A Typology of Reform Outcomes

Although the triad of liberalization, deregulation, and privatization was universally applied, the outcomes in the 1990s varied greatly. Social sciences discuss this development under the topos “varieties of capitalism.” While the term “capitalism” carries a critical undertone, the reference to its varieties suggests that no other order was considered viable, just different shadings of the same. This, too, was an indirect outcome of the global neoliberal hegemony established in 1989–90. Radical alternatives were supported at most by the politically marginalized, hidebound former communists in the Czech Republic, Ukraine, and Russia. In some respects, the “varieties of capitalism” research paradigm parallels the “multiple modernities” concept developed by sociologist Shmuel Eisenstadt in the 1960s. Interestingly, Eisenstadt rejuvenated his thesis almost four decades later, eliciting a strong response from the academic world.36 In both periods of economic history, it was widely held that the contemporary economic and social changes could be controlled. In the sixties, the telos was modernity; in the nineties, capitalism. Looking at the postcommunist countries ten years after the first neoliberal reforms were introduced, it seems the changes were, in fact, rampant.

Research into the “varieties of capitalism” has increased so exponentially in recent years that it would be impossible to give a comprehensive overview of the existing literature. In general terms, it focuses on the relationship between the economy and the state, economic structures, and especially entrepreneurship. Occasionally the school of thought is criticized for underestimating the impact of political system change and noneconomic power relations on economic development. These criticisms will not be considered in depth here. In a historical perspective, it is remarkable that the “varieties of capitalism” paradigm conceives of the economic sphere in such autonomous terms. Yet it provides some good reference points for developing an economic-historical typology of transformation.

One useful example is a 2002 article by political scientist Lawrence King, contrasting Russia’s patrimonial capitalism with Poland’s liberal capitalism.37 King points out that market economy in Russia is organized along strictly hierarchical lines and rests predominantly on the exploitation and export of natural resources. At the time of writing, the oligarchs were at the height of their power. Although Vladimir Putin took steps against them a short time later, it did little to change the economy’s hierarchical structure. Entrepreneurship in Poland, King argues, is much more varied and profits most from the export of semifinished goods such as machine parts and consumer items, many of which are finished in Germany to earn the “made in Germany” label. King also observes that the Polish economy is more open and shaped by foreign investors. This binary typology can, to a large extent, be applied to contrast all the countries of East Central Europe (including the Baltic states) with the post-Soviet countries.

In 2005, King and his coauthor Iván Szelényi extended this model to consider the differences between capitalism “from without” (as in East Central Europe), “from above” (as in the former Soviet Union), and “from below” (giving China as an example).38 This second typology is based on considerations of management structure, the role of foreign capital, and power relations between the state and the economy. King and Szelényi, along with other social science scholars, investigated the strengths and weaknesses, and prospects for development, of each variant of capitalism. As denationalization is a central element and the ideologeme of neoliberalism, historians find the relationship between the state and the economy of primary interest. The economic reforms in all postcommunist countries aimed to reduce the state. Hence all sectors of the economy and eventually the social security system—core responsibilities of the state—were to be privatized.

The nature of the transformation of post-Soviet states depended, above all, on the relative weakness of the state and its bureaucracy. Russia, where privatization was privatized, is an extreme example. By 1995–96, the Russian oligarchs had become so powerful that they were able to plunder the state almost unchecked. Ailing President Yeltsin appeared to be a mere puppet of big business. The problem with oligarchic capitalism was that the “new Russians” generated very little growth or prosperity. Eventually the political system came to mirror the economic order; Russian democracy turned into an oligarchy. Developments in Southeastern Europe show certain similarities with those in Russia and Ukraine. But Romania and Bulgaria were encouraged to establish more constitutional structures to prepare for accession to the EU. The latter prospect, combined with the low cost of labor in those countries, attracted foreign investors.

Capitalism was more firmly rooted in East Central European society than in the former Soviet Union and southeastern Europe. This was due not only to the success of “small privatization” but also to the greater entrepreneurial activity of the newly emerged elites as well as the established middle class that had existed throughout state socialism. Here, then, a form of middle-class capitalism, or “capitalism from below,” became established. This is illustrated by the fact that at least four million companies were formed in the Visegrad countries and the Baltic states between 1988 and 1993. These, in turn, generated further economic momentum.39 In the nineties, this participation in capitalism was rarely discussed, despite its relevance to the popular contemporary maxim that democracies equaled markets.

The economies of East Central Europe were also propelled by foreign direct investments (FDI), as King and Szelényi have stressed. These could take the form of purely financial investments such as share-buying, or involvement as a dormant partner, or active influence on management. The more closely an investor is involved, the longer the FDI’s lifespan tends to be. While a government bond or company share can be immediately unloaded and serve purely speculative purposes, the takeover of a company, construction of a new plant, or other costly measure usually indicates long-term interests. Iván Berend has further differentiated between “market oriented investments,” which aim primarily to tap into new sales markets in the target countries, and “labor seeking investments,” which are concerned mostly with exploiting cheap labor to manufacture products for export to Western Europe. Generally the type of foreign investment depends on the size of the country. While it serves the domestic market in larger economies such as Poland’s, in smaller countries such as Slovakia the stress is usually on exports.

In the immediate aftermath of communism’s collapse, Western players hesitated to invest in former Eastern Bloc countries, doubting that they would be able to simultaneously build up their economies, political systems, and governments. But with time, their confidence grew. From the mid-nineties on, a constant stream of foreign capital flowed from the old EU countries. In total, FDI in the period 1989–2004 in the Visegrad countries amounted to 146.5 billion US dollars (see figs. 4.3a and 4.3b).40

In relation to population numbers, the Czech Republic gained the largest volume of investments. Here, over $4,000 was invested per capita in contrast to around $1,500 in Poland. Millions of dollars in foreign direct investments also went to Russia. However, these consisted mostly of oligarchs’ money that had previously been laundered in the West. From 2004 on, the new EU member states also received transfer payments from Brussels. As these were not technically FDIs, their analysis will be saved for a later chapter.

Fig. 4.3a.  Direct investments (inflow) in the transformation states, 1990–2010. Source: WIIW Report 2012 (Table I/2.8).

Fig. 4.3b.  Direct investments (stock) in the transformation states, 1990–2010. Source: WIIW Report 2012 (Table I/2.9).

The statehood of Poland, the Czech Republic, Slovakia, and Hungary was consolidated over the course of transformation.41 These countries, unlike Russia or Ukraine, had the advantage of not being the breakdown products of an empire. Moreover, their middle-class capitalism served to stabilize the political order. The new managers and small- and medium-sized entrepreneurs had an active interest in strengthening democracy. Oligarchs played a lesser role, although some emerged and have recently gained political influence, especially in the Czech Republic and Slovakia. These countries’ new governments and political systems stood the test of the transformation crises. While the ruble crisis brought Russia to the brink of collapse, the Czech government reacted swiftly and effectively to the bank crisis of 1996. Far from being a Czech peculiarity, the state’s function as a savior in times of acute financial and speculative crisis is a permanent component of the neoliberal order.

Finally, to close this chapter, the significance of two main categories of history must be underlined: space and time. As discussed in chapter 2, the Visegrad group gained an early advantage by forging contacts with the West and familiarizing themselves with market economy during the period of détente. Consequently, its leading reform politicians had expert knowledge at their fingertips, which even the most ardent opponents of Leszek Balcerowicz and Václav Klaus do not dispute. Proximity to the West was another major advantage in the nineties: in a political respect, for export trade, and, not least, in the competition to win international investors.

The temporal factor—timing—was crucial in this competition. The East Central European pioneers of transformation attracted a great deal more foreign direct investments (per capita) than did the countries of Southeastern Europe and the former Soviet Union. Moreover, the foreign capital injected into East Central Europe was invested predominantly in long-term industrial projects (see chapter 7). The duration of communist rule is another important temporal factor. In a large part of the Soviet Union (but not the Baltic states or the Western territories annexed in 1945, including western Ukraine), communists had ruled for over three generations. The former intellectual elite, along with the executive and merchant classes and independent farmers, had been virtually annihilated during the Russian civil war and under Stalinist terror. Post-Soviet societies, then, had fewer surviving links with earlier free enterprise. By contrast, for East Germans, Czechs, Poles, Hungarians, residents of the Baltic nations, and western Ukrainians—people from all the areas that were annexed by the Soviet Union in 1945—entrepreneurial traditions were still within living memory, and business initiative remained a cultural value in their societies. Poland and Hungary, especially, had introduced reforms in the 1980s that opened up many more opportunities to evolve economically. Romanian society, meanwhile, had suffered such oppression under the neo-Stalinist Ceauşescu regime that its subsequent recovery from collective trauma left little strength and few resources to build market economy. These differences in duration and types of state socialist rule and the timing of reforms had a crucial influence on Eastern Europe’s new economic and social orders.

Lastly, the time factor can be viewed in terms of the longue durée of economic and social structures. The forerunners among the postcommunist states had had well-developed economies before 1939. Saxony, Bohemia, and parts of Silesia were centers of industrialization in the nineteenth century.42 Slovenia was the wealthiest constituent republic of Yugoslavia by far, with a gross national product just slightly lower than those of the southern EU countries Portugal or Greece. The more westerly countries of the former Eastern Bloc had generally better infrastructure, from road networks to hospitals and schools. This proved a considerable advantage for transformation and generating new wealth. In social sciences and history, the term “path dependence” is used to explain the endurance of political, economic, and social structures. In the nineties, historical paths of development in Eastern Europe and the former Russian Empire, which had converged under Soviet hegemony, came to diverge again, perhaps more than ever before.

However, national predispositions and path dependence should not be overstated. Large parts of Poland, for example, had been about as prosperous and developed as Soviet Ukraine or Lithuania in the 1980s. Poland’s boom, in relation to its initial circumstances, was a positive surprise of the transformation period that demands closer investigation. This chapter has outlined mainly reform policies, viewing developments “from above.” The following two chapters, which compare regions and cities, will take a more “bottom up” perspective and consider everyday life and experiences in postcommunist societies.

It is difficult to gauge the long-term effects of abiding structures and mentalities on political system change. Among the more westerly Eastern Bloc states, only Czechoslovakia had any enduring history of democracy. All its neighboring countries had become authoritarian states or dictatorships in the interwar period. But their lack of democratic traditions was compensated for by the creativity of their dissidents and reform elites. Polish historians and intellectuals constructed a democratic past for their country up to the early modern Noble Republic (which was indeed built on the political participation of a sizable nobility) or recalled the republic of the interwar period. The experience of democracy gained through the Solidarność movement, however, had a more profound influence on the political changes in Poland after 1989. In conclusion, it emerges that the postcommunist world was determined by a number of temporal vectors. Some stretched back to the nineteenth century and the age of continental empires (or even to early modern times and the feudal order). But the most important criteria were formed during late state socialism.

These reflections on temporal dimensions bring us back to the starting point of this chapter—periodization—and, by extension, the continuities and disruptions within transformation history. In specialist literature and, above all, in the world of politics, 1989 is often regarded as a kind of zero hour, and the transformation that followed as a continuum. But even the immediate aftermath in the 1990s was rife with changes and transformation crises. These cannot be precisely dated, as they were of varying intensity and duration. They occurred in the middle of the decade, affecting predominantly countries that had already introduced drastic reforms, and were one of the causes of the “postcommunist turnaround.”

Poland was the only country of Eastern Europe to be spared a renewed economic slump in the nineties. Jeffrey Sachs has attributed this to the shock therapy and the policies of Leszek Balcerowicz.43 But it could also be explained by the decision to moderate reforms and the (largely continuous) economic policy of the postcommunist government that came to power in 1993.

Moreover, Poland managed to avoid some of the mistakes its neighboring countries made. As the example of the shipyards in Szczecin and Gdynia shows, Polish management operated quite successfully under the direction of the state. Deferring privatization proved an advantage, especially in comparison to the former GDR. Here, privatization was such an imperative that the Treuhand agency was forced to throw all state enterprises onto the market or liquidate them before its closure in 1994. Adherence to the principle of returning communist-seized property rather than providing compensation (“Rückgabe vor Entschädigung”) was symptomatic of Germany’s passion for privatization. It prompted thousands of court cases and deterred many entrepreneurs from investing in land, real estate, or industrial plants because their future seemed too unpredictable. The Kohl government was at pains to help those who had suffered damages through communism, the majority of whom belonged to the pre–Iron Curtain, East German ruling class. But it was not concerned to the same degree with promoting future elites in the five new Länder.

The government of the Czech Republic took out cheap bank loans to cover state subsidies for large enterprises. The problem was, it had little control over the quasi-privatized businesses or the losses they incurred. Still, the Czech Republic managed to maintain relative stability and its middle-class structure. Hungary, however, was thrown severely off balance. While the West granted Poland a respite and even remitted a large part of its foreign debt in view of its strategic importance, Hungary had to continue paying interest on its loans. When the burden became too great, it devised the “Bokros package”—a neoliberal series of austerity measures named after then–Minister of Finance Lajos Bokros, appointed by the postcommunists. These measures had the effect of dragging approximately 30 percent of the Hungarian population under the official poverty line. Transfer payments from the West prevented the former East Germany from suffering the same turbulence as Poland or Hungary but could not kick-start its economy.

Yet the social problems in East Central Europe were slight in comparison to those in the former Soviet Union. In Russia and Ukraine, the economic crisis precipitated by the collapse of the old system was followed almost seamlessly by a transformation crisis after the first attempts at reforms. Russia’s economy finally showed signs of minimal growth in 1997. But one year later, the ruble crisis caused a renewed crash. Many Russians lost their hard-earned savings as one bank after the next became insolvent. In 1991–94 Romania’s rate of inflation rose to three figures, and in 1997 it was struck by another period of high inflation with over 150 percent currency devaluation; Bulgaria, meanwhile, went through a period of hyperinflation, with over 1,000 percent currency devaluation.44 These developments in Southeastern Europe suggest that trying to avoid reforms was the worst alternative. But does this imply that radical reforms were the better—or only—way ahead? This question is hotly debated among economists and will be considered in the next chapter.

The transformation crises revealed how susceptible even the comparatively well-positioned postcommunist economies were to economic upheaval. Their fundamental weakness was acutely apparent again during the crisis of 2008–9.45 The favorable global economic situation helped these countries to make relatively rapid recoveries from the crises of the nineties. With the economy booming in the United States and running steadily in Western Europe, businesses were seeking new export markets. In addition, domestic consumer demand began to pick up. Western European corporations discovered the advantages of Eastern European countries as manufacturing bases—namely, cheap labor and low prices—and the FDIs started rolling in. As shown in the section “Rich Cities, Poor Regions,” only a fraction of these countries’ population profited from the early upswing. But it allowed advocates to claim that the austerity measures were beginning to work, and that the situation would be far worse without radical reforms. This had profound consequences for those countries that had not yet jumped on the neoliberal bandwagon. The communicative dimension of neoliberalism came into effect. The negative repercussions of the reforms on society and the need for pragmatic adjustments were, to a large extent, glossed over. Policymakers focused entirely on growth statistics and a few macroeconomic indicators. Despite the enormous difficulties with which these countries put neoliberal doctrine into practice, the advantages outweighed the disadvantages in the international public’s perception.

If you find an error please notify us in the comments. Thank you!