Rule No.1 In Switching To Capitalism: Move Fast

The very different paths taken toward market economies by the ex-communist nations provide a remarkable laboratory on how to transform centrally planned economies. The evidence from these experiments is loud and clear: It's best to introduce large changes 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 technocrats.

Still, many economists advocate a slow, systematic pace. They believe that the ordering of reforms toward a market economy makes an enormous difference to the long-term success of the process. Yet history offers little guidance on what the proper sequence might be, simply because of the unprecedented scale of transformation required by the collapse of communism. Nor does economic theory provide an adequate blueprint. Markets have their own dynamics that are often impossible to anticipate.

Prime Minister Vaclav Klaus of the Czech Republic has led the highly successful transformation of that nation. In a recent book of essays, he emphasizes that an overhaul should be done rapidly and with a "mixture of intentions and spontaneity." Similarly, Adam Smith more than 200 years ago in his Theory of Moral Sentiments argued that important public policy changes cannot be planned the way a master chess player moves pieces around on a chess board.

FOOT-DRAGGING. Rapid reform can also prevent interest groups who thrived under communism from organizing effectively to slow and even derail the transition to a market economy. These groups were on the defensive for a while after the old regimes toppled. But now, most of the current leaders in the ex-communist countries are former communists, and these politicians are slowing the pace of change by appealing to the elderly and mthers hurt by the capitalist upheaval.

Telling evidence that foot-dragging on the road to the free market hurts is not hard to find in Eastern European nations. Take their experience in privatizing state-run companies. Hungary, Poland, Romania, and most other ex-communist nations have held off privatizing thousands of midsize and large enterprises until government "restructures" employment, overhauls accounting practices, and changes the product mix at the various concerns. Since getting companies "ready" takes time and runs into opposition from management and workers, government-directed privatizations have been slow and inefficient. In Poland, despite its quick shift toward sensible fiscal and monetary policies, almost half of its large enterprises remain in government hands. Unemployment is well over 10%, and only a few companies are traded on its stock exchange.

BRILLIANT IDEA. In sharp contrast, the Czech Republic acted before political opposition could organize and relied on market forces. Klaus and a small team of associates came up with the brilliant idea of selling vouchers at a nominal price to the general public that they could use to bid for stock in different companies. In just three years, the Czechs used vouchers to privatize over 2,000 enterprises, and they have essentially completed this stage of the transformation process.

Despite a few scandals and other problems, the Czechs succeeded beyond even the most optimistic expectations. Many mutual funds and other financial intermediaries formed to buy vouchers and bid for shares. These investors gained a voice in guiding the newly privatized enterprises. A sophisticated stock market developed where shares in hundreds of companies are traded every day, not the few dozen traded gn other exchanges in central Europe. The Czech Republic has the lowest unemployment rate in Europe, even though most of its privatized companies have been restructured by their new owners.

The success of the Czech approach encouraged the Russian Republic to introduce a slightly modified version of the voucher plan in 1992. It took Russia only two years to privatize some 14,000 midsize and large companies, and by June, 1994, more than 85% of the country's industrial labor force was working in the private sector. Russia has not yet achieved macroeconomic stability or a stable currency, but it has managed to quickly shift an economy dominated by state-owned companies to a system of private ownership.

Abundant evidence from the ex-communist countries indicates that it is a mistake for government bureaucrats to attempt to fine-tune the transformation to market economies. It is much better to unleash the spontaneous creativity of businesspeople, workers, and markets.

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