Twenty-five years after the fall of communism, a clear consensus has arisen about what kind of economic policies were most successful in helping countries make the transition into stable and prosperous market economies. Countries with visionary leadership, willing to take major and comprehensive steps rather than incremental reforms, achieved the best outcomes, and privatization of state-owned enterprises and deregulation were essential to their success. But another consensus exists that is more ominous. Recent developments, notably the renationalization in Russia and the reversal of both economic and democratic reforms in Hungary, have humbled reformers and cast a shadow over the legacy of the transition a quarter century ago.
These were some of the conclusions of a two-day symposium of political leaders, policymakers, and scholars to assess lessons learned and the road ahead. The conference—entitled "Transition in Perspective" and held in Budapest, Hungary, on May 6–7, 2014—drew an extraordinary group of former leading policymakers and specialists from Russia, Ukraine, Poland, Hungary, the Czech Republic, Slovakia, Latvia, Bulgaria, Romania, Georgia, and other countries. It was organized by Simeon Djankov and me of the Peterson Institute for International Economics, together with Wolfgang Reinicke of the School of Public Policy at Central European University. Participants discussed 10 country studies and 5 theme papers in 8 different sessions on such aspects as the future of Ukraine, why many economic reforms in Russia and elsewhere are being reversed, and the role of privatization of government enterprises. We plan to produce a book of essays from the conference later this year, tentatively entitled The Great Rebirth: Lessons from the Victory of Capitalism Over Communism.
Among the participants (photographed above) were Leszek Balcerowicz, Vaclav Klaus, and Anatoly Chubais, architects of economic reform in the 1990s in Poland, Czechoslovakia, and the Czech Republic and Russia respectively. (See the conference program attached [pdf].) Although the discussions were off-the-record, I can offer a brief summary of the proceedings based on permission obtained from the participants.
Several speakers pointed out that overall transition can be considered a success in terms of economic performance because each subregion has increased its share of the global economy. Five countries have not reached their GDP per capita level of 1990 as yet, however. Daniel Treisman, political science professor at the University of California, Los Angeles, noticed that countries have tended to converge with their neighborhoods: Central and Eastern Europe has converged with the European Union, and Central Asia with its neighbors Afghanistan and Pakistan. As a whole, the conference discussed the rise of anti-capitalist and nationalist sentiments in Russia and Hungary but also new opportunities for reform, especially in Ukraine.
Poland and Estonia stand out as the greatest economic and political successes today. Polish reform leader, twice finance minister and also chairman of the central bank, Leszek Balcerowicz, repeated his longstanding contention that radical approaches work the best, noting: “A risky strategy is always better than a hopeless one.” In order to work, reforms need to move on several tracks: deregulation, macroeconomic stabilization, privatization, and institution building.
Hungary was a reform leader together with Poland in the 1990s, but since 2001 the country has regressed. Former Finance Minister Lajos Bokros and preeminent Hungarian economist Professor Janos Kornai discussed this disturbing trend. In the early 1990s, Kornai coined the phrase “premature social welfare state” for Hungary, describing its excessive tax burden and social expenditures. Today these attributes have resulted in low growth and high public debt, although Hungary developed excellent European institutions. Since 2010, the accumulated pension funds have been abolished or nationalized, and the government is creating new monopolies and nationalizing enterprises. Predatory taxes are chasing away foreign investors, and utility prices are being fixed at low levels. Is this a temporary setback or a secular decline? A Hungarian in the audience argued that the change has been profound. Half the Hungarians reject modernity in all its forms, and 60 percent are strongly dependent on the state and support a paternalistic society. The April 2014 election results reflected a revolt of Hungarian villagers against urban elites.
Former Czech Prime Minister and President Vaclav Klaus laid out his case for radical reform and stated that one prerequisite for reform was the unconditional liquidation of the communist system as a whole. He said the key for success was avoiding rent seeking and gradualism and to ensure that political and economic reforms move in parallel. The decisive part of the transition was the privatization of all state-owned firms.
Former Slovak Finance Minister Ivan Miklos (1998–2006) explained how Slovakia had lagged in economic reforms in the 1990s but caught up by adopting reforms in 2003–04, producing the highest economic growth in Central and Eastern Europe in 2000–2010. The reform breakthrough had been preconditioned on the elaboration of a reform program in opposition, the propagation of reform ideas, and finally swift implementation when the political preconditions existed. Miklos emphasized the importance of political leadership, referring to Klaus and his Prime Minister Mikulas Dzurinda. He quoted Benjamin Disraeli: “Whereas politicians care only about the next election, statesmen think of the next generation.”
A striking insight at the conference was the importance of disrupting the old communist elites, who were corrupted by their hypocrisy of obedience to an ideology that nobody believed in. The worst part of the old elite has turned out to be the secret police, being the least transparent, the most lawless, the most ruthless, and also the most international. The continuing power of secret police networks is particularly apparent in Russia and Bulgaria.
Both Treisman and Gerard Roland, professor of economics and political science at the University of California, Berkeley, showed in their papers that democracy and market economic reform go together. Treisman argued that the causality runs from democracy to market reforms, rebutting arguments that radical democracy and market economic reform are inherently incompatible. Leadership matters, they agreed. The three leaders who stood out for that quality were Yegor Gaidar of Russia, Dimitar Popov in Bulgaria, and Balcerowicz of Poland. Roland and Oleh Havrylyshyn, former deputy finance minister for Ukraine, emphasized the positive impact of a strong civil society and national cohesiveness.
Will reforms in Ukraine succeed despite disputes with Russia over borders? The case of Georgia may be instructive. The near-failure of the Georgian state made radical reforms even more necessary. The main impetus for reform must be domestic, on the other hand. Little can be done without a parliamentary majority. The European Union and the International Monetary Fund are important tools, but they cannot do the job on their own. The European Union has proven most effective in requiring adjustments before a country accedes to it. A dividing line persists between the Central and East European countries that have become members of the European Union or are on that track and the former Soviet republics, which are far more corrupt. Though among the latter, Georgia greatly improved after its Rose Revolution in 2003 and to some extent so did Moldova while adjusting to the European Union.
While the importance of deregulation and macroeconomic stabilization is unquestioned, issues surrounding privatization remain controversial, raising concerns about fairness, justice, and trust because of the way that state-owned enterprises have been handed to oligarchs and insiders in too many cases. Russia and Hungary stand out as examples of the fragility of the post-communist transition and the fact that privatization can be reversed. Hungary and Kazakhstan have nationalized all the mandatory private pension savings, 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.
One lesson from the transition is that economic policymakers need to explain and disseminate their ideas more intensely, using old and modern social media. Economists must be able to sell their proposals to a broad public. Few achievements are safe from being reversed. As the grand old man of East European economics, Professor Kornai, pointed out: “Anything can happen. Low probability events do occur.”
See also the keynote speech entitled "Threatening Dangers" [pdf] by Janos Kornai, Professor of Economics Emeritus, Harvard University and Corvinus University of Budapest.