6 On the political economy of transformation
6.6 On the starting conditions of economic transformation
and the concrete circumstances of the country in question. In other words, it might be useful to work out a continuum, at least multidimen- sional scale of relative success and failure, utilizing something like the pro- posed transformation agenda. That should, of course, be individualized so that one could ideally compare what needed to be done with what has actually been accomplished in the dimensions of the transformation agenda that matter. I return to these issues in section 6.9.
Whereas I do not have a patent indicator for when the transformation will be over, any answer must be based on what a market economy and pluralist politics are supposed to accomplish. A normal market economy is one that functions well, is not beset by rampant bank failures, where enterprises are largely privately owned and work for their own profit, where governance of economic organizations is effective, where taxes are not onerous, the social safety net is tailored to what is sound social policy and fiscally affordable, where government and external imbalances are not too large and soundly financed, and so on. Absent most of this, effect- ive transformation has yet some way to go. An answer should also heed the need of all TEs to embark on a self-sustainable growth path permitting catch-up with levels of income, wealth, and productivity prevailing in western Europe; a distribution of income and wealth, and influence over societal affairs, that sustains the sociopolitical consensus; and a level of maturity in politics that allows stable, transparent, and reliable governance through the institutions built. Despite resumption of growth in many TEs, there can be no room for complacency in economic transformation. Few if any are on a self-sustainable growth trajectory, as recent events in the wake of the Russian crisis have amply underlined.
nalistic mode; lack of entrepreneurship, a good deal of dysfunctional experience in the second economy, and poor mobility of workers and management; considerable security in respect of health, education, medical care, pensions, jobs, and civil protection; and economic struc- tures poorly geared to the consumer and intermediation.
Second, the extent to which communist fervour had fibrillated into lacklustre ideological commitment fostered incrementalist social engin- eering that contributed to forging a special sociopolitical environment for transition: demands for change by existing lobbies (the trade unions in Poland), the underground opposition among the intelligentsia (as in Czechoslovakia and Hungary), or ad hoc oppositional groups (as in Czechoslovakia) left no choice but rapidly to replace the political forces in place. The degree to which these groups participated in the transfer of power and were able to govern depended importantly on persuading the population at large of the desirability of moving toward political pluralism to arbitrate political rivalry and the degree to which the various interest and opposition groups in place had benefited from political liber- alization prior to state socialism’s collapse. This differed greatly among the TEs, perhaps nowhere more than in central Europe as compared with the CIS.
Third, anti-communism combined with independence claims by various political groups determined the outcome of the transition’s incep- tions in several Baltic, Caucasian, and Central Asian states as well as in inciting the Yugoslav conflagration. Pro-independence sentiments deter- mined the extent and urgency of the need to build a new nation, hence the degree to which the political leadership could focus primarily on eco- nomic transformation. The quality of state administration and the degree to which the legal system had been transformed during earlier attempts at decentralization were important factors in pursuing transformation.
Finally, state-socialist commitments to a strong military, and perhaps even an adventurous foreign policy, varied enormously among the TEs, and hence had differential impacts, for example in budgeting, defence production, and society’s perceptions of an erstwhile regime pillar.
No transition can realistically be envisaged in the absence of minimal sociopolitical support for the various hardships and uncertainties engen- dered (Melich 1997). Many factors influence the thickness and robustness of the cushion for experimental transformation policies. But I limit myself to eight. First, countries enjoying a great degree of ethnic homogeneity do not have to deal with rival claims by various ethnically based interest groups, which may have implications for preferred economic links or modes of operation to be emulated in the new country. Second, a militant trade union operating as a dissident group may help to negotiate an orderly transfer of political power. But it is unstable as its ostensible united front rests on opposition to the regime in place rather than on a common understanding of the changes to be launched. Third, TEs with
some tradition of managerialism underpinned by enterprise independ- ence find it difficult to dislodge managers. It is not always clear how best to design incentives to buy out this class or induce it to behave construc- tively in the nascent market environment. Fourth, the population at large harbours expectations that the state-socialist social-welfare policy should be retained at little direct monetary cost, which narrows the room for manoeuvre for policy makers bent on fiscal consolidation. Fifth, imbal- ances under state socialism leave economic agents with deeply embedded behavioural traits that cannot be rectified overnight. Sixth, though educa- tional attainments under state socialism were considerable some TEs were better prepared for seizing the newly emerging economic and other opportunities. Seventh, fiscal reform must aim at minimizing microeco- nomic distortions, if only because these societies value limited income differentiation, nearly free education and health services, fostering the arts for the wider public, and related social services. The associated trade- offs between fairness and economic efficiency need to be factored into the policy setting, which itself will be constrained by downward pressures on fiscal revenues at a time of rising pressures on expenditures. Finally, soci- eties with a young population and a recent elevated birth rate may experience special demographic pressures with potentially dysfunctional social consequences, given the limited employment opportunities.
The economicstarting conditions can be grouped into five classes. First are inherited economic structures, including the level of economic devel- opment; the distribution of resources among various activities; the degree to and the forms in which state socialism tolerated private enterprise; the extent to which the economy had been exposed to international competi- tion; and the degree to which domestic resource allocation had heeded production costs. Second, prior reform experience has positive as well as negative implications for transformation. Especially in the smaller TEs, positive aspects are a better grasp of the instrumental and institutional requirements of the market economy, hence in forging ahead with sound FIEMAF actions. Negative influences are the poor economic coordination on the transition’s eve, the emergence of the second economy, scepticism with respect to the economic role of the state, and deep-seated distrust about the ability of the powers-in-place to discharge those functions.
Third, the economic crises and policy dilemmas on the transition’s eve varied among the countries (Brabant 1998, pp. 74ff.). Arguably the great- est economic crisis was the inability of the political leaders to live up to their ambitions, at least to deliver the steady, if modest, gains in per capita income earlier promised. By the late 1980s, the room for policy flexibility had become very confined, with loss of control over money aggregates in some TEs. Fourth, prior experience with the second economy is not always a bonus in a nascent market economy, as much of it (even disre- garding the criminally illegal) was based on shady access to state resources, thus fostering widespread corruption, deep-seated furtiveness,
and general dishonesty not limited to pilfering and theft—an enduring legacy for the behaviour of economic agents. Fifth, although the foreign sector remained arguably the weakest links of state socialism, the TEs had varying experiences with external economic linkages, especially with market economies, in spite of external imbalances and foreign debt.
By way of summing up, it is not at all easy to classify which country had clearly superior starting conditions. Some inherited fewer macroeconomic imbalances from the period of communism (Czechoslovakia); fewer struc- tural distortions (Hungary, Poland, and Slovenia); and a partially decen- tralized, somewhat liberalized economy with some vestiges of market institutions and policy instruments (Hungary, Poland, and the former Yugoslavia). There may have been remnants of the experiences with democratic traditions (as in Czechoslovakia) and the market economy (the Baltic States and several eastern European countries). But the latter should not be overemphasized, given the time passed and the different realities.
6.7 Economic and political intermediation, markets, and