European Economics

Evolution of capitalism in transition countries of Central and Eastern Europe*

*Part of this presentation was created based on my experience as a teacher of various courses of Economics of Transformation lectured by me under the supervision of Prof. Ryszard Rapacki, and based on his teaching materials which I used during those courses.

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European Economics – Evolution of capitalism in transition countries of CEE

 

1. The ontology of centrally-planned economy.

2. Transformation strategies.

3. The Washington Consensus.

4. The Copenhagen Criteria.

5. CEE countries - what kind of model?

European Economics – Evolution of capitalism in transition countries of CEE

The Ontology of Command EconomyThe Ontology of Command Economy

• Monocentric nature of socialist system

• The system of ‘nomenklatura’ and negative selection

• The role of political doctrine

Primacy of investment over consumption

Primacy of capital goods sector over consumer goods sector

Material sphere as the sole source of value creation

European Economics – Evolution of capitalism in transition countries of CEE

The Ontology of Command EconomyThe Ontology of Command Economy

• Fulfillment of plan targets as main performance criterion

• Rationing as chief resource allocation mechanism

• Negligence for cost economy

• Dominance of short-term planning

• No integration between physical and financial planning

• Dominance of branch principle

European Economics – Evolution of capitalism in transition countries of CEE

Command Economy LegacyCommand Economy Legacy

• Atrophy of market institutions and incentives

• Abundant supply of skills useless for market economy

• Pervasive rent seeking and unproductive entrepreneurship

• Erosion of professional ethos and work ethics

• Strong egalitarian attitudes

• Negative perception of education and skills as carrier drivers

• Spread of authoritarian styles of management

• Acquired helplessness syndrome; state as a dispenser

• Deep macroeconomic imbalances.

European Economics – Evolution of capitalism in transition countries of CEE

Barriers to Economic TransformationBarriers to Economic Transformation

• Slow pace of dismantling managerial barrier

• Perverse adjustment of SOE managements

• Survival of unproductive entrepreneurship in private sector

• Predominance of short-termism in economic decision making

• Strong inertia in distorted work ethics and attitudes

• Persistence of egalitarian and anti-meritocratic attitudes

• Unsatisfactory changes in public administration

• Unforeseen reaction of SOEs to recession (no bankruptcies)

European Economics – Evolution of capitalism in transition countries of CEE

Transformation Strategies

1. Starting point – the role of initial conditions

2. The stabilization package

3. Sequencing of the reforms

European Economics – Evolution of capitalism in transition countries of CEE

 

Four main dimensions of a market system:

• to put in place market structures,

• to develop market participants by freeing enterprises and households in their decisions to produce, invest, consume and price their resources,

• to establish a new payments system for the economy and develop a new financial system to muster savings and allocate financial capital,

• to reduce the size of the public sector in the production of goods and services, while developing indirect tools for economic management (as opposed to the old system of direct intervention).

European Economics – Evolution of capitalism in transition countries of CEE

 

The Stabilization Package

• Price liberalization,

• External liberalization,

• Liberalization of the capital account,

• Currency convertibility and the exchange rate regime

• Property rights and financial markets

• Macroeconomic stability and an efficient fiscal system

European Economics – Evolution of capitalism in transition countries of CEE

 

Sequencing of the reforms

Two strategies were offered:

The process of liberalization and privatization should be done as quickly as possible („big-bang”).

More gradual process of reform. The sale of government assets needed to be done slower and the economy had to be liberalized more gradually.

Political economy matters!

European Economics – Evolution of capitalism in transition countries of CEE

 

Would the overall transition strategy be the same if the command economy had happened to collapse 20 years

earlier?

European Economics – Evolution of capitalism in transition countries of CEE

 

Washington Consensus (WC)

focus on privatization, liberalization, macro stability (price stability), strong faith in unfettered markets and reducing

(minimizing) role of government

So, all of the major components used during the transformation process.

European Economics – Evolution of capitalism in transition countries of CEE

 

Washington Consensus – main line of criticism

Focusing on too narrow a set of objectives and on too limited set of instruments.

Blindness for the market failures which give rise to an important role for government.

Focus on openness of markets (especially capital market).

„One-size-fits-all” policy.

European Economics – Evolution of capitalism in transition countries of CEE

 

Washington Consensus – main line of criticism

 

The objective of policy should not have been limited to an increase in GDP, but should have included sustainable increases in standards of living, as well as the promotion of democratic and equitable development.

Political economics issues.

Confusing means with objectives (privatization and liberalization).

European Economics – Evolution of capitalism in transition countries of CEE

 

New Emerging Consensus

Development of a successful sustainable development strategy will have to involve societies in the countries in which it is going to be apply in an important and meaningful way.

“One-size-fits-all” policies are doomed to fail. Policies that work in one country may not work in others (compare for example the successful policy adopted in East Asian economies and Latin America countries which at least partly followed instructions of WC).

A successful development requires not the minimal role assigned to the state by the WC, but a balanced role. The exact role may differ from country to country.

European Economics – Evolution of capitalism in transition countries of CEE

 

New Emerging Consensus

There may be a broad consensus against excessive protectionism (with a lot of creditability to the meaning of this expression) that only serves the interests of distributional coalitions, but there is no consensus that rapid liberalization, especially in a country with high unemployment, will lead to faster economic growth. It may only lead to higher unemployment .

European Economics – Evolution of capitalism in transition countries of CEE

 

New Emerging Consensus

Success is to be measured not just by an increase in GDP, but by a broader set of measures, including those that assess environmental and social sustainability. Greater attention must be paid too to issues of distribution, a development strategy that leads to increases in GDP with most citizens not sharing in the fruits of that growth is not a success, and such a development strategy will almost surely not be sustainable over the long run .

European Economics – Evolution of capitalism in transition countries of CEE

 

The Copenhagen Criteria

The rules that define whether a country is eligible to join European Union. The criteria require that a state has the institutions to preserve democratic governance and human rights, has a functioning market economy, and accepts the obligations and intent of the EU.

June 1993

European Economics – Evolution of capitalism in transition countries of CEE

 

The Copenhagen Criteria

„Membership requires that candidate country has achieved stability of institutions guaranteeing democracy, the rule of law, human rights, respect for and protection of minorities, the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union. Membership presupposes the candidate's ability to take on the obligations of membership including adherence to the aims of political, economic and monetary union.”

European Economics – Evolution of capitalism in transition countries of CEE

CEE countries - what kind of model?

 

Efficiency

Low HighEquity

High

Low

Continental

Mediterranean

Nordic

Anglo-Saxon

CEE countries?

European Economics – Evolution of capitalism in transition countries of CEE

 

“Will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends?

We now have the opportunity to create a new financial system that will do what human beings need a financial system to do; to create a new economic system that will create meaningful jobs, decent work for all those who want it, one in which the divide between the haves and have-nots is narrowing, rather than widening; and, most importantly of all, to create a new society in which each individual is able to fulfill his aspirations and live up to his potential, in which we have created citizens who live up to shared ideals and values, in which we have created a community that treats our planet with the respect that in the long run it will surely demand.

These are the opportunities. The real danger now is that we will not seize them.”

Joseph Stiglitz

 

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