Transcript 6. Economies in Transition

STATES AND MARKETS
IN TRANSITION
Changing from one system of political economy,
entrenched over many years, to another diametrically
opposed system is stressful.
Over half the world s population are undergoing such
a change.
The former Soviet Republics..such as Russia and
Ukraine.
Former Warsaw pact nations such as Poland and
Hungary
Transition to “market socialism” nations such as
China and Vietnam
Conflicting Styles of
Political Economy
A fundamental conflict between a political economy
system based on individual economic and political
choices – a “bottom up approach”- VERSUS a
system where choices were made collectively for the
public good- a “top-down” approach.
No system is entirely “top-down” or “bottom-up”-the
problem of transition in these countries is is to
change the flow of social choice without destroying
valuable social institutions and undermining social
stability.
Three Stages of
Transition
The OLD ORDER
The transition process itself-reform of
the old order
The emergent NEW ORDER
The OLD ORDER
Classical Socialism as described by the
Hungarian political economist Janos Kornai
The political economic relationships
developed by JV Stalin in the USSR and
continued by Mao Zedong in
China…commonly referred to as communism
This system was only ever referred to by the
systems themselves as “existing” or “real”
socialism.
The Socialist Planned
Economies
Communal ownership of production
resources.
Strong emphasis on economic equality.
Public ownership of resources and an active
role for the state is not exclusive to socialist
systems, but the dominance of the state and
the emphasis on economic and social
planning was characteristic of the socialist
countries…led by a Communist Party with an
adherence to Marxist-Leninist ideology
Socialist Income
Distribution
“Communism” was a term confined to describing the
final stage of the socialist transition –when the state
would wither away-and which could only commence
when socialism was established globally.
“Socialism”- was deemed to be the transitional stage
in the process-where social relationships were
determined by the precept “from each according to
his ability to each according to their work.”
Whereas communism would implement the principle
of “from each according to their ability to each
according to their NEED”
The Socialist Countries
The Union of Soviet Socialist Republics- USSR- 1917Mongolia 1921
Albania 1944
Yugoslavia 1945
Bulgaria 1947
Czechoslovakia, Hungary, Poland, Romania, North Korea 1948
China 1949
German Democratic Republic 1949
Vietnam 1954
Cuba 1959
Vietnam –reunified 1972
Various “Peoples Democracies”- Angola,
Mozambique,Ethiopia,Kampuchea
POWER
The Vanguard Party-the Communist Party-since the nations
were self-defined as proletarian democracies where the working
class was the dominant class, represented by its party-the
Communist Party
Communist Party therefore had a built-in permanent position at
the head of society-with between 5-10% of the population as
members-and many others participating in various Party led
organizations and movements.
A combination of economic and political power since the state
owned all economic resources and the state was dominated by
the Party.
All positions of influence and privilege were therefore held by
people approved of by the Party –whether party members or
allies-creating the Nomenklatura…
POWER
The “Nomenklatura” were the leading forces within these
societies and consisted of intellectuals, officials, the media,
politicians,etc.
Also could gain access to privileges such as “hard currency”
with which could be purchased the better things in life.
Although economic differences did exist between rulers and
ruled –they were not as vast as seen in capitalist systems.
The most significant inequality was in the concentration of
economic and political power in very few hands-which
underpinned the undemocratic nature of these systems.
This meant that economic and political reform were closely
connected-since it could change the distribution of power
between govt. and society-making reform a very difficult
process- difficult to dismantle the economic system of socialism
without challenging the balance of power in society.
IDEOLOGY
Based upon the teachings of Marx and Lenin-the governing ideology enshrined
the achievements of socialist revolution as part of the inevitable onward
progress of human development.
Particular pride was taken in the greater degree of economic equality and the
absence of unemployment.
Economic planning could ensure that resources were directed to where they
were most needed e.g. hospitals, schools, universities as well as the various
industrial developments which marked an advanced industrial and technological
society.
For many socialist countries the advance of industry and technology from prerevolutionary underdevelopment was significant-also the advance towards
literacy and health care-DID represent very significant and RAPID material
advances-but progress of this sort latterly slowed
Personality Cults- emerged in both the USSR and China-where individual
leaders were deified as symbols of the revolution both before and after their
deaths- Communism as a form of secular religion –with beliefs – sacrifices for a
future reward-and with its own set of saints martyrs and devils.
Government
Distinction between the Government and the Party-the leader was often the
Gen.Sec. of the CP-when in fact the PM and the President could be different
individuals.
Power however flowed from the party and the leadership rose and fell from
power based not on public elections but from internal Party debate.
Opposition within the party often viewed with suspicion-since it could be
construed as being counter-revolutionary and therefore traitorouspurges and
mass expulsions and often terror….Especially in the Stalinist era..also under
Mao’s Cultural Revolution Leads to fear preventing criticism stagnation and
conformity.Also many of the most able are lost due to purges-Stalin’s military
officers greatly weakened by purges prior to Nazi invasion.
State and Party structures a mirror of each other-power derived from the
leading force in society the CP sometimes in alliance with tame Party’s
representing other groupings in society e.g the farmers party in the DDR
The Economics of Classical
Socialism
The economy of the classical socialist states were the direct outcome
of the application of Marxist theories to the running of an economy.
Property:- Communal ownership of all the means of production-land
and capital was the property of the state-some private property of a
personal nature was permitted-the logic of this was that the transferring
of the ownership of the means of production from the individual to the
state removed the mechanism for the extraction of surplus value
(exploitation of man by man).
No profit nexus therefore in determining what would be produced, in the
absence of price signals the allocation of resources had to be achieved
by extensive state planning systems-which were frequently
unresponsive to actual need-and whilst successful in some key stages
of early development proved insufficiently sophisticated and flexible
enough to meet the needs of more advanced industrial societies.
Problems of Planning
It was hoped that with accurate statistical data and demographic
analysis the states central planning bodies would be able to develop
the ability to meet the needs of society-but this proved to be an
impossibly complex task.
The interdependence of an advance industrial economy meant that
failure to meet targets in for example one key ball-bearing plant would
have widespread repercussions throughout the entire planned
economy-arising from the INTERDEPENDENCE of many goods.
When failures occurred then the sacrifice would be borne primarily by
consumer good production-thus passing the problem on to the backs of
the ordinary people-creating a festering discontent that despite their
hard work, the workers were short of many quite basic
commodities…e.g. in the 1980’s in the DDR fathers of new babies
would register the birth and follow that by putting the child’s name down
on the waiting list for a “Trabby” (A Trabant 2-stroke engine fibre-glass
car!)
Problems of Planning
Information overload-combined with problems of collecting dataprocessing data-bureaucratic implementation of production and
distribution plansshortagesa black marketcorruption.
MATERIAL BALANCING problem-how do all the component elements
of the planned economy balance SUPPLY and DEMAND-They very
often failed to do so.
The Role of Prices-Prices act as market signals in market economies
but in the planned economies did not fulfill this role at all-Prices set to
simply reflect costs of production-and many producers dealt in trade
creditswidespread wastage since costs of production were not
reflected in the final price.
Repressed Inflation-Goods were relatively cheap compared to wages
but they were often of low quality and in short supply –most families
had excess money-and channeled this into gaining “valuta” (hard
currency)…for access to special “INTER-SHOPS” where only hard
currency was used.
Incentives…absence of .
Prices were set in a way which did not reflect goods true valuebut also LABOUR was undervalued .
Wide wage differentials were not allowed –since they were seen
as a source of class inequality…therefore less incentive to take
on responsibilities and leadership..and a tendency to reward
through privilege.
Unemployment ceased to exist…so workers had little fear of
being sacked which reduced commitment to work standards
Also workers knew that bonuses and targets were achieved by
QUANTITY and not QUALITY –goods often shoddily made-High
levels of wastage.
Products often were out-dated-no incentive to innovate-LADA’s
remained largely unchanged for over 30 years.
The Problems of Transition
The failure of the planned economies did not arise from any inherent
weakness in the intellectual strengths of these societies-on the contrary
they produced highly educated workforces-a a current strength of many
formers socialist states in the quest for FDI.
These systems could generate ideas but could not harness
themstagnation, resignation, and cynicism reigned towards the end
of the planned economies lives.
Mikhail Gorbachev-sought to reform socialism with the implementation
of “PERSTROIKA” and “GLASNOST” in the mid 1980’s (
RESTRUCTURING and OPENNESS) .But Reform was taken up by the public
which forced the pace of change beyond the reform of socialism
towards to its abolition. By 1990 after a series of far reaching changes
and a failed coup the USSR broke up into its constituent 15 Republics.
Biggest problem was the absence of any blueprint to revert to
capitalism….but how to achieve this without risking political upheaval or
even civil war.
The Politics of Transition
Redistribution of power-since a movement to freer markets requires that
economic and political power are separated.
State loses the power to set prices/plan the economy.
Private economic actorsother sources of power emerge.
Economic and political power decentralized-market forces in the economy
and some form of democracy politically.
Two possible directions which the reform of the system can take in the
early stages…
1) Market socialism – state retains central and decisive role but greater
role is given to market forces
2) Capitalism – states role is further reduced and privatization of state
enterprises becomes the policy.
Power stops flowing DOWN from the TOP and is increasingly vested
towards PRIVATE ACTORS with power now altering and changing the
response of the state
The IDEOLOGY of Transition
Marxism-Leninism loses much or all of its power as a source of
explaining the past , present and future.
Widely regarded in the former socialist countries INITIALLY as
failed ideologies-though later several Communist Party’s have
reconstituted their message and become quite politically
influential once again…especially when the new solutions fail.
What values and beliefs become dominant- some countries
have enthusiastically embraced Anglo-American free enterprise
culture-Others have seen more nationalist or even fascist
ideologies come to the fore-All promise to RESTORE the
nations greatness.
This IDEOLOGICAL VACUUM can be dangerous and unstable.
The Governance of Transition
Transition SHOULD result in the Authoritarian System 
Greater democracy…Failures of socialism compounded by
failure to be accountable..therefore democracy is seen as
essential.
Difficulty in creating the culture, institutions,and norms of
democratic life….political parties? Policies?
Electoral systems? Who is not discredited? Undue credibility of
extremism? etc etc
In some cases economic reform has NOT been accompanied by
political reform
In some parts of the USSR the former republics have reverted to
authoritarian and undemocratic systems…e.g. Kazakhstan &
Byelorussia
The ECONOMICS of Transition
Property- redefinition of property-economic and political task of
PRIVATIZATION difficult to implement…
De-politicization of the Economy seen as essential.
BUT what are the means of production WORTH?
WHO should get these assets-redistribution to workers of
factories? Homes to tenants? Will this be unfair on
workers/tenants in less advantaged situations.
Sell off assets to the highest bidder?But who after decades of
socialism will be the bidders?..the nomenklatura? Or as appears
to be the case in many former Soviet states the old and newly
emergent CRIMINAL UNDERWORLD…
Foreign Investors? Risks criticism that the country is being sold
off to foreigners.
Former capitalist class-often fled- should they have their wealth
back?
Inefficient firms?Who wants them?Allow them to go
bustunemployment?
ECONOMIC Coordination
MECHANISMS
Prices replace bureaucratic mechanisms-although
govt. coordination is still necessary in many parts of
the economy.
Responsibility-individuals take responsibility for
gathering information and making business decisions
and taking actions…the transition towards this is
often slow and the state lingers on in many ways
…not least in the popular mindset.
Mercantilist tendencies to control production and
distribution of commodities such as food and energy
may well persist
The ROLE of PRICES
The role of prices in a market economy is at odds with their role
in a planned economy.
free market –the INVISIBLE HAND-aim to achieve nothing other
than economic efficiency-signalled by profit.
Planned economy-prices are often do not reflect cost or even an
equality of Demand and Supply-Often fulfill a social roleThe old problem of REPRESSED INFLATION is replaced by
OPEN INFLATION –Forces some sectors of society into poverty
because they can no longer afford the goods which have
become expensive.
Also workers in certain industries may flex their n muscles and
demand higher wages industrial unrest  Govts.may meet
these demands by printing money FURTHER INFLATION
Dual Economy of hard currency and soft currency can often
persist