Whither Reform? Ten Years of the Transition Kristof FILEMON

Joseph Eugene Stiglitz 1943. Columbia University 2001. Nobel Memorial Prize in Economic Sciences 1995-1997. 17th Chair of the Council of Economic Advisers 1997-2000. Chief Economist of the World Bank 2011. Time Magazine: one of the 100 most influential people

Historical background 1991. End of USSR Yeltsin  false hopes Oligarchs Waiting for the „invisible hand of market” No drive to EU, no Copenhagen Criteria  no incentives „Lost decade”

Russia China GDP: -50% Rising poverty & inequality Western textbooks Better starting position GDP: +100% Chinese way Greater challenge

Why failure? Too much/little shock? Wrong implementation? TEXTBOOK ECONOMICS US style  relies on certain intellectual traditions Misunderstandings Not only creating market economy

Failures of the Washington consensus Market economy = Competition + Private property What if there cannot be both? Privatization Giving away to friends Lack if institutions Corruption  undermining social structure Illegitimate privatization Not necessarily good managers were the new owners  no improvement Market: unattractive for foreign investors No competition Creative destruction  unknown, no institutional background (especially not a tailor-made one!) No enterpreneurship + lack of capital

Essentials of transition Institutions  not enough „Social glue” Narrow self-interest  not enough Transforming social contract Norm destruction  creation! No victim blaming Participation & self-transformation Cannot be imposed from above Restructuring Separation of ownership & control Small & medium enterprises (NO) Large enterprises (YES) CONFLICT SOURCE No motivation to restructure

Highly developed agency relations Organic development  not overnight Restructuring one firm in a functioning economy Restructuring the entire economy Decentralization of decision-making Vertical + horizontal Smaller structures with new managers Ministry vs market Increase information efficiency

Misunderstanding the reform process Sequencing Everything at once  NO  priorities Go for „low hanging fruits” 3 options: ASAP Framework for P, not legal framework When all is prepared, P is necessary Privatization  nothing Functioning market! Success, rather than speed! Government failure? Grabbing hand theory: corrupt state Privatization without regulatiory safeguards Solves no problems

Shock therapy vs. Incrementalism Institutional „blitzkrieg”  revolutionary Same methods to reverse socialism Russia  Western shock therapy China: incrementalism, own way Best way: start from where they were, not clean sheet Fear from the losing of momentum

Summary 2 economic experiences of the XX. Century Transition to capitalism  not as it was expected Huge challenges ahead Basic services need to be financed by tax More failures than successes  hopes that the lessons were learned

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