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Second-Wave Neoliberalism

Neoliberalism at Full Speed

One decade after the breakdown of state socialism, the triad of privatization, liberalization, and deregulation had been implemented throughout Eastern Europe and in the post-Soviet states and was starting to affect Western Europe. Since neoliberalism was adopted and changed for the specific purposes of each country, the term “diffusion” is too simplistic. It is more useful to view this period in terms of “cultural transfers,” and focus on the receiving more than the sending cultures. As in the years around 1989, the second surge of neoliberalism was propelled by the interaction of global and local players.

Among the former were institutions created in the early postwar years, such as the International Monetary Fund and the World Bank, which were still connected, at least indirectly, with national governments. Since the 1970s, economic policies had been influenced increasingly by a second group of global actors: private think tanks, consulting agencies, and media conglomerates. In the 1990s they invented a plethora of indices, the names of which speak volumes about the political and economic priorities of the time. In 1994, the British magazine the Economist came up with the “emerging markets index.” The very title of this weekly column is remarkable, because it equates countries and their populaces with markets. The countries listed in it were not yet regarded as fully fledged market economies, but as “emerging” from obscurity into the light of Western modernity—the hidden telos of history. (The Western industrialized countries were listed and rated in a separate index.) In 1995 the conservative Heritage Foundation and the Wall Street Journal created the “Open Market Index.” This was soon followed by the “Global Competitiveness Index,” the “International Property Rights Index,” and the “Ease of Doing Business Index.” Karl Marx, whose legacy was virtually deleted in the 1990s—I remember how some of my fellow graduate students in Washington, D.C. protested against using Robert Tucker’s The Marx-Engels Reader in 1992 because they regarded Marxism as failed—might have summed up all these statistics in one “Exploitation of the Working Class Index.”

The thrust of these indices went beyond the Washington Consensus. This is especially visible in the field of privatization. In 1989 and the early nineties, privatization was still limited to state-owned enterprises; in the West it affected mainly the railways, postal service, and telephone companies. In the late nineties, discourse on privatization broadened to include key competences of the welfare state, such as pensions, health care, and education. Another recurrent focus of the indices and their guiding institutions was taxation and the introduction of flat tax systems. The general assumption was that lower taxes would generate growth and that the money spent by the rich would “trickle down” to the poor.

This chapter puts forward a different, sociohistorical explanation of how the postcommunist countries recovered from the deep recessions of the early nineties. It analyzes human capital and compares the resources of various postcommunist societies for coping with the daily challenges of transformation. One of the major results of the second wave of neoliberalism was growing social and regional divergence. But at least in East Central Europe, social inequality remained lower than in the United States—in contrast to the former Soviet Union. This was due to another international player, the European Union, which increasingly shaped transformation. Brussels’ agenda was not strictly neoliberal, but focused on the reform of the state and the institutions that would guide transformation. Its transfer payments since EU enlargement were not entirely in line with neoliberalism and even alleviated some of its side effects. This thesis is supported by another guiding theme of this book: the deviations from and disruptions to neoliberalism, as well as its rise.

The aforementioned indices created the competitive atmosphere of a major international sports tournament. There were winners and losers, but everybody wanted to stand on the rostrum. Immediately after the fall of the Wall, Hungary and Czechoslovakia (and, after the latter’s division, the Czech Republic) were applauded by various neoliberal indices, Western financial newspapers, and international investment agencies. In spite of its pioneering role in 1989, Poland was initially regarded with skepticism, mainly because of the power of the labor unions, its high proportion of agricultural workers (though the statistics were bloated due to the government’s creation of a number of incentives for citizens to register officially as farmers), and the election victory of the postcommunists. But by the time Finance Minister Balcerowicz entered his second term in office, following the 1997 election victory of the post-Solidarność party AWS, Poland had also become a favorite of Western analysts. Slovakia under populist leader Vladimír Mečiar was the Cinderella of East Central Europe, but shed its dusty image and joined the other Visegrad countries once Mečiar was voted out of office. In the mid-nineties, the Baltic countries and especially Estonia started to climb the international rankings. The more open (that is, deregulated and liberalized) a country’s market, the smaller its government and more advanced the privatization process, the further ahead the nation and its economy were considered to be. The mere act of listing these countries had a dynamic effect. Many Wall Street stockbrokers and hedge fund managers might otherwise not have known that Slovakia and Slovenia were two different countries, or where in the world Latvia and Lithuania were. It was not self-evident for financiers to turn their attentions to these countries. Global corporations such as Microsoft achieved a higher turnover in 2004 than their annual gross domestic products combined.1 New York and London are more populous than all the Baltic republics put together. Their nomination on the emerging markets index signaled to international investors that they were potential targets. At the same time, an increasing number of specialized funds made it possible to invest in macroregions such as Eastern Europe as well as in individual countries.

Local stock markets were also evolving. In Warsaw, trading began at the reopened stock exchange (an outcome of the Round Table talks) in April 1991 with five joint-stock companies and a daily turnover of the equivalent of $2,000. Twenty years later, the Warsaw stock exchange listed 426 companies, ran fifteen classified indices, and achieved an annual turnover of almost €85 million.2 This exponential increase in the volume of sales affirmed the positive prognoses for Poland’s economy. With its market of 38.6 million consumers—every citizen is a consumer under neoliberalism—Poland promised good business to investors.

Like shares in major companies, Eastern Europe had to be presented in a suitable light to make it attractive to investors. The reform countries did their best to convince the world of their neoliberal credentials. Leszek Balcerowicz’s “shock therapy” and Václav Klaus’ “market economy without attributes” were not only the products of personal convictions but also crafted to appeal to the international arena. Deviations from the standards set by the IMF and the World Bank—the Czechs’ strict protection of tenants springs to mind—were glossed over.

About a decade after the end of state socialism, the countries of East Central Europe and the Baltic states were able to chalk up a number of key reform successes. Most of their large enterprises had been privatized, and their currencies were fully convertible. Capital moved freely; customs and trade barriers had been largely removed. In the late nineties, Western investors rewarded this “progress”—another recurrent term in contemporary media coverage and business journalism—by pouring more foreign capital into Eastern Europe each year. The region continued to entice investors with low labor costs and a “favorable economic climate.” Indeed, in view of the dearth of domestic capital stock and still-large gap in productivity, it depended on an influx of foreign capital for its economic development.

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