Political Economy of. Post-Communism

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1 Political Economy of Post-Communism

2 A liberal perspective: Only two systems Is Kornai right? Socialism One (communist) party State dominance Bureaucratic resource allocation Distorted information Absence of freedom, misallocation of resources but full employment Capitalism 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

3 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

4 Bartering is inefficient Suppliers of industrial goods often demanded consumer goods for their workers in return No direct contracts

5 Kornai: So Capitalism is better because Capitalism is more efficient because prices and free choice determine industrial inputs and outputs

6 And Capitalism spurstechnological innovation 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

7 In fact..capitalist countries are both innovative and rich Index of technological achievement 1990s 2000s 0 High Income Capitalist Countries Upper Middle Income Source: World Bank, Global Economic Prospects (2008) Lower Middle Income Low Income High state intervention in economy

8 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

9 Kornai: Capitalism is better, but problems can arise.like unemployment

10 But Socialism s chief goal is equality not growth. Social equality Both political and economic Full employment And The Soviet Union pursued that goal.

11 Health Care for All!

12 Wage Equality

13 It worked!

14 Communism was widespread

15 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, (USA = 100) GDP GDP per capita Consumption per capita

16 the race between the capitalist and socialist systems would ultimately be decided by which could ensure higher productivity. --Vlad Lenin

17 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

18 But there is no need for democracy under capitalism

19 But how to change? A Celebrity Economist vs. a Nobel Prize winner Sachs Appeal Shock Therapy Polish success Russian Failure Jeffrey Sachs

20 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

21 And the "Battle of Metaphors Continuity vs. Break Role of Initial conditions Shock Therapy (Radical Reform) Raze old social structure Engineer solution that is not distorted by initial conditions Incrementalism Preserve social capital Piecemeal changes taking initial conditions into account Role of Knowledge Knowledge Attitudes Chasm Metaphor Technical knowledge of end-state blueprint Knowing what you are doing Jump across in one leap Local practical knowledge for small changes Knowing that you don t know what you are doing Build a bridge Repairing the Ship Repair in dry dock Repair the ship at sea

22 Real Live Transitions from Socialism to Capitalism: Russia

23 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!

24 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

25 Economic Crisis! GDP Drops drastically Budget deficit grew What to do? Print money No more distribution of goods..

26 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?

27 And China too Wanted to modernize Socialism with Chinese Characteristics Goal: generate sufficient surplus Realized socialism wasn t working.. Tried the Great Leap Forward

28 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

29 Which path to capitalism? OR

30 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

31 Russia: Shock Therapy in action Privatization and Price controls are removed Led to inflation Prices rose for necessities So govt. printed money.but that didn t help So factories reverted to barter Govt. gets IMF loan IMF imposes Washington Consensus Inflation drops Macroeconomic stabilization Unemployment and inequality More Privatization

32 Results.Unemployment

33 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

34 Inequality

35 Brain Drain

36 Poverty

37 Protesting Bandit Capitalism

38 Repression

39 Russia. A One Trick Pony or a new world economic Power?

40 Russia: Crash and Burn?

41 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

42 China

43 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

44 Peasants regain control of the land after the Great Leap Forward failed

45 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

46 Free movement of people? Chinese migrant workers

47 The China Price Low wage industrial reserve army Joint ventures Technology transfor Competition Remember the product cycle?

48 Microeconomic Reforms One-stop shopping

49 Influx of Capital: FDI

50 China s growth

51 Growing at 9 per cent per year China's GDP, (current value, billions of U.S. dollars)

52 70% of goods in Wal Mart are made in China

53 Equality and Inequality in China

54 Poverty

55 Corruption

56 Any movement toward democracy?

57 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

58 China is more cushioned from economic shock than most countries.

59 China and the current economic crisis

60 Requirements for developmentg

61 Lessons for the Future

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