Strategies of Transformation

POST-COMMUNIST REFORMS: KEY QUESTIONS 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 “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

The economic blueprint: LIBERALIZATION STABILIZATION PRIVATIZATION (added later: INSTITUTIONALIZATION)

Liberalization 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 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 ?

The Missing Link: Institutionalization 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 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 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.

PROBLEM 2: “Shock therapy” inflicts tremendous costs on the society 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

PROBLEM 3: “Shock therapy” creates new forms of power and control for the elites through concentration of wealth

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: --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

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 re-invention

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

Multiethnic societies 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 Monoethnic societies Similarity of patterns Competition not ethnically coloured Ethnopolitical mobilization may shore up stability

Success is most likely: In a country with 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 countries are somewhere between these two extremes