Political Entrepreneurs

The Economic Engine of Political Change

Case Study on Reform: The Transition to Market Economies in Central and Eastern Europe

May 31st, 2013 by Wayne Leighton

Lajos Bokros, former Minister of Finance of Hungary and current Member of the European Parliament, has published an overview of the main elements of reform in post-Soviet states, Accidental Occidental: Economics and Culture of Transition in Mitteleuropa, the Baltic and the Balkan Area. For students of political change, the book draws links between nine different elements of reform. Below, some highlights.

On liberalization of the business sector: The key was liberalization of entry and exit for private firms, along with liberalization of prices. The immediate effect of such a policy may be price swings, but this simply demonstrates the need for a greater mass of private firms that can respond to the opportunities in the market.

On macroeconomic stabilization: For transition economies, macroeconomic stabilization required successfully addressing monetary, fiscal and wage policy. A stable money and a newly liberalized market sector need to go hand in hand. When the money is stabilized (no massive inflation) and the market is liberalized (entry is easy and prices can adjust without regulation), there will be fewer “irrational” price swings.

On privatization: There is a huge difference between privatization of the Eastern (post-communist) and Western (Margaret Thatcher and the UK) varieties. For the former, Bokros argues that the development of new private firms, and indeed the privatization of the economy, was far more important than the mere de-nationalization of a former public entity. Further, it was important for these new economies to be truly open to foreign investment.

On the financial sector: Under the socialist governments, banking existed as a vehicle of the command economy. This had surprising effects on the transition economies. Money had little meaning, which meant financial literacy was poor. This made transition all the more difficult and raised vulnerability to setbacks/shocks.

On corporate restructuring: Newly privatized firms were likely to improve productivity only if the new owners had sufficient control. Because there were usually few domestic investors with the necessary resources, foreign strategic investors were critical. They not only supplied the necessary capital; they changed corporate structures and cultures.

On utility and financial sector re-regulation: There was a delicate task of moving from government agents tasked with privatization to government agents tasked with supervision as regulators. This turned out to be one of the most highly politicized and time-consuming aspects of transition.

On public finance administration: Establishing a democratic state from the ruins of a totalitarian state was tricky. Some institutions were abolished while others were created. Institutions mattered more than ever. In most transition economies, pension systems have been comprehensively restructured (not that all reforms were done well). All the communist countries reviewed by Bokros used to operate a pay-as-you-go type pension system where benefitis for retired people were financed by current contributions of the working populace. Some private plans have since emerged, with Hungary leading the way.

On municipal/regional governments: Reform at this level has been surprisingly difficult, often more so than reform of the central government. Many municipal governments inherited assets from the communist system — housing stock, commercial ventures, shares of utilities — that could be borrowed against, even if their net value was negative. Local governments often took on debt, to their detriment. Services such as education and healthcare have deteriorated. Services related to physical infrastructure — street repair and lighting, water distribution and treatment, garbage collection — could be outsourced or privatized, but little has been done.

On legal/judicial reform: There is a huge gap between existing legislation and judicial practice. To some extent, this is to be expected. Under communism, firms didn’t sue each other when conflicts arose. Under transition, conflicts must be worked out through courts. The judicial system frequently is overburdened.

 

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

Madmen, Intellectuals, & Academic Scribblers

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

Madmen, Intellectuals, & Academic Scribblers

The Economic Engine of Political Change

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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