Chapter 89 Section 7 Central and Eastern Europe

Perhaps the most crucial test of capitalism's creative potential is its application in the former communist countries of Central and Eastern Europe and in the former Soviet Union.For several reasons, Russia and the other republics of the former Soviet Union fall into a different category than the other new democracies of Central and Eastern Europe. (The Baltic states, with their history and traditions leaning toward the West, must be considered closer to the latter than to the former, as also prominently demonstrated by their astonishing success in economic reform.) Although Russia was During the half century between the world wars the capitalist economy developed rapidly, but only for a short period - essentially after the revolution of 1905 - did liberal institutions and ideas take root.Seventy years after the Bolshevik Revolution, the communist planned economy has left its own legacy: misdirected investments, out-of-place factories and power stations, conventional technology, the appointment of bureaucrats as managers of industrial enterprises, an unmotivated workforce and ecological disasters.

Much more work should have been done earlier to help Russia, Ukraine, and the rest of the former Soviet Union build free economies.In particular, we should have been prepared to support the currency board to bring about some stability in the Russian ruble.The Russian people rightfully distrust their government's ability to provide a stable currency.The only solution is to stop the government from managing the currency and implement a "hard ruble" where the currency board we established in Hong Kong in 1983 has a firm grip on it.Currency boards, preferably backed by IMF or Federal Reserve representatives, exchange hard rubles for dollars at a fixed rate.History has shown that this transparent system works, even in the toughest of circumstances.For this to work, Russia needs enough dollar reserves to back the hard ruble more than 100%.The West could have found no other form of assistance more valuable than providing this support.

The secret to successful economic reform has always been making sure that all the parts work together, because only then is it easier to adjust.For this reason, some are now criticizing Russia's reformers in 1992 for liberalizing prices without breaking the state monopoly that dominated the economy.But at a time when there is talk of Muscovites simply not getting enough to eat, price liberalization has at least got the goods into the shops.In any case, a far-reaching privatization program based on the guarantor method pioneered in Czechoslovakia has since turned much of the industry into private enterprise.More than 70% of Russian workers are now in the private education sector.Indeed, uncertainty about property rights, excessive bureaucratic regulations, high taxes and widespread corruption remain major problems, discouraging foreign investment and turning business into a black market economy controlled by the mafia.But despite this, there seems to be no reason to predict a very bleak outlook.Some unreliable figures point to a decline in its production, but others point more strongly to a massive increase in private consumption.In any case, this is exactly what is required for the transition from a production-led economy to a consumption-driven economy.Much unpleasantness can also arise when laws are not properly enforced and upheld, but no one who visits Russia today will claim that Russians are not responsive to opportunities to develop business enterprises.In fact, the most important message the West has for Russia today is that full fledged capitalism requires the rule of law, without which private ownership in Russia will lack legitimacy and will not be stable.

The economic challenges facing the former communist states of Central Europe are formidable, but on a smaller scale.Naturally, East Germany was able to merge with the most economically powerful country in Europe.Hungary has moved towards a Western-style economy in the final years of its communist rule.Significantly, the Polish governments, and especially the Czech Republic's, achieved their most remarkable success when they first took the boldest decision to move from socialism to capitalism. The great factor in Poland's favor was that the communists had largely failed to collectivize agriculture.So communism failed to gain full control of the economy, just as it failed to control society as a whole in the face of Catholic resistance.However, the attempts of the Communists to carry out economic reforms failed.Indeed, its greatest legacy is hyperinflation.The government under the leadership of the Solidarity trade union carried out successful reforms, and its architect, Leszek Barcerovich, deliberately chose a radical path: simultaneously taking steps to abolish price controls, adopt austerity monetary policy, reduce the budget deficit and abolish the almost All restrictions on international trade.Inflation has dropped significantly.New small businesses popped up and goods flowed into stores.True, their prices are unpalatable, but many argue that the decline in living standards is based on fictitious statistics, as Poles have faced scarcity before.Later, the important content of the privatization plan was finally added to the reform.Today, the private sector accounts for 55 percent of the economy.However, success is also mixed with mistakes.Unbridled entitlement spending has made it look like the budget deficit will continue.Since the left took power in 1993, the privatization program seems to have slowed down.As part of a response to the European Community's failure to fully open its markets to Polish products, Poland has again tended to raise tariffs.On balance, however, the reform's successes far outweighed its failures, so that Poland's economy grew by about 4 percent in 1993 and 1994, and it appears that things will be just as good in 1995.There is no need to attribute the right's defeat in the 1993 election to dissatisfaction with the reform process itself.Due to proportional representation (hastily adopted by most of the new democracies), the fragmentation of the anti-socialist vote among a number of competing minor parties must be largely responsible for this.

In the Czech Republic, the results of economic reforms have also been significant, as opposed to Slovakia, which has consciously maintained a more socialist orientation.The Czechs, of course, carried on a tradition of industrial achievement that not even 40 years of communism could kill.Before World War II, Czechoslovakia's economy was among the most advanced in the world, and its per capita income was equal to that of France.Moreover, unlike their Polish counterparts, Czech reformers did not inherit hyperinflation, nor did they have to seek communist support for their reform measures.Under the steadfast leadership of former finance minister and then chancellor Vaclav Klaus, an aggressive strategy was adopted that did not budge on demands for a "third way" between capitalism and socialism.The Czech Republic has removed price controls, cut subsidies, drastically reduced public charges, and made it possible to exchange currencies for trade reasons.The large-scale privatization program initiated through guarantors changed the form of ownership, with 80% of Czech assets now in private hands.After the trauma of change, the economy started to grow on a healthy basis (2.5 percent in 1994).Unemployment is now low (4 percent in 1994), despite a mild recession in the old, "inefficient" industry. Unlike in Poland and Hungary, those pushing for necessary economic reforms in the Czech It has also paid off, which in itself is the best guarantee that the reform will continue.

Perhaps, however, Albania, the smallest and poorest of the former Eastern Bloc countries, best illustrates the creative potential of constrained capitalism.Albania used to live in a state of stagnation in time, completely cut off from political or economic contact with the outside world.It has no decent means of transport, a hopeless, obsolete industry weighed down on its shoulders, agriculture has been completely collectivized, and suspicious rulers have built bunkers all over the landscape.The only way forward is to start from scratch again, which it is doing now.The sudden mass emigration caused immediate difficulties for Albania's neighbors, but after that brought it large remittances, coupled with foreign aid, and a consumer society began to emerge.Small businesses are popping up everywhere.Anything that could be salvaged from kibbutz and bunkers was opened for new private farms.Since the government has removed price controls, these farms will soon be able to provide food to the people.Albania is now achieving what almost everyone thought was impossible: Its economy has grown by double digits for the second year in a row.Of course, this starts from a very low level.Foreign investment, taking advantage of its low wage costs and lack of regulation, is exploiting the country's mineral resources and developing its tourism potential.

Thus, the uneven pace of economic development in former communist countries supports my main thesis that, while political, social, and cultural factors are not unimportant, the formula of free enterprise works regardless of when and where it is adopted.In addition, its application is also very important for the consolidation of democracy.A recent poll of public opinion in 10 former communist countries showed that, in almost every case, nostalgia for the old communist regime was associated with a failure to make a rapid transition to a free economy.