Trials of transition: economic reform in the former Communist bloc
Authors: Michael Keren, Gur Ofer (Ed.)
About the Book:
The book is dedicated to Professor Joseph S. Berliner, the founding father of the theory of the firm and of the microeconomics of Soviet socialism.
The contents hereafter were retranscribed from the Carl Melchior Conference on "Wither Socialist Society? Economic and Social Transformation in the Soviet Union and Eastern Europe", held in Jerusalem (1991, April 8-10), organised by the Hebrew University of Jerusalem.
Participating scholars from Eastern Europe and the Western world including Israel have been following developments in the region since before the new turn of events and brought with them this knowledge in contributing to the understanding of the changes that took place.
Four main topics are dealt with:
- Political transformation
- Stabilization
- Privatisation
- Foreign economic relations
The introduction by J.S Berlin gives a vision of Socialism in the 21st century.
2 parts:
Part I:
Chapters 2,3, 5 describe the political foundations of the economic transition.
In chapter 3, Brucan recommends the sequencing as Perestroika, implemented by a strong government, must precede glasnost and democracy (citer Ref); He rejects Kornai's proposal for a strong, but democratic government as "unrealistic". and cites the example of the West and Far East, where capitalism and its institutions were established under authoritarian regimes, as in his views "the initiation of a market economy is an extremely painful social process and is therefore also politically dangerous, with high rates of unemployment, collapse of social-insurance safety net, and principles of democracy are not adequately understood in such circumstances, which often led to populist demands".
Chapters 4,5,6,7 focus on the ex-Soviet Union. Boris Yeltsin and Yegor Gaidar embarked on a radical program on economic reform in 1992. This was a "big bang" that included the wholesale liberalization of most prices (including that of foreign exchange) and partial current-account convertability; a rigorous macroeconomic stabilisation effort, freeing internal markets, and promoting rapid privatization in services, industry and even agriculture. the results (at the time of writing the program in its infancy) were mixed: Open inflation has virtually eliminated the monetary overhang, open markets and supply situation improved somewhat, fiscal and monetary efforts of the government have been quite successful. BUT, a high-inflation spiral seems to be developing, fueled by cost-push factors, by the monopolistic structure of production and markets, by the unofficial, inter-enterprise credits. The higher-than-expected initial price shock and the inflationary spiral have resulted in a continuing decline in production and in the build-up of inventories.
The former Soviet Union experiment represents the mutual dependency between political and economic developments . The appropriate coordination and sequencing of major elements of economic change is very complex.
Bogomolov's contribution in chapter 4, while blaming Gorbachev's unquestioning faith in the viability of the old socialist system, his innate conservatism, and his attempt to maintain a rigorously centralized Soviet Union. He stresses the importance of reintegrating a more closely knit CIS in the world economy, particularly in Europe. One may consider his viewpoint as a counterpoint of Brucan's view in chapter 3.
Friedgut, in chapter 5, agrees with Brucan, but adds that perestroika must be built up from below by reconstructing a civil society in place of the one destroyed by the prolonged power monopoly of the communist party and the totalitarian regime. Social organisations at grass-root level are important to the successful implementation of changes at the top. Donetsk mining region illustrates his views: 2 simultaneous processes are taking place here: first, a takeover and radical transformation of existing institutions (trade unions, local communist party newspapers, the city government), and second, the creation of a variety of new social organizations and economic entreprises, that improve the quality of life, materially, politically and socially, with little expenditur of additional resources. Although in appearance, this looks like a spontaneous privatization, which disrupts the orderly process of stabilisation, Friedgut points out another aspect of the situation: the new order urgent needs new, smoothly functioning institutions, and when these appear, they may improve the well-being of society much earlier than manna dispensed from the center.
Cottarelli and Blejer, in chapter 6, examines the "monetary overhang", considered as the main cause of macroeconomic instability of former Soviet Union. The main building block of the model is a savings function adapted to conditions of a "shortage economy" by introducing constraints on consumption. Using an ordinary savings function to estimate the monetary overhand is justified on the grounds that, under the old system, monetary assets were virtually the only form of capital (other than human capital) that people could accumulate. However this theory is overwritten by the fact that the overhang occurred only after 1985, and therefore could not be considered as the cumulative outcome of decades of "shortage economy" as so often claimed. Overhang is understood as the combined result of the an expansion of the budgetary deficit, the relaxation of controls over the expansion of credit and the "monetization" of the production sector's non-money balances that fueled (repressed) inflationary pressures in the Gorbachev era. By the end of 1990, undesired asset holdings (forced savings) are estimated at about one-third of all financial holdings. Of these, only one-third was inherited from the old (pre-1985) regime.
Ofer, in chapter 7, discusses the problems of sequencing the major economic reforms, especially in relation to the choice between a "big-bang" and a more gradual approach, both under the former Soviet Union and under the first Russian regime. The first part of the chapter discusses alternative modes and sequences of price reform that could not only achieve the major goal of creating competitive markets, but would also stabilize the economy, foster the secure and calm environment needed for privatization and further structural change, and prevent the development of a cost-push inflationary spiral. Ofer proposes a sequence that starts with an administrative price revision followed by a temporary price freeze, after which the time is ripe for price liberalization. The stabilisation program implemented by the government in 1991 proceeded along these lines, but failed, mostly due to the unstable political situation and too abrupt liberalization by the first Russian government.
Part 2 discusses policy choices regarding privatization. Major issues concern on what should be done with large government enterprises. Ofer favors a gradual approach. In the first stage, infrastructure for large-scale privatization should be prepared by small-scale privatization and the expansion of a private service sector. At the same time a major management reform should be undertaken to transform the state sector into something more compatible with a market economy. Ofer is also of the opinion that a conservative government may not have enough political power, public trust and credibility to implement a gradual reform. A strong government, with a clear radical stance on reform, would have such power and thus could and should use the "gradual" approach, if this is warranted by economic considerations. We need to clarify here that the stronger governments of the two happened to be the democratically elected.
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Note ATA: to treat rest of text later.
Contents
1. Socialism in the 21st Century, Joseph S. Berliner, Fellow of Harvard Russian Research, Professor of Economics Emeritus, Brandeis University;
2. The End of the Soviet Union and the Return to History, Shlomo Avineri, Professor of Political Science, Hebrew University, Jerusalem;
3. Democracy at Odds with the Market in Post-Communist Societies, Silviu Brucan, Professor of IR, Bucharest University, Romanian Ambassador to the UN and Author of 5 books on world politics and transitional economies issues;
4. The Collapse of the Communist Empire: An Avenue to European Civilisation, Oleg T. Bogomolov, Director of The Russian Academy of Sciences, Institute of International Economic and Political Studies, Key Economic Advisor and Member of The Consultative Council to Yeltsin;
5. Popular Efforts Toward Self-Government: Political, Social and Economic Initiatives in Donetsk, Theodore H. Friedgut, Ass. Prof. Russian and Slavic studies, Hebrew University, Jerusalem; Author of many books on Russia and Former Soviet Union Perestroika;
6. Forced Savings and the Monetary Overhang in the Soviet Union, Carlo Cottarelli, Senior Economist, IMF; Mario I. Blejer, Senior Adviser, Europe and Central Asia Region, World Bank;
7. Stabilizing and Restructuring the Former Soviet Economy: Big-Bang or Gradual Sequencing? Gur Ofer
8. Polish Economic Reform: Principles, Policies and Surprises, Stanislaw Gomulka, Prof. at Stanford, Columbia, Harvard. Program Director of Post-communist Reform Group, LSE's Centre for Economic Performance; Author of Many books on transitional economies;
9. Transition from Socialism and Stabilization Policies: the Polish Experiences, Grzegorz W. Kolodko
10. The Transition to a Market Economy: Lessons of the Experience of the CSFR, Miroslav Hrncir, Institute of Economics, Prague, adviser to Gov. of State Bank of Czech Republik. Publications on Foreign Trade, Finance and Currency and international and monetary economics;
11. The Currency Union and the Economic Road to German Unity, Maria Haendcke-Hoppe-Arndt, Research Institute of German Economic and Social Issues in Berlin, Committee for Problems of Reunification. Author of many publications on GDR and German Unity; Michael Keren, Prof of Economics, Hebrew University of Jerusalem. Expert on Planning and incentives in soviet-type economies, economics of hierarchies and bureaucracies; and Günter Nötzold;
12. Privatisation in Hungary, Domenico Mario Nuti;
13. Who Will Own the Factories and the Land? Marton Tardos;
14. Strategies for Privatization in the USSR, Joseph S. Berliner;
15. The Socialist Firm, the Value of Capital and Transition to Capitalism, Michael Keren;
16. Is There a Future for Regional Economic Cooperation in Eastern Europe? Sandor Richter;
17. The Transition from the CMEA System of International Trade, Arye L. Hillman, rof of International Economics, Economics Research Institute, Univ. Bar-Ilan, Israel. Publications on Role of State in Market transitions in Eastern Europe;
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