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The phenomenon of post-soviet oligarchs in Russia, Ukraine, and others is so well-known it needs little definition; however, how exactly it came about and how this was related to economic reforms is often misunderstood – this chapter relies on extensive earlier studies to summarize the main explanations. Littler-known is the embryonic start of most oligarchs under the partial reforms of Gorbachev, allowing for the first time private enterprise with the 1997–1998 Laws on Cooperatives. With no market liberalization for prices or foreign trade, these new companies could only prosper by using insider connections to intermediate between state firms and thus skim off profits and assets. The cleverest and best-connected rapidly accumulated hordes of cash and established pocket-banks, preparing for future open privatization of state firms. The notorious episode of Loans-for-Shares in Russia may not have been the largest part of actual privatization, but illustrates well the nontransparent quasi-legal “stealing” of state assets that the population saw this to be, and due to this believed that market reforms in general were bad for the people. The reality that this could only happen because reforms were very partial did not change such perceptions, even to the present day.
This chapter is a review of the early debates on how best to do the transformation from socialist central planning to a market economy with private capitalist owners sets the stage. It is noted that the popular euphoria generated by the fall of the Berlin Wall permeated the world academic community with numerous papers and conferences on the subject, and a broad consensus on the main changes was reached; however, a wide rift occurred on two key points: should this be done rapidly or gradually, and what should come first: market liberalization or development of new institutions? An important clarification is made that criticisms of the Washington Consensus for ignoring social costs of liberalization and institutional development were unfounded straw-man depictions. All relevant documents or statements of international institutions clearly include both of these elements; at most, such criticisms could justifiably note IMF and others paid insufficient attention to these elements.
The old debate in history on how much individual leaders matter compared to underlying forces that move things is explored in this chapter for the post-communist transition episode. Key leaders in Central Europe, like Havel and Klaus in Czechoslovakia, and Wałęsa, Mazowiecki, and Balcerowicz in Poland, may have had the historical force of a return to prewar Europe behind them, but it was their strong commitment that resulted in seizing the opportunity of 1989’s critical juncture and moving fast to consolidate Big Bang reforms before old and new vested interests could capture the process. In Bulgaria, Romania, and even more so farther east, remnants of the old elite did not have this commitment and used the excuse of historical inertia to slow the process to their personal benefit. The best example of this was the almost complete lack of reforms in the three years of Kravchuk’s presidency in Ukraine. Some exceptions on both sides existed – Slovakia and Serbia hesitated despite the European heritage, while Yeltsin in Russia without this incentive initially tried to leverage this critical juncture into real reforms led by a capable and committed reformer Gaidar – the power of the old-guard interest soon led to aborting this Big Bang effort.
More than a half-century of isolation and ideological limits meant theoretical and practical knowledge of market economics was very limited. But the view exemplified by President Kravchuk of Ukraine that before reforms started one needed to train experts and managers was much overstated. In retrospect, it is clear that enough expertise was available to move forward, especially in Central Europe where many academics had exposure to Western economics. In the USSR, the numbers were indeed far lower, but these could be easily supplemented by foreign advisors –some diaspora returnees, others seconded from international organizations. Most important, the numbers of market experts needed was not large – a few ministerial and deputy ministerial positions, and heads of key departments numbered not in the thousands nor even hundreds. The best example of the limited need was the Baltics, which were among the fastest reformers with virtually no experts in market economics; a physicist Einars Repše, heading the Central Bank, was considered by international experts one of the most effective in the entire region. The chapter makes these arguments while providing an inside look at many key individuals involved, including Balcerowicz in Poland, Bokros of Hungary, Gaidar in Russia, and Pynzenyk in Ukraine.
Public opinion polls of transition populations reveal inter alia a surprisingly high degree of dissatisfaction with the outcome, even in Central Europe where objective measures of income and living standards show large improvements since 1989. This is closely associated to opinions that former communists “stole” state assets and became the new capitalist elite. Like most myths, this contains elements of truth, for indeed many former communists and insiders count among the new rich – especially in the USSR region. But this is far from the case in Central Europe, as has been shown by detailed studies of who the new elite is and what happened to the old nomenklatura. There, former political elites were largely replaced by formal or informal lustration; the only part of the nomenklatura that did relatively well were the Red Directors, especially mid-level managers of the socialist period. The chapter also discusses why many Central Europeans whose incomes have more than doubled are dissatisfied: unreasonable expectations of reaching, say, Austrian incomes were not met. The catch-up was “merely” 60–70 percent thereof. Dissatisfaction is not with incomes but with fact that “others”, the most successful new entrepreneurs, did much better.
Four major forces played a role in determining whether a country moved rapidly in the transformation: historical legacy; reform commitment by leaders; the role of specialist technocrats; and external influences. This chapter addresses the historical legacies that affected the strategy and speed of transition, be they inertia or return to earlier history. While in general being closer to Western Europe and today’s European Union, or having a shorter history of communism tended to propel countries toward more rapid reforms, there were many exceptions on both sides of the divide. Thus, Bulgaria, Serbia, and Romania initially moved far more slowly. Farther east, Russia, Kyrgyzstan, and to some extent Armenia initially moved far faster on economic reforms that others in the USSR – although this was effort was soon aborted. The chapter also asks how related historical issues affected economic reform speed: the occurrence of wars or civil conflicts (Yugoslav republics, Armenia and Azerbaijan, and Tajikistan); and the role of nationalism – sometimes positive (the Baltics and Ukraine), sometimes negative (Armenia and Azerbaijan, Georgia, and Moldova).
The vast amount of new data for transition countries since 1989 provides measurement not only of standard performance indicators like GDP, foreign investment, exports, poverty, income distribution, overall indices of well-being (the Human Development Index), democracy, and human freedom indicators, but also many new measures of governance, Rule of Law, corruption, market freedom, and ease of doing business. Many such indicators are used to trace the evolution of changes during transition and provide some insight into what transformation policies led to better outcomes. The main conclusions from such a statistical analysis are that countries that undertook early and more extensive economic reforms moving to a market economy generally performed much better on both economic and social indicators – and generally also in progress to more democratic societies.
A widespread criticism persists that international institutions – the IMF, the World Bank, and the EU) “imposed” the neoliberal model of the market on countries, often causing great pain to people. Chapters 1 and 2 showed that, on the contrary, pain was greatest not where reforms were fastest, but where they were gradual and partial. This chapter discusses how in fact foreign influences interacted with domestic policy choices and historical forces, concluding that reforms could not easily be forced where leaders wanted to move slowly, and where they chose rapid reforms they often moved even faster than recommended by external conditionality. Notably, one aspect in which the IMF succeeded in convincing virtually all transition countries was the need for budgetary and monetary discipline to control inflation; the three- to four-digit inflation of the early nineties was effectively under control by about 2000 – with many countries below 10 percent and others only slightly above. The World Bank and EBRD focused on other aspects of reform with mixed success, while the most effective incentives/pressures were those of EU membership requirements, often called the EU anchor.
An epilogue first notes that the only notable recent development not covered in the book is the slippage of democratic standards in Hungary, and less so Poland, albeit signs this may spread exist. However, this would not appear to be a transition-related dynamic, as it parallels the same trend of nationalist-populism in Europe and elsewhere. Speculating on possible future developments, it is concluded that little change is likely in the near-term. Those that have completed transition (and now EU members or candidates) are like other market democracies and their problems will be the same. The authoritarian reversal farther East that began in 2000 is unlikely to be infected by democratic inclinations of entrenched leaders, nor for that matter efforts to complete the economic transition – the status quo suits those in power very well and opposition is completely marginalized. Only Ukraine and Moldova are in a middle ground, with potential for moving closer to the EU, to more democracy, and fuller markets – but, at the same time, domestic vested interests continue to slow any movement in this direction, muddling through would seem a likely outcome.