Transcript Shock therapy

Strategies of
Transformation
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 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”
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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 ?
The Missing Link:
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?
1. ACCEPTANCE OF CAPITALISM AS NORMAL.
The degree of development of market economy
Poland, Czech Republic, Hungary, Slovenia –
elements of capitalism in the economy were
present to a higher degree
Russia, Ukraine, Belarus, Romania, Bulgaria,
Central Asian countries –
market institutions were almost non-existent
So, it was a case of reversal, rather than a reinvention
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2. 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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3. ETHNOPOLITICS
Multiethnic societies
Patterns of and results of transition vary between
different ethnic groups
 Competition easily acquires ethnic connotations
 Ethnopolitical mobilization leads to conflict
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Monoethnic societies
Similarity of patterns
 Competition not ethnically coloured
 Ethnopolitical mobilization may shore up stability
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Success is most likely:
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In a country with embedded market institutions, a
strong civil society, not significantly divided along
cultural-ethnic lines
Failure is most likely:
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In a country with embryonic market institutions, weak
civil society, ethnically divided
Most countries are somewhere between these two
extremes