The Neoliberal Turn in East and West

Viewing Europe in the latter years of the Cold War as a system of interconnected conduits casts a different light on the reform debates of the 1980s. Some developments occurred almost in parallel in Western and Eastern Europe. Margaret Thatcher responded to the United Kingdom’s economic stagnation in the 1970s by drastically reducing government expenditure, cutting subsidies and social security benefits, and combating inflation. Her reform package included extensive privatization, even of key industries such as the national railways. In this way, Thatcher put an end to the Keynesian policies pursued by her predecessors, which had failed to solve the country’s problems following the oil crisis and ended in spiraling inflation and national debt.

Experts in think tanks, universities, and international financial institutions had prepared this political paradigm shift for some time. An increasing number of economists at British, American, and, eventually, other Western universities held neoliberal views, and they did not confine them to academic discourse. Milton Friedman, one of the best-known proponents of the Chicago School, appeared in his own TV series in 1980 to convey his views to a mass audience. The first episode, entitled “The Power of the Market,” clearly spelled out his message of faith in free, unfettered markets.10 He coupled his economic doctrine with an ideological, libertarian critique of big government and the welfare state, which he demonized as an obstacle to economic activity and the cause of the day’s crisis. A follow-up series was made in 1990 in a slightly different format. This time, prominent politicians and actors including Ronald Reagan, former US Secretary of State George Shultz, and Arnold Schwarzenegger moderated the programs, lending additional weight to the PBS series. Since the Eastern Bloc had recently collapsed, one episode was dedicated to the “Failure of Socialism.”

Initially, neoliberalism and the teachings of the Chicago School resonated less in continental Europe. In France, the Socialists led by François Mitterrand won the 1981 general election and pursued an opposite course, increasing public expenditure and government intervention in an attempt to boost the economy after the second oil crisis. But inflation remained high, debts mounted, the economy stagnated, and the government was under constant pressure to devalue the French franc against the West German mark. Just two years later, Mitterrand was obliged to bow to the international capital markets and introduce a cost-cutting program in order to avert the further devaluation of the franc and an even higher rate of inflation.

Meanwhile, the social-democratic chancellor Helmut Schmidt was brought down by the burgeoning budget deficit and disagreements over how to overcome the deep recession caused by the second oil crisis. The new center-right government distanced itself from the Keynesian policies of the previous government. Christian Democratic chancellor Helmut Kohl announced a new economic policy, “away from more state to more market; away from collective burdens to more personal achievements; away from entrenched structures to more flexibility, individual initiative and competitiveness.”11 Germany’s tradition of proportional representation and coalition governments prevented radical changes akin to those in the United States or Britain with their two party systems. But a pronounced paradigm shift nevertheless took place in German economic think tanks and universities. They now saw the strong state as a burden rather than a solution to the current economic problems. For the first time in postwar history, social expenditure was criticized and cut. When the Berlin Wall came down in 1989 and the course was set for the transformation of East Germany, hardly any Keynesians remained in Germany to support state interventionism or state ownership of industries.

As Geoff Eley has argued in his groundbreaking work on the European Left, the Social Democrats in all European countries adapted to neoliberal economic paradigms over the course of the eighties.12 “The markets,” which Friedman had still referred to in the singular, became a buzzword in the media and politics. Like a supreme, personalized, and yet anonymous authority, “the markets” have judged the economic power and viability of companies and even entire nations ever since. As the stock market crash in 2007 demonstrated, it remains unclear who exactly is passing judgment or who will take responsibility for errors.

The Chicago School wanted society and the economy to be propelled by the “hidden hand” of the market(s) and demonized the visible presence of the state. Friedman and other commentators railed against big government “standing on your shoes,” as Arnold Schwarzenegger put it in the aforementioned TV show. And in some respects, Europe’s new social movements and the up-and-coming “Green” parties voiced similar demands for less government control and more public participation in environmental protection, education, and many other fields. Still, the paradigm shift away from government intervention was less prominent in continental Europe than it was in the United Kingdom and the United States. In broad terms, the West reacted in one of two ways to the economic problems following the two oil crises and recessions of 1973–74 and 1980–81, either attacking the welfare state and its allocative functions (Thatcher and Reagan), or returning to more defensive, conservative politics (continental Western Europe). All of Europe’s moderate political parties, from the Christian Democrats and other center-right parties who now assumed government (as in West Germany) to the left-leaning Social Democrats and Socialists who remained in power (as in France, Sweden, and Austria), tried to preserve the welfare state. In terms of growth rates or, perhaps more importantly, the discourse on economic policy, neoliberalism clearly triumphed over welfarism within the West. European policymakers enviously watched the United States emerging from the recession in the early eighties with greater economic growth than the core states of the European Community.13 In fact, there were many different reasons for this. Reagan’s policy of rearmament had the effect of an economic growth program (something that was theoretically anathema to his economic advisers); the “digital revolution” generated further growth. Great Britain profited from the oil boom in the North Sea, as well as London’s status as a global finance center. The growth figures in the United States and the United Kingdom were also partly the result of statistical adjustment: from the basis of their earlier and deeper crises in the late 1970s, their recoveries appeared more rapid. The extent to which Reaganomics and Thatcherism were responsible for their countries’ economic upturns can, then, be questioned. But they certainly placed increasing pressure on the welfare states of continental Europe to conform. These had been designed during the “trente glorieuses”; in times of rapidly rising unemployment and aging populations, it was becoming impossible to finance them. As a consequence, even confirmed Social Democrats and Socialists, including the later president of the European Commission, Jacques Delors, eventually adopted neoliberal ideas.

The Eastern Bloc, in contrast, seemed virtually immune to all the crises affecting the West in the early eighties. The developments that put an end to Fordism (the labor-intensive mass production of consumer goods) and full employment, along with all the problems this posed for social security systems, seemed to stop at the Iron Curtain.14 The Soviet Union even indirectly profited from the two oil crises. These enabled it to demand higher prices for oil and gas from the West while cushioning the oil-price blow for its allies by supplying them cut-price energy.

But under the surface of apparent stability the problems were mounting. Hungary and Poland were not able to pay back their foreign debts from the 1970s. The GDR accumulated increasing debts in order to maintain its standard of living—the highest in the Eastern Bloc. Bulgaria accrued mounting foreign debt in the late eighties; the Soviet Union suffered from the rapid drop in oil and gas prices after 1982. The economic problems were reflected in the increasing divergence between the official and unofficial rates of exchange for foreign currencies described above.

Poland faced additional problems. The imposition of martial law and the suppression of the Solidarność movement plunged the country further into recession. Almost all basic foodstuffs were rationed; the black market boomed.15 State repression and constant scarcity demotivated the workers. Aware that the People’s Republic of Poland was on the verge of economic and political bankruptcy, the Polish government welcomed perestroika and the opportunity to concede greater freedoms, especially to farmers and smaller firms. In 1986 General Wojciech Jaruzelski announced an amnesty for political prisoners. One year later, the government entered into negotiations with the opposition, mediated by the Church. In 1988 additional economic reforms were introduced that further loosened the restrictions on private entrepreneurs, and the following year the controls on prices for agricultural products were lifted. These measures were groundbreaking for Eastern Europe.

Even further-reaching reforms were introduced in the communist countries of East Asia. As early as 1979, the party leadership in Vietnam had allowed farmers to sell some of their output privately. In 1986, in step with perestroika, it abolished the entire system of compulsory levies and state price regulation in agriculture. This bold move to accommodate the individual profit motive in what was then a key sector of the Vietnamese economy paid off. Agricultural production rose and Vietnam soon became a rice exporter. But the communists protected their positions of power at the same time. The land the farmers cultivated was only ceded to them as usufructuaries; they did not own it. Like China, then, Vietnam introduced market economy without privatization.

By contrast, Poland’s reform program of 1989 focused on privatization. One reason for this was the country’s high foreign debt—the Polish government needed the revenue from the sale of state industries and enterprises. Two groups of actors cooperated to design the reforms: foreign advisers from the IMF and other international institutions, who prescribed Poland a neoliberal austerity program, as they had previously the ailing countries of Latin America; and national experts who had worked their way up the government career ladder and now supported radical reforms. These experts did not look to the Western European model of the welfare state for inspiration, but to the policies of Margaret Thatcher and Ronald Reagan. In late 1988, the Polish weekly Polityka had already commented on the growing influence of “eastern Thatcherites.”16 These were on the rise because of growing discontent with Gorbachev’s perestroika and its Eastern European variants. Hence domestic circumstances paved the way for 1989’s radical reforms.

Similarly to Yugoslavia, Poland lurched toward hyperinflation. The cheap aluminum coins of the seventies were immobilized and ever more zeroes printed on Polish banknotes. International and Polish economic experts agreed that the only way to curb the price rise was to strictly limit government expenditure and money supply. Even wages were not safe. In 1988 industrial workers had successfully taken strike action to have their wages index-linked to the rate of inflation. While this boosted incomes, it also caused inflation to rise even further. As a consequence, wages and salaries were rigorously controlled and de facto reduced after 1989.

Reforms in Hungary were shaped by debates within the Communist Party. The Hungarian private sector was expanded during the eighties, as was the Polish. But Hungary’s private enterprises did not have sufficient influence or scope to propel the economy. In 1987 the party abandoned its guarantee of employment for every adult citizen; the specter of unemployment loomed on the horizon. At the same time, Hungary opened its borders to foreign direct investments.

In the Soviet Union, too, the authorities were forced to admit that they could not simply grind on. Leonid Brezhnev’s successor Yuri Andropov, a former head of the KGB, had been aware of the dismal state of the economy since the early eighties. In 1986, Andropov’s protégé Mikhail Gorbachev proclaimed glasnost and perestroika (literally, “openness” and “restructuring”). He also introduced a different course in foreign policy. Recognizing the hopelessness of the Soviet intervention in Afghanistan, he tried to end the arms race in order to redirect more resources toward the economy.

Gorbachev hoped to save state socialism by reforming it. State enterprises were to retain some of their output to sell on their own initiative; kolkhoz farmers were encouraged to cultivate small plots of farmland independently; productivity was to be improved by raising workers’ morale. These measures were less targeted than the reforms in China and Vietnam, and, thanks to glasnost, discussed more than they were actually implemented. Such a tentative approach to reforms and decentralizing the economy only served to aggravate the Soviet Union’s problems. The individual republics drifted further apart and pursued their own increasingly nationally defined interests. Even glasnost had unintentional side effects. While the opportunity to articulate criticisms and discuss problems initially had a liberating effect, as long as it failed to alleviate the USSR’s economic plight, it ultimately undermined the authority of the party.

In 1989, the disclosure of major crimes committed by the state under Stalinism shook the foundations of the ailing Soviet Union. The Politburo’s admission of the existence of the Molotov-Ribbentrop Pact delegitimized Soviet rule in the Baltic states and gave the oppositions in Lithuania, Latvia, and Estonia a tremendous boost (see fig. 2.1). Civil rights activists started demanding independence for the Baltic republics. They, too, took advantage of contacts with exiles and other actors in the West. In the Caucasus, armed conflicts broke out between Armenians and Azerbaijani, forcing tens of thousands to flee their homes. The pogroms and unrest further undermined the legitimacy of the Soviet empire, which was proving incapable even of maintaining internal peace. In retrospect, the interethnic violence of the late eighties can be seen to have presaged the war in the former Yugoslavia and the Caucasus. Then, as later, conflicts flared up over the issue of whether to preserve the territory of the constituent republics or draw new, ethnic borders. Nationalism, then, was a crucial factor contributing to the breakup of the Soviet Union.17 But it was bred on the ground of economic crisis.

Struggling enough with the economic problems in his own country, Gorbachev ceded the peripheral states of the Soviet Union greater freedoms, and encouraged the other Eastern Bloc countries to introduce reforms. But glasnost and perestroika created new difficulties without remedying the flaws of the existing system. Soviet experts and managers increasingly doubted the viability of—or possibility of reforming—“real existing socialism,” a term that now inevitably carried a mocking overtone.

Fig. 2.1.  On August 23, 1989, over a million people marked the fiftieth anniversary of the signing of the Molotov-Ribbentrop Pact by forming a human chain that stretched approximately four hundred miles, from Vilnius via Riga to Tallinn. Photo: ullstein bild / Juraitis.

At this point, several of the Eastern Bloc’s later reform politicians finally rejected state socialism and embraced neoliberalism. They included Václav Klaus, Leszek Balcerowicz, and Yegor Gaidar, all three of whom were state-employed experts working in official think tanks. Balcerowicz had even received a government scholarship to study in New York, where he became familiarized with the teachings of Milton Friedman. Having hitherto known only ineffective, spoon-feeding governments, these Eastern European economists were particularly drawn to the antistatism that is characteristic of neoliberalism.18 Thus neoliberalism and the theories of the Chicago School were disseminated via various channels: first, encounters between individuals, especially economists (interpersonal cultural transfers); and second, the reception of various writings (intertextual transfers). Both channels of exchange with the West were, however, more restricted in the Soviet Union than in East Central Europe.

The manifest failure of the reform communists’ efforts in the Soviet Union, Poland, and Hungary had repercussions in the West, too: Western variants of socialism lost their appeal. A number of comments and writings by prominent contemporaries such as US economic historian Robert Heilbroner testify to this. In early 1989, even before the Eastern Bloc crumbled, Heilbroner wrote in the New Yorker that “the contest between capitalism and socialism is over. Capitalism has won.”19 Milton Friedman took this up in the abovementioned TV series of 1990 and produced a sequence with the title “The Failure of Socialism.”20 It is interesting to note the choice of vocabulary: not communism—the United States’ Cold War adversary—but socialism was seen to have failed. By this cipher, Friedman and other confirmed anticommunists conveyed their hostility toward the already much-reduced welfare state and liberal left in their own country. Friedman’s TV program features a bizarre appearance by Ronald Reagan, who confused the Nobel Peace Prize with the Nobel Prize for Economics (the latter of which Friedman had indeed received) in his introduction declaring Friedman the recipient of the “Nobel Peace Prize in Economics.”

While Heilbroner focused primarily on the past, the neoconservative Francis Fukuyama looked to the future. In his controversial theory of the “end of history,” he claimed there was no longer any alternative to democracy and market economy, a view that liberal sociologist Ralf Dahrendorf shared. The Western elites’ entire political and ideological spectrum seemed to be made up of variants of dissociation from socialism. Previously Heilbroner had viewed economic history from a Marxist perspective. Clearly the failure of state socialism had such a deep impact that it changed the nature of the Left in the West, too.

Yet even at this point, some Eastern European civil rights activists continued to propagate a Third Way, linking market economy with the positive achievements of state socialism in their countries. Left-wing Western social democrats such as Egon Bahr supported their views. But the economic collapse of the Eastern Bloc and the de facto bankruptcy of Yugoslavia and its system of self-administration precluded the combination of the two systems. Czechoslovakia was less encumbered with debts and so could afford to postpone drastic reforms (which Friedman explicitly criticized in his TV series). But Yugoslavia, Poland, and other debt-ridden countries had no other choice than to follow the recipes of the Washington Consensus to secure the financial support of the West. As attempts to reform socialism failed before the eyes of the world, its Western, welfare-state variant also lost support and legitimacy. Even Sweden’s Social Democrats, who had run the country for many decades, were soon forced to surrender power. After 1989, then, the traditional Left-Right political framework was fundamentally challenged in Eastern and Western Europe alike.

The proponents of deregulated, free market economy seized the opportunity these changes presented. The Washington Consensus established the hegemony of neoliberalism on a global level. Here, too, it is important to note the subtle use of terminology. Referring to the economic prescriptions it advanced as a “consensus” implied that alternatives were deviant. Thus the ground was prepared in East and West for the revolutions of 1989–91 coming to a neoliberal end. But neither the civil rights activists nor the millions of people out on the streets foresaw this conclusion.

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