False Economy - Alan Beattie [139]
As it turns out, the economies that had the biggest distortions underwent the largest drop in output, as the most inefficient and unwanted parts of those economies imploded. The FSU countries were chief among these. After all, most Central European countries outside the Soviet Union had experienced some form of market economy before the Second World War, until the Soviets invaded and turned them into satellite states. Most of the Soviet Union's economy, by contrast, had been subject to a hugely distorting and militarily oriented crash industrialization program run by a dictatorship since 1917, and did not have much to build on even before that. It wasn't the speed of the policies that each undertook that proved the critical factor; it was the path that their economies had followed in the way up to starting them.
Even more interesting is what happened after the shock of transformation in the first half-decade or so after reforms began. This second, longer-term part of the reaction to change appeared to depend more on the quality of the institutions that supported the market economy rather than the simple government policies. The institutions that countries started off with—the rule of law, respect for property, a functioning bureaucracy, an appreciation of market economics—depended greatly on their history. What happened to those institutions also varied with the route that each of the governments took.
In the medium term after undertaking market reforms, China and Vietnam grew merrily, as did most of the Central and Eastern European nations. The Baltic states, whose highly distorted economies shrank rapidly in the first half of the 1990s, turned around in the middle of that decade and grew steadily thereafter, though they have more recently encountered the downside of market economics, being hit badly by the financial crisis that spread rapidly in 2008. Central and Eastern European and Baltic countries have also made big strides in establishing democracy and the kind of institutions generally seen in successful market economies: stable, predictable, nonpredatory taxation; functioning corporate law; the absence of widespread corruption; a general ease of doing business. Lest this be thought of as an argument for indiscriminately rolling back the state, these countries have also managed to keep government spending fairly high as a share of gross domestic product—and they redirect it toward helpful things like health and education, rather than spray subsidies on inefficient industries.
Those Central and Eastern European and Baltic countries had a variety of historical experiences before the Iron Curtain came down at the end of the Second World War. By no means were they a collection of liberal democracies with market economies. But many had experienced strong influence from Western powers—for example, from the Austro-Hungarian empire and the kingdom of Prussia, and before that from the Polish-Lithuanian federation. They naturally looked to the West more than did Russia. And they had more experience of constitutional limited government and individual rights than those countries that had known mainly the rule of the Russian empire.
As well as starting off from a more helpful history, they also had a clear idea of where they were going: the European Union. The EU often does more good to countries when they are trying to join than once they are in. The prize is membership in a lucrative free-trade area and the seal of respectability that comes with membership. The hoops that countries need to jump through on the way include demonstrating economic stability, democracy, justice, and the rule of law. Even if nations don't start off with good institutions,