I have been asked recently to discuss transition analysis. In a post last month I suggested that successful transitions are characterized by (a) creative adaptability, and (b) resiliency in the face of crisis. But in that post I never really addressed how we might approach the study of transition. Professionally, my career started out with a focus on theory, practice and failure of socialism in the former Soviet Union. I earned my PhD in 1989, so transition studies were thrust upon me.
At a fundamental level the Austrian school should have been my main intellectual inspiration in this task with its focus on changing circumstances, enterpreneurial adjustment, and dynamic efficiency. But much of the Austrian theory of the market process takes place against a given framework of institutions, and the transition period is defined by the reconfiguration of that framework. James Buchanan's work in constitutional political economy proved to be more relevant on this particular point -- especially the distinction Buchanan draws between the pre-constitutional and post-constitutional levels of analysis. But Buchanan's social contract approach --- however useful for some analytical purposes --- fails to address the endogenous evolution of rules; so Hayek enters once again. On the other hand, Buchanan's focus on the existing status quo as the starting point of political economy analysis of viable bargaining in the realm of politics enables us to avoid Hayekian flights of fancy.
So on an intellectual level this is who I would argue are the important figures to study and what they bring to the table to understand transition studies:
1. Ludwig von Mises --- why socialism as traditionally defined cannot achieve its stated goals
2. F. A. Hayek --- the unintended and undesirable consequences of real world socialism
3. James Buchanan and Gordon Tullock --- the undesirable consequences of unconstrained political bargaining, and the possibilities of effective governance when constitutional restraints on government are enforced
4. Milton Friedman, F. A. Hayek, Israel Kirzner -- on the power of the market economy to satisfy the multiplicity of consumer preferences and to self-police "bad behavior"
5. James Buchanan --- on the relative position of the status quo in political bargaining for reform
6. F. A. Hayek --- on the spontaneous emergence of norms, conventions and law that provide the foundation for a liberal constitutional order
7. Ludwig von Mises, Murray Rothbard and Robert Nozick --- on the promise of in terms of peace and prosperity of the classical liberal order, and the possibility of an ideal libertarian society
Now the art of transitional political economy is to put these different elements together to analyze the possibility of positive social change.
Rule #1: Must start with the HERE AND NOW
The first rule of transition analysis --- know what is the existing status quo and in particular how it really operates and not how people say it operates on paper. It is the de facto system that is in operation in the real world. There is no normative weight attributed to the status quo, only a pure positive descriptive weight. It is what it is. And this is where we must start from.
Identify who benefits from the current system, what is the nature of the benefit and who are the current losers from the existing status quo. Viable reforms must start from this recognition and begin political negotiation from that point to move in the direction desired.
Rule #2: Must have a clear vision of the END POINT DESIRED
Political negotions and realignment are intended to produce a movement toward some desired state of affairs. We cannot make much progress on the path from here to there unless we define the "there" that we hope to arrive at.
Most transitional analysis of the post-communist situation failed due to a failure to correctly identify the "here and now" and the lack of courage to offer a vision of the desired destination of the journey. Among Sovietologists circa 1990, Ed Hewett of Brookings probably identified the "here and now" must better than any of his contemporaries, but he did not share the classicial liberal vision of a free market economy with a limited government to offer the significant reforms required. Edgar Feige of U of Wisc had a decent vision of where he hoped reform would lead, but had no concept of the latent interest groups that dominated the real existing Soviet economy. Their confusion was simply a product of their times and was shared also by the real reformers in the post Soviet situation --- Gaidar, Fedorov, Chubais, etc., in Russia. And this was true also with the reformers in East and Central Europe --- Klaus, Balcerowitz, etc. Eventually, the desired destination simply became the European Union, and the regimes muddled along in their treatment of the previous status quo. Life is certainly much better than what it was under the old regime, but an opportunity was lost.
The most accute case of a troubled transition might be Russia, where one could claim that the more things change the more they have stayed the same. For a statistical analysis of the failure of Russia's transition that challenges most optimistic readings of Russian reform see the paper by Bill Trumbull and Pete Leeson currently under review at Post Soviet Economy.
Rule #3: Draw up a Road Map from Here to There
Transition is about negotiating. Once you have a good understanding of the existing interest groups and a vision of the ideal end state you hope to achieve, then strategies can be drawn up that will enlist the existing interest groups to be partners in reform. In the abstract, this just means policies must provide enough monetary benefits that the present value of the expected future income stream from the existing status quo is met in a lump sum transfer. Of course, if the system had that sort of surplus to provide right now and the new regime could credibly commit to such a policy promise then no reforms would currently be necessary!!! But that is the basic abstract concept that must inform our strategy in transition.
Rule #4: Think Through All Steps Using a Rational Choice Model, But Recognize the Role of Emotion
Draw up all plans for reform as if the world was populated by homoeconomicus. The first test must always be incentive compatibility. Don't expect reforms to work that require individuals to act against their interests or become better and smarter than they currently are as individuals. Align incentives and make sure the penalties and rewards are clear cut. And then build in some slack to recognize that emotional attachments will present individuals from behaving completely in line with the rational actor model. But they will conform to that model more often than they will deviate from it.
Rule #5: Don't Throw Good Money After Bad
Know when a regime is hopeless because of an ideologically disturbed leader and realize that the only solution in that case is to articulate as coherently and persuasively as possible an ideal. Stalin, Hitler, and Mao were not candidates for reform, nor would we want to help them realize a more efficient economy to help carry out their particular forms of barbarism. Sometimes it is best not to try to fix a system but to help in its demise. This is a tricky question which individuals must ask themselves because the cutt off point might not always be as clear as with Stalin, Hilter and Mao. The point I want to make, however, is that abolitionism is a viable intellectual and political strategy, and in many cases THE only truly viable and intellectually honest strategy.
So those are the five rules of transition analysis that I believe are reflected in my own work on the subject. There are more concrete points, but in my mind they are derivative of these points of emphasis.
Finally, I want to stress that among the important concepts in transition analysis such as property rights, rent seeking, economic calculation, principal/agent, credible commitment, etc., one must always recognize the existence of an accumulated surplus from previous periods of economic growth. Countries in crisis almost by definition do not have a surplus to draw on and thus cannot afford even mildly stupid economic policies if they hope to improve the situation. Countries with a great deal of accumulated surplus can survive even the most stupid policies in the short run as they pay down the surplus. This is another way in which the shortsightedness bias in politics is reinforced. And as we have learned from Buchanan and Tullock, good economics and good politics might not go together. So again in putting the political back into political economy what we are trying to achieve in transition is to find those policies which align good economics with good politics and anything short of achieving that will result in failures of implementation and thus failure in terms of improving the lives of those we had hoped to help.