A political economy approach to the neoclassical model of transition - New Perspectives on Transition Economics: Europe

American Journal of Economics and Sociology, The, Jan, 2002 by John Marangos

I

Introduction

THE DOMINANCE OF NEOCLASSICAL ECONOMICS in the economic literature and of economic policies in market economies was the only decisive factor in determining the transition strategy of Russia and Eastern Europe. The neoclassical model of transition from a centrally-administered socialist economy to a capitalist market economy provided a set of liberalisation, stabilisation, and privatisation policies based on the neoclassical body of economic analysis. The neoclassical model of transition was also adopted as the only solution to the transition problem by the international financial institutions--International Monetary Fund (IMF) and the World Bank--that provided financial aid upon the implementation of policies recommended by the neoclassical model. Consequently, the debate on transition had nothing to do with the goal, method, or ideology underpinning the transition process. These elements had already been decided and imposed upon transition economies. The goal had to be competitive capitalism, the methodology neoclassical economics, and the ideological foundation of the reform had to be self-interest. Nor were the initial conditions of each country a concern. As a result, the debate on transition was restricted to the speed of the reforms. The only concern was whether transition economies should immediately liberalise, stabilise, and privatise, the shock therapy approach, or implement the neoclassical policies at a slow pace, the gradualist approach.

The aim of this paper is to demonstrate that the debate between shock therapy supporters and the gradualist neoclassical economists (1) was immaterial. Both transition approaches adopted a combination of shock therapy and gradualist strategies. A careful investigation of the reforms recommended and implemented with regard to price liberalisation and stabilisation, privatisation, monetary and fiscal policies, and international trade policies reveals contradictions and inconsistencies in each approach to the point that the distinction is, in fact, invalid. Meanwhile, it is important to recognise that the transition process also depended on developments in the institutional and political structure. Incorporating the institutional and political structure into the transition analysis, which is consistent with a political economy approach, further highlights the contradictions of shock therapy and gradualism, reinforcing the inadequacies of neoclassical economic analysis as being politically/institutionally naked.

II

Economic Reforms in Transition Economies

THE SHOCK THERAPY MODEL derived its name from Poland's stabilisation and liberalisation program, initiated on January 1, 1990. The countries that followed this approach are Czechoslovakia (starting on January 1, 1991), Bulgaria (February 1, 1991), Russia (February 2, 1992), Albania (July 1992), Estonia (September 1992), and Latvia (June 5, 1993). Jeffrey Sachs was an advisor to the Polish government and both he and Anders Aslund advised the Russian government and guided its shock therapy reform process in 1992 to 1993 (Schlack 1996:617). Aslund was, in fact, an economic advisor to the Russian government from November 1991 to January 1994 (Aslund 1995:xi). Sachs and Aslund "shared the belief that the economy tin Russia] was in such a terrible mess that a radical, comprehensive, liberal program would be needed to introduce any kind of rational order" (ibid., p.16).

The shock therapy model highlights the interdependent, mutually supportive, and interactive character of economic relationships, implying that reforms should be introduced simultaneously. Fragmented changes are ineffective. "The idea that there is choice between doing one radical measure or another is simply wrong. There is no trade-off but, on the contrary, complementarity" (Aslund 1997b:187). Thus macroeconomic and microeconomic reforms must be concurrent (Sachs 1990:21). This was why the reform program needed to be sweeping and expedient. Jeffrey Sachs stated, "Poland's goal is to establish the economic, legal and institutional basis for a private-sector market economy in just one year' (1990:19). The program has been described as a "leap to a market economy" (Sachs and Lipton 1990:48) and a "jump to a market economy" (Sachs 1993).

The fundamental basis of the gradualist neoclassical approach to transition was the need to establish economic, institutional, political, and ideological structures before any attempt to liberalise. Without this minimum foundation, radical reforms would have inhibited the transition to a competitive market capitalist system. Moreover, the implementation of the reform program required minimum standards of living; otherwise the social fabric of the whole society would have been at risk. The aim of the gradual neoclassical transition process was to initiate a profound and unique change, a "transformational recession" (Kornai 1993a:182, 189; 1994:41), and to overcome the "shortageflation" syndrome (Kolodko 1993:21) by initiating "preventive therapy" (Kornai 1997:183). This was only possible by taking "the longest road" (Abel and Bonin 1993:230), or by "rebuilding the boat in the open sea" (Elster, Offe, and Preuss 1997). The gradualist neoclassical transition process was implemented in Romania (Poirot 1996: Hungary, which has a tradition of a gradual transformation starting is 1968 with the New Economic Mechanism (Kornai 1993a; Samonis AND Hunyadi 1993; Szekely and Newbery 1993; Wolf 1991; Hare 1991: and Slovenia (Kornai 1997).