Collected Works of Domenico Mario Nuti, Volume I

My understanding of an inaugural lecture is a cross between sermon and sales talk, an occasion for inflicting one’s research and world view on to a well-disposed, yet watchful audience.

Michal Kalecki’s contributions to the economics of socialism—less widely known but no less important than his pioneering contributions to the economics of capitalism – span the period 1946–1970 and are affected by the development and performance of the Polish system, as well as coloured by his views on capitalist dynamics. They consist of a coherent model of the socialist economy and its functioning, characterised by centralised economic planning and political decentralisation with a limited role for markets; a well-developed theory of socialist dynamics, emphasising exogenous constraints to growth and accumulation policy, which were neglected by Polish leaders with dramatic consequences; and a number of planning procedures and guidelines of practical use, for the selection of investment projects, consumption planning and the construction of long-term plans.

Official price trends in the USSR and in the Soviet-type economies have changed markedly through time but have followed a roughly uniform general pattern: hyperinflation at times of war, systemic transition and reconstruction; inflation at times of accelerated industrialisation; stabilisation through currency reform and fiscal measures, followed by modest deflation and a record of substantial price stability, recently broken by the spreading—with fewer and fewer exceptions—of renewed open inflation. This general pattern is due to fairly uniform trends in both policy stances and objective conditions: in theory central planning of both physical and financial flows should enable Soviet-type economies to achieve price stability; in practice the persistence of downward rigidity of money wages, the ambitious growth and accumulation targets, as well as adverse exogenous and systemic factors, have frequently necessitated planned or unplanned price increases.

Since the mid-1950s there have been repeated attempts at reforming the Centrally Planned Economy (CPE) of the Soviet Union and other Soviet-type economics, i.e. decentralising economic decisions, activating markets to replace plans, using incentives geared to performance at market values. The frequency of these attempts and their reversals indicates both the intense pressure for reform and the difficulty of its successful implementation. The current round of economic reform involves the Soviet Union, with the ‘perestroika’ launched by Gorbachev on his accession to power in March 1985; Hungary, where the process started in 1968 has entered a new phase in the last three years; Poland, in spite of a spell of military rule; Bulgaria and from a higher achieved degree of marketisation—Yugoslavia. Reform appears to have restarted, more recently and slowly, in Czechoslovakia; in Eastern Europe the only countries without signs of reform are the GDR, where pressure for change is reduced by its privileged relationship with the FRG and by its more flexible vertically integrated structure, and Romania which is regressing towards the Albanian model. However significant reforms are also taking place in socialist countries outside East Europe, notably in China and Algeria.

Over the last 30 years centrally planned economies, also known as Soviet-type or socialist economies or as instances of realized socialism, have often undertaken and to some extent implemented reform projects for the progressive expansion of the scope of markets at the expense of direct central allocation. From Yugoslavia to China, from Hungary to Poland and the Soviet Union, none of these economies with the possible exception of Albania has escaped this process; the very frequency of reform attempts indicates both the necessity and difficulty of changing the principles of operation of socialist planning, rather than simply introducing marginal improvements. Reform projects have included varying degrees of enterprise decisional autonomy, contractual relations instead of central allocation of materials and foreign exchange, direct access to foreign trade, workers’ self-management, and reprivatization.

The ultimate model for the wave of economic reforms attempted in Central Eastern Europe over the last thirty-five years has been a moving target. At first, reform aimed at improving Soviet-type central planning, replacing central commands with contractual relations, using net value instead of gross physical indicators of enterprise performance, credit instead of budgetary grants, material incentives instead of campaigns, and gearing the system to some market signals, especially to world markets (e.g. Poland, 1956; USSR, 1965; Hungary, 1968; Czechoslovakia, 1981).

There are interesting links to be drawn between Tibor Liska’s model of entrepreneurial socialism and Polanyi’s explorations of alternative economic systems. Liska’s model is also an original version of what ‘market socialism’ might look like, if it is to differ from the model of a capitalist society pursuing socialist policies. This is important in its own right at a time when many centrally-planned economies within and beyond Eastern Europe are undertaking radical reforms, while social democratic parties in the West—whether in power or in opposition—have no alternative system to propose other than a moderately and temporarily improved capitalism. While Tibor Liska may not provide an ideal alternative—indeed it is claimed in this paper that he does not—his ideas are a very useful starting-point for debating the questions of initiative, efficiency and equality that are so crucial to the feasibility and viability of a distinct model of market socialism; moreover, some practical lessons can already be drawn from his model.

The countries of Central and Eastern Europe, including the Soviet Union, are currently facing three major economic tasks at the same time: macroeconomic stabilization, both domestic and external; microeconomic and sectoral restructuring; and the transition from central planning to a mixed market economy. Political reform is also being attempted throughout the area, away from “democratic centralism” namely, Communist Party monopoly of power in the state and the economy, toward forms of democratic pluralism. This chapter considers the appropriate order in which governments might introduce changes in economic policy and institutions in these transitional economies.

For a number of years before 1989 Central Eastern European countries had been facing, to various extents, severe domestic and external imbalances, economic slowdown or decline and the need to restructure production capacity, while attempting to reform their traditional central planning system (see Nuti 1988). These problems were less intensely felt in Hungary and Yugoslavia, both early starters on the road to reform, relatively free from endemic shortages and more open to trace with the West; but even there the same underlying trends were present.

The restoration of capitalism, opened by the 1989 revolutions in Central and Eastern Europe and by the August 1991 coup/countercoup/revolution in the former Soviet Union, was expected to put those countries back onto the road to greater efficiency, technical progress, and prosperity. A “shock therapy” of price liberalisation, monetary and fiscal austerity, the opening of the economy to unrestricted free trade, and internal convertibility for residents, was understood to require initial sacrifices; however, thanks to stabilisation, privatisation and other economic and political reforms, these side effects would be short lived. In Poland, for instance, the government expected the Balcerowicz Programme to bring about a decline in national income of 5% in 1990, with a positive supply response already six months after the beginning of the Programme (Lipton and Sachs 1990). Western advisors and international organisations encouraged this expectation, in Poland and elsewhere (see Kolodko 1992a, Sect. 14.2, who reports their optimistic projections).

The usual role of a discussant is to stir up controversy, but the two papers in this chapter appear to take positions that are so far apart that instead I shall try to be conciliatory. When and how fast should currency convertibility be introduced in the Eastern European economies? Friedrich Levcik’s answer is that it should be introduced fairly late in the process of transition to a market economy, which process should take place gradually over a period of three to five years; another five years will be needed before these countries become eligible for EC membership. According to Jacques Polak, convertibility should come early and fast, almost as fast as advocated by Czechoslovak Finance Minister Vaclav Klaus, who said in his oral presentation at the conference, “There is no convertibility problem—all there is to do is declare it.”

Exchange-rate regimes in transition economies over the last decade have spanned the entire spectrum of possibilities, going from freely floating to permanently fixed (currency boards, DM-ization) through managed floats, preannounced crawling rates, and bands with or without intermittent adjustments. Such extreme diversity is due to differences in available foreign reserves and in initial macroeconomic imbalances (especially the presence of a monetary overhang in some transition economies) and to differences in government preferences between inflation and unemployment. Performance of alternative exchange-rate regimes is difficult to assess, (i) because performance can be mixed, (ii) because all exchange regimes if sustained have a tendency to validate themselves via their impact on inflation, and above all, (iii) because performance depends on the entire package of public policy instruments (fiscal, monetary, and structural) and on exogenous factors, as well as the exchange-rate regime itself.

The current drive towards privatisation by transitional economies of central and eastern Europe is based on the same expectation as privatisation in Western countries, i.e. greater efficiency through changed and improved incentives. This expectation is not controversial in the centrally planned economies in transition, because it is believed that privatisation will inject life into the inert traditional system, de-politicise economic life and harden budget constraints. In addition, private property was never completely abolished and a limited regime of private property seems to be inherently unstable, given the strong logical arguments and actual pressures for its extension.

There are three main general issues raised by privatisation of the transitional economies of central and eastern Europe. First, in the early stages of economic reform and in order to free enterprise there is the danger of divesting central organs of their powers without transferring those powers to other agents. This raises on the one hand the problem of “re-subjectivisation” of ownership before privatisation, and on the other the problem of workers’ self-management institutions. Next, there is the risk of unfair private appropriation—whether legal or “wild”—of state assets. Last, when should privatisation occur in the sequence of reform measures relative to stabilisation, demonopolisation, and partial financial and productive restructuring?

In Poland, privatisation has been facilitated by a long-standing tradition of private enterprise, but rendered difficult by the necessity to reconcile the sale of shares with the self-management institutions active in Polish enterprises (to be accomplished perhaps by reserving 20 per cent or so of shares to enterprise employees on privileged terms, or by a contractual package involving forms of profit sharing and “Mitbestimmung”). The debate in Poland has revolved primarily around the adverse distributional impact of privatisation, which sectors to begin with, the small size of the potential market, how to finance share purchases (free shares, credit or foreign capital), and the scope for debt-equity swaps. These issues reflect political struggle: the 15th version of the privatisation law was presented to Parliament in April 1990 and was met by a parliamentary counter-proposal. Although the law was finally approved in July 1990, it left open both the pace and modality of privatisation, further delaying progress towards privatisation .

A striking feature of post-1989 systemic transition in Central and Eastern Europe is the widespread, almost universal reliance—to greater or lesser extent—on mass privatization, understood as offering the free or very heavily subsidized transfer of a large proportion of state assets to the whole population.

In 1990–1997, in the vast majority of central and eastern European countries, the “transition” to the market economy has been accompanied by mass privatisation schemes, i.e. the free or subsidised distribution of state assets to citizens, through vouchers or equivalent means (see Nuti, 1995). This was a major track for the privatisation of large state enterprises, usually labelled large scale privatisation, but in some countries, vouchers could be used also for the “small” privatisation of flats, shops, restaurants, small plots of land. The few exceptions to date are Hungary; Azerbaijan, Turkmenistan and Uzbekistan in the former Soviet Union; Bosnia and Herzegovina, the FYR of Macedonia and Serbia in the former Yugoslav Federation (see Estrin and Stone, 1996).

The privatization of state financial institutions is partly the same as for other state enterprises, namely the expectation—backed by recent literature on principal agent relations—of higher efficiency, through the subjection of state managers to bankruptcy rules and stock market discipline; the raising of budget revenue to contain or pay off government debt, or to allow a less severe deflationary stance than otherwise might be necessary; and the search for a model of property-owning democracy. However, the privatization of state financial institutions raises special issues, and, in particular, issues in the transformation of centrally planned socialist economies into private property market economies (see Nuti 1991). Alongside privatization of state assets and institutions, the growth of a private financial sector in any system is further increased by newly founded private activities.

On Sunday 18 June 1815, at the Battle of Waterloo, Napoleon Bonaparte was decisively defeated by the Duke of Wellington and the forces of the “Seventh Coalition”, marking the end to his rule as French Emperor. Wellington is reported to have declared that the battle was “the nearest-run thing you ever saw in your life” (to Thomas Creevey, see Maxwell 1903, p. 236). In 1965 Dr Jerry Koehl, a History Lecturer at Oxford, having resigned to take up a lucrative job in commercial television, ended his last lecture with the words: “And this is how Napoleon won the battle of Waterloo”.

The post-socialist transition that began in 1990–1992 in central-eastern Europe and the former Soviet Union (FSU) was widely expected to lead to early significant improvements in the level and growth of people’s consumption and income.