Economic Transition in Eastern Europe 2023-2024 PDF

BUDAPEST ECONOMIC TRANSITION IN EASTERN EUROPE 2023-2024  OUTLINE 1. The Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Tra...

BUDAPEST ECONOMIC TRANSITION IN EASTERN EUROPE 2023-2024  OUTLINE 1. The Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion  OUTLINE 1. The Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion WHAT IS SOCIALISM? WHAT IS COMMUNISM? 4  1. The Socialist economic system in Eastern Europe A. The first conceptions of Socialism “Utopian and prescientific” socialists The theoretical foundations of socialism emerged from the 19th century Most socialist thinkers and social reformers of the 19th century aimed to offer an alternative system to the capitalist market economy. Karl Marx described these early socialists as utopian and prescientific while echoing many of their ideas. 5  1. The Socialist economic system in Eastern Europe The main concepts o The distribution of wealth must be less unequal than in the 19th-century capitalism For Jean-Jacques Rousseau, the “Social Contract” must achieve equality between individuals through a redistributive tax. Etienne Cabet imagines an ideal society (named “Icaria”) where the distribution would be based on the following principle: “To each according to his needs. From each according to his strength.” Robert Owen defends the idea of egalitarianism which goes as far as the abolition of differentiated remuneration. 6  1. The Socialist economic system in Eastern Europe o The exchange of goods must occur without any intermediaries and must be self- organized According to Pierre-Joseph Proudhon, the intermediaries will disappear “because of direct communication from producers and consumers.” Robert Owen is for the suppression of unproductive workers (buyers, sellers, traders, wholesalers and retailers, bankers, brokers…) “who add nothing to the sum of products” (future Soviet vision of unproductive work). For Jean Charles Léonard Sismondi, the market must be complemented by regulations ensuring social protection and promoting full employment. 7  1. The Socialist economic system in Eastern Europe o Cooperation make it possible to organize activities freely Pierre-Joseph Proudhon, people must be able to carry out freely "associated work" in cooperatives (a theme prefiguring industrial democracy, self- management, and the Yugoslav experience) Henri de Saint-Simon announces the disappearance of salaried work in favor of associated work. Joseph Fourrier defends the idea of a society where work would be free, varied, and chosen according to each taste. 8  1. The Socialist economic system in Eastern Europe o Production must be developed For Henri de Saint-Simon, active industrial action is required to reach an abundant supply. Industrialism is a compulsory step to improve the material well-being William Godwin sees machinery as an excellent way to reduce strenuous work. 9  1. The Socialist economic system in Eastern Europe o Private property is questioned Private property may subsist alongside collective property (Charles Bray, Karl Rodbertus). Still, the inheritance must be abolished (Jean Charles Léonard Sismondi, Henri de Saint-Simon) because the legacy of the property of some entails the heredity of the misery of others. Or at least, the State must regulate successions (Jean-Jacques Rousseau) Private property must completely disappear. For Pierre-Joseph Proudhon, “property is like stealing” because it allows the owner to receive an income without working. 10  1. The Socialist economic system in Eastern Europe o The State must disappear for some thinkers; it must remain strong for others Ferdinand Lassale proposes a “State socialism,” where a strong State would help the cooperative sector achieve socialism. Others believe the State must disappear because it “always harms industry when it gets involved in its business” (Henri de Saint-Simon). The State will disappear spontaneously. Pierre-Joseph Proudhon denounces the “parasitic” bureaucratic State. “We are protesting against anything that will look like communism and State socialism” (Mikhail Bakunin). “As long as a country is ruled by one single party, the workers and peasants councils lose all their significance” (Pierre Kropotkine) 11  1. The Socialist economic system in Eastern Europe o Right to work or obligation to work According to Louis Blanc, the right to work must become the fundamental economic right before the right to private property. For Etienne Cabet, work would become "compulsory for all" in Icaria, where "everyone must work the same number of hours per day.” Paul Lafargue (son-in-law of Marx) proposes to replace the right to work with the right to laziness. He plans to cut the working day to three hours. 12  WHAT IS SOCIALISM? WHAT IS COMMUNISM? Rosa Luxembourg Karl Marx Friedrich Engels “In theory” 13  1. The Socialist economic system in Eastern Europe B. The Marxist definition of Socialism According to Marx and Engels, Socialism is a “transition” o Socialism is the first stage of communism It is a stage of political and economic transition “where the State cannot be anything else than the revolutionary dictatorship of the proletariat“ (Karl Marx) During this stage, there are still contradictions caused by the coexistence of formal and informal institutions inherited from the past and emerging institutions of the new system. o The priority of socialism is to increase the quantity of productive forces The proletariat must "centralize all the instruments of production in the hands of the State" (Karl Marx). Society makes itself the “owner of all the means of production to use them socially according to a plan” (Friedrich Engels). Decisions concerning investments, the division of income between consumption and savings, credit, etc. will not be taken individually but by the society as a whole 14  1. The Socialist economic system in Eastern Europe According to Marx and Engels, Communism is a “system” o A situation of abundance "To each according to his needs" (Karl Marx). o A decline of the State The State becomes useless since society organizes accumulation and distribution on its own o The disappearance of money A direct evaluation of the products will follow the monetary evaluation in working time. Planning will regulate the economy instead of the market o The decline of private property "Common possession of all means of production, including the land" (Karl Marx). o The end of history A society without social class 15  WHAT IS SOCIALISM? WHAT IS COMMUNISM? Rosa Luxembourg Karl Marx Friedrich Engels “In practice” Evgueny Preobrajensky Vladimir Ilitch Lenin 16 Leon Trotsky  1. The Socialist economic system in Eastern Europe C. The Characteristics of socialist economies in practice The four pillars of socialist economy o The forced collectivization of agriculture In the USSR, the share of collectivized land rose from 2.7% in 1928 to 34% in 1930 and almost 100% in 1936. The State built small collective farms (Kolkhozes) and State farms (Sovkhozes). o Accelerated industrialization The socialist industrialist model appears as a means of catching up with the level of development of capitalist countries: “we are fifty or a hundred years behind the advanced countries, we must catch up with them in ten years” (Stalin, 1931). Stalin stated in 1928 the idea that industrialization was “the development of the production of the means of production... carried out at the highest possible speed”. 17  1. The Socialist economic system in Eastern Europe o Autarky In the 1930s, the international socialist revolution no longer seemed imminent outside the USSR (German Spartakists were defeated in January 1919, and Hitler took power in 1934). Therefore, the ideology of constructing socialism in a single country is essential. Stalin states the thesis of “the besieged fortress”: a closed economy model in which import substitution (industrialization strategy by import substitution - ISI) is as systematic as possible, explicitly targeting self-sufficiency. The State monopoly on foreign trade isolates domestic economic agents and Soviet production companies. Creation of Central Purchasing Offices (specialized companies under the supervision of the Ministry of Foreign Trade who alone have the right to trade with the outside world according to the directives of the plan) 18  1. The Socialist economic system in Eastern Europe o Centralized and imperative planning (1) A hierarchical, centralized, and imperative system: the economic organization is centralized, and a set of administrations is responsible for carrying out the plan. Sanctions are provided for non-execution. GOSPLAN GOSKOMTSEN GOSBANK (1921) GOSSNAB GOSKOMTRUD (Social Affairs) Foreign trade GKNT (science and technology) Stalin kept repeating: “the plan is the law.” 19  1. The Socialist economic system in Eastern Europe o Centralized and imperative planning (1) The companies are under control. Companies in Centrally Planned Economy (CPE) undergo internal controls (chief accountant) and external controls (line ministry, Gosbank, tax services) However, Companies in a centrally planned economy benefit from a “soft budgetary constraint” (which is not the case for capitalist companies) The “unlimited thirst for resources” and the emergence of shortages Jànos Kornaï (It is going to be studied later) 20  WHAT IS SOCIALISM? “In practice” Institutional Collective ownership of the means of production base Single Communist Party CHINA Centralized and mandatory planning economy CUBA Planned administered prices clients and suppliers set by the central authority collection by the State of all profits permanent subsidies for companies Bernard Control of foreign trade Chavance Other Collectivization of agriculture (state farms and collective farms) Allowed market economy 21  OUTLINE 1. Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion  OUTLINE 1. Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion Fall of the Berlin Wall November 9, 1989 24  2. The Post-Communist transition A. The Crisis of Socialism The “Soft Budget constraint” of companies Jànos Kornaï Unlimited “thirst” for resources Alexey Stakhanov Crises and attempts of reform 25  2. The Post-Communist transition B. The transition dictated by the Washington Consensus The Washington Consensus Ten specific economic policy prescriptions that encompassed policies in such areas as macroeconomic stabilization, economic opening concerning both trade and investment, and the expansion of market forces within the domestic economy John Williamson Theoretical pillars of the Washington Consensus The “invisible Hand” of the market: is a metaphor conceived by Adam Smith to describe the self- regulating behavior of the marketplace. Individuals can make a profit and maximize it without government intervention. Effectiveness of private property (Irina Grosfeld) “Creative destruction” process Vaclav KLAUS Adam Smith The limits of the Washington Consensus The race to the bottom: Washington Consensus as a way to open the labor market of underdeveloped economies to exploitation by companies from more developed economies Unconvincing results: the Washington Consensus has not led to any significant economic Joseph boom in Latin America or Africa but rather to severe economic crises and the accumulation Susan of crippling external debts that render the target country beholden to the First World. Stiglitz GEORGE 26  2. The Post-Communist transition “When I first formulated the Washington Consensus, it really wasn’t written as a prescription for development. It was a list of policies that I claimed were widely held in Washington to be widely desirable in Latin The Washington Consensus America” http://www.youtube.com/watch?v=XMIKEX7eM7E John Williamson “These are very bad rules” http://www.youtube.com/watch?v=NQ952ba75Yk http://www.youtube.com/watch?v=_viNHVzadeM Susan GEORGE “The Washington consensus was neither necessary nor sufficient for growth” http://www.youtube.com/watch?v=QKvig0cFQJc Joseph Stiglitz 27  2. The Post-Communist transition Liberalization of the Economy Prices were liberalized -> hyperinflation Stabilization of the Economy IMF interventions (see next slide) Privatization of the Economy Major companies were privatized 28  2. The Post-Communist transition Stabilization of the Economy IMF interventions Main objective: TB > 0 Structural Adjustment Policy Stabilization Policy TB = X – M GDP + M = C + I + ∆ S + G + X TB = Σ px. x – Σ pm. m. e GDP = C + I + ∆ S + G + X – M GDP = C + I + ∆ S + G + TB px pm TB = GDP – (C + I + ∆ S + G) x m GDP C ∆S e I G 29  2. The Post-Communist transition The Scores of the Post-Communist transition A: Large privatization; B: small privatization; C: corporate restructuring and governance; D: price liberalization; E: trade liberalization and exchange rate; F: competition policy; G: banking reform and interest rate liberalization; H: capital markets and non-bank financial institutions; I: infrastructure renewal Notes: 1 = close to the planned economy; 4 + = market economy Source: EBRD and other documents 30  2. The Post-Communist transition C. Unfinished Transition Path dependency and lock-in "Homo economicus" or "homo sovieticus"? An economy based on networks is not a “market” economy A “primitive accumulation” according to Marx Toward a “greed-based Economy”? Karl MARX Asset grabbing relies on bad practices such as underestimating asset value, asset Wladimir tunneling, price and rate manipulations in financial markets, short selling, systematic ANDREFF lending to insolvents, financial pyramids, fraud, swindling, and even economic crime. It is conducted by breaching the formal rules of capitalism. 31  OUTLINE 1. Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion  OUTLINE 1. Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion  3. The Enlargement of the European Union to Eastern Europe Short EU Enlargement history https://www.youtube.com/watch?reload=9&v=GfN05WB_rYw https://www.youtube.com/watch?v=RE6QgoykLZU 34 The Thessalonika European Council June 21, 2003 35  3. The Enlargement of the European Union to Eastern Europe A. The European Economic Integration What is “Integration”? “In the hierarchy of the obscure and unnatural words whose economic discussions clutter our language, integration stands at a high rank.” François PERROUX “The act of integrating brings together elements to build a whole, or it increases the coherence of an already existing whole.” GENERAL DEFINITION OF ECONOMIC INTEGRATION Economic integration is an economic agreement between different countries, including generally the reduction (or elimination) of trade barriers and coordinating monetary and fiscal policies. Economic integration aims to reduce costs for consumers and producers and increase trade between the countries participating in the agreement. 36  3. The Enlargement of the European Union to Eastern Europe The levels of Integration There are varying levels of economic integration, first defined by Bela Balassa in 1961: LEVEL #06 PU: political union LEVEL #05 CP: Common Policies Bela BALASSA LEVEL #04 CM: Common markets (4 freedoms+CET) LEVEL #03 CU: Customs unions (2 freedoms+CET) LEVEL #02 FTA: Free trade areas (2 freedoms) LEVEL #01 PTA: Preferential trade agreements 37  3. The Enlargement of the European Union to Eastern Europe Exercise: 15 minutes Give the right level for the right area. You are allowed to use the internet and work together with other students. NAFTA EU CETA EFTA MERCOSUR TPP LEVEL #06 PU: political union LEVEL #05 CP: Common Policies LEVEL #04 CM: Common markets (4 freedoms+CET) LEVEL #03 CU: Customs unions (2 freedoms+CET) LEVEL #02 FTA: Free trade areas (2 freedoms) LEVEL #01 PTA: Preferential trade agreements 38  3. The Enlargement of the European Union to Eastern Europe Exercise: 15 minutes Give the right level for the right area. You are allowed to use the internet and work together with other students NAFTA EU CETA EFTA MERCOSUR TPP LEVEL #06 PU: political union LEVEL #05 CP: Common Policies LEVEL #04 CM: Common markets (4 freedoms+CET) LEVEL #03 CU: Customs unions (2 freedoms+CET) MERCOSUR LEVEL #02 FTA: Free trade areas (2 freedoms) NAFTA EFTA LEVEL #01 PTA: Preferential trade agreements 39  3. The Enlargement of the European Union to Eastern Europe The EU Institutions European Court Council of of Justice the EU European Parliament European Economic and Social Committee (EESC) Committee of the regions European Commission European Council 40  3. The Enlargement of the European Union to Eastern Europe B. EU Enlargement: “Join the EU at all costs” The European Summit of the Arch of La Défense (1989) 41  3. The Enlargement of the European Union to Eastern Europe C. Four Step Integration Strategy 1. The EU Aid to Eastern Europe € per capita Transition Assistance Pre-Accession Aid Structural Aid Structural Funds (Annual average) PHARE PHARE, ISPA, SAPARD Obj. 1, 2, 3, Ifop, Convergence, Interreg, Equal competitiveness and territorial cooporation (1990-1997) (1998-2003) (2004-2006) (2007-2013) Bosnia-Herzegovina 7,3 - - - Slovenia 7,3 26,2 39,7 298,8 Bulgaria 10,2 33,9 - 127,5 Romania 4,8 29,5 - 130,3 Hungary 9,6 23,3 60,5 371,9 Slovakia 5,2 23,0 64,8 306,9 Poland 5,0 24,6 65,9 906,9 Czech Republic 4,2 17,9 48,4 370,7 Estonia 12,9 52,8 83,0 367,8 Latvia 10,0 4,6 80,7 289,4 Lithuania 8,2 38,3 78,2 290,5 Weighted average CEECs 5,4 22,9 62,2 492,6 42 Source : A. Slim et A. Hapiot, La documentation française  3. The Enlargement of the European Union to Eastern Europe C. Four Step Integration Strategy 2. Local Unions CIS Free trade Area of the Baltics CU Visegrad Group GUAM FTA Balkan Area of Economic Cooperation in the Black Sea 43  3. The Enlargement of the European Union to Eastern Europe C. Four Step Integration Strategy 3. The Association Agreements - EU-Hungary Agreement, signed 16 December 1991 (entered into force on 1 February 1994). - EU-Poland Agreement, signed 16 December 1991 (entered into force on 1 February 1994). - EU-Romania Agreement signed le1er February 1993 (entered into force on 1 February 1995). - EU-Czech Rep. Agreement, signed on 4 October 1993 (entered into force on 1 February 1995). - EU-Slovakia Agreement signed on 4 October 1993 (entered into force on 1 February 1995). - EU-Bulgaria Agreement, signed on 8 March 1993 (entered into force on 1 February 1995). - EU-Latvia Agreement, signed on 12 June 1995 (entered into force on 1 February 1996). - EU-Estonia Agreement, signed LE12 June 1995 (entered into force on 1 February 1996). Association - EU-Lithuania Agreement, signed on 12 June 1995 (entered into force on 1 February 1996). Agreements - EU-Slovenia Agreement, signed in late 1995 (entered into force on 1 June 1996). 44  3. The Enlargement of the European Union to Eastern Europe EU27 Trade balance Evolution with the Balkans (in millions of €) Bulgaria Romania Croatia FYROM 45 Source : Assen SLIM from Eurostat Database  3. The Enlargement of the European Union to Eastern Europe C. Four Step Integration Strategy 4. Copenhagen Criteria In June 1993, the Copenhagen European Council recognized the right of the countries of Central and Eastern Europe to join the EU once they fulfill three criteria: - Political criteria: stability of institutions guaranteeing democracy, the primacy of law, human rights, and respect for minorities; - Economic criteria: a functioning market economy; - Compliance with the “EU Acquis”: comply with a large number of criteria (31 chapters) In December 1998, the European Commission established the final list of CEE eligible for membership in the EU. 46  3. The Enlargement of the European Union to Eastern Europe D. New Tensions Within the EU 27 Towards Nationalization of the Common Agricultural Policy 1988 1993 1999 2004 2015 47 3. The Enlargement of the European Union to Eastern Europe Growing Regional Inequalities in the EU (2016) 48  3. The Enlargement of the European Union to Eastern Europe D. New Tensions Within the EU 28 Evolution of standard deviations of GDP / capita. (PPP) NUTS II regions (2000-2017) 49 Source : Assen Slim from Eurostat database 50  3. The Enlargement of the European Union to Eastern Europe C. New Tensions Within the EU 28 A cheaper labor force 51  3. The Enlargement of the European Union to Eastern Europe 1998 : PHARE, ISPA (2000), SAPARD (2000) (Pre-accession assistance ) EU Budget 2004 : Structural funds and cohesion (Structural Aid bis) 1989 : PHARE 2007 : Structural Funds (Transition Assistance) (Strategic structural aid) 1990 1995 2000 2005 2010 2015 2020 1991-1995 : Local Unions 1991 : Association Agreements Loans and Trade (Asymmetry) 2013 : EU membership 1990 : First EBRD loans 1990 : First global EIB loans 2007 : EU membership 1988 : Trade and cooperation Agreements 2004 : EU membership (SPG) 52  OUTLINE 1. Socialist economic system in Eastern Europe 2. The Post-Communist Transition 3. The Enlargement of the European Union to Eastern Europe 4. The Social Costs of Transition Conclusion