False Economy - Alan Beattie [138]
The experiences of the fifteen former Soviet Union (henceforth FSU) republics—including Russia itself, the three Baltic states, Ukraine, and Georgia—and the rest of Central and Eastern Europe since communism collapsed there in the early 1990s has been the subject of intense debate. Much of it has centered on the question of whether the state controls of the command economy—bureaucrats fixing prices, directing factory output, and running the banking system—should have been dismantled in a single big bang of "shock therapy" or taken apart piece by piece. Underlying that debate is the assumption that a single set of policies was appropriate for all countries—or indeed would have produced the same results had it been evenly applied.
In practice, when the same kind of policy was applied in different countries, it had different outcomes. Shock therapy in some Central and Eastern European countries, Poland and the Czech and Slovak republics for instance, produced relatively good results in a short period of time. By the mid-1990s they were back up above their 1989 level of national income and growing briskly. Similar reform in the Baltic states that had been part of the Soviet Union (Latvia, Lithuania, and Estonia) led to sharper reductions in output: their gross domestic product dropped in the early 1990s by between a third and three-fifths. Yet most of the other FSU republics reformed much more slowly than the Baltic states but still experienced big drops in output.
A comparison with the reform of centrally directed "command economies" in East Asia—specifically China and Vietnam—also suggests that it is not the pace of change that matters most. China and Vietnam reformed in different ways. China started earlier, in the late 1970s, but went much more gradually. Vietnam had a big bang of liberalizing prices and allowing its currency to be freely exchanged with others in 1989. But both of them grew quite happily in the years immediately afterward—both, in fact, far quicker than any of the countries from the former Soviet bloc.
What appears to be the case is this: How individual economies initially reacted to liberalization depended more on where they started from than on how they did it. All economies under communism looked a lot different from the way they would under a market economy, because the market mechanisms of supply and demand were not allowed to function and prices were fixed. Shortages were managed through rationing and black markets, not through allowing prices to change. As a result, the economies' structures were often wildly different from those that a market would have produced. They had huge but inefficient manufacturing sectors as a result of massive centrally directed capital investment. Their service sectors tended to be small and feeble. Their banking systems, required to direct money where it was politically expedient rather than where it would best be used, operated more like bureaucratic accounting offices than providers of finance. These distortions were magnified by trade relationships among the Soviet bloc countries that followed administrative diktat more than comparative advantage.
That the economies were inefficient and distorted should have surprised no one. But the organizational incompetence of enterprises under communism went beyond even what many pessimists predicted. Many subtracted, rather than added, value by overusing