Feb 10, 1993 - exchange of money in the Soviet Union in February 1991 (exchange of 100 and 50 rouble ...... 500 Days (1990): Mandat doveriya na 500 dnei, Assocjacja No. 4. ... with non-monetary pricing of goods), Ekonomista 1987 No.2.
Marek DABROWSKI Version III February 10, 1993
FROM PLANNED ECONOMY TO MARKET ECONOMY: RATE AND STAGES OF TRANSFORMATION 1. Political Background The years 1989-1992 brought a rapid collapse of the communist system in the Central and Eastern Europe. One can separate three stages of this process. First stage was connected with the gradual political liberalization in Hungary and Poland in the second half of eighties. The acceleration of this process took place, however, in Poland, the country with a long tradition of anti-communist resistance and with a strong "Solidarity" organization, not destroyed by the Marial law time. Two waves of political strikes (April-May and August 1988), the internal crisis in the Central Committee of the Polish United Workers' Party (10th Plenary Session of the Central Committee at the break of 1988 and 1989), talks and the agreement of the "round table", partly democratic elections in June 1989 which brought a striking victory of "Solidarity", and organization of the Government headed by Tadeusz Mazowiecki - such is the course of events which lead to the political breakthrough in Poland. Parallel processes of liberalization and democratization, although much less spectacular, took place in Hungary. The autumn of 1989, often called by journalists "the Autumn of Nations" became a second stage of de-communization in the region. It was a period of authentic political revolution in the most of the countries of the region: East Germany, Bulgaria, CzechoSlovakia and Romania. The last of the former European socialist countries, Albania, joined the liberalization and democratization processes at the beginning of 1991, although the level of advancement of those changes is much lower than in the other countries of the region. Outside Eastern Europe similar processes began in Mongolia and Vietnam. The former Yugoslav federation represents a special case. The political democratization and liberalization started in the mid of 1990 in the two north republics Slovenia and Croatia. They formed non-communist governments after the free elections and the led the privatization process in the former Yugoslavia. However, the lack of similar developments in Serbia (still dominated by former Communist Party), the old economic conflicts with other republics representing lower level of economic wealth and the resurgence of inter-national conflicts brought the Yugoslav Federation to the complete political desintegration and to civil war. In the beginning of 1993 only Slovenia joined the group of Central European countries with relatively stable democracy, convertible currency and advanced market-oriented reforms. Other countries are ruled by the mechanism of war economy. The reunification of Germany, collapse of Yugoslav and Czecho-Slovak federations and liquidation of the Warsaw Pact and CMEA were the international consequence of two first stages of political changes in Central and Eastern Europe.
The third stage of political transformation is an effect of the political disintegration in the Soviet Union and the end of communist regime in this country. Starting from 1989 changes in the traditional political system of the Soviet Union was accelerated, although it was strongly differentiated between republics. The deterioration of the economic situation and strong nationality strains created additional factors strengthening disintegration processes. Two turning points of the contemporary history of the former USSR were: unsuccessful coup d'etat in August 1991 (after which three Baltic states received independence) and the formation of the Commonwealth of Independend States (CIS) at the end of 1991 which replaced USSR. Abstracting from former East Germany, now fully incorporated into the area of influence of the Constitution and legislation of the Federal Republic of Germany, the group of Central European countries - Hungary, Poland, Czech Republic, Slovakia and Slovenia lead in processes of creating Western-European institutions of liberal parliamentary democracy. Other countries have also made a significant effort to build Western-type democratic institions, however, they are less advanced in this process in comparison with the states of "Visegrad group" and with Slovenia. 2. Economic Transformation Economic changes accompany political ones, but these two processes are not fully synchronized with each other. Real resignation from the centralized economy in some countries started much earlier: in Yugoslavia in 1950 (so in that country the classical model of planned economy functioned for only 5 years), in Hungary in 1968, in Poland in 1982, but reforms went only half way and were inconsistent. In particular, privatization was outside the consideration and accepted concepts of the reforms. As a result, the model of a mixed economy - partly planned and partly a market one - generating a permanent lack of macroeconomic balance and economic stagnation formed in the earlier mentioned three countries. The acceleration of political changes does not mean automatic progress in economic reforms. Initially only Poland (since 1 January 1990) and the Federal Republic of Germany in the area of the eastern lands (since 1 July 1990) entered the road of radical transformations of the economic system. Yugoslavia, from 1 January 1990, began to implement a tough anti-inflation program, which initially brought significant success (the first half of 1990) but later started to suffer gradual erosion, among others as a result of increasing political conflict and disintegration of the Federation. Ownership and institutional changes, partly for the same reasons, lagged clearly behind the stabilization effort. Hungary is trying to continue the strategy of gradual changes, but the setting up of a new, rightist government as a result of democratic parliamentary election in 1990 did not accelerate that process at all. From 1992 Hungary has suffered rising budget deficit and balance of payment difficulties. At the beginning of 1991 Czecho-Slovakia and Bulgaria joined the group of countries attempting more radical transformations. The initial macroeconomic situation of both those countries differed, however. Czecho-Slovakia maintained a relative macroeconomic and
market balance (only slightly damaged during the second half of 1990) during all the years of the planned economy, while Bulgaria presented the example of an economy with an enormous monetary surplus. Economic changes in Romania started later and seems to be less advanced. Both those countries (Romania and Bulgaria) have immense problems with the internal and external balancing of their economies. In 1992, putting aside Germany, Czecho-Slovakia became a country with the most restrictive monetary policy, smalest inflation and fully stable currency. In the Soviet Union the political battle for the shape and rate of future reforms lasted almost two years (from the begining of 1990 until the autumm of 1991). Finally, after August 1991 revolution (the defeat of the coup d'etat) the new Russian Government with Vice-Prime Minister Yegor Gaidar choosed the way of radical reforms concentrated mainly on price liberalization and mass privatization. However, this government failed to stabilize economy because it was unable to resist the pressure of military- industrial lobby. Gaidar must resign in December 1992. Hyperinflation started in the end of 1992. The new government of Victor Chernomyrdyn includes some reformers from previous cabinet, however, it is not clear has the stabilization policy any chance of acceptation in terms of rising political destabilization? Some CIS states (like Kazahstan and Armenia), as well as the newly independend Baltic states, try to follow Russian reforms. Estonia which introduced its new, convertible currency (on the basis of currency board with the stable exchange rate to the German mark) seems to be the most successful in this process. Lituania and Armenia accomplished a significant progress in privatization (especially in agriculture sector). Ukraina seems to be the opposite case - far less advanced in privatization, trying to freeze different elements of the central planning system. Moreover, super- expansionary credit policy in attitude to state enterprises bring this country to hyperinflation in the second half of 1992. Some post-Soviet states as Georgia, Armenia, Azerbaijan, Tadzhikistan find themselves in the situation of open military conflicts which stop any macroeconomic stabilization and other reform steps. 3. Another Reform or Transformation? General criticism of the traditional model of the socialist economy (in its classical Stalinist version or in a slightly modified version dominant during the sixties and seventies and in some countries even later) does not mean a concensus concerning postulated directions of changes. The example of Poland, where undertaking a radical and complex program of building an authentic market economy with the domination of private ownership met immense resistance from intellectual and political elites educated for more than 40 years in distrust and prejudice towards the laws of the market and principles of business, showed that. The case of Poland is not isolated. Also in the remaining countries of our region heated discussions concerning the concepts of reforms are taking place. This concerns, e.g.,
Czecho-Slovakia where the memories of the concepts of reforms from the period of so called Prague Spring of 1968, reforms defeated by the military intervention of the member states of the Warsaw Pact, are still alive among a part of intellectuals. Resistance against consequent market reforms became one of the reasons which caused the separation of Slovakia from former Czecho-Slovak federation. Also radical plans of Russian economic transformation have raised at once strong anti-reform opposition, including even people who have had reputation of reform advocates earlier. After Gaidar resignation the idea of "third road" between capitalism and socialism became again very popular among leading politicians. The basic nature of the discussion may be brought to the choice between the model of the contemporary capitalist economy and variously understood "third road" [2] or "market socialism". Although both notions are not sufficiently explicit [e.g. Dabrowski, 1990; Le Grand and Estrin, 1989], for the requirements of this paper it can be accepted that the model of market socialism is connected with domination of non-private property. This is the basic identifying factor of that concept compared to the model of the capitalist economy. Independent enterprises being public, collective or cooperative property possess in that model a wide autonomy of decision taking. As concerns the capital market, it may be present only in a greatly narrowed form on account of domination of non-private ownership. The operation of the labor market, on the other hand, in general is limited by the self-managed or cooperative nature of enterprises [Dabrowski, 1989, pp. 109-115] or by the strong position of trade unions. Different variants of "market socialism" formed, for numerous years, the intellectual model for reform oriented activities in Central and Eastern Europe [3]. The reasons why that boundary was never crossed were both in the political area (the official doctrine excluded, e.g., any discussion concerning privatization of the state sector) and in the consciousness of economists and politicians. Many of them for a long time had been sure that it was possible to find a variant of market socialism that would be not worse than contemporary capitalist economy [4]. They neglected very long theoretical [5] and empirical arguments against market socialism and in favor of private ownership. The political changes of 1989-1991 finally abolished existing ideological barriers and they opened up the road to the real capitalist transformation. In the beginning of 1993 this way was definitely choosed in the former East Germany, Poland, Hungary, Czech Republic, Slovakia and Slovenia. In the remaining countries the debate concerning the direction and speed of transformation is not closed yet. The choice of the road of capitalist transformation does not determine all detail solutions and the speed of changes. Even very general knowledge of systemic solutions in other countries indicates that both at present and in the past we do not deal with one capitalism but with numerous variants of it. If we define the capitalist economy as characterized by domination of private enterprises, a limited degree of state intervention, particularly into allocation processes, and a so-called liberal system of ownership rights permitting free functioning of various forms of ownership of enterprises [Balcerowicz, 1986] , then different variants are within such a general formulation of the notion. So we have countries with significant, although not dominant participation of the non-private sector (e.g., Israel, some Latin America countries and in Europe - Austria and Finland),
countries with far reaching socialization of the distribution sphere (e.g., Sweden or Norway), countries with very strong regulating influence of the state (e.g., India, some Third World countries). On the other hand, we can single out economies with little participation of the public sector (e.g., the U.S.A.), with a low level of welfare state (e.g., South Korea and other South-East Asian countries) and entirely open to the world (HongKong, Singapore). The question of the choice of a variant of capitalism has already become a subject of heated discussion. The differences concern, among others, the regulation function of the state in economic life [Lipowski, 1991; Dabrowski, 1992a], final size of the state sector, level and forms of income and wealth redistribution, the level of openness of the economy and stability of macroeconomic policy. I will return to some of those questions later in this article. So far, however, in the majority of countries of our region the polemics are, at least partly, too early. It is difficult to decide at the moment, e.g., whether the state sector will as a target include 10% or 20% of the economy if at the present moment it is still some 50% (in case of Poland) or far much more in other countries. Beyond the above considerations attention should be drawn to the terminology question. In principle the different scope and scale of system changes after 1989 compared to earlier reform procedures incline to use the term "transformation" [6] rather than "reform". The latter should be reserved for complex changes of the economic system which do not reach beyond the outline of "market socialism" [7]. 4. Nature and Key Points of Economic Transformation Market transformation of the economies of Central and Eastern European countries is a complex undertaking concerning almost all aspects of the economic system. This makes it difficult to single out the most important elements of that process. Some authors propose very elaborate classification. Stanley Fisher and Alan Gelb, for example, differentiate the following groups of elements of the transformation process [Marer and Zecchini, 1991, vol.I, p.199]:
macroeconomic stabilization and control;
institutional reforms;
price and market reform;
small- and large-scale enterprise restructuring and privatization;
reform of financial markets.
For the requirements of this paper I will operate with a more simplified scheme which names three basic elements of the transformation process, that is: (a) macroeconomic stabilization, (b) liberalization (deregulation) connected with the change in the system of economic institutions and (c) privatization. 4.1. Macro-economic stabilization
The need for macroeconomic stabilization results from the chronic lack of balance in a centrally planned economy. For many years the sources of economic disequilibrium were sought for mainly in the behavior of state enterprises under the conditions of the command system and the planning and bargaining that accompanied it. The planning target in the form of global production or sold production caused unlimited demand for production factors [Beksiak and Libura, 1969, pp.53-61, 93-103]. The assessment of an enterprise management according to realization of plan targets encouraged to protective attitudes [Hlavacek, 1986] - the enterprise strove to maximize the probability of fulfilling the plan among others through increasing the demand for production factors [Balicki, 1979]. With the moment of starting the economic reforms in such countries as Yugoslavia, Hungary and Poland directive planning targets and gross measures disappeared as criteria of evaluation of enterprises. Yet despite this the phenomenon of general shortages did not vanish. So new theories were created to explain the causes of this phenomenon from the point of view of microeconomics. During the eighties, numerous Polish economists, basing upon empiric analyses of the behavior of enterprises, stated that, e.g., a state enterprise is not interested in profit or income maximization but only in achieving a certain level of economic surplus, satisfying from the point of view of employee remunerations and from the point of view of expectations of the higher authorities [Lipinski, 1985]. Consequently, it is not interested in aggressive market behaviors and achieving equilibrium prices [Kawalec, 1987, pp. 437-452; Topinski, 1988]. However, the best known microeconomic explanation of causes for chronic imbalance in the socialist economy, including its centralized model, is the theory by Janos Kornai [1980]. Kornai sees the causes for the deficit in so called soft budget constraints resulting from state paternalism in relation to enterprises that are property. Without negating the correctness (at least partial) of the above explanations it is hard to resist the impression that they overlook significant macroeconomic and regulating factors. Classical socialist economy, as a result of passive treatment of money (financial streams should follow physical planing targets) was characterized by permanent presence of monetary overhang [8]. If we add to this overall price control, we will find the basic explanation for chronic shortages. Price control made the appearance of inflation in the open form impossible, permitting only its hidden form. That is the basic cause of the shortage economy. The example of the Polish stabilization and liberalization program from the beginning of 1990 proved that even with unchanged ownership relations equilibrium in all markets is possible. The Yugoslavian stabilization - liberalization program from 1990 (and also economic reform of 1965) and Czecho-Slovak program of 1991 show the same phenomena. They undermine the significance of the Kornai theory and other theories of disequilibrium in the socialist economy based mainly upon the microeconomic point of view. The last Central and Eastern European experience shows that the successful elimination of the shortage economy needs to fulfil at least four conditions:
(1)
price liberalization;
(2)
efficient monetary control;
(3)
external liberalization (i.e. decreasing tariff and non-tariff barriers and free access to foreign currency);
(4)
allowing free private enterpreneurship at least in the area of domestic and foreign trade.
The Russian experience from the first half of 1992 shows that the price liberalization alone is not enough to break definitely with market shortages. Now let us to return again to decentralized model of a socialist economy. Half-way reforms changed partially the hidden inflation into open one. The scale of that phenomenon depended on the scale of deregulation of prices. On the other hand, there were numerous reasons for the acceleration of money velocity. The surplus of monetary resources was neutralized so far by various planning and administrative restrictions and general regulation, limiting the possibility of its effective spending. The increase of economic autonomy of enterprises and limitation of administrative distribution of physical resources brought an increased flow of existing financial resources [McKinnon, 1991a]. This process is sometimes named as the increase of the level of the internal currency convertibility. Half-way economic reforms also caused numerous structural problems of a fiscal nature. Greater autonomy of enterprises did not permit confiscation of their whole financial surplus by the budget. In the classical model of a centrally planned economy enterprise profit was a significant source of budget incomes. Economies in transition did not always possess a sufficiently effective tax system to replace traditional profit confiscation [McKinnon, 1991a]. Selective price control coupled with inflation lead, in general, to increasing burdens for the state budget by way of subsidies (or decreasing the revenues from the turnover tax). The inflation also caused increasing pressure on the increases of wages (including remunerations financed by the budget) and social benefits. The "softness" of monetary, fiscal and income policy (among others creation a lot of tax exceptions and credit preferences) caused by the lack of political legitimization of the government ("buying" social peace in exchange for economic concessions) should be added to the above picture. Also microeconomic pressure upon enterprises was relatively weak as a result of a certain system vacuum. The traditional plan targets did not act any more and the pressure of domestic and foreign competition and the barriers of demand were still insufficient. That last remark corresponds to a certain extent with earlier discussed theories of shortage. The characteristic syndrome of inflation (or hyperinflation as in case of Yugoslavia and Poland at the end of the eighties) coupled with still numerous shortages (among others as a result of selective control of prices and import restrictions) and stagnation or decrease of production are the final effect of the above factors. Grzegorz Kolodko [1990, p.125]
defines this state as "hypershortageflation".From the point of view of macroeconomic balances, the basic role here is played by high (and often increasing year by year) budget deficit automatically monetized by the central bank. So liberalization of prices and fundamental reduction of subsidies are necessary conditions for success of the stabilization effort. Without that step it is hard to think of eliminating market shortages and the budget deficit. But beside the problem of the current, flow imbalance of the budget there also exists the need to eliminate the monetary overhang accumulated in the past. Three methods of proceeding are to be considered: (1)
non-equivalent exchange of money (currency reform) connected with liberalization of prices,
(2)
liberalization of prices and elimination of subsidies connected with restrictive monetary policy (elimination of the surplus through corrective inflation),
(3)
mass sale of state property on commercial principles.
The two initial methods are in a way classical. The economic history of the 20th c. knows numerous cases of the application of one of them to remove a monetary overhang [Dornbusch, Sturzenegger and Wolf, 1990]. However, the answer to the question which of them is better is not a simple one. The monetary reform permits to avoid high corrective inflation, which is often hard to accept by the society from the psychological point of view. It is possible also to avoid a redistribution of property with results which are very difficult to forecast. It permits application of a penal exchange rate for incomes and resources which are not proven, in relations to which there are suspicions that they originate from illegal or even criminal sources. The monetary reform distributes the burden of monetary stabilization upon individual citizens more equally. Using method (2) that distribution may be entirely random. Method (1) may also give almost immediate results in the sense of stabilization of the market and the inflation rate. There is no need for the corrective inflation period which in some cases may last even for a couple of months. The method of corrective inflation is, on the other hand, much simpler from the technical point of view to implement: it does not require long-term preparations including printing new banknotes and minting new coins. And such works must be carried out in absolute secrecy to avoid the outbreak of market panic. The monetary reform may also damage the trust in the monetary system for long years. Additionally, in a country such as Poland, a confiscatory monetary reform would strike very strongly at the developing private sector, which to a high extent in current activities operates with large amounts of cash in view of the retarded development of the banking system. Method (1) also requires very precise simulation as concerns the demand for money after the implementation of the reform. More serious mistakes may destroy the sense of the entire operation damaging the trust in stabilization decisions in the future. The unsuccessful exchange of money in the Soviet Union in February 1991 (exchange of 100 and 50 rouble banknotes) may be a warning example here.
The idea of the third method of neutralization of the monetary surplus has a relatively short pedigree, from the period of model discussion on privatization in the post-communist economy. Stefan Kawalec [1989, pp. 245-246] was one of the firsts who presented this concept. Also the program of 500 days elaborated in 1990 by a group of Soviet economists directed by S. Shatalin and G. Javlinsky, provided for the use of paid privatization to a mass scale as the means leading to monetary stabilization [500 Days, 1990]. So far it has not been tested in practice anywhere. There are numerous doubts whether it is a real concept at all. Can mass privatization under conditions of artificial prices decided in an administrative way by the state be expected? Can privatization give the budget sufficient income to eliminate the deficit and neutralize the monetary surplus? These are only some questions which require thorough answers. I will return to some of them later in this paper. 4.2. Liberalization and institutional reforms The liberalization (deregulation) needs to dismantle the entire command system. However, this process brings the danger of additional destabilization. Setting in motion market instruments of self-regulation requires some time from the moment of abolishing administrative regulations. In this way an inevitable transition period is created, the period of a system vacuum in which additional disturbances may take place. Liberalization of prices presents a particularly important, difficult and politically delicate fragment of deregulation processes. Without freely determined prices it is hard to imagine the functioning of the market mechanism. Administrative intervention in the creation of prices paralyzes market adjustment processes and indirectly to deforms deeply the economic system. Administratively determined (or limited) price stops being a parameter of market equilibrium. Because setting prices below the level of market equilibrium is both the goal and the result of administrative intervention, the earlier mentioned situation of shortages arises. Attempts are made to neutralize shortages on one hand by various forms of regulation of purchases and on the other by means of production orders or quasi-orders, tax relief, subsidies, special preferences etc. Typical command-rationing instruments additionally deepen shortages, decrease efficiency, and create monopoly structures. Tax relief, subsidies and credit preferences lead, in turn, to what was mentioned earlier, to budget deficit and monetary imbalance. The next increase of market imbalance and/or inflation deepens price disproportions even more and makes necessary still larger subsidies. A vicious circle is created of increasing subsidies and price disproportions which is very difficult to break. The shift of the supply from goods at controlled prices to those which are not controlled or less controlled, earlier mentioned price disproportions, difficulties in opening the economy and, with the introduction of convertibility of currency, false allocation signals for economic subjects and non-optimal allocation of resources are further inevitable consequences of price control. The lack of effective techniques of price control by the state, free from negative side effects, should be finally mentioned. Liberalization of prices under conditions of shortages, market monopolization and budget deficit must unavoidably lead to a socially painful increase of prices which generally
causes political perturbations. That is why politicians, when they decide to undertake such a risky operation try to amortize and soften it to a maximum. The most often used method of softening it is to pay compensations for the increase of prices or introduce wage indexation. However, such a procedure does not eliminate the monetary and budget imbalance, but on the contrary increases it. As a result of various pressures and the difference between the real increase of the cost of living and the subjective perception of that phenomenon (usually higher) by various social groups, the tendency of overcompensation exists. That accelerates the price-income-price spiral which, in case of lack of a restrictive monetary policy, turns into hyperinflation. The method of implementation so called "marketization" of agriculture and food sector in Poland in August 1989 as well as a partial price liberalization in post-Soviet countries in 1992 give a sufficient illustration of that variant. Gradual liberalization of prices is another half-measures. Such a procedure softens the shock of one time deregulation. Applying small doses of liberalization moves it is even possible to avoid the necessity of compensations. However, the appearance of price disproportions and selective shortages (goods at still controlled prices disappear from the market very fast) is the negative aspect of the variant discussed. Besides, the process of liberalization itself (and at the same time returning to market and budget balance) spreads in time. Finally the administrative increase of prices undertaken in an attempt at balancing the market, eliminating or limiting subsidies and improving the relations of prices happen to be another shock-absorber or rather a substitute for real liberalization. Price-income operations carried out in Poland in February 1982 and at the beginning of 1988 as well as the increase of prices in Czecho-Slovakia in July 1990 and in the Soviet Union in April 1991 can be typical examples of such an approach. The administrative change of prices may bring assumed results only temporarily. It does not eliminate the causes for market disequilibrium, the budget deficit or price disproportions since it does not liberalize prices. The risk of "missing" the right level and relations of prices is immense for the reason of objective information barriers of the state administration. Administrative price operations usually must be connected with the administrative wage compensations, which bring the above mentioned inflation danger. The process of price determination becomes the subject of political bargaining and all the odium hits the government. So liberalization of prices brings with it great political and economic danger. At the same time, without taking that step, it is hard to think seriously about consistent elimination of the command system, bringing back market balance, elimination of the budget deficit, demonopolization and even privatization. Social and economic difficulties resulting from deregulation of prices can be decreased by effective demonopolization of economy. However, this is not an easy task. The command system was the main source of monopolization in the socialist economy. To simplify the preparation and realization of the central plan sectoral - branch structures of management were created such as ministries, associations, trusts, concerns, multi-plant enterprises etc. In numerous countries, liquidation of those structures encounters the opposition of the bureaucratic lobby connected with them, which at the same time defends
the remaining instruments of the command system justifying their continued functioning [Dabrowski, 1992a]. Great state investment projects made possible thanks to centralized redistribution of profits of enterprises were another source of monopolization. A significant part of those projects was motivated either by the logic of the economy of shortages or by purely political influences. Numerous administrative barriers to competition, both internal (difficulties with setting up new enterprises, particularly private ones, impossibility of changing the enterprise profile etc.) and external (state monopoly of foreign trade, lack of a convertible currency) should be added to the factors mentioned. Demonopolization of post-communist economies is a complex problem and should cover several parallel undertakings: liquidation of sectoral-branch structures of management, entire elimination of non-market forms of goods turnover, quick reconstruction of the entire legal and institutional system which in the past safeguarded the monopoly of the state or defined state institutions in particular branches (e.g., foreign trade, banking, commercial insurance, telecommunication), forced deconcentration of numerous multi-plant enterprises and change of their profile etc. All these changes, although necessary, require time. The example of Poland, a relatively advanced country in demonopolization before 1990 (compared to other countries of our region) confirms this clearly. The often presented demand to demonopolize the economy first and next to liberalize prices seems unreal then for at least two reasons. First, liberalization of prices is usually necessary much faster than significant advancement of demonopolization is possible. Second, it is hard to imagine a real development of the private sector (being the most significant factor of internal demonopolization) under conditions of the omnipresent control of prices. So there is no practical possibility of avoiding deregulation of prices before completing the demonopolization of the domestic market. Under such circumstances the need for liberalization of foreign trade and introduction of a convertible currency as inseparable elements accompanying the liberalization of domestic market and deregulation of domestic prices are even more significant. That means not only allowing foreign competition into the monopolized domestic market but also making possible adjustment of the structure of domestic prices to the structure of prices in the international market. In that way the real reallocation of resources based upon the criteria of the world market can be initiated and comparative advantages for economy from international trade can be achieved. If the necessity of external liberalization seems undoubtful, the rate and the level of this process is a subject of hot controversies not only in the post-communist counntries [Bruno, 1988, pp. 223-247]. Already substituting the multiple exchange rate regime by the unified exchange rate and elimination of foreign currencies rationing brings with it a shock similar to that brought by liberalization of prices (the scale of that shock depends upon the share of foreign trade in the national income and the level of differentiation of real exchange rates before introduction of convertibility) [see - Kalicki, 1991, pp.25-29]. Particularly the devaluation of the official exchange rate means a significant increase in the price of import of numerous supply and consumption goods. But we also encounter the opposite situation. Numerous goods, so far beyond the reach of the importers can flow
freely into the country at present, successfully competing with domestic products. Also the adjustment of domestic prices to world prices forms the real test of truth. It shows that a certain part of economy is extremely ineffective - not only does it not bring profit but its added value is negative [Hare and Hughes, 1991; McKinnon, 1991b]. This means that the non-personal costs of production, converted to world prices are higher than the value of production sold according to world prices. The radical opening of the economy (the reunification of Germany was an extreme example) in such a situation means the probability of sudden bankruptcy of a large number of enterprises with all the political and social consequences resulting therefrom. Undoubtedly, we can observe many empirical examples when the domestic output (especially in industry) is substituted by more competitive imported production. It means that some industries and enterprises must be eliminated after opening up a post-communist economy. Such a danger makes many politicians postulate that external opening should be carefully "dosed". But in such a case possibilities of demonopolization of the domestic market (the only fast means in case of small and medium size countries) are lost. Putting off the opening delays only the test of truth for ineffective branches. The general technological backwardness of post-communist economies does not provide, in principle, chances for significant reconstruction during the transition period. What is more, in the meantime further investment decisions based on a falsified price system can be taken. The political lobbies interested in continuation of the protection policy get stronger. The comparative advantages coming from external liberalization, especially in the trade and service sectors, are the other side of this story. Trying to analyze the Polish experience and taking into consideration both positive and negative consequences we are coming to the conclusion that the foreign trade liberalization and current account convertibility have probably not affected per saldo the GDP level in 1990-1992 [Dabrowski, 1992b, pp. 316-321]. However, they have influenced significant changes in the sectoral structure of the Polish economy - decreasing role of industry and increasing role of trade and services [Berg and Sachs, 1991]. As a result, liberal approach, although more painful during the initial stage of transformation gives greater chances for overcoming economic backwardness over the long term. Russian experience from 1992 with price liberalization in terms of still closed economy seems to support the latter thesis. Another dilemma of deregulation concerns the income policy. While the liberalization of wage rates and wage systems seems a relatively simple operation (the more so as the efficiency of administrative control in that field is mostly an illusion), a larger problem is connected with the removal of control of the wage fund. The justification for the control of the wage fund is of two types. From the microeconomic point of view it concerns the lack of sufficient interest of non-private enterprises in profit, that is, in the somehow natural tendency for the increase of remunerations at any price. On the macro-scale it may cause inflationary pressure on the consumer market. The additional arguments are low propensity for saving resulting from the permanent lack of market equilibrium and from inflation and the narrowness of the
financial and capital markets, which under normal conditions could absorb a part of wage incomes. Another problem are numerous weak points of the wage control among others difficulties in constructing a precise taxation system which would be impossible to avoid, negative results in the field of economic activity, forced substitution of personal costs with non-personal costs and creation of non-market wage relations. So far in no post-communist country (except the area of former East Germany) the wage control was entirely eliminated. So it is still a dilemma to be solved in practice and subject of political and social conflicts with trade unions (in the case of Poland). However, it is worth stressing that Polish experience of the years 1990-1992 and even the end of 1989 shows that the monetary policy and not the tax on the increase of remunerations is the basic factor determining the rate of increase of nominal wages. During periods when monetary policy was restrictive (the last quarter of 1989 and the initial five months of 1990 as well as the first half of 1991) nominal wage increase stopped and the enterprises did not use the possibilities created for them by the tax on the increase of remunerations. During the period of softening the monetary policy, the second half of 1990, a wage explosion took place which could not be stopped by the earlier mentioned tax. The similar tendencies could be observed in 1991 and in 1992 [Dabrowski, 1992b, pp. 309310]. 4.3. Privatization Privatization is the third significant element of post-communist transformation. To reverse the ownership structure inherited from the socialist economy is its goal. The property entirely or in most part owned by the state should be replaced by domination of private ownership. For a long time the doctrinal barrier had been the obstacle to privatization, and for many years even discusion on it had been a forbidden issue. When that obstacle disappeared other ones appeared of a conceptual, organizational, social, political nature, etc. They concern, among others, the function of the state in privatization, the choice of one or many ways of ownership transformations, the form of specific ways, the role of foreign capital, etc. The program of Polish privatization can be an example. Poland, beside Hungary, is the post-communist country in which the problem was discussed the earliest (starting in 1986) [see e.g. PTE, 1988]. But at the same time the beginning of real privatization on a wider scale took place only in the second half of 1990. The earlier discussion, with strong emotional and ideological accents in which different, often mutually exclusive options met, was the factor delaying it [Dabrowski, 1991; Blaszczyk, 1991a]. Among the most important ones are: (1)
Commercial privatization through the capital market (public auction or public subscription for shares being the property of State Treasury).
(2)
Employee ownership
(3)
Citizens ownership
(4)
Leading role of institutional investors (holding companies, banks, mutual funds, social insurance funds, etc.).
In the end the concept of a multi-way approach using various paths and methods of privatization won. A similar discussion were also held in Czecho-Slovakia and Russia. Numerous dilemmas, this time more practical than theoretical or ideological, are still unsolved. Here are some of them: The first problem concerns the speed of privatization. As I mentioned earlier, the starting point of the transformation in all countries of Central and Eastern Europe was characterized by exclusive state and pseudo-cooperative form of ownership (Czechoslovakia, Romania, Bulgaria) or their significant domination (Poland, Hungary). Wishing to implement a quick market reform one must decide to carry out quick ownership changes. Progress in numerous other aspects of the transformation process depends, as it seems, on the speed of privatization. In the same way the possibility of coming out of deep post-inflationary recession to a great extent depends on the progress in ownership changes [9]. That, in turn, directly and indirectly influences the durability of achieved macroeconomic stabilization [10]. In the political sense, quick privatization may support reconstruction of the middle class forming the social base for the democratic system and market economy. Quick privatization cannot be achieved by classical methods elaborated in highly developed countries, that is, through the sale of state enterprises on commercial principles, careful market valuation of offered property, earlier restructuring of the firms, etc. It requires unconventional methods permitting non-equivalent transfer of ownership rights and greatly simplified methods of valuation. Probably allowing participation of foreign capital to a larger extent is inevitable under such circumstances and is also connected with additional benefits such as transfer of modern technology and management know-how as well as opening the access to the world market and breaking the barriers of the shortage of domestic capital. However, this may also bring political accusations of "sale of national property to foreign hands," the sale at too low prices etc. Besides that, following the quantitative success the danger of pseudo-privatization may appear, which would rather be another reorganization of the state sector. This concerns, among others, some concepts of holding companies and trusts organized by the state. Another danger can connected with the scale of non-equivalent transfer. Most variants of so-called "citizens" privatizatation containes the equal distribution of state property to all citizens [or to all adult citizens) usually using either vouchers (the case of Czecho-Slovakia, also Russian concepts) or shares in national investment funds (Poland). Taking into account the technical complexity and financial costs of such an operation, as well as the social expectations connected with it, there is probably necessary to give each eligible citizen the sufficient amount of state property. That means the issue shares or vouchers (coupons) of huge total nominal value. It can have at least two negative consequences:
First, such an operation probably has serious monetary implications. Even if one introduces restrictions to trade these coupons or shares, they have still quasi-money character. Secondly, there is danger that vouchers denominated in money will not have real equivalent in the state property. It is connected with the phenomena of over-expectations concerning the real value of the state firms. Most authors of "citizens" privatization usually takes into consideration only the book value of state firms. Unfortunately, there is a false assumption. The first privatization experience in Eastern Europe shows that the real market value of state firms is in most cases much lower than a book value. Sometimes the real value is even negative (especially after macroeconomic stabilization and external liberalization). A dramatic reassessment of the real value of state property took already place in Eastern German and, to some extend, in Poland. Czecho-Slovakia wants to avoid temporary this problem by issuing vouchers denominated in points not in money. In Polish variant of mass privatization citizens will also receive shares of NFI without any nominal value. However, the time of market verification of their real value will come sooner or later with all political implications connected with it. The second dilemma is organizational. Privatization (sale or giving away state property) requires the active participation of state agencies. At the same time the conceptual, organizational and decision making efficiency of the state apparatus in postcommunist countries is highly limited. Political and social-technical reasons also would speak for transferring certain rights to the enterprises (the directors and employees' councils in the case of Poland). However, decentralization is also not free of dangers. Generally, politicians in the countries of Central and Eastern Europe face a choice between the dangers of slow activity, etatist constructivism and corruption of the state apparatus in the case of excessive centralization of decisions and also corruption in the case of excessive decentralization. The practical experience of Poland and Hungary shows, however, that decentralized procedures allow to make privatization more quickly and with smaller social tensions. The third question concerns the future of the state sector during the transition period. Assuming that even the most accelerated process of privatization must take at least a couple of years, the problem how to secure the feeling of stability among managers and employees of state enterprises, how to set up positive motivations for keeping the enterprises at their best before privatization becomes significant. So far Polish experience indicates the danger of negative motivation - the worse the condition of the enterprise before privatization, the easier it is to buy it out for the management and the employees at a low price. It seems that Russia is staying before the same dilemma just now, when massive privatization process is starting. To solve this dilemma there is probably necessary to create strong incentives for insiders (managers and employees) which would link the priviledged participation in privatization process with the economic results of enterprise before privatization. From technical point of view it means the preference for non-equivalent distribution of a part of shares (e.g. 10% of equity as in Mass Privatization Program in Poland or 25% as in Russia)
at zero price or at symbolic constant price rather than at concessionary price (e.g. at 50% of the initial market value like it is under the hitherto Polish regulations). The latter variant still stimulates to decrease the market value of enterprise before privatization. The fourth question also concerns the organization of the state sector before privatization. Polish state enterprises entered the process of system transformation with relatively large independence safeguarded by the institution of employee self-management. A similar situation exists in the former Yugoslavia and in Hungary, although in the latter country the role of self-management solutions was significantly lower. Most of the real ownership rights were delegated to the enterprises organs. This undoubtedly makes taking privatization decisions much more difficult for government bodies and creates the temptation to recentralize numerous rights in the hands of the state. However, whether repeated nationalization of state property would really make privatization more efficient, whether it would not cause unnecessary social conflicts is another question. Would it not paralyze the economy during the transition period [Blaszczyk, 1991b]? Without independent enterprises there is no market! The fifth problem is politictal. How to organize the process of privatization and not cause both local protests in privatized enterprises and general social unrest against privatization? Until now there is no practical answer to that question. Finally, the sixth dilemma concerns reprivatization. Several countries as former East Germany, Hungary, Czecho-Slovakia, Baltic states adopted regulation concerning this problem. In Poland political debate in parliament is still going. In all the countries demands for restitution of former ownership rights turned to be a serious political problem. We deal here with, on one hand, a clash of historical, legalistic and moral rights (the harm done to old owners, expropriated by communist authorities) with social objections, limited financial ability of the state to satisfy claims of this kind and worries concerning the paralysis to the process of privatization on the other. There are also two types of reprivatization regulation: physical restitution (East Germany and Czecho-Slovakia) and compensations, mainly in the form of reprivatization bonds convertible into shares of privatized enterprises (Hungary, probably in Poland). Privatization is relatively the most advanced in the eastern lands of Germany, in Poland, and in Hungary. However, nowhere apart East Germany, in practice, it has achieved a critical point. Therefore, it is very difficult to assess its real speed and real (not potential) obstacles that would take place during its realization. 5. On the Problem of Historic Precedent The important question asked numerous times by economists and politicians is whether the process of economic transformation taking place at present in Central and Eastern Europe has historical precedents or is it an absolutely pioneer undertaking. The authors and executors of the Polish transformation program (commonly called the Balcerowicz plan), for a long time have tended to stress the uniqueness of that undertaking and as a result the necessity of "moving in the dark". This kind of evaluation was also not strange to numerous politicians and commentators. The sources of such an attitude should be searched for, among others, in subjective emotional involvement (in a
natural way the tendency to treat one's own history as exceptional takes place), in certain self protective tendencies (it is easier to justify failures and mistakes using the thesis on pioneer activities), and finally incomplete knowledge concerning the experience of other countries, particularly of the less developed ones. On the other hand, there is a lot of analyses looking for relatively simple comparisons between the processes of transformation taking place particularly in Poland (but also in East Germany and Russia) and the experience of various Western and developing countries concerning stabilization, external and internal liberalization, privatization, etc. So, for example, in 1990 the comparison of the Balcerowicz plan to the Erhard plan introduced in the Western occupation zones of Germany in 1948 was popular [see e.g. Jermakowicz, 1990]. Other authors tried to form suggestions for governments of Central and Eastern European countries resulting from the experience of stabilization and liberalization processes of economies in Western Europe and South Eastern Asia after World War II [Helliwell, 1991]. Another subject of comparison was the experience of Chile during the last twenty years, which, as it seems, is closest to what is taking place at present in Central and Eastern Europe [Edwards, 1991]. So, where is the proper answer to the earlier question? It seems that the truth, as usually should be looked for between the extreme opinions. It is a fact that all components of the transformation process have their equivalents in older or newer economic history. This also concerns the struggle with high inflation and general shortages, as well as liquidation of the rationing system, general regulation and other elements of the commandrationing system, deregulation of prices, introduction of a convertible currency, external liberalization, liberalization of the financial sector, and finally privatization. In many cases the liberalization of the economy was connected with liberalization and democratization of the political system (post-Franco Spain). But it is very difficult to find such a great concentration of problems at the same time. And that undoubtedly is the first differencia specifica of Central and Eastern European transformation. A similar opinion is also expresed by Stanley Fisher and Alan Gelb [Marer and Zecchini, 1991, p. 184]: "In fact most of the individual requirements for socialist economy reform have been faced before, in China, and in Latin American and African countries where the combination of a weak private sector, political monopoly, heavy policy induced distortions and macroeconomic imbalance is not uncommon. Nonetheless the challenge is unique, in its system-wide scope, in its political and historical context, and in the speed of desired reform". The second specific feature is the level of nationalization of the economy and long years of ideological struggle with private ownership and private business initiative. Even in such cases of a complex and wide change of the economic system as in Chile under Augusto Pinochet regime the initial participation of the private sector was incomparably higher than in the least nationalized economies of Central Europe (Poland, Hungary) [Edwards and Edwards, 1991]. So it is worth studying the experience of Western Europe or developing countries (maybe even the experiences of that second group of countries are more useful to us than
those of the first one), however, having in mind the basically different scale and different historical context of changes in our region. 6. The Sequence of the Process of Changes In the previous comments I characterized the key subject points of the transformation process. The problem of the sequence of individual changes and their speed (concentration in time) is of no less significance. The first controversy concerns the second problem: whether one should prefer so called shock therapy (that is a large quantum of changes concentrated in time) or a gradual approach. The shock operation is usually connected with greater economic and political risk and with concentration of difficulties and material sacrifices in time. It may cause more social resistance to changes. That is why numerous politicians, particularly those who do not feel strong social support, prefer the strategy of gradual transformations, putting the most painful moves off in time. But can such an approach give satisfactory results? So far the experience of post-communist countries seems to deny the effectiveness of the strategy of gradual changes. It presents a picture of an economic system in which old rigors of a command economy do not act any more and the influence of the market mechanism is still too small to force economic growth and improvement of efficiency. It is a half-plan and half-market economy, or in extreme cases of the lack of a macroeconomic control, in fact a non-plan and non-market economy, that means not susceptible to any influence. The earlier mentioned syndrome of market imbalance, inflation or hyperflation and decreasing output is the product of the strategy of gradual changes. Economic events in Russia nad Ukraina in 1992 and in the beginning of 1993 give a new confirmation of the weakness of this way of transformation. Another weakness of gradual changes is the necessity of constructing various substitute solutions (system prosthesis) for the period of transformation. Palliative solutions in general do not bring us closer to the final market solutions. Quite the contrary, they start living their own lives and create an independent logic of behavior of economic subjects. Very often they have unexpected side effects making the additional intervention and regulation necessary. The energy of government is used not for quick achievement of target solutions but for improving temporary instruments. The transformation period becomes extended in time and economic policy gets into a vicious circle of over-regulation. The problem of the excess-wage tax in Poland is a concrete example of that phenomenon. However, some elements of system vacuum during the period of transition from a centralized economy to a market economy, even in the extreme "shock" variant, cannot be avoided. This results from at least two causes. First, there is the limited ability of the government in introducing new system and legal solutions. This concerns designing individual legal acts, the legislative process itself and then introducing these new regulations into practice. All this requires time, particularly if constitutional procedures are to be respected. Intensive system changes in economy very often collide with the beginnings of real parliamentary democracy, with learning democratic procedures, etc.
At the same time the entire state administration is under political, organizational, and personal reconstruction. All of this slows down the process of changes and waters down even a program of reforms strongly concentrated in time. This is confirmed by the examples of both Poland and Czecho-Slovakia. Only East Germany, as the result of incorporating legal and institutional solutions of West Germany and the import of staff, could make the transformation of its economic system (similar to political system) really from day to day. Other countries of our region do not have such a possibility. Second, the inertness in thinking and behavior of actors of economic life must be taken under consideration. In connection with that the change of legal or institutional situation in itself does not yet mean a change of real behaviors. People need time to familiarize themselves with the rules of the game, accept them from the psychological point of view and learn to use them. The longer the planned economy lasted, the more rapid the jump into the new rules of the game, the more difficult it is to overcome inherited mentality, the longer the period of inertness. In many cases the use of the new systemic rules takes extreme forms during the transition period which are a reaction to the earlier lack of economic freedom. That is why, e.g., after a price liberalization the attempt to significantly increase prices by enterprises "testing" the conditions of acting within the free market could be expected. Similar reactions can be expected with the elimination of various forms of rationing of goods, foreign currencies, labor, etc. Above, we presented significant arguments for the "shock" transformation of the economic system. To keep a balance it is also worth saying what benefits can be obtained from a gradual reform of the system. One of them is greater ease in familiarization of the society and enterprises with the new rules of the game and softening the earlier mentioned inertness. It can be said that from that point of view the years 1981-1989, the years of partial and inconsequent reforms were not entirely lost in Poland. The society, at least partly, got used to flexible prices and wages, to certain elements of the market game, to the private sector. The same can be said about the results of over 20 years of economic reforms in Hungary. The Russian reformers have not had such an advantage. One more possible benefit of gradual transformations can be observed, although the argumentation makes the impression of a Machiavellian one. The earlier mentioned macroeconomic disregulation caused by that strategy may overcome social and political reservations towards radical market solutions. A psychological pressure often acts here, that things cannot be worse and that in reality there is nothing to lose (that is, that the political risk connected with the shock therapy is subject to a significant decrease in that case). There is a paradox that the macroeconomic chaos increases the chances of social acceptation for radical reforms. That would mean that both strategies do not entirely exclude each other. Under certain circumstances, partial reforms, thanks precisely to their inefficiency, may push the society and the government towards radical solutions. That is what really happened in Poland during the years 1987-1989 and in the former Soviet Union in 1989-1991. What I stated a moment ago does not, however, change the generally sceptical evaluation of the strategy of gradual changes. As the experience of economic reforms in our region indicates very often partial and gradual transformations do not give any perceptible effect of change at all. The predominant mass of old systemic solutions swallows and adapts new instruments and institutions. We obtain the effect of apparent changes. There is
the need for the critical mass of transformations which makes an easy return to the centralized system impossible. In the beginning of 1993 this critical mass seems to be acchieved in East Germany, Poland, Hungary and Slovenia. In this place we reach the problem of the sequence of changes. What to do first and what to do next? The problem is of particular significance when against above mentioned objections the government opts for the gradual process of transformations. But also in case of shock transformation, on account of its sectional character, the question remains valid. Owing to the political and economic complications accompanying liberalization of prices, the postulate often appears to carry out privatization first and only then liberalize prices. Similar objections also concern the location in time of macroeconomic stabilization. According to this way of thinking anti-inflation activities and activities balancing the market should be put off till at least partial privatization of economy. The authors of the Program of 500 days, published in the second half of 1990 in the USSR, started with the above assumptions [500 Days, 1990]. The sequence of activities proposed by them is different from the Balcerowicz program: first mass, at least partly paid privatization, making it easier, among other things, to draw the monetary overhang out off the market, next balancing the budget and only at the final stage liberalization of prices. Is this a feasible sequence? Undoubtedly, in the Polish stabilization program, too little use was made of privatization for absorption of the financial resources of population (it was only limited to privatization of a part of housing resources) and for balancing the budget. As concerns that last problem, the issue of long term treasury bonds, in the future convertible into shares of privatized enterprises (a specific form of advance payment for privatization) was met by little interest by the public. Also in Czecho-Slovakia liberalization of prices, introduction of a convertible currency and macroeconomic stabilization outpaced privatization. In both cases (Poland and Czecho-Slovakia) the causes of the delay in privatization should be sought in the earlier mentioned program and ideological discussion and in the attempt to find one general pattern for ownership transformations. Even if we accept the assumption that both in Poland and Czecho-Slovakia privatization could be used to a wider extent for reduction of the budget deficit and monetary surplus, the question to what extent it would be realistic still remains open. What would be the potential demand of the population for the property or shares of privatized enterprises? Is greater privatization possible without free formation of prices and without the entire elimination of administrative tools in privatized branches? Can potential purchasers evaluate the expected profitability of privatization transactions under conditions of non-market prices, controlled by the state and the lack of elementary macroeconomic balance and a convertible currency? Is proper valuation (at least in a form of estimation) of sold enterprises or their property possible? Can various speculations during privatization under conditions of hyperflation and lack of balance be avoided? And it is known how sensitive the society is to the whole discussion on privatization, especially the problem of proper valuation of privatized property.
The above doubts find confirmation in the practice of the first year of Polish privatization. Despite its quite large scale in 1991, it still does not bring large budget income. The same occurred in Russia in 1992. A relatively quick and intensive privatization program was not able to diminish the budget deficit. Moreover, privatization process is connected with large costs (valuation of enterprises, advertising, current administrative costs etc.) which was forgotten in theoretical discussions. Earlier evaluations of the economic prospects of some of the privatized firms proved to be wrong for reason of still existing deformations in the system of prices (among others lowered prices of energy and fuels). Even larger doubts accompany the postulate to first balance the budget and only then liberalize prices. The main source of the budget deficit in the first stage of post-communist transformation (especially in the economy of the former Soviet Union) is in the excessive subsidies to official retail prices and official purchase prices. Without a radical reduction of subsidies connected with price liberalization, it is hard to think about budget balance. 7. Recapitulation The following picture appears from the above considerations: macroeconomic stabilization (monetary and fiscal) connected with wide liberalization of prices and deregulation of product markets as well as liberalization of foreign trade and introduction of current account convertibility must be the decisive factors of the initial shock package [Balcerowicz, 1989]. Paid privatization of state property can probably be a factor supporting (or even partly preceding) that operation, but one must realize the natural limitations in the use of that tool which was discussed earlier. As concerns institutional and systemic changes in the broad sense (new civil law, legal base of privatization, housing law, principles of operation of state enterprises, etc.), they must be carried out simultaneously and as quickly as possible. One must however take under consideration the fact that the process requires time (with the exception of East Germany). The same concerns privatization. Even the most radical privatization projects, if they appear feasible in practice (because in that field we have too little experience to forecast) they will require at least 2-3 years to introduce and a few more years till their positive effects are seen in full. Can the decisive stabilization- liberalization operation be preceded by a certain amount of institutional changes so that the costs of the main strike can be decreased and the appearance of positive effects accelerated? I think it can, but that depends on the exact state of macroeconomic balance in the economy. It seems that e.g. Hungary, with a largely market economy and a pretty good internal macro-balance, could concentrate upon institutional changes and privatization, putting off or gradually realizing stabilizationliberalization moves. Also Czechoslovakia in 1990 could permit itself a certain period of preparation, although possessing a typical centrally planned economy, but well balanced. In countries where monetary and fiscal balance rapidly deteriorate, inflation increases and goods rapidly vanish from shop shelves; hence postponement of the decisive stabilization- liberalization operation would only worsen the situation in the future. It
cannot be avoided, and the later it begins, the worse the starting position and the higher the costs of stabilization. From the above considerations the conclusion arises that in transforming a postcommunist economy the stage of a certain "market socialism", that is, an economy with a supremacy (or significant participation) of state ownership is inevitable. Assuming consistent privatization this will be a transition stage on the way to a capitalist economy and not the target solution as in the visions of earlier reforms. However, one should be conscious that the length of that intermediate stage may be from a few to several years. 8. References: 1) This article is a corrected and extended version of an earlier paper with the same title prepared in 1991 in the framework of a joint research project on Polish Economy After First of Systemic Reform sponsored by the Institute of Economic Science of the Polish Academy Sciences in Warsaw and by the International Center for Economic Growth in San Francisco. The Polish version of this earlier version was published in `Economista' 1991 No 3-4. 2) That notion was introduced in literature by Ota |ik [1972]. 3) Even such a radical project of the system reform as the one elaborated by a team of young economists working under Leszek Balcerowicz published for the first time in the autumn of 1980, did not go beyond the frames of market socialism for reasons of, among others, the marginal role assigned to private ownership [Balcerowicz et al., 1981, pp. 279373]. 4) I also include myself in that group. I expressed that, among others in the works concerning the theory of employees self-management and non-private economy [Dabrowski, 1986a; Dabrowski, 1986b; Dabrowski, 1990]. Only the discussions of the years 1987-1989 finally persuaded me that even the most liberal concepts of market socialism were sub-optimal solutions. The experience of the years 1989-1991 together with personal participation in preparation and realization of Tadeusz Mazowiecki government economic program additionally strengthened my scepticism concerning the justification concerning the search for the "third road" or "market socialism". 5) Ludwig von Mises [1981] was the first who questioned the economic efficiency of "market socialism" starting the famous discussion on the possibilities of economic calculation in socialist economy during the period between the wars. At that time the arguments of Mises opponents (among others O. Lange and P. Lerner) seem to be of little persuasive value. Wider discussion on that debate is contained in the paper by L. Balcerowicz [1988]. The pamphlet by Anthony de Jasay [1990] can be an example of the contemporary criticism of the concept of "market socialism". 6) In English language literature the terms "economic transformation" and "economy in transition" (to market system) are used as parallel.
7) In an earlier work a Hungarian economist Tamas Bauer [1986] made a difference between "reform" (as the activity changing the economic system in a complex way) and "perfecting" (partial changes cosmetic in nature). 8) Among the exceptions here were Hungary during the sixties (and later during the realization of economic reform) and Czechoslovakia during the seventies and eighties where as a result of relatively strict monetary policy the level of macroeconomic imbalance was much lower than in other socialist countries. The same statement, to a certain degree, concerns also East Germany where a significant function was probably played by various forms of external financing. 9) The situation in Poland in 1992 seems to support this statement. On the one hand, the contribution of the private sector to GDP exceeded 50%. On the other hand Polish economy, especially industry, started to grow after three years of depression. 10) This problem was analyzed more widely in relation to Polish situation in the middle of 1990 by Cezary Jozefiak [1990] who wrote, among others: " System changes, although radical, were not enough to force upon enterprises such principles of behaviour which are characteristic for competition economy. It lacked two elements: capital owners who for reason of interest in profit and individual risk with their capital would supervise the management of enterprises and the competitive structure of producers in individual branches." That condition was named by C. Jozefiak "inmature market economy". 9. Literature: Balcerowicz et al. (1981): Reforma gospodarcza: glowne kierunki i sposob realizacji (Economic reform: main directions and the method of realization), collective work of: L. Balcerowicz (editor), H. Bak, B. Blaszczyk, M. Dabrowski, J. Eysymontt, W. Kaminski, S. Kasiewicz, A. Lipowski, R. Michalski, A. Parkola, P. Pysz in: R.Krawczyk (ed.): Reforma gospodarcza - propozycje, tendencje, kierunki dyskusji (Economic reform - proposals, tendencies, directions of discussion), Warszawa, PWE. Balcerowicz, Leszek (1986): Uwagi o pojeciu wlasnosci (Comments on the notion of ownership), Studia Filozoficzne, no.4. Balcerowicz, Leszek (1988): The "Socialist Controversy" Debate and the Discussion of Reform in the Socialist Countries, paper for the Conference: Plan and/or Market, Institut fur die Wissenschaften vom Menschen, Vienna, 15-18 December 1988. Balcerowicz, Leszek (1989): Albo szybko albo wcale (Either fast or not at all), J. Baczynski and P. Tarnowski talk to Leszek Balcerowicz, Polityka, No. 48. Balicki, Wladyslaw (1979): Nierownowaga popytowa jako wlasciwosc dyrektywnego systemu zarzadzania (Demand disequilibrium as the property of a directive system of management), Poznan, typescript.
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Edwards, Sebastian and Alejandra Cox Edwards: Monetarism and Liberalization. The Chile Experiment, Chicago & London 1991. The University of Chicago Press. Hare, Paul and Gordon Hughes (1991): Competitiveness and Industrial Restructuring in Czechoslovakia, Hungary and Poland, Centre for Economic Policy Research, Discussion Paper Series No. 543. Helliwell, John F. (1991): Lessons from the West, in [Marer, Zecchini, 1991] Hlavacek, Jiri (1986): Homo se assecurans, Politicka ekonomie, No.6. Jasay, Anthony de (1990): Market Socialism: A Scrutiny "This Square Circle", London, Institute of Economic Affairs. Jermakowicz, Wladyslaw W. (1990): The beginnings of Social Market Economies in Germany and in Poland (A Comparative approach), University of Southern Indiana, Evansville, typescript. Jozefiak, Cezary (1990): Progi i szanse gospodarki (Tresholds and chances of economy), Xycie Gospodarcze, no. 36 & 37 Kalicki, Krzysztof (1991): Polityka pieniexna w okresie gospodarczej transformacji (Monetary policy during the period of economic transformation), Warszawa, Friedrich Ebert Foundation, issue 5. Kawalec, Stefan (1987): Szczegolny rynek z niepieniexna wycena dobr (Particular market with non-monetary pricing of goods), Ekonomista 1987 No.2. Kawalec, Stefan (1989): Privatization of the Polish economy, Communist Economies, vol. 1, No. 3. Kolodko, Grzegorz (1990): Inflacja, reforma, stabilizacja (Inflation, reform, stabilization), Warszawa, Alma Press. Kornai, Janos (1980): Economics of Shortage, Amsterdam - New York - Oxford, North Holland Publishing Company. Le Grand, J. and S. Estrin (eds.) (1989): Market Socialism, Oxford, The Clarendon Press. Lipinski, Jan (1985): Motywy postepowania kierownictwa przedsiebiorstwa i jego zachowanie na rynku (Motives for performance of an enterprise management and its behavior in the market), paper for the conference: Efektywnosc gospodarowania w warunkach reformowanego systemu ekonomicznego (Efficiency of management under conditions of reformed economic system), SGPiS, Jadwisin 17-19.12.1985. Lipowski, Adam (1991): O polityce rozwojowej i przemyslowej (On development and industrial policy), Studia i Materialy INE PAN, issue 33, Warszawa. Marer, Paul and Salvatore Zecchini (eds.)(1991): The Transition to a Market Economy, Paris, OECD.
McKinnon, Ronald (1991a): Financial Control in the Transition to a Market Economy, Conference on The Transition to a Market Economy - Institutional Aspects, IRIS & IPR, Prague, Czechoslovakia, 24-27.03.1991. McKinnon, Ronald (1991b): Liberalizacja handlu zagranicznego w gospodarce socjalistycznej: Problem negatywnej wartosci dodanej (Liberalization of foreign trade in socialist economy: Problem of negative added value), Conference on The Transition to a Market Economy - Institutional Aspects, IRIS & IPR, Prague, Czechoslovakia, 2427.03.1991. Mises, Ludwig von (1981): Socialism: An Economic and Sociological Analysis, Liberty Classic, Indianapolis. PTE (1988): Propozycje przeksztalcen polskiej gospodarki (Proposal of transformations of Polish economy), Warszawa, Polish Economic Society (PTE). Sik, Ota (1972): Der dritte Weg, Hamburg. Topinski, Andrzej (1988): Przyczyny nierownowagi rynkowej [w poszukiwaniu zrodel patologii] (Causes of market imbalance, [in search of sources of pathology]), Warszawa, typescript.
