the challenge of changing the old mindset ruslan stefanov coordinator of the economic program center...
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THE CHALLENGE OF CHANGING THE OLD MINDSET
Ruslan Stefanov
Coordinator of the Economic Program Center for the Study of Democracy, Sofia, Bulgaria
Transition: Launching into the unknown
• No one at the beginning of transition knew how it was going to play out• New and unknown challenges of transforming state-run,
highly centralized economies into free markets• Transition has been both easy and hard
• Easy: In the 1980s, nobody believed that a systemic change in the Eastern bloc would come soon; few expected that 10 ex-communist countries would join the European Union (EU)
• Hard: Despite massive costs and long transition, former communist countries still lag behind the West
• Changing the old mindset is a very difficult issue
The legacy of post-communist mindset
• The lack of personal responsibility • Expectation that the state will take care of everything
• The lack of choice• No choice among consumer goods and services• State-provided security (employment, etc.)
• Shattered values• As communism collapsed, the old value system also
crumbled• Learning to make choices was a challenge• Can the boat steer in a stormy sea without an anchor?
Differences within the region
• Transition has been easier in countries with traditions of market economy and industrialization prior to the communist takeover in the 1940s – e.g. Poland, Czech
Republic, Hungary
Formal and informal institutions of democracy and market economy
formal - informal
formal + informal
- formal -
informal
- formal +
informal
More centralized economies• Southeastern Europe, former Soviet Union
Less centralized economies• Central Europe
Economic growth in the post-communist regions
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
World
Emerging and developing economies
Africa
Central and eastern Europe
Commonwealth of Independent States and Mongolia
Developing Asia
ASEAN-5
Middle East
Western Hemisphere
Source: IMF
Economic growth in Eastern Europe
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-20
-15
-10
-5
0
5
10
15
BulgariaCzech RepublicEstoniaHungaryLatviaLithuaniaPolandRomaniaSlovak Republic
Source: IMF
Measuring the reform effort in post-communist countries
ALBANIAARMENIA
AZERBAIJANBELARUS
BOSNIA & HERZEGOVINA
BULGARIACROATIA
CZECH REPUBLICESTONIA
FYR MACEDONIAGEORGIA
HUNGARYKAZAKHSTAN
KYRGYZ REPUBLICLATVIA
LITHUANIAMOLDOVA
MONGOLIAMONTENEGRO
POLANDROMANIA
RUSSIAN FEDER-ATION
SERBIASLOVAK REPUBLIC
SLOVENIATAJIKISTAN
TURKMENISTANUKRAINE
UZBEKISTAN
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50
Source: EBRDSimple average of all transition indicators of EBRD
Key reform steps
• Price liberalization
• Privatization
• Trade and capital liberalization
• Institution building
• Macroeconomic and microeconomic reforms
• The market and rule of law
Economic liberalization – letting the steam out
• The first step towards reducing imbalances and introducing price incentives for economic agents
• Liberalization requires prudent central bank policies and quick restructuring of the economy to escape excessive inflation and financial crises
• In Central and Eastern Europe, liberalization also brought the first voices of discontent, as democratic rules began to take hold in the region– The seeds of reform reversal were planted through this discontent
While indispensable for inducing market reforms, liberalization also produced reverse reactions to market economy and
democracy.
Privatization
• Two types of privatization: freedom of private enterprise vs. privatizing state-owned assets
• Privatization without having a private sector created the missing local stakeholder problem
• The “quick and ugly” privatization – was there a middle way in post-communist countries?
• The dangerous political economy of privatization: privatize profits, nationalize losses Privatization was indispensable for market reforms: it improved long-term economic performance and helped create pro-market
attitudes. But serious shortcomings in how it was conducted gave rise to many abuses.
Macroeconomics vs. microeconomics
• Early-stage reforms focused on easier to implement macroeconomic, monetary, and fiscal stabilization programs (some failed already here)
• Mid-stage reforms encompassed tackling long-term fiscal challenges such as social security and healthcare
• Advanced reforms include microeconomic policies aimed at strengthening economic institutions: the rule of law, competitiveness, etc.
• Countries that failed to build a new mindset early faced problems with the microeconomic reforms later on
Early reforms can be done under external pressure but sustainability requires internalizing values. The further down the
reform road, the more a new mindset is needed.
Institution building: Markets and the rule of law
• Building market institutions and making them work takes longer and is much harder than liberalization and privatization
• While it is fairly easy to create a private sector through privatization, it is much more difficult to foster entrepreneurship
• In Russia or Southeast Europe, for instance, there is private economy but it is still largely controlled by the state or oligarchs connected to the state Having a private sector does not automatically mean having a
competitive market economy.
Economic freedom and institutional performance: Central and Eastern Europe
Source: Index of Economic Freedom, Heritage Foundation
0 20 40 60 80
AlbaniaBosnia and
BulgariaCroatia
Czech RepublicEstonia
Hungary Latvia
LithuaniaPoland
RomaniaSlovak
Slovenia
Feedom from corruption Overall 2008 score
Economic freedom and institutional performance: former USSR
Source: Index of Economic Freedom, Heritage Foundation
0 20 40 60 80
ArmeniaAzerbaijan
BelarusGeorgia
Kyrgyz Republic Moldova
MongoliaRussia
TajikistanTurkmenistan
UkraineUzbekistan
Feedom from corruption Overall 2008 score
The values of democracy and market economy
• Democracy and market economy are about values
• Freedom of choice, speech, and entrepreneurship is at the core of both democracies and markets
• It is easier to build the formal traits of democracy and market economy than to internalize the underlying values in a society
• It is much more difficult to build institutions that allow democracies and free markets to work
Building democracy and free markets goes hand in hand and requires the presence of underlying values
and institutions of good governance.
Lessons learned
• Having unclear distinctions and relationships between the public and private sector has been one of the key challenges in Central and Eastern European transition– In many countries, just formal elements of democracy and
market economy were adopted with no in-depth institutional transformation
• Countries that introduced the deepest reforms in both formal and informal institutions have achieved the highest growth and prosperity – Although there are different paths toward greater social well-
being, countries that reformed early and reformed deepest saw the most successful outcomes
The views expressed by the author are their own and do not necessarily represent the views of the Center for International Private Enterprise (CIPE). The Center for International Private Enterprise grants permission to reprint, translate, and/or use in the classroom the materials available through the CIPE Development Institute website provided that (1) proper attribution is given to the original author and to CIPE and (2) CIPE is notified how and where these materials are used.
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