementthe productionand marketing
in theirongoingoperations,and because of the relativeease with whichtheycan
upgrade technologyand quality of the enterprise. So even if citizens were not
constrainedby lack of means,theywould still be outbid by foreigners.For reasons
that economictheoryalone has difficulty
explaining,the people may not wish the
- some
states' assets to be sold to foreigners.This is a worldwidephenomenon
Americansare upset that the RockefellerCentrein New Yorkbelongsto a Japanese
companyratherthan to Rockefeller.
If the state's assets are sold, there is a question of what the government
does withthe money.It has not taken long forthe citizensof the post-communist
countriesto realize the presenceof the principal/agentproblemin the systemof
- that is, the memberof parliamentis supposed to reprepresentative
democracy
resentthe interestof the voter,but how does the individual voter monitorthe
behaviourof his elected representatives?People may ask, "what good it is to me
that the government
has securedthe moneyfromthe sale of assets that in principle
intocollecbelongedin part to me?" The collectivepropertyhas been transformed
tive money,but not moneythat the individualcan spend. He or she must relyon
the government
to spend it forhim. These concernsare beyondthose that citizens
may have regardingmonitoringthe sale itselfof the state's assets, to assure that
fullpaymenthas been made to the collectivityof the state, and not part payment
to those close at hand in negotiatingthe sale.

287
Ifthereare objectionsto sale to foreigners,

and citizensdo not have themeans
to buy,thenthe assets mustbe givenaway to citizens. But proposalsto give away
the assets willbe counteredby objectionsbased on: the need forconcentratedholdor on the need forforeignownershipto ensuretechnology
ingsto ensuremonitoring,
or on paternalisticargumentsthat the people willnot knowthe truevalue
transfer,
of theirholdingsand will be exploited via markettransactionsby knowledgeable
insiders,or that the people will sell offtheirshares immediatelywithoutrealizing
theirtruevalue because ofmyopictimepreference,
or othervariantsofpaternalistic
that
the
be
should
from
themselves.
arguments
people
protected
It is onlyto be expectedthat, under the circumstances,privatizationwill be
a long,drawnout process. Some countrieswill proceed more quicklythan others,
- how muchwill
and the fastestprogresswill be made wherean objective criterion
you pay dictates the assignmentof ownership,and wherethereis little concern
about who the owneris. Amongsovereignstates (of whichthe formerGDR is not
one), Hungaryhas made the mostprogresshere,and has attractedthe mostforeign
investment(fordocumentation,see Dervis and Condon 1992).
Privatizationis one source of the efficiency-equity
conflictthat potentially
inhibitsthe transitionto a marketeconomy.There is an associated sourceof social
conflictthat complementsprivatizationof assets. This is inequalityofincomeflows.
The neo-classicaltheoryofhow competitivemarketsfunctiondescribeshow,under
competitiveconditions,individualsare paid the values of theirmarginalproducts
in production.That is, individualsare paid what the competitivemarketindicates
theyare worth.The marketcan be a verycrueljudge, since,in competitivecircumstances wheremarketsare not protected,some people by theirnature and ability
are not worthverymuch. But theymay have large families.At least individuals
was
mayhave feltequallytreatedunderthe old system;forexampleunemployment
sharedon the job and not designatedto particularpeople whileothershave jobs.
So even ifa social safetynet eliminatesthe fearof starvation,it will not eliminate
envy.
sociCommunismaimed in principleto eliminateenvy.In a post-communist
ety in the stage of transitionfromthe old system,envyreturnswith a vengeance,
as some people can hardlysurvivethe monthon their incomesor transferpaymentsfromthe government,
whileothersare seen to be drivingtheirexclusivecars
and renovatingtheirexclusivehouses. Also, the people withthe exclusivecars and
housesare also the people who willhave the means to buy the state's (or people's?)
assets; or theywill be the ones who have boughtthe state's assets and taken risks
withtheirmoney.
Envy can be eliminated,by forbiddingthe privateownershipthat underlies
unequal wealth,eliminatingthe marketsthat are the source of unequal incomes.
However,the failedsystemthat was based on thesefoundationsis the one that it is
intendedto be replaced. So, to make the transitionfromthe old system,inequality
has to become sociallyacceptable.

288
While a marketeconomydoes not promiseequality of incomesand wealth,

it should provideequality of opportunity. This means that there should be no
- there were
artificialbarriersto entryinto competitionforjobs or forcustomers
manysuch barriersin the old system.
The old system'sbarriersto entryprotectedrentsof specificindividualshere rentsreferto paymentsabove what an incumbentwould have received,were
he or she not protectedfromthe competitionofothersby theentrybarriers.It is to
be expectedthat the incumbentsfromthe old systemshould seek to preservetheir
rents. If theirrentsderivefromstate ownershipof an enterprise,theywill seek to
impede privatizationof the enterprise.If the rentsderivefrommonopolypowerin
the domesticmarket,they will use argumentsabout protectingthe workers'jobs
to impede moredomesticcompetition.If the rentsderivefromprotectionagainst
importcompetition,theywill seek to impede liberalizationof trade.
Rent protectionis a principalbarrierto a transitionto a competitivemarket,
but Adam Smith told us that it is the comptitivemarketthat is the invisible
hand of efficiency.
societies. The
Competitionis a new conceptin post-communist
emphasisin the past was always on cooperation,not competition. Accordingto
the past ideology,competitionwas wasteful,destructive,and a source of social
instability. The competitivemarkethad to be avoided even if, as in Hungary,
marketsof some sort wereto be introduced.The "socialist"marketwas therefore
not a competitivemarket,and there is no surprisethat the "socialist" market
could not do what Adam Smith had claimed forthe competitivemarket. People
who knoweach otherwell and trustone anotherare not led easily to depart from
cooperation.The citizenas workeralso views cooperationto be to his advantage,
since competitioncould threatenjobs and incomes. Adam Smith's invisiblehand
encounterdifficulties
in establishingits competitivepreconditions.
may therefore
Cooperation is also a means of avoidinguncertainty.People who all their
lives have been told what to do, and have lived and workedin an environment
of predictablecertainty,can find it difficultto know how to exercise their new
founddiscretionand freedomof choice in the marketeconomy.What should they
produce? To whom should they sell? How do they know that there will be a
"market"fortheiroutput? If theydecide to build a plant today,how can theybe
sure that the marketwill still be therewhen the plant is completed,or that a new
technologywill not have appeared that will make the new plant obsolete?
One responseis to keep doing today- ifpossible- what was done yesterday.
The domesticplan and the CMEA systemof internationaltrade facilitatedthis
continuityand stability.The "socialist" marketdid the same. However,a change
in the institutionalframeworkwith the intentionof implementinga true market
economymeans the continuityis lost and adaptation to the new conditionsis
and deal
required.Lack ofadaptivebehaviour,in particulartheinabilityto confront
withuncertainty,
can lead the economyto inertiaand possible collapse, especially
in the presenceof pre-privatization
ambiguities.

289
So, giventheseinhibitionsthat impedechange,howcan the transitionprocess

be accelerated? There are necessarypreconditionsfor institutionalchange that
the economist,when called upon, will list. The list has familiarcomponents
privatization,an appropriatelegal system,a financialand bankingsystemwith
an independentcentralbank, a tax systembased on privatelyearned incomesand
formacroeconomicmanagementand monetary
privateexpenditures,a framework
policy,a social safetynet, and a marketframeworkfor conductinginternational
trade. The list, whichgoes on, is the subject of World Bank and International
MonetaryFund technicaladvice.
to establishtheconditionsfor
However,theelementsofthelistmaynotsuffice
acceleratingthe pace oftransition,because ofpotentialinhibitionsthat derivefrom
theaccompanyinginequality.Inequalityarisesas the marketrewardsentrepreneurs
and investorsfortheirsuccess. This success will be reflectedin a more efficient,
competitive,technologicallyadvanced economy,and the benefitsof this will spill
overto thepopulationat largein termsofgreaterincomes- but notgreaterequality.
The marketeconomycan yieldinequalitiesthatsome people mayregardas extreme.
Considerthefollowing
statistic(reportedby the Economist,April1992,sourceU.S.
- in the Unites States, duringover the whole of the
CongressionalBudget Office)
1980s,overhalfof the increasein after-taxincomewas receivedby the richestonepercentof the population. This shows how Adam Smith's invisiblehand cannot
promiseequality.
There were numerousundesirableaspects of socialism,none of whichhave
to be recountedto those who lived under the system. It is said howeverthat in
particularsocialismfailedbecause the systemwas contraryto the natureof man.
It triedto suppressgreedand envy.The old systemdid providestability,security,
and some sort of equality. Promtime to time,theremay a need for
predictability,
reminders
that the loss of this stability,security,predictability,
and equality
gentle
is inconsequential,
that
the
old
to
the
little
systemgave
else, except
privileged
given
fewwho weresuccessfulin manipulatingpolitical monopolyto theiradvantage.
Finally, although I have chosen to focus on domestic aspects, the role of
foreigngovernmentsshould not be neglected. Foreigngovernmentshave a role
here,in resistingprotectionistpressuresof theirown industriesand allowingthe
post-communistcountriesto take advantageof theirinternationalcomparativeadvantage. The claims that are made forthe invisiblehand are equally applicable in
internationaltrade as in the domesticeconomy,and thereis little consistencyin
westerngovernments'
praisingthe virtuesof the marketbut denyingthe realization
of the internationaldivisionof labour.
May 1992
Ada Oeconomica44t 1992

290
DEBATE: BRANKO HORVAT
References
Dervis,Kemal and Condon,Timothy.1992. "Hungary:An emergingsuccessstory". Washington,D. C: The WorldBank.
in reforming
socialisteconomies"in: Hillman,B. and
Hinds,Manuel. 1992. "Policyeffectiveness
Milanovic,B. (eds): The transition
fromsocialismin EasternEurope: domesticrestrucD. C: The WorldBank.
turingandforeigntrade.Washington,
. in: Hillman,B. and Milanovic,
Milanovic,Branko.1992. "Privatization
optionsand procedures"
and
B. (eds): The transition
fromsocialismin Eastern Europe: domesticrestructuring
D. C: The WorldBank.
foreigntrade.Washington,
BRANKO HORVAT*
to a market
1. Whatdo youregardas the mainbarriersof the transition
in
the
countries?
economy
post-communist
Firstofall letmepointoutthatthesocialistsystemdidnotcollapsebecause
a systemthatdidnotexistcouldnotceaseto exist.A socialistprojectcanbe characterized
Socialismis
invariousways,butmentioning
onlytwoofthesewillsuffice.
a societyin whichthefreedom
forthefreedom
is a precondition
ofeveryindividual
ofall {Communist
and wherethestate,as an apparatusofoppression,
Manifesto)
will"wither
heldbyearly19thcentury
away"(viewsgenerally
socialists).It is clear
thatthesystemwhichexistedwas as contrary
to thesocialistprojectas it could
continue
and sloppypoliticians
it collapsed.Journalists
possiblybe and therefore
to talkabout "socialism".The termused in scientific
studiesis etatism,because
thestatewas (almost)theonlyemployer,
therulingpartytheonlypoliticalparty
and thestatecontrolled
theentiresociety.That thisis notonlya semanticissue
whichis responsible
demonstrates
the current
confusion
intellectual
(in part)for
theslowpace ofthenecessary
reforms.
The secondmisunderstanding
arisesfromthe changinghistoricalcircumstances. In the last century
economicprocesseswererelatively
simple:national
wereuneducated,national
workers
economieswerelargelybased on agriculture,
technolincomestatisticsand econometric
modelsdid not exist,no information
was
in its
science
economic
slow
and
was
was
available,technological
ogy
progress
econhousehold
to
mistake
was
natural
"art"
not
a
It
infancy
quite
(an
"science").
way
omyfornationaleconomyand to believethatthemostrationaland efficient
the
with
state
the
to
entrust
to conductbusinesswasto nationalize
and
everything
to
was
state
The
to
a
central
of
the
manage
plan.
development
economy
according
That beliefwas a greatmistakebecausethereal
thingsnotpeople(Saint-Simon).
occurrednot only
worldfunctions
However,
differently.
post-warnationalization
*Professor
ofEconomics,Zagreb,Croatia
Acta Oeconomica44> 1992

291
in EasternEuropebutin theWestas well. Nowadays,

thedescribedsituationno
fora largescale
are responsible
longerexists. Changedhistoricalcircumstances
Markettransformation
in EasternEuropeis just a part
everywhere.
deregulation
of thisgeneralprocessof deregulation,
the purposeof whichis to enhancefree
initiative
and efficiency.
withthis
The thirdmisbelief
concerns
theknowledge
availableforproceeding
and we
It was said thatexamplesofnationalization
werenumerous
deregulation.
knewhowto carrythemout; however,
it is also heldthatthereverseprocesshas
neverbeenundertaken
andknowledge
thisdoesnotexist.Thusthelack
concerning
ofknowledge
to
is replacedbymereimitation
is moreappropriate
which,however,
Yet thiscontention
abouthavingno previousexamplesis
apes thanto economists.
nottrue.By 1950,theYugoslaveconomy
nationalized
had beenalmostcompletely
andagriculture
to a largeextentcollectivized.
Due to a breakwithCOMINFORM,
in
itwasdecidedto disconnect
selfmanagement
firms
fromthestatebyestablishing
thefirms,
andthesewereto becomeindependent
market
agents.Overthenexttwo
was preparedand from1952onwardstheeconomydevelopedat
yearsthereform
thehighest
rateinEurope.Therewasnounemployment
andnoinflation.
However,
in thelargeliterature
to this
on "transition"
, I havenotfounda singlereference
notevenin myowncountry.
experience,
Whatwas basicallywrongin EasternEuropewas an undemocratic
political system,
to Europeansocieties.A rationalreactionrequiresnew
inappropriate
economic
to introduce
thatbringforward
governments
politicalsystems
redesigned
changesonlygradually.
Abruptchangesin anyeconomicsystemare alwayscatasand inflation.
a drasticfallin output,greatunemployment
trophic.Theygenerate
otherwise
etatistsystem,
theywould
Besides,therewas a lotofgoodin theformer
nothavesurvived
forso long.The goodfeatures
ofthesystemwere:fullemployThesefeatures
andeducationand medicalcareforeverybody.
ment,socialsecurity,
- and
ofthesystemmustbe preserved
and not destroyed.However,
governments
the generalpublic havenot reactedrationally(as theyneverdo). Reactionsof
frustrated
individuals
wereemotional,
to negateeverysinrevanchist
and intended
is
If
the
was
bad,everything
gle featureoftheformer
system.
system politically
nowconsidered
bad! The ideologyhas remained
thesame,onlythe
fundamentally
moralsignshavechangedtheirplaces:whatwasconsidered
goodearlierhas turned
out to be bad nowand viceversa. Halfa century
was enthusiasago everybody
- nowadayseverybody
is equallyenthusiastically
ticallynationalizing
privatizing.
as
Class differences
and conflicts
wereonceconsidered
bad, nowtheyarejustified
owner
a
that
and curinginflation
in
the
contention
efficiency
private
promoting
(as
willnotincreasethewagesofhisemployees)!
The answerto thefirstquestionis unequivocal:ideologyis themainbarrier,
and theideologycannotbe corrected
byeconomicarguments.
process?

292
social psychologists
morequalified
and priestsare professionally
Psychiatrists,
thanan economistto answerthisquestion. Thus, I can answerit onlyconditionally:
what could be done ifthe people could be persuaded to do it.
Perhaps the main confusionrevolvesaround the generalinsistenceon privatization. The institutionis understoodas a formof 19th centuryproprietorship,
existingin a laissez-faireenvironment.To anyeducatedeconomistit is immediately
clear how completelywrongthis aim is. Let me onlymentionthe main constituent
partsof the problemsince I have writtenextensivelyon this topic elsewhere.(Horvat 1990; 1991a; 1991b)
In America and Europe, two thirdsof the moderneconomyconsistof corporations,not of proprietorships.Proprietorshipscan be usefulfor small scale
production,but they do not and cannot organizelarge-scaleproduction. In this
sense corporationsare a drivingforceof moderneconomicsystems.There are definite reasonsforthis,but the space allotted here does not allow me to explain in
moredetail. What was economicallywrongin the formeretatist systemswas not
that the economydid not consistof proprietorships
but that it consistedof state
enterprises.In orderto establisha market,we need firstto "deetatize" the economy. It is well knownthat all "privatisation"schemesenvisagestate ownershipfor
the next 20-30 years.
Secondly,ownershipis a relativelyunimportantand passive elementin the
process. It is confinedto buyingand sellingsharesand its functionis to supplycapital. What is cruciallyimportantis entrepreneurship,
and privatizationschemesdo
nottake care ofthatat all. Since the appearance ofthe book by Berle and Means in
theearly1930s,economistshave become awareofthe processofseparationbetween
ownershipand management,withthe latterplayingthe activepart. Amalgamating
the two componentsinto one means committinga disastrousmistake. Managers
own less than one percentof the stock of theircorporationsbut are in complete
controlof theiroperations. The discipliningagencyis not the board of directors
(itselfcontrolledby the managers),but marketcompetition.
is
Thirdly,insteadof succumbingto an inferiority
complexthat "everything
betterdownthere", a rationalattitudeis to take advantageofthe initialconditions
that alreadyexist. No new capital- whichdoes not exist anyhow- is necessaryin
orderto buy state enterprises.They should only be proclaimedcommonownership (social) enterprises.No searchforan identifiableowneris necessary,because
in the worldin a marketeconomythe firmacts as an owner(buys raw
everywhere
material,sells products,borrows,lends,exports,and employs;thefirmis registered
with the court and, generally,is responsibleforall its economicactivities). It is
truethat we also need someonewho will own the firmitself.However,thereis no
need forthestate to decidewho thatshould be; in fact,thisis extremelydangerous.
Whynot let the marketselectthe mostviable formsofownership?Apart fromproprietorshipand state ownershipthe possible formsare: partnership,cooperative,
limitedliabilitycompany,ownershipof employeesand common(social) ownership.

293
Consequently,the economicpart of the second questioncan also be answered

ratherunequivocally.The state should immediatelydivestitselfof all enterprises,
except of thosewhichfunctionally
belong to the state sector(such as railwaysand
post office).Severingenterprisesfromthe state means de-eiatization.Enterprises
should be leftin the marketas independenteconomic entities. This is what is
meant by marketization. Except for small enterprisesall the others should be
legallyorganizedas corporations.This may be done in a couple of monthsand the
statute of societas europea,recentlyprepared by the European Community,may
be used forthe purpose. The new corporation,call it social corporation,will differ
fromthe old corporationin the West in only two respects:
(1) It will be commonlyowned and thereforeits shareholderswill be all
membersofsociety;forthat purposeno paper shares and no distributionof shares
are necessary. Social corporationsmay raise additional capital by issuing new
shares and sellingthem to anybody. As long as the controllingstock is socially
owned,the firmremainsa social corporation.Whetherit will remainsocial or not
dependson its viabilityin the marketand not on the arbitraryideologicaldecisions
of governments.
(2) The managementis appointed and controlledby the employeesacting
on behalf of shareowners(all citizens). This means shiftingthe legitimationof
managementfromthe ownershipofcapital to the participationin the workprocess.
It is obvious that employeeshave the greateststake in theirenterpriseand that
theyare vitallyinterestedin its prosperity.It is also obviousthat selfmanagement
is the worldtrend,and numerousparticipationschemes(co-determination,
profitsharing,etc.) in European countriesdemonstratethis fact. It may also be shown
that enterprises
organizedin thisway have certainothereconomicadvantages(i.e.,
inflationcan be curbed moreeasily and investmentexpanded in orderto provide
fullemployment).
- and not somethingelse- that is wanted,
In short,if it reallyis a market
this can be achievedin less than a year and withoutall those dreadfuleconomic
and social losses due to unemployment,
fallsin the standardof living,state driven
bureaucratic"restructuring"
and "privatization". Two legitimateand extremely
importantfunctionsremain for the state: the overcomingof marketfailuresby
equalizingthestartingpositionsofeconomicagentsand thesteeringofthe economy
along a highgrowthpath. It is symptomaticthat the East European states do not
performparticularlywell in these two most importantfunctions.
The transformation
of state enterprisesinto social corporationsthat engage
in markettransactionsis the most importantbut not the onlymeaindependently
sure. It is also necessaryto create an environmentin which a marketcan work
- as it is forthe functioning
of
properly.For that a legal titleis a firstprecondition
politicaldemocracy.Next,commoditymarketsmustbe supplementedby financial
markets.Finally,it mustbe said that laissez-fairemarketswill not work. Although
regulationsoughtto be avoided as much as possible, a responsibleand competent

294
DEBATE: BELA KDR
macroeconomic
policyis indispensable.It is hardto say whichof the elements
enumerated
is lackingmostly.
Zagreb,4thApril1992
Literature
ofsocial ownership".Zagand markettransformation
Horvat,Branko.1990. "Entrepreneurship
reb: Institutza javne financije.
ofthesoor stabilization:theemergence
Horvat,Branko.1991a. "Nationalization,
privatization
cial corporation"
. EconomicAnalysis,pp. 1-10.
. Ekonomskipregled,
of ownershipoperationalized"
Horvat,Branko.1991b. "Transformation
pp. 348-56.
BELA KDR*
to a market
1. Whatdo youregardas themainbarriersofthetransition
countries?
in
the
economy
post-communist
- Vol. 40,Nos3-4 (1989)In myanswerto thequestionofActaOeconmica
statedthattheconcept
I first
thenatureofthesocialistmarket
economy,
concerning
inquestionwasbecoming
a "magicword". Sincethen,profound
changeshavetaken
a
It is,however,
in
terms
of
market
and
Eastern
in
Central
economy.
place
Europe
a
market
to
transition
of
a
of
that
the
historical
economy
paradox
continuity
concept
it in
is becomingempty:politicians,
and economists
interpret
politicalscientists
it
to
attach
and
of
different
vest
it
with
a
wide
many
widely
ways,
range attributes,
different
meanings.
I havestatedmanytimesin mywritings
thata changeofeconomicsystem,
of
i.e. the transition
to a marketeconomy,
maynot be reducedto replacement
thesocialistmodelby themarketmodel. Besidethe changeof economicmodel,
a further
is the changeofpoliticalmodel,the
important
aspectof thetransition
trade.
of
the
of
economic
and
changeofemphasisin foreign
change path
growth,
The mainobstaclesto thedevelopment
ofa marketeconomyare relatedto these
to thepopulation'spsychic
and further,
ofthetransition,
aspects(or dimensions)
*
ofInternational
EconomicConnections,
Budapest
Ministry
"The Main Obstaclesin theWayofthe Emergenceofa MarketEconomyin thePost-Socialist
Countries.Techniquesand Means ofSpeedingup the TransitionProcess"

295
DEBATE: BELA KDR
and economicenduranceand the peculiaritiesof economicreasoningand concept

formation.
Dual rationalitiesare well knownin the historyof economics and politics.
The rationalitiesof economicsand politics raise different
demands and may come
into conflictover a ratherwide field. In dictatorialpolitical systems,the course
of economicgrowthcan be changed, ceieris paribus, withoutparticulardifficulties: sectorsand subsectors or indeed any economicactivitiesthat are inefficient
by worldeconomicstandards can be reduced,or streamlined. In democraticpolitical systems,however,only such economic policy measures aimed at economic
stabilizationor developmentof a marketeconomycan be taken,whichare backed
by the majorityof the population;ifthingswereotherwise,the politicallegitimacy
of any changewouldbe doubtful.Owing to the natureof things,this circumstance
narrowsdown the scope of manoeuvringof economicpolicy.
In the successorstates of the Soviet Union and Yugoslavia, and to a smaller
extentalso in Czechoslovakia,the transitionto a marketeconomyis made more
difficult
by the conflictsof nationalitiesand ethnic minoritygroups; and in the
states of the CIS and thoseofYugoslavia, it is hinderedby necessityof adjustment
to a changed,or reduced,framework
of the state.
In Centraland Eastern Europe marketeconomiesbegan to be formedunder
the pressureof externalshocks. The change of economic model and economic
stabilizationhad to be effectuated
simultaneously.Hungaryhas struggledthrough
the difficulties
caused by the disintegrationof the CMEA cooperationsystem,the
economic crisisof the partnerstates, and the beginningsof a new type of East
European divisionof labour. These factors,however,still hinder transitionin
severalpost-socialistcountries.
In the courseof developinga marketeconomy,nationalpsychologicalaspects
should not be disregarded. Society is a complicatedsystemin which every interventionhas its far-reaching
consequencesin the future. In the politicallyand
economicallycentralizedsystems,the social systemof values became distorted,aland
beit to different
countries: discipline,self-discipline,
degreesin the different
orientationtowardsperformancewerenot consideredvalues, and the population's
initiativefellto a low level. Besides, in the socialist system,people attributedan
a safejob to higherliving
independentsocial value to fullemployment,preferring
standards. Transitionto a marketeconomyinfersa change in old attitudes and
whichjeopardizes social and povalues, as well as the handlingof unemployment,
liticalstability.However,it is not possible to accomplishthis fromone day to the
next. Thus the entireregionneeds a long period of timeto make the transition.
The transitionto a marketeconomy fromthe so-called socialist model is
withouthistoricalprecedentand cannot relyon eithertheoreticalor practicalexperience. The politicalforcesthat came to powerdid not have, and in fact could
not have had, in theirhands the conceptsnecessaryforthe elaborationand effectuationof the transitionstrategy.The initial hesitationscan largelybe ascribed
Ada Otconomica44* 1992

296
DEBATE:BELA KDR
to these factors. The total lack of precedentsposed a serious challengeto those

in chargeof organizingthe change of system,of elaboratingthe economicpolicy
conceptof the transition.
The emergenceof a marketeconomyis, however,delayed not only by the
lack of ready-madeformulasbut also by the uselessnessof the earlieraccumulated
thefunctioning
and regulationofthevariouskindsofsocialist
knowledgeconcerning
model: i.e. theirtheory,economicpolicy regulationsand managementtechniques.
Of course,this is not quite so pertinentto Hungarysince there,the 1968 reform
ofeconomiccontroland managementhas enabled experienceto be gatheredwhich
is to a considerableextent usable now. Nevertheless,the general circumstances
indicatethat it is by no means accidental that increasedinterestis shownin the
of the marketeconomiesof othercountries.
practiceand functioning
forthe transitionemergesfromthe factthat
However,a significant
difficulty
the foreignsourcesdrawnupon have been comprisedalmostexclusivelyof the economicphilosophyand economicpolicies of the advanced marketeconomies.There
are manyreasonsforthis,one of them being the desireto totallynegate the centralizedplanned economy. Old habits, particularitiesof economists'trainingand
postgraduatetraining,the methodsof revealingreal-lifefacts,and the expectations
of the global internationalfinancialorganizationshave all playeda part in creating
a situationin whicheconomicthinkinghas not concentratedon strategy,but on
one or anotherkindof liberalapproachto a marketeconomy,or reducingeconomic
processesto only a fewfactors,or overemphasizingthe monetarysphere and the
roleof the legal and institutionalframework.The details of these are applicable to
advanced marketeconomies,wherethereis equilibriumin both the home and the
foreigneconomicspheres.
Attemptsat a fast introductionof the marketeconomyby applyinga shock
therapyof 15-20 measures,and relyingexclusivelyon marketfactorsduringthe
transitionperiod have had a dramatic effect. This can be seen in the immense
social costs of buildingup the new political and economicmodel and the creation
of an economic policy which reacts to external shocks by bringingabout internal shocks: the consequencesof these unsettleddevelopmentswill be feltfora long
timein severalEast and CentralEuropean countries.At the same time,neitherthe
economicpolicyexperienceof medium-developedcountries,nor the social market
economywhichlargelycontributedto the "economicmiracle"ofpost-warGermany
have been givensufficient
attention,comparedwiththat givento the liberal market economy.The narrownessof the economicpolicy approach, and the limitsto
the automaticapplicationof foreignmodels are essentialobstacles in the way of
developinga marketeconomyand add to the social costs of transition.

297
DEBATE: BELA KDR
process?
Thestageofdevelopment
ofthelegalandinstitutional
systemis an essential
not
of
a
market
absolute
indicator
of
the
of
economy.
though
stage development
Anotherimportant
indicatoris the degreeto whichreal economicprocessescan
and
be influenced.The development
of a marketeconomybeinga complicated
diversified
the
be
under
a
transition
must
process,
strategic
comprehensive
guided
can be accelerated
thetransition
conception.By meansofsuchstrategiccontrol,
and its social costsreduced.The strategicmanagement
a market
of developing
of
the
elaboration
demands
the
the
transition
of
economy
periodization
process,
economicpolicypriorities;
of the economic
the coordination
and harmonization
of the Centraland
The marketmechanisms
policyobjectivesand instruments.
that
East Europeancountries
havenotyetreachedsucha degreeofdevelopment
transition
can takeplaceexclusively
on sucha basis.
can be
The newpoliticalsystems
oftheEast and CentralEuropeancountries
eleconomic
In
the
byimproved
legitimized
performance.
judgement,
population's
values
ements
not
oftheinstitutional
are
framework
andofmanagement
techniques
in themselves:
successisjudgedbythefactsofeconomic
inflation,
changes
growth,
in realwages,etc. In orderto improve
it willbe useful
realeconomicperformance,
to relymoreon thestimulative
elements
ofeconomic
policybesidethederegulation,
- and
liberalization
andrestriction
thatup untilnowhavebeenappliedextensively
evenexcessively
cannotbe
in certaincountries
of the region.Fast privatization
Initiaor depressed
economicenvironment.
expectedto takeplacein a stagnating
tivewillnotgrow,or whatis therewillebb away,ifno prospects
ofimprovement
are heldout. Whatis more,in thisregionofEuropeshortsupplyin generaland
in particular
ofexportgoods,and theinadequatestructure
ofthoseexports,have
the
bottlenecks
to
economic
traditionally
presented
growth.This again calls attentionto theimportance
and selectiveexport
ofencouraging
an export-oriented
It
is
a
to
of
values
as
the
of
supply.
pricetheeconomicpolicy
question judgement
can afford
andsocietyis preparedto pay- in termsofbudgetbalanceand therate
- to improve
ofinflation
thesupplyconditions.
with
a
ofthemarketeconomy,
view
to promoting
the development
Finally,
I attachgreatimportance
to determining
thecharacter
and degreeofcooperation
betweeneconomicactors:entrepreneurs,
banks,and thestate- which,
employees,
ofcourse,are changing
in spaceand overtime.
To acceleratetransition
funds(resources)
and to provideforthe necessary
it is indispensable
to transform
thebankingsystemintoa vehicleformodernizing
as wellas technology
Thereare no made-out
and structure.
production
processes,
formulas
forthedevelopment
andat any
ofa marketeconomy,
applicableanywhere
time. Everycountry
has to do its utmostto elaboratethe economicpolicybest
suitedforthe purpose.One of the important
trendsin the historyof economic

298
DEBATE: MICHAEL KEREN
to
is concerned
and exploiting
withrevealing
capacitiesthatarespecific
workshops
a country.
to a marketeconomy.
The sameholdsforthetransition
MICHAEL KEREN*
It is nowalmostunanimously
agreedthata privatemarketeconomyhas to
underthe old regime.
thatall but monopolized
replacethemonofirm
production
Thereis therefore
no needto belaborthispoint. It is also widelybelievedthat
state
theexisting
thisentailstheprivatization
oftheconstituents
ofthemonofirm,
I shallarguebelowthattherearemoreurgentshort-run
enterprises.
goalsthatare
ifall attention
is focusedon thelongrungoal ofprivatization.
likelyto be suffer
Thisis becauseprivatization
theotherbeingclosing
inonlyonepartoftheproblem,
and theyare
downthoseenterprises
thathaveno chanceforcontinued
existence,
is boundto be a verylong
many;and becauseat thebest of timesprivatization
newprivatesector
process,and thatthe urgenttaskof supportto the fledgling
mustnotbe delayed.Andoncethisis realizedit becomesclearthatthehardtask
so thatit
aheadis howto deal withtheexistingstatesector,as yetunprivatized,
does notimpedethegrowthofthe newsector.It is thislast taskwhichI see as
thehardestoneofthetransition
process,and I shalltryto providean economist's
viewson thewaythistaskshouldbe carriedout. I am awareofthefactthatthis
that
is also (or mainly)a politicaltask,and I am deeplyawareofthe limitation
mysphereofqualification
imposeson me.
Marxistsocialismaimedat constructing
a newsocietythatwas foreverto
replacetheold order.As welookat theruinsit has leftbehind,thereis notmuch
thatis positivethatit has managedto build;we can be surethatit has destroyed
ofanyalternative
foundations
withina shortspanofunderfifty
yearstheeconomic
is
orderin itsareaofdomination.
The buildingfromscratchofa marketeconomy
and
sureto takea longtime,requirebothpatienceand scarceeconomicresources,
costmuchhumansufferings
and pain.
the institutions
Socialismhas not onlydestroyed
necessaryforthe proper
even
it has createda lotofworthless,
ofa competitive
market
economy;
functioning
it
is
none
where
harmful
profitable,
positively
capital.It has builtheavyindustry
function
cannot
has constructed
thatin themselves
humanorganizations
efficiently
in a
and it has invested
neworganizations,
and hinderthedevelopment
ofeffective
it
in
and
humancapital,providing
itwiththewrongskills inculcating the
misshapen
backto that
Allofthesewillhindertheprogress
andexpectations.
wrongattitudes
have
forever
should
to Marxianprophecies,
ofsocietywhich,according
organization
*The HebrewUniversity
ofJerusalem
"Is Privatization
theRemedy?"

299
DEBATE:MICHAELKEREN
been banishedbysocialism. As theepitomeofthesortofharmfulcapital shaped by

the old regimeI see the socialistenterprise:it is a major hindranceto any change,
and on the obstacleson its replacementby competitiveprivatelyowned firmsthat
I choose to focusin this briefnote.
I wish to concentrateon a single aspect of the socialist enterprise,on its
functionsas an investingorganization.Considertheexistingstate firmsas machines
whose aim is to build the capital of the future. It is not only physical capital
that this investmentleaves behind: investmentin human capital, includingthe
very human capital that is the enterpriseitself,may have an even more longlastingsignificance.We should view the firmas the networkof humans,a network
groupingpeople who have learnt to interactamong themselvesin a given way.
This networktends to perpetuateitselfas the organizationalcapital of the firm,
an importantpart of the firm'scapital. As with any capital, the social value of
this human capital lies in its abilityto create a flowof social values in the future,
and if prices mirrorscarcities,this flowequals the stream of profitswhich the
firmis expected to generate. The value of the firmis the expected value of this
streamof profits.This is why a profitmaximizingfirmin a competitivemarket
investsin a sociallydesirableway. Firms whose mode of interactionleads themto
makinglow or negativeprofitsare also makinga small or negativecontributionto
society.Firmsin the socialisteconomieswere not structuredwithprofitsin mind.
What motivatedthemunderthe old regimewas the need to obey ordersor rulesof
behaviour.They eitherhad to fulfillplan targetsor to supplywhat was demanded
underthe "responsibility
to supply". Cost did not count,or did not countformuch.
As a resultenterpriseshave learned to design and create capital that is not cost
saving,that tendsto squanderinputs. They have not had to care forqualityand for
innovationin orderto protecttheirexistencein the market,because theirlevel of
operationwas exogenouslydetermined,and theirmarketthus assured. They were
ofa firmin a competitiveenvironment,
"relieved"ofone ofthemainresponsibilities
overa marketshare. They were
the responsibility
of conqueringa market,fighting
also guaranteedcontinuedexistence,because the socialisteconomydid not (and, I
believe,cannot) findwaysoffacilitatingexit, as it cannot providefordecentralized
entry. Unlikethe capitalist firm,the demographicsof the socialist enterprisedo
not depend on its activities.
This has led to the developmentoffirms,i.e., ofnetworksof individuals,that
and do not
have built-inmodes of operationthat do not lead to usefulinvestments
accord with competitionin the market. And this mode of operationscannot be
in reorganizationand re-schooling
(as wellas ofrechangedwithouta massiveeffort
in human
investment
this
of
the
and
heavy
physicalcapital). And, by
tooling
large,
cease to
firms
these
unless
well
as
cannot
be
done
successfully
(as
physical)capital
be state-owned.The reasonforthisshould be clear: it is the firmsthemselvesthat
need firstto be changed,to be reorganizedin a way that will revolutionizetheir
mode of investment.This is not likelyto be done by themselvesas long as they
6

300
DEBATE:MICHAEL
KEREN
continueto be state-ownedand protectedfromthe cruel demographicpressures

of the capitalistmarket,because the exit decision,the bankruptcyverdict,has to
be providedby a bureaucracy. Regardlesswhetherthis bureaucracystylesitself
socialist,it will alwaysbe underpoliticalpressuresthat make it next to impossible
to declare a firmunsalvageable. The enterprisessubordinateto this bureaucracy
will knowthat the veryinabilityof theirsuperiorsto declare thembankruptgives
theman indefinitelease of lifeand ipso facto softenstheirbudgetconstraint.
In other words, the economies of Eastern Europe cannot enter a path of
serious growthunless they start growinga privateproductivesector. This is a
because a privatesectorthat is not exposed
necessarycondition.It is not sufficient,
to competitionis as freeof demographicpressuresas a state-ownedone, and the
of competitionand freeentryis thereforean essential
propermarketenvironment
ingredientforefficient
growth.However,it is the othernecessaryconditionthat I
would liketo focuson, i.e., on the eliminationof obstacles to the constructionof a
privatesector.
I am sure the reader has noticed that, except in the opening paragraph,I
have not mentionedthe word "privatization"
. The reasonis that I believethat the
firstorderof priorityis to lead to the rise of a new, home-grown,
privatesectorof
industryand services.There are several reasonsforthis:
1. Privatizationcannot be effectedwithinreasonabletime. Enough evidence
exitsforthat,and sufficeit to say that even the Treuhandansialt in East Germany,
withunlimitedresourcesat its disposal and hardlyany constraintsof fairness,i.e.,
of the need to convincethe electoratethat no state propertiesare sold too cheap,
even theyhave not managed to sell the main part of theirindustry.And theyhave
an easier task, because instead of earningincomeforthe national exchequerfrom
sales proceeds,theycan allow themselvesto spend manybillionsof DM to entice
investorsto purchasefirmson theirterms,i.e., withan undertakingto continuea
givenlevelof activityand, above all employment.
2. Most state firmsneed to be reorganizedbeforethey can be privatized.
This, again takes time. They have to be reorganizedbecause they are too large,
both horizontallyand vertically.They are too large horizontallybecause theyare
because
monopolistswithoutthesavinggraceofreapingscale economies.Vertically,
forreasonof insuranceagainst the non-arrivalof suppliestheyhave branchedinto
their essential inputs. Both reasons lead to a scale of
producing(inefficiently)
level.
operationsfarabove the efficient
3. A large part of the existingstock of capital in industry,i.e., manyof the
existingfirms,are not salvageable at all. This is the obverseside of the need to
reduce the weightof industryin GDP, in particularthat of heavy industry.To
decide whom to close down and whom to continuein existenceis bound to be a
long drawn out affair,as the Treuhandis findingout, both because of the pure
economicsof the decisionprocess(i.e., of the need not to erron the side of haste in
writingoffvaluable capital) and its politics. Decisionsthat the centralizedpolitical

301
DEBATE:MICHAELKEREN
hierarchycould not take beforethe politicalchangedo not become any easier after
it. No examplesare required.
4. The new serviceindustriesthat need to be set up cannot be created out
of the existingstate firms.They have to supply the veryservicesthat the state
sectorfoundso difficult
to produce,amongthembusinessservicesthat are essential
fora marketeconomy.They requirea small scale of operations,and could best be
suppliedby newlycreatedprivatefirms.
The developmentofa home-grown
productivesectoris not unrelatedto what
happens to the old monofirm.The two will be competingforthe same resources,
and unless the new sectorreceivesprecedence,it will findit verydifficult
to take
root. Considerfirstthe land and premisesneeded forthe new firms.Many of these
resourcesare the object of "small privatization". The Treuhand,whichis surely
as advanced as any otheragency in Eastern Europe, has sold some 40,000 small
objects so far: this numberis minusculein relationto the numberof privatefirms
whichneed to be set up. Clearly,manyof the assets whichare requiredare still in
the possessionof the old enterprises.To pry them fromtheirgrip must be one of
the prioritiesof any industrialpolicy.
Creditis nextin line. It is difficult
to providethe new firmswithequal access
to credit,let alone priority.The existingfirmshave old established ties to the
providersof finance;theymay seem to have assets whichcan serve as collateral;
and they can always threatenthat bankruptcyand unemploymentmay followif
loans are not granted. The potentialnew entrantslack all these connections,and
to obtain finance.
may findit verydifficult
This problemhas a macroeconomiccounterpoint
in thesoftbudgetconstraint.
Since the as yetunprivatizedstate firmsare likelyto be, at any pointin time,those
organizationswhose value is low or even negative,i.e., enterprisesthat proveto be
unreformed
and poor at selectingprofitableinvestments,they are the firmsthat
should be starvedof any new resources.Otherwisetheywillsquander them,invest
themin uselesscapital, and deprivethe nationaleconomyof the abilityto use them
productively.These firmshave to be denied the abilityto investand the abilityto
raisethe incomesoftheirworkers.Their budgetconstraintshave to attain a degree
of hardnesswhichat least equals that of the communistregime. The Gorbachev
periodmayhave been requiredto provethat thereare degreesof budgetconstraint
under the Stalinistregimeor under the Hungarian NEM may have been soft in
comparisonto that underclassical capitalism,and the loan guaranteesto Chrysler
may have shownthat even undermodernUS capitalismsome softnessmay creep
in. Events after1985 have shown that these budgets can become immeasurably
softerwhen centralcontrolbreaks down. Hence what is requiredis a returnto
NEM-timehardness,withstrictcontrolover the wage fundand over investments.
And here begins the hardestpart of the transitionpolicy: how to chaperonthese
intoeitherliquidation(of the majority)or radical restructuring
enterprises
priorto
6*

302
KEREN
DEBATE:MICHAEL
eithereventualsale, or to transformation
(of a verysmall minority)into a public
corporation.This raises seriousadministrativeproblems:
1. Who should overseethe enterprises?Each firm'smonitorwill have to be
a singleagencythat will be able to gatherall the needed information
on each firm,
and thusremovethe possibilitythat the firmwill tryto play offone agencyagainst
the other. It would, on the other hand, be preferableif state industrycould be
dividedamongseveralcompetingagencies. The success of these should be judged
into the privatesector,or
by the numberof state employeeswho weretransferred
relievedfromdependenceon the public sector. The choice of success criteriaand
incentivesforthe privatizersis all important,because these agencies are to take
the place ofthe old ministriesbut should not followin theirfootsteps.The natural
aim of such an organizationis firstand foremostto remainm employment,
i.e., to
keep theirjob througha slow privatizationprocess. Appointmentsto theseboards
shouldtherefore
be fora strictlylimitedperiodof time,withpaymenttiltedtoward
the end of service,so that monitorswould look forwardto the end of theirstint.
On the otherhand, the stintshould not be too short,so that the overseerwould
withdetails.
be handicappedin negotiationswithhis subordinatesby unfamiliarity
This is a particularlydifficult
incentivestructureto build into a bureaucracy.
2. The reconstruction
and reorganizationshould consistof strippingthe enterpriseof all assets that are not requiredfor the immediateand principaltask
of the firm. Those parts strippedoffcan be hived offinto separate enterprises
or sold offas individualcapital assets. One of the disadvantagesof the vertically
mergedenterprisesis that the internalunits,whichsupply inputs that the market
can producemore cheaply,oftenlack a sufficient
scale of operations: the required
shouldnot be performedby a public agency,because it is the task
re-amalgamation
foran entrepreneur,
not one in whicha public agencyis likelyto excel.
3. The splittingup of large,horizontallyintegrated,enterprisescan be leftto
unless these units pose monopolisticthreats,or unless the
privateentrepreneurs,
fromthe
size
of
the
very
undertakingwould exclude too manylocal entrepreneurs
for
them.
bidding
4. The firstpriorityis to removefromstate ownershipany enterprisethat
poses no monopolisticthreat and that has potential buyers. Althoughthe proceeds of the sale are of some importance,the veryremovalof as many as possible
enterprisesfromthe public apron stringsis of greaterpriority.This will freethe
monitorsto pay more attentionto those enterprisesthat have to be reorganized
priorto sale, or to make the painfuldecisionon the closureofthosethat are beyond
salvation. Unfortunately
a large part of state industrybelongsto the latter class,
and political resolveis needed to convincethe populationthat closureis reallyin
the best interestsofsociety.This task would be muchmorepalatable iftherewere
some promisefor
proofthat a vigorousprivatesector was sproutingand offering
alternativeemploymentto those who lose the place of workto whichthey have
been tied formanyyears.

303
DEBATE: PETER KNIRSCH
Ifan efficient
agencycan carryouta crediblehardbudgetpolicy,
monitoring
thenthe
andifstateenterprises
areseento be lesspleasantandsecurework-places
ofunsuccessful
newprivatesector,and ifthethreatsoftermination
ofemployment
and privatizaareseento be real,thenthepressures
forreorganization
enterprises
tionmaycomefromwithintheenterprises.
The problemofwhatto do withthose
whohaveworked
fordecadesin unprofitable
especiallyin regions
heavyindustries,
rewheresuchindustry
is concentrated
and thereis littlealternative
employment,
mains.It is notone thatis easyor painlessto solve.However,
ifit can be isolated
to it
fromthemassofsalvageablestateindustry,
it maybe easierto payattention
whenthetimecomes.
PETER KNIRSCH*
- economists
and politicians
Onlya fewyearsago- up untilabout 1989/90
wereoftheopinionthattheformer
ofCentraland East Europe
socialistcountries
The general
shouldquicklychangetheireconomicsystems
intoa marketeconomy.
a general
became
more
economicstagnation
whichmoreand
in thesecountries,
mostofthesupporters
ofa centrally
crisis,had convinced
plannedsystemthatit
was not suitableforsatisfying
the economicneedsof a societyand its members.
- in contrast
countries
The extremely
in westernindustrial
dynamicdevelopment
to declinein socialistcountriesgavethe impression
thattheireconomicsystem
means
state-owned
wasobviously
offormer
theonlyrealalternative.
The transfer
central
oftheobligatory
ofproduction
intoprivateownership
and thereplacement
werethewidelyacceptedgoalsforthenecassary
bymarketmechanisms
planning
system.
changeoftheeconomic
processin at leastsome
Today,aftertwoor threeyearsofthereorganization
oftheformer
socialistcountries,1
somereform-oriented
groupsare alarmedbythe
difficulties
in thisprocess.Therewerethosewhowereagainstreforms
occurring
- becomeratherquiet. They
and had- whilewatching
theirsystemgo to pieces
concluded
from
thedifficulties
thatthistransformation
ofthereforms
processwould
be connected
withgreatsocialtoughness.However,
iftheywereto behaveina blind
*OsteuropaInstitutan der FreienUniversitt
Berlin
"The LongWayBack to a MarketEconomy"
1Mostnoticeablein theformer
- due tounification
Federal
western
withtheformer
GDR, where
of
her
has
been
Republic Germany
system
quicklyand fullytakenover.A quicksystemchange
to as "shocktherapy")has also been triedin Poland sincethe beginningof 1990.
(oftenreferred
Serious,but so farslowerand morepartial changesof the economicsystemcan be foundin
Hungaryand theCSFR and- less clearto me- in Bulgaria.In thesuccessorstatesoftheformer
SovietUnionthistransformation
processis onlyhesitantly
takingplace due to thepoliticallyand
unstablesituation.
economically

304
ormalicious
thatitwouldbe possible
way,thesetransformation
problems
suggested
to forcebacktheold centrally
plannedeconomicsystem.
seriousdifficulties
in thetransformation
Indeed,thereareextremely
process.
The critical
economic
decay,whichstartedunder,andwascausedby,theoldsystem
continues
in all transformation
countries
and has increasedin mostfields.The
realsocialproductand theproduction
economicbranches
in themostimportant
are in recessionand inflation
ratesare high. Sincethe nominalincomehas not
therealincomeofthepopulationhas declined.Companieshave
grownaccordingly,
of
dismissed
orhavecompletely
closeddown.Unemployment
manyoftheirworkers
- is the
- inconceivable
inconceivable
extent
forthesecountries
undertheoldsystem
The fixedcapitalinvestment
is recessive.Alltheseindicatednegative
consequence.
but
economiceffects
in thetransformation
occurwithvarying
countries
intensity
arepainfully
in the
noticeable
is thedevelopment
Somewhatdifferent
everywhere.
tradeofthosecountries;
especiallyas
foreign
yethere,too,recession
predominates,
faras exportsare concerned.2
Theseextremely
ofa largepoputhesocialcondition
negativeeventsaffect
lationgroupand haveresultedin corresponding
discontent.
On one side thishas
- on the
led to a refusal
to changetheeconomicsystem;but- and moresignificant
othersidethereis littleconfidence
established
in thesimultaneously
parliamentarydemocratic
forthesocialand politicalstapoliticalsystem.Thisis verydangerous
extremist
countries
and createsthethreatofgrowing
bilityofthetransformation
fromrightand left.
politicalmovements
Thereare variouscauses forsuch an unfavourable
economicdevelopment
in the reform
that originatedin former
process. It is the economicstructures
reasonfor
socialistcountries
that are mostoftennamedas the mostimportant
theproblems.The extensive
oftheformer
economicdevelopment
systemstressed
quantitative
gowthand thisled to a neglectof quality,and antiquatedfactories
withlow productivity
weredominantwhencomparedwithdevelopedindustrial
of nationaleconomies
countries.In additionto thesepoints,the transformation
to a marketsystemis takingplace withan openingto theworldmarketand this
is onlyservingto demonstrate
thatthe former
systemsofthe reform
production
oftheother
countries
werecompetitive
to a verylittleextent.The 'easy'markets
former
to
socialistcountries(CMEA-countries)
ceased
exist,
especially
abruptly
side
whenmutualdeliveries
On thedomestic
hadtobe paidinconvertible
currency.
of
in
the
in
the
former
but
also
qualitatively
GDR,
(especially
Poland) competition
higherestimatedimportsfromthe westhas limitedpotentialdomesticmarkets,
and
and thishas resulted
in a declinein production,
theclosingdownsoffactories,
unemployment.
in the old systemseldomproducedon a low-costAdditionally,
enterprises
- theirproductioncostswereveryhighwhencompared
basis. On the contrary
2Formoredetail,see Gabrisch 1992.

305
internationally.The low productivityis an essentialreason forthis fact,but the

underdevelopedinfrastructure
(especially communicationand transportationsystems) has also played its part. In the old political systemthis was (and in some
cases still is) compensatedby state subsidies. Since in most of the reformcountriesthe centralbank has not yet become independentthe state budget loses only
veryslowly- if at all (e.g. Russia)- the potentialformoneycreation,due to the
economicallyunjustifiedmaintenanceof enterprisesby subsidies. The latterled to
surplusmoneyand demand.
This is the beginningof a vicious circle: the introductionof a marketeconomy presupposesfreepriceformation,i.e. the abolitionof formerprice settingby
the state. The surplus money,due to social or political reasons, then leads to
inflationary
processes- to a dramaticextentin Poland and Russia.
Thus the bad, antiquated,uncompetitivesituationof productionplants and
infrastructural
institutionsin Central and East European countriesis certainlyan
essentialhandicap for the transitionto a marketeconomy. Naturally,it is also
the essentialreasonforthe fact that privatization,as a second importantcomponent of the transformation
process, makes so little progress,no matterhow it is
intendedthat it should be achieved: neitherdomesticinvestors,most of whomare
also not able to raise enoughnew capital, norforeignones want to buy and runinand somewhat
efficient
enterprises.However,privatizationbecomes unsatisfactory
strangeifonlythe relativelyfeweconomicallyworkingenterprisescan be sold and
all unprofitablebusinessesrest with the state. Beside that, obscure questions of
impairment(both ofspecial
ownershipand the necessaryremovalof environmental
importancein East Germany)stand in the way of privatization.
In a shortand sketchyarticlesuch as this one could leave it with this argumentation:the hereditaryburdenof the old systemis too immenseto be overcome
by just changingsome institutionalelementsof the system. To change a system
presupposesimmenseinvestment
means; thisis the onlywayto achievea promising
economicbasis forthe realizationof the systemchange towardwhichthe reforms
aspire. It cannotbe done simplythroughan individualcountry'sown efforts.If the
richWest European countrieswantto have politicallyand sociallystable conditions
in neighbouring
East Europe, theymust help to create these preconditions.
- even some western
we
oftenhear such abbreviated argumentation
Today
difficulties
politiciansargue like that. This attemptto explain the transformation
is correctto some extent but it does not satisifyme, because is shows a biased
economicorientation. Beside that, accordingto my understanding,a significant
barrierto the transformation
process is representedby the disagreementand confusionabout reformgoals and how to get there. Also post-communistsocieties
- ifat all- accept the veryfundamentalsystemchanges. In my
do not sufficiently
viewthissituationcauses muchhigherbarriersto the aspiredsystemchangewhich,
will not, or only to a limitedextent,be overcomeby foreignaid.
unfortunately,

306
I thinkthatthewaysin whicha thorough

acceptanceofthesystemtransformationis to be brought
aboutarealreadydifficult
to compare,due to thedifferent
in the transheldby leadingpoliticiansand economists
opinionsabout reforms
formation
countries.Here,theonlybasic tendency
ofthe transformation
process
of
thatis unquestioned
is privatization
and the coordination
of stateenterprises
economicprocesseson markets.However,
the hugetransformation
problemsdisconcertmanya reform-willing
forceand conservative-communistic
groupsbecome
openreform
opponents
again.EspeciallyinRussiathebasicdecisionto pressahead
withreforms
standsin thewayof
is moreand morequestioned,
and thishesitation
startedwiththesystemchange.
getting
But evenin the transformation
wherethe systemchangeis the
countries,
ofopinionson thefuture
economic
goal,wefinda greatnumber
system.Stillmore
confused
is the controversy
The neweconomic
on howto achievethistransition.
systemis oftencalled "marketeconomy"or "socialmarketeconomy".Naively
modelofa statethissystemis thought
to comecloseto theliberalistic
speaking,
freeeconomy.In the reform
withconservativecountries
thishappenssometimes
liberalistic
ofthemodeland thepossiblereality(ideal
groups.Heretheconfusion
ofthe
andrealtype)can be understood
thewrongs
as a pendulum
swingreflecting
or
scientists
former
system.Notquiteso easyto excuseis whenwestern
politicians,
"councellors"
to a "market
advisea quickand completetransition
, such
economy"
as wouldfitintotheabovemodelas a solutionto transformation
problems.They
oughtto knowthe economicsystemsin whichtheylive,to realizethat- in the
- a statewestern
world
doesnotexist,thatstateintervention
freemarketeconomy
in the economyas reactionto a marketfailureis obviouslyinevitablein some
destructive
structures,
aspects. This necessityis mostlyjustfiedby monopolist
and distributional
externaleffects,
competition,
concepts.
ofstateinofthemarketeconomywillregretthisnecessity
Everysupporter
eitherforefficiency
reasonsor forpoliticalfears(at themomentI am
tervention,
as alwayswithgreatintellecbyHayekin a semminar,
reading"Roadto Serfdom"
interventions
tual gain),but ifhe is realistiche willadmitthatpolitico-economic
takeplace in theinterest
ofsocial and thusalso politicalstabilityin all "market
economies".Today all actual economicsystemsare mixedsystemswherestate
tax systems,and also prices,are directlyadministrated
by
subsidies,respective
these
thestate3and can be regarded
Whenrealizing
interventions.
as far-reaching
countries
factsit is dishonest
to the East Eurpeantransformation
to recommend
arThe mostfrequent
a quickand possiblytotalchange-over
to marketeconomy.
3Even if thenecessityofstateeconomicpolicyis realizedit is shockingto read thatthe perbasketin Germanytodayamounts
by thestatein theconsumer's
centageofpricesadministrated
to 40% ofall pricesin thebasket.Heretheauthorsdrawa verynarrowcirclearoundtheadminisfromtheEC agricultural
tratedprices,i.e. theyneglectthestateinfluence
on foodprices,resulting
marketregulations.See Informationsdienst...
1991.

307
wouldbe theright
thattheefficiency
immanent
in themarketmechanism
gument,
meansto overcome
all transformation
problems("The marketwillsettleit all"),
underestimates
theconnected
socialinstabilities.
Beyondthat,it can be said that
of
western
recommendations
in thisextremesituationoftenlack realknowledge4
intheEast
theveryunfavourable
circumstances
structural
andpolitico-psychologic
countries.
Europeanreform
are notmainly
theCentraland East Europeanreform
countries
Fortunately,
- thisis moreoftenfoundin theminds
oriented
towardsa "pure"marketeconomy
ofsinglepersonsratherthanin thepolitico-economic
Polandis
reality.Sometimes
theexception
to therule.It is typicalthatat timestheEast Germanchange-over
to theeconomic
withsuchextreme
systemoftheold FederalRepublicis connected
a radical
the character
of West-German
however,
prevents
thinking;
regulations
ofsuchideas.
application
is
Its is true,thattheideaofa marketeconomy
totallybasedon competition
theconceptions
butat leastit is definite.
decisions
Forstateregulatory
unrealistic,
- are more
- as mostlymetin the reform
ofa "socialmarketeconomy"
countries
in casesof
vague. This systemshould,on one hand,containpoliticalcorrections
"market
failure"and on theotherhandmakethetransformation
process"socially
tolerable".Here,the politicaldecision-makers
witha numberof
are confronted
ideas as to howthe systemtheyare aimingforwouldbe politically
stableand
efficient.
economically
is estimatedto be
offormer
stateproperty
Generally
speakingprivatization
theextentof
for
the
about
views
but
there
are
necessary
transformation,
differing
theprivatization,
shouldbe maintained.
andaboutwhichbranches
ofstateproperty
Thosewhosimplywantto keepaliveinefficient
understateownership
enterprises
conditions
forsocialreasons(job preservation)
structural
changes,
impedenecessary
is the
and in thelong-run
difficult
.
a
"social
of
pursue
policy poverty"Similarly
for
basis
the
decision
about
the
release
needed
for
actuallycreating
"right"
price
and closely
a marketeconomy.As faras foreign
economicopeningis concerned,
connected
withthefactabove,thereis also a widerangeofopinions.Freetrade
and the introduction
of convertibility
is suggestedas wellas protectionist
policy
and forms
ofexchangecontrol.
The lackofa consistent
to a socialmarketeconconceptforthechange-over
inasthis
is
often
lamented.
for
the
reform
omy
Certainly,
process is unfavourable
more
exist
soon
muchas thereform
there
arise
and
are
as
difficulties
plans changed
- thishas becomea specialproblem
thanseriousefforts
forreforms
programmes
around
in Russiain recentyears.In spiteofthat,I believethatthisuncertainty
of mixed
the conceptof transition
is necessarily
connectedwiththe inevitability
- onlyextremeformsare clear,but cannotbe realizedor are inefficient.
systems
The neweconomic
in eachCenwillprobablyturnoutto be verydifferent
systems
4See also, veryinformative
on thesubjectLaski 1992,esp. pp. 18-20.
Ada O econmica44, 1992

308
trai and East European country.They will develop by "trial and error"and the
errorswill definitelycost a lot, but they will certainlybe a good experienceon
the way to a somewhatefficient
system. They will not be the resultof champion
economists,who make blue printsbut ignorereality.
The missingdetailed conceptionfor the transformation
process, of course,
carriesa great danger: structuralchanges connectedwith the change-overto the
marketsystembringalong high costs which in general have to be borne by the
populationofthe reformcountries.This is trueevenifthereis considerablewestern
support(East Germanyeasily receivingthe largestand Russia- whenconsidering
thetask- thesmallestsupport). In spiteofall social measuresa low livingstandard
willbe inevitablein the reformcountriesfora longerperiodoftimethat commonly
anticipated. The resultingdiscontentcan easily be abused by conservativecircles
to discreditall reformefforts.
I thinkthe main barriersto the transitionto the marketsystemin postcommunistsocieties exist politico-psychologically.
Althougheverywherethe political powerof the communistparties is broken,its economicstructuresare still
preservedin most places. The acting functionarieshave littlereason to use their
abilitiesforthe organizationof a new economicsystem: a systemthat so far has
been presentedas hostile,socially detrimental,whichtheycannot understandand
in whichtheycannotbehavein theway theyhave been trained.The systemchange
makes themsocially unnecessary,individuallyjobless in general. This is not only
true forthe economicbureaucratsconnectedwith the Soviet economicsystemin the case of any reformeffortsthey are the firstwho can be dismissed. It also
- who have to re- certainlyforthe management
largelyapplies to all employees
theirplans; now they
orientthemselves:so far they have been used to fulfilling
have to search fora possible marketand to react quicklyto marketsignals- at
the same time they have to act efficiently
and be sensitiveto costs. In a market
all
are
whiteand
blue-collar
workers
system
expected to show a greatersense of
than in the old centrally
and
self-initiative
responsibility,
performanceefficiency,
plannedsystem.
This enormoustransformation
processin economicbehaviour in Germanwe
- can onlybe carriedout very
wouldspeak of a revolutionof the "Wirtschaftsgeist"
and
with
a
of
at
time
slowly
huge economicproblemsand when
great difficulties,
sanctionsare threatening(e.g. unemployment).It is also not easy when positive
motivations(higherstandard of living,bettersupply) at best stand out as hopes
- these changesin
on the horizon.So far- i.e. in the two to threeyearsof reforms
economicperformance
have not been carriedout decisivelyin the post-communist
I think
countries.Togetherwithstructuralproblemsand conceptionaldifficulties
these are the main barriersto the transitionto a marketeconomy. A considerable degreeof information,
education in the workingsof a marketeconomy,and- better individual insightinto its libertiesand obligations
especiallyimportant
seem to be the most importanttask forguaranteeingthe transformation
process

309
DEBATE: JNOS MTYS KOVCS
and gettingit going.All members

mustrecountries
of the old post-communist
and welfare
as we understand
it can onlybe achieved
alize,thatpoliticalfreedom
undermarketeconomyconditions,
but thatthisrequirestotaland unconditional
and thefullcommitment
ofeach member
ofsociety.
engagement
References
Gabrisch,Hubertet al. 1992. Depressionand inflation:threatsto politicaland social stability.
Wien: WIIW Forschungsberichte,
Nr. 180.
Informationsdienst
derdeutschenWirtschaft,
17. Jg. 1991. Nr. 27 vom4. Juli.p. 3.
Laski,Kazimierz.1992. Transition
fromcommandto marketeconomiesin Centraland Eastern
and questions.Wien: WIIW Forschungsberichte,
Nr. 191.
Europe:firstexperiences
JNOSMTYS KOVCS*
Howcan thetransition
to a marketeconomybe acceleratedin EasternEurope? The questionraisedby theeditorsof Acta Oeconomicaseemsto dominate
economicthought
post-communist
today.(Laski 1991;Portes1991; Wiles1991)I
wouldalmostsay "unfortunately",
becauseI am afraidthat- however
justifiedit
maybe in dailypolitics theanxiousdesirefora rapidtransition
mayencourage
* to lose
the"transformer"
of
theemergence
sightofa) hisoriginalgoalofassisting
a liberaleconomic
in thisgoal.
inherent
order;b) thelogicaldilemmas/paradoxes
- notexTwokindsofacceleration.
BelowI wouldliketo emphasizeseveral
It is
thepace ofeconomictransformation.
presslypolitical difficulties
concerning
clearthatin thefieldofpolitics,and bypoliticsI meancurrent
economicpolicyas
cannothelpbut lobbyforfasterinstitutional
well,theliberaltransformer
change
whilecriticizing
the"retarders"
in thenewgovernments.
Thesegovernment
politicianstend,withsomeacademicbacking,to introducederegulation
by newstate
and decentralization
regulations,
privatization
byrenationalization
byrecentralization. Witnessing
thisdialecticaltwist,the liberaleconomistmustworkhardto
determine
whether
or a gradual
whathe sees is merelya provisional
slow-down
reversal
of
ofthetransition
theclearsignsoftheemergence
process.In recognizing
newauthoritarian
for
him
becomes
difficult
it
structures,
(clientelist,
party-state)
notto call foran acceleration
ofthetransformation.
InstituteforHumanSciences,Vienna; Instituteof Economics,HungarianAcademyof Sciences,Budapest
"Moneyis Time (On the Pace of Post-CommunistTransformation)"
*Fora distinction
betweenthe terms"reformer"
see Kovcs 1991.
and "transformer",
Acta Oeconomica44f 1992

310
Paradoxically,the same liberal economistmust also distance himselffrom

thoseofhis colleagueswho advocate not deceleration,but anotherkindof acceleration,i.e., increasingthe rate of economicgrowthratherthan the scope of economic
liberalization.In challengingsuch suggestions,he relieson, and justly so, similar
argumentsto thoseapplied in the recurrentdebates about "selectiveindustrialpolicy", "export-ledgrowth", "structuralmodernization"
, etc. fromthe last decades
of the ancien rgime. (Ironically,his counterpartsare oftenthe same people as before.) The essenceof his argumentsis the following:insistingon economicgrowth
would mostprobablynot onlylead to recession(like in so manycases in the past),
but it would also give the "visiblehand" and the mightylobbies in the state sector
a goldenopportunity
forrestoringtheiralliance whichwas damaged by the collapse
of communism.
A new uskorenie?Unfortunately,
the twin dangersof a slow-downof liberto
alization and old-newexpansionismprompteven the most liberal transformers
forceinstitutionalchangein the hope that it mightreducethepowerofthe state bureaucracyand the new authoritarian-populist
parties. It would,of course,be going
too farto suggestthat a new kindof uskorenieis beingpreachedby liberal-minded
economistsin this part of Europe. They knowfromexperiencehow muchdamage
the forcedaccelerationof economicprocesses (the Great Turnaroundsand Leaps
Forward) caused in establishingand managingthe old system. "Growthrush",
"taut planning"and "administrativecampaign" wereindispensabletermsforany
seriousinquiryintothe behaviourof economicactorsin a commandeconomy.The
word "acceleration"was compromisedagain- some years ago by Gorbachev,and
morerecentlyby Walesa. By usingthe term,both ofthemresortedto theold tactic
of blurringthe distinctionbetweenlong-terminstitutionalreformand short-term
politicalstrugglewiththeiropponents.
Yet now,when- to quote Lenin- we could reallymake "twosteps backward"
to capitalism,many economistsof liberal convictionstend to direct these steps
zeal of the
witha radical activismthat remindsthe observerof the interventionist
socialists.
non-market
earlier
of
to
the
market
not
mention
proponents
socialism,
i
and
DognaV peregnaV(catching-up
overcoming)capitalismagain?
Undoubtedly,there is a whole series of legitimateargumentsin favourof
economic
in the post-communist
some,I wouldsay, "sound" govermentinterference
temon
based
of
transition
It
would
be
futile
to
a
moderate,
system.
dispute theory
liberalization.
and
and
state
involvement
protecting
porary,
permissive
supporting
leftto the ultimaratioofspon(Kovcs 1992) Anyliberaleconomictransformation
taneous evolutionmay be derailed at the veryoutset if it begins under extremely
illiberalconditions.This is whyso manyeconomistsin EasternEurope are seeking
to accelerateinstitutionalchange at the beginningof the transitionwith the aim
- a point beyond which
of arriving,as quicklyas possible, at a point of no return
liberalizationwould prove irreversible,and spontaneous marketprocesses would
predominate.Similarto the formerreformeconomists,theyassume that this is a

311
life-and-death
racebetweenthosewhobuildup themarketand thosewhotryto
thedeconst
ructionofthestate.
prevent
and supposefor
At thisjuncture,let me offer
a counter-factual
hypothesis,
in
a moment
thatthetransformer
doesnothaveto faceauthoritarian
temptations
inlabourto accelerate
to theeconomy
politics.Wouldhestillprescribe
"injections"
ofsupportive
side-effects
thebirthofthemarket?Shouldhe notfeartheharmful
intervention?
Timeis short.My impression
is thatthe imminent
dangerofnewauthoriin
tarianism
attitudesofeconomists
thetraditional
interventionist
onlyreinforces
timepressure"
EasternEurope.(Kovcs1992)"Weareunderenormous
, "Youcannotcrossan abyssin twoleaps", "Amputation
shouldbe doneall at oncerather
thanbitbybit", "Ifwe do nothurry,
we can getstuckin a no morecommunism
notyetcapitalism'vacuum" journalistic
truisms
suchas thesehavemushroomed
in theliterature
ofpost-communist
transition
duringthelast threeyears.Fortumanner,castingthe
nately,thehasteis usuallyexplainedin a moresophisticated
menaceof authoritarianism
Balkanization,
populism,
etc.) as
(neo-communism,
causes.
onlyoneoftherelevant
oftenreferto
Forexample,in arguingforshocktreatment,
its proponents
thetechnicalinterdependence
the needfora tabofmovestowardsliberalisation,
ula rasa and a criticalmass of the initialtransformative
measures,the inertia
ofpartial
ofthedecomposition
oftheSoviet-type
system,and the neutralization
short"
"time
is
and
Sachs
-style
Nevertheless,
1990;
Lipton
changes.(Kornai
1990)
to
across-the-board
for
are
not
restricted
concentrated
moves
justifications quick,
not onlyin Hungary,
one hearsthesearguments
Poland,
operations.Moreover,
liaison
the
are mostfrightened
Romaniaor Russia- whereliberaltransformers
by
where
oftheold andthenewauthoritarian
but
also
in
Czecho-Slovakia,
pressures
in
of
their
theleadingeconomists
role
the
influential
justified initially
government
For
the processof liberalization
considerations.
additional
example,
by
political
itscollectivist
theirkuponprivatization
elements,
theydefended
scheme,including
a
new
of
to
a
its
contribution
entrepreneurial
byemphasizing
rapid"production"
middleclass. (Klaus and Jezek1991;Klaus 1991)
The "beauty"
of slowness.Threeyearsago, whenthe Czech transformers
discusseda "negative
theold systemwithout"enreform"
thatwoulddeconstruct
withgreat
to
theirreasoning
the
construction
of
the
new
I
listened
one,
gineering"
first
the
to
when
authorized
their
strong
sympathy.
Later,
they
government give
fromtheday-toand promised
thatit wouldwithdraw
pushto thetransformation
I beganto doubttheirallegedly
ofthetransition
soonthereafter,
daymanagement
neoliberalcredentials.I askedmyself:Wouldthe Hungarian,Polish,etc. liberof entrepreneurs
als urgethe "building
up" of the marketand the "production"
if theyformed
the nextgovernments
in theircountries?Wouldtheyfallintoa
now-orneverpanic,or wouldtheysit backand relaxafterhavingtakentheessen- a reform,
tialstepstowardsa negativereform
in thewakeofwhichmarketsand

312
would already be able to createthemselveswithoutthe help of the

entrepreneurs
government?
To facilitatethisrelaxationand self-restraint
in thefuture,I wouldliketo sugon the risksof acceleratinginstitutionalchange:
gest the followingbriefreflections
(1) Let me referfirstto the conventional"Austnan"-typeargumentsabout
the marketas a "discoveryprocess", entrepreneurship
as "creativedestruction",
the importanceof "spontaneoushuman action", the role of uncertaintyand the
. One does not have to be a blind discipleof Mises,
dangerof "social engineering"
to agree withat least part
Hayekand Schumpeter,or theirneo-Austrianfollowers,
oftheirtheoryabout the evolutionary(organic) characterand the naturalslowness
of markettransformations.2
Similarly,if we accept at least part of the historical
observationsmade byWeber,Polnyior Hirschmanon thelong-runaccumulationof
the legal, anthropological,and ethicalpreconditionsformodernmarketbehaviour,
and the short-runvulnerability
of marketinstitutions,we willmeasuretime not in
electioncyclesbut in decades, ifnot centuries.Also, we will thinktwice
four-year
beforelaunchinglarge-scalemarketisationcampaignsor privatisationdrivesbased
on Grand Designs.
Time is money,but the reversepropositionis also true: moneyas a principal
institutionof a marketeconomyneeds timeto develop. The emergenceof a refined
exchangesystemof a monetizedeconomywithits complexorganisations,including
all the skills,habits and attitudesof the main economicactors,may last an entire
historicalperiod.
(2) Forcingliberalizationis not simplyfutilebut mayalso be counter-productive; it can lead to "empty"institutionswhich only simulate secular trends in
economichistory.Marketinstitutionsmay proveemptynot onlybecause theywere
but also due to
eitherdesignedin an uncoordinatedfashionor werenot fine-tuned,
thesheerfactthattheyweredesigned.In otherwords,havingbeen introducedfrom
above and in advance,theymay lack humaninput(interests,routines,moralvalues,
who do not take risks,businessagreementswhich
etc.) frombelow. Entrepreneurs
are not observed,dormantcompanies which serve tax evasion, stock exchanges
in whichno transactionsare made- one can cite numerousrecentexamples from
Eastern Europe to show how the quick introductionof capitalismcan resultin its
similarlyquick discrediting.
socialist
I would suspect a behind-the-scenes
If I were an arch-libertarian,
on
intent
our
liberalisation.
to
effect
conspirators,
Imagine
conspiracy
premature
market
a
create
"Let's
new
dysfunctional
interference,
saying:
eliciting
government
economywithWild-Easternovertonesin orderto demonstratethe importanceof
state regulationsto the public". Institutionalchange,like any investment,has to
2JnosKornaiis one ofthefeweconomists
stressed
in EasternEuropewhohas mostrecently
the need foran evolutionary
approachto privatisation.At the same time,however,he has not
ceased to recommend
and marketisation
policies.(Cf. Kornai1990; 1991)
quickstabilisation

313
be absorbedby theeconomyand thesociety,or it willbe resistedas a foreignentity.

Not onlyis publicfrustration
at stake but rapid liberwithliberal transformations
alizationmay also createinstitutions,
whichthemselveswill impedefurtherliberal
change. (This mightwell be the case with the new regulatorybodies monitoring
deregulation,and privatisationin Eastern Europe.) To counter-balancesuch orold institutionsor create new ones,
ganisations,you willprobablyhave to reinforce
thusneverescapingthe treadmillof interventionism.
scenarios
transitionspresupposesintelligent
(3) Acceleratingpost-communist
of liberalisationwhichinclude a well-defined
approsequencingof transformation,
priate coordinationof the simultaneoustasks (shock treatment),and above all a
"tachometer"measuringthe velocityof institutionalchange. Who should decide
when the economyshould shiftgears? Which countryshould serve as a basis for
comparison?Germany,Chile or South Korea?
tranI thinkit is not only the unprecedentednatureof the post-communist
sitionthat preventsthe transformer
fromdesigningadequate programmesor the
properinstrumentsto assess the tempo of their implementation.Here I would
leave aside the technicaland political obstacles to writinggood, or even secondbest, scenariosforthe transformation.I will also disregardthe legacy of the old
regimeand the intellectualhistoryof the scenariowritersthemselves.Instead, by
way of conclusion,I would like to point brieflyto the logical dilemmas/paradoxes
of liberalization.3
The generaldilemmaof politicaldemocratizationversuseconomicliberalization is unfortunately
all too familiarin Eastern Europe today. We are no longer
surprisedwhendemocraticallyelectedparliamentsvote down,almost instinctively,
radical proposalsforliberaleconomicchange. Anotherdilemma,that of interventionism(if the government
intervenes,it endangersthe new, liberal order; if not,
it cannotdismantlethe old one), has already been mentioned.The dilemmaof simultaneousversussequencedchange(you can call it the shock-treatment
paradox),
however,requiresfurtherdiscussion.Most surveysof the recentshockexperiments
in our regionemphasize exclusivelythe old issue of gradual versus comprehensive/immediatereform.Withinthis context,if you opt forstep-by-stepmodification,the non-reformed
parts of the systemwill offsetyourefforts;if you attempt
across-the-boardchange,a) you cannot realize it technically,and b) you run up
againstthe wall of politicalresistance.
These dilemmaswould be more than sufficient
to preventthe transformers
fromadvocating acceleration. Nevertheless,simultaneouschange hides another
paradox- one I would call the paradox of interdependence.This stems fromthe
fact that in the shortrun the parallel tasks of the economictransition(privatisation,marketisation,
stabilization,restructuring,
etc.) may not only presupposeor
but
also
exclude
or
counteract
each
other.
To cite the one example that
support
3Formoredetail,see Kovcs 1990.

314
has probablymost embarassedthe liberal economistsin Eastern Europe recently:

marketreforms(e.g., price liberalization)have- to put it mildly- not always assisted privatization;at the same time,privatepropertyhas sometimescontributed
to the perpetuationof distortedmarkets.
Therefore,one cannot be confidentwhetheracceleratingone of the transformationprocesseswillnot slow downanother. If we considerthat the counteracting
effectsare usuallystrongerin otherspheres(e.g., marketizationand stabilization),
and that the tasks affecteach otherin everyimaginableway,a scholaror a politician urgingthe accelerationof institutionalchangehas to be verycourageous. He
mustbe preparedto select whichspecifictransformation
movesshould be speeded
up, and to reassurehis colleaguesthat such an accelerationwillstillleave something
to be acceleratedin the future.
P.S.
To avoid any misunderstanding,
mysceptical approach to acceleratinginstitutionalchangedoes not implytoleratingrestorationofthe old regime.The new
obstacles to liberalizationmust be removedeven fasterthan the old ones.
Similarly,it would be a mistaketo reject any carefulor balanced acceleration of certainsub-processesof the economic transition. My argumentonly
demand foracceleration.
challengesa comprehensive
I am aware that substituting"limitedliberalization"underdecayingcommunismfor "self-limiting
liberalization"under slowly-emerging
capitalism cannot
be particularlyappealing to liberal-mindedpoliticiansor theireconomicadvisers.
As a Hungariancitizen,I feelsorryforthem. As an analystof theirtransformation
scenarios,however,I am curiousto see if the new Eastern European liberals will
be able to reconciletheirscholarlyand political agendas.
June 1992
References
Klaus, V. 1991. A roadto marketeconomy.Prague.
falseliberalismand recentchangesin CzechosloKlaus, V. and Jezek,T. 1991. "Socialcriticism,
vakia". EasternEuropeanPoliticsand Societies,Vol. 5, No. 1. Winter.
Kornai,J. 1990. The roadto a freeeconomy.New York: W. W. Nortonand Co.
in Eastofprivatization
Kornai,J. 1991. "A privatizcieiveiKelet-Eurpban"(The principles
ernEurope). KzgazdasgiSzemle.11.
Kovcs,J. M. 1990. "bergang:das GrosseExperiment".Transit
, 1.

315
DEBATE: FERENC KOZMA
in Hungarianecoto transformation
Kovcs,J. M. 1991. "Fromreformation
(Limitsto liberalism
nomicthought)".EasternEuropeanPoliticsand Societies,Vol. 5, No. 1. Winter.
in EasternEuropean
ofthetransition
Kovcs,J.M. 1992. "Engineers
temptation
(Interventionist
economicthought)".Ada Oeconomica,Vol. 44, Nos 1-2. pp. 37-52.
Laski,K. 1991. Transitionfromcommandto marketeconomyin Centraland EasternEurope.
Manuscript.
in EasternEurope. The case ofPoland. Brooking*
Lipton,D. and Sachs,J. 1990. Privatization
2.
Papers on EconomicActivity,
Portes,R. (ed.) 1991. "The path of reformin Centraland EasternEurope". EuropeanEconomy.2.
in Osteuropa".EuropischeRundschau,3.
Wiles,P. 1991. "Die kapitalistische
Siegessicherheit
FERENC KOZMA*
Firstofall it seemsto me necessaryto clarify
whatis to be understood
by
theterm"market
is
This
because
some
of
the professional
opinionis
economy".
inclinedto understand
unrestricted
it as a synonym
forthe idea of an "entirely
freemarket". Consequently,
a non-market
such opinionregardsany formation
economyin whichthe relationsof demandand supplyare subjectto individual,
- regardless
instituofwhether
tangibleinfluences
theystemfromentrepreneurial
tions(largecompanies,
state
or
from
structures
power
banks)
(local authorities, or
international
In
a
market
economyis- at least in its
organizations). myopinion
- a systemin whichthefirstdimension
format theendofthe20thcentury
is the
network
ofsales relations,
ofoligopolisand theseconddimension
is the network
and economicpoliticaleffects
exercisedon the meshof thefirst
tic,monopolistic
dimension.
Neither
ofthemexcludestheotherone: whatis more,theyarepreconditionsofeachother.Besidetheproductive
thedivisionoflabour,and the
forces,
socialstructure
reoftoday,ifattempts
aremadeto eliminate
thiscomplementary
the
be
what
I
understand
ceases
to
functional.
In
other
lationship, economy
words,
a selling
whichis simultaneously
by the term"marketeconomy"is a formation
and buyingautomatism
and a manipulation
imbuedwithconsciousinterventions,
businesstransactions
builtintothe multitude
ofspontaneous
systeminseparably
thattakeplaceon a highlydetailedlevel.
Thus,takenin thissense,the buildingup of a marketeconomyin Central
East-Europehas indeedveryseriousobstacles.Let me describethreeofthem.
1. Theorganicdevelopment
has been
Europeaneconomies
oftheCentral-East
ofthese
As
a
result
troubles
and
accompanied
bypermanent
regularinterruptions.
boththestructures
havebecome
andmechanisms,
as wellas thewaysofbehaviour,
*
ofEconomics,Budapest
University
7

316
DEBATE:FERENCKOZMA
unbalancedand distorted.This exacerbatesthebackwardnessofdevelopmentstemmingfromthe peripheralpositionof the region,and makesit veryhard to improve

the situation.All this createsa specificmarketstructure,in which:
a) the effectof pre-capitalistsocial relationscan be found;
b) the marksof peripheralbackwardnessare also present;
c) the remnantsof variousephemeraland now abandoned attemptsto break
free- which can be found in the productionstructure,in the internaleconomic
mechanismand in the institutionalsystem- settleupon one another;
d) also significantis the remainderof the specificmodel used forbreaking
loose, whichwas typicalofthe past fourdecades and adds to the foregoing;namely,
a model whichtriedto overcomeperipheralbackwardnesswith the aid of a social
structurebased on economicand social securityand welfareequalization.
It created masses of technical, legal, and behaviourial systemicelements
which,underthe circumstancesofa marketeconomy,are simplyunable to function.
2. This veryparticularmarket- the economiesdevelopedundermoreor less
harmoniouscircumstanceslook at it as a "distorted","incomplete"one- could,
fromtime to time,start proceedingon a developmentpath of self-correction.
Going along this path, it could be accelerated by consistentlyapplyingan adequate
economicpolicy that would lead back the economyin the originaldirection,after
thecataclysmswhichafflicted
theeconomiesfollowingthispattern.Over the course
of history"postponeddemands" have accumulatedin the region:in the economic,
social and politicalspheres. This is probablydue to the peripheralpositionof the
regionin relationto highlyadvanced WesternEurope to whose commoncultural
spherethese countriesstill belong. This compels everyregimeand governmentin
the regionto concentrateits effortson rapidlyachievableresults. The conscious
influenceexertedby the Central East-European societieson the relationsof their
distortedmarketsrequiresa consistentstrategywhichhas been thoughtoverfrom
everyaspect: in otherwords,preparationscan be made forcultural "surfriding"
and the superficiality
this entails,or effortscan be made to findlong-term"fixed
points"by absolutizingsome elementsof the possible strategies.Anotheralternative is to continueout desperatelytowardsthe "richrelatives"in the West. Such
attemptsusually fail. The highlysensitiveeconomiesof Central and Eastern Europe falteror even collapse at the veryfirstsignof an unfavourableeconomiccycle.
A panacea that is selectedon a political basis, by the natureof its originsor due
to its side-effects,
it causes more harm than good. Finally,it is not in the interest of the wealthywesternneighboursto liftup the "poor relatives"to theirown
- instead of relievingthe originalfunclevel. Hence, politicoeconomicstruggles
tional disordersof the market,that have been caused by organic(anatomical and
- heap themup withnew ones.
physiological)developments
3. All these circumstancesrequirea profoundanalysis,that focusesentirely
on the specificconditionsand the powersmotivatingdevelopmentin the area, and

317
DEBATE:FERENC KOZMA
looks carefullyat the societiesthat live there. Furthermore,

some of the economicpoliticalmodels built upon such an analysis need to be elaborated. These models
oughtto give priorityto the following"questions":
a) how, and for what developmenttargets, can a concreteCentral EastEuropeanmarketbe relativelysmoothlyoperated?
b) howcan an optimumbe foundbetweenthe effectsofmarketautomatisms.
At presentthese workin a distortedform,under distortedrelations- yet in the
short-term
they are irreplaceable;also there are the impacts of "underdeveloped"
aspects (of large enterprises,banks or the state). An optimumhas to be found
so that the workingcapacityof the marketshould not worsen,and development
should turninto a "self-correcting"
direction.
how
can
an
be
found
optimum
among the externaland internalinfluences
c)
on the national marketso that the main point of decision-makingon the trend
and pace of developmentdoes not shiftoutside the frontiersof the country? At
the same time,thisoptimumshould ensurethat the economiesare not deprivedof
the stimulatingeffectof integration.In otherwords,the economiesshould feelthe
stimulatingeffectof the internationalmarket,but at the same time competition
fromthe developedworldmust not paralyse domesticforcesand thus weaken activitiesthat have prospectsforlong-termdevelopment,and whichwereintroduced
at the cost of big sacrifices.
So far every "success strategy"has put the above threequestions to itself,
includingthe Danish and also the South Korean ones. Of course,manyeconomies
fromdifferent
eras have produced many answersto such queseconomic-political
and
these
differ
from
one another. This means that the necessary
tions,
strongly
have
to
refrain
from
analyses
imposingthe model of some respected theoretical
school upon the practicalsolutionof the Central East-European problems;nor is
it a solutionto choose some standard-or model-country
or economicpolicy which
be
and
fast adaptability,when
because
of
its
may promising
simplicity,popularity
in factit is impracticable,and wouldnecessarilylead to new failures,confusionand
frustration.Buildingup the Central East-European marketeconomiesrequiresa
newindependentmodel-family,
just as both the NorthEuropean and the East Asian
marketshave forthemselves. It also needs securityfor introducingand seeing it
through,and a backgroundto political and public lifewhichis exempt fromany
inclinationto adventurism.Such factorsare needed to guaranteethe success of
elaborationand implementation.
I am convincedthat creatingthisspecificmodel is not a questionof inventing
or skilfullyadapting some "techniques". First of all, it is necessaryto see clearly
in mattersof "self-knowledge
and environmentalknowledge". Great emphasishas
to be laid on clearsightedness,
forif we try to findresponsesto our marketand
economicpoliticalopportunities(or some means suitable to influencethe market)
based on prejudicesor politicalself-suggestion,
we would merelylengthenthe series
of abortiveattemptsonce again- at a time when we are, indeed, in the state of
7*

318
DEBATE: HELMUT KRAMER
trendsof doultimatepossibilities.Beingfamiliarwiththeshort-and long-term

in Hungary
aboutfonmng
mesticpubliclife,unfortunately
I am nottoo optimistic
this.
thesocio-political
forachieving
mediumso fundamentally
necessary
HELMUT KRAMER*
1. What do you regard as the main barriersto the transitioninto a market
economyin the formersocialistcountries?
notonlytheecoinfluenced
The transition
processofa systemthatstrongly
nomicmechanism
but moreor less all fieldsof societyin Centraland Eastern
Europecannotbe regardedas a mereeconomicmodelexercise.It has to be seen
ofmost
attitudesand aspirations
ratheras thetransformation
ofveryfundamental
groupsofthepopulationand its individualmembers.To reducethistaskto the
forcesto playin a certainwaymeans
construction
ofinstitutions
thatallowmarket
themagnitude
oftheproblem.
misjudging
results
Themagnitude
thatonecannotexpectsatisfying
is ofsucha dimension
oftheSoviet
ina shortwhile.In thefirst
enthusiasm
bythebreak-down
engendered
that
bothin Easternand in Westerncountries
bloc thereoccurredextrapolations
offormer
thatiftheeconomic
ledtoverypremature
visions.Theysuggested
growth
around7% p.a. fora time-period
socialistcountries
couldbe expectedsomewhere
development
up to theyear2000,muchifnotall ofthedelayineconomic
extending
that
couldbe caught-up.
toWestern
countries
Also,therewereassertions
compared
but also naturalin some
sucha perspective
was notonlyrealisticand convincing
oftheprocessesassociatedwithmarketforces.
It is true,
By now,suchillusionsmayalreadyhaveled to disappointment.
thatwereheavilyaffected
thatsomeWestern
byWorld
however,
Europeancountries
WarII succeededin observing
growthratesof around7% p.a. betweenthe late
outsideEuropesucceededin fostering
1940sand mid1950s.Someothercountries
evenafterthatperiod,at leastup to the 1970s.
veryrapideconomicdevelopment
But evenin thesecases the catching-up
processestookmoretimethan 5 to 10
years.
standards
LetmetaketheexamplesofAustriaandSwitzerland.
Byeconomic
was
ofthefifties
inAustriaat thebeginning
thelevelofincomesandofproductivity
a
lessthanhalfthatofSwitzerland.SincethenAustriahas been relatively
rapid
is belowtheWestern
whereasSwitzerland's
Europeanaveconomy
growth
growing
Yet evenso, forty
impressively.
erage.This indicatesthatAustriahas caught-up
*AustrianInstituteofEconomicResearch
Ada Oeconomica44) 1992

319
in incomes,and obviouslyan even bigger

years later, there remainsa difference
one in materialassets levelsbetweenthe two neighbouring
countries(about 25 percent,as measuredin purchasingpowerparities),to the advantageof Switzerland.I
mightadd that thisprocessin whichsome European economiescaught-upwiththe
mostprogressivecountriestook place undercomparativelyfavourableinternational
circumstances:manymarketsforinternationally
traded goods could be described
in the initial phase of the take-offas sellers,markets. Everythingthey produced
also could be sold all overthe worldat good prices. Furthermore,
the international
sensibilityagainstall sortsofprotectionof domesticproductionwas well below the
level that is nowadaysobservedin internationaltrade disputes and negotiations.
Marketswerenot characterisedby oligopolisticcompetitionto such a highdegree,
implyingthat barriersto marketentrywerecomparativelylow comparedto the ex- among
pectablesituationin the 1990s. My next argumentis that manycountries
themAustria havingthe highestintensitiesenjoyedsignificant
unilateralcapital
transfers
fromabroad on the basis of the European RecoveryProgrammeand some
otherschemes.Anothersignificant
pointis that, the ruptureof institutionsformed
and experiencesgatheredbetweenthe pre-warperiod and afterwas not so deep
and so extendedas it is now formany Central and Eastern European countries.
All these aspects look considerablyless favourablefor the formersocialist
countries. Yet apart fromthose mentionedso far, there are new problemswith
whichtheyare faced now in contrastto the situationof the 1950s. For example,
thereis an urgentneed to investhuge amountsof capital into the naturalenvironmentin orderto improveecologyand human health in some regions.
Such argumentsmightpointto morerealism,but theymay also lead to scepticismand even resignationas to the changesof success of the transitionprocess.
However,I thinkthe picturewould be one-sidedifwe leftit like this.
The basic economicparadigmof the multilateraladvantagesof the increased
internationaldivisionof labour has to be qualifiedunder circumstanceslike those
sketchedabove, but neverthelessits main messages still hold. There certainly
are advantagesand favourabledifferences
betweenthe currentsituation and that
of the post-wardecades: e.g. the greateramount of knowledgeand technology
of
available internationally
at comparativelylow cost, the much higherefficiency
internationalcapital marketsand of internationaleconomicpolicyinstitutions,the
experienceaccumulatedand applicable to economicand social problemsthat can
be drawnfromWesterncountriesand that could enable avoidanceof at least some
of the mistakesthey made, the possible reductionof militaryspending because
of the end of East-West-tensions
and the consequenthigherproportionsof public
financeformoreproductivepurposes,the shorteningof cyclesof production,and
the segmentationof many marketsdue to special qualities offeredby the chance
of niche production. I would even say that a generallack of capital need not be
seen as the main barrierto a moredynamicgrowthprocess. The inflowof foreign
capital, in the post-warexperienceof my country,has at no point of time played

320
DEBATE:HELMUTKRAMER
the dominatingrole in financingthe necessaryinvestment. The Marshall Plan

can be regardedas havingoperated as an initialignitionfortake-off;
yet its main
value was that it gave credibilityto the economicpolicyand confidenceforprivate
investment.If, as unfortunately
it looks at the moment,the Westerncountriesfor
variousreasonsare not readyto offera packageof that size, thenit can be replaced
orientedeconomicpolicyefforts.
by countriesmakingtheirown sound, longer-term
However,the basis forthese should be the broadlyshared convictionwithinthe
populationthat by renouncingmaximisationof consumptionforquite a long time,
and by a country'sown strategicefforts,
the goal of catching-upwith the Western
neighboursis by no means unrealistic.
Yet whenmakingthisstatementI have to tryto understandwhat it means to
a generationthat has alreadybeen forcedto renouncesome of the not alwaysvery
convincingconsumeraspirationsof Westernpeople. It indeed means a prolonged
sacrificeto provideadvantagesforthe welfareof the next generation.
2. What measuresand techniquesdo you suggestto accelerate the transition
process?
as thetop priority.
I haveto confessthatI do notsee acceleration
Hungary
and
has made slowbut steadyprogressin the reform
of herlegal,institutional
ofyearsandshehas donewellinchoosing
behavioural
overa number
characteristics
timefor
thisapproach.The finalreasonforthisargument
is thatthishas provided
other
The
and
to
social
and
approach,
parameters.
learning adapting
psychological
- bywhatwasEast Germany,
chosenbyPolandand- underdiffering
circumstances
thatofa "BigBang", inmyopinionnotonlyincurshigher
politicalandsocialcosts
Thereare two
and risks,but it evenmeanshighereconomiccostsand frictions.
reasonsforthis: it wearsdownphysicaland humancapitalthatcouldotherwise
be usedmoreprofitably
oncethecorrectadaptationshavebeenmade. Also,in the
case ofa step-by-step
processnotonlythepoliticalbasiscan be stabilizedbutalso
thuscontributing
theexpectations
ofprivateeconomicplanningand investment,
fromabroad.
to thedomesticcapitalformation
and to capitalinflow
ofpolicyorientation
Havingsaid thisI hurryto assertthata longer-term
has
It
reforms.
of
must
not
mean
the
obviously
postponement necessary
making
Posttime
ambitious
to be coupledwithclearand immediate
an
and
path.
steps
ofthefulleffectiveness
ofmarketforceshas to be limitedin time.There
ponement
shouldbe no doubtaboutthat.In Austria,manytypesofdirectpoliticalinterventionhavebeendevelopedin a variety
ofmarkets.Theyhavebeendevelopedover
and domestic
international
thecourseofrecentdecades,reactingto thedifferent
times.In manycaseswerealisedafter
circumstances
thathaveemerged
at different
thatsuchregulations
a while,and aftertheiroriginalcausewas no longerexistent,

321
show a tendencytowardsunjustifiedself-reinforcement.
This reducedthe capacity
to react promptlyto shiftsin markets. One should be well aware of the fact that
regulationslead to vestedinterestsand theyin turnlead to self-perpetuation.
Nevertheless,the average productivityincreasesin Austria have turnedout
higherthan in manyWesternEuropean countries.The argumentbroughtforward
forthis,in spite of what we observedabout ptrification
of intereststructures,is
that stable social relationsand a climateof mutual understandingof social groups
makes solutionspossible that could otherwisebe blockedunder less consensualor
less corporatistcircumstances.
In a paper writtenby ProfessorYoshitomi(1991) of Tokyo,he asks whether
thereare elementsin the economicpolicydevelopedby Japan that could be of use
forthe growthstrategiesof Central and Eastern European economies. Certainly,
the situationand the characteristics
fromthemin
of Japan wereand are different
a numberof veryfundamentalinstances. Nevertheless,in view of the convincing
success of the Japanese example, the question is appealing. Indeed, much to the
surpriseofthosespectatorswho are used to blamingJapan foran implicitlyprotectionistapproach,Yoshitomiconcludesthat he sees fourbasic principlesthat could
be applied to Central and Eastern Europe. From our Austrianexperience,both
fromthe success and fromthe failuresof our approaches,I could subscribeto his
conclusions.
He calls them the fourC's: Competition,Comparativeadvantage, Capital
accumulation(both physicaland human) and Consensus building. In contrastto
those advocatingthe sole priorityforthe workingof marketforcesand neglecting
the role of the government,
we would be inclinedto stress that it is necessaryto
a
close
on the one hand and
develop
workingrelationshipbetweenthe government
businessand labourunionson theotherin definingnationaldevelopmentstrategies.
This may wellimply(fiscaland other) incentivesforcapital formation(to curb the
propensityto consume) and, possiblyeven more important,the encouragementof
competitionamongsupplierson the domesticmarket.
Needlessto say,such a model only promisespositiveresultswhen it is develon
the basis of sound macro-economic(fiscal and monetary)fundamentals,
oped
and on the carefulassessmentof static and dynamiccomparativeadvantagesin an
internationalcontext.
References
M. 1991. "Lessonsfrommarketeconomies",in: The transition
to a marketeconomy.
Yoshitomi,
Vol. 1. Park: OECD. pp. 140-150.
Acta Oeconomica44t 1992

322
DEBATE: LSZL LENGYEL
LSZL LENGYEL*
"The age ofcactusesand sand is approaching"
GyorgyPetri: Inscription
into
fromthedictatorial
socialistplannedeconomy
Whydoesthetransition
a liberalmassdemocratic
marketeconomy
or at bestsucceeding
seemto be failing
withgreatdifficulty?
A timelyandvalidquestion.YetsomeEast Europeansceptic
mightevenput the question:whyshouldit succeedat all? Can it succeed? In
otherwords:arewe notsearching
fora waywherethereis in factnone,or are we
notattempting
thatis impossible?
When,beforethechangein 1989-90,
something
we askedeach otherand ourselveswhether
existingsocialismcouldbe reformed,
and whether
a socialistmarketeconomycouldbe realized,ourquestionscameto
thesameimpasse.At thattimemanyobservers
answeredthattherecouldbe no
suchthingas a socialistmarketeconomyand thusit was notevena possibility.
Justas thenit was said that existingsocialismcould not be turnedintosome
kindofsocialistmarketeconomy,
socialismcannot
so todayit is said thatexisting
be turnedintoa liberalcapitalistmarketeconomy;in otherwords,it cannotbe
reformed
and it cannotbe revolutionalized.
I thinkit typicalthatthosewhotryto answerthequestiontoday,
However,
do notsay thisstraight
out. The experience
ofthepast twoor threeyearshave
beenbewildering
notonly
and theEast Europeansocietieshavebeendisappointed
in Gorbachev's
but also in theideasofa liberal
and reform-socialism,
perestroka
marketeconomy.
It seemsthattheattemptat a liberalmarketeconomyhas only
continued
thepoorresultsofthereform-socialism.
Yet,just as earlierit was not
so todayit is not
to
socialist
market
criticize
Gorbachev's
economy,
thought
fitting
It
is notseemlyto
to
the
solutions
of
a
liberal
market
economy.
becoming malign
of
declare
to
this
that
there
is
no
Also,it is
economy.
openly
type
wayleading
not at all popularto say thatthereis no leap froma shortageeconomyintoan
of abundance,or froma centralized
economy
economyintoan individualmarket
Yet thefact
It
is no redemption.
is
like
to
that
there
the
believers
economy.
saying
eitherof a socialist,
seemsto be thatin EasternEuropethereis no redemption,
thata market
or ofa liberaltype.Fromthis,one shouldnotdrawtheconclusion
or
a
centralized
is
than
more
effective
economy
planned
economy not,historically,
thata societyofmassdemocracy
statedo notprovidebetter
and a constitutional
division
or authoritarian
livingstandardsthanoneor anothertypeofdictatorship
mean
not
it
does
ofrights.However,
a
better
because
life,
implies
just
something
thatit is easierto attainit.
It wasin 1988thatC. Castoriadis
summarized
whythebigleap is impossible.
butwe cansee
It is truethatat thattimehe wasspeakingaboutreform-socialism,
*FinancialResearch
Inc.,Budapest
"Gravitation"

323
thathe couldrepeathisarguments
eventoday.He pointedout thereasonsforthe
oftransition
in fourpoints.
impossibility
1. The pictureof a bureaucratic
demarketcapitalismcan be coherently
scribedin a scenario.According
to thisscenario,pricesand wagescan be liberalcan becomethecentreofeconomicactivities,
ized,profitability
enterprises
(below
a certainsize) can pass intoprivatehands,and land (fromthe dividedcollectivefarms)can becometheproperty
ofpeasantsand voluntary
also,
cooperatives;
the quantityof moneycan be reguforeign-trade
monopolycan be eliminated,
latedbythecentralbankand bymonetary
can be
means,and publicexpenditures
"war
coveredbytaxes. Monopolistic
and
a
be
decentralized
can
companies
giant
can slowlybe turnedintoa civilianone.
economy"
2. However,
thelogicofsuchchangesis onlyapparent.Firstofall, howcan
- e.g. fromtherealRussiaoftodayto a fictive
weget "there"from"here"
Russia?
In principle,
thereis somesolutionforthistransition
butit has notbeenproperly
elaboratedbecauseit is so difficult.
resultsofthemeasures
The short-or long-term
forimplementation,
eveniftheywereto be gradual,wouldshockthemodel
waiting
and theconsequence
rise
thesignificant
couldbe dramatic:massunemployment,
ofconsumer
and socialgroups.
pricesand thecollapseofregional,
professional
3. Anactualreform
fromabove- i.e.
cannotbe realizedbyresolutions
coming
withoutthesupportofbroadstrataofthepopulation,
and theiractiveparticipation.In otherwords,sucha reform
ofa deepsocial
to
achieve
the
ought
unfolding
movement.
does not
it is notonlythecase thatsucha socialmovement
However,
existin Russiabutthereare notevenanymeasureswhichcouldstartturning
the
scenariointoreality,
northeconditions
whichcouldcreatea coalitionofthosewho
is needed
oughtto be able to realizethe reform.Such a coalitionforthe reform
those
and
almost
who
it
vast
of
bureaucrats
the
against
oppose namely,
majority
all workers.
the
4. Themostimportant
to recognize
thatitis impossible
thingis,however,
of
and
of
bureaucratic
the
which
would
suit
type society politicalsystem
economy
marketcapitalism.1
fromhereto theredifficult,
or whyis it impossible?"
"Whyis thetransition
This questionis basedon theconceptthathistory
towards
movesfromsomething
the less
that
from
there
is
a
modernization
certain
of
else,
something
regularity
to
the
more
social
An
earlier
from
perfect
philosophy
perfect.
theoryemanating
thatuniversal
tendstoproclaimed
progress,
thoughwithdetoursand transitions,
wardsa corporate
and no
and
where
there
is
no
society economy
privateproperty
1In hisstudyCastoriadis
(1988) didnotor did notwantto see a pictureofsocietywithbureaucraticmarketcapitalism,eventhoughhistoricalprototypes
ofit werealreadywellknown.Such
were,forexample,the dictatorialform:Germannationalsocialism,Italian fascism,phalangism
or Salazarismin the Iberianpenninsulaor the variousLatin Americanpopulistdictatorships;
and the democraticform:the Frenchmodel of "plannedcapitalism"or the Japaneseone of a
controlled
economy.
Acta O econmica 44 > 1992

324
state. Today,some ideologistsand politicianstake a simplisticapproachand call to

accountcertainsocietiesand economiesfortheirimperfection,
claimingthat these
- i.e. the marketeconsocietiesare stillnot ripeforthe summitof humanprogress
omyof privatepropertyand individualcompetition.East European societiesmay,
with some surprise,experiencethat they are livingin a continuousstate of transition of societyand economy- except that yesterdayit was a transitiontowards
socialist society,and today it is a transitiontowardscapitalistsociety. Yet when
are we goingto be in our own societyand economy?(There is somethingironically
woefulin that in 1918 youngeconomistsand politicianswishedto achieve a modern systembased on a doctrineof salvation, involvingthe eliminationof money.
Today,youngeconomistsattemptthe same, throughthe "introduction"of money.
The resultof the laws and interventions
is tragicallythe same.) Hence, would it
not be reasonable to considerthe propositionthat,just as the precedingsystem
was not a transitionfromcapitalisminto socialism and communism,so even the
presentone is not a transitionfromsocialism into capitalism,but somethingenThe Soviet-typesocietyis not some hybridmade up ofsocialistand
tirelydifferent.
capitalistelements,but a systemwhichcan be explainedfromitself;in myopinion
the East European systemsbeing built up today are also not simple hybridsbut
autonomousforms.In termsof worldhistory,theyare not tendingfromsomething
to something.For instance,Italian fascismor Germannationalsocialismwerealso
not transitorysocieties and they were not born to constitutethe foundationsof
the later liberalmarketeconomiesof Italy and Germany.Analystsof societiesand
economiescannot proceed by tryingto measure the distance of one given system
fromanother.East European economicscience attained majoritywhen it came to
deduce the laws and rulesof real socialismfromthe lived experienceand not from
a hypotheticalsystem. It became a science when it understoodwhy and how a
systemcan workwhich,fromthe aspect of the rationalityof the marketeconomy,
is nonsensical,as well as comprehending
what the rationalregularitiesof that system are. In otherwords,whenit began to examine not to what extentthe system
departedfromor approachedan ideal system,but what the basis of its operation
is. Today's East European systemdeservesa similarstudy.
Observersofthe presentsituation- amongthemalso some who have already
providedanswers- have repeatedlysummarizedwhat is missingin the East European societiesforthe assumptionof a marketeconomy. They deem the social
elementsto be at least as importantas the directeconomicones. Out of thesethey
emphasizethe low level of social development,the lack of a real middle class- i.e.
the entrepreneur,
the consumerand the civiliancitizen- and the behaviourof the
man. Further"homosovieticus":the authoritarian,risk-avoiding,
state-controlled
more,the social conflictsstemmingfromthe growthof social inequalities,as well
as fromregionaland sectoralinequalities,are becomingincreasinglyopen and are
leading to the disintegrationof the existingsocial systems. From the economic
aspect, theypointto the lack of a marketwithprice markings,the riskof turning

325
thepricesintomarketprices,theunregulated
centralmonetary
monetary
systems,
andfiscalpolicy,thelackoffinancial
al operation.
institutions
and theirdisfunction
A thirdset ofproblems
natureof
to whichtheydrawattention
is theunprepared
economicpolicies,theirinconsistent
and theirlackofsocialsupimplementation,
true. Theyweretrueevenbefore1989. Thus what
port. All theseare perfectly
cannotbe understood,
havingtakenthesefactsintoaccount,is thatcommentators
cuintheEast andtheWestareactuallysurprised
byall thatis goingon. Another
riousassertion,
thatthereexists
ofthesefacts,is theconclusion
despiteknowledge
a transition
to themarketeconomyand massdemocracy,
but it requiresa longer
assumed.In practice,thepath awayfromthe classic
periodthanwas originally
- including
societies
thesuccessorstatesoftheSovietUnion,Bulgaria,
Soviet-type
is one thatis
Romania,Slovakia,Albania- and towardsmarketeconomicsystems
thecase
for
circumstances.
is,
example,
hedgedwiththemostextraordinary
(Such
ofEast Germany,
It is beingchangedbyWest
whichalso belongsto thiscategory.
The samecould
intoan ill-matched
withhugesacrifices.
market
Germany
economy,
- thoughit is notverylikely
- in thecase ofsomeBalticstates,
also be imagined
ifa helpinghandwereto reachout fromtheScandinavian
region.)GreatSerbia
is
has similarly
no chanceofbecominga marketeconomy.The next"gradation"
themthose
national
economies
a
few
represented
by
which,
yearsago,separated
selvesfromtheleadingtenetsoftheSoviet-type
societybut provedto be unable
Polandand
to transcend
theirnationallimits.Sucharethetwo"riddle"countries,
thethird
whichcomprise
Croatia.2It soundsa mockery
ifI saythatthecountries
classical
the
of
and
the
model
which
in
recent
decades
have
not
followed
group,
close
and
and
small
and
are
Soviet-type
society
suitably
economy
geographically
- i.e. in the
to the marketregions,are waitingin the "transition
of transition"
anteroom
of the marketeconomictransition.These are Bohemia,Hungaryand
Slovenia.3
At thesame time,thesocietiesand economieswhichhave developedsince
fromthe
1989are transitory
onesin thesensethatthe normsand lawsinherited
and
norms
act
in
the
new
different
particprevioussystem
ways;concomitantly,
2The "riddlecountries"are Poland and Croatia.
There,thepoliticalcultureand eruditionof
theintellectual
ofwhatis happening
elite,as wellas theeconomic,culturaland politicalknowledge
in theWesthavebeenon thehighestlevelin EasternEurope. However,theirstruggle
formedium
havetended
basisoftheirpoliticaland economicthinking,
powerstatus,alongwiththenationalist
to push aside liberalconceptsand evenled to xenophobia;thustheyhave been thrustintoan
intermediary
position.
3At various
a human-faced
haveattemptedto construct
socialism,
periodsthesethreecountries
and all ofthemare adjacentto thewesterncountriesand provincesoftheregion,i.e. to Austria,
Northern
The Westhas neitherthedesirenorthepower
Italy,Bavariaand Baden Wrttemberg.
to admitEasternEuropeintoits camp. If it admitsanybody,he willhave to be small,close to
whether
themarketeconomies,
and willbe subjectto a thoroughtesting.The testwilldetermine
haveachievedtheintermediate
situationand can thusbe admittedintothe
anyofthesecountries
anteroom.

326
ipants are uncertainand difficultto recognize. They are transitorysocieties in

that political and economicstabilizationand order have not been fullyachieved.
Thereforetheycannotbe studiedas maturesystems.In fact,theyare by no means
determinedto growinto one or anothertype of a system. (For instance,to state
that Russia or the Ukrainewill necessarilybecome models of national socialistsocietiesis an unfoundedexaggeration.Althoughcertainconditionsattractthemin
this direction,it is not as yet a necessitythat theywill become national socialist
societies.) We wouldbe in an easierposition and I, as a Hungarianeconomist,am
inclinedto believe this is so if we could measure the societies and economiesof
the East European countriesin termsof the Hungarianchronology.In this case we
could say that Russia, the Ukraine,Romania and Bulgaria are at about the same
level as Hungaryin the late fifties;in other words,they are tendingtowardsthe
stabilizationof the early 1960s and the 1968 reform.The model is a dictatorship
sprinkledwith a certainliberalism,in which the centralizedstate starts bargaining withlocal companyand sectoralpowers,and acts morelike a peace-makerand
evenimitatesmarketbehaviour.In addition,thismodel beginsto recognizecertain
small libertiesand createsopportunitiesforconsumption.Poland and Croatia are
in the state of Hungaryin the 1970s wherethereis some autonomyforcompanies,
a certainlevel of consumerdemand exists, and a struggleis goingon in orderto
decide whetherrecentralization
or the processof a marketdevelopmentshould be
implemented.Finally,based on this chronology,
Hungaryand Slovenia are similar
to Austria in the seventies. As I say, it would be easy to introducethis chronolmy
ogy ifsuch historicalprogressactually existed. Yet it does not exist; therefore
is
more.
chronology merelyexcitingguesswork,nothing
The riddle of the East European situation is at the same time a riddle of
our economicknowledge.Our formulasand descriptionsdo not complythe facts.
New experimentsare needed in orderto get acquainted with what exists, and to
reviewthe normsaccordingto which,forexample, Romania or Bohemia are run.
These are neithernormsof the planned economiesnor of the marketeconomies,
and not even mixturesof them. But then,what are they? Who are the important
participantsin the economy- namely,the real ones and not the imaginedones?
Let us confessthat we do not know. This is whyit is worthstudyingeconomicsin
Eastern Europe.
References
a Gorbatchev,le systmesovitiqueest-ilrformable?"
Castoriadis,C. 1988. "De Krouchtchev
Pouvoirs,45. pp. 116-17.

327
DEBATE: SILVANAMALLE
SILVANAMALLE*
Forsometimescholarsreferred
to marketsocialismand thusa qualification
of "market"
coordination
is needed. I considerthe marketto be a decentralized
mechanism
whichneedsa propersystemofincentives,
riskbearingattitudesand
financialresponsibility
in orderto workproperly.The capatalistmarketis the
mostdevelopedformofthismechanism.Property
rightsensuremoreeffectively
- suchas leasing,usufruct
thananyotherarrangement
urnor anyothermix- the
combination
ofincentives
and financial
The marketis also themost
responsibility.
them
effective
toolinrevealing
andbringing
interests
different
oroppositeeconomic
is
to a compromise.
whatdemocracy
To thatextent,themarketis in theeconomy
in thepolity.Bothinstitutions
needfundamental
laws,to protectindividual
rights
and contractual
committments.
"Transition"
also needssomequalification.
Transition
necessarily
impliesa
incontrast
tochangesofa revolutionary
nature.In thediscussion
gradualapproach,
oftransition
thetimespan,orderand preferability
ofchangesmattermost,rather
thangraduality
itself.To thatextenttransition
cannotbe anarchic,but needs
government
guidance,ifnotcontrol.
needto be qualified
notonlyfroman economic
pointofview,
Lastly,barriers
butalsofromsocialand politicalpointsofview,sincethesamepeopleand institutionswhichshouldsupporttheeconomic
couldbe antagonistic
oftransition
benefits
froma socialor politicalstandpoint.
onesdeto transition
it seemsto me thatthefollowing
Amongthebarriers
servespecialconcern.
1. Distortion
structure.
oftheproduction
Capitalistmarketeconomieshave
emerged
historically
pathinwhichdomestic
alonga continuous
and/orinternational
demandhaveprovided
Oband newtechnology.
thecorrectsignalsto investment
soleteproduction
branchesand enterprises
weregradually
replacedbynewsectors
theeconomicsurvivaland restructuring
duringa periodoftimewhichpermitted
ofsomeof the obsoletefirms.The otherfirmswentbankrupt.The patternsof
demandchangedas gradually
as thepatternofsupply.
irrational
The socialisteconomies
haveproduceda dramatically
production
distristructure
fromthepointofviewofmarketallocationofproduction
factors,
to marketmeans
butionofgoodsand ofmarketcapital/labour
ratios.Transition
an
thechangeofthisstructure.
thisverystructure
represents
essentially
However,
I insistonstructure
obstacleto mobility
oftransition.
whichis themaincomponent
as
ratherthanon scale(monopoly)
, sincein myopinionthelatteris lessimportant
*
ofVeronaFacultyof Economicsand commerce
University
"Barriersto theTransitionofPost-CommunistEconomiesto a MarketEconomy"

328
a barrier.Not onlyheavy (or military)industryis overexpandedcomparedto consumergoods industryor trade,but withineach mainsector,productsand allocation
of resourcesdo not bear any relationto marketdemand as it emergeswith price
liberalization.Even withinfirms,the allocation of capital and labour in different
workshopsmay be quite irrational. Reallocation of resourcesrequiresmobilityof
all factors,fromlabour to management,fromcapital to land use, because without
this the reliabilityof new and rapidlychangingprice ratios are reduced. Much of
capacitymustsimplybe scrapped. This bringsabout the short-term
worseningof
all relevanteconomicindicators.
2. Soft-budget
constraints.As argued in the case of the economicstructure,
transitionschemesshould introducehard budget constraints,but- as experience
- the lack of financialdisciplineis not only
showsnot onlyin ex-socialistcountries
the product of governmentpolicies and disregardfor financialequilibria (which
characterizedcentralplanningand should be revertedby systemicchanges) but its
absence is also an obstacle to such changes. Effortsmade in Poland to introduce
some sort os financialdisciplinehave failed. A particularconspiracybetweenthe
managementand workforceof public enterprisesagainst financialresponsibility
reflectsnot only labour claims to job rightsbut also the persistingrent-seeking
approach of state managers; the latter can still findsome sympathyamong the
unchangedupperstate bureaucracy.
in3. People's socio-culturalbackground.Differentgroups have different
terestsin the transitionto a marketeconomy. One should not generaliseabout
peoples psychology.Nevertheless,my impressionis that people tend to fear dramatic changes and thus emphasize the importanceof whateverthey acquired in
the previoussystem,even thoughthey do not rate veryhighlythe qualityof any
presentasset, includingtheirpersonaljob. The fearof losingsocial status in comparativetermsturnsinto suspicionand hate foranyonewho is improvinghis/her
position. The magnitudeand rapidityof changesin individualeconomicfortunes
producesocial strainswhichbecome a major factorof politicalinstability.Similar
strainswereproducedafterthe war in Westerncountries.However,rapid growth
sustainedby reconstruction
and capital inflowfromabroad helped to smooththe
differences
in relativegains.
4. Enclaves of conservativepolitical-bureaucratic
power. The formersystem
was based, on the one hand, on the ruleof communistpartiesand on an egalitarian
ideologyand the catch-wordswhichconstitutedits methodof demagogicmobilization. On the otherhand, it was also based on the networksof personal favours
coordination
and informalrelationsamong the rulers.These providedan effective
mechanism,in defaultof 'the ruleof contract'.The politicalchangeshave brought
to powerin mostex-socialistcountriesotherpartiesand a new leadership.Yet the
informalnetworkstill exists and mighteven have been strengthenedas a defence
mechanismagainst the institutionalvacuum. This networkdoes not need to coincide with the nomenklatura,thoughit shares with the latter an interestin the

329
status quo againstsystemicchanges. Any changewhichneeds government

impulse
and/or guidance is filteredthroughthe informalnetworkof bureaucraticpower
whichcan eitherdelay and distortimplementation
or vilifyit.
5. Extentof the state-ownedeconomy.The morepervasiveand moredeeply
rootedthe state-ownedeconomy,the higherthe barrierto transition.In some exsocialist countriesprivateownershipor formsof usufructumof land have spared
introducedby public
part of the economyfromthe distortionsand inefficiency
marketis an importantadvantage
enterprises.The existenceofa domesticfoodstuff
fortransition,since,on one hand,partofthepopulationis alreadypreparedto work
withmarketrulesand incentivesand, on the otherhand, the inflationary
impulses
of priceliberalizationare reduced.
Large-scaleprivatizationencountersthe hostilityof enterpriseswhichresist
financialresponsibility,
and entails time and oftenshort-termlosses due to the
immediateneed for restructuring.Privatizationdoes not solve immediatelythe
problemof management.If propertyrightsare to providethe correctincentivesto
propermarketbehaviour,theyneed to be earmarkedin some way. This needs time
and delays transition.If propertyrightsare obtained as a freegood, therewill be
waste and abuse of property.Misuse of privatepropertymay altogetherdamage
the programmeof transitionto a capitalistmarket.
6. Role of the state. If the capitalist marketis an alternativeto state managemenet,the role of the state in the economyshould diminish.But all the above
points,from1 to 5, suggestthat government
guidanceis needed and mustbe firm.
Therefore,in the short-term,state interventionand some degree of public mismanagementare stillto be expected and may affectnegativelythe expectationsof
the most adventurousentrepreneurs
and of the domesticand foreigninvestors.
7. Lack of credit,financialand insuranceinstitutionsas well as the lack of a
coherentcorpusof laws based on theprincipleof the contractwhichconstitutethe
dividingline betweenprimitiveor 'bazar' marketand capitalistmarket.The term
"regulated"marketis oftenused as an alternativeto pure marketeconomy,but this
seems to me to be inappropriatein so far as it conveysthe idea of extra-market
forces,ideas or values introducedby governmentalwisdom to correctmarketbehaviour. In theireffortsto reduce the cost of misinformation,
price fluctuations,
investmentrisk and exogenousvariables, marketeconomieshave 'over time' developed and incorporatednew institutionsand behaviours. These have made it
possibleto increasethe numberof actors in the marketcomparedwiththe number
ofspectators.Governments
have been importantin interpreting
thesechangesand
institutions
to
behaviourand
match
new
demands.
The
different
adjustinglegal
of
credit
and
insurance
institutions
organization banking,
among developed market economiessuggestthat each countryhas foundin its own historyand culture
the institutionalresponserequiredby each stage of capitalist development. The
ofthisprocessin thesocialistcountriesis perhapsthe worstobstacleto
interruption

330
fromthe
thetransition
to a marketeconomy.
ofsuchinstitutions
The importation
mostdevelopedcapitalisteconomies
thebestpolicy.
is notnecessarily
Otherbarriers
whichshouldalso be listed,butwithno specialemphasis,are
themonopolistic
withequityand justice,
structure
of production,
preoccupation
These
investment.
lackoffundsforsocialsecurity,
and prejudiceagainstforeign
butI do not
features
and concerns
morecomplicated,
mayindeedmaketransition
have
thinktheyshouldbe considered
as the mainobstacles.Privatemonopolies
at least
an advantageoversimilarsocialiststructures
in thattheyare constrained
by demandand theirownbudgetequilibria.Equityand justicein the previous
- must
- whichsomehaveconsidered
to be the basisforsocial consensus
regimes
nothavebeeneitherso evidentor crucialto peopleiftheoverwhelming
majority,
whenfreeto vote,had beenable to optfornon-communist
systems.As to foreign
theexperience
oftheUnitedStates,Canada,andAustraliainthepast,
investments,
andSouthEast Asiamorerecently,
fromabroadhas
thatdirectinvestment
suggests
beenthemotorofdevelopment
and growth,
up untilthetimethatthesecountries
becameforeign
investors
themselves.
Measures and techniquesto accelerate transition
of
the effectiveness
to a capitalistmarketeconomy,
Duringthe transition
anymeasureshouldbe ratedaccordingto its impacton theeconomicstructure.
needsa propersystemof
The transformation
economicstructure
oftheirrational
indicators
and incentives.
tradeproofpricesand,to a certainextent,offoreign
1. The liberalization
on production
videsnewpriceratioswhichareneededfordecision-making
capacity
thisstagehas precededprivatiand itsutilization.
In manyschemesoftransition,
Muchhasbeen
zationandtheinstallation
ofcredit,financial
andlegalinstitutions.
but
is a necessary,
Priceliberalization
ofreforms.
alreadysaid on thesequencing
thisdevelopment
notsufficient
condition
formarket
forcesto develop.To accelerate
marketoperators,
bothentrepreneurs
and labour,mustbe givenproperincentives
to use mobility.
Brancheswhich,due to newpriceratios,remainor becomeineffinewwage
through
cient,mustbe inducedto disinvest.Labourmustbe stimulated
ratiosinorderthatit movesto newexpanding
sectors.Thismeansthatoneshould
avoidwageregulations
and ceilingsas wellas punitivetaxationofprofit-booming
activities.
seemsbettersuitedin thisphase
2. Indirecttaxation(tax on consumption)
- profit
- tax policies.Incometax shouldnotbe highlyprothandirect
or income
incometax couldevenbe mostsuitableto avoidor minimise
gressive.Proportional
in the
in thelabourmarket.Nevertheless,
tax evasionand introduce
competition
transition
emphaphasetaxevasionshouldnotbe targetedagainstwithparticulat

331
sis. If the mobilityof all factorsof productionis what is mainlyneeded,emerging

activitiesmustbe encouraged,even ifthisenprivateindividualor entrepreneurial
tails some damage to the state budget. Short-termtreasurybonds can be used for
budgetequilibriumpurposes. Some degreeof shadow economyforthe purpose of
tax evasioncan be tolerated.
3. The "hunger"forconsumergoods experiencedbysocialistshortageeconomies remainsevenafterpriceshave adjusted to themarket.It is likelythat the supply
of labour will increaseand help to contain wage increasesin expandingmarkets.
Obstacles to holdingmorethan one job should be removed,whileat the same time
the institutionalbarriersto redundanciesshould be relaxed. Needless to say, the
most needymustbe protected.The veryhigh participationrate forwomenin the
workforce
suggeststhat some of themcould retreatforsome timefromthe labour
market,providedthe familyincomeis adequate.
4. Propertyrightsshould be approved at once, includingthe rightto own
land. Tax rates on income earned fromleasing and subleasingflats,houses and
land should be kept down, to stimulategeographicaland occupational mobility
in a situationstill characterizedby shortageof residentialspace. The leasing of
land should not be limitedto specificutilization,except that agreed by the private
parties.
5. Public enterprises,whetheror not on the list forprivatization,must be
stimulatedto get rid of excess capacity,throughthe applicationof harderbudget
constraintsand freedomto disposeofpartoftheequipment,tools,stockofmaterials
and attachedfacilitiesin orderto repay debts. Some privatizationlaws stressthat
the sellingof enterprisesshould include all their premises,whetherassigned to
productionor to servicepurposes. These provisionspreventthe emergenceofsome
adjustmentsin the phase precedingprivatization;thesecould benefitboth the main
productionunit and the customersfor its productsand services. The povertyof
the serviceand trade networksin most ex-socialist countriesand the importance
of these sectors as main vehiclesof marketincentivesbased on consumergoods
availabilitysuggest,indeed,that not only state shops and departmentstoresmust
be firston line for privatization,but enterprisesmust be induced to sell these
facilities,eitherto repaydebts or to recapitalizethe main productionunit. Liberal
legislationon worktimeand openinghoursforservicescould help in increasingthe
flowsof servicesand, in the clearingof local markets.
6. Thereexistseveralprivatizationschemeslargelydiscussedin the literature
and in partalreadyimplemented.The advocates ofrapidprivatizationevensupport
the freedistributionof propertyshares. I do not believe that this will help to
acceleratethe transitionto a marketeconomy.The process of transitionmust be
one in whicheverybodystartsthinkingin termsofopportunitycosts. An unearned
claim to propertydoes not seem to be the most propitiousstart. The sellingof
large-scalestate-ownedpropertycould be preparedby the separationof production
fromnon-production
ofthe latterto local governments.
capacityand by the transfer
8

332
DEBATE: PTER MIHLYI
to
The lattershouldcarryout thesellingthrough
openauctions.Someprivileges
workers
can be agreedupon,providedhardbudgetconstraints
applyto themas
well.
7. Creditpolicymustbe subordinated
onlyto the centralbankmonetary
fromthegovernment.
policy.The lattermustbe madeindependent
as soonas possible
8. Convertibility
mustbe pursuedfirmly
andimplemented
to attractbadlyneededforeign
shouldbe acinvestment.
convertibility
However,
tariff
companied
bya discriminatory
policy.Pendingthecreationofsolidfinancial
and creditinstitutions,
theabsenceofprotective
couldhamperthedeveloptariffs
mentofdomestic
consumer
forthereasonslisted
which,primarily
goodsindustries
above,shouldbe encouraged.
ofmarket
9. To carryforward
feature
thesimilarity
betweentheinstitutional
and democracy,
one also needsto developcommontransitional
features.Highly
and incomplete
thenecesmarkets
in thephaseoftransition
imperfect
accomplish
fromabovemaystillbe
Somedegreesofunpleasantdirection
saryrestructuring.
neededand shouldnot be regardedas a step backwards,
providedthe goalsand
policiesare clearlystatedand dulyimplemented.
PTER MIHLYP
1. The real question
In all probability,
the emergence
(or revival)of a marketeconomyin the
countries
whereSovietsocialism
has
failedwill not be possibleto hinder.
type
it
seems
to
me
about any "mainobstacles". As we
to
talk
Therefore,
pointless
neartheendofthe20thcentury,
themarketeconomyhas grownto be a natural
and theuse of
element
ofhumanexistence,
alcoholdrinking
just as bookprinting,
firearms.The marketeconomy
willcome- thereis no questionaboutit.
withthe
I surmise,
thattheeditors'questionis in factconcerned
however,
points:
following
marketeconofa successful
a) whatarethemainobstaclesto theemergence
omy?
and
ofa freemarketeconomy?
hinderthedevelopment
b) whichcircumstances
These are, obviously,
twodifferent
questions,and it is not easy to answer
and
eitherin a fewwords. Namely,the criteriaof successare not self-evident,
noteventheall too oftenvoicedassumption
thattheclosera country
is justified
UnitedNationsEconomicCommissionforEurope,Geneva
"No Success- ifLeftAlone"

333
DEBATE: PTER MIHLYI
can getto thetextbookmodelofa marketeconomy,

it can be
themoresuccessful
considered.
Economic
ofa market
showsthatthebasicinstitutions
economy
history
- in somecasesevenfordecades- withcertaincontrol
areverywellable to coexist
alien
mechanism
aliento thenatureofthemarket,
whileinothercasessuchmarketelements
do in factexerta paralyzing
effect.
Forreasonsoflimitedspace,I willonlytryto answerthefirstquestion:will
therebe a successful
I am afraid
market
countries?
inthepost-communist
economy
not. If leftalonein thetransformation
process,EasternEuropewillhaveno chance
in theworldwide
ofclosing-up
Yet, up untilnow,therehas beenno
competition.
traceofanysubstantial
assistance.
The countries
in questionhavebeenout oftheraceformuchtoo long,and
wastedtheirtimein "inventing"
and ownspecialrules.Altheirowncompetition
in degreesofseriousness,
theproblems
oftodayareverysimilarin
thoughdiffering
eachcountry.
- The valueofthematerialand intellectual
in thepreassetsaccumulated
belowthatneededformarketconditions.
cedingdecadeshas fallendramatically
built
An over-sized
warindustry,
mines,stablesand cowsheds
expensively
working
to thedemandsofcollective
are notneededanylonger.The old
according
farming
forms
ofcontroland management
mustgraduallydisappear:thepartyapparatus,
the planningboards,the ministries,
state-owned
trade,as wellas the leforeign
and statisticalframeworks,
whichwereall based on the logicof
gal, accounting,
a plannedeconomy.Specialistsfamiliar
haveceasedto be
withtheseframeworks
useful.The case oftheformer
GDR clearlyshowsthat,in theshortrun,thereis a
closeconnection
betweentherateofconverting
a systemto marketeconomyand
theintensity
oftheprocessofasseterosion.
- East oftheRiverElbe a secondindustrial
is needed.However,
revolution
the reserveswantedforgrowthhave runout: the massesof undemanding
agriculturalworkers
environmental
accustomed
to hardlabourare nowtown-dwellers;
is beyondall acceptablelevels;thecountries
areup to theireyesinforeign
pollution
debt.
- It is notjust an accidentalcircumstance
thatthenationsofEasternEuand
of
the
former
have
rid
of theirsocialisteconomiesat
Soviet
Union
rope
got
almostthesametime.Thisfactis a disadvantage
ratherthanan advantage.The
listofEuropeancountries
aid is alreadyfrightfully
longqueuingup forWestern
19 countries
withtheGDR included1 and it is onlya questionoftime
altogether,
beforeCuba, China,Koreaand Vietnamjoin thequeue.
- Afterdecadesofforcedsymbiosis,
thenationsoftheregiondo notseem
based
to be preparedforpeacefulcoexistence,
politicaland economiccooperation
1Albania,Belarus,BosniaEstonia,(ex-GDR),
Hercegovina,
Bulgaria,Croatia,Czechoslovakia,
Latvia,Lithuania,Macedonia,Moldova,Poland,Romania,Russia,Serbia(?), Slovenia,
Hungary,
Ukraine.
8*

334
DEBATE: PTER MIHLYI
on trustand self-limitation.
This laysa burdenbeyondenduranceon the democraticinstitutions,
whicharestillratherfragile.In theraceforthegoodwillofthe
- or,in a worsecase,forthesupportofthemoband thearmedparamilitary
voters
- oldwoundsareeasilyreopened.The Westlookson,shockedand irritated:
troops
contested
frontiers
arevictimized,
"Euphoriahas givenwayto violence:minorities
and barbarity
rekindled.
Warshavebrokenout and stillrageamongseveralofthe
thecosts
countries
here."2As theconflicts
between
nationsareworsening,
gathered
ofintervention
are risingexponentially
in thepoliticalas wellas in theeconomic
sense.
2. What can be done?
The international
ofthepost-communist
assistanceneededfortherecovery
conviction
countries
is notjust a matterofmoney.Determination
and intellectual
are also lacking. A favourite
phrasewithWesternpoliticiansand "expertson
Easterneconomies"
refers
to thebottomless
barrelintowhichno one shouldpour
is theChineseparablesayinghowmuchmorewise
money;and anotherfavourite
it is to teachthehungry
to fishthanto givehimone fish.Threeyearsafterthe
thepolicyofthe
thesetwoplatitudesstilldetermine
pointof 1989/1990
turning
West.
This summary
statement
needs,of course,to be qualified.Firstthe fact
on
shouldbe mentioned
thattheWestclearlyfeelsthepoliticalpressureweighing
and eachorganizawhentalkingabout assistance,each country
it, and therefore,
with
tionquotethelargestpossibleamountsdeliberately
promises
mixingfulfilled
stateunfulfilled
ones.This,however,
doesnotin anywaychangethefundamental
oftheWestern
ment.Second:it is an easilydemonstrable
factthatthemajority
do not
economies
economists
on thepost-communist
seriously
engagedin research
as wellas G. Soros
agreewiththeopinionstatedabove. J. Sachs,J. Williamson,
are on thescale
use everypossibleforumto emphasizethatthecostsoftransition
ofthousands
ofmillions
ofdollars,and theWestmustshouldera substantial
part
abofthesecosts.Theyalsopointoutthatit is hypocritical
as wellas economically
surdto advisethepost-socialist
to liberalizetheirforeign
countries
trade,whilethe
steelprodto openits markets
to theagricultural
Westrefuses
textiles,
products,
A realexceptionis theGermancase. The politicians
ucts,etc. ofthesecountries.
wouldrunhigh,and
in Bonnknewfromthebeginning
thatthecostsofunification
assistance
Western
however,
theyactuallyfootthebill.3Fortheother18countries,
Statement by Mr. J. Attali,Presidentof the EBRD, at the OpeningSessionof the First
AnnualMeeting(13 April1992,Budapest)
3
Taking the net value, Bonn will have spent DM300 billion supportingthe fiveEastern
provincesovertwoand a halfyears,fromJuly1 1990 to December31 1992.

335
DEBATE: PTER MIHLYI
has so farnotrepresented
additionalresource.The majorpartof
anyconsiderable
theassistancethathas beenoffered
is simplycreditwithstrictbusinessconditions.
is also problematic.
The coordination
oftheWesternassistanceprogrammes
to showthe amountof
A largenumberoffrightful
examplescouldbe mentioned
is
mechanism
waste,damage,and abortiveideasthatcan ariseifan organizational
andofa clumsysupra-national
burdened
withthehandicapsofnationalselfishness
The negativeexamplesare ofcourseamusingand notwithouttheir
bureaucracy.
ownmoral,buttheydo notanswerthequestion:"Whatis to be done?"
theUnitedNationsEconomicCommission
Oftheinternational
organizations,
forEuropewas thefirstto suggest,in spring1990,thattheWestshouldset up
ofEastern
a newinternational
fortheeconomicrecovery
cooperation
organization
a
and
the
at
the
time
still
Soviet
Union
Europe
legalunity.(UN 1990)The idea
since.
MostWestern
wasnotapproved
nor
has
it
been
governments
then,
approved
wereofthe opinionthatthe wayto promotethe spreadof the marketeconomy
to thealready
idea was notbyaddingone moreaid-dispensing
super-bureaucracy
be denied.
can
truth
in
this
ones.
That
there
is
a
hardly
opinion
grainof
existing
substantial.
The arguments
also
rather
it
are,
however,
against
oftheBrussels
Atpresent,
assistanceis a function
thecoordination
ofWestern
oftheEuropeanCommunities,
and thecontrolofmacropoliciesand
Commission
reform
of the International
is the responsibility
MonetaryFund. It
programmes
couldbe clearlyseenat thestartthatsucha divisionoflabourwouldposeproblems
in the
fromtwoaspects.The firstdifficulty
is causedbytheamountofoverlapping
is thatsupportofthe
functions
ofthetwoorganizations.
An evengreaterdifficulty
taskforboth
transformation
post-communist
is, in thefinalaccount,a secondary
of
Western
Brussels
the
is
with
Europe,
process
organizations.
occupied
integration
in
countries
and theclientsofprimary
are
the
for
the
IMF
developing
importance
thetraditional
sense.
The experience
of the last twoyearsprovidesanother,perhapsevenmore
in
important,
argument the handsof thosewho thinkthata Westernassistance
on the scale of the Marshallaid plan shouldbe workedout and adprogramme
coordinated.
It is worthquotingthe 1991reportofthe UnitedNations
equately
EconomicCommission
forEurope:
fororganizing
framework
"Another
advantageofa clearand morecoherent
it
could
is
that
Westernassistanceforthe transition
play an important
process
In
rolein building
and
in
the
various
reform
programmes.
restructuring
confidence
a
is
there
somecountries,
of
the
some
of
the
members
problemof
CIS,
especially
confidence
on thepartofthepopulations
whohaveseena seriesof "plans"cometo
nothing
(orverylittle)andremainveryscepticaltowardsnewsetsofproposals.In
couldprobablybe
suchcircumstances,
thecredibility
ofa newreform
programme
as theIMF or the
such
enhancedwiththesupportofa majorinternational
group,
should
theprogramme
to havea significant
effect
on expectations,
G-7. However,
the
and
discussed
be seen to havebeen thoroughly
and
supportof the
analysed

336
DEBATE: ALEC NOVE
internationalcommunitymustbe publiclyknown. More broadly,a clearlydefined

frameworkcould provide a more "generalsafetynet" for the transitionprocess,
in whichthe inevitablemistakescould occur withoutdamagingconfidence."(UN
1992)
That safetynet is, however,stillmissing.Afterone or twoyears' activity,the
democraticallyelectedgovernments
are, one afteranother,runningout ofwhatever
vitalitythey had. Even those that have really accomplisheda lot are forcedto
quit- see the Czechoslovakand the Polish cases. Yet it shouldbe rememberedthat
theirsuccessorsand the successorsof theirsuccessorswill have to start fromever
moredifficult
positions,and witheven less roomformanoeuvre.
References
"Economicreform
in the East: a framework
forwesternsupport",in: EconomicsurveyforEuropein 1989-1990. 1990. UnitedNationsEconomicCommissionforEurope. New York:
UnitedNations,pp. 5-26.
"The transition
economiesin 1991: An overview", in: Economic surveyfor Europe in 19911992. 1992. UnitedNationsEconomicCommission
forEurope. NewYork:UnitedNations,
p. 10.
ALEC NOVE*
It is hard to generaliseabout what are "the main barriers"to marketization,

as the answeris not everywherethe same. For Russia, much more than forHungary,a major obstacle is lack of a marketculture,among a people who have not
knowna real marketforoverseventyyears. Also in Russia, to muchgreaterdegree
than in Hungaryor Czecho-Slovakia,the attemptto marketizetakes place under
conditionsof monetaryand fiscal chaos and political disintegration.In Hungary
sector in the
and in Poland therewas already a sizeable private,market-oriented
last decades of communistrule, contrastingwith the situationnot only in Russia
but also in Czecho-Slovakia. Withinthe formerSoviet Union, it is clear that the
Baltic republicswere more closelyattuned to a marketeconomythan were either
between
Russia or the Ukraine. There were and are also importantdifferences
countriesin respectof the attitudesto marketizationof the formernomenklatura,
and of orinarycitizenstoo.
In Russia and Poland in particular,marketreformsare associated with a
painfulshock therapy,involvinga steep decline in output and in real incomes. It
*InstituteofRussianand East
EuropeanStudies,Glasgow

337
DEBATE:ALEC NOVE
is surprisingin the circumstancesthat therehas not been a political-socialexplosion. It may yet occur. In Russia effectiveaction is inhibitedby lack of political
power: manysourcesspeak of paralysis,and a fewdays ago (May 1992) Shakhrai
is "100 % impotent".How can a market
resigned,complainingthat the government
be introducedunder hyper-inflation,
supply breakdownsand in the absence of a
constitutionand legal order?
But thereare plentyof problemswhich,in varyingdegrees,are commonto
all the ex-communist
countries.One is some ambiguityas to aim. To restorecapitalism? But of what kind? When I was in Harvard,the "Boston Globe" published
an articlewith the title: "In rejectingLenin it is not necessaryto accept Milton
Friedman".(I do not recallthe name of its author). The marketis indeedessential,
but one findsmany,in myview too many,whoseformerfaithin Marxismhas been
replaced by a naive faithin marketsas a cure forjust about everything.Social
servicessuch as healthand education,essentialtransportand otherinfrastructure,
of
environmental
researchand muchelse are the responsibility
protection,scientific
a
a
road
in
on
authorities
I
was
from
Francisco
to
San
Stockholm.
public
recently
beautifulpart of California;on one side was a regionalpark withpublic access, on
the othera seriesof noticesstatingPRIVATE LAND: TRESPASSERS WILL BE
PROSECUTED. Whichwas the road to serfdom?
But the triumphoflaissez-faireraises moredirectlyeconomicproblems.Hungary,Russia, Romania, all the ex-communistcountries,have inheriteda distorted
capital structure.To change it requireslarge investmentsin industrialand environmentaland infrastructural
perestroka.They have also inheriteda societyin
whichlegitimateprivatecapital is scarce. And while foreigncapital can certainly
volumeto make a decisive
in sufficient
help, it is veryunlikelyto be forthcoming
difference.
The scale of investmentneed can be seen in the vast sums whichWest
of East Germany.If in the single
Germanyis now devotingto the reconstruction
this
1991
amounted
to
billion
150
marks,i.e. roughly80 billion
year
expenditure
dollarsfora populationof some 16 million,then Russia, withnearlyten timesthe
population,and on a lowerlevelof development,cannot even begin to solve many
of its deep problemsthroughthe promisedlevel of foreignaid.
What is surelyneeded is an investmentstrategy,directingor inducingscarce
domesticand foreigncapital into selected prioritysectors. This is what happened
in the postwaryearsin WesternEurope, Japan, South Korea. They did not rush
into immediatefullcurrencyconvertibility.
The freemarketis not necessarilythe
most effectiveway to get to the freemarket,to create the preconditionsfor its
existence.Competitionis indeed desirable,indeed essential,outside of a fewareas
of naturalmonopoly.But the closerone approachesthe conditionsof perfectcompetition,the greaterare the obstacles to investment:in conditionsof equilibrium
thereis no profitto justifythe risk. In the real, and not textbookcapitalistworld,
investmentsare made in expectationof disequilibriumor of otherso-called margeia O econmica44* 199&

338
DEBATE: ALEC NOVE
ket imperfections:temporarymonopoly,collusionwith potentialcompetitorsand

and so on.
suppliersof complementary
inputs,coordinationby government,
should be confinedto
Yet forbelieversin laissez-fairethe role of government
the task of macro economicstabilization,and thereforethe veryidea of an investmentstrategyis ideologicallyunacceptable,remindingthemof socialist planning.
Of course it is true that "socialist" centralisedinvestmentsdistortedthe economy
and pollutedthe environment.But it does not followthat the necessarycorrective
action will followautomatically.Apart fromthe earlier-quotedexamples of Japan
and South Korea, thereis also the activityof Treuhand in East Germany. (It is
said that Vaclav Klaus regardsTreuhand as unacceptably"socialist". If so, then
so is the Germanchancellor!).
The above remarksimplya partial answerto yoursecond question,but also
to be consideredis the nature, scope and speed of privatization. Again, different countriesface different
situations. Thus restitutionto formerownersis not a
problemin Russia, it is in the Baltic republics,as well as in Hungaryand CzechSlovakia. There is everywherea shortageof privatecapital, and it would surely
be most unfortunateif most of it, and bank creditstoo, went into the purchase
of what alreadyexists: how then would new investmentbe financed?Small scale
privatization,and freeentryofprivateenterprise,can and shouldproceedfast. But
twootherquestionsarise. First,whatof largestate-ownedfirms?Could not leasing
of theiroperationsbe a short-term solution?
plus commercialization
Second,what ofemployeebuy-outs,an easternversionof the so-calledESOP
(Employeestock ownership),whichhas been makingsome progressin the United
and workers'participationare
States? It is odd that all ideas of self-management
out of fashionin ex-communistcountries,and both Kornai in his recentbook and
the Russian law on privatizationexpresses clear opposition to employeecontrol
(In Russsia theirshares are to be non-voting). Why? Yugoslav experienceis not
relevant,in that the workerstherewere NOT co-owners,and naturallysoughtto
maximiseincome.
Mathematicalmodels abstract fromthe human factor,or treat employees
as a species of robot. Surely,foreconomic as well as forpolitical-socialreasons
it is desirableto secure the willingparticipationof the workforce. A loyal and
and
committedworkeris moreefficient
and productivethan one who is indifferent
alienated. If Friedman (and Kornai) are to be believed, co-ownershipby (say)
less efficient
twentydoctors,or taxi-drivers,
plumbers,builders,mustbe inherently
than ifone of thememployedthe othernineteen.The Americancar hirefirmAvis
than
advertisesthat it is employee-owned.Must conclude that it is less efficient
Hertz, whichis not? Giventhat manyemployeesin Russia and otherex-communist
countriesretaina feelingthat "their"enterpriseis or oughtto be theirs',one might
achievea greaterdegreeofsocial consensusifthisformofde-statizationweregiven
or at the least not be ruledout by law, as it seems to be in Russia
encouragement,
just now.

DEBATE:ALFREDSCHLLER-DIRK WENTZEL
339
to a degreeofincome
in manyofthesecountries
Finally,thereis a tendency
whichmustoffend
inequality
manyreasonablepeople.This is notdue,or notonly
In Russiaat least,mostoftheveryrich
due,to envy,or residualegalitarianism.
havenotbecomeso through
have
and corruption
and bribery
producing
anything,
reachedunprecedented
levels.Atthesametimethe"safety
net"is fullofholes,and
is
medicalservices
haveall butcollapsed,and deathratesarerising.An emergency
morebearableifthereis at leastan attemptto achievegreater
equalityofsacrifice.
In thelastwartheKingofEnglandhad a rationcard.Its importance
was,ofcourse,
are
butsymbols
andCzecho-Slovakia
sometimes
matter.Hungary
purelysymbolic,
- but in Russiaover
- thoughunemployment
notin so direa situation
maygrow
halfthepopulation
aresuffering
realhardship.One hopesforgovernment-imposed
as wellas necessary
But has the
to achievemacro-stabilization.
efforts
priorities,
Russiangovernment
thepowerto imposesucha policy,indeedanypolicy?Laws
and decreesare many,but will theybe implemented?Thereis littlesensein
policieswhichcannotbe put intoeffect.Thingsare verydifferent
recommending
in Hungary.
ALFRED SCHLLER- DIRK WENTZEL*
Obstacles to transition
Generalobstacles
The current
in theformer
socialistcountries
requiresthe
processoftransition
of
the
closed
of
the
and
economic
conditions
replacement
systemic
political,legal
worldof the centrally
of the
framework
plannedeconomywiththe institutional
- an
marketeconomy.This is- as a precondition
whichis desired
forthewelfare
of
the
of
the
of
which
is
characteristic
expression
opensociety
principle freedom,
and itslegalconstitution.
The unavoidableand evennecessaryconsequence
is a far
of thistransition
of
sources
social
of
all
It
a
revaluation
is
combined
with
reaching
disintegration.
incomeand withtheexposureofall negativeeconomicdevelopments
causedbythe
old system,
inflation,
e.g. hiddenunemployment,
suppressed
shortageofadequate
and
other
of
manifestations
of
an
housingspace,
economy shortage.Duringthis
timeofdisillusion
theold politicalsystemmightcollapsequickly,
and thenewone
caneasilygainnewstructures.
economic
the
of
a
new
construction
system
However,
InstituteforComparativeEconomicSystems,PhilippsUniversity
Marburg
"FromSocialismto a MarketEconomy:What is Decelerating,
and What is Accelerating?"

340
DEBATE:ALFREDSCHULLERDIRKWENTZEL
willtake a considerabletime. A latentdemandof the people forso-called "socialist

achievements"(e.g. guaranteeofemployment,
state-fixedlow prices,cheap housing
a
space, protectionof the domesticindustry)complicatesthe task of formulating
strategyfortransitionas an expressionof consequentpoliticalaction.
Even if the "know how" for the creation of all kinds of institutionsof a
marketsystemcan be takenover "forfree", likein the processof the Germanunification,the institutionalarrangementsneed timeto develop the intendedwelfaremaximizingresults; and this depends on the human capital, which makes institutions more effectiveand which changes the state-economyinto a free market
economyof competitiveenterprises.
The obstacleson the road to the interlacingof all interactionsbetweenstate
sector,privatehouseholds,privateenterprisesand all otherrelevantgroupsof the
society come out in the overlappingof elementsof the old and of the emerging
new system.This "jungleof different
institutions"is unstable and has to face the
of
back
into
the
danger falling
practicesof the old system.
Obstaclesthrough"denial coalitions"and "distribution
coalitions"
The liberalizationof pricesand the newlydistributedpropertyrightswill,in
of wealthand of the main sourcesof incomein all
any case, lead to rearrangements
partsofthesociety.Certaingroupswillsurelyturnout to be thepermanent"losers"
of transition. This "group of losers" can rapidlybecome a group of "transition
rsistants"
, forexample:
- communistpartyleaders who have lost their
privileges,
- employeesofministriesand otheradministrative
responbodies,formerly
sible forthe organizationand controlof centralplanning,
- the
who lack
managerialpersonnelof the formerstate-ownedenterprises,
experiencein modernmanagerialdecision-making,
- other
groups,whichhad certainbenefitsfromthe socialist system,e.g.
the leadersof the unions,teachersof Marxism-Leninism
and so on.
These groups try to organize resistanceto change in order to secure their
sourcesof income. The least theytryto do is to preserveelementsof the former
socialistsystemin orderto retaintheirinfluenceduringthe periodof transitionfor
as longas possible. These groupsmightnot be verynumerous,but as the leadership
ofthe old systemtheycan be- iftheystay in charge- a veryimportantqualitative
factorwith a far reachinginfluenceon the administrativestructuresof the state.
This factorof resistanceto change can be extended,if the old "nomenclatura"
succeeds in gettingpower over those groups which are temporarylosers of the
transition. These are the people who have to accept lowerincomes in the short
run due to the urgentprocessof restructuring
the economy,but who have better

DEBATE:ALFRED SCHLLER-DIRK WENTZEL
341
opportunitiesin the long run than theyever had in the old system. These groups
consistof:
- unemployedpersons,
lookingfornew jobs duringthe process of demoand
nopolization
privatization,
- unskilledworkersand older employees,
- familieswith many children,students,pensionersand disabled persons,
who mightget into difficulties
duringthe period of transitionthroughthe lack of
a social securitysystem.
A verysignificantobstacle to transitionmay be caused by a "coalitionof
distribution"
, whichhas directpoliticalpowerand emergeson the side of the transitionlosers. The powerof these groupscan be strengthenedby the fact that the
people withinthemsufferfroman asymmetricperceptionof the costs and benefits
of transition:
- the "costs" can be calculated directlyand individually(e.g. unemployment) and usuallythe groupsreact immediatelywithpolitical action,
- the "benefits"of the new systemcannot be calculated directlyand individually(e.g. the generalrise of welfare),and people quicklyfeel a decreasing
perceptionof the benefitsof transition,
- it is impossibleto compareexactlythe costsand benefitsofthe old system
and the new one. Such comparisonsof real incomein the formercommunistsystem
and in the new marketeconomyusually systematicallyneglectaspects of quality
and availabilityof goods and services.
Asymmetric
perceptionofthe advantagesand disadvantagesof the transition
encouragea coalition
processand the asymmetric"abilitiesto organizeaffliction"
of transitionlosers,and thusthe latterbecome a severeobstacle to transition.The
problemincreasesdue to the fact that in the beginningthe establishmentof the
new economic order has to be done without a social securitysystem. The old
order was socialist, but not social. That is the reason why it is veryimportant
to build up a social insurancesystemin accordance with the principlesof a free
marketeconomy,i.e. a systemwhichis able to reducethe social hardshipsof those
afflicted.Institutionslike thesecan promotethe acceptanceofthe new systemand
reducethe problemsof asymmetricperception.
The politicalsystemas an obstacleto transition
whichoriginatefromcommunisttraditionsand experience,will
Governments,
hardlysucceed in creatingthe conditionsfora marketeconomy,even thoughthey
mightexpresstheirwillingnessto do so. The reason forthis is the fact that the
legal and moral basis of a freesocietyis rooted in individualrightsand values. It
can be expected that governmentswhich representand stand forcollectivistvalues, will search forindirectand directopportunitiesto implementcorresponding
Acta O econmica44* 1992

342
DIRKWENTZEL
DEBATE:ALFREDSCHLLER-
organizationforms,e.g. the dominanceof state-ownedfirms.They will prefera

regulationof marketswhichaims at incomedistributionbut in factbringsabout a
closeinterlacingbetweentherulingparty,thestate and theeconomy.Those governmentsthat fightforpoliticalpowerwill tend to distinguishthemselvesby adopting
populistmeasures,whichlead to a retentionof protectionismand subsidies.
Non-communist
and theirsupportersin multipartyparliamengovernments
tary democraciesno longerstand in the magneticfieldof the old system. Neverto create
theless,theyalso have to face the problemthat it is muchmoredifficult
a marketsystemthan build up a pluralisticpolitical system. During the implementationof the institutionalframeworkof a marketeconomy,the membersof
have to behave in such a way that theycan winthe nextelection. This
government
is a well-known
patternofPublic Choice Theory.Yet thecircumstancesofeconomic
policy are extremelydifficult,
rightfromthe beginningwith the firsttransitional
steps, when the effectsof price liberalizationreveal the bad legacy of socialism.
In this situation,the governmenthas to informthe people about the unavoidable
effectsof transformation
negativeshort-term
policy.The success of these measures
is sustained
is by no means assured,even ifthe economicpolicyof the government
by a freepress.
ecoThe alternative"solution", financedby an evasive and inflation-pushing
nomic policy,increasesthe social differences,
whichdirectlylead to new dirigistic
interventions
of the state. As we knowfromexperiencesin westerncountries,the
politicalprocessin democraciestends mainlyto preferexpansivemeasuresoffiscal
policy. Facing the enormoustasks and financialeffortsthat everypost-communist
democraticgovernmenthas to fulfil,the well known recommendationof Public
Choice Theory gains in significanceto constrainthe endogenoustendenciesof a
. Appropriateconstidemocracy,and thisleads to a fiscalpolicyof "softfinancing"
tutionalarrangements,
hard
to
and
self-constraint
budgetrulesforeconomic
leading
would
to
the
the
resist
policy
pressureof interestgroups.
certainlyhelp
government
but
Non-communist, strong-handed
(authoritarian)politicalsystemsare sometimesconsideredto have betterchancesof success witha consistentand appropriate transitionpolicy.The argumentis the following:the concentrationof political
powerpermitsa strongpolicy against the selfishnessof organizedinterestgroups.
Strong-handedregimesdo not have to thinkabout the next elections. They can
plan and act over a longerperiod of time. Contraryto this argumentstands the
fact that the transformation
countrieshave the experienceof several decades of
a
dictatorship. Establishing new strong-handedregimecould revitalizethe old
"nomenclatura",includingthe army,the secret services and the administrative
- all havingstronginterestsin an economydominatedby collectivized
bureaucracy
enterprises.

DEBATE: ALFRED SCHLLER- DIRK WENTZEL
343
Acceleratingfactors
The transitioncan be acceleratedand advanced in equal proportionsin the
followingareas:
- establishingan overalleconomic calculation,drivenby marketprices of
producergoods and consumergoods, as a preconditionforrationaleconomicbehaviourand rationalallocationof resourcesin termsof opportunitycosts,
- accumulationof the necessarycapital forinvestments
in human and real
above
all
basis
for
owners
as
the
vital
capital
by private
competitivefirms,
- international
interlacingof the national pricesystem,in such a way that
structuraladjustmentsin domesticand foreigntrade followsimultaneously,
- focusingon public and privateinitiativesso that shortagesin all parts of
the economyact like magnetsforforeigninvestors.
These improvements
can only be achieved if prices are liberalized,if a free
is
entrepreneurship established,and ifforeigntrade is liberalized.
Accelerationthroughprice liberalizationcombinedwithmonetarypolicy
The firstconsiderationmust be to adjust the moneysupply to the real volume of production,avoidingany inflationary
or deflationaryeffect.The question
the
be
in
which
this
can
way
concerning
managed is withoutdoubt one of the
mostimportantproblemsof macroeconomicpolicy. The issue is this: the adequate
solutionof the problemof economiccalculationbeginswherewe find
market-type
the existenceofpricesrepresenting
real relativescarcitiesofthe commoditiesavailable forexchange.
One strategycould be the freeadjustmentof pricesto the existingvolumeof
money.However,dependingon the extentofthe monetaryoverhang,it can happen
that price inflationgets out of control,with the consequencethat the "coalitions
of denial" get strongsupport. A strategyof controlledinflation(like in Poland)
combinedwith a stability-oriented,
hard monetarypolicy mightbe socially more
on
betweenregulatedand freeprices,
the
difference
acceptable. However,depending
a flightof the supplyout ofthe sectorsofshortagecould be the result. The success
of this strategyis extremelydependenton the political and psychologicalabilities
of politiciansin officialpositions.
The strategyof a radical currencyreformhas to face strongresistancein the
politicalprocessofa democracy.Some argumentsand experiences(e.g. in post-war
Germany)underlinethat a "cutting"of the monetaryoverhangin connectionwith
way
toughmonetaryand hard privatizationpolicy seems to be the most effective
to reduceincomeand priceinsecurities.A stability-oriented
monetarypolicyplays
a key role in this context. In a situationin whichthereare freeprices,but often

344
DEBATE:ALFREDSCHLLERDIRKWENTZEL
limitedfinancialand real capital operations,connectedwithextremelyhightransaction costs caused by a precariouspropertyrights-structure,

a stronganchorof
economiccalculationsand decisions.This condition
stabilityis needed forefficient
is a necessityforbringingabout an increasein real production,and also, of course,
forthe decreaseofunemployment.Duringa timeofhighelasticityof demand combined with a limitedelasticityof supply,it can be expected that the adjustment
process will show an asymmetricslope. The rise in unemploymentwill lead to
an extensionof state activities. Without constitutionalself-protection
fora tight
money-policythe political process, with its immanenttendenciesforgovernment
"fiscalsocialism".
job-creationprogrammes,will cause an early inflation-pushing
The necessaryadjustmentswill be shiftedintothe future,and the achievementsof
transitionwouldbe jeopardized. Inflationenlargesthe crisis,because it is quite impossibleforthe economicagentsto developrationalexpectationsabout the future.
The short-term"success" of expansive monetarypolicy turns into the opposite.
Inflationhas neversolved any problem,but alwayscreatednew ones.
Accelerationthrough
freeentrepreneurship
The establishment
offreeenterprisesand the redemptionand avoidanceofunused productioncapacitieswillgrowout of the newlyemergingsmall and mediumsized businesses. These enterprises,managed in accordance with the owners'interests,are veryflexible. They will attract a lot of workerswho are lookingfor
employmentand education opportunities.Smaller units can easily adjust to new
will turnout to be a pace-makerforinnovationand
conditions,and thisflexibility
imitation,and thus foreconomicand technicalprogress.These effects,whichcan
be recognizeddaily in the westerncountries,recommendan intensivepromotion
of small-sizedfirms.This should not implicateexpensive,state-bureaucraticproand burdensfacing
grammes.More importantis the removalof all discrimination
small firms,especiallythose laws whichimpede new foundations.In this situation,
it is advisable to workwith tax privilegeswhichhelp the accumulationof equity
capital. In the early stage the new firmswill sufferfroma lack of equity capital,
and this cannot be compensatedby any kindof materialsecurity.Combinedwith
undefinedpropertyrights,corporatefinanceturnsout to be complicated. Followforthe collateralizationof loans
ing this argument,it is obvious that instruments
- e.g. instruments
like discountcredits,reservationof the right
gain in significance
of disposal, the rightof lien and so on. Followingthis, it is clear that the best
help forthe new small businesseswill be the existenceof a strongand competent
privatebankingsystem,whichis responsibleforthe provisionof loans. This can
only be achievedif privatesavings increase. Yet this can only be expected if the
succeeds in creatinga stable monetarypolicy.
government

345
The chancesof the new privateenterprisesbeingsuccessfulare worseneddue

to the existenceofa varietyoflargerstate-ownedfirmsreceivingsubsidiesfromthe
budget. The competitionbetweenthe new emergingfirmsand the old combinesis
distorted,especiallyin the case ofenormoustax burdensforthe new privatefirms.
Followingthe strategyof accelerationby enforcingnew foundations,it is obvious
that the state should followa policyof "hard" privatization.This implicatesthat
firmswhichcannot be privatizedshould be closed. In this case, the managersof
firmswill tryto give a positiveimage of theirfirmsin orderto attractinvestors,
especiallyfromabroad. Taking into account that the directorsdo not participate
in the privatization-proceeds,
it is to be expected that they will act on behalfof
the acquiringcompany. This stimulatesthe transformation
of the state-owned
into
firms.
enterprises
competitive
In the case of "smooth"privatization,responsibility
forappropriateactivities is givento the managers. In such cases the managerstryto followa survival
strategy,togetherwiththe employees,to the debit of the state budget. The managementand the workersalwaysintendto documentthe possibilityof revitalizing
the firmand to struggleforthe survivalof "their"firmby mobilizingprotection
and subsidies. Plants can continueto operate despite wastefulinvestment,low
labour productivity,
insufficient
and liquidity. If large state-owned
self-financing
can
from
the
enterprises alwaysexpect help
state, as has been the case up till now,
tendenciesof both internaland externaleconomicinstabilityare unavoidable.
Generallyspeaking,in the case of "smooth" privatization,the strategyof
preventinga takeoverwould be dominant,with all its negativeimplicationsfor
the whole transitionprocess. On the road to a freeeconomyone has to take into
account strongpersistenciesand distributionconflicts.In orderto attain a competitiveplant size structure,withthe intentionof overcomingmonopolisticsupply
structures,it is necessaryto have measures of demonopolization,privatization,
takeoverand sometimesbankruptcyof state-ownedenterprises.The time these
proceedingsrequiretends to be muchlongerthan expected,especiallyconsidering
the fact that no well-functioning
marketsforassets and no capital marketexist.
The state-ownedenterprises,
whichhad, fordecades, certainsubstantialprivileges,
will tryto keep an importantrole in the politicalprocess. To weakenthe inherent
forcesof persistenceand denial,it is necessaryand appropriateto mobilizeprivate
entrepreneurs
by openingthe economyto foreigninvestors.This may help to put
on
the
pressure
policy-makers
responsibleforthe privatization.
Accelerationthroughopenforeigntrade markets
Directcontactwithforeigncompetitionwouldamelioratethefunctionsoffree
pricesin theirmotivational,allocational and distributionaldimensions. FurtherActa Oeconmica44t 1992

346
DEBATE: ALFRED SCHLLER- DIRK WENTZEL
more,the openingto foreigntrade would take away the powerof the bureaucrats
involvedwiththeforeigntradeorganizationsofthe CentralPlanned Economy.The
internationalpressureof demand and supply would forcethe monopolisticstateownedfirmsto adjust to the new situation,and the formerclosed economies,
witha
highdegreeof monopolizationwould soon have to demonopolize.In short: foreign
competitioncould replacethe controlof domesticcompetition.In the firststage of
transitionforeigncompetitionis limitedbecause ofthe lack ofinitiativeforstarting
new enterprisesin large quantities.
Freetradealso impliesconfronting
the countrywiththe criticaljudgementsof
foreigncountries,concerningthe qualityof the constitutionalarrangementsin the
fieldof propertyrights,labour markets,enterprisesand foreigntrade laws. Reservationsagainst foreigninvestorsin order to "protectthe domesticindustryfrom
would be extremelydisadvantageousfora successfultransforforeigninfiltration"
mation and integrationin the world market,if this retentioncannot be justified
with argumentsconcerningthe competitivestructureof the economy. Reservations against foreigninvestorsdiscriminateagainst the most permanentformof
capital import,namely the inflowof foreigndirectinvestment.The politicians,
who are responsibleforthe transitionprocess, should improvethe conditionsfor
directinvestments,
also withregardto foreignparticipationin state-ownedenterprises. The strategyof attractingforeigninvestorsseems to be the most efficient
one forenablingfirmsto receivea "kindof competitiveness"
, derivedfromforeign
enterprises.
Profitableforeigntrade relations in combinationwith an efficientcapital
- need essentiallya realistic
allocation- whichstimulatethe dynamicsof transition
exchangerate. Realisticrates of exchangeare representedby pricesof foreigncurof transition
rencies,whichare dominatedby marketforces.The special framework
is characterizedby an enormousuncertaintyabout importantdata of economicactivitiesand by variousasymmetries;consequently,
the earlyfixingofexchangerates
appears as a "corset"forthe economicpolicy. The argumentthat fixedexchange
rates lead to an importof confidence,is only valid when the exchangerate is the
resultof marketforces.If this conditionis not fulfilled,
the resultwould be misallocationofresources,inflation,as well as internaland externalcapital flight.These
effectscomplicatethe task of privatizationand theyincreasethe uncertaintiesand
costs of transition,whichare big enough anyway.
A fixed,overvaluedexchange rate acts as an artificialimportsubsidy and
as an export duty. The competitivenessof domesticindustryis weakened,as the
firstexperiencesof German unificationillustrate. The overvaluedexchange rate
makes importscheaper,and this has the effectof reducingincentivesforforeign
investorsto come into the country.This of course,stands in conflictwiththe task
of privatization.
Undervaluedexchangerates workjust the other way round. They operate
likea bonusforexportsand an importlevy. Artificialpressureto exportand a price

347
increaseof importsdecreasethe supplyof goods on domesticmarkets.The people

have to face a smallerratioof absorbtion.The social acceptanceof transformation
policy will be weakened. Especially problematicare undervaluedexchange rates
concerningmonetarystability,because the defenceof the exchange rate against
the marketforcescan lead to a largermoneysupplywithinflationist
consequences.
However,ifmonetarystabilityis endangered,privatizationwill be complicated.
The choice betweenan undervaluedand an overvaluedexchange rate is a
have to face duringthe tranverygood exampleof a dilemmawhichpolicy-makers
sitionprocess. The accelerationof transitioncan easily turn to deceleration. An
overvaluedexchangerate can supportmonetarystability,but it surelyimpedesprivatization. An undervaluedexchangerate can supportprivatization,but it surely
impedesmonetarystability.This resultsin a vicious circle.
A flexibleexchange rate can preventthe causes of a vicious circle. Flexible exchangerates support the hardeningof the currencyand they reduce price
fluctuations.The transitionpolicy will be both: relievedand promoted.
The integration
of the transitioneconomyintothe fieldof internationalcomcan
lead
to
petition
shocks,whichare perceivedas overcharging.Flexibleexchange
ratesworkas a buffer
againstsuch shocks,particularlyin combinationwitha moderate tariffprotection.It resultsin a double-protection
againstforeigncompetitors
with the advantagethat it does not conflictwith the logic of market-determined
pricesand the conditionsof convertibility.
Using tariffprotection,the government
has the opportunityto offercompromisesto certaininterestgroups, and in this
can secure the transitionpoliticallytoo.
way the government
Anotherimportantargumentfor the immediateopening of the countryto
foreigntrade is the opportunityto import know-how: unlimitedcontacts with
developed marketeconomiesare very helpfulin findingways to solve the actual
problemsin all spheresof the society. The search forjoint venturepartnersor
directinvestorsis easier. Furthermore,
the foreigntrade openinghas to go hand in
hand withmoretransparencyin externalrelations.This, of course,is veryhelpful
in gettinginto closercontactwiththe internationalfinanceinstitutionssuch as the
InternationalMonetaryFund and the World Bank.
Last but not least, the openingup the post-socialistcountriespermitstheir
citizens to travel to foreigncountries. People can see with their own eyes the
prosperityand the welfareof an open society.This should increasethe acceptance
of the temporaryhardshipsof transitionand contributeto a generalconsensusin
society.

348
DEBATE: MRTON TARDOS
MRTONTARDOS*
The difficulties
oftransformation
In the wakeof the ruinsof communism,
thereare manyobstaclesto the
transformation
to a marketeconomy.The difficulties
in one
can be summarized
statement:
The politicalmanagement
ofthechangewillbe done- and indeedshouldbe
done by a politicalstructure
system.
parliamentary
bya democratic
legitimated
in the shortrunthe taskof transformation
is verypainfulforsociety.
However,
Citizenswhoelectparliaments
do notliketo opt forlongruninterests
or,in other
wordstheydo notliketo voteagainsttheirshortruninterests.To examineand
thereasonsforthisis nota simplematter.In thefollowing
systematize
thoroughly
I shallundertake
to highlight
factors.
onlyfiveofthemoresignificant
1. The collapseofcommunist
ruleendeda regimewhich,manydecadesago,
heldpromises
formany.From1917,andreinforced
from1945-49,itwasa functional
systemin itsownway,and one which,frommanyperspectives,
producedpositive
results.Yet communism
of
wasneither
withtheprofessions
capable,in accordance
the
Marx,to bendtheworldto thepowerofmannorwasit capableofconquering
in thefieldofeconomiccompetition.
capitalistcountries
In spiteofthefactthattheapplicationofcommunism
was characterized
by
a low rateofefficiency,
and
offactorsof production
the insufficient
exploitation
forcitizens'efficient
demands,it provedto be capableofthefollowing:
disregard
- it raisedstandardsofliving,albeitat a lowerlevelthanthatoftheEuropeanand American
standards,
- it ensuredfullemployment,
albeitat thecostofhiddenunemployment,
- overa largeareait createdconditions
ofsociwhich,fromthestandpoint
enableda fairdistribution
ofgoods.Also,despitemanyundeniable
etyin general,
countries
at thelevelofdevelopment
oftheCentral-East
injustices,
Europeanreevenwhen
conditions,
gionwereable to createsomesignificantly
advantageous
in thefreeworld.Thus thesocial-political
comparedwiththoseprevailing
legacy
of the dictatorial
communist
systemalso sets not a smalltask beforethe newly
forming
legitimate
pluraldemocracies.
- i.e. plural
2. The targetedsystemof the post-communist
transformation
its
and
within
it
the
marketeconomy notwithstanding undeniable
democracy,
is
not
ideal
fora social system.It maybe betterthanall
successes,
equipment
but
it
is
still
It has a fewwell-known
negativefeatures
existingones,
imperfect.
at lowerand
whichI shall mention.These are especiallyapparentin countries
middlelevelsofdevelopment;
therefore
it is likelythatsuchnegativeconsequences
*AllianceofFree
Democrats,Hungary

349
could affectthe countriesin the process of the post-communisttransformation.

These are as follows:
- it is not capable of ensuringfullemployment,
- it is not capable of creatingequal conditionsforthe population,and this
inequalitystartsfromchildhood.
- the successesand failuresof the individualand the familyare oftenrandom, and thus theyare not the resultsof efforts(or the omissionof such efforts)
recognizedby society.
3. The newlyformingmarketeconomieswill be most successfulin those societies wherethereis a developed cultureof awarenessand technicalknowledge.
However,the latterpoint,in many aspects, only demonstratesformalresults,and
it is in a state ofquasi-development.This has the unpleasantconsequencethat the
of the sociof the populationare not harmonizedwiththe efficiency
requirements
ety,but withthe assumed hightechnicallevel of the economyand with a cultural
state of citizenswhichhas not yet been reached.
From this it followsthat the citizens,who were already discontentat the
timeof dictatorshipbecause theywerepoorerthan theirneighboursin the market
economies(despitesimilarskillsand training),will be facedwiththe fact,without
the reasonforit, that thereis no opportunityto fulfiltheirwants.
comprehending
This is not onlybecause theforcesthat werein powerutilizedthe factorsofproductionfortheirown use- forexample concentrationon the promotionof the military
- but primarilybecause the capabilityof productionof the economywas
industry
and reallyis weak.
4. Perhaps the most shockingfeatureof the unavoidabledeclineof the standard of livingis the emergingcrisisof the public servicesin the post-communist
featureof communistsociety,as is commonknowledge,
period. The characteristic
of the revenuesof the national budis that it bolstersthe roleof the redistribution
subsidizationof freeor low-priced
The
the
national
has
two
functions:
get.
budget
servicesand the provisionofsupportforselectbranchesofthestate. Both principal
channelsofbudgetaryexpenditurecontributedto the incomeofthe population;the
systemconsideredthese to be guidingsteps towardsthe realizationof communist
exceeded even the usual
redistribution.The scale of the budgetaryredistribution
rates in those welfarestates with the most developed social networks.Under the
effectof extensiveredistribution
the population became accustomedto freeor inand
and
overlookedthe factthat the societal consequence
services,
expensivegoods
in the sustained sectors. It also
of this was a particularlypoor rate of efficiency
led to the oftenseverelycritizedlow level of goods and services- yet it was not by
chance that the populationwas forcedto sufferthe negativeconsequences.
of the communistregimes,the newlydeveloping
Followingthe disintegration
weak regimes(in anyevent,weakergovernments
than formerones) are not capable
of concentrating
on the budgetaryrevenuesnecessaryforthe operationof the system of redistribution
whichhad been functioningfordecades. This is impossible
9*
Acta Oeconomica 44, 1992

350
of the economyis that GDP

partlybecause one consequenceof the transformation
unavoidablydecreases;also, the incomefromtax collectionshrinks.The inevitable
consequenceof the state budget's crisisis the declineor cessationof subsidization
thereis a dramaticdeof the individualbranchesof the economy. Furthermore,
clinein the quantityand qualityof public services. However,these abrupt changes
manifestthemselvesnot only in the inflationary
effectbut also in the appearance
of illegal activitiesand corruptionin the fieldof public services.
to transform
a communisteconomyinto an effi5. Finally,it is also difficult
cientmarketeconomybecause, followingthe collapse of communistrule, an economydominatedby state propertyis no longerviable. The new systemhas to face
a declineup untilthe point whennew institutions(in firstplace, privateproperty)
have notjust been establishedbut have also taken roots. The obstacle to the formationof these institutionsthat satisfythe requirementsof a marketeconomyis
that, with its extremeambitions,socialism eithereradicated all institutionsof a
has
marketeconomyor weakenedthemto such an extentthat theirreconstruction
to beginrightfromthe start. However,privateownershipis not capable of making
quick progress.
Yet the pointis that onlythe growthof the roleof privateownershipcan lead
to the success of a marketeconomy.The effective
controllingmechanismwhichis
based on privateownership,however,came about over a period of decades, even
centuriesin successfulmarketeconomies.The unparalledtask of the rapid creation
ofthismechanismin the post-communist
societies(and the chancesofsuccess with
this cannot be trulypredicted)is whetheror not it can be broughtabout without
a persistentdeclineof economicoutput.
The difficulties
related to this arise fromthe fact that the dominationof
to be createdby a societyin whichtechnicaldevelopment
needs
privateownership
or the generalstate of developmentare on a relativelyhigh level. However,the
operationof the institutionsof the formerlycentrallydirectedeconomiesbecame
impossibledue to the weakeningof the state, and in addition,at the beginningof
the transformation
privateownershipplayed only a marginalrole.
of the
Thus the change in ownershipin connectionwith the transformation
a
of
state
of
the
to
the
be
neither
typical
politicalsystemmay
position
compared
capitalisteconomy,nor to redirectionof ownershipfollowingdenationalizationof
state-ownedindustriesin the capitalistwelfarestates (whichis also referredto as
privatization).Thus we are encounteringnew tasks, unknownup to this point in
the process of the socially acceptable realizationof privatization. This makes it
necessaryto execute the processrapidlyand on a mass scale.
What may also make the change in the systemof propertyrightsmoredifficultis the fact that in the process of the breakdownof the dictatorshipthere
appeared (or therewas a strengthening
off)so-called "second" normsof behaviour,
whichexhibitedthemselvesamongst entrepreneursin the private economy(e.g.
avoidance of the paymentof tax returnsand social security,the receiptof stolen

351
DEBATE:MRTONTARDOS
goodsas a methodoftradeon a widescale,etc.). This behaviournotonlyretards

thesuccessful
ofa marketeconomy,
but also producesa greatdeal of
functioning
in widecirclesofsocietytowardsthefuture
middleclassesand thetruly
antipathy
oftheneworder.
thefoundation
wealthy
people,whoaresupposedto constitute
Whatis to be done?
The mostimportant
thingto be recognizedis that, althoughthe abovementioned
in other
5 features
ofpost-communist
societycouldalso be discovered
socialand historical
taskof
this
the
within
the
collection
of
and
situations,
tasks,
stillcreatesa uniquesituation.This meansthatthe
rapidand massprivatization,
valueofexperiences
relevant
gainedinotherpartsoftheworldcanonlybe partially
and
then
after
examination.
here,
only
verythorough
of
1. The solutionoftransformation
The structure
is relatedto privatization.
weakened
inherited
the
from
be
the
cannot
ownership
previousregime
managedby
pluraliststate. The latternaturally
rejectstheideologyofcentralplanning.The
ofefficiency
ownerswhoareconcannotbe accomplished
withoutproperty
growth
sciousoftheirowninterests
and whoare capableofrealizingthem.The citizens,
eveniftheyhaveoptedfora capitalistmarketeconomy,
do notlikeprivatization.
Thismeansthatthenewgovernment
has thetasknotonlyofprivatizing
efficiently
butalso ofconvincing
to
people exceptprivatization.
2. It mustbe madeclearwhois to be thenewowner,and thismeansthat
one seriouscontradiction
mustbe overcome;namely,thatin orderto avoidthe
former
and a rapideconomicdeclinefollowing
regime'ssystemofnationalization
thechangeinthegovernmental
to show
therehas to be consciousclarification
form,
howit is beingcarriedoutand bywhom.This
societyas a wholeforwhosebenefit
is in spiteofthe pureideologyof markets,
and trusts
whichprefers
spontaneity
onlyin spontaneity.
strategy,
Onlythe state,witha well-designed
management
is capableofliquidating
at a rapidpace. My
thedomination
ofstateownership
thesissupportsa well-regulated
whichcan
withmanyprivatefirms,
privatization
lead
to
.
with
of
connection
In
this,it is
eventually
"privatization privatization"
to openup thepossibilities
ofdomesticprivatesavforthemobilization
necessary
in the processof
ingsand to encouragethe influxof foreign
capital. Moreover,
it is indisputable
thatit is necessary
to clearthewayforownership
privatization
controlled
andmanagers(theso-called"manager
bycompany
employees
buy-out").
The vouchersystemhas to be workedout forcitizensand groupsof citizens,for
and non-profit
etc.
municipal
foundations,
governments,
organizations
3. Budgetary
mustbe reduced.It is notonlythebudgetofthe
expenditures
stateadministration
and thesubsidization
ofindustry
thatmustbe reduced,butit
is also necessary
to effectively
limitotherareasofsubsidization
(health,education
spiritand which
etc). A tax systemis neededwhichdoesnotlessenentrepreneurial

352
DEBATE: DM TRK
societyis able to except voluntarily;yet at the same time it must limitbudgetary

expenditures.
It is preciselyfor this reason that municipal,cultural,social securityand
healthinstitutions
mustbe involvedin privatization.This is notonlybecause in this
way it is possible to create manynew legitimateownerswithoutmajor resistance
to
offered
by the society,but also because in thisway,togetherwithtax preferences
public investors,it will be possible to overcomethe crisisof public servicesrelated
to reducedbudgetaryexpenditures.
4. Strongmonetaryand marketbuildingpolicies must be pursued,whichin
turnensurecontroloverinflationand the evolutionof competitionamongbusiness
agents. Liberalization,demonopolization,and marketand bankingregulationcan
economicgrowth.
bringabout profit-orientated
5. Until the point is reached which makes it possible to constructa comprehensivenetworkof social servicescapable of coveringthe entiresociety,some
protectionmust be provided. For the middle classes protectionmust be provided
against individual governmentmeasures, and positive help has to be offeredto
the strata of the newlypoor, who will sufferserious losses in the process of the
transformation.
Budapest, June 16, 1992.
DM TRK*
societiesin general,my
Althoughthe questionrefersto the post-communist
answerwillcoveronlythe Hungariancase- sinceit is theonlyone I knowin depthand eventhat in onlysome ofits aspects. Withoutaspiringto completeness,I shall
deal witheightpoints,each treatinga particularproblemand, wherefeasible,I shall
also put forwarda proposalforsolution.
1. The governmentis justly criticizedfor its wrongselectionof economic
forslow privatization,and forthe maintenanceof centralinfluence
policypriorities,
in severalfields.At the same time,it is quite obvious that the government'sscope
formovementin the fieldof economicpolicy is ratherlimited(in a fewinstances,
of course,this is because the legal frameworkforenlargingthat scope is missing
due to the mistakesof the government:for example, their delay in presenting
the bill for the budget, and the resultingbudget crisis). More importantthan
levellingcriticismat the economicpolicy instrumentsand targetsin generalis, in
*ResearchInstituteofIndustrialEconomicsofthe
HungarianAcademyofSciences,Budapest
Obstaclesand Prospects"
"HungarianEconomicTransformation:

353
DEBATE: DM TRK
my opinion,to point out that economicpolicy itselfis in fact not a firstpriority

forthe government.
This is manifestnot only in the distributionof the acts passed, and in the
as it is seen in the mass media, but in
strongly"politicalprofile"of the government
the institutional-organizational
as well. One peculiarity
systemof decision-making
is that an "economicCabinet" is workingon its own: that is to say, the larger
sectionof the governmentplays only a limitedrole in economicdecision-making.
The otherpeculiarity:the Prime Minister,whose main interestsobviouslylie in
fieldsfaraway fromeconomicpolicy,is not followedin the government'shierarchy
by any clearlyoutstandingeconomicpolicyleader. The Ministerof Finance is head
of the economicCabinet, but in his persononly one aspect of the economicpolicy
stands out as against the otherones. As it is, the sectoralinterests,or the sectors
havingdifferent
weightsin the governmentcannot be integrated,nor is thereany
that
the
head of the economicCabinet will represent,as a quasi-equal
guarantee
partnerof the Prime Minister,economicpolicy interests,as against,forexample,
partyor domesticpolicyinterests.
2. Governmentpropaganda and the economic press too, like to dwell on
the abundant inflowof foreignworkingcapital and, thoughwith less unanimity,
on the resultsof privatization.Facts are not to be contestedbut, the seemingly
favourableimage notwithstanding,
I think that private capital- especially Hungarian privatecapital has not yet gained strongand lasting enough confidence
in the country'seconomictransformation.The population's savings have largely
remainedimmobile,turningonly slightlytowardsprivatizationor the foundation
ofprivateenterprises,
and theyare not presenton the instititutional
capital market
to a sufficient
either.
extent,
To win the confidenceof private capital and especially of small investors,
ambiguousadvantagesofferedbut often withdrawnin a few years' time are not
suitable. Such indicationsof economicpolicy are needed whichcan provethe government'spreferenceof capital incomes as against other kinds of incomes. Such
indicationcould be the source tax levied on incomesof interestpayments,or the
abolitionof the income tax on the incrementof prices of securities(in any case
difficult
to collect and to check). At present,the overwhelming
part of the population's capital stock may be consideredquasi-frozenin foreigncurrencyaccounts
and forintsavingsdeposits. In addition,it is totallyimmobilein that part of the
housingstock whichcame into existencewith a view to saving in the chronically
overheatedboom of the real estate market;the latterwas fedby cheap credits,but
the capital is now incapable of flowingout fromthere,because of the crisisof the
housingmarket.
To encourageinvestment,
a government
programmeis needed,without,howthe
intermittent
character
a
of
ever,
campaign. It should exempt fromtaxation
the widestpossiblesphereof capital incomesand beside these,that part of earned
incomeswhich are deposited fora long term (at least three years) with banking

354
DEBATE: DM TRK
houses.It wouldfurther
be usefulto supportsavingsforpensionsand lifeinsurancebygranting
now.
tax reliefs,
to a muchhigherextentthantheyaresupported
in
tax reliefsshouldencouragethepopulation'sparticipation
Finally,substantial
nationaland localinfrastructural
investments.
3. To all appearances,the implementation
of the above proposalswould
overburden
the budget,whichis alreadyin a precarious
position.A programme
thatencourages
can of coursebe introduced
onlyifthe
savingsand investments
shouldat
of publicfinancesis put intoeffect.The government
longdue reform
lasttreatthisas a taskoftheutmosturgency.
has already
A neartotalconsensus
beenreachedon theprinciples
ofthebudgetreform.
however,
halfway
Obviously,
theelectioncycle,thegovernment
willcarefully
through
weigheverymeasurethat
wouldsurely
maylowerits popularity
index,and a comprehensive
budgetreform
do so in theshortrun. It is notonlytheprospects(possibleincomesources)and
liabilities(financialburdensthat willhave to be borne)of the budgetthat the
reform
is to newlyand precisely
in case
regulate,but also theirpossibletendency
ofa changein themarket.
Forexample,witha lowering
whiledemand
ofoutputthetaxbaseis shrinking
forsubsidies
ofrising
fromthebudgetis rising.Thisis because,amongotherthings,
in the
In
the
case
cause
of
an
what
difficulty
unemployment.
may
upwardtrend,
ofthe
is
that
the
the
demand
for
fall
at
a
slower
rate
than
subsidies
system
growth
tax base. That is to say,thedemandsforsubsidiesdisappearfromthesystemat a
slowerratethannewsourcesare accumulated
ofsuchdemands.
forthefulfilment
a
to
found
whichgradesthe
form
of
has
be
Therefore,
budgetregulation
variousproposalsofconcerning
and expendithechangein thepatternofresources
comesand it
tures.In a systemwhichhas a dynamicapproach,if- say- recession
is notpossibleto reduceexpenditures,
or incometaxesthat
it willnotbe company
are raised,but the tax itemsof accumulatedunproductive
assetsand of current
consumption.
4. Noteventhepassingofa suitablebudgetact willbringabouta solutionif
theprevailing
is basicallywrong,and for
systemoftaxationremains.Its structure
and
severalreasons:first,disadvantageous
the
variousincentives,
of
proportions
the
the
need
for
control
that
is
into
second, high
system.
"integrated*'
Households
to increasetheirincomesand savingsas
oughtto be encouraged
should
wellas theirinvestments,
on current
whiletheirexpenditures
consumption
income
tax
more
if
the
to
that
effect
Taxation
would
work
grow
slowly.
personal
less
and
revenues.
turnover
tax
more
in
weighed
Sucha changewouldalso reducethecostsofcontrolofthetaxationsystem,
turnover
tax payments
beingeasierto controlthanpersonalincometax returns.
The disadvantageous
roleofthesourcetaxhas alreadybeenmentioned.
orientation
The introduction
to be considered.Such
of a kindof property
tax is, however,
a measuremay not be successful
but
it
politically,
maywell promotea model
ofgrowing
of unproductive
richerthrough
investments
ratherthanaccumulation

355
DEBATE: DM TRK
property
expensivehousing,a car, or a holiday
(such as oversizeor excessively
house). In a numberof advancedindustrialcountries(forexample,the U.S.),
tax is applied.However,
levied.
thisshouldnotbe centrally
property
Withor withouta property
tax, the important
thingis to raisethe rateof
localtaxesas againstcentral(national)onesin thetax burdensofthepopulation.
andtheir
thepopulation
localtaxes,theirlevying
canmoredirectly
control
Namely,
use,and can betterexpresstheiropinionat elections(at nationalor parliamentary
whileat local government
elections,votesare cast forpartiesand programmes,
electionsforindividuals
. For thispurpose,of course,
of personalacquaintances)
On
thetaxadministration
decentralized.
and considerably
oughtto be reorganized
theotherhand,thestressing
in thetaxationsystemmaywell
ofthelocalelements
of tax
contribute
to growing
confidence
in the system,and to the improvement
morale.
oftherevenueside ofthe budgetmaybe extendedso as to
5. The reform
the
Atpresent,
oftheprivatization
privatization
priorities
change existing
strategy.
ofthestate-owned
incomethatthe
sectoris carriedon witha viewto thecurrent
can gainfromit. On theotherhand,state-owned
are,for
enterprises
government
are
that
themostpartoflowtax-(and dividend-)
it
is
these
being
payingcapacity;
transformed
intoprivately
in thehopethata changeofowners
ownedcompanies,
alonewillconsiderably
theirincomegenerating
capacityand,consequently,
improve
theirtax payingcapacity.This is a mereillusionas regardsa largenumberof
industrial
sincethechangeofownersis usuallyfollowed
by
Hungarian
companies,
in
substantial
raise
and
rationalization, reorganized
companiesrarely
good profits
theirinitialperiod.
thenewand largeprivately
ownedsectorin Hungary
Therefore,
oughtto be
old
established
than
new
rather
by creating capacities
by reorganizing ones. The
of
the
of
the
sphereoughtto
improvement
productive
capacity
income-producing
beside
their
on
the
new
rely,
supportshouldnot
privatization,
privatecompanies:
be a strategic
from
Even
of
this,thegovernapart
priority secondary
importance.
ment'spresenttreatment
seemsinadequatesince,becauseof
ofthe privatization
thelongdrawn-out
process,thebureaucracy
livingbyit maystrikerootsand grow
intoan independent
factorofinterests.Withsomeof the state-owned
property,
It maynotbe
slownessoftheprocessinvolves
theproperty.
theriskofconsuming
an overradical
delimitthescopeoftheAVU (State Property
proposalto strongly
ofa
and
to
reduce
itssize,parallelwiththeimplementation
considerably
Agency)
fastandoverallprivatization
of
number
on
a
professionals.
programme
relying large
6. The effects
of the lastingcrisisof economicgrowthcan clearlybe seen
fora processthatwilllead to
in searching
today. Prudenceis needed,however,
on
an emergence
fromthecrisis.Attempts
at stirring
up theeconomyby relying
the
that
the
risk
from
the
create
productive
sectors,right
government
beginning
ratherthanthe
willselectsuchsectorswhichholdout prospectsfortheemployed

356
DEBATE: DM TRK
investors.In otherwords,it will select sectorsin whichfastabsorptionof labour is

expected,withfarless prospectsof reasonable profits.
In the stirring-upprocess, the state's role should be confinedto launching
suchinvestment
actions- notsectorallyselected- whichcontributeto development,
and of certain
throughprivate capital, of the national and local infrastructure,
regions.In such cases it is inevitable,ofcourse,that certainregionalor professional
lobbieswillget a rolein planningand implementing
the actions. The economymay,
however,profitmorefromthis than fromthe earlierstrongpositionsof the energy,
agrarian,or metallurgicallobbies.
7. In Hungary,a new industrialpolicyhas stillnot been formed.The government'sefforts
should not to be blamed entirelyforthisstate of affairs.In any case
theirefforts
shouldbe directedonlyat layingdownthe rulesof game forstructural
development;in otherwords,they should providea set of means, but in no way
should they devise objectives dealing with specificsectors. It is veryimportant
to reveal the foreigneconomic aspects of industrialpolicy. Overstressedexport
incentivesare hardlynecessary;neverthelessthe governmentshould take a stand
in the question,indicatingto what extentit will toleratethe disturbanceofforeign
influenceon the domesticmarket,giventhe existinghighlyliberal importregime.
In establishingthe minimumof a necessaryindustryand marketprotecting
system,the traps of protectionismshould be avoided. This could be the first
area ofeconomicdecision-making
would relyon a regular
in whichthe government
and extensivereconciliationof interests.The forumforsuch reconciliationcould
basic
have threeor fivesides: government,
producers,consumers,or: government,
materialproducers,finishedproductmanufacturers,
traders,consumers.
8. The presentmonetarypolicyhas been widelycriticizedforbeingrestrictive
and it is held by manyto be the primarycause of the crisisofgrowth.Deregulation
may,however,entailveryseriousrisksof destabilizationin an economywhere"soft
money"is still flowingto manyeconomicunits and, the generallybad social welfaresituationnotwithstanding,
not a small part of householdincomesstill accrues
fromworkwhichhardlyrepresentsgenuineperformance.Softeningthe constraints
placed on the earningof incomesmay increasethe suctioneffectof demand. This
will not enable the supply of capital available to investorsto grow,but will either
raise consumergoods imports,or elicit anothersudden growthof demand on the
housingmarket,at an acceleratedrate of inflation.
The slowingdownof inflationmust continueto be treatedas a firstpriority;
however,theproportionsoftheinstruments
appliedmustbe changed. The incentive
that ought to be given to investmentpropensityby fiscalmeans is to be stressed
at this point again. At the same time, the role of the rate of exchangepolicy as
an instrumentin the fightagainst inflationmust be reconsidered.The policy of
real revaluationcan be justifiedas long as the inflowof foreigndirectinvestment
is strong,and the pressureon producersto supply is primarilydirectedtowards
exportmarkets,due to the limiteddemand on the domesticmarket.

357
DEBATE: LSZL URBAN
sectorsreal
it has to be remembered
thatfornon-competitive
Nevertheless,
revaluation
sincethepricesoftheirimported
providesan everwidening
umbrella,
inputswillrisemoreslowlythanthe domesticconsumer
(wholesale)priceindex.
Thus,without
competition,
theycanraisetheirpricesat leasttothelevelofthedomesticconsumer
may
pressure
(wholesale)priceindex.That is to say,inflationary
theentire
startin thenon-competitive
sectorsand thismayin theendundermine
antiinflationary
especiallywhenconsiderpolicy.Thisproblemdeservesattention,
sector(domestic
outlinedabove: ifthenon-competitive
ingtherevivalpossibilities
becomes
a
first
publictransport,
priority
telecommunications,
targetofthe
ets.)
domestic
flowofcapital,itsimportdemandmayrisefasterthantheaverage,while
thegrowth
witha specificfallof
ofitssupplywillnotnecessarily
be concomitant
supplypricesfollowing
capacityincreases.
LSZL URBAN*
1. What do you regardas the main barriersof the transitionto a market

countries?
economyin the post-communist
I wishto beginbystatingmyopinionthatit is theinternal

qualitiesofeach
thatdetermine
theobstacles.Externalconditions
country
are,in the mainvery
favourable
bothpolitically
and ideologically,
sincetheexternalimpulsesthataffect
thesecountries
ofa market
areinvariably
onesthatworktowardsthedevelopment
and a generalshortage
Someanalystscitetheworldeconomicdepression
economy.
ofcapitalas externaldifficulties.
thesedo notrepresent
In myopinion,however,
therealobstacle.
exist
differences
to theinternal
it can be seenthatsignificant
factors,
Turning
between
thepost-communist
countries
andthesemustbe stressed.I seethedecisive
eachcountry's
difference
havedeveloped
through
lyinginthewayculturalattitudes
as forming
Firstofall,weshouldmention
to individualism
thesusceptibility
history.
thebasisofa market
inasmuch
collectivist
Its
is
the
attitude,
economy. counterpole
as it putsin theshadethelogicofcompetition.
selectsbyindividual
Competition
and is the predominant
of economicactivities.
performance,
principle
organizing
and
I do not contendthatthe ambitionof competitive
individualperformance,
a collectivist
are in antagonistic
attitudethatis sensitiveto social communities
contradiction.
In real lifetheyco-existin everysociety,and that includesthe
countries
ofthisregion.I do contend,
in whichthe
thatin thecountries
however,
tiesand conflicts
politicalsceneis dominated
byethnicand religious
(in somecases
AllianceofYoungDemocrats,Hungary

358
DEBATE: LSZL URBAN
extreme
as bad as civilwar),thedevelopment
willencounter
ofa marketeconomy
difficulties.
In connection
factorinthesocialsystem
withtheabovea somewhat
different
in
ofconditions
is presented
frompoliticsand politicians
bypeople'sexpectations
thatthegovThe greaterthe conviction
copingwiththeireconomicdifficulties.
or thatthey
ernment
or otherpoliticians
fortheeconomictroubles,
areresponsible
aloneshouldprovidesolutions(thusimplying
the needforpoliticalstruggleand
suchas demonstrations
and strikes),thelessthechanceforthedeveloppressure
solutions
mentofa working
market
The morepeopletrytofindindividual
economy.
to thedifficulties
thebetterthechances.
ofmakinga living,
ofthe
The above-mentioned
socialattitudesare,ofcourse,notindependent
initialeconomiccapacitystandardsof the countries
of thisregion,sincesomeof
themsuffer
fromseriousshortages
in primary
energiesand foods.Low standards
of initialeconomiccapacity
mayalonerenderthesituationhopeless,and in such
ofa
a situationtheindividualinitiative
forthedevelopment
thatis indispensable
marketeconomywillsurelynot appear. Anotherimportant
factoris the macroeconomic
to establishtheinstituoftheeconomy,
forit is impossible
stabilization
with
in a situationfraught
tionalframework
ofa well-functioning
marketeconomy
deficit.
trade
an
and
inflation,
foreign
graveshortages,
unmanageable
galloping
thefactors
above,thenextpointthathas to be considered
Havingmentioned
is theroleoftheinstitutional
It has to be established
political
through
framework.
needs
and wayoffunctioning
decisionsand withcentralresources,
and its profile
to be adjustedto thesocialenvironment
in whichit has to operate.A successful
is notpossible.
oftheinstitutions
ofadvancedmarketeconomies
importation
Had thisinquiry
as
covereda narrower
such
only,I wouldhave
field,
Hungary
is
Thisis becauseHungary
discussedtheconditions
oftheinstitutional
framework.
conditions
and
the
the
social
the
in
which
of
political
practically onlycountry
region
havebrought
worthanalysing.
aboutan institutional
framework
process?
above cannot,or can
My opinionis that the social conditionsmentioned
I see thesituation
Therefore
be
onlyveryslowly, changedthrough
anytechniques.
ofsomeof thecountries
in the regionas beingquitehopelesswithregardto the
thisquestion,I
of a competitive
marketeconomy.Thus in answering
emergence
a
fordeveloping
shallfocuson Hungarysincethereit seemsthatthe conditions
marketeconomy
are in place.
- namely,
thatspeed
I disagreewiththeimplicitassumption
ofthequestion
ofthe
is themostimportant
The intensity
transformation.
criterion
ofa successful

359
DEBATE: JZSEF VERESS
process,and the degreeto whichadjustmentis made to the new rulesof the game
seem more importantto me. What mattersis not how soon the majorityof the
state-ownedenterprisesand theirpropertypass intothe hands of privateownersin
the legal sence, but: what kind of corporategovernancestructureevolveson that
level. Also relevantis the selectionprocess the economic actors will adopt, and
what progresscan be made in restructuring.
"Fast" privatizationtechniqueshave shownthat theymake no changeeither
in the efficiency
of controlover managers,or in the companies' liquidityposition,
or in theirchancesof acquiringcapital; thus theyare not reallysteps forward.
In the presentHungariansituation the crucial point forme is whetherthe
governmentwill have enough political patience and determinationto cope with
the bankruptcy
and liquidationwave,sort out the economicactors,and by its own
- it
means help to acceleratethe process. If not- if it yields to political pressure
willuse its resourcesto save certaincompaniesand to restrainthe selectionprocess.
will lack intensity.The liquidationwave
Thus, fromthe start the transformation
mustbe allowedto makeits sweepbecause thisis a factorofdecisiveimportancefor
forthe restorationof disciplinewithrespectto payments,
companyrestructuring,
and forthe breakingof the still existingand harmfulbargainingpositionof a few
large companiesand lobbies. Governmentaction foreconomicrevivalwhichstarts
out prematurelymay preventthe necessaryselection,whichin turnmay prevent
the emergenceof a marketeconomybased on geniunecompetition.
can promotethe
It is quite easy to name the fieldsin whichthe government
of
its
with
concrete
actions
aims
development
supposed
(forexample, infrastructural construction,or assistingthe growthof the numberof marketactors with
creditguaranteefundsto help small enterprisesto receivecredits). Nevertheless,
I do not thinkthat the governmentcan best help the economic transformation
simplyby its own actions. What it must do is create favourableconditionsfor
the economicactors to adjust themselvesto the rules of game of a marketeconomy based on competition.The two most importantconditionswhichare in the
and a stable
competencemay be a stable systemof legal regulations,
government's
destabilize.
at
the
should
not
deliberately
currency these, least,
government
JZSEF VERESS*
1. At theriskofsimplification,
by treatingthe advancedmarketeconomyand
of the formersocialist
the modernmixed economysynonymous,the governments
difficult
countriesin CentralEastern Europe are tryingto solve an extraordinarily
*
ofEconomics,Budapest
University
Acta Oeconmica44t 1992

360
task. Standingon the ruinsof a systemthat has collapsed both socially and economically,theyhave to develop a strategywhichcan lead to moderncapitalism.
The problemis not simple even froma psychologicalaspect. Namely,it must be
made clear to the citizensthat the desireslinkedto a rapid ascent of the economy
and societyare illusions.Of course,all this has to be presentedin such a way that
it avoids replacinginitialenthusiasmwith permanentapathy.
It shouldbe obviousthat the firstobstacleis a historicallyinheritedeconomic
- a reallyposand social backwardness.The secondone is- beyondthe declarations
itiveintentionto attain a marketeconomy.The pictureimmediatelygrowsvaried
and multicoloured.Afterthe two obstacles, and takinginto account the political,
moreoverwarlikerealitiesin the firstpart of 1992, the Czech and Slovak Republic,
Poland, Sloveniaand Hungaryconstitutethe groupforwhichotherobstaclesseem
to be less problematic. The futureCzech Republic will have even more chances.
The generaltrendsofeconomicpolicyin the cases of Albania, Bulgaria and Romania are, forthe timebeing,not clear enough. The Baltic republicsare makinghuge
efforts
at maintainingthe viabilityof theirnational economies,thoughthe former
- seen throughtoday's eyes- are provingto be very
Soviet internalconnections
strongand oftenhard to replace. The membersof the Commonwealthof Independent States (FIS) as well as the othersuccessorstates of the Soviet Union are also
strugglingwithseriousinternalpolitical and economiccrises. It is not impossible
that the shock-therapy
in Russia will resultin muchgravercircumstancesthan it
has in Poland. In the area of formerYugoslavia- withthe exceptionof Sloveniathe situationis practicallyimpossibleto survey. The formerGDR cannot be, of
course,the subject of our analysis.
Settingout fromthe state of affairsin 1992, it has to be mentionedhere,
even ifthisis not correctfromthe didactical pointof view,that withinthe former
European socialist regionthe growingnumberof independentcountrieshas had
the effectof reducingthe importanceof the particularcountriesin the eyes of
the developed world. Hence, there is no other way than to become increasingly
attractiveforthe potentialinvestorsand those ready to grantfinancialaid. This,
in turn,means that the thinkingbehindthe choseneconomicpolicyhas to relyon:
- the generalinterdependencesof transition,whichhave only recentlybeto
gun crystallize
- the regularitiesof the marketeconomicsystemthat servesas our model;
- theparametersofthegiveneconomicmanagementbasis (this meansthere
- a so-callednational way) and
is no- or at least means not underany conditions
- the economicpolicy measuresof the government,
in order to secure attractiveness.
The problemswhichlogicallyfollowfromthese points can be derivedfrom
of the
the misinterpretations
and fromthe "wildings"of the everydayfunctioning
common
the
and
freedom
Namely,
democracy.
newly-introduced
politicalpluralism,
characteristics
of these countriesare the following:
Acta Oeconmica44t 1992

361
- the economiesin question are crisiseconomies;

- the weak inclinationforperformance-orientation
and adaptation;
- politicaloverheating,whichis harmfulto the operationof the economy.
- some kindof unityand a highdegreeof
In a criticalsituation- in principle
elasticityoughtto be an especiallyhigh priority.Paradoxically,in this regionthis
is not easy to attain.
If we disregardall theseproblems,we have to startdealingwiththe economic
realitiesof a marketeconomy.
have to be developed whichenFirst of all, economicand legal frameworks
is
sure the operationof a real market-pricesystem. Developingsuch frameworks
the
in
mentioned
circumstances
ratherdifficult
the
characteristic
because
of
partly
foregoing.On the other hand, it is very difficultto determineand agree on the
of
and consistently
help implementation
logicalorderwhichwould mosteffectively
the goal. The core of this sphereof problemsis privatization.Withoutthe overwhelmingdominanceof privateownership,or of ownershipwhichcan be directly
and unanimouslytracedback to privateownership,we cannotspeak about a market economy.It has to be immediatelydeclared that competitionmust be a very
strong,relevantfactorforthe actorsof the economy it is at least as importantas
privateownershipitself.In the economiesin questioncompetitionis farfrombeing
an internal,immanentfeatureof the participantsof the economy.
The ideas about privatizationare varied. In additionto two quasi-gratuitous
solutions(Czech and Slovak Republic, Poland), in Hungarythe arsenal of privatization techniquesis, fortunately,
ever growing;however,with regardto the State
the
and
state, bureaucracyhas still not been reducedto a miniPropertyAgency
mum. It is verydifficult
to strikea balance (not at all sure to exist) whichcan be
achievedbetweenthe desirablepace of privatization(the fastestpossible one) and
the greatestpossibleproportionof genuineand not artificialproprietors.
The redistribution
and allocation functionsof economic policy are complicated by a specificproblem. In the countriesin question,besides applyingthe in- withinthe mediumof non-improving
heritedmethods,it is necessary
budgetary
to
a
new
one
too. This should containat least threeelements:
positions
develop
the reformof public finances,measuresconcerningforeigntrade and development
to be taken in conformity
with the marketby the governmentthat is now under
and
Parliamentarycontrol,
finally,placing the role of moneyfromthe aspects of
economicpolicy- into a centralposition.
Finally,in most of the countriesconcernedan economicpolicy aimed at stabilizationis also needed. This may take variousforms,fromgradualismthrough
solution
to theso-called'big-bang'. Obviously,withouta satisfactory
shock-therapy
of the innumerableproblems,modernizationis impossible.
2. Whateverthe techniqueor means to be implemented,these can only be
builton an economicpolicybased on political compromisesand on a policywhich
reflectsconsensusand also containsa logical orderforeach of the measures. A no

362
less importantconditionis a highdegreeof tolerancefromthe population. This is,

of course,difficult
to interpretfroman economicpointof view,yetthe lack ofsuch
tolerancemay renderunfeasibleeven the most promisingeconomicpolicy.
It is veryimportantto face the significantfact that none of the countries
will be able to solve theirimmenseproblemsfromtheirown resources. Thus, it
is clear that the advanced worldcan, individuallyor collectivelyupset the chances
of realizinga modern mixed economyin Central East Europe. The amount of
- that the governments,
minimumaid in venturecapital- or in any other form
banks or enterprisesof the advanced countriesare ready to grant is, of course,
another question, particularlywith regard to the attractivenessof this type of
assistancefromtheirpointof view. A necessaryconditionforsuch readinessis the
existenceof a definite,clear and consistenteconomicpolitical programmeon the
part of each CentralEast European country.
It is necessaryto speak separatelyabout the acceleratingfactors,giventhe
natureof the constrainsi.e. the seriousnessof the situation,especiallyconsidering
the problemsassociated withstrictmonetaryrestrictionand shock-therapy.Here
one has to pay attentionto two dangers which are very serious whethertaken
togetheror individually:
- the trade-offbetween the- temporary
- success of forcedmeasures and
economicrecession(in the backgroundofwhichthe veryslow changeofthe obsolete
economicstructureis a loomingburden);
- the extremesofboth overdosingor too low doses maybe equally harmful:
the former,by givingin under the pressureof the population,may turn into its
opposite,
- and the latterwill certainlybe unable to repressinflation.
Behind or ratherbeside both dangers it is necessaryto reckonwith one of
the classic South Americansyndromes:stabilizationmay be successful,but the
strengthformodernizationbecomes exhausted.
Paradoxically,the pace of the transformation
process can be definedby the
economicpoliticalmixtureof prudenceand determination,
especiallyin the following spheres:
- treatmentin parallel, and with equal importance,of privatizationand
competition,the avoidance of artificialsolutions,and the unequivocalityand stabilityovertimeof social and legal frameworks;
- the radicalreformation
ofthestate's directand indirectrole- withregard
to the budget, and drastic reformsof the public financesand the so-called large
distributionsystems(with special attentionbeing givento social insurance);
- rapid developmentof tradingrelationswiththe world,but withrealistic
expectationswith regard to the possibilitiesof the domestic participantsof the
economy;domesticassertionof internationalstandards;
- special preference
withthe aid
forthe developmentof the infrastructure,
of foreigncapital and know-how,and linkedwiththe reductionof unemployment;

363
DEBATE: HANS-JRGENWAGENER
forthe sake of increasingthe job-creatingabilityof small- and mediumsize privateundertakings,tax burdens should be lessened, parallel with making
taxationopen and controllable;
- attentionmust focus on the macro-levelregulationof the quantityof
money,throughconcentrationon and/or buildingup of the intellectualand technical infrastructure;
- makingthe economicand servicestructuremoreversatileand rebuilding
it in a portfolio-like
manner,withspecial respectto the variousregionsof the world
market;
- elaborationof a time-table
(time schedule) whichcan be followedup and
controlledby publicopinion;also, consistentimplementation
ofit in orderto winalbeit gradually public confidence.
HANS-JRGEN WAGENER*
or
Over the last three years a lot has been writtenon the transformation
the transitionfromthe planned to a marketorderof the economy. The question
whichelementsand institutionsare necessaryin orderto have a workable
concerning
marketeconomycan be consideredas settled. Importantare:
- people who are preparedand
willingto act on theirown account;
- well defineddecentralizedproperty
rightswith a leading, albeit not exrole
for
clusive,
privateproperty;
- a judicial order which
guaranteesfreedomof contractand well defined
rules
is
the
liability
juridical counterpartto well definedpropertyrights);
(which
- a well
administrationwhichprovidespublic goods, accounts
functioning
forexternalities,and is financedby a rationaltax system;
- a stable systemof moneyand
banking;
- a social securitysystem.
Professionaleconomistsare less unanimousabout the process of transition,
the problemof sequencing,the speed of transition,and appropriatepolicies for
liberalizationand privatization.On theone hand thismayreflectthe preoccupation
of economicswith equilibriaand comparativestatics ratherthan with dynamics.
On theotherhand it maybe due to the factthat the process,otherthan the general
- and thesediffer
fromcountry
objective,is dependentupon the startingconditions
to country.
It has soon become quite clear that the process of transitionis neitherinstantaneousnor is it determinedwhollyby the desiredfinalstate. Certain shock
vereitelt
*Rijksuni
Groningen
"The LegacyofthePast and the Uncertainty
about the Future"
10

364
therapiesseem to be inspiredby the idea that a marketeconomycan be negatively

defined:abolish all restrictions,regulations,interventions
and a well functioning
marketwill be the spontaneousresult. This is certainlynot the case. Where it
workswithreasonablesuccess the marketeconomyis a verycomplexsystemwhich
has evolvedfromthe interactionof social, economic,and politicalforces. That is
to say, it is the result of deliberatepolitical bargainingand decisions that have
structuredthe framework
ofeconomicactivity,and it is at the same timethe result
of the behaviouraladaptationsof economicactors,and the latteralso includesthe
fine-tuning
(or degeneration)of the institutionalframework.
A marketeconomycan be characterizedas a decentralizeddecision-making
structurewhichgeneratesby spontaneousinteractionprocessesinvolvingthe developmentand orderingof economic activity. These processes are self-sustained.
We know,of course,that it does not workwithoutbumps and crashes; thus the
state, along with its constitutionaland administrativerole, has subsidiarytasks
of regulatingthe interactionand repairingits failures.Havingsaid this,it can be
stated that the transformation
ofthisdecentralized
is about the institutionalization
or a
structureand the task of gettingit past a point of take-off
decision-making
point of no returnin order to start the self-sustainedprocess of developmentof
welfareproductionand furtherinstitutionalselectionat the same time.
There are two major sourcesof barriersto this transitionand to the take-off:
the legacyof the past and the uncertaintyabout the future.Once it is recognized
- and this impliestwo things,firstthat it
that transformation
is path-dependent
heavilydependsupon thestartingconditionsand secondlythatdecisionsnowtaken
reducethe choiceset in futuretimesand hencebar possibleefficient
solutions- the
identification
of the legacyof the past and the uncertainty
of the futureas barriers
to efficient
and rapid transformation
is moreor less tautological,but this does not
make it less real. As to the former,all which does not conformwith or is not
adapted to the marketorderand whichcannot be changedby the strokeof a pen
has to be enumeratedhere. Importantstructuraland behaviouralpeculiaritiesof
the old systemare:
- The product and capital structureof the economy,which was characterizedby its specificmode of centraladministrationand its (lack of) evaluation
criteriaor implicitprices. Under the regimeof the market-price
mechanisma sizeable share ofproductiveassets would be partiallyor totallydevaluedand takenout
of operationby rationaldecentralizeddecisionmakers. Froma political and social
point of view it cannot carriedout instantaneouslybecause of the accompanying
This problemon the one hand impedesprivatization
highlevelsof unemployment.
and on the otherhand calls in the state to protectthe old structuresin the new
environment
or to administeran orderlyprocessof structuralchange.
- The lack ofan entrepreneurial
"class". (Private) individualinitiativewas
and morallysanctionedunderthe communistsystemas a disturbing
institutionally
anti-socialactivity.Yet the resilienceof the marketsystemreliesheavilyupon it.

365
If Keyneswas rightwhenhe said that "animalspirits"are at work,we neednot

titles
wellfunctioning
marketforownership
worry.Forifthisis truea reasonably
and formanagerial
abilitieswouldbringrathersoon the rightmenand women
to the nodesof the decentralized
structure.If we nevertheless
decision-making
do worry,
it is becausewe thinkthat}nextto animalspirits,culture,values,and
"class".
rolein theemergence
ofan entrepreneurial
techniques
playan important
was
Forinstance,one ofthebasicentrepreneurial
techniques,
accounting, onlyof
the
but
is
under
old
Herrschaflswissen
secondary
importance
system,
indispensable
underthenew.
- The lack of a civilsociety.By thatwe meanabove all the lack of an
therulersaresubjectedand of
objectivesetofrulesto whichall citizensincluding
a reasonably
oftheserules.Despitethe
and
predictable
interpretation application
alsointhe
existence
ofarbitration
courtsundertheold system,
conflicts,
important
and
businesssphere,werearbitrated
withintheparty,and thisimpliedpartijnost*
of civil
a lot ofvoluntarism.
and personalinfrastructure
It is the administrative
normswhichare lackingrightnow. The market
societyratherthanappropriate
of
freedom
contractand welldefinedliability,cannotdo
process,relyingupon
withoutit. The Weberianideal-type
thestateofsucha
of Beamteimpersonates
to
civilsociety,
administrative
and
uncertainty
impartiality reducing
guaranteeing
a minimum.
- Capitalshortage
andthelackoffinancial
markets.The necessary
process
ofrestructuring
needsan awfullotofcapital.Thiscapitalcouldbe accumulated
by
wayofforcedcentralized
bystateagencies.It is generally
savingand distributed
heldthatsucha solutionwouldbe a wasteof timeand money.The alternative
is theformation
i.e. by decentralized
and distribution
of capitalvia the market,
solution.It
forced
and
an
the
Schumpeterian
independent
saving
bankingsystem
looksas iffinancial
to goodsmarkets.
markets
are neededpriorto thetransition
inwhichwell
Financialmarkets,
aretheresultofa verycomplexevolution
however,
stable
a
defined
and
reasonably
property
liability,
credibility,
expectations
rights,
to
the
conclusion
and
fiscal
boils
down
a
role.
This
monetary
policyplay major
to a
that a wellfunctioning
marketsystemis a precondition
forthe transition
marketsystem.The solutionof the conundrum
is time. And a majorbarrierto
hereof
transition
in thiscase is thedesiredspeedoftheprocess.We are reminded
theargument
forStalin'stransformation
policy1928-30:it was thedesiredspeed
ofindustrialization
whichmadeStalin"necessary"
.
- The lackofcompetition
The firstis due
and thelackofcompetitiveness.
to thehighdegreeofconcentration
the
the
structure
and
of firm
completeabolition
ofmedium
andsmall-sized
and
businesses
on whichtheflexibility innovative
powers
of a marketeconomyare based. I do not thinkthata highdegreeof monopoly
is reallyan immediatebarrierto transformation.
It may laterimpedefurther
freetradecan
and
be
forthemoment
dealt
with.
development accordingly
However,
some
is
constrained
This
bythe
supply
however,
competitive
pressure.
possibility,
10*

366
low competitiveness
of the East European economies.Thereforesome protectionis
necessaryfordomesticindustries.Apart fromthat it also makesnecessarya severe
austeritypolicywhichdepressesreal incomesin orderto be able to pay forurgently
needed importsand to service the debts inheritedfromthe past. This does not
enhancepopular supportforthe new marketsystem.
In sum, we can conclude that the legacy of the past in Eastern Europe is a
whichdoes not lend
system,a structure,and a concomitanteconomicperformance
itselfto a smooth transitionto a marketeconomy. Compare with it the starting
conditionsin West Germanyafterthe war or in Spain afterthe fall of the Francobecome quite apparent.
regimeand the differences
A crucialelementofthemarketsystemcomprisesthepeople whoare prepared
and willingto act on theirown. This presupposesconfidencein the futureand as
little marketand institutionaluncertaintyas possible. If people do not trust in
the success of the transformation
operation or if they are uncertainabout the
futureregulativeframeworkfor profitmaking,they will refrainfromlong-term
engagementsand tryto make a quick profitby speculating.
Confidenceis a ratherirrationalelementin the economicsystem. Once it
effects.Schumpeterian
and self-fulfilling
exists, it will have strongself-enforcing
live on it. A countryin whosesuccess the businesscommunitytrusts
entrepreneurs
will also attractforeigncapital engagements,thus improvingthe chances of this
verysuccess. The problem,of course, is how can confidencebe created or how
can the inborncaution and scepticismof investorsbe overcome.An unambiguous
answerto this questionwas already a lacuna in business cycle theory,wherethe
lowerturningpointshouldhave been explained. It willbe evenmoredifficult
to find
a satisfactoryanswerin the contextof developmentaltake-offafterthe complete
collapse of an old economicorder.
Ifwe look at the post-warsuccessstoriesin WesternEurope and East Asia, we
see thattherewas everywhere
a nationalexertionand effort
towardsreconstruction,
and
in
was
This
effort
industrialization, growth general.
supportedby government
policies:
- different
formsof global, macro-economic,indicativeplanningas in The
Netherlandsand France- and this type of planningshould be discernedfromthe
ratherunsuccessfulstructuralpolicies duringthe 70's, whichare now oftenquoted
disapprovingly;
- industrialization
and recoverydriveslikethe Austrianenergyprogramme
and West German reconstruction
or the Japanese administrativeguidance of industry;
- even a
personalitylike Ludwig Erhardcould not disconfidence-inspiring
with
tax
and
pense
appropriate
exchangerate policies.
Success was greatestwherenational consensusincludedthe workingclass, as
in Scandinavia,The Netherlands,Germany,Austria and Japan. For it made the

367
necessaryausterityacceptable over quite an extendedperiod,at least till the first

halfof the 1960's.
Marketand institutionalcertaintysounds almostlikea contradictionin terms
whenstructuraland institutionalchangeis the mainobjectiveofthetransformation
processin the economicas well as in the politicalsystem.The natural uncertainty
of the future,togetherwith the path-dependencyof the transformation
process,
means that decisionswill have to be adapted to futuresituationsand hence they
willbe moreefficient
the later theyare taken. This createsa dilemmabetweenthe
desireddegreesof stabilityand flexibility.
Shock therapiestend to fixinstitutional
structuresat a veryearlypointin timewhilegradual approachesare moreopen for
adaptations to later situations. The solution to this second conundrumcould be
confidence:the objectiveuncertaintyof the futurecannot be reduced,the subjective uncertaintyabout the futurecan. What is needed is a stable socio-economic
framework
whichleaves roomforinstitutionaladaptations.
If we look once moreat the countriesjust mentioned,it becomesevidentthat
political stabilityand hence long-termcredibilityof policy measures was one of
the outstandingfeaturesoftheirpost-wareconomichistory.The evidencesuggests
that it is the stable state, and not the minimalstate, which creates favourable
conditionsforthe developmentof a self-sustainedmarketprocess. A stable state
is the resultof a nationalconsensusabout objectivesand instruments
of economic
and social policy. The minimumrequirementis clear and lastingpolitical majorities, and they were to be foundin the quoted cases. We mightpoint to a third
transformation
dilemmahere which,althoughit resemblesthe second, should be
crethe
distinguished: dilemmabetweenstabilitycreatingunanimityand flexibility
and
the
indoctrination
Consensus
Gulag certainly
ating pluralism.
supportedby
can be ruledout, as well as thoseformsof pluralismwhichbreakup the coherence
ofsocietyand the state. Some tentativeand historicalsolutionsto this conundrum
were alreadyhintedat: an open societywhichis integratedby a certainnational
identitydrive,social fairness,and commonlyshared confidencein the solvabilityof
economicproblems.
calls for
Stabilityoflaws,rules,and regulationsin a processoftransformation
a kindofshocktherapy,or a moreor less sudden and integralswitchoforderwhich
thenremainsuntouchedin its essence. It is doubtfulwhethersuch a constitutional
switchcan be realized in all the countriesof Eastern Europe. First, it would be
necessaryfortheobjectives,laws,and rulesto be knownand specifiedrightfromthe
beginningof the transformation.
They would need to be workedout, disputed,and
over
of political
in
the
course
of
this
bargained
process. Secondly,differentiation
missed
for
a
to
result
such
cannot
be
opinions,
immediately
expected
long time,
in the great and stable coalitionsnecessaryforestablishinga stable state. There
be a dangerof populism,whichin most cases leads to a high
may,on the contrary,
of
degree uncertainty.

368
It is not so difficult
to identifybarriersto the transitionfromplan to market
in Eastern Europe; however,it is not so easy to suggest measures which could
acceleratethisprocess. I have alreadyhintedat the problemofwhetheracceleration
in itselfis to be wishedfor. If the desiredspeed determinesthe instrumentsand
at least in the shortand mediumrun
policies,and ifthe chosenpath is irreversible,
(as it was the case with Stalins's 1928-30 second revolution)a slowertransition
may sometimesbe preferable.Yet what most people implyby accelerationis a
of the transformation
crisisand catchingup withWesternwelfare
rapidovercoming
standards. It is by no means impossiblethat this objective is partlyservedwhile
the transitionfromplan to marketis still going in. Systemicchange and growth
are consideredto be interrelated,
but theyare not perfectlyparallel developments.
It is certainlynot true that the firsthas to be completedbeforethe second can
get under way. It is of primaryimportancethat stagnationof both processesis
avoided. This in any case makes it necessarythat economicgrowthgets started
again in Eastern Europe.
deGiven what has been said about the politicaleconomyof transformation,
a ratherconsequentialmeasure
pendencyon initialconditions,and irreversibilities,
wouldbe to get foreignconsultantsout ofthe country.Foreignadvisors,certainlyif
theircredentialsincludesuccessfulmonetarystabilizationpolicies- forexample,in
Bolivia or somewhereelse in that area- create the impressionof a quasi-objective
transitionstrategywhichdoes not in realityexist. They also appear to be impartial
and independentof nationalpoliticalinterests,but thisis not what is needed. The
transitionfromplan to marketis not a transitionfromthe objectivelaws of socialism to the objectivelaws of capitalismand a switchof elites who are able to interpret them. It should be a transitionfromtotalitariancentralizeddecision-making
(with accompanyingchaoticadaptations) to democraticdecentralizeddecisionand
policy-making.In this process therecan indeed be situations- the so-called prisoners' dilemma or locked-insituations- where a "benevolentdictator" would be
soneeded forefficient
solutions. I doubt verymuch,however,that such efficient
lutionscan be identifiedand successfullyimposedby externalagents(independent
advisorsor IMF officials)in the presentcase. Althoughit has to be mentionedthat
elementsof the post-wareconomicorderin Germanyand Japan weresuccessfully
imposed by the United States. The necessarysupport needed in the formof an
internalpoliticalconsensuswas perhaps less of a problemaftertotal defeat,and it
was backed by a stable state.
Let me add that I would ascribe a similarlymarginal,althoughnot totally
unimportantrole to foreigncredits- in contrastto foreignventurecapital, which
of
can be an expressionand reinforcement
togetherwithforeignentrepreneurship
credits
confidence.Giventhe enormouscapital needs forstructuralreforms,
foreign
can coveronly a verysmall share. This was also the case with the oftenquoted
Marshall-Planaid at a time when the capital needs perhaps were much smaller.
The problemwhichwas solved by the Marshall-Planwas the dollargap or the lack

369
of internationalliquidityof WesternEurope afterthe war. This is not exactlythe

problemof Eastern Europe today. If the West reallywants to supportthe process
of transformation
in Eastern Europe, and indeed it can do so, it oughtto open its
marketsto those productswhichthe East is able to supply.
The mainthrustoftransformation
lies withinternalnationalpolicies,internal
accumulation,and withtime. In orderto bridgethe time and to get decentralized
activityat work,stabilityseems to be a primerequirement:
- politicalstability,
- stabilityof rules and regulations,
- monetarystability,
- stabilityof expectations.
Stabilizationpolicy is conventionalwisdom. We would like to understand
it here in a verybroad sense- and this may not be what the people in Eastern
Europe initiallyhoped forwhen they came out fordemocracyand freedom. For
let me remarkas an aside: the 50's and early 60's whichproduced this stability,
togetherwith growthin WesternEurope, were quite dull and uninspiring,and
finallyresultedin the upheaval of 1968.
Stabilizationcannot do the wholejob. In orderto avoid stagnation,and the
dangerwhichalways looms behind stabilization,some more measuresare needed.
crisisor downturnof economicactivityhas to be
First,the initialtransformation
reverted. Secondly,a spiritof reconstructionand growthhas to be created and
sustained. The role of the state in both is not conventionalwisdom,althoughthe
role of the state in the post-warsuccess storiesis all-apparent,as we have already
mentioned.Possible measuresare:
- credit-and tax policies whichfavouraccumulationand investment,
- exchangerate policies whichstimulateforeigndemand,
- incomespolicieswhichavoid
wage hikesand supportinternationalcompetitiveness,
- some "new deal" projectswhich
signal national commitment,
- social policieswhich
signal fairness,althoughtheycannot totallynullify
the hardshipsof transition.
All this will be conduciveto growthand not directlyforthe transitionfrom
to
market. Given the firmintentionto instai a social marketeconomyin
plan
the countriesof Eastern Europe, and giventhe necessaryinitialconstitutionaldecisions,includingthe decentralizationof economicdecision-making(corporatizing
state firmsbeforetheycan be privatizedforinstance),it is success witheconomic
growthwill stabilize and speed up systemictransformation.
It should be clear by now that the policy options of shock treatmentversus
gradualismought not to be interpretedin a dichotomousway,thus leaving aside
the practicalimpossibilityof instantaneouslyeffectivepolicies. Stabilizationcalls
forshock treatmentin the monetaryand fiscal sphere as well as in the constitutionalsphere. Inflationaryuncertaintyand uncertaintyabout propertyrights,

370
DEBATE: JANWINIECKI
for instance,do not stimulatelong-terminvestmentengagements. Political and

economictransformation,
on the otherhand, is a learningprocessand a searching
processwhichtakestime. Gradual adaptationsto changingsituationswillcertainly
improveefficiency.
Negativeexamplesare moreeasilyunderstoodthanpositive:the
institutional(and personal)fixationof the Sovietpoliticaland economicorderafter
Stalin's shock treatmentin 1928-30, to quote it once more,resultedin long-term
and inefficiency.
inflexibility
Withinthe European Communitywe can observea strongconvergenceofthe
economicorder. Fromthisone may inferthat the "Europeaneconomicorder"could
be obtained most rapidlyby the association and ultimateintegrationof the East
European countriesin the European Community,
alwaysassumingthat it is not the
veryeconomicorderwhichis the stumblingstoneforintegration.Indeed,we do not
thinkthis to be the case. Rather the huge structuralproblemsinheritedfromthe
past make the EC hesitantto accept the countriesof Eastern Europe immediately
as new members. Also, seen fromthis angle, the legacy of the past is a major
impedimentforthe transitionto a marketeconomy. Anythingwhichcan reduce
these structuralproblemswill furtherintegrationand implicitlytransformation.
Again, it is growthwhichis needed most to achievethis objective.
JAN WINIECKI*
Main barriers
There are in myopinionfourdifferent
typesof barriers(problems,obstacles)
to the successfultransitionof post Soviet type economies(post-STEs forshort).
They are the knowledgebarrier,the institutionalbarrier,the structuralbarrierand
the mentalbarrier.I will deal withthem in that order.
The knowledgebarrieris associated withthe unprecedentedsituationof havto
ing bringabout transitionto a marketeconomy.As a result,the receivedeconomictheorydevisedin capitalistmarketeconomiesis not always directlyapplicable. I have expressedmyselfon the subject severaltimesboth in scholarlyarticles
and in the press (includinga Hungarianarticle)1and will shortlystressagain the
the transition.
main theoreticalweaknessesthat are adverselyaffecting
A major distrubancewithrespectto thestabilisationprogrammesthatare beingapplied in post-STEs has been generatedby a directtransplanationofstandardised stabilisationprogrammesrecommendedby the IMF. Devised for economies
ProfessorofEconomics,CatholicUniversity
ofLublinand Director,EuropeanBank forReconstruction
and Development
*See,forexampleWiniecki(1992a) as wellas twopressarticles(Winiecki1992band 1992c).

371
DEBATE: JANWINIECKI
with an overwhelmingly
dominantprivatesector,they did not take into account
thestructureofpropertyrightsin theeconomiesin question. Whereboth banks and
Conseindustrialenterprisesare state-ownedtheirbehaviouraltraitsare different.
of theirclientsand the
quently,the formerdid not care about the creditworthiness
riskinessof financedprojects;the latter,especiallythe largerones, accustomedto
"soft"budget constraint,did not care about the level of interestrates.
It is here that more innovativeblendingof the receivedtheoryof macroeconomicstabilisationwith what we know about STEs would bringbetterresults.
For example,we knowthat it is the largestenterprisesthat have historicallybeen
the least efficient
ones and simultaneouslyhave been the recipientsof the largest
financialaid fromthe state. Consequently,we could tryto devise a creditrationing
and would limit
schemethat would supplementtraditionalmonetaryinstruments,
access of thesewastefulmastodonds to scarce credit.
There have been otherintellectualslip-ups,some affectingthe outcomesof
pursued policies,other generatingpolicies that may have resultedin failures. In
the formerI wouldincludefirstof all anotherfeatureof the stabilisation'package',
namelyfixed(or pegged) exchangerates. Studentsof economicdevelopmentand
transitionsfrominwardto outwardorientation,(whichare usuallyaccompaniedby
stabilisations),have noted that the shiftto stable low inflationlasts a fewyearsat
least.
In themeantimeexchangeratesshouldsupporttheshiftto exportorientation;
theuse ofexchangeratesas an antiinflationary
weapon usuallyadverselyaffectsthe
reallocationof resourcestowardexports. This has been happeningin East-Central
Europe, alleviatedto some extentby discretionarydevaluations,but nevertheless
underminingin turn the time horizon of foreigntrade transactions. (Winiecki
1992a)
Anothertype of intellectualerrors,due to the misunderstoodlegacy of the
STE regimes,is the generatingof political pressuresfor reflation. Steep output
fall at the start of the transition(not foreseenin stabilisationstaking place in
ofeffective
marketeconomies),resultsin assessmentsthat claimthereis a deficiency
as
the
answer.
and
reflation
is
demand,
posited
Keynesian-type
- the one-offadjustHowever,this fall is largely- althoughnot completely
mentto a more efficient
economicsystemby both producersand consumers. In
was equal to 60-90% ofactual GDP, whilein the
STEs the levelofinputinventories
West it is about 30-40%. Obviously,with budget constraintbecomingharderand
creditless accessible,enterprisesstartedadjustingdownwardboth theirinput and
capital demand. The resulthas been a steep initialfallin ordersand, subsequently,
ofoutput. (Winiecki1991a; 1991b) This kindof output fallcannotbe remediedby
increasingaggregatedemand,forneitherenterprisesnor householdswill returnto
morewastefulbehaviour(withoutthe returnto the STE regime,of course!).
These weremajor examples. Other cases of the knowledgebarriermay also
be expectedto emergewithinthe framework
of the transitionprocess.

372
DEBATE: JANWINIECKI
The institutionalbarrieris of a different

sort fromthe firstbarrieranalysed
here. The painfullack ofmarketinstitutionsis clearlyon themindsofsocial reformers and theyfacetwodifferent
issuesofimportance.The firstis the implementation
of a range of institution-building
measures than can be undertakenrapidly. Even
in the short-runa post-STE needs to get at least some of these institutions(and
not only prices) rightin orderto get thingsmovingaccordingto marketrules of
the game.
The problemis: whichinstitutionsshould be tackledfirst?From the 19891992 experienceof post-STEs in transition,it has transpiredthat two institutional
measuresof primaryimportancewerenot sufficiently
appreciatedat the start. The
firstis the reformof the tax system.
Since the old tax systemdepended so much on quasi-corporateincome tax
(tax on profitsof state enterprises),there was a clear necessityto adjust the tax
of that state enterprisesector(and to
systemto the prospectivefallin profitability
the shrinkageof the sector). A diversification
of tax revenueswas also important,
forwith this a sudden fall of revenueswould not make such a dent in the volume
of revenueand would not forceexpendituresto be reduced to such an extent.
tax
The difference
betweenhavingand not havinga more adapted and diversified
systemmay clearlybe seen in the developmentsin Hungary,wheresome changes
werealready made in 1988, and Poland, wheretheywere not. The impact of the
dryingup of revenuesfromstate enterpriseshas been clearlymuchstrongerin the
lattercase.
Anotherproblemindicates that the reformof the bankingsystemis need
at
right the start,and the pile of bad debt incurredby state enterpriseshas to be
- and later on. This problemis linkedto
anticipatedat the start of the transition
the ownershipstructureissue,stressedwithrespectto monetarypolicyunderstate
ownership.Procedureshave to be elaborated to begin the financialrestructuring
of both state banks and state industrialenterprises,for withoutsuch measures
privatisationof eithercannot proceed quickly(if at all). I have already signalled
and Winiecki1991;
this issue some time ago. (Beksiak, Grzelonska,Tybczynski
Winiecki1992a)
The second issue of importanceis the roleof the timefactor.There is clearly
a difference
institutionsof one
betweensowing,i.e. building minimallyefficient
- that is, bringingabout a rise in the efficiency
sort or another,and harvesting
of performanceof the economy. For no matterhow strenuousthe effortof social
thereis a certain'criticalmass' of marketinstitutionsthat must be in
reformers,
and
in orderthat the economycan enjoy a
function
with minimalefficiency
place
better
visibly
performance.(Winiecki1992d)
This is a well nighinsurmountablepoliticalbarrier.With costs of transition
needingtime,the
appearingrightfromthe start and betteraggregateperformance
of
the
survive
the
transition
has
to
period mountingcosts
governmentmanaging
withoutfeelingthe benefitof commensurateresults. Since nothingcan be done

373
DEBATE: JANWINIECKI
aboutthat(evenfaultless
thetimefacefforts
cannotovercome
institution-building
torpresented
shouldbe soughtelsewhere
here!),remediesagainstdisillusionment
(see thelastsection).
The structural
barrier
is usuallyperceived
in termsofthelargeraveragesize
ofthefirmin post-STEs.The distorted
muchmorevaried
structures
are,however,
and theirimpacton transition
is accordingly
larger(and morepainful).
has theoversized
industrial
sectorofpost-STEs(in terms
Onlyveryrecently
of its shareof GDP and employment)
as a seriousbarrier.Its
been recognized
levelofeconomic
thatare at a comparable
beinglargerthanin marketeconomies
oflabour
theinevitable
a
structural
affects
development,
percentage
larger
change
and capitalthanelsewhere.
are
of
such
the
costs
change goingto be
Accordingly,
greater.
On topoftheoversized
industrial
sector,comemoreoftenstressedoversized
- againforsystem-specific
- firmsare on the averagelarger
firmsbecause
reasons
thantheircounterparts
inmarket
economies.It meansmakingevenlargeremploymentshiftsunderthetransition
to a marketeconomy.
In additionto the foregoing
in STEs also devithe occupationalstructure
ated fromthepatternregistered
in the West,forit displayeda distinctly
higher
ofa sysworkers'
ratioin industry.
Thisratio,a consequence
manual/non-manual
temthatgenerated
particularly
strongexcessdemandformanuallabour,had a
on
relative
Not
strongimpact
onlywerewagesin industry
higherthanelsewages.
wherebutalso thewagesofmanualworkers
wererelatively
(as comparedwiththe
or
workers.
than
those
of
non-manual
higher
West) absolutely
The impactofthestructural
ofpost-STEscan be
barrieron the transition
summarized
as follows:moreworkers
and a muchlarger
wereemployed
in industry,
of
those
who
were
on
in
firms
proportion
were, topofthat,relatively
employed large
- and evensuperiors.The structural
betterpaid thantheirwhitecollarcolleagues
distortions
in questionpromiseto be an extremely
toughnut to crack. For it
meanslargeremployment
due to thepolitical
shifts
in thefaceofgreaterresistance
of
workers'
have
collectives
in
which, turn,
strength large
(or had) morefavourable
relativewagesto defend.2
The mentalbarrierwillmostprobablybe the longestlastingbarrierof all
and it maylingeron evenwhenall otherbarriershave alreadybeen overcome.
willemergeovertime,and
maybe absorbedfairlyeasily,institutions
Knowledge
- but
as theyearsgo byevenstructures
be
and
newoneserected
dismantled
may
mentalhabitsgenerated
the
will
not
Soviet
by
disappearquickly.
system
Threemajormentalproblems
societiesareforced
withwhichpost-communist
to copeconcernworkethics,expectations
undersystemic
changeand theneedfor
self-reliance.
half
a
former
of
the
communism
USSR, a quarter
Nearly
century
(in
2On structuralcharacteristics
of STEs, see a collectionof articles(Winieckiand Winiecki
1992).

374
DEBATE: JANWINIECKI
of a centurymore) had a corrosiveinfluenceon workethics and human initiative.

Moreover,near total isolationfromthe advanced societies created verydistorted
imagesof the capitalistmarketsystem.
ifnot actuallynegligentattitudesto
Employeesgot accustomedto indifferent
workand to a lack of wage differentials
forgood or bad work. As decades passed
by, indifference,
negligenceand undemandingworkpace came to be seen almost
as a rightof employeesin STE enterprises.This attitudeis difficult
to eradicate
withinthe short-to-medium
term.
The fear of decent workshows throughon many occasions when privatisation or foreigninvestmentis resisted,even if forthose who are really needed in
the enterpriseit means significantly
higherwages. Also, manypublic opinionsurveysreveal a tellingsplit attitudewheregeneralsupportforprivatisationis much
strongerthan forprivatisationof one's own firm(a phenomenonalso revealedin
Hungary).
Expectationsof the workforce,and the population at large, have not only
been high in termsof higherlivingstandards- and fast risingones at that- but
have also been rooted in corrodedworkethics. It has meant that disillusionment
has set in fairlysoon because not only have expectationsof a rapid rise in living
standardsnot been fulfilledbut also hopes for'capitalist wages forsocialist work'
have almost inevitablybeen disappointed. But in the meantimeexaggeratedexsector of
pectationswill cause many a tensionin the privatisedor foreign-owned
post-STEs.
The last of the major mentalbarriersis that of overcomingthe fearof somethingalmost unknownin the communistregime(in fact,it was banned): namely
initiative,or otherwisetakingone's own lifein one's own hands.
entrepreneurship,
No matterwhat the communistpropaganda said, passive waitingforordersfrom
above was a rewardedvirtueunderthe previousregimes.In a systemin whichthere
wereno rules of the game (Szymanderskiand Winiecki1989; Winiecki1991d) any
decision,no matterhow small,was a dangerto its maker.Therefore,decisionswere
to be avoided at any cost.
The resultantpassivityappeared as a strongdisadvantageonce transition
began. It is manifestedin many ways. Non-adjustmentat the state enterprise
level, doing nothingand waitingforeconomicpolicy to change course or cutting
and outputratherthanlookingfornewproducts,marketsand channels
employment
of distributionare stronglypresentin the behaviourof managementand workers
of state enterprises.Less visible but probablyeven moreoftenpresentis the fear
of leavinga 'socialist' enterpriseand 'goingprivate'.
This fear is stronger,the longerone has been subjected to the debilitating
passivityof the old regime. Yet even if they 'go private'theyshun entrepreneurship. Thereforeit is muchmorecommonto findin privatefirmsa youngboss and
olderemployeesratherthantheotherwayround. A lot oftimehas to pass to change

375
DEBATE: JANWINIECKI
that; it may even be that the generationsdiseased with passivityby communism

turnout to be to a largeextentincurable.
Remedies:
The "remedies"part of mycontributionis muchshorterthan the analysisof
barriersto transition.This should not be construedas indicatingthat thereare no
remedies.There are some. But a no less importantreason is that a properposing
of a problemby itselfsuggestremedies.
Thus, if I submit that intellectualerrorswere made in devising (not only
implementing)the strategyof transition,then I at the same time offera remedy:
a betteruse of knowledge.If I stressedmany times that an unintendedeffectof
structureofownershipwould
monetarypolicyundera drasticallydifferent
stringent
be the crowdingout of smallerand better-performing
state enterprises,thereis an
implicitremedysuggestedhere. Credit limits should be established that would
reduceaccess of wastefulstate-ownedgiantsto commercialcredit. This is, in fact,
what I suggestedin earlySpring1991.3
The knowledgebarrieris, quite obviously,the easiest barrierto remedy(theoreticallyat least, since people tend to cling to theirviews, howevererroneous,
quite tenaciously). The same cannot be said about the institutionalbarrier. Althoughmajor omissionsin most transitionprogrammescan to a certainextentbe
of the bankingsector),
remedied(changesin the tax systemand the restructuring
some otherscannot.
I have in mind, firstof all, a different
speed for carryingout institutionand
of
the
the
economy. The disillusionment
performance
building
improving
and 'reformfatigue'- knownfromnon-post-STEs that stabilised and liberalised
earlier- cannot be remedieddirectly.However,it is here that variouspolicies,not
onlyeconomicones, may help indirectly.
Properlydesignedunemployment
compensationschemes,takingintoaccount
both incentivesto work and the familystatus of the unemployed,are one such
policy measure. It may alleviate the consequencesof the fact that the shiftto a
more efficient
systementails general welfaregains but simultaneouslyindividual
welfarelosses.
In theoreticaltermspolicy-makers
and theiradvisersshouldstop treatingthe
in
a
neo-classical
manner.
economy
They should accept the fact that behind each
allocational
are
shift
there
people. They are both gainersand losers;and
aggregate
as
North
losers, Douglas
rightlystresses,tend to resistchanges that affectthem
This
is
the
adversely.
reality.Thereforea sensible transitionstrategyshould try
3See my
paper,preparedforthe PoliticalAdvisoryCommitteeofthe Presidentof Poland.

376
DEBATE: JANWINIECKI
to minimisethe resistanceof losers. Otherwise,theymay slow downor even abort

the transition.
Unemployment
compensationschemesare one example. Retraining-oriented
employmentpolicies are another.Afterall, as an analysisof the structuralbarrier
suggests,the extentof employmentshiftswill be much largerin post-STEs than
in other countriesthat earlier underwentstructuralchange. The percentageof
industriallabour that will be forcedto change both workplaceand occupation is
expectedto be veryhigh.
Social policies should also be draftedinto the serviceof overcomingthe resistanceto the transitionprocess. Introductionof schemessupportinglow-income
familieswith dependentchildren(especially those with singleparents) should become a part of social assistancesystems,since it is thesefamiliesratherthan those
of pensionersthat are at the bottomof the incomedistributionladder.
The broad capabilityto arrangelocal developmentschemesin areas affected
by closuresof the only large employerin the area could also become a part of the
effortto overcomethe resistanceto change. Schemes should focus on encouragand the expansion of the privatesector as the fastest(and
ing entrepreneurship
healthiest!)way to reduceunemployment.
One caveat is in orderhere. All thisshouldby no means amountto an 'overall
developmentstrategy','industrialpolicy' or any other all-encompassingscheme.
Since post-STEs are onlybeginningto discovertheircompetitiveadvantages,their
emergenceis betterleftto the marketin orderto avoid new distortions.Retraining
schemesor regionalschemesare in the nature of 'rapid deploymentforces'that
quel local disturbancesratherthan large armiesthat marchaccordingto the plan
elaboratedby the generalstaff...
A broad set of measuresshould be aiming at overcomingthe resistanceof
losersby makingthe landingin the new systemsofterthan it otherwisewould be.
Effectswould be reinforcedby the fact that certainmeasuresaccord withwhat is
vaguelyperceivedby the generalpublic as just. This is, however,only one set of
recommendationsthat should be in high demand here. Anothershould concern
measures(both of policydesignand policy implementationtype) that increasethe
probability
of successof the transitionitself.
The presentwriterdoes not have in mindspecificpolicyareas or instruments.
Rather,it is a sensibledesign and/or implementationof already existingpolicies
that mattershere. Two examples are illustrativeof what this authorhas in mind.
First, in no countryhas therebeen the case of a bankruptcyof a large state enterprise.Yet both empiricalresearchand conventionalwisdompoint at large state
ones.
enterprisesas the least efficient
As time goes by, the credibilityof governmentsthat are afraid to allow a
wastefulgiant to go bust begins to decrease. The consecutivestatementson the
intentionto pursuetightmonetaryor fiscalpolicywill be receivedwithdecreasing
seriousness. In consequence,state enterprisesmay be temptedto continuetheir
Ada Oeconmica44* 992

377
DEBATE: JANWINIECKI
recklesswage increasesand borrowingpolicies. If a sufficiently

large numberdo
of macroeconomicpolicies is weakenedand problemsof the state
that,the efficacy
enterprisesectormultiply.
Anotherexampleis fromPoland, wherethe centralbank was pursuinginterest
rate policies vis--viscommercialbanks that contradictedstated macroeconomic
goals pursued (presumably)throughmacroeconomicpolicy measures. The term
structureofinterestrateswas such that the longerthe periodforwhichmoneywas
deposited,the higher(and sharplyhigherat that) was the interestrate offered.
Thus, while the Polish governmentcontinuedto proclaim under Deputy Prime
MinisterBalcerowiczthe steadinessof its anti-inflationary
policy,the centralbank
was signalingthe opposite, i.e. it expected inflationin the medium run (6-24
months)to increase.
of economiesin transitionhave devoted too little atOverall, governments
tentionto the credibility
factor.4 It is the belief of the presentwriterthat the
whole credibilityissue was largelymisconstruedby the architectsof transitionin
the respectivepost-STEs. They seem to have mixedup broad politicalsupportfor
the directionof changeand personalitiesinvolvedwiththe credibilityof particular
transitionrelatedpolicies.
To give an example, Mr. Mazowieckienjoyedextremelyhigh regard in all
publicopinionsurveys(approvalratingswerearound 90% in the firsthalfand 7080% in the secondhalfof 1990). Yet he got- to the surpriseof many- only 17% of
the vote. He, also, I am afraid,mixed up popularitywithcredibility.Governments
may be popular but if their polices are not seen as credible,the probabilityof
success is not goingto be veryhigh.
References
T. M. and Winiecki,J. 1991. "List otwartydo PrezyBeksiak,J.,Grzelonska,
U., Rybczynslri,
October15 and
denta" (Open letterto the Presidentof the Repuclic). Rzeczpospolita,
16. (in Polish).
dans
J.and Winiecki,J. 1989. "Dissipationde la rente,managerset travailleurs
Szymanderski,
le systmesovitique:les implications
du systme".Revue d'tudes
pour un changement
comparatives
Est-Ouest,Vol. 20, Mars,No. 1.
economy.LonWiniecki,E. D. and Winiecki,J. 1992. The structurallegacyof the Soviet-type
don: CentreforResearchintoCommunistEconomies.
ofpost-Soviet-typeeconomies:expectedand unexpecteddeWiniecki,J. 1992a. "The transition
Banca Nazionaledel Lavor QuarterlyReview,No. 181,June.
velopments".
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Winiecki,J. 1992b. "Monetary
perversity
ary6.
oftransiWiniecki,J. 1992c. Az atalaiadas nehzsgei.1. Pnzgyipolitika"(The difficulties
tion. 1. Financialpolicy). MagyarNemzet,March18. Az talakulsnehzsgei.2. A
4Formoreon thesubjectsee Winiecki199le.

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berausprogramelveiw(The difficulties
of transition.2. The principlesof the liberal
programme).MagyarNemzet.March19.
thatare not costs: on non-welfare
Winiecki,J. 1991a. "Costsoftransition
reducingoutputfall."
Rivistadi PolticaEconmica.Vol. 81. ThirdSeries.June,No. 6.
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Winiecki,J. 1991b. "Theinevitability
theoretical
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underpinnings."
infrastructure"
in: Siebert,H. (ed.) 1992. The
Winiecki,J. 1991c. "Shapingthe institutional
transformation
of socialisteconomies.Symposium1991. TbingenJ. C. B. Mohr(Paul
Siebeck)
Winiecki,J. 1991d. Resistanceto changein the Soviet economicsystem.London: Routledge.
Chapter3.
in mid-1991: stabilisationunderthreat.
Winiecki,J. 1991e. The Polish transitionprogramme
KielerDiskussionsbeitrage
174. Kiel: InstitutfrWeltwirtschaft.
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Winiecki,J. Inflacjai wzrostgospodarczya politykarzadu (Inflationand economicgrowthand
the government's
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Debate On The Transition of Post-Communist Economies To A Market Economy

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DEBATE ON THE TRANSITION OF POST-COMMUNIST ECONOMIES TO A MARKET ECONOMY

Author(s): WLADIMIR ANDREFF, ANDERS SLUND, ALEKSANDER BAJT, JOZEF M. VAN

This content downloaded from 79.175.88.212 on Thu, 1 Aug 2013 01:08:09 AM

Acta Oeconomica,Vol. 44 (8-4), pp. 219-37S (1992)