#5
Book Review: 'Building Capitalism'
By Martin Hutchinson
UPI Business and Economics Editor

WASHINGTON, Dec. 18 (UPI) -- Restructuring formerly Communist economies is something the West will probably never get to do again (since South Korea will presumably take care of North Korea, and China and Vietnam seem to be looking after themselves). There is thus a sense of nostalgia in reviewing the process, the economic equivalent of "Greatest Generation" books about World War II.

Anders Aslund's "Building Capitalism -- The transformation of the former Soviet bloc" of course makes the point that there is much left to do, that a number of countries have reverted largely to Stalinist traditions, and that in most countries of the region the free market system as we would understand it is by no means securely established. Nevertheless, as Russia takes firm control of her own destiny, central Europe and the Baltics move inexorably towards the EU, and even Bulgaria, Romania and Ukraine finally start to show some economic growth, there is a sense that for the West the most difficult phase of transition has passed.

Certainly the decade ahead is unlikely to see the number and penetration of Western advisers that the early 1990s saw. At their best, the Western advisers were very good indeed and in some cases made a crucial difference to the economies of their client states. However, for the individual advisers at least, the game is now largely over; the large bureaucracies of the EU, US-AID, the World Bank, EBRD and the accountants' consultancy firms have taken over, and it is time to find another field of endeavor.

Aslund's central thesis is that "shock therapy" -- rapid implementation of as full as possible a slate of free-market reforms -- worked better than its opponents have admitted. In terms of gross domestic product, "shock therapy" countries were growing again within 3-4 years of the treatment; they have since shown more consistent growth and far less corruption than their peers, and have seen inequality, measured by the Gini coefficient, increase only to West European levels. On the other hand, with the notable exception of Estonia, none of even the "shock therapy" countries has achieved a polity significantly to the right of West European social democracy, in terms of size of government or tax levels.

At the other extreme, a number of countries have seen essentially no reform. While official statistics suggest that their fate has been only moderately bad, Aslund demonstrates that official statistics greatly overstate their performance. In general, these countries have limited or no civil liberties, and are sinking slowly deeper into a Stalinist mire.

Aslund's most interesting analysis is of the middle group, those that opted for reform, but on a gradualist program. These countries have suffered the most severe fall in living standards, both nominally and in many cases in real terms -- gradualism, from every point of view, was clearly inferior to "shock therapy." They have also suffered the greatest increases in inequality, although their Gini coefficients are still only at U.S. levels and well below those of Latin America. Nevertheless, a number of gradualist countries are showing that reform, once it progresses beyond a certain point, and provided it is accompanied by democracy, may be irreversible and indeed self-reinforcing. Partially reforming countries, subject to ferocious economic attack by kleptomaniac "rent-seekers" tend to suffer economic crises. However in a number of cases, notably Bulgaria in 1997 and Russia in 1998, the crises themselves have pushed the countries towards greater reform rather than away from it, and have reduced the power of the rent-seeking former-nomenclatura "oligarchs."

Aslund draws surprising conclusions about the role of the West, and is severely critical of Western economic assistance policies. In spite of a peace dividend to the United States totaling $250 billion per annum from the fall of the Soviet Union, the West missed the chance to provide Russia with crucial economic aid in early 1992, when reformers were securely in control, and thereafter provided subsidies that largely went into the pockets of the oligarchs.

During the middle period of transition, 1993-97, Western public sector aid for the reforming countries was in total negative, since debt repayments and interest on old Soviet-era credits exceeded the flow of new money. Only the private sector, which began investing directly in 1993 and has remained a net investor on a fairly consistent basis since, provide the capital that these countries needed. As for Western technical assistance, it was crucial at first in reorienting the thinking of decision-makers in these countries, but rapidly expanded in size and deteriorated in quality (and was accompanied by innumerable bureaucratic requirements, particularly from the EU's Phare and Tacis programs) to the extent that its value became minor at best and in some cases negative.

One area where in my view Aslund is excessively optimistic is the question of the interaction between democracy and reform. It is certainly clear that dictators generally were captured by the "oligarchs" and hence increased the level of "rent-seeking" and that democratic supervision of the political process has tended to eliminate those governments for which theft was their principal raison d'etre. Nevertheless, at no time in these countries, other than right at the beginning, does there appear to have been a clear democratic wish for a free market, except with levels of social provision attached that were unsustainably expensive.

Even since Aslund's book went to press, two election results, in Poland and Bulgaria, have re-emphasized the lack of electoral commitment to reform. In Poland, an admirably reforming government, with a good economic record, was not only voted out of office but received so few votes that it was no longer represented in parliament. In Bulgaria, the reformist president Peter Stoyanov was unexpectedly replaced by a Communist, a member of a government that had run the Bulgarian economy into the ground only four years before. In Slovakia, too, opinion polls are pointing to the likely return of the odious Vladimir Meciar in next year's elections, again in spite of a reform process and economy that have performed well.

Aslund leaves out former Yugoslavia, and to some extent raises doubts over his case by doing so --- if you include the countries of former Yugoslavia, economic health appears more correlated with geography than with reformism. Slovenia, with a highly unreformist government since 1992 and a very corrupt banking sector, is nevertheless the richest country in Central Europe, and the readiest to join the EU. Croatia, bedeviled by civil war and until 2000 ruled by president Franjo Tudjman, the type of "strongman," albeit fully democratically elected, that Aslund abhors, was by the time Tudjman died in many respects ahead of most central European countries in terms of reform and privatization, even without significant Western economic or technical help. As the head of Croatia's Privatization Agency said to me in 1994: "We have had one enormous advantage --- absolutely NO foreign advisers."

Aslund's book is fascinating to those interested in the transformation, and full of hope for the future for most of the countries of the former Soviet bloc. Yet, at the end, it remains an exercise in nostalgia. There is still much to be done, in all of these countries -- but we Western advisers and consultants won't, in general, be doing it. From now on, they're on their own.

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