Eastern Europe ‘has not learnt the lessons of capitalism’

  • October 26, 2011
Eastern Europe ‘has not learnt the lessons of capitalism’

Gates scholar Ivan Rajic publishes paper on economic troubles in Eastern Europe.

Most, if not all, of the promises for a better standard of living and a stronger economic system given at the beginning of the transition process in Eastern Europe have not come true, according to a conference paper published by a Gates scholar.

Ivan Rajic gave his paper at a conference in Belgrade in the summer and it has now been published as part of the conference proceedings.

In the paper he argues that in fact in some areas such as technological output, some Eastern European countries are significantly worse off than they were before the transition. He says the problem is that the countries have misunderstood what makes capitalist economies advance.

He says: “The economic policies we have been pursuing for the past twenty years are based on the idea that free markets, operating through the price mechanism and based on private ownership, are the core of an efficient economic system. Small and medium enterprises are also seen as the biggest drivers of innovation. I argue that the core of economic development are actually large firms – state, private, self-managed, mixed – with sufficient resources to cover various large fixed costs, such as research and development. Such companies do not compete through prices, but rather through improvements in technology, organisation and so forth and thus create benefits for the wider society.”

He adds: “It is not only vital for an economy to have large firms, but to have them in those sectors which offer a large potential for further improvements and for connecting with other parts of the economy. Today, the important sectors are many branches of manufacturing, and advanced services.”

Ivan says the state has a vital role to play in supporting these companies until they can withstand foreign competition.

“We in Eastern Europe have ignored all of this,” he says. “We have followed policies which did not pay attention to the need for large firms, which did not differentiate between economic sectors in terms of their importance for overall development, and we, or at least most decision-makers, have come to believe that capitalism is indeed a system based on free competition, free foreign trade, private ownership, price fluctuations, small and medium enterprises, etc., and that the more of these things we have, the quicker we will develop.”

The result has been inactive states and domination by foreign competition,with the effect that our economies have actually regressed in many respects, for instance, their technological capacities are less than they were before.In human terms, this has led to substantial increases in poverty rates, homelessness, emigration, unemployment, etc. Ivan says recent proposed changes to the economic policies that Serbia and other eastern European countries are pursuing do not represent any fundamental deviation from the previously pursued policies. “Thus,” he says, “we should not expect any fundamental improvements in our economic situation, and, by extension, in our living standards.”

Ivan’s chapter, Large firm capitalism and transition, is published in Reforme i ekonomski razvoj u tranziciji: Srbija i Zapadni Balkan [Reforms and economic development in transition: Serbia and the Western Balkans].

Ivan [2009], who is doing a PhD in Development Studies, was a junior economist at the Foundation for the Advancement of Economics (FREN) in Belgrade from October 2008 – September 2009 and a junior assistant at the Economic and Social Policy Institute (ESPI) in Belgrade from May 2009 – July 2009.

Picture credit: patpitchaya and www.freedigitalphotos.net

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