Transition Economics

Two Decades On

Gerard Turley, Peter Luke, Peter J. Luke

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9780415438827
• eBook ISBN: 9781136909085
• Topic: Business
• Subtopic: Business General
• Index: Business

Celebrating twenty years of transition from socialism to capitalism, this book is designed to be the core textbook for undergraduate courses in transition economics and comparative economic systems. Given the passage of time, Transition Economics: Two Decades On reviews and accounts for the outcomes in the so-called transition economies and, from an academic perspective, takes the reader through developments and issues in the twenty years of transition from plan to market.

Treating its subject matter thematically, the book incorporates much of the transition economics literature and evidence that have evolved over the past two decades. In particular, the authors focus on the most important aspects of economic transition, including:

• The initial conditions at the outset of transition
• Paradigms and patterns of transition
• The main transition policies and economic reforms
• The performance of transition countries and firms
• The lessons from transition

The textbook covers a wide range of both contemporary microeconomic and macroeconomic issues, in over thirty ex-socialist European and Asian countries, including Russia and China.

Transition Economics: Two Decades On

is more than just a book about a particular part of the world or the transformation that was experienced at a particular time in history. The authors believe that the study of the economics of transition gives the reader an insight into theories, policies, reforms, legacies, institutions, processes and lessons that have application and relevance, beyond the specific transition from plan to market, to other parts of the world and to other times in history.

1

PRE-TRANSITION:
THE SOCIALIST SYSTEM

An economic and historical description

In August 1991 Boris Yeltsin, President of the newly self-declared independent Russian Federation, hauled himself atop a Russian armoured vehicle, shook the hand of the slightly bewildered Russian soldier inside and declared, ‘Soldiers, officers, generals: the clouds of terror and dictatorship are gathering over the whole country. They must not be allowed to bring eternal night.’ In doing so he thereby helped to bring to an end one of the greatest social experiments in human history. (See Box 1.1, Attempted Coup d’état in the Soviet Union, 1991, for a description and an explanation of this failed Communist coup d’état.)

Before examining this social, economic and cultural experiment we first give a primer in Russian revolutionary history and the ins-and-outs of the various factions that conspired to take power in Tsarist Russia. Later we describe in more detail the actual mechanisms by which the economy under Soviet-style socialism operated. Some of the historical material which follows may seem initially a little archaic but we demonstrate that apparently forgotten disputes still resonate even today when we come to look at the debate as to whether governments have any role to play within the market economy. We also look at the socialist economic system in Central and Eastern Europe after the Second World War (WWII). We leave details and discussion of the other great socialist economic experiment in the People's Republic of China until Chapter 9 when we make a comparison of the transition paths followed in both China and Russia.

Box 1.1

Attempted coup d’état in the Soviet Union, 1991

The attempted coup d’état by hard-line members of the Communist Party of the Soviet Union (CPSU) was staged in order to prevent the Soviet Union from disintegrating. The irony is that the coup plotters far from saving the Soviet Union merely speeded up its ultimate demise.

Mikhail Gorbachev as General Secretary of the CPSU and as President of the Union of Soviet Socialist Republics (USSR, or simply the Soviet Union) had instigated a series of reforms to reverse the declining state of the economy. These reforms on the economic front had not succeeded; on the political front, however, Gorbachev's reforms had increased the democratisation of the country and allowed far greater freedom of expression both for the individual and the media (see Chapter 9 for more details). The coup participants argued that this set in motion ‘centrifugal forces’ which were starting to rip the USSR apart. Indeed, up until the time of the coup some Soviet Republics had already declared independence, such as the Baltic States. In addition, while the Russian Federation was still formally a part of the USSR at the time of the coup, it had already in June 1990 declared its sovereignty from the USSR, placing Russian federal law above that of Soviet law where conflicts arose between the two sets of laws. The goal of the coup participants was ultimately to take the country back to pre-Gorbachev times despite their declared commitment to free enterprise and elections at the time of the coup itself.

The attempted coup ran for three days over 19 to 21 August 1991. Perhaps the greatest ‘technical’ failure of the coup participants was not to arrest Boris Yeltsin when they had a chance. By allowing him to remain at large he acted as a rallying point against the coup. Gorbachev himself was on holiday in the Crimea at his dacha at the time of the coup. Prior to the coup Valeriy Boldin, Oleg Baklanov, Oleg Shenin and Deputy USSR Defence Minister General Valentin Varennikov flew to the Crimea for a meeting with Gorbachev, hoping that he would either side with them or formally resign: he did neither, claiming later that he refused utterly to be involved or to resign.

On their return from the Crimea they formed the State Committee of the State of Emergency (GKChP) consisting of eight members in total. As with attempted coup d’états the world over, at the start of the coup newspapers were banned (except for the Communist Party newspapers), troops and tank divisions were rallied, prisons cleared to make way for anticipated new inmates, and an address to the nation made on both radio and television initiating the start of the coup was broadcast early in the morning of 19 August. Moscow citizens began to gather spontaneously around the Russian Federation Parliament building, the White House; cracks began almost immediately to appear in the military when the head of one tank battalion guarding the White House declared his loyalty to the Russian Federation (strictly speaking, the Russian Soviet Federative Socialist Republic, i.e. the body led by Yeltsin). This was the moment when Yeltsin (his finest moment) climbed atop a tank and addressed the crowds. Unbelievably for a coup that had months to prepare, Yeltsin's address went out on the evening television news broadcast!

Two armed detachments of troops were to storm the White House in the early hours of 21 August. However, the units concerned made no decisive move to do so, perhaps ultimately because they realised that while they could have taken the White House the bloodshed of ordinary Russian civilians would have been too great. Learning of their failure to act, the GKChP members met at the Defence Ministry on 21 August to discuss their next move. They decided to send a delegation to Gorbachev in the Crimea to negotiate. With this decision the coup was effectively over. On their return from the Crimea they were arrested at the airport.

After the coup the very thing the coup leaders were trying to avoid was accelerated: on 24 August the Supreme Soviet of Ukraine declared its formal independence from the USSR and announced that a referendum would be held to ratify the move. In quick succession – all by the end of August 1991 – Moldova, Azerbaijan and Kyrgyzstan all declared their independence. Finally – and unbeknown to Gorbachev – on 8 December 1991 the leaders of the three ‘Slav’ nations within the remnants of the USSR (Boris Yeltsin, Leonid Kravchuk and Stanislav Shushkevich of the Russian Federation, Ukraine and Belarus, respectively) met in Minsk. (The leaders of Kazakhstan and Uzbekistan had not been invited.) At this meeting it was decided to establish the Commonwealth of Independent States (CIS) consisting of the former republics of the USSR and to formally annul the 1922 treaty which established the USSR. The flag of the Soviet Union was lowered at the Kremlin for the last time on 25 December 1991, the same day that Gorbachev formally resigned as President of the USSR.

What's in a name (and a date)?

For those not steeped in Soviet history, the Bolshevik Party was founded and led primarily by Vladimir Ilyich Lenin (1870–1924, born V.I. Ulyanov). The name Bolshevik derives from a split in socialist forces inside the Marxist, Russian Social Democratic Labour Party (RSDLP) of pre-revolutionary Russia in 1903 when the Tsar still reigned supreme. The Bolsheviks were so called because when the forces of Russian socialism split, Lenin's faction was in the majority and the rival faction was in the minority. The Russian words for (man of the) majority and (man of the) minority are Bolshevik and Menshevik, the name given to the rival faction. The Bolshevik Party proper only emerged in 1912 when attempts at unity came to nothing.

Although the original split had been over issues such as who should or should not be considered a party member (in short, a core professional group of cadres versus a broad party-based membership), deeper divisions between the two rival groupings became more apparent only with the passing of time. In brief, one of the main differences concerned the mechanics of achieving socialism in Russia. The Mensheviks believed that for the new socialist dawn to arrive in Russia one needed to be patient. The need for patience arose, it was claimed, because Russia had not reached the right ‘stage’. Karl Marx and Friedrich Engels, they went on, had shown in their theory of ‘Historical Materialism’ that human society had evolved through various stages – ancient slave societies, feudalism, capitalism – and then would come socialism's turn, building on the efforts of capitalism which had raised human society to a higher level compared to all previous ‘isms’. Russia, they concluded, was still at the stage of feudalism personified by the Tsar.

True, nascent capitalism had started to develop in the major cities (see below) but the proletariat or working class was still in a minority with the bulk of the population still living on the land. Factory life gave the proletariat a collective consciousness, it was argued, which was lacking in the peasantry. Time was needed to allow capitalism to take root, build up industry and consequently the natural supporters of socialism – the working classes – would emerge in sufficient numbers. Then, and only then, could a successful onslaught against the prevailing order commence.

It followed that any revolutionary movement in Tsarist Russia would be characterised as bourgeois-democratic; it would be for the rising capitalist class within Russia to lead the way, establish a democratic framework within which socialist forces could operate and prepare for the future.¹

In addition, to struggle for socialism now would be futile since the ‘material conditions’ for socialism did not exist. A successful assault on the ruling order would inevitably be derailed since even if such an assault was successful, then, to put it succinctly, if the working man and woman were in the running of society (what Marx had called the dictatorship of the proletariat) they could not very well do that if they spent 12 hours a day at the factory bench, returning home exhausted, and having to feed themselves and their children before being expected to go out to attend meetings on running society. Let us allow capitalism to develop first, argued the Mensheviks; let us allow the rising capitalist class to build up the economic prosperity of the country – and, just as importantly – the cultural, social and educational levels of the workers, and then we can think about establishing a socialist order.

It may be a bit harsh but Lenin's view may be characterised as having taken a more direct view of the situation: let us overthrow the established order first and then worry about all of the above. In particular he believed that it was necessary to form a ‘vanguard party’ to lead the working class since, on their own, the working class at best would concentrate on trade unionism.² As Lenin put it himself in his pamphlet What is to be Done? written between 1901 and 1902:

We have said that there could not have been Social Democratic consciousness among the workers. It would have to be brought to them from without. The history of all countries shows that the working class, exclusively by its own efforts, is able to develop only trade-union consciousness, i.e. the conviction that it is necessary to combine in unions, fight the employers, and strive to compel the government to pass necessary labour legislation, etc.³

The party was needed to focus the minds of the ‘masses’ on the struggle for political power.

In addition, Lenin, like Mao Zedong who was to follow in China later, had a more optimistic view of the peasantry, seeing their potential for revolutionary action. Unlike Mao, however, Lenin did not see them in the forefront of the struggle to overthrow Tsarism. True, in 1905 Lenin had put forward the slogan of the Democratic Dictatorship of the Proletariat and the Peasantry without fully explaining what this implied; and in 1917 the Bolshevik slogan of Land, Bread, and Peace was to encapsulate the desires of the three main disaffected sections of Tsarist society – the peasantry, the urban workers, and the soldiers at the front.⁴

Finally, Lenin justified a concerted attack on the citadels of Tsarist power by his belief that he was helping to break the weakest link in the chain in the European assortment of capitalist and semi-feudal regimes. Once Russia fell – ran the logic – then, domino like, more advanced capitalist countries such as Germany would follow. Workers inspired by events in Russia would follow the lead of the Russian workers. Once the isolation of the Russian Revolution was ended, Germany and other newly established socialist orders would come to the material aid of the new workers’ state in Russia.

Developments in the Russian social democratic movement echoed developments in all major parties of social democracy throughout Europe at the end of the nineteenth and start of the twentieth centuries and, indeed, other parts of the world where parties of the Left had taken root. This evolution versus revolution debate is one that still continues to this day.

The irony is that initially the term social democratic was one which implied a belief, in part or in whole, in much of the writings of Karl Marx and Friedrich Engels. As this profound difference between the parties of the Left developed, in 1918 Lenin's Bolsheviks changed their party name to the Communist Party in order to distinguish themselves from what they saw as the ‘revisionist’ social democratic parties in Europe and beyond which had increasingly moved away, as Lenin saw it, from the true path.

The key turning point had been the outbreak of the First World War; it was this event that burst asunder the loose alliance of Left political parties. The Second International formed in Paris in 1889 was a collection of labour and socialist parties having replaced the dissolved First International of similar bodies.⁵ This organisation had openly declared that they would resist the coming war in Europe and elsewhere by using their influence over the trade unions and workers in general to lead strikes that would stop what was seen as a war between imperialists. As it turned out, virtually all parties belonging to the Second International fell into line with their own respective governments, overcome as they were by a groundswell of nationalistic and patriotic fervour in each country. Each socialist party helped the war e...

Table of contents

• Front Cover
• TRANSITION ECONOMICS TWO DECADES ON
• Title Page
• Copyright
• CONTENTS
• LIST OF ILLUSTRATIONS
• ACKNOWLEDGEMENTS
• LIST OF ABBREVIATIONS
• INTRODUCTION
• 1 PRE-TRANSITION: THE SOCIALIST SYSTEM
• 2 STYLISED FACTS OF TRANSITION: Two decades on
• 3 INITIAL CONDITIONS AT THE OUTSET OF TRANSITION
• 4 PARADIGMS OF TRANSITION
• 5 TRANSITION REFORMS AND ECONOMIC POLICIES
• 6 ENTERPRISE REFORM AND RESTRUCTURING
• 7 PERFORMANCE AND TRANSITION OUTCOMES
• 8 LABOUR MARKETS IN TRANSITION: A focus on Russia and China
• 9 ECONOMIC TRANSITION: Russia versus China
• 10 LESSONS FROM TRANSITION
• APPENDIX 1 The crux of the market
• APPENDIX 2 Transition countries vs. the rest of the world
• APPENDIX 3 World Bank Corruption Index
• APPENDIX 4 Tackling poverty and income inequality
• APPENDIX 5 Hard budget constraint (HBC) and enterprise restructuring in Romania
• APPENDIX 6 Human Development Index 1990–2005
• APPENDIX 7 Policy conclusions and lessons from transition
• NOTES
• BIBLIOGRAPHY
• INDEX