The listing of these factors suggests that while the Polish "Big Bang" approach may be exemplary, it may also be, in many respects, exceptional. In the absence of some combination of political cohesion, commitment, and consensus with economic receptivity and responsiveness, the shock therapy is likely to produce political conflict and economic chaos, with well-positioned monopolies taking advantage of price liberalization simply to increase prices, thereby also stimulating inflation.

The fifth and last general lesson regarding post-communist reconstruction follows from this last point: One should not rule out transformation strategies that involve slower motion through the needed several stages, and that are also reliant on continued governmental guidance rather than purely on the unleashing of independent and dynamic market forces. Here the warnings of the very prominent Japanese development economist, the late Suburo Okita, come to mind. He argued cogently in several papers that governmental intervention is needed in countries in which the free market mechanisms lack tradition, experience, and appropriate social culture. He stressed that there are societies in which some combination of market mechanism and governmental planning is necessary for historical reasons, especially as the market mechanism is not always and of itself infallible.

The examples of both Japan and Korea are very pertinent to the case made by Okita. In the summer of 1993, the World Bank was completing an exhaustive analysis of what transpired in the Far East in the last three decades and what lessons may be derived from that experience. According to a preview in the Financial Times, one of the Bank's conclusions regarding the Korean experience was that "...from the early 1960s, the government carefully planned and orchestrated the country's development...[It] used the financial sector to steer credits to preferred sectors and promoted individual firms to achieve national objectives...[It] socialized risk, created large conglomerates, created state enterprises when necessary, and moulded a public-private partnership that rivalled Japan's." Much the same could be said about Singapore as an example of successful directed growth. At the very least, such Asian experience should not be disregarded when contemplating the current political, economic and social dilemmas facing both Russia and Ukraine, countries without strong free market traditions and developed entrepreneurial cultures.

The Western Response

Let us now turn to the second of the four major questions posed at the onset: the lessons to be learned concerning Western policy designed to aid and promote post-communist transformation.

First, Western aid is most critical during the first stage of transformation. In fact, significant Western aid is probably essential if that stage is to be traversed successfully. Later, after the first phase, Western aid ceases to be central, whereas access to Western markets and foreign investment become increasingly important. That access becomes the primary source of continued internal change and of export-driven economic dynamism. That is largely the case today in the relationship between post-communist Central Europe and the European Community, with the result that the issue of "access" has become much more controversial than the scale of "aid." In contrast, the former Soviet Union is still in the first phase of the transformation process, when direct Western aid for stabilization and initial political transformation is essential.

Second, and perhaps more controversially, after the critical first phase, the inflow of external capital is not decisive. If Western capital was the key to success, the former East Germany should be flourishing, Hungary should have taken off economically some time ago, followed by the Czech Republic, with Poland trailing behind. Moreover, Russia should be doing much better than China.

The former East Germany (GDR) has received monumental amounts of external capital over the last three years, at a rate of $100 billion per annum, for a population of mere 16 million people. (Just calculate what anything comparable to such a per capita inflow would be required for Central Europe as a whole, or for Russia specifically!) But the crucial point is that the former GDR is still in a massive socio-economic crisis. Similarly, Hungary and Czechoslovakia (prior to its division into two states in early 1993) have been the beneficiaries of much larger capital inflows than Poland. Yet today, Poland has a larger private sector and is the first former communist country to have attained a positive economic growth rate.

China has been the beneficiary of relatively small amounts in terms of grants, loans, credits, and until recently, investments. Over the first twelve years after the start of the reforms in 1979, the total involved for China--a huge country with an enormous population--was less than $60 billion. This is much less than the Soviet Union/Russia has received since 1986--some $86 billion. Yet China has done extremely well in terms of its economic development, growing over the last decade at a rate of 6 percent per annum, last year at 9 percent, this year probably at 13 percent. Russia, in contrast, is still in an economic mess, with a negative growth rate.

In brief, after the conclusion of the first critical phase during which external assistance is central, the nature of domestic policies, social discipline and motivation cumulatively become more important than the inflow of external capital in determining success or failure in the pursuit of economic transformation.

A third lesson with respect to the inflow of external capital is that explicit preconditions and strict supervision of its utilization are imperative. In fact, if a choice is to be made between quite limited but tightly monitored financial assistance and large inflows of external and largely untargeted capital, the former is clearly more beneficial and, therefore, should be favored. This is especially true in the first phase, until trade and foreign investment replace the initial dependence on direct aid. Trade and investment almost automatically tend to be subject to more effective control by the directly interested and personally concerned parties. In the absence of close external supervision, as experience sadly shows, massive diversion and extensive theft of foreign aid is to be expected

The West should have learned this from its experience with Poland under Gierek. In the 1970s, Poland borrowed about $30 billion, yet it is very difficult to account for what happened to these funds. Today, there are even more serious questions to be raised regarding the $86 billion that has flowed into the former Soviet Union since the second half of the 1980s. Some estimates made in the United States conclude that as much as $17 billion of it has been diverted away from intended purposes and recycled to Western banks. While recently in Moscow, I cited that estimate to Arkady Volskiy, the head of the Russian Union of Industrialists and Entrepreneurs. With a laugh he dismissed the estimate as absolutely wrong, insisting that the total diverted is at least $23 billion.

A recently concluded Japanese study, conducted on the eve of the July G-7 Summit in Tokyo by a private think tank, the Toray Corporate Business Research Inc., also addressed this issue. The study concluded that the Russian government has lost control over the capital flight phenomenon, with the consequence that large amounts of cash, gold, and diamonds have been stashed in Swiss and Hong Kong banks. "The scale of the capital flight has already exceeded 40 billion dollars," the study asserted. Though this estimate may be too high, it is nonetheless clear that the problem of illicit diversion is a very serious one.

Accordingly, precise targeting and close monitoring by donors should be explicitly asserted, even if it offends the national pride of the recipients. Specific conditionality is also essential regarding the fundamentals of reform. Stabilization in the monetary area, depoliticization of the banking system, de-monopolization, at least initial small-scale privatization, including in agriculture, and the decentralization of economic decision-making, are the minima that the West has the right to insist upon when granting aid, if the aid is to be helpful.

Fourth, the West ought to encourage the recipient countries to develop some longer-range mobilizing vision, one capable of sustaining domestic support for the needed painful reforms. Even with generous external aid, domestic sacrifices and a great deal of social pain are unavoidable. Therefore, the articulation of a more positive, hopeful, constructive perspective on the future is politically necessary. The public must perceive a sense of direction which justifies their transitional pain and sacrifice.

For the Central Europeans such a vision largely exists already. It involves the notion of united Europe, and of their eventual membership in it. That vision is very meaningful and tangible for an average Czech or a Hungarian or a Pole. It represents something to which they can relate personally. The issue becomes more difficult and elusive when one moves further east. What can provide such a constructive vision today for a Ukrainian who has experienced independence for two years and has found that it has brought mainly socio-economic deprivation? What is that vision for a Russian, who not only experiences similar socio-economic deprivation but also feels acutely humiliated by Russia's loss of the big power status? It is not easy in these circumstances to generate a positive vision of the future.

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