Economics of Planning 30: 61–62, 1997.
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Book Review
Starting Over in Eastern Europe: Entrepreneurship and Economic Renewal Simon Johnson and Gary W. Loveman Harvard Business School Press, Boston, 1995, 262 + xx pp., index, ISBN 0-87584-569-X. The debate over rapid versus gradual strategies for effecting the post-communist economic transition hinges to a significant extent on the question of enterprise restructuring. When programs for rapid transitions were introduced in Poland in 1990 and Russia in 1992, opponents were quick to ascribe the large declines in output and high inflation rates to the failure of enterprises and financial institutions to adapt to new conditions. The inevitably slow pace of institutional change, according to the ‘gradualists’, means that the ‘shock therapists’, emphasis on stabilisation and liberalization is misplaced. Instead, the key focus should be on privatizing state enterprises, and on constructing the appropriate financial and regulatory infrastructure for a capitalist economy. Proponents of rapid transition strategies have generally responded by arguing that desirable structural changes are unlikely to occur if enterprises remain in highly controlled and inflationary environments. The resolution of this debate has awaited the appearance of a case-study literature that would provide detailed analyses of changes in enterprise behavior in response to liberalization and stabilization as well as privatization and institution building. Starting over in Eastern Europe is one of the first books to do this, and it does it very well. The authors conducted extensive survey research at the enterprise level-nearly 1000 questionnaires were administered to Polish entrepreneurs by Johnson’s and Loveman’s research team-during 1990–1993, analyzing the impact of the Balcerowicz Plan for rapid transition on the development of private firms. These private-sector results are accompanied by case studies on the development of roughly a dozen new private firms, which are supplemented by case studies of restructuring efforts in three state enterprises, two of which undergo privatization. In addition to being one of the first books of this type, Starting Over in Eastern Europe should be widely read for another reason: it speaks directly to the debate over rapid versus gradual transition strategies. The authors make a very strong case that ‘the macroeconomic changes involved in the Balcerowicz Plan were extremely well designed in terms of their effect on the micro economy. The change in macroeconomic policy was both necessary and sufficient to cause a boom in new private business and irrevocably change the organization of work in the Polish
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economy’ (p. 13). Moreover, Johnson and Loveman emphasize the importance of new private firms, as opposed to privatizing state enterprises, in explaining Poland’s economic recovery. As the authors point out, ‘Poland has privatized proportionally fewer of its large state enterprises than other post-communist countries which are doing worse economically . . . Poland’s economy has improved, and privatization, to date, has not been the explanation’ (pp. 7–8). The driving force behind Poland’s economic recovery is instead ‘the emerging small business sectors. . . in all sectors of activity, from manufacturing to trade and services, and many compete with high levels of quality and technical sophistication’ (p. 12). Critics of post-communist macroeconomic stabilization programs have often argued that, when combined with largely-unreformed financial systems, such programs starve the indigenous private sector of capital. According to this argument, quasi-state banks prefer to lend to the devil they know (large, inefficient state enterprises) rather than the small, privately-owned devils they don’t know. Likewise, high real interest rates associated with monetary austerity and stepped-up bank provisioning are thought to cause a liquidity squeeze for the private sector. Without challenging such arguments directly, Starting Over in Eastern Europe finds that high nominal interest rates were in fact the single greatest constraint on the expansion of new private firms in Poland during the early 1990s. This intriguing result leads the authors to conclude that quicker, not slower, macroeconomic stabilization that brought down nominal interest rates would have made bank credit more accessible for private firms. To be sure, Starting Over in Eastern Europe can be challenged from a number of perspectives. It does not address, for example, such frequently-discussed aspects of the private sector and privatization in Poland as corruption, nomenklatura privatization, or the problems of peasant agriculture. This leaves the book open to the charge that it only focuses on the beneficial aspects of the private sector, while ignoring the problems. Also, banking is presented as a sector in which, like the other sectors considered, the best prospects for restructuring lie in ‘starting over’ via the creation of new private banks. This has not happened in Poland. Moreover, some of the worst abuses of the Polish financial system were committed by the weak, under-capitalized private banks created during 1990–1991 many of which have since gone under or have been merged with healthier institutions. Such criticisms are relatively minor, however, and are unlikely to detract from the significance of Starting Over in Eastern Europe. This is an important and well written book, one that should be accessible, and of interest to, economists, business people, Polish specialists, as well as graduate and advanced undergraduate students. BEN SLAY Open Media Research Institute, Prague Middlebury College