Moreover, closer examination of the realities of African economies challenges some preconceptions. Take South Africa, for example. In terms of mineral wealth, economic development and institutional sophistication it is outstanding. So far, the worst fears about a breakdown of order have not been realized, for which the country’s leading political figures deserve great credit. But it does South Africa no good at all to minimize the economic problems or to suggest that large inflows of foreign investment are likely to overcome them. There has been too much state direction of investment and too little competition. Industrial conglomerates have been immune to the beneficial threat of takeovers. The powerful general trade union COSATU has pushed up real wages, which in industry are about the same as in Taiwan, rather more than in Korea and about double those in Brazil. Not surprisingly in such circumstances, investment has gone into labour-saving equipment; and unemployment — with its resultant poverty — is very high. Unfortunately, socialist rhetoric and unrealistic expectations fuelled by the less responsible members of the ANC in the election campaigns will make these problems more difficult to solve. But the way forward is still to apply the same prescriptions as we would for any other over-collectivized economy — keeping down inflation and taxation, curbing public spending, cutting back regulations, promoting competition and avoiding protectionism. The only way to pay for the improved education and better living standards which the black population of South Africa need is to achieve the right conditions for wealth creation. Alas, there is no alternative — and no short cut.
Other states’ experience confirms that free-enterprise economics can be just as effective a source of progress in Africa as elsewhere. A quiet revolution has been taking place in East Africa — so quiet that its lessons may not be learned.[118] Traditionally, Kenya, the most industrialized and economically advanced East African country, was the exception to the generality of mis-government in the region. But now Uganda, Zambia and Tanzania — all previously impoverished by incompetent and corrupt regimes — are moving ahead fast. Uganda has curbed its inflation, turned a budget deficit into a surplus, all but abolished exchange controls, welcomed foreign investment, privatized the agricultural marketing boards which had wreaked such damage on cotton and coffee production, and now plans to establish a stock market. Zambia, though its privatization programme is only proceeding slowly, has made major progress in bringing down inflation and has opened a stock exchange. Tanzania has reduced tariffs, ended price controls and has a vigorous privatization programme. Of course political instability still risks jeopardizing economic progress in many of these countries. But economic progress also itself creates the conditions for stable democratic government. And one of the most effective ways of entrenching liberal political systems in that continent is to promote liberal economics.
CENTRAL AND EASTERN EUROPE
Perhaps the most decisive test of the creative potential of capitalism has been its application in the ex-communist countries of Central and Eastern Europe and the former Soviet Union. For a number of reasons, Russia and the other states of the former USSR are in a separate category from the other new democracies of Central and Eastern Europe. (The Baltic states, because of their history and traditional Western orientation, must though be regarded as closer to the latter than the former: and the striking success of their economic reforms emphasizes that.) Although Russia enjoyed swift capitalist growth in the half-century between the end of serfdom and the First World War, there was only a very limited period — essentially after the 1905 Revolution — in which liberal institutions and attitudes could take root. Communism extinguished these memories and also destroyed the still small middle class who were capitalism’s hope. Seventy years after the Bolshevik Revolution, communist economic planning has bequeathed its own legacy of misdirected investment, wrongly located factories and power plants, ossified technology, ex-bureaucrats posing as industrial managers, an unmotivated workforce and ecological catastrophe.
More should have been done — and earlier — to help Russia, Ukraine and other ex-Soviet states to build free-enterprise economies. In particular, we should have been prepared to provide backing for a currency board to bring some stability to the Russian rouble. The Russian people rightly had no trust in their government’s ability to provide a stable currency. The only solution was to take it out of the government’s hands, introduce a ‘hard rouble’ and set it firmly in the institution of a currency board similar to that which we set up in Hong Kong in 1983.[119] The currency board, preferably buttressed by representatives of the IMF or the Federal Reserve Board, would always exchange hard rouble currency for US dollar notes at a fixed rate of exchange. History shows that such transparent systems work, even under the most trying circumstances. To make this feasible Russia needed sufficient dollar reserves to give over 100 per cent backing to the hard rouble notes; the West could have found no more worthy form of aid than to have provided such backing.
The secret of successful economic reform is always to ensure that all of the components work together, because then the process of adjustment is easier. On these grounds, some now criticize the Russian reformers of 1992 for freeing prices before breaking up the state-owned monopolies which dominated the economy. But at least price liberalization brought goods into the shops at a time when there was talk of Muscovites simply not having enough to eat. In any case, a far-reaching privatization programme using the voucher method pioneered in Czechoslovakia has since transferred large swathes of industry to the private sector. More than 70 per cent of Russian workers are now in the private sector. True, uncertainty about property rights, excessive bureaucratic regulation, high taxes and widespread corruption are still major problems, deterring foreign investment and driving enterprise into the mafia-controlled black economy. But, for all that, the most gloomy prognostications seem unjustified. Unreliable figures for the decline in production are more than balanced by others suggesting large increases in private consumption — which is in any case precisely the re-orientation which transformation from a production-led to a consumer-driven economy requires. And unpleasant as many of its manifestations may be in a situation where the law is not properly administered or upheld, no one visiting Russia today could claim that its people are failing to respond to the opportunities for entrepreneurship. In fact, the most important message which Westerners must impart in Russia now is that fully fledged capitalism requires a rule of law. Without that, private ownership in Russia will lack legitimacy and therefore stability.
The economic challenges facing the ex-communist states of Central Europe, though formidable, are of a lesser dimension. East Germany, of course, was able to merge with the most economically powerful state in Europe. Hungary had already advanced some way towards a Western-style economy in the last years of communist rule. It is, though, significant that the two most striking success stories — Poland and, still more so, the Czech Republic — occurred where governments took the boldest and earliest decisions to move from socialism to capitalism.
Poland’s great advantage was that the communists had largely failed to collectivize agriculture. Communism thus failed to gain total control of the economy — just as in the face of resistance from the Catholic Church it failed to gain total control of society. Communist attempts at economic reform, however, failed: indeed, their most significant legacy was hyper-inflation. The architect of the successful reforms achieved during the Solidarity-led Government, Leszek Balcerowicz, deliberately chose a radical course — the simultaneous introduction of measures to eliminate price controls, tighten monetary policy, cut the budget deficit and remove almost all restrictions on international trade. Inflation fell dramatically. New small businesses started up. Goods flowed into the shops — certainly, at prices which people found difficult to afford, but much of the alleged drop in living standards was a statistical fiction, since previously Poles had faced crippling shortages.[120] Subsequently, a programme of privatization added the final element to the reforms. The private sector now comprises 55 per cent of the economy. Success has not been unalloyed, however. Budget deficits under the burden of unchecked welfare spending seem likely to continue. The privatization programme appears to have slowed since the Left gained power in 1993. Partly in response to the European Community’s failure to open up its markets sufficiently to Polish produce, there has been a tendency for Polish tariffs to rise once more.[121] On balance, however, the successes of reform far outweigh the failures: to such an extent that Poland’s economy in 1993 and 1994 grew by some 4 per cent and looks likely to repeat the performance in 1995. Nor should the Right’s defeat in the 1993 elections necessarily be attributed to popular discontent at the reform process itself. The fragmentation of the anti-socialist vote among small competing parties under a system of proportional representation (adopted thoughtlessly by most of the new democracies) must bear most of the blame.
118
I am grateful to Peter Anwyl-Harris and GT Management pic for much of the following information.
120
These reforms are well described by Jeffrey Sachs in
121
Marek Matraszek,