#5
Carnegie Endowment for International Peace
www.ceip.org
Book Launch
Building Capitalism: Transformation of the Former Soviet Bloc
November 28, 2001
Carnegie President Jessica T. Mathews chaired the session featuring a
presentation by the author, Carnegie Senior Associate Anders ?slund.
INTRODUCTION
Dr. Anders Aslund, an author "with a unique combination of diplomatic, academic, and policy experience, has written a magnum opus that no one else could have attempted," remarked Carnegie Endowment President Jessica Mathews, introducing Aslund. "Aslund set out not only to clarify the facts of what happened, which in and of itself would have been an enormous contribution, but also to tease out the trends and patterns of all twenty-one post-Soviet transitions, to identify the connections between events in the economic and political realms, and to reach policy conclusions as well. In order to have a good sense of the future, one needs a sense of the past, and that is what Anders has given us on an incredibly bold and ambitious palette."
ASLUND'S REMARKS
Aslund structured his presentation around five major theses of his book: First, countries have taken widely divergent paths and as a result, outcomes have varied greatly, ranging from normal market economies to fully state-controlled economies. Second, reforms of all kinds drive growth. Third, countries' politics determine economic policy, which in turn determines the economic outcome. Fourth, the role of the West has been essential and inexpensive. Fifth and finally, most policy changes have been preceded by economic and political upheavals which delivered "severe shocks" to these societies. This shows that "shock therapy works."
The experiences of countries of the former Soviet bloc over the last decade illustrate three different models of transition. Radical reformers, such as Poland, Hungary, the Czech Republic, Slovakia, and the three Baltic states, have achieved fully-functioning democratic market economies. Gradual reformers, like Bulgaria, Romania, and most CIS countries, are today semi-democratic, semi-privatized, rent-seeking societies. Belarus, Turkmenistan and Uzbekistan are non-reformers, stifled by authoritarian governments, public ownership, and state-controlled economies, and have changed little over the last ten years. From this, Aslund observed that the levels of democracy, privatization, and market economy are comparable within each grouping.
By examining GDP for these three country groups, Aslund made the case that fast reformers have been most successful. Interestingly, according to official statistics the gradual reformers have fared worse than non-reformers who remain rooted in the Soviet-era; this, however, is a "statistical illusion." With reforms, the key is "the more, the faster, the sooner, the better," explained Aslund. "My belief is that it is better to undertake whatever reform you can."
Aslund posited that four reforms drive growth. Prices and trade must be liberalized, inflation must be brought below 40% a year, the private sector must control at least 60% of the country's GDP, and exports must be increased, for economic growth "always starts with exports."
Regression analyses show that real growth is correlated to systemic reform. When the two are graphed together, data show the successful reformers have achieved both growth and reform, while the non-reformers have achieved neither. Liberalization and privatization are also closely related.
Transition countries have experienced some common fiscal problems, to which ?slund proposed some basic solutions. To cure chronic budget deficits, budgets must be balanced. When high taxes paid by a small few plague a society, a country should "lower the tax rates and people will be happy to pay." Another major hazard has been a lawless bureaucracy prone to extortion, to which the best cure is to cut taxes, thereby removing them as a means of extortion. Excessive enterprise subsidies must be cut. For example, in 1998, Russia had enterprise subsidies equal to 16% of GDP--a situation Aslund described as "completely untenable," and "the main cause of the financial crash."
Aslund observed that the economics of transition have been relatively clear-cut and straightforward, while politics has been the complicating factor. Ruling elites with vested interests in preserving market distortions have often determined a country's policy choices. Often, the corrupt elite have come into conflict with liberal reformers -- the proponents of democracy and market economics. Thus, a "very strong" positive correlation between liberalization and democracy, as well as between privatization and democracy is seen. Political and economic pluralism go together, said Aslund, and by choosing democracy, a country enables the majority to impose its interest on the rent-seeking elite.
Formal democracy is not enough; "its vibrancy and efficacy matters." Thwarting rent-seeking elites is essential. Parliamentary systems are more conducive to reform than presidential rule, and coalition governments are more effective reformers than one-party governments because the more power is concentrated, the greater the vested interest in maintaining the status quo. Likewise, government instability benefits reform. Poland, Estonia, Latvia, and Lithuania have been among the most successful reformers, and their governments have changed every year, on average. Labor protests and strikes promote reform by checking theft by enterprise managers.
The West has played an instrumental role in transition as a source of advice, though monetarily, Western aid has been "tiny," argued Aslund. The debt service on communist-era loans has actually been greater than inflows of Western grants and official loans to the transition countries.
"Shock therapy works," concluded Aslund. Severe financial and political crisis has preceded most successful reforms, and often, good economic policies have been adopted only after a second severe shock, as happened in Poland, Bulgaria, and Russia. (Russia's first shock was the breakup of the Soviet Union in 1991; the second was the ruble crisis in 1998.) Shocks have broken up rent-seeking structures and have discredited corrupt big government and communist halfway policies.
Now we see that the "economies of the former Soviet Union are growing by about 6 percent this year, despite falling oil prices, and structural reform appears to be driving growth." In essence, said Aslund, this represents a new breakthrough in the post-communist transition.
Summary by Caroline McGregor, Junior Fellow with the Russia & Eurasia Program.
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