Economic Reform

1
Economic Reform

• Are shock therapy and democratisation compatible?

2
Jeffrey Sachs economic theory of transition

• Shock Therapy/treatment
• Radical Economic Reform Plan
• The Economic Big Bang
• By 1990 the G7 states were pressing this on the
  region as a whole

3
Shock Therapy 1

• Break up of Comecon
• root and branch switch to particular form of
  capitalism a condition of normalisation
• hub and spoke West the hub, target states
  spokes. US 90-92 still favoured Moscow as hub
• start with most politically sympathetic
  statessticks and carrots for rest

4
Shock therapy 2

• Western states to provide incentives and
  constraints through multilateral orgs.
• Economies to be revived via Western European
  oriented trade-led growth
• Cooperative states to gain full access to EU
  markets this would mean change of CAP, trade
  regime change and eventual entry to EU.

5
Problems

• Destruction of East European mutual trade system
• competitive race for entry to EU no further
  cooperation
• rejection of mixed or hybrid forms of
  socio-economic system on bizarre grounds that
  market socialism didnt work
• need for rapid, radical reform of EU

6
Requirements for ST to work

• Open trade
• currency convertibility
• private sector as engine of growth
• therefore switch to private ownership
• corporate ownership for large enterprises
• openness to foreign investment
• membership of IMF, World Bank and GATT

7
Arguments

• Joining global economy will lead to importing
  prosperity via new technologies, organisational
  patterns, managerial methods and financial
  capital
• foreign direct investment
• if dont do it, soft currency, no reform of
  industry, hostile investment climate

8
Were all the countries in the same boat?

• USSR price irrationality
• Poland debt
• Comecon CMEA distortion
• Rust-bucket economies
• Consumer goods demand
• no incentive to work
• Agriculture?

9
Consequences of ST

• Undermining of existing political institutions in
  name of true democracy
• new institutions immensely costly in short and
  medium terms
• free-trade led policy for economic revival
  misconceived
• macro policies have weakened rather than
  strengthened long term revival

10
Consequences continued

• Western actors have not behaved as ST theorists
  predicted and this damaged EC Europe
• By its own measurements, ST failed
• Double-depressive shock destruction of
  regional trade and implementation of domestic
  policy cycle

11
And worse!

• Increased unemployment
• reduction in real incomes
• reduction in production levels
• credit squeeze produced recession
• break up of Comecon wrecked output
• institutional vacuum produced inadequate
  supply-side response

12
Jury still out shock horror probe

• Will ST produce higher living standards than
  those under Communism? We dont yet know.
• Transition to capitalism was inevitably going to
  be painful
• Was it appropriate to transfer Pinochet-style
  economics to nascent democracies? Latin American
  achievements due to force.