Economic Reform

Are shock therapy and democratisation compatible?

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

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 states:sticks and carrots for rest

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.

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 didn’t work

• need for rapid, radical reform of EU

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

Arguments

• Joining global economy will lead to importing prosperity via new technologies, organisational patterns, managerial methods and financial capital

• foreign direct investment

• if don’t do it, soft currency, no reform of industry, hostile investment climate

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?

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

Consequences continued

• Western actors have not behaved as ST theorists predicted and this damaged E+C Europe

• By its own measurements, ST failed

• “Double-depressive” shock: destruction of regional trade and implementation of domestic policy cycle

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”

Jury still out shock horror probe

• Will ST produce higher living standards than those under Communism? We don’t 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.