The Logic of System Change

POST-COMMUNIST REFORMS: KEY QUESTIONS

What is the design? What is the speed? Who decides? Does it work? Who wins and who loses? Is a new system in place?

The Design

“The Washington Consensus”, also known as

the Neoliberal Orthodoxy, also known as

“Shock Therapy” Simultaneous economic and political transformation under

Western guidance Proclaimed goal: to create capitalist economies and liberal

democratic states integrated with (meaning: dominated by?) the West

The destruction of the old system has to be as rapid as possible

The economic blueprint:

LIBERALIZATION STABILIZATION PRIVATIZATION (added later: INSTITUTIONALIZATION)

Liberalization

Replace command with self-interest as the economy’s driving force

The government stops setting prices, let them be determined by supply and demand (easy to do)

Trade should be as free as possible, both internally and externally

Expected result: replacement of the hierarchy of state control with a network of free economic agents

THE STATE RETREATS

Stabilization Liberalization leads to hyperinflation, which may destroy the

economy Need for tight monetary policy: the government limits the

amount of money it prints Sharp reduction of government spending Raising taxes Expected result: the new market economy gets its most vital

component: a solid monetary base which can service all those myriads of free market interactions stimulated by liberalization

THE STATE COMES BACK WITH A TIGHT FIST

Privatization Restoration of private ownership of the means of production Transfer of state property into private hands Creation of a bourgeoisie – a capitalist class capable to act

as the main agent of transformation (no capitalism without capitalists)

Methods: Sell state companies to local buyers Sell to foreigners Allow managers of state companies to become owners Mass privatization through vouchers Allow employees to become owners

Effects of “shock therapy” Production falls while trade flourishes Living conditions worsen Rapid concentration of wealth in the

hands of a small minority Expansion of “underground economy” The state loses most of its economic

sovereigntyTEMPORARY DIFFICULTIES,

ACCEPTABLE SIDE EFFECTS –OR FAILURE OF THE DESIGN?IS NEW CAPITALISM SUSTAINABLE ?

Institutionalization

You can’t build any system without a well-functioning state

The state is badly needed to make a market economy work. Since mid-1990s, “institutionalization” has been listed as the fourth key component of the neoliberal transition orthodoxy

What kind of a state is needed to accomplish the transformation?

The question of democracy During the fall of communism, democracy was viewed as

an essential value in itself It was also associated with prosperity If the main issue is the dominance of the communist

bureaucracy over society, democracy is a natural remedy: the people should have the power to determine how their society is to be organized and governed

Did the people get that power under the neoliberal orthodoxy?

“Shock therapy” vs. democracy

PROBLEM 1: “Shock therapy” does not depend on popular participation. Its main agents are the state, the West, and the New Rich in the East. Citizens’ main role is to adapt as best they can.

PROBLEM 2: “Shock therapy” inflicts tremendous costs on the society. How will citizens react? They may keep patience, if they are convinced that the

transition moves in the right direction, but requires temporary sacrifices. This allows the reforms to go through

They may protest, using democratic institutions, and force their governments to change reform policies. This slows down and distorts the reform process

If one is committed to the reform blueprint, one has to try and minimize public impact on policy-making

PROBLEM 3: “Shock therapy” creates new forms of power and control for the elites through concentration of wealth

PROBLEM 4: Ethnic nationalism rises as a channel of popular protest and mobilization, resulting in tensions, wars, persecution of minorities, rise of fascist-type movements

Possible solutions:

1. --Liberal democracy (elections, rule of law, accountable government)

--Reform authoritarianism

--Reliance on external forces (joining NATO, EU)

--Alternative reform strategies based on democratic principles

Challenges to society:

Accumulation of capital

Unemployment and poverty

Dismantling of the welfare state

Zero-sum struggles for survival

If society accepts capitalism as something normal, it is better prepared to cope with these challenges

If society is not familiar with capitalism, it tends to reject the changes

In the first case, democracy aids in the transition

In the second case, it may prevent it

Which factors account for success in transition from state socialism to capitalism?

ACCEPTANCE OF CAPITALISM AS NORMAL. The degree of development of market economy Poland, Czech Republic, Hungary, Slovenia, Baltic states –

elements of capitalism in the economy were present to a higher degree

Russia, Ukraine, Belarus, Romania, Bulgaria, Central Asian countries – market institutions were almost non-existent

The first group - cases of return to capitalism The second group – cases of re-invention of capitalism

SOCIETY’S POTENTIAL TO INFLUENCE THE COURSE OF TRANSITION.

The strength of civil society The stronger the civil society, the more the reform

strategies have to take into account citizen reactions to the transition

As a result, the transition process is relatively less costly Since the transition costs fall most heavily on the majority of

society, the ability of citizens to defend their interests presents challenges to the transition

LOW IMPACT OF ETHNOPOLITICS Multiethnic societies

Patterns of and results of transition vary between different ethnic groups

Competition easily acquires ethnic connotations Ethnopolitical mobilization leads to conflict

Monoethnic societies Similarity of patterns Competition not ethnically coloured Ethnopolitical mobilization may shore up stability

Success is most likely: In a country with already embedded market institutions, a

strong civil society, not significantly divided along cultural-ethnic lines

Failure is most likely: In a country with embryonic market institutions, weak civil

society, ethnically divided

Most post-communist countries are somewhere between these two extremes

2 stages of post-communism The transition shock Living under normal capitalism

http://hdr.undp.org/external/gapminder/2005/2005.html

The transition shock Economic recession or depression Contraction or collapse of the welfare state Unemployment and poverty Rapid rise of social inequality Crisis of the value system

“Social calamity is primarily a cultural not an economic phenomenon that can be measured by income figures. Not economic exploitation, as often assumed, but the disintegration of the cultural environment of the victim is then the cause of the degradation...it lies in the lethal injury to the institutions in which his social existence is embodied… [It] happen[s] to a people in the midst of violent externally introduced, or at least externally produced change… though their standard of life… may have been improved” (Polanyi, [1944] 1957, 157e159).

‘‘What emerged after the defeat of communism was the ethos of competition, the ethos of getting wealthy… Economic evolution pushed our

countries toward… heartless market economy… a rat race, and money became the only measure of the value… of life’s success’’ (Michnik, 1999, 2002).

The transition leads to normal capitalism Private ownership Market economy Limited role for the state Liberal democracy Integration with the West (WTO, EU, NATO)

Measures of success “Free” “Partly free” “Unfree”

Some people are more successful than others Some countries are more successful than others Those not successful will keep trying – but will also look for other options

Normal capitalism East Europe as a periphery of the West Problems of Western capitalism hit peripheral countries

especially hard Total dependence on the West – inability of “independent”

states to conduct policies in the national interest Regulating the market economy Rebuilding industries Rebuilding social services Reducing social inequality

These challenges to post-communist countries are familiar to the rest of the world

But PC states are less well equipped to deal with them

“Eastern Europe: A Crisis of Confidence in Capitalism?”

Pew Research study, 2009: http://pewresearch.org/pubs/1142/easter

n-europe-crisis-capitalism-poll

State capacity to deal with economic and social problems The issue of democracy The lure of nationalism and authoritarianism The danger of war

What kinds of democracy will work in PC countries? Socialist alternatives?