Atlantic Community:Open Think Tank Article "Bright-Side Economics"

László Andor:

Anders Åslund: How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia

Can "everyone" be wrong about central and eastern Europe's transitions?

Swedish economist -Anders Åslund was an influential economic advisor in the post-Communist transition of eastern and central Europe. Åslund was-and remains-an uncompromising advocate of liberal shock therapy and the rapid transformation of planned economies into free markets. While in the early 1990s this approach appeared to have just about "everyone's" backing, it has subsequently been challenged. Events like the Russian financial crisis of 1998, in addition to an increasing body of critical academic literature, have called Åslund's theories into question.¹

Åslund's new book, How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia, is a comprehensive report on the central and eastern European transformations, as well as a reply to his abundant critics. Many economists and mainstream political scientists alike advocated a negotiated transition in the former eastern bloc, encouraging various forms of consensus creation in order to shore up the legitimacy and political stability of the new regimes. But Åslund allows no critique. Should we be concerned about the 20 percent decline in GDP across the region? No, he explains, the statistics are imperfect and do not capture real output. And the rising male mortality in Russia? These deaths are a result of accidents and cardiovascular diseases-unrelated to the transition itself. Was the 1998 financial crisis in Russia a sign of system failure? No, it was the markets correctly punishing the government for overspending. And the new Russian oligarchy? Åslund cites sources that show that the oligarchs actually aided the economy by investing locally instead of channeling money abroad.

Åslund tells the reader to look on the bright side. In his view, it is the doubters, the gradualists, the social democrats, and laissez-faire critics of all stripes that have been proven wrong. The IMF was right all along, and, for the most part, the World Bank too. Åslund also compliments a small group of local superheroes, including the one-time Polish finance minister Leszek Balcerowicz, the former Czech prime minister Václav Klaus, Russia's ex-prime minister Yegor Gaidar, and, above all, the late Russian president Boris Yeltsin. Åslund declares that with the exception of Belarus, Turkmenistan, and Uzbekistan, the countries of the post-Communist world have all been successfully transformed. Task completed.

This means that Russia is also a success, even if in his own words Russia has been transformed from a "semidemocratic oligarchy to a centralized police state" after Yeltsin's departure. According to Åslund, Russia took the right road in the 1990s but swerved in the wrong direction after Putin took over. The emergence of oligarchy in Russia may be unfortunate, but those who accept the existence of the very rich in the West should now accept the existence of the very rich in Russia. The oligarchs, he argues, "were not guilty of the conditions that arose, but they responded rationally to the existing conditions." Åslund suggests that the objection to the rise of the new rich, and even the grounds for eastern European populism, is purely moral. He advocates a more pragmatic approach to the issue.

Åslund works hard to prove that free market radicalism in some places was more successful than the grad-ualist approach taken in other countries. His inconsistent reasoning, however, leaves him open to challenges. The Czech Republic, for example, is a success simply because it is the country of the market-minded Václav Klaus. Hungary does not receive the same recognition since it lacked such an internationally prominent and vociferous free-marketeer. By any account, the market institutions in Hungary have long been more advanced than those in the Czech Republic. Consequently, Åslund argues that Hungary was also a case of successful shock therapy, but with a little delay. In reality, Hungary's successful transition in the early and mid-90s was not a result of shock therapy at all. It was a product of several decades of reform policy in the 1970s and 1980s when Hungary's mixed economy was referred to as "goulash communism." By claiming that socialist state reforms were limited, Åslund unfairly diminishes the role of the pro-reform bureaucrats.

Another major structural deficit of the book is the absence of Yugoslavia. Though a very special case, Yugoslavia was part of the socialist East for more than four decades. It certainly remained in the same geographical group for the period of transition as well. In Åslund's book, southeastern Europe is represented by Romania and Bulgaria. By leaving Yugoslavia out of the transition story Åslund helps himself in two ways. First, he avoids discussing the most disastrous case of post-Communist transition. Second, by ignoring Slovenia he circumvents discussion of arguably the most successful transition country, one that managed to produce a well-functioning and stable market economy without a neoliberal chorus of advisors. Slovenia, first to introduce the euro among the new EU states, is airbrushed from the story. Åslund even forgets to mention it when he lists the countries that started EU accession talks in 1998.

Other omissions are equally glaring. Åslund states that Polish GDP started to grow in 1993, but fails to mention that in 1991 Poland received a 50 percent cancellation of its foreign debts. Moreover, an explanation of how foreign debts and representation of foreign creditor interest shaped reform policies is completely missing.

As a longtime student of the eastern European economies, Åslund does make many solid observations. He stresses that the post-Communist transition did not follow one pattern but that these countries took divergent paths and will continue to do so. His analysis of the collapse of state socialism is sophisticated and he rightly assigns the arms race a pivotal role. His claim that the history of these transformations "is to a considerable extent the history of the Soros foundations" is one scholars should not ignore.

But Åslund also takes contradictory positions. He writes that the "international community knew how to build a market economy." However, he then admits that the international community was incoherent and often confused in the early 1990s. US president George H. W. Bush initially worked against the disintegration of the Soviet Union. The G-8 invented the European Bank for Reconstruction and Development (EBRD) for assisting the transition, something that Åslund considers to have been a mistake. He believes that the money channeled through EBRD should have been used to support the IMF in the region. He condemns the European Union for advocating a social democratic paradigm of a social welfare state in central Europe.

Essential to Åslund's position is the claim that the neoliberal views have been supported by a majority of the people in eastern Europe. This is anything but self-evident. Political support for figures like Gaidar and Balcerowicz progressively diminished, in a similar way to Hungary's own neoliberals, the Alliance of Free Democrats. Free market ideology lost its appeal, and ever greater voter groups sought protection from the impact of the capitalist transition in Christian Democratic or Social Democratic parties. However, we cannot expect such a dispassionate inquiry from Åslund, especially given his undisguised hatred of social democracy. He goes as far as blaming social democratic policies for the high unemployment in central Europe. As a Swede, one would expect him to have a better understanding of social democracy, even if it is not his political preference.

This book is Åslund's attempt to justify his own and his counterparts' roles in the transitions. His picture is basic: the reforms were implemented, capitalism was created, and the post-Communist countries lived happily ever after. As if it were so simple.

1) See, for example, Joseph Stiglitz, Globalization and its Discontents (WW Norton, 2002). An early critique of shock therapy is Jan Kregel, Egon Matzner, and Gernot Grabher eds., The Market Shock: An Agenda for the Economic and Social Reconstruction of Central and Eastern Europe (Austrian Academy of Sciences, 1992).

László Andor is associate professor of economics at the Corvinus University of Budapest and currently Hungarian director for the European Bank for Reconstruction and Development. This book review was first published here by our partner Internationale Politik.

Anders Åslund: How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia