Social Costs, Social-Sector Reforms, and Politics in Post-Communist Transformations
Joan M. Nelson
The social costs of attempting to transform command into market economies have been very high—far higher than almost anyone anticipated at the beginning of the post-communist transitions. The impact on people of dismantling old economic institutions and rules of the game and beginning to build new ones has been compounded in many countries by the effects of the dissolution of the Soviet empire and the disruption or collapse of governmental capabilities. At the same time that the scope of social costs has become clearer, the challenges of restructuring social programs in a manner consistent with the needs and constraints of mainly market economies have begun to emerge. A triple shift in social-sector concerns is under way:
A shift in the definition of the key problems from an almost exclusive focus on the immediate impact of transformation policies on welfare to a much broader array of long-term structural concerns.
A corresponding shift in policies from an initial emphasis on limiting or buffering the social costs of transformation to addressing the challenges of restructuring social security, health, and education systems to be compatible with and sustainable within mainly market economies. At the same time,
I would like to thank Harley Balzer, Nick Barr, Valerie Bunce, Carol Graham, Janos Kornai, Vladimir Mikhalov, Branko Milanovic, Dena Ringold, and Irena Topinska, as well as my colleagues on the Task Force on Transition Economies, for valuable comments and data.
social-sector reforms have moved from the margins to the center of the transformation agenda, especially in those countries hat have addressed fairly successfully the initial challenges of macroeconomic stabilization and liberalization.
A shift in concerns regarding the political implications of social costs. Initial concerns focused on the possibility of a backlash against poverty, unemployment, and social stress that might jeopardize or reverse market reforms, democratic consolidation, or both. Fear of reversal persists in much of the former Soviet Union, but has ebbed in most of Eastern Europe; attention is shifting to the ways in which changes in social structure and social policies may shape the long-term character and quality of post-communist political systems.
These shifts introduce far more complex and controversial challenges—for data collection, analysis, policy formulation, and policy implementation—than the already formidable challenges of initial safety net concerns. The next section of this essay briefly sketches the changing nature of and forces driving the social-sector agenda. The following section examines major political and institutional obstacles to social-sector reforms. The final section turns to the implications of social trends and policies for still-evolving post-communist political systems.
First, however, a caveat is necessary. The post-communist world—Eastern Europe and the former Soviet Union—includes a tremendously varied array of states. Several of the chapters in this and earlier parts of this volume explore contrasts among countries or regions. This essay, however, glosses over important differences among countries with respect to pre-communist and communist histories, the nature and sharpness of the break from communism, socioeconomic structure, and a great deal more. Its goal is not to describe or analyze in detail, but to provide an overview and perspective on major trends in social costs, social-sector policies, and their political implications in the course of transformation.
THE EVOLVING SOCIAL-SECTOR AGENDA
Initial Policies: Selective Gradualism and Safety Nets
When most of Eastern Europe and much of the former Soviet Union began to transform their economic systems from command to mainly market models after 1989, few anticipated the scope and depth of economic disruption and social costs that would result. Despite widespread disillusionment with communism's economic performance, ordinary people had no grasp of the depth and pervasiveness of its distortions and inefficiencies, and therefore no premonitions of the extent and speed of collapse once key controls had been
lifted.1 Paradoxically, some ardent market reformers (domestic and foreign) seem to have underestimated transformation costs for the opposite reason: they were so thoroughly convinced of the massive inefficiencies of the old systems that they hoped changes in key incentives would trigger rapid improvement after only brief disruption. The repercussions from the collapse of the Council for Mutual Economic Assistance (CMEA), the disintegration of the Soviet Union, and (more briefly) the Middle East War were also unexpected.
Although the extent of social costs was a surprise, both the public and reformist officials certainly did expect costs; many were deeply concerned. Broadly, policy responses took two main forms: (1) ''selective gradualism," or measures to delay (and therefore, it was hoped, soften) those reforms that would most directly harm large numbers of ordinary people, and (2) compensatory programs, mainly through direct cash transfers.
Selective gradualism with respect to consumer price decontrol and state enterprise reforms was designed to prevent or delay social costs from occurring. Many countries retained full or partial price controls for medicines, rents, utilities, and sometimes selected food staples for months or years after most other price controls and consumer subsidies had been removed. Most governments also moved quite slowly on privatizing or otherwise reforming large state economic enterprises, in part for technical reasons, but also because of concern about the social costs and political risks of rapidly rising unemployment. For instance, in the Czech Republic, despite far-reaching and determined market-oriented reforms in general, bankruptcy legislation that would have forced action on inefficient state enterprises was thrice delayed; when it was finally passed, its implementation was again postponed.
In contrast to selective gradualism, compensatory programs were designed to mitigate the impact of costs after they occurred. Concern focused mainly on the unemployed and the elderly, but also on families with young children. Between 1987-1988 and 1993-1994, most post-communist countries increased cash social transfers, usually by 2 to 4 percentage points of gross domestic product (GDP). Hungary and especially Poland did much more; by 19931994 both were spending almost a fifth of GDP on these programs. The Czech Republic, Moldova, Romania, and Russia maintained but did not increase cash transfers as a share of GDP.2 However, even in those countries that substantially increased money transfers and partly indexed some benefits, inflation eroded their real value. In countries where increases were smaller, the real value of social transfers shrank to a fraction of earlier levels. More-
over, most transfers (with the exception of the new unemployment compensation programs) were targeted to categorical groups (the elderly, or families with children), but not to the poor within those groups. As market reforms increased inequality, the lack of targeting to the poor made transfers still less effective in reducing poverty.3
At best, selective gradualism and compensatory programs could only partially mitigate the costs of the initial period of adjustment. Social costs varied tremendously across countries (as well as within countries, with major cities generally faring far better than rural areas and smaller towns). Costs were determined largely by initial conditions, including the scope and depth of poverty in absolute terms, and by the character of macroeconomic reforms, which ranged from consistent and determined to vacillating, partial, and chaotic. In Hungary before 1989, only about 1 percent of the population was poor (measured by an absolute, cross-national standard of $120 a month at 1990 international prices); in 1993 that figure was 2 percent. In Poland, poverty increased from 6 to 12 percent during the same period (using the same yardstick); in Bulgaria it increased from 2 to a startling 33 percent. In Russia as well, poverty swelled dramatically to more than a third of the population by 1993 (World Bank, 1996a:69, Table 1). In the absence of at least partly effective stabilization and liberalization, compensatory programs are a bucket brigade confronting a forest fire. Once major macroeconomic reforms are in place, such programs can become more effective (Åslund, 1997).
Will Resumed Growth Solve Social-Sector Problems?
Analysis and debate regarding the actual social costs of the initial post-communist periods will undoubtedly continue for a long time, given the knotty problems of appropriate concepts, standards of comparison (across time periods and among countries), quality of data, and interpretation.4 It has long been recognized that much production and income go unrecorded in official data. Estimates of the importance of the informal economy grow steadily; however, middle- and upper-income households may well benefit more than poorer ones from informal opportunities. Household survey data for several countries indicate that a great many households increased their holdings of consumer durables and/or their savings even in the early years of the transformation. Rather than suggesting increased incomes, however,
that fact may reflect liberalized exchange rates and dramatically appreciated currencies.5
Direct data and indirect clues on the subjective impacts of transformation are also emerging. For many, especially older, less educated, and rural people, the tremendous changes have imposed overwhelming psychological costs in terms of insecurity and uncertainty, the devaluing of lifetime contributions to now-crumbled systems, and (for Russians) the collapse of national prestige along with empire. These impacts may be indirectly but dramatically signaled by the accelerated increase in mortality rates among adult men, particularly in Russia, in the early 1990s.6 For others, particularly the younger and better educated, the transformation is quite literally liberating, with respect to both economic opportunities and political freedom.7
From a policy perspective, however, the key questions do not hinge on understanding of the recent past, but on prospects for the near-term future. In particular, in those post-communist countries that have turned the corner, will price stability and economic growth erase the social costs of the initial shocks?
By 1994, most of Eastern Europe had stopped its economic slide. Polish GDP increased steadily from 1992. Most Eastern European countries had brought inflation to or below 30 percent by 1995; six of ten grew 5 percent or more in that year (World Bank, 1996a:173, Table A.2). Growth remains fragile in some Eastern European and several Soviet successor states, and a few, including Bulgaria, Belarus, Serbia, and Bosnia, show little progress. Unemployment has responded fairly rapidly to improved economic conditions: in most Eastern European countries, unemployment peaked in 1993 or 1994 and has since declined.8 Measured poverty levels have been slower to respond. In Poland, with the longest record of growth, different measures of
poverty tell varied stories; while poverty seems to have stopped increasing, 1995 data show no clear downturn.9
One major factor limiting the effects of growth in cutting poverty and other social costs is the dramatic increase in inequality in all post-communist countries, coupled with dwindling state redistributive capabilities. In most countries, growing inequalities in income and wealth are coupled with failure to rationalize the tax system and collect taxes effectively, and thus to direct some of the winners' gains from growth into programs targeted to reducing poverty.
More specifically, the transformation process has created large pools of poverty that will not shrink automatically as economies strengthen. Two problems in particular stand out: (1) the large number of acutely depressed regions and cities that depended on industries that are now dying, and (2) the growing pool of long-term unemployed. As noted earlier, in most of Eastern Europe, unemployment has declined since 1993 or 1994. However, workers who have been unemployed for more than a year comprise a growing proportion of the still-substantial totals. By 1995, long-term unemployed were more than 40 percent of total unemployed in all Eastern European countries except the Czech Republic, and exceeded 60 percent in Bulgaria and 87 percent in Macedonia (Allison and Ringold, 1996:27-28). In most of the Eastern European countries for which data are available, roughly a fifth of the long-term unemployed are under 25 years of age, while two-thirds to three-quarters are between 25 and 60; substantial portions are unskilled or have comparatively limited education (supplementary tables provided by Dena Ringold). Experience in Western Europe and elsewhere indicates that it is particularly difficult for the long-term unemployed to find and keep new jobs (see, for example, Boeri and Scarpetta, 1994). Other longer-term problems are probably emerging in some of the poorest countries. For instance, in Albania, it is likely that child labor has increased, and school attendance (particularly by girls) has dropped (personal communication from Katherine Verdery).
If brisk and sustained growth can be achieved, many of the households near the center of the income distribution that were pushed into hardship in the early 1990s will rise once again above the poverty line. But some of the costs of the initial transformation—sharply increased inequality, dying industries, and the long-term unemployed—pose problems for social policy that will not yield to growth alone.
The Need for Systemic Reforms in Social Sectors
In addition to the enduring problems created by the initial stages of transformation, post-communist countries face an array of social-sector challenges that have quite different causes. Even more than the problems generated by
the transition process, these additional problems require not simply safety nets or add-ons to existing social-sector programs, but far-reaching reforms in the entire systems of social transfers and services.
One of communism's undeniable and proudest achievements was the expansion of access to education and health services for entire populations. However, as Schieber and Klugman (in this volume) detail with respect to health, major inefficiencies were built into the design of these services, including excessive emphasis on hospital care and low priority for public health measures addressing some of the most important causes of poor health and mortality, such as personal behavior (alcohol, smoking, diet), environment, and safety.
Moreover, as broader economic difficulties and budget pressures developed in many communist nations from the 1970s on, problems deepened in the health and education systems. The quality of services deteriorated, while queuing, reliance on personal connections, and corruption (including widespread use of under-the-table fees) increased. So, too, did informal and illegal privatization. For example, it became common for doctors to offer fee-for-service treatment after normal hours, using public facilities and equipment.
Despite these shortcomings, old social-sector institutions might have continued to function semi-adequately in the absence of the larger transformation. But as command economy arrangements are dismantled or crumble and formal and informal market arrangements emerge, social-sector programs and policies need fundamental redesign to operate in the new context and to address new as well as old needs. For example, under state socialism, a wide array of health, education, housing, and other services and benefits were channeled largely through state industries and farms. As these are dismantled, privatized, and/or streamlined, they are shedding their social functions. Moreover, more mobile labor forces and the growing importance of small firms necessitate entirely different arrangements for delivering social services and benefits.
Financing also needs to be rethought. For instance, in many post-communist countries, pension and health systems are funded largely through payroll taxes (see Fox, in this volume). These taxes swell the wage bill by as much as half, discouraging new investment in general and labor-intensive investment in particular.
Both market economies and more democratic political systems demand changes in content, as well as finance and delivery systems, especially in education. Beyond the obvious requirements for new or revised curricula (for instance, in business management, economics, and social sciences more generally), basic teaching approaches and techniques must give more emphasis to initiative, flexibility, and problem solving (for a comprehensive overview, see Heyneman, 1996).
More broadly, as Kornai discusses (in this volume), post-communist nations need social service and benefit systems that provide more choice and place more emphasis on individual responsibility. Such changes will demand
revised assumptions about entitlements and social contracts between state and citizens-assumptions discussed in more detail later. Shifts toward choice and individual responsibility will also require much more sophisticated publics, with a better grasp of the implications of alternative options for themselves and others (including the next generations). Altered perspectives and increased sophistication are difficult challenges in established market democracies; they may prove still more wrenching in Eastern Europe and especially in the Soviet successor states.
Changes in the division of responsibilities and financing between national and subnational governments do not necessarily accompany market-oriented reforms. But in the half-dozen years since the collapse of communist monopolies on power, many post-communist countries have decentralized major responsibilities for public services and facilities from national to provincial and local governments. The trend has often been driven by financial pressures and general administrative overload on central governments, as well as by reactions against communism's strong central controls and a desire to spread both power and participation. Devolution is particularly marked in the education and health sectors. Whatever the motives, the effects thus far have often been tremendous confusion regarding who is responsible for what, and mismatches among responsibilities, finances, and technical and administrative capacities.
In some post-communist countries, aging populations add pension reform to the formidable agenda of social-sector issues (see Fox, in this volume). In 1990, between 10 and 13.5 percent of the population of most Eastern European countries, and Russia and the Ukraine as well, was over 65 years of age. (In Albania and the Central Asian republics, the elderly are a far smaller proportion of the population.) Long-established patterns of early retirement and generous disability, a surge in retirements at the outset of the transition, and the rapid growth of the informal sector and tax evasion intensify the effects of age structure on pension systems. In 1993, 1.9 workers in Russia and Poland were contributing to the pension system for every retiree drawing on it; the ratio in Hungary was 1.5:1 and in Bulgaria only 1.2:1. Pensions consumed 10.4 percent of GDP in Hungary in 1992 and more than 15 percent of Poland's GDP in 1994 (see Svejnar, 1996:Tables 1, 4, 5). There is almost universal agreement among specialists that the commitments embedded in existing systems are unsustainable. Moreover, in some countries, including Hungary and Poland, pensions' large and growing share of government expenditures may well be squeezing other social-sector expenditures, including education and health for children (see also Ferge, in this volume).10
As social-sector reforms move to the center of the policy arena, a still larger issue may loom in the Central European countries with very high total levels of social expenditures: a clash between social spending and the levels of saving and investment needed to spur rapid growth. If the Czech Republic, Hungary, and Poland wish to catch up with Western European income levels within one or two generations, the argument runs, they must reduce current very high levels of social expenditures relative to gross national product (GNP)—levels that perpetuate high taxation and inhibit public and private investment (Sachs and Warner, 1996). The same point can be made regarding Slovenia and Slovakia. The argument moves beyond the earlier emphasis on the need to reduce public spending to contain inflation and highlights a long-term clash between particularly high levels of social expenditures and rapid growth. That clash is further sharpened by the fact that some key social-sector reforms, including certain pension measures, can be extremely costly in the short or medium run.
In other parts of the post-communist world, social spending claims a much more modest share of GNP. Moreover, national and local public revenues have virtually collapsed in Russia and some other countries. Not only has the real value of pensions and other social assistance shrunk in Russia, but payments are often delayed for months. For many of those still in the labor force, delays in wages spell poverty; miners, teachers, and others have periodically struck in protest (see McAuley, in this volume). In contrast to Central Europe, in Russia the need is not for cuts in mandated or actual social spending, but for restoration of state capacity to collect taxes and administer public programs, including social services and transfers. Indeed, restoring and reorienting state capabilities is crucially important, above all in Russia, but depends on decisions and actions that go far beyond the social sectors themselves.
In sum, the social-sector agenda has evolved with almost bewildering speed in the past half-dozen years. From the understandable initial preoccupation with minimizing and buffering the social costs of transformation, the agenda must now address the persistent transformation legacies of deeply depressed regions and long-term unemployed, the inefficiencies and distortions inherited from the communist era, the demands of emerging market economies, the opportunities and problems of rapid decentralization, and (in some cases) the threat of fairly imminent pension crises. In some countries, the overall balance between social spending and the requirements of rapid growth poses a still larger issue. These formidable challenges cannot be met by modest improvements in existing systems. They demand systemic reforms—far-reaching changes in organization, financing, administration, and incentives. In parts of the post-communist world, they also require a still broader revitalization of basic state capacities.
THE POLITICS OF SOCIAL-SECTOR REFORMS
While the agenda has ballooned, thus far (as Kornai notes in this volume) there has been remarkably little change in social-sector institutions and operations—or at least, little change designed primarily to reorient and improve social programs.11 Many of the reforms that have occurred or are in process are substantially (though usually not entirely) driven by financial pressures. In Hungary, for instance, current (1996) designs and legislation for far-reaching changes in the pension and health systems were initiated by the Ministry of Finance and have been coordinated by that ministry, though other ministries and interests are active in the process. Other changes in actual operations are not the product of planned reforms, but ad hoc responses (especially by local governments) to the shedding of social service functions by state enterprises, devolution of responsibilities from higher levels of government, dwindling tax revenues, and other trends.
This scenario is not unique to post-communist countries. As Graham points out (in this volume), in Latin America and other regions, countries that have drastically reduced state economic intervention and opened their economies are now beginning to address social-sector reforms. Several have launched major pension and/or health reforms, but many are finding it difficult to move ahead rapidly in these sectors. In Western Europe, the United States, and Japan, the need for reforms in pensions and social benefits (and, in the United States, health services) is well recognized, yet there is little action.
To some extent, slow progress on social-sector reforms is simply part of a much broader pattern: reforms entailing major institutional change are inherently slower and more complex than macroeconomic stabilization and liberalization measures. Price changes, like devaluation and interest rate adjustments and the dismantling of controls and subsidies, are often politically controversial, but they are not complex administratively. With the backing of top political leaders, such measures can be put into effect by a small number of senior economic officials. Moreover, they take effect rapidly, sometimes overnight. Institutional reforms, such as financial-sector restructuring, privatization or rationalization of large state enterprises, and liberalization of labor markets, are much more complex. They demand the cooperation of a much wider range of branches and agencies of government, and they take months, sometimes years to put into effect. Moreover, while many of the initial costs of stabilization are temporary and distributed over much of the population, institutional reforms usually result in permanent losses to specific groups, prompting particularly vigorous resistance.
Major social-sector reforms may be even more difficult than other kinds of institutional reforms. Four characteristics of social services converge to make systemic reforms particularly challenging:
There are no templates. Even within technical circles there is only limited consensus on the design of reforms.
The beneficiaries of social services and transfers often view them as entitlements to which they have a moral claim.
Major social service reforms are particularly complex organizationally. They involve large numbers and many categories of players—people whose cooperation is crucial for the success of the reforms. Complexity in turn implies a long timetable: major social service reforms are likely to take years to put in place and begin operating effectively. (Transfer programs can be modified more quickly.) Therefore, there are many potential veto actors and veto opportunities.
At any given moment, the evident costs of postponing action are small, even though the cumulative costs of inaction may be immense. Therefore, politicians have little incentive to act.
These difficulties, it should be noted, hinge only to a small degree on the specific reforms being promoted. They apply to reforms that emphasize privatization, but also to those that rely on public-sector approaches. Similarly, they are relevant regardless of whether new arrangements incorporate extensive user participation or rely on professional and technical control. The difficulties spring from the nature of social services and transfer programs. Each difficulty is discussed in more detail below.
The Lack of Templates
The lack of templates for social service reform flows in large part from two facts. First, education and health programs serve multiple goals and constituents, and it is difficult to reduce the trade-offs among goals and groups to a single common denominator. Should priority be given to the quality of health care or its coverage? Should education emphasize national unity or distinctive ethnic and geographic heritages (including languages)? There are technical considerations, but no adequate technical answers to these and similar questions; they must be resolved in the context of specific national (and sometimes subnational) circumstances and priorities.
Even at the level of technical considerations, there is only limited consensus. For instance, health specialists agree regarding high pay-offs from public health (as distinct from curative) programs, but most doctors do not accept the implications. Health-sector analysts argue among themselves about the most desirable arrangements for financing health care under varied circumstances. In education circles, the conventional wisdom regarding the high returns to
primary education (as distinct from secondary and tertiary levels) is now under challenge. With regard to pension systems, a consensus is emerging, in part as a result of World Bank leadership, on the weaknesses of existing pension systems. But intense debate continues regarding the design of funding and other reforms to correct those weaknesses.
The lack of templates also reflects the strong public goods component of social services. The latter fact implies a major role for the public sector, but the division of responsibilities among public (national and subnational) agencies, voluntary organizations, private for-profit actors, and households and individuals is highly flexible and immensely controversial. (For contrast, consider the considerable—though far from complete—consensus that has emerged since the early 1980s regarding the risks of direct government ownership and the potential advantages of mainly market mechanisms in industrial production.)
From one perspective, the wide array of potential models frees debate within each country. But the practical effect has been, and is likely to continue to be, extreme difficulty in reaching national political consensus regarding reforms. Even after a decision has been reached to move ahead on specific measures, lack of consensus on a broader vision or design for the sector is likely to leave the door open to stalling, backtracking, and inconsistent initiatives. In much greater degree than in other sectors undergoing major institutional reforms (for example, the financial sector), reforms in health and education are likely to unfold in a start-stop manner, as a series of successive approximations. That approach can have some advantages, opening the way for experimentation and learning by both agencies and individuals. But evolutionary, start-stop approaches also have high costs, including reduced credibility and therefore lowered incentives to adjust. Those drawbacks are still more acute if there are actual rollbacks or sharp changes in direction, rather than simply an incremental approach to reform.
The psychology and politics of entitlements are a major obstacle to the reform of pension systems around the world. Entitlements are benefits that are guaranteed by law or even by a country's constitution, and are viewed not as privileges but as rights. Moral claims rest on more than legal foundations. Often pensioners believe (usually erroneously) that they have paid in full or overpaid during their working lives for the pensions they receive after retiring. In the post-communist world, the same belief may take a slightly different form: pensions have been paid for, in effect, during a lifetime of working for low wages for the state. Changes viewed as reducing the value of pensions therefore prompt resistance fed not solely by economic concerns, but also by moral outrage.
In Eastern Europe and the former Soviet Union, many regard a broad array of social services and benefits as entitlements. Under communism, there was a widespread expectation that the state would guarantee economic security and a modicum of comfort in exchange for political acquiescence and (poorly paid) work. That social contract between state and citizens had come to be viewed with growing cynicism toward the end of the communist era; the state was seen to have reneged on its commitments. Nonetheless, most people continued to regard a generous array of public services and benefits as the norm or standard for a legitimate and desirable state. Indeed, for Eastern Europeans, the vision of ''joining Europe" probably includes not only an array of consumer goods, better housing, and other material gains, but also much-improved education and health services—assumed to be provided by the state. At the very moment when the insecurities and inequalities of market economies are becoming ever clearer, radical revision of these expectations—or, put differently, a radical renegotiation of the social contract—may be particularly difficult. Resistance is likely to be even more intense in Russia and some other post-Soviet states, where more of the population regards the disintegration of the social contract not as a result of the failures of communism, but as a direct outcome of market-oriented reforms.
Complex Organizational Changes
In modern states, delivery of health and education services entails large-scale, multilayered organization. Even where control is highly centralized, actual delivery of primary education and health care must be decentralized. In all but the smallest countries, higher-level facilities are also widely scattered. Provincial and local governments often play important roles in education and health provision. As noted earlier, this is increasingly the case in most post-communist states. Therefore, reforms involve the cooperation of executive branch agencies and often legislative bodies at all levels of government. However, ministries frequently are sharply divided, with different branches holding quite different perspectives. Operating ministries and agencies also are often at odds with budget authorities: even reforms intended to reduce costs eventually are likely to incur up-front costs. Not only the ministry of finance but often subnational financial authorities must concur, and come to detailed agreements regarding the allocation of financial, technical, and managerial responsibilities.
Health and education are big employers. In many countries, teachers and health workers are the largest categories of public employees. They are often highly organized. Moreover, both in the post-communist world and in other regions, public-sector teachers and health workers have been hard hit by the budgetary pressures of the last 15 or 20 years. Their real wages have dropped sharply; in some countries, many have slipped from middle-class status into
poverty. Driven by both perceived self-interest and professional commitment to established programs, doctors often oppose changes that emphasize public health over curative programs and clinics and other preventative and primary care facilities over hospitals. Teachers' unions have been formidable opponents to proposed reforms in education systems in a number of Latin American countries and in Poland, Hungary, and Russia. Effective reforms in organization, financing, administration, and program norms must usually be negotiated, at least to some degree, with the service providers themselves.
That conclusion is reinforced by the fact that the quality of outputs in health and education depends in unusually high degree on the motivation and initiative of the service providers themselves. In other public services where large numbers of workers deal directly with the public—for example, the post office or the customs service—much less initiative and judgment are required to provide reasonably good service. At the same time, it is difficult to monitor and measure the effort and performance of health and particularly education workers fairly, perhaps especially in the case of primary-school teachers scattered across thousands of small schools. Reforms attempting to decentralize responsibility and introduce performance-linked incentives face particularly difficult principal-agent problems of the kind described by Przeworski (in this volume). Reforms can be effectively halted by widespread informal resistance or indifference among service providers, even without open strikes or demonstrations. Solutions often entail either enhanced consumer choice among providers (for instance, through school vouchers) or direct monitoring by user groups—parents of school children, for example. Such approaches have considerable potential, but they swell the number of actors involved in effective reforms.
In part because of the multiple levels and categories of actors involved and in part for technical reasons, social-sector reforms typically take years to implement. In Chile, systemic reforms in education took a decade even under Pinochet's authoritarian rule—not because of (suppressed) resistance, but because of the reforms' technical and organizational complexity.
The organizational complexity of health and education systems affects the politics of systemic reforms in these sectors. If many actors must cooperate to put a reform into effect, any one of them can weaken or stop the reform; there are many potential veto actors. If implementation entails multiple steps over several years, there are many potential veto opportunities. Moreover, the long timetable means that the benefits of reforms often do not become apparent to users for some time. That makes it difficult to mobilize proreform coalitions to counter opposition from vested interests.
Politicians' Incentives: Low Apparent Costs of Delay
Most politicians prefer to defer controversial measures. Sometimes a politician is genuinely convinced that specific reforms are highly desirable
and is willing to run the political risks. More often, politicians make difficult decisions only when they are convinced that the risks of action are less than those of failing to act. In the context of post-communist transformation, certain sets of reforms are obviously urgent: inaction courts disaster. Examples include measures to cope with rapidly accelerating inflation and/or low and dwindling foreign exchange reserves, and aspects of financial-sector reform.
Systemic social-sector reforms, however, seldom have this urgent edge. At the beginning of the transformation, social safety net provisions—especially with respect to unemployment compensation and pensions—were indeed viewed as urgent and were rapidly enacted, but they did not entail basic changes in existing systems. In those countries with large and rapidly increasing elderly populations, the costs of failure to adjust existing pension systems can be fairly precisely predicted and timed, but in most cases, massive shortfalls remain some distance in the future. The costs of delay in reforming education and health delivery arrangements, including financing, are much more difficult to gauge precisely.
In these circumstances, politicians' incentives will favor delay. The costs and risks of action are likely to be seen as clearly outweighing the costs of inaction. Hesitation is reinforced by the facts reviewed above: the absence of a consensus template and disagreements among technical specialists regarding the design of reforms; the predictable opposition from citizens who believe reforms threaten their entitlements; and the formidable complexity, long timetables, and delayed benefits of major social service reforms. The pattern in many post-communist countries is likely to be similar to that in many industrialized democracies and some Latin American countries: growing recognition of the need for reform, but slow, partial, and inconsistent action.
Overcoming Obstacles to Social-Sector Reforms
In the mid-1990s, a number of countries have moved ahead with significant social-sector reforms despite the above gloomy prognosis. Social security reforms are well under way in Argentina, Bolivia, Peru, Uruguay, and (more tentatively) Mexico; Argentina is also undertaking major reforms in the health sector. In Eastern Europe, Latvia has adopted far-reaching pension reforms, as Fox discusses (in this volume). Hungary and Poland are likely to take major actions in 1997.
Paradoxically, the crisis atmosphere generated by macroeconomic pressures and stabilization policies may itself foster reforms in social (as well as other) sectors. In Chile in the 1980s and in Argentina, Bolivia, and Peru in the early 1990s, social service reforms were part of much broader reform agendas undertaken by political elites convinced that their nations faced
fundamental economic and political risks. A sense of crisis and far-reaching economic and societal change broader than the social sectors themselves can help overcome the obstacles discussed above through several channels.
First, protracted crises tend to weaken vested interests and lower aspirations. Labor unions in much of Latin America are much weaker in the mid-1990s than they were a decade or more earlier; structural economic changes have also undermined union power in much of Eastern Europe. Moreover, benefits from old arrangements may become so severely eroded that the commitment of vested interests to the status quo dwindles. For example, where pensions have become almost derisory, as in Russia, existing arrangements have few supporters. Weakened unions and eroded benefits are not inherently desirable. But such factors may indeed facilitate reforms that would have been impossible earlier.
Second, crises and major political and economic changes involve new stakeholders in specific issues. New stakeholders in turn make possible new coalitions and altered relationships. Most obviously, ministers of finance and economy have become much more attentive to social-sector issues. As more open economies expose local industries to international competition, progressive businessmen may become more concerned about the quality and content of secondary and technical education; this trend is already evident in some Latin American countries. In many countries, nongovernmental organizations are also taking a rapidly increasing role in direct provision of certain social services and in pressing for better governmental programs.
Third, both ongoing pressures and structural changes stretch receptivity to new ideas. In Latin America, many stakeholders viewed the fiscal pressures that became acute in the early 1980s as temporary; their first instinct was to wait until things "returned to normal." Only after roughly a decade during which it became increasingly clear that the "golden age" would not return has a serious search for alternative solutions begun. In Eastern Europe, despite recognition (and, for many, strong desire) that the reforms of the early 1990s would bring fundamental changes, many expected only temporary economic hardships, and very few anticipated major changes in the social sectors more specifically. It has taken several years to begin to recognize important longer-run resource constraints and trade-offs among resource uses, and to perceive the implications of changing economic structure for the design and delivery of social services.
In short, changed circumstances can improve the prospects for social-sector reforms, despite the obstacles catalogued earlier. As Graham emphasizes (in this volume), reformers' tactics also matter. I argue elsewhere that sustainable institutional reforms demand different political tactics than do
macroeconomic stabilization and liberalization, and that reforms undertaken in later stages of the adjustment process inherently have different political dynamics than do the initial measures (see Nelson, 1994:13-20). More specifically, precisely because of the political difficulties and vulnerabilities of social-sector reforms, the process through which policies are formulated is crucial to their success.
In Pinochet's Chile, radical reforms in education, health, and social security could be designed by technical specialists and mandated by the executive (though even in this setting, considerable education and persuasion accompanied the launching of the measures). In more open political systems, it is obviously far more difficult to push through measures that command little support. If such measures are adopted, perhaps in the context of financial crisis, they are vulnerable to reversal. For example, New Zealand adopted radical hospital privatization and other health care measures in the early 1990s as part of a broader program of market-oriented reforms responding to severe and long-standing economic troubles. The health measures were bitterly controversial. After the elections of October 1996, they were abandoned (while spending on health and education was increased) as part of the bargaining to create a new governing coalition. In contrast, monetary policy was merely eased, without moving sharply away from the design or intent of earlier reforms.
In short, sustainable social-sector reforms almost surely require much more investment in public education and broadened support than do reforms in many other sectors. That process can be immensely frustrating (as the United States discovered a few years ago with respect to health-care delivery reforms). Yet shortcuts may well leave measures vulnerable to early reversal or erosion, thereby lengthening the route to sustainable reform.
This point bears on the roles international agencies and advisors should and should not play in promoting social-sector reforms in the post-communist world (and elsewhere). These agencies can make extremely important contributions to the internal debates now beginning in Eastern Europe. They have a wealth of information and experience from many countries, which can critically to inform debate in sectors that have tended to be somewhat parochial. They are also well qualified to point out the implications of sectoral policies for broader economic stability and growth. However, they may well be tempted to go beyond advisory and educational roles, pressing and perhaps even insisting on rapid action. Similar pressure in other fields, such as macroeconomic management or financial-sector restructuring, has often proved a useful catalyst for sustainable reforms. The argument here is that the intrinsic features of social-sector reforms, including the fairly wide array of feasible designs, simultaneously reduces the justification for external pressure and heightens the risk that measures adopted under pressure will not be politically sustainable.
THE POLITICAL IMPLICATIONS OF TRANSFORMATION COSTS
Initial Political Concerns: The Threat of Backlash
As Eastern Europe and (somewhat later) the successor states of the former Soviet Union began to adopt market-oriented reforms, concerns about high social costs focused both on welfare (as already discussed) and on possible political implications. Reformers and their foreign supporters worried that the dislocations and sacrifices of economic transformation would fuel a backlash against market-oriented reforms, democratic governments, or both. That backlash could take a variety of forms: direct support for the return to power of communist politicians and parties; scapegoating and extreme ethnic or nationalist appeals (possibly leading to violent clashes within or between countries); widespread protest and instability; or spreading disillusion and alienation, indirectly opening the way for extremist groups or the military to seek the violent overthrow of governments and the reversal of economic reforms.
Seven years later, it is striking how few instances there have been of these scenarios. Politics has been fragmented, quarrelsome, and indecisive in many countries and polarized and stalemated in some. In several countries, very little economic reform and/or political opening has occurred. But neither democratic politics nor market-oriented economic reforms have been reversed once clearly started.
Nationalist and extremist ethnic politicians have appeared, but generally have not drawn enough support to dominate politics, nor is there any consistent pattern linking support for such groups to the severity of social costs. Ethnic conflict has indeed broken out in a number of ethnically heterogeneous countries (Tajikistan, Moldova, Georgia, the Russian Federation, and of course former Yugoslavia), but has not emerged in other states with diverse populations. Bunce (1996) argues that such conflict has been largely unconnected with overall economic performance, and is much better explained by whether leaders and citizens tend to define the political community in ethnic rather than residential terms and by specific actions of political leaders toward ethnic minorities (Bunce, 1996).12
Starting with the parliamentary elections in Lithuania in November 1992, formerly communist politicians and parties that were fairly clearly descended
from the old communist parties won pluralities in half a dozen parliamentary elections: Poland (September 1993), Russia (December 1993), Hungary (May 1994), Bulgaria (December 1994), and Estonia (March 1995). Many observers expected market-oriented reforms to be rolled back, or at least to slow abruptly. Yet despite their desire to ease the social costs of reform, the new social-democratic coalitions did not reverse the broad thrust of economic or political reforms. Indeed, in Poland, Hungary, and Lithuania, post-communist social-democratic parties clearly moved toward the center of the political spectrum.
Initial fears of backlash turned out to be off target because they were based on far too simple a model. (Such expectations have proved similarly unreliable in Latin America and elsewhere.) The model posits a direct and strong causal relationship running from social costs to widespread political protest and/or the emergence of powerful antidemocratic and antimarket movements. Without attempting a detailed discussion, we can briefly review a few of the flaws in that model.
Worsened living conditions do not automatically generate political protest, even in permissive political settings. People's reactions to rising prices, falling real incomes, and deteriorating services are shaped by their assessments of the causes of these trends and the prospects for improvement. Many in Eastern Europe and some in the former Soviet Union hold communism and its legacies responsible for much hardship. Moreover, if today's hardships are believed to be the price of reasonably likely improvements tomorrow—or next year—patience is rational. These beliefs are widespread in Central Europe, but weaken farther east. Within individual countries, age and education quite rationally influence whether one focuses on the costs or opportunities of transformation. For instance, Eastern European opinion surveys indicate that younger people in particular prefer unaffordable to unavailable goods.13
Even if hardships are attributed to the current government and the future looks bleak, political protest is only one of a wide array of possible responses—and by no means the most probable. Indeed, in the post-communist world (as in much of Latin America and Africa during hard times in the 1980s), most people cope primarily by using individual initiative and household, kinship, neighborhood, and community networks. Many households gain from inter-household transfers; other survey evidence documents the varied forms and sizable quantitative importance of informal earnings. Less constructive individual responses range from excessive drinking or beating one's spouse to seeking solace in religion.
While blind anger can prompt riots, sustained collective political action depends on participants' perceptions that that course is worth the costs and
risks—and is likely to be more effective than alternative uses of time and energy. Many of those hardest hit by the transformation—older, less educated, and often rural people—are likely to view protests and demonstrations as risky and ineffective. Solidaristic groups such as miners may well resort to protest to exert pressure for specific claims such as payment of back wages, but are not likely to extend their demands to broader goals.
Moreover, not many leaders or groups are eager to provoke antisystem efforts. In most of Eastern Europe and increasingly in Russia, elections are now viewed as the sole legitimate route to power. More specifically, communist parties or their reoriented successors seek to establish their credentials as players in the system rather than challengers outside of it. Therefore, they will appeal for electoral support by criticizing the social costs of transformation, but have not been quick to try to organize disorderly protests.
In short, the links between social hardship and political protest are mediated by a large number of subjective interpretations and expectations, by institutional and organizational contexts, and by explicit or (more often) implicit rational assessments of the benefits and costs of alternative courses of action. In the post-communist world as in much of the noncommunist world, severe economic hardships have prompted a great deal of complaint and considerable protest, but only rarely a sustained backlash strong enough to derail economic reforms or political openings already under way.
Longer-Run Impacts: What Kinds of Societies and Polities Are Emerging?
A focus on the risks of reversal is a very narrow lens through which to examine the political implications of the costs of transformation. While they probably will not provoke reversal, social costs (and benefits) already incurred or still unfolding will profoundly shape the character and quality of rapidly evolving and still fluid political systems. Preoccupation with reversal may lead to neglect of other, less dramatic yet ultimately crucial impacts.
A glance at current trends in much of Latin America suggests some of the issues at stake. Bolivia, Mexico, and several other countries adopted stabilization programs and market-oriented reforms in the mid-1980s, several years before the beginning of the transformation in Eastern Europe; Argentina and Peru launched particularly draconian reforms at roughly the same time as Central Europe. Since Latin American economies were largely market economies, despite extensive government intervention, structural adjustment has been far less profoundly disruptive there than in the post-communist world. Where initial measures contained hyperinflation (Bolivia, Argentina, Peru), they brought early popular support. In Argentina and Peru, they also generated striking macroeconomic success, including initially rapid growth and sharply expanded exports. But many of the benefits of new growth have been
channeled to the top. While the proportion of poor has dropped somewhat since 1990, the absolute numbers have grown (fed by rapid population growth, a problem not shared by most post-communist countries). Moreover, growth has not generated many formal-sector jobs. In Argentina, despite several years of rapid growth in the early 1990s, roughly one in six workers remains unemployed. Violence of all sorts, from crime to guerrilla insurrection, has increased sharply. Social services in most countries continue to deteriorate (see Schrieberg, 1997; for more careful empirical evidence, see Londoñio and Székely, 1997).
Similar but more intense trends are all too obvious in Eastern Europe and the former Soviet Union. As more post-communist states succeed in stabilizing their economies and introducing basic elements of market systems, concern grows about what kinds of societies are being created by the new institutions. Surveys indicate that many people value new political, religious, and personal liberties and prefer the wider array of consumer goods, even with high price tags, to the scarcity economy. But unemployment remains very high even in those countries that have begun to grow. Concerns about the pathologies of half-installed market mechanisms are widespread. Most citizens are frightened and cynical regarding organized crime unchecked by ineffective or corrupt police and courts, sometimes linked to high officials. Many are also deeply worried by the decline—in some countries, the virtual disintegration—of social services and transfers that used to provide considerable security and opportunity.
Already high and rapidly increasing inequality may be generating particularly undesirable effects, especially in societies that until recently had comparatively narrow spreads in income, opportunity, and security.
Low-end poverty—the possible emergence of a pool of long-term unemployed, the plight of many elderly living alone, the hardships faced by many large families—is clearly a humanitarian or welfare challenge. It is less clear to what extent and in what ways poverty also threatens to erode system legitimacy or distort representativeness. The hard fact is that in most societies with more or less open political systems, the very poor play little role in politics. That fact is not desirable, but if post-communist systems replicate the pattern, they will not be very different from most other open or semi-open political systems. However, the fact of considerable poverty may be an insidious solvent of social solidarity and national self-respect among citizens in general. This may be particularly true in countries that did not have (or denied that they had) extensive poverty before the transformation.
The impoverishment of large segments of the old middle strata of society may have more powerful effects on evolving political systems than the emergence (or growth) of severe poverty in post-communist societies. Civil servants, teachers and professors, medical and scientific workers, and other professionals in public service have been hard hit by falling revenues and budget
cuts. Many of the most articulate and active proponents of democratic values have been drawn from these groups in the past. Much the same can be said of some of the greatly weakened trade unions. Disillusionment and alienation in both groups weakens democratic prospects. In some post-communist countries, the declining state-dependent middle class may be counterbalanced by a rapidly growing class of small- and medium-scale entrepreneurs. It remains to be seen whether the new middle classes will believe that their best prospects are linked to liberal and democratic as well as stable governments.
At the top end of the socioeconomic scale, the fact that some people have grown extremely rich in the course of the transformation carries clear-cut risks for stable societies and open political systems. In most post-communist countries, the manner in which the very rich have acquired their wealth (as well as the fact that many among the wealthy were also well placed under communism) erodes confidence in the rule of law and the fundamental fairness and transparency of new political and economic arrangements. Still more important, in some cases (perhaps most clearly Russia), the growing links between economic wealth and political influence corrode the integrity of democratic processes. In an ironic echo of Marx, government is indeed increasingly the instrument of the rich. Institutional arrangements—such as laws governing the financing of parties and political campaigns or the concentration of the media—can help limit the political influence of wealth. Thus far, however, there are few such laws and even less enforcement. Opportunistic networks, relationships, and norms of behavior that emerged in the chaos of initial transformation may well jell. Democratic politics need transparency and credibility as much as markets. The political implications of highly concentrated wealth threaten both.
Regional inequalities, too, can distort and fragment national unity and political systems. Sometimes regional inequalities combine dangerously with ethnic or religious cleavages, as in Serbia, Slovakia, and perhaps Latvia and Estonia. Like increased vertical inequality, geographic or horizontal inequality is bound to increase with the introduction of mainly market systems. But the collapse of central taxing authority in some of the post-communist countries—again, most obviously Russia—removes the main means of mitigating regional inequality and its political consequences.
Sharp inequalities not only pose direct political risks, but also may slow economic growth. A growing (though not yet conclusive) body of cross-national evidence suggests that over time, more equal access to education and to credit is associated with more rapid economic progress, while markedly unequal income distributions are associated with slower growth, perhaps in part because they generate populist policies and/or political unrest.14 More-
over, higher inequality in one period reduces the effects of growth in reducing poverty in later periods; at the same rate of growth, poverty will fall more rapidly in societies with less unequal distributions of income and wealth (Ravallion and Chen, 1996:24-27).
Containing the explosive growth of inequality and mitigating its social and political effects will require a wide range of instruments and strategies. As already noted, restructuring taxes (including revised relations between national and subnational units) and building capacity to collect them is one crucial approach. In some countries, continued direct or indirect subsidies and controls have created opportunities for immense profits for the few (see Åslund, in this volume); dismantling these vestiges of old systems is a key step in capping the growth of inequality. Appropriate regulations to encourage and protect lively media competition and to limit the influence of wealth on elections are also vital.
On any list of strategies for containing and mitigating inequality, revitalized and reoriented social services and transfers must have a major place. They are among the most direct and visible approaches for increasing security against the risks and costs of ill health, disability, and old age, and for opening opportunities and improving life prospects through education. Moreover, in much of the world, but particularly in the post-communist countries, ensuring reasonably high-quality social services is viewed as a prime responsibility of a legitimate state—whether that responsibility is discharged directly through public programs or through combinations of public and private provision and finance. Under state socialism, universal entitlement to state-provided services was viewed as a major force for equity and social cohesion. Proposals for reforms to address new and old needs within resource constraints—for example, proposals for targeting to replace universal entitlements—are not simply pragmatic solutions to technical problems. Such proposals spotlight competing interpretations of equity, social justice, and community cohesion.
As social-sector reforms move higher on the reform agenda, their design will be powerfully shaped by financial considerations and by some of the specific needs generated by the broader shift to market economies (such as the need to find alternatives for the functions previously served by state economic enterprises). Those are indeed vital considerations. But they must not exclude attention to other goals—in particular, the need to counterbalance emerging severe inequalities in security and opportunity and to encourage social cohesion.
This essay argued earlier that social service reforms are burdened by special political obstacles. Therefore, politically sustainable reforms probably require more consultation, persuasion, and negotiation than do many other sectoral reforms. The goal of consolidating democratic institutions provides a further reason for focusing on the process of designing social-sector reforms, as well as on the designs themselves. Because social-sector institutions are so
central to the security and opportunity of most of the population, the way reforms are determined will be regarded as an important test of democratic institutions. A process that takes time to disseminate information, permit debate, consult stakeholders, and perhaps experiment with pilot efforts is more likely to build confidence in democracy than is a process controlled more fully by technocratic and financial perspectives—even though the latter approach is likely to produce more rapid and coherent action.
The very fact of growing concern about the character of emerging post-communist societies, together with the embryonic but growing realization that considerable redesign of social services is unavoidable, may create a climate for a broad public debate, rather than one dominated mainly by vested interests. In short, both the process of social-sector reforms and their specific design can make major contributions to shaping livable societies and legitimate political systems—or can fall short of that potential.
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