Jeff Sachs is no friend of employee ownership. Several years ago
he attacked our third way approach for Eastern Europe as "the bolshevization
of capital." What he's now discovering was predicted in my 1992 article,
"The Third Way: America's True Legacy to the New Republics," which was
reprinted in the final chapter of our book, "Curing World Poverty: The
New Role of Property." The Gorbachev Foundation translated the article
into Russian and arranged its publication in Svododnaya Misl in Moscow.
Central European Economic Review
October 25, 1999
Lessons of Transition
A reform architect looks at what worked -- and what didn't
By JEFFREY SACHS
--Mr. Sachs is director of the Center for International Development
at
Harvard University. He was one of the architects of Poland's economic
reforms, and subsequently served as an adviser to many governments
in the
region, including Estonia, Kyrgyzstan, Mongolia, Russia, Slovenia and
Ukraine.
Once, when Chinese Communist leader Zhou En-lai was asked whether the
French Revolution had been a success or failure, he replied, "It's
too
early to say." Ten years after the fall of the Berlin Wall and eight
years
after the collapse of the Soviet Union, it's perhaps too early to assess
the social transformations in Central Europe and the former Soviet
Union.
Yet, with weeks remaining until the new millennium, and many key choices
facing the West in policies toward Central Europe, the Balkans, and
Russia,
it's important to learn what we can from the drama of the past
decade.
There certainly have been surprises. Poland -- everybody's "basket case"
of 1989 -- proved to be the most durable and dynamic reformer. Poland's
economic growth easily outshines all of the other transition economies.
By
contrast, the Czech Republic, which was everybody's favorite for a
smooth
transition, finds itself mired in recession and controversy. Yugoslavia
exploded, and the rest of the Balkans remains embattled in economic
difficulties. The Baltic States, especially Estonia, outpaced the rest
of
the former Soviet Union as expected, but the transition has proven
more
difficult than predicted. And Russia has perplexed us all. It failed
to
fall into utter chaos, as predicted by the gloomy Sovietologists. But
it
has also stubbornly refused to become a "normal" country, as hoped
for by
reform-minded economists like me. We thought the end of communism would
bring a quicker social rejuvenation in Russia, though I always argued
that
the path would be tough and that Russia would need considerable help
from
the West.
In other words, optimists and pessimists can find evidence to support
their past predictions, but both have been surprised in one way or
another.
This kaleidoscope of success and failure nonetheless offers some
general
lessons:
Markets work, but require a solid legal framework to function well.
The
end of price controls and the floating of exchange rates at the start
of
economic reforms succeeded in ending chronic shortages and bringing
long-absent goods to the market. Quick liberalization unleashed the
beneficial forces of supply and demand, but speedy privatization didn't
have a similar effect. When privatization was rushed through via mass
voucher schemes -- as in Czechoslovakia in 1991, Russia in 1993, and
much
of the rest of the former Soviet Union after that -- the result was
usually
corrupt asset grabs, managerial plunder of enterprises, and paralysis
at
the firm level. It didn't unleash the beneficial effects of private
ownership.
Civil society is critical to successful transformation. Philosophers
have
long noted that power corrupts. Even when governments begin with good
intentions, they often become corrupted, if power is left unchecked.
Sure,
constitutions can provide some modest checks, but civil society --
with
associations of professions, religions and regions -- must provide
the
deeper balance. Stalin was no fool: He kept his grip on power largely
by
murdering and dispersing every manifestation of civil society. In Poland,
some vestiges of a civil society survived. (Stalin once complained
that
putting communism in Poland was like putting a saddle on a cow.) The
Roman
Catholic Church and the Solidarity movement deserve much credit for
the
success of Poland's reforms, even though they often opposed many specific
policy proposals. In Russia, where civil society was dead, the government
acted with impunity and the results have been tragic.
Geography influences the pace and depth of transformation. Ironically,
the
single most important factor determining success has proven to be the
reform country's distance from Frankfurt. The closer the country is
to
European Union markets, the more successful and dynamic the transformation.
States bordering the EU, such as Poland, Hungary, the Czech Republic,
Slovakia, Slovenia, Croatia and the Baltic States, have done much better
at
attracting foreign direct investment, expanding exports and generally
achieving a successful transformation. Farther away, some of the Balkan
States are doing downright poorly. And the non-Baltic former Soviet
Union
is in worse shape still.
History casts a long shadow in social life. 1989 was supposed to be
a
fresh start, the awakening from a nightmare. But we must be honest;
1989
also awakened ancient antipathies and mythologies that had been repressed
in the Communist era. Who would have thought that in the late 20th
century
Serbian mythologies over the Battle of Kosovo of 1389 could galvanize
a
population behind the murderous cynicism of Slobodan Milosevic? History
conditions different societies to expect different things of their
leaders.
In Russia, society expects little and gets less. In Poland, much
more was
expected -- and demanded -- of the post-1989 leaders, and much more
was
obtained in good governance.
Initial conditions matter in economic restructuring. During the 1990s,
glib comparisons between countries flew a mile a minute, without taking
into account vast underlying differences in economic structures.
Comparisons were often drawn between Russia and China, even though
only 20%
of the Chinese work force was in state-owned enterprises while
the Russian
figure exceeded 90%. Neither country smoothly solved the problem
of
reforming the state-owned behemoths, but China didn't have to; it could
rely on its vast nonstate sector -- with hundreds of millions of workers
--
to carry forward the reforms. Similarly, the chaos in Poland
in the 1980s
helped to create the basis for rapid growth in the 1990s. By the time
the
reforms began, the Poles had effectively smashed the stultifying hand
of
central planning. By contrast, central planning was still very much
intact
in Czechoslovakia until the Velvet Revolution in November 1989. As
a
result, the Czech Republic and Slovakia are much more burdened by
unprofitable state enterprises today.
Western actions make a huge difference, but have consistently fallen
short. Perhaps the most damaging view in the West has been the persistent
feeling that the success or failure of transition was none of our business.
The glib optimists held that reform would be its own reward;
simply
introduce markets and all will work out well, they said. The pessimists
maintained that no matter what we did, the situation would be terrible
in
the transition economies for a generation to come, so why waste the
money
and effort? These rationalizations of inaction proved tragically wrong.
When the West helped -- as with canceling Poland's debts or giving
Poland a
special fund to stabilize the currency -- the results repaid
the efforts
many times over. When help was withheld, such as when Yugoslavia appealed
for a rollover of foreign debts in 1990 only to be rebuffed by finance
officials in Europe, the inaction contributed to catastrophe. Ultimately,
history will judge the EU, the U.S., and the International Monetary
Fund.
But overall, the slogan of the decade should be: "You pretend to reform,
and we will pretend to help you." The EU has delayed membership of
the
countries of Central Europe for much too long. The EU and the U.S.
were too
cheap and too narrow-minded to provide Russia with adequate financial
help
in the early days of reform. And their Balkan policies have been
a
decade-long study of neglect, missed timing, and inadequate response.
On a more personal note, my watchwords as an economic adviser to the
region were: Go for quick internal reforms, seek ample international
assistance, pay attention to morality, and insist on transparency in
the
actions of all parties. This formula got a lot right, and in the places
where it was actually applied -- in Poland, Estonia, or Slovenia --
the
results have been salutary. But I was too optimistic about the
possibilities of mass privatization, an approach that I now think was
flawed. In the case of Russia, I repeatedly warned that reforms were
going
off the rails. I even resigned from advising Moscow nearly six years
ago,
and issued a strong public warning against Russian corruption and Western
inattention. Sadly, that particular forecast has proven correct.
Somehow, though, Russia's fragile democracy still survives, and could
provide a base on which to build. We can only hope that in the early
years
of the next century, the new Russian and U.S. presidents will find
the
wisdom and energy to fulfill the hopes of the democratic revolutions
of a
decade ago.
*******
--
Dan Bell
International Program Coordinator
Ohio Employee Ownership Center
Kent State University
Kent, OH 44242
(330) 672-3028
(330) 672-4063 fax
dbell@kent.edu
http://www.kent.edu/oeoc/