#8
Interview: Building capitalism, Part 1
By Martin Hutchinson
UPI Business and Economics Editor

WASHINGTON, Jan. 10 (UPI) -- Having served as an economic adviser to the Russian, Ukranian and Kyrgyz governments during the 1990s, the Swedish-born Anders Aslund expects many of the former Soviet Union and Eastern European economies to grow stronger, with particularly high hopes for Ukraine. Currently senior associate at the Carnegie Endowment for International Peace, Aslund's book "Building Capitalism" (Cambridge University Press) discusses the restructuring process in Eastern Europe and the former Soviet Union. I interviewed him at his office to find out where he thought these countries would go from here, and what lessons his work might teach us about China, another economy recovering from central planning.

Q: Where do these economies go from here; it's been 10 years?

A: The big question now is the extent to which the rule of law will be introduced. These countries have now done privatization, liberalization and financial stabilization, and now comes the question of whether property rights and contractual rights will be sufficiently well-enforced. What has really happened in terms of crime development is that first there was an explosion of individual crime, from 1989-1994, and then crime became centralized, because it was more efficient to pay off one person than to pay many. After that the oligarchs with their private security forces became dominant. After 1998 crime became institutionalized, and it became evident that the police, security forces, tax police, court and customs are the most corrupt -- this is not well-understood, that it is now the police and not the oligarchs that are the principal source of corruption.

Today crime is concentrated, and the question in the different countries is to what extent the rule of law will be re-established, and I expect very different outcomes. It really all comes back to this one question; the others are sorted out. The laws are in place -- they need improvement, but they're there -- even Ukraine has now adopted a civil code and a commercial code.

Q: Did you see UPI's Sam Vaknin's piece on Ukraine? His basic thesis is that the oligarchs now control the companies, and want to run the companies properly, and that they have a wonderful base to do it from, in terms of good education, low wage costs, good geographical position, etc. They have people around them who are decent businessmen, like the Russian oil barons have. Thus Ukraine could surprise everybody.

A: There are several things in Ukraine that all work in the same direction. Last year Industry and Energy Minister Timoshenko extracted $4 billion from the Ukrainian oligarchy, which is 13 percent of Ukrainian GDP, by cleaning out the energy sector -- $2 billion from the gas trade alone -- and the oligarchs simply ran out of money. There are now only two other major oligarchs standing. For example, Victor Pinchuk, 40 years old, who dominates the steel sector, wants to play within the established legal framework -- the Russian Alfa Group is his ideal. The remaining big oligarchs are businessmen, and those who were not -- the bad guys -- they're gone. It was enough to liberalize a little bit and demand that people pay their taxes.

The other part of it in Ukraine is land reform; 50 percent of the land is now in private hands. The problem is that some of the holdings are huge, one I've heard of is 60,000 hectares. That's a problem, but still there is a market, it's not just rent seeking.

Then since President (Leonid) Kuchma kicked out the minister of Security after the Gongaza scandal, the police organizations, that used to function as a centralized organized crime apparatus, can no longer do so because the leadership is too weak. There's an enormous frustration in the Ukrainian elite now, they can't steal any longer -- they're blocking each other from stealing all the time. Ukraine is thus a clear model for the thesis that democracy produces conflicts and competition that drives down rent seeking.

The other approach is of course Russia, where everything is done on a top-down basis by the president and his aides through parliament. Everybody likes the Russian model but you have to compare Russian growth in 2001 of 5-6 percent, with problems beginning to appear because of the lower oil price; and Ukraine, where growth in 2001 was about 9 percent. Ukraine seems much more stable actually -- everybody complains about it because it's totally opaque at the top -- you can't talk to one person and say "can I trust your word?" -- nobody has such power. In Russia now it's orderly at the top, on the other hand only those reforms that are started from above go through; you can't have reform from below, as there is in Ukraine, where you have a model that is essentially bottom-up.

In central Asia, the position is bleaker, even in countries such as Kyrgyzstan that seemed models of reform in the mid 1990s. The problem with small countries, such as Kyrgyzstan (which unlike Kazakhstan, does have a lot of small enterprises), is that you can't do substantial business without the support of the ruling family. Ukraine and Russia are too big for that; to some extent democracy is easier in a large country, look at India. Democracy and economic reform work closely together, because it's a matter of controlling the elite, particularly now the elite in law enforcement.

So far things have changed very fast, and now probably that era of change will slow down -- we are in a post-revolutionary period.

Q: My impression is that structurally a lot less will change in the next 10 years than in the last 10, but that hopefully average rates of economic growth will be considerably higher. You may also see Pat Buchanan's "giant sucking sound" of Western European jobs heading to Eastern Europe.

A: It will be very interesting to see, but in my view the growth rates in the former Soviet Union may be higher than in Eastern Europe. There the EU accession process has in general already taken place as far as the easy, helpful items are concerned, and now you're coming to the hard, damaging ones such as agriculture and labor legislation. Estonia, in particular has had to re-impose an external tariff as a result of EU harmonization, as well as regulating its free agriculture and free labor market, and probably raising tax and social transfer rates. So Estonia, in entering the EU will undergo a strange regression, as well as closing the doors to Russia and its neighbors.

In the former Soviet Union, on the other hand, tax rates are coming down and reforms are continuing; for example, Estonia, Latvia and Kazakhstan have a free labor market. So some of the Central European countries, such as Poland and the Czech Republic, have got stuck, and are looking to Brussels, which itself is more concerned with the situation in Western European countries, which want stability rather than growth. This I think can produce a very interesting collision of ideas and values.

Q: It's an interesting question then whether some of the Eastern European countries may turn Euro-Sceptic, and decide they'd be better off outside the EU.

A: There are two obvious candidates for this. One is the Czech Republic, where ex-Prime Minister Vaclav Klaus is anti-EU, or at least very critical, and which, because of its geographical position, doesn't need to join the EU to get the benefits of its economy -- very like Switzerland, for example. The other is Estonia, which really has a different ideology from the EU -- Estonia is a truly free trading country -- and Estonia now has a majority against joining the EU.

Q: I think this may happen in some of the former Yugoslavia, too -- in Croatia, the HDZ (the party of the late President Tudjman) did very well in the recent local elections, so there could be a Euro-Sceptic government there from the end of 2003.

A: Yes, and since the last chapters of the acquis communautaire are the most difficult, you may get some countries that are priced out of the market by the new social costs.

Q: In the case of a Bulgaria or Romania, though, they're fairly strongly Europhile because almost whatever they do, if they're in the EU they're a lot richer than they are now, since particularly Bulgaria has very well-educated people.

A: You have to look at say East Germany, which has 35 percent unemployment.

Q: Yes, but that's because the two marks were united at 1 to 1 -- presumably nobody's going to raise Bulgarian wages to German levels in a hurry.

A: But if you have a common labor market, there will be a tendency that way. That's why Poland, which was the great success of the first decade, now has unemployment of 18 percent and is one of the most problematic countries, partly because they haven't privatized fully and still have a huge unproductive state sector, for example their coal industry which they haven't privatized and Russia, for instance, has.

Q: And Poland exemplifies the habit that electorates have of throwing out governments regardless, like in Bulgaria where they threw out President Stoyanov only five months after electing a reformist government.

A: Yes, that was quite shocking. The point you have to remember about these elections is that all elections in these countries are essentially referenda on corruption, and that is the cleansing mechanism for the state. In Lithuania for example each election goes the opposite way of the last one, but there's very little ideological or policy differences between the parties.

So in summary we'll see quite an interesting picture in that Russia and Ukraine will look much sounder than most of Eastern Europe, provided next March's Ukrainian elections have reasonable results, as seems likely.