New Wealth

The result of this upswing was new wealth, generated under the steam of pent-up demand. Once postcommunist societies had overcome the poverty of the early transformation era, they eagerly indulged in any newly available products, from foodstuffs (every Pole over age forty remembers food stamps and the desperate hunt for meat in the eighties) to household appliances. Possession of a fully automatic washing machine, a telephone, and—the ultimate status symbol—a private automobile was a novelty for many. International investors calculated how many of these consumer items they would be able to sell in the former Eastern Bloc countries and invested accordingly. Export to Western Europe was also factored into investments in manufacturing, particularly in East Central Europe.

When European Union expansion was announced, the volume of investments shot up. In 2005, FDIs in the new member countries totaled seventy-seven billion dollars; by 2006 they had risen to 112 billion. Over these two years, almost twenty-nine billion dollars was invested in Poland—more than half the amount invested over the previous fifteen years.22 In 2006 and 2007 Poland achieved an increase in gross domestic product of over 6 percent each year; unemployment dropped considerably. Overall, Poland’s GDP and per capita purchasing power parity tripled in the twenty years from 1989 to 2009.23 It would be no exaggeration, then, to speak of a Polish economic miracle, comparable to Germany’s in the 1950s and ’60s (qualified only by the facts that the boom in industry was much smaller and well-paid jobs are still hard to find). Having never plummeted to the same economic depths as other Eastern European countries, Hungary and the Czech and Slovak Republics did not see such dynamic growth. But in Slovakia the economy started to develop from 2001, peaking at over 10 percent in 2007. The populations of all the countries of East Central Europe got their shares of the growing cake; real incomes rose by 40 to 50 percent between 1999 and 2005.24

After the turn of the millennium, the Southeastern European and post-Soviet countries began to catch up. Foreign direct investments in Romania increased fourfold to over five billion euros from 2002 to 2004, and continued to rise in 2006 and 2008. The Baltic states recorded even greater increments; the volume of FDIs in Latvia increased sixfold between 2003 and 2007; ninefold in Lithuania. More foreign capital also flowed to Ukraine, though far less per capita than to Romania or other new EU member states. FDIs fueled Eastern European economies; Iván Berend has proposed that they were the principal growth engine. From 2001, the Baltic states’ GDP grew annually by at least 6 percent; in 2006 they touched the 10 percent mark. Romania and Bulgaria had an upturn of between 4.2 and 7.5 percent. Russia achieved a record growth rate of 10 percent in 2000; Ukraine even reached 12.1 percent in 2004.25

When evaluating growth rates, it is important to take the poor initial state of the economy in the Baltic states, Southeastern Europe, and the former Soviet Union into account. After the long transformation crises of the nineties, these countries had plenty of catching up to do. The effect of FDIs should be interpreted with similar caution. For a while, as long as international investors followed their herd instincts, they fueled economic growth. Nobody wanted to miss out on getting a stake in Eastern Europe. In this respect, the conclusion that Andrei Shleifer and Daniel Treisman drew in their 2014 article for Foreign Affairs, that the postcommunist nations had caught up and developed into “normal” countries, would perhaps have been justified some ten years previously.26 In 2005 and 2006, the prospects for the entire postcommunist world seemed bright, and were reflected in the local and global stock markets, which bounded from peak to peak.

Behind the scenes of rapid westernization, there were a number of important structural differences between various regions and countries of postcommunist Europe. In the reform-pioneering Visegrad countries, FDIs flowed predominantly into manufacturing. Foreign capital was used to upgrade existing factories or establish new firms to serve the domestic market and export to the EU. In the Baltic states, Croatia, Romania, Bulgaria, and Ukraine, the FDI were channeled primarily into the finance sector and from there to the real-estate industry.27 These foreign direct investments did not necessarily signify actual economic activity; some were purely asset investments. Takeovers of privatized state enterprises also fell into two categories: nominal values in the account books, and actual investment in companies. The availability of venture capital and cheap loans caused demand, and prices, to rise. But incomes and securities for the loans did not keep pace, presaging the “Eastern Europe bubble,” considered in chapter 7.

In general terms, countries with an advanced production capacity were at an advantage. Steelworks, modern car factories, and refineries require high investment and cannot be transferred easily to cheaper sites. Light industry, in contrast, can be relocated at any time, and is exposed to tighter international competition. A number of new light industry sites were established in the Baltic states and parts of Southeastern Europe. Nokia is a case in point. To reduce labor costs, in 2008 the company relocated its cellular phone production from the original site in Bochum, Germany, to a newly built factory in Romania. A few years later, it moved its production to Southeast Asia, as Romania not only proved to have difficulties with the logistics but had also become too expensive.

This case shows that economic growth in postcommunist countries hinged, to a large extent, on the supply of cheap labor. As soon as the skilled workers in Eastern Europe started demanding higher wages, investors lost the primary motive for manufacturing there. At the same time, budget dependence on FDIs gave the (mostly foreign) corporations more power than in Western Europe. Volkswagen Slovakia’s announcement in January 2014 of a 4-percent wage cut fits this pattern.28 When the Romanian government revealed plans in late 2013 to reorganize the tax system and raise corporate taxes, the Foreign Investors Council (an association of locally operating foreign corporations) threatened to leave the country.29 The trade associations in the old EU countries would have exercised more diplomacy in the public eye. In nearby Austria, where average net incomes are triple those in Slovakia, the prospect of wage cuts would have unleashed storms of protest. But outside the Slovak capital Bratislava, unemployment is notoriously high. As in Poland, it only dipped below 10 percent at the end of the extended boom in 2008. Following the crisis, the unemployment rate in Slovakia rose again to over 14 percent; youth unemployment went up to 34 percent in 2012 (see figs. 5.2a and 5.2b).

Even after the wage cuts, automobile workers in Bratislava remain relatively privileged, earning about double the average monthly net wage of 600 euros.30 Unlike Germany, Slovak industry did not conclude any nationwide collective wage agreements. The result is a huge disparity of incomes in western and eastern Slovakia. In the latter, average wages are estimated at about a third of those in the metropolitan region of Bratislava.31

Fig. 5.2a.  Unemployment in the transformation countries, 1992–2010. Source: WIIW Report 2012 (Table I/1.16).

Regional divides exist in all the new EU member states. The western parts of Poland, the Czech Republic, Hungary, Romania, and Bulgaria are far more affluent than the eastern parts. A huge gulf also emerged between the cities and the rural areas. This is not immediately visible, as new roads have been built with EU funding, and enormous shopping malls, containing the same Western supermarkets, DIY markets, and home electronics stores, have emerged on the outskirts of every medium-sized town. But while the goods in the stores cost more or less the same as they do in the West, wages in the retail industry are a pittance. Most local residents cannot afford the goods on offer, or can buy only on credit. (See the section below on foreign currency loans.) The ostensibly greater prosperity is, then, a mere illusion.

Fig. 5.2b.  Unemployment in Poland, 2000–2012: Warsaw and selected voivodeships compared. Source: Eurostat regional statistics (table lfst_r_lfu3rt); Eurostat metropolitan statistics (Table met_lfu3rt).

In the face of such competition, starting a business or becoming self-employed is much harder today than it was in the nineties. The shopping malls at the city limits make ghost towns of the centers. While all Western countries are familiar with this problem, postcommunist countries are especially vulnerable. Beyond a few core growth areas (mostly the capital cities plus two or three regional centers), the kind of middle class has not been able to form that would patronize small boutiques, florists, health-food stores, art galleries, or other niche suppliers, or have the capital to start new businesses. Rapid westernization has eroded the social basis of capitalism and, indirectly, of democracy. There is new wealth in Eastern Europe, but it is unevenly distributed and distinctly fragile, as the crisis of 2008–9 showed.

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