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.