C&B Notes

Behind the Iron Curtain

Twenty years ago, communist countries began their shift towards capitalism. What do we know now that we didn’t know then?  Harvard’s Andrei Shleifer, the Russian-born, American-trained economist, provides his answers and their relevance for contemporary policymakers.

First, in all countries in Eastern Europe and the former Soviet Union, economic activity shrunk at the beginning of transition, in some very sharply…These declines contradicted at least the simple economic theory that a move to free prices should immediately improve resource allocation.  Economic transformation takes time.”

Second, the decline was not permanent.  Following these declines, recovery and rapid growth occurred nearly everywhere… As predicted, capitalism worked and living standards improved enormously. So lesson learned: have faith — capitalism really does work.”

“Third, the declines in output nowhere led to populist revolts — as many economists had feared…But the lesson is clear: a reformer should fear not populism but capture of politics by the new elites.”

“Fourth, economists and reformers overstated both their ability to sequence reforms, and the importance of particular tactical choices… Lesson learned: do not over-plan the move to markets, but, more importantly, do not delay in the hope of having a tidier reform later.”

“Fifth, economists have greatly exaggerated the benefits of incentives by themselves, without changes in people…Transition to markets is accomplished by new people, not by old people with better incentives…the lesson both in firms and in politics is profound: you cannot teach an old dog new tricks, even with incentives.” Transition to markets is accomplished by new people, not by old people with better incentives.

“Sixth, it is important not to overestimate the long-run consequences of macroeconomic crises and even debt defaults…This experience bears a profound lesson for reformers, who are always intimidated by the international financial community: do not panic about crises; they blow over fast.”

“Seventh, it is much easier to forecast economic than political evolution… Lesson learned: middle-income countries eventually slouch toward democracy, but not nearly in as direct or consistent a way as they move toward capitalism.”

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