Thinking Points
	What advice did foreigners provide Eastern European nations about how to establish a strong capitalist economy? Why did that advice, in many cases, miss the mark?

David Stark: It's interesting to go back and remember what things felt like at the end of 1989 and early 1990. One of the things that happened was that plenty of people who didn't know anything about Eastern Europe, socialism, Communism, or what had been going on in these societies for the last decade flew into the country and said, "We know what's best for you." They even wrote articles with titles like "What Is to Be Done." Although they weren't intentionally ironic, that was Lenin's title in his presentation of scientific socialism.

In some ways, there was a kind of parallel to the Leninist project: Leninism was about redesigning a society from scratch, heroically rejecting the past entirely, wiping the slate clean and starting over. Some of these designer capitalist models assumed the possibility of designing a society and running it by design. So there were recipes, formulas, blueprints and therapies for how to get from Communism to capitalism in six steps or sixty.

The idea was that the collapse of Communism had left a tabula rasa. This is a wonderful opportunity for economists--especially for neoclassical economists who thought that institutions are not all that important. For them, this was a chance to make capitalism from scratch.

In fact, there were two waves of advisers who flew in from the West after 1989. The first wave said, "The best way to restructure these economies is to use strong markets." They asked, "How do you restructure these firms? Well, you need strong markets. That's the best way." Their answer for the dilemmas of privatization and economic policy was, "Let the market do its work. You don't know what the value of a company is? Well, its value is whatever somebody's willing to pay for it, so just let the market decide." The belief was that if you want to get to strong markets, you must start acting as if you had strong markets.

Starting in about 1993, a new wave of advisers flew in via East Asia, from places such as Singapore, South Korea and Taiwan. They said, "Actually, the best way to restructure these economies is to have strong states." In their mind, the lesson from East Asia, and from places such as Taiwan and Korea, is that markets are the goal and not the means, and what you need in order to get there are strong states.

Now, the problem was that Eastern Europe is a part of the world that, for decades, if not centuries, had lacked precisely both strong markets and strong states. It's probably obvious that they lacked strong markets, but it's also the case that a Communist state is not a strong state. It's big, awkward, clumsy and actually very ineffective. So these two sets of advisers were coming in and telling the society that what it needs was something that it didn't have.

It reminds me of this joke. An Irishman in the far countryside is asked, "What's the best way to get to Dublin?" This Irishman thinks a little bit, scratches his head, and says, "Don't start from here." The Irishman's irony would not be lost on East Europeans, because they all know that the best ways to get to capitalism started somewhere else. Instead of the question "What is the best way to get to capitalism?" they asked the question "How do we start from here?" What resources did they have?

Lacking strong markets and lacking strong states, the major resource for Eastern Europeans was strong networks. These networks had their origin in the sub-rosa activities that got the job done under Communism, whether that was in the personal ties of the second economy or the informal ties between directors of socialist enterprises. Privatization didn't destroy those network ties but built upon them as former socialist firms acquired shares in each other, leading to large and dense networks of cross-ownership.

These networks can be a source of good, and can serve as resources to build upon as people used their interdependent assets to recombine things in productive ways. But we should not be naive and say, "Let the networks solve all the problems that are produced by markets and states." Networks can produce their own problems of corruption and under-the-table dealings if they're not supervised.

It's interesting to see the differences in the various countries. Hungary and the Czech Republic now look very different from the Russian economy. Where the networks were not supervised, as in Russia, they took over, as you didn't just have the privatization of enterprises. The state itself was privatized in some ways as public offices and agencies were captured by private interests. With the government itself so "privatized," companies could go about their shady dealings unregulated.

Fathom: What political differences were there between the East European and Russian cases?

Stark: I think one important difference in the East and Central European cases and the Russian case was in the form of transition itself. In the Czech case, the Polish case and the Hungarian case, transition was negotiated. There were roundtable negotiations that preceded the transfer of power from Communist authorities to non-Communist hands. There were roundtables in Poland in the spring of 1989, in Hungary in the summer of 1989, and in the Czech Republic at the very end of fall and in the early winter of 1989.

Sitting at those roundtables were the representatives of the old Communist parties and the new democratic forces. They negotiated the transfer of power. In these cases the state didn't collapse, and there was an orderly process of transition, whereas, in the Russian case, it was much more a situation of state collapse. Communism collapsed everywhere, but state authority didn't. In some places it was a very orderly transition.

This is important, and goes back to the "capitalism by design" question. In that view, building on the clean slate left by the ruins of capitalism, it wouldn't matter how the pieces fell apart. The reality, however, was that a new society was being built not on the ruins of Communism but with the ruins of Communism. So, how the pieces fell apart mattered not just for how they're put back together again but for how a new society could be built. That orderly transition was extremely important in the Polish, Hungarian and Czech cases, but quite different from the post-Soviet experience.

Fathom: Are there other lessons that we learned from Eastern Europe?

	Thinking Point
	How did the Eastern European countries face the dual challenge of transitioning political and economic systems simultaneously?

Stark: Let's take a comparison across the countries. Again, the sort of early view was that these societies would have an extremely difficult time because they were engaging in a dual transition. They were simultaneously attempting to change the system of property the political system. In China, for example, you have a change of the economy but not a change of the political system. If you think about East Asian societies that have democratized, such as South Korea and Taiwan, economic development and liberalization preceded political change. I think even in Latin America they embarked on democratization but had a property system, either good or bad, already in place, in that legitimate private property already existed.

Hungary, the Czech Republic, Poland and other Eastern European societies were facing political and economic change simultaneously. They were creating property and a propertied class and, at the same time, creating citizenship rights and expanding citizenship rights to subordinate classes. Around 1990, people thought the danger was "Well, what a tricky thing to restructure an economy in which opportunities to vote incumbents out of office would go to the losers." And it was assumed that a lot of people in the short run would lose and would not benefit immediately from this transition.

People wondered, "Is it possible to introduce democracy and economic restructuring and growth at the same time? These may have to be traded off. Maybe one should emphasize democracy and accept a slower economic development. Maybe one should grow the economy but then forgo some democratic principles and insulate decision makers from the demands of the society."

The really interesting lesson of the East European and postsocialist cases, taken as a group, is that those societies that are more democratic also have higher levels of economic growth. By democratic, I mean not just checks of vertical accountability in free elections but also horizontal accountability--checks and balances in their polity in which legislatures can check executives and judiciaries can check legislatures and hence also create accountability to the populace. The further you've moved down the road to extended accountability in a democracy with institutions of horizontal and vertical accountability, the more likely you are to have the fast rates of growth and sustainable development.

Also, people thought that economic development was going to have to come at the price of big disparities of income in these societies. People anticipated a trade-off between economic growth and relative income equality, and that turns out to have been wrong. What we find is that countries with the biggest income disparities are those that are developing less quickly, especially in some of the new states that have emerged with the breakup of the Soviet Union.

Fathom: Is there a way you could sum up the postsocialist condition today?

Stark: In the 1990s, a friend in Budapest told me about a board game he had played as a child during the socialist period. Prior to the Second World War, Hungarians had played Monopoly, known there as Kapitaly. But this competitive, capitalistic game was banned by Communist authorities, who substituted another, Gazdalkozde Okosan!, or Economize Wisely! In this Communist version, players tried to get a job, open a savings account, and acquire and furnish an apartment.

My friend was too young to have a Kapitaly board, but his older cousins knew the banned Monopoly game and taught him the basic rules. They quickly saw that Monopoly was the more exciting game. So they turned over the socialist board game, drew out the playing field from Start to Boardwalk on the reverse side, and began to play Monopoly--using the cards and pieces from Economize Wisely! But the specifics of the rules were unclear, and the memories of the older cousins dimmed, so the game developed its own dynamic, using the cards and pieces from the "other side." Why, for example, settle for simple houses and hotels when you could have furniture as well? In what situation would a Prize of Socialist Labor release you from or send you to Jail?

The idea of playing capitalism with Communist pieces seems like an apt metaphor for the postsocialist condition. The political upheavals of 1989 in Eastern Europe and 1991 in Russia turned the world upside down. Misled by an apparent tabula rasa, the International Monetary Fund (IMF) and Western advisers issued instructions for the new "rules of the game." But the game was played with these remnants of the past; they may limit some moves and facilitate other strategies. Firms responded to these uncertainties by exploiting the uncertainties, using these networks that linked statist institutions and "privatized" firms. There are creative organizational solutions that are evolving, and they show that the most dynamic sectors are likely to be arenas where public and private are closely intertwined.