Political constraints need to be taken into account in design of transition strategy

• Pages: 231-233

Page 231

The transition from socialism to capitalism, and the comprehensive transformation of the economic institutions of the countries concerned, is surely one of the most important economic events of the twentieth century. According to Gérard Roland of the Free University of Brussels, speaking at an IMF Institute seminar on July 6–7, future economic historians will probably remember the twentieth century for the contest that took place between the socialist and the capitalist economic systems.

The large-scale institutional changes that transition requires are among the most complex economic and social processes one can imagine, Roland said, but because the collapse of central planning in many countries was sudden and unexpected, no theories or empirically tested models for dealing with transition existed to which policymakers and strategists could turn for guidance. Given these complexities and the important stakes for hundreds of millions of people, economists cannot claim to know the right answers. The experience in policy advice to transition countries, Roland acknowledged, has been “particularly humbling.” It is important, he said, that research on transition issues be collated and systematized for the benefit of policymakers in transition countries as well as for the insights such research can provide to the study of economics at large.

Roland devoted the first part of the seminar to the political economy of reforms. The second part focused on the role of soft budget constraints (see box, pages 232–33).

Political constraints

Transition is an economy-wide process involving winners and losers. Thus, even if aggregate welfare is enhanced, political constraints are of crucial importance. These constraints, Roland said, have played an important role in the transition process in many countries, influencing both the design and the implementation of policy and affecting its outcome as well. Privatization strategies, for example, have differed markedly, depending on the political situation. In the Czech Republic, privatization was undertaken quickly, the object being to distribute assets and put ownership into the hands of outsiders as quickly as possible, leaving the new owners to undertake the necessary restructuring. In Russia, assets and ownership of privatized state enterprises...