Overcoming Europe’s East–West Divide

by Brigita Schmögnerová

Prime ministers of the visegrad group at the prague european summit 2016
PHOTO:

Prime Ministers of the Visegrad Group at the Prague European Summit 2016. Klara ovc via Wikimedia Commons.

Recently in Vienna, Professor Attila Ágh presented his latest book: Declining Democracy in East-Central Europe: The Divide in the EU and Emerging Hard Populism. In his talk, he characterised the results of transition in Central East Europe (CEE) as freedom, democracy and neoliberal capitalism. Dorothee Bohle and Béla Greskovits, in their 2012 book Capitalist Diversity on Europe's Periphery, analyse the emerging capitalism in the post-communist countries in Europe. Their theoretical framework is based on Karl Polanyi’s The Great Transformation and his concept of the economy embedded in politics or, put differently, the market embedded in society.

Bohle and Greskovits classify the transformation and emerging capitalism of the post-communist countries into three groups: neoliberalism (the Baltic states), embedded neoliberalism (the Visegrád Group, or V4) and neo-corporatism (Slovenia). This is not the only classification of emerging capitalism in the post-communist countries based on the Varieties of Capitalism framework. However, Bohle and Greskovits’ approach helps us understand why the transformation scenario, which was exclusively designed for the transition of centrally planned economies to market economies by the International Monetary Fund (IMF) and World Bank in cooperation with the US Treasury, was not implemented in all CEE countries (except Slovenia) and was not implemented identically with identical results.

The transition blueprint of post-communist countries was based on the Washington Consensus – the name coined in 1989 by English economist John Williamson for the ‘standard’ reform package consisting of 10 economic policy prescriptions. This consists of rapid macroeconomic stabilisation with drastic cuts in social expenditure if necessary; the liberalisation of trade, prices and capital; the liberalisation of a labour market based on flexibility with limited job security; rapid and excessive privatisation including in sectors like education, health, pensions or private provision of public services; low taxation, in extreme cases low flat tax and a shift from direct to indirect taxes and a minimal social safety net centred on minimal help to the poorest.

The transition blueprint, considered as neoliberal, was implemented in its purest form in the Baltic states. In the V4 countries, politics had to respond to the pressures of the electorate, adherents of the social security provided by the former regime. Therefore, the neoliberal transformation co-existed with the implementation of some characteristics of the welfare state of the Rhine or continental type. Slovenia was the only CEE country that resisted the imposition of the neoliberal transition blueprint as a) she could afford it, and b) the political will was strong enough to resist the pressure.

Governments’ transition policies within the V4 group of countries differed in a few respects. In the former Czechoslovakia, ‘shock therapy’ advocated by the then federal finance minister, Václav Klaus, defeated advocates of the gradual approach, which questioned the rationality of rapid privatisation in the form of mass (or voucher) privatisation. They argued that the enterprise sector needs time to adapt to the market economy and the development of market institutions also requires some time. Poland at the beginning of the transition process concentrated on speedy and over-shot stabilisation policies, the rapid liberalisation of prices and trade, but their approach to privatisation was much less speedy and their tax policy was not as radical as that in the Baltic states. The Czech and Slovak Republics, as parts of the common state until 1992, implemented mass privatisation as a dominant method of privatisation from 1990–1992. The Czech Republic continued mass privatisation after 1992. However, mass privatisation did not play a dominant role in Polish privatisation and Hungary did not implement it at all. The Hungarian approach to privatisation was much more cautious and reluctant.

A review of transition history provides an interesting insight into the drivers of reform. During the first stage of transition, reforms based on the IMF orthodoxy were a part of the IMF’s and World Bank’s conditions for providing financial assistance in the form of stand-by arrangements and structural adjustment loans, etc. The second stage of reforms in the pre-accession countries was strongly affected by the adoption of the EU’s Acquis Communautaire. EU accession was an ‘engine of reform’. The third stage of reforms for newcomers to the EU was marked by two aspects: first, the greater discretion of political parties in power to make reform decisions, which was in some cases much slower and therefore dubbed ‘reform fatigue’; second, progress in Europeanisation.

A market economy was considered an ultimate target and not an instrument for growth, employment and welfare.

As one can see, the weight of key players in the reform process changed depending on the stage of transition. In the first stage of transformation based on the orthodoxy of the international financial institutions (IFIs), the managers of transformation were mainly the IMF and the World Bank. In the second and third stages, ‘the manager of transformation’ was mainly the EU. However, the EU cooperated closely with the IFIs whenever countries requested financial assistance from IFIs and insisted that borrowers comply with the IFIs’ requirements.

As assumed by the advocates of gradual transition, the development of the private sector was time consuming. In the V4 countries, it was very much dependent on foreign direct investments (FDIs). The countries fiercely competed for FDIs, providing incentives like tax holidays and subsidies, reducing their budget income. Thanks to the accession process, tax competition could not be accompanied by a race to the bottom in regulatory policies. Low wages and weak trade unions were major attractions for investors. Most of the foreign investments went to the low-skill segment of the production chain with low value added. It is assumed that automation and robotisation will have devastating implications for low-skill labour. According to the Organisation for Economic Co-operation and Development (OECD),  Slovakia will be the most affected among OECD states. More than 40 percent of workers will have to be dismissed and will have to adjust to new job requirements.

While there has been considerable progress in the development of the private sector, achievements differ from one country to another. A dual economy exists within the same country: the two separate economic sectors, divided by different levels of development, technological progress and tradability of products, etc. The first is mostly, but not exclusively, represented by subsidiaries of foreign companies, particularly in the industrial sector; the second mainly by domestic small and medium-sized enterprises.

The transition from a centrally planned economy to a market economy was a consistent part of the great transformation, which included the transformation of a totalitarian system to a democratic one, and in the case of Slovakia from a federal to a national state (a so-called triple transition). However, a market economy was considered an ultimate target and not an instrument for growth, employment and welfare. The price paid for the rapid transformation, the extent of measures, wrong timing and sequencing of measures based on the primacy of the market was high and avoidable. The transformation recession that followed the implementation of the transition blueprint was accompanied by a rapid increase in unemployment, a rise in regional disparities, income inequality and poverty. It took Slovakia almost a decade to reach the same GDP as that of 1989.

The accomplishment of the great transformation (incorporated in the Copenhagen criteria) made the post-communist CEE countries eligible for EU accession. The reward for the hardship of transformation (and the efforts of the pre-accession process), as understood by the new member states, would be the prospect  of  closing the East–West divide in the not too distant future – the best way to promote of the year 1989 and the EU accession date of 2004, that is, the thirtieth and fifteenth anniversaries of the new history of the CEE countries.

 

This article is part of a special series connected with the Cambridge Central European Conference 2019: Post-1989 Transformation and Historical Memory.

About the author

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Brigita Schmögnerová was the Finance Minister of Slovakia from 1998 to 2002 under Prime Minister Mikuláš Dzurinda. She was Executive Secretary of the United Nations Economic Commission for Europe (2002–2005) and  Vice-President of the European Bank for Reconstruction and Development (2005–2010). She is a professional advisor of the Czech and Slovak Academy of Social Democracy and President of the non-governmental organisation PROFORUM.

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