After fifteen years of economic transformation we can conclude that the transitional period in post-Communist countries has ended, but unfortunately the economic (and not only economic) systems of some are far from Western-style capitalism. They are better called “post-communist capitalism,” far different from the classic understanding of the word “capitalism” or any other model. The key reason is what can be termed the “necroeconomy” (Papava, 2005); it is precisely because of the necroeconomy that neither the economic system of post-communist capitalism nor any permutation can be explained simply in the context of classic theories of capitalism.
Command economies never recognized any form of competition, either domestically or internationally. Only a single form of competition was permitted, limited to the USSR: the competition with the West in the field of military production, which encouraged the USSR to produce nuclear and conventional weapons, explore space, and so on. The denial of competition forced command economies to reject the only effective stimulus of economic development. As a result, farms and factories produced low-quality goods whose prices were artificially reduced by subsidies paid out of the state budget.
The collapse of the communist regime and the breakdown of the command economy “stripped off” the post-communist economies vis-à-vis the international market: with rare exceptions (hydroelectric power, mining, and primary processing of raw materials) all goods produced in these countries were incompatible with international standards and could not compete with Western products due to low quality or high prices. There is no market for such goods and there is no hope that such markets can ever exist. An economy of this type can only be referred to as “dead” economy, or “necroeconomy” (Papava, 2005, Ch. 3), which is similar to the Gaddy-Ickes “virtual economy” (Gaddy, and Ickes, 2002).
The material and technical bases of command economies have turned into a foundation on which necroeconomy rest. This process was most dramatically reflected in the industrial sector.
Naturally, even if a certain section of an economy is dead, the other sections may be alive; we refer to a vital economy, or “vitaeconomy,” the theory for which is economics.
How do necroeconomy and vitaeconomy compare?
In both the production of goods is possible, in principle, so “supply” exists. However, goods produced in a necroeconomy, because of their poor quality or high cost, cannot create any demand. Consequently, no sales occur and there can be no equilibrium prices.
To explain the interactions of necroeconomy and vitaeconomy, it would be helpful to divide post-communist economy into five sectors:
- Public-sector necroeconomy
- Public-sector vitaeconomy
- Privatized necroeconomy
- Privatized vitaeconomy
- Private-sector vitaeconomy based on new investments
The first group, as a rule, consists of large and medium-sized industrial enterprises that, because of their importance, are considered strategic, although their products are completely non-competitive. They are, therefore, dead under the conditions of the free market.
The energy sector (especially electric power generation and fossil fuels), transport, and communications constitute a vitaeconomic segment of the public sector. If any of these companies are privatized they may move to the fourth group. The privatized vitaeconomy also consists of some medium-sized and, more often, small industrial companies.
The third group consists of privatized, former first-group enterprises. The change of ownership itself cannot result in the revival of frozen production, because what is dead cannot be recovered, whether owned by the government or a private company. For this very reason privatization is often discredited, as it — especially in its initial phases, in isolation from any investments — has often been assigned the function of reviver of frozen production, without considering whether it is dead or alive.
The fifth and the last group integrates the healthiest segment of the post-communist economy: a new private sector based on new investments and market economy principles. Despite this, this group also faces considerable problems. In particular, some foreign investments burden post-communist states with obsolete equipment, which could be considered “secondhand investments.“ Goods manufactured with such technologies can be sold only in emerging markets and only until internationally competitive products reach them.
A dead segment of the should not face any problems, as it should have no influence on a more-or-less healthy segment and, therefore, could be easily neglected. In a market economy that is exactly how it works: non-competitive businesses usually pass away without doing any harm to the rest of the economy. Perhaps this is why economic theory, which has always been concerned with the problems of market economies, has never paid any attention to necroeconomy.
The situation is essentially different in post-Soviet countries (except the Baltic states) with post-communist capitalism. Why does necroeconomy persist in post-communist countries? The most apt explanation is the evolutionary theory of economic change (Nelson and Winter, 1982), which advances the concept of “routine” — companies’ customary rules and methods of behavior, which regulate the reproduction their activities (Murrell, 1992a, 1992b).
Routine, which has been deeply rooted in command economies over many decades, is the main factor that forces dead enterprises to work in a bygone regime of the command economy. As a result, their warehouses are flooded with poor-quality goods. Furthermore, as the dead enterprises cannot sell their goods, they incur debts (public and private) and are unable to pay wages, yielding a net of mutual outstanding liabilities (e.g., Åslund, 1995, Ch. 6).
In a command economy, when an enterprise accumulated debts (sometimes on purpose), its leadership would ask the governmental agencies to write them down them; as a rule, such requests were granted. Accumulation of debt, therefore, had never been considered dangerous. The routine of debt accumulation and writing down is so deeply rooted in the command economic system that it can reveal itself even in a transition economy, albeit disguised by as “tax amnesty,” backed by politicians pretending to be reformers.
The negative impact of necroeconomy on the development of post-communist nations is obvious. Are there mechanisms to cope with the problems of dead enterprises in the way that they are automatically weeded out in a market economy? The evolutionary theory of economic change may provide a solution.
A routine consistent with a market economy must be in the fifth group, a newly established private sector. The state must focus on that group and assist it in emerging from the embryonic phase of expansion and development. The state must create stable political and microeconomic environments that facilitate the formation of new firms based on private investment. The post-communist state, in crafting its economic policy, must give priority to the overall development and expansion of the fifth group at the expense of the first and third groups.
Even secondhand-investment–based companies of the fifth group, irrespective of their poorer appearance, cannot underpin a necroeconomy within a favorable legal framework. These companies are rooted in a market economy, so that — should they fail to thrive — they will naturally withdraw from the market.
Enterprises in the second and the fourth groups, whether state-owned or privatized, need to attract new investments (for public-sector vitaeconomy through privatization) or long-term concession of some of their assets to strategic investors. Otherwise, it is likely that the vitaeconomic potential of these groups will be transformed into the necroeconomy of the first and the third groups.
Privatization alone cannot eradicate necroeconomy, so to revitalize dead but strategically important enterprises of the first group the government must hold, as soon as possible, open international tenders for the selection of strategic investors to whom these enterprises will be conceded on a long-term basis. It is likely, however, that this will not be acceptable to strategic investors. In that case, the government will have to privatize such enterprises at symbolic starting prices, because a dead enterprise cannot be worth much.
There is no hope for the third group — the privatized necroeconomy. These assets are “scrap metal.” One of the most effective ways to get rid of necroeconomy (in its literal meaning) is to sell scrap, including overseas; this enables the owner of the scrap to acquire foreign-currency resources and use them for the creation of a vitaeconomy.
The routine of a command economy resists recognizing dead machinery as scrap metal, creates barriers to selling (especially) exporting scrap metal, and, thereby, extends the life of the necroeconomy.
Theoretically, bankruptcy law should be an effective tool against necroeconomy. In post-communist capitalist countries the bankruptcy laws were stillborn, inasmuch as, according to these laws, none of the de facto bankrupt enterprises was de jure bankrupt (e.g., Papava, 2005; Sánchez-Andrés and March-Poquet, 2002). Prolonging necroeconomy’s life by prohibiting bankruptcy procedures, these countries will remain in post-communist capitalism.
Professor Vladimer Papava is a Fellow at the Central Asia-Caucasus Institute, the Paul H. Nitze School of Advanced International Studies, The Johns Hopkins University and a Senior Fellow of the Georgian Foundation for Strategic and International Studies (GFSIS). He is a former Minister of Economy of Georgia, and is the author of Necroeconomics (http://www.iuniverse.com/bookstore/book_detail.asp?&isbn=0-595-34915-3), a study of post-communist economic problems.
