November 1993 will be the 75th anniversary of the October Revolution and Russia's adoption of the communist system. After World War II this system spread around the world, completely, changing the life of many nations. By the mid-80s almost 1.5 billion people lived under the nomenklatura system and worked daily in centrally planned economies. However, after decades of expansion and economic growth, the communist countries experienced very serious multilevel crises, of which the economic appeared to be the most disastrous. To shape future developments it is very important that this process be understood properly.

One could read frequently in Western newspapers and periodicals the thesis summed up by Jackson Diehl's article in The Washington Post of October 16, 1988 that the "Communist World Can't Jump Price Reform Hurdle." The article was quite typical of Western opinion on the economic troubles that have plagued the communist world since the beginning of the 1980s. In Poland that year inflation was expected to exceed 100 percent; in Yugoslavia, the rate was more than twice that. China faced unexpected obstacles in her economic reform; frightened by an inflation rate of 50 percent annually (the highest since the communists took power) the Chinese government slowed the implementation of new measures. In the Soviet Union, the future of economic perestroika looked gloomy.

Jumping the Price Hurdle. All the evidence seemed to support the title of Diehl's article, and other Western evaluations were very similar. The New York Times of October 14, 1988 stated that "without an end to subsidies and establishment of market prices, which means a painful interim of austerity and inequality, there is no way to economic health." It does not say, however, how to establish market prices when the market simply did not exist in the communist countries. It is also worth adding that most reformers in centrally planned economies eagerly accepted the position of the international financial community that, to revive economic growth, a country must first raise consumer prices in order to diminish state subsidies. Thus, communist governments listed "price reform" as the first objective on their agenda. Hence, the question arises: why can they not succeed in jumping the price reform hurdle despite repeated efforts, if this agrees both with their own beliefs and with Western advocates? Could there be some trap hidden behind the hurdle?

The facts speak for themselves. Yugoslavia introduced an economic reform based upon the idea of "self-governing" socialism and free market prices in 1965. Hungary started her effort to reach a "socialist controlled market" in 1968. China introduced reform in 1978, which has been recognized widely as the world's most dynamic transformation from a Stalinist economic model to a free market. Poland, after the convulsive years of Solidarity and martial law, climbed two "stages" of economic reform. The first one began in 1982 with 300 percent price hikes. The second one began at the end of 1987 and took observers by surprise by rejecting many communist economic dogmas. However, all these efforts seem to have failed to achieve their objectives. If the communist world has experienced repeated waves of reforms that simply do not work, the question is why?

Using Western Criteria. It is not easy to answer this question. The Western public, bankers, and journalists seem to forget at times the substantial differences between the two economic systems, trying to explain developments in the East usually by painting pictures with Western brushes and Western imagination. Such a method of explanation did not help to understand the essence of perestroika or the sudden delay in Chinese reforms; it made the picture dimmer instead of clearer.

Understanding the East has become a Western problem as great business and political opportunities have opened up. It is strongly possible that there will not be a single communist state on the earth by the end of this century. Is the West prepared to benefit from this entirely new situation? Are the reasons behind the fall of "The Eastern Empire" properly understood in order to exploit the opportunities for world peace? What are and will be the basic mechanisms of transformation from a Soviet-style economy to a free market, and is such a transformation a prerequisite for democracy? These are questions which, if improperly answered, may bring about revolutionary and violent developments, harming not only the one-third of the world population which had lived under the communist system, but the so-called Free World itself.

Communism walked on four legs: ideology, a "flat social structure," a centrally planned economy, and a political nomenklatura system. All of these have a very practical meaning and in the past have been very useful and even efficient; all of them must walk together in order for the system to be energetic. After decades of militancy based upon potent aggregation of most of the national resources under control of the state, all four legs apparently became more or less consumptive; all four shook so that walking became more and more painful.

IDEOLOGY

The practical meaning of ideology is hope. In the early stages of communism the people's expectations for a better future (perhaps, not for themselves, but surely for their children) had been one of the most important incentives for hard work and "mass political activity." When the future arrived, however, communist nations and their political activists at first faced empty shops and long lines of tired people hoping to buy merely the most basic goods. Instead of a promising future, communist societies faced deep economic, social and political crises. A widespread feeling of lack of hope for a better future became widespread.

Vitali Korotich, who edited the lively Soviet politics review, Ogonyok, when asked what he wants and is fighting so hard for, said simply: "I'm tired of labels; I want a normal country." In Budapest, a young journalist said in disgust: "Nothing works here the way it is supposed to in a normal country." In Poland, Solidarity's Lech Walesa said the real issue was no longer reforms, "It's how to get out of this abnormal system that can only produce absurdity." In the spring of 1988, Polish Prime Minister Mieczyslaw Rakowski, then a Communist Party Politburo member, distributed a secret memorandum to the communist power elite warning that the future of the Soviet Union and of the communist system was in doubt. "Let's do something now before it's too late," said Rakowksi. The Kremlin's ideology chief, Vadim Medvedev, said modestly: "We have to understand better the practice of modern social democracy; our ideas on the economic and social bases of socialism need seriously to be renewed and deepened." It was the real end of communist ideology. What can replace it?

A FLAT SOCIAL STRUCTURE

Social structure was flattened at the very beginning of the communist system: to be wealthy was equal to being an "enemy of the people." The top portion of society was physically or economically eliminated; the social hierarchy was turned upside down and the huge bureaucracy was recruited mainly from the bottom of society. That was one of the most important factors in building popular support for the system. The state bureaucracy provided a unique historic chance for the poor, uneducated and imprudent individuals and their families. A basic commandment in the communist bloc to anyone wishing to make a career in the system was: "Never try to be too professional, never try to be too intelligent; that will get you killed." Now there is an obvious need to diminish the number of bureaucratic positions in order to save resources and time; there is also a need to promote professionals instead of political activists. The differences between social stratification as a foundation of the political systems in democratic underdeveloped and communist countries are illustrated in Diagram 1.

Achieving Internal Equilibrium. Despite the curious character of social stratification under the communist regimes, quite logical rules were hidden behind this structure and stabilized the entire system. A certain balance in spending is essential for achieving an internal socio-economic equilibrium. The balance, however, depends upon the availability of economic resources, and the centrally planned economy and its state-owned companies are the major source of state spending for different purposes. At least half of all resources went to the state budget. The rest of the gross national product was strictly controlled by central planners. Thus, consumption was not a result of economic development, but was dictated by the central plan. The level of consumption and average salary reflected not the economy's ability to produce consumer goods, but the planner's conviction that these salaries offered to employees, when combined with expenditures for repressive forces, would be sufficient to maintain the social order. As the costs of the social order depended mostly on the extent of resistance, the situation in Poland differed from that of Romania, for example. The cheaper the social order, the more resources could be diverted from consumption to state projects, which were the main objects of the state's care because they represented a "state power" factor.

Additional factors influenced the socio-economic equilibrium of a communist country. One of them was state employee benefits directly connected with the social prestige of the bureaucracy. The more privileges available for the bureaucracy, the stronger was bureaucratic careerism, which solidified the whole balance of the system. On the other hand, the vast majority of the society depended on some subsidies from the state budget. The most important part of this "social security" factor were subsidies in areas of housing, food prices, health care and education. Since employees of the socialized sector were beneficiaries of this factor, changes of expenditures for these purposes influenced the whole system's equilibrium. Diagram 2 shows the main factors influencing the socio-economic balance of the communist society and the position of a centrally planned economy as the source of funds for maintaining social order and supporting the state power factor--the ultimate goal of the whole system.

CENTRALLY PLANNED ECONOMY

Central planning was the core of the communist system from its very beginning. Remarks from such prominent economists as Ludwig von Mises and Friedrich Hayek that such a system would ultimately be inefficient were neglected. At the early stage of communism, central state planning seemed triumphant and, to some degree, was backed with enthusiasm by many Western economists who warned that the West would be surpassed economically by Soviet-style nations. The early successes of communist economies, however, were only short-term for they relied on a concentration of all available resources in order to obtain a high rate of economic growth. This effect could last only as long as the pre-communist market price structure was maintained. But, since communist states intentionally destroyed market forces and granted themselves the right of price regulations, their economies became blind.

Price Restructuring. The greatest plague of centrally planned economies was a lack of sense of locality. When prices ceased to be controlled, inflation shot up, central planning jerked convulsively from one direction to another; much investment was wasted; pollution became the most intense in the world; and in the system that claimed social justice to be the most important issue there was more inequality than ever. That is why governments of communist nations followed so willingly the World Bank's advice to begin reforms by first implementing price reforms. Rulers thought that this way they could revive the market price structure and restore the system's economic orientation, but it was not so easy.

A free market is not simply the implementation of price equilibrium; this is not even the beginning of market revival, nor should it be taken seriously as a prerequisite for major reforms. This can be seen from the example of Yugoslavia. Though Yugoslavia implemented price equilibrium in the late 1960s, the economic crisis seemed to be as painful as in Poland where price disequilibrium was intentionally sought for many years. That is because it is impossible to build a free market price structure on the surface of a completely centrally planned economic and social structure. Resistance to price restructuring came not merely from those who did not like it (nobody likes price hikes); the real resistance came from the substance of the communist system, from all the elements of its economy and social stratification. People resisted price hikes mainly because they doubted that they could bring any positive result since there was no link between price changes and productivity in a communist system. Thus, a communist country needed to start free market-oriented reforms not by price reform, but by introducing a new legal system, a new civil code able to secure property rights and accelerate the emergence of a capital market.

There is a substantial difference between the meaning of the term "market" in the two systems. In a free market system the market is a complex structure regulating the behavior of three market "actors": consumers, entrepreneurs and government agencies. In a free market system the government plays a specific moderator's role. In the centrally planned economy, the market means something entirely different: it is only a small margin of the economy where consumers can buy some goods with their salaries. Only this part of the economy is called market. Thus, one actor--the consumer--is being kept on a short leash by central planners, while another one--the entrepreneur--simply does not exist. The only independent and really decisive actor remains the state which is an amalgamation of the communist party structure, the government and its agencies, and the socialized sector of the economy. The difference between a free market complex and the market in a centrally planned economy is shown in Diagrams 3 and 4.

Thus, the national economy in a centrally planned system is divided into two areas which are not connected directly: the market and the non-market areas. The primary part of the economy is the non-market one; the market area is of secondary importance and represents the consumption factor from Diagram 2. The GNP is distributed in two sequences. The extent of consumption is not divided before the level of investment is stabilized. The level of consumption is what remains after the investment plan is executed. Interrelations between market and non-market areas are shown in Diagram 5.

THE NOMENKLATURA SYSTEM

The system of nomenklatura, which was frequently misunderstood in the West, stopped working. This system was very unusual because it gives more power to informal or non-normative institutional structures than to formal or normative ones. This allows power elites to implement the most democratic-looking legal systems in the most oppressive ways. For instance, it enabled Stalin to celebrate the abandonment of the death penalty in the Soviet penal code while millions of people were dying in the Gulag. The nomenklatura system was not reflected by law. The only legal basis for communist party power was its role as a "vanguard" as mentioned in the communist state's constitution. The real basis of its power, however, was the social contract formed and solidified by years of Stalinist repressions. The position of the Communist Party hierarchy in the state's structure is shown in Diagram 6.

Finally, the nomenklatura system stopped working. That Poland was a forerunner of the nomenklatura's decay could explain the Polish phenomenon. Formally and legally the Polish Communist Party had no power: it had always relied upon vocal orders, never written decisions, to carry out its wishes. That is why all the documents found by Solidarity activists investigating illegal practices contained only signatures of people from administrative institutions--Communist Party leaders appeared to be free of any charges. Even Mr. Gierek, Polish ruler and first secretary of the powerful Communist Party Central Committee, pretended he was not in a position to make any important political or economic decisions. He was fired from his post, but since there was no legal evidence against him, he was never punished. After martial law was implemented in Poland, the Polish Sejm became one of the busiest parliaments of the world, issuing hundreds of new regulations to prevent blaming the administration for further Communist Party apparatus power abuses. The Communist Party never recovered from this blow, and its informal power was weakened as never before. This was also a heavy blow to the nomenklatura system, which explained why Poland under military rule turned out to be one of the most liberal countries in Eastern Europe.

Life had become uneasy in the East not only for the ordinary people, but also for their rulers. Many questions coming out of the communist Pandora's box, if not answered properly, could result in hopelessness and violence. That is why the governments began desperately to seek for any pragmatic answer to the current crisis, no matter how unpleasant. The answer lay in the popular Polish joke, that "socialism is the longest way from capitalism to capitalism." Some communist governments understood the problem better than others. The Parliament in Budapest, Hungary, approved a Law on Corporate Association intended to let the private sector blossom, to liberate the movement of capital, and to allow Western companies to buy Hungarian ones. Hungarians look capitalism out of the closet and put it on the statute books.

The communist nations, after decades of economic and social experiments, found themselves trapped in a time machine, taking them back to the reality they had passed. They had to witness history again, but this time in reverse: from a centrally planned economy to a free market, from a flat and equalized society to social and political diversification, from nomenklatura to democracy, but also from hopelessness to newborn hope. This is a long, rocky, and dangerous path; but the West can help them mount the mule.

Catholic University of Lublin

Lublin, Poland