Political Economy of Post-Communism
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
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 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
120 100 80 60 40 20 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
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 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
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 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
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