Metropolitan Convergence, or Why the East Looks like the West

Although the various capital cities took different paths of development, these have been leading in a common direction since 1989. Their convergence is due on the one hand to the sustained rapid growth of Warsaw, Prague, and Budapest (and Kyiv, with some delay), and to the transformation crisis in Berlin on the other hand, which the city overcame after 2005. Following EU enlargement, the economic boom in Warsaw and Prague accelerated further. Figure 6.8 gives a statistical overview of the period prior to the crisis of 2008–9.

Kyiv’s development can be variously interpreted. In the national currency hryvnia, the economic performance of the Ukrainian capital doubled between 2005 and 2008 (having tripled in the period 2000–2005). But this increase in Kyiv’s per capita GDP, adjusted to purchasing power parity (which is always calculated on a national basis, disregarding local price differences) was just 25 percent, similar to Budapest’s.57 Berlin’s per capita GDP grew in the same period from 23,400 to 25,700 euros, or by 10.8 percent. Although this marked a recovery from the long transformation crisis, the German capital was outpaced by Prague and Warsaw in terms of per capita GDP by 2007.

Does this mean that the inhabitants of Warsaw and Prague are now more affluent than the hypothetical average Berliner? Statistics cannot, of course, be left to speak for themselves. The figures on GDP presented here (adjusted to purchasing power parity and converted into euros) reveal nothing about the specific administrative and business environments in which they were collated. Economic strength is far more concentrated in all former Eastern Bloc countries than in Germany or Austria. Most Polish, Czech, Hungarian, and Baltic company headquarters are in their respective capitals, where the profits boost the local GDP. Many German companies are based in Munich, Hamburg, or other regional centers. GDP is therefore more evenly distributed and mostly generated outside Berlin. The same is true of Austria, where a number of large companies are based outside Vienna.

Fig. 6.8.  Economic development of East Central European cities, 2000–2008. Source: Eurostat Regional Statistics; Статистичний збірник “Регіони України” (Statistical Anthology “Regions of Ukraine”).

Second, the figures on gross domestic product cannot be equated with actual incomes or living standards. In 2008, the average per capita household income in the metropolitan Prague region was 11,800 euros; in Berlin, by contrast, it was 18,000. Incomes in Warsaw were similar to Prague’s; Budapest’s were somewhat lower.58 Hence, Berliners had almost 50 percent more disposable income than the average Prague or Warsaw household, despite the city’s long transformation crisis. Unlike the figures on GDP, however, these statistics do not take purchasing power into account. Food and other staple goods were still cheaper in Warsaw and Prague than in Berlin in 2008; taxi journeys and metro tickets cost less than half. Privately leased apartments, on the other hand, were scarce and expensive. But Poles, Czechs, and Hungarians still pay similar rents, as they tend to live in smaller apartments. Overall, a convergence can be observed, which is astounding considering the disparity among these cities in 1989–90.

Even assuming that the inhabitants of Warsaw or Prague were somewhat poorer, or lived in more modest conditions, in some ways they were more privileged than Berliners. Prague had only 3.7 percent unemployment in 2009; unemployment in Warsaw dropped in the period 2005–9 from 11.1 to 4.3 percent. There was de facto full employment in both cities. Job prospects for young people, especially, were far better than in Berlin (or southern Europe).59 In summary, Berliners had a higher standard of living (at least on average) but far fewer job opportunities.

High unemployment caused more Berliners to drift into poverty. By OECD criteria, which place the poverty threshold at half the average per capita income, 435,000 Berliners were classified as poor in 2002.60 The recession of 2001–4 aggravated the situation. According to the benchmark usually applied in Germany—60 percent of the average income—almost one in five Berliners lived below the poverty line in 2005. The subsequent recovery reduced unemployment by a third but did not dent poverty levels. The “Hartz” reforms to the labor market had chiefly created more low-paid job opportunities (small grants for one-person firms, one-euro jobs, top-up benefits for the working poor).61 The Warsaw statistical agency does not compile data on poverty rates (which is itself a political statement). But a survey of the wages paid in various Warsaw industries shows that employees in simple service occupations, especially, do not earn any disposable income.62 Many compensate by moonlighting.

It is difficult to find a reasonable sideline in Berlin. However, in 2013, the Berlin state office for statistics announced proudly that the city had become one of the fastest growing locations in Germany, surpassing even Hamburg and Munich.63 Indeed, Berlin has begun to see a business boom in recent years. This delayed upswing has reduced unemployment by almost half; the population has grown since 2011 by 40,000 annually.64 Behind these statistics lies Berlin’s peculiar situation. After years of recession (2001–4) and over a decade of stagnation, its economy was at a low point from which it was better poised to grow. Tourism, Berlin’s most successful sector by far, boomed partly as a consequence of the long transformation crisis. This depressed property prices and rents in Berlin, offering ideal conditions for new hotels and restaurants and the city’s famous club scene, and attracting gallery owners, artists, and players from other creative industries. All this contributed to Berlin’s image as a cultural hub.

In 2005, the Social Democratic–Green government’s labor market reforms launched a wave of business-forming that continues to this day.65 But many self-employed owners of small businesses, prompted more by desperation than inspiration, were not included in the statistics on turnover-tax-paying businesses, and did not engender the kind of boomtime spirit of optimism that prevailed in Warsaw or Prague in the nineties. Since 2009, Berlin has profited from the euro crisis along with the rest of Germany. International and German investors looking for a safe haven for their money, out of the tax authorities’ reach, have channeled huge sums into Berlin’s property market. These property owners seem to be confident in the German capital’s prospects. Positive predictions were also an important factor in the upswings in Warsaw, Prague, Budapest, and Vienna during the business boom of the late twentieth and early twenty-first centuries. The drawback for Berlin residents is rent increases—a trend that has already forced a number of gallery owners and club managers to close down.

A problem specifically affecting Berlin and Vienna is the large ratio of resident immigrants. In the districts of Berlin with a particularly high proportion of former “guest workers” (Wedding, Moabit, Neukölln, parts of Kreuzberg—all in West Berlin), unemployment and the number of welfare recipients are twice as high as the city average. Seen in this light, the actual losers of transformation are not East Berliners but the second and third-generation immigrants in West Berlin. All the capital cities, then, have a distinct but comparable underclass of transformation losers.

Vienna’s far larger immigrant population—almost triple the size of Berlin’s—is more socially mobile. According to official statistics, 49 percent of Viennese come from an immigrant background, and around a third were born abroad.66 They are better-integrated into the majority society and the job market, partly on account of their numbers. A group this size cannot remain on the margins. Another factor is the city’s low unemployment (which, however, has gone up in recent years) relative to Berlin. The better labor market enables even less-qualified immigrants to find a regular occupation and achieve upward social mobility. Moreover, the city’s social democratic government has hitherto rejected most neoliberal reforms. As a result, there is no low-pay sector or significant group of working poor, as in London or New York.

Bratislava is smaller than the cities compared so far. Yet the Slovak capital experienced even more dynamic growth than Prague or Warsaw—per capita GDP tripled from 8,900 to 28,300 euros between 2000 and 2009.67 According to a recent Eurostat survey on regional GDP in the European Union, the Bratislava area ranks fifth, after inner London, Luxemburg, Brussels, and Hamburg. With a GDP that is 186 percent higher than the EU average, it surpasses Paris, Stockholm, Groningen, Prague, Upper Bavaria, and Vienna.68 The statistics are certainly somewhat distorted; for instance, centers such as Munich and Frankfurt are not considered in isolation but with larger regions, despite being more populous than Bratislava. Purchasing power is calculated according to national averages, not taking the higher prices in centers of growth into account. And the statistics do not say anything about urban household incomes. Bratislava would rank far lower in a rating of these, as much of its turnover is generated by foreign companies registered there; their profits boost the local GDP but end up in the company headquarters abroad. Nevertheless, the city undeniably profits from the presence of foreign business.

Vienna, less than forty miles from Bratislava, participates indirectly in the new prosperity in its neighborhood. In economic terms, the two cities are perfectly complementary: one is an international center for services and trade; the other, an attractive production site with many new factories, especially for vehicle construction. Berlin lacks a “hinterland” of this kind. Poznań and Wrocław, the two closest growth centers to the East, are both around 185 miles away. Admittedly, they have become much easier to reach since the expansion of the Schengen zone, and are closer to Berlin’s Schönefeld airport than to Warsaw. Perhaps they can help Berlin evolve into a regional center. Moreover, Berlin can capitalize on its cultural appeal. Its nightlife is, after all, particularly popular among young Poles. But the urban-rural divide and the long distances between the three cities are continuing disadvantages. Despite the upturn since EU expansion, the western border regions of Poland and eastern Brandenburg, the state surrounding Berlin, remain poor and economically underdeveloped. Even if the European Union maintains its generous regional funding, it will take a long time to fill the empty spaces between the centers. Economist Paul Krugman has previously identified regional disparity as a fundamental hindrance to economic development.69

Budapest and Hungary face problems of a very specific nature. During the boom of 2000–2005, Budapest’s economy grew faster than that of any other East Central European capital. At the same time, the Hungarian trade and budget deficit reached new peaks. In other words, the boom was financed largely on credit. For a few years, it was glossed over by the high level of foreign direct investments in Hungary. The banks issued substantial construction loans in the hope of high returns, and agreed to foreign currency loans in Swiss francs and other Western currencies, despite the exchange rate risks. Increasingly, Hungary’s FDIs were channeled not into mid- or long-term projects such as building infrastructure or production sites but financing consumer loans. A housing construction boom resulted and the demand for consumer goods rose. But when the foreign capital stopped flowing in 2008, the credit-financed growth came to an abrupt halt. The Hungarian government was forced to introduce austerity measures (which the public had voted against in a referendum a short time previously). As a consequence, the recession during the crisis of 2008–9 was especially deep, unemployment spiraled, and the forint was devalued. Some other factors originating from the early transformation period also dampened Budapest’s development in the last decade. To prevent long-term tenants from being ousted and protect residential areas from industrial exploitation, the first postcommunist government allowed tenants to buy their formerly subsidized apartments at low prices. In this way, the government led by József Antall (in power from 1990 to 1993) aimed to create a nation of homeowners in agreement with both neoliberal principles and the conservative Hungarian Democratic Forum. However, the new owners did not have the capital to pay for the eventual renovation of the stuccoed old buildings. For this reason, a number of streets in Budapest today look as gray and crumbling as so many did before 1989. The much-maligned socialist housing blocks made of precast concrete slabs are usually in better condition. They benefit particularly from the installation of more efficient heating systems, allowing residents to save on energy costs. Similarly, Prague’s Panelaky (as these blocks are called, in reference to the concrete panels) do not have a bad reputation. Almost all the suburbs built during state socialism have been extended since 1990. In the meantime, Prague’s city center—again similarly to Budapest and Warsaw—has transformed into a purely tourist and office area.

As the city centers have become increasingly commercialized, the suburbs have grown. The trend toward suburbanization that has shaped (and damaged) many Western cities was contained in the Eastern Bloc. In Berlin, the Wall prevented the city from proliferating; in Vienna, the long period of decline after the collapse of the Austro-Hungarian Empire inhibited urban sprawl. Today the smaller suburbs mean a higher quality of life. But a process of belated suburbanization has set in, as people realize their dreams of a family home with a garden. Following their Western counterparts, Eastern European cities are also displaying a tendency to separate the industrial from the residential. Many factories that were built near the central districts of East Berlin, Prague, Warsaw, and Budapest, often adjacent to residential buildings, have been closed. If investors can be found, the sites are redeveloped as housing estates or shopping centers. The speedy pace of urban development has resulted in new residential and commercial centers being built in the same neighborhoods as tumbledown tenements; upper- and lower-class districts are separated by only a few streets.

The new middle- and underclasses, especially in Warsaw, meet in supermarket parking lots. While the former load their cars with their purchases, the latter are glad to pick up the abandoned shopping carts or empty returnable bottles to claim the deposit. Social contrasts are even more striking in Kyiv, where some suburbs and inner-city areas with modern apartment buildings are hardly distinguishable from Western streets. A few blocks along and around a number of metro stations, however, the streets are populated by shabbily dressed street traders and down-at-heel grandmothers. The very goods on offer speak of poverty—anyone trying to sell a few bunches of spring onions or hand-picked flowers (a common sight in Warsaw’s city center in the early nineties and later at Jarmark Europa) will make a few dollars a day at most.

Global statistics show that only a fifth of the populations of postcommunist countries profited from the economic reforms introduced since 1989, while around two-fifths grew poorer.70 In the East Central European capitals compared here, the ratios are reversed. The upswings in Prague, Warsaw, Budapest, and Bratislava have led to the emergence of broad urban middle classes. Around half of these urban populations have achieved the same standard of living as the Western European middle classes. Whether this applies to Kyiv is questionable. The population of the Ukrainian capital has grown by around 200,000 since 2000. A large proportion of the influx is made up of immigrants from rural areas in search of better prospects; their poverty is obvious even in the capital. In East Central Europe, by contrast, the new affluence dominates the urban landscape. Indicators are the proliferation of private cars (which in the Czech Republic and Poland are not significantly smaller or older than those in the West), upmarket household appliances, Western retail chains, and lifestyle diseases such as obesity.

Behind this convergence, however, lie divergent developments. In 1989, Warsaw’s unprecedented rise did not seem any more probable than reunified Berlin’s ten-year stagnation and recession. The convergence was not planned—economic reforms in East Germany were designed to bring the region up to West German standards as swiftly as possible—but caused by Berlin’s unintended downward adjustment. Vienna, Prague, Bratislava, and Warsaw experienced new-business booms, which continue to the present. The same finally began in Berlin some years ago. It is harder to draw conclusions about Budapest, where the impact of the crisis of 2008–9 has caused outcomes that can not yet be gauged. The new sheen of all these cities has banished the gray of the eighties, with which this comparison began, to their niches and peripheries. But as the saying goes, all that glitters is not gold. The gulf between rich and poor not only divides urban and rural populations but is also a very real factor in the social life of the capitals.

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