6 On the political economy of transformation
6.2 The rationale for specifying a road map
Since transformation must be managed under concrete circumstances of time and place, politics in reality may well not leave enough leeway to chart an “optimal” agenda and pursue carefully each element as part of a coherent whole; optimal means completing the economic transformation
as rapidly as possible, so that sustainable economic growth can begin to pay off, while minimizing the transformation’s socioeconomic cost and duration. Yet it may be helpful to have such a consistent agenda as a beacon. In as polarized societies as the TEs on the eve of the regime switch (Brabant 1998, pp. 74ff.), it is imperative that something bold be undertaken rather quickly if only to jolt economic agents out of their lethargy and preclude a return to the old regime. Even so, much of the apprehension about transformation and some errors committed could have been compressed if those under fire had better understood what was at stake and formulated their concrete strategy accordingly. I advance the basic contours of an “ideal” transformation agenda for a generic TE pri- marily as a framework for a holistic discourse on the various policy choices posed starkly with their respective virtues and drawbacks. That forms an important ingredient of steering the political debate and informing the public at large about what is really at stake. It should also provide the backdrop for the formulation and implementation of concrete policies in an objective and transparent manner. But one should harbour no illusion that those most influential in setting the framework for debate and in out- lining policy choices will avoid promoting their own agenda (Brabant 1998, pp. 464ff.). At least the subsequent modulations and refinements in many TEs could have been conceived, and evaluated, within the contours of a coherent agenda such as that presented here.
Whereas the twin components of political economy are intricately inter- laced, up to some degree they should be kept separate. One must ask in particular whether economic (political) battles should be waged with noneconomic (nonpolitical) instruments (for Russia, see Boycko et al.
1995, 1996). Wielding the economic axe to settle intrinsically ideological and political battles is not usually the most fruitful option. Alas, econo- mists are not good at configuring the tradeoff, except in the spirit of Bergson’s “illusion of retrospective determinism” (Garton Ash 1996, p. 18).
Depriving politicians and bureaucrats of the economic resources they formerly commanded may be highly desirable. I have my doubts that uti- lizing formalized privatization to achieve that aim, as in Russia, offers a compelling rationale. The argument made by “shockers” that economic instruments, notably property rights to state assets, be utilized en masseto forge an irreversible coalition for transformation and improved resource allocation is a weak one. The “market” in these countries was at least as weak as the “state”. As a result, “political capitalism” often transformed itself into the shriller disparities of primitive or robber-baron capitalism.
Never in peacetime have so few acquired so much from so many in such a short time span. Perhaps a dose of carefully chosen authoritarian shock was useful. But experience has shown that this does not suffice. So, in the first instance, economic and political battles should be fought with eco- nomic and political instruments, respectively. Furthermore, positive
change usually comes about slowly and requires a sustained commitment to a goal whose achievement is far from guaranteed; in the process noner- godic path-dependence cannot be avoided.
But what if the political and bureaucratic battles cannot be fought by political means because the reform agenda precludes meaningful changes in the way in which society’s controversies get ironed out? Political paraly- sis is obviously very serious. While I lean toward rejecting shock therapy as a cudgel to rid the TEs of the most obdurate political and administrative legacies of state socialism, I recognize that the latter need to be overcome soonest to break irreversibly the back of the old regime. At least the bureaucracy, lethargic managers of SOEs, the political intelligentsia, the inflationary expectations of consumers, the syndrome of chronic shortage, and so on need to be restructured or abolished. Could these more polit- ical purposes not primarily have been accomplished through the political process? Eliminating this “political capitalism” is easier said than done (Mokrzycki 1991; Staniszkis 1991), if only because the new governments in TEs tend to be weak.
That said, the first task of governing the economic agenda of the trans- ition is to stabilize the economic situation, thus removing one vital dimen- sion of uncertainty in these already labile economies. By that I do not simply mean macroeconomic stabilization, or the removal of imbalances in internal and external sectors through Draconian policies. When the transition erupts in an environment with runaway inflation, a loss of confi- dence in macroeconomic policies, a government lacking popular support, a loss of control over basic monetary aggregates, and/or inability to stabi- lize the fiscal regime (such as in Poland and Yugoslavia in 1990), this may well be the first order of business. Rapid stabilization must be accom- plished through monetary and fiscal instruments, as well as through a more than trivial measure of price and trade liberalization. But these are not all-or-nothing options (Bruno 1992) and decisions cannot stand apart from other needed mutations. Since most occur under pervasive uncer- tainty, monitoring, assessing, and fine-tuning the policies wielded accord- ing to evolving circumstances is necessary to avoid policy reversal.
It would be wrong, however, to recommend this démarche to all TEs.
Indeed, in most the initial conditions for a meaningful transformation were not as bleak as some observers have depicted them. True, the under- lying socioeconomic reality in virtually all TEs had earlier been on a corro- sive path, entailing a severe malaise in some countries. But the really dramatic slide occurred with the implementation of transformation pol- icies. The reason is simple: a genuine stabilization program within the context of comprehensive structural change cannot avoid temporarily depressing sustainable levels of economic activity, notwithstanding argu- ments to the contrary (Nuti and Portes 1993, p. 11). As experience has shown, at least two to three years pass before growth resumes; it takes much longer to carve out a sustainable modernization trajectory, however.
Policy credibility matters in minimizing this loss. This does not, however, mean that policy makers should adhere at all cost to policies that are not working or encumbering other transformation components.
Central on the agenda should be sound macroeconomic management, including in fiscal and monetary policies as well as with respect to external liberalization, and a vision of the broad direction into which institutional and structural change should preferably evolve, while defusing any suspi- cion that the current transformation process may be retracted. It is hard to envisage how this could be accomplished without an activist government, obviously one markedly differing from the remnants of state socialism.
In designing transformation policies as coveted by TEs, it is crucial to be clear about the fact that a market is essentially a set of institutions set up by man rather than an immutable part of the natural environment. For that very reason, there are various configurations with specific institutions for encouraging competition. But the latter should not be confounded with the former. Competition provides a constraint on self-interested behaviour of individual agents, channelling it into a confined range of mutually compatible outcomes, involving at times suitable modifications in the market as a “man-made institution” (Kregel 1990, p. 45). Market lib- eralization does not necessarily generate competition, nor does it guaran- tee the quick and orderly emergence of constructive competition.
As an organizational and coordinating mechanism markets involve positive transaction costs. Even to create and sustain functioning markets, society must bear costs. These include in the first instance the creation of a legal framework for the identification, protection, and enforcement of contracts for all kinds of market-based transactions. Reliance on explicitly detailed contracts with spelled-out pecuniary costs and benefits leads to increased dependence on laws, lawyers, litigation, and codified proce- dures—all costly—for ostensibly market-based contracts that in other soci- eties are handled with greater trust in partnerships, custom, and networks (Pistor 1999). It also involves the creation of an entire industry that insures against risk, if at a price.
When available, properly functioning markets for production factors (capital, labour, land, and other natural resources) as well as for all kinds of goods and related services must aim at efficient resource allocation, that is, the maximization of the sum of the discounted values of consumer and producer surpluses (Hay 1993, p. 2). This outcome is trivial, given the stated circularity. One or more markets may not be available or function only poorly because either no equilibrium exists or economic agents do not behave competitively, leading to market failure. The real world is riddled with imperfect and asymmetric information. In addition, the specifics of marketing and production technologies are hardly such that atomistic competition among economic agents solely bent on maxi- mizing their profit or utility prevails or can emerge in an orderly manner.
Moreover, gathering and processing this information is costly. Further- more, there are scale and learning economies and externalities that, when not regulated, distort market outcomes. Also monopolies and oligopolies exist, mostly but not all “network industries”. Others are subject to correc- tive action. Both need to be regulated through other than pure market channels (Willig 1993), none of which is cost-free. Nor does it provide an ironclad guarantee that minimal separation of powers can be enforced at an affordable cost, given other priorities (Laffont 1999).
In other words, in charting the transformation agenda one must investi- gate how quickly functioning markets can be erected and what could con- ceivably be done in the interim to mitigate market failure endemic to the sui generisnature of transition, those typical of economies working toward catch-up modernization, and those prevalent even in mature market economies. Note that the aim of transformation policies must be more encompassing than perfectly functioning markets. Also, improving the environment for resource allocation depends on performing tasks that the market will normally not, or only inadequately, take care of. In view of the considerable constraints on perfect competition, asymmetries of informa- tion, restrictions on the ability to contract, limits to designing comprehen- sive incentive rules, and other real-life features (Stiglitz 1994, 1997a, 1997b), many markets simply do not function properly. If only for that reason, setting aside market fundamentalist ideology (Petrella 1999), one may seek relief through non-market intervention when the latter is not itself subject to failure whose cost exceeds the dimension of the market distortion.
6.3 Transformation – an evolving agenda subject to