Academic journal article Demokratizatsiya

The State of Transition Economics

Academic journal article Demokratizatsiya

The State of Transition Economics

Article excerpt

Much has been done in the post-Communist economies in East-Central Europe and the former Soviet Union, but much has also failed. On the positive side, rudimentary market economies have been established, inflation has finally been brought under control, and most economies in the region have become predominantly privately owned. Many of the worst fears never materialized, notably starvation and mass migration. Social unrest has been surprisingly limited.

On the negative side, the decline in output has been great and it still continues in some countries, at least in Ukraine, Turkmenistan, and Tajikistan. The large decline in output is connected with long-lasting high inflation and persistent state regulation, causing severe corruption. Privatization has, not surprisingly, been immersed in controversy. The key problems of the post-Communist transition have been rent-seeking, the exploitation by a small elite of cheap state financing, and remaining state regulations of prices and foreign trade. The main riches come from two sources: cheap credits and raw materials, bought at low state-controlled prices and exported to a free world market. Natural consequences have been sharply rising income differentials and increasing poverty. Characteristically, income differentials and poverty have been mitigated with the demise of exorbitant rent-seeking, and other social indicators have improved as well.

In hindsight, the lesson of the transition is clear: an early and radical reform is the best. The sooner financial stabilization takes place, the earlier economic growth returns. The showcase is Poland, which returned to growth as early as 1992. Sadly, Poland is the only country to have reached high sustained growth of over 5 percent for three years, and even there the growth rate is declining from 7.0 percent in 1995 to a forecast 5.0 to 5.7 percent this year. Poland is also alone in having exceeded the output of 1989. Visions of East Asian tigers have faded from the horizon. After all, Ireland is currently growing faster than Poland.

The more far-reaching the initial deregulation has been, the more likely it is to hold, and the better for growth as well as financial stabilization. Both speedy privatization of existing enterprises and the development of new private enterprises are positive forces, and there is no natural choice between one or the other. Not surprisingly, the more radical reforms that have occurred, the more institutional reforms appear to take place, although they are more difficult to measure. Hence, positive complementarities dominate in the empirical evidence to date. It is not a question of what reform to start with, but rather to build as much as possible of each pillar as early as possible.

The literature on transition economics is huge. A World Bank bibliography contains over 5,000 titles. The serious literature can be crudely divided into three categories: first, a prescriptive literature arose about what should be done; second, a more formal literature of economic models was elaborated somewhat later; third, a broad empirical literature has been produced.

Most of the prescriptive literature was written in the years 1989-1992, and it was strongly influenced by the dominant economic thinking at the time, which has been coined the "Washington consensus" by John Williamson. In essence, the term means conservative fiscal and monetary policies, far-reaching liberalization of the economy, and privatization. Jeffrey D. Sachs emerged as both the dominant and most radical advocate of a swift market economic transformation, and Poland became his showcase. Other prominent proponents of similar policies were Michael Bruno, William Easterly, Stanley Fischer, Janos Kornai, Richard Layard, David Lipton, and Lawrence Summers in the Western academic establishment, and economic politicians in the regions, such as Leszek Balcerowicz, Vaclav Klaus, Yegor Gaidar, Vladimir Dlouhy, and Marek Dabrowski. …

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