224. "How is Russia Bearing Up?" Challenge, (May-June 1992), pp. 40-43. Also published: "Socio-Economics and the Former Soviet Union," Guest Opinion, Washington Economic Reports, United States Information Agency, No. 42, p. 7.


Some leading neoclassical economists feed into American triumphalism and excessive optimism to prevent us from approaching the historical developments in the post-Soviet world in a sensible and productive fashion. Several neoclassical economists, like Jeffrey Sachs, argue that if the republics that comprise the former USSR just follow a few relatively easy steps such as freeing the ruble, slashing regulations, and privatizing, and if we grant them some scores of billions of dollars in aid, they will quickly "stabilize" democracy and capitalism. "Shock therapy" is prescribed because, it is said, the political regimes of these countries will not be able to withstand the pain involved in a more gradual transition. The United States is continually criticized for dragging its feet, delivering too little aid, too late. This delay, it is said, will cause the former Soviet republics to turn authoritarian, if not return to Communism.

EXCESSIVE OPTIMISM

The recommendation to engage in shock therapy is based upon the implicit assumption that because Communism was overthrown and the people of the former Soviet Union mouth Western slogans and hold a few elections, the republics are burgeoning democracies that are keen to establish market-based economies. The fact is, their democratic institutions are at best nascent and highly tentative. A key prerequisite for democracy is the nonviolent turnover of those in power at regular, institutionalized intervals, in line with the preferences of the people. Following his dramatic and heroic opposition to the August 1991 attempted coup, and drawing on the support of some tank brigades and some masses in the streets, Yeltsin usurped much of the authority previously bestowed on Gorbachev in the former USSR. In Georgia, armed groups ousted a president recently elected by 87 percent of the popular vote. Yeltsin (like Walesa in Poland) often reminds the Russian parliament that it was not quite freely elected, that it contains many Communists, and demands that his powers be increased whenever the parliament does not favor his economic policies. Several of the new republics have outlawed the main opposition party (the Communist party), and again in some of them the press is often muzzled. Among the republics and the ethnic groups within them, conflicts often lead to armed confrontations rather than democratic-style give-and-take, and the populace (which has not experienced democracy in its long history) shows few signs that it has the predisposition or cultural traits to sustain democracy. I am not saying that the republics have no democratic potential; only that they have a long way to go before they acquire what it takes. Generally, though, it must be noted that democracy is a plant that grows slowly even under favorable conditions, and is rather vulnerable, as we have recently seen in Haiti and Peru.

The same point holds true for capitalism. The fact that a command-and-control economy collapsed under the weight of an oppressive government and overextended bureaucracies, and that the republics now aspire to a Western standard of living, and their people have even learned to recite the virtues of capitalism the way they used to recite Marx, does not mean that capitalism is in sight. The present state is one of grand confusion bordering on anarchy: a confused mixture of statism and touches of robber "capitalism," rather than a serious laying of the foundations for a Western-style economy.

In short, there are no democratic capitalistic societies in the former USSR that any government, however well-meaning and affluent, could help "stabilize." The notion that if we give them umpteen billions to soften the pain of transition that we will "save" the Yeltsin regime and allow it to complete the transition, reflects our tendency toward excessive youthful optimism. In the same way, we used to believe in the early sixties that we could swiftly, under the Alliance for Progress, develop and democratize the Third World. Note that we gave more than $42 billion to Poland in the seventies, and the money disappeared like water in the sand. To get a sense of the magnitude of the aid needed if we really wanted to shoulder the transition, we should look at what Germany is doing in the eastern provinces. Germany has already poured in more than $100 billion, and it is far from done, and this is in a territory that is much smaller than the former USSR and was much better prepared for transition. Even these amounts would not suffice were it not for the fact that, in effect, West German managers have moved in and are directing most of the transition in the former East Germany. (By the way, the result has been a building of much resentment in the East and the West, and large-scale dislocations in the German economy.) Thus, if we would commit aid to the tune of $1 trillion dollars (give or take a few billion) to the former USSR and hundreds of thousands of managers and technicians, the West might well accelerate Russia's progress, with the result that the United States and its partners would be kicked out as colonial powers once the former Soviets were on their feet. If anything, we should have learned by now that massive foreign aid buys neither allies nor ideological compatibility, not to mention appreciation. Third World countries moved toward freer markets and democratic governments when they themselves realized the demerits of authoritarian governments and controlled economies--they were not swayed by years of relatively high levels of foreign aid.

ENTER NEOCLASSICISTS

As for the neoclassical economists who counsel shock therapy, one must note that they are acting outside their area of expertise. One can argue whether neoclassical economics is much of a science, whether economic theory has become excessively deductive (or mathematical), whether its assumptions are unrealistic, and so on. But there can be little doubt that neoclassical economics is ill-suited to deal with issues such as how much one can rush the change of a culture, what it takes to evolve a new set of social institutions, how long a political regime can withstand pain, and to what extent a given people has or lacks the predispositions democracy presumes and capitalism requires.

In effect, neoclassical economists who deal with these questions are at a particular disadvantage. The mainframe of the theory is well characterized as "comparative static." That is, it contains characterizations of states but no conceptions of the processes that lead to a transition from one state to the other and, above all, what may shape and modify these processes. This is one reason that much of developmental economics is in such an underdeveloped state.

Moreover, the dominant neoclassical economic theory is largely individualistic and aggregative. As a result, it is congenitally ill-constituted to deal with institutions and their changes, the core of the subject at hand. Rather than affirm with such assurance that the former Soviet republics require shock therapy and that gradualism will fail, neoclassical economists should at least admit that they are practicing in an area in which they are not licensed to work.

ENTER SOCIO-ECONOMICS

Socio-economics is a new discipline that draws on numerous works by leading scholars, such as Amartya Sen, Albert Hirschman, Harvey Leibenstein, Neil Smelser, Herbert Simon, institutional and social economists, and attempts to synthesize the insights and findings of all the social sciences that study various aspects of economic (and, more generally, choice) behavior. (For the main tenets of socio-economics, see Amitai Etzioni, The Moral Dimension: Toward a New Economics in For Further Reading.) A society to advance socio-economics has been founded, and a series of books and a journal explicating its work are being published.

What does socio-economics have to say about societal transitions? To the extent that a consensus has evolved in the new discipline, it is safe to state that socio-economists believe that major societal change is a slow and gradual process that cannot be significantly hurried, above all, not by foreign aid. The reasons are numerous. Among them is the fact that the culture of the outgoing regime is typically deeply ingrained in the personalities and relationships of the populace. Resocializing people cannot be hurried. We can see from our own experience how difficult it is to wean people off welfare, to retrain steelworkers, even for most of us to lose weight and keep it off. From this, we get a sense of how difficult it is to change habits.

Second, the notion that capital assets can be privatized and then used efficiently to construct a new economy, is belied by the fact that most of these assets are of little use in an economy that is freely exposed to international markets. These assets were usable, however inefficiently by Western standards, in a semi-protected economy. Once released from government ownership and control, the alleged magic of privatization turns most industrial assets into rubble and scrap metal. It follows that transitions must be gradual, during which some state plants will continue to provide employment and some production while new facilities are being financed and built as largely new resources become available, unless one wants to cause prolonged depression levels of unemployment and loss of production that not even a semi-democratic regime can endure.

Gradual transition is also needed to permit domestic savings, which will provide the new capital needed for new facilities, unless foreign aid is to be so sizable as to provide for a largely new capital-goods sector. (Foreign aid of the kind just suggested by the International Monetary Fund (IMF) that is largely reserved to buy consumer goods, to "ease the pain," does little to foster the formation of productive assets.)

Third, the process of sorting out a new value system and building commitment to it cannot be hurried. The fact that most citizens of the former USSR reject Communism and speak of Western values does not show that they have developed a true commitment to these values. Indeed, the various Western countries have each gradually evolved their own versions of what is variously called mature capitalism or social democracy, all of them mixed systems in which various social goals take precedence over raw economic ones. To urge the former USSR to embrace raw capitalism, with its cutthroat competition, inhuman treatment of labor, unbounded exploitation of the environment, and so forth, will not be acceptable to the citizens of these countries and will only delay the process of their sorting out their own pathway. They must discover for themselves how much they are willing to compete in order to achieve a higher standard of living.

Initial indications suggest that they are largely resistant to the side-effects of capitalism, especially insecurity, unemployment, poverty, crime, and inequality. Of course, they would love to have the safety from street crime that a police state provides, and the fruits of a Western economy. But given a choice between the two, many signs indicate that they are in no hurry to embrace a highly competitive economy.

In short, socio-economics points to the fact that, at best, transition has to be slow. On the basis of the same line of analysis, we predicted that the recommendation made in January 1990 that Poland ought to jump into democratic capitalism in two years was doomed to failure and that Poland would either slow down its rush or lose whatever democratic institutions it commanded (Challenge, July-August 1991). The jury is still out on this first try at shock therapy. It is clear, however: that the transition has not been achieved in two years; that economic changes are being slowed somewhat; and that democratic institutions are under severe strain. For example, there are frequent calls either to stop the so-called austerity program or to give Lech Walesa dictatorial powers.

The experience of Poland deserves attention because transition in Poland was easy compared to what the former USSR now faces. So if it cannot be rushed in Poland, it surely cannot be rushed in Russia. It should also be noted that neoclassical economists often suggest that the reality of theoretical assumptions is irrelevant; the validity of predictions is what counts. Well, socio-economics did predict the current state in Poland. So far, shock therapy neoclassicists are, if not yet flat-out wrong, woefully behind their predicted schedule.

BOOMERANG EFFECTS

While there are rather few constructive or significant contributions a foreign power can make to major societal changes in another country (look what has happened to U.S. efforts to control drug traffic in Panama, which has about doubled since the occupation and ouster of Noriega) short of extensive foreign management, a foreign power can cause some harm. Western quick-fix recommendations, backed up by pressure from the IMF, did lead some leaders in the former Soviet Union, especially Yeltsin and his crew of young neoclassical economists, to commit themselves to shock therapy. When it fails, they will be swept away in its wake and are likely to make way for authoritarian regimes, either immediately or after a few more feeble attempts at democracy and rushed economic transition.

The best way the West can help is by reducing rather than fanning expectations. American experts on societal transitions should share with colleagues and governments the fact that transitions are difficult, prolonged, and require greater domestic sacrifices, and yield slower results, than is widely anticipated. They should reject all notions that the West can significantly reduce the pain of transition, as well as any implications that there are shortcuts on the way to genuine democracies and productive economies. These lessons will be fully supported by what the people of the former Soviet Union face next. Only if they properly steel themselves will they be able to face the prolonged struggle that is ahead.

In addition, the West should provide a steady flow of humanitarian aid (especially of medicines), because it is the decent thing to do, without any expectation of outcomes for us or anyone else other than that sick individuals who will be helped. Finally, the West should offer economic assistance where it directly serves U.S. or world interests, such as the conversion of military plants to peaceful uses, retraining nuclear scientists, and enhancing the safety of nuclear reactors.

Probably the best the United States can do is to focus on strengthening our own economy, a task we are finding out is far from easy. Indeed, if we had a significantly stronger economy, say, like the one we had during the Kennedy administration, in which annual growth of the GNP exceeded 6 percent and inflation never topped 1.3 percent, we would again provide an engine for the world economy that would help the economies of many other countries, including that of the former Soviet Union.

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