Socialist Economies and the Transition to the Market: A Guide. – book reviews
Thesia I. Garner
Of all the major economic, political, and geographic changes in 1989, the most evident occurred in the socialist countries that began moving toward more market-oriented economic systems, and that gave individuals freedoms they had not enjoyed for decades.
Efforts to establish market economies have been introduced in the transition countries of Eastern Europe: Albania, Bulgaria, the former Czechoslovakia and East Germany, Hungary, Poland, and Romania, and in parts of the disintegrated Yugoslavia. Market systems also have been started in the ex-Soviet republics and in Mongolia. In addition, most of these countries have been establishing political systems that are characterized by multiple parties.
In contrast, different types of economic reforms have been made in other traditionally socialist economies. The economic systems of China and Vietnam are strongly socialist-oriented, although some markets operate; such systems could be referred to as socialistic-protected capitalism. China began its market-oriented economic reforms after 1978, primarily in agriculture with its successful household responsibility system.
Cuba and North Korea have adhered to traditional Soviet-style political and economic systems. They have rejected market-oriented economic reforms, yet are indebted to foreign investment. Cuba allows some private plots and farming. The actions, begun in 1989 in the Eastern Europe countries adopting markets and some democratic measures, have had significant impacts on those socialist countries that did not follow quite the same path. For example, Vietnam’s 1991 constitution confirmed the status of the private sector by describing the economic system as a socialist-oriented multi-sectoral commodity economy driven by the State-regulated market system.
The changes these previously socialist economic and political countries, primarily in Eastern Europe, have introduced are essentially unprecedented in history. The impacts of the changes on the populations were sometimes predicted. Some predictors had scant knowledge of market economies, while others had little knowledge of their countries and their histories. To better understand the economic and political events that we read about today and that affect those who live in these countries, it is critically important that we understand the history of the countries and their experiences with socialism.
In Socialist Economies and the Transition to the Market: A Guide, Ian Jeffries provides an overview of this history and documents recent developments for 14 transition countries. “The rejection of central planning by so many countries in 1989 represents one of the truly extraordinary events in the history of economics,” Jeffries writes. In addition, he says, “The issues will remain at the top of the economic agenda for many years to come.” This presents formidable challenges to economists because the path is new.
This book is a reflection of what Jeffries calls his “massive investment” in the topic of transition from communism to capitalism. His investment has been substantial, and is reflected in the details and breadth of his book. Jeffries draws extensively on historical materials and current periodicals. Details, for example, on the number of hectars on a collective farm and the ideal number of workers in a basic production unit are presented for several countries. Although a reader who is interested in an overview of the events may be annoyed with such details, this book is a gold mine of information that is not readily found, and certainly not in one place. For the most recent events, Jeffries relies heavily upon current periodicals, including the Current Digest of the Soviet Press, Eastern Europe Newsletter, Far Eastern Economic Review, Financial Times, and International Herald Tribune, and information from the Economist Intelligence Unit.
Although the book was published in 1993, the last reference is for January 1993. Unlike many texts and reference books, this book is up-to-date as of the date of publication.
Socialist Economies is an update and expansion of a 1990 book by Jeffries, A Guide to the Socialist Economies. In contrast to his earlier book, the current volume includes an analysis of events before 1989, with discussion of what has happened since. As justification for writing both books, Jeffries notes that approximately one-third of the world lives in the 14 countries studied. In China, the population is 1.1 billion persons and in the former Soviet Union, it is 285 million. The former Soviet Union was by far the largest country geographically, excluding Antarctica, and was one of the two major military superpowers. Jeffries’s book is divided into three major sections: the socialist economies outside Eastern Europe, Eastern Europe to 1989, and the transition from command to market economies in Eastern Europe. A postscript highlights the latest economic and political developments and provides a timeline by day, month, and year that describes the events that upended East European socialism. More than half the book is dedicated to the transition countries of Eastern Europe. Each chapter, with the exception of three, is dedicated to a country. The three exceptions are an introductory chapter outlining the traditional Soviet economic system, a description of the rise and fall of the Council of Mutual Economic Assistance (COMECON) established in 1949 and disbanded in 1991, and a presentation of the general issues of moving from a command to a market economy. The eight Eastern European countries – Albania, Bulgaria, the former Czechoslovakia and East Germany, Hungary, Poland, Romania, and Yugoslavia – are discussed in two chapters each; the first chapter in the pair includes a description of events before 1989 and the second highlights events and policies that were proposed and put in place during and after the transition.
Several topics are reviewed in each country chapter. Included are the political and economic backgrounds, the economic and financial systems, the agriculture and nonagricultural sectors, and foreign trade and investment. The determination of wages, labor rules, prices, taxes, and the distribution of income and consumer goods are discussed. As an introduction to the separate country chapters after 1989, Jeffries presents a chapter outlining general issues, such as the “big bang” and “shock therapy,” which refer to the pace of change to a market economy. In addition, the chapter details privatization, Western aid and trade, and the link between political and economic reforms. An extensive list of references and a 5-page glossary of terms is included at the end of the book.
Each country chapter in the 1993 Guide can be used independently of every other chapter. However, I recommend the combined use of a chapter pair for an Eastern European country, with sections from the postscript, if the focus of one’s study is one country in particular. But in some cases, reading all the chapters that review a particular region provides insights that are not possible to obtain from reading single chapters. For example, in the early chapter about Czechoslovakia, Jeffries notes that Czechoslovaks benefited from the second highest level of living among the socialist economies, but he does not tell the reader until the next chapter that East Germany was ranked the highest. This is not a criticism, only an observation. However, the introduction provides this information about both countries.
In the introduction, Jeffries outlines the traditional Soviet economic system as a command economy with overwhelmingly dominant State ownership. In this system, as in any economic system, the problem was how to meet infinite needs with limited resources. In a system of command planning, the State makes the basic decisions about what to produce and in what quantities, but the whole economic hierarchy has to be involved in decisionmaking, according to Jeffries. Because Soviet command planning was the basis for the economic and political systems of most transition countries, characteristics of the Soviet system are highlighted as follows.
In the traditional Soviet system, the communist party played the crucial role in formulating policies and putting the in place. In a one-party State, the part dominated economic, political, and social life. The party, particularly the Politburo, instructed the State Planning Commission about basic economic policies related to growth rates of nation income, consumption, investment, defense, and other important goods. Consumption was held to levels considered adequate to maintain political stability and work incentives; the choice of consumer goods and services depended commodities that were made available in the overall economic plan.
The industrial worker’s pay consisted mostly of two parts: a State-guaranteed basic wage that varied according to industrial branch, skill, and region; and the residual. The residual was affected by bonuses related to factors such as fulfilling the plan and the nature of the job, such as dangerous working conditions.
Nonmarket manpower elements varied substantially. Forced labor camps were often used to help collectivize agriculture. Graduates of universities and technical schools were assigned to a place of work for 2 or 3 years; students and workers often had to help during harvest time. Unemployment was officially declared eliminated at the end of 1939 in the Soviet Union, although in the Gorbachev era, the government acknowledged that unemployment existed and unemployment benefits were needed.
Private enterprise was severely limited in terms of the. type of enterprise, who could work in the enterprise and income taxes that were paid. The focus of output was on production and not goods consumers needed. As a result, quantity was emphasized over quality. Plant directors often understated productive capacity because the next period’s plan was based on the previous period’s output. Labor and other resources were at times left unused – or hoarded – to meet unforeseen needs or frequent changes in plans and to compensate for the uneven supply of goods and services needed for production. An anti-innovation bias in production evolved because prices were being set and were not acting as signals in the market.
In terms of the financial system, the command economy used money but because resources were largely allocated centrally, it played an essentially passive role. Industrial prices were formally fixed by the State on die basis of planned branch average cost of production and a small profit mark-up on costs. Wholesale prices did not reflect true production costs but were a means of control and evaluation. Domestic prices were separated from world prices by the State foreign trade monopoly.
In the Soviet Union, all land belonged to the State. This was not true in all the other countries that adopted the command economy system. For example, in Poland, private farming accounted for a larger percentage of the total agricultural sector than did State fanning.
In the Soviet system, foreign trade did not play a major role, although trading among COMECON countries developed over time. comecon Was Created by Stalin largely as a political response to the Marshall Plan of June 1947 for the reconstruction of Europe and the 1948 schism between the Soviet Union and Yugoslavia. The official aim of COMECON, according to Jeffries, was for socialist economies to collaborate and coordinate their economic progress on the basis of equality of rights of all member States. One Polish writer suggested that COMECON’S real purpose was to solidify Soviet control over Eastern Europe by switching its trade from the West and helping to impose the Stalinist economic system.
Jeffries establishes economic and political categories for the 14 countries before and after 1989. In the earlier period, he groups together Albania and North Korea because they hewed closest to the Stalinist political and economic system; both practiced what Jeffries refers to as a “cult of personality.” The cult system refers to the perceived strengths of national leaders and their self-aggrandizement.
Cuba occupies its own group, also deviating little from the Soviet system, but moving forward with direct foreign investment. East Germany and Romania are viewed together, identified as reluctant reformers because tight political control was never relaxed and radical economic reform was never attempted. Jeffries labels Czechoslovakia and Bulgaria the “economic foot-draggers.” Czechoslovakia was on the road toward major political and economic changes with the ill-fated Prague Spring of 1968, but Soviet tanks halted whatever progress was made. Yet, as noted earlier, Czechoslovakia maintained the second highest standard of living in the socialist world. Bulgaria followed Soviet policy but engaged in pioneering work in agricultural-industrial organization by bringing together collective and private agriculture, and establishing a small enterprise program.
Also noted earlier, China’s and Vietnam’s communist parties maintained and still maintain strict control, but some economic reforms have been market-oriented. China began its economic reforms after 1978 and Vietnam started in 1975. Jeffries writes that North Vietnam’s movement south, “gobbling up” the former capitalist South Vietnam, helped promote market-oriented reforms and a more relaxed attitude toward the private sector.
Poland and the Soviet Union before 1989 are referred to as “paper tigers.” The industrial reforms in Poland in the 1980’s were, for the most part, not put in force, but remained on paper. Poland struggled continuously with severe inflation and foreign debt, but agriculture was largely private, and officials took a relatively relaxed attitude toward the private nonagricultural sector.
Although numerous economic reforms were introduced in the Soviet Union, particularly in the mid-1960’s, the economic system remained a command economy. With the Gorbachev era, glasnost and perestroika became household words in the West, but the terms – defined as openness and restructuring – referred primarily to political reforms rather than economic ones. Yet some private sector and direct foreign investment changes were introduced. By the time Gorbachev decided to introduce market reform, many observers believed it was too late; economic reforms never left the planning stages and the country disappeared.
Mongolia also is placed among the “paper tigers.” Mongolia followed the Soviet lead, adopting communism in 1924; however it quickly responded to the changes of 1989 and introduced political and economic reforms.
Hungary and the former Yugoslavia were in the forefront of reform. Hungary’s “New Economic Mechanism” of 1968 decentralized the economic system. This change is credited for easing the transition to the market after 1989. Officials also adopted a relaxed attitude to the private nonagricultural sector and the links between collectivized and private agriculture. Yugoslavs introduced a different type of market socialism based on self-management by workers’ councils of socially-owned enterprises. Agriculture was mostly private and privatization elsewhere was encouraged.
For the post-1989 period, Jeffries regroups Cuba and North Korea into one category, and China and Vietnam also remain together. Cuba and North Korea still follow the traditional command economy system, rejecting market-oriented reforms and keeping the communist party in control. China and Vietnam are characterized as communist although they have introduced market-oriented economic reforms. These two Asian nations have rejected mass privatization along Eastern European lines, yet they have experimented with share ownership.
Czechoslovakia, the Soviet Union, and Yugoslavia no longer exist and independent republics in varying stages of democracy and transition to the market are emerging. Czechoslovakia divided peacefully into two countries, the Czech Republic and Slovakia, in January 1993. Market reforms have been vigorously followed in the Czech Republic; such reforms have been somewhat slower in Slovakia. The Soviet Union ceased to exist toward the end of 1991. The split had been peaceful. The same cannot be said of Yugoslavia, with the parting of some republics bloody and violent.
East Germany joined West Germany to become one republic again, although the political and economic costs have been tremendous. The other Eastern European countries – Albania, Bulgaria, Hungary, Poland, and Romania – are in transition to Western-style economic and political systems with varying degrees of progress and success. Jeffries identifies Hungary as the most successful, and Albania as the least. Mongolia’s progress places it in a category characterized as similar to what this group of Eastern European countries are experiencing.
As we read about the reforms in these countries, Jeffries wants us to be aware of major factors that help explain the rapid demise of socialism in Eastern Europe in 1989. He describes the communist regimes as “folding like packs of cards.” He emphasizes two factors of primary importance: the role of Mikhail Gorbachev and the tendency of communist leaders to appoint “yes men.”
Gorbachev’s refusal to send Soviet troops into Eastern Europe to quell unrest was critical in the success of the collapse of the status quo. In addition, as leaders who were isolated from reality began to be exposed and fell from power, people lost their fear, according to Jeffries.
Yet even with the euphoria from the fall of the totalitarian regimes, Jeffries warns of dangers. First, the dismantling of an old system before a new one is in place can spell danger. Expectations are raised and dashed and people begin to long for the stability they remember from the previous system. Second, ethnic and nationalistic conflicts are boiling to the surface after decades of suppression. Third, the loss of a civil society takes hold. Individuals voluntarily associate together outside the control of the State. Such associations can undermine the goals of the transition as cynicism rises and the many who suffer during the harsh transitional period enviously observe the relatively few who benefit to a high degree. (Frequently, those who benefit also prospered under the previous regime, Jeffries writes.) Fourth, the danger arises of new dogmas ruling; these dogmas emphasize the virtues – not the limits – of markets and privatization. And fifth, policymakers and citizens must continually acknowledge that the problems of transforming socialist or communist systems to “Western-type” systems have never been faced before, and many obstacles to parliamentary democracy and market economic systems may have to be overcome.
After reading Socialist Economies, we can come away with a clearer understanding of why Albania, for example, has chosen a different path than what Czechoslovakia or Vietnam is following in adapting marketplace reforms. Although other books have been written on the transition economies as a group and as separate countries, the Jeffries book is one of the few that covers the major issues and most of the countries involved. For all students of economics and other interested readers, Socialist Economies provides a fascinating, quite detailed, account of one of the most exciting (or, perhaps, the most exciting) changes in the economic and political environment of the 20th century.
COPYRIGHT 1995 U.S. Bureau of Labor Statistics
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