What Comes First In The Transition From Communism: Democracy Or Private Enterprise?

When Central and Eastern European countries "emerged out of the red" in 1989, they faced the dual task of simultaneously dismantling the old socialist state apparatus and redundant structures of over-industrialized economies, and constructing a new state and a new economic base that would be capable of integrating into world markets and sustaining steady progress. Dismantling was essentially done through privatisation, which means transferring state owned enterprises into private ownership. This of course was no simple task, and its challenges will be discussed later on in this paper. As with the construction of new state institutions, Central and Easter European countries chose to follow the democratic example of their Western neighbours. This of course entailed adopting the economic base of capitalism to go with it. This paper will investigate the relationship between democracy and privatisation, and how what role they played in the transition process.

It was indeed the complexities and contradictions of the dual task of simultaneously dismantling and constructing, and the resulting systemic vacuum, which was the cause of much of the economic disruption suffered in these countries during the transition from communism to becoming market economies. The question is whether it is even possible to carry out political and economic reform at the same time, or if one needs to precede the other. But before we dwell any deeper on this question, we must look at why Central and Eastern European countries specifically chose to build democracy and capitalism Ð'- structures that were completely opposite of what they had experienced for the last 40 years Ð'- instead of following some other path, like that of China, which combined the socialist state with a market economy.

The answer to this one is fairly simple; we only need to look at the experience of those 40 years to understand why these countries wanted to stay as far away as possible from any form of authoritarian state. Democracy was a central feature of the revolutions of 1989. Of course in addition to this internal desire, there was external influence from the West, which was dominated by neoliberal discourse at the end of the 1980s. Western economists quickly jumped into the situation after the revolutions of the former Soviet republics to push their radical programs for economic reform. And this was not resisted in these countries, because they wanted to "return to Europe" and join the Western club, and knew that these reforms had to be implemented in order to gain membership to the club.

JÐ"ÐŽnos Kornai even goes as far as to say that the new political structure of the central eastern European region simply reflects the main direction of historical progress over the last two millennia towards capitalism and democracy, and that communism was only a derailment off the main track. On the other hand, it can be argued that complete rejection of state intervention and over-reliance on market signals to determine what is socially desirable, was in this case an "institutional overshoot". Therefore, when it seems like these countries were simply acquiring new structures "off the shelf," their choice of what model to follow was going to be dictated less by a particular model's proven long-term success, and more by short-term political pressures (both domestic and international). This means that people had high expectations of what the new system could offer, and were desperate to get improvement in their living standards. However, as they would soon learn, it takes a lot longer for economic and political reforms to bear fruit than it takes for them to be set up.

Bearing this in mind, policy makers had a hard time deciding between two reform strategies. The first strategy was to implement radical economic reforms using the neoliberal blueprint Ð'- by privatising enterprises, liberalising prices and creating stable macroeconomic environment to encourage international trade Ð'- which would at first lead to mass unemployment and social dislocation as the entire structure of the economy was reorganised, but if done correctly could promote faster growth in the future. The supporters of this approach claimed that reformers must be insulated from interest groups, and changes must be implemented in a "window of opportunity," which is a period of "extraordinary" politics when people are more inclined to act for the common good and accept radical reform. Thus they argue that "normal" democracy, where opposing interest groups can affect decisions and cause an anti-reform backlash, should wait until later.

The critics of the neoliberal approach point out that it assumes that quickly creating an economic environment that emphasises "getting the prices right" and allowing people to trade freely and set up private businesses, will lead to spontaneous adjustment to economically efficient behaviour. This assumption highlights perfectly the obsession that neoliberal economists have with the rationality of individuals. It fails to take into account that these were people who had always been told by the planning agency exactly what to produce, how much and what price to produce it. So once markets are liberalised, they might not adjust "spontaneously". For example, some workers who had been trained in heavy industrial production, and found themselves out of work when these inefficient industries were shut down, did not have the skills to do anything else and thus had a hard time finding a job.

These critics, who could be said to represent a socio-economic approach, believed that if reformers are insulated from all interest groups, they will not realize that their policies produce harmful social costs. A Polish political scientist, Adam Przeworski, presented a theory of transition politics in which he argued that neoliberal reforms will cause an anti-reform backlash, which will make voters kick them out and choose the opposing, more gradual but less costly approach. However, as gradual reforms will take too long to produce positive results, and voters will be again tempted by the promise of radical solutions. Przeworski argued that this will lead to policy instability, which will eventually jeopardize democracy itself. So in a way, neoliberals believed that democracy endangers reforms, and the socio-economic approach believed that neoliberal reforms endanger democracy. This brings us right back to the question whether democracy and economic reforms are compatible to be implemented simultaneously in the first stages of transition.

Thankfully, some theorists have come up with a more optimistic answer to this problem. Stark and Bruszt suggest that grounding economic policies in democratic deliberation would actually lead to social cohesion, by building linkages

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