Introduction: The Transition in Central and Eastern Europe

Gareth Dale

It is over two decades since the economies of Soviet Central and Eastern Europe (CEE) experienced their 'transition' to the market. The ongoing restructuring of the region has been the subject of successive waves of analysis as new events occur: the accession of erstwhile Warsaw Pact members to the European Union (EU) and NATO, the 'colour revolutions' in Georgia, Ukraine and Kyrgyzstan, and the oil and gas price boom which fuelled the Russian economy's return to growth. The global recession of 2008–9 has ushered in a new phase, and it is this, the impact of the world economic crisis on CEE, that provides the central focus of this volume.

The chapters in this volume cover a representative range of CEE countries, from the former Soviet Union to the Visegrád Four (the Czech Republic, Hungary, Poland and Slovakia), including states both big (Russia) and small (Latvia), and which are within and outwith the EU and NATO. The tenor of contributions is critical. While acknowledging that the freedoms achieved in much of CEE – of speech, assembly, organisation and the vote – represent resounding victories for the mass movements of 1989, contributors take issue with the mainstream account of the transition, according to which archaic economies and closed societies gave way, aided by aid and expertise from the West, to efficient markets and democratic polities. Instead, they paint a picture of persistently low productivity and repeated crises, of self-serving Western involvement, of retrenched forms of servitude and 'managed democracy' and of an undergrowth of rent-seeking and corruption that flourishes within the market environment.

In this introductory chapter we set the scene with a summary analysis of the demise of the Soviet economic model and the broad social and political trends that bore upon the events of 1989, before surveying the arguments made in the substantive chapters concerning the 'transition' of the 1990s.

THE DEMISE OF THE SOVIET MODEL

Although state ownership of the means of production was nominally socialist, G. M. Tamás and Stuart Shields (Chapters 2 and 8) argue, the Soviet-type economies were constructed from a recognisably capitalist set of constituent parts: the separation of the means of production from the producers, wage labour and the coercion to work, money and the drive to accumulate capital – an imperative that was decreed by both geopolitical and geo-economic competition. The Soviet Union found itself positioned outside, and in competition with, what some authors call the 'liberal-capitalist heartland'. For some of the nineteenth and much of the twentieth centuries, the 'catch-up' attempts by challengers to the liberal heartland powers, relying as they did on the direct mobilisation of people and allocation of resources, constructed forms of state that were relatively differentiated from society, proactive in economic development and heavily reliant on centralised administration. It was a 'variety of capitalism' that flourished especially at times when intense geopolitical competition coincided with economic deglobalisation, and where backward economies led by modernising elites engaged in catch-up industrialisation. De-globalisation – the breakdown of international trade and capital flows – encourages the 'nationalisation' of domestic economies. Militarism draws states into an economic coordination role, notably of the arms industry and other strategic sectors. And where a low propensity to save meets a high demand for investment, coercion offers a solution – where the land is barren and productivity low, as Nigel Harris put it, 'only a very powerful army and police force can snatch the surplus for national investment between the peasant's hand and mouth'.

Geopolitical competition on the basis of economic backwardness locked the Soviet Union and its allies into a peculiar economic structure, characterised by relative autarky, an emphasis on heavy industry, a high savings ratio, allocation by administrative decision and an extensive use of political incentives and ideological appeals geared to increasing output. These features, Oskar Lange and others have noted, are typical of war economies. In the words of the vice president of the GDR's State Planning Commission, they represented an attempt 'to transpose the economic rationality of capitalist enterprises onto the national economy as a whole'.

Although 'backward' compared to the liberal heartland, the Soviet-type regimes were in many respects brazenly modern. They mobilised their populations in the service of rapid economic growth and a future-oriented ideology; they applied science and technology systematically to the production process and Taylorist techniques to the labour process; and they imposed performance targets on employees within all social institutions. At least during the early decades, moreover, social mobility was rapid. As Tamás describes:

The change from village to town, from back-breaking physical work in the fields to technological work in the factory, from hunger, filth and misery to modest cafeteria meals, hot water and indoor plumbing was breathtaking – and the cultural change dramatic. Also the route from illiteracy and the inability to read a clock face to Brecht and Bartók was astonishingly short.

The Soviet model proved well adapted as a framework for capital accumulation within backward economies during a world-economic epoch of relative autarky. In the 1950s and 1960s large parts of CEE industrialised and some oversaw successful shifts of investment into high-tech sectors, such as aerospace and electronics. However, structures that had evolved in the 1930s and 1940s became obstacles to competitiveness as the ability to gain external markets and organise production on a transnational basis became a divider between winners and losers in the world economy. The Soviet system was structurally resistant to the trend. Trade was mediated through export and import licences and administered by cumbersome foreign trade organisations. Trade aversion was compounded by nonconvertible currencies and by treatment by the major Western states as 'least favoured nations'. Limited market size, small-scale production, a low degree of specialisation and high depth of production, and low productivity all tended to reinforce one another. The phase of economic globalisation that set in during the 1960s and 1970s strengthened tendencies towards polarisation in which market leaders and firms with monopolies from product or process innovations – typically the most advanced enterprises and sectors based in the OECD – stood to reap surplus profits on an enhanced scale while others suffered declining terms of trade. Contrary to David Ricardo, international trade liberalisation tends to benefit regions with concentrations of absolute ('competitive') advantage. Trade between such regions and those with little or no areas of absolute advantage, instead of bringing mutual benefit, steers the latter towards persistent trade deficits, foreign exchange strangulation and mounting debt.

Whereas in the early and mid-1970s the low cost of borrowing encouraged import-led growth, that strategy proved unsustainable when, in the early 1980s, interest rates soared and demand fell away, provoking acute crisis – in East Germany and Poland, just as in Peru or Mexico. While exports from the Soviet Bloc to OECD countries had surged during the 1970s, they slumped in the 1980s. In the 1980s, then, CEE policy-makers were in a double-bind. They were torn between autarky (both in its national and Comecon-wide forms), which spelled stagnation, on the one hand, and on the other closer integration into the world market, which bore the prospect of increasing debt and dependency. If integration was a rational gamble, the odds of succeeding were long, given the relative weakness of CEE economies. Integration exacerbated their vulnerability to fluctuations in global demand, interest rates and to the dictates of 'hard' world standards and prices which exposed their lagging productivity. The greater the level of integration, the less their control over the pace and direction of economic development and the greater their dependence on Western technology and credits. Each Comecon economy was gradually 'sucked into a chaotic, disorganised, world system', as Chris Harman put it in 1977, a process that involved an intermeshing of economic crises East and West.

Comecon integration could offer little in comparison with Western-led globalisation. Its basis was the sale of the Soviet Union's raw materials at below world market prices to its allies in the West in exchange for manufactured goods – transactions that were conducted in soft currencies and administered by bilateral treaties. But foreign exchange scarcity drove Comecon's members to prioritise exports to the West to an ever greater degree. Competition for Western markets, loans and investment infiltrated the supposedly cooperative relations between its members. Each jostled for position over trade and good relations with the 'non-socialist abroad', as manifested, for example, in bilateral trade deals struck with the European Community by Hungary, Poland and the USSR. In the 1980s, Comecon transactions converged towards world prices and were increasingly denominated in US dollars. Moscow hiked the price of oil, a move that somewhat ameliorated its economic plight but at the cost of undermining its hegemony – for pipelines carrying cheap oil had complemented military might as the skeleton of Comecon.

Perceiving their own and the hegemon's decline, CEE ruling classes lost faith in the Soviet model and looked to alternative methods for securing the conditions for capital accumulation. But this led to divisions. The fact of continuing relative decline meant that any serious opening to global competition would be destructive, with major bankruptcies and mass unemployment. But the prospect of further decline strengthened calls for radical reform. By the mid-1980s Poland had turned in this direction, as had Hungary, whose leaders began to tout its enterprises for sale in Western business centres ('even if they became 100 per cent foreign owned'). Gradually and inexorably, the Soviet model hollowed out from within; ideas of a 'socialist market economy' and political pluralism gained ground. As a result, as Harman pointed out at the time, it did not require a great deal of pressure for the entire edifice to collapse: 'the old people at the top raved about betrayal and even fantasised about telling their police to open fire. But key structures below them were already run by people who, at least privately, accepted the new multinational capitalist common sense.'

TRIBUTARIES OF 1989

It is conventionally supposed that the starting pistol for CEE's transition was fired in 1989. But a zero hour it was not. If the events of that year were unpredictable, they were influenced by broader economic and political trends. I shall consider five of these, most of which date to the mid-1970s.

The first was the demise of the various types of 'national economic' model, including Soviet-style state capitalism, national planning in the West and import-substitution industrialisation in the South. This was hastened by the re-emergence of a world financial market. Offshore currency markets were permitted by Washington (and built up by the dollar deposits of, inter alia, Soviet and Chinese institutions). The mid-1970s witnessed a loosening of capital controls in the United States and then Britain, followed by the deregulation of stock exchanges. These changes facilitated a spectacular growth and centralisation of international banking, insurance and securities markets. The role of finance capital in organising the restructuring of capital grew exponentially, and the deregulation of national capital markets eroded the walls of that captive pool of savings on which Keynesian policies had been based.

The second was a slowdown in global economic growth and the return of crises. Whereas in the 1960s and early 1970s per capita annual global growth averaged around 3 per cent, the corresponding figure for the three decades since 1980 has been only around half as high and financial crises have become more frequent. As outlined by Jeff Sommers, Janis Berzinš and Adam Fabry (Chapters 6 and 10), these first two trends were linked: financialisation and economic globalisation should be understood in part as responses to the crisis of the mid-1970s.

The third, responding to the second and drawing confidence from the first, was the ascendancy of neoliberal economic policy and ideology. Narrowly defined, neoliberalism is taken to refer to an economic doctrine: in essence, a new edition of the neoclassical orthodoxy of the early twentieth century, with its commitment to market 'self-regulation', albeit with several updates (the monetarist analysis of inflation, supply-side theory and the deployment of 'enterprise models' which allow arms of the state to be run like businesses). In a broader sense, it refers to a regime of policies and practices that claim fealty to that doctrine, including a structural orientation to export-oriented, financialised capital, deep antipathies to social collectivities, open-ended commitments to market-like governance systems, privatisation and corporate expansion. There is, as David Harvey has argued, necessarily a divergence between the regime of practice and the doctrine itself, since the doctrine, if applied consistently, implies a world that could never exist. Rather than applying neoliberal doctrine, Harvey contends, elites around the world have deployed neoliberal concepts to furthering a class project. 'Neoliberalism' in this sense describes a range of highly interested policies that have brought enormous wealth to the owners of the means of production, while inflicting insecurity, the loss of public services and a general deterioration in the quality of life on workers and the poor. Having adopted an extreme form of statism during global capitalism's étatist phase, much of CEE swung to the opposite extreme during the subsequent neoliberal phase – most egregiously in the case of Latvia, discussed by Sommers and Berzinš (Chapter 6).

The fourth trend was the geographical spread of liberal-democratic government. From the mid-1970s breakthroughs in Southern Europe onwards, a substantial number of states adopted parliamentary government, albeit with key areas of public life handed to private interests, quangos or international organisations, and sequestered from democratic will-formation. Meanwhile, socio-economic polarisation encouraged a 'revolt of the elites' (Lasch), alongside alienation and insecurity among society's losers. As the voice of the latter weakened, political parties succumbed increasingly to plutocratic interests, and mechanisms of interest representation corroded.

In CEE in the 1980s the long-established normative arguments for political liberalisation came to be supplemented by pragmatic ones linked to economic decline and the 'pull of the West'. In their discussion of democratisation in economically stricken countries in the Second and Third Worlds, John Walton and David Seddon summarise three of these pragmatic claims. One is that democracy provides a relatively stable political environment for business. Another, that the neoliberal ideology propagated by the international financial organisations and lender governments favours weak, non-interventionist states. Liberal democratic governments fit this bill 'because they dilute state power to a level acceptable to diverse coalitions, just as they give greater power to the free play of markets'. Finally, debt and austerity contribute to 'partial state breakdown', as the sacrifices required by structural adjustment exceed the normal limits of patronage and coercion practised by authoritarian governments, attenuating the ability of regimes to ingratiate supporters and bureaucratic retainers through subsidies and favours, even as austerity policies enhance the need for acquiescence, or even cooperation, from the masses. Nowhere was this more apparent than in Poland in 1989. As General Jaruzelski remarked, after initial steps towards democracy had been made, 'we tried economic reforms time and again. But we always met with public resistance and explosions. It is very different now. Now, with a government that enjoys public confidence, it has become possible to demand sacrifices.'