Human Capital

In this chapter, “human capital” denotes the individual and collective resources and abilities used to cope with the challenges presented by transformation.10 These resources and abilities did not develop overnight or in 1989 but during, or even prior to, the era of state socialism. Human capital cannot be measured in the same way as the capital stock of a given country. Individual and collective education, expert knowledge, and qualifications cannot be converted into economic performance indicators. But cheap labor certainly attracted foreign investors. In the postcommunist countries, labor costs were only 7 percent of the EU average at the 1990 exchange rate (with the major exception of the GDR after economic union with the FRG).11 News of a third factor, Eastern Europeans’ work ethos, quickly got around investor circles.

Consider this “participating observation” of the early transformation years: Five years after the Volkswagen group took over the Czech automobile company Škoda, a group of German undergraduates and doctoral students linked to the social democratic Friedrich Ebert Foundation visited the company plant in Mladá Boleslav. The German visitors, along with the present author as their guide, expected the staff committees they had arranged to meet to complain about their low pay and bad working conditions. Indeed, Škoda then paid its skilled workers less than a third of the German wage (the equivalent of about $750 a month) and demanded longer hours without any extra pay. But contrary to the visitors’ expectations, the apparently contented trade unionists did not want to bemoan their wages or exploitation but to present Škoda’s latest model, a midrange car developed in part by their own engineers. They lovingly stroked the sample car’s fender, proudly highlighting its merits and finally pointing out that their factory produced fewer rejects and maintained better discipline than the Volkswagen parent plant in Wolfsburg. (The Octavia model went on to become a bestseller as hoped.) With their presentation, the Škoda staff not only exemplified the popular myth of Czech inženirství (a nation of technicians and tinkerers) but also vindicated the new owners’ clever concession of allowing the Czech plant to retain staff committees and strong trade unions.

Relations between Western investors and local employees were rarely as harmonious as they were at Škoda. But apparently here, at least, the workers and their representatives had adapted to the new system with ease. Under state socialism, factories such as Škoda had been notorious for producing goods of uneven quality and a high rate of rejects. Logistical problems arising from the planned economy were partly to blame. Manufacturers were often forced to improvise because certain parts were unavailable or deficient.12 Work practices in state socialist enterprises were, moreover, rather loosely organized. It was normal procedure to take impromptu breaks (on top of the forced breaks while waiting for supplies or for material problems to be solved) and run a few errands during the working day. Yet within just five years, all trace of these habits had been erased.

Another example of human capital is the millions of self-employed who set up their own businesses. In Hungary and Poland, as mentioned above, this was possible years before the fall of the Iron Curtain. In Poland, communist party leader Edward Gierek gave the go-ahead in 1979 for the special Polonia enterprises, designed to attract investment from expat Poles or other Western shareholders and export to the West. Partners in these joint ventures enjoyed privileges such as permission to hold foreign currency accounts, and were subject to laxer import and export regulations. Looking back, these new entrepreneurs often stress the restrictions under which they worked, but their businesses were cradles of capitalism.13 In 1988, the Polonia enterprises employed over eighty thousand people. They organized Poland’s komputerizacja, the import of more than one hundred thousand computers from the West, which were used to modernize the Polish economy from below.14 The main difficulty was importing the devices, as memory chips were on the CoCom list of armament-relevant goods and their export to the Eastern Bloc was prohibited. To get around this problem, the computers were taken apart before being transported (for the most part, legally) across the borders, then reassembled in Poland. Polish traders also sold many products to consumers farther east. In 1986 the Soviet authorities registered eight hundred thousand visitors from Poland, most of whom were no doubt “commercial tourists.” In 1989 the number of incoming travelers rose by 100 percent; the number of transit visas, which played an important role in long-distance trading, increased by 200 percent.15

As the Soviet Union collapsed, entrepreneurs such as Mikhail Khodorkovsky and Ukraine’s future Prime Minister Yulia Timoshenko made fortunes dealing in computers and entertainment electronics. Trade in scarce products such as jeans, nylon pantyhose, Western cigarettes—the brands Marlboro and Kent were virtually currencies in their own right, ideal for mollifying customs officers and other state functionaries—whiskey, and cognac was equally lucrative. Oligarchs built their careers on a combination of business sense (knowing which products would reap the highest profits), contacts (how to get goods through customs and around police controls), insider knowledge (when to acquire companies earmarked for privatization with one’s accumulated capital), and ruthlessness (when to bribe whom, or to offer other favors instead of cash bribes). The oligarchs’ mostly semilegally or illegally acquired wealth was, then, also based on human capital. Neither this concept nor the abilities individuals acquired under state socialism should be viewed through rose-tinted spectacles. Even so, human capital is an important factor for explaining the fortunes of individuals, peer groups, and entire countries.

Poland, beginning in the postwar period, provides a good example. It was modernized in a far more piecemeal manner than were its socialist neighbors. Collectivization was aborted in 1956 in the face of resistance from the farming population; its agriculture remained compartmentalized and underproductive. Industrialization progressed more slowly than in the GDR, ČSSR, and Soviet Union. In contrast to its neighbors, Poland remained without a nuclear power plant, perhaps fortunately in view of the Chernobyl disaster. Neither did it build any substantial stretch of highway (the Autobahn in Silesia dated from the Nazi era), nor a single mile of subway track. The lack of economic modernization was one of the reasons why Poland remained distinctly poorer than the GDR and even comparably agrarian Slovakia, until 1989. But the resistance offered by farmers, workers, and intellectuals had also kept more market niches and entrepreneurial practices alive. As a consequence, Polish society was better prepared for the second, postindustrial wave of modernization. Within the Eastern Bloc, Poles were famous (or notorious, as will be seen in chapter 6) for their keen business acumen. Polish entrepreneurs displayed a sixth sense for gaps in the market.

An interesting illustration is provided by the Warsaw-based Eris cosmetic company. Just as Western shampoo or shower gel was de rigueur in prestigious communist households, today no sophisticated Polish bathroom is without a tub of Eris face cream. The company was founded at an inauspicious time, shortly after martial law was declared in 1981. Poland was deep in economic crisis. Even basic foodstuffs like sugar and flour were rationed; meat was rarely available.16 But company founder Irena Eris sensed a demand for a little luxury amid all the hardship and misery. In 1983 she began producing semirich face and hand cream in an abandoned bakery near Warsaw. Gradually the business expanded. In 1989–90 the company set up its own distribution arm (the key to its continued success) and in 1995 extended its range to include exclusive, high-end cosmetics. Today the company employs some five hundred people and commands great respect.17

Scholars disagree over the extent to which the small-business owners of the eighties profited from the changed circumstances of the nineties. Many entrepreneurs were not able to withstand the competition they suddenly faced from the West (a problem that was especially severe in the former GDR, where the economy had been far more strictly controlled prior to 1989). And yet, the Forbes list of the hundred wealthiest Poles includes a number of former Polonia business-owners. With their greater freedoms and business experience, millions of Poles (including all the “commercial tourists,” shopkeepers, tradesmen, and official Polonia entrepreneurs) were better prepared to deal with transformation than the average East German or Russian.

Due to the semilegal or illegal nature of many businesses, the contribution of private enterprise to the economic output of socialist Poland (or Hungary or any other Eastern Bloc country) is difficult to gauge. The Polish capital Warsaw, especially, spawned a class of self-employed in the late eighties, who emerged through the loopholes of the planned economy. These so-called prywaciarze (persons of independent means) made their money in the service sector, underground economy, and black market (see fig. 5.1).18 Known in Polish and Russian by an almost identical, pejorative Anglicism, biznesmeni, they acquired their business skills some time before 1989.19

The same is true of the many executives of state industries who profited from manager buyouts during privatization. According to some estimates, at least half the new economic elite in Poland had held top positions in state industry prior to 1989.20 In East Germany and the Czech Republic, many department heads (the buzzword “manager” and the hype surrounding them were characteristic features of the nineties) were able to retain their positions despite the radical break with the previous regime.21 If they did not already have the necessary business skills, they rapidly acquired them after 1989. In the nineties, however, this continuity in the economy was hushed up. Governments and finance focused firmly on the new departures and, of course, the magic word: “reform.”

Being ranked in the “emerging markets index” and referred to as “reform countries” by Western commentators considerably improved the postcommunist countries’ external image. At home, too, neoliberal reform discourses boosted the confidence of many young people who profited from the new opportunities, found well-paid jobs with Western companies, worked their way up the domestic economy, or ventured into self-employment.

The spirit of capitalism was particularly vigorous in the Czech Republic, the postcommunist country with the highest proportion of self-employed people among the workforce in the early nineties. Two individual cases can help to illustrate the opportunities that arose through the new, neoliberal order. One friend of mine broke off his studies at the Prague conservatory due to the meager prospects of earning money by playing jazz, and to devote more time to selling musical instruments, his main source of income. In 1995 he established his own business, “Atelier Paganini,” the Czech Republic’s largest specialist dealer in old violins, cellos, and double basses. His primary customers now come from South Korea and China; the business started importing Far Eastern replicas of old instruments some years ago. Happy to show his newfound wealth, he drives to work in a top-range Audi. The second example is the son of my aforementioned great-uncle. With his family’s financial and intellectual assets—his father had also been an engineer and an entrepreneur until the communist February Putsch of 1948—he set himself up in business. His company specialized in ventilation engineering and profited from the recent construction boom in Prague and its suburbs. But to outward appearances, this scion of an entrepreneurial family has remained as unassuming as ever. His interests do not lie in fast cars or expensive clothing. Though differing in their individuality, then, small entrepreneurs such as these became the backbone of the relatively successful East Central European economies.

Fig. 5.1.  Polish prywaciarze at a market at Berlin’s Reichpietschufer, February 22, 1989. Photo: DPA/Landov.

In Southeastern Europe and the former Soviet Union, the element of nascent capitalism was much weaker. Only half as many, or even fewer, of these small-to-medium-sized business were established in Romania, Bulgaria, Russia, and Ukraine. Moreover, as long as these countries were unstable and had no prospect of joining the European Union, foreign investors had little confidence in them or their economies. They were left to their own devices, with meager social and cultural resources on which to draw. Once again, Poland provides a counterexample: despite its shaky economic foundations, it experienced a boom verging on an economic miracle, thanks to native entrepreneurship and massive external support. While the border between Germany and Poland still marked a prosperity divide in the nineties, two decades later the difference is barely perceptible. This was due not only to the Schengen Agreement enabling passport-free movement between many EU countries and the economic reforms introduced from above, but also to Polish society’s human capital and the process of transformation from below.

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