Dismantling The Command Economy In Eastern Europe

The Vienna Institute For Comparative Economic Studies Yearbook Iii

Peter Havlik

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9780429714818
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The contributors to this volume analyze the general problems of economic transition in countries of the former Eastern bloc: changing the ownership structure, abolishing the command economy, and integrating with the world economy. Because unique political, economic and social conditions in each nation require individual policy solutions, the contri

Part One
General Issues

Transition from Command to Market Economies

Hubert Gabrisch
Kazimierz Laski

1. Introduction

Though partial setbacks are feasible, the transition from command to market economies is not likely to be reversed in most countries of Eastern Europe. Most importantly, none of the ideological, social and personal prerequisites exist for the return of communist regimes, in contrast to the situation at the end of the 1940s and in the early 1950s. Even if the struggle for power in the Soviet Union were won by conservative forces, the country, itself tied up in internal problems, would be militarily and politically incapable of preventing the power- and system changes in Eastern Europe. This study deals with the most important preconditions, measures and risks involved in the transition to market economies - while stressing that there is neither a theoretical foundation nor sufficient practical experience concerning this kind of systemic and political change; hence the transition processes are learning processes, which cannot happen from one day to the next.

Counter to a frequently expressed view, the authors consider the question of what particular kind of market economy should be envisaged (a welfare state of the West European variety, a liberal type after the American pattern or the patriarchal model as in Japan) already at an early stage of transition, as an issue of major importance, for this choice will also affect decisions on how to prevent excessive inflation and unemployment and how to create incentives for structural change. All these are questions of burning actuality in Eastern Europe and the Soviet Union. This study regards these problems as a task mainly of macro-economic policy, which cannot be left to the self-healing effects of the market forces alone. But the present Polish government and some Czecho-Slovak Federal Republic (CSFR) government members, e.g., prefer to rely on the latter option.

On the way from a command to a market economy two targets must be aimed at concurrently: first, change of the ownership structure and, second, abolishing the shortage economy. As a radical privatization of the economy requires time, a “cohabitation” between a big state enterprise sector and a market mechanism would be unavoidable during some transitional period.

On the way from a seller’s to a buyer’s market prices must be basically liberalized, although some price controls can be useful too. The price liberalization should be accompanied by a stabilization program which as a rule would comprise the following elements: hardening of the “budget constraint” on firms, meaning financial responsibility for their decisions; reducing deficit spending by cutting, first of all, subsidies; controlling demand of private households by conversion of forced savings into voluntary savings and by an active incomes (mainly money wage) policy; reorganizing the banking system and introducing a restrictive monetary policy. Supply policy measures as a necessary supplement to the policy of global reduction of demand would make possible the productive utilization of resources released in other parts of the economy. Last but not least labor and social policy measures are needed to increase labor mobility. These measures should include the creation of unemployment insurance, the introduction of retraining measures, and transfer payments to the poorer households, using part of the budgetary savings resulting from subsidy cuts, etc.

Integration into the world economy necessitates the abandonment of the state’s foreign trade monopoly and foreign exchange control, the introduction of a unified exchange rate, internal convertibility of the currency (initially for goods and services), and appropriate tariff policies. Full convertibility will have to be approached in concurrence with the transition to free market conditions in other fields. This study indicates that the desired targets - achieving balanced foreign trade and expanding exports - can only be met if at the same time the financial discipline of state enterprises is increased. Otherwise currency depreciations would only foster inflation without redressing the trade balance.

An important problem is the choice between a shock therapy and a more gradual approach. A shock therapy can become indispensable if there is hyperinflation, but it is accompanied by high risks: a severely restrictive fiscal and money policy may set off a chain of enterprise bankruptcies, while only a small proportion of resources thus set free can be absorbed into other sectors of the economy. Secondary effects such as a decline in demand for goods produced by the efficient sectors may exacerbate recessive tendencies. This danger is currently great, especially given the excessively restrictive fiscal and money policy of the Polish government.

On no account should the West take the opening of the East to be nothing but an opportunity for increasing its exports, but it must open its markets to imports from the East. Discriminatory tariffs and non-tariff import barriers must be dismantled. This study advocates renegotiation of trade and cooperation agreements between the EC Commission and the former communist countries. For example, the Polish foreign trade regime today is much more liberal concerning imports from EC countries than the EC regime is concerning imports from Poland. Also the Austrian import authorization procedure (“Vidierungsverfahren”) should be abandoned step by step. Western aid should not be confined to financial assistance and the promotion of trade, but should also include training opportunities for Eastern managers and scholarships for students. Moreover, all Eastern countries require Western technical assistance for the transition to Western systems of statistics, to the Western tax-, price-, and foreign trade regimes and to Western technical norms and standards (including health and environmental areas).

During the ongoing transition from command economies within authoritarian systems to market economies in a setting of political pluralism, the East European countries are faced with a series of economic problems. There being no sound theoretical foundation for their solution and only limited practical experience at best, professionals dealing with the problems of transition in both East and West offer various policy suggestions, depending also on their ideological backgrounds. In this discussion the authors do not claim to have ready answers to all relevant questions, but it is the aim of this chapter to single out the main problems related to such transition and to outline alternative options. Any actual policy choice will have to involve a tradeoff between the variants’ pros and cons, in both economic and political terms.

2. A New Political Framework

In Eastern Europe the year 1989 has brought the most profound changes since the end of World War II: first there was the humiliating defeat suffered in Poland by the Communist Party ("Polish United Workers’ Party") in the first semi-free elections held there, next, Hungary’s communist party (HSWP) split, then changed its name; then in the autumn and winter, the power elites were overthrown in quick succession in the GDR, Bulgaria, Czechoslovakia and Romania. In January 1990 this was followed by the split-up of the PUWP into four distinct parties; and the GDR’s “Party for Democratic Socialism” - the former ruling “Socialist Unity Party” - is about to fall to bits.

The GDR, unlike other countries, faces an option of fast assimilation into the “social market system” of the FRG, whose economic potential might counterbalance retarding effects connected with system conversion. Another aspect of this would be deeper dissociation of the GDR economy from the East European context. Therefore the GDR case remains outside most of the considerations of this study.

All these changes signal the economic and political collapse of the centrally planned economies and authoritarian systems which had been installed in Eastern Europe by the Soviet Union after the Second World War. Up till now the Soviet Union has tolerated these revolutions (in contrast to its stand against the revolts and attempted reforms of former years, e.g. 1953 in the GDR, 1956 in Hungary, 1968 in Czechoslovakia, 1980 in Poland), but the former “Eastern Bloc” has dis-integrated. These events were triggered and facilitated, but certainly not intended by the Soviet policy of “perestroika” and “glasnost”: present developments in most of the East European countries and the Soviet Union go far beyond any of the original blueprints for reform and the Soviet leadership’s (or the former East European regimes’) expectations. The repercussions of all these events have put the Soviet Union - where the attempted reforms have up till now brought no improvements in the economic situation - under growing pressure to accelerate the pace of social change (national self-determination, institution of a presidency, accommodation of new groupings and parties). The consequences of developments in Eastern Europe (especially the German unification) bear not inconsiderable dangers for essential Soviet security requirements. After all, present-day policy was not designed to secure any sort of “orderly disintegration” of the Soviet empire.

Meanwhile, though partial setbacks are feasible, the process is not likely to be reversed in most countries of Eastern Europe. For one, none of the ideological, social and personal prerequisites exist for a return to a “really existing socialism”: first of all, in the shape of communist parties who could hope to command some acceptance or at least tolerance on the part of the workers (as was the case at the end of the 1940s and in the early 1950s). Further, the traditional systems have failed since neither their grandiloquent economic and social promises were kept nor have they managed to respond effectively to the challenges of global technological, economic and political change. And then, even if it still were an “intact” Stalinist system, the Soviet Union, itself tied up in a process of change, would be militarily and economically incapable of intervening simultaneously all over Eastern Europe, in countries where their traditional allies, the party cadres and security forces, are decisively weakened. The present Soviet leadership will therefore concentrate mainly on preventing a dissolution of the Soviet “family of nations”, on developing new forms of economic and political relationships with Eastern Europe and on arriving at new economic, external and security policy relations with the West that can prevent instability in Europe and have due regard for Soviet interests.

3. What Kind of Market Economy?

The Soviet leadership still wants to reform the traditional planned economy by searching for a combination of plan and market; in this combination the market is treated as an instrument of the central planner and limited mostly to current, in contradistinction to investment, decisions. It corresponds in principle to the New Economic Mechanism introduced in Hungary in 1968. Most of the countries of Eastern Europe, however, having attempted various reforms, and having failed, set their sights on a transition from command socialist economies to genuine market economies after the Western pattern - and that as quickly as possible. But processes of transformation are learning processes, for all concerned; and such processes take time. Transition from an authoritarian command to a pluralistic market economy is a unique undertaking. In tackling it one cannot fall back on any previous experience. In these circumstances it is bound to be a highly complex process of trial and error: it cannot happen from one day to the next.

A central question to be answered by the governments concerned is this: what kind of economic order do they desire? The numerous abortive reform attempts signify that a third road, in between plan and market economy - be it a combination of plan and market, be it a “socialist market economy” - is rather unrealistic. That conclusion has already been accepted in Poland, Hungary, Czechoslovakia and meanwhile also in the GDR, and it is likely also to be drawn by the Soviet reformers. The way out of the economic, social and ecologic misery of “real Socialism” is the passage towards a market economy and the restoration of the functions of private property, at least in a substantial segment of the economy.

The question, what particular model of market economy should be envisaged - a liberal type after the American pattern or a welfare state of the European variety - may at first sight appear of minor importance against this background. Seen ab ovo - central administration of the economy, state ownership - the common micro-economic features of the alternative market economic models may really appear of greater significance: in both of them private ownership predominates, the principle of competition prevails, there are financial markets and functioning labor markets. But there are distinct differences between these models in essential areas: we see such distinctions mainly in the role and functioning of governmental macro-control (countercyclical policy, taxation policy, redistribution, active industrial policy, social network vs. hands-off in the economic field), and the role of the trade unions in the shaping of industrial relations (partnership models in continental Europe vs. the antagonistic/confrontation models in the Anglo-American area) and of human relations (the patriarchal model in Japan vs. hire-and-fire modus in the United States).

Macro-control is ultimately a question of government attempting with its economic and social policy instruments to prevent excessive inflation and unemployment and giving incentives for structural change - or leaving well alone. In the East European countries this is not a matter that may be left to be solved at a later stage: it is a problem of burning actuality, even in the period of transition. Already the selection of a particular policy of transition constitutes an anticipated decision about the desired market-economic model. The adoption of the welfare state model, apparently the logical choice in view of the East European countries’ traditions, could, in building-up a social security network (which would anyway, in consequence of the productivity backlog, be on a considerably lower level than in the West), mean a comparative slowing-down of the necessary structural change. On the other hand it might render the latter socially more acceptable, thus facilitating the delicate task of imposing it. It seems that Hungary may choose this road. Exponents of a more liberal orientation, e.g. the present government of Poland and some of the members of the Czechoslovak government, accord higher priority to a more radical dismantling of the outworn institutions, rather relying on the self-healing effects of the market forces in the course of the forthcoming reconstruction.

4. Market Socialism - a Necessary Transitional Phase?

The target of a market economy with predominantly private ownership is a far cry from the economic order inherited from the system of "real socialism”. On the one hand, most enterprises are state-owned and follow the rules of behavior of a command economy; on the other hand the whole environment of a market economy - a sound financial and monetary system, and especially a market clearing system with scarcity prices - is still lacking. Thus two targets must be aimed at on the way to a market economy. First, a change of the ownership structure by a radical increase of the share of private enterprise and the simultaneous transformation of the remaining public units into real enterprises motivated solely (with rare exceptions) by considerations of profitability - both to go hand in hand with a demonopolization and the creation of competitive structures. Second, the new market environment should be instrumental in abolishing the shortage economy by curtailing effective demand to the volume of available output by means of appropriate incomes-, wage- and credit policies, by reducing the volume of deficit spending and by a sound monetary, including exchange rate policy. The second aim can be summarized as achieving an equilibrium between demand and supply on the domestic goods, labor and capital markets and maintenance of solvency abroad.

The two targets, systemic changes and a working market mechanism, are interlinked and interdependent. If the enterprises were to follow the profitability criterion but get false market signals, specifically non-scarcity prices, the market mechanism would not work: economic rationality could not prevail. If, conversely, the market produces the right signals in the form of scarcity prices but the enterprises do not react appropriately because they follow other aims than profitability, the market would not work either.

Although the interdependence of the two targets is quite obvious, their concurrent realization is rather difficult. A radical change of the prevailing ownership structure requires first of all an increase of the share of the private sector in the economy. This implies growth of existing private enterprises, entry of new enterprises and, foremost, the privatization of state enterprises. Most existing private ventures are, however, small; so are most of the start-ups. Thus, in order to have large private firms, de-nationalization would have to be speeded up. Total savings of the population amount to a fraction only of the net book value of assets of state enterprises. Various concepts are being discussed to increase the purchasing power of private capital, but of course a quick solution is not easy to find. Hence, the transformation of state-owned enterprises into privately or cooperatively owned ones, although of decisive importance for the outcome of the reform, is not Immediately possible, because the amount of domestic private (or group) capital is rather limited and, additionally, the enterprises to be sold must prove their (at least potential) profitability. Foreign capital can and should play quite an important role in this respect, but of course the majority of enterprises could not, and should not become foreign owned. Also there are some problems related to the creation of the legal basis...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• CONTENTS
• Foreword
• Introduction
• Part One General Issues
• Part Two Selected Aspects of Transition
• Part Three Country-Specific Transition Policies
• About the Contributors