Stuck in Transition

LONDON – The G-8 recently asked the European Bank for Reconstruction and Development, which was created to support the post-communist transitions to democracy and market economies in Central and Eastern Europe, to put its experience to use in Egypt. But which lessons from the Eastern European transition experience are relevant for countries in North Africa and the Middle East? An important difference is that, unlike Eastern Europe in 1989, the countries of the “Arab Spring” do not have centrally planned economies. While the state is involved in much economic activity and property rights are frequently contested, private property is nevertheless firmly established. Subsidies are common, but prices are not fixed. There may be impediments to international trade, but nothing like in Eastern Europe, which largely traded with itself in distorted and artificial ways. So it is in the countries of the Eastern Europe of today – and the two decades of reform experiences that have brought them to where they are – that we should seek parallels with North Africa. Despite the financial crisis, political and economic progress in Central Europe and the Baltic countries has been remarkable. On the other hand, most countries in the former Soviet Union are like much of North Africa and the Middle East – “stuck in transit.” Some, like Belarus and Uzbekistan, have not even started reforms in earnest. The richness of Eastern European transition experience offers valuable clues about how to break out of being “stuck in transit.” The emotional debates over “shock therapy” vs. gradualism have been replaced by a broad consensus that, while we need to exploit windows of political opportunity, not everything can be done at once, and reversal is always a threat. Careful sequencing of reforms is critical to ultimate success. By starting with more visible and popular reforms in the short term, policymakers can build constituencies for tougher reforms later. Key constituencies for political and economic reform in Central and Eastern Europe have been private small and medium-size firms and younger age cohorts. Developing private sectors with meaningful jobs is even more important in countries like Egypt, which have much younger and rapidly growing populations.The state has an important role to play in this process. Early calls in many countries to dismantle the state have given way to more sophisticated assessments. A strong state is needed to support nascent markets and enforce laws and regulation, and it must invest in productivity-enhancing education and health care. Another lesson is that we should not worry too much about shifting political majorities. In fact, the ability of voters to remove incumbent governments has proven to be a strength, not a weakness. The Polish government that launched the initial “shock therapy” reforms was replaced by a coalition with a “gradualist” bent and greater concern for distributional outcomes. Since then, successive Polish governments of varied orientations have taken turns. In the end, the country has built a thriving economy and a well-established democracy capable of dealing with calamities such as the global financial crisis and the tragic death of the country’s president last year. Fear of reversals should not be used to bypass parliaments and civil society. Important constitutional reforms and normal parliamentary processes were suspended in Russia in the early 1990’s, owing to fear of a Soviet revival. While this prospect seemed real enough at the time, we now know that such an outcome was highly unlikely, given the economic and political bankruptcy of the system. Today, poorly thought-out reforms in North Africa and the Middle East are being rushed through under the perceived threat of Islamist extremism. But even when such fears are well-founded, reforms should be evaluated on their own merits in broad consultations.In Central Europe and the Baltics, the promise of EU accession offered a path through the transition. As for most of the countries of the former Soviet Union, which remain stuck in transit, EU membership is not in the cards for North Africa and the Middle East. Even so, these countries’ geographic proximity to Europe enhances the benefits from trade and financial integration. Conditional on reforms, Europe must open its market to both its southern and eastern neighbors. Erik Berglof is Chief Economist, European Bank for Reconstruction and Development. Copyright: Project Syndicate, 2011.