1. Strategies of Transformation

2. POST-COMMUNIST REFORMS: KEY QUESTIONS
What is the design?
What is the speed?
Who decides?
Does it work?
Who wins and who loses?
Is a new system in place?

3. The Design “The Washington Consensus”, also known as
the Neoliberal Orthodoxy, also known as
“Shock Therapy”
Simultaneous economic and political transformation under Western guidance
Proclaimed goal: to create capitalist economies and liberal democratic states integrated with the West
The destruction of the old system has to be as rapid as possible

4. The economic blueprint:
LIBERALIZATION
STABILIZATION
PRIVATIZATION
(added later: INSTITUTIONALIZATION)

5. Liberalization
Replace command with self-interest as the economy’s driving force
The government stops setting prices, let them be determined by supply and demand (easy to do)
Trade should be as free as possible, both internally and externally
Expected result: replacement of the hierarchy of state control with a network of free economic agents
THE STATE RETREATS

6. Stabilization
Liberalization leads to hyperinflation, which may destroy the economy
Need for tight monetary policy: the government limits the amount of money it prints
Sharp reduction of government spending
Raising taxes
Expected result: the new market economy gets its most vital component: a solid monetary base which can service all those myriads of free market interactions stimulated by liberalization
THE STATE COMES BACK WITH A TIGHT FIST

7. Privatization
Restoration of private ownership of the means of production
Transfer of state property into private hands
Creation of a bourgeoisie – a capitalist class capable to act as the main agent of transformation (no capitalism without capitalists)
Methods:
Sell state companies to local buyers
Sell to foreigners
Allow managers of state companies to become owners
Mass privatization through vouchers
Allow employees to become owners

8. Effects of “shock therapy”
Production falls while trade flourishes
Living conditions worsen
Rapid concentration of wealth in the hands of a small minority
Expansion of “underground economy”
The state loses most of its economic sovereignty
TEMPORARY DIFFICULTIES, ACCEPTABLE SIDE EFFECTS –
OR FAILURE OF THE DESIGN?
IS NEW CAPITALISM SUSTAINABLE ?

9. The Missing Link: Institutionalization
You can’t build any system without a well-functioning state
The state is badly needed to make a market economy work. Since mid-1990s, “institutionalization” has been listed as the fourth key component of the neoliberal transition orthodoxy
What kind of a state is needed to accomplish the transformation?

10. The question of democracy
During the fall of communism, democracy was viewed as an essential value in itself
It was also associated with prosperity
If the main issue is the dominance of the communist bureaucracy over society, democracy is a natural remedy: the people should have the power to determine how their society is to be organized and governed
Did the people get that power under the neoliberal orthodoxy?

11. “Shock therapy” vs. democracy
PROBLEM 1: “Shock therapy” does not depend on popular participation. Its main agents are the state, the West, and the New Rich in the East. Citizens’ main role is to adapt as best they can.

12. PROBLEM 2: “Shock therapy” inflicts tremendous costs on the society
PROBLEM 2: “Shock therapy” inflicts tremendous costs on the society. How will citizens react?
They may keep patience, if they are convinced that the transition moves in the right direction, but requires temporary sacrifices. This allows the reforms to go through
They may protest, using democratic institutions, and force their governments to change reform policies. This slows down and distorts the reform process
If one is committed to the reform blueprint, one has to try and minimize public impact on policy-making

13. PROBLEM 3: “Shock therapy” creates new forms of power and control for the elites through concentration of wealth

14. PROBLEM 4: Ethnic nationalism rises as a channel of popular protest and mobilization, resulting in tensions, wars, persecution of minorities, rise of fascist-type movements

15. Possible solutions:
--Liberal democracy (elections, rule of law, accountable government)
--Reform authoritarianism
--Reliance on external forces (joining NATO, EU)
--Alternative reform strategies based on democratic principles

16. Challenges to society:
Accumulation of capital
Unemployment and poverty
Dismantling of the welfare state
Zero-sum struggles for survival

17. If society accepts capitalism as something normal, it is better prepared to cope with these challenges
If society is not familiar with capitalism, it tends to reject the changes
In the first case, democracy aids in the transition
In the second case, it may prevent it

22. Which factors account for success in transition from state socialism to capitalism?
1. ACCEPTANCE OF CAPITALISM AS NORMAL.
The degree of development of market economy
Poland, Czech Republic, Hungary, Slovenia – elements of capitalism in the economy were present to a higher degree
Russia, Ukraine, Belarus, Romania, Bulgaria, Central Asian countries – market institutions were almost non-existent
So, it was a case of reversal, rather than a re-invention

23. 2. SOCIETY’S POTENTIAL TO INFLUENCE THE COURSE OF TRANSITION.
The strength of civil society
The stronger the civil society, the more the reform strategies have to take into account citizen reactions to the transition
As a result, the transition process is relatively less costly
Since the transition costs fall most heavily on the majority of society, the ability of citizens to defend their interests presents challenges to the transition

24. Multiethnic societies
3. ETHNOPOLITICS
Multiethnic societies
Patterns of and results of transition vary between different ethnic groups
Competition easily acquires ethnic connotations
Ethnopolitical mobilization leads to conflict
Monoethnic societies
Similarity of patterns
Competition not ethnically coloured
Ethnopolitical mobilization may shore up stability

25. Success is most likely:
In a country with embedded market institutions, a strong civil society, not significantly divided along cultural-ethnic lines
Failure is most likely:
In a country with embryonic market institutions, weak civil society, ethnically divided
Most countries are somewhere between these two extremes