and Eastern Europe. (The Baltic states, because of their history and traditional Western orientation, must though be regarded as closer to the latter than the former: and the striking success of their economic reforms emphasizes that.) Although Russia enjoyed swift capitalist growth in the half-century between the end of serfdom and the First World War, there was only a very limited period — essentially after the 1905 Revolution — in which liberal institutions and attitudes could take root. Communism extinguished these memories and also destroyed the still small middle class who were capitalism’s hope. Seventy years after the Bolshevik Revolution, communist economic planning has bequeathed its own legacy of misdirected investment, wrongly located factories and power plants, ossified technology, ex-bureaucrats posing as industrial managers, an unmotivated workforce and ecological catastrophe.
More should have been done — and earlier — to help Russia, Ukraine and other ex-Soviet states to build free-enterprise economies. In particular, we should have been prepared to provide backing for a currency board to bring some stability to the Russian rouble. The Russian people rightly had no trust in their government’s ability to provide a stable currency. The only solution was to take it out of the government’s hands, introduce a ‘hard rouble’ and set it firmly in the institution of a currency board similar to that which we set up in Hong Kong in 1983.[119] The currency board, preferably buttressed by representatives of the IMF or the Federal Reserve Board, would always exchange hard rouble currency for US dollar notes at a fixed rate of exchange. History shows that such transparent systems work, even under the most trying circumstances. To make this feasible Russia needed sufficient dollar reserves to give over 100 per cent backing to the hard rouble notes; the West could have found no more worthy form of aid than to have provided such backing.
The secret of successful economic reform is always to ensure that all of the components work together, because then the process of adjustment is easier. On these grounds, some now criticize the Russian reformers of 1992 for freeing prices before breaking up the state-owned monopolies which dominated the economy. But at least price liberalization brought goods into the shops at a time when there was talk of Muscovites simply not having enough to eat. In any case, a far-reaching privatization programme using the voucher method pioneered in Czechoslovakia has since transferred large swathes of industry to the private sector. More than 70 per cent of Russian workers are now in the private sector. True, uncertainty about property rights, excessive bureaucratic regulation, high taxes and widespread corruption are still major problems, deterring foreign investment and driving enterprise into the mafia-controlled black economy. But, for all that, the most gloomy prognostications seem unjustified. Unreliable figures for the decline in production are more than balanced by others suggesting large increases in private consumption — which is in any case precisely the re-orientation which transformation from a production-led to a consumer-driven economy requires. And unpleasant as many of its manifestations may be in a situation where the law is not properly administered or upheld, no one visiting Russia today could claim that its people are failing to respond to the opportunities for entrepreneurship. In fact, the most important message which Westerners must impart in Russia now is that fully fledged capitalism
The economic challenges facing the ex-communist states of Central Europe, though formidable, are of a lesser dimension. East Germany, of course, was able to merge with the most economically powerful state in Europe. Hungary had already advanced some way towards a Western-style economy in the last years of communist rule. It is, though, significant that the two most striking success stories — Poland and, still more so, the Czech Republic — occurred where governments took the boldest and earliest decisions to move from socialism to capitalism.
Poland’s great advantage was that the communists had largely failed to collectivize agriculture. Communism thus failed to gain total control of the economy — just as in the face of resistance from the Catholic Church it failed to gain total control of society. Communist attempts at economic reform, however, failed: indeed, their most significant legacy was hyper-inflation. The architect of the successful reforms achieved during the Solidarity-led Government, Leszek Balcerowicz, deliberately chose a radical course — the simultaneous introduction of measures to eliminate price controls, tighten monetary policy, cut the budget deficit and remove almost all restrictions on international trade. Inflation fell dramatically. New small businesses started up. Goods flowed into the shops — certainly, at prices which people found difficult to afford, but much of the alleged drop in living standards was a statistical fiction, since previously Poles had faced crippling shortages.[120] Subsequently, a programme of privatization added the final element to the reforms. The private sector now comprises 55 per cent of the economy. Success has not been unalloyed, however. Budget deficits under the burden of unchecked welfare spending seem likely to continue. The privatization programme appears to have slowed since the Left gained power in 1993. Partly in response to the European Community’s failure to open up its markets sufficiently to Polish produce, there has been a tendency for Polish tariffs to rise once more.[121] On balance, however, the successes of reform far outweigh the failures: to such an extent that Poland’s economy in 1993 and 1994 grew by some 4 per cent and looks likely to repeat the performance in 1995. Nor should the Right’s defeat in the 1993 elections necessarily be attributed to popular discontent at the reform process itself. The fragmentation of the anti-socialist vote among small competing parties under a system of proportional representation (adopted thoughtlessly by most of the new democracies) must bear most of the blame.
The success of economic reform in the Czech Republic is also notable — as is the contrast with Slovakia, which has deliberately retained a more socialist orientation. The Czechs, of course, inherited a tradition of industrial success which not even forty years of communism could extinguish. Before the Second World War Czechoslovakia was one of the world’s most advanced economies with an income per head equal to France. Moreover, the Czech reformers, unlike their Polish equivalents, did not inherit hyperinflation; nor were they inhibited by the necessity to seek communist support for the reform measures. Under the determined leadership of Vaclav Klaus, first as Finance Minister and since as Prime Minister, a radical strategy was adopted with no concessions made to demands for a ‘third way’ between capitalism and socialism. Price controls were removed, subsidies cut back, public spending sharply reduced and the currency made convertible for trade purposes. A pioneering scheme of mass privatization through vouchers has transformed the pattern of ownership, with 80 per cent of Czech assets now in private hands. After the traumas of change, economic growth (at 2.5 per cent in 1994) has begun on a sound footing and, in spite of the shake-out of labour from old inefficient industries, unemployment (at 4 per cent in 1994) is low. Unlike in Poland and Hungary, those who pushed through the necessary economic reforms have in the Czech Republic also reaped the political rewards — which itself is the best guarantee that those reforms will continue.
Yet it is perhaps the example of the smallest and poorest of the former Eastern bloc countries, Albania, which best illustrates the creative potential of uninhibited capitalism. Indeed, what has happened since the fall of communism gives a quite new understanding of Schumpeter’s description of capitalism as a process of ‘creative destruction’. Albania had lived in a time warp, cut off from political or economic contact with the outside world, without decent communications, burdened by hopelessly outdated industries, its agriculture totally collectivized, the landscape dotted with bunkers built by its paranoid rulers. The only way forward was to start again from scratch; and this is what happened. A sudden huge emigration, though presenting immediate problems for Albania’s neighbours, has since resulted in a substantial inflow of remittances which, with overseas aid, allowed the beginnings of a consumer society. Small businesses mushroomed everywhere. Everything which could be salvaged from the collective farms and the bunkers was dismantled and used in new private farms which sprung up and which — the government having abolished price controls — were soon able to feed the population. Albania is now achieving what almost everyone considered impossible: its economic growth has been in double digits for two years running — though, of course, from a very low level. Foreign investment is taking advantage of low wage costs, lack of regulation and the country’s mineral wealth and potential for tourism.
The different rates of economic progress, therefore, in the former communist states bears out my central thesis — namely that although political, social and cultural factors are not without importance, the free-enterprise formula works whenever and wherever it is applied. Moreover, its application is crucial to the entrenchment of democracy too. As a recent survey of public opinion in ten ex-communist countries shows, in nearly every case nostalgia for the old communist regime is associated with failure to make a rapid transition to a free economy.[122]
