![[ NATO COLLOQUIUM ]](../../../icons/bd-new/bd-serv.jpg){kind=icon}
Colloquium
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Judging Romania's Way in a Comparative FrameworkDaniel DaianuChief Economist, National Bank of Romania, and President of the Romanian Institute for Free Enterprise (a), Bucharest
What is absolutely unique about post-communist transformation in Europe is that it implies several simultaneously evolving processes: large scale institutional change (including the unprecedented scale of changing property rights), economic restructuring, structural adjustment and macrostabilization, and, last but not least, modernization. The topic of this conference is more than welcome since it makes the attempt to take a look at what makes up a very "soft" portion of what economists are used to dealing with: the functioning of institutions in an economy and the social texture of society. As many social scientists (including economists) would not disagree with, the quality of institutions is what counts, ultimately, for the long term growth differentials of national societies and for their varied lots. For accumulation and the volume and quality of investment (primarily in human capital) need to be explained in the end, and simple macroeconomic parameters do not have sufficient explanatory power to this end. Recent studies by R. Barro, L. Summers, P. Romer, etc. reconfirmed the role of capital build-up for economic growth, but this result did not surprise the profession. What needs to be elucidated is what makes a nation accumulate and invest more than others, what role is played by income distribution in it, and why it can achieve dynamic efficiency gains over time, whereas others may be plagued by substantial diminishing returns. And as M. Olson would forcefully point out, economists are quite unconvincing in this respect although they may claim otherwise.
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An Overall PictureThere is both good and bad news about post-communist transformation in Europe. The good news is that, overall, surprisingly much has been achieved, bearing in mind the burden of the past. In other words, the current state of affairs could have been substantially worse. At the same time a certain kind of normalcy is spreading in the area in terms of patterns of functioning of market-based systems. Even the participation rates in the recent elections in most of the post-communist countries can be interpreted from such a perspective. This normalcy may be partly at the origin of the apparent declining interest Western public opinion and governments show in post-communist transformation; only recently the outcome of elections in Russia again made big headlines. It is true, nonetheless, that this diminishing interest can be linked with the mounting domestic problems of Western governments. A necessary qualification is, however, needed in relation with the use of the word normalcy; it does take into account what the realists -- as they can be named -- have been saying is most likely to occur, or what is achievable under the circumstances. Why the number of realists as against that of idealists (optimists) has been much lower, among scholars as well, is a topic less relevant for our discussion, though not uninteresting.There are some remarkable achievements. One is the Czech Republic's impressive record with stunningly low inflation and unemployment rates. Likewise, the buoyant Polish economy, in spite of the very high unemployment rate, is proof that institutionally organized expanding markets are getting a good hold of the country's economic body. Economic recovery has been underway in most of the countries of the region; in Romania this recovery started in 1993 and the growth rate rose to 6.9% in 1995, which was among the highest in Europe. In general, the formidable expansion of the entrepreneurial sector all over the region is a clear proof of the enormous economic potential that was stifled by the command system. The data on privatization show that, in spite of many difficulties, this process has registered remarkable advances in almost all European post-communist countries. Another good news is the way the emerging democratic institutions have been able to vent, with relative success -- until now --, the frustration of large segments of the citizenry with the costs of reforms and secured, thereby, a surprising degree of social stability. This fact is, in itself, quite encouraging and may seem to give support to those who have argued that history and analogies are not necessarily the best predictor of what is going to happen in Eastern Europe (1). It is hard not to agree, in this respect, with Valerie Bunce when she says that "It is the balance between levels of conflict and systemic capacity to adjudicate conflicts, then, and not simply the degree of conflict which should receive our foremost attention in assessing the stability of the new Eastern Europe" (1992, pp.281). But it can be contended, with similar validity, that it would be a major mistake to consider that Eastern Europe is endowed with some specific traits which make it relatively immune to what acute social friction entails in the rest of the world. Even in the Czech Republic, which is considered almost a role-model among the transforming economies and which evinces an amazingly low unemployment rate -- one of the lowest in the world -- the pains of economic reforms take the expected toll; they also explain the political ascendancy of the Social Democrats (Milos Zeman's Party). As in other countries of the region, in Romania, too, these pains explain the appeal of political discourses which pledge to cushion the effects of reforms. This propensity of the electorate forced even the main opposition political group (The Democratic Convention) to adopt a political platform with some populist overtones. In a wider context one can speculate that the longer and more tortuous the transition is and the more distanced from the euphoria of year 1989, the more intense would be the confrontation among brands of populism, at least rhetorically. The patience (stoicism) of many people (losers) during the last six years may also be explained by the big talk of joining the EU and NATO in the near future; this prospect has operated as a kind of "anchor" for reform policy. For instance, domestic polls and those taken by Eurobarometer and Eurostat show a tremendous desire of Romanians for their country to join the two institutions, which would presumably guarantee economic prosperity and security. Obviously, a question can easily be posed: is this anchor a stable one and for how long can it still be relied on? The bad news, or "the empty half of the glass" is that lots of people in the region have had a very hard time in coping with the psychological pressure and material difficulties caused by transformation, a fact clearly proven by the results of elections in the various countries. Owing to the high expectations entertained by people at large, and also by many policy-makers, the pace and results of transition are looked upon by many as quite unsatisfactory. People realize that post-communist transformation is a much more complex and complicated process than initially thought, and that time can not be compressed at will. Defining and enforcing a new structure of property rights, setting up and making institutions work (seen as "rules enjoying wide social acceptability"), achieving durable macrostabilization via structural adjustment and industrial restructuring are intertwined prerequisites for attaining economic viability. But these are time-consuming and painful endeavors. In this context one can try to answer the question: why have post-communist parties fared so well in Eastern Europe? I have in mind the parties which shed their former names and claim to espouse a democratic political philosophy (2). Part of the answer is linked with the extent of underestimation of the costs of reforms. Another explanation would be that many people were seduced by reform programs that promised to be less painful. One should consider also the disillusionment produced by the discrepancy between reality and the portrayal of a market-based system (capitalism) as a perfect society. Instead of talking about the virtues of an emerging society which, in spite of inherent imperfections can perform, a myth has been in the making. Politicians and the mass media should have explained to the citizens of post-communist countries that, as Churchill said about democracy, a market-based system is analogously imperfect, but it can deliver on its promises under proper circumstances. The fact is that, in most of the cases, the left of center of the political spectrum was pretty much void and the post-communist parties have occupied it for three fundamental reasons: because they wanted that position in view of their professed new ideology; because there was a big vacuum to be filled there; and because it is human nature to want power, and especially to wish not to relinquish it. Over the longer term and if the political traditions of Europe (less individualism than in the USA) are also considered, the political future of left-oriented parties in post-communist societies needs to be assessed in a balanced way. Moreover, the quasi-egalitarian ethos espoused by many citizens and the almost subconscious desire of and expectation to be looked after by a paternalistic state reinforces the posture of left-oriented parties and may induce other parties to ride populist themes in the political debate. This trend is more likely to occur the poorer society is (such as Romania, Bulgaria, etc.) and the higher is the gap between expectations and reality, which may create hurdles for the relatively better off countries as well (like Hungary and Poland). One needs to mention, also, that, in certain cases, the political discourse of the newly emerged democratic parties has met inherently unsurpassable obstacles in selling the programs of reforms -- with their costs -- to the public. Lofty ideals, the values and principles of democracy are not sufficient for rallying public support when large sections of the population feel left out (3). As one could say in terms of current French political terminology, post-communist reforms create their own "exclus". George Schopflin pertinently remarked that the concept of society propounded by some of the new democratic elites "was curiously like the one Marxists had put forward forty years ago. In their view, society need not be significantly marked by conflicts of interests, nor were there any deep cleavages which called for intermediation and aggregation" (4). A highly simplifying and politically counter-productive clich was, also, frequently used; namely, that the political conflict is between neo-communists and anti-communists (true democrats). This claimed political divide begs one major question: how does it come that so many people voted the so-called neo-communists back to power? Do so many people want "neo-communism" back? If that were the case our whole analysis and premises about what people fought for under communism would have to be turned upside down. It is my opinion that this clich, and the line of reasoning that motivates it, are incorrect and cognitively misleading. It is true that former high-ranking officials play important roles in the post-communist parties, which is a fact that adds a moral dimension to the whole issue. But this fact can not change the basics of the political equation, and the reality that many voters felt hurt by economic reforms while, at the same time, they espouse a left of center ideology. Quite confusing can also be the fact that, as in Romania, "former communists" -- as the Western media say -- operate all along the political spectrum, which invalidates the notion itself. Of course, in Poland, where the communist party was relatively much smaller numerically than in Romania, the adjective "former communist" has much more meaning; but even there I would argue that, for many of those involved, the more appropriate term is "former declared communist". Things get more complicated when leftism (containing much populism) combines with ultra-nationalism and xenophobia, for the sake of sheer "power politics" and the preservation of entrenched vested interests -- or what is, generally, seen as a process of converting political power assets into economic assets (5). This combination runs, clearly, against the furtherance of democratic reforms, and it will shape capitalism in this part of the world. Institutional Change and Modernization: The Legacy of BackwardnessIf the system-related (institutional) dimension of transition is of paramount importance, one can detect another meaning which has defined the evolution of these societies through this century: it is "the quest for catching-up with the West", an idea which obsessed both national politicians during the interwar period and the communist leaderships bent on proving the alleged superiority of their system through forced (Stalinist) industrialization and modernization. Today, this quest is reflected by the ardent desire to join the European Union.Why is the quest for catching-up emphasized? For often one can hear presumably knowledgeable professionals making judgments on the transformation process, while seeming to neglect the legacy of backwardness of most of these societies -- a state of affairs which goes back deeply into history (6). As a keen student of the area observed: "... Eastern Europe was in some sense economically backward long before it was absorbed into the broader Western world market. This backwardness has roots in the very distant past..." (7). Similarly, Ivan Berend remarks that "What is missing in most of these analyses is a deeper understanding of long-term historical trends in East-Central Europe" (8). A note of caution is nevertheless required. As has already been underlined, the post-communist societies of Europe are societal entities that show common (structural) traits, but also major discrepancies: the latter can be linked with the different pre-communist legacies and the different brands of national central planning in terms of relaxation of direct controls and economic policy choices. Thus the former Czechoslovakia, as a leading industrial country during the inter-war period, is a most conspicuous example. Likewise, Romania, with its late Stalinism embodied by Ceausescu's regime and rejection of any partial reforms is another glaring example. The different histories explain why market institutions vary qualitatively among the national environments and, also, why macro- and micro-disequilibria differed among them on the eve of 1989. Undoubtedly, Hungary, the former Czechoslovakia and Poland have had a substantial competitive edge in starting the process of managing the transition. Unsurprisingly, all these countries have fared better then the rest in their stabilization programmes, although their recipes were not similar as some would argue. And not surprisingly, too, Russia and other former Soviet republics have fared worst in this respect. At the same time, Romania, although it appears to have subdued very high inflation (which came down from cca.300% in 1993 to under 28% in 1995) has been relatively slow in privatizing industry and in getting substantial capital inflows which, in my view, are essential for making macrostabilization durable. The stress put on the burden of the past is meant to warn against its dragging effects and an unfavorable path dependency which is not easy to break away from. I remember how baffled were some of my Romanian colleagues when Ken Jowitt, a well known political scientist from the University of Berkeley, said that "Latin American countries have been in transition for more than a century" (9). He referred not only to mistaken economic policies (Argentina comes easily to mind, for it belonged to the group of advanced economies before the Second World War) but also to institutional bottlenecks rooted in a certain level of economic development. Backwardness makes it harder to overcome the fragility of the market institutions in the making and it enhances the potential for the dynamics of change to get out of control. It should be stressed that institutional fragility was very much underestimated by policy-makers and their advisers. As Peter Rutland rightly points out by referring to Russia, "in a travesty of Hayekian logic, it was assumed that market institutions would be self-generating" (10). It is true and, at the same time, it is fair to stress that the extremely high degree of literacy of Eastern European societies, their large segments of well trained workers, the existence of a numerous technical intelligentsia, and the linkages with the developed world offered by the "age of information" provide positive counter-balancing factors (11). Nonetheless, it would be very myopic and counterproductive to disregard the industrial, cultural, and institutional distance -- however varied this is -- that separates Central and Eastern Europe from Western Europe. Institutional fragility has already been implied. Apart from the insufficient analytical attention paid to the institutional build-up in the transforming societies in Europe, one has to consider the seeds of instability produced by this fragility. The poor capacity to perform displayed by immature institutions needs to be mentioned in this context. For example, the debate about universal vs. narrow banks (on whether and how banks should be involved in resource allocation) is quite relevant for the concern that immature market institutions create in terms of enhancing instability and uncertainty in the system (12). And the ubiquity of banks' crises in the region exemplifies tellingly this fragility. From a broader perspective one can pose the issue of the governance capabilities of the political and economic elites of these countries. -- to what extent these elites are capable to induce and manage change (transformation) when so much fuzziness, volatility and uncertainty is prevailing. A possible assessment would emphasize the infancy of institutions and the scarcity of organizational capital in these societies; it would also highlight the potential for learning and for catching-up over time. Differently, a skeptical judgement would stress that the very development of institutions would be undermined by the poor quality of "seeds". But one would have to go further analytically in order to differentiate among current and future situations. For instance, governance does not need to refer necessarily to government policy; the term can be broadened. Dorel Sandor, who is a leading Romanian political analyst, pointed at the responsibility which is bestowed on Parliament in this respect-- for apart from those who govern as central government there are others (members of parliament) who are supposed to rule as well as members of the ruling elites. How harsh should then be our evaluation? One line of reasoning could go as follows: one should not ask for very much, bearing in mind the burden of the past and other peculiar circumstances. Another line of reasoning could be: the main political players who had no chance until now to test their capabilities in government deserve the benefit of the doubt. And a third view which is echoed by several high-profile Romanian social scientists (A. Teodorescu, A.Mungiu, V.Pasti, St.Tanase, etc.) is that the current political elites of the country (including the opposition parties) have not been up to the task and that something different is needed in terms of both vision and policy pragmatism. This thinking prompted the formation by a group of leading members of the Romanian intelligentsia of the party "Alternativa Romaniei" (The Alternative of Romania) which, however, has not met big resonance in the political electorate until now. I would submit that the main difficulty such a political demarche has faced is threefold: the purported messianistic approach which is accompanied by a certain implicit intellectual arrogance vis--vis other political parties and the rest of society in general; the challenge of articulating and representing concrete social and economic interests; and the realization that assessing the political elites' performance against a mythical yardstick is counterproductive. Tellingly enough "Alternativa Romaniei" joined the main opposition political group, the Democratic Convention, in July of 1996. Organized Crime and CorruptionA phenomenon which reflects with much intensity the institutional fragility and the complicated nature and complexity of transformation is the ubiquity of lawlessness in economic life -- the "blossoming" of organized crime and corruption. There is no doubt that much of it is just an outcome of activities becoming less hidden. It is also true that some of what appears as illegal activity is due to the still great fuzziness of the legal environment, and to the emerged need to privatize contract enforcement when official law enforcement capability is almost non-existent. But there is also an element of novelty in this field, which, in certain cases can take frightening forms and proportions. Again Russia is noteworthy in this respect, with a number of bankers, businessmen and journalists murdered. This has an impact on the social psyche which is not favorable to market and democracy-nurturing reforms. For the sake of fairness, it should be said that other post-communist countries are keeping a tight hold over the ranks.A very detrimental vicious circle can be at play here. Thus, because of institutional fragility (as a matter of fact, owing to the lack of socially accepted norms and of authorities capable of enforcing them, should the need arise), organized crime and lawlessness in general do proliferate. Simultaneously, their proliferation undermines the very effectiveness of the budding democratic institutions (see also Susan Rose-Ackerman). And, consequently, the so-called "proto-democratic institutions" are very likely to remain in a limbo state for a long period of time. One can, normally, pose the following question: what kind of capitalism is being built in the transforming economies? An optimistic answer would be twofold. First, the picture is too multicolored for justifying an all-encompassing answer -- the intensity of the phenomenon is different in the various national environments (the Czech Republic is different from, let's say, Ukraine) and, therefore, its consequences and prospects are dissimilar. As a matter of fact, different kinds of capitalism would be emerging in the post-communist countries. Secondly, the presumption should be accepted that this phenomenon will recede over time in keeping with the unfolding of transformation (13). A pessimistic answer would highlight the vicious circle mentioned above -- as a conspicuous instance of "path dependency" -- and the enhancing factor represented by rising unemployment and poverty among large segments of society as well as the increasing mistrust of the citizenry of an apparently impotent and corrupted government bureaucracy. In Romania this disenchantment is expressed by the saying "there is much corruption but no corrupted people". A pessimistic answer would also point out the danger that the tentacles of organized crime would influence the functioning of institutions increasingly, and would encroach on the political process, ultimately, in a resilient fashion; something resembling organized crime as a phenomenon in Italy, Mexico or Colombia, would come into being, but it would very likely have its own peculiarities. Both Eastern and Western governments should not be complacent about this phenomenon in the hope that it may prove "benign" and useful for building up market-based economic systems in the long run. The Magnitude of Resource Reallocation and PrivatizationAnother issue which, in my view, is not sufficiently highlighted in public debate is the dimension of the inherited misallocation of resources in Eastern Europe -- i.e. the sheer scale of disequilibria, at the new relative prices, that indicates the magnitude of required restructuring as compared to the ability of the system to undergo wide ranging and quick change. What is amazing is the nonchalance of many professionals about the consequences of the magnitude of required restructuring. When one sees Western governments - and their social constituencies - vacillating and deeply reluctant to undertake relatively minor adjustments, the strain under which the former command economies operate becomes understandable.In Eastern Europe, the structure of the economy and its resource misallocation have put the system under exceptional strain, once the combination of internal shocks (engineered by reforms, or, simply, triggered by uncontrolled processes of system dissolution) and external shocks occurred. Structure refers to the network of institutional arrangements, including rules of conduct that are socially ingrained, and of vested interests which are based on material/productive interdependencies and the distribution of property rights, that creates a specific logic of motion in the system and makes individual enterprises its captives. The vested interests are also the result of the configuration of industry as a legacy of the command system (14). This industrial structure, with its extremely high concentration and reliance on chain links, explains the degree of market monopolization in the transforming economies. In this respect one can talk about a power of structure, which is well illustrated by the power of debtors over creditors. This power is not of a conspiratorial nature (the cartel is unconscious), because it rests on the system's rules of functioning. Command planning, with its inherent impossibility for rational calculation, and forced industrialization, left a legacy of resource misallocation that was brought, conspicuously, into the open by price liberalization and the functional opening of the economy. The new prices show what was, previously, kept hidden by administrative prices and heavy redistribution of income: a very wide range of profitability rates and a very wide dispersion of units fitting into several categories: negative value-added enterprises; inefficient, but still positive value-added units which, in turn, can be split into non-viable and, potentially, viable firms; and inefficient enterprises. The wide range of profitability rates and wide dispersion of enterprises with varying performances mean that, should market (financial) discipline be strictly enforced, a large number of units would go under -- as a sign of the start of drastic reallocation of resources: namely, aggregate output would go down substantially since market destruction is significantly more intense than market construction, at least in the first stage. There are two important aspects involved in this process: firstly, the scope of reallocation (dislocation) and, secondly, the speed required to maintain a certain balance between exit and entry (15), so that the growth of the healthy (private) sector is not unduly impaired. A plausible assumption is that the greater the scope and the faster the desired speed of the process are, the higher the imbalance will be and strain will build up within the economy. Actually, when "low supply responsiveness" is mentioned the finger is pointed at this imbalance. What are the major implications of this strain? One is that these economies could easily become exceedingly unstable and that their capacity to absorb shocks is quite low; these economies have a high degree of vulnerability! Another implication is that policy-makers face extremely painful trade-offs and that, in most cases, unless sufficient external support is available, the room for maneuver is in practice quite limited. Basically, policy-makers would have to sail between the Scylla of high inflation (or hyperinflation, in the structurally more rigid economies) and the Charybdis of huge unemployment, both results being highly undesirable politically and socially. Russia, and Ukraine, provide, perhaps, the most dramatic examples of this miserable trade-off. As Jeffrey Sachs pointed out "Economic chaos could produce a political collapse in at least two ways -- through the descent into hyperinflation, or through a catastrophic rise in unemployment not cushioned by a social safety net" (16). This is a very plausible explanation for the almost negligible official unemployment rate in Russia, which hovered around 2% in recent years. An interesting aspect of Sachs' remark is that it emphasizes how an economic policy can collapse when, though it has to cope with a tremendous strain in the system and the insufficiency of external support, it goes ahead as if this support were available. This may very likely have been one of the main causes which led to Gaidar's downfall as acting Prime Minister of Russia in the early 90s. Unemployment rates in the transforming economies are not exceedingly high, in comparison with the European levels of the mid-nineties. After a very sharp rise after 1990, they seem to have stabilized around the 1993 level. One should consider also that part of this unemployment disguises the activity of many persons in the unrecorded (shadow) economy. Additionally, the resumption of growth in most of Eastern Europe, in 1994 and 1995, will very probably help contain this phenomenon; in Romania the economic recovery of 1994 and 1995 brought down unemployment to below 9%. However, there are several factors that provide cause for concern. One is that the yardstick used is itself questionable, taking into account the unemployment problem in Western Europe . A second factor is the weakness of safety nets; this problem acquires particular significance in the poorer post-communist countries, where the consequences of a "new type" of poverty (17) could be extremely serious (18). And another factor is the fact that the restructuring of large companies -- which mostly need to shed labor in order to become profitable -- is very slow, or, in practice, not taking place; this means that potential unemployment increases are still very significant unless substantial greenfield investments occur. Thus, John Odling Smee, Director of the IMF European II Department (which deals with the Baltics and the former Soviet Union) considers that in most of the countries under his focus, "The transition will take many years, even decades, especially if one includes the enormous downsizing of heavy industries and the buildup of services and consumer goods industries that will be needed. The process will involve major disruption and will be painful for those individuals who will lose their jobs. While open unemployment is still relatively low, it is quite possible that in some places it will rise quite sharply. Within the aggregate, there will be groups -- such as those who lose their jobs and have difficulty finding new employment -- for whom hard times are still ahead" (19). One should also mention an increasingly intense distributional struggle, and an erosion of the consensus for a certain kind of societal change in circumstances when many individuals appear as losers -- once market forces start to reward people in accordance with merit, effort, good ideas, and inspiration, but also as a result of some workers' misfortune to have jobs in bad (unprofitable) enterprises. These two processes are not a good omen for securing consistency of and support for economic policy-making. They also explain why inflation is seen by some governments as a redistributive device when strain is extreme. As a leading Russian economist emphasized "Money is collected from all enterprises and redistributed to the chosen few, and this redistribution cannot be achieved without inflation" (20). In Romania the large array of subsidies, together with the still high inflation rate, express the degree of strain in the system. On PrivatizationThere is another dimension to this distributional struggle which needs to be highlighted for its exceptional character in human history, and for its effects on systemic transformation. This is the process of privatization, which means a massive (total) redistribution of state assets. As we know, economic textbooks take as a given the initial distribution of assets among individual private owners; this distribution is almost God given, and it underpins the whole reasoning on how best to allocate resources and to achieve Pareto optimality (highest welfare). In the case of post-communist countries, "God" has decided to come down from heaven -- for what we are witnessing currently is an extraordinary process, without precedent in the history of mankind. In the next few years, much of the fate of tens, if not hundreds, of millions of living individuals (and of their descendants) is going to be shaped by the mechanics and dynamics of privatization.Chrystia Freeland, from the Financial Times, has captured remarkably well this process when looking at what is going on in Russia. She says: "Gang-land style assassinations, of bankers, politicians, and recently of one of Russia's most beloved television personalities, are bloody testimony to the fact that Russia is now absorbed in a strategic competition to determine which families will be rich and which families will be poor for a very long time to come" (21). What took many hundreds of years in the advanced capitalist countries is supposed to occur, through various procedures (more or less legal), in the post-communist countries in a snapshot on the scale of history. It is not, therefore, surprising that everything surrounding this process is so highly charged emotionally -- why so many hopes, dreams, reckless and ruthless actions, misbehaviour, and delusions are linked to it. All individuals want to be on the winning side, but markets cannot make all happy at once. The nature of capitalism in the post-communist countries will be decisively influenced by the actual results of privatization seen as a process. If privatization results in the development of a strong middle class as the social backbone of the new economic system, the latter's stability and vigor will be secured, and democratic institutions will develop. Otherwise, the new system in the making will be inherently unstable -- like the bad Latin American model (22) -- with politics very liable to take an authoritarian route. Obviously, a strong EU anchor would reduce the likelihood for such an outcome. There is a feature of communism that needs to be emphasized, in order to understand better the social tension engendered by post-communist transformation, and the intensity of the distributional struggle. Communism -- as an economic system -- functioned as a kind of poor and steadily declining (suffering from economic euthanasia) but, nonetheless, "welfare state" (23). Thus, Janos Kornai called the former command system in Hungary a "premature welfare system" (24). In the spirit of officially proclaimed egalitarianism, its most distinctive trait was job security from cradle to grave, which was accompanied by a full array of other benefits provided by the paternalistic state -- in exchange for a total political (ideological) submission. With reference to Russia, The Economist made the comment that it "inherited from Communism a universal system of welfare. This system is an asset as long as it helps to ensure that the poor continue to support reform. The snag is that decent welfare provisions cost a great deal of money. If even the rich Sweden is having trouble financing its welfare state, then emerging Russia can not possibly afford the system it has got" (25). The post-communist countries maintain among the most generous social welfare budgets in the world when calculated as a share of GDP: social spending budgets are between 15-30% of GDP, as compared to 5-10% in the case of East Asian countries at similar income levels, for similar social programs (26). As in Western countries, where there exist powerful vested interests which oppose economic adjustment, in post-communist countries those who can not compete on the markets have become a strong coalition of interests which can slow down, or even arrest the reforms. This mass of individuals is most likely to fall prey to populistic slogans and is obviously inclined to support the left-oriented (mostly, post-communist) parties. Robert Gilpin's observation, that adjustment is very difficult in welfare states, applies mutatis mutandis in the case of post-communist countries. Variety of Capitalisms?One can already try to identify different models of capitalism among the post-communist countries, and seek also to speculate on the intensity of Western Europe's vs. Russia's influence in each case. This variety of models has to be judged in a substantive and a formal sense. Formally, all these countries are implementing market reforms, and some of them have signed Association Agreements with the European Union. It can be said. also, that these agreements, and the other links with the pan-Western European institutions, have created a sort of an evolution-guiding "straitjacket" -- which can be seen as synonymous to an "anchor". Nonetheless, post-communist countries differentiate among themselves in terms of the quality of actual institutional development, the quality of macro-economic fundamentals, and the resultant economic performances. These qualitative differences -- many of which are of an intangible nature -- are essential when screening the prospects for each individual country.Countries like the Czech Republic, Hungary and Poland seem to go the Western way, though one cannot -- and should not -- dismiss possible, and quite probably serious, stumblings and setbacks on the road (see L. Csaba, J. Hardt). There seems to be a heavy flavour of the German model in this dynamic, not least owing to the intricate links between banks and enterprises, and to the active presence of German and Austrian companies in the region. There is, however, an interesting development connected with the Czech case: the mass privatization program, with its ensuing development of capital markets, would have presumably favored the Anglo-Saxon model of corporate governance which relies on external control (via capital markets). But major banks became key stakeholders in the most important investment funds, and indirectly, can control a large number of enterprises. One can see, again, the heavy role of geography and history at play (27). The Baltic countries are, apparently, moving along the Scandinavian model, but with a strong dosage of German financial rigour. Vacillating more, though making strenuous efforts, is Romania, which is burdened by both the effects of some delayed reform measures, including privatization, and the relatively more complicated communist legacy. Romania is at a kind of crossroads in the transformation process: it will either implement some required changes and thereby try to keep pace with the front-runners or will risk losing contact with the Visegrad Group. It should be said, however, that there is a non-negligible probability for Romania to improve substantially her economic performance and, thereby, to keep in the neighbourhood of the Visegrad Group. As was stated, in Romania inflation came down remarkably to 61.7% (end of year) in 1994 and its continued stabilization efforts brought its macroeconomic performance close to that of the front-runners in the following year. Nonetheless, in view of the large distortions in its economy, and the still slow pace of restructuring as well as the feeble capital inflows, it is still to be seen how durable this stabilization is. Very much depends also on the results of the legislative elections in the Fall of 1996 and the ensuing economic policies. The danger for Romania, and other post-communist countries, is to fall into the institutional traps of a bad type of capitalism -- with kleptocracy, authoritarian politics, ubiquitous corruption, socially damaging growing income inequality and intense social strife. Such an evolution, should it be sealed through an early accession of the Group of Four into NATO and the EU, would accentuate the divide among the European post-communist countries. It may even cause intense disappointment among the population at large, whose tolerance for the costs of reforms has been significantly sweetened (until now) by the promises of joining the two Western clubs. This would, clearly, have important consequences for "high politics" on the European continent and would have implications on the shaping of spheres of influence. It would also fit the logic behind the Copenhagen Statement of June 1993 and reiterated at Essen in June 1994, which said that joining the EU is conditional on actual individual performances. In a different vein one could argue that such a policy-accentuated divide is short-sighted to the extent it neglects the different initial circumstances and other geopolitical considerations. For example, could one overlook the bilateral Romanian-Hungarian relationship in view of the precedent created by the "discipline" imposed by NATO on Greece and Turkey; or could one be oblivious to the growing political assertiveness of Islamic forces in Turkey, which reinforces the position of Romania as a potential strong bulwark in the region? Not to mention the fact that Romania is one of the largest and most populous countries of the region? Additionally one could argue that the best way to fight social and political negatives in Romania and other post-communist countries, is via integration and the avoidance of discriminatory gestures. In the case of Romania I would highlight also that the existence of two major political poles (the Party of Social Democracy and the Democratic Convention) and the vigor of another alliance (the Social Democratic Union) create prerequisites for precluding a fatal evolution of the political process and the shifting towards blatant authoritarianism. One would also have to mention the role of the independent press in this respect. As a conclusion to this section I dare to say that that the leaders of Europe need to pay more attention to the role of icons for social psychology. It can be stated that the more laggard a transforming country is, and the closer it is to Russia geographically, the more critical for its future is the nature of capitalism in the latter country. Conversely, it can be submitted that the closer is a country geographically to the EU the more likely it undergoes the influence of the EU "anchor". A similar thesis can be submitted regarding the nature of domestic politics, with Russian developments providing a strong demonstration effect, if not direct influence. What are then the prospects for Russian capitalism? As was highlighted above, the new economy is very much market-based, but it is also "anarchic, predatory, corrupt and oligarchic...unfortunately, the maldistribution of wealth and power is likely to give Russia a rentier economy that fails to provide the competitive dynamism the country desperately needs and its elite expects. It will also make democracy less workable, since it must pit a deprived and resentful majority against a wealthy minority" (28). "One danger is populism; the more likely outcome is repression" (29). The growing profile of those who advocate a more authoritarian rule in Russia and the likelihood for it to come into being can be judged also by the rising number of high-ranking military people (like Aleksander Lebed) who play a role in politics. The temptation of authoritarian rule can be discerned in other post-communist countries as well. There is, however, a big difference as against Russia, since in the latter country military figures are getting increasingly into the limelight of politics and the mood of large segments of the population -- who want some "order" restored -- seems to favor their political ascendancy. The comeback of the Communist Party in Russian politics is to be judged in this vein as well. A Cognitive Issue: ComplexityThe analysis of transition very much needs to take cognizance of the extreme complexity of the process under way. Gross oversimplifications and reductionism of the type "black vs. white" (with no shades in between), and the lack of understanding of how interests are socially articulated -- particularly in a transition period -- can not but obscure real processes and lead to hasty and inadequate decisions. As a scholar aptly noted, "The elites failed to understand that society was a far more complex organism than what they had thought, that simple, well-meaning declarations were not effective in politics, that ideas and programs would have to be sold to the public, and that institutions were necessary for the routinized exercise of power" (30).An open and honest debate is also made difficult by what seems to have been turned into a kind of non-discussable matter. There seems thus to have developed an entrenched habit among some of those who analyze, or are involved in, the policy-making of post-communist transformation which does not help a genuine and fruitful exchange of views at all. I refer to the kind of statements and judgements which seem to ignore completely the existence of trade-offs and dilemmas for any policy, under any circumstances. It is not rare to meet and listen to people who seem to have a very hard time in accepting the fallibility of human nature, and the fact that any individual, or organizationally (institutionally) structured thinking has flaws -- that there is no such thing as a perfect policy; that they, themselves, or the political or non-political organizations they represent cannot be one hundred percent right in their thoughts and actions. There are some people who have a very rudimentary view of what a modern market-based system means, and who do not realize that there are variants of real capitalism -- that a "pure" market economy as such does not exist in reality and that the concept is meaningless without proper qualifications. Besides, "Imperfect and costly information, imperfect capital markets, imperfect competition: these are the realities of market economies -- aspects that must be taken into account by those countries embarking on the choice of an economic system" (31). The implication is clear in the sense of the stringent need to consider how market economies actually function, and not to succumb to the beauty, yet irrelevance, of the textbook model of perfect competition. Such people are opaque to the reality that it is high time to deal seriously with the fine print of reforms, and that this involves much more than simple ideological statements and exhortations; that this involves unavoidable pragmatism and making hard policy choices based on solid theoretical and empirical knowledge, when one can not escape facing painful trade-offs and dilemmas. For instance, one issue that badly needs serious debate is the structures of corporate governance. It is ever more clear that one needs to go beyond the general statement regarding the necessity for privatization, and that it is not at all clear what are the best formulae for corporate governance in the transforming economies. On a more general level it is high time to acknowledge an extremely important fact: the post-communist countries are in a period when the basic constructs of the future systems are put in place and this can be seen as an historical opportunity for designing viable societal aggregates. For example, the future dynamics of the consolidated public budget will very much depend on how its structure is built. At the same time, due to the rush of events and the complexity of the whole process big mistakes can be made. These mistakes can put the evolving systems on a less convenient path; they can create a bad "path-dependency". This is like saying that the institutional "QWERTY keyboard layout" of the transforming systems is now being created and one needs to be very careful on which path the lock-in occurs (32). It is true that the above described behaviour can more often be met among those who have strong personal and direct political involvement, and who may feel, consequently, more reluctant to be candid and self-critical. And in their case one may try to find justifications, but only to the extent the limits of decent dialogue and transparency are not totally misconstrued and misued. What is puzzling is that such politician's type of behaviour has extended its reach among certain academic people, whose posturing and intellectual masquerading can be quite ridiculous and grotesque. Overall, this behaviour is mishandling ordinary citizens' interests and feelings and confusing their perceptions of social and political life. For how else can one interpret the stances that exude - explicitly or implicitly - the slogan "those who are not with us are against us", which, ironically, fits very much the communist pattern of thinking ConclusionMost Eastern European governments are under terrible time pressure - for them "it is raining while the house is still roofless". They do not have the luxury of dragging their feet, and those who waste time are heavily penalized. On the other hand, increasing worries are created because of the still-depressed levels of output and relatively low investment ratios and real wages. These are factors which can hinder the attempts to create viable economic systems, and can undermine the prospects for long-term growth. An ever more pervasive social fatigue, together with the instability caused by inter-ethnic and military conflicts in several places of the area, can play havoc with transformation and lead national systems astray. The diminishing vitality of Western Europe and the latter's inability to provide clairvoyant guidance can only intensify the dilemmas of transition (Daianu, 1996a,b).Path-dependency is a very meaningful expression under the circumstances. A sequence of major policy blunders and unfavorable external shocks can put a system on a misdirected trajectory which would be hard to correct. That one needs also to consider that the degree of instability in Eastern Europe is amplified by the extent to which the countries in the region feel that their security is threatened. When military conflicts (wars) occur in the neighboring areas, when borders are questioned (explicitly, or implicitly), when inter-ethnic tensions heighten, such a feeling is more than justified. All these enhance the development of a social and political psychology which makes harder the task of working out and implementing sound long term economic policies.
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