Soros Says Transition From Closed To Open Society Imperfect

By Jefim Fistein

Few western figures have been more involved in the transformations in Central and East Europe over the last 10 years than international financier George Soros. The Hungarian-born Soros -- a U.S. citizen -- has invested in the region. He has also been active in philanthropic work aimed at promoting democratic institutions and what he terms an 'open society.' During a recent visit to Prague, Soros spoke with RFE/RL's Jefim Fistein about 1989 and the years since.

Prague, 20 October 1999 (RFE/RL) -- Soros was asked to recall his thoughts in 1989 when communist regimes in Central and East Europe began to fall.

"Well, I saw it as a revolution, effectively, the collapse of an ancient regime, a form of organization that has outlived its ability to function; it was collapsing, and the birth of a new regime. I was convinced about the collapse of the old regime, and my concern was what kind of new regime will take its place, and my hope was that the dissolution of a closed society would lead to the creation of an open society. Now, this hope was only rather imperfectly accomplished."

Soros was reminded of his own stated claim that an 'open society' is still an imperfect society.

"That is right, so I can't complain too much. But I do believe that there was a historical opportunity which the West failed to capitalize on. Because there was at the time a willingness, a really strong desire to establish democratic institutions. But the capacity to do so was lacking. Not so much in the countries like Czechoslovakia, Poland, and Hungary, but more inside the Soviet Union, and there was an opportunity to help with the establishment of those institutions, and we, I mean the West, have failed to realize the urgency and missed the opportunity."

Soros says the West's biggest failure was in not adequately helping the region's transition to market economies. He says the region effectively had no functioning economies before 1989 because decisions were based on political rather than economic considerations.

"So everything had to change, all at once, that's what creates a revolution. When change is that rapid, then the existing arrangements break down. But there is no time for a new system to emerge. So that is why there would have been a crying need for guidance from abroad, from the West, because the change would have been from the Soviet system to, let us say, something closer to the Western arrangements. Without it, you had the collapse, without the birth of the new system, and eventually you had chaos. And out of the chaos emerged something that was a caricature of open society, it was even a caricature of capitalism, because it was a robber capitalism--because capitalism presupposes the existence of capital. But you had no capital in the Soviet system, and therefore the best way to create capital was to steal it, to expropriate it, from the state. And that was the basis for the robber capitalism that emerged."

Soros was asked whether the process of change had been too fast.

"It was by nature tremendously condensed. It is in the nature of a revolution that change becomes so rapid that it slips out of control. And that is in fact what happened. The countries in the Soviet empire slipped out of control of the Soviet empire, and arrangements then within the Soviet Union slipped out of [Soviet leader Mikhail] Gorbachev's control, and at the time, it was surprising that Gorbachev was willing to move forward, because it was obvious to me and to others that it would slip out of his control. And of course, that is what happened."

Soros says that there was a basic misunderstanding on the part of many over what the transition in the region was all about.

"I think there was a basic misunderstanding of what was at stake. Because the transition in my mind was from closed society to open society. In the minds of others, it was from socialism or communism to capitalism. So there was a belief that if you rush from state ownership of capital to private ownership of capital, everything else, more or less, will take care of itself, that the change would become irreversible. In fact, it was irreversible, but it did not lead to a well-formed market system, because markets require institutions as well as private ownership. Private ownership alone does not give you a properly functioning market system. And that was not understood."

Soros says this misunderstanding was at the heart of his public disagreements with now former Czech Prime Minister Vaclav Klaus.

"I remember at the time discussions that I had with Vaclav Klaus for instance on this subject. He thought that everything can be done simply by distributing the shares in these companies through an auction or through a voucher system, and then the owners will take care of their property and everything will be fine. Now, the trouble was that in order for some people to accumulate the vouchers, they had to buy them with borrowed money. And in order to repay the borrowing, they actually had to steal from the enterprises which they controlled, because they couldn't pay the interest just out of dividends. They had to effectively tunnel into the property and suck out the assets to pay back the money that they borrowed. So this tunneling was a disaster for the Czech economy."

Soros says similar mistakes were made in Russia, leading to what he terms a "robber capitalist system." In contrast, he says the transformation was better handled in Poland.

"I think that actually the transition was moving quite effectively in Poland, it was very rapid, and it had to be rapid. Somebody painted the picture of an infected swamp, that you have to pass through to get from one side to another. And the longer you linger in the swamp, the more you become infected. So a gradual approach, which many people advocated, was really not possible. I was very much in favor of a big bang, like they did in Poland. It was not a time for gradual steps. But in Poland, they did not transfer ownership of the state-owned enterprises. They introduced a market economy with free trade in goods, and prices being determined by the market. But they did not rush into a voucher privatization."

Soros talks about the shortcomings of western advice on economic reform offered Russia.

"One of the mistakes was bad advice, bad economic advice .... and [Anatoly] Chubais tried to follow the advice of the market fundamentalists who said, '[adopt] private ownership and everything else will take care of itself'. So I think there was a lack of understanding of the institutional needs that have to be satisfied first, and the role of the state as a regulator, which was not fulfilled before the private enterprise was launched. So there was a lack of regulatory framework. Now to create, to help or guide the transition, would have required a more intrusive intervention than what the West was willing to do. It would have really required providing financial resources the same way as the Marshall Plan had done, but also controlling the spending of the money, much more than it was done by the Marshall Plan. Because just by giving money, you more or less made sure that it was stolen. So there was not enough money given, and there was not enough control over the spending of the money."

Soros was asked whether he thinks the countries in the region made a mistake in embracing the idea of a capitalist economy.

"I think you now have a global capitalist system, and to stay out of it is a recipe for disaster. So there is no choice but to try to be more effective as a competitor within the global capitalist system. Now, the system itself needs to be improved so that it provides a better chance for countries which are lacking in capital to become more competitive. So it is the global capitalist system that needs some improvement. Countries like the Czech Republic or Hungary have no choice but to try to flourish within the system that prevails, because there is no other system in existence. That is what you have to live with, that is the reality."

Soros talks about his disagreements with governments in the region, some of which have moved against his foundations established to promote "open societies."

"Now, I've had other regimes that were very much opposed to the activities of the foundation, but these were basically regimes that seek to reestablish a closed society. So in Yugoslavia the foundation was shut down, it never actually stopped functioning, and under pressure it was eventually allowed to reestablish itself. In Croatia, we were persecuted because I have spoken of [Croatian President Franjo] Tudjman and [Yugoslav President Slobodan] Milosevic as enemies of open society, so we were in fact at loggerheads. In Slovakia the foundation was [criticized] by [now former prime minister Vladimir] Meciar, and I also [criticized] Meciar in turn, so we were in conflict. In Belarus, where [President Alyaksandr] Lukashenka has effectively established a presidential dictatorship, the foundation was trying to support pluralism, so eventually Lukashenka closed down the foundation. Those are sort of relatively clearly understandable conflicts between a regime that seeks to reestablish a closed society and a foundation devoted to the concept of open society."

Soros was asked whether he is optimistic or pessimistic about the futures of the countries in the region.

"I used to say, when I was asked whether I am optimistic or pessimistic, I used to say I am neither, I am just cataclysmic. That was in relation to Russia. But actually even Russia has escaped the cataclysm, and some of my worst fears, which would be a total economic breakdown, never materialized. I mean, at one time I was afraid, let us say, that the supply of gas would be interrupted and people might be freezing to death. Now that never happened. It did happen between Russia and Ukraine and Russia and Romania, and there were times when people were, in fact, very very cold. But you have avoided a total economic collapse. We have not avoided armed conflict, because you had the collapse and disintegration of Yugoslavia, and all the atrocities that it brought, you had also the problem of Chechnya, which is still there. So [while] the worst has been avoided, some of the worst things have actually happened."

Soros sees a brighter picture for at least some of Russia's neighbors in Central and East Europe.

"I think that countries that are now candidates for accession to the European Union will eventually become part of the European Union, so that they will become open societies. I think that there is now a chance to do the right thing in the Balkans, by Europe effectively introducing something like a Marshall Plan to help those countries become closer to Europe, and that would bring about a real and lasting transformation of that region. This is, I think, at the moment the supreme challenge for the European Union."

Soros says he sees a better future for Russia as well.