Post-Communist Countries: Similar Problems, Different Solutions

On May 23^rd the international symposium ‘Twenty Years: Political and Economic Evolution in Post-communist Europe’ started at the HSE. The event was organized by the Higher School of Economics with the support of the Liberal Mission foundation and the Friedrich Naumann foundation.

Sasha Tamm

The main aim of the symposium is to discuss why different post-communist countries have achieved different results.

The first day of the symposium included primarily presentations on economics. On behalf of the organizers, Evgeniy Yasin, Academic Supervisor of the HSE, and , Head of the Friedrich Naumann foundation Moscow office, welcomed the forum participants  emphasized that there are many shared problems in the countries of the region.

The first plenary session ‘The Way to a Market Economy’ started with a presentation by , senior fellow at the Peter G. Peterson Institute for International Economics in Washington, DC and lecturer at the Georgetown University, on ‘Conclusions from the Financial Crisis in Eastern Europe’.

According to the speaker, the situation in Eastern European countries during the financial crisis was very different. And while the reason of the crisis is well known and similar for every country, its effects vary considerably. For example, Poland, Czech Republic, Slovakia and Slovenia have avoided nearly all negative consequences, while  the Baltic countries and Bulgaria have found themselves in a difficult situation with the budget deficit reaching and even exceeding 20% of GDP.

Anders Aslund

Countries also fought the crisis differently. For example, in some countries (Poland, Czech Republic, Hungary and Romania) they used a floating rate of the national currency but for Slovenia and Slovakia this tool was not relevant, since these two countries are part of the Eurozone. The governments of Baltic countries and Bulgaria resorted to a very tough monetary policy. In Latvia the budget were cut at the expense of slashing salaries in the public sector, cutting of the number of public officers and closing ineffective medical and educational institutions. And, according to A. Aslund, such measures are much more effective than tax increases.

It is remarkable that in these countries which cut their budgets by less than 10 percent, there were no active protests, and in the vast majority of cases the governments have remained in power

Pekka Sutela, Adjunct Professor at the Aalto University, Helsinki, in his presentation tried to answer the question: did the deep integration strategy turn out to be unsuccessful during the financial crisis of the Baltic countries?

The Baltic countries are among the ‘small economies’. That’s why for them, in fact, the only way for economic development is integration into the European space. And, according to P. Sutela, the deeper the integration, the better. At the initial stage of the development of states and economies in Lithuania, Latvia and Estonia, local nationalism played a positive role: they managed to abolish the trade discrepancies and diversify their markets. But the competitive ability of the goods was an obstacle to deep integration.

Pekka Sutela

Nevertheless, the Baltic governments have managed to solve most of the problems. Liberalization and privatization have been carried out. But it is necessary to move forward and it is widely accepted that economic integration goes faster if there is parallel political integration.

Deep integration has it positive and negative sides. On one hand, it is possible to send a child to study abroad. On the other, there is a danger of the decrease of intellectual potential, since not everybody returns after they go abroad, and the labour market in the Baltic countries becomes half-empty. This problem is especially relevant for Lithuania.

According to Evgeniy Yasin, in this sense the Baltic countries and their relation to Europe are similar to Central Asian countries and their relation to Russia: they are the sources of labour migration. But even this situation can have a positive outcome.Vyacheslav Dombrovskis, associate professor of the Stockholm School of Economics in Riga, mentioned that ‘these people can come back later with new experience and capital’. The main thing is to create the environment for this return, and not to forget about the problem of youth unemployment which is very topical for this region.

Marek Dabrowski, President of CASE–Center for Social and Economic Research in Warsaw (Poland) suggested discussing the role of external institutional factors in the process of transformation in post-communist countries.

‘My report follows the two previous ones, but it is closer to the topic of the symposium: over 20 years, much has been done in all the countries in terms of economy’ M. Dabrowski said.

Marek Dabrowski

In the process of transition from a planned economy to a market one, from a totalitarian society to democracy, market tools were not used for a long time. For various reasons, Governments kept using non-market tools in the administration of economic processes. According to Professor Dabrowski, institutional and legal reforms turned out to be the most difficult. In some cases they are still not finished, there is a problem of real independency of the courts. The system of social care has considerably changed and social help has become more targeted. But in many countries in Central and Eastern Europe and the CIS an effective system of social care has not yet appeared.

In the late 2000s, according to Marek Dabrowski, in most countries of post-communist Europe the transitional period ended. The exceptions are Turkmenistan, Uzbekistan and Belorussia. But even the leading countries in this region in terms of reforms are still behind the developed countries. The changes revealed some trends in development. For example, more politically free countries turn out to be freer economically. There is also a correlation between the level of corruption and economic development.

Today none of the CIS countries meets the requirements for EU accession. According to Marek Dabrowski, this will happen for another 10 or 20 years. Visa requirements will become easier, of course, but not as rapidly as many people want. The Central Asian members of the CIS are falling behind in many parameters. The joint problems of development are worsened by the consequences of the financial crisis and the lack of necessary institutions or their limited effectiveness.

The presentation by Timothy Frye, professor at the Columbia University, who heads the International Center for Studies of Institutions and Development at the HSE, was dedicated to an analysis of a problem which is shared by all post-communist countries – an extremely negative attitude to the privatization which took place in the 1990s. In Timothy Frye’s view, privatization has became a ‘scapegoat’ (often undeservedly), with which the inhabitants of Central and Eastern European countries associate the hard economic and social consequences of the reforms which were carried out after the fall of communism.

Timothy Frye

According to a survey which was carried out in post-communist countries in 2006, about 80% of the population are in favour of reprivatization in one form or another. The skepticism relating to privatization varies depending on the level of the institutions’ development in a specific country or the level of respondents’ adaptation to life, work and business under the market conditions, but this variation is not as wide as might be expected. Timothy Frye sees as a positive the fact that the opponents of the privatization mostly do not want to return to public ownership, but would like privatization to be more ‘honest’ and ‘fair’. Less than a third of the respondents support full renationalization of the privatized industries.

It is conventional to believe that the expropriation trends become stronger in autocratic regimes under a resource boom. But, Timothy Frye mentioned, despite all the criticism of privatization, renationalization in 2000s was very limited. A different matter is that the secondary effect from a renationalization policy can reveal itself after some time.

Professor Frye did not agree with the comment that the negative image of privatization was created by the effort of mass media and the ‘left-wing’ intellectual elite. According to him, the contradicting views of privatization can be seen even inside a homogeneous group of the population. ‘For example, among the people with a high level of education there is a big proportion who believe privatization was unfair but who are ready to make use of its results, Timothy Frye said. But one other thing is important. It is important that people understand: yes, today we have lost something because of the privatization, but in a long-term perspective we shall benefit from it’.

Rostislav Kapelyushnikov, Deputy Director of the HSE Centre for Labour Market Studies, also believes that time is the best ‘remedy’. According to his words, in Russia everybody has a negative attitude to privatization, regardless of their social status, level of education or income. This negative view dominates even among large proprietors who have inevitably benefited from privatization. Only time and repeated change of ownership will get rid of the negative memories about mass privatization of 1990s followed by the loans-for-shares auctions. But, Rostislav Kapelyushnikov believes, it will happen only if further economic activity will not be accompanied by such ‘outrageous violations of the fair play principles’ as accompanied privatization.

Evgeniy Yasin

I think that Timothy Frye and his colleagues have taken this issue off the table, summarized Evgeniy Yasin. Whatever you ask people about, privatization will always get a negative attitude after it has been carried out. I do not agree with Kapelyushnikov: however you carry out the privatization, most of the people will think it was unfair. But let’s remember that before it started 80 percent of the Russian population supported privatization. Why? Because it was not their property, but belonged to an abstract state, and their life was bad. Everyone thought: if they divide it up, I’ll probably get something out of it. And it turned out that this was not so’.

In the end of the first plenary session, Evgeniy Yasin presented his report entitled ‘Russian Economy: 20 years ago and 20 years ahead’ which was partly based on the study prepared by the HSE and the Expert journal for the XII International Academic Conference on Economic and Social Development. According to Evgeniy Yasin, the reconstructive growth experienced by the Russian economy over recent years, was a compensation for the transformation crisis, the ‘trough’ of which was reached in 1996-1998. The peak of the reconstructive growth occured in 2007, which was the most successful econimic year in Russian contemporary history, when the GDP reached 108% of level in 1990. Nevertheless, even during the critical period of the transformational crisis in Russia, the most important changes have been carried out; changes to the economic structure. ‘Until 1999 this structure looked similar to the structure of normal market economies’ Evgeniy Yasin believes.

According to Evgeniy Yasin’s evaluation, since 2003 good GDP growth indicators have been accompanied by a decrease in business activity related to the YUKOS case, which led to a reaction (though delayed) from the business community. Natural business activity was replaced by a very advantageous external conjuncture: high oil prices and cheap credits which were obtained by Russian businessmen, sometimes even with a bonus, since the interest rates were lower than the inflation. These processes heated and overheated the Russian economy, which reached its peak at the eve of the global crisis.

‘Today these artificial factors have been eliminated, Evgeniy Yasin said, and again we have to rely on natural business activity which needs an improvement in the investment climate and some institutional changes, including the democratization and development of public control over the bureaucratic apparatus and security agencies’.

Speaking about the future development of the Russian economy in the next decades, Evganiy Yasin said that ‘we are in transition to a stage of innovative development, when it will be impossible to rely on natural and labour resources to the extent that we have been doing’. Evgeniy Yasin sees two main scenarios for Russian economic modernization. According to the calculations which he unveiled, ‘modernization from above’ which involves some important economic reforms and at the same time the conservation of the current institutions, is able to raise the Russian economy to the level of 26-32% from the international technological margin by 2050. ‘From my point of view, this result is unsatisfactory’ Evgeniy Yasin stressed. The other scenario, ‘modernization from below’ which involves serious institutional reforms will raise this level to 33-40% from the technological margin.

‘We should not make too far-ranging conclusions from this study’, the HSE Academic Supervisor warned, ‘but if we do not implement the necessary changes which require certain political conditions, we shall not get a satisfactory shift in the Russian economy’.

Andrey Shcherbakov, Oleg Seregin, HSE News Service

Photos by Nikita Benzoruk