The New Business Boom

The transformation from below and the gradual influx of foreign direct investments launched a sustained upswing in all the capitals compared here, except Berlin. In 1995, Warsaw obtained a gross domestic product of 8,200 euros (converted on the basis of Eurostat and WIIW data) per capita, adjusted to purchasing power parity.24 At 24,000 euros, Berlin’s GDP was almost triple that amount. The difference in average incomes was even larger. According to the Warsaw statistical agency, the average wage in the Polish capital was a mere $160 per month in 1995 (converted from złotys at the contemporary exchange rate).25 But this, at least, was two and a half times more than the average in 1991. Moreover, the official statistics do not include incomes generated by the gray economy, which played a substantial role in this period.

The upswing was tangible in everyday life. Privately run supermarkets opened on the main streets. There were more places to go in the evening than just the state restaurants and cafés, which closed at ten or eleven o’clock. Elegant boutiques appeared on Krakowskie Przedmieście, the boulevard connecting Warsaw’s old town and the stock exchange. Two nightclubs that stayed open until well after midnight were launched close to the university. However, few Poles could afford to become patrons. A light meal and one or two drinks consumed the daily wage of a teacher or university lecturer. The proximity of enticing but costly new opportunities created powerful incentives to get started in business. Income trends in Prague were similar. Here, residents earned on average seven thousand euros per year in 1995; in Budapest, six thousand euros (each adjusted to purchasing power parity). The figures contradict the Hungarian elites’ long-held belief that the country’s “goulash communism” and early introduction of economic reforms placed it, or at least its capital, at the forefront of developments in Central Europe. But variations of one or two thousand euros were not particularly significant in the long run. More importantly, all three postcommunist capitals experienced upward trends.

Berlin had a huge head start on Warsaw and Prague, but began to suffer the effects of homegrown problems in the early nineties. Unemployment rose between 1989 and 1995 by more than two-thirds to 13.6 percent.26 Despite the generous provision of early retirement, retraining, and job creation schemes, one in six adults was unemployed at the turn of the millennium. This problem was not specific to Berlin. Unemployment was a negative side effect of transformation that affected all of East Germany. Although the inhabitants of Warsaw, Prague, and Budapest obtained a smaller GDP than the average Berliner, and earned distinctly less, their job security was higher and their livelihoods less under threat (see fig. 6.4).

Fig. 6.4.  Unemployment rates in East Central European cities, 1999–2012. Source: Eurostat Metropolstatitistik (Tabelle met_lfu3rt).

Vienna, the other Western metropolis next to the Iron Curtain, did not suffer such “shocks without therapy,” as the later Polish Finance Minister Grzegorz Kołodko put it.27 Market vagaries caused a slight rise in unemployment in Austria in the first half of the 1990s, after which it lingered at a low rate of 5 to 7 percent. Prague and Budapest boasted full employment, though not all reasons for this were positive. In all Eastern Bloc capitals except Berlin, housing was expensive and scarce. Few people from rural or old industrial regions could afford to move to the capital in search of better prospects. The rent for a two-room apartment on the free market in Warsaw or Prague consumed an average worker’s monthly income.

While plenty of cheap housing was available in Berlin, the ailing economy deterred potential jobseekers. At the same time, few Berliners moved to the affluent south or west of Germany, as hundreds of thousands from Leipzig, Chemnitz, and Magdeburg had done—not even when unemployment reached 19 percent in 2005. Perhaps they were confident of Berlin’s imminent recovery. Indeed, symbolic reunification projects such as the redevelopment of Potsdamer Platz, begun in 1993, nourished hopes of better times ahead.

But glimmers of light only appeared on the horizons of other capitals. Between 1995 and 2000, Warsaw’s GDP, adjusted to purchasing power parity, rose from 8,200 to 13,800 euros—an increase of 68 percent. Prague’s economic strength also grew robustly, from 7,000 to 11,900 euros (a gain of 70 percent); Budapest’s per capita GDP increased from 6,000 to 10,000 euros (up by 67 percent). Of course, rising GDPs do not necessarily signify parallel improvements in living standards; these are better measured by the Human Development Index/HDI, but this is not recorded in the local or regional archives on the period in question. From 1995, wages and salaries actually increased more rapidly than the GDP—from an average equivalent of 160 dollars to 600 dollars per month in Warsaw.

However, averages are only meaningful to a limited degree. Teachers, most civil servants, and my university associates still earned no more than the equivalent of $200 to $350 in the mid-nineties. By contrast, any young person with an economics-related university degree and one or two foreign languages could take his or her pick of the best jobs and make three times as much. There were also many opportunities for those prepared to venture into self-employment. A culture of second and third jobs evolved. Many residents of Warsaw, Prague, and Budapest supplemented their incomes by moonlighting. But by the late nineties, the generation of 1989 had occupied the best positions and self-employment niches, and it became harder to find well-paid jobs.

Moreover, with the exception of Poland, there were serious economic upheavals in all postcommunist countries. In the Czech Republic, the bank crisis of 1996 brought the upswing to an abrupt end. However, the tourist boom in the capital, Prague, compensated for the crisis, and prompted the authorities to commission the large-scale renovation of the old town, creating many jobs. Hungary, in contrast, continued to struggle with its high foreign debt. In 1995, under pressure from the IMF and the World Bank, the postcommunist government adopted the aforementioned “Bokros package,” an extensive austerity program that cut civil servants’—hardly extravagant—real income by over 5 percent. Economic growth dropped to 1.1 percent in 1996;28 about 30 percent of the population fell below the poverty line. Although mostly rural and old industrial areas were affected, homeless beggars began to appear at store entrances in Budapest, too—a new and shocking phenomenon to postcommunist societies. Warsaw was spared an economic slump of the kind that Prague and Budapest suffered, but had higher unemployment (8.8 percent in 2000)29 as the baby-boom generation born in the early eighties crowded the job market. This was a late repercussion of the curfew and the scarcity of contraception during the period of martial law in 1981–83.

Despite the general and specific problems besetting each of the former Eastern Bloc capitals, they all spawned urban middle classes over the nineties, whose living standards came close to those in the West. The wealthiest 20 percent of the population of Prague, for example, had an average annual income equivalent to 12,600 euros. With rents strictly regulated and food still much cheaper than in the West, this sum went a long way. The second-wealthiest fifth of the population, with annual incomes ranging between 8,500 and 12,600 euros, were also relatively comfortable.30 But financial difficulties could arise if a major household appliance or car broke down. Hence the improvisational talent developed under socialism remained useful. Gasoline was very expensive; filling a car tank cost as much as several days’ pay. For this reason, most vacations were spent in family cottages in the country, or camping, rather than in hotels abroad. A fifth of Prague’s population (no comparable data are available on Warsaw) had to make do with the equivalent of 300 euros per month. As prices for food and other staple goods were rising, they had just enough to survive from day to day.

Although the citizens of the former GDR and especially East Berlin were financially advantaged, rapidly rising unemployment made them deeply insecure. The proximity of affluent West Germans, who had been appointed to many senior positions in the East in order to westernize the former GDR, bred envy and inferiority complexes. The conflicts among Germans with different backgrounds found expression in stereotypical notions of “Wessis” (presumptuous colonizers from the West) and “Ossis” (whiners from the East). Interestingly, there was less antagonism within reunified Berlin, perhaps because West Berliners were only slightly better off than East Berliners. Weathering economic crisis together seemed to foster social cohesion.

Though local balladeers continued to extol Vienna’s tumbledown charm, in fact the city experienced a robust upswing. Between 1995 and 2005 the per capita GDP rose by almost 2 percent per year, in absolute numbers from 33,200 euros to 40,000 euros. What, then, sustained Vienna’s blossoming? Economic historian Dieter Stiefel has calculated that the opening of the Eastern Bloc and trade with the postcommunist countries boosted Austria’s economic growth by at least 0.5 percent annually from 1989.31 And due to Vienna’s geographical location and function as a center of trade and services, the city certainly profited more from the opening up of Europe than did the rest of Austria. As a result, banks, insurance companies, construction companies, retail trade, and tourism thrived. Austrian companies expanded, usually in two stages: first into former Habsburg territories, then into more remote Eastern European countries.

The former capital of the Austro-Hungarian Empire utilized Europe’s opening in another way. According to the Viennese economic chamber, some three hundred Western companies chose Vienna as the location for their Central Eastern European offices.32 At the same time, Eastern Europeans came to the city to purchase goods, open businesses, or settle permanently. Polish, Ukrainian, Russian, Hungarian, Romanian, and various South Slavic languages are often spoken on the streets; some (though still too few) state schools provide classes in the above languages to native-speaker children. The influx of foreigners, including 35,000 Germans, caused the population to swell by 200,000 between 1998 and 2014 (from 1,541,000 to 1,741,000 inhabitants). These figures put a different complexion on the GDP figures. In the years of rapid population growth between 2000 and 2006, Vienna absorbed almost twenty thousand new residents annually while the per capita incomes continued to improve.33 Vienna is poised to reach the same population density as it had in the late Habsburg Empire.

This business boom at the transition from the twentieth to the twenty-first century washed away Vienna’s grayness, or displaced it to the poorer suburbs. The inner-city areas between the Ring Road and the Gürtel have been largely renovated, with mixed consequences. As in Prague and the fashionable districts of East Berlin, rents have risen, causing a separation of the urban rich and poor, both socially and geographically. But complaints about blanket gentrification seem exaggerated in view of Vienna’s strict protection of tenants and the dispersion of subsidized housing in all districts of the city. Vienna’s renaissance as a multinational service capital defies simplistic explanations claiming that radical reforms are the only key to economic success. Comparison with Berlin suggests that the reverse might be true, because Vienna resisted privatizing or deregulating its huge public sector.

The populations of Warsaw and Prague grew less rapidly; that of Budapest actually shrank, primarily on account of the difficult housing market and a delayed process of suburbanization. Many former residents of the capital moved out to the surrounding areas, where land was cheap, to build their dream homes in the country. The dream often ended in a nightmare of endless traffic jams for the commuter-belt residents. But the construction boom thus generated propelled economic growth in the postcommunist capitals to even greater heights per capita than Vienna’s. As figure 6.5 shows, Warsaw’s per capita GDP (all figures are adjusted to purchasing power parity and converted into euros) rose in the years 2000–2005 from 13,800 to 19,100—an increase of 38.4 percent. Prague recorded a 72 percent increase and Budapest a mighty 88 percent.34 The Ukrainian capital Kyiv experienced similar growth rates, though the upswing began some five years later. Here, the per capita GDP almost tripled.35

Fig. 6.5.  Economic performance of compared capital cities, 1995–2008. Source: Eurostat Regional Statistics (table nama_r_e3gdp).

Factors such as low starting points and the effect of foreign direct investments on relatively small and centralist-governed “emerging markets” must be taken into account when interpreting statistics on growth. Purchasing power adjustments must also be approached with caution, as they are calculated on the basis of national data, regardless of regional differences (between rural areas, small, large, and capital cities), which can be substantial. In a global perspective, it might even seem doubtful whether this boom was anything out of the ordinary. Metropolitan growth is a worldwide phenomenon. Viewed in this light, Warsaw, Prague, Budapest, Kyiv, and Vienna are just following a general trend.36 Still, the fact remains that just two or three years after the revolution, a business boom started in Eastern European capitals that lasted until 2009 and even beyond.

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