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8 Case Study Assistance to the Transition Countries The Challenge of the Transition My primary purpose is to lay the intellectual foundations for an alternative philosophy of development assistance. For concrete examples (mostly negative), I have focused on the “case study” of the World Bank and to a lesser extent the other large multilateral and bilateral agencies (e.g., IMF and USAID). The transition from communism to a private property market economy presented a unique challenge to the major development assistance agencies. A new regional development bank, the European Bank for Reconstruction and Development (EBRD), was also established to help meet the challenge. My purpose in this chapter is to discuss the propensities of the development agencies by examining how they tried to meet the challenge of privatization in the transition countries of Europe and Central Asia during the 1990s. It is a tale of woe in general and a debacle of historical proportions in Russia and the former Soviet Union. The development agencies after some indecision and shallow debate adopted what became known as a “shock therapy” and “market bolshevik” approach (see Stiglitz 2001; Reddaway and Glinski 2001; Ellerman 2001a, 2003). It was driven by visions of social engineering that massively violated the precepts of starting where people are, seeing the world through their eyes, and respecting their autonomy (the three Dos). China by contrast largely rejected Western advice and chose an incremental homegrown (internally motivated) approach, so the con186 trast between Russia and China provides a remarkable natural experiment to compare two strategies of institutional change. The difference in results could hardly be more striking. Since the Chinese reforms started with government support in the early 1980s, China has had around 8 percent per capita annual growth (McMillan 2002, 204), perhaps the largest growth episode in history. Russia, using the shock therapy strategy, went the other way. In the ‹rst year of shock therapy (1992), production fell by 19 percent with a further 12 percent and 15 percent in the ensuing two years (McMillan 2002, 202). In all, the country bottomed out at about a 50 percent drop in gross domestic product (GDP). Experts can argue about the interpretation of the economic statistics, but the demographic trends tell an even more worrisome story. The population has actually declined over the 1990s in such a precipitous manner—now for every 100 babies born, 170 Russians die—that the government projects a 30 to 40 percent drop by 2050 (Feshbach 2003b). In her preface to Feshbach (2003a), Laurie Garrett notes: There have been few times in human history when a vast region, encompassing a militarily, if not economically, powerful nation has been depopulated to the extent Russia has—and will. It is dif‹cult to ‹nd a precedent from which to draw a comparative reckoning about Russia’s future. The causality behind these trends is very hard to disentangle— which is why the side-by-side comparison with China is so revealing. The apologists for shock therapy are quick to offer one-liners like “Russia is not China.” But it is hard to see how the other differences aside from the opposite institutional change strategies and the ensuing disruption could account for the diametrically opposite results for the two neighboring countries making the transition from communism to a market economy. The Privatization Debates: Did History have a “Timeout” under Communism? While the transition countries faced large challenges on many fronts, I view this history through the lens of privatization. This was not a matCase Study 187 ter of privatizing a few state-owned companies. All companies of any size had some form of state or social ownership, so it was more a matter of systemic ownership transformation rather selling off a few dinosaurs. In the debate about privatization, one of the basic determinants of one’s position was one’s view of history. Many held the ideologically driven view that history essentially stopped in Central and Eastern Europe when the Iron Curtain descended across it after World War II. History was then restarting after the Berlin Wall fell and the other liberations of the 1989–90 period. History in between was like a timeout during a sporting match. Whatever people may have constructed or accomplished positively during that time period was like a goal scored during a timeout; it didn’t count. Starting from where people were by recognizing their positive accomplishments was seen as tantamount to validating communism. This view is held with particular vehemence by political and economic...


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