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Transforming Communist Economies

CHICAGO: The very different paths taken toward market economies by the ex-communist nations provides a remarkable laboratory on how to transform centrally planned economies. The evidence from these experiments speaks loud and clear that it is best to introduce large reforms rapidly without waiting to discover the "right" sequence of reforms. Moving quickly allows the transformation to be guided mainly by the spontaneity of innovative market forces rather than by government planners or economists.

Yet many economists have advocated a slow and systematic pace because they believe the ordering of reforms toward a market economy makes an enormous difference to the long run success of the process. However, historical experience offers little guidance on what the sequence should be because the scale of the transformations required by the collapse of communism is unprecedented. Nor does economic theory provide a blueprint for change because markets have their own creativity and dynamics that are usually impossible to predict in advance.

In a recent book of essays Prime Minister Vaclav Klaus of the Czech Republic -- who has led the highly successful transformation of that nation -- draws on his experience when he emphasizes that the transformation process should be done quickly with a "mixture of intentions and spontaneity". More than two hundred years ago, Adam Smith in his Theory of Moral Sentiments argued along similar lines that important public policy changes cannot be planned the way a master chess player moves pieces around on a chess board.

Rapid introduction of major reforms also prevents the various interest groups who benefited from communism from organizing effectively to slow and try to derail the transformation to a market economy. Since these groups were thrown on the defensive for a while after the old regimes were toppled, initially they did not have the political power to oppose rapid and irreversible changes. But they recovered their political voice -- in fact, most of the current leaders of the ex-communist countries are themselves former communists -- and they are advocating a slowdown in the pace of change that appeals to the elderly and others hurt by the transformation process.