Transcript The Logic of System Change

The Logic of
System Change
POST-COMMUNIST REFORMS: KEY QUESTIONS
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What is the design?
What is the speed?
Who decides?
Does it work?
Who wins and who loses?
Is a new system in place?
The Design
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“The Washington Consensus”, also known as
the Neoliberal Orthodoxy, also known as
“Shock Therapy”
Simultaneous economic and political transformation under
Western guidance
Proclaimed goal: to create capitalist economies and liberal
democratic states integrated with (meaning: dominated
by?) the West
The destruction of the old system has to be as rapid as
possible
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The economic blueprint:
LIBERALIZATION
 STABILIZATION
 PRIVATIZATION
 (added later: INSTITUTIONALIZATION)
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Liberalization
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Replace command with self-interest as the economy’s
driving force
The government stops setting prices, let them be
determined by supply and demand (easy to do)
Trade should be as free as possible, both internally and
externally
Expected result: replacement of the hierarchy of state
control with a network of free economic agents
THE STATE RETREATS
Stabilization
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Liberalization leads to hyperinflation, which may destroy the
economy
Need for tight monetary policy: the government limits the
amount of money it prints
Sharp reduction of government spending
Raising taxes
Expected result: the new market economy gets its most vital
component: a solid monetary base which can service all
those myriads of free market interactions stimulated by
liberalization
THE STATE COMES BACK WITH A TIGHT FIST
Privatization
 Restoration of private ownership of the means of production
 Transfer of state property into private hands
 Creation of a bourgeoisie – a capitalist class capable to act
as the main agent of transformation (no capitalism without
capitalists)
 Methods:
Sell state companies to local buyers
Sell to foreigners
Allow managers of state companies to become owners
Mass privatization through vouchers
Allow employees to become owners
Effects of “shock therapy”
Production falls while trade flourishes
 Living conditions worsen
 Rapid concentration of wealth in the
hands of a small minority
 Expansion of “underground economy”
 The state loses most of its economic
sovereignty
TEMPORARY DIFFICULTIES,
ACCEPTABLE SIDE EFFECTS –
OR FAILURE OF THE DESIGN?
IS NEW CAPITALISM SUSTAINABLE ?
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Institutionalization
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You can’t build any system without a
well-functioning state
The state is badly needed to make a
market economy work. Since mid-1990s,
“institutionalization” has been listed as
the fourth key component of the
neoliberal transition orthodoxy
What kind of a state is needed to
accomplish the transformation?
The question of democracy
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During the fall of communism, democracy was viewed as
an essential value in itself
It was also associated with prosperity
If the main issue is the dominance of the communist
bureaucracy over society, democracy is a natural remedy:
the people should have the power to determine how their
society is to be organized and governed
Did the people get that power under the neoliberal
orthodoxy?
“Shock therapy” vs. democracy
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PROBLEM 1: “Shock therapy” does not depend on
popular participation. Its main agents are the state, the
West, and the New Rich in the East. Citizens’ main role is
to adapt as best they can.
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PROBLEM 2: “Shock therapy” inflicts tremendous costs on
the society. How will citizens react?
 They may keep patience, if they are convinced that the
transition moves in the right direction, but requires
temporary sacrifices. This allows the reforms to go
through
 They may protest, using democratic institutions, and
force their governments to change reform policies. This
slows down and distorts the reform process
 If one is committed to the reform blueprint, one has to
try and minimize public impact on policy-making
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PROBLEM 3: “Shock therapy” creates new forms of
power and control for the elites through concentration of
wealth
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PROBLEM 4: Ethnic nationalism rises as a channel of
popular protest and mobilization, resulting in tensions,
wars, persecution of minorities, rise of fascist-type
movements
Possible solutions:
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--Liberal democracy (elections, rule of law, accountable
government)
--Reform authoritarianism
--Reliance on external forces (joining NATO, EU)
--Alternative reform strategies based on democratic
principles
Challenges to society:
Accumulation of capital
Unemployment and poverty
Dismantling of the welfare state
Zero-sum struggles for survival
If society accepts capitalism as something normal, it is better
prepared to cope with these challenges
If society is not familiar with capitalism, it tends to reject the
changes
In the first case, democracy aids in the transition
In the second case, it may prevent it
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Which factors account for success in transition from state
socialism to capitalism?
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ACCEPTANCE OF CAPITALISM AS NORMAL.
The degree of development of market economy
Poland, Czech Republic, Hungary, Slovenia, Baltic states –
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Russia, Ukraine, Belarus, Romania, Bulgaria, Central Asian
countries –
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elements of capitalism in the economy were present to a
higher degree
market institutions were almost non-existent
The first group - cases of return to capitalism
The second group – cases of re-invention of capitalism
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SOCIETY’S POTENTIAL TO INFLUENCE THE COURSE
OF TRANSITION.
The strength of civil society
The stronger the civil society, the more the reform
strategies have to take into account citizen reactions to the
transition
As a result, the transition process is relatively less costly
Since the transition costs fall most heavily on the majority of
society, the ability of citizens to defend their interests
presents challenges to the transition
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LOW IMPACT OF ETHNOPOLITICS
Multiethnic societies
 Patterns of and results of transition vary between
different ethnic groups
 Competition easily acquires ethnic connotations
 Ethnopolitical mobilization leads to conflict
Monoethnic societies
 Similarity of patterns
 Competition not ethnically coloured
 Ethnopolitical mobilization may shore up stability
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Success is most likely:
 In a country with already embedded market institutions, a
strong civil society, not significantly divided along
cultural-ethnic lines
Failure is most likely:
 In a country with embryonic market institutions, weak civil
society, ethnically divided
Most post-communist countries are somewhere between these
two extremes
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2 stages of post-communism
The transition shock
Living under normal capitalism
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http://hdr.undp.org/external/gapmin
der/2005/2005.html
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The transition shock
 Economic recession or depression
 Contraction or collapse of the welfare state
 Unemployment and poverty
 Rapid rise of social inequality
 Crisis of the value system
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“Social calamity is primarily a cultural not an economic
phenomenon that can be measured by income figures.
Not economic exploitation, as often assumed, but the
disintegration of the cultural environment of the victim is
then the cause of the degradation...it lies in the lethal
injury to the institutions in which his social existence is
embodied… [It] happen[s] to a people in the midst of
violent externally introduced, or at least externally
produced change… though their standard of life… may
have been improved” (Polanyi, [1944] 1957, 157e159).
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‘‘What emerged after the defeat of communism was the
ethos of competition, the ethos of getting wealthy…
Economic evolution pushed our
countries toward… heartless market economy… a rat
race, and money became the only measure of the value…
of life’s success’’ (Michnik, 1999, 2002).
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The transition leads to normal capitalism
 Private ownership
 Market economy
 Limited role for the state
 Liberal democracy
 Integration with the West (WTO, EU, NATO)
Measures of success
 “Free”
 “Partly free”
 “Unfree”
 Some people are more successful than others
 Some countries are more successful than others
 Those not successful will keep trying –
 but will also look for other options
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Normal capitalism
East Europe as a periphery of the West
Problems of Western capitalism hit peripheral countries
especially hard
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Total dependence on the West – inability of “independent”
states to conduct policies in the national interest
Regulating the market economy
Rebuilding industries
Rebuilding social services
Reducing social inequality
These challenges to post-communist countries are familiar
to the rest of the world
But PC states are less well equipped to deal with them
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“Eastern Europe: A Crisis of Confidence
in Capitalism?”
Pew Research study, 2009:
http://pewresearch.org/pubs/1142/easter
n-europe-crisis-capitalism-poll
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State capacity to deal with economic and social problems
 The issue of democracy
 The lure of nationalism and authoritarianism
 The danger of war
What kinds of democracy will work in PC countries?
Socialist alternatives?