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The Collapse of East European Regimes
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Evaluation of the problems involved in restructuring the economy in the former Soviet Union. Looks at the difficult balance between creating a market economy where none previously existed, and protecting the consumers.... More...
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Paper Abstract:
Evaluation of the problems involved in restructuring the economy in the former Soviet Union. Looks at the difficult balance between creating a market economy where none previously existed, and protecting the consumers.

Paper Introduction:
The collapse of East European regimes probably had less to do with political opposition from within or economic and military pressure from without than is commonly thought to be the case. When Gorbachev launched perestroika, he apparently made the decision to dismantle the Soviet empire in Eastern Europe, an empire which the Soviets could no longer afford or properly manage. Thus the 1989 demise of communism in Eastern Europe should probably be seen as less a political victory by the democratic opposition within Poland, East Germany, or Czechoslovakia but rather a defeat by default of these local ruling elites, set adrift by a Gorbachev bent on reforming a fast disintegrating Soviet economic system (Ash, 1990). The nature of the economic crisis in Eastern Europe has to a large extent paralleled the economic crisis in the former Sovie

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Consequently a formidable pressure group developsfor continued protection, subsidies and wage increases among industrialworkers, state managers, and government bureaucrats. But as Wedel ((1992) has pointed out,Eastern European officials and managers have also raised the followingcriticisms of the use of foreign aid and funds to further privatization:(1) Western consultants tend to be ill-equipped to handle questionsarising in the legal jungle of East European property ownership; (2) theytend to undervalue national properties, especially with regard to the skilland experience of employees and the value of land; (3) well-conceivedconsultants' reports have only the most tenuous links to the practicalitiesof implementation and thus the plans for the privatization of a particularfactory become useless if they are ill-informed. pp 47-59.Wedel, J.R. This meant that it was difficult to planinvestments properly as well as to motivate individuals to produce asproductively as possible. 14, 1992). The pointis that rapid privatization is not necessarily the panacea that manyeconomists, such as Sachs, have suggested. For Eastern Europe, the insistence on promoting the growth of acapitalist private sector, without a strong capitalist class fighting foritself, leads the state to penalize workers in state-owned industry.Furthermore, by eradicating workers councils, in such countries as Poland,it becomes difficult for workers to defend themselves. The process of economicliberalization involves the freeing of most prices, an open trading policy,and the establishment of a legal basis for private property. (Jan. "Eastern Europe: Apres le Deluge Nous," New York Review of Books. Reform in Eastern Europe. The problem is not capitalism but theattempt to impose it according to ready-made blueprints, treating entiresectors of an economy as necessary sacrifices of a brave new world withouttaking into account a particular country's actual situation. (Winter, 1992). Several other factors also contribute to revenue shortfalls in EasternEuropean economies. "Beware Western Governments Bearing Gifts," Wall Street Journal Europe. "Crossing the Valley of Tears in East European Reform," Challenge (Sept./Oct. The nature of the economic crisis in Eastern Europe has to a largeextent paralleled the economic crisis in the former Soviet Union. Macroeconomicstabilization usually involves sharp cuts in subsidies, a devaluation ofthe exchange rate, and a restriction of domestic credit expansion.Privatization insoles the conversion of state enterprises into corporateform, followed by ownership transfer of state enterprises to the privatesector. Instead the end result was economic stagnation. 13.Blanchard, O., Dormbusch, R., Krugman, P., Layard, R., and Summers, L. In bothplaces it had been hoped that the "central plan" governing production anddistribution would pave the way for continued economic growth anddevelopment. ppl 4-11.Stark, David. (New York: F.A. XXVII, No. For decades the Soviet ruling elites were convinced that a plannedeconomy was more rational and that, in the long run, it would win outagainst the market economy. 1-9. "Toward Glasnost in the IMF," Challenge. However, there have been powerful critiques of this prescription foreconomic reform. He also maintains that an importantportion of the East European labor force, typically 3 -4 %, is employed inthis industrial sector. Vol. Sachs (1991) also points out that the weakest portion of the economicreforms in Eastern Europe revolve around that state industrial sector.This part of the economy tends to be vastly overgrown as a result of fortyyears of Stalinist development, and therefore needs a substantialrestructuring and modernization. 26-31.Sachs, Jeffery. The impetus for a period of primitive accumulation is increased by thefact that most of the $27 billion in foreign aid that has been promised topost-Communist Europe by the IMF, World Bank, and Western governments hasnot yet arrived (Sachs, 1994). TheChinese communist party still appears to function as a legitimate politicalforce committed to modernizing the country -- an option that was probablyexhausted during the Khrushchev reforms in the Soviet Union. Shocktherapy may result in populations completely rejecting marketization, withdevastating results economically and politically. In addition the effects of privatization have also been quitedramatic. With thestate as the central planner and sole owner of the means of production theeconomic system in the former Soviet Union and throughout Eastern Europebecame more and more unmanageable. The New Class: An Analysis of the Communist System. pp. 6, No. (Cambridge: Massachusetts Institute of Technology Press, 1991).Djilas, Milouan. The move tocapitalism is a necessity in Eastern Europe but what should be opposed areirrational policies that create havoc by needlessly weakening domesticindustry and dangerously alienating a significant promotion of thepopulations of these nations. For example, the lack of domestic capital, capitalmarkets, and a well-developed banking system seem to lead to "primitiveaccumulation," where private entrepreneurs accumulate capital in ways thatare shady, if not illegal. In a country such as Poland, where the state acquired over 8 % itsrevenues during the last years of communism by appropriating surplus fromstate enterprises, the fiscal crisis has been especially severe. 1991) pp. Praeger, 1957).Sachs, Jeffery. Thus the 1989 demise of communism in Eastern Europeshould probably be seen as less a political victory by the democraticopposition within Poland, East Germany, or Czechoslovakia but rather adefeat by default of these local ruling elites, set adrift by a Gorbachevbent on reforming a fast disintegrating Soviet economic system (Ash, 199 ). Vol. (May-June 1994). Insofar as socialist states rely heavily on the appropriation ofsurplus from state enterprises to finance expenditures, the sale of stateassets necessarily reduces the traditional core of the state's revenuebase. When Gorbachev launchedperestroika, he apparently made the decision to dismantle the Soviet empirein Eastern Europe, an empire which the Soviets could no longer afford orproperly manage. "Path Dependence and Privatization Strategies in East Central Europe" East European Politics and Societies. Furthermore, because thestate is starved for revenues, it often turns to particular workers in thestate sector. The sale of purposefully undervalued stateassets, often to members of the nomenklatura or their cronies is a case inpoint (Blanchard, Dormbusch, Krugman, Layard, and Summers, 1991). Itestablishes a wage norm for a given firm or sector and then taxes all wageincreases above that norm up to 1 %. BibliographyAsh, T.G. 1. Since the communist parties in the Soviet Union and Eastern Europewere largely discredited before the revolutions of 1989, these countriesdid not have the luxury of considering the Chinese alternative. Instead the economic history of the SovietUnion since 1917 and the East European economies since the end of WorldWar II, have shown that the destruction of the market economy entails thedestruction of social spontaneity and competition; its replacement by astate monopoly in all areas, eventually rendering the bureaucracyomnipotent and society sterile (Djilas, 1957). Jeffery Sachs (1991) has given an overview of the type of economicreforms which have generally been undertaken in Eastern Europe. Ironically, to the extent thatprivatization precipitates budget deficits and fiscal crisis, it couldcontribute to political instability and create obstacles to furthereconomic reforms, including more privatization. These economic systems were structuredin such a way as to render rational economic calculation impossible.Furthermore these economies existed without incentives, since theyattempted to eliminate profits. The collapse of East European regimes probably had less to do withpolitical opposition from within or economic and military pressure fromwithout than is commonly thought to be the case. In Poland the state has passed an excess wage tax. They havethree major dimensions: economic liberalization; macroeconomicstabilization, and privatization of the economy. David Stark (1992) has argued that rapid liberalizationof prices, creation of markets, and deregulation of economic activity hasled to declining output and recession in all of the Eastern Europeannations.

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