Ignorance and impotence
Systemic transformations in the post-Soviet post-totalitarian area are over. Socialist as the system of full-fledged centralized decision making has been replaced by interventionism or the system with various degrees of state involvement in economic affairs. The system can also be called welfare state, market socialism or mixed economy. The ideology of the compromise between socialism and capitalism prevailed. The thirdway-ism took the place of Marxism. Central planning has been substituted by econometric modeling. Political economy of socialism was replaced by economics. Old labels died and new trendy brands in politics and economy have been successfully promoted. Sustainable development, corporate social responsibility, good governance, fair trade and “let’s make poverty history” and “let’s do something about global warming” became ideological pillars of new post-modern, post-industrial and post-totalitarian world. Ethics of redistribution remained strong. The concept of social justice was revised but it was state-centered and government-inspired.
Jaroslav Romanchuk
As post-totalitarian governments had to act in dire circumstances of huge deficits, hyperinflation, loss of savings and markets, suspension of production, demoralization and failure of the state to deliver its basic services they did not have time for considering various theoretical models of transformation. Advice and recommendations of Western policymakers and analysts, international organizations were overwhelmingly accepted at face value without any critical evaluation. The truth is that the West was not ready to face the breakup of the totalitarian socialism. It has failed to critically evaluate its own failure of delivering prosperity, stability and sustainability, which a multitude of development economics tools and policies promised. The lessons of the painful and costly experiment held in dozens countries of Africa, Asia, Latin and South America, recipes of development projects of the World bank and IMF were the only one available for post-totalitarian countries to try. A. Greenspan in his book ‘The age of turbulence” accurately described the readiness of the world community to face the collapse of the Soviet Union dominated area. He evaluated the position and proposals of the developed world as impotence. “Washington consensus” was the only offer that theoretical western mainstream could generate at this time. It was far from being a concrete blueprint for reforms but rather a set of benevolent recommendations based in many cases on wishful thinking.
Theories omitted and major features ignored
There are a few important faults, blunders and false propositions that were made by or recommended for emerging post-totalitarian countries.
Major theoretical mistakes are the following:
ignoring the conclusions of economic calculation debate (economic calculation is not possible under socialism). Price liberalization on all factor of production including money was limited which prevented full clearing of socialist structural blunders. Hence economic entities and decision makers made decisions in severely distorted information environment;
ignoring the Austrian theory of business cycles and its conclusions (the nature of money, the role of central banks and governments in countercyclical policies);
ignoring the lessons of application of development theory recommendations world wide (malinvestment, indebtedness, corruption, environmental damage):
Ignoring the conclusions of public choice and rational choice theories and the nature of the government in general). Economics worldwide taught failures of markets based on dubious facts and wishful thinking but it has failed to provide in-depth analysis of state failures in economy and especially in the social sphere;
ignoring the nature of real decision-making process in post-totalitarian countries (the power of nomenclature, the weakness of formal institutions, the culture, traditions and habits of people in relations among themselves and their attitude to the state);
ignoring the weakness of democratic institutions, severe deficit of state transparency and inability of the state to deliver its fundamental services (protection, law and contract enforcement);
lack of the appreciation of the role of the entrepreneur in «creative destruction», the emphasis on the balance, optimal distribution, the effectiveness of the state investment rather than on the institutions that ensure the process of generating natural production structure, hence natural employment and investment pattern (“natural” here means resulting from the decisions of private investors, risk taking entrepreneurs and consumers rather than from five or ten year government plans).
Decision makers and theorists ignored and still keep ignoring quite a few significant features of the transitional period:
legal nihilist of nomenclature and the population. They did not understand the true nature of private property, its economic and political functions;
weak electoral support of free market solutions, poor quality of educational elites, the prevalence of freeloading culture based on egalitarism, envy to the rich and the successful, the anti-achievement culture. Wealth was and is still associated with robbery, theft and corruption;
lack of natural production and employment structure, fixed prices, overregulation of production and trade
lack of independent judiciary and high propensity for state capture by different power groups including criminal gangs and mafia;
lack of the tradition of civil society and independent mass media participation in exercising control over the state and in forming the values of open society, rule of law and democratic procedures;
reliance on contradictory unfathomable legislative base that was passed in the totalitarian times. The existing legal framework made it impossible to have “tabula rasa” legislative start;
severe deficit of experts, analysts, policymakers who are well-trained and prepared to carry out market reforms on the central and local levels;
weak and inefficient mechanisms of coordination of activities of various bodies of power. Different ministries, bodies of power do not work as one team. They rather fight one another for the control over resource distribution and bigger share of the budget expenditures;
lack of experience in neutralizing considerable administrative, political and human capital that old soviet style communist party and nomenclature elite had. When the old system began to fall apart the old elites were the first to take advantage of new opportunities both in politics and in the economy. They were quite fast in monetizing their old nomenclature capital and to transform new political power into economic one and vice versa;
high risks of deterioration of the of basic functions of the government, spreading criminalization of the society, state capture, wide spread corruption, nepotism and formation of oligarchs.
The trap of a “good law”
Designing the strategy of development the emerging economies took many “good” western laws and uncritically applied them in their countries. However the environment where these laws were supposed to provide good results had a big impact on them. As a result, the governments faced many negative unintended consequences that increased economic and social costs of transition. A good law is not the law copied from the West but the law that takes into account the following:
informal norms of behavior;
the existing incentive structure in the government, business and civil society;
the strength of formal and informal institutions and their interaction;
the quality of the judiciary;
the quality of control and enforcement system;
risks of state capture and sectoral lobbying;
probability of unintended consequences in the form of additional legal acts (to clarify a law), additional expenditures on making the law work, distortion of production, investment and employment structures as well as the distortion of the incentive structure of economic `entities.
In most transitional countries compliance costs of many normative acts were not taken into account. Hence, policymakers made decisions where the costs of government intervention were very much underestimated. Post-Soviet countries wanted to build a kind of Scandinavian model but they ignored such key elements as
open political competition,
independence of the media,
rigid transparency standards,
high corporate culture,
open domestic and foreign economic competition,
independence of the judiciary;
sophistication of the civil society in controlling the state and understanding basic institutes of free market economy;
valued based (achievement, fairness, freedom, responsibility) solidarity inspired civil society.
Welfare state, interventionist models can not generate the same results in post-totalitarian emerging countries as in Germany, Sweden or even the USA as they do not have the mentioned above features and institutions. In all transitional economies the reform of education, healthcare, pension and social security was postponed and even after 17 years of transition the state still holds commanding heights in these sectors. Market solutions, free and fair competition was not allowed there. As the reforms were carried out under the banner of democratic change, liberalism and market transformations the people who suffered the pain and faced considerable costs of transition formed strong distrust not only to economic freedom but also to the West in general. It is especially true in former Soviet Union countries.
How unhampered state threatens social economy and solidarity in the society
Post-totalitarian countries kept a big government, the state with different, often conflicting interests and functions of politicians and nomenclature. The state keeps the monopoly over money, considerable presence in financial markets and in land ownership. It regulates economic activities, interferes in production, investment and trade. It keeps distorting labor market, education, insurance and healthcare. At the same time, it performs poorly in delivering its basic functions, makes low quality legislation and can not build strong anti-corruption institutions.
Raison d'etre of state interventionism is to reduce poverty, to make flexible labor market, to provide social safety net to the disenfranchised and the poor, to make the economy more competitive, sustainable and innovative. The social orientation of the economic policy is best evaluated according to the following criteria:
life expectancy;
income level during working years;
income level upon retirement;
flexibility of labor market;
access to normal food and consumer goods;
access to clean water, stable supply of energy, sewage and transport infrastructure;
availability of durable goods;
ability to buy an apartment (a hose);
ability to buy educational and healthcare services;
clean environment (water, air, forests, land).
The evidence, facts and statistics provided by numerous international organizations prove that the countries` that chose full-fledged democracy, more economic freedom and limited government delivered better social results. Macroeconomic foundations for solid social policies are
low inflation;
balanced budget;
low debt;
stable exchange rate in the mode of liberalized current and capital accounts;
dominance of private sector in finance, investment, production and trade;
good governance.
Central and Eastern European countries that succeeded in building strong institutes of democracy and ensured economic freedom achieved best social results though it is difficult to name a country that has been consistent in delivering this during 17 years of reforms. While the governments managed to reduce the interference of the state in private lives of citizens (by passing constitutions of democratic states) they have failed to set limits on the state’s intervention into the economy (for example inflation ceiling, debt limit, budget deficit limit, general government expenditures to GDP limit). As a result the governments failed to keep financial discipline and could not even deliver stable prices. They increased the size of the state, indebted countries and crowded out private capital (see statistical appendix). The governments have failed to eliminate the conflict of interest that in ingrained in the legislative framework in the area of managing assets and regulating market entry. The institute of private property has been turned into its static form by means of stifling regulation, price regulation, currency and merchandize controls, unhampered and unpunishable bureaucracies. The conclusions of Austrian school of economics, the research on economic freedom and its impact on sustainable development have been mostly ignored. Active industrial policies (monetary, fiscal and administrative tools), naming “strategic” sectors and “national corporate champions”, old-fashioned protectionism aimed at saving old industries and the old structure of production resulted in malinvestment, structural unemployment, brain and skill drain on the one hand and nepotism, formation of oligarchs, corruption and low work ethics.
After 17 years of reforms, the recipe of the economic success sounds as simple and consistent as in the beginning of 1990-es. In different times in their history this recipe was tried by Germany, Ireland, Sweden, Japan, Great Britain, Chile or New Zealand. Economic freedom matters! Coupled with strong democratic institutions, values of hard work and achievement the economic freedom is yet to be discovered by most post-totalitarian countries in Europe. It is economic freedom that delivers job creation and flexible labor market, income growth, access to basic social infrastructure, education and healthcare. It ensures modernization and creative destruction of not just good but institutions that hamper sustainable development and ethical behavior.
Interventionism has proved to be unstable, immoral anti-social. It even brought about the authoritarian states in Belarus, Russia, Azerbaijan, Turkmenistan or Uzbekistan. Scholars of the world face a huge challenge of working out a new set of theories ands practical recommendations for new development economics. I would call it new enlightenment economic policies. It should be fact based, value oriented and utopia-free.