Article For The Independent

25 October 1996



Economies In Transition

Roger Kerr

ECONOMIES IN TRANSITION

Since the collapse of communism in the former Soviet Union and Eastern Europe, the countries of that region have experienced very mixed fortunes. Some - such as the Czech Republic, Poland, Hungary, Estonia and Slovakia - have travelled a remarkable distance down the road towards a market system based on stable democracy and the rule of law. Others - like Ukraine, Romania and Bulgaria - have floundered in an insular post-communist inertia, and appear to be going nowhere very fast.

Yet all of these countries have faced inherent problems which - even with luck and a fair wind on their side - inevitably meant that the transition to market liberalism would be a testing one.

Each is having to undergo the cultural change of shifting from a command-based, centrally-managed economy to an economy based on the institutions of market exchange. Completely new roles and tasks must be learnt, both in government and in the private sector.

In a market economy such as ours, the clarity of the laws and the certainty of their enforcement is crucial if transactions are to take place in an environment of trust and reasonable certainty. In the ex-communist countries, legislatures are having to acquire the skill of making clear, stable and mutually consistent laws - an art difficult enough for many western legislatures and much more difficult for ex-communist countries, many of which have hardly known the rule of law at any stage of their history.

It is a similar learning process for judiciaries. Almost without exception law enforcement is a problem in the ex-communist countries. After being tools of the Communist Party, and often morally compromised, judges are being required to learn how to apply the law sensibly in what are - to them - quite novel circumstances.

Players in the private sector are also having to acquire the cultural habits needed by participants in a market economy, at the very time that the laws are often rudimentary and poorly enforced. In these circumstances, the costs of doing business are inevitably high.

There is another, more fundamental, problem that all of the ex-communist countries in transition share - the corrosion of the moral order that occurred, to varying degrees, under communism. This disintegration was an inevitable feature of communist society, and is a factor much stressed by analysts such as the eminent Polish economist Jan Winiecki.

The pressures on moral standards under communism were extreme. Getting on in business was not about successfully satisfying the customer. It was about toeing the party line, keeping your mouth shut and satisfying the authorities.

The penalties for independent thought and action were heavy. Life was a struggle to survive, and for large sections of the populations of communist countries 'getting by' was reduced to what the Soviet dissident Zinoviev aptly termed 'technical rules of survival'. Traditional morality was largely irrelevant.

Technical rules of survival could - and easily did - involve spying on others, lying to one's superiors, doing as little work as possible, pilfering on the side, and bribing officials (who of course had their own rules of survival) to turn a Nelsonian eye. This amorality appeared to grow with time. In the mid-seventies, it is estimated that around 40 percent of shopkeepers in Czechoslovakia were cheating their customers. A decade later this fraction was probably over 50 percent. In Poland it was thought to be 60 percent, and in the Soviet Union 80 percent.

This climate of widespread amorality - in which other people were there to be ripped off if possible - made the transition to a market system doubly difficult. Because most relationships in a market economy are long-term and involve trust, highly-opportunistic behaviour is generally not rewarded. Indeed a market economy tends to encourage honesty, fair-dealing and good faith. Only in places such as the bazaar, where most customers may not be returning to a particular seller, are there incentives to drive as sharp a bargain as possible.

Winiecki argues that, due to the corroded moral order of ex-communist countries, they became much more like bazaar economies in the early stages of liberalisation. For many who had been following merely technical rules of survival under communism, the obvious thing to do was to rip off the nearest person and disappear. Needless to say, such behaviour - through eroding trust - further increased transaction costs in these economies.

Corrosion of the moral order also helps explain the recent succession of electoral outcomes. Reformist governments, often involving figures who had earlier shown remarkable courage in standing up to communist regimes, have been voted out of office in favour of former communists or populist figures. Boris Yeltsin in Russia and Vaclav Klaus in the Czech Republic have been among the very few reforming politicians to stand out - just - against this tide.

This trend has occurred even in countries where economic liberalisation has, on virtually all objective measures, already made people better off.

What exactly is happening? In analysing Polish voting behaviour, Winiecki found that even people who had become successful entrepreneurs still harboured dissatisfaction about the way they were now having to work much harder for a living. They had unlearned habits of hard work in their former existence. A Latvian I encountered selling goods at a market outside St Petersburg complained that life was better under Brezhnev - competition had eroded his profit margins.

The biggest islands of resistance are typically found in the giant enterprises built up under communism. As showcases of Marxist-Leninism, these firms were even more inefficient than the others, and their workers were relatively privileged in economic terms. Consequently the waste, theft, laziness, damn-anyone-else attitude and general moral torpor tended to be highest here.

Their rural equivalents were the large collective farms which were also islands of waste, mismanagement and free-loading, and similar breeding grounds for the assumption that the world owed people a living. Added to this was a significant segment of the intelligentsia that had secured power and status by following its own technical rules of survival.

All of these groups saw change as threatening their privileges and their (often dubious) ways of operating. They found to their dismay that capitalism not only meant goods in the shops. It also meant an honest day's work. They wanted the one without the other, and this schizophrenic attitude has still not been resolved in many countries.

Such groups have constituted a ready political market for populists, ex-communists and nationalist demagogues. They are a fluid market: being not too troubled by higher thoughts and feelings, they have shown themselves ready to transfer their allegiance to politicians who best evoke the 'good old days' in which they had a higher place in the scheme of things.

Accordingly they are a far from moderate electoral bloc. Their fluctuating flirtations with insubstantial figures are a real source of instability, slowing the process of successful economic adjustment.

The extent to which these retrograde forces have put the breaks on reform varies considerably from country to country. It also varies with some intuitively plausible factors.

One is the sheer length of time a country was under communism. The longer the period under communism (and in some cases an earlier period of Nazism), the fewer the people who remember the institutions of a liberal social order and a market economy.

Another obvious factor is the state of capitalist industrial development prior to communism. Here countries like the Czech Republic, Slovakia and Hungary have an advantage.

An intriguing additional factor posited by Winiecki is the historical legacy he sees in the division between Orthodox Europe and Western Christendom. He points out that Catholic and Protestant Europe saw a greater separation of church and state, less centralised forms of feudalism, and the development of a greater philosophy of individualism in comparison with the more absolutist forms of authority of the Orthodox world. And indeed the border between Western and Eastern Christendom - whether by coincidence or not - serves to divide quite neatly those countries that appear to be successfully liberalising from those still struggling.

In all countries, the biggest positive force working for cultural change is simply the market order itself (to the extent that it has been allowed to develop). Markets encourage socially valuable habits, and ex-communist countries have seen many people who were once fly-by-night sellers of stolen goods becoming respectable proprietors of shops dependent on a regular clientele.

An encouraging feature is the high percentage of young people willing to participate in the market economy and making genuine efforts to get ahead through working hard. The young had much less stake in the old system, and a generation gap has opened up concerning attitudes to economic liberalisation.

However, attitudes towards the success of other people remain mixed and sometimes negative. Much of this is due to the communist legacy: being 'successful' under communism generally meant toadyism, opportunism and the selling-out of any principles individuals might have had. To this historical legacy has been added envy towards those who are doing well in the market economy.

It would be wrong to overstate the parallels between New Zealand's own liberalisation programme and the experience of the ex-communist countries. Though our economy sometimes seemed - in David Lange's famous phrase - like a Polish shipyard, we were thankfully never under communism, and our own transformation cannot compare with the degree of change undergone by ex-communist countries.

But there are parallels nonetheless. Like the communist countries, New Zealand was a place where, for many people, "they pretended to pay us and we pretended to work". In the state bureaucracies, much work had little useful purpose. Personal advancement was often a question of family or other connections.

As for successful businesses, they were often the ones which had lobbied the government to shut down their competition. Privilege was rampant and favouritism was not unknown. And we had pockets of gross inefficiency, laziness, and even gangsterism - such as on our wharves and in our freezing works - which would not have looked out of place in Eastern Europe.

New Zealand has also seen strong resistance to change, as people were obliged to adopt new work habits and shift into real jobs where they could make a genuine contribution to society. Many businesses preferred the old New Zealand in which they were able to live off government licences - they had worked out their own technical rules of survival.

Meanwhile, other businesses were discovering that once they were in the water, it was not nearly as cold as it looked. But here, too, there were some initial problems. It is perhaps not too fanciful to suggest that New Zealand - like the ex-communist countries - experienced a short period of bazaar economics, in which the short-sighted opportunism bred by a quasi-command economy was applied by some players in a deregulated market environment - usually with spectacularly bad results for themselves and others.

The well-established 'tall poppy' syndrome and attitudes towards the successful may, in part, be a hangover from old New Zealand. In a society where success was so often unrelated to the real value (if any) of the service one was performing, a suspicion of success was not unnatural.

Like the ex-communist countries, we also have a generational divide. It seems that young people who had no stake in the old system by and large welcome the opportunities provided by a liberalised economy. The old have had more mixed feelings about the changes.

And while it may be far more traumatic for life-long communists to discover that the party slogans they had been mouthing for decades were simply so much hot air, it was also traumatic for believers in 'fortress New Zealand' to discover that the system they had long supported was actually a one-way ticket to stagnation and debt.