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Political Economy of
Post-Communism
A liberal perspective: Only two systems
• Is Kornai right?
One (communist) party State dominance Bureaucratic resource
allocationDistorted information
Absence of freedom, misallocation of
resources but full employment
Political power disbursed and
friendly to market and private property
Dominance of private property and
markets Freedom
Buyers market, no shortages,
unemployment, fluctuations in business cycle
Socialism
Capitalism
Socialism: Inevitable distortions
• Bottlenecks arose
• Factories improvised
• Found ways to produce critical inputs themselves or bartered directly for them
• So they were self-sufficient conglomerates
• Did not develop comparative advantage
Bartering is inefficient
• Suppliers of industrial goods often demanded consumer goods for their workers in return
• No direct contracts
Kornai: So Capitalism is better because……
• Capitalism is more efficient because prices and free choice determine industrial inputs and outputs
And Capitalism spursTechnologicalinnovation
• Innovation brings economic growth
• Because new technologies make industries more competitive in the international economy
• Competitiveness spurs exports
• Which bring in income
• So prosperity depends on knowledge-based production
In fact…..Capitalist countries are both innovative and rich
0
20
40
60
80
100
120
High Income Upper MiddleIncome
Lower MiddleIncome
Low Income
Index of technological achievement
1990s
2000s
Source: World Bank, Global Economic Prospects (2008)
Capitalist Countries High state intervention in economy
So the logic behind the “Washington Consensus”: liberalize, stabilize, privatize
• Internal liberalization of Markets• Integration into the world Economy• Reduction of extensive government programs
because they…….– allocate funds to non-productive activities– Prevent Entrepreneurs from finding funding for
new knowledge-based production– Create wrong incentives
Kornai: Capitalism is better, but problems can arise….like unemployment
But Socialism’s chief goal is equality not growth….
• Social equality
• Both political and economic
• Full employment
• And The Soviet Union pursued that goal….
Health Care for All!
Wage Equality
It worked!
Communism was widespread
But Everyone is equally poor under Socialism because equality was preferred to freedom,
efficiency, and growth
• “We pretend to work, they pretend to pay us”
Comparative GDP and Consumption, USSR and USA, 1990.
(USA = 100)
GDP GDP per capita Consumption per capita
49 43 31
“the race between the capitalist and socialist systems would ultimately be decided by
which could ensure higher productivity.” --Vlad Lenin
Back to Theory: What does it take to Change Systems?
• Replacing state ownership with private property
• Replacing bureaucratic decision-making with market decision making
• Opening to international markets• No spontaneous change: change is imposed
on the system (remember Polanyi)• State has to be friendly to the market and
private property
But there is no need for democracy under capitalism
But how to change? A Celebrity Economist vs. a Nobel Prize winner
• Sachs Appeal
• Shock Therapy
• Polish success
• Russian Failure
Jeffrey Sachs
Vs. Joe Stiglitz: We’ve met him before…
• He criticized the “Washington Consensus” and the IMF in the handling of the Asian Fincial Crisis
• Critic of neo-liberalism
• “Closet” follower of Polanyi
• Still a liberal…..
• But advocates incrementalism
…And the "Battle of Metaphors“
Shock Therapy (Radical Reform) Incrementalism
Continuity vs. Break
Raze old social structure Preserve social capital
Role of Initial conditions
Engineer solution that is not distorted by initial conditions
Piecemeal changes taking initial conditions into account
Role of Knowledge
Technical knowledge of end-state blueprint
Local practical knowledge for small changes
Knowledge Attitudes
Knowing what you are doing Knowing that you don’t know what you are doing
Chasm Metaphor
Jump across in one leap Build a bridge
Repairing the Ship
Repair in dry dock Repair the ship at sea
Real Live Transitions from Socialism to Capitalism: Russia
Economic Nationalists want Growth which leads to wealth which leads to power…
• Soviet Union: The inefficiencies of Autarky
• Soviet Growth rates fall
• Technology gaps widened and multiplied
• Soviet elites: “Yikes! We are no longer a Great Power!
Grow, compete or die!
• A non market autarkic economy was not bringing growth• No technological innovation• Technology gaps with the West• Economic Nationalist Elites saw the draining of Soviet power• So they purchased Western technology• And then plunged into debt • Which further decreased economic growth• Need to change goals: pursue growth
over equality
Economic Crisis!
• GDP Drops drastically
• Budget deficit grew…
• What to do? Print money
• No more distribution of goods…..
So…….Velvet Revolutions in the Soviet Union and Eastern Europe: Communist elites turn into Capitalist elites overnight
Vlad Putin, then and now: Is Kornai correct?
And China too……
• Wanted to modernize
• “Socialism with Chinese Characteristics”
• Goal: generate sufficient surplus
• Realized socialism wasn’t working…..
• Tried the “Great Leap Forward”
Large Leap…..Large Failure
• Land Reform
• People organized into “communes”
• Everyone was involved in making steel…..
• So harvests failed
• 30 million people starved
Melting down metal objects for Steel
Which path to capitalism?
OR
Russia choses Shock Therapy….
• “Washington Consensus”• Same process as the Bolshevic Revolution• Utopian social engineering?• Reason: “triumphialism” at winning the Cold
War• Large cluster of simultaneous changes needed
– Price liberalization + privatization + elimination of subsidies for industry + anti-monopoly policies + enforcement
Russia: Shock Therapy in action
More Privatization
Unemployment and inequality
Macroeconomic stabilization
Inflation drops
IMF imposes “Washington Consensus
Govt. gets IMF loan
So factories reverted to barter
So govt. printed money….But that didn’t help
Led to inflation…Prices rose for necessities
Privatization and Price controls are removed
Results….Unemployment
Privatization benefitted the Rich and Powerful….and the corrupt
• Crony Capitalism
• Emergency of oligarchs
• Asset stripping
• Capital flight
• Bandit Capitalism
• Protest
• Longing for a return to Communism
Inequality
Brain Drain
Poverty
Protesting “Bandit Capitalism”
Repression
Russia…. A “One Trick Pony” or a new world economic Power?
Russia: Crash and Burn?
Small Stimulus Package…
• Russia benefitted from the same easy credit that everyone else benefitted from….
• Debt is still high and billions are needed to rebuild infrastructure
• Sept. 2008, govt. used oil revenue to bolster stock market
• But oil price volatility
China
China choses Gradualism
• The Chinese got “shock therap”y out of their system
• They learned the hard way
• They chose the path of gradualism
• Ideological pragmatism
• Stiglitz believes they had the wisdom to “know what they didn’t know”
Peasants regain control of the land after the “Great Leap Forward” failed
Abandoning Autarky
• China started entering the international economy after 1978
• Foreign trade decisions were decentralized
• Special economic zones were created
• Volume of foreign trade rose
• And foreign investment flowed in……
Free movement of people? Chinese migrant workers
The China Price
• Low wage “industrial reserve army”
• Joint ventures
• Technology transfor
• Competition
• Remember the “product cycle?”
Microeconomic Reforms
• One-stop shopping
Influx of Capital: FDI
China’s growth
Growing at 9 per cent per year
China's GDP, 1990-2006 (current value, billions of U.S. dollars)
70% of goods in Wal Mart are made in China
Equality and Inequality in China
Poverty
Corruption
Any movement toward democracy?
Economic growth substitutes for political reform?
• Economic reform as a substitute for political reform?
• Institutional reforms limit the power of the one-party state
• Some of the reforms were……
China is more cushioned from economic shock than most countries….
China and the current economic crisis
Requirements for developmentg
Lessons for the Future