Transformation experiences of Central European countries after 1989 can serve as a springboard for South European states that find themselves in a state of crisis. One of the lessons learned: stable economic growth cannot come without the investment into non-speculative areas of economy.
Not so long ago were the terms “neoliberalism,” “deregulation,” “privatization” and other of similar creeds thought of as unmentionables in any decent company. They were being blamed for all sorts of things; from growing socioeconomic gaps in societies, unleashing of the global economic crisis in 2008–2010 and subsequent difficulties in coping with its aftermath in the most affected countries.
Such sweeping criticism almost became to be expected of many commentaries prevalent mainly in Western Europe. It ought to be said that the critics were not always far off the mark, but more often than not the authors appeared to be in dire need of further education on many fronts; terminology, cultural and economic specifics of stricken countries spring to mind, among others. Simplifications were not particularly helpful. Central and Eastern European states were often cited as examples of countries that underwent economic transformation guided by neoliberal principles. After 1989, these states sought to implement social and economic changes whose main features were to limit government and establish, or strengthen, private ownership. In some instances the implementation of neoliberal reforms led to an almost instant success, in others it took some time. Most recent studies have shown an interesting finding: The foundation of the reforms’ success or failure had been laid much earlier, very often in the times of deep socialism. At least such is the conclusion of Austrian historian Philipp Ther in his book New Order on the Old Continent (“Die neue Ordnung auf dem alten Kontinent”).
The abovementioned new order is, of course, neoliberalism. It could bear comparison to the most successful ideology of the 19th century— nationalism. Their main objectives were very similar. They both sought to limit the role of the state. Whereas nationalism strove to establish the dominance of a nation over the state and its institutions, the neoliberalism has been seeking to establish the dominance of the economy or the market.
The ideas that market can sort out everything better than any public (state) institution and that it is better to privatize than to subsidize unprofitable companies from the state budget, or that the international trade ought not to be limited by custom duties and other regulations, were in line with the premises of economic reforms in the majorities of communist countries after 1989. These premises were, in fact, the postulates of the so-called Washington Consensus, which were formulated the same year. Ten points of this consensus are thought to be the main rules of the neoliberal approach to economy. It was only logical that countries whose economies were governed by central planning chose measures that were complete opposites of the old system and that promised the fastest departure from the old system.
The first experiences with the neoliberal approach in the countries behind the former Iron Curtain have also shown its limits. It became apparent that economic growth, documented by positive GDP numbers, does not always correspond with the well-being of the broadest masses of society, however one might try to interpret it that way. A classic example is the so-called coupon privatization, which was to help establish “people’s capitalism” or “the capitalism for the masses” in Czechoslovakia in the early 1990s. What really happened was that the state’s assets, which were being given away among the populace in the form of vouchers, very quickly ended up in more or less murky investment companies. Many of them, after they had collected coupons—in other words people’s trust—and thus gained access to state assets, promptly went bust.
Had there been established a proper legal framework and the institutions overseeing the market had been worth its salt, there could have been a markedly different outcome than the strong disillusion that was so prevalent among many citizens of the Czech Republic and Slovakia after their experiences with the coupons. The words of Václav Klaus, the then finance minister, came to bear fruit: during the transformation process “economists must win over lawyers.” This first experience with capitalism has been somewhat priceless; it may be that in the minds of many Czechs and Slovaks the whole of capitalist system was thus discredited.
Was it realistic to expect that in the countries that had been controlled by the communists for so many years (who had bent the law, state and its institutions as they saw fit) there could have been properly functioning institutions enforcing democratic legal order from day one? Probably not. But in these societies there could have been a counterweight as it was defined by Phillip Ther: a civic society.
Countries that had a thriving and active civic society, despite the communist rule, did not experience the harshest impact of neoliberal reforms. Poland can serve as an example. At the bottom of the ladder we will probably find the majority of post-Soviet countries, where neoliberal economic reforms have led to the creation of oligarchic capitalism; wealth having been concentrated in the hands of few and masses living in poverty.
If we focus on the situation in the four central European countries, Poland, the Czech Republic, Hungary, and Slovakia, we find that the fall of socialism in these countries had begun much sooner, in the late 1960s, in fact. In Czechoslovakia it was the crush of the reform movement of the so-called Prague Spring that made it abundantly clear that socialism had no future. Poland and Hungary underwent a similar experience. Their governments were forced to take action over the widespread dissatisfaction of the populace with the shortages in supply of consumer goods. In the 1970s, with scarce Western cash, they invested into Western technologies and then expected the centrally planned economy to increase its productivity and at least partially meet the demand for consumer goods, which were in such a chronically short supply. Alas, the new machinery and licenses did not help; on the contrary, it led to a further increase of the countries’ debt. A massive hike in prices led to widespread protests across the whole of society, which peaked in 1979–1980, and inspired the foundation of independent Solidarity union movement in Poland.
In the atmosphere of general lack of consumer goods that was so typical even for the showcase socialist countries such as Eastern Germany and Czechoslovakia, it became logical to come to rely on the unofficial (black) market. The ability to obtain goods in short supply, to settle on a price—that became an important factor in the development of market economy after 1989. The most obvious example from the four abovementioned countries is Poland.
Polish capitalism did not spring from the privatization of the huge state conglomerates, but from the bottom up. It was created by traders who were able to find their way around the shortcomings of the economy in the 1980s. Hundreds of thousands of Polish citizens started a sort of a capitalist enterprise before the fall of communism. At the beginning of the 1990s this venture system was so developed that when in the middle of the decade the communists—with the label of social democrats—came back to power, they kept the whole system in place and only mitigated the effects of the worst excesses of the “wild capitalism.”
The example of the transforming societies of socialistic countries showed one more important thing: not always were the politicians proclaiming the neoliberal reform policy able to put it into practice as well. Their words and slogans were very often only aimed at attracting foreign investors, or at placating them. Václav Klaus is one such example—in theory the poster boy of American neoliberal economists, but in reality his practical policies during his tenure as a prime minister were in stark contrast with his ostensibly neoliberal agenda he has always been so fond of proclaiming.
Experiences of the countries in Central and Eastern Europe with the economic transformation that was implemented according to the Washington consensus postulates can be a vital lesson to the countries of Southern Europe that find themselves in trouble due to the sovereign debt crisis. Countries such as Spain, Portugal, Italy and Greece are facing similar challenges as once the countries of Eastern Europe did. Even the rhetoric the Southern governments are confronted with is not that much different from what Prague, Warsaw, Budapest and Bratislava used to hear in the nineties. Economic reforms then and now are very often being labelled as “unavoidable” or “without a real alternative.”
What is also similar is the problematics of consumer lending, or mortgage loans in foreign currencies, which were very popular in some countries, for example in Hungary, around the year 2000. These loans were cheaper than loans from domestic banks but the customers had not been informed about the possible risks in connection with currency volatility. When the bubble burst due to the world economic crisis and the loans got more expensive, the impact for many real estate owners was the same as in Spain, Portugal or Ireland; foreclosures.
There are some differences, though. Different segments of society were among the most affected when neoliberal reforms exacted their dues. In Central Europe, many of the middle aged generation were forced to leave their decades-long employment, and were not able to adapt to the new environment; in Southern Europe the crisis has affected mainly young people, regardless the level of their education.
Another difference would be that the governments of some South European countries acted on only some of the postulates of the Washington consensus, namely austerity and investment cuts. What was missing from the mix were the measures designed to attract foreign investment or an increase of investment into education. Many areas of economy that had long been protected were not open to outside competition, for example taxi services.
What has also became apparent is the fact that economic growth that was later to come in the Central Europe was kick started by investments into manufacturing and industrial sectors of the economy. Money that was poured into speculative industries, such as real estate or banking sector, only inflated the bubble further, with the inevitable result. The effect of such investments in the long run was zero.
And there is one more inspiring experience from the Eastern Europe. After the collapse of many state-run companies the potentially dramatic threat of mass unemployment was offset by increased mobility—not only within the affected countries, but also abroad. Many thousands of, mostly young, Poles, Lithuanians, Latvians, and Estonians went abroad and after their countries’ accession to the EU they created now legendary colonies in the UK and in Ireland. When the socioeconomic conditions of the host countries went into decline, many of them decided to return back home. It is important that they brought back the money they earned abroad and invested these funds at home—a direct foreign investment of sorts. Thus, in the crisis year 2009 Poland was growing 1.6%, one of only a handful of countries in the EU. Just for the comparison: German economy fell by 5.1 % in the same period and Austrian by 3.8%.
What to say in the end? Neoliberal economic reforms are not the wonder cure for all. There are opportunities as well as dangers. Nevertheless, the examples of Central and Eastern European countries have shown that when there is a need for fast systemic changes to the economy there are no better tools available today.
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