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This paper argues that a knowledge of the characteristics of Soviet-type economies could have led to the better application of stabilization and reform packages for economies in transition. Among these characteristics, excess inventories, enterprise behavior, and structural deformations are discussed. Knowledge of these characteristics would not have eliminated all negative consequences of reforms, such as the decline in output, but it would have provided policymakers an opportunity to prepare the public for developments during the early years of the transition. J. Comp. Econom., June 1995, 20 (3). pp. 347-367. Viadrina European University, Frankfurt an der Oder, Federal Republic of Germany.

W tekście autor wskazuje na rzadziej dyskutowane problemy instytucjonalne i politykę prowadzoną w ramach strefy euro. Zwraca uwagę na, niezgodne z teorią integracji, wcześniejsze stworzenie unii monetarnej niż unii gospodarczej (wspólnej polityki budżetowej, podatkowej itd.) na stworzone surogaty w postaci kryteriów z Maastricht oraz Paktu stabilizacji i rozwoju. Podkreśla też zmiękczanie tych reguł w praktyce w stosunku do członków założycieli. Wreszcie, wskazuje na zdumiewający brak „reguł wyjścia” z takiej strefy. Autor ostrzega jednak, że problemy eurostrefy są – mimo ich znaczenia – jedynie przejawem głębszego i bardziej długotrwałego kryzysu Europy Zachodniej, a właściwie Zachodu w całości. Źródłem problemów strefy euro jest głęboki kryzys państwa opiekuńczego, którego coraz bardziej pogarszające się finanse spowodowały ów proces przyspieszonego zadłużania się państw. Od kryzysu tego nie ucieknie się poprzez szybszy wzrost gospodarczy, gdyż to właśnie wysoki poziom wydatków publicznych w relacji do PKB jest głównym czynnikiem coraz silniejszego spowolnienia gospodarczego na Zachodzie. Dlatego kryzys Zachodu będzie trwać jeszcze wiele lat. *The author identifies the less often discussed institutional and policy issues of the Eurozone. He points out the theory-inconsistent creation of the monetary union performed ahead of the economic and fiscal union, the implementation of surrogate solutions such as the Growth and Stability Pact and the weak discipline in its observance, as well as the surprising lack of exit rules and the real problem of the crisis that is not financial, but that of waning confidence. He further warns that the Eurozone crisis, serious as it is, is an outgrowth of a much more serious and lasting problem of the crumbling Western welfare state and its ever growing size of indebtedness. The financial crisis has simply accelerated the day of reckoning by a few years, but without major changes the collapse is inevitable. The kind of changes needed is politically costly and, therefore, will be introduced only when all other non-solutions have failed. For that reason the author expects that the crisis of the West will last for at least another 5-10 years.

AT THE TIME OF WRITING (late autumn 1993) it seems pretty certain that the long awaited recovery from 'transformational recession'1 has finally arrived, at least in three out of the four countries under consideration. It has, however, been weaker than expected in some countries. It is most visible in terms of GDP, with Polish growth in the healthy 4-5% range and that in the two other countries, Hungary and the Czech Republic, in the 0.5-2% range (see Table 1). Differences in the aggregate performance stem to an important extent from the degree of structural adjustment (ownership, size, and sectoral changes) and macroeconomic policies pursued. However, other factors, related or unrelated to the transformation process, have interfered as well. It is only with the passage of time that the effects of various institutional changes and policies become more clearly visible. It is therefore only now that the question: 'Why Poland?' can be answered in a manner that is analytically meaningful. Thus, the present writer sees the advantage of the Polish economy in further-reaching and more decisive liberalisation cum deregulation than in any other country under consideration (or any post-Soviet-type economy for that matter!). Unlimited freedom of entry into almost any economic activity marked the Polish transition from the very start.2 As a result, growth of the generic private sector, i.e. the one beginning from scratch, has proceeded very rapidly. The fact that Poland has the largest share of the private sector in output and employment can be directly related to the elimination of barriers to entry, as well as to price liberalisation that did not leave many advantages from subsidised inputs in the hands of the state sector. This compares favourably with, for example, the relatively strict control by the lower-level bureaucracy over the choice of activity and location of generic private firms in the former Czechoslovakia and, until now, also its successor states.3 Even in comparison with Hungary, Poland retained or erected fewer barriers for the generic private sector (the situation with respect to direct foreign investment has been different, though). What also mattered was the extension of free entry to domestic wholesale and foreign trade. As stressed perceptively by Gomulka,4 'the trade sector becomes ... a major innovative force for the entire economy'. Private traders identify unsatisfied

Certain types of laws and institutions shape economic behavior in market economies. In Eastern Europe these general rules and market institutions are often nonexistent, and a major problem is to create market economies while simultaneously building the supporting institutions. We describe the type of institutions inherited from Soviet-style economies and show institutional reforms and macroeconomic policies may have limited effects due to the interdependence and lack of complementary market institutions. Without a "critical mass" of market institutions, the benefits of markets are slow in realization. The advantages of reforming existing but distorted institutions over building new ones is stressed. I. INTRODUCTION "Economics is about a game within rules. Choices are made by actors...constrained within specifically determined 'laws and institutions'" (Buchanan [1979]). Nowhere are we reminded of this dictum more clearly than in the countries of East Central Europe, trying to shift to the market economy while lacking the basic institutions of the market. General rules are often absent, market organizations nonexistent, policy instruments underdeveloped-with an adverse impact on the performance of economic agents and the economy as a whole. Despite strenuous efforts at reform, the institutional infrastructure remains much too underdeveloped relative to the requirements of a "workable" market economy, let alone an efficient one. This deficiency will diminish only with the passage of time and many laws, which by their current absence limit the benefits of the stabilization and liberalization programs now underway in these countries. The following section of this paper describes the type of economic institutions inherited from the Soviet-type economy and argues that even those few that can be transformed into market- style institutions will have a rather limited usefulness. I then discuss the process of institution building currently underway in Central Europe. What I have tried to describe is the interplay between "getting the prices right," which is what all stabilization cum liberalization programs are really about, and institution- building. It has sometimes been erroneously assumed that the former is a short-run and the latter a long-run problem. But even the short run requires "getting (at least some of) the institutions right" to create room for the effective use of policy instruments in the (short-run) adjustment process. And the need to get macroeconomic policy-related institutions right dictates to large extent the institution-building agenda of the executive and the legislature. The third section of the paper emphasizes the role of time, which emerges as the scarcest factor in the transition process. Two case studies are presented to show how important institutional reforms may have only limited effects due to the interdependence of various market institutions. A lack of complementary institutions may nullify or severely limit the expected benefits of otherwise radical market-type measures. The gap between the demand for and the supply of institutions will be narrowed only with the passage of time. In the last section the main themes are reconsidered and certain conclusions drawn with respect to the Central European experience as compared to transition cases in Latin America or Asia. The advantages of reforming existing but distorted-- institutions over building new ones from scratch are stressed. Also, the relative importance of a set of well-developed market institutions obtained by Eastern Germany as a result of reunification is emphasized. I see this importation of market institutions as a more important advantage than the flow of financial resources that is commonly regarded as the most important advantage the former G.D.R. has over the other post-Soviet-type economies in Central Europe. I believe it is the presence of market institutions that ensures a smoother transition and an earlier realization of the benefits of higher efficiency. …

(1992). The Characteristic Traits of Privatization in the Economies of Eastern Europe. Eastern European Economics: Vol. 30, No. 3, pp. 6-20.

AT THE TIME OF WRITING, the Polish transition programme has entered its third year of implementation. In the almost continuous debate about its merits and demerits that goes on in Poland and also, within a larger, comparative framework, abroad, one question has been conspicuous by its absence, namely: 'Why was Poland the first to start implementing the transition programme?'. After all, Hungary was well ahead of Poland in tinkering with the Soviet economic system and its communist rulers were more amenable to reforming than Poland's were (to say nothing about Czecho-Slovakia or East Germany!). The answer is very important for understanding the political economy of transition from the Soviet-type economy, centrally administered under the communist party monopoly, to the capitalist market-type economy. For it concerns the fundamental difference between reform, i.e. tinkering with the old system, and change, i.e. decisive break with the past. As this author insisted for years (see Winiecki, 1984, 1987(a), 1987(b), 1990(a), and 1991(a), one should begin by establishing who has the strongest incentive to maintain the Soviet economic system and why. The predatory theory of the prerepresentative state (North, 1979) posits that such a state specifies the fundamental rules of the game, inter alia, the property rights structure, so as to maximise the rent to the ruling stratum. Changes to a more efficient property rights structure are resisted by those segments of the ruling stratum that stand to lose from such changes. This applies very well to the stratum ruling Soviet-type economies (STEs). If reforms-let alone changes!-were to be implemented, two segments of that stratum, communist party apparatchiks and bureaucracies running the economy, would lose two vital system-specific modes of appropriating their rent from running the system. Firstly, efficient management by competent professionals would require abolishing the system of nomenklatura, that is, the right of the communist party apparatus to appoint themselves and their card-carrying cronies to all the best paid managerial jobs in the economy. Secondly, return to equilibrium would eliminate another crucial mode of rent appropriation, namely 'kickbacks' from the managers already appointed to their cronies elsewhere-mostly the communist party apparatchiks and bureaucrats who could help them in their career. For most of the kickbacks were attractive because beneficiaries paid list prices for

THE STEEP FALL in industrial output in Poland and the even steeper one in East Germany at the start of the respective transition programmes came as a surprise to many analysts. It prompted a discussion on the 'costs of transition', giving the chance to criticise the 'big bang' (or 'shock therapy' or 'critical mass') approach of both residual believers in the old order and proponents of various allegedly painless formulae of gradual transition. Leaving aside the discussion itself, I shall concentrate here on the fall in output and its treatment as a cost of transition to the market. What is particularly puzzling is the near-complete neglect of the economic theory of the centrally planned (or centrally administered or Soviet-type) economy in discussion of the fall in output in the early stages of the transition period. I posit that both economic theory and empirical data supporting that theory clearly suggest exactly such an outcome after the start of the 'big bang'. I posit further that the fall in output can only to a certain extent be seen as a cost of transition, understood as a welfare loss. A major part of the fall in output has no impact on the welfare of the population. As the economic system changes, so does the behaviour of economic agents: firms and households. The change in behaviour inevitably induces a fall in output but the level of welfare remains unchanged. In this article, first, various sources of output loss are considered and their theoretical rationale is presented. Next, implications of output loss for welfare are presented in comparative economic systems' terms. Finally, policy implications are drawn.

Introduction Jan Winiecki. Overview of Export Performance of "New Europe" Matija Rojec and Maja Ferjancic. Changes in Export Patterns of the Czech Republic, Hungary, and Poland Anna Wziatek-Kubiak. How to Attract FDI and Maximize its Benefits Beata S. Javorcik and Bartlomiej Kaminski. Multinational Corporations and Export Performance of "New Europe" Bartlomiej Kaminski and Beata S. Javorcik. A New International Division of Labor in Europe Dalia Marin. From Crisis to Crisis? Judit Hamar. How Much Trade and FDI Theories Help in Analyzing Competitiveness-Related Issues? Laszlo Csaba. How Much are Studies of Competitiveness Worth? Wojciech Bienkowski

JAN WINIECKI Why do economic reforms fail in Soviet-type systems despite the obvious interest of ruling groups in improving the performance of their ailing economies? The author applies a property rights-based analysis stressing modes of rent-maximization by ruling groups as a crucial explanatory variable. Party apparatchiks and economic bureaucrats particularly benefit from persistent interference in the economic sphere and consequently are most interested in maintaining the status quo. The author surveys the impact of these motivations on the content of economic reforms, outlines the strategies of counterreformers and predicts the future of reforms in Soviet-type economies. 1. INTRODUCTION In analyzing the disequilibrium characteristics of contemporary Western economies, Mancur Olson [1982; 1984a; 1984b] agrees with the neoclassical macroeconomists in finding that, given the tendencies of markets to clear and given the rational expectations of economic agents, any disequilibrium indicates that all mutually advantageous transactions have not been consummated. Having made this point, however, he asks what can make agents ignore the potential gains from unconsummated transactions and turns his attention toward the structure of incentives, and thus of institutions and policies. Olson insists, and rightly so, that a satisfactory static and dynamic macroeconomic theory has to explain who, among key actors, has the incentive to generate economic growth and equilibrate the economy and who does not. Furthermore, no government, even an authoritarian one, has an incentive to generate serious recessions or disequilibria. Olson [1984a, 637] writes that even in dictatorial systems, the dictator has an incentive to make the economy of the country he controls work better, since this will generate more tax receipts he can use as he pleases and usually also reduce dissent." Olson's arguments about incentives, institutions, and disequilibria offer an ideal basis for an inquiry into why reforms fail in Soviet-type economies (STEs). In Olson's theories of incentives, the old Roman principle of criminal law cui prodest (who gained) is applied to modem economies, and the results suggest that, contrary to widespread opinion, it is not necessarily the "small but powerful group of high and highest leaders" that stands to gain most in terms of power and privilege from "the preservation of the existing order." A powerful political elite could satisfy its desires for both power and privilege through an alternative undemocratic system, one which involves authoritarian "don'ts" rather than totalitarian "do's." In that perspective, the inefficient system of economic control typical in STEs, involving centrally planned production goals and input rationing, would not be a condition sine qua non of an authoritarian solution. Since totalitarian command and control systems persist, however, one must seek groups other than the powerful and privileged few which have incentives to resist reforms and keep the economy inefficient. The following sections identify the membership and motives of groups having strong incentives to keep the STEs inefficient and prevent successful (i.e., market-oriented) reforms. We show how those groups operate, and analyze their effects on the economic performance of their countries. First the incentives for these groups to prevent decentralized management in the state sector are spelled out. Then, their incentives to prevent the expansion of the more efficient private sector are outlined. Third, having identified who benefits from the status quo and why, the paper discusses when and how market-oriented reforms are aborted, limited or reversed by those who stand to gain from the reforms' failure. The last two sections consider the prospects of current attempts at economic reform in three specific countries: Poland, the USSR, and China and the prospects for economic reform in STEs more generally. …

This article sketches briefly an answer to the question of why economic reforms fail under the Soviet-type system in spite of the obvious interest of the respective ruling groups in improving the performance of their ailing economies. The author, applying a property-rights approach, points to the fact that all segments of the ruling stratum benefit from maintaining an undemocratic political system, but party apparatchiks and economic bureaucrats benefit also from the persistent interference in the patently inefficient economic system. Therefore they are most interested in maintaining the status quo in the economic system as well. Moreover, since the rulers turn to them for the design and implementation of reforms, their chances for preventing, distorting, and/or aborting reforms are all the greater.

Poland's transition from socialism to capitalism has largely been praised as a success story. In reality, however, according to this study, Poland's case is an 'incomplete' transition. Looking at the processes involved in economic transition, covering key issues including financial markets, labour markets, competition and intervention, social security, property rights and attitudes towards the changing political economy, this book provides a wide-ranging and invaluable study of economic development. It will be of great use to economists, those involved in Russian and East European studies, and political scientists.

The central theme of this paper is the role of the new, entrepreneurial private sector, established after the fall of communism, in output recovery, and, more generally, in economic expansion of post-communist economies. This role is considered specifically in the context of the successes in Poland, the Czech Republic, and Hungary. The author notes a substantial difference between the performance of the new private sector and the privatized sector in the short to medium run (3-7 years) from the start of privatization. New private firms typically enter the economic game with well-established de jure and de facto property rights and with industrial relations based on market economy rules. Unlike the public sector or privatized firms, the labor force of these firms is not demoralized by the change to market-economy rules. As a result, they often perform better and are quick to increasing their share of aggregate output. This also helps the economy as a whole emerge earlier from transitional recession. The author discusses two hypothetical paths of recovery and expansion; one with and one without a dynamic new private sector. The determinants for establishing and growth of new private firms are considered. In addition to the specific rules and general framework of transition, the study concludes that broad institutional fundamentals of political liberty, law and order, and trust contribute to the successful emergence of this new entrepreneurial sector.

How can socialist economies make the transition to the free market? Jan Winiecki, of the University of Warsaw, explains some of the difficulties and concludes that reform in the Soviet Union may only be achieved after a military coup.

The steep fall of industrial output in Poland after January 1, 1990, and even steeper one in East Germany after July 1, 1990, as well as smaller declines elsewhere even before the beginning of transition programmes generated a lot of criticism. This criticism came from the not so numerous defenders of the communist order and more numerous believers in painless transition to the market.

Among the former CMEA countries, some are moving faster and more radically toward the market system than others. Prof. Winiecki shows that the former will in future be in a better position to compete on world markets than those countries whose transition to the market system is incomplete or distorted.

The “Spring of Nations” that took much of East-Central Europe by storm last autumn was without doubt a political phenomenon. An apparent abandonment of the doctrine of military intervention in subordinated East-Central Europe by the Gorbachev regime had encouraged change for some time. The Hungarian decision to dismantle border fortifications at the border with Austria triggered a flood of East German refugees to the West that put pressure on the East German communist regime. Once Honecker fell, Czechoslovak neo-stalinists found themselves isolated and the pressure applied skillfully by the opposition resulted in the smoothest possible transfer of power. The fall of Ceausescu completed the domino effect.

Can perestroika be made to work in the Soviet Union? Jan Winiecki of the University of Warsaw, suggests that easy optimism may be misplaced.