The Political Economy - PowerPoint Presentation

Slide1

The Political Economy of Regime Change in Central-Eastern Europe

Bálint MADLOVICS

Foundations

of

Political

Economy

BCE, 28 November 2019

OutlineWhat is Socialism?

What

is

C

apitalism

?

three

basic

models

of

socialism

;

general

ideal

of

capitalism

Transition

from Socialism to Capitalism

liberalization

,

stabilization

,

privatization

Regime

Change

in

Central

and

Eastern

Europe: Poland and Hungary

political

antecedents

;

case

studies

Recommended

literature

What is socialism? What is capitalism?

economic

side

:

different

solutions

to

the

coordination

problem

political

economy

:

different

regimes

,

sets

of

institutions

varieties

of

capitalism

,

varieties

of

socialism

(pre-

regime

change

)

Varieties of Socialism:1. Classical (Stalinist) Model

exclusive

state ownership

of most,

if

not

all

non-

agricultural

means

of

production

economic management through administrative command (central planning with physical targets)

economy and society incorporated into a totalitarian state (one-party dictatorship, autarky)

limited role of money BUT using prices, taxes and budgets at various levels of state as mechanisms of control over the economy and society

economic growth pursued for political and ideological goals (competition with the West) instead of improving living standards

shortage economy

Varieties of Socialism:2. Yugoslav Reform Model (from

1950s)

instead of direct state-ownership, nominal ownership by employee’s cooperatives

self-management in selecting and appointing managers of individual firms

two-tier banking system (banks were regional monopolies, under the direct influence of client enterprises)

opening toward Western economic influence

Varieties of Socialism:3. Hungarian Reform Model (from

1968)

dominant (not exclusive) state ownership; private ownership was tolerated, only on a small scale in the beginning (service sector) but private property was acknowledged and institutionally protected

collective farming BUT farmers were allowed to have relatively sizable household plot (eliminated the shortage of food!)

indicative central planning; more autonomy in “simple reproduction” (in the lack of physical targets)

consumption: no longer rationing or dictatorship over needs, money (“semi-hard currency” status)

foreign borrowing and debt instead of shortage (1982: Hungary joins IMF)

freedom of movement, more bargaining power of the worker, more flexibility in wages

more open economy: 50% East, 50% West;

Comecon

Capitalism and System Changethe ideal: dominant private ownership, competitive entrepreneurship with hard budget constraints, “buyers’ market instead of sellers’ market” (Kornai)System change: from socialism to capitalism, from

one-party dictatorship

and

state ownership

to

multi-party democracy and private ownership; “restoring

the relative autonomy for institutions in all spheres of societal

existence” (

Bokros

)

HOW?

i

n theory (debates): shock therapy vs. gradualism, sequencing of reforms

(SLIP)

etc.

in practice: political imperatives, values and ideologies, and popular acceptance

Transition from Socialism to Capitalism: 1. Liberalizationof entry and exit of new ventures (freedom of entrepreneurial activity);

of

prices, which reflect information about demand and provide the basis of market competition (including: of money, internal and temporal prices—interest rates—and external and spatial prices—exchange

rates,

so relative scarcity in the world market becomes the ultimate reference point

);

employment

and wages (this can cause inflation

)



restoring consumer autonomy, a critical mass of private businesses responding to the fast changing structure of

demand

Transition from Socialism to Capitalism: 1. Liberalization making

visible the structure and degree of economic distortions caused by the constant and massive misallocation of resources in the communist

system

transitional

crisis

:

(

hyper

)

inflation

, output decline, mass

unemployment

,

rampant

poverty

.

What

is

to

be

done

?

nothing

(politically unfeasible)

reverse

liberalization (

Balkan)

macroeconomic

stabilizatio

n

Transition from Socialism to Capitalism: 2. Macroeconomic stabilization

monetary

policy:

independent

central

bank

problem

: (

hyper

)

inflation

,

price

stability

should

be

reached

no

monetary

financing

of deficit

new currency had to be established in 14 CIS

countries

!

fiscal

policy:

fiscal prudence

problem

:

financial disequilibrium

,

double-digit and persistent fiscal deficit

,

current account

(CA)

deficit

made

difficult by the collapse of tax revenues and the new safety net (unemployment benefits and social

transfers)

but

mitigated by cutting state-subsidies (hardening budget constraint) and restrictive income policy (e.g. Poland

)

banking

prudency

: lend only to those who can repay

Transition from Socialism to Capitalism: 3. Regime-changing privatizationre-establishment of

private

ownership

(

after

it

was

abolished

in

communist

nationalization

/

collectivization

)

“making capitalism without capitalists” (

Szelényi)

not just selling SOEs

, but

organic development of

new private firms

“It

is supposed to bring about fundamental change in enterprise behavior and the incentive structure for managers at the helm of private and state-owned firms alike. Privatization of the national economy means,

therefore, that

the profit motive and the creation of more and more market value for owners, as principal stakeholders, is now a concept and consideration of paramount importance. […] As a result, after privatization enterprises are supposed and expected to act, first and foremost, in the interest of their private owners […]. From that moment onwards individual economic organizations no longer existed as mere administrative units of a single monstrous state entity; they were reconstituted as enterprises

.” (

Bokros

)

Technocratic Dimensions: Openness of the Privatization Market

Barriers

to entry

Openness

of the market

Corruptibility

potential

Share issue privatization

Minimal capital requirements

Open

Closed

Low

High

Public

auction

High capital requirements

Public tender

Multi-criterion

decision

Restricted

auction

Need

for invitation

Direct sellingNeed for appointment by the ruling elite

Technocratic Dimensions: Object of Privatization

What is privatized?

Special

p

ost

-transfer relation of state to business

Post-transfer economic

form

Contracting out

Activity

Customer

Artificial monopoly

Franchising

(licensing)

Enterprise

Regulator

Artificial

monopoly (oligopoly)

D

irect privatization (partial)

Enterprise (+ assets)

Co-partner

Competitive

firm (with state interference in the management)Direct privatization (total)Enterprise + assets-Competitive firm

Unfeasibility of technocratic changedifferent

intentions

from

technocracy

,

but

even

technocrats

faced

hardly

surmountable

challenges

:

there

was no financially sound internal demand, for under the conditions of state monopoly and the command economy no one could have accumulated assets close to what would have been needed;when an administrative market and command economy are collapsing, it is impossible to determine the exact value of a former state corporation in a market environment that has not even been established. After all, neither the price of the products nor the costs of production—nor for that matter supply and demand—had been shaped by market forces. (Of course, it could be suspected that the raw materials industry, which had been selling at depressed rates compared to international rates, would bring significant profits to those who managed to grab it.)

Non-Technocratic Motives of Privatization: Justice Making

Form

of j

ustice-making

Temporal

dimension of justice-making

Legitimation basis

of privatized ownership

Scope of privatized property

Reprivatization

Pre-nationalization / pre-collectivization

period

Former owners

Former property

Compensation

Pre-nationalization / pre-collectivization

period

Former owners

Optional

property

Insider privatization (management-employee buyout, MEBO)

Pre-regime change period

Operators of the assets

Operated propertyFree distribution among citizens (voucher)Pre-regime change periodCitizensOptional property

Non-Technocratic Motives of Privatization: Transformation of the Power of the Nomenklatura

Way of capture

by

the

nomenklatura

Graduality

of capture by

the

nomenklatura

Beneficiaries

Bottom

-up

power

transformation

Making

use of superior social and knowledge capital

Single stage

Outsiders (+

nomenklatura

) in high number

Horizontal

power transformation

Facilitating the concentration during secondary privatizationMultistageNomenklatura (+ outsiders) in high numberTop-down power transformationDirect selling (“the state privatizes itself”)Single stageNomenklatura

in low number

Destinations of the old economic nomenklatura

Class position of 1988 economic nomenklatura in 1993

Russia

(N = 60)

Poland

(N = 263)

Hungary

(N = 82)

Elite

81.1

56.6

29.2

Non-elite with subordinates

13.2

12.6

18.3

Non-elite without subordinates

1.7

7.2

4.9

Retired

3.3

23.6

47.6

Source:

Szelényi

and

Szelényi

(1995, 627)

Regime Change in Central and Eastern EuropeWhy not the Chinese path?the Hungarian communist leadership wanted this

politically

unfeasible

:

the

people saw communism as foreign oppression, against which they can now gain freedom (GDR, Czechoslovakia, Poland, Baltic

States)

Western linkage and leverage (

high number of economic, intergovernmental, technocratic, social, information and civil-society

ties

+

vulnerability

to

Western

democratization

pressure

) (Levitsky and

Way

)

The Case of Polandno reform model, but

relatively

weak

socialism

1980s: official statistics show 2-4% GDP growth, but there are significant shortages and dollarization

fall of socialism: hyperinflation

shock therapy: liberalization,

macrostabilization

and institutional transformation policies at the same

time

B

alcerowicz

: extraordinary

politics

mass privatization could not happen (they did not want large foreign ownership at first), the share of private owners grew because of new enterprises

most reform policies toward SOEs took place only after 1993 by the new

government

The Case of HungaryHungarian modified model (New Economic Mechanism, 1968)growing from relatively cheap loans (1984-1987)four steps of transition (László

Csaba

):

1987: two-tier banking system and competition authority -- starting changes that deliberately stepped beyond any socialism

1990:

Antall

government, liberalization and crisis management; privatization, bottom-up power transformation

1994-1998: Horn government, privatization and macroeconomic stabilization (

Bokros-Surányi

package)

a one-off 9 percent devaluation of the forint and the introduction of a preannounced crawling peg with gradually lower rates;

an 8 percent surcharge on all imports except primary energy and investment goods, with a preannounced firm timetable for its phasing out;

a negotiated double-digit reduction in real wages as well as lower inflation to restore the international competitiveness of Hungarian labor;

some structural reforms

1998-2000: finishing stabilization and privatization, protection of private property and steps toward joining Western alliance (NATO, EU)

Recommended literatureÅslund, Anders, and Simeon Djankov, eds. 2014.

The Great Rebirth: Lessons from the Victory of Capitalism over Communism

. Washington, DC: Peterson Institute for International Economics.

Bokros

, Lajos. 2013.

Accidental Occidental: Economics and Culture of Transition in

Mitteleuropa

, the Baltic and the Balkan Area

. Budapest–New York: CEU Press.

Csanádi

,

Mária

. 2009. “The ‘Chinese Style Reforms’ and the Hungarian ‘Goulash Communism.’” Discussion Paper; Centre for Economic and Regional Studies, Hungarian Academy of Sciences. http://econ.core.hu/file/download/mtdp/MTDP0903.pdf.

Kornai,

János

. 1992.

The Socialist System: The Political Economy of Communism

. Oxford: Clarendon Press.

Soós

,

Károly

Attila. 2011.

Politics and Policies in Post-Communist Transition: Primary and Secondary

Privatisation in Central Europe and the Former Soviet Union. NED-New edition, 1. Budapest–New York: CEU Press.