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Transitional Economies
Transitional Economies J. Round, University of Birmingham, Birmingham, UK & 2009 Elsevier Ltd. All rights reserved.
Glossary Command Economy Economic system developed in the Soviet Union through which the state controlled all aspects of the economy. Post-Socialist Countries/Regions Refer to the areas that were under the influence of the Soviet Union but were not within its borders. Post-Soviet Countries Countries which gained independence from the Soviet Union when it collapsed in 1991. Privatization Within structural adjustment programs, this refers to the selling off of state enterprises. Shock Therapy The simultaneous unleashing of market reforms. Structural Adjustment Programs Originally referred to the movement away from a state-led economy but came to refer to the conditions imposed by the World Bank and the International Monetary Fund (IMF) on reforming countries in return for continuing assistance. Washington Consensus The term given to policy advice given by Washington, DC-based institutions such as the World Bank and the IMF.
Introduction Transitional economies are considered to be countries which are undertaking macroeconomic reforms in an attempt to alter the ways in which their economies are managed. Traditionally it implies that the country is making a structural adjustment from a state-run economy toward a more market-led system. The use of the term transition suggests that there is a start- and endpoint to the reforms and that there is a set of policies that can be followed to achieve this. The term came into popular usage when South American countries, such as Argentina and Brazil, moved from military dictatorships toward democratic governance in the 1980s. Under military rule their economies were tightly governed by those in power, with little integration into global markets, and were often extremely inefficient. Therefore, economic problems, such as inflation and unemployment, often contributed to a regime’s downfall, meaning that democratically elected leaders were faced with immediate economic crisis. Forced to look for outside assistance, states typically turned to institutions such as the World Bank and the International Monetary Fund (IMF). These groups offered loans to enable a country to avert economic
collapse, and technical advice on how to implement economic reform. In order to qualify for financial assistance governments had to agree to undertake the policy advice and further installments were conditional on their continuous implementation. This advice evolved to become a ‘recipe’ for transitional economies to follow and as the headquarters of the World Bank and the IMF are in Washington, DC, the process became known as the ‘Washington Consensus’. At approximately the same time as the bestowing of this sobriquet the countries of Eastern Europe were beginning to break free from communist rule. The economies of these countries were dictated to by Moscow with almost every aspect centrally planned. The type and number of goods produced, their price, and location of sale were, for example, controlled by the state. The poor performance of the economy and the lack of consumer goods were some of the reasons why people wanted reform, therefore it was no surprise that the new leaders wished to develop market economies. Given their experience of effecting economic change it was logical that these states turned for assistance to the policy experts who had worked in South America. The policy prescriptions of the Washington Consensus were quickly adopted. Soon after these events the Soviet Union collapsed and the newly independent states turned to the same sources for advice and financial assistance. It was now this region of the world which became synonymous with transitional economies, though Southeast Asian states were also following similar advice to liberalize their economies. Such polices, and the term itself, are not unproblematic. Given the very high social costs and the persistent poverty that former Soviet states have endured since embarking on this reform path, many have questioned the thinking behind the advice. The main criticism is that a transition policy ‘recipe’ ignores the geographical legacies of the regions undertaking them, and that too much emphasis is placed on withdrawing the state from the economy at the expense of institutional reform. Such debates challenge traditional econometric viewpoints for planning/researching economic change, as geographical approaches highlight how reform is mediated differently across regions. Therefore, a single policy recipe of economic transition in order to create a market economy, and the belief that subsequent growth will lead to increases in prosperity for the population overall, must be questioned. In other words, when examining structural economic reform geography matters. Such debates have
355
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vast importance for how governments/international organizations construct development policies and whether importance is placed on macro or micro processes. Through a case study of Russia, the discussions below demonstrate how such debates led to the development of a ‘post-Washington Consensus’, and the idea that economies, rather than undergoing transition, are in fact in transformation.
The Washington Consensus The theory of neoliberal macroeconomic reform, which came to be termed the ‘Washington Consensus’, originated from the World Bank’s and IMF’s responses to the economic crises faced by Latin American countries in the 1980s. The resultant development paradigm was one of a withdrawal of the state: fiscal discipline and liberalization bound up in the structural adjustment programs that came attached to financial aid supplied by the World Bank/IMF. The consensus suggested that economically struggling countries needed to follow a set of ‘rules’ in order to promote stable, sustainable growth. By following these rules the country would be able to progress toward a market economy and experience long-term economic growth. These rules became known as the ‘four pillars of transition’ as countries had to liberalize, stabilize, privatize, and internationalize their economies. Within each category the following was to be achieved; Liberalization The freeing of the economy from state control and • political influence. The state can no longer dictate
• • •
what, where, and how much is produced, or where it can be sold. Prices are to be determined by the laws of supply and demand. Subsidies on goods must be removed and prices for services must be brought into line with world levels. Regional subsidies must be curtailed. The use of barter between enterprises should be eliminated.
Stabilization As the state withdraws from the economy, it must also • curb its expenditure. This entails a reduction in the
• •
size of the state apparatus and a decrease in spending on social safety nets. The state should avoid excessive borrowing and living beyond its means. It should implement a strict monetary policy to control inflation and create a stable currency.
of laws is implemented for the whole system • toA myriad work, making it an extremely complex and timeconsuming process. Privatization state must divest itself of ownership of the means • ofTheproduction. This is to be achieved through privat-
• • •
ization schemes, open to both foreign and internal competition. The state should create conditions for the formation of new private enterprises. It is preferable that employees have the opportunity to become stakeholders in their enterprises through voucher privatization schemes. Monopolies are to be dismantled.
Internationalization The domestic economy must be opened up to inter• national competition. Conditions must be created to encourage foreign in• vestment, such as legal norms, property rights, and a ‘trust’ culture.
International standards for accounting, custom duties, • and tax to be developed. • A stable, convertible currency is to be introduced. Furthermore, these reforms had to be implemented simultaneously, in what became known as a ‘big bang’, in order for them to work effectively. Therefore, for example, a country could not liberalize prices and maintain state monopolies on production. This process is also known as ‘shock therapy’, as the initial reforms are so far reaching the market are shocked into action. This is why China, which has undertaken some of the above, is not referred to as a transition economy as the reform process was introduced gradually and the state retains some control. Fundamental to the theory of transition is the notion that the ‘market knows best’ and that government interference stymies economic development. Thus the Chinese model of reform was not seen as a viable alternative reform path for post-socialist states as the state remained too prominent an influence. The geopolitical aspects of these reforms must also be considered. By implementing such wide-ranging reforms in a very short space of time, a very decisive break with the past has been made. For example, if a market economy is implemented and its subsequent growth leads to increased prosperity for the general public it is much harder for a military-led government to regain power. Similarly, if a command economy is dismantled it becomes almost impossible for communists to return. As Fukuyama famously stated, the collapse of the communist system signaled the ‘end of history’, as it demonstrated the superiority of the Western neoliberal
Transitional Economies
economic model and therefore, signaled the end of the Cold War. Jeffery Sachs, a leading advisor to many former Soviet countries, stated that ‘‘The thinking of the day was that ‘we’ had a once in a lifetime window of opportunity to effect change.’’ This suggests that the set of policy reforms was concerned with far more than just the economic. This is not to suggest that political change was not desirable in the countries undergoing such reforms but it highlights how the reforms were, at least partially, an ideological construct. Furthermore, the opening up of these states had economic benefits to Western countries as it provided access to new markets, cheaper labor, and natural resources.
Transition in the Former Soviet Union Using Russia as an example it is clear that while the above reforms seem relatively straightforward on paper they were incredibly difficult to implement in practice. The first major obstacle was the complexity of the reforms and the context in which they were taking place. At the collapse of the Soviet Union at the end of 1991, every single aspect of the Russian economy had to be reformed. Given that the country was also moving from a one-party system to a democracy and was contending with the loss of its empire it is unsurprising that a sense of uncertainty prevailed. With the assistance of foreign experts it was decided that shock therapy was the correct path for Russia to take. However, the ‘big bang’ was not ignited, as debilitating political turmoil ensured that price liberalization was, initially, the only reform the federal government could introduce effectively. Even this process could only be partially executed as some regional administrations retained control of local prices, and basic goods and services remained subsidized across the country. Privatization – the largest and, in theory, irreversible step to the market – began in early 1992. By 1993 over 60 000 enterprises were privately owned, compared to only 70 in 1991. By the end of 1993, twothirds of all state assets had been transferred to private enterprises. However, this did not lead to significant increases in efficiency. The government, more concerned with transferring ownership to private hands in case it lost power, did not concern itself with who it was selling to or that it was receiving only a fraction of the market value for its assets. Liberalization occurred without stabilization, at both macro and micro levels, resulting in inflation levels reaching over 2500% in 1992, as the monetary overhang, accrued during the Soviet period, entered the economy. Attempts at macro-stabilization were flawed, with money supply constricted simply by not paying state employees, suppliers, or pensions, with the failure to enforce hard budget constraints allowing bankrupt enterprises to continue operating. Two years
357
after the process began foreign trade remained heavily regulated, any benefits of foreign aid were negated by the financing of imports by export credits, and foreign investment regulations were at best opaque. The increasing unpopularity of the transition project, due to its ever-growing social costs, led to the previously compliant communist politicians, sensing that they might be able to regain power, withdrawing their support for the process, plunging the government into crisis. Several prominent reformers were dismissed and by the end of the first year it appeared that the reform process would grind to a halt. It was only revived when Yeltsin won a nationwide referendum on his position and policies in 1993, though gaining only 53% support for the reform process. Despite this, gross domestic product (GDP) still continued to fall, leading the government to near bankruptcy. The Russian government, facing a crippling budget deficit, was offered loans by Russian entrepreneurs in return for letting the lender ‘manage’ the enterprises exploiting the country’s resources. If the government was unable to repay the loan then it would be converted into shares, passing control to the lender. As the government could not repay the loans entrepreneurs were able to take control of key enterprises for a fraction of their true worth and an oligarch class emerged. Despite such problems, institutions such as the European Bank for Reconstruction and Development (EBRD), the European Union (EU), and many economists, believe that Russia has completed its transition to a market economy as it has privatized production, stabilized the economy as inflation has fallen, the lack of price controls means it is liberalized, and foreign firms can operate in the region. However, many believe that the form of economy that has developed is far removed from that envisaged by the reformers. Rather than the growth of a neoliberal market, it is argued that systems of ‘economic involution’, ‘chaotic capitalism’, or a ‘virtual economy’ have developed instead. This, coupled with the social costs of transition detailed below, led many to question the validity of the whole transition process and the Washington Consensus.
The Social Costs of Transition Even the most enthusiastic free market reformers acknowledged that the social costs arising from transition would be high. Each of the four pillars has a negative impact on the general population. As shown above liberalization leads to very high levels of inflation. This means that savings are wiped out overnight and the real worth of wages cannot keep pace with price rises. Privatization leads to unemployment as enterprises seek to increase efficiencies and those that cannot compete go into bankruptcy. As governments attempt to stabilize
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their economies, state workers often go unpaid, or the real worth of their wages falls dramatically, pension and unemployment benefits fall to match the cost of living, and other social support packages are withdrawn. Many economists note that the burdens of transition are disproportionately felt by the poorest members of society. Furthermore, some see increasing social dislocation as an indicator that the reforms are working. What was not envisaged in the former Soviet Union is the depth and longevity of these social costs. Reformers assumed that managers and workers, now free of the constraints of the command economy, would become aware of the new market opportunities and transmute into rational actors in the new flexible labor market. This would mean, in theory, that for the majority the pain caused by the transition would be brief and beneficial as they now had the opportunities to fulfill their potential. Thus it was expected that as macroeconomic growth occurred after the initial expected collapse, wealth would trickle down to the advantage of the majority. Very few reformers gave much attention to how this was going to happen; it was just expected. By the end of 1992, 65% of Russians were considered to be living on incomes below subsistence levels and by 1995 real incomes had declined by over two-thirds. While there is much debate over the causes, Russia has also seen its population decline by approximately 7 million people and male life expectancy is around 59 years. This figure is the lowest in the Northern world, and is a full 14 years below female life expectancy. In 2007 it is estimated that 20% of the population, around 30 million people, received incomes below the subsistence minimum. While this figure is a lot lower than that in 1992, it does not reveal the full story. For many more people everyday life is extremely uncertain as employment is often insecure and low pay means that saving for retirement is difficult. As the subsistence minimum figure does not reveal the true costs of everyday life, for example, it only allows for one pair of shoes every 5 years, many people know they will not be able to retire as pensions are so low. In response to this many people have developed informal practices to generate extra income, such as undertaking extra work, growing food for sale and domestic consumption, or setting up micro-enterprises. While this provides a certain standard of living they do not provide long-term security. Social safety nets offer little protection. Pensions, as noted above, are low and unemployment benefits are very hard to obtain. Therefore, while unemployment rates remain relatively low, and are used to show that the reforms are working, they underestimate nonemployment. At the turn of the century it was estimated that the true level of unemployment was more than double the official 11% level. Senior citizens are entitled to free medicines. However, as the pay for government workers is so low
medical staff often ask for a bribe before they issue or honor prescriptions. Corruption has become endemic in many countries that underwent transition. A 2006 report suggested that over 70% of Ukrainians have had, in the past year, to pay a bribe to access goods or services they were entitled to. Corruption has become so prevalent in these regions not just because of low wages, but due to the lack of institutional development, such as robust legal systems, during the initial reform period.
Institutions and Geographies Matter As it became clear that the long-term consequences of the shock therapy approach were far worse than expected, the rationales behind the Washington Consensus came under scrutiny. The World Bank began to publish reports with titles such as ‘Institutions matter’, and it was acknowledged that it had been too simplistic to expect fully functioning market economies to form without state guidance. As Joseph Stiglitz, then the World Bank’s chief economist, stated in 1998, The policies advanced by the Washington Consensus are not complete, and they are sometimes misguided. Making markets work requires more than just low inflation; it requires sound financial regulation, competition policy, and policies to facilitate the transfer of technology and to encourage transparency. States can improve their capabilities by reinvigorating their institutions. This means not only building administrative or technical capacity but instituting rules and norms that provide officials with incentives to act in the collective interest while restraining arbitrary action and corruption. (Stiglitz 1998)
This was a dramatic reversal in thinking and spelt the end of the Washington Consensus. It was argued that such statements were a plea to economists to accept that the world is more complex than their macroeconomic policies had assumed. It was simply not enough to expect the market to develop the necessary institutions as the state withdrew from the economy. This has led to the World Bank taking a much more microeconomic approach, with an emphasis on reducing corruption and strengthening the institutions which guide market development. However, this is proving problematic in postSoviet states, as corruption has become so entrenched it is proving very difficult to combat. Missing from these debates, however, is the role that geography played in the transition process. As shown above, Eastern European states and the former Soviet Union countries have experienced rather different outcomes as a result of shock therapy. One of the reasons for this, it is argued, is because the transition process failed to incorporate, or even acknowledge, the differing
Transitional Economies
geographies of post-socialist regions. Countries had differing levels of economic development before they entered the Soviet sphere of influence. These can be split into four groups (see Figure 1): 1. The states involved with Europe’s Industrial Revolution, such as what are now known as the Czech Republic and Slovenia. 2. Those which lagged behind group one in the industrialization process, such as today’s Hungary, Poland, and Slovakia. 3. Those which were still predominantly rural as they entered into the command economy, such as Belarus, Russia, and Ukraine. 4. The ‘underdeveloped’ regions of Central Asia. The countries from the first two groups above had established some form of market economy prior to their subjugation into the socialist space. Thus after its demise they were able to revive existing legal frameworks, such as property rights, almost immediately thereby avoiding the vacuum that existed in groups 3 and 4. While such legislation was not ideal, it did provide a basis around which institutions, such as a banking code, could be developed. Therefore, these countries were able to adopt a market framework very quickly, whereas in Russia such institutions had to be developed from scratch. This would be difficult enough under normal circumstances but
given the political turmoil, economic collapse, and the developing oligarchy who wished to steer institutional development to their benefit, it is no surprise that the process is still not complete. It was also assumed that the Soviet sphere of influence was a homogenous economic and political space, with mediations from Moscow accepted universally across it. The reality was markedly different, with interpretations of the plans differing widely from the macro-country level to the actions of individual plant managers and workers. Some countries were able to interpret state socialism in differing ways, for example, within Hungary some smallscale private enterprises were permitted. Thus upon moving toward a market economy there was some entrepreneurial culture, as well as relevant legislation, which could be called upon. Furthermore, there were artificial divisions within the Soviet Union as sector planning meant that certain sectors of the economy were concentrated in individual republics. For example, Belarus was the site of a considerable amount of light industrial production and in Ukraine agricultural development was prioritized. Also, one-industry towns were created, often based around one enterprise. Therefore, countries and regions simply did not have the infrastructure in place within which a market economy could easily develop. Geography also played an important role for the countries of East and Central Europe as the Soviet Union collapsed. These countries,
. Figure 1 The geographies of economic legacies.
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Transitional Economies
such as Poland and the Baltic States looked immediately toward Western Europe with the hope of joining the EU. This meant these states had institutional structures which they could work toward implementing.
development that is relevant to specific countries. Furthermore, it recognizes that the economic forms that might eventually develop in the region might be very different to those that were expected and that forcing them, through policy and financial assistance, to conform to a textbook market economy is counterproductive.
Transition or Transformation? The very notion of transition suggests single start- and endpoints. Using this theoretical base, economists developed a singular policy approach to be applied in countries wishing to move toward a market economy. This assumes that all the regions are starting from the same base point and that policy advice will be mediated in a uniform manner. By ignoring individual geographies, those leading the reform process were unable to foresee the problems that individual countries would have. Such a catch-all policy also ignores the fact that the market economy they were trying to implement only existed in textbooks. Every country has its own version of a market economy, for example, the Swedish model is very different to the German form which in turn differs significantly from the Anglo-American variations. Therefore, it can be seen that as well as differing start points, there are also a multitude of endpoints. Thus the question must be asked as to what point transition economies start from and at what point is the process complete? Using the EBRD’s scorecards, most post-socialist states have completed the transition process. Therefore the reform process in Russia and Ukraine is considered by some to be complete as their economies are, in theory, privatized, liberalized, and open to international competition; a popular view amongst economists. However, as the above has shown, macroeconomic indicators fail to reveal the economic complexity in these regions. Many social scientists working in this area dispute that the reforms are complete, arguing that the form of economic development that has occurred in these countries is very different to that envisaged by those who steered the reform process. If macro-level differences were not incorporated into the transition process then clearly microscale experiences could not be articulated within such strategies. As these are the spaces where the momentous political and economic changes were mediated, interpreted, experienced, and lived it is understandable that the results of the orthodoxy have seen widely different outcomes across the post-Soviet sphere of influence. The fact that there are so many outcomes problematizes the term ‘transition’ even further. This has led to an increase in the use of the term ‘transformation’ when referring to these economies. Transformation suggests that there is not a singular starting point and that the process is fluid and the outcomes unclear. While this might seem like a semantic argument, this distinction demonstrates the diversity of the region and encourages institutional
See also: Communist and Post-Communist Geographies; Economic Geography; Economics and Human Geography; Geopolitics; Globalization, Economic; Liberalism; Neoliberal Economic Strategies; Neoliberalism and Development; Poverty; Privatization; Structural Adjustment.
Further Reading A˚slund, A. (1995). How Russia Became A Market Economy. Washington, DC: Brookings Institution. Berglof, E. and Roland, G. (eds.). The Economics of Transition. Basingstoke: Macmillan. Bradshaw, M. and Stenning, A. (eds.) (2003). East Central Europe and the Former Soviet Union: The Post Socialist Economies. Harlow: Pearson/DARG Regional Development Series. Burawoy, M., Krotov, P. and Lykina, T. (2000). Involution and destitution in capitalist Russia. Ethnography 1(1), 43--65. Burawoy, M. and Verdery, K. (1999). Uncertain Transition. Lanham: Rowman & Littlefield Publishers. Gros, D. and Steinherr, A. (1995). Winds of Change: Economic Transition in Central and Eastern Europe. London: Longman. Gustafson, T. (1999). Capitalism Russian-Style. Cambridge: Cambridge University Press. Klein, L. and Pomer, M. (eds.) (2001). The New Russia: Transition Gone Awry. Palo Alto: Stanford University Press. Lane, D. (2000). What kind of capitalism for Russia? A comparative analysis. Communist and Post-Communist Studies 33(4), 485--504. Lane, D. and Myant, M. (eds.) (2006). Varieties of Capitalism in PostCommunist Countries. Basingstoke: Palgrave Macmillan. Lavigne, M. (1999). The Economics of Transition: From Socialist Economy to Market Economy. Basingstoke: Macmillan. Pickles, J. and Smith, A. (1998). Theorising Transition: The Political Economy of Post-Communist Transformation. London: Routledge. Smith, A. (2007). Articulating neo-liberalism: Diverse economies and urban restructuring in post-socialism. In Sheppard, E., Leitner, H. & Peck, J. (eds.) Contesting Neoliberalism: The Urban Frontier, pp 204--222. New York: Guilford. Smith, A. and Stenning, A. (2006). Beyond household economies: Articulations and spaces of economic practice in post-socialism. Progress in Human Geography 30(2), 190--213. Stiglitz, J. (2003). Globalization and Its Discontents. London: Penguin. Stone, R. (2002). Lending Credibility: The International Monetary Fund and the Post-Communist Transition. Princeton, NJ: Princeton University Press. Wedel, J. (1998). Collision and Collusion: The Strange Case of Western Aid to Eastern Europe. Basingstoke: Macmillan. World Bank (2002). Transition – The First Ten Years: Analysis and Lessons for Eastern Europe and the Former Soviet Union. Washington, DC: World Bank.
Relevant Websites http://www.ebrd.com European Bank of Reconstruction and Development. http://www.imf.org International Monetary Fund. http://www.worldbank.org World Bank.
Glossary Command Economy Economic system developed in the Soviet Union through which the state controlled all aspects of the economy. Post-Socialist Countries/Regions Refer to the areas that were under the influence of the Soviet Union but were not within its borders. Post-Soviet Countries Countries which gained independence from the Soviet Union when it collapsed in 1991. Privatization Within structural adjustment programs, this refers to the selling off of state enterprises. Shock Therapy The simultaneous unleashing of market reforms. Structural Adjustment Programs Originally referred to the movement away from a state-led economy but came to refer to the conditions imposed by the World Bank and the International Monetary Fund (IMF) on reforming countries in return for continuing assistance. Washington Consensus The term given to policy advice given by Washington, DC-based institutions such as the World Bank and the IMF.
Introduction Transitional economies are considered to be countries which are undertaking macroeconomic reforms in an attempt to alter the ways in which their economies are managed. Traditionally it implies that the country is making a structural adjustment from a state-run economy toward a more market-led system. The use of the term transition suggests that there is a start- and endpoint to the reforms and that there is a set of policies that can be followed to achieve this. The term came into popular usage when South American countries, such as Argentina and Brazil, moved from military dictatorships toward democratic governance in the 1980s. Under military rule their economies were tightly governed by those in power, with little integration into global markets, and were often extremely inefficient. Therefore, economic problems, such as inflation and unemployment, often contributed to a regime’s downfall, meaning that democratically elected leaders were faced with immediate economic crisis. Forced to look for outside assistance, states typically turned to institutions such as the World Bank and the International Monetary Fund (IMF). These groups offered loans to enable a country to avert economic
collapse, and technical advice on how to implement economic reform. In order to qualify for financial assistance governments had to agree to undertake the policy advice and further installments were conditional on their continuous implementation. This advice evolved to become a ‘recipe’ for transitional economies to follow and as the headquarters of the World Bank and the IMF are in Washington, DC, the process became known as the ‘Washington Consensus’. At approximately the same time as the bestowing of this sobriquet the countries of Eastern Europe were beginning to break free from communist rule. The economies of these countries were dictated to by Moscow with almost every aspect centrally planned. The type and number of goods produced, their price, and location of sale were, for example, controlled by the state. The poor performance of the economy and the lack of consumer goods were some of the reasons why people wanted reform, therefore it was no surprise that the new leaders wished to develop market economies. Given their experience of effecting economic change it was logical that these states turned for assistance to the policy experts who had worked in South America. The policy prescriptions of the Washington Consensus were quickly adopted. Soon after these events the Soviet Union collapsed and the newly independent states turned to the same sources for advice and financial assistance. It was now this region of the world which became synonymous with transitional economies, though Southeast Asian states were also following similar advice to liberalize their economies. Such polices, and the term itself, are not unproblematic. Given the very high social costs and the persistent poverty that former Soviet states have endured since embarking on this reform path, many have questioned the thinking behind the advice. The main criticism is that a transition policy ‘recipe’ ignores the geographical legacies of the regions undertaking them, and that too much emphasis is placed on withdrawing the state from the economy at the expense of institutional reform. Such debates challenge traditional econometric viewpoints for planning/researching economic change, as geographical approaches highlight how reform is mediated differently across regions. Therefore, a single policy recipe of economic transition in order to create a market economy, and the belief that subsequent growth will lead to increases in prosperity for the population overall, must be questioned. In other words, when examining structural economic reform geography matters. Such debates have
355
356
Transitional Economies
vast importance for how governments/international organizations construct development policies and whether importance is placed on macro or micro processes. Through a case study of Russia, the discussions below demonstrate how such debates led to the development of a ‘post-Washington Consensus’, and the idea that economies, rather than undergoing transition, are in fact in transformation.
The Washington Consensus The theory of neoliberal macroeconomic reform, which came to be termed the ‘Washington Consensus’, originated from the World Bank’s and IMF’s responses to the economic crises faced by Latin American countries in the 1980s. The resultant development paradigm was one of a withdrawal of the state: fiscal discipline and liberalization bound up in the structural adjustment programs that came attached to financial aid supplied by the World Bank/IMF. The consensus suggested that economically struggling countries needed to follow a set of ‘rules’ in order to promote stable, sustainable growth. By following these rules the country would be able to progress toward a market economy and experience long-term economic growth. These rules became known as the ‘four pillars of transition’ as countries had to liberalize, stabilize, privatize, and internationalize their economies. Within each category the following was to be achieved; Liberalization The freeing of the economy from state control and • political influence. The state can no longer dictate
• • •
what, where, and how much is produced, or where it can be sold. Prices are to be determined by the laws of supply and demand. Subsidies on goods must be removed and prices for services must be brought into line with world levels. Regional subsidies must be curtailed. The use of barter between enterprises should be eliminated.
Stabilization As the state withdraws from the economy, it must also • curb its expenditure. This entails a reduction in the
• •
size of the state apparatus and a decrease in spending on social safety nets. The state should avoid excessive borrowing and living beyond its means. It should implement a strict monetary policy to control inflation and create a stable currency.
of laws is implemented for the whole system • toA myriad work, making it an extremely complex and timeconsuming process. Privatization state must divest itself of ownership of the means • ofTheproduction. This is to be achieved through privat-
• • •
ization schemes, open to both foreign and internal competition. The state should create conditions for the formation of new private enterprises. It is preferable that employees have the opportunity to become stakeholders in their enterprises through voucher privatization schemes. Monopolies are to be dismantled.
Internationalization The domestic economy must be opened up to inter• national competition. Conditions must be created to encourage foreign in• vestment, such as legal norms, property rights, and a ‘trust’ culture.
International standards for accounting, custom duties, • and tax to be developed. • A stable, convertible currency is to be introduced. Furthermore, these reforms had to be implemented simultaneously, in what became known as a ‘big bang’, in order for them to work effectively. Therefore, for example, a country could not liberalize prices and maintain state monopolies on production. This process is also known as ‘shock therapy’, as the initial reforms are so far reaching the market are shocked into action. This is why China, which has undertaken some of the above, is not referred to as a transition economy as the reform process was introduced gradually and the state retains some control. Fundamental to the theory of transition is the notion that the ‘market knows best’ and that government interference stymies economic development. Thus the Chinese model of reform was not seen as a viable alternative reform path for post-socialist states as the state remained too prominent an influence. The geopolitical aspects of these reforms must also be considered. By implementing such wide-ranging reforms in a very short space of time, a very decisive break with the past has been made. For example, if a market economy is implemented and its subsequent growth leads to increased prosperity for the general public it is much harder for a military-led government to regain power. Similarly, if a command economy is dismantled it becomes almost impossible for communists to return. As Fukuyama famously stated, the collapse of the communist system signaled the ‘end of history’, as it demonstrated the superiority of the Western neoliberal
Transitional Economies
economic model and therefore, signaled the end of the Cold War. Jeffery Sachs, a leading advisor to many former Soviet countries, stated that ‘‘The thinking of the day was that ‘we’ had a once in a lifetime window of opportunity to effect change.’’ This suggests that the set of policy reforms was concerned with far more than just the economic. This is not to suggest that political change was not desirable in the countries undergoing such reforms but it highlights how the reforms were, at least partially, an ideological construct. Furthermore, the opening up of these states had economic benefits to Western countries as it provided access to new markets, cheaper labor, and natural resources.
Transition in the Former Soviet Union Using Russia as an example it is clear that while the above reforms seem relatively straightforward on paper they were incredibly difficult to implement in practice. The first major obstacle was the complexity of the reforms and the context in which they were taking place. At the collapse of the Soviet Union at the end of 1991, every single aspect of the Russian economy had to be reformed. Given that the country was also moving from a one-party system to a democracy and was contending with the loss of its empire it is unsurprising that a sense of uncertainty prevailed. With the assistance of foreign experts it was decided that shock therapy was the correct path for Russia to take. However, the ‘big bang’ was not ignited, as debilitating political turmoil ensured that price liberalization was, initially, the only reform the federal government could introduce effectively. Even this process could only be partially executed as some regional administrations retained control of local prices, and basic goods and services remained subsidized across the country. Privatization – the largest and, in theory, irreversible step to the market – began in early 1992. By 1993 over 60 000 enterprises were privately owned, compared to only 70 in 1991. By the end of 1993, twothirds of all state assets had been transferred to private enterprises. However, this did not lead to significant increases in efficiency. The government, more concerned with transferring ownership to private hands in case it lost power, did not concern itself with who it was selling to or that it was receiving only a fraction of the market value for its assets. Liberalization occurred without stabilization, at both macro and micro levels, resulting in inflation levels reaching over 2500% in 1992, as the monetary overhang, accrued during the Soviet period, entered the economy. Attempts at macro-stabilization were flawed, with money supply constricted simply by not paying state employees, suppliers, or pensions, with the failure to enforce hard budget constraints allowing bankrupt enterprises to continue operating. Two years
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after the process began foreign trade remained heavily regulated, any benefits of foreign aid were negated by the financing of imports by export credits, and foreign investment regulations were at best opaque. The increasing unpopularity of the transition project, due to its ever-growing social costs, led to the previously compliant communist politicians, sensing that they might be able to regain power, withdrawing their support for the process, plunging the government into crisis. Several prominent reformers were dismissed and by the end of the first year it appeared that the reform process would grind to a halt. It was only revived when Yeltsin won a nationwide referendum on his position and policies in 1993, though gaining only 53% support for the reform process. Despite this, gross domestic product (GDP) still continued to fall, leading the government to near bankruptcy. The Russian government, facing a crippling budget deficit, was offered loans by Russian entrepreneurs in return for letting the lender ‘manage’ the enterprises exploiting the country’s resources. If the government was unable to repay the loan then it would be converted into shares, passing control to the lender. As the government could not repay the loans entrepreneurs were able to take control of key enterprises for a fraction of their true worth and an oligarch class emerged. Despite such problems, institutions such as the European Bank for Reconstruction and Development (EBRD), the European Union (EU), and many economists, believe that Russia has completed its transition to a market economy as it has privatized production, stabilized the economy as inflation has fallen, the lack of price controls means it is liberalized, and foreign firms can operate in the region. However, many believe that the form of economy that has developed is far removed from that envisaged by the reformers. Rather than the growth of a neoliberal market, it is argued that systems of ‘economic involution’, ‘chaotic capitalism’, or a ‘virtual economy’ have developed instead. This, coupled with the social costs of transition detailed below, led many to question the validity of the whole transition process and the Washington Consensus.
The Social Costs of Transition Even the most enthusiastic free market reformers acknowledged that the social costs arising from transition would be high. Each of the four pillars has a negative impact on the general population. As shown above liberalization leads to very high levels of inflation. This means that savings are wiped out overnight and the real worth of wages cannot keep pace with price rises. Privatization leads to unemployment as enterprises seek to increase efficiencies and those that cannot compete go into bankruptcy. As governments attempt to stabilize
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their economies, state workers often go unpaid, or the real worth of their wages falls dramatically, pension and unemployment benefits fall to match the cost of living, and other social support packages are withdrawn. Many economists note that the burdens of transition are disproportionately felt by the poorest members of society. Furthermore, some see increasing social dislocation as an indicator that the reforms are working. What was not envisaged in the former Soviet Union is the depth and longevity of these social costs. Reformers assumed that managers and workers, now free of the constraints of the command economy, would become aware of the new market opportunities and transmute into rational actors in the new flexible labor market. This would mean, in theory, that for the majority the pain caused by the transition would be brief and beneficial as they now had the opportunities to fulfill their potential. Thus it was expected that as macroeconomic growth occurred after the initial expected collapse, wealth would trickle down to the advantage of the majority. Very few reformers gave much attention to how this was going to happen; it was just expected. By the end of 1992, 65% of Russians were considered to be living on incomes below subsistence levels and by 1995 real incomes had declined by over two-thirds. While there is much debate over the causes, Russia has also seen its population decline by approximately 7 million people and male life expectancy is around 59 years. This figure is the lowest in the Northern world, and is a full 14 years below female life expectancy. In 2007 it is estimated that 20% of the population, around 30 million people, received incomes below the subsistence minimum. While this figure is a lot lower than that in 1992, it does not reveal the full story. For many more people everyday life is extremely uncertain as employment is often insecure and low pay means that saving for retirement is difficult. As the subsistence minimum figure does not reveal the true costs of everyday life, for example, it only allows for one pair of shoes every 5 years, many people know they will not be able to retire as pensions are so low. In response to this many people have developed informal practices to generate extra income, such as undertaking extra work, growing food for sale and domestic consumption, or setting up micro-enterprises. While this provides a certain standard of living they do not provide long-term security. Social safety nets offer little protection. Pensions, as noted above, are low and unemployment benefits are very hard to obtain. Therefore, while unemployment rates remain relatively low, and are used to show that the reforms are working, they underestimate nonemployment. At the turn of the century it was estimated that the true level of unemployment was more than double the official 11% level. Senior citizens are entitled to free medicines. However, as the pay for government workers is so low
medical staff often ask for a bribe before they issue or honor prescriptions. Corruption has become endemic in many countries that underwent transition. A 2006 report suggested that over 70% of Ukrainians have had, in the past year, to pay a bribe to access goods or services they were entitled to. Corruption has become so prevalent in these regions not just because of low wages, but due to the lack of institutional development, such as robust legal systems, during the initial reform period.
Institutions and Geographies Matter As it became clear that the long-term consequences of the shock therapy approach were far worse than expected, the rationales behind the Washington Consensus came under scrutiny. The World Bank began to publish reports with titles such as ‘Institutions matter’, and it was acknowledged that it had been too simplistic to expect fully functioning market economies to form without state guidance. As Joseph Stiglitz, then the World Bank’s chief economist, stated in 1998, The policies advanced by the Washington Consensus are not complete, and they are sometimes misguided. Making markets work requires more than just low inflation; it requires sound financial regulation, competition policy, and policies to facilitate the transfer of technology and to encourage transparency. States can improve their capabilities by reinvigorating their institutions. This means not only building administrative or technical capacity but instituting rules and norms that provide officials with incentives to act in the collective interest while restraining arbitrary action and corruption. (Stiglitz 1998)
This was a dramatic reversal in thinking and spelt the end of the Washington Consensus. It was argued that such statements were a plea to economists to accept that the world is more complex than their macroeconomic policies had assumed. It was simply not enough to expect the market to develop the necessary institutions as the state withdrew from the economy. This has led to the World Bank taking a much more microeconomic approach, with an emphasis on reducing corruption and strengthening the institutions which guide market development. However, this is proving problematic in postSoviet states, as corruption has become so entrenched it is proving very difficult to combat. Missing from these debates, however, is the role that geography played in the transition process. As shown above, Eastern European states and the former Soviet Union countries have experienced rather different outcomes as a result of shock therapy. One of the reasons for this, it is argued, is because the transition process failed to incorporate, or even acknowledge, the differing
Transitional Economies
geographies of post-socialist regions. Countries had differing levels of economic development before they entered the Soviet sphere of influence. These can be split into four groups (see Figure 1): 1. The states involved with Europe’s Industrial Revolution, such as what are now known as the Czech Republic and Slovenia. 2. Those which lagged behind group one in the industrialization process, such as today’s Hungary, Poland, and Slovakia. 3. Those which were still predominantly rural as they entered into the command economy, such as Belarus, Russia, and Ukraine. 4. The ‘underdeveloped’ regions of Central Asia. The countries from the first two groups above had established some form of market economy prior to their subjugation into the socialist space. Thus after its demise they were able to revive existing legal frameworks, such as property rights, almost immediately thereby avoiding the vacuum that existed in groups 3 and 4. While such legislation was not ideal, it did provide a basis around which institutions, such as a banking code, could be developed. Therefore, these countries were able to adopt a market framework very quickly, whereas in Russia such institutions had to be developed from scratch. This would be difficult enough under normal circumstances but
given the political turmoil, economic collapse, and the developing oligarchy who wished to steer institutional development to their benefit, it is no surprise that the process is still not complete. It was also assumed that the Soviet sphere of influence was a homogenous economic and political space, with mediations from Moscow accepted universally across it. The reality was markedly different, with interpretations of the plans differing widely from the macro-country level to the actions of individual plant managers and workers. Some countries were able to interpret state socialism in differing ways, for example, within Hungary some smallscale private enterprises were permitted. Thus upon moving toward a market economy there was some entrepreneurial culture, as well as relevant legislation, which could be called upon. Furthermore, there were artificial divisions within the Soviet Union as sector planning meant that certain sectors of the economy were concentrated in individual republics. For example, Belarus was the site of a considerable amount of light industrial production and in Ukraine agricultural development was prioritized. Also, one-industry towns were created, often based around one enterprise. Therefore, countries and regions simply did not have the infrastructure in place within which a market economy could easily develop. Geography also played an important role for the countries of East and Central Europe as the Soviet Union collapsed. These countries,
. Figure 1 The geographies of economic legacies.
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such as Poland and the Baltic States looked immediately toward Western Europe with the hope of joining the EU. This meant these states had institutional structures which they could work toward implementing.
development that is relevant to specific countries. Furthermore, it recognizes that the economic forms that might eventually develop in the region might be very different to those that were expected and that forcing them, through policy and financial assistance, to conform to a textbook market economy is counterproductive.
Transition or Transformation? The very notion of transition suggests single start- and endpoints. Using this theoretical base, economists developed a singular policy approach to be applied in countries wishing to move toward a market economy. This assumes that all the regions are starting from the same base point and that policy advice will be mediated in a uniform manner. By ignoring individual geographies, those leading the reform process were unable to foresee the problems that individual countries would have. Such a catch-all policy also ignores the fact that the market economy they were trying to implement only existed in textbooks. Every country has its own version of a market economy, for example, the Swedish model is very different to the German form which in turn differs significantly from the Anglo-American variations. Therefore, it can be seen that as well as differing start points, there are also a multitude of endpoints. Thus the question must be asked as to what point transition economies start from and at what point is the process complete? Using the EBRD’s scorecards, most post-socialist states have completed the transition process. Therefore the reform process in Russia and Ukraine is considered by some to be complete as their economies are, in theory, privatized, liberalized, and open to international competition; a popular view amongst economists. However, as the above has shown, macroeconomic indicators fail to reveal the economic complexity in these regions. Many social scientists working in this area dispute that the reforms are complete, arguing that the form of economic development that has occurred in these countries is very different to that envisaged by those who steered the reform process. If macro-level differences were not incorporated into the transition process then clearly microscale experiences could not be articulated within such strategies. As these are the spaces where the momentous political and economic changes were mediated, interpreted, experienced, and lived it is understandable that the results of the orthodoxy have seen widely different outcomes across the post-Soviet sphere of influence. The fact that there are so many outcomes problematizes the term ‘transition’ even further. This has led to an increase in the use of the term ‘transformation’ when referring to these economies. Transformation suggests that there is not a singular starting point and that the process is fluid and the outcomes unclear. While this might seem like a semantic argument, this distinction demonstrates the diversity of the region and encourages institutional
See also: Communist and Post-Communist Geographies; Economic Geography; Economics and Human Geography; Geopolitics; Globalization, Economic; Liberalism; Neoliberal Economic Strategies; Neoliberalism and Development; Poverty; Privatization; Structural Adjustment.
Further Reading A˚slund, A. (1995). How Russia Became A Market Economy. Washington, DC: Brookings Institution. Berglof, E. and Roland, G. (eds.). The Economics of Transition. Basingstoke: Macmillan. Bradshaw, M. and Stenning, A. (eds.) (2003). East Central Europe and the Former Soviet Union: The Post Socialist Economies. Harlow: Pearson/DARG Regional Development Series. Burawoy, M., Krotov, P. and Lykina, T. (2000). Involution and destitution in capitalist Russia. Ethnography 1(1), 43--65. Burawoy, M. and Verdery, K. (1999). Uncertain Transition. Lanham: Rowman & Littlefield Publishers. Gros, D. and Steinherr, A. (1995). Winds of Change: Economic Transition in Central and Eastern Europe. London: Longman. Gustafson, T. (1999). Capitalism Russian-Style. Cambridge: Cambridge University Press. Klein, L. and Pomer, M. (eds.) (2001). The New Russia: Transition Gone Awry. Palo Alto: Stanford University Press. Lane, D. (2000). What kind of capitalism for Russia? A comparative analysis. Communist and Post-Communist Studies 33(4), 485--504. Lane, D. and Myant, M. (eds.) (2006). Varieties of Capitalism in PostCommunist Countries. Basingstoke: Palgrave Macmillan. Lavigne, M. (1999). The Economics of Transition: From Socialist Economy to Market Economy. Basingstoke: Macmillan. Pickles, J. and Smith, A. (1998). Theorising Transition: The Political Economy of Post-Communist Transformation. London: Routledge. Smith, A. (2007). Articulating neo-liberalism: Diverse economies and urban restructuring in post-socialism. In Sheppard, E., Leitner, H. & Peck, J. (eds.) Contesting Neoliberalism: The Urban Frontier, pp 204--222. New York: Guilford. Smith, A. and Stenning, A. (2006). Beyond household economies: Articulations and spaces of economic practice in post-socialism. Progress in Human Geography 30(2), 190--213. Stiglitz, J. (2003). Globalization and Its Discontents. London: Penguin. Stone, R. (2002). Lending Credibility: The International Monetary Fund and the Post-Communist Transition. Princeton, NJ: Princeton University Press. Wedel, J. (1998). Collision and Collusion: The Strange Case of Western Aid to Eastern Europe. Basingstoke: Macmillan. World Bank (2002). Transition – The First Ten Years: Analysis and Lessons for Eastern Europe and the Former Soviet Union. Washington, DC: World Bank.
Relevant Websites http://www.ebrd.com European Bank of Reconstruction and Development. http://www.imf.org International Monetary Fund. http://www.worldbank.org World Bank.