Laszlo Csaba:  Capitalist Revolution in Eastern Europe
by Martin Schrenk

Scholars living in the once socialist, now postsocialist, countries are intimately familiar with the history and functioning of their economic system. That empirical evidence is extensively used in Laszlo Csaba's new book, The Capitalist Revolution in Eastern Europe: A Contribution to the Economic Theory of Systemic Change.

Taking a "second-generation" perspective on transition, the author abandons any illusion that by following a reasonable scenario, reforms can be accomplished quickly, and at predictable social and economic costs. He disagrees with any radical masterplans—"grand designs"—that lack historical and systemic insight. He also decries inappropriate comparisons, such as equating the "transformation" of postsocialist countries with "reform" in semi-industrialized capitalist countries. While in the latter, efforts focus on improving the prevailing system, in order to preserve it, "transformation" implies much more; it is, rather, a "modernization" that implies the destruction of the traditional economic and political order, and its replacement with multiparty democracy, a new set of coordination mechanisms, as well as openness to economic, technological, and cultural exchange with the outside world, reasonable monetary stability, and development of a vibrant private sector to sustain economic growth.

Csaba does not regard the misguided use of "reform" for "transformation" as just a quibble over terminology. In his view, "both sides" (presumably meaning both advisers and governments of transition countries) have underestimated the difficulties related to the multidimensional character of modernization. In applying theories and translating them into policy advice, advisers and decisionmakers should pay more attention, warns the author. The problem is not an overdose of sound macroeconomic policies, he continues, but that poorly digested, contestable, or fully untested macroeconomic theories were combined with total disrespect for the peculiar qualities of transforming economies. No wonder that these countries' first encounter with mainstream economics brought only meager results, he concludes.

He also makes clear that it is not the mainstream economics that should be blamed for the mistakes: "Mainstream economics does not call for confusing stabilization with institutional reform. It does not call for disregarding the environment in which it is applied, since it is not concerned with application at all." But Csaba also rejects "pragmatism" as an alternative approach. In his view, it lacks a "compass" with which to orient the countries as they move from one economic system to another.

Csaba argues that in the transformation process—which even in the most advanced Central European countries could take 15 to 20 years—balancing the budget should remain a long-term concern. But he warns against simplistic attempts to keep inflows and outflows in balance in each calendar year. He recognizes the dangers of inflation, and that price stability is the best way to protect the socially vulnerable, especially the elderly and the disabled, to promote savings, and to make investment decisions simpler. But he emphasizes that while hyperinflation will prevent transformation, a moderate rate of inflation does not call for stabilization as the inevitable first stage of a transformation strategy: "the modernization strategy could not, but also need not, afford the luxury of a single digit inflation." But if the transition countries' fiscal imbalances will be eliminated only in the medium to long run, and if moderate inflation is there to stay, a stable exchange rate for a lengthy period is not sustainable, he asserts.

The author rejects the notion that universal privatization at maximum speed is self-evidently the most desirable approach. As long as the institutional

prerequisites are not available, such as an efficient financial market and effective corporate governance under private ownership, full-speed privatization is not tempting, argues Csaba. He views voucher privatization as "populist" and suggests "equally cheap but fairer ways of paying one's electorate." Csaba disputes the assertion that managers of state-owned enterprises are inherently inept to run their firms efficiently. He sees anecdotal evidence that many managers, once they accept hard budget constraints as definitive, and recognize that privatization offers them long-run opportunities, do make the necessary adjustment. Consequently, he only mildly disapproves spontaneous privatization, appreciating its "evolutionary" potential for creating a vibrant private sector.

Beyond his forceful critique of mainstream views, Csaba offers, as an alternative, an "evolutionary" approach (in Hayek's and Popper's sense) based on "organic," "incremental" changes resulting from "spontaneous" decisions by autonomous agents. For the reader eagerly awaiting an alternative "vision" after the extensive critique of familiar blueprints, this message may appear disappointingly general. The author, however, would probably argue that any other than such a low-key posture would be a relapse to "social engineering," deduced from a "theory of transformation"—the very approach that the proponents of the evolutionary paradigm reject. This would follow from his thesis that "shock-therapy and gradualism, although in pursuit of converse ideological agendas," both provide detailed top-down prescriptions for institutions, focus excessively on details, and suppress spontaneity—common characteristics of "social engineering."

Csaba's prescription for arriving at a more operationally relevant methodology reflects his concept of "modernization" as the essence of transformation, as mentioned earlier. In his view, there is no room for a distinct economic "theory of transformation" with cross-country validity and endowed with predictive powers, from which "optimal" speed and sequence for specific countries can be deduced. Instead, he calls for a multi-disciplinary approach that addresses the social and cultural environment of transformation, such as descriptive and comparative economics, institutional economics, political economy, history, law, and sociology. The yawning gap between abstract theories and utopian designs of transformation, and aimless muddling-through, needs to be filled by patient, multidisciplinary dialogue between scholars and practitioners, Csaba suggests.

This evolutionary approach assumes a sound relationship between a government and its people. Public trust should be based on a fairly simple but stable set of institutions and rules and on efficient conflict management. Stability of expectations is also important and requires credibility of policies and diminishing fears of policy reversal. This may be attained through laborious and time-consuming consensus building, in which the challenge is to persuade social partners and a large part of the public of the virtue of following sensible economic policies, instead of jumping at the promises of the latest wizards offering swift, painless economic cure-alls.

Csaba's very explicit criticisms and rather vague proposals will probably be contested by many readers; similarly, his occasionally caustic or dismissive language will not meet with universal applause. He portrays as "quick fixes" comprehensive first-generation reform blueprints, and labels specific proposals as "ideological," "reductionist," or "naive." Some chapter subtitles promise more than the author delivers, such as "The Operationalization of Transformation in Functional Terms" or "Towards a Theory of Transformation." But the author makes no secret of his limited purpose: it is to "contribute to, rather than settle the international debate on this particular area of general economics." And indeed, this book will be rewarding reading for those who are not satisfied with the conventional wisdom and are looking for new answers to the formidable puzzles of transformation.

(Laszlo Csaba's The Capitalist Revolution in Eastern Europe: A Contribution to the Economic Theory of Systemic Change, is published in the Studies of Communism in Transition Series, Edward Elgar Publishing, Aldershot, U.K. and Brookfield, U.S., 1995, 342 p.

Martin Schrenk is Economist in the Transition Economy Division, the World Bank.