When Is Transition Over?

Citation

Tisdell, C. (2001), "When Is Transition Over?", International Journal of Social Economics, Vol. 28 No. 4, pp. 380-391. https://doi.org/10.1108/ijse.2001.28.4.380.4

This book is based on lectures given by six distinguished economists at the 33rd Annual Lecture‐Seminar Series of the Department of Economics at Western Michigan University in the 1997‐1998 academic year. This series is co‐sponsored by the W.E. Upjohn Institute for Employment Research, which also published this book. The contributors in order of their lectures are Marie Lauigne (Professor of Economics, University of Pau, France), Alan H. Gelb (Chief Economist, Africa Region, World Bank), Anders Åslund (Senior Associate, Carnegie Endowment for International Peace), Nicholas Lardy (The Brookings Institution), Jan evejnar (Executive Director, William Davidson Institute), and Everett E. Berg (Professor of Business and Economics and International Business, University of Michigan Business School) and János Kornai (Allie S. Freed Professor of Economics, Harvard University and Permanent Fellow, Collegium Budapest, Institute for Advanced Study).

In addition to the lecture material, the book contains an introduction by Annette N. Brown (Assistant Professor, Western Michigan University). She received her PhD from this institution as recently as 1996 but during her studies spent two years consulting at the World Bank where she was part of the core team who wrote the World Development Report: From Plan to Market. It seems that she was the entrepreneur behind this particular set of lectures, and decided on the theme for these – “When is transition over?” It appears to have been an awkward theme for contributors because some lecturers do not address the theme at all and those who do give different answers. Marie Lauigne (p. 27) in fact states: “When is transition over?… I think the question is unanswerable”. Gelb does not answer the question directly nor does Lardy. evejnar suggests that the economic transition process is completed when:

(a) central planning is abolished, and no longer serves as the allocational and distributional mechanism in the economy, and

(b) central planning and direct government intervention are replaced by an efficiently functioning market system (p. 77).

However, the latter criterion does not seem to be a very precise one. Åslund, after describing methods of rent appropriation in transitional economies, claims that “the end of transition is the end of rent‐seeking” (p. 65). While this is a “smart” answer, rent‐seeking is by no means absent in Western economies, even if less blatant than in some transitional situations. So it does not appear to be an adequate test on its own.

Kornai’s criteria are the most precise and operational but not all would necessarily agree with his choice of criteria. In his view, transition has ended when:

the Communist Party no longer has monopoly power in politics (as it does in China);

the dominant means of production are held privately and the private sector accounts for the major portion of GDP;

the market is “the dominant coordinator of economic activities, alongside various other mechanisms” (pp. 99‐100).

On the basis of these criteria, he concludes that Hungary’s transition from socialism to capitalism is basically finished. Although the system can be improved or further transformed, in his view Hungary’s transition is over.

Possibly the main value of this book lies not so much in answers to the question “When is transition over?” but in the discussion of the authors about the different transitional processes of the former centrally planned economics or groups of these economies and their varied experiences and reasons for these variations. In her overview, however, Brown does not do justice to these discussions, preferring rather to concentrate on answers to the question “When is transition over?” I feel that this is a pity. Her overview is relatively mechanical and she avoids critical comments on any of the lectures. This is probably understandable in terms of her relatively junior position, but it does not make for controversy.

Lauigne provides an excellent and balanced overview of transitional issues in her lecture. She gives good reasons why transitions were destined to occur, why historical factors continue to influence the process and various problems which have arisen such as increasing inequality of income, lack of efficient market institutions and lack of appropriate social policies. Gelb takes issue with those who have criticized the World Bank and IMF for supporting policies to introduce markets rapidly in the former centrally planned economies prior to building up appropriate market institutions. He suggests that this is rather like a “chicken‐and‐egg” problem. He claims that such institutions will not develop unless there is a demand for them. The demand possibly can only be created by precipitating markets, even though this process may involve some social trauma.

Åsland appears to remain a “big‐bang” advocate. One of his main regrets is that market‐making did not proceed rapidly enough in Eastern Europe and the former USSR to keep the rents of many of the beneficiaries from transition lower. By contrast, Lauigne is somewhat critical of the institutional expectations of “big‐bang” advocates, and in my view correctly so.

Lardy provides an excellent overview of the situation of China, pointing out that its economic transition is far from finished. In fact, China now faces its most difficult task in corporatizing or privatizing its state enterprises. China’s entry to WTO will add new urgency to this task. He argues that China’s past development strategy is no longer sustainable because it has to a large extent been based upon unsustainable bank lending practices. If China is to avoid an economic calamity, it has to transform its banking system and impose economic discipline on business borrowers. This discipline has been lacking as far as state owned enterprises are concerned.

Sovejnar provides an interesting review of the Central European Model of Transition. Amongst other things, he brings attention to the difficulties of establishing effective corporate governance in former state firms which have been privatized. For example, Czech and Slovak governments distributed vouchers (shares) to their citizens to provide widespread ownership to these firms. They engaged in mass privatization. But evejnar claims that “the new dispersed owners or their investment fund representatives have not exercised effective control over management in many privatized firms” (p. 89).

Kornai, after providing his answer to the question which forms the basic rationale of this book, concentrates on the provision of health services as an area requiring attention in post‐socialist economies. He suggests that the basic health needs of all should be met by the state and considers methods which might be most effective in achieving this. He discusses the whole matter in a wise manner.

One of the greatest challenges of the transformed centrally planned economies is how to provide basic social services and meet basic needs of all their citizens in an efficient manner. The demise of state owned enterprises (which provided social security for their workers) has made it imperative to find alternative means of providing for basic needs. The state has an important role to play in that regard – justice and equity concerns cannot be met by the use of market mechanisms alone.

As Lauigne points out, the state continues to play an important role in most Western economies and, therefore, the completion of economic transition does not imply that administration of resources by the state withers away. Rather it has an enhanced role in the provision of social welfare and in supporting and regulating private enterprise to some extent. In the past, it was the state owned enterprises which provided social services in the centrally planned economies. In a society with mobile labour and freer markets, the state should become the principal provider of social security. As Lardy points out, this requires the state to collect sufficient taxes to provide social welfare services. In the case of China, and presumably those of some of the other countries in transition, the state does not have a sufficiently efficient tax revenue collection system to make this possible. Therefore, urgent changes and greater efficiency in the tax collection systems are needed if adequate social services are to be provided. Failure to do this will result in political unrest and would constitute abrogation of important social principles which socialism has championed.

There is indeed much food for thought in this short book. A concluding chapter by the editor might have been useful as a follow‐up to the lectures. This might have been used to highlight differences in interpretations and views of the transition processes by the authors. One could easily be stimulated by the lectures to do so.

The book will clearly be of interest to scholars specializing in transitional economies and as reading for university students in classes dealing with this subject. It is not too technical, so it may also interest a wider audience. The main shortcoming of the book is that, in my view, the editor missed a golden opportunity to do more comparative analysis of the lectures and the economics covered.