Andrei Shleifer, one of my favorite economic thinkers, offers a rough guide to the lessons of the post-communist transition:
(1) Immediately after the transition, economic activity tended shrink dramatically. To some extent, this might have been an artifact of dodgy GDP calculations under communism, but Shleifer recommends that “reformers not count on an immediate return to growth.”
(2) These declines were, however, followed by recovery and rapid growth. Shleifer adds that “for a time things looked glum,” which is quite an understatement. The period before recovery and rapid growth take hold is fraught with political danger.
(3) Interestingly, Shleifer finds that the rise of economic populism wasn’t the big problem during the transition. Populism tended to take off many years later, after improvements in living standards were clear. The real danger is the rise of new economic elites (ex-nomenklatura-turned-oligarchs), who use their considerable political influence to shape the new institutions to entrench their power and wealth.
(4) Reformers tend to overestimate their ability to neatly plan how the transition will unfold.
(5) My favorite:
Winners in the communist system turned out not to be so good in a market economy. Transition to markets is accomplished by new people, not by old people with better incentives. I realised this and wrote about it in the mid-1990s, but the lesson both in firms and in politics in profound: you cannot teach an old dog new tricks, even with incentives.
(6) Interestingly, Shleifer recommends that reformers not panic about crises and debt restructurings, which can “blow over fast.”
(7) And while the transition to liberal democracy has involved a lot of backsliding and a lot of surprises, the transition to a basically market-driven economy seems more consistent and predictable.
Shleifer’s (5) gives me reason for optimism. This election cycle has made me somewhat pessimistic about the near-term prospects for institutional reform, but the real question, to my mind, is whether or not we’ll allow the Internet-enabled economic revolution that is putting pressure on incumbents in virtually all industries and on governments across the world will be allowed to continue. That is an oversimplification, but it offers at least some reason for hope. Today’s “digital natives” are in many respects better psychologically equipped for a more dynamic, competitive economic landscape than today’s prime-age workers. Unfortunately, the failure of incumbent instructional providers mean that many of them don’t have the human capital they’ll need — but that won’t necessarily be true of their younger siblings.
