Studies in Contemporary Economics Editorial Board D.Bös B. Felderer B. Gahlen H. J. Ramser K. W. Rothschild Hans-Jürgen Wagener (Ed.) The Political Economy of Transformation With 8 Figures Springer-Verlag Berlin Heidelberg GmbH Professor Dr. Hans-Jiirgen Wagener Europa-Universităt Viadrina Gro6e Scharmstr. 59 D-15230 Frankfurt/Oder, FRG Die Deutsche Bibliothek -CIP"Einheitsaufnahme The political economy oftransformation / Hans-Jiirgen Wagener (ed.). -Heidelberg: Physica-Verl., 1993 (Studies in contemporary economics) ISBN 978-3-7908-0738-7 ISBN 978-3-642-52404-2 (eBook) DOI 10.1007/978-3-642-52404-2 NE: Wagener, Hans-Jiirgen [Hrsg.] This work is subject to copyright. All rights are reserved, whether the whole orpart ofthe material is concemed, specifically the rights oftranslation, reprinting, reuse of illustrations, recitation, broad casting, reproduction on microfilms or in other ways, and storage in data banks. Duplication ofthis publication or parts thereofis only permitted under the provisions ofthe German Copyright Law of September9, 1965, in its version ofJune 24,1985, and a copyright fee must always be paid. Violations falI under the prosecution act ofthe German Copyright Law. © Springer-Verlag Berlin Heide1berg 1994 Originally published by Physica-Verlag Heide1berg New York in 1994 The use of registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such nal!1es are exempt from the relevant protective laws and regulati ons and therefore free for general use. 8817130-543210 -Printed on acid-free paper Preface Transformation has become the major puzzle of economics for the last decade of this century, and not of economics alone: it has so many ideological, cul tural, juridical, social and political ramifications that it will take some time to construct a framework within which the process can be analyzed proper ly. Economists usually discern three major aspects of transformation, macro economic stabilization, institutional reform and restructuring. Since transfor mation was not only caused by political will, after the demise of more or less totalitarian regimes, but also by a manifest economic crisis, the success of the operation will be judged by its ability to bring the transforming economies back on a road of self-sustained economic growth. Macro-economic stabilization is considered a precondition of growth as well as of institutional reform and restructuring. It is theoretically understood best, and can be implemented rather directly. This is much less true of institutional reform and restructuring. Where they are functioning well, competitive market economies have emerged over a long period of time. Nowhere do they exhibit theoretically pure forms, and economic theory does not understand well the process oftheir constitution. However, it seems evident that institutional reform is also mainly a task of policy. As for restructuring, there is much less consensus that this is the case. The schools of thought differ in their opinion about the role of the state in guiding production and investment decisions. Restructuring is left for the greater part to the new heros of the market economy, the entrepreneurs, even if there are not any about which, with prevailing state ownership of big enterprise and no pool of experienced captains of industry, cannot be other. Yet restructuring is the sine qua non for self-sustained economic growth. The pattern of the economic transformation in Central and Eastern Europe is dictated by the political situation, namely the collapse of the old political system with the ensuing necessity to constitute a new one at the same time as the economic system. Thus, the whole societal organization is in motion which certainly does not ease the task of economic transformation. Perestroika has badly used the five years it was given and has failed to get institutional reform and restructuring from the ground. It seems as if China has learned the lesson and uses the still existing authority of the state to be more successful in this respect. One may be inclined to speak of a Sauth-East Asian model of transformation characterized by an authoritarian state as motive force. In an authoritarian political context, or under hegemonic leadership, the problern of transformation can perhaps be approached as a decision theoret ic problem, the determination and implementation of an optimal policy. In an VI Preface evolutionary context such an approach would be rather misleading. The present decision making situation in Central and Eastern Europe lies between delib erate planning and spontaneaus evolution which could be seen as first sign of normalization. In consequence, the process of decision making matters. This has been made quite clear by Vaclav Klaus: "When I first became involved in the reform process of Czechoslovakia, I believed that the design and sequencing of reform could be controlled. Having been a part of the process for some time, I am now convinced that I was wrang" ( quoted in Rausser 1992: 314). This is the central topic of the present volume: the political economy of transformation. The book grew out of the 4th Colloquium on Transfomation, held at the Werner-Reimers-Stiftung, Bad Homburg, in early January 1993. Since 1989, a conference group with a stable core and varying guests tries to assess the problern of transformation from a rather theoretical point of view, i.e. no direct policy consulting is intended. Results ofthe earlier discussion have been published (see Wagener 1993). In the present volume, the focus of interest has changed only slightly, whereas the stock of experience with transformation has grown with the years. This, of course, will still be the case for some time to come: generalizations in transformation economics may turn out to be a perishable good which, however, should not impede us to Iook for them. The reader will notice that two key words repeatedly make their appear ance in the contributions to the book, paradox and dilemma. This refiects the extreme complexity of the present political and economic situation in Central and Eastern Europe and a certain helplessness of standard theory with it. Thus we see the actors of transformation continuously entangled in dilemmas and the theorists trying to show them a way out confronted with paradoxes. From a long-run point of view, this may be a positive development. For it makes clear that innovations are needed, in practice as weil as in theory. The study of transformation has been a special concern of the Volkswagen Stiftung, Hannover. Tagether with the Werner-Reimers-Stiftung this institution has financially supported the Colloquium on Transformation. The help is grate fully acknowledged. As with the earlier volume, the production ofthe book was assisted by R. Ufihausen, Osteuropa-Institut München. Frankfurt/Oder, August 1993 H.-J. Wagener References Rausser, G.C., 1992, "Lessons for Ernerging Market Economies in Eastern Eu rope", in: Ch. Clague and G.C. Rausser (e ds. ), The Emergence of Market Economies in Eastern Europe, Cambridge, Mass., Blackwell: 311-32. Wagener, H.-J. (ed.), 1993, On the Theory and Policy of Systemic Change, Heidelberg, Physica. Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Part I Introduction Chapter 1 Transformation as a Political-Economic Process H.-J. WAGENER............................................... 3 Part li The Political-Economic Theory of Transformation Chapter 2 Capitalism by Democratic Design? Democratic Theory Facing the Triple Transition in Centrat and Eastern Europe C. ÜFFE....................................................... 25 Chapter 3 Transition to a Market Economy as the Transformation of Coordination A. RYLL. .. . .. . . . . .. ... .. . . .. .. . .. . . .. .. . . . .. . . . . .. . . . . . . . . . . . . 45 Chapter 4 On the Convergence of Formal Rules: A Reformulation of Efficiency Arguments J. DE BEUS. ... .. .•.. ..... .. .. ....... .... ... .. .. .. ... .. .. .. .. .. 61 Chapter 5 Which Institutionalism? Searching for Paradigms of Transformation in Eastern European Economic Thought J.M. Kov.Acs................................................. 85 Vlll Contents Part 111 Policy Aspects of Transformation Chapter 6 On the Normative Theory of Transformation L. CSABA... .. . .. .. .. . . . . . . . . . .. ... . . .. .. ... .. .. .. ... .. . . .. .. .. 97 Chapter 7 Some Reßections on Privatization as a Means to Transform the Economic System: The Western Experience B. DALLAGO................................................... 113 Chapter 8 The Paradox of Transformation: An Evolutionary Case for Rapid Privatization I. GROSFELD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Chapter 9 Tax Policy Choices in New Market Economies Administrative Restrietions L. MUTEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 Chapter 10 Perverse Effect of Fiscal Adjustment in Transition Economies G.W. KoLoDKo. .. .. ... .. . . .. ... .. . . .. .. ... .. .. .. ... .. .. .. .. .. 175 Chapter 11 Industrial Restructuring and Microeconomic Adjustment in Poland. A Cross Sectoral Approach S. ESTRIN and X. RICHET..................................... 189 Part IV The Alternative or the Odd Man Out? Chapter 12 China's Transition to the Market: A Paradox of Transformation and its Institutionalist Solution C. HERRMANN-PILLATH....................................... 209 Part I Introdu ction Chapter 1 Transformation as a Political-Economic Process HANS-JÜRGEN WAGENER • 1. Introduction The last years economics has been confronted with a new puzzle: the transfor mation of an economic system. The profession has enthousiastically adopted the challenge and produced a ftood of publications. The question of objectives, of the final state to be reached has been treated extensively. The system el ements or institutions which are required to support a fairly efficiep.t market process are rather weil known. There is much less unanimity in the profession about the process of transformation, the sequencing of steps, the pace, the appropriate procedures to liberalize, to monetize and to privatize. Of course, economic theory has been preoccupied with comparative statics rather than with dynamics. But dynamics in itself is less accessible for general theory in that the process, other than its objectives, is highly dependent upon the his torical initial conditions which differ from country to country. The process of the intended system transformation, in the present historical case the transition from a socialist planned economy to a capitalist market econ omy, is neither performed instantaneously nor is it determined unambiguously by the desired end state. Where a competitive system is working successfully, it is a highly complex system which has developed from the interaction of social, political and economic forces. The competitive system is the result of political bargains and deliberate decision-making shaping the framework of economic activity. At the same time it is also the result of behavioural adaptations of economic subjects who more or less spontaneously adjust the framework to their actual needs (cf. Wagener 1992b). Transformation is a concrete process leading to the emergence of a new economic system. It can only be understood and reconstructed as a political-economic process. One of the major problems of analyzing the origins of socio-economic insti tutions may be seen in the fact that there is no unique process generating such institutions. So, there are different theories explaining their development ( cf. Wagener 1992a, de Beus 1994) which arenot in all instances mutually exclu sive. They rather are complementary. If we now use concepts from bargaining • Europa-Universität Viadrina Frankfurt/Oderand Rijksunivemiteit Groningen. Helpful support from the Institute for Human Sciences, Vienna, is acknowledged. The author has got valuable suggestions from H. Hoen and semin&l'B at Trento, Tübingen, and Vienna.