Trade access versus an economic model

Anders Aslund is a senior associate of the Carnegie Endowment for International Peace and author of Building Capitalism: The Transformation of the Former Soviet Bloc (Cambridge University Press, 2002).

Diverse Paths of Postcommunist Transformation

After a decade, the outcomes of postcommunist transformation are varied. In the former Soviet bloc, the Central European and the three Baltic countries have so far been the most successful. 1 All have become full-fledged democracies and market economies, with 70-85 percent of GDP arising in the private sector. All were early and radical reformers.

In contrast are Belarus, Turkmenistan, and Uzbekistan, which have barely undertaken reform. They are still state-trading countries, with the public sector accounting for four-fifths of GDP in Belarus and Turkmenistan, and all are true dictatorships, in which the dictator has done little but dispense with the Communist Party.

Nine of the twelve former Soviet republics, which have become members of the Commonwealth of Independent States (CIS), have become market economies, although it has taken them quite some time. 2 The economies of those countries are still harrowed by excessive state intervention and thus corruption. Some 60-70 percent of their GDP is generated by private enterprise. Freedom House has rated most of them as partially free. Arguably, Romania and Bulgaria belong to this group as well, although they are more like the Central Europeans in some regards. We may call this group of countries late reformers, but reformed they are.

These very different outcomes show that it was never a given that postcommunist transformation would lead to a market economy, private ownership, and democracy. The policy that each country adopted at the start of transformation has usually been adhered to until a profound political and economic crisis occurred. An example of such discontinuity was the Russian financial crash of August 1998; another was the Bulgarian hyperinflation of 1996-97.

The unreformed dictatorships--Belarus, Turkmenistan, and Uzbekistan--have nowhere to go. The question is how long their dictators will possess sufficient economic and military resources to continue suppressing the people. Belarus is both politically and economically far too open to persist. It will crumble when Russia finally cuts its still very substantial subsidies, and President Vladimir Putin is obviously intent on doing so. Like Belarus, Uzbekistan is currently experiencing a slow-down in its economic growth, and it might face such an economic squeeze that its leader will feel compelled to undertake economic reforms. Turkmenistan is a full-fledged totalitarian state. Economically, it is totally dependent on its extraction and export of natural gas. Currently, that presents no problem, rendering the survival of the regime a primarily political issue.

The broader question is how East-Central Europe will fare in comparison with the reformed former Soviet republics. 3 Although the latter group is catching up in market economic reforms, the two groups are not converging toward the same economic model. East-Central Europe is adopting a model with high taxes, social transfers, and public expenditures. The reformed CIS countries are opting for much lower taxes, social transfers, and public expenditures, and corruption in those countries remains greater.

In recent years, the ten East Central European countries have been preoccupied with their EU accession. Their economic policy agendas have been determined by West European concern in Brussels rather than by their own economic trepidations. Especially the Central European countries have become, in Janos Kornai's words, "premature social welfare states." 4 This state is premature because their average GDP per capita is only about 40 percent of the EU level, measured in purchasing power parity, while they have social transfers almost as large and taxes as high as Western Europe's. Their new economic model ensures stability rather than dynamism, and the question is how fast their economic growth will be. Shockingly, these ten countries had an average growth of only 3 percent a year from 1998 to 2001, while the whole West was booming.

The situation of the nine reformed members of the Commonwealth of Independent States (CIS) looks very different. Unlike the Central Europeans, for the last three years they have benefited from average economic growth of no less than 6 percent a year. They have overcome the initial problems of transition, but their corruption remains significantly greater than in East-Central Europe. Their main problem is access to export markets and the attraction of foreign direct investment (FDI).

Some consider these nine countries as two groups. Russia, Ukraine, Kazakhstan, and Azerbaijan are relatively wealthy and have small external debts. Russia's GDP per capita in purchasing power parity exceeds those of Bulgaria, Romania, Latvia, and Lithuania. Kazakhstan and Azerbaijan are being flooded by foreign direct investment because of their oil, and many now believe in the economic success of these four countries.