Commentary: Transition in context-I

By SAM VAKNIN, UPI Senior Business Correspondent

SKOPJE, Macedonia, Dec. 23 (UPI) -- The implosion of communism was often presented -- not least by Francis Fukuyama in his celebrated "The End of History" -- as the incontrovertible victory of economic liberalism over Marxism. In truth, the battle raged for seven decades between two strands of socialism.

Social democracy was conceived in the 19th century as a benign alternative to the revolutionary belligerence of Marx and Engels. It sparred with communism -- the virulent and authoritarian species of socialism that Marxism has mutated into. European history between 1946-1989 was not a clash of diametrically opposed ideologies, but an internecine war between two competing interpretations of the same doctrine.


Both contestants boasted a single market -- the European Union and COMECON, respectively. In both the state was heavily involved in the economy and owned a sizable chunk of the means of production, though in the Soviet Union and its satellites, the state was the economy.


Both sported well-developed, entrenched and all-pervasive welfarism. Both East and West were stiflingly bureaucratic, statist, profoundly illiberal and comprehensively regulated. Crucially, the West was economically successful and democratic while Russia evolved into a paranoid nightmare of inefficiency and gloom. Hence its demise.

When communism crumbled, all of Europe -- East and West -- experienced a protracted and agonizing transition. Privatization, deregulation, competition and liberalization swept across both parts of the continent. The irony is that central and east Europe's adaptation was more far-ranging and alacritous than the west's.

The tax burden -- a measure of the state's immersion in the economy -- still equals more than 40 percent of gross domestic product in all members of the European Union. The countries in transition, from Russia to Bulgaria and from Estonia to Hungary, are far more economically liberal than France, Germany and even Britain -- let alone the nations of Scandinavia.

An increasingly united Europe has opted for "capitalism with a human face" -- the democratic isotope of socialism (sometimes with a touch of corporatism). But it now faces the challenge of the Anglo-Saxon variety of the free market. Nowhere is this ideological altercation more evident than in the countries formerly behind the iron curtain.


Long before Enron and WorldCom, the tech bubble and Wall Street's accounting frauds and pernicious conflicts of interest -- transition had exposed the raw and vulnerable nerves running through the foundations of Anglo-Saxon capitalism. Eastern Europe is a monument to the folly of unmitigated and unbridled freemarketry.

Transition has given economists a rare chance to study capitalism and economic policies from scratch. What's more important -- free markets, institutions, education, democracy or capital? Central and Eastern Europe became a giant lab in which to peruse policies pertaining to criminality, private property ownership, entrepreneurship, privatization, income distribution, employment, inflation and social welfare.

Superficially, the debate revolved around the scientific rigor and usefulness -- or lack thereof -- of the "Washington Consensus." Opposing monetary and fiscal policies, free trade vs. protectionism, capital controls and convertibility -- these occupied the minds and writings of all manner of economic and development "experts" in the first decade after the fall of the Berlin Wall.

Yet, deep underneath, transition -- perhaps because it was so thoroughly botched -- taught us unforgettable lessons about markets and the way they work, namely that "objective," "mechanical" capitalism is a mirage.

Perhaps the most important moral is that, like all other economic processes, transition is, mostly, in the mind. Successful capitalism requires education and experience. The blind in Eastern Europe were led by the one-eyed. Capitalism was presented -- especially by Western protagonists of "shock therapy" -- as a deus ex machina, a panacea, guaranteed to transport the region's derelict economies and destitute people to the kitschy glamour of the tacky soap operas that flooded their television screens.


Bedazzled by the alleged omnipotence and omniscience of the "invisible hand," no one predicted the utter meltdown that ensued: the mass unemployment, the ubiquitous poverty, the glaring abyss between new rich and always poor, or the skyrocketing prices even as income plummeted. Nor were the good parts of the new economic regime understood or explained: private property, personal profit, incentives.

The dangers of transition were flippantly ignored and the peoples of central and eastern Europe were treated as mere guinea pigs by eager Western economists on fat retainers. Crime was allowed to hijack important parts of the post-communist economic agenda, such as the privatization of state assets. Kleptocracies subsumed the newborn states. Social safety nets crumbled.

In their vainglorious attempt to pose as accurate and, thus, "respectable", scientists, economists refused to admit that capitalism is not merely a compendium of algorithms and formulas -- but mainly a state of mind. It is an all-encompassing, holistic, worldview, a set of values, a code of conduct, a list of goals, aspirations, fantasies and preferences and a catalog of moral do's and don'ts. This is where transition, micromanaged by these "experts" failed.

The mere exposure to free markets was supposed to unleash innovation and entrepreneurship in the long-oppressed populations of Eastern Europe. When this recipe bombed, the West tried to engender a stable, share-holding, business-owning, middle class by financing small-size enterprises. It then proceeded to strengthen and transform indigenous institutions. None of it worked. Transition had no grassroots support and its prescriptive -- and painful -- nature caused wide resentment and obstruction.


(Part 2 of this commentary will appear Tuesday. Send your comments to: [email protected].)

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