1 Personal Involvement

There was a period of about nine months when I was so involved in the Soviet Union that I neglected my home base. When I visited Hungary again in the fall of 1988, I found that it had leap-frogged the Soviet Union. Political parties were forming and the Communist party was visibly disintegrating. The foundation enjoyed such favor among the authorities that the Ministry of Education offered to match my contributions in excess of $3,000,000 a year, presumably to establish their own legitimacy. I accepted.

The foundation found itself in an entirely new situation: its moral capital far exceeded my financial contribution. This opened up possibilities that previously could not have been contemplated. At the same time, the original objective of the foundation had been accomplished. It set out to demolish the monopoly of dogma by making an alternate source of financing available for cultural and social activities. Dogma had indeed crumbled. It was one thing to work for it, but quite another to see it happen before one's own eyes.

I was reminded of a stone I once had taken out of my salivary gland. The operation had been quite painful, and I wanted to keep the stone as a memento; but after it had been exposed to the open air for a few days, what had been a stone-hard object and a source of great discomfort crumbled into dust.

It was time for radical rethinking of the objectives of the foundation. We had been effective in working outside the established institutions; now it was time to help in reforming or transforming the institutions themselves. Whether we could be effective remained to be seen. But it was a risk worth taking; otherwise we would ourselves become an institution whose time had passed.

We already had some experience in institution building. We had assisted Karl Marx University in a program to reform its curriculum. Over a three year period, we sent some sixty lecturers, representing about 15 percent of the teaching staff, abroad to attend business courses which they would then teach after their return. I was also a founder of the International Management Center in Budapest.

We decided to tackle the humanities first because the teaching of humanities is still largely in the hands of party hacks who were chosen for ideological reasons. The task will be much more difficult than it had been in the case of Karl Marx University because there the initiative came from the university itself, while here we would have to overcome considerable internal resistance. We formed a task force; it remains to be seen how successful it will be.

I identified two other objectives: one was business education; the other, much closer to my heart, the promotion of what I call open society throughout the region. Specifically, I wanted to promote greater contacts and better understanding with the other countries of the region. Programs involving neighboring countries had been strictly taboo; now there was nothing in the way of greater cooperation with Soros-sponsored foundations in other countries. We established our first joint program, a series of seminars at the Dubrovnik Inter-University Center, which took place in April 1989. It will be expanded in 1990 with participants from several more countries.

After the gentle revolution in Prague, the Charta 77 Foundation of Stockholm, which I had supported since 1981, sprung into operation fully armed like Pallas Athenae. Frantisek Janouch flew to Prague and I joined him a week later on December 13. We set up committees in Prague, Brno and Bratislava, and I put one million dollars at their disposal. With the help of the newly-appointed Finance Minister, we put up $100,000 in the next official currency auction and got an exchange rate that was almost triple the black market rate, or eight times the official rate. The first grants were paid out within the week. I was very proud of this performance but, ironically, the foundation ran into criticism from the very people it benefited. It was a case of what I call the paradox of charity.

Together with Prince Kari Schwarzenberg we went to see Marian Calfa, who was then acting president. It was meant to be a courtesy visit but it turned into a moving occasion. Calfa opened his heart. He said that the last three weeks had really shaken his view of the world. He had not realized how far out of touch his party was with reality. He had had an intimate conversation with Jiri Dienstbier, the former political prisoner and newly-appointed Foreign Minister, and that is when he found out that dissidents' children had been regularly denied the right to be educated in Czechoslovakia. (Dienstbier's daughter had managed to get to Switzerland.) He was deeply ashamed and determined to establish democracy in Czechoslovakia. We all agreed that it was imperative to have Vaclav Havel elected president by the present rubber-stamp parliament; to organize a plebiscite would delay matters and create uncertainties. Hovel as president would consolidate the `gentle revolution.' `Unfortunately, the leaders of the party do not agree with me but, as acting president, I have certain prerogatives and I intend to use them,' he said. He sounded genuine and we were impressed. It was an unbelievable situation: the head of an apparatus of repression which only a few weeks ago hit students on the head voluntarily abdicating in favor of a dissident without an organization who would have trouble winning a plebiscite.

As I am writing this (January 11, 1990), I am about to go to Romania; Bulgaria will follow shortly. My intention is to sponsor a network of foundations whose main mission is to promote better understanding and greater cooperation in the region. They will be fully autonomous: it will be up to them to decide how they want to cooperate; but if they do not, I shall stop supporting them.

My involvement has followed the same revolutionary course as the events themselves. It now extends well beyond my foundations to the issues of economic policy and international affairs. Until quite recently I had kept a very low profile: I could be much more effective by not taking a public stand. The fact that I was under wraps in Hungary and did not give any interviews in the Western press was an important element in the success of the foundation; but all this has changed in the last few years. I became a public figure; indeed, .I began to act like a statesman. It was a somewhat anomalous situation because I had no state to represent but I soon got used to it. My father, who had lived through the Revolution of 1917, had told me that in revolutionary times anything is possible and I was guided by his advice.

The story began at a conference on East-West security concerns in Potsdam in June 1988. I presented a grandiose plan for a mutual security pact between NATO and the Warsaw Pact, coupled with large-scale economic assistance to the Soviet bloc. My proposal was greeted with laughter, as the Frankfurter Allgemeine Zeitung duly reported. The reader will note that I am still arguing for much the same program but it may now be too late.

The Soviet Ambassador in Washington, Anatoly Dubinin, said that my ideas were too visionary. `Tell us what we can do by ourselves,' he asked. That set me thinking and during the summer I developed the concept of a market-oriented open sector that would be implanted within the body of the centrally planned economy. Dubinin liked the idea and forwarded it to Moscow. I received an invitation from the Chairman of the Council on Foreign Economic Relations, Kamintsev, who passed me on to his deputy, Ivan Ivanov. We agreed to form an international task force to develop the concept. But the team that the Soviet side wanted to field was inadequate. When

Dubinin came to see me one morning for breakfast before leaving for Moscow, I told him that nothing would come of it unless it was taken up at a higher level. He agreed, and got Prime Minister Ryzhkov to issue an order commanding all the relevant agencies to cooperate.

Our team, consisting of Wassily Leontief, the Nobel Prizewinning economist; Ed Hewett from the Brookings Institute; Phil Hansen from Birmingham University; and Marton Tardos, the Hungarian economist, and me, went to Moscow in November 1988 and met with a fairly high-powered Soviet team including people who are now in high positions. Our meetings culminated in a four-hour session with Ryzhkov in the Kremlin. He seemed favorably impressed. 'It looks like a good way to go, once you have decided you want to get there,' he said. It was agreed that the idea should be developed further and six sub-groups set up to study separate aspects of the concept. But underlying this agreement there was a conflict between Ivanov's interest in geographically defined free trade zones and our interest in using the open sector to gradually convert the entire economy to market principles.

Ed Hewett took charge of organizing the task force from the Western side and the first series of meetings was arranged for late January 1989 in Moscow. We had some twenty people from Western countries and a slightly larger number from the Soviet Union. I insisted on a plenary meeting because I did not want the sub-groups to go off at tangents until the basic principles had been agreed; but Ivanov kept the plenary very short. It soon became obvious that some of the Soviet participants were genuinely interested and eager to further the cause while others were attending out of bureaucratic duty or were downright hostile to the idea.

One of the `good guys' privately suggested that we should ask for a meeting with the economic section of the Central Committee. This was arranged and a small group of us was received by Vladimir Mozhin. We presented our concept and I told him that we needed some direction from the Soviet authorities, otherwise the groups would just go over the same ground again and again. In response Mozhin went through an hour or so of what I call 'automatic speaking', until his assistant, who had obviously been briefed by our friend who had suggested the meeting, asked some pertinent questions and we had a good discussion; but we never got the guidance we asked for.

I told Ivanov that I would not take any part in further discussions personally but the Cultural Initiative Foundation would continue to sponsor them financially. The meetings continued for a few months, but as I had predicted, they were deteriorating into tourism. We were supposed to present our final report in May in a series of meetings involving first the academics, then the government, then the party, and finally the press. But it did not come to pass because Ivanov asked for a postponement on account of the pressure of other business. I was glad because, based on my experience with the task force, I no longer thought that the concept was viable. I recognized that the decision-making center was paralyzed and the body of the centrally-planned economy had decayed too much to be able to nurture the embryo of a market economy. Nevertheless, I did not consider either the time or the money wasted. I had learned a lot about the disintegration of the Soviet economy and the paralysis at the decision-making center; and some of the Soviet participants learned a lot about market principles. I came away with the conviction that the Soviet economy cannot be turned around any time soon. The best that can be hoped for is to slow down the process of disintegration so as to give a chance for a much slower process of learning to start producing positive results.

I felt much more hopeful about Poland, where the process of disintegration had reached a climax and the elections produced a clear-cut break with the past. That is the kind of discontinuity that permits a new departure. Poland was also a country for which the outside assistance necessary to give the economy an upward momentum could be mobilized. I considered it essential to demonstrate that the political transformation could result in economic improvement: Poland was the place where this could be accomplished.

I prepared the broad outlines of a comprehensive economic program. It had three ingredients: monetary stabilization, structural changes and debt reorganization. I argued that the three objectives could be accomplished better in combination than separately. That was particularly true for industrial reorganization and debt reorganization since they represented opposite sides of the national balance sheet. I proposed a kind of macroeconomic debt-for-equity swap.

I showed the plan to Geremek and Professor Trcziakowski. who headed the economic roundtable in the talks that preceded the transfer of power, and they were both enthusiastic. I started to drum up support in Western countries, but there I was less successful. The so-called Paris Club debt (i.e. money owed to government institutions), which accounted for three-quarters of the Polish total, was an untouchable subject. Concessions made to one country would have to be extended to all the others; therefore no concessions could be made. Moreover, there was general incredulity that Poland would be willing to switch to a market economy in one bold move.

I linked up with Professor Jeffrey Sachs of Harvard University who was advocating a similar program and sponsored his work in Poland. He created a tremendous stir with his ideas and became a very controversial figure, but he succeeded in focusing the debate on the right issues. I also worked closely with Professor Stanislaw Gomulka, who became advisor to the new Finance Minister, Leszek Balcerowicz, and was in the end more influential than Jeffrey Sachs.

I visited Warsaw the week after the new government took office. It was an interesting experience. I could see clearly the clash between two approaches. The President of the Central Bank, Bakka, who was appointed by President Jaruszelski and not responsible to the government, advocated a policy of continuity. It would have meant piecemeal reforms and it would have made the new government dependent on the present power structure because only they knew which levers to pull. Balcerowicz was committed to a radical approach, but he was overwhelmed by the enormity of his task. He brought in only two new people with him to the ministry; otherwise he had to depend on the existing staff: not the best conditions for establishing discontinuity. But Balcerowicz stuck to his guns and presented a radical program at the International Monetary Fund meeting in Washington. The IMF approved and the program went into effect on January 1, 1990. It is very tough on the population, but people are willing to take a lot of pain in order to see a real change. The biggest danger is that there will be some administrative slip-up which derails the program.

An example of such a problem has already occurred. I took an illustrious group of foreign economic advisors to Warsaw to discuss the Polish plan. The budget minister outlined the budget for 1990 based on an anticipated inflation rate of 20 percent. This was incompatible with the Balcerowicz plan which called for a virtual wage freeze after the initial adjustment period. But it was too late to rewrite the budget. Fortunately, the inflation rate came in much higher than expected in November so that, by introducing indexation at the rate of to percent of the cost of living, the plan could be fitted to the budget. But it would have been much cleaner to fit the budget to the plan and to have no cost-of-living escalation.

After the collapse of the East German regime, my focus shifted back to the Soviet Union. Events were speeding up tremendously and I was afraid that there was no time to wait for the Polish experiment to succeed. Only the promise of large-scale Western assistance to the Soviet Union could prevent the descent into the abyss. I summarized my views in an article that was published in the Wall Street Journal on 7 December 1989 and I tried desperately to reach President Bush before his meeting with Gorbachev in Malta; but I got only as far as Under-Secretary of State Lawrence Eagleburger. That is when I decided to write this `instant book.'

The book serves several purposes. One is to help me understand the historical process in which I am participating; another is to make that understanding available to the world and, as the third objective, to influence the course of events by doing so.

It is characteristic of revolutionary periods that events outpace the ability of participants to understand them. That is why leaders get left behind or, as the saying goes, `the revolution devours its own children.' The phenomenon is clearly observable in Eastern Europe, if not in the Soviet Union where Gorbachev has demonstrated an uncanny ability to ride the tiger.

I have tried to keep abreast of the revolution, adjusting both my interpretation and my objectives to the circumstances. Now I feel that the task ahead far exceeds my own capacity and the foundations I have set up will have to take second place to trying to influence Western policy. I must take the risk and expose both my foundations and myself in order to spell out my ideas and to offer a framework for action by the Western world. At the same time I feel that my own ideas need revision. I approached events with a well-developed theoretical framework which has guided me through all my actions. But as I get sucked in further into the historical process, I get more confused. I must pause, even if only for a moment, and ask myself what am I doing and why I am doing it. I have become caught up in events. Power is intoxicating and I have gained more power than I have ever thought possible, even if it is only the power to spend hard currency in situations where it is in extremely short supply. Undoubtedly that is one of the reasons why I got so deeply involved. But I need to have a better reason. I need to understand what is going on. I pride myself on my understanding; it is more important to me than being a participant.

The theoretical framework with which I started needs to be modified. Like all theoretical frameworks it is distorted and events have shown up the flaws. The best way to clarify matters is to present the framework and then to point out the modification that is necessary. The framework has served me well. I have already adjusted my actions to the changing circumstances in practice; now it is time to adjust the theory.

The framework is quite old. I formulated it first as a student at the London School of Economics in the late 1950s. I had recently left a Hungary which had come under Communist domination and I was preoccupied with the differences between the social system I wanted to get away from and the one I had chosen to live in. I was greatly influenced by the philosophy of Karl Popper and to a lesser extent by that of Friedrich Hayek. I had finished my courses in two years and I had a third year to wait before the degree was conferred on me. I used that opportunity to submit some essays to Popper, and I continued to develop my ideas while working first in London and then in New York. The product was 'The Burden of Consciousness,' a manuscript that I completed in 1963. I sent it to Popper who did not remember me but responded enthusiastically. I went to see him in London and when I introduced myself I got an unexpected response. `I am so disappointed,' he said. 'When I received your manuscript, I thought you are an American who understood what I was talking about when I described the dangers of totalitarian society. But you are a Hungarian; you experienced them at first hand.' He encouraged me to continue, and I did so. That is when I got so entangled in the relationship between thinking and reality that I could not understand what I had written the day before. Eventually I managed to break through the knot and formulated what I call the theory of reflexivity. By that time my interest had shifted from questions of social organization to the business of making money in the financial markets. I used the financial markets as a laboratory for testing my ideas and when I finally wrote a book, The Alchemy of Finance, it dealt primarily with financial phenomena. All that time, the framework of open and closed societies which I had formulated in The Burden of Consciousness stayed with me and served as the basis of the Open Society Fund and everything that followed from it. That is the framework that is now in need of modification in the light of experience.

As a start, I shall present the framework more or less in the form in which I constructed it in The Burden of Consciousness. I shall eschew a discussion of the underlying theory of reflexivity so as not to get bogged down in abstractions. Those who are interested in questions of philosophy should read the Appendix; those who find even the theoretical framework too theoretical may skip to Chapter 4.