Tuesday, February 07, 2012

Andrei Shleifer on transition from communism

Patria.cz, a server for Czech investors, published a shortened Czech translation of Andrei Shleifer's essay called
Seven things I learned about transition from communism
Andrei Shleifer co-authored the Russian privatization scheme. However, I know him from Harvard – as a close colleague of Larry Summers. The President of Harvard University helped Shleifer to settle a bizarre $28 million fine that Prof Shleifer had to pay to the U.S. (?) for his apparent financial conflict of interests in Russia. (He bought stocks even though he was a mastermind initiating the privatization in Russia.)

Needless to say, the fanatical anti-market types – and there are very many of these folks at Harvard University, especially but not exclusively in the most inferior humanities such as the Department of Professional Whining Blacks and the Department of Professional Whining Women – were upset and they gave Larry Summers a hard time about this episode, too.

At any rate, I guess that Shleifer is on the same page as I am. His opinions are arguably closer to mine than those of Summers, a fact that may be correlated with our experience with communism. If I summarize and rephrase the lessons, they say the following:
  1. The economic activity dropped but the official numbers exaggerated the drop because communists overstated their economy; and because lots of quickly thriving grey economy in the newborn capitalism wasn't counted. Some patience is needed, anyway.
  2. Such drops can't be extrapolated; a fast growth came soon because capitalism works.
  3. The drop didn't cause populism; new economic elites and not populists had the tendency to accumulate more power than what was appropriate.
  4. The timing of the reform steps wasn't optimal but it (and the questions whether the laws must be optimized before the liberalization, and so on) wasn't important in the big picture, anyway. Experiences differed but the market economy finally arrived everywhere. The lesson is Don't overthink the details and don't ever use such dilemmas as arguments to slow down the reforms. (I am sure this lesson has to sound as a heavenly music e.g. to Czech President Václav Klaus.)
  5. The importance of the changes to the incentives was overestimated. Capitalism not only changes the motivation but it also brings (somewhat or very) different people to the top; the latter change may have been more important. With the very same people, the progress would have been very difficult if not impossible. You can't teach an old dog new tricks.
  6. Long-term panic ignited by recessions or even defaults is indefensible. There are numerous examples when the growth returned within a year.
  7. The economy evolves in a much more predictable way than politics. The degree of democracy in Eastern Europe was pretty much a decreasing function of the longitude (a variable that is minimized in Western Bohemia where I live); countries with some medium incomes may ultimately converge to democracy but this path is less direct than the path to capitalism.

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