The Transformation of the Communist Economies: Against the Mainstream

447 Pages·1995·43.07 MB·English

by  Ha-Joon Chang

THETRANSFORMATION OF THE
COMMUNISTECONOMIES
Also byHa-Joon Chang
THEPOLITICALECONOMYOF INDUSTRIALPOLICY
Also byPeter Nolan
CHINA'S ECONOMICREFORMS IN THE 1980s:The Costs and
BenefitsofIncrementalism (editor with Fan Qimiao)
GROWTHPROCESSES AND DISTRIBUTIONALCHANGEIN
ASOUTHCHINESEPROVINCE: The Case ofGuangdong
INEQUALITY:India and ChinaCompared, 1950-1970
MARKETFORCES INCHINA:Competition andSmall Business
theWenzhouDebate (editor with Dong Fureng)
STATEAND MARKETIN THECHINESEECONOMY: Essays
onControversial Issues
THE CHINESE ECONOMY AND ITS FUTURE(editor with
DongFureng)
THEPOLITICALECONOMY OF COLLECTIVEFARMS: An
AnalysisofChina's Post-MaoRural EconomicReforms
The Transformation
of the Communist
Economies
Against the Mainstream
Edited by
Ha-Joon Chang
AssistantDirectorofDevelopmentStudies
UniversityofCambridge
and
Peter Nolan
DirectorofStudiesinEconomics
Jesus College. Cambridge
M
St. Martin's Press
©Ha-JoonChangandPeterNolan1995
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ISBN 978-1-349-23918-4 ISBN 978-1-349-23916-0(eBook)
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LibraryofCongressCataloging-in-PublicationData
Thetransformationofthecommunisteconomies:againstthemainstream
/editedbyHa-JoonChangandPeterNolan.
p. ern,
PaperspresentedataconferenceheldatSidneySussexCollege,
Cambridge,inJuly1992.
Includesbibliographicalreferencesandindex.
ISBN 978-0-312-12323-9
1.Communistcountries-Economicconditions--Congresses.
2.Europe,Eastern-Economicpolicy-1989-Congresses. 3.Former
Sovietrepublics-Economicpolicy-Congresses. 4.China-Economic
policy-l976-Congresses. 5.Privatization-Europe,Eastern
-Congresses. 6.Privatization-FonnerSovietrepublics-Congresses.
7.Economicstabilization-Europe,Eastern-Congresses. 8.Economic
stabilization-FormerSovietrepublics-Congresses. 9.Economic
stabilization-China-Congresses. I.Chang, Ha-Joon. II. Nolan,
Peter.
HC704.TI23 1995
338.947-dc20 94-60590
CIP
.Contents
Preface VB
Notes on the Contributors xi
PART I THEORETICAL AND HISTORICAL
OVERVIEWS
1 Europe versus Asia: Contrasting Paths to the Reform
of Centrally Planned Systems of Political Economy 3
Ha-Joon Chang and Peter Nolan
2 Capitalist Triumphalism in the Eastern European
Transition 46
Peter Wiles
3 Economic Theory and Transformation of the
Soviet-type System: The Challenge of the Late
Industrialisation Perspective 78
Dic Lo
PART II POLICY ISSUES
4 Wasted Sacrifices: Real Wages and Reconstruction
in Eastern Europe 113
Andrew Glyn
5 The Transition in Eastern Europe:The Case for
Industrial Policy 136
Michael A. Landesmann and Istvan Abel
6 Reflections on the Privatisation Issue 162
Keith Cowling
7 Financial Fragility in the Transition to Market
Economies 177
Laurence Harris
8 Equality, Efficiency and Economic Progress: The
Case for Universally Applied Equitable Standards
for Wages and Conditions of Work 203
Frank Wilkinson
v
vi Contents
9 SocialSecurity Reform in Urban China:The Case of
Shanghai 230
Steve Pudney
10 The Role of Foreign Direct Investment in the
Transformation of Eastern Europe 282
Hugo Radice
m
PART LEARNING FROM EXPERIENCES
11 The Lessons of History: New Economic Policy in
China and the USSR 313
Chris Bramall
12 Nicaragua:The Sandinista Experiment and its
Aftermath 340
Gabriel Palma
13 Return to Europe? Is There Anything for Eastern
Europe to Learn from East Asia? 382
Ha-Joon Chang
14 Political Economy and the Reform of Stalinism:The
Chinese Puzzle 400
Peter Nolan
Index 419
Preface
This book arose from a conference organised at SidneySussex Col
lege, Cambridge in July 1992.*When we began to plan for this con
ference in 1991,the reforms in Eastern Europe were intheir infancy.
There was a widespread belief that the task of reforming the com
munist systems of political economy was basicallyanalogous to that
of implementing 'structural adjustment and reform' programmes in
developing countries. It was widely felt that if the communist eco
nomies seriously pursued the policies advocated by themajor inter
national institutions, such as the World Bank, the IMF and the
European Bank for Reconstruction and Development, then there
would be a relatively short period of 'pain' followed by sustained
growth. This optimism ignored both the mixed record of structural
adjustment policies in developing countries (see, e.g.,Taylor, 1987,
ch. 4) and the vastly more complex nature of the problems con
fronted in reforming the communist systems of political economy.
Theclassicstatementofsuch naive,technocraticoptimismcame in
the Report produced on the Soviet economy in 1990by the IMF,
World Bank,the OECD,and the EuropeanBank for Reconstruction
and Development. It strongly advocated a 'radical' programme of
stabilisation and structural adjustment, including privatisation, hard
budget constraints on reforming enterprises, price liberalisation and
close integration into the international economy:
[A] comparison in general terms that draws on worldwide experi
ence of stabilisation and reform programmes may help illustrate
the tradeoffs involved [in choosing between 'conservative' and
'radical' programmes]. In advocating the more radical approach
we are well aware of the concerns of those who recommend cau
tion ...Outputcould fallsharply asnonviable productionwascut,
and unemploymentwould rise. But sinceinvestmentwouldbe cur
tailed initially and inventories run down, and with some availabil
ity of external assistance, aggregate consumption levelsmight be
broadly maintained. A recovery from the reduced levelof output
should be able to get under waywithin twoyears or so.Iffinancial
• We are most grateful to Alan Hughes for his assistance in both the intellectual
aspects and the practical organisational tasks ofpreparing for thisconference.
vii
viii Preface
policieswere kept tight, inflationwould then be under control and
the conditions for a much more efficient allocation of resources,
guided bymarketprices, putinplace. A period of catchingup with
Western standards of efficiency could begin, during which growth
inproductivityand outputwould likely exceedthatofmost mature
market economies. Unemployment would be expected to decline
as the initial labour shakeout gave way to a strong recovery in
employment. Further strong growth of output and rising living
standards could be expected for the remainder of the decade and
beyond,and therewould be agood possibility ofsignificantfinancial
inflowsfrom abroad. (IMF et aI., 1990, pp. 18-19)
By the time we were doing the final work of editing this volume, in
the Autumn of 1993,the early optimism had disappeared. Indeed, a
huge paradox had arisen. The reforming country that had most
strongly gone against the prevailing orthodoxy of Western social
science, namely China, was booming. Moreover, the communist
countries around itwere taking the same path and beginningto show
good results. The reforming countries of Eastern Europe and the
former USSR, which had in different degrees pursued the paths
advocated by orthodoxWestern opinion,werein deep decline. In his
introductory speech for the launch of the EBRD's Annual Report
for 1993,John Flemming,the EBRD's chiefeconomist,made it clear
that inflation was likely to remain at high levels in the reforming
countries of Eastern Europe and Russia and that there existed 'dis
mal prospects' for private investment in these countries. Moreover,
he predicted that it would take several decades before income levels
in these countries approached those of Western Europe (quoted in
Financial Times, 22 September 1993).
Despiteholding different political and theoretical perspectives,the
participants in the conference shared a common view that the prob
lems of reform were much more complex than the conventional
wisdom suggested.They agreed that mainstream Western social sci
ence was inadequate to the task of trying to construct policies for
successful systemic reform. They share a common perspective of
looking upon the economy as a complex social and political institu
tion. Such a perspective is especially important at times of massive
system change, when one is not tinkering with variables within a
reasonably stable framework of parameters. Rather, the essence of
the change is that the parameters of economic life are themselves
being transformed. There was no precedentfor the magnitude of the
task faced by the reforming communist countries. A first step to
Preface ix
good policy formation should have been a recognition that caution
and experimentalismshould be the watchword inpolicyformulation.
Sadly, over much of the former communist system,both internal
and externaladvisors failed to exhibitsuchmodestyorcommonsense.
Instead, crude and arrogant simplifications, derived from models
developed in sophisticated market economies and then applied in
less relevant circumstances in non-communist developing countries,
were in tum applied in the still less relevant situation of reforming
the communist economies. These rapidly came to dominate policy
formation.They resultedin callsfor 'revolutionary' changesinorder
to establish atextbook version ofAnglo-Saxon capitalism,withstock
markets and perfect competition. This did not even correspond with
many of the key features of advanced capitalism such as the domi
nance of massive oligopolies.
The essays in this volume share a common conviction that the
dramaticcontrastinresults betweenthe reform programme inEurope
and the former USSR on the one hand, and Asian communistcoun
tries on the otherderives primarilyfrom differences inpolicychoices.
The overarching contrast is between an experimental, evolutionary
approach and a revolutionary approach towards system change.
It is deeply paradoxical that a 'revolutionary' approach towards
the political economy of reform of communist countries emerged
from the mainstream of Western social science, much of which had
itself been deeply hostile to the revolutionary transformation into
communism a generation earlier. The supporters of this revolution
ary 'great leap' out of communist planning would have done wellto
re-read Karl Popper's scathing critique of the 'historicist' attempt to
leap into communism:
Every version of historicism expresses the feeling ofbeing swept
into the future by irresistible forces ... Modem historicists .. .
believe that theirown brand ofhistoricismisthe latestand boldest
achievement of the human mind ... Contrasting their 'dynamic'
thinking with the 'static' thinking of all previous generations they
believe that their own advance has been made possiblebythe fact
that we are now 'living in a revolution' which has somuch accel
erated the speed of our development that social change can now
be directly experienced in a single lifetime. This story isofcourse
sheer mythology. (Popper, 1957, p. 160)
HA-JOON CHANG
PETER NOLAN