Post-Soviet-Type Economies in Transition.

This book contains a collection of papers written between 1990 and 1992. It provides impressive theoretical and empirical analyses of two (sets of) central issues of "Post-Soviet-Type" economies in transition: stabilization and (market) liberalization; privatization and institutional reforms. The economies primarily referred to are Poland (heavily), Hungary and Czecho-Slovakia (moderately), Yugoslavia and East Germany (lightly). Major topics addressed include an explanation of the "steep fall in industrial output" in these countries (chapter 1); the initially promising, but subsequently disappointing, transition in Poland (chapter 2-3); an insightful typology of developments (expected versus unexpected; actually happened versus did not happen) (chapter 4); a rousing, though partisan, review of privatization theory (chapter 5); a short, but instructive, primer on the major mistakes "damaging to successful privatization" [p. 169, chapter 6]; and, saving the best until the last, an explication of the need for and some examples of institutional reforms without which transition policies may trigger less successful, indeed perverse, consequences (chapter 7). These topics are preceded by an Introduction, which benefits from having been written after the papers which comprise the book and helps to provide linkages and cohesion which a compendium of papers, even when prepared by a single author, often fails to exhibit. Each chapter is succeeded by a list of references, including numerous recent contributions by Winiecki.

In chapter 1, the author addresses the dramatic fall in industrial output (30% to 45%) in the initial phase of transition. Some, notably that associated with the transition program's "initial macroeconomic squeeze," is a genuine transition cost and "actually reduces welfare." But the "major pan" has "no impact" on welfare and is, instead, a temporary accompaniment of the shift from a less efficient to a more efficient economy. For example, the shift out of central planning enables a "shrinkage of the oversized industrial sector" relative to western market economies and permits enterprises (and households) to reduce the ratios of inventories to production (and consumption).

In Poland, Winiecki observes, transition pains were intensified in the early 1990s by both policy errors and surviving vestiges of behavior patterns from the pre-transition economic system. Policy mistakes included an unrealistic attempt to finetune, overly restrictive policies, notably sharp increases in interest rates in late 1990, and "excessive devotion" to a fixed exchange rate under high inflation. Surviving behavior patterns associated with state ownership of banks and enterprises compounded the problem. Inertia in both borrowing and lending, coupled with greater political clout (and monopoly power) by larger and typically less efficient enterprises, combined to secure an adverse selection of borrowers. The results: The more restrictive the macroeconomic policies, the worse the output structure, and thus the greater the tendency for inflation and output contraction to continue.

The author's examination, in chapter 4, of expected versus unexpected developments (notably, in Poland) is one of the most illuminating in the book. The list of things that were expected to happen and which did happen is "rather short". More interesting were unrealized expectations and surprises. Examples of unrealized expectations were "monetary overhang" and bankruptcies. The former, a legacy of repressed inflation during the ancien regime, quickly dissipated with price liberalization and accompanying inflation. Wage controls and inertial soft budget constraints obviated the latter. The biggest surprise was the unusually large fall in output, especially in industrial output, noted earlier. An unintended consequence of excessive monetary restraint was that profitability of both private firms and smaller (and more efficient) state enterprises was disproportionately undermined, with resulting larger reductions in state revenues and greater fiscal crisis.

In chapter 5, the author explicates the major advantages of private ownership and, thereby, the rationale for privatization. Although lucid and cogent, the strong arguments presented are likely to be perceived, especially by those on the democratic left as well as many policy makers and ordinary citizens in the countries involved, as rather one-sided. For example, a table which nicely summarizes some of the major implications of property rights theory notes five salient "problems" with labor-managed firms, but only one "problem" with privately owned corporations. The author's clear normative perception of transition as the road to market capitalism and accompanying indictment of "market socialism" and workers' ownership actually may obfuscate the fairly high degree of consensus on the direction of transitional change and the need, in light of such criteria as equality, democracy, and full employment, for variegated ownership patterns.

In chapter 6, the author reviews three prominent errors of privatization: (1) over-emphasizing means relative to ends; (2) ignoring the crucial role that time plays; (3) neglecting the politics of privatization. Concerning the third of these errors, he wisely proposes a "simultaneous application of a broad array of privatization approaches" as an "insurance against failure".

In his final, and to this reviewer most insightful, chapter, the author discusses the gap between the demand for and supply of new market-supporting institutions, which "can be narrowed only by the passage of time". Examples: "two-tier banking;" institutions for unemployment benefits and job training; rules and machinery for privatization, and a "network of institutions" to foster "bottom-up privatization" through an expanding small business sector.

In concluding, because the author believes that gradual change to market economy lacks "coherence" among the new rules of the game, whereas rapid change fosters a "critical mass" of new measures and institutions necessary for such coherence, he vigorously endorses rapidity ("shock therapy," the "big bang"). This rather austere proposal would gain practicability by linkage with the politics of transition, a point consistent with and perhaps implicit in his analysis. Greater rapidity might actually elicit larger political support than a more gradualist transition strategy if it were accompanied by strong measures to spread the costs of transition (for example, anti-monopoly policies, tight tax discipline on the nouveaux riche) and generous programs to compensate those hardest hit by inflation, unemployment, and relocation.

John E. Elliott University of Southern California 

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