The Emergence of Market Economies . ill Eastern Europe EDITED BY Christopher Clague and Gordon C. Rausser I] BLACKWELL Cambridge MA & Oxford UK j Copyright © Basil Blackwell 1992 First published 1992 Blackwell Publishers Three Cambridge Center Cambridge, Massachusetts 02142 USA 108 Cowley Road Oxford OX4 UF UK All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, no part may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher. Except in the United States of America, this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. Library of Congress Cataloging-in-Publication Data A CIP catalogue record for this book is available from the Library of Congress ISBN 1-55786-333-4 1-55786-334-2 (pbk) British Library Cataloguing in Publication Data A CIP catalogue record for this book is available from the British Library. Printed in the USA by Maple-Vail, New York This book is printed on acid-free paper Contents Contributors ................................................................. v Preface ..................................................................... vii 1 Introduction: The Journey to a Market Economy .................. 1 Christopher Clague Part I The Problem of the Transition 2 The Next Decade in Central and Eastern Europe ................. 25 Lawrence Summers 3 Evolution in Economics and in the Economic Reform of the Centrally Planned Economies ..................................... 35 Peter Murrell 4 The Hidden Path to a Successful Economy ........................ 55 Mancur Olson 5 Organization as Property: Economic Analysis of Property Law Applied to Privatization ...................................... 77 Robert Cooter 6 The Transition to a Market Economy ............................. 99 Alan Walters Part II Macroeconomic Policy and Financial Discipline 7 Taxation, Money, and Credit in a Liberalizing Socialist Economy ................................................ 109 Ronald McKinnon iv Contents 8 Stabilization and Liberalization Policies for Economies in Transition: Latin American Lessons for Eastern Europe ........ 129 Sebastian Edwards 9 The Design of Financial Systems for the Newly Emerging Democracies of Eastern Europe .................................. 161 Joseph E. Stiglitz Part III Government Policy Toward the Private Sector: Antitrust Policy and the Safety Net 10 Anti-Monopoly Policies and Institutions ......................... 187 Robert Willig 11 The Safety Net During Transformation: Hungary .............. 197 David Newbery 12 Institutions for the New Private Sector ........................... 219 Anne Krueger Part IV The Privatization Process 13 Privatization in East European Transformation ................. 227 Stanley Fischer 14 The Political Economy of Transition in Eastern Europe: Packaging Enterprises for Privatization ......................... 245 Gordon Rausser and Leo Simon 15 Privatization in East-Central Europe: Avoiding Major Mistakes ................................................... 271 Jan Winiecki 16 The Political Economy of Privatization: Poland, Hungary, and Czechoslovakia ................................................... 279 Scott Thomas 17 Strategies for the Transition ...................................... 297 Arnold Harberger 18 Institutions and the Transition to a Market Economy ........... 301 Andras Nagy Part V Conclusions 19 Lessons for Emerging Market Economies in Eastern Europe .... 311 Gordon Rausser References ................................................................. 333 Index ....................................................................... 347 Contributors CHRISTOPHER CLAGUE: Professor of Economics, University of Maryland; Director of Research, Center for Institutional Reform and the Informal Sector, College Park, Maryland. ROBERT D. COOTER: Professor of Law, University of California, Berkeley, California. SEBASTIAN EDWARDS: Professor of Economics, University of California, Los Angeles, California. Research Fellow, Institute for Policy Reform. STANLEY FISCHER: Professor of Economics, Massachusetts Institute of Technology, Cambridge, Massachusetts. Research Fellow, Institute for Policy Reform. ARNOLD C. HARBERGER: Professor of Economics, University of California, Los Angeles, California. ANNE O. KRUEGER: Professor of Economics, Duke University, Durham, North Carolina. Research Fellow, Institute for Policy Reform. RONALD I. McKINNON: William Eberle Professor of International Economics, Department of Economics, Stanford University, Stanford, California. PETER MURRELL: Professor of Economics, University of Maryland, College Park, Maryland. Research Fellow, Center for Institutional Reform and the Informal Sector. ANDRAS NAGY: Professor, Institute of Economics, Hungarian Academy of Sciences, Budapest. v vi Contributors DAVID M. NEWBERY: Professor and Director, Department of Applied Economics, University of Cambridge, Cambridge, England. Research Fellow, Institute for Policy Reform. MANCUR OLSON: Distinguished Professor of Economics, University of Maryland; Chair/Principal Investigator, Center for Institutional Reform and the Informal Sector, College Park, Maryland. GORDON C. RAUSSER: Robert Gordon Sproul Distinguished Professor, Department of Agricultural and Resource Economics, University of California, Berkeley, California. President, Institute for Policy Reform. LEO K. SIMON: Department of Agricultural and Resource Economics, University of California, Berkeley, California. JOSEPH E. STIGLITZ: Professor of Economics, Stanford University, Stanford, California. Research Fellow, Institute for Policy Reform. LAWRENCE SUMMERS: Chief Economist, and Vice-President for Research, The World Bank; Professor of Economics, Harvard University, Cambridge, Massachusetts. SCOTT THOMAS: Principal Economist for Eastern Europe, Europe and Near East Bureau, Agency for International Development, Washington, D.C. SIR ALAN WALTERS: Vice Chairman, American International Group, Washington, D.C. JAN WINIECKI: Professor of Economics, Institute of Production, Aalborg University, Denmark, and President, Adam Smith Research Center, Warsaw. ROBERT D. WILLIG: Professor of Economics, Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, New Jersey. Preface Almost everyone now agrees that the government domination of economic life in Soviet-type societies largely explains their economic collapse. With the sweeping repudiation of communism - even those who announced the failed Soviet putsch of August, 1991, did not use the word - government control over the once-communist societies has diminished. All of the ex-communist coun­ tries have introduced some liberalizing measures and the first and largest com­ munist government - the Union of Soviet Socialist Republics - has been liter­ ally dissolved. Thus the comprehensive governmental management of the economy that led to the economic failure of the communist societies has been cut back. Though this scaling down of government control was expected to improve economic performance, the national incomes of most of these societies have, in fact, fallen - drastically in some cases. Why? If too much government control of the economy brought about the failure of the communist economies, why did economic performance not improve as communism was repudiated and govern­ ment control cut back? Once the drop in national income after the repudiation of communism was apparent, it became commonplace to suppose that a transition from one set of economic arrangements to another inevitably reduces output. Not so. Major changes in economic institutions and policies are not regularly associated with drops in national income. The economic liberalization that Deng introduced in China not long after the death of Mao promptly generated large increases in pro­ duction. After the defeat of the right-wing dictatorships of World War II, it was almost universally assumed that the German and Japanese economies would take decades to recover from wartime devastation, changed boundaries, and totalitarian controls, yet they soon enjoyed economic miracles. Even the Soviet- vii 7 viii Preface imposed transition to communism in East-Central Europe, for all its tragedy and brutality, was not associated with at least any protracted reduction in output. At a loss to explain the severity of the economic problems after the collapse of communism, many seek refuge in metaphors: "it is easy enough to make fish stew out of an aquarium, but you cannot make an aquarium out of fish stew." But why should a transition from communism to a market economy be more dif­ ficult than the transition the other way? The conventional wisdom is that mar­ kets do not need to be painstakingly constructed by government - they emerge spontaneously. Indeed, many argue that they work best with laissez faire. Cer­ tainly the market economy that led to the Industrial Revolution, like the more rudimentary markets that preceded it, was not the result of any government plan to create a market economy. A communist economy, by contrast, has to be cen­ trally planned and implemented - organizing