in postcommunist Europe. M. A. Orenstein ... and economic growth during its rule was high (on average ... wing parties reshuffled and beat the post-communists ...
Economics of Transition Volume 11 (3) 2003, 593–596
Blackwell Publishing Ltd
Book Review Out of the Red: Building capitalism and democracy in postcommunist Europe M. A. Orenstein Ann Arbor: The University of Michigan Press, 2001, pp.166 ISBN 0-472-06746-X Price: $24.95
It is always inspiring to see reality from the other side. Orenstein’s book offers us exactly this kind of view of the transformation. He concentrates mainly on two countries – the Czech Republic and Poland – and compares economic strategies and changes in these strategies during the 1990s. Orenstein focuses particularly on the relationship between economic policy and democracy during the transition process. The structure of the book is clear – at the beginning the author describes the theory of the reforms, then their introduction in Poland and in the Czech Republic, next is a special example of privatization and in the final part he underpins his results with a theory of alternation in democracy. In the first chapter Orenstein analyses the theory that lay behind the neoliberal approach to economic transition. He notes the impact of the so-called ‘Washington consensus’ on the reformers and the cornerstones of the radical strategy – stabilization, liberalization and privatization, then reminds us that the authors of the reforms were not simply orthodox liberals, since their programmes included measures like
wage controls. They did, however, tend to underestimate the importance of institutional change. According to Orenstein the reformers were afraid of the impact of democracy on the transition process and this fear was one of the reasons for the rapid pace of the reforms. But there were also contrary worries – about the impact of a radical economic strategy on political development – democracy. A later chapter focuses on a critique of the neoliberal strategy. Orenstein does not accept a division based on radical and gradual lines, preferring one between efficiency-orientated economic and cohesion-orientated political-sociological theories. Later on Orenstein also discusses reactions to the critique. At the end of the chapter he asks one of his main questions: ‘Was there a backlash against the neoliberal reforms?’ His hypothesis, which he defends in subsequent chapters, is that there really was a backlash and that reformers had to change their style and concentrate on interest groups (just as in standard democracies). His other theses are that reformers had to transform themselves into politicians;
© The European Bank for Reconstruction and Development, 2003. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
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and that democratic procedures caused policy instability which, contrary to the predictions, was actually a positive factor in the development of the countries. The second chapter describes the development of Poland in the 1990s. Orenstein regards the first part of Polish reforms as true shock therapy. He outlines the core principles of Polish therapy and the economic problems to which the policy had to react, notably the hyperinflation and inability to pay foreign debts. Initially, the reforms led to a decline in production, a drop in the standard of living and growth of unemployment. Reacting to this development, government policy rapidly took sides against the shock strategy. This reverse was completed after the elections in 1993 when the leftists won and a post-communist party formed a new government. This cabinet slowed down the pace of the reforms but continued with the main trend towards the European Union. They were more orientated to state interventions into economy, dealing with pressure groups – especially trade unions – and they preferred economic growth to restrictions. The government was able to enforce reform of pensions and economic growth during its rule was high (on average around 6 percent per a year). Meanwhile the right wing parties reshuffled and beat the post-communists in the next elections of 1997. In order to regain power the right became more pragmatic and the reformers entered politics. A party led by Balzerowicz, for example, obtained 13 percent of the votes and its leader again became the Minister of Finance. In the period following this reverse the reformers became less radical. They focused not only on issues that the leftists had neglected, like fiscal stability, but also on the issues that they them-
Book Review
selves had omitted in their previous period of governing – like building institutions or reforming the educational system and pensions. Orenstein evaluates the whole process as learning from mistakes and stresses the point that Polish success was based on the changes of government during the transition and the shifts of major right wing and left wing parties more to the centre of the political spectrum. The Czech reforms form the subject of chapter three. The author sees the Czech transformation approach at the beginning of the 1990s as ‘social – liberal’ in contrast to the Polish shock therapy. This position can seem surprising in a country where reformers were (and are) criticized for being ‘too’ radical in the early years. Orenstein notes the strong position of gradualists in the ‘Government of National Understanding’ but notes the change of mood after the free elections in 1990 that led to the growth of support for a more radical strategy. Nevertheless, a strong social policy was implemented from the start of the reforms – with guarantees of the minimum living standard; interventions and policy on the labour market or wage bargaining at the national, branch and enterprise levels. This social character of the Czech reforms was overlooked abroad because Klaus himself never trusted it. The situation for the radical reformers changed with the partition of the country into the Czech Republic and Slovakia. According to Orenstein, Klaus (as prime minister of the Czech Republic) subsequently gained almost full control of the reforms. This situation led to a more radical strategy after 1993. But the reformers always paid attention to social stability and this prolonged their hold on power. This strategy worked well and Klaus was
Book Review
able to remain in power until 1997. But Orenstein mentions the growing number of political scandals and increasing economic instability (financial crises in 1997) that ended with the fall of the Klaus administration. The next period addressed the problems that Klaus had not been able or willing to deal with, and Orenstein highlights the overall better Polish results (with alternating governments) in comparison with the Czech performance (with stable government). The fourth chapter is more questionable. Orenstein focuses on a comparison of the privatization processes in both countries. He looks at the differences between the strategies (and results) and from these he tries to draw broad conclusions. At first the author concentrates on the Czech model. At the start it was the quickest privatization process in the post-communist world; with public support and the admiration of economists around the world. Orenstein correctly describes the process including the voucher privatization. Some examples of corruption and scandal linked to the voucher privatization, however, were not wholly convincing, and not enough attention is given to the really serious problems with privatization funds and corporate governance. Overall, the author evaluates the mass privatization as a costly mistake and concludes that if there had been more changes of government the mistake would have been avoided. Then Orenstein turns to privatization in Poland. Some concerns over insiders and employee councils had already arisen in the closing stage of the communist regime, the period of ‘spontaneous’ privatization. The Solidarity government tried to eliminate the employee councils but was only
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partially successful due to the entrenched position of these councils. In 1990 an Act on ‘The Privatization of State-Owned Enterprises’ was passed outlining three methods: (a) the capital track (sale for cash); (b) mass privatization – but the law omitted concrete measures to achieve this; and (c) sale or lease to the management and employees. He judges the last method to be the best. The slow progress of privatization and the situation of many firms that remained in state hands are noted. The mass privatization played only a minor part in Polish reforms, but the relatively slow pace of the whole process did not negatively affect Polish economic results. But this conclusion was not based on a thorough analysis of the results of privatized firms or those that remained in the state’s hands, aside from a remark that at the end of 1998 in Poland, there were still 3000 state-owned companies with 25 percent of all workers (in non-financial enterprises), creating only 2 percent of gross profit. The final short chapter is entitled: ‘Democratic Policy Alternation’. Orenstein provides theoretical support for his main idea concerning the positive advantages of changes of government during transition. Given the huge uncertainties about the transition, and hence the inevitability of making mistakes along the way, changes of government might enable some mistakes to be eliminated – because an incoming former opposition can change the worst aspects of the previous government’s policy. This is a process of learning through democratic alternation. The book is very readable and can be recommended to all who are interested in a global and complex view of the Czech and Polish transformations from a more distant perspective. On
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the other hand some findings are not convincingly justified and some even seem rather shallow. The book may well have been unduly influenced by the years of economic decline in the Czech Republic during the mid-1990s (and without analyzing reasons for the
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decline), which helped to make the Czech performance look quite weak for a time. Libor Zídek Masaryk University Czech Republic
