3 Transition Strategies

--Beyond Shock Therapy and Gradualism--

3-1 The Background to Transition from Socialism to the Market

3-1-1 Forces for Change at the End of the 1980s

(1) Renaissance of the Neo-classical School in the Major Developed Countries

In the developed economies in the 1980s, the improvement of market function was a keenly pursued policy target. The collapse of socialist economies in the post-cold war era meant that most of the world's economies were suddenly becoming market-oriented. Even before that, however, the promotion and better functioning of the market mechanism had been a keen issue in capitalist economies. One of the major principles in economic management in the 1980s was neo-classical or anti-Keynesian theory. It emphasized deregulation, specifically, the drastic reduction of government intervention in business activities. Based upon this principle, Reaganomics, Thatcherism, and Nakasone economic policies developed. In Japan this main stream was elaborated into a comprehensive policy program under the name of the Maekawa Report, which mainly emphasized the promotion of the market function, both domestically and internationally. It stressed that efficient allocation of resources raises the level of real income as competition reduces prices.

(2) The Collapse of Socialism as an International Economic System

The socialist economic system, which was in truth heavily dependent upon the capitalist system even in the early stages of its establishment, finally collapsed in the late 1980s.

In principle, the socialist economic system works on the assumption that all participating economies are operating under purely socialist principles. In other words, a socialist bloc is supposed to be an internationally closed system, in which the division of labor, production and distribution of commodities, and movement of capital are controlled by a central authority, such as Moscow. Thus, in theory, the former COMECON was an autocratic economic system, the members of which were completely independent from any external economic system. But, in fact, the socialist principle had not been realized even in the early stages of the system's establishment. COMECON countries were deeply dependent upon capitalist countries for capital inflow. From the beginning, large sums of capital were needed in order to finance budget deficits, which had arisen mainly in the form of subsidies to inefficient state-owned enterprises. This is the ironic result of socialism. Failures in economic management necessarily strengthen a deep dependence on the opposing economic system-capitalist countries-or on international bodies like the IMF and the World Bank. Such dependence was a suicidal path for the socialist system, because economic reliance on capitalism was inevitably the precursor of capitalist ideas and thinking. However, it was otherwise impossible for them to finance the huge deficits within COMECON. In the late 1980s, the collapse of the former USSR became the final signal to the COMECON member countries that they must fully embrace capitalism.

(3) The Enviable Development of Surrounding Capitalist Countries

The economic development in the second half of 1980s of the Asian capitalist countries surrounding the socialist countries was driven mainly by direct foreign investment. The ASEAN countries' rapid economic growth, and the dynamic formation and development of an economic network through trade and direct investment, put great pressure on Vietnam