TEMBA A NOLUTSHUNGU: Lessons from a socialist country that transitioned to a free market

Policymakers have an uncanny ability to ignore empirical evidence that challenges their choices. This is especially the case where their policies are driven by socialist ideology.

They are seldom deterred from their chosen path, even where there is overwhelming empirical evidence showing them to have made poor choices. This is clearly a case of self-inflicted failure. 

Among the most notable, easily accessible empirical studies are:

• The Economic Freedom of the World (championed by the Fraser Institute and over 100 think-tanks worldwide);
• The Human Freedom Index (Cato Institute);
• The Index of Economic Freedom (Heritage Foundation);
• The International Property Rights Index (Property Rights Alliance); and
• The Freedom and Prosperity Equation (Atlantic Council).

Though they use a range of criteria on which to base their analyses, these studies concur that economic and political freedom correlate with socioeconomic development, progress and prosperity and is thus a necessary condition for achieving the best developmental outcomes. Even so, those policymakers who are control freaks will still ignore the evidence.

Let us not forget that in the 1980s and 90s the communist states of Eastern Europe were dismantled by their own citizens. After the fall of the Berlin Wall in 1989 many of the other communist regimes of the region imploded or were overthrown by their citizens. The fall of the wall was arguably the single most important geopolitical event of the 20th century. 

Socialism had produced moribund economies and impoverished the citizens of these countries (with the exception of the nomenklatura). But have contemporary policymakers learnt from the collapse of these interventionist and statist regimes? Demonstrably not. Many seem bent upon enacting similar policies, oblivious to the inevitable consequences. The words of Albert Einstein (1879-1955) come to mind: “Insanity is doing the same thing over and over again and expecting a different result.”

There are many countries that transitioned from socialist orders to market-orientated systems with astonishing socioeconomic results. Former communist Estonia is one of them.

“Looking back on Estonia’s transition from misery to prosperity I can say from personal experience that the prime minister’s task is not to be popular but to have a clear programme of what to do, and then have the courage to make the decisions.” So said Mart Laar, the 32-year-old who became prime minister of Estonia in 1992 and served until 1994, and again in 1999-2002. 

The Estonian example of transition from a dictatorial socialist country to a fully fledged free market system warrants high praise. The country should be lauded on the global stage as perhaps one of the best manifestations of speedy transition from a socialist order to the consonance of free markets and democracy. The transition has brought about high economic growth, which has bettered the fortunes of many people in a short period. 

In a paper, “The Estonian economic miracle”, Laar writes: “Estonia was destroyed during the period of communist rule. In 1939 Estonia’s living standards and way of life were more or less the same as neighbouring Finland’s ... [After 1939] people learned and worked hard on both sides of the Finnish Bay, but only the Finns seemed to prosper. After starting from the same point, Finland’s GDP reached $14,370 per capita by 1987, while optimistic calculations put Estonia’s GDP at only $2,000 per capita.” 

It is an amazing feat that against this background in recent years Estonia has emerged from socialist slumber to boast the fastest economic growth rate in all of Europe. In the early stages of the policy reforms its growth rate was already 6% per annum. By 2005 and the first half of 2006 growth exceeded 11% per annum.

In terms of the UN development index Estonia had transitioned from membership of a “group of not-so-developed countries to [membership of] the group of developed countries” with living standards on a progressively upward trajectory. To date its most important invention is the Skype electronic system, which was acknowledged as the third most influential new trademark in the world in 2006. Of the new EU member states, Estonia is acknowledged to have the most competitive economy. It is also described as the least corrupt of all the newly incorporated countries. 

This raises the question as to how all this and more was achieved within a short period. The answer points to the market-orientated economic reforms that were implemented in one fell swoop and with the utmost urgency. Some of the highlights of the programme were: 

• The entire country was declared a free-trade zone, which provided the context for all components of the overall economic reform programme. Export restrictions were abolished and trade tariffs were reduced.
• A low flat rate of personal income tax was introduced. This made tax compliance simpler and far less costly. The motivation for the adoption of the flat tax as opposed to the progressive tax system was that the “system should favour savings and investments and encourage people to create new wealth”.
• There was large-scale privatisation of state-owned enterprises and assets. Each enterprise was sold to a core owner and minority shares were awarded to individuals in exchange for privatisation vouchers, thereby maximising and broadening the economic participation of the population. This measure was expedited by the Estonian Privatisation Agency. This was understandably worrying for the Soviet-era labour unions, which still existed. However, in the words of Laar: “Trade unions understood that even though a lot of working places would be lost during privatisation, privatisation was the only way to escape from the current situation. If the enterprises were not privatised and reconstructed, all of the workers in the enterprises would lose their jobs.” 
• A stringent law was passed enjoining that only a balanced budget could be submitted to the Riigikogu, the Estonian parliament. Of necessity and as a precondition this measure required “radical cuts in all kinds of subsidies and a reduction in the size of government... Cutting subsidies sent the Soviet industrial dinosaurs a simple and clear message: start working or die out”. It is noteworthy that even when the IMF offered a loan to balance the budget, the government turned it down in favour of building “the future of Estonia on the momentum of radical reforms, not loans”.
• The rule of law was institutionalised as the bedrock of the reforms. Laar notes that “the rule of law is especially important in fighting corruption, one of the worst diseases of transition economies. Corruption thrives when public officials and private agents have much to gain and little to lose from taking a bribe, which is precisely the situation that exists in most transition countries. Uncertain or non-transparent rules, heavy regulation and pervasive controls give officials exceptional power, many opportunities to seek bribes, and a wide scope for appropriating public wealth”. 

Let it be known and remembered that the economic mess in which many countries find themselves (outside a war situation) is often a consequence of the implementation of ideologically orientated statist policies that are at variance with human nature. Such policies violate the liberties that people hold dear, especially the freedom to pursue their socioeconomic aspirations without coercive interventions by government.

As in Estonia, free market reforms would unleash the spirit of enterprise in SA — a rising tide that floats all ships. The government should set the people free to pursue their endeavours, provided that these do not entail force or fraud. In this scenario, the government should protect private property and voluntary exchanges, ensure the freedom to compete and enable personal choice accompanied by personal responsibility. 

• Nolutshungu is a director of the Free Market Foundation and vice-president of the SA Institute of Race Relations. He writes in his personal capacity.