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The Burdens of Freedom: Eastern Europe since 1989

Fernwood Publishing and Zed Books Ltd

Different paths on an open road economic and social change

On a gray July evening in 1993, there were hundreds of people on the train station platform in the small town of Sestokai, in southern Lithuania, waiting for the train to Poland. The prospective passengers – I was the only one with a reserved seat – were dwarfed by mountains of cargo, for this was the only train connecting the two countries, and thus the best way to transport goods from the Baltics and northern Russia to the bazaars of eastern Poland. My reservation did me little good in the frenzied rush that ensued when the little train finally pulled in. Only with the help of the conductor could I even find a space to stand in the corridor. My assigned compartment was occupied by two Latvian men and their offering to the Polish consumer: several huge milking machines.

In those milking machines, in a Lithuanian border town, we encounter all the mysteries and ambiguities of post-communist economics. How did these passengers come to have such unlikely baggage? How could they know that just such an esoteric item would find a buyer in some Polish town or village? And is this an example of the wonderful ingenuity of modern economic relations, or an illustration of the utter breakdown of law and order, a grotesque parody of globalization enacted by those left on the margins of change? Much depends on perspective – and Western perspectives, since 1989, have been strongly colored by political assumptions. That train was either full of the marginalized and dispossessed, or of wily entrepreneurs building a free market economy suitcase by suitcase. Perhaps we were all right, as we watched Eastern Europe embark on an uncertain journey across once-closed borders.

Those trains filled to bursting are now largely gone, though every bus west from Belarus and Ukraine is destined for the same bazaars, while the milking machines (if there are any left, after all the collective farms have been stripped) now come by truck, shipped by respectable firms. That ingenuity, though, deserves much of the credit for the region's success so far, as well as the blame for some of its suffering. This chapter will explore the most rapid and surprising of all the post-revolutionary transformations: how East European economies and societies evolved into serious competitors with their Western neighbors – into, of all things, "normal" places.

A time for experiments?

In the late communist period, the countries of Eastern Europe were more different socio-economically than they were similar. A few – Albania, Bulgaria, Romania – maintained strict control by plan and police. The Baltic republics of the Soviet Union had emerged under Gorbachev's rule to experiment with cooperatives and nascent social movements. Hungary, Poland, and Yugoslavia had long been at the forefront of efforts to combine private or cooperative economies with central planning; in all three (and to a lesser extent in Czechoslovakia), legal and illegal social activism, especially in the cities, undermined the stereotypes of rigidity and fear. Despite the very real restrictions that communism imposed, Eastern Europe had already accumulated some of the social and economic experience necessary for life outside the cage.

Ultimately, all the countries under consideration here have followed paths toward broadly similar outcomes. Did they have to? Today, the emergence of free market economies, based upon private enterprise, tax incentives, low rates of unionization, and the rest, appears to be inevitable. At the time of communism's collapse, though, some hoped that a "third way" between communism and capitalism could now be found. The best of the socialist system, such as the minimalization of individual economic risk, or collective/cooperative forms, could be combined with the innovation and dynamism of market economies. That such ideas came to nothing – such that throughout the region today, only marginal parties use "third way" language – tells us little about free market inevitability. After all, the conditions in 1989 were such that most people accepted the need for radical change. "Market socialism" was not a promise, but a familiar communist phrase – albeit one from a heretical tradition. Meanwhile, a crisis in West European social democracy meant that international support for experimentation was at an ebb. In another context, the quest for a third way could have been a progressive move, and been eagerly pursued. In 1989, especially since those who talked about it were often from the reformist wing of the old communist parties, it sounded cautious, even fearful.

In 1989–90, the economies of Eastern Europe appeared to collapse with ferocious speed. Industrial production and standards of living plunged, while unemployment and prices rose. Thus, for example, all of the economies of the region saw a decline in GDP in 1990–91, in many cases by over 20 or even 30 per cent. Unemployment went from zero to over 10 per cent in the same period, while inflation hit double or triple digits. This is a bleak picture, but what really happened? It is hard to tell for a number of reasons. First, regime statistics before 1989 cannot be relied upon as benchmarks for what happened later; they tended, for example, to exaggerate economic productivity and underestimate costs; prices in particular made little sense. Second, it is difficult in any case to capture rapid change in annual statistics. And third, as the Latvian milking machine peddlers remind us, so much economic activity remained beyond the reach of any measurement. Millions of East Europeans, moreover, had cash reserves which they had not entrusted to communist banks – the $20 in a Christmas card from an aunt in Chicago, the under-the-table cash earned in a summer picking strawberries in Sweden, the wages of a Gastarbeiter husband or son employed in a BMW factory in Munich. This softened the blow, though the hardships of inflation and unemployment would touch everyone. At any rate, the communist economies had been falling apart for at least a decade; the economic and social impact of political change, then, stemmed as much from perception as it did, initially, from actual collapse.

The scope and depth of the revolution also handicapped economic change. Had any one country sought to transform its economy, the results might have been very different; instead, the entire Council for Mutual Economic Assistance (CMEA – the economic organization of communist states, also known as COMECON) faced the same challenges; as a result, export markets for many products disappeared overnight. The collapse of the Soviet Union hit Eastern Europe particularly hard: gone was a guaranteed trade partner, replaced by fifteen fledgling states. Later, war in the Balkans would similarly create trade wars where borders had once been invisible.

Finally, East European leaders had to reckon with social unrest. The nature of that unrest distinguishes post-communist change from previous revolutions. East Europeans are literate, largely urban, and were organized – both in official and independent unions, youth groups, etc. They had struck, marched, rallied, and joined illegal organizations in protest against communist policies. Even before any market reforms had been enacted, workers had shown the regimes (and themselves) what they were capable of. For example, a wave of strikes accompanied Poland's round table discussions of February–April 1989. The Velvet Revolution in Czechoslovakia featured a brief nationwide general strike – the first in that country in twenty years. Millions of others, of course, had participated in non-economic demonstrations in nearly every country in the region in 1989. Who really understood social aspirations, and how people would react to hardship? Reformers throughout the region would have to take this into account.

Unfortunately, 1989 was not the most propitious moment for change. First, the West was experiencing a small recession. A slowdown in the American, Japanese, and Western European economies meant that less attention (and material help) would be paid to emerging economies. Second, the Iraqi invasion of Kuwait in 1990, and the ensuing embargo placed on Iraq by Western allies, led to a drastic reduction in oil deliveries to Eastern European countries; these deliveries had in part been in lieu of debt payments from Iraq. Some countries saw a significant decline in crude oil supplies; all found oil more expensive on the world market just as they were trying to adapt to that market. In addition, most Eastern European countries were heavily in debt to Western banks and governments; Poland owed about $40 billion; Hungary had the highest per capita debt (over $2,500), and owed $20 billion total, while Bulgaria owed nearly $10 billion. Romania, in turn, had paid off its foreign debt under Ceausescu, but at the cost of utter impoverishment. While domestic trends are the focus here, the international dimension (to be discussed in Chapter 5) turned out to be more an obstacle to change than a bonus.

Still, given the euphoria with which the West – and especially the United States – greeted communism's demise, many within Eastern Europe and beyond assumed that a "new Marshall Plan" would be forthcoming to reward the nations that had ended the Cold War. After all, the cost of change had turned out to be so much lower, without war, than anyone could have expected. The amount of aid given may seem quite large, in the order of $53 billion in official aid from all sources in the years 1990-98. Yet one estimate pegs grant aid from the West in the 1990s, in relation to its GNP, as just one-fiftieth of what the United States had committed to Europe in the 1940s and 1950s. Most aid was in the form of loans or technical assistance, not grants. There would not be a second Marshall Plan.

There was logic as well as stinginess (or distraction) in Western policy. Lacking any inkling of the Yugoslav wars just a few years ahead, the West did not see the same kind of urgency as had been the case in 1947. Then, fears of a communist takeover of France and Italy, and of a slide into chaos in Germany, had jolted the US out of probable isolationism. Forty-three years later, with the Soviet Union on the wane and no discernible alternative to free market models, the West could take its time. It could offer instead what Janine Wedel derisively calls a "Marshall Plan of Advice," in which consultants, credits, and loans replaced straightforward capital assistance. Furthermore, while the Marshall Plan aid had gone largely to countries that had been either close allies or formidable enemies during the war (Britain, France, Germany, Italy), the targets in the 1990s could be assumed to have much less expertise; the main problem, to Western leaders, was that they had mismanaged economies for forty-five years – not to mention the fact that some, at least, had put a lot of energy into economic espionage. Better, then, to keep tight control over money dispersed. Thus, while Eastern Europe was not left to its own devices, it would have to bring about economic transformation on its own.

Hungary and Poland set the pace, in different ways. Poland's last communist prime minister, Mieczysiaw Rakowski, began freeing prices from state control and eliminating subsidies just weeks before handing over power, in August 1989; ration cards for meat and gasoline, symbolic of communist mismanagement, also finally disappeared. The result – in the absence of any macro-economic policy – was chaos: by early fall, hyperinflation raged and retail trade took to the streets. Every street corner was crowded with farmers selling (presumably) fresh meat and vegetables from the back of small trucks, next to tables piled with new clothing, kitchenware, and books. Perhaps the apparent anarchy made the idea of a "Big Bang" approach to economic reform more appealing. Leszek Balcerowicz, Finance Minister in 1989–91 and 1997–2000 (and later Director of the National Bank), has become most associated with this approach. Just after Christmas 1989, Parliament passed a package of laws designed to hasten the process of marketization. Price liberalization and currency devaluation accompanied strict wage controls (through a tax on excessive wage increases). This was "shock therapy"; its leading international proponent, Harvard economist Jeffrey Sachs, has pointed to Poland's strong economic record as vindication of the approach. The great costs of this shock will be discussed later, meanwhile, one must consider other causes for that success.

Hungary provides an interesting contrast. There, "market socialism" had been the watchword since the 1970s; prices and wages were not as regulated as they were elsewhere in the region. Still, government subsidies were large, and their phasing out in early 1990 led to unrest, including demonstrations organized by unions and by the center-right Hungarian Democratic Forum. Hungarian leaders, preoccupied with elections and certain of their country's economic superiority, were slower to embark upon economic reform. The belief that Hungary did not need wholesale reform was encouraging to Hungary's neighbors, but caused problems for Hungary in the long term.

Similar divergence can be seen in approaches to the privatization of state assets. Since state control of industry and land had been one of the hallmarks of communist regimes, there was no doubt at all in the early 1990s that privatization was an essential step. This may not be true, and the programs enacted resulted in a rapid rise in unemployment. Yet it is worth pointing out that privatization of industry was both vastly larger than that undertaken by, for example, Margaret Thatcher in the UK in the 1980s – thousands of firms, rather than dozens – yet also more limited: most countries today do not have privatized infrastructure (transport, oil refineries, post and telecommunications, etc.). Countries as diverse as Slovenia (now by far the wealthiest in the region), Bulgaria (soon to be the poorest in the European Union), and Hungary have chosen to privatize slowly and selectively, despite external advice.

If the task was clear, then, the method was not. The privatization of retail and service (shops, restaurants, etc.) was everywhere uncontroversial, and proceeded quickly. Large manufacturers were another story. Who would buy such dinosaurs, which had operated in accordance with central planning dictates, indifferent to buyers' expectations? One obvious answer was the employees themselves – especially since they were already the owners, according to communist propaganda. Where there were strong unions, employees often demonstrated in support of this approach, or even struck to prevent privatization by other means. Usually, though, employees were offered 10–20 percent of shares in their company, at reduced rates or free. Similarly, there was strong sentiment in favor of mass privatization – that is, distribution of state assets to citizens. Who had made the revolution, after all? Thus emerged the popular idea of citizen vouchers – adopted in Czechoslovakia in 1991, followed by others (particularly Bulgaria, Lithuania, and Poland) in the mid-1990s. Citizens were either allotted vouchers free of charge to be invested in shares of the firm of their choice (or even, in some cases, to buy housing), or were permitted to buy investment vouchers at low cost up to a certain limit and then exchange them for shares in a firm.

The perils and advantages of such a system can be seen in the Czechoslovak case, engineered by the then-Finance Minister Vaclav Klaus. Each adult citizen could (after paying an administrative fee) acquire a voucher booklet to invest in shares. Most, however, subsequently allocated their shares to investment funds, such as Harvard Capital and Consulting, created by twenty-eight-year-old Viktor Kozeny (who had failed to complete his studies at Harvard, but took the name anyway). Kozeny (and others like him) ended up a wealthy émigré; few citizens saw the fantastic returns on investment that he promised. Meanwhile, the now-privatized companies derived their capital from state-owned banks. Thus, the Czechoslovak system had succeeded only in transferring ownership from the state back to the state, in the process enriching a few investors. On the other hand, this system did create a kind of "shareholder culture," and moved assets quickly out of the hands of communist managers and the government ministries.

While it is not obvious that investment funds and banks are any more beneficial to the economy and society, as owners, than are the communist nomenklatura, resentment of the latter has been a source of a large part of anti-government anger ever since. Throughout the region (but much less so in countries that implemented programs like that in Czechoslovakia), many feel that the communists engineered a takeover of the economy in exchange for relinquishing control of the state – and did so with the connivance of their successors. With their knowledge of the firms they controlled, managers and government officials created complex holding companies to which they sold off assets, or used insider knowledge to acquire majority stakes during privatization.

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Excerpted from The Burdens of Freedom: Eastern Europe since 1989 by Padraic Kenney. Copyright © 2006 Padraic Kenney. Excerpted by permission of Fernwood Publishing and Zed Books Ltd.
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