When Communism dissolves

A minimal definition of a well-ordered society is that its drivers stop when they see a red light. Some episodes that indicate why people on occasion fail to respect red lights can also, incidentally, illuminate the terminus a quo and the terminus ad quem of recent political events.

In Shanghai during the Cultural Revolution, the Red Guards found it unacceptable that red should mean ‘stop’. They wanted the system of traffic lights changed to make red signify ‘go’. Chou En-lai was allegedly willing to go along with the proposal, until his driver told him that red lights were easier to notice in the dark and in bad weather.

In Beijing, more recently, I heard the following explanation of why cyclists cross at red lights: it is so hard to get spare parts for brakes that many bike riders prefer to take a calculated risk rather than stop.

In Sao Paulo, also recently, I was surprised when my otherwise law-abiding host failed to stop at red. He explained that it was more danerous to stop: given that the driver behind him would certainly assume that he wasn’t going to stop, the risk of being hit from behind if he did was considerable.

In Chicago, there are many intersections where drivers in the outer lanes prefer to go against the red light, knowing that if they stop they risk being held up at gun-point by robbers hanging around at the side of the road.

The hallucinatory quality of the Shanghai episode is also found in reports from Ceausescu’s Romania. These dramatic manifestations of an ideology gone mad are not direct consequences of a social system. Although they are more likely to occur in some systems than in others, we know from Peronist Argentina and Weimar Germany that democracies are not immune to this deadly combination of ideology and megalomania.

The Beijing episode points more directly to a system-inherent failure. An economic system that cannot deliver the goods may for a variety of reasons fail to ensure compliance with the law. In particular, firms that do not get the supplies they need to fulfil their quota have to resort to bribery.

The Sao Paulo episode shows a society which is locked into an inferior equilibrium. Given a situation where everyone expects other people to drive against the lights, it is in everyone’s interest to do so. That it would be better for everyone if nobody did so is neither here nor there. Corruption is an instance of the same phenomenon: if others bribe and expect to be bribed, not to do so is tantamount to economic suicide.

The Chicago episode could equally well have taken place in Sao Paulo: in fact, it would be a more commonplace event there. What it shows is the explosive potential of any encounter between two worlds that are normally insulated from each other. (Tom Wolfe’s Bonfire of the Vanities is built around a similar episode.) In Third World countries, such meetings can have a special poignancy. When my car stopped at an intersection in Mexico City, young boys came up to us to show their flame-eating prowess, hoping to get a few pennies for risking their lives. Most of them, I later read, die in their teens. In Delhi, there was one particular intersection at which we were regularly approached by a blind beggar whose eyes, we were told by someone who should know, had probably been put out by the syndicate to which he belonged, in order to increase his appeal. In either case, private initiative – in the form etched in the memory by the Herald of Free Enterprise – was at work.

For the reform movement that is sweeping the Communist world, the Shanghai and Beijing episodes represent the terminus a quo. Will the other stories illustrate their terminus ad quem? When sclerotic Communism dissolves, the result might be savage capitalism. In Delhi in 1988, I met Indian social scientists who expressed a feeling of inferiority with respect to China, based on the fact that the Chinese had managed to solve the problem of radical poverty in the countryside. Might future developments in China make them feel less inferior? Should we expect Hungary and Poland to catch up with Spain, or to remain locked into a state of bargaining and bribery?

Before looking at the future of the reform movements, we should attempt to understand the recent past. We shall probably never be able to understand the exact dynamics of the changes that have taken place in the Communist countries over the last year or two. The combination of motives – rational and irrational, selfish and selfless – that made for success in some cases and failure in others is almost certainly too complex to be fully unravelled, but we can at least point to some ingredients in the mixture, and identify some of the strategies that were open to the participants.

Consider first the choices faced by authoritarian or totalitarian leaders of a country ridden with inefficiency and popular discontent. To retain power, they have four options: reform, repression, inaction and pre-emption. Recent events fully confirm Tocqueville’s dictum that partial, symbolic and tactical reforms made under popular pressure ne font jamais qu’enflammer le peuple sans le contenter. In China, the concessions of April-May 1989 polarised not only the opposition, but the leaders as well, preventing any bargain or compromise. Krenz’s move – opening the borders to West Berlin, in order to stop the haemorrhage of the country’s population – would have been a stroke of genius if made three months earlier.*The short-lived attempt to impose political demi-virgins on the Czech people was equally futile.

The role of repression is more complex. I can see four different effects of brutality under the conditions stated. First, and most obviously, there is the intended effect of making resistance more costly and more risky. Next, there is an unintended and unwelcome effect: the harsher the repression, the less the oppressed have to lose, the stronger their hatred of the regime, and hence the greater their willingness to sacrifice themselves. What happened in Romania can be explained, in part at least, by Ceausescu’s miscalculation of the relative strength of these two effects. Furthermore, repression can provide the unorganised and scattered opposition with information and thus with confidence: if the repression is harsh, it must be because the opposition is more widespread than any individual dissident can see for himself, or because the regime is more vulnerable than it appears to be. A textbook case occurred when the East German authorities forbade the sale of Soviet newspapers to avoid a dangerous contamination of liberal ideas. Finally, the harsher the repression the more likely it is that the oppressors themselves will be harshly punished if the regime is overthrown, and thus also the more likely it is that they will hang onto power by all means, at all costs, and for as long as possible. A paradoxical feature of an extremely harsh regime like the Romanian one is that it ensures that neither the opposition nor the regime’s men have much to lose by fighting.

The last-mentioned effect has a further implication. In Latin American transitions from military to civilian regimes, it is often argued that officers should be severely sentenced for any illegal actions, not only to ensure the future legitimacy of the democratic regime, but also to deter future officers from similar undertakings. It is true that, other things being equal, the expectation of a severe sentence will make a coup d’état less likely. But if a coup nevertheless takes place, the same expectation will make officers more reluctant to give up their power peacefully. On balance, the outcome might be worse. In Eastern Europe, this strategic argument does not (yet) apply, although we may wonder about the significance of the abolition of the death penalty for members of the security forces in Romania. In China, with its tradition of policy oscillations, it could well be relevant.

Inaction in the face of popular unrest is a policy that requires considerable cool. In recent events it wasn’t attempted; and if it had been, it might not have succeeded. In early June 1989, most of the students on Tiananmen Square were visitors from the provinces. There was no real momentum, the Beijing students and most of their leaders having withdrawn from the square. The occupation would probably have petered out within a few days. Did the authorities lose their nerve when they decided on a crackdown? It is more likely that they chose repression because the split within the leadership required decisive action. We might also ask why inaction wasn’t used as a deliberate strategy in Czechoslovakia: given that the popular movement was largely nonviolent and without a strong base in the factories, what would the authorities have had to lose by tolerating it? At the very least, inaction might have been less risky than repression. This is not to say, however, that the movement would have subsided if the Police had been given orders not to interfere: it would have been carried along by the East German example.

If doing nothing takes nerve and cool, pre-emption requires wisdom. Gorbachev’s remarkable feats have been achieved by being, at least up to the time of writing, one or several steps ahead of popular demands. But the reforms have not so far fed any stomachs. Drawing once again on Tocqueville, one can argue that to raise expectations without fulfilling them is a recipe for revolution. If, as is likely, things have to get worse before they get better, the situation will become increasingly precarious. Gorbachev’s strategy sometimes has the appearance of a flight forwards, in which each political concession is made to alleviate the frustrations created when the previous concession is found to be largely symbolic. He may soon run out of symbols. Yet, or so I shall argue, the path of substantial economic reforms may be even more risky.

For the citizens the major question is whether to take to the streets. In the Warsaw Pact countries, the explanation of why they did, and when, involves two series of cumulative events, one within and the other across the national borders.

We know from collective-action theory that nobody who acted on purely selfish motives would take to the streets. From that perspective, it is better to stay at home and let others make whatever sacrifices have to be made. Very obviously, much of the behaviour we have seen was spectacularly selfless. Yet for most people there must have been limits to the risks they were willing to take. A crucial element in their decision whether or not to take to the streets must have been their expectations as to how many other people were likely to do so. There is safety in numbers, both because the Police hesitate to shoot at large crowds, who cannot plausibly be dismissed as foreign-paid hooligans, and because the risk for each participant is less should the Police decide to shoot even so. Also, as the numbers grow, many follow suit out of a feeling that they ought to do their share or, less nobly, to avoid the stigma of being thought a free rider.

From Leipzig to Bucharest, we have observed the snowball effect by which crowds and demonstrations grow bigger from one occasion to the next. In East Germany and in Prague, the stupid reactions of the authorities acted as a catalyst to speed up the process. But the movement also had an internal dynamic. We know little about the motivation of those who made up the core in the first demonstrations, where numbers rarely went beyond four figures. Some probably had nothing to lose; others may have acted on something like the categorical imperative; some may have perceived, shrewdly, that by participating in what was likely to be a small event they could have an impact on the size of future demonstrations; some may have joined for the kicks; and some out of plain eccentricity. Whatever their reasons, they formed a group large enough to attract differently-motivated individuals for the next event. Schematically, the snowball grew as follows. For each event that was announced, there was a general expectation that the number of participants would be at least as great as on the preceding occasion. For reasons stated in the previous paragraph, the hesitation of some additional participants would be dissipated; and by joining, they created even higher expectations, thus inducing more people to participate in the next event, until eventually the numbers reached six figures and the regime fell.

Needless to say, this cannot be the whole story. We have to explain why the regimes in Eastern Europe fell in 1989, rather than in 1979 or 1969. One factor in the explanation may be growing dissatisfaction with an economy that was more and more obviously failing in relative and even in absolute terms. But the most important cause was clearly the Gorbachev doctrine of non-intervention in Eastern Europe. As long as a Soviet invasion was seen as possible, protestors had to face the fact that whereas small-scale resistance could harm only themselves, large-scale movements put the whole country at risk. With the latter danger removed, escalation was probably inevitable. A domino effect was at work: once the Soviet Union had refrained from intervening in one country it was less likely that it would intervene in the next. The fact that the Police did not shoot at demonstrators in East Germany allowed the inference that they were discouraged from doing so by the Soviet Union, and hence would also be restrained in Prague.

An important aspect of the reform movement in the Communist world is the transition – aborted in China, under way in the Soviet Union, further advanced in Eastern Europe – from one-party rule to democracy. Similar transitions have occurred several times in Latin America and Southern Europe, and some lessons from these countries also apply to the Communist regimes. What might appear to be unique about the current process is that the political transition is being accompanied by an equally momentous economic transition from a centrally-planned to a decentralised market economy. One may ask whether the two facilitate or obstruct each other – or both.

The combination of political and economic reform is not uniquely East European, however. Last November I took part in a conference, held in Buenos Aires, on human rights and democracy in Argentina. In the course of the proceedings I met former President Alfonsin. Argentina is a fragile democracy. It has just emerged from a particularly brutal military dictatorship and, for reasons discussed below, elected itself an old-style Peronist president. Economically, it is in very bad shape. Whereas around World War One the Argentine per capita product was more than five times that of Japan, today the proportion is four to one the other way around. All sectors and groups in the economy benefit from huge subsidies and other special arrangements. In this country of thirty million inhabitants only thirty thousand, individuals and corporations included, pay income tax. To get rid of the monopolies and protected sectors, a move to a competitive market economy is vitally necessary: yet each sector has strong political representatives who guard its privileges jealously. The question I put to Dr Alfonsin when my turn came was the following: ‘In the light of events taking place in Eastern Europe and China, do you think a strategy of joint economic and political reform is feasible?’ He eyed me sternly, and said: ‘I know what you are implying. But let me tell you, in Latin America the strategy of implementing economic reform before political reform has been tried over and over again. It has never succeeded.’ If a successful reform includes an equitable distribution of income, he was right; otherwise, recent Chilean history provides a counter-example.

As I see them, economic reform and political reform in the Communist or formerly Communist countries have two components each. On the economic side, both price reform and ownership reform are needed. Price reform – letting prices be determined by supply and demand, with no attempt by the state to set prices – is needed to ensure that prices reflect the real scarcity of resources, and that investment, expansion and contraction occur in the right sectors. Ownership reforms are needed to ensure that managers have incentives to perform efficiently. Although that goal may be achieved by reforming management, the joint-stock form is a more reliable tool. Price and ownership reforms would not necessarily take these countries all the way to capitalism. At least two forms of market socialism are conceivable, although their viability remains an open question. One might move to a market economy with each firm being owned or controlled by those who work in it. For its efficient operation the system would need a credit market, but a labour market would not be necessary. Alternatively, one might locate the ‘socialist’ component of market socialism in the use by the state of macro-economic policy tools to ensure that the rate and distribution of investment reflect political enterprise.

On the political side, both democracy and constitutional guarantees for individual rights are strong desiderata, both in themselves and as prerequisites for economic reform. I want to argue that the double reform process is fraught with difficulties. I shall do so by stating five interdependencies that cannot, as far as I can see, obtain simultaneously.

First, to be efficient price reform and ownership reform presuppose each other. To allow private entrepreneurs in an economy with administered prices would encourage arbitrage, at the expense of productive activities. Moreover, profit could not be used as an index of efficiency. To set prices free, while relying on bureaucracy-cum-bargaining for the allocation of capital and labour, would blunt the impact of market forces.

Secondly, price reforms preclude political democracy, if they lead to the worst-off being very badly off. Free price-setting will certainly lead to inflation; if combined with ownership reforms free prices will also create bankruptcies and unemployment; in some countries there might be starvation. If workers have political clout, through parties or trade unions, they will use it to stop or reverse the process. The argument that hardships are necessary in the period of transition but will not be part of the steady-state system that finally emerges, will not carry much weight with them.

Thirdly, ownership reforms are also incompatible with political democracy if they lead to the best-off being very well off. Private ownership leads to income inequalities which are unacceptable to large segments of the population. By a twist of history, the workers of China and the Soviet Union now brandish the egalitarian ideology as a weapon against the regime itself, as until recently they did in Hungary. In doing so, they find natural allies among conservative members of the bureaucracy, who want nothing more than the failure of the reforms. Although by now everybody knows that no one believes in Marxism, the regimes which still subscribe to it are hard put to defend themselves against claims that are based on it.

Fourthly, ownership reforms demand legal stability and constitutional guarantees. To ensure that the economic agents are willing to make investments which take time before coming to fruition, property rights must be respected, and retroactive legislation made impossible.

Finally, constitutional constraints and democracy presuppose each other. One might think that it would be easier to uncouple these two than the two components of economic reform, each of which requires the other if perverse effects are not to arise. Constitutional monarchy, after all, worked in a fashion: why not a constitutional dictatorship? The difficulty, as I argued in an article on China, published in this paper in October 1988, is that the strength of the dictator is also his weakness: he is unable to make himself unable to interfere with the legal system whenever it seems expedient. Constitutional monarchies were kept in line by strong intermediary bodies, whereas in modern dictatorships the society is largely atomistic. Power must be divided to ensure that the constitution will be respected. (Again, Pinochet’s Chile seems to provide a puzzling counter-example.) Conversely, democracy without constitutional constraints is ultimately impotent: it can make decisions, but not make itself stick to them.

To summarise, price and ownership reforms presuppose each other, as do democracy and constitutionalism. Each of the economic reforms is incompatible with democracy, while constitutionalism is required for the success of ownership reform. If these premises are true, full-scale reform is impossible. Given the direction of the causal arrows, political reform without a transition to competitive markets is possible, although in the long run democracy will also be undermined if the economy stagnates. Economic reform within an authoritarian framework is even less plausible.

Now, each of the five propositions might be contested. Fine tuning and incrementalism by the authorities, and a willingness in the population to accept temporary hardships and inequalities, might sustain a feasible path to a stable market democracy, perhaps with a socialist component. Lech Walesa’s proposal of a temporary economic dictatorship to get over the transitional hardships might also provide a way out of the dilemma. I cannot disprove these claims, but I have no faith in them. Will the Polish workers accept a dictatorship that might last for a decade or more? There is no theory to guide the reformers, and no earlier experience to draw on. The lessons of experiments will be invalidated by the fact that people behave differently when they know that the current policy is an experiment. In this state of radical uncertainty the population will find many good reasons, in addition to the obvious bad ones, to oppose policies of hardship and abnegation. In a country like Poland, the leaders might solve the problem by handing over power to the International Monetary Fund, so as to able be say to the population, credibly: ‘Our hands are tied.’ But it is hard to imagine the Soviet Union going into receivership. Reports that the Soviet Union might sell off the family silver (their gold reserves, actually) to finance imports of consumer goods during the turbulent transition to a self-sustaining economy seem implausible – cautious leaders would hardly use this high-risk strategy.

There are additional difficulties. Political culture – a factor as important as it is elusive – might prove an obstacle. The double reform will not succeed unless the military stay out of politics; and unless economic transactions are constrained by elementary standards of honesty and trust. In societies where the Army has been political to the core and where hypocrisy and distrust have been indispensable for survival, these values will not emerge overnight. A delegation of Soviet legal scholars recently visited the University of Chicago, to learn about the mechanics of compliance with the law. ‘We have excellent laws,’ they said, ‘but we do not know how to get people to obey them.’ It would have been tempting to answer: ‘Wait a few hundred years.’ The fact that the reforming countries are now trying to compress into decades or even years what in the West took centuries, and to do intentionally what in the West came about largely as the unintended result of decentralised decisions, may prove a fatal difficulty.

Moreover, the people may not want democracy. Once again, I draw on evidence from Argentina. The participants in the conference met the chairman of the Peronist Party, Sr Cafiero, who told us how he used his power in a way that undermined his own position. After the collapse of the military regime, he undertook to inculcate respect for democratic values in the Party. As part of this re-orientation, he organised the Party itself along more democratic lines. Traditionally, the Peronist candidate in Presidential elections was chosen by the top leaders of the Party, without concern for the opinions of the rank and file. As a contender for the candidacy, Sr Cafiero could just have selected himself, but he decided not to do this. He could also have opted for a limited democratisation, by having the candidate chosen by the Party congress, at which he would have beaten the other contender (and current President), Carlos Menem, ten to one. He preferred, however, to have the selection made by the party members, who chose Mr Menem by a narrow margin. Although Mr Menem is much closer to the traditional Peronist mould, he had more popular support than the contender who wanted the candidate to be chosen by popular vote. I am not repeating the story for its historical accuracy, about which I know nothing, but to suggest that a development of this kind in the Soviet Union cannot be ruled out. Gorbachev’s policy of pre-emption also means that democracy has largely been introduced from above. It remains to be seen whether, in genuinely free elections, the most democratic candidates will be chosen. The anti-modernist strand in Russian culture suggests that they might not be.

To ensure a smooth transition, it is often necessary to ensure that the former élite does not lose too much. In order to facilitate administrative reform in China, Deng Xiaoping tried to get rid of the old guard by offering them generous pensions. The policy was very expensive, and by no means totally effective: both in January 1987 and in June 1989 their influence was decisive. Gorbachev is in an even more difficult position. In the Soviet Union, opposition to reform does not come mainly from old diehards, but from the vast mass of middle-level functionaries. To buy them off is impossible; the idea of changing their thinking is utopian; to coerce them would require capable coercers the absence of whom is part of the problem. Perhaps little can be achieved before they retire.

To make deals with the leaders of an authoritarian regime in the transition to democracy can be even more difficult. There is no guarantee that autonomous democratic institutions will respect private deals made with former oppressors. Again, the Argentinian experience is instructive. In response to strong pressures from the military, President Alfonsin promised the officers that he would stop prosecuting them for atrocities committed during the military regime. He then issued a directive in December 1986 to the effect that any further accusations would have to be made before the end of January 1987 – the judiciary usually goes off on holiday during this period. Incensed by this attempt to manipulate them, the prosecution went on working through the holiday and probably brought more cases than they would otherwise have done. We do not yet know what deals, if any, were made with army, party and security force leaders in Romania, East Germany and Czechoslovakia; or, if such deals were made, whether they will be respected by democratic institutions; or, if they were made and are not respected, whether these leaders have the power to reverse the process of reform. The difficulty of making promises on behalf of emerging democratic institutions may also turn out to be an obstacle to a move towards democracy in China.

Further problems appear when we ask who will own the private enterprises. The Polish trend of letting former party functionaries enrich themselves contained the seed of new popular unrest and has now stopped, probably for that reason. The Hungarian and East German trend of selling off firms at bargain basement rates to the West also has its dangers. The anticipation of popular unrest, and fear of confiscation, not only contribute to the low prices, but create an incentive to repatriate profits rather than invest them locally.

I am pessimistic with regard to the future of reform in the Soviet Union. Gorbachev may be able to hang onto power if he continues to avoid hard economic decisions, but he will not be able to use that power to much purpose. If he tries to use it, and even if he does not, there is a serious risk that he might be replaced by a military regime and that the tiny economic reforms might be quashed altogether. I do not think, however, that the Gorbachev doctrine will also be reversed. The idea of an intervention by Soviet forces in four Eastern European countries is mind-boggling on logistical as well as political grounds.

Last May, America’s Vice-President was reported to have said: ‘The evolution towards democracy in China is irreversible – but that could change.’ We may, out of charity to Mr Quayle, find some kind of poetic wisdom in this statement. The perception of a chain of events as irreversible may itself be reversible. The grass fire that has swept Eastern Europe leaves an almost irresistible impression of an irreversible movement towards Western, capitalist democracy. Communism has lost; capitalism has won. It comes as no surprise that Communism has lost; it never looked much like a winner. Market democracy, on the other hand, is not one system, but many. It includes Brazil no less than Sweden; it can be savage as well as civilised. Nor is it the only alternative to Communism. Or, to put it the other way around, central planning and the Leninist one-party system are not the only alternatives to competitive markets and a pluralist democracy. My point is not only that in thinking about the future of the Communist and formerly Communist countries, we should bear all possibilities in mind: if we want to influence that development, it is vital to remember that the transition to a society based on the three pillars of constitutional democracy, markets and a welfare state is neither automatic nor irreversible.