Philipp Ther: Ruthless Modernization from Top Down
It is not a coincidence that right-wing populists and nationalists have taken government control in countries whose economies are very open to the outside world and where the state social safety network is either very weak or has had little time to develop properly.
ROBERT SCHUSTER: How would you evaluate the economic transformation that began thirty years ago in the countries of Central and Eastern Europe? Broadly speaking, can it be viewed as a success?
PHILIPP THER: I would not say it can be measured on a scale between success and failure. That approach used to be very common in the 1990s, when countries were evaluated on the basis of various indexes, as if at a sports competition. The perception of success or failure comes down to the subjective perspective of an individual in the end. From a historian’s point of view, your perspective is of utmost importance. Various charts paid attention to growth, inflation and debt but less so to the earnings and purchase power of the population.
There is no doubt that former communist states have been catching up with the West, a process that has no parallel in European history. Viewed from this angle, it can be argued with some merit that the transformation has been relatively successful. The Czech Republic and Slovenia have overtaken several older EU members as far as GDP creation is concerned and stand a very good chance of catching up with the level of prosperity that is the EU average.
Poland has done exceedingly well, and despite certain prognoses right after the dissolution of Czechoslovakia, Slovakia has achieved some good progress. It should be stated, however, that the growth data does not tell you much about the earnings and purchasing power.
It should also be noted that experience based on real-life often differs from the official perspective. The Documentation Center Karta announced, for example, a memoir competition in Poland in 2009. Young people were then asked to record their experiences after 1989. What clearly stood out from the results was that people were much more critical of the transformation than was apparent from all the macroeconomic data.
Despite clear progress and new opportunities for personal consumption, many people growing up in the 1990s perceived this time as an era of struggles and great uncertainty. So one has to bear in mind these negative reflections as well. I, therefore, disagree with a simple evaluation of the transformation into categories of success or failure. Experiences with the transformation differ significantly based on your social standing and, most of all, in your region.
Each and every post-communist country has a strong division between its western and eastern part, as well as between urban and rural. There is also a generational divide. Young people often went on to do rather well, while those who were forty at the time were often left behind by the transformation. It is these differences one has to keep in mind in order to comprehend the complexity of the entire transformation process.
Despite clear progress and new opportunities for personal consumption, many people growing up in the 1990s perceived this time as an era of struggles and great uncertainty.
Is this the case of Eastern Germany, where despite massive financial transfers from the West satisfaction with the unification has been stagnating and electoral success goes to parties that seek to cast doubt on the successful unification narrative?
As far as Eastern Germany is concerned, I have compiled the economic data of the five new German states for my planned book and viewed them as if the East German state still existed. When we compare the data with the Czech Republic, it is evident that earnings and pensions are significantly higher in former East Germany. When one compares the GDP performance, for example, the Czech Republic is only a fraction behind. This took me by surprise because during the first 25 years of the transformation, the West sent about 1600 billion euros in transfer funds. It is apparent that the investment fell short of its intended effect.
Additionally, the East has not been catching up with the West for several years now, but on the contrary, the economic divide is actually growing. This is one of the reasons for the popular discontent in Eastern Germany. Another reason is one’s reference point. For Eastern Germans, it is Western Germany, and not Poland or the Czechs.
If they were to compare themselves with their eastern and southern neighbors, they might feel a good deal happier. In the 1990s and around the turn of the millennium, the protest votes went mainly to the post-communist Party of Democratic Socialism (PDS), or later to the Left (Die Linke). In recent years in most European countries, the clash between right and left-wing populism has been won by the former, with this being the Alternative for Germany (AfD) in Germany. The reason behind this may be that nationalism draws in more capitalist critics. It needs to be said that the share of the vote going to AfD is not that dramatic when compared with other post-communist countries.
Is it possible to say, with the benefit of hindsight, what the biggest transformation mistakes were?
On the basis of the data that I have at my disposal, I can not grasp the notion of “a success—story”, when roughly since the 1980s there has been this dissemination of the idea that so-called “shock therapy” is the basis for economic growth further down the road. The Eastern Germany story can attest to that. Poland has also had its share of problems with its shock therapy.
It has eventually experienced economic growth, partly because Leszek Balcerowicz was a pragmatist. The same goes for the Czech Republic, where Václav Klaus was nominally a Thatcherite, although he ended up making a number of compromises. The housing market and rents remained well regulated, for example, as well as privatization—which led to the banking crisis of 1996. In hindsight, I am now convinced that deep structural changes were the main problem of shock therapies.
Some regions have gone through massive deindustrialization, and small to mid-size towns have often failed to deal with it to this day. There are nations that were more careful back then, the Czech Republic in the 1990s, for example, and it was better for them. On the other hand, countries that put off reforms because post-communists took control of the government, such as Romania or Ukraine, fared much worse in the end.
Another mistake that can be clearly seen was a strong anti-etatism. There was a clear antipathy towards the government with the Chicago school and Milton Friedman. During Reagan’s era in the 1980s, for example, Friedman warned against “big government” and attacked the institution of the state as such. It is clearly untrue that all human needs are best met when in private hands. On the whole, such anti-etatism was counterproductive, because the states that were having the most serious problems with reforms after 1989, such as Russia or Ukraine, were struggling with the weakness of the state and its institutions.
This led to corruption on a massive scale that ought to have been dealt with much more strictly. It is not surprising that transformation as such had a bad reputation among the people. Even the West had its own share of problems with corruption during privatization drives. The goal of the privatization was to increase effectiveness and competition. What seemed correct in theory did not necessarily work in reality.
The East has not been catching up with the West for several years now, but on the contrary, the economic divide is actually growing. This is one of the reasons for the popular discontent in Eastern Germany.
All in all, the transformation was a process of modernization from top-down, and often very ruthless. The intention was to transform the perceived homo sovieticus to homo economicus. Human resources were not compensated properly, and not all were competitive under new rules. Many people were disappointed by the reforms and their wellbeing declined dramatically. The notion, in other words, that an individual drive for profit automatically leads to greater prosperity for all needs to be reexamined as an outdated liberal concept.
In former Czechoslovakia, there was this witticism during the transformation that it was a tug of war between lawyers and economists that would decide how fast or slow it would be. How important was it that the transformation of a socioeconomic system took place in the context of a poorly developed legal framework?
It just demonstrates the lack of understanding of what it takes for a state with democracy and rule of law to function. To do something hastily does not necessarily mean to do it better. To establish the rule of law has never been easy yet I am not sure the lawyers are to blame. It is difficult when most of the legal experts were educated in the old system. I am also surprised by this bon mot because, according to neoliberal ideology, a human being only needs a state providing rule of law, police protection and a market economy. The economic crisis in 2008-9 has shown that something else is needed, this being a democracy and a social state Most of the people in the post-communist countries wanted exactly that.
To what extent were the reformers in Central and Eastern Europe autonomous when it came to the methods they chose to implement after 1989, and to enact systemic changes? Did they have to play ball with the creditors, for example?
When it comes to the concept of the reforms, there was a worldwide neoliberal hegemony, with the exception of Vietnam or China. You had the IMF, on the one hand, providing a clear neoliberal framework, along with the World Bank and European Development Bank (EBRD) later. Then there was the EU, which put a great emphasis on the reform and improvement of governance and civil service, and strengthening of the state as such, as it was not viewed with such scepticism.
We should not underestimate, however, the influence individual national actors have had. Leszek Balcerowicz in Poland, Jegor Gajdar in Russia and Václav Klaus in the Czech Republic were acting independently when they managed to push through their way of reform, which did not always align with the recommendation of the IMF. The amount of debt towards Western institutions also played its role.
In 1989-90, Poland had little room to manoeuvre and had to all but follow the Western guidelines. It needs to be said that there was strong support for radical overhaul even in the political camp of the former Solidarity movement. Czechoslovakia ventured into its systemic reforms more independently, and later Slovakia under the authoritarian government of Vladimír Mečiar rejected the conditions of the IMF altogether. At a later point, it needed a line of credit and turned to neoliberalism towards the end of the 1990s. On the whole, the autonomy of national government, when implementing reforms, should not be understated.
Some socialist countries did not have such rigid rules; private handicraft companies always existed there, and agricultural collectivization also had not been fully established. In 1989, did such countries have a head start? Have people there adapted to free-market conditions and rules more easily than elsewhere?
Yes, it did help, and it also meant that Poland and Hungary were pioneering reformers that managed to attract significant foreign investment. Both countries were quickly off the blocks as, towards the very end of state socialism, they tolerated many privately owned initiatives and enterprises in their economies. When initial transformative capitalism later entered another phase, many of the self-employed also experienced economic difficulties, but this also varied in different sectors of the economy.
In the service industry, retail and manufacturing it was beneficial to have a large diverse private sector. In agriculture, specifically in Poland, not so much. There a large number of independent small farmers was thought to be the major obstacle for the reform. On the whole, the most important resource for the transformation in all of these countries was the relatively high level of skills and education and very low wages and salaries. The quality of education was of course given by state socialism and began to be neglected after 1989.
All in all, the transformation was a process of modernization from top-down, and often very ruthless. The intention was to transform the perceived homo sovieticus to homo economicus.
Over the past thirty years, could there have been an establishment of a strong middle class, which is such an important condition for democracy?
The bigger the middle class, the greater the support for democracy—there is a clear interconnection. The new class of small and mid-size businesses in Visegrad countries and the Baltic states was very important for building and consolidating democracy. Today they play an important role in protecting and preserving democracy. This middle class is very unevenly distributed.
It is mainly found in cities, and struggles in the rural areas and postindustrial regions. It can be seen in the results of the election, as well as in demonstrations fighting for democracy and rule of law. Fortunately, the Czech Republic, Slovakia and Poland have a relatively strong middle class, with Slovakia recently having abandoned right-wing populism.
How would you explain the current situation in Hungary? People there had some experience with market principles before 1989, the country had great support from foreign investors, transformation went about relatively smoothly without any hitches…
Hungary today is not a fully functioning democracy but a semi-autocratic system. We can see it in the media and there are interventions into academic liberties, as is the case of Central European University (CEU) which was expelled from the country. Another important factor in Hungary is a traditionally strong polarization between the government and the opposition. It also needs to be said that the opening of the Hungarian market was so radical that in some sectors there are no local products to be found, and this also led to a certain alienation among people.
Thirdly, direct economic investment was partly very speculative, especially in the consumer and building loans in foreign currency. Orbán’s regime managed to take hold mainly thanks to the financial crisis of 2009. It discredited the Western order and neoliberal policies as such. In connection with foreign currencies loans, Orbán managed to pull off an act as the savior of the middle class, thus laying the basis for his current popularity, which cannot really be disputed.
Even prior to 2009, the reforms did not always go smoothly, far from it. In 1995 there was a credit and currency crisis which the then post-communist government decided to solve with the so-called Bokros packet (named after the finance minister responsible). As a result, thirty percent of the population slid under the official poverty line. In other words: in Hungary, there were many left reeling from the effects of transformation, and such people are especially susceptible to slogans and propaganda, be it right-wing populist, nationalist or now anti-European.
Parallel with the transformation processes in Central and Eastern Europe, there was the worldwide advent of globalization. Did they influence each other, did they overlap, was there a connection of any kind?
There is a close and direct relationship. What transformation brought about was that the post-communist countries were again part of the world economy.
It is not a coincidence that right-wing populists and nationalists have taken control of governments in countries whose economies are very open to the outside world.
They became active players in globalization and made it stronger. Another relationship is that European integration, or Europeanization, can be seen as globalization on a smaller scale. In certain aspects it went even further, when it established open borders for capital, goods, and people—i.e. for potential migrants as well. It can be argued that Central and Eastern Europe became the subject and even the driver of globalization. The right-wing populism that has been so strong recently is a reaction to this dimension of transformation, as well as globalization and Europeanization.
What lessons for the future can be learned from the transformation experience in the last thirty years?
It is not a coincidence that right-wing populists and nationalists have taken control of governments in countries whose economies are very open to the outside world and where the state social safety network is either very weak or has had insufficient time to develop properly. If we want to apply the domino theory from 1989, then Hungary, Poland, the UK and the US have been domino pieces that fell down first and moved in this direction.
The success of right-wing populists is tied with socioeconomic changes, and especially with the social and geographic divide. This development is not only taking place in post-communist countries. Western countries have undergone social-economic transformations that have created, apart from a few victors, too many disenfranchised and too many worries. There also exists a link and continuity between neoliberalism and illiberalism, not least in that they dismiss public debate and criticism. It used to be that there was no alternative to their course, and now critics are being labeled as the enemies of the government, the nation and the people.
If there was a conclusion to be made from all of this, then it is perhaps that openness to world markets and globalization can be sustainably managed via the social-liberal way, not the neoliberal. Countries with a traditionally strong social state have experienced a smaller rise of right-wing populism, such as Austria, Germany or France, although it has been gaining some support.
One of the factors is the level of education in society, and there are notable differences between Central and Eastern Europe. This could explain why the Czech Republic and Slovakia have resisted the right-wing populism more than Hungary, and to a certain extent Poland. The critique of neoliberalism should not be too broad. It makes no sense to turn it into a bogeyman. When we look at transformation, it is important to distinguish between certain phases.
Many of the reforms made sense in the 1990s. That applies, for example, to subsidies for big companies being scrapped, (when small enterprises were sold to private owners, (so-called small privatization), convertibility of currencies established, gradual opening to the world market and to certain extent privatization of big industrial conglomerates.
But then the second phase of radical neoliberalism came about, which directly led to the global economic crisis in 2008–9 due to deregulation of the world financial markets. From a historical perspective, the crisis started a new era. In many regards, a number of the current political problems stem directly from it. It remains to be seen whether we can reach some stability, but there are some reasons for hope, the recent election to the EU parliament being one of them. It was lampooned as an almost certain catastrophe but in the end, it was far from it. The large party coalitions of Christian Democrats, Liberals and Social Democrats have remained key powers in the new parliament. Perhaps even the right-wing populism has already reached its zenith.
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