National ideology, public policy, and the business environment: A contingency approach to economic reform in Hungary, Poland and Eastern Europe

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International Business Review Vo]. #*, No. 3, pp. 355-372, ! 9q5 EKevie~ ScLenc~ Lid Printed in Great Britain ~69-5931/95 $9.50 + 0.00

National Ideology, Public Policy, and the Business Environment: a Contingency Approach to Economic Reform in Hungary, Poland and Eastern Europe Lance Eliot Brouthers* and Charles W. Lamb, Jr.t *Division of Management and Marketing, College of Business, University of Texas at San Antonio, San Antonio, TX 78285, USA ?Texas Christian University, Fort Worth, TX 76129, USA

Abstract -- This paper proposes a contingencyapproach to economicreform in formerEastern bloc countries. In contrast to the standard view suggestingthat market economies are the only viable alternative to command economies, this paper presents three alternative models of capitalism and offers a contingency approach to economic reform. The contingency view suggests that Eastern European countries should adopt the capitalisteconomytype that (1) best matches their capital and labor market structures; (2) is most consistent with their national history; and (3) best matchestheir economic developmentgoals. Hungaryand Poland are used to illustratethe efficacyof the proposed contingencyframework. Key Words -- Public Policy,EconomicReform,Eastern Europe. Introduction Historians will likely conclude that one of the most significant events of the late 1980s and early 1990s was the unexpected upheaval in Eastern European countries. Little, if any, economic reform planning took place in anticipation of transforming centrally run economies into market driven societies. In late 1989, former Nobel Memorial Prize winner in Economic Science, Robert M. Solow noted that "most of us [Western economists] don't know how the Eastern bloc institutions and state enterprises work or how to model an economy that is half market driven and half controlled by bureaucrats" (Uchitelle, 1989). Nevertheless, as one senior fellow at the Brookings Institute noted, "if you are the head of a Russian economics institution, the status thing to do is have some American economists as consultants" (Uchitelle, 1989). What advice are these economists offering to reform-minded governments? And, is this advice appropriate? This paper begins by reviewing what has become the standard approach to economic reform in Eastern Europe. Second, an alternative c o n t i n g e n c y approach, which incorporates the standard approach to economic reform, is presented and recommended. Finally, the contingency model is illustrated using Hungary and Poland as case examples.

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The Standard Approach A standard approach to economic reform in former Eastern bloc countries has developed. It entails a six-point strategy, moving as fast as possible on all fronts (Fischer and Frenkel, 1992). The components of the strategy are: 1. Macroeconomic stabilization, requiring both a budget that is close to being balanced and tight controls over credit. 2. Liberalization of the price of most goods. 3. Current account convertibility of the currency. 4. A social safety net. 5. Privatization of state property. 6. Laws to accommodate and facilitate the development of a market economy. Although each of these components is a monumental task, privatization stands out as the most difficult because of the enormous challenges in converting state-owned property into private property in a manner that is rapid, equitable, and fiscally sound (Lipton and Sachs, 1991). Privatization, the core of economic reform, requires the creation or renewal of the basic institutions of a market financial system, including corporate governance, managers, equity ownership stock exchanges, and a variety of financial intermediaries needed for the movement and exchange of currencies and investments (Lipton and Sachs, 1991). Economists generally agree that the task of reforming economies is politically and practically complex. There is, however, disagreement about whether a common approach to economic reform is appropriate (Sachs, 1993). Many Western economists, such as Harvard international trade professor, Jeffrey D. Sachs, recommend uniform economic reform policies, despite vast disparities between countries such as Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Russia, Slovakia, Slovenia, and the Ukraine (Holstrom, 1992). These experts believe that most of the economic problems faced by Eastern European countries can be ameliorated by rapid privatization (Sachs, 1992). Other economic analysts refer to this proposition disparagingly as the Henry Ford approach, in reference to Ford's famous quote, "You can have any color you like as long as it's black" (Holstrom, 1992). According to Sergei Khrushchev (1992), "the Russian and Western economists who advise Russin President Boris Yeltsin are operating on a deeply flawed assumption. They assume that government controls over the economy have only to be lifted and the 'free market' will miraculously solve all problems and provide everything that people need. They are wrong."

Critical Evaluation of the Standard Approach Assessments of the results of the standard approach to economic reform in Russian and other former Eastern bloc countries suggest that the standard model may not be applicable in all cases (Holstrom, 1992; Khruschev, 1992; Ignatius, 1992; Schememann, 1992). One Russian economic reform observer noted that "the policy of the reformist government is on the brink of collapse" (Ignatius, 1992). Industrial production in Russia fell 14% in the first six

357 months of 1992 and consumer prices rose 1000% during this period of 'economic reform.' Unemployment in the former USSR was forecasted to rise 24% between 1992 and 1994 (Carrington, 1992). Industrial output in Czechoslovakia also shrank substantially in 1990 and 1991 under similar reforms (Carrington, 1992). Between 1990 and 1991, real GNP fell by 19% (Thomas, 1993). Experts predict that unemployment in the former Czechoslovakia will rise by 9% between 1992 and 1994 (Carrington, 1992). Data reported by the RAND/UCLA Center for Soviet Studies in 1991 provides further evidence that the standard approach to economic reform may be inappropriate for some parts of Eastern Europe (Horelick, 1991). Although only 10% of respondents living in Russia and in the Ukraine perceived 'a socialist society along the lines we have had in the past' consistent with their views about the future development of society, only 17 and 23%, respectively, rated a free market economy as being consistent with these views. Fifty-nine percent of Russian respondents and 53% of Ukrainian respondents favored either 'a more democratic type of socialism' or 'a modified form of capitalism such as found in Sweden' (Horelick, 1991, p. 159). These findings indicate that the standard approach to economic reform may lead some countries along a path that only a small proportion of their citizens advocate.

A Contingency View The standard approach to economic reform appears to be based upon the assumption there is one best type of economy for all countries - - market economy. In contrast, this paper presents a contingency framework, building on the work of Lodge and Thurow. This framework is based on three assumptions that are at variance with the standard approach to economic reform: (1) there are at least three generic capitalistic alternatives to a command economy; (2) there is no single 'best' form of capitalism, each type of capitalism produces its own global champions; and (3) an appropriate choice of economy type for one nation may be inappropriate for another country.

Ideology and Economic Policy Lodge (1990a, b) recently proposed that countries should develop goals and policies based on the ideology of their citizenry. He noted that economic policies vary from country to country because different countries have different national ideologies. Lodge further suggests that these differing national ideologies emerge from each country's unique history. A nation's strategy - - its goals and policies - - do not operate in a vacuum. It is the product of that nation's historical context, the social, political, cultural, and ideological foundation of the institutional roles and relationships that shape that strategy. (Lodge, 1990b)

Lodge and Vogel (1987) suggest that differing national ideologies can be placed on a continuum ranging from individualism to communitarianism. Following is a brief discussion of these polar ideologies.

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Individualism Individualism as an ideology stresses (1) the freedom of individuals to make decisions that are in their personal best interests; and (2) the 'right' of businesses to develop and implement strategies that reflect shareholders' desire to maximize profits (Thurow, 1992). In such a system, tension frequently exists between workers and employers who independently seek to achieve their sometimes conflicting goals. Workers often change jobs when opportunities arise to earn higher wages, and employers are expected to resist wage increases and to lay off unnecessary workers (Thurow, 1992). The role of government in an individualistic society is limited to protecting property, enforcing contracts, promoting vigorous competition, and regulating the marketplace, but only in situations in which competition is unreliable or unacceptable (Lodge, 1990a). The individualism ideology stresses the separation between business and government. Lodge (1990a) and Thurow (1992) have noted that the United States occupies the position furthest in the direction of individualism on the continuum between individualism and communitarianism. Communitarianism Communitarian as an ideology stresses the role of government in defining the needs of the c o m m u n i t y and striving to see that these needs are met. According to Lodge, government in a communitarian society: is a vision setter for the community; it defines and ensures the rights and duties of community membership; it plays a central role in creating -- sometimes imposing -consensus to support the directionin which it decidesthe communityshould move. (Lodge, 1990a) Relationships between individuals in a communitarian society are governed more by consensus than by contract (Lodge and Vogel, 1987). Stakeholders in a communitarian society are quite different from those in an individualistic society. Employees are considered to be the most important stakeholders in a business, followed by customers, with shareholders a distant third (Thurow, 1992). Businesses in communitarian societies are expected to pursue higher employee wages and employment stability goals above profits. Business groups are also expected to have collective strategies to strengthen each other's activities (Thurow, 1992), Japan occupies the position furthest in the direction of communitarianism on the individualism to communitarianism continuum.

The Middle Ideology Between the ideological extremes of individualism and communitarianism are countries whose citizenry values aspects of both ideologies. The 'middle ideology' countries tend to value extensive social welfare programs including national health care, pensions, and extensive g o v e r n m e n t legislation protecting workers' rights in the workplace (Poole, 1986). 'Middle ideology' governments regularly support joint public/private ownership of industry. Trade a s s o c i a t i o n s in these c o u n t r i e s f r e q u e n t l y w o r k c l o s e l y and

359 cooperatively with government on issues ranging from occupational health and safety to tax laws and environmental regulation. Firms in these countries tend to have a longer-term profit orientation than is characteristic of firms in individualistic countries (Lodge, 1990a). Lodge (1990a) has noted that most Western European countries are illustrative of the 'middle ideology'.

Relating Ideology to Alternative Economy Types Citizens and governments in countries having dissimilar ideologies tend to favor different economic policies that lead to distinctly unique economy types. Individualistic national ideologies tend to produce economic policies favoring the free movement of labor and capital, which is characteristic of a market economy. Communitarian societies tend to favor economic policies that support free labor markets but heavily regulate capital to stimulate the production of goods (usually for export). The result is a production-oriented economy. 'Middle ideology' societies tend to emphasize economic policies that legislatively mandate 'workers rights'. Countries that routinely intrude into their domestic labor markets but not their capital markets are frequently referred to as industrial democracies. Each of these three alternative economy types is more fully described in the following sections.

Market Economy In a market economy, both capital and labor flow toward opportunities presenting the greatest anticipated return. In a competitive environment, laborers and capitalists seek opportunities that increase their returns by reallocating their labor and/or capital. This environment produces a short-term profit orientation on the part of business, and a focus on increasing labor productivity. One way to increase labor productivity is to substitute capital for labor. However, substituting capital for labor often reduces short-term profits. This leads to capital investments that produce short-term profits and postponement of capital investments that enhance profits in the long term. This short-term profit orientation leads to chronic under-investment in market economies (Hill et al., 1988). The United States is illustrative of a market economy. Production Economy Key aspects of production-oriented economies are: (1) regulation of capital markets to encourage business to adopt a long-term growth and market-share orientation; (2) the availability of inexpensive capital for long-term investment; (3) policies that encourage and facilitate investment in research and development with long-term potential payoff; and (4) protection from acquisition for firms experiencing short-term stock price declines resulting from pursuing long-range growth goals (Thurow, 1992). Firms in production economies frequently measure success by sales or market-share growth. Profits are seen as the result of long-term sales and market share growth rather than as a primary goal (Kono, 1984). Japan is illustrative of a production economy.

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Industrial Democracy Economy Industrial democracy economies are characterized by free capital markets but government-regulated labor markets. Key aspects of industrial democracy economies are: (1) high taxes on business to support extensive social welfare programs such as national health care and pensions; (2) extensive regulations to protect workers' rights; and (3) policies that encourage full employment. This orientation typically produces expensive worker entitlement programs that inhibit managers from reacting to short-term fluctuations in labor needs. The orientation also results in higher overall business costs than those experienced by finns in market or production-oriented economies. The costs of doing business in the industrial democracies of Western Europe are the highest in the industrialized world (Lane, 1989; Jain, 1990). The combination of extensive worker rights legislation and higher costs constrains firms in industrial democracies from engaging in price competition or responding quickly to changes in consumer preferences. The profit orientation of business is necessarily long tenn. In addition to highly regulated private sector firms, industrial democracies also use state-owned enterprises (SOEs) and mixed enterprises (shared ownership between the state and the private sector) which pursue both profit and full employment goals (Hafsi, 1988). Joint pursuit of these often conflicting goals frequently produces stable employment patterns, high wages, low efficiency, and low profits compared to private sector firms (Rugman, 1983). Germany is illustrative of an industrial democracy economy.

The Contingency View Applied to Eastern Europe The standard approach to economic reform suggests that Eastern European countries should be transformed into market economies as rapidly as possible. The alternative contingency view illustrated in Fig. 1 is based on three assumptions: (1) Three capitalist economy types exist - - market, production, and industrial democracy. Each represents a different combination of freedom or regulation of labor and capital markets based on a country's (a) national ideology, (b) history, and (c) citizens' preferences. (2) Each of the three capitalist economy types produces its own global champions and losers. Thus, there is no one best capitalist economy type (Lodge, 1990a, b; Thurow, 1992; Porter, 1990; Brouthers, 1992). (3) Eastern European countries should adopt the capitalist economy type that (a) best matches their capital and labor market structures, (b) is most consistent with their national history, and (c) best matches their economic development goals. The contingency perspective recognizes that the best economy type for one nation may not be the best for another country, even a neighboring nation. As Hieronymi has noted,

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Economic alternativesfor Eastern Europe EU

A

Timehorizon

(Long-term ve

Japan ~ Communitarianism --

~.~ ,~,,.

Factor preference (capital versus labor)

Goal orientation t)

" USA -- Individualism

Economic and social policies have to be closely tailored to the situation and structure of each country. Their current situations and the structural problems differ in important ways. Thus, in formulating the economic policies of Hungary and of the Organization for Economic Development and Cooperation (OECD) countries, it is important to keep in mind the specific conditions in each country with respect to internal structures, policies and macroeconomic equilibrium. Applying identical policies in Poland, Hungary, or East Germany (DRR) would be economically disastrous and socially and politically counterproductive (Hieronymi, 1990).

Industrial Democracy and Eastern Europe The industrial democracy economy type best meets the needs of much of Eastern Europe for three reasons. First, it is the capitalist economy type most similar to the command economy, minimizing the degree of change required in the economic structure of the nation. Second, most Eastern European countries are more like Western Europe than they are like either the United States or Japan. Eastern and Western Europeans tend to have c o m m o n cultures, traditions, and historical linkages. "The experiences most directly relevant to Hungary are those of the Western European countries, both in the post-war reconstruction period and during recent decades" (Hieronymi, 1990). Hungary and Western Europe are also natural trading partners due to geographic proximity. Some Eastern and Westen European countries have large numbers of skilled workers but limited capital resources. Thus, it would seem logical that the Western European form of capitalism would 'fit' many East European countries. Third, to gain tariff-free access to the European Union (EU), the largest and most affluent market in Europe, Eastern European countries need to be moving toward EC membership, which necessitates 'social harmonization', aligning economic policies with those of the industrial democracies of Western Europe. Thus, long-run objectives suggest that many Eastern European countries should consider adopting the industrial democracy economy type.

Figure 1.

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Market Economies and Eastern Europe Not all Eastern European countries seem best suited for adopting the industrial democracy type. Poland, for example, possesses three general characteristics which are commonly found in what Lodge refers to as an "individualistic" culture (Lodge, 1990a, b). These are: (1) an initially relatively homogeneous population in terms of ethnicity, religion, and hence, cultural values; (2) an entrepreneurial spirit; and (3) worker rights secured by adversarial class conflict (between workers, managers, and owners) rather than legislatively mandated (as in the case of industrial democracies). Because market economies stem from individualistic cultures, and because Poland displays the three characteristics of an individualistic culture, Poland would appear to be an appropriate environment for adopting a market economy. Poland could benefit from the standard market economy approach being advocated by Sachs and others. The following sections use Hungary to illustrate the efficacy of the contingency view and its value in assessing the appropriate e c o n o m y type for Eastern E u r o p e a n countries prior to implementing economic reform. The Case of Hungary The contingency view proposed in this paper holds that a country committed to changing its economy type from a command economy to one of the three models of capitalism should adopt an economy type that best utilizes national resources while fulfilling the economic aspirations of its citizenry. One way to do this is to choose a successful country with similar attributes, history, and aspirations and imitate it. For Hungary, Austria provides such an example. Historical Similarities Between Hungary and Austria Hungary and Austria have similar sized populations, about 10 million and 7 million, respectively. Both are experiencing population declines, have had formal feudal structures based on agricultural economies, and were part of the Austro-Hungarian empire. Conditions in Hungary following the recent collapse of the Eastern bloc are similar in some ways to those in Austria at the end of World War II. Improvements were needed in communications, capital structure, financial transactions, transportation, and transferring goods and information, among others. The reforms and policies enacted during the post-war reconstruction period resulted in social progress, individual freedom, and economic stability for Austria (Hieronymi, 1990). Hungary, like post-war Austria, has a highly skilled labor force, which is much easier to train than those in the underdeveloped regions of the world, thus increasing chances for foreign investment and subsequent higher standards of living (Foreign Economic Trends and Their Implications for the United States: Hungary, 1990). Hungary, like Austria at the end of World War II, lacks capital (OECD Economic Surveys: Hungary, 1991). Because neither country has abundant natural resources, relying upon their skilled and highly-educated citizenry seems to offer the best basis for national competitive advantage.

363 Industrial Democracy Characteristics of Hungary As previously noted, industrial democracies are characterized by policies that encourage full employment. Industrial democracies use SOEs and mixed enterprises to jointly pursue profit and full employment goals. Hungary has a large number of SOEs. Although investment in the private sector increased by 20.9% in real terms from 1980 to 1987, and one goal is to have the entire farm and food distribution sector privatized by 1994 (Beck, 1993). Hungary's government still invests in its state enterprises (Wolfe and Poor, 1992). Only about 6% of Hungary's SOEs had been privatized by April, 1992 (Whittle, 1992). This is due primarily to parliamentary logjams and the coalition government's caution. By keeping the SOEs and using some of the capital flowing into the country from the West, Hungary could update its equipment and increase productivity while employing more people and helping the economy as a whole. Recent Reforms Hungary recently established the State Property Agency and the State Ownership Share Company that "will exercise proprietary rights not only over those companies in which the state has between 50% and 100% interest, but also over those where the interest amounts to 25%" (Szendrei, 1992). The government is still keeping close tabs on most of its former and current SOEs. Privatization has concentrated on bringing in foreign partners and judging companies to be privatized when an active private participation has been established, even if the majority shareholders seem to be, either directly or indirectly, the government (Economic Developments Outside the OECD, 1991). Since 1991, foreign investors have been permitted to initiate the privatization process (OECD Economic Surveys: Hungary, 1991). Industrial d e m o c r a c i e s also allow for, and encourage, private entrepreneurship. The theory that decades of communism have left people with little or no understanding of a market, supply and demand, and prices that reflect competition or scarcities is false. "Forty years of rationing, shortages and thriving black markets were an excellent course in elementary economics - - better perhaps than a century or two of capitalism, whose beneficiaries take the miracle of supply and demand for granted" (Pioneers of Capitalism, 1992). In fact, by the end of 1991, Hungary had 30,000 incorporated firms and 300,000 unincorporated businesses (Pioneers of Capitalism, 1992). The objective is to reduce the state's 90% ownership of trade and industry to less than 50% within a few years (OECD Economic Surveys: Hungary, 1991). Private Sector Reforms Private sector reforms in Hungary are the most advanced in Eastern Europe (Hieronymi, 1990). For example, the legal rights of businesses are well established, with codes modeled along German-Austrian lines, Like Hungary's pre-war rules. Private firms now have the same legal rights as SOEs. Since the mid-1980s, Hungary has completely revised its tax system

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(OECD Economic Surveys: Hungary, 1991). The government allows private firms to deduct accelerated depreciation charges from tax bills and provides tax incentives for joint ventures. In 1987 Hungary introduced a two-tier banking system. Hungary has embarked on social security reform and has established new wage and labo r policies (OECD Economic Surveys: Hungary, 1991). Privatization efforts have opened markets to imports and encouraged foreign investment (OECD Economic Surveys: Hungary, 1991). Hungary has the most attractive regime for foreign investment in Eastern Europe and is further along the path of economic reform than any other former Soviet bloc country (Economic and Political Change in Eastern Europe, 1990). Austria's Response to Hungarian Reforms Since the collapse of Communism and the movement of Hungary toward 'social harmonization' with Western Europe, Austrian firms haye directly invested more than $300 million in Hungary, which represents 17% of Hungary's foreign total investment (In the Middle of Mitteleuropa, 1992). Austria has also been involved in about 2000 of the 9000 joint ventures in Hungary (In the Middle of Mitteleuropa, 1992). More than a dozen Austrian banks have opened branches in Eastern Europe, and most of these have been in Hungary and the Czech Republic. Austrian banks are active on the Budapest Stock Exchange, which opened on 21 June 1990 (Copeland, 1992). Over 20 Hungarian firms' shares are traded on the Vienna Stock Exchange, and the Austrian government is giving money to help train 10,000 East Europeans in business skills (In the Middle of Mitteleuropa, 1992). Austria's exports to Hungary rose by 20% in 1990 and by 43% in the first half of 1991, due in great part to many deliveries of machinery - - a benefit of foreign investment (In the Middle of Mitteleuropa, 1992). In 1991, Austria replaced the former Soviet Union as Hungary's major trading partner (Haslach, 1992). Thus, it appears that in the case of Hungary, movement toward the industrial democracy form of economy has attracted investment and stimulated economic growth. This record stands in stark contrast to many other countries in Eastern Europe that have uncritically adopted the more radical 'free market' approach.

EU Considerations and Hungary's Future Another major reason for Hungary to pursue an industrial democracy economy type is that it would be easier to fit into, and adapt to, the European Community if its economy type were similar to EU member countries. Joining the EU is important to the transformation, growth, and modernization of the Hungarian economy (Hieronymi, 1990). In December of 1991, Hungary signed an Association Agreement with the EU which grants more favorable conditions for Hungarian exports, as well as exposes its domestic market to competition from Community members (Hollos, 1992). According to Endre Juhasa, The Director General of the Ministry of International Economic Relations, the agreement will open up Hungary to foreign investment as well as trade (Barnard, 1992).

365 Tariffs Tariffs on 70% of Hungary's non-steel and non-textile industry exports were lifted in March, 1992. Tariffs on textile products were reduced by 28.6% and will be completely lifted by 1996 (Hollos, 1992). Tariffs on chemical industry products, which comprise almost 26% of Hungarian industrial exports, will probably be lifted by the end of the fifth year of the 10 year trade agreements (Hollos, 1992). Customs duties on agricultural products will be reduced by 20% annually between 1993 and 1995. Tariffs on such goods as automobiles, machinery, chemicals, and steel and textile industry products, which represent more than 60% of all imports from the EU, will be lifted in a seven-year period starting in 1995 (Hollos, 1992). Customs duties on other products will also be phased out over time, and agricultural tariffs on imports will be reduced by 30% by 1995. 'The short-term benefit will be better access to EC markets, while the long-term benefits will include stable and predictable policy as [Hungary] works to adapt [its] regulations to those of the EC over ten years' (Barnard, 1992).

Financial Aid The EU has been helping Eastern Europe's transition to capitalism with financial aid packages and technical assistance, as well as trade agreements. The EU coordinated the 'Group of 24' nations, whose total commitments in Eastern Europe equals about $45 billion, most of which has come from the EU(Barnard, 1992). The EU also helped establish the European Bank for Reconstruction and Development (EBRD). The EU countries have been, and continue to be, instrumental in helping the fledgling governments in Eastern Europe establish regulations, policies, and laws that are more conducive to trade with Western European industrial democracies. This will become increasingly important because political cooperation is part of the association agreements Hungary now has with the EU.

Summary The contingency view presented here suggests that an industrial democracy would be the best ecofiomy type for Hungary. Instead of making a bold, painful, and apparently, at least in the short-run, severely dislocating leap to a free-market economy, it seems logical for Hungary to move toward an industrial democracy, as found in Austria and most of Western Europe. An industrial democracy would encourage private entrepreneurship, while controlling labor markets and using some foreign investment in the developing capital market to make SOEs more productive, efficient, and profitable in the long run. With any luck and lots of hard work, Hungary might become a member of the EU by the year 2000, as Douglas Hurd, the British Foreign Minister hopes (Barnard, 1992). Jacques Attali, president of the EBRD, says the Europe Agreements are "not enough and too slow" and should give way to an agreement incorporating the EU, the seven-nation EFTA, Eastern Europe, and the former Soviet republics. This would be

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complemented by a trade financing organization to help countries through hard currency shortages" (Barnard, 1992, p. 7). By creating an industrial democracy using Austria as its model, Hungary can more easily integrate into the regional economy of Western Europe and create long-term profitability and better standards of living for its eager population. As Mr Goncz, the President said, "Hungary has always been at a crossroads of h i s t o r y . . . I'm convinced that the centers of growth in Europe will shift and are shifting towards the e a s t . . . [and] Hungary could well-be - and will be - - a center of growth in the future of Eastern Europe" (Whittle, 1992).

The Case of Poland Poland has adopted a market economy type consistent with the standard approach to economic reform commonly advocated by Western economists. Although market reforms initially traumatized the economy by producing high inflation, increasing unemployment, and factory closings, there are strong signs that the country will recover and prosper (Foreign Economic Trends and Their Implications for the United States: Poland, 1990). Econon~c reforms have produced a liberalization of 90% of prices, the disappearance of shortages, and substantial movement toward a consumer market. Inflation, which ran at 80% in January, 1990, following the removal of price controls, has declined to a few percent a month (Economic and Political Change in Eastern Europe, 1990). Poland has been called the "economic Cinderella story" of the former Soviet bloc (Miller, 1993). Poland and the 'Individualistic' Culture In April of 1989, President George Bush (1989) commented on the cultural similarity of Poland and the US: Americans are not mildly sympatheticspectators of events in Poland. We are bound to Poland by a veryspecialbond-- a bond of blood, of culture, and sharedvalues. The ties between the Polish and American people date back to the American revolution and have been strengthened by the immigration of some 10 to 12 million Polish Americans (Poland: Its Renewal and a US Strategy, 1981). As previously noted, Poland possesses the three general characteristics common to individualistic cultures. These are an initially homogeneous population, an entrepreneurial spirit, and workers' rights secured by conflict between workers, managers and owners. Poland's Population Poland has a current population of about 40 million, making it the most populous of the former Society Union's client states (Poland's Economic Reforms, 1993). Its population is overwhelmingly Roman Catholic and remained so even under Soviet domination. Poland possesses no large ethnic groups, unlike the former Yugoslavia, the Soviet Union, Czech Republic, and

367 Hungary. Thus, it has been spared the ethnic and/or religious tensions that have plagued much of Eastern Europe. As a result of these two factors, Poland has a homogeneous culture in terms of ethnicity, religion, and hence, values.

Entrepreneurial Spirit Poland historically has been a crossroads. Located between Germany and the Ukraine, it is ideally suited to serve as a bridge between the east and the west. Perhaps as a result, Poland has the most entrepreneurial private sector of the former Soviet satellites. Privately owned shops and small businesses were restricted but permitted under the communist policies in Poland. During the late 1980s, there were over 231,000 private firms in Poland employing an average of two workers each. By the end of 1990, there were over 17,000 private retailers (Lipton and Sachs, 1991). In mid-1991, more than 40,000 shops were privately owned (Sachs, 1991). By the end of 1992 there were over 1.6 million nonagricultural private businesses and only about 8000 state companies (Robinson and Bobinski, 1993). More than 50% of Poland's output now comes from the private sector that employs about 56% of the labor force (Robinson and Bobinski, 1993). Under communist control, more than 90% of industry was state-owned (Sachs, 1991). Poland is attracting significant foreign direct investment, second only, to Hungary in the former Eastern bloc. Interestingly, Poland is attracting smaller Western European investors that are drawn to a country where labor costs are comparable to a third-world country but finished goods are trucked rather than shipped or air-freighted (Domanski, 1992). According to the US Department of Commerce, business prospects for American firms in Poland have never been better (Foreign Economic Trends and Their Implications for the United States: Poland, 1990). The growth rate in Poland, estimated at 4.5% in 1993, is the highest in all of Europe (Miller, 1993). Poland is firmly committed to rapidly creating an open, free-market economy, and is particularly seeking foreign trade with the United States (Foreign Economic Trends and Their Implications for the United States: Poland, 1990). Worker Rights Contemporary Poland is characterized by adversarial relations between unions and management in large-scale enterprises. Since the early 1980s, Polish workers have demanded their right to organize trade unions and expose abuses of power and corruption. "Unresponsive factory directors and local party bosses have been replaced. Corruption in high places has been exposed, discredited as a way of life, and in some cases punished" (Poland: Its Renewal and a US Strategy, 1981). Although workers still do not have constitutionally mandated 'rights', strikes (often called by Solidarity) and work stoppages are tactics commonly employed to gain wage and work concessions. Structural economic reform may give workers a feeling of a

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personal stake in the economic system and cause them to be more willing to invest their labor in the future (Poland: Its Renewal and a US Strategy, 1981).

Poland's Privatization Poland engaged in a three-stage process to move from a command economy to a free-market system. Unlike the more gradual and less painful route the Hungarians have taken, Poland attempted to move quickly to a free-market system (Economic and Political Change in Eastern Europe, 1990). Stage one was Solidarity's toppling of the Communist regime in Poland. Stage two was the transformation of Polish macroeconomic policy from command to market economics. 'Shock Therapy,' the simultaneous elimination of administrative rationing of goods and services and elimination of price controls, caused: (1) initial declines in production of 40%; (2) unemployment to rise drastically; and, (3) officials to estimate that more than 40% of Polish families lived at minimum income levels (Robinson and Bobinski, 1993). Stage three focuses on privatization. For publicly held corporations, employees are restricted to 20% of total ownership. Foreign ownership is p e r m i t t e d , but h o l d i n g s in e x c e s s of 10% must be a p p r o v e d by the government's Foreign Investment agency. The primary reform, however, is that firms are to be run by the owners and managers, not by the workers, although provisions for worker participation on boards of directors are provided (Wilson, 1991). The Impact of Polish Free Markets The results in Poland thus far appear to be mixed. Initially, the Polish economy suffered with steep rises in unemployment and steep declines in output. Although an entrepreneurial class has appeared, its activities are primarily limited to very small enterprises and to the retail sector. Large-scale manufacturing has stagnated due to a stalemate between the state bureaucracy, industrial managers, and factory workers. This was further complicated by constraints placed on foreign capital and the unacceptably slow pace at privatization of manufacturing, largely brought on by a lack of willingness to invest in Polish stock companies. However, by the end of 1992 things began to change for the better. Unemployment reached 13%, which was lower than projected (Carrington, 1992). In 1992 the economy stabilized, and 1993 appears to be producing the changes that Lipton and Sachs predicted (Lipton and Sachs, 1991). As Robinson and Bobinski (1993, p. 1) state: Strong export growth to Western markets,a fast growingprivate sector, and signs of greater efficiencyin the public sector have combined to produce sharp productivitygains and the basis of an export-led economy. Poland appears poised for sustained economic growth which the governmenthopes will double GDP over the next decade. Free market economics appear to be taking root in Poland. This is due, at least in part, to the cultural characteristics of Poland. According to Sachs, Poland had made it more than half way through the process needed to transform itself into a market economy. The price system now works

369 according to supply and demand, international trade is flee, imports and exports are rising, and private firms are forming and growing at a rapid rate (Sachs, 1991). Other factors contributing to exceptional prospects for domestic sales and export growth include Poland's large internal market and its geographical position in East-Central Europe (Foreign Economic Trends and Their Implications the United States: Poland, 1990).

Conclusion The standard approach to economic reform that many Western experts recommend for Eastern Europe is producing mixed results. In some countries, such as Russia, the approach seems to be leading to havoc and hardships. In others, like Poland, it appears to be working. The contingency approach to economic reform presented in this paper recognizes there is more than one possible alternative to a command economy, and that the economy type that is appropriate for one country may be inappropriate for another. The 'best' economy type for a given country is based upon its history, culture, the ideology of its citizens, and its capital and labor market structures. Based on this contingency approach, Hungary appears to be best suited for an industrial democracy, whereas a market economy seems more appropriate for Poland. In general, the industrial democracy economy type has four distinct advantages (at least in the short run for Hungary and much of Eastern Europe, compared to the more extreme standard approach to market reform most frequently advocated. First, an industrial democracy form of economy minimizes the immediate magnitude of trauma and change while still introducing needed market economic reforms. Second, switching to an industrial democracy form of economy will facilitate economic integration with the EU and Western Europe. Third, "the experiences most directly relevant to Hungary [and much of the rest of Eastern Europe] are those of the Western European countries, both in the post war reconstruction period and during more recent decades" (Hieronymi, 1990). Fourth, and perhaps most important, the general aspirations of most Hungarians align with the industrial democracy model (Hieronymi, 1990), and an industrial democracy is the type of economy that a majority of Eastern bloc citizens want (Horelick, 1991). Although the industrial democracy type of economy would appear to be in the long-term best interest of Hungary, taking this approach to economic reform is not without its problems. One difficulty is that the claims of the restitution of property confiscated by the communists have not yet been settled. Second, there have been technical and financial problems due to the basic lack of a strong capital market as well as the small amount of domestic savings available for investment. Hungary cannot become capitalist without capital. However, the primary challenge facing Hungary's move to industrial democracy is what to do about the SOEs (state owned enterprises). The challenge lies in striking " . . . a balance between equity considerations to make the process politically acceptable, and efficiency in getting the government out of the business of running enterprises as quickly as possible"

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(Economic Developments Outside the OCD, 1991). The more quickly Hungary can solve these three problems, the smoother their transition to industrial democracy will be. One problem Hungary does not have is a lack of entrepreneurs. By the end of 1991, Hungary had over 30,000 incorporated and over 300,000 unincorporated businesses. This amounted to eight incorporated and 80 unincorporated businesses for every 1000 people (Pioneers of Capitalism, 1992). Future Research The primary thesis of this paper is that countries attempting to reform their economies have a number of alternatives from which to choose, rather than merely restricting their choice to a market economy. We attempted to illustrate how this might be done by drawing upon the experiences of Hungary and Poland. However, the evidence we have presented is merely prima facie. Future research which focuses on other nations' attempts to reform their economies in order to make them more globally competitive will do much to enhance the generalization of this initial study. So, examinations of other former second and third-world countries might be in order. This article advances the notion that at least three different types of capitalism exist, and that each of these types has relative advantages and disadvantages and therefore, under the right circumstances, is likely to produce its own set of globally competitive firms. Thus, it appears that the stage is being set to develop a contingency framework of global competitiveness based on strategic synergies achieved between different forms of capitalism and the yet to be discovered 'right circumstances'. This contingency approach to economic development also has implications for the theory of comparative advantage. Rather than factor abundance being the driving mechanism, it may turn out that in the emerging global economy of the twenty-first century that it is a strategic synergy between the generic economy type chosen by a government and the appropriate factor usage chosen by the firm which determines a basis for advantage. Thus, eventually a 'new' theory of comparative advantage might be developed in which factor regulation replaces factor abundance. References Bamard, B. (1992) Going to Market. Europe, March, p. 6. Beck, E. (1993) Private Hands Now Till Hungarian Soil. The Wall Street Journal, 22 January, p. A6. Brouthers, L. (1992) National Bases of Competitive Strategy. Doctoral dissertation, University of Florida. Bush, G. (1989) Encouraging Political and Economic Reform in Poland. Address given in Hamtramck, Michigan, 17 April. Carrington, T. (1992) Eastern Europe's Ills May Defy Usual Cures. The Wall Street Journal, 7 December, p. A 1. Copeland, H. (1992) Volatility Part of Vitality in MAGYAR Stock Exchange. Budapest Week, 12-18 March, p. 9. Domanski, T. (1992) Development of Small Private Companies and Their Marketing Activities. Journal of Business Research, Vol. 24, pp. 57-65.

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