Political Economy of Reform and Change (Routledge Revivals)

Jan Winiecki

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136462436
• Edition: 1
• Topic: Economia
• Subtopic: Economia internazionale

First published in 1997, this collection of articles and essays analyses the political economy of reform and change in Eastern Europe during the years of Gorbachev's perestroika and the years immediately following the fall of the Berlin wall and the collapse of the Soviet Union.

Written by Polish economist Jan Winiecki, between 1984 and 1996, this work explores the issue of the feasibility of reform and change during the period of decline and collapse of communist economic order and, later, the emergence of the capitalist economic order in the post-communist Eastern Europe. Split into three parts, the work considers firstly the failures of Gorbachev's political economy of reform, secondly the determining factors in the collapse of the Soviet system, and finally the feasibility of the systematic change which began in the wake of its collapse.

PART I

POLITICAL ECONOMY OF REFORM: FAILURES AND THEIR CAUSES

CHAPTER 1

POSSIBLE SCENARIOS FOR EASTERN EUROPE*

On the one hand, continuation of the old wasteful, ‘extensive’ growth is impossible because of constraints on quantities of production factors and material inputs. On the other hand, qualitative changes in East European economies (innovation, quality improvement, structural change, greater international division of labour) are impeded by system’s inherent constraints.

It is this perception of the lack of any prospects for the continuation of the traditional Soviet-type growth model, coupled with sharply curtailed possibilities of its prolongation by means of Western credits, which led some scholars, both in the East and in the West, to believe that reforms are inevitable. This view is very optimistic, however, as it does not take into consideration certain vital determinants of any remedial action (…)

FROM OBVIOUS TO LESS OBVIOUS NON-SOLUTIONS

Something which is quite often not appreciated is the low learning capacity of the Soviet-type system. If by learning we mean change in reactions to unchanged actions (stimuli), then learning by a system in which all dissent has been eliminated (or its outward signs suppressed) has been shown to be agonizingly slow. Overvaluation of the ruling elites’ collective memories and corresponding undervaluation of incoming current information adversely affect the capacity to recognise the problem, while the narrowing of information inflow decreases the capacity to select a solution.

All this affects the system adversely, quite apart from the fact that proposed solutions may run contrary to the ruling elite’s interest in maintaining the status quo – a question to which we return in the next section.

The signs of the exhaustion of expansion possibilities began to appear in Eastern Europe in the early 1960s. Attempts at partial economic reforms in late 1960s, even if limited, did inject some new vigour into these economies and, with production factors still available in large quantities and natural resources relatively inexpensive, a renewed acceleration of the traditional, wasteful type of growth occurred.

In the early 1970s Western technology and credits were substituted for economic reforms. The fact that the exhaustion of expansion possibilities has since reappeared with much stronger symptoms, due both to the decreasing rate of growth of availability of factors of production and much dearer natural resources, does not guarantee that some obvious non-solutions will not be proposed and attempts at their implementation not undertaken. Such developments have actually been taking place for some time in certain East European countries.

‘DOWN PERISCOPE’ SCENARIO

Two scenarios of this sort can be envisaged, in fact. The first we would call the ‘down periscope’ scenario. Both the frame of mind of the ruling elites and their reactions to the stimuli can be deduced from its title. Overvaluation of the elites’ memory of the ‘good old days’ and undervaluation of unpleasant current information degenerates, in extreme cases, into a kind of withdrawal symptom. The facts indicate that things are bad and getting worse. If we disregard them, problems may go away. And even if they do not, let us enjoy both the power and the wealth we still have. Moreover, let us eradicate any statements reminding us of the unpleasant problems in question, for if nobody states openly that the emperor has no clothes, then, by convention, the emperor is well clad. And let us repeat on all possible occasions the litany of advantages the system possesses in comparison with any competing one.

In such a scenario grotesque propaganda reigns supreme while nothing really changes in the economic system (the sphere from which the hard data on the deterioration come). The late Gierek era in Poland is a good example of a ‘do nothing, pretend the problems do not exist’ attitude. This complacency could last, however, as long as Poland ‘s borrowing ability and ceased abruptly in 1980. In this scenario at least some measures are taken, but they are mainly non-economic in character. Exhortations become more and more frequent, campaigns against absenteeism, shoddy goods and black market activities become more shrill, as symptoms are treated (often in all seriousness) as causes of the decline. New layers of control are created and enmeshed with the existing ones and ad hoc shock therapies applied, like searches in public places to find people who ought to have been at their respective workplaces (these were instituted in Poland during the early martial law period and then in the Soviet Union at the beginning of Andropov’s period of power).

In the management of the economy ‘more of the same’ still seems to be a frequent resort. Czechoslovakia, for example, carried out another unsuccessful drive to make enterprises adopt more ‘taut’ plans in the late 1970s and a phony reform that changed nothing in the early 1980s. Everywhere, except in Hungary, one hears about the need to strengthen the role of medium-term plans, as if repeated investment cycles had not shown their un-tenability. Learning capacity is indeed very low and Pavlovian reflexes dominate the way the system reacts to repeated, although increasingly strong, stimuli.

Even some partial reforms aimed at improving the performance of the increasingly inflexible multi-level hierarchical organization of the economy may be cautiously undertaken, modifying (usually not very consistently) certain less decisive elements of the traditional Soviet-type model. But given the preponderance of the elements of the traditional model they are unable to bring about any discernible and lasting improvement. On the contrary, they may even become a source of new disturbances.

Under the circumstances of the ‘down periscope’ scenario, performance has nowhere to go but down. All the causes that have been contributing to its deterioration so far are still present, while the cynicism and accompanying corruption spread further. The elites have nothing to offer to the population at large: consumption is falling or stagnant, the conditions of acquiring goods and services are getting worse as disequilibria increase.

Moreover, the population is not willing to ‘swallow’ the ideology any more. Neither the ruled nor the rulers believe it any more. A.J. Toynbee, tracing the sources of the breakdown of civilizations, found that failure voluntarily to imitate the behavioural patterns demonstrated or suggested by the ruling elites usually preceded failure to obey.

In the Soviet-type system the control and repression are so strong that failure to obey may appear only after a relatively long lag. But when the demonstrated behavioural patterns of the ruling elite deviate consistently from the suggested ones a ‘reverse mimesis’ begins to take place. The population adapts itself to the existing conditions and imitates the demonstrated behavioural patterns of the elite only too well, with corroding effects on the system (and on itself).

Thus, whether one begins with the repeated disappointments due to the inferior and deteriorating performance of the economic system, or with the deteriorating integrity of the elites, the outcome is predictable and the same: cynicism and corruption. A second order but lasting and self-reinforcing cause of the economic decline has taken root in the body social. There is no need to outline here the step-by-step development under this scenario. Both causes-symptoms-effects linkages and the constraints on the ‘more of the same’ type of response allow us to predict in sufficient detail the dynamics of slow decline.

‘RECENTRALIZATION-CUM-REPRESSION’ SCENARIO

But what if the decision makers decide to apply a large dose of the old medicine to decentralize decisions and repress those who protest or only dissent? The ‘recentralization-cum-repression’ scenario would lead, in my opinion, after a short acceleration due more to imaginative reporting from below than increased effort, to faster decline. As in the previous scenario, all the causes contributing to the decline would be present, but their impact, or at least the impact of some of them, on economic performance would become stronger.

Let us begin with the feasibility of the recentralisation part of this scenario. With gross national product now many times greater than in the earlier period of extreme centralization, during the forced industrialization in the 1950s, and with a more sophisticated structure of production, the earlier level of centralization simply cannot be repeated. To give an example, the Czechoslovak economy produces over 5 million products, finished and intermediate. The number of decisions concerning production factors and material inputs to produce each product is far beyond what can be decided consistently at the top of the hierarchical pyramid with the speed necessary to achieve planned production targets (leaving aside the allocational efficiency of such decisions). Nor is it possible at intermediate levels of the hierarchy. It is worth remembering that recentralization reactions historically have followed the failure of attempts at partial decentralization of decision-making to the middle levels of the hierarchy (but not to the enterprises). Under these circumstances the decision-making process would slow down to a snail space.

The next issue to be considered is the non-economic consequences of the ‘great (investment) leap forward’ that would become a key component of this scenario. Rapid growth in the share of investment would result, under the existing circumstances, in an absolute fall in consumption, or an accelerated fall if consumption were falling already. Would such a fall generate Toynbee’s ‘failure to obey’, open eruption of discontent? It is difficult to answer this question with a high degree of probability. Polish and Romanian experience so far suggest different answers. The limitation to the present is legitimate. For in both cases the fall in living standard has occurred in spite of cuts in investment (…). Thus the negative consumption effects of any large-scale investment expansion would come on living standards which were already falling.

If an open eruption of discontent is a probable, but not a certain outcome of the ‘recentralisation-cum-repression’ scenario (given the efficiency of the repression), there are other outcomes well known from past and present, that would certainly contribute to the accelerated decline. The reactions of producers-consumers would, however, be more accentuated than in the earlier case of slow decline and would result in a precipitous fall in the quality of manufactured products. Under the double impact of sharply reduced import possibilities and falling quality, exports of manufactures to world markets would suffer disproportionately.

The export structure would resemble that of less entrepreneurial developing countries due to the more than usually dominant role of commodities. Given the fact that commodities would become scarcer and their production more costly, the limits would quickly be reached in the external sphere too. An alternative to exporting more manufactures would be to increase exports of certain commodities (food, fuels) to an even greater extent at the cost of further cuts in consumption, but here, again, the question of possible eruption of discontent has to be taken into account, for it is assumed that there are limits to cuts in living standard below which the fear of repression ceases to be a deterrent (although the threshold may be different in each country).

All in all, the above scenario may be regarded as a short- to medium-run one. It is doubtful whether the kind of developments described could last, in the face of much stronger constraints than before, beyond one investment cycle without a serious break-down (economic, social or both). And even if the ‘down periscope’ scenario could be envisaged as a longer lasting one, it is obvious that both are non-solutions to the problem of decline.

THE HUNGARIAN SCENARIO

Yet another scenario is the Hungarian one, that is a more serious attempt at economic reform of the Soviet-type model without relevant changes in the political and social environment in which a reformed model has to function. With respect to the Hungarian scenario, held up sometimes as an example of the reformability of a STE, we have to consider two questions instead of one, as was the case with the previous scenarios. Before ascertaining whether it is possible to repeat it, it is worthwhile considering whether it is desirable, that is, whether it is a clear enough success to be worth emulation.

In my opinion the Hungarian economy since 1968 cannot be regarded as an unqualified success, in spite of the good press it has enjoyed both in the West (due to brilliant salesmanship by Hungarian officials and experts) and (to an extent) in the East. It is true that in macroeconomic terms the level of disequilibrium in the consumer goods market has been smaller than elsewhere. It is also true that its input-output characteristics, like the material intensity of the national economy, are somewhat better than those of other East European countries. Another point in favour of Hungary is its agricultural sector, which since the 1960s has been a significant exporter – and this without simultaneously impoverishing the domestic market (as other food exporters in Eastern Europe do). Yet another difference, since 1980, has been an enhanced entrepreneurial (and, to a much lesser extent, also innovative) vigour on the part of Hungarians, mainly visible in the development of intra-enterprise production initiatives by employees and, to a smaller extent, in new small business establishments, both cooperative and private.

On the other hand, system-specific features continue to affect adversely Hungarian economic performance. Disequilibria, although smaller, still add discomfort to constraints on the level of consumption. Input-output characteristics, better, as we have stressed, than in other STEs, are nevertheless very much higher than in most market economies (MEs). A substantial number of large industrial enterprises, inflexible and shunning innovation, are chronically unprofitable. The enterprises that needed relief in 1972 were found in the same situation in 1982, receiving large subsidies, tax reductions and other forms of assistance [see, e.g., Csaba, 1983], It comes as no surprise then that export performance on world markets is not at all impressive as far as manufactures are concerned and small surpluses on trade with the West have been achieved mainly by the familiar method of import cuts. Actually, if it had not been for the favourable view of Hungarian economic reforms taken by Western governments and banks, Hungary might have followed the path of other STEs that asked for debt repayment relief (just as, at the other end of the reform continuum, the West German ‘umbrella’ helped the GDR to avoid a similar necessity at the peak of the latter’s debt repayment burden).

In consequence the Hungarian economy is not reducing the gap in development between itself and the West. On the contrary, in comparison with countries like Austria, Italy and France, or medium-developed Spain, the distance seems to have increased since the late 1920s. Also, the newly industrialising countries (NICs) have been performing much more impressively in the last 15-20 years.

The Hungarian economy is therefore a qualified success, the most important qualification being its geopolitical limitation: it is a success relative to other STEs only. This precariousness of the Hungarian position is best understood by those Hungarian economists who know what makes their economy tick. They are concerned that without keeping up the momentum of far-...