Transition in CEE: institutional framework and typology

1. Transition in CEE: institutional framework and typology Pavel Ptáček Department of Geography Palacký University, Olomouc Czech Republic

2. International financial institutions and transition process in CEE • Origin and role of Bretton Woods institutions in the world economic order: • the shared experiences of the Great Depresion • the concentration of power in a small number of states (further enhanced by the exclusion of a number of important nations because of the war) • the presence of a dominant power willing and able to assume a leadership role in global monetary affairs • Main aim: higher stability of the world economic system • Conference in Bretton Woods (1944) led to establishing of the key institutions and the new international economic order

3. International financial institutions and transition process in CEE • Pillars of Bretton Woods system: • Free trade relied on the free convertibility of currencies • The liberal economic system • Gold standard replaced by fixed exchange rates using the U.S. dollar (which was a gold standard currency for central banks) as a reserve currency • International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), later renamed to World Bank (WB) • Genaral Agreement on Tariffs and Trade (GATT), later (since 1995) World Trade Organisation (WTO)

4. John Maynard Keynes

5. Bretton Woods Institutions • Development of BW institutions: • Substantial role by reconstruction of post-WW2 Europe • Rising role by problems solving in Third World countries • Rising influence on credit policy for developing countries and on their general economic policy • In 1980s – serie of crisis in Latin America • Reaction: elaboration of Washington Concensus

6. Washington Concensus • policy advice by Washington-based institutions such as the International Monetary Fund, World Bank, and U.S. Treasury Department, which were believed to be necessary for the recovery of Latin America from the economic and financial crises of the 1980s. • Williamson in 1990: “the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989 • It is often seen as synonymous with“neoliberalism” and “globalization” or “market fundamentalism” • 1980s – period of Reaganism and Thatcherism

7. Principles of Washington Concensus by Williamson (1989) • 1] Fiscal discipline, • 2] Redirect public expenditure, • 3] Tax reform, • 4] Financial liberalization, • 5] Adopt a single, competitive exchange rate, • 6] Trade liberalization • 7] Eliminate barriers to foreign direct investment 8] Privatize state owned enterprises, • 9] Deregulate market entry and competition, • 10] Ensure secure property rights • Note: only macroeconomic arrangements • “One size fits all“ policy

8. International financial institutions and transition process in CEE • International advisors from IMF and WB recommeded in 1990s this strategy universaly for all countries in transititon • Special packegesfor regions and countries undergoing economic crises (Mexico, SE Asia, Russia, L. America and lastly Argentina) often failed • Gradualist approach X shock therapy for post-communist countries • Criticism of the market fundamentalism and neo-liberal practicies • Neglecting of path-dependency or history • Neglecting of law environment establishing • General mistrust to public sector efficiency

9. Strong proponents of shock therapy in CEE: Are they guilty?

10. Yegor Gaidar

11. Leszek Balcerowicz

12. Václav Klaus

14. Who else???

15. Criticism on shock therapy and practicies of IMF Joseph Stiglitz (2001 Nobel price winner)

16. Alternatives and/or supplements to Washington concensus • J. Stiglitz strongly criticies these points by IMF: • Badly manged privatisation • Bad timing for capital market liberalisation • Privatisaiton before ateblishing of legal framework and infrastructure • Focusing on just certain macroeconomic characteristics, especially inflation • Social cost of transititon (widening gap between rich and poor – possible extinction of middle class) • Revolutional (bolshevik) instead of evolutional approach to reforms

17. Lessons learned and recommendations for IMF by Stiglitz: • Capital market liberalisation is usually dangerous („hot money“ transfers) • Necessary changes in the Act on Bankruptcy (share of responsibilities between creditor and debtor) • Not to relay so much on rescue packages by IMF • Improving of banking commitee and regulation (call for broader, less ideological approach to regulation) • Improved risk management (especially in case of exchange rate maintaining, interest rates regulation, credit cranch) • Improving of social networks (social tension can cause very difficult environment for reform promotion) • Improving of reactions on economic crises

18. Moisés Naím (Editor-in-chief of Foreign Policy magazine )

19. Moisés Naím‘s team alternative recommendations for economy transformation

20. Moisés Naím‘s team alternative recommendations for economy transformation

21. Moisés Naím‘s team alternative recommendations for economy transformation

24. Argentina ,Bolivia , Brazil (Plano Real), Chile, Colombia,Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Indonesia, Mexico, Marocco, Nicaragua, Paraguay , Peru, South Korea, Thailand, Tunisia, Uruguay , Zambia Czech Republic, Poland, Russia (in early stages of transition) China, Malaysia, Singapore, Ethiopia, Hungary, republics of ex-Yugoslavia (except Macedonia) Countries accepting Xopposed to Washington concensus

25. The case study of (voucher) privatisation in the Czech Republic • By 1990 in Czechoslovakia was one of the most etatised economies in CEE (similar to GDR, Romania or Soviet Union) • share of state owned property was over 95 % • There was no question if to privatise or not, but the privatisation mode and the pace • Implication of neo-liberal prescriptions of IMF • Axiom: “private ownership is always better than state ownership“ • Privatise as quick as possible without regard to external legal and institutional environment and regulation mechanisms; “do not wait for legislation, time is running!“

26. The case study of (voucher) privatisation in the Czech Republic 3 basic modes of de-etatisation: • Restitutions (property depropriated after 25/2/1948) • Transfer of the property to municipal level • Privatisation Modes of privatisation: • Selling to domestic enterpreneurs • Selling to foreign investors • Distribution of property among citizens (voucher privatisation)

27. The case study of (voucher) privatisation in the Czech Republic • While the state ended its direct ownership in privatized enterprises, it continued to own many banks and other major financial institutions in the Czech Republic (and Slovakia) throughout the 1990s • financial institutions in turn established the largest privatisation investment funds (IPFs) in the early 1990s to amass a huge number of former state properties in the form of enterprise shares during the period of voucher privatization

28. The case study of (voucher) privatisation in the Czech Republic • Four of the five largest IPFs were established by the largest banks in which the state represented by the National Property Fund (NPF) held the controlling interest • The state was also the major creditor to 80% of all large and medium-sized Czech companies because a large number of nonperforming loans were transferred to the state owned Konsolidační banka, which was controlled by the Ministry of Finance

29. The case study of (voucher) privatisation in the Czech Republic • banks were reluctant to force enterprise restructuring through bankruptcies in the 1990s because the government was following active anti-bankruptcy policies in order to preserve the social peace by preventing the low unemployment rate from soaring • this situation described as “banking socialism” or “pseudo-privatization”

30. The case study of (voucher) privatisation in the Czech Republic • Reproducing of the old negative forms of enterprise behavior: enterprises retained an information monopoly developed under central planning, new owners received only distorted and filtered information, • enterprises were controlled by the same management joined by new representatives from IPFs creating “recombinant coalitions” that followed their own interests

31. The case study of (voucher) privatisation in the Czech Republic • the phenomenon of recombinant property has negatively affected enterprise performance • typically paralyzed the industrial enterprises instead of leading to its successful development • weak state chose not to enforce its ownership rights in the vast majority of cases, leaving many existing pre-1989 managers in charge of enterprises • new owners, the IPFs and thousands of small shareholders, did not understand production in privatized enterprises resulted in their failure to establish an effective corporate governance

32. The case study of (voucher) privatisation in the Czech Republic • recombinant ownership structure failed to exert strong enough pressure on enterprise managers to conduct the radical enterprise restructuring necessary for the future survival of the enterprises, nor did it make them accountable for their managerial decisions • managers continued acquiring large debts through soft loans • banks continued to provide loans to heavily indebted enterprises (especially between 1994 and 1996)

33. The case study of (voucher) privatisation in the Czech Republic • “pre-privatization agony” has been in effect replaced by a “post-privatization agony” • the neoliberal assumption that any new private owners would conduct effective enterprise restructuring immediately after privatization were largely false • privatization of SOEs to domestic owners typically resulted in profound organizational restructuring, it did not necessarily lead to immediate and effective restructuring

34. Turtle and Rabbit Race Two individuals, named Turtle and Rabbit, were applying for the same job. They were given the same programming assignment, due at the end of the day. Rabbit went immediately to the computer, began programming, and declared he was 80 percent done by noon. Turtle initially spent some time thinking, was slow to get to the computer, and did not have much code done by noon. She felt that she was 50 percent done. Rabbit was so confident that he even took a nap after lunch. Then he began debugging, and by the afternoon coffee break declared to be 95 percent done. Turtle continued programming after lunch, and justbarely began testing by the afternoon tea-time break. After the afternoon break they both continued testing. Rabbit often had to make significant changes to his code; Turtle had few and small changes to make. At the end of the day both submitted their work to a test suite; Turtle passed all the tests, but Rabbit failed many of them. Turtle was hired, but Rabbit continued, trying to complete the project, apparently far into the night chasing a few elusive bugs. He never did finish. Moral of the story: Quick to code; slow to finish Turtle and Rabbit Race

35. Try to guess: which countries were hares (rabbits) and which were turtles (tortois)?

37. Shock therapy Croatia? Czech Republic East Germany Poland (early stage) Russia Gradual changes Austria Bosnia and Hercegovina? Hungary Poland (later stage) Slovenia Typology of countries after selected transition trajectory Serbia? Bulgaria? Romania?

38. THEORETICAL APPROACHES TOPOST-COMMUNIST TRANSFORMATIONSIN CENTRAL AND EASTERN EUROPE • teleological “transition” approaches, associated with neoliberal and neoclassical economic interpretations • “transformation” interpretations stemming from evolutionary and institutional economics, the analysis of networks of economic embeddedness, and Marxist political economy and regulation theory

42. Criticism of transitology • the simplistic and teleological view of “transition” as a relatively unproblematic shift from state socialism to capitalism through the process of modernization and democratization • Ignores the CEE transformation as a complex political, economic, social and cultural change • It concentrates on CEE as a whole or the national level and does not pay sufficient attention to the changes and processes taking place on other scales, especially at the local level, and the relations between these scales • Ignores the geographical variability of the transformation and the issue of geographic scale • This is leadning to many mistakes by interpretation of transformation (or transition?)

43. Common signs of alternative interpretations • path dependent and embedded nature • political economic system that emerged in CEE in the early 1990s as neither capitalist in the Western sense (nor state socialist in the sense of the previous centrally planned economy) • gradual, organic, institution-building process (including market economy itself) • stresses the existence of continuities and similarities between the post-1989 developments and the previous state socialist system • direct opposition to the neo-liberal belief in the possibility of instant capitalism imposed through shock therapy on the imaginary tabula rasa • plurality of transitions

44. PATH DEPENDENCY • the transformation does not take place in a vacuum or on a tabula rasa • outcomes are strongly influenced by past developments • neoliberal and neoclassical approaches did recognize different starting positions of different countries • path dependent approaches stress the importance of institutional legacies and continuities in shaping the outcomes of CEE transformations • they draw on evolutionary economics and its understanding of economic change as an open-ended process • not to confuse pathdependency with pastdependency

45. The concept of path dependency • associated with strategic choices or path shaping strategies (often highly contingent) • the actual transition pathway results from a combination of path dependent constraints and path shaping transformation strategies • past dependency is a form of historical determinism • transformation as a combination of path dependent evolutionary social and economic change with active path-shaping change based upon key active decisions of social institutions and decisive actors (decisions about privatization strategies in CEE countries) • not all changes are by necessity path dependent (restructuring of the passenger car industry)

46. NETWORK ANALYSIS • the location or embeddedness of economic actors in complex sets of external social relations of integration and networks • the web of informal and interfirm networks that existed under state socialism did not disappear • routines and practices, organizational forms and social ties survived and were activated to function under the new conditions

47. Typology processes of network transformation and institutional change in CEE after 1989 • 1) pre-existing networks dissolved resulting in the continuing existence, but isolation (were unable to integrate into new networks, so called “tombs in the desert”) • 2) pre-existing networks could be reconfigured so that existing institutions remained part of functioning networks and learned new forms of action (interactive learning networks) • 3) endurance of pre-existing networks and the insulation of institutions as a means of resisting the enforcement of a new economic rationality (“over-embedded” regional economies, prevented the enterprises from developing new forms of strategic action and locked them into the existing (state socialist) ways of operating and development

48. Classification of foreign direct investment driven transformations in the CEE car industry based upon the relationship between embeddedness and path dependency in the 1990s Source: Pavlínek, 2003

49. REGULATION THEORY • neoliberal and neoclassical approaches accorded the state a minimal role in economic regulation • regulation theory emphasized the role of the state in the development and regulation of the economy • Regulation theory analyzes a particular political-economic system from four interrelated perspectives: • 1) production and consumption, • 2) economic regulation, • 3) labor processes, • 4) power from the perspective of politics, ideology, culture and behavior.

50. Regulation theory introduced four middle-range concepts: • regime of accumulation (long term development in conditions of production and conditions of social use of output) • mode of regulation (characterizes institutional and other mechanisms used to regulate the behavior of individual agents according to the general principles of the regime of accumulation • labor process model (general principles of work organization and development under a specific development model) • hegemonic bloc (involves a long term imposition of particular power dominance and relations in the spheres of politics, ideology, culture and behavior that secure continuation and stability of a particular development model)