Book of the Month

Marie Lavigne: The Economics of Transition: From Socialist Economy to Market Economy

by Martin Schrenk

In a market that is flooded with ad hoc collections of diverse country-focused, issue-specific papers (pieced together by their editors' heroic efforts), this book takes a pointedly different approach by presenting a cross-country, cross-issue synopsis. Part I develops the concept of "real socialism"—in contrast to "ideal socialism," as an abstract model of perfect internal consistency at par with the textbook version of capitalism. The author presents a synthetic prototype economy that combines features relevant "most of the time" (in fact from the 1960s to the 1980s, when a series of piecemeal reforms was already under way) to "most countries" within this group (just briefly citing country specific features). Part II deals with the legacy of real socialism for the formulation of effective transition strategies and policies.

"In the East economists and politicians alike endorse the fundamentals of neo-classical economic science. Their Western advisers eagerly support this attitude, especially as the standard adjustment and stabilization packages which they recommend are based on the same theoretical assumptions," the author points out. She expects that "the disillusions in the transition process will lead to a more complex approach, closer to the political economy concept." In this context, "knowledge of the past helps understand the inertia of the present." She suggests that inspiration be sought "in new approaches, such as the institutionalist one, and the combination of economics with political science and history."

The Past: Real Socialism

Why did real socialism collapse, and why did this happen at this particular time? Although the efficiency gains of the system were declining continuously since the 1950s and had all but disappeared by the mid 1980s, there was no specific economic reason that triggered the collapse. (One could add that most capitalist countries, whether with mature democratic or astute authoritarian governance, had weathered even more severe crises and longer stagnation periods.) In the author's view the system had the potential to "muddle through" indefinitely. The kiss of death was delivered by the breakdown of the command and control monopoly of the communist parties.

In the Soviet Union, Gorbachev let the lid come off by permitting discussions on the dismal economic performance of earlier periods, and on the stifling party control engulfing the daily life of Soviet citizens. Glasnost encouraged open criticism, public discussions, and publication of alternative points of view. The party rapidly lost control over the unfolding process. At some point the "Brezhnev doctrine"—the Soviet Communist Party's claim to ideological and political leadership over the parties in the other socialist countries—was discounted as no longer legitimate. In turn, the rapid disintegration of the socialist governance in the "brother countries" undermined the Soviet Communist Party's claim to represent the leading force of society. The emergence of the administrative and managerial elites exploiting the opening power vacuum, the rapid disintegration of the traditional economic system, as well as the growth of the parallel economy, were the byproducts of the political disintegration.

The parallel or "shadow" economy, regarded by many analysts as an invaluable breeding ground for entrepreneurship during socialism, is one of the most harmful legacies of socialism, claims the author. She argues that the shadow economy created the institutions, the resources, the mentality, and—most important—the networks that permitted the explosive growth of corruption and crime, once central control by the party-state began to wither away. In agriculture for instance, the parallel economy was able to achieve a disproportional high share only through massive appropriation of inputs from the state and the collective sector.

Present: Transition in the Making

The author links the rapid emergence of new wealth to the symbiotic relationship between the nomenclatura and the parallel economy. During the early and mid-1980s, members of the bureaucratic and managerial elites were not yet able to accumulate tangible personal wealth or to engage in inconspicuous consumption. But once these formal and informal barriers were torn down, the already existing networks of informal cooperation within the state sector and across its borders were refocused to serve rapid accumulation of wealth.

Quick mass privatization does not create efficient corporate governance by itself, claims the author, who terms "illusionary" the hope that a capitalist entrepreneurial elite of owners will emerge spontaneously. "Spontaneous privatization" is, in her view, irrelevant, for there are not enough new owner/managers who can replace the previous managerial class. But, in some sense, all forms of privatization are bound to end up as "spontaneous privatization," with governance largely resting with the established insiders.

If the transition is viewed as a continuing process of indefinite duration—clearly, this is the author's position—then a transition theory is essential to avoid misplaced analogies related to other cultural models. The author locates such theory squarely in the domain of microeconomics. She lists a number of analytical paradigms that are relevant—such as theories of property rights, transaction costs, industrial organization, incentives, principal/agent relations, decisionmaking in the context of bounded rationality, strategic behavior, and asymmetric access to information. In her view transition economies will for an indefinite period remain mixed economies, displaying a specific inertia of the former system. Therefore, "state desertion" of its shareholder role would be destructive. Instead, governance by the state will have to focus on nudging managers toward an adaptive path to entrepreneurial attitudes. The author advocates the prudent use of "industrial policy," without discussing its function and scope in any detail.

Bottom Line

The first part of this book, with its superb overview of the initial conditions that created countless institutional constraints for the transition process, and the second part, the intricate intersections between different subject areas, are invaluable to analysts that are newcomers to the world of transition. The book's quality belies the modesty of its author, who wants her work to serve merely as a "textbook."

In reading the book, however, one cannot avoid asking whether it delivered on the promise—implied in the sequencing of the two parts—of pointing to relevant prescriptions for the future through analysis of the past. From that perspective, the book is a mixed success. The paradigms it proposes—the political economy for the past, and microeconomic niche theories for the present—do not coincide. For instance, the presentation of the CMEA system of mutual trade in the first part is perhaps the most brilliant summary ever written. However, it is by now history. Similarly, although the causes of the collapse of real socialism will rightly engage a generation of historians, it is not immediately clear whether the author's hypothesis will contribute to finding a feasible transition path. And while the author explicitly advocates a "theory of transition," she does not progress beyond listing some of its ingredients. Perhaps the most fruitful "political economy" hypothesis—though it must still be backed up by evidence—is the symbiosis during the 1980s of the parallel economy and the nomenclatura which in the 1990s merged into a new class of wealth-holders.

Marie Lavigne, The Economics of Transition: From Socialist Economy to Market Economy, New York, NY, St. Martin's Press, 295 p. The author is Professor at the University of Pau, France. Martin Schrenk is Consultant, Transition Economics Division, the World Bank.