Common Fallacies in the Debate on the Transition to a Market Economy

Abstract

Fallacies and other lessons Leszek Balcerowicz Words and the concepts they express exert a powerful influence on political debate and policy decisions in transition economies. In this introductory essay, the principal architect of the first radical reform programme in Europe after the fall of the Berlin Wall develops a lexicon of common fallacies in the political debate, and introduces many of the main themes of the volume. One common fallacy is that of country-specificity: ‘Ukraine is different; what worked or did not work elsewhere is not relevant here.’ Some countries may indeed have specific economic problems (viz the huge military-industrial sector in Ukraine), but economic theory is clear about which policies are best for basic problems: macroeconomic stabilization as the appropriate response to hyperinflation; price liberalization and liberalization of supply are the prescribed therapy for massive shortages, etc. So there are useful lessons to be learned from prior experience. By the same token, erroneous interpretation of those experiences can give credence to mistaken policy arguments. For example, the argument that whatever has been done before in the West must be right is, itself, clearly wrong. Similarly, Balcerowicz argues that China's success does not prove the universal merits of gradualism; the agricultural reforms of the late 1970s in China were in practice surprisingly radical. The essay identifies many other pitfalls in reasoning about transition experience, several having to do with the failure to apply ceteris paribus reasoning. For example, the fall in output in 1991 in all the countries connected with the former Soviet Union (including Finland) was caused in large part by the collapse of their trade with the Union, and certainly not exclusively by the policies they followed. There are numerous other examples.