The Political Economy of Transition: Coming to Grips with History and Methodology

By Jozef M.Van Brabant | Go to book overview

5

INTERNAL AND EXTERNAL LIBERALIZATION

The second major component of the transformation agenda comprises “liberalization.” In the domestic economy, this refers in particular to widening and deepening the decision space accessible to all economic agents, the policy parameters for guiding their behavior, and the institutions for facilitating coordination. Among the instruments prices figure prominently. When appropriate I shall differentiate among prices for goods and related services, wages, interest rates, and other parameters of the alternatives offered in the emerging market setting. Price adaptations are expected to be actively encouraged by macroeconomic policy makers to modulate the behavior of microeconomic agents. Internal liberalization also refers to facilitating exit and entry of firms. This is particularly crucial in environments that prior to the transition were regimented by central decision making. For the same reason, I stress explicitly liberalizing property transactions, including real estate. But contract sanctity and its legal enforcement are also critical (see Chapter 7). Perhaps most important, a market economy without adequate competition and without properly structured incentives to foster it is unlikely to be very efficient. That competitive environment must in the first instance emerge from within these economies. But also traded goods and foreign actors appearing in domestic markets are essential. Note that incentives need not necessarily be material or pecuniary; they could be entirely of a moral dimension. What matters is that they be properly tailored. They should be individually appropriable and directly associated with the effort made.

Arguably an equally important component of this agenda item concerns external liberalization. Several actions are required, including managing the exchange rate as a quasi-price for clearing foreign-exchange markets; the abolition of the MFT to permit external competition and the direct linkup between internal and external prices; devolution of access to foreign exchange for all legitimate economic agents; and regulating trade through conventional trade-policy instruments, such as tariffs, rather than through the myriad of implicit protection instruments inherited from state socialism. In addition to embracing domestic administrative and economic measures regarding external behavior, the transition economy can also avail itself of the benefits of multilateral (regional as well as global) regimes. That merger too forms part and parcel of

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