In other contexts, the multilateral Bargaining model has been used descriptively to explain how during the process of multilateral negotiation, coalitions are formed, deals are struck, and compromises are reached.
5) Political economy.
A second basic premise is that any policy recommendations must be both economically and politically consistent. This consistency requires a specification of the relationship between short-term economic developments and longer-term political ramifications. Obviously, economic policy objectives cannot be pursued in isolation, since the prevailing political configuration will constrain the set of options available to planners of the transition process. On the other hand, economic post-privatization economy develops, new interests will acquire economic power and new institutions will emerge to strengthen the power of groups that wish to defend these institutions. The dynamic interaction between these economic and political facets of massive privatization programs must be taken into account. Indeed, one can expect that models, which ignore political economic feedback effects, will have a natural tendency to overestimate the prospects for a successful transition.
The following example illustrates the kind of political-economic interaction that could adversely affect the reform process. Policy makers in Central and Eastern Europe appear to be overly complacent in their reliance of foreign competition as the main disciplinary device that will force monopolists to operate efficiently. Indeed, Polish officials cite their country’s liberal tradition in the area of trade policy when questioned about the viability of this approach to antimonopoly policy. Our dynamic political-economic perspective leads to skepticism about this heavy dependence on competition from abroad.
If a seems very likely, the post-privatization industrial structure turns out to be highly over-concentrated and inefficient, then the main effect of threatening foreign competition will be to unleash a powerful confluence of political forces in favor of protectionism. Owners of the domestic enterprises will lobby to defend their rents, managers will lobby to defend privileges, and workers will lobby to defend their jobs. Because the problem of unemployment never really arose under communism, the potent tension between introducing free trade and maintaining employment levels never became apparent.
2.2. Poland and Hungary as the best example of transition in the East
Europe
Economic Reform in Eastern Europe: The Background
The background of economic reform in Eastern Europe is not unlike that in the Soviet Union, even though, as I have emphasized, the setting is rather different. The brief political thaw following the death of Stalin in the early 1950s did permit a freer discussion of ideas, which, along with growing problems of economic performance, led to limited attempts to develop and implement economic reform. Initially, these changes were modest in scope, and they typically followed the Soviet reform pattern: Try to improve decision making while preserving socialist objectives and the essence of the planning system. This was the focus of the New Economic System in the GDR and of the New Economic Mechanism introduced in Hungary in 1968. The potential for genuine economic reform was certainly limited by Soviet influence. Indeed in some cases (such as Czechoslovakia in 1968), reform was abruptly forestalled by Soviet intervention. In other cases, such as Hungary, reform attempts dating from the late 1960s were sustained on a limited basis, to become the background for more serious reform in the present era. There were, then, numerous attempts at reform in Eastern Europe. What were the major forces promoting these efforts?
First, as was the case in the Soviet Union, rates of economic growth in Eastern Europe have undergone a long-term secular decline. The magnitude of this decline (see Table 1) has varied from case to case, but overall it has been pervasive. Moreover, these countries had taken pride in being high- growth economies, even if the costs, such as little growth of consumer well- being, were also high. At the same time, growth in productivity slackened, especially in the late 1970s and 1980s. And inflation quickened, though it was most serious in Poland and Yugoslavia. Repressed inflation, though difficult to measure, grew in importance in the 1980s.
Second, East European countries relied heavily on foreign trade as a means of stimulating economic growth in the 1970s. Their strategy was to promote exports in Western markets so that the imports required both to stimulate technological change in industry and to enhance consumer well- being could be obtained without the growth of hard-currency debt. Unfortunately, this strategy was not successful. The energy crisis led to a significant slackening of Western markets at the very time when East European nations were becoming more aggressive in these markets. East European imports were sustained, but largely by means of building a substantial hard-currency debt. The magnitude of debt repayment subsequently led to considerable internal belt-tightening for these countries in the 1980s — precisely the opposite of what had been intended.
Third, one could argue that in Eastern Europe, the possibilities for economic growth through extensive means had initially been less promising than in the Soviet case and had been exhausted more quickly. In light of the level of economic development in Eastern Europe compared to that in the Soviet Union, it is not surprising that the imperative for reform was strong and that developments of the Gorbachev era quickly spilled over into Eastern Europe. In the absence of Soviet backing, interest in the administrative command model faded fast.
Table 1. Economic Growth and Performance in Eastern Europe:
The Background to Reform
| |1961-70 |1971-80 |1981-85 |1985 |1986 | |Eastern |3.4 |2.4 |1.0 |.2 |2.2 | |Europe | | | | | | |Bulgaria|5.0 |2.3 |.1 |-3.2 |4.7 | |Czechosl|2.4 |2.3 |1.0 |.4 |1.9 | |ovakia | | | | | | |East |3.2 |3.5 |1.7 |3.3 |1.6 | |Germany | | | | | | |Hungary |3.1 |2.5 |.6 |-2.3 |2.4 | |Poland |3.3 |3.0 |1.0 |.2 |2.1 | |Romania |4.2 |3.5 |-.6 |-1.4 |3.1 |
East European Reform Programs: Similarities and Differences
In this chapter we pay special attention to Poland and Hungary. We do so because these countries are both examples of aggressive reform but have employed different strategies. However, before we consider these cases in greater detail, it is useful to summarize the East European reform experience, noting important similarities and differences among the various cases. To do so will entail some repetition of basic themes.
First, economic reform in Eastern Europe (at least in Poland, Hungary, and Czechoslovakia) is generally described as a transition in that these countries seek to replace the planned economy with a market economy rather than attempting merely to modify the former.
Second, transition programs have varied in speed and intensity. Some countries have pursued reform on a "gradual" basis, whereas others, like Poland, have pursued what is often termed a "big bang," or rapid, approach to reform. However, we must remember that even in those countries not pursuing a "big bang" or "shock therapy" approach, the process of transition in Eastern Europe has been relatively rapid, especially when compared to reforms of the past - and notably so when compared to the recent Soviet record. It is important, therefore, to be aware of the basic issues associated with transition and of the extent to which the attempted speed of transition alters the overall reform experience.
Third, although it is possible to examine and understand the basic elements of economic reform and even of transition from one system to another, we really do not have a general theory of change in economic systems. In some cases — for example, during such a period of rapid change as the 1990s — it is difficult even to develop a way to classify the issues involved in transition.
Fourth, important differences exist from one country to another. Our view of the socialist transition process is heavily influenced by our image of the best-known and most advanced reforms, such as those of Poland, Hungary, and Czechoslovakia. We know much less about, and tend to pay less attention to developments where reforms are proceeding at a slower pace, as in Romania and Bulgaria. Figure 1 offers a simple, stylized view of contemporary political and economic reform (transition) in Eastern Europe.
Figure 1. Reform in Eastern Europe
POLAND: FROM PLAN TO MARKET VIA SHOCK THERAPY
Until Solidarity won the parliamentary elections in Poland in the summer of 1989, the Polish economy had been, since the end of World War II, a rather typical planned socialist economic system. State ownership predominated, and though economic reform was attempted in varying degrees at different times, little real systemic change had taken place. Moreover, as Table 1 shows, the rate of economic growth continued to decline, and the period saw recurring shortages, increasing inflation, and an understandably declining work ethic.
Beginning in 1990, Poland took decisive steps toward a market economy. This "shock therapy" approach was to be sudden, and in this it differed significantly from the gradualist approach being discussed in other socialist systems. In addition to treeing prices, Poland implemented monetary controls, the zloty was made convertible into hard currencies, and steps were taken to control wage increases.
As we shall see, the "shock therapy" approach has not been without critics. Moreover, although the Polish case quickly attracted the interest of those who study the problems of socialist transition, it was viewed as unique. Thus it was argued that. for a variety of reasons that were discussed earlier, reform was much more likely to succeed in Poland than in a case like the Soviet Union. But before we examine the Polish reform experience in greater detail, we must review what brought the Polish economy to the reform phase and how, at that point, it might be different from other socialist countries.
I begin our discussion of Poland with a brief examination of the setting. Then I discuss the Polish command system, considering the extent to which this system led to distortions in the Polish economic structure. Finally, I turn to the issue of transition and examine the mechanisms utilized and the results achieved thus far.
1) Poland: The Setting
By European standards, Poland is a relatively large country. With a land area of just over 300,000 square kilometers, it is just over half the size of France. Moreover, with a population that approached 38 million in 1990, Poland is some 68 percent of the size of France in terms of population.
Poland is frequently viewed as having a homogeneous society, a factor that facilitates economic reform. Although social homogeneity is difficult to measure and may well be overstated in the Polish case and in other cases (for example, there are regional differentials, urban-rural differentials, and the like), the basic statistical evidence is strong. In terms of religion, 95 percent of the Polish population is Roman Catholic. From a stannic standpoint, 98.7 percent of the population is Polish, and only a few minority groups occur. Urbanization and industrialization have changed the nature of Polish life and customs, but the church, family, and folk ties that have sustained Poland for a long time remain strong. Thus, although Poland must deal with problems of modernization, it also has valued traditions and a clear identity. These qualities make implementing change more manageable here than in many other countries. In terms of natural resources, Poland is a country of considerable regional diversity, though major portions of the land area are not especially fertile. Poland's main energy resource is coal; basic minerals and some deposits of oil and natural gas also exist. Both basic data and methods of computing economic aggregates of socialist systems are currently under scrutiny. New evidence that will make it possible to do different kinds of computations may well lead to important adjustments. With these reservations in mind, however, we note that Poland was reported to have a per capita gross national product of approximately $4500 measured in 1989 U.S. dollars. This figure places it between the high-income countries of the region (Hungary and Czechoslovakia) and the low-income countries (Bulgaria, Romania, Yugoslavia) and at one-quarter that of the United States. Prior to the onset of major economic reform, the bulk of Polish industry was state-owned and planned. Agriculture (representing roughly one-fifth of total Polish output) was a mixed system wherein the private sector produced about three- quarters of the total agricultural product. Foreign trade turnover — that is, exports plus imports — represents roughly one-third of Polish product, again using U.S. dollar measures.
2) Poland: The Command Economy
The organizational arrangements of the Polish command economy were established immediately after World War II and closely resembled those prevailing in the Soviet Union. There was widespread nationalization of property, central planning mechanisms were established, and agriculture was socialized. In addition to organizational arrangements, Polish economic policies of the era, such as those on investment, sectoral development, and the like, closely mirrored the Soviet model.
Although Poland attempted modification of the command system as early as 1956 when collectivization was abandoned, little actually changed. Over time, private agriculture was neglected by the state, and continuing political protests, especially in the early 1970s, signaled both political and economic difficulties.
The 1970s was a difficult decade for many countries, especially those that rely on imported oil. The Polish strategy in the 1970s and later was to stimulate the domestic economy through the importation of foreign technology. This was not an unreasonable strategy in theory, but Western economies were themselves in the midst of the energy crisis and the recession it caused. Poland's effort to expand exports failed, hard- currency debt accumulated, and the projected impact of Western technology on the Polish economy was minimal. As the 1970s came to an end, it was evident that domestic retrenchment would be essential — a difficult path in light of the continuing unrest among Polish workers. The 1980s began with roughly three years of martial law and an attempt to achieve economic stabilization.
After half-hearted economic reforms in the early 1980s, the rise of Solidarity (which had been outlawed in 1982) proved that major systemic and structural reform was necessary. Even so, and despite the fact that Polish economic performance was deteriorating badly, serious economic reform did not begin until the late 1980s.
3) The Polish Transition: The "Big Bang" in Practice
The Polish transition from plan to market has been watched closely by a variety of interested observers. Although many of the policy and systemic changes introduced in Poland are familiar hallmarks of the general reform scene, the speed of implementation in the Polish case is unique.
There had been attempts to decentralize decision making in large state- owned Polish enterprises in the 1980s, but these reforms failed to change outcomes (a possible exception is their contribution to the wage explosion that took place toward the end of the decade). Moreover, on the eve of reform in Poland (the reform program began officially on January 1, 1990), macroeco-nomic conditions there were in a state of severe disequilibrium. Although the exact nature of monetary overhang in Poland (as elsewhere) has been the subject of debate, there was a significant budget deficit, wage increases were out of control, and hyperinflation had resulted. Poland's hard-currency debt position was better than that of Hungary, but the debt that had been accumulated did little to stimulate the Polish economy, the zioty was overvalued, and no debt relief from external sources was in sight.
In the fall of 1989, most price controls were lifted (on both producer and consumer goods), public spending was reduced, and the zioty was devalued. In the second stage of major reform, begun in 1990, the budget deficit was sharply cut, largely through a reduction of subsidies to state enterprises. A positive real rate of interest was to be implemented, and the market was to be used to signal changes in the value of the zloty. The latter was a critical measure, because foreign trade and the impact of this trade on the Polish industrial structure was to be a key component of the overall reform strategy. In January of 1990, the government set the exchange rate of the zloty at 9500 to the dollar (this represented a devaluation from 1989), a rate roughly approximating its value on the black market, and it established convertibility of the zloty for international trade. Many trade restrictions were eliminated, and internal exchanges were set up to handle the buying and selling of hard currencies. Although these changes resulted in domestic inflation, the initial increases proved to be short-term and the exchange rate of the zloty has proved to be realistic.
Finally, wage increases were to be controlled partly through wage indexation and partly through a new tax on wage increases that exceeded established guidelines.
Privatization is a major element of the Polish strategy of transition. In 1990 the Polish government passed a law creating a Ministry of Ownership Change, a mechanism to supervise the process of privatization. Privatization has proceeded rapidly, though it has been achieved mainly for small enterprises in the trade and service sectors. Industrial output in the private sector grew by 8.5 percent in 1990 and is reported to represent roughly 17 percent of total Polish industrial output Though privatization has been very successful for small-scale enterprises, the picture for large state enterprises is quite different. For reasons we noted earlier, privatization of these enterprises has proceeded very slowly. In addition, the economic position of these enterprises worsened as the state took decisive measures to introduce a hard-budget constraint. In addition to price changes and wage limitations, subsidies have been ended and protection from foreign competition has been sharply reduced. This new setting has encouraged enterprise managers to reduce costs by restricting unnecessary output and reducing the labor force. However, the strong commitment to rapid privatization was reinforced in June of 1991, when it was announced that a major portion of state industry would be privatized through creation of stock funds, with the population receiving vouchers.
Beyond these changes in the state sector, new guidelines have been introduced to monitor enterprise performance. Furthermore, a new Industrial Restructuring Agency will consider how remaining state enterprises should be handled, to what extent privatization is possible, and what restructuring should take place for those enterprises that are not viable in the new setting. These new arrangements are designed to ensure a rapid transformation of the Polish industrial structure, to make it similar to and competitive with market economic systems, and to achieve this result quickly and as openly as possible.
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