Delusions of "Shock Therapy": Western Economists, Eastern Economies

...For enterprises, "subsidies" — as distinct from direct ministerial control—have proved harder to "remove...

...In approaching aid to the former Warsaw Pact, Washington's thinking has been deeply influenced by its victories at Bretton Woods, as well as by its lessons from perhaps the two greatest challenges of the Bretton Woods era: in the 1970s, by the massive OPEC price shocks that shattered the Bretton Woods peace and by the global debt crisis that followed...

...In Poland, its most important proponent, Leszek Balcerowicz, is out of office...

...Government domestic indebtedness is also extremely low, since most operations were financed out of current accounts, not long-term borrowing...

...As frustration mounts on failure, and as unemployment grows on top of production collapse, the dangers to fragile new rights and institutions grow...

...The focus of consumer demand on bare necessities and the collapse of enterprise demand for investment has been further exacerbated by the shock therapy's country-by-country approach —as distinct from Keynes's emphasis on global coordination...

...Originally formulated a decade ago to deal with those third-world debtors, much of the West's official thinking today about post-communist reform relies on what have been called "The Three New Pillars" of economic development theory, a strategy radically at odds with Keynes in its hostility to government's role in economic policy...

...The boom in turn would not only swiftly "rationalize" prices but spur efficient production for export as well as domestic markets, thus reducing the external indebtedness of these countries—a crucial measure of "success" for the "Three Pillars" approach...

...As a consequence, most enterprises start with surprisingly low levels of debt vis-à-vis their sales or nominal asset value...

...Perhaps the most important promise of the shock therapists was that macrostabilization and privatization would quickly lead to a boom in foreign investment— a boom that would bring not only Western capital but Western managers, techniques, and "business culture" to the bloc...

...credits were set by central plans...

...Even with highly concentrated industries, however, the nature of competition and business cycles dictates in market economies that excess capacity—both in idle plant and unemployed labor—is usually available for fluctuating demand...

...Only in the former East Germany does change seem to be coming relatively rapidly— and even there, the Treuhand has sold only four thousand of the ten thousand state enterprises under its control, while more than a third of the work force is un- or underemployed...

...Not only had real salaries fallen by half and disposable income by 20 percent since 1980, but unemployment was on the rise, particularly in La Paz, where the number of factories was reduced by 55 percent...

...now governments should be willing to recognize that they've entered a fundamentally new period, when utilizing intermittent wage-and-price controls to choke off resurgent inflation will be necessary...

...Morgan Stanley, a U.S...

...This is a program meant to address the real and present political dangers underlying postcommunist societies...

...Embedded over decades in accumulated patterns of investment and output, they could be "readjusted" across enterprises and sectors by shock therapy, but, without consumer and enterprise demand, have had nowhere to go...

...As a result, funds that were invested in Bolivia during 1987 only served to pay back foreign creditors rather than to increase the country's productive capacity...

...Private investment (except in the former East Germany) so far has been minuscule—well under $10 billion since 1989...

...As an alternative to shock therapy, certainly he would have been sympathetic to a more active public policy and to a much more active role for government...

...But in July, Bank vice-president Lawrence Summers quietly gave international banking officials the bad news: that "given disappointing Eastern European economic performance in the last year, even 2010 may be in doubt...

...In Western economies, these costs are generally external to the firm, and paid for by wages and taxes that are distributed through the society as a whole...

...To the orthodox economists, the problems of transition are (1) price distortions, both relative and absolute...

...Who will take over the old role of the state...

...Bolivia is frequently cited as a success story...

...The point here is to disperse at least several aggressively entrepreneurial firms across as wide a number of sectors and regions as possible, rather than concentrating either on selling a handful of profitable enterprises in select industries or selling industrial behemoths whose viability is doubtful under any ownership combination...

...Now contrast the Economist's conclusions with the performance of countries that have tried the "shock therapy" approach...

...But it is not...

...But capital markets have proved easier to admire than to create...

...With the decline in employment levels and purchasing power, as well as in the production of food for local use, food consumption was down 40 percent from 1978 levels...

...It cites an average fall in the region's industrial production of nearly 20 percent in 1991 (after a 10 percent fall in 1990), and notes that despite shock therapy's promises, "[I]nflation is still far from under control, foreign trade is collapsing and current account deficits have increased...

...The population was eating significantly less eggs, meat, cheese, vegetables and potatoes, helping to explain the 50 percent malnourishment rate among women and children in 1986...

...With little ability or experience in extending consumer credit, they now compete among themselves for reduced consumer spending—a fact that has contributed to the high failure rate among these microenterprises...

...But now, we live in the era of "post-communism," an odd term that serves as foundation for speculation, hope, and confusion among (and about) more than four hundred million people exiting a system that a half century ago proclaimed itself the future of all mankind...

...These economies are coming to market at a time when the West is mired in slow growth, and face direct competition from both the Asian "winners" and recovering Latin American economies...

...Consider then this 1989 analysis, by the Washington-based Bank Information Center, of Bolivia's "New Economic Policy," adopted under IMF tutelage, to end that country's mid-1980s economic crisis: The Policy's principal objectives were the reestablishment of balance-of-payments equilibrium, the elimination of fiscal deficits, and the promotion of both exports and the private sector's involvement...

...Initial price deregulation cut back hyperinflation on a 78 • DISSENT one-time basis...

...Despite Bolivia's adherence to IMF recommendations "to the letter," the economy shrank by three percent in 1986 instead of growing by the three percent that the IMF had predicted...

...In none of the postcommunist countries does indebtedness appear to equal even 10 percent of current GNP—or 1/20th United States levels...

...For these problems, "shock therapy" presents few palatable—let alone politically plausible— answers...

...Yet, so far, Western companies have proved far more cautious than the shock therapists predicted...

...While such a proposal will provoke objections from shock therapists about short-term self-interest and muddy decisions, the fact is that the economic transformation of these countries is deeply linked to the construction of democratic processes that are as novel in the region as markets...

...and President Lech Walesa openly complains of "betrayal" by the West...

...But with no such class, and with the asset value of state enterprises severely depressed, the post-communist state—as the region's de facto "capitalist class" —can't simply sell assets to generate cash for investment or to stimulate demand...

...Meeting at Bretton Woods, Allied policymakers agreed that a new global economic framework was needed, to avoid the mistakes of the past—especially high-tariff, beggar-thy-neighbor policies and the inadequate support for currency stability that had so exacerbated the Depression...

...In debating the postwar global economy and the role of new multilateral institutions, the Americans (mindful of their earlier failures at Versailles) defeated Keynes's views and established simple free-trade, balanced-budget, and open-economy orthodoxies, with the dollar as the determining currency and Washington the determining power...

...Price is the signal that drives the direction of markets...

...Public-sector assistance will continue at a somewhat higher level, but the post-communist governments must understand that the scale of assistance sought will not be met externally now or in the foreseeable future...

...Small-business creation—and the growth of consumer credit—likewise hasn't solved the demand problem, because in many instances such businesses have merely "inherited" eco74 • DISSENT nomic activity once performed by state shops and face the same sharp collapse of consumer demand...

...They also insulated their economies from global inflation by simply not trading with market economies, while negotiating intra-bloc prices ministerially, or in later years, maintaining dual prices (for domestic, and export markets to the West) in crucial items such as oil, gas, and other raw materials...

...As mentioned above, a defining characteristic of Soviet-bloc countries was always the subordinate, and highly bureaucratic, character of their financial institutions...

...Forced to focus increasingly on exportled strategies and prompt debt repayment, the countries have sacrificed not only education and health but crucial economic infrastructure development that would directly aid the majority living in poverty...

...More relevant to the "demand" question, none of these sales will inject substantial new working capital into the enterprises or spur consumer demand—mostly they involve title transfer of shares for no or little money...

...Defined by what was, post-communism's promise of transition has yet to show what will be—and nowhere more clearly than in economics...

...on prices, they did so through administrative means as outlined above...

...investment bank not known for socialist views, is warning grimly of an "approaching calamity," which can be avoided only "if the West recognizes that laissez-faire reform will not produce minimal prosperity within a politically feasible time," and pointing to the now-unfolding "second shock" of skyrocketing unemployment in Eastern Europe, which it predicts will rise by next year to nearly 20 percent (from the 3.4 percent of 1989...

...3) government ownership and subsidies...

...The country's trade balance had moved into a deficit by 1986...

...Nor, under orthodox shock therapy, can the state run a budget deficit as an alternative means of stimulating demand...

...John Maynard Keynes, head of Britain's delegation, passionately believed that avoiding past mistakes was not enough...

...Are Poland and Hungary no different from Bolivia or Peru or Jamaica...

...The upshot has been a series of proposals—from Poland's public "mutual fund" schemes to Czechoslovakia's (and now Russia's) "coupon lottery" program, meant to lessen public resentment...

...removal of those subsidies—in the name of "balanced budgets" —increased basic food costs between 100 percent and 400 percent...

...Poland, for example, tried selling off the strongest 10 percent of 1,800 large enterprises and got barely $700 million in the bargain...

...But having carried out parts of their program—fundamental decontrol of prices, creation of a burgeoning small-business sector, and deep cuts in government subsidies—the East Europeans and CIS members face a new crisis: the enormous production collapse of 1990 and 1991, and now what follows that—massive layoffs that could reach 20 percent of the work force by mid-1993...

...Concentration...

...Central banks and finance ministries assumed the conventional Western role of private banks...

...They did so through several means: on wages, they maintained relatively high equality of incomes, and abolished most forms of non-wage income (from rents, dividends, capital gains, etc...

...3. Governments need a policy of wage-andprice controls to focus public attention on their serious hostility to inflation...

...The centrally planned economies historically maintained significantly lower general price levels than the West— levels that only now are shifting upward rapidly...

...In Hungary, transformation has proceeded—but at a much slower pace than anticipated, since under "goulash communism" nearly a third of its 72 • DISSENT GDP was already private...

...What Keynes would have quickly pointed out in challenging the Three Pillars approach is—anomalously for a theory so beloved of pure markets—the vexatious core issue: how to create capitalism without first creating capitalists...

...the second seeks aggressive promotion of export-led industries...

...Keys to Success Compare this recent experience with the much more successful "winners" in the post–World War II economic race: Japan and the "Four Tigers" of South Korea, Hong Kong, Taiwan, and Singapore...

...Thus, a highly profitable firm in Western terms—but dependent for profit on distorted prices—might have seen 50 percent, 60 percent, or even 70 percent of its "surplus" taken by a supervising ministry for reallocation elsewhere...

...In Western economies, the existence of a capital-owning class (generally the top 1 percent to 2 percent own 30 percent to 40 percent of net private assets, with 10 percent holding roughly 60 to 70 percent, exclusive of housing) would theoretically have, under a similar collapse of production and trade, provided an alternative to the state...

...Dismantling so far has proved infinitely easier than rebuilding...

...The best estimate is that by 1995 total medium- and long-term private investment will add perhaps another $17 to $25 billion—a far cry from either expected levels or calculated needs...

...The attempt to sell off large enterprises, meanwhile, has ignited widespread political resistance from the public...

...But without a commitment to demand stimulation and a willingness to engage in debt financing (pure anathema to the shock therapists), the state remains paralyzed—and with it, the economy...

...By Western standards, then, all the former Soviet bloc countries are "underindebted...

...The collapse of communism has not brought with it any guarantee of democracy...

...The inability to value enterprises has led to further complications, as have the profoundly unstable economies themselves...

...In Russia, efforts at "shock therapy" are faltering badly only months after they began...

...Shock therapy tries to deal with the absence of this capital-owning class by postulating three possible solutions: first, the creation of Westernstyle "capital markets" (such as stock exchanges and commodities markets) where capital is exchanged for ownership...

...With 60 percent to 85 percent of Eastern Europe's pre-1989 trade confined within the old Soviet bloc (and 35 to 65 percent of it with the Soviet Union), the loss of the Soviets as supplier of oil and gas and as purchasers of foodstuffs, intermediate, and consumer goods has meant an often chaotic search for new suppliers and customers...

...the shock therapists —Sachs, Fisher, Balcerowicz, Klaus and others—became heroes to many, their revolutionary zeal oddly entrancing to peoples for whom revolution had brought such costs...

...Successful First World economies hardly have small governments—as a percentage of GDP, government size ranges from 37 percent to 52 percent...

...Under centrally planned re* The prices of goods and services relative to other goods and services within the same economy or relative to prices for similar goods and services in another economy...

...The Crisis Last Time The last time the West faced looming economic crisis on a comparable scale was at the end of World War II, when Europe and Japan lay in ruins...

...He viewed the depression as a fundamental failure of demand, a failure exacerbated by governments' inadequate role in stimulating that demand when markets failed—and exacerbated as well by prevailing economic and business orthodoxies that had opposed government intervention...

...In planned economies, with their emphasis on taut production schedules and full employment, by contrast, seldom was either excess plant or labor available to meet sudden shifts in demand (Under administered prices, when such demand rose, prices remained unchanged—and scarcity instead substituted...

...Shock therapy has severely limited consumer demand...

...A year ago, as a major supporter of shock therapy, it benignly calculated that by 2010 these countries might reach not parity with, but their 1989 levels relative to, the West...

...In Hungary and Poland, new stock exchanges remain pathetically thin, with often no more than a dozen or two companies listed and trading volume amounting to a few thousand dollars a day—or even a week...

...2) structural distortions, with too much industry, too little service, trade, and finance...

...The significance of this old debate for post-communism is that, although some pundits speak freely today of our "post–Bretton Woods" era, that era—like postcommunism remains ill-defined and unfocused...

...The first pillar calls for near-absolute adherence to balanced budgets and stable money supplies, to choke off domestic inflation...

...At the beginning, "shock therapy" seemed somehow necessary, the castor oil to cleanse centrally planned systems...

...Added Costs...

...New governments expended valuable time, resources, and public goodwill trying to recapture these enterprises from these new "owners" —often with only mixed success...

...the European Community regularly subsidizes farm prices by more than $100 billion per year...

...three consecutive governments have fallen, principally over economic issues...

...Or, as one Russian economist quipped recently, was the old Soviet Union "nothing more than a giant Brazil with nuclear weapons...

...4. Governments must recognize the middleterm need to reestablish as much as possible old COMECON-bloc trading links, even if based on barter for a time...

...It contains, of course, a host of dangers—but can claim success in the real world, something shock therapy so far lacks...

...The Lessons of Keynes In sum, the governments of Eastern Europe and the CIS need to face realistically the daunting WINTER • 1993 • 79 task ahead of them: to play a role in stimulating economic recovery...

...These threaten to choke off underlying growth, as well as inflation...

...First, as a direct successor to shock therapy, a new policy would establish competitive marketization and demand stimulation as its model, for the near-term at least...

...The difference in communist societies was in extent...

...In a postcommunist society, in which neither consumers nor enterprises possess large savings pools, generation of demand becomes the immediate crux of the transition...

...Still lacking is any coherent public policy toward demonopolization, toward legitimate and coordinated government stimulation of the economy, and toward reconstruction of former trade relations internationally...

...second, the encouragement of small business, both through selling off state-owned shops and enterprises and through removal of impediments to new business...

...The plans by themselves, however, do little to solve the issue of state control over large enterprises—in most cases, they involve a 20 percent to 30 percent ownership set-aside for the public, while the state holds onto a majority stake for later sale to unspecified purchasers...

...and (4) unmotivated labor...

...From fiscal and monetary policies, through health and safety and environmental regulation, to laws governing discrimination, firing, retraining, and so on, governments actively pursue policies that shape economic growth...

...This hardly should be taken as a license for uncontrolled debt accumulation—but it does cut deeply into shock therapy's presumptions about what these countries need most...

...the Third demands rapid privatization of publicly owned enterprise and a severely proscribed economic role for government...

...The failed coup in Moscow vastly expanded the terrain—psychological as well as geographic —of that collapse...

...But even as a diluted Keynesianism took hold in the West, Keynes's vision for global development failed at Bretton Woods...

...Such a program would contain at least six important points: 1. To begin, priority would be placed on breakup of the vast majority of large, aggregated enterprises into autonomously operated, smaller units...

...Faced with a choice between consumer demand and plan priorities, what resulted was not new production, but consumer queues...

...Consumer indebtedness also has been almost nonexistent by Western standards, given provision of food, housing, pensions, and medical care, from state and enterprise budgets...

...it is a pragmatic, transitional program that borrows most heavily from the actual experience of the most successful developing economies of the last thirty years, as well as successful Keynesian policies used in the West...

...What commentators note repeatedly—to the discomfort of the shock theorists—is that success for these countries has come almost invariably from systematically ignoring or bending the textbook rules of modern economic development...

...Price Insulation...

...Rather, governments need to look to Western experience—and pioneer demand–stimulation appropriate to their own economies...

...With the IMF carefully supervising the government's 1986 budget, the prescription to achieve these objectives included the privatization of nationalized enterprises, the closure of major mines, a one-percent tax on all citizens, including subsistence farmers, and a further reduction in social expenditures...

...In the West one finds all sorts of highly concentrated industries, but not to the degree that they existed in these economies...

...But what actual post-communist experience now increasingly suggests is that although the "Three Pillars" can dismantle a centralplanning system, what they've yet to do is WINTER • 1993 • 73 show how to build a prosperous new society atop the old...

...Although points four and five may be comforting to shock therapists, the first three points shouldn't be because they challenge shock therapy's enforced limitation of government's role to simple macrostabilization...

...Either prices collapsed or—because production was often monopolistic —prices "stuck," and production collapsed, and with it enterprise "demand" for new investment...

...The simple answer, of course, is "no," and to understand why we must look at the ways in which ex-communist economies dealt with the following issues: Pricing...

...For the ideologically upright, of course, all this sounds horrendous—the worst of "old socialism...

...Since 1989, between seven and ten billion dollars in private capital has been committed to Eastern Europe (excluding the former East Germany), with more than half of that in a handful of highly publicized ventures like Volkswagen's $1.5 billion deal with the Czech automaker Skoda...

...Right behind them stands a second Asian quartet—China, Malaysia, ThaiWINTER • 1993 • 75 land, and Indonesia—that now seems poised for take-off...

...For the moment, the shock therapists are insisting that nothing has gone wrong—or, that if perhaps something has gone wrong, it is not their fault but rather the failure of governments to do all the therapists had prescribed—or to do it as recommended...

...6. Finally, the post-communist governments need to be substantially more pragmatic toward financial institutions and debt and their uses in the next several years...

...But to lead such a recovery requires an explicit commitment to demand stimulation— something that the balancedbudget shock therapists have been congenitally loath even to suggest...

...First, there was an outcry over "spontaneous privatization," as former communist managers took advantage of a legal and regulatory vacuum to transfer effective ownership to themselves...

...By itself, such distortions weren't unique to communist societies...

...They also exhibited a ferocious antagonism to inflation and generally allowed price makers little independence...

...Nor do these governments simply leave crucial decisions about their economies to abstract market forces...

...5. Rapid growth is impossible without a commitment to markets and private property (November 16-22, 1991...

...That class might have been expected to mobilize capital (through borrowing or asset sales) to fuel—if one believed Reagan-era supply-siders —a supplyled recovery...

...If we take the end of communism as a given, what remains wholly ambiguous is where these economies are headed now...

...2. A relatively equal distribution of incomes and relatively low taxes motivates workers...

...And that estimate, it should be noted, was calculated prior to the Soviet Union's dissolution, and the consequent further demands on public treasuries...

...In Czechoslovakia, GDP is also sharply down, and Vaclav Klaus—prime minister for half the nation— heads a coalition government at odds with parliament over shock therapy...

...The OPEC shocks had led to "petrodollar recycling," a torrential flood of cash channeled to the Third World, which in turn precipitated near-monumental banking failure when repayment became impossible...

...Shifting trade to the West—even where the process has gone relatively well, as in Hungary—won't take up the lost export demand generated by former COMECON partners in the next several years...

...Worse yet for the average Bolivian, the price of basic necessities rose 340 percent from 1985 to 1988...

...What follows are broad policy recommendations that could serve as an alternative to the Three Pillars...

...Inflation...

...but deciding who shall direct such growth, under what terms, and for whose benefit, is at the crux of the debate...

...Decorously, he reserved comment on the trailing republics of the Commonwealth of Independent States...

...Diverted Capital...

...Under communism, relative prices* were distorted by administrative pricing of inputs (labor, capital, natural resources, and so on) that included government subsidy or selective taxation...

...Other socio-economic figures for 1986 also reflected the weakening of the Bolivian economy...

...By the end of this year, for example, most of the legal and commercial code structure will be in place in Eastern Europe (CIS members are following quickly), as will the fundamental financial institutions—however primitive by New York or London standards...

...Similarly, per capita expenditures on social services fell some 15 percent...

...Along with that would come selection of key yardstick enterprises for immediate sale (if need be, at a low initial cost but with an "equity reward" retained by the seller) to the most plausibly entrepreneurial purchaser, whether a foreign firm, former managers, a labor-management team, or mutual fund...

...Third, they hardly utilized credit and debt at all in the Western sense, preferring to finance large capital-intensive projects through current budgets, sharply constraining enterprise credit to short-term accounts, and never permitting consumer credit to emerge as a demand force that in the West has often frequently fueled rises in both real and nominal price levels...

...80 • DISSENT...

...Other Western experts aren't so sure...

...Even Western public financing (through multilateral and bilateral agreements)—much more a reflection of political concerns than market interest—is now expected to provide no more than $50 billion in the next several years to Eastern Europe...

...Even the usually sanguine World Bank is now sending up red flags...

...interest was low...

...The choice—once easily offered by the shock therapists and certainly still by many conservative economists in the West—is not simply between communist government and unregulated markets...

...3. The single biggest source of comparative advantage is their well-educated workers...

...and third, a major injection of foreign capital, foreign management, and foreign expertise...

...Several of the most promising Polish companies listed last year, for example, have watched their values plummet, as both their markets and raw materials (particularly Soviet energy supplies) disappeared...

...The fact that several million new businesses have already sprung up in Eastern Europe and the CIS is testimony to the openness felt toward private enterprise throughout the region...

...The U.N.'s Economic Commission for Europe is also alarmed, fearful of an impending "1930s-style Great Depression" in both Eastern Europe and the former Soviet Union...

...Today, the arguments for "rapid transformation" are clearly in trouble...

...5. It is especially imperative to discount previous estimates of Western aid and investment, whether private or public, bi- or multilateral...

...Central planners had provided the largest government budget subsidies to food and housing...

...Translated ad hoc in the last three years to the sharply different experience of the former Soviet bloc countries, the Three Pillars have retained almost all their original emphasis...

...But these new structures alone won't work without policies that make them effective...

...What post-communist governments need right now, from a Keynesian standpoint, is a strategy that more coherently directs future growth, even while it no longer plans it...

...Recent surveys of development results in Brazil, Costa Rica, Ghana, Jamaica, Indonesia, and the Sudan—all following variants of the Three New Pillars model—show similar results...

...General prices in Sweden are high relative to those of Brazil...

...Then new governments eroded good will further as workers and managers vociferously argued that initial "therapy" plans, excluding them from equity in their companies, were unacceptable...

...gimes, enterprises were also charged with a host of social welfare responsibilities—for worker housing, recreation, health, and so on—which significantly added to production costs embedded in final goods prices...

...What Went Wrong...

...In such a situation, what might Keynes have done...

...Flexibility...

...None of these countries had extensive experience with democracy in the pre-communist period...

...4. The priority of state action should be economic development, defined not by the government's ability to hand out welfare payments to the less privileged, but rather by growth in output, productivity, and, above all, international competitiveness...

...Gross Domestic Product (GDP) is down 35 to 40 percent, inflation is up, the zloty falling...

...In 1988, the Gross Domestic Product, while rising, had still not increased in relation to population growth, thus further reducing the standard of living...

...and depending on the clout of enterprises of their ministries, loans frequently became de facto grants...

...Inflation was on the increase once again, doubling from its 1987 level...

...Implications for Eastern Europe and the CIS Even if one agreed that such cases represent "successes," could the experience of the Third 76 • DISSENT World be easily transferred to the Second World of former communist societies...

...Shock therapists' favored alternative mechanisms for constraining inflation are tight monetary and credit policies...

...The British journal the Economist, generally a vocal proponent of free trade and minimal government, recently summarized the lessons learned from the East Asian experience: 1. Markets do not have to be completely free...

...in the 1980s, by the conservative anti-Keynesian backlash, symbolized by Ronald Reagan and Margaret Thatcher...

...Or, following earlier, preKeynesian theories, the capitalist class would have simply waited until wages fell low enough to equilibrate supply and demand, then begun the process of investment to meet new demand...

...Accompanying these basic price distortions was a communist structural preference for economies of scale, that is, an emphasis on giant enterprises that concentrated production in a small number of firms...

...Better ultimately to adapt policies and goals as experience dictates, borrow bits of reforms from here and there, defer change when necessary, encourage it when one can, than to hope that human life is willing to follow the textbook dreams of academic scribblers, whether communist or capitalist...

...Total costs for transforming this economy (and its population of sixteen million) are likely to exceed $1.5 trillion...

...WINTER • 1993 • 77 What Can Post-Communist Societies Do...

...Meanwhile by 1988, one out of every four Bolivians was out of work, and those who were fortunate enough to still be working found that their real wages had declined by 43 percent since 1985...

...Today most families in Eastern Europe spend between 45 percent and 65 percent of their incomes on food alone...

...Moreover, some nominally capitalist governments direct private-sector activity through a broad range of policies, not simply through taxes, subsidies, regulation, and tariffs but through active establishment of investment, production, and trade priorities...

...Simultaneously, effective "taxation" of enterprises tended to follow ministerial requirements for capital and other objectives external to the firm—and varied widely among enterprises, industries, and ministries, and over time, depending on demands of the overall national economic plan...

...In Poland and the former East Germany, for example, such rates have reached 30 percent to 35 percent after two years...

...Demand stimulation in a post-communist era needn't mean simple return to government control of all aspects of production and finance...

...While the new Policy did eliminate hyperinflation, it has not strengthened the overall economy...

...For instance, food in Sweden is high in Sweden relative to health care, while food in Brazil is low relative to the high cost of health care...

...As one critic has described it, Keynes believed passionately in a "Holy Trinity" of "free markets, intervention, and growth...

...2. Active public debate would be encouraged about future economic priorities, leading to a consensus (rather than imposed) development strategy...

...Missing Pieces Once upon a time, in control of new capital for investment expansion, only the state stimulated or retarded effective demand...

...In the United States, for example, total indebtedness of corporations, individuals and government exceeds $10 trillion—twice the size of United States GNP...