Central and Eastern Europe politics: gradualism and shock therapy - Essay Example

CENTRAL AND EAST EUROPE POLITICS: GRADUALISM AND SHOCK THERAPY The collapse of Communism in 1989 sparked a debate over the best strategy to transform the Central and East Europe (CEE) countries from communist economy to western based market economy. Conflict arose between radicals who believed that the economy required sudden transition to a market-based economy and gradualists who believed that the economic transition ought to be gradual on the basis that a sudden transition would be too much disruptive to social institutions. The fall of communism occurred at time of rise of market revolution wave initiated by then U.K Prime minister Margret Thatcher and U.S President Ronald Reagan. Subsequently, majority western governments and economists rallied their support behind radicals and indeed offered them support from the western international community. The CEE set up strategies, laws and regulations on various economic matters. Some countries adopted shock therapy while others adopted gradualism. In addition, the move of these countries to join the EU and the forms of regimes adopted over the years involve some of the political based strategies that were aimed at growth and stabilization of economy. Gradualism refers to slower implementation of economic reforms in comparison to radicalism (shock therapy). Proponents of gradualism contended that by adopting a slower implementation of economic reforms there would higher expected economic outcomes for the majority. Further, gradualism would allow the population to either accept or reject reforms which could allow the government to assess the need to restructure the reforms. Therefore, gradualism would cause minimum disruption to the social system unlike shock therapy (Balcerowicz, 1995). Shock therapy refers the strategy of rapid implementation of economic reforms on privatization, monetary policy and other economic sectors. In this regard, the supporters of shock therapy emphasized quick implementation of reforms that would enhance economic growth. Adam Przeworki in his book, Democracy and the Market articulated why shock therapy was the best strategy for economic reform. First, he appreciated that radicalism to shift to the market economy posed a risk of a sharp economic decline as it implied that the old communist economy would cease to operate effectively in absence of government financing, subsidies and fixed prices. Unemployment would probably rise to disastrous levels (Orenstein, 2009)). On the other hand, enforcement of rapid privatization would lead to emergence of massive private sectors. Assets would be transferred into private enterprises, and free markets would lead to increase the overall production as a result of transferring assets to private firms who would use them more effectively. The opening of national frontiers would lead to flow of new technology and expertise, and there would be rise in growth and consumption. Radical reforms would have adverse effects to the citizens, but it would speed up the economic growth of the Central and East Europe countries (Orenstein, 2009). Under communism regimes and the planned economies, the focus was on creating benefits that would benefit the majority of the population. Most firms were owned by the public, the government decided which products would be produced and how much would be in supply. The government had total control over procedures that enabled it to exercise control over the people. One of the repercussions of this form of economy was shortages. This happened because the government, rather than the market forces, determined what products were to be produced whereas the public still had the ability to influence demand for the products. Communist planned economies had a lot of incentive systems, but these incentives worked against economic growth and efficiency. The implication of a planned economy is that the government suppresses production and the economy eventually falls. This was the case that resulted to fall of communism; it was inflexible for growth and hence failed (Fish and Choudhry, 2007). If people had confidence in the government that reforms would succeed, the voters would choose the radical approach. Thus, politicians who care about political reactions would prefer shock therapy rather than gradual approach since they would want to have proceeded as far as possible before the negative reactions on the painful effects of economic transition sets in. Thus, supporters of the shock therapy believed that public support for reforms is short-lived. If the gradual approach was adopted, political opposition would gather and disrupt the economic reform process. Yet, politicians care so much about social stability and popular support. They, therefore, preferred radical changes (Balcerowicz, 1995). Another reason shock therapy gained preference over gradualism was economic analysts fear of the effect democracy would have on the process of transition to a market economy. They feared that either reforms or democracy would be jettisoned if the economic reforms were to be subjected to democratic oversight. They, therefore, considered rapid economic transition in order to avert mutual overturning of democracy and capitalism. Polish Finance minister and economist Jeffrey Sach advocated rapid economic reforms to be carried out before a democratic election that was imminent and which would possibly make such reforms stall. In short, there was a belief that democracy and capitalism were incompatible as the latter had not been experimented during democratic rules in these countries. Therefore, reforms had to be implemented as quickly as possible before the era of democracy set in most of the CCE countries (Orenstein, 2009). After a decline in the growth rates across the communist region from 1970 onwards, it was expected that economic transition would enable the economies of the region to achieve faster growth rates and eventually, converge with the advanced western economies. In this respect, most countries in CEE adopted shock-therapy. This was not the first time the CEE region had been involved in a joint push towards leaving communism, referred to as "periphery" of the global economy.However, it was the first time the region was adopting western style market and political institutions with such common enthusiasm(Connoly,2012). Radical personalities such as Leszek in Poland ascended to government economic positions and rolled out shock program reforms, including abrupt removal of subsidies, rapid privatization, tightening monetary austerity and liberalization of trade and investment (Orenstein, 2009). Liberalization had an adverse effect on the former Communist CEE nations as it rendered insolvent thousands of companies that had been affiliated to the Soviet Council for Mutual Economic Assistance(COMECON) markets and forced the firms to compete with the more experienced and technology advanced western markets. Following liberalization, 90% of trade in the CEE countries shifted from the soviet to west in a span of two years. Most of these firms previously affiliated to the COMECON were forced to phase out most of their workers while other closed down (Orenstein 2009). Privatization was one of the widely implemented strategies under shock therapy in most CEE countries. Considering the adverse effects associated with reforms such as removal of subsidies, wage caps and price deregulations, privatization seemed to be the best economic reform that would mildly hurt the public and therefore safeguard their support for the new governments in CEE in their pro-market economy agendas (Gould and Colo, 2012). According to Appel (2004), the supporters of the shock therapy advocated mass privatization to produce a wide base of capitalists overnight, who, given their vested interests would be reliable defenders of the new market economy. However, rather than bolstering economies and garnering legitimacy and support, privatization became the focal point of frustration of the public with massive corruption and economic disappointments during the post-communist period. Although it was supported during the early phase of its implementation, the program and its supporters were demonized in the 19th century with the emergence of French socialist idea that ownership is synonymous to theft. In most cases, the post-communist privatization amounted to collusion, material deprivation and corruption. The fault in the privatization programs revolved around how the programs were designed and the effects of distribution of property. In the first place, privatization did not bring about the revival of economies in most regions, at least not as it was expected .Secondly, privatization did not lead to a broad restructuring of enterprises in the short run but rather left many enterprises susceptible to asset stripping. Third, while results varied from country to country, the formal mass privatization did not yield equitable distribution of property ownership among citizens. Rather, it intensified the general trend of enrichment of few that had been on the rise during the Gorbachev regime by offering legal means to transfer title of state property to the well-connected few (Appel, 2004). Mass privation was also faulted for heightening popular expectations of individual material gains only to frustrate them when companies collapsed, investment funds folded and rights of small shareholders violated.In this regard, even most of those who supported privatization as an ideal strategy to grow economies were critical in view of the decision to distribute state property at almost for free or at very low prices since it jeopardized the opportunity to generate revenue for social safety nets and acquisition of new technologies and investment for local firms (Appel, 2004). Appel (2004) critiques how the mass privatization was implemented in the post-communist communities. The mass support it garnered from the general public, local government officials and foreign advisers across many states. She specifically cites the vigour of mass privatization in the 1990s among the government officials as surprising given that there had been no historical precedent of such mass privatization but the leaders enthusiastically embarked on the program without a precedent that would guide policy design or assure them that this new course of reform of property rights would be viable and effective. Another problem with the shock therapy reforms was that the investments in the beginning did not keep pace with the rapidly falling communist economic sector. This was attributed to the fact that initially foreign investors were cautious to invest in the former communist countries because economic relationships with these nations were new, the trade rules were unclear and bound to change. In addition, many investors were doubtful that most of these countries would join the European Union. While renowned economists such as Jeffery Sach called for the European nations to devise comprehensive plans to assist the CEE economies, this did not happen and the CCE economies lacked investors who were wary of an imminent recession (Orenstein, 2009). However, at the same time liberalization and privatization provided opportunities for creation of new enterprises, majorly in the consumer sector where demand had been depressed for many years under communism. In most regions, shops sprout out dealing in all sorts of goods in market places and eventually began restructuring to western like places of consumption. Cities in these post-communist countries also developed rapidly and were characterized with malls and big box stores (Orenstein, 2009). Therefore, despite the successes the shock therapy brought in various economic sectors such as emergence of entrepreneurs and positive transformation of state enterprise, the strategy caused numerous disruptions to weak sectors and populations. Whereas the pro-shock therapy politicians and economists had promised a short recession that would usher in a period of economic prosperity, the transitional recession in the post-communist nations turned out to be long lived. Indeed, as at 2002, twelve years since the inception of the transition to market economy, most of the CEE nations had not even returned to their economic level before the fall of communism in 1989. The recession caused escalation of poverty and mortality rates, and fertility rates declined severely. In countries such as Ukraine, Bulgaria and Romania, emigration rose as people escaped from the harsh economic conditions.Human trafficking erupted as people sought refuge in other countries. Politics took a new turn in the CCE countries as the people started to elect populist leaders who advocated rights of workers who were laid off their employment in the state firms during the transition period and faced economic impoverishment (Orenstein, 2009). After 2000, most post-communist countries, both those who had implemented shock therapy reforms and those who had not experienced rapid economic growth. Countries such as Poland and Slovakia, which had implemented radical reforms lead in economic growth among the reform countries. Ukraine led in economic growth among the no- reform countries. Also, Belarus that had not implemented radical reforms and remained in communism experienced substantial growth. Orenstein (2009) in view that most post-communist countries experienced rapid economic growth irrespective of whether they had adopted shock therapy contends that the neoliberal reforms cannot be exclusively attributed to the CEE countries economic collapse in the early years of post-communist period nor can they be wholly attributed to the economic prosperity in the period after 2000. He attributes the oil prices boom in the 2000s and ascension of Vladimir Putin to power to the economic directions taken by the former Soviet Union and the rest of the CCE region in the period after 2000. Another strategy that had an impact on the CCE countries’ economies was geopolitics which involved joining the European Union or establishing close ties with Russia. Most CEE countries joined the European Union. This move was preceded by foreign direct investment from the EU in 1998, when negotiations on membership of EU commenced and neo-liberal reforms effectively halted (Drahokoupil, 2008). The move to join EU was important to these countries in two facets. The EU would serve as a coordinating and stabilizing factor and secondly it would offer financial assistance. Therefore, the EU membership provided these countries with immense potential for growth by converting their markets into regulatory environments and making trade relations more secure. Market harmonization had positive impacts such as rapid expansion of car industry in the East Europe (Drahokoupil, 2008). Subsequent to joining EU, most of these countries increased their social spending beyond the limit typically advised by neoliberal reformers such as Jeffrey Sachs. The new EU members underwent a U-shaped recession and ultimately returned to growth. Also, countries that forged close relations with Russia did well economically while those that had no specific affiliation to either EU or Russia performed poorly (Orenstein 2009). Membership to the European Union had other far-reaching effects to the economic growth and relative stability of CEE countries. Orenstein (2009) argues this out by claiming a reasonable correlation between economic growth and democracy as reported by EBRD transition report data. The data showed that post-communist countries that adopted democracy reformed better and experienced economic growth faster than countries that adopted authoritarian regimes. This is largely attributed to the influence the European Union had on the new members. The EU demanded market economy as well as democratic governance from the potential member states. It actually imposed conditions for membership and stabilized several countries that initially seemed to falter on markets, democracy or both, such as Bulgaria, Romania and Slovakia. To acquire membership to the European Union required the CEE countries to embrace democratic governance and market economy. Since the CEE countries needed the European membership to solve their economic and geopolitical dilemmas, they had to adopt democratic governance. Stable democratic governance reinforces economic growth. Democracy establishes a system of continuous policy testing in which succeeding governments have opportunities to experiment the policies they deem will function better to achieve growth (Orenstein 2009). The economic crisis of 2008 that started from the crisis in banking in the United States affected the economies and political development of most countries around the world. The post-communist states of the Central and Eastern Europe were also not spared. Generally, the economies of these former communist countries commonly referred to as transition economies were the worst victims of the crisis. They suffered decline in GDP in 2009 that were lower than the world’s average. In response to the crisis, different countries in this region employed diverse strategies that did not necessarily reflect the nature of the harshness of the economic factors. Political wise, in some countries, the same governments remained in power, whereas in others there were substantial changes and indicators of a rising instability in party and political structures (Myant and Drahokoupil, 2013). In most countries, the economic decline led to deterioration of public finances, budget deficits rose as tax revenue decreased, and in some situations, public spending increased either to compensate the higher social costs, or as part of an intentional attempt to reduce the effects of the crisis or, in some cases , reflecting continuation of previously decided policies. Faced with continuous economic decline, some countries were forced to seek financial assistance from the IMF, this applied to Latvia and Hungary and the latter was put under IMF recovery program. Other countries continued with the past policies or deliberately changed policies, in particular increasing spending in order to compensate for the reduction in exports or credits that characterized the economic crisis. Poland and Czech Republic are clear example of this (Myant and Drahokoupil, 2013). Myant and Drahokoupil, (2013) notes the different policies adopted by governments and political actors in these countries in response to the crisis and argues that the policy choices were influenced by the strength of particular social and political forces, opportunities for representation of interest, public and elite perceptions of causes and nature of the crisis, past histories and experiences and the strength of and receptiveness to potential external pressures. An alternative explanation for the choice of policy adopted is that different policies were suggested by different social and political forces. Further, Myant and Drahokoupil (2013) observe that in most of the CEE countries, there is a substantial division between neoliberal and social-democratic policy directions. The political and economic structures of these countries resemble those of Western Europe, and also, being members of the European Union, many of the policy themes of EU apply. Social democratic label involves combination of policies such as employment protection, creation or support for activities in the public sector and protection of low-income sectors of the society. Governments are more likely to listen to social interests. In this regard, the crisis can be attributed to failure of a free market economy and hence it was expedient for the government to devise strategies to correct these failures of the free market. The neoliberal label policies are reverse of social democratic label policies in that they aim at reducing as much as possible the role of the government, this usually achieved through reducing government spending. Under neoliberal policies, there is constant opposition to the government’s redistribution of income. In this regard, politicians used the facts of the crisis enact policies for as much as possible reduction of governments roles in redistribution of income from higher income earners to lower income groups under the guise of balancing the states budget and averting rise of the state’s debt. In conclusion, countries in Central and East Europe have devised various strategies to protect of economies from disruption. Following the fall of communism and in the face of an economic decline, most countries in the region underwent economic transition from a planned economy under communism to a market-based economy. The transition was mainly achieved through radical implementation of reforms under the shock therapy school of thought. The two main strategies under shock therapy were privatization and liberalization of economy. The approach had political motivations and though the countries that adopted it experienced economic growth in later years, the early years of its implementation were marked by a long recession. The directions of geopolitics taken by these countries were also political and aimed at gaining economic benefits. Most countries joined the European Union over the years while some established closer ties with Russia. The global economic crisis of 2008 also rendered the CCE countries devising neoliberal economic policies that also had a political dimension. Bibliography Appel, H., 2004. A New Capitalist Order: Privatization and Ideology in Eastern Europe and Russia. Pittsburgh: University of Pittsburgh Press. Balcerowicz, L., 1995. Capitalism, socialism, transformation. Central European University Press. Connolly, R., 2012. The Determinants of the Economic Crisis in Post-Socialist Europe. Europe-Asia Studies, 64(1), pp.35-67. Drahokoupil, J., 2008. The Investment-Promotion Machines: The Politics of Foreign Direct Investment Promotion in Central and Eastern Europe. Europe-Asia Studies, 60(2), pp.197-225. Fish, M. and Choudhry, O., 2007. Democratization and Economic Liberalization in the Postcommunist World. Comparative Political Studies, 40(3), pp.254-282. Myant, M. and Drahokoupil, J., 2008. Transition Economies after the Crisis of 2008:Actors and Policies. Europe and Asia Studies, 65(3), pp.373-382. Orenstein, M., 2009. What Happened in East European (Political) Economies?: A Balance Sheet for Neoliberal Reform. East European Politics & Societies, 23(4), pp.479-490. The Politics of Privatization: Wealth and Power in Postcommunist Europe. By John A. Gould. Boulder, Colo.: Lynne Rienner Publishers, 2011. viii, 247 pp. Notes. Bibliography. Index. Tables. $55.00, hard bound. $22.50, paper. (2012). Slavic Review, 71(4), pp.932-933. Read More