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East: Analyst Discusses Postcommunist Economic Transformation

Since the fall of communism, economists have debated the best mix of policies and reforms to transform a command economy into a market-based one. Now, a researcher in the United States has concluded that the lessons of postcommunist transformation may be simpler than anyone thought. Anders Aslund of the Washington-based Carnegie Endowment for International Peace says it doesn't matter so much what policy prescriptions a country adopts, as long as the reforms are radical and accompanied by sweeping democratization. Aslund tells RFE/RL correspondent Mark Baker in Washington that, according to his research, the countries that have implemented radical reforms have largely succeeded, while the others have not.

Washington, 14 January 2002 (RFE/RL) -- Since the fall of communism in the late 1980s, economists have pondered the best mix and sequence of policy prescriptions for transforming command economies into market-based ones.

Some economists have argued, for example, for quickly freeing prices, while others have placed the emphasis variously on reforming currencies, selling off state-owned assets, balancing budgets, or improving infrastructure.

Now, a Washington-based researcher with the Carnegie Endowment for International Peace says it doesn't appear to matter so much which specific policy prescriptions a country adopts, or in which order, as long as the reforms are sweeping and accompanied by a similar level of democratization.

In a report entitled "Building Capitalism: Lessons of the Post-Communist Experience," research associate Anders Aslund says in retrospect, it's clear the best path for transforming an economy is simply to undertake radical reforms, and as early as possible.

"It's very clear: If a country has pursued a radical reform policy and instituted democratization, [it has] succeeded. And those [countries] that have only [carried out partial reform], [they] ended up only halfway. And those [countries that] did very little, they have gotten stuck."

Aslund puts the former communist states into three groups. The so-called "radical reformers" include most of the countries of Central Europe and the Baltics that have built up democracies and market economies. The "gradual reformers" include Bulgaria, Romania, and most of the former Soviet states. They share the attributes of limited privatization and deregulation, combined with limited political reforms. The "non-reformers" comprise Belarus, Turkmenistan, and Uzbekistan, which are characterized by dictatorship, limited reform, and lingering high levels of state ownership.

Aslund says that whereas culture and geography play a role in a successful economic transformation, the most important indicator is a country's level of democratization.

"Democratization is crucial. A profound point is that politics is decisive and that economics is comparatively [important] only once you have decided what you really want to do."

He says countries with more effective democracies produce better reforms because the voices of liberal market reformers are more likely to be heard in the struggle with what he calls the "rent-seeking" elite -- the entrenched bureaucratic and former communist opposition.

He says the actual sequence of reforms has proven to be less important in determining how successful an economy will be. He says the big step is to free up prices and foreign trade.

"The profound change is to liberalize prices and liberalize foreign trade. When you have done that, you become a market economy. Then after that you have high inflation. And you need to stabilize as fast as possible. The best way of doing that is to cut public expenditures."

Aslund says he was able to shatter a number of myths that endured during the transition process.

The most pernicious, he says, is the myth that living standards have declined across the region since 1989. This is seen, for example, in statistics on output published by the European Bank for Reconstruction and Development and other international lenders. These figures show output in countries like Bulgaria and Romania at just a fraction of their 1989 levels. Only now, according to these statistics, has output in the Czech Republic, Hungary, and other leading reformers managed to climb back to pre-1989 levels.

Aslund says this is simply false: "One [myth is] that there was a massive decline in standard of living, and that the output fell enormously. To start with output, there are two serious problems with the official statistics. First, that the communists measured more than what was really produced, since the point was to reach plan targets for the enterprises. And under capitalism [now], [firms are under-reporting because of] tax avoidance and tax evasion, and the statistical systems catch much less of what is going on in the economy."

He says this is made worse by the fact that under communism, much of what was produced was neither valued nor useful.

Aslund says his conclusions on democratization and reform do not bode well for countries like Belarus, whose days as a dictatorship, he says, are numbered. "I think that Belarus is simply an untenable model and that it will collapse in a few years. Economically it is untenable because Belarus is actually a very open economy. Belarus enterprises have to export, otherwise Belarus cannot survive. Another reason is that Belarus has lived on substantial subsidies from Russia, and under [Russian President Vladimir] Putin, these subsidies have been sharply reduced."

Aslund compares Belarus unfavorably with neighboring Ukraine, a gradual reformer that has recently taken steps to deregulate its economy. In particular, he points out that the dollar wage in Ukraine is now much higher than in Belarus -- something he says means a lot to people.

Aslund says even more striking is that Ukrainians today commonly talk about Belarusians as being poor. He says that was not the case a few years ago. Indeed, Aslund says the outlook for Ukraine and other gradual reformers like Russia and Kazakhstan is improving greatly.

Aslund says that in the past three years, economic growth in former Soviet countries, led by Russia and Kazakhstan, has outpaced growth in European Union-accession countries. This disparity was most obvious last year, when the former Soviet Union grew by a collective 6 percent, or nearly double the rate of the accession countries.

He attributes this to two factors. One is that Central Europe is adopting a more Western European socioeconomic model -- with relatively high levels of social spending and taxation -- that is not dynamic.

The other reason is that Russia, Ukraine, and Kazakhstan have all moved quickly in the past couple of years to institute what Aslund calls "radical" reforms.

"Right now, we have seen that they have undertaken very radical reforms late in the day. I'm thinking of Russia, Ukraine, and Kazakhstan. And they've got very substantial economic growth. And this comes after very substantial reforms -- tax reforms in Russia, for example, also in Kazakhstan; land reform in Ukraine; and a substantial deregulation of small enterprises in Ukraine."

Aslund says the experiences of Russia, Ukraine, and Kazakhstan show it's never too late for shock therapy.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.