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The Road to a Free Economy.

THIS BOOK made its first appearance in 1989 intended for a home audience. Its title was A Passionate Pamphlet in the Cause of Economic Transition in Hungary. But Kornai - who is a member of both the Hungarian Academy of Sciences and the Department of Economics at Harvard University - was persuaded by economists on both sides of the Atlantic to bring forth an expanded English version. We should be glad he did. This is not a proper scientific study' says the author, but a passionate statement written with deep conviction regarding what can be and what should be done in Eastern Europe, specifically in Hungary. His prescription is similar to that advocated by Jeffrey Sachs (also of Harvard) for Poland: drastic and simultaneous action on several fronts. "You cannot jump a deep chasm in two leaps" say both of these 'country doctors.'

Kornai is no stranger to call for reforms, although his previous work (especially his 1980 book, The Economics of Shortage) was couched in more careful and certainly more scientific language. Here, by his own admission, he goes out on a limb, whereas previously he was content in identifying problems. His theme throughout the volume can be summed up in one word: "embourgeoisement." He loves this term and he elaborates on it in many ways, but his most succinct one is when he states that denying luxury goods to the nouveau riche will not put meat on the pensioner's table.

The book is divided into three unequal parts. In the first two long sections, the topics are ownership and stabilization; the third part is very short, but it is the most interesting one, dealing with the economic transition from a political viewpoint. Clearly, Kornai is following in the footsteps of those who wish for the good old days' when the departments at universities were those of political economy. Kornai is willing to say what political decisions should be and how these relate to those about private/public ownership as well as economic stabilization.

In Part 1, dealing with ownership, Kornai espouses the idea of a strong movement toward private means of production, but he recognizes that state bureaucracies will not wither away overnight. He shows, almost step by step, how to set the state firms loose. Large state organizations can be and should be broken into divisions; they should be given authority and limited credit; no liberal wage policy should be available to managers; and monitoring coupled with publicity is a fine tool for enforcement. At the same time, Kornai argues that state assets need not be given away to either domestic or foreign gold diggers.

In Part 2, the author takes to task a former finance minister and others who claim that inflation is the price to be paid for restructuring. Not so, says Kornai; such views only result in self-fulfilling prophecies. And it will do little good to continue with finger-pointing. Instead, enforce budget constraints on the state sector and encourage private initiatives of all kinds. As for tax policy, he wants taxes to be "seizable neutral and not progressive; this is a fresh viewpoint and an unusual one, but Kornai argues strongly for his stand. He wants a single linear tax on consumption, on payroll, and on profits; and he calls for elimination of subsidies, even for foodstuff.

Kornai thinks that the maintenance of wage discipline is the Achilles heel of the whole stabilization process. So he would not tolerate managers at state firms who do not stand firm on this question. He calls for liberalization of prices, embracing the anarchy of the marketplace and the existence of high - some would say obscene - profits. He would like prices to be quite similar in the department stores of Vienna and of Budapest (as well as the variety of goods). Kornai believes that the convertibility of the forint must and should come about soon and that trade restrictions should be lifted. He warns of the danger of strong demand for hard currency from managers, but calls for resisting them.

The road map to the future has to be drawn for the first time, for no country has ever performed the operation proposed in this book. "Hungary and Poland are the first two countries to approach two major tasks simultaneously, namely the transition of the economy toward the dominance of the private sector and fundamental macroadaptation and stabilization." It can be done, the author argues, not in a piecemeal fashion, but only by a strong, decisive Parliament - possibly a coalition government - that enjoys support from the majority of voters and enterprise managers. Kornai thinks that the strong medicine or drastic surgery he calls for will appeal to those who are entrepreneurially minded. Both he and this book reviewer (who spent much time there during the past twenty years) find that the entrepreneurial spirit is alive today in Hungary - and that it can and should be tapped.

In concluding the book, Kornai repeats his call for budgetary constraints and for stomping out inflationary fires. He is not calling for wholesale liquidation of Hungarian assets to foreigners or citizens. He calls for order - not the order of the barracks, but for stability of economic policy, guarantees for individual autonomy, and security for savings and investment. In repeating the battle cry for his term, embourgeoisement, he says "have no fear; accumulate!"

The book reads well, the arguments are persuasive. I was delighted to see the reemergence of political economics. How will, how should this program be sold to the population at large, to politicians, and to business managers? Kornai says little on this. I would have liked to hear what tools he prefers, because establishing a dialogue is no easy matter.

Changing attitudes is no easy task either. Kornai is right; a strong coalition government closely linked with the private sector is a crucial element in this process. But it seems to me that the fate of the program goes beyond that and each segment of society must be involved in this enormous transformation. Case studies of successful changeovers will help. So will a decrease in rhetoric by newspapers, by politicians and by Western "experts." Loosening the still prevailing rules of the bureaucracy is the biggest step. For the nation to bloom, I believe the two key steps needed are improving the infrastructure and changing people's mind about capitalism. Kornai has outlined the radical economic and political reform process necessary and sketched in specific details.

Andrew C. Gross Cleveland State University
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Author:Gross, Andrew C.
Publication:Business Economics
Article Type:Book Review
Date:Jan 1, 1991
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