Economic and Political Reform in Slovakia: A Comparative Overview (1991), by Sean Gabb

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Economic and Political Reform:
A Comparative Overview
A Briefing Paper
by Sean Gabb
Economic and Political Adviser
to The Prime Minister
November 1991

Note: This is is a briefing paper I wrote in November 1991 for the Slovak Prime Minister when he was preparing a speech on economic reform. The speech was not well-received.

You need to speak about the ways in which the new democracies of Central and Eastern Europe may best transform a centrally planned economy to one based on free markets.

My advice on the content of the speech is as follows:

1 The law of property must be clarified. There must be a clear statement of property rights, and the means must be provided for their simple, regular enforcement. This will require that an end be made to the current disputes over the restitution of property stolen by the Communists, and will therefore be unpopular. But, if the economy is to be reformed, this law must be made.

2 So far as possible, government spending must be paid for out of taxation, not from borrowing or printing money. This means that the taxation system must be reformed, to bring it to Western standards of honesty and efficiency.

3 All controls now existing over interest rates and bank lending policy must be lifted, and a private banking system encouraged.

4 Most businesses now owned by the State must be sold. The most profitable businesses should be sold first, but even the unprofitable must eventually go. In the meantime, however, since privatisation is a long process, it may be best to concentrate on making these businesses operate as if they were already in private hands - that is, to compete on price and quality, and to try to make a profit.

5 All controls on prices must be lifted. To prevent the decontrolled prices from rising too high - and thereby endangering the principle of economic reform - this policy should be combined with strict laws against monopolies and other anti-competitive activities on the part of businessmen.

6 Since the policies recommended above will lead to an increase in unemployment, it must be made more attractive for businessmen to hire workers. It must be made easier to dismiss bad or otherwise unwanted workers, and to negotiate more flexible pay agreements with those remaining. This means the abolition of all minimum wage requirements, and the cutting down of holiday, maternity and other benefits - all of which increase the costs of employing someone.

To help the unemployed, the government must provide the usual benefits and assistance - such as unemployment benefit and retraining programmes.

8 The currency must be made freely convertible, and any rules concerning foreign investment not already dealt with above must be lifted.

This advice is justified by referring to the experience of seven other countries that have tried economic reform programmes of their own - New Zealand, Spain, Chile, Taiwan, Yugoslavia, West Germany, and South Korea. By examining the experience of these countries, we may find a scheme of reform that can, with certain changes, be applied to the nations of Central and Eastern Europe.

The comparative method is always useful. A pattern can often be seen from many cases than from one alone. It can even take the place of a more rigorous economic analysis. For example, if I knew nothing of monetary economics, I should know by looking at Germany between 1914 and 1923 aand at England between 1971 and 1980, that to print a lot of money leads to big price increases. In one of these cases, the connection between cause and effect might be hidden by some other circumstances. In both cases, it is far more likely to be seen.

Of course, the information derived may not always be relevant. It is worth noting that of the seven nations, Chile, Taiwan, Yugoslavia and South Korea were all reformed by authoritarian governments that had little or no need to worry about public opinion. West Germany was even under military occupation by the Western Allies when the most painful measures of the reform programme were announced. New Zealand was a mature democracy, well able to bear the strains of economic reform.

The only country with an experience very similar to that of Slovakia is Spain after 1975. Here was a newly established democracy pursuing a programme of reasonably free market reform. Spain, however, was far luckier than Slovakia so far as only 20 per cent of its economy needed to be restructured, and the legal and social bases of a free market economy already existed.

Spain's other advantage was the promise - kept in 1986 - of admission to the European Economic Community. This was a very large incentive to the Spanish people not to lose faith in democracy - for undemocratic nations are not admitted to the Community.

Together with the other nations of this region, Slovakia faces uniquely large problems. It must certainly use experience gained elsewhere in the world. But there are no precedents that can be exactly - or even approximately - applied.