Transition

Report on the paper

STRATEGIES  AND PRIORITIES

FOR REFORMS

by: RUDIGER  DORNBUSCH
in: TRANSITION TO A MARKET ECONOMY
 (Paris: OECD Publications, 1991) 181.


Krystyna Kostka:

 

"If reform proceeds hesitantly, economic collapse is certain and the market economy experiment becomes discredited before it even had a chance to be born."1 These opening remarks best summarize the transitional approach of Rudiger Dornbusch, namely shock therapy. The author adamantly claims that a gradualist approach, although seemingly less painful, may actually be harmful and if implemented could block the path for further reform. "Gradualism opens the door to an unstructured free-for-all..... The common experience is that economic disintegration takes much longer to come than one thinks, but that it ultimately happens much faster than one would have thought."2

The basis for this theory obviously lies in the vacuum hypothesis. Mr. Dornbusch insists that as Eastern Europe advances into the unknown world of the free market, old mechanisms of the centrally planned economy will be systematically dismantled, thus creating a dangerous void. If a country does not immediately rush forward in its reforms, it is evident that chaos will be the result; former structures will be removed and new structures will not yet exist to provide necessary legal, financial and governmental administration. Furthermore, the author suggests that mundane issues should not be pondered, namely the reinvention of a financial and legal system which already exists in Western Europe. Eastern Europe should simply adopt these adequately functioning systems as its own.

Following the traditional methods of shock therapy, it is also advised that reforms will be least difficult if the market is not influenced by political or societal pressures and is allowed to record the signals so necessary to change. Based on experiences in Latin America, monetary policy must be restrictive and wages must also be kept under firm control in order to avoid hyperinflation.

In conclusion, the transition process must be accomplished quickly, so that further progress will be feasible, a stable market economy must be developed and perhaps most importantly, the sacrifices of the people must be minimized. The sacrifices of people whose patience has already come to an end; people who are unwilling to support the vague promise of future reform.3

Although the above arguments are logical and persuasive, one can nevertheless formulate several criticisms of this approach by using the concrete example of Poland. Primarily it is important to question why such a deep recession exists after the shock therapists, more specifically Jeffrey Sachs, forecasted that the most important changes can be accomplished within a period of six months.

Obviously, it is naive to believe that years of programmed behavior and inertia can be changed by instituting reforms and soliciting the advice of western economists. Furthermore, although shock therapists prefer to link chaos with the gradualist approach, it is highly doubtful that necessary institutions will be formed quickly enough to replace those that are removed. Even if a western system is adopted, one cannot be certain that it will be effective in the long run as it is difficult to impose a completely foreign system of laws that will gain credibility. Quite frankly, the countries of Eastern Europe would like the opportunity to create their own new order, based upon their own history and culture.

Mr. Dornbusch even ascertains that integration with Western Europe would advance the East culturally and politically. On closer inspection this idea is revealed as preposterous. Instead of accusing the Eastern European countries of intellectual stagnation, western economists must realize that some of their innovations are quite helpful, and accept many institutions that already exist. Finally it is difficult to believe that the experiences of Latin America will provide much insight as the macroeconomic situations in these two regions prior to stabilization were completely different.

In Poland, after personal observation, it is evident that although shock therapy is responsible for much progress, several crucial mistakes have been made.

The first of these is the overly restrictive monetary and wage policies. It was inhumane to imagine that people would survive the transitional years as much of their monetary overhang was depleted during the hyperinflation of the period prior to this. Furthermore, nothing is being done to correct monstrous wage inequalities. While industrial workers are being appeased by small increases other state workers, namely teachers and doctors, must be satisfied with nothing. It is important to note that in most cases industrial workers are already earning twice the salary of many professionals.

I would also argue that a decline in living standards has occurred, but certainly not among the elderly living on more than adequate pensions or among the rural population which frequently supplements its income with other work; this decline has occurred among professionals who continue to subsist on East European salaries while paying Western European prices for consumer goods. (These observations are based upon discussion with individuals representing both sectors of the population, both professsional and industrial and on various articles which I have not been able to find in the US).

Finally, perhaps the most important mistake was the assumption that attitudes would change in accordance with reforms. The same lack of initiative that existed during the communist years still exists today in all institutions from factories to universities. Private enterprise still remains a grey area where legal dealings frequently intertwine with the illegal due to programmed attitudes about the shadiness of business and legal loopholes. In conclusion, I would venture to suggest that reform will last many more years than the shock therapists expected. A market can be implemented, goals can be set and accomplished but in my view reforms will last until a new generation of Eastern Europeans come to power, a generation raised in a capitalist society, lacking the communist ideals that unfortunately have become second nature to many people.

FOOTNOTES

  • 1 Rudiger Dornbusch, " STRATEGIES AND PRIORITIES FOR REFORM." TRANSITION TO A MARKET ECONOMY (Paris: OECD Publications, 1991) 181.

  • 2 Rudiger Dornbusch, 1991, 170.

  • 3 Rudiger Dornbusch, 1991.

 

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