AALS Annual Meeting, New Orleans, Louisiana  January 2-6, 2002
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TEACHING EMERGING MARKET ECONOMIES
FROM A SOCIO-ECONOMIC PERSPECTIVE
Teaching Objectives: 2. To provide students with a useful perspective with which to both analyze and recommend transformation policies for a particular economy.
Topics to Include: I. What is meant by transforming an economy?1 2. Transformation is not merely a matter of getting the prices right or of privatizing previously state-owned enterprises at the initial stages of transformation - then expecting automatic adjustments to a "free market economy." It is unrealistic to expect transforming economies with their unique initial conditions to automatically and quickly experience institutional transformation in a productive direction following the establishment of macroeconomic stabilization. Such a belief assumes that Schumpeterian-type entrepreneurs will emerge to provide the supply-side creation of new processes to simulate economic recovery. 3. Transformation typically includes establishing (1) new philosophical basis which includes and business culture and a climate of trust2 which overcomes the absence of individualistic, achievement-oriented competitiveness, of a civic culture whereby people willingly adhere to the rule of law; (2) a new political structure; and (3) different principal institutions and their working rules, especially regarding organization of decision making, ownership and control of productive resources, and social processes for coordinating production and distribution decisions. 4. History indicates that there are many types of national economies, and that many such economies have experienced favorable performance for periods of time. However, no economy has experienced continual favorable performance for more than a few decades. In response, economies continually evolve in terms of their principal institutions and working rules, both formal and informal. By definition economic reforms are designed to alter some aspect of economic life. Due to the fact that the variables that the policies address are likely to change over time, policies that are efficacious for resolving certain problems (such as alleviating poverty) may eventually become counterproductive after a certain level of change has been achieved. This inconstancy of effectiveness appears to be the case in issues of unemployment and tax disincentives in Western European economies such as Sweden, the Netherlands and France. II. What to avoid when seeking to analyze and recommend
policies for a transforming economy? It is implied that only laissez-faire market economy is efficacious for former Soviet Union economies while economies with eclectic, alternative institutional structures (e.g., Sweden, Japan, China) are not considered. Such thinking has led to heavy reliance upon policies for transformation, which emphasize open markets, rapid privatization, stringent fiscal and monetary policy, extensive borrowing from foreign lenders, and a minimal role for the state in economic matters. 2. Treating transformation like a chef preparing a recipe (expecting a predictable, determinate outcome in the form of a "free market economy" if the proper ingredients are used). Rather, transformation must be treated as a game of chess in which the outcome from each policy measure introduced must be evaluated before proposing the next measure, with no predetermined outcome in mind. 3. Advocating one single set of "economic" policies designed to serve as a universal panacea for a transforming economy, which make no allowances for cultural and historical differences between the countries and ethnic groups. This was illustrated by Western "experts" who advocated the "arrogant messianism of shock therapy" based upon the assumption that higher prices or market-determined prices would be a panacea for a basic economic malaise. In that sense, shock therapy was like an over-the-counter drug -- good for any ailment regardless of preconditions, ideology, or institutions. 4. Exclusively relying upon either Classical, neoclassical or Keynesian paradigms. These are/were significant within a particular historical and cultural context -- which is not the context of currently transforming economies. Adopting these perspectives today is ahistorical and acultural. 5. Policies designed to privatize state-owned enterprises rapidly. Attempting to do so likely will result in hidden privatization or changes in form of ownership without any substantive changes in management of enterprises. 6. Devoting too much emphasis on reforming large state-owned enterprises to the detriment of providing credit and other support for budding new entrepreneurs who historically have been significant creating employment opportunities. 7. Rapidly opening a weak economy to globalization since domestic enterprises will not be able to compete with most foreign firms, and since the image of foreign products typically will be more favorable than that of domestic products. 8. Quickly reducing the existing political structure. Experience has demonstrated that this has paved the way for organized crime to assume much control while minimizing the support private enterprises need to become established and have their property rights maintained.4 III. What is a useful transformation perspective? 2. One that is developed following an in-depth study of an economy's history to understand what has survived in the country's consciousness, what existing problems must be overcome. By focusing attention on a particular economy, analysts can move beyond the tendency to classify it within a theoretical paradigm and instead identify those patterns of economic behavior that are peculiar to the particular economy under study. This knowledge can contribute to the development of new working rules that take advantage of existing circumstances in order to accommodate change. 3. One which focuses on first getting the institutions right so that complex, unique principal institutions can evolve which are capable of enabling markets to function properly. 4. Adopting a philosophical basis that reflects a pragmatic, measured, experimental, evolutionary approach to transformation based more upon common sense and learning from experience is more productive and likelier to produce more realistic insight than upon advanced levels of economic theory. Further, pragmatic methods of analysis that ignore most canonical principles are likelier to better explain patterns of behavior. 5. Recognizing that there will be considerable resistance to institutional change, and that the points at which such resistance is overcome tend to conform to unique and indigenous historical, social, political, cultural, institutional and philosophical patterns. Historical analysis of economies indicates that neither historical chaos nor deterministic process provide good explanations for such change. That is, institutional change appears to be neither random nor immutably foreordained. . 6. Focusing on both economic and non-economic, often non-quantifiable social, political, and cultural factors. Too often these latter factors, which may significantly influence a particular issue of comparative economics, are either erroneously dismissed as unimportant (because they resist inclusion in a particular theoretical approach) or inappropriately inflated to the status of a constant universal. Examples of such factors include lack of trust, fear of foreigners, and having had as role models for bureaucrats whose control over resources rather than entrepreneurial activity made them wealthy. IV. Are there useful case studies, which illustrates this perspective? Four cases illustrate that adopting an evolutionary-institutional transformation perspective and implementing pragmatic policies can contribute to raising the well-being of a majority of the population significantly include Sweden, 1932-1980; France, 1945 - 1990; Japan, 1952 - 1994; and China, 1978 - today. The case of China is particularly useful in this regard. As Peter Nolan argues, China's success is due to its pragmatic, measured, experimental, evolutionary approach to transformation based more upon common sense and learning from experience than upon advanced levels of economic theory. On the other had, the cases of former Soviet Union economies since 1989 illustrate the harmful effects of transformation policies based upon a narrow, neoclassical "economic" perspective.
1. Avoid the term economic system since it implies theoretical sets of conditions and encourages false capitalist versus communist dichotomy. Such a dichotomy ignores the evolutionary nature of economies, the importance of history, culture, and specific complex institutional arrangements, and that every economy is country specific with a particular mixture of state, private, quasi-private, cooperative complex institutions and corresponding formal informal rules. 2. The case of the Bulgarian agricultural chemical enterprise Agropolychim illustrates this problem. 3. Economics education has become narrowly focused on technical issues. Undergraduate and graduate students are bombarded with mathematics and mathematical models. Economics is taught in a formulaic manner in which the focus is on making economics as "scientific" as physics, complete with determinate solutions. Non-economic variables (i.e., non quantifiable social, political, and cultural factors) are either assumed to be unimportant or held constant, although often these are the factors, which most significantly influence the problem in question. There is virtually no teaching of economic history, history of economic thought, or comparative economics. Such an education narrows economists' perspective towards societal behavior. They tend to view economies as being either "market" or "planned." Their analysis leads them to arrive at theoretical conclusions, which they postulate as valid for every time, place and culture. They fail to recognize the evolutionary nature of economies. Institutions and working rules are constantly changing, so that policies which were efficacious for resolving certain problems (such as alleviating poverty) may become counterproductive after a certain level of development has been achieved. Such has been the experience of the European "welfare states" who now must revise many redistributional policies or face the threat of serious economic recession. Adam Smith and other scholars of the Classical School incorporated history, philosophy, and politics into their analysis. Those charged with teaching economics need to revise their economics curriculum in a direction that will encourage a broader perspective towards societal problems. This will discourage future economists from leaping from their narrow field of specialization into grand simplistic generalizations for problems (and often countries) about which they have little knowledge. 4. None other than Jeffrey Sachs has recognized that a new way of thinking about economies and transformation is necessary before transformation policies can be advocated which are likely to be more productive than those proposed over the past decade by academic consultants and by economists from the IMF and World Bank. Sachs' extensive experience advising Poland's and Russia's transformation efforts (and his subsequent study of development problems in Africa, Asia and Latin America) led to his identifying the following features of transforming and developing economies which he believes economic analysts and policy makers need (but have not yet begun) to accept. (1) Corruption has coincided with rapid privatization programs throughout CEE; (2) a strong state is necessary to maintain a civil society; (3) understanding the history of a nation is a vital prerequisite for sound policy making; and (4) that each nation has its own initial conditions that must be overcome before successful transformation policies are possible. The last feature has been recognized by Alan Greenspan who argued that the unique attitudes and institutions of "communism" not only established an "economic system," but a culture as well - - and that necessary replacement of the way of thinking and way of life which dominated such a culture is unlikely to be quickly achieved merely by the introduction of orthodox macroeconomic stabilization policies. REFERENCES: Adam, Jan Social Costs of Transformation to a Market Economy in Post-Socialist Countries New York: St. Martin's Press, 1999. Amsden, Alice H., Jacek Kochanowicz, Lance Taylor The Market Meets Its Match Cambridge, MA: Harvard University Press, 1994. Angresano, James The Political Economy of Gunnar Myrdal, Cheltenham, UK: Edward Elgar, 1997. __________. Comparative Economics, 2nd ed. Upper Saddle River, NJ: Prentice Hall, 1996. __________. "Poland After the Shock", Comparative Economic Studies, Volume 38, 1996, pp. 87-112. Kregel, Jan, Egon Matzner, Gernot Grabher The Market Shock Vienna: Austrian Academy of Sciences, 1992. Myrdal, Gunnar. Against the Stream: Critical Essays on Economics, New York: Vintage, 1975. __________. Objectivity in Social Research, New York: Pantheon, 1969. __________. Asian Drama: An Inquiry into the Poverty of Nations, 3 volumes. New York: Pantheon Books, 1968. Nolan, Peter. China's Rise, Russia's Fall New York: St. Martin's Press, 1995. Todaro, Michael P. Economic Development in the Third World, 7th edition, Reading, MA: Addison, Wesley, Longman, 2000.
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