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The Great Rebirth: Lessons from the Victory of Capitalism over Communism
The Great Rebirth: Lessons from the Victory of Capitalism over Communism
The Great Rebirth: Lessons from the Victory of Capitalism over Communism
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The Great Rebirth: Lessons from the Victory of Capitalism over Communism

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The fall of communism transformed the political and economic landscape in more than two dozen countries across Europe and Asia. In this volume published on the 25th anniversary of the fall, political leaders, scholars, and policymakers assess the lessons learned from the "great rebirth" of capitalism and highlight the policies that were most successful in helping countries make the transition to stable and prosperous market economies. Also discussed in this book are examples of countries reverting to political and economic authoritarianism. The authors of these essays conclude that the best outcomes resulted from visionary leadership, a willingness to take bold steps, privatization of state-owned enterprises, and deregulation. Recent backsliding in Russia and Hungary has cast a shadow over the legacy of the transition a quarter century ago, however.

This volume grew out of a two-day symposium of experts and practitioners reflecting on the past, present, and future of reform, held in Budapest, Hungary, on May 67, 2014.
LanguageEnglish
Release dateOct 10, 2014
ISBN9780881326987
The Great Rebirth: Lessons from the Victory of Capitalism over Communism

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    The Great Rebirth - Simeon Djankov

    Introduction

    ANDERS ÅSLUND AND SIMEON DJANKOV

    After nearly a decade of strikes, protests, and demands for political freedom, Poland held semifree parliamentary elections on June 4, 1989, signaling the beginning of the end of communism in Eastern Europe. In August the opposition Solidarity movement’s Tadeusz Mazowiecki formed a coalition government. Solidarity’s sweeping election mandate ushered in reforms throughout Eastern Europe. The courage of the Poles in standing up for political freedom inspired two battle cries in the region: We want a normal society! and We want to return to Europe! By normal people meant more than change from communist oppression. They wanted to live in a democracy and a market economy based on private ownership and the rule of law. They also wanted to be a part of the European Union, with the North Atlantic Treaty Organization (NATO) addressing Europe’s security concerns.

    In the fall of 1989 communist regimes collapsed in the rest of Eastern Europe. Less conspicuously, Hungary carried out its own democratization. On November 9, 1989, the Berlin Wall fell; the next day the old Bulgarian communist dictator Todor Zhivkov was ousted in a palace coup. Later in November Czechoslovakia went through its Velvet Revolution. On Christmas Day Romanian dictator Nicolae Ceaușescu was ousted and killed in a violent uprising.

    In August 1991 an abortive coup by the old Soviet hardliners against President Mikhail Gorbachev led to the collapse of the Soviet Union. Russian president Boris Yeltsin, who had been democratically elected in June 1991, gained actual power in Russia. The Baltic countries (Estonia, Latvia, and Lithuania) became independent in August; in December the 12 remaining Soviet republics parted company through a peaceful agreement and became sovereign states.

    Box I.1 Countries covered in the book

    This book examines the former communist countries of Eastern Europe, the Caucasus, and Central Asia. These countries may be described as the former Soviet Union, the Soviet bloc in Eastern Europe, and the former Yugoslavia and Albania. The group comprises 30 countries. In various contexts, they are categorized as follows: Central and Eastern Europe (CEE) or the CEE-10 consists of the 10 countries that became members of the European Union in 2004 (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia) and 2007 (Bulgaria and Romania). Central Europe refers to the Czech Republic, Hungary, Poland, Slovakia, and Slovenia. The three Baltic countries are Estonia, Latvia, and Lithuania. The 12 former Soviet republics are Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. They are somewhat incorrectly captured by the concept of the Commonwealth of Independent States (CIS)—incorrectly because Georgia entered late in 1993 and departed in 2009. Six other countries are the remaining successor states of Yugoslavia: Bosnia-Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, and Serbia. Croatia joined the European Union in July 2013; it is not included in the CEE-10 because of its recent accession. The remaining two countries in the group are Albania and Mongolia.

    In the quarter century since the fall of communism, the former Soviet bloc and Yugoslavia have undergone tremendous changes (see box I.1 for countries covered in this volume). All but 3 of the 30 countries in the region (Belarus, Turkmenistan, and Uzbekistan) have become market economies. The Central and East European countries have also become full-fledged democracies. In contrast, apart from the Baltic States, democracy has not taken hold in the former Soviet countries. Per capita GDP based on purchasing power parity has more than doubled in two countries (Estonia and Poland). But in five countries (Kyrgyzstan, Macedonia, Moldova, Tajikistan, and Ukraine)—countries that carried out some but not sufficient reforms—GDP per capita is lower today than in 1989.

    Why was postcommunist reform successful in some countries but not others? A broad consensus among experts and former policymakers has emerged about what constituted the most successful economic policies in transforming countries from stagnant command economies into prosperous market economies. Visionary leaders willing to carry out early, radical, and comprehensive reforms in incremental steps rather than delaying reform achieved the best outcomes. Deregulation of prices and markets, macroeconomic stabilization, and privatization of state-owned enterprises were essential for the success of market economic reforms and the early return to economic growth. A variety of political reforms, both institutional and social, accompanied the economic adjustments, validating the view that democracy and economic liberty go hand in hand.

    Few doubts now exist about the importance of deregulation and macroeconomic stabilization, which have been tested many times in numerous countries. Privatization remains much more controversial, but the postcommunist experience demonstrates clearly that no market economy can be successful without far-reaching privatization. The problems associated with privatization, however, pose a major challenge for reformers: How to privatize without inviting corruption, crony capitalism, and rent seeking, which provoke political backlash?

    Postcommunist reform is by no means over. To quote Wall Street Journal journalist Matthew Kaminski, The unfinished business of 1989 is Ukraine.¹ In the same vein, Washington Post columnist Anne Applebaum notes that Poles in 1989 were motivated by the same things as Ukrainians are now.² The struggle of Ukrainians—to break free from corruption and Russian intimidation—is still unfolding, but the country appears ready for comprehensive and far-reaching market economic reforms, including the hardship and sacrifice some of these reforms may entail in the short run. Ukrainians hope to reform their way toward European integration and benefit from the lessons of postcommunist transition elucidated in this book.

    Recent history also suggests that market reforms are not safe or permanent; they must be protected. A mounting concern is reversal of reforms. In Russia as well as Hungary, populism and statism are on the rise following recovery from their first postcommunist decade of turmoil. Both countries reveal the fragility of the postcommunist transition. Russia’s substantial renationalization shows that privatization can easily be reversed. Several of Hungary’s seemingly successful institutional reforms, not to mention its climate of ethnic and religious tolerance, have proven vulnerable. These recent reversals of both economic and democratic reforms have humbled reformers and cast a shadow over the legacy of the transition a quarter century ago, even as that legacy has proven one of the most remarkable episodes in the modern history of Europe.

    Purpose of the Book

    To assess the postcommunist transition in the last quarter century, the Peterson Institute for International Economics (Anders Åslund and Simeon Djankov) and the School of Public Policy at the Central European University (Wolfgang Reinicke) organized a two-day symposium, Transition in Perspective, on May 6–7, 2014, in Budapest. Forty-five experts presented papers on lessons learned and illuminated the road ahead. The conference attracted leading former policymakers and economists from Bulgaria, the Czech Republic, Georgia, Hungary, Latvia, Poland, Romania, Russia, Slovakia, Ukraine, and other countries.

    This volume of the papers presented at the conference assesses what did and did not work in the economic transformation after communism. The essays are devoted primarily to the former communist countries in Eastern Europe, the Caucasus, and Central Asia. (China and Vietnam are very different from the European and Central Asian countries, for reasons that have been discussed extensively elsewhere).³

    In selecting the essays for this volume, we were inspired by the 1994 Peterson Institute volume The Political Economy of Policy Reform, edited by John Williamson. One of its starting points was the observation by Jorge Domínguez and Richard Feinberg that techno-pols were a burgeoning breed of economic technocrats who assume positions of political responsibility (Williamson 1994, 11). We invited the leading reformers, the technopols, who are still alive and active to write chapters about their experiences. We involved top policymakers, academics, and intellectuals who implemented or oversaw these reforms in the hope that this volume will stand as a monument to postcommunist transition.

    Three major figures from the era contributed to this volume. Leszek Balcerowicz, a Polish professor of economics chosen by Prime Minister Mazowiecki as minister of finance, published his epoch-making reform program in September 1989. Another professor of economics, Václav Klaus, became minister of finance and later prime minister and president of the Czech Republic. Mart Laar, a young historian, became prime minister of Estonia in September 1992. Thanks to their efforts, Central Europe and the Baltics largely enjoyed successful early transitions to market economies, even if many did not see it at the time. Much of this transition has been forgotten and taken for granted for the very reason that it worked so well.

    Russia attempted radical market economic reform under the leadership of economists Yegor Gaidar and Anatoly Chubais. For many reasons it was much more difficult to reform Russia than Central and Eastern Europe; it was even more difficult in many former Soviet republics. Eventually most of these countries launched reforms, albeit with varied success, but nowhere were the reforms as swift and successful as in Central Europe and the Baltics. Because the early Russian experience was accompanied by so many difficulties—including hyperinflation, crime, falling living standards, and the enrichment of oligarchs—many Russians look back on this period with contempt, speaking of the damned 90s.

    Figure I.1 Democracy and Corruption, 2013

    Sources: Freedom House, Freedom in the World 2013, www.freedomhouse.org/sites/default/les/Country%20Ratings%20and%20Status%2C%201973-2014%20%28FINAL%29.xls; Transparency International, Corruption Perceptions Index 2013, http://cpi.transparency.org/cpi2013/results/.

    Outcomes of Postcommunist Transition: Major Progress but Considerable Variation

    The most obvious criterion for assessing the postcommunist transition is economic achievement. But it would be a mistake to ignore governance, particularly levels of corruption and political freedom, which are often inextricably related to success and failure of reforms. Daniel Treisman observes that countries have tended to converge with their neighbors in these criteria. The Baltic countries have converged upward with the democratically run Scandinavian countries, while Tajikistan has converged downward with its authoritarian or poorly governed neighbors Afghanistan and Pakistan.

    Figure I.1 sums up the state of governance in 22 postcommunist countries. This striking picture shows a strong correlation between authoritarianism and corruption. A clear dividing line is evident between the 10 Central and East European countries that have become members of the European Union (EU) and the former Soviet republics. All 10 new EU members lie in the upper-right corner (indicating a high level of political freedom and a low level of corruption). These countries are in optimal equilibrium, where political and civic freedom checks corruption. In the opposite corner, with low levels of freedom and high levels of corruption, lie most post-Soviet countries—Azerbaijan, Belarus, Russia, and the countries of Central Asia. These eight countries represent suboptimal equilibrium of stable and severe corruption maintained by authoritarian rule with no hope of improvement short of regime change.

    Four unstable countries—Armenia, Georgia, Moldova, and Ukraine—fall in between. Interestingly, they are also members of the Eastern Partnership of the European Union. They represent the current frontline between the rule of law and corruption and between democracy and authoritarianism.

    Main Lessons from Postcommunist Transformation

    The old reformers, international officials, and academics at the conference reached a broad consensus on 12 major takeaways from postcommunist transition, some old and some new. Others acquired new nuances. These lessons can be summarized as follows:

    1. Speed is important. All reforms—deregulation, macroeconomic stabilization, privatization, and institution building—should be implemented as quickly as possible and in parallel. In the postcommunist countries, deregulation could and should have been carried out quickly. Macroeconomic stabilization took somewhat longer, but delaying it was not beneficial. Institutional change and privatization were by necessity more complex processes, requiring more time, but more intense reform would have been better. As Balcerowicz puts it, A risky strategy is always better than a hopeless one. Klaus emphasizes that the reforms had been carried out by people with dreams, not by optimizing theoretical models. Both Balcerowicz and Klaus reject the concept of shock therapy as a pejorative term used by those opposing radical reforms. Most conference participants preferred to talk about early, radical, and comprehensive reforms. In hindsight most technicalities of reforms appeared rather prosaic.

    2. People’s behavior cannot be changed, so the people in charge have to change . It was not enough to change incentives. There had to be an unconditional liquidation of the communist system, according to Klaus. As great a disruption as possible in the elite was desirable. The old communist elite was exceedingly hypocritical, claiming obedience to an ideology in which no one believed. Most conference participants argued for lustration of old cadres, a practice adopted in most of Central and Eastern Europe but not in Bulgaria, Romania, or the former Soviet Union. Estonia carried out the most radical purge of old structures and staff, quickly becoming the least corrupt postcommunist country. During the early transition, many people worried about the transition causing excessive instability. But in hindsight more people are concerned about the unrelenting communist elite. In this respect reformers have become more radical over time.

    3. The dominant economic problem after the initial transition was rent seeking or corruption. The level of corruption is high in postcommunist countries and appears closely related to both the severity of rent seeking in the early transition and the level of democracy. A clear dividing line runs between the new EU members and the post-Soviet countries, among which only Georgia sharply restricted corruption.

    4. The early, short period of " extraordinary politics ," to use Balcerowicz’s term, is critical : Either reform or rent seeking takes over. As former Estonian prime minister Mart Laar notes, To wait means to fail. Reform won in Central Europe and the Baltics, whereas rent seeking prevailed in the former Soviet Union. The outcome of that battle was usually determined in the first year of transition.

    5. Leadership matters most in the early transition, before institutions rein in leaders. Daniel Treisman’s econometric analysis identifies the three leaders who had the greatest impact on reform: Yegor Gaidar in Russia, Dimitar Popov in Bulgaria, and Leszek Balcerowicz in Poland.

    6. The state is more difficult to reform than enterprises. No serious policymaker argues that the state should get out of the way, although many argue that it should be smaller. Much deregulation remains to be done in the postcommunist countries. The state retains many roles. Its reform is a complex, slow undertaking, involving many principles and long-lasting actions. Enterprises are much easier to reform because they just have to be privatized.

    7. The secret police represents the worst part of the old elite , because it is nontransparent, powerful, skillful, international, lawless, and ruthless and has strong networks. It has proven ideal as an organized crime network, as is particularly apparent in Russia and Bulgaria. For this reason lustration and disruption of the old elite are vital; countries that did not purge their old secret police or pursue lustration have suffered. Other enemies of reform—including communist and state officials, state enterprise managers, the military, and organized criminals—have proven much less tenacious. Today the former communist secret police is far more destructive than private organized crime groups.

    8. Democracy is vital for successful market economic reforms , because it offers a new start, transparency, checks and balances, civil society, and free media. Successful reform requires the adoption of hundreds of new laws; Russia’s reform efforts in the 1990s illustrate how little can be done without a reformist majority in parliament. Through regression analysis, both Treisman and Gérard Roland show that democracy and market economic reform go together. Treisman demonstrates that the causality runs from democracy to market reforms, debunking earlier ideas of Adam Przeworski (1991) that radical democracy and market economic reform are incompatible. Previous concerns of reformers about labor unrest, strikes, and social upheaval turned out to be unjustified. Roland and Oleh Havrylyshyn emphasize the positive impact of strong civil society and national cohesiveness for the success of market economic reforms. Empirically, parliamentary systems have proven more conducive to economic reform and control of corruption than presidential systems in the region.

    9. It is nearly impossible to know when serious reforms can become possible. Reforms can become feasible all of a sudden. The collapse of communism in 1989 came largely as a surprise to East Europeans. Reformers therefore have to be prepared—with ideas, programs, concrete proposals, and reform teams—to act when a window of opportunity opens. They need to advocate for reforms through think tanks, traditional media, and new social media to increase popular understanding and win political support. Reformers in the postcommunist countries failed to realize early on that reform was not a technocratic but a political endeavor. Once they did, they devoted effort to communication and public education. Klaus stands out as a reformer who understood this from the outset; not surprisingly he became the most successful reformer politically.

    10. The main force of reform must be national. Every major reform started with regime change. The European Union and the International Monetary Fund (IMF) are the most important international tools, but they cannot lead reform; the national government must be the driver. In the 1990s the IMF was the dominant foreign actor. In the 2000s the European Union took over as the main reform anchor. It has proven most effective when a country is trying to accede to the Union. Early EU engagement with a country is desirable, but premature accession is not advantageous. Many observers considered the accession of Bulgaria and Romania too hasty. An outstanding question is how important the early commitment of foreign support is for the success of reforms.

    11. The worse the situation is, the more radical reforms must be, but the more difficult they are to carry out. Countries with severe crises are more likely to fail in their initial reform efforts, with rent seeking becoming pervasive. Reform succeeded in Georgia because the near failure of the state made radical reforms all the more vital. Georgia’s experience also shows that substantial reforms can be carried out even when borders are uncertain, a lesson that could apply to Ukraine. Among the many radical reforms undertaken by the Georgian government was the firing of all traffic police virtually overnight, a step that led to a decline in traffic accidents. Therefore, success of reforms in today’s Ukraine must not be precluded.

    12. Reversals of structural reforms have aroused new concerns . Russia and Hungary illustrate the fragility of the postcommunist transition: Both countries have reversed major reforms, including privatization and pension reform. Hungary and Kazakhstan have nationalized all mandatory private pension saving schemes, and Poland has nationalized half of these funds. Many countries have reduced the financing of mandatory pension savings, and Bulgaria has frozen the gradual increase in the retirement age. Several countries, notably Hungary and Bulgaria, have retreated from energy sector reforms that called for full cost recovery. The lesson is clear: Few achievements are safe and truly irreversible. As Professor János Kornai has pointed out, Anything can happen. Low-probability events do occur.

    A substantial part of this book is devoted to the second wave of reforms and how it differs from the first one. The first wave needs a leading reformer, a reform team, a program, and elaborate reform proposals that can be advocated in public and that can command a parliamentary majority and a broad public understanding. During the second wave, more complex and challenging reforms, such as tax, pension, energy, and social reforms, can be carried out, often after a change of government. The second wave requires much more political skill and public communication to be successful, as by then reform is part of the ordinary political process.

    This volume focuses on the political economy of reform; less attention is devoted to pure economics. Old fights about topics such as exchange rates have faded. The importance of fiscal adjustment and tax reforms is now barely contested. Among the purely economic issues, the most striking may be the positive attitude to orderly default. The dominant view now appears to be that excessive public debt should be written off early on, but no one can say what is excessive. Bulgaria and Poland reached agreements with their official creditors on substantial and conditional reductions of their foreign public debt, and no one seems to regret those decisions. Russia defaulted on its domestic public debt in 1998; the main regret was that default did not take place earlier and in a more orderly fashion. Hungary never restructured its large public debt. It has managed to service its public debt, with the intermittent assistance of the IMF, but it has not succeeded in breaking out of the fiscal trap of excessive public expenditures and public debt, forcing it to maintain higher taxes than all other countries in the region and leaving it with the lowest growth in the whole region after 2000.

    The country that now arouses the greatest hope for new market economic reforms is Ukraine, where skillful policymakers have reached a Stand-By Arrangement with the IMF, to be accompanied by a far-reaching Association Agreement with the European Union. But the threat of Russian aggression and resistance of strong vested interests remain.

    On June 27, 2014, Ukraine, Georgia, and Moldova signed Association Agreements with the European Union, as the Central and East European countries did in the mid-1990s. They all want to become members of the European Union, and Article 49 in the Treaty of the European Union states that any European country may apply for membership. In order to become a member, a country has to fulfill the so-called Copenhagen criteria of 1993 on democracy, human rights, and market economic development and be approved by all EU members.

    It remains to be seen whether these Association Agreements initiate new reforms in the region. Ukraine is an obvious opportunity. Georgia has already carried out great reforms and now needs to secure them. Moldova has implemented more reforms than Ukraine, but it is politically fragile.

    Structure of the Book

    This volume consists of nine country case studies and five thematic crosscountry chapters. The country studies selected include the most interesting cases from the viewpoint of economic policymaking.

    The book is divided into three parts. Part I showcases five early reform countries. Part II presents three latecomers and one no-show (Ukraine). The case studies were written by the men who led the reforms or who were instrumental in their adoption. Part III comprises five chapters presenting broader trends written by academics or expert analysts.

    The authors of the country studies were encouraged to address the following questions:

    1. What were the main goals of the postcommunist reform in your country? What did you want to accomplish?

    2. What were the greatest problems you anticipated?

    3. What turned out to be the greatest problems in practice?

    4. Was there a second wave of reforms? If so, how did it differ from the first wave?

    5. What do you consider the greatest achievements of the postcommunist reforms in your country?

    6. What do you consider the greatest shortcomings and mistakes of the postcommunist reforms in your country?

    7. How has your perspective on the reforms changed today?

    8. With the benefit of hindsight, what would you have done differently?

    Part I begins with Poland, which together with Estonia is the greatest economic and political success today. Chapter 1 is written by Poland’s former reform leader, finance minister, and chairman of the central bank Leszek Balcerowicz. He sticks to his original idea that radical approaches work better. Reformers had to be prepared to act when a window of opportunity opened up and move quickly, because one never knows how long such an opportunity lasts. Reforms needed to move on several parallel tracks—deregulation, macroeconomic stabilization, privatization, and institution building—but the maximum speed at which they could be carried out varied. Inevitably, uncertainty about policy was greatest in the first period. It was much easier to reform enterprises, which could be privatized, than state institutions, especially courts, which had to stay state owned. In a second wave of reforms, more complex problems, for which the early reformers had not been prepared, such as social reforms and tax policy, could be handled. Most problems later on concerned politics, management, and returning statism. Balcerowicz’s conclusion is that reformers win by speed or communication.

    Chapter 2 is written by Hungary’s former finance minister Lajos Bokros. Hungary was a reform leader in the 1990s, but since 2001 it has regressed considerably, providing an interesting contrast to Poland. Hungary rapidly developed excellent European institutions but has suffered from low growth and high public debt. In the early 1990s, preeminent Hungarian economist Professor Kornai, who gave a dinner speech at the conference, coined the phrase premature social welfare state for Hungary, because it had too high a tax burden and excessive social expenditures. Since 2010 Hungary has turned statist and reversed much of its successful institution building. The government nationalized accumulated pension funds and enterprises and created new monopolies. Predatory taxes are chasing away foreign investors, and utility prices have been fixed at low levels. Having lost competitiveness, Hungary’s economy did not grow between 2005 until 2013.

    In chapter 3 former Czech prime minister and president Václav Klaus lays out his case for radical reform and states that one prerequisite for reform was the unconditional liquidation of the communist system as a whole—Joseph Schumpeter’s creative destruction. The new system had to be built by people with dreams, not according to theoretical models of optimal sequencing. Gradualism was not a practical reform strategy in a democracy, because reforms could easily be diverted and stopped. To succeed, the nation had to own reforms. The key to success was avoiding rent seeking and gradualism and ensuring that political and economic reforms moved swiftly and in parallel. Institutions that are as perfect as possible should be introduced as early as possible. The decisive part of the transition was the privatization of all stateowned firms.

    Market economic reforms were the most radical and successful in Estonia. The country’s great reformer and two-time prime minister Mart Laar focuses on the pillars of his reform in chapter 4. Comprehensive reform comprised effective democracy and a normal market economy, as well as integration with the European Union. Laar puts great weight on both radical and comprehensive reform. Arguably, reform is easier in a small country, but Estonia’s clarity of intention and consistency of implementation are impressive. Reform in Latvia and Lithuania has been similarly successful. The experiences of the two countries were omitted from this volume because the lessons are the same as those of Estonia. Latvia’s former prime minister Valdis Dombrovskis gave a keynote address about how he led his country through the global financial crisis (see Åslund and Dombrovskis 2011).

    In chapter 5, on Russia, Anders Åslund, senior fellow at the Peterson Institute, economic adviser to the Russian reform government from 1991 to 1994, and coeditor of this volume, emphasizes that the preconditions for market economic reform were very difficult in Russia in late 1991 but the government realized that the best option was to proceed with market economic reform anyway. Reformers achieved the three main economic aims of reforms: farreaching privatization, formation of a market economy, and, after 1998, macroeconomic stability. In hindsight the greatest shortfalls were sins of omission. The ruble zone should have been dissolved earlier, energy prices and export controls should have been liberalized, Russia should have received early international financial aid for its reforms, and the old parliament should have been dissolved and early parliamentary elections held. Russia stands out as the clearest example of reversal of market reforms. Much needs to be done to revive reform there.

    Part II is devoted to latecomers and no-shows. In chapter 6 former deputy prime minister and finance minister Ivan Mikloš explains how Slovakia lagged in economic reforms in the 1990s but caught up by adopting impressive reforms in 2003–04, producing the highest economic growth in Central and Eastern Europe in 2000–10. The reform breakthrough was preconditioned on the elaboration of a reform program by the opposition, the propagation of reform ideas, and swift implementation once the political preconditions were met. Thanks in large part to nongovernmental organizations, a broad opposition coalition won the 1998 elections. The coalition was too broad, however, with nine parties, including the former communist party, so few reforms were possible. In 2002 new elections brought four reformist parties to power. These parties were able to carry out the reforms they had sought during the previous four years. They quickly undertook long-prepared tax, pension, labor market, and other reforms at a time when no other country was reforming. Mikloš emphasizes the importance of political leadership, referring to Klaus and his prime minister, Mikuláš Dzurinda. He quotes Benjamin Disraeli, who noted that whereas politicians care only about the next election, statesmen think of the next generation.

    In chapter 7 former finance minister and deputy prime minister Simeon Djankov, a coeditor of this volume, discusses reforms in Bulgaria, the postcommunist country that has experienced the greatest vacillations. Bulgaria experienced both early and repeated radical reforms and repeated reversals. According to Djankov, the cause of the reversals is the strong influence of the old secret police, which permeates every aspect of society. He argues that Bulgaria’s main shortcoming was not purging members of the former secret police in the first years after the end of communism. In 2007 Bulgaria became a member of the European Union, which impedes the risk of serious reform reversals.

    Former president Mikheil Saakashvili and former minister of economy Kakha Bendukidze coauthor chapter 8, on Georgia’s economic reforms. When Saakashvili led the Rose Revolution in 2003, Georgia was widely considered a failed state, with possibly the worst corruption in the whole former communist world. Today Georgia is the only post-Soviet country to have brought corruption under control. Saakashvili and Bendukidze explain how they did it. The reformers carried out radical reforms in one area after the other, going so far as to fire all traffic police at once.

    Chapter 9, by former deputy minister of finance Oleh Havrylyshyn, is devoted to Ukraine, the most interesting laggard. Ukraine had several more or less false starts of reform. Although it has become a market economy, it has not gone very far. Havrylyshyn argues that the fundamental problem was that Ukraine had no real economic policy in its first three years of independence. As a consequence, a group of rent seekers, who soon became oligarchs, came to dominate the Ukrainian economy and polity. The Orange Revolution of 2004 failed to break the power of the oligarchs, but Ukraine now harbors great hope of catching up with the other latecomers to economic reform. This chapter benefited from lively discussion at the May conference in Budapest, as Ukraine was suffering from Russian military aggression at that time. Ukraine’s minister of economy, Pavlo Sheremeta, gave an inspiring keynote speech.

    Part III brings together five prominent scholars who compare the experiences of the transition economies. In chapter 10 Simeon Djankov discusses the crucial issues of marketization and privatization. Privatization, deregulation, and the removal of subsidies made postcommunist economies more market oriented, though the achievements varied significantly by region. A key problem was and remains corruption, which needs to be combatted through the creation of institutions upholding the rule of law. Demographic challenges increase the need for pension reforms. The EU regulatory model may constrain badly needed productivity increases. Thus, although the foundations for economic growth exist, the transformation of the postcommunist economies is far from over.

    In chapter 11 Charles Wyplosz covers the many macroeconomic aspects of transition. Half of all hyperinflations recorded in world history occurred in the early stages of postcommunist transition, but over time inflation, budget deficits, and public debt have by and large been brought under control. Unemployment has been relatively limited. He concludes that the most successful policymakers were those who stuck to the simple principles that have long been recognized as approximately right in all circumstances, including the role of monetary policy in driving inflation, the dangers of monetary financing of budget deficits, and the theory of financial crises.

    In chapter 12 Daniel Gros offers an overview of the role of trade, investment, and European integration. A sharp dividing line runs between the new EU members and post-Soviet countries. The postcommunist countries that have become EU members quickly concluded European Association Agreements and turned their trade overwhelmingly toward the European Union. The post-Soviet countries lacked an international anchor for their trade and experienced a much slower international integration. East European enlargement turned out to be successful, whereas the post-Soviet countries grappled with uncertainty about their international role, although eventually they have also undergone substantial international integration.

    In chapter 13 Gérard Roland takes a long-run view of transition. Most transition economies have been relatively successful in catching up with advanced market economies. Success in introducing good economic institutions in transition economies is much more mixed, with countries that have not acceded to the European Union performing poorly. The quality of economic institutions in transition economies is strongly intertwined with democratic political institutions. Success in democratization depends to a significant extent on civil society involvement and deep-rooted cultural values.

    In chapter 14 Daniel Treisman surveys the 25 years of economic change in the former communist countries since the fall of the Berlin Wall. Although diverging sharply from one another, these countries have converged economically and politically toward their nearest neighbors outside the Soviet bloc. The typical country experienced a spurt of economic reform in the early 1990s, slowing dramatically after 1996. Speed in these early years of reform determined which countries achieved liberal market economies and which got stuck halfway: The race went to the hares, not the tortoises. A longer history of communist rule and an Islamic religious tradition correlate with less movement toward democracy after 1989; slower democratization, in turn, predicts less market reform. Even controlling for numerous aspects of the setting in which they governed, certain leaders saw significantly more or less rapid reform, suggesting the importance of leaders’ choices at critical historical junctures.

    References

    Åslund, Anders. 2013. How Capitalism Was Built, 2d ed. New York: Cambridge University Press.

    Åslund, Anders, and Valdis Dombrovskis. 2011. How Latvia Came through the Financial Crisis. Washington: Peterson Institute for International Economics.

    Przeworski, Adam. 1991. Democracy and the Market. New York: Cambridge University Press.

    Williamson, John. 1994. The Political Economy of Policy Reform. Washington: Institute for International Economics.

    Anders Åslund, senior fellow at the Peterson Institute for International Economics; economic advisor to Russia (1991–94); economic advisor to Ukraine (1994–97). Simeon Djankov, rector of the New Economic School in Moscow; vice premier minister and minister of finance of Bulgaria (2009–13); creator of the World Bank Ease of Doing Business Report.

    1. Matthew Kaminski, The Battle on the New Russian Front: How Ukrainians United to Turn Back Kremlin Rebels in One Eastern City, Wall Street Journal, June 5, 2014.

    2. Anne Applebaum, The Legacy of 1989: Poles Chose Europe. Now Ukrainians Want In, Washington Post, June 1, 2014, A17.

    3. Communism did not last as long in China and Vietnam; their economies were much less developed, with more manual agriculture and fewer economic distortions; and China did not suffer from a major macroeconomic crisis (Åslund 2013, 45–47).

    I

    EARLY REFORMERS

    1

    Poland

    Stabilization and Reforms under Extraordinary and Normal Politics

    ¹
    LESZEK BALCEROWICZ

    Until the summer of 1989 I was not planning on a career in politics. But the historical change under way in Poland persuaded me otherwise, and I entered politics, or rather public service, that year and remained there until early 2007—albeit with a brief holiday in 1992–95. Over the course of that career, I served in the following positions:

    ▪ deputy prime minister and minister of finance (September 1989–December 1991)

    ▪ leader of the Freedom Union, the largest free market party in Poland (April 1995–December 2000)

    ▪ deputy in the Polish Parliament (September 1997–December 2000)

    ▪ deputy prime minister and minister of finance (October 1997–December 2000)

    ▪ governor of the National Bank of Poland (January 2001–January 2007).

    In this chapter I describe my role as minister of finance in charge of fiscal policies and deputy prime minister responsible for the overall coordination of economic reforms. I devote much attention to this first romantic period when Poland was the first postsocialist country to launch and implement a radical stabilization and reform program—also called the period of extraordinary politics.

    I also cover another period of stabilization and accelerated reforms in Poland from October 1997 through late May 2000, when I was again deputy prime minister and minister of finance, as well as leader of the Freedom Union. These reforms took place under completely different political conditions—normal politics. This second reform period is less well known than the first, but in some respects it is more interesting; it offers some illuminating contrasts with the first period of reform.

    In discussing both periods, I deal with three interwoven topics: the content of policies, the managerial aspects of their launching and implementation, and the political economy of stabilization and reforms. I try to be as honest as possible in identifying any errors in the policies for which I was responsible. Here I define errors as negative deviations

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