Eastern Europe on the Brink

The Legacy of 20 Years of Unrelenting Neoliberal Reforms

Twenty years after the fall of the Berlin wall, we witness the rise of nationalism, xenophobia, and right wing extremism in the “new” Europe; those ghosts that have haunted the region historically are back again. But why now?

I recall reading The Global Gamble by Peter Gowan in the late 1990s while doing my master’s dissertation in post-communist studies. The book almost seems prescient now because it had predicted all that has come about in the region. In hindsight, the stock phrases and slogans of “return to Europe” embodied by Lech Walesa and Vaclav Havel, which I heard back then, today seem so hackneyed, irrelevant, and hollow. But then they were once essential in order to sell the “new order” to the masses of central Europeans eager to join the West once again.

What Europe have they returned to? One that has virtually implemented, for two decades, an unsettling blend of unrelenting “shock therapy” mixed with neoliberalism with mixed results? It seems the transformation has created a “united Europe” that has “successfully” devised a corporate takeover of the entire region of the “other Europe” and in the process mothballed textile factories in Poznan, coalmines in Katowice, steel mills and armaments factories in Slovakia and shipyards in Gdansk, the city by the sea known as the birthplace of the “solidarity” movement.

The West introduced market capitalism immediately after the fall of the wall. Its main sales or pitchman was Jeffrey Sachs, a brilliant young Harvard professor who was practically anointed as the apostle or father of “shock therapy” in the form of the “new economic theory of the transition.” As Gowan describes it, “a western-directed plan for regional social engineering” to achieve a market economy. At the time, Sachs ran up against skepticism from some eminent thinkers, for example, Baron Ralf Gustav Darendorf.

Instead of imposing an economic model on central Europe, Darendorf, an “old school” German social democrat, argued that the cornerstone for fostering regional growth should be “respecting the existing tissue of social institutions” and strengthening social institutions through “the circulation of ideas and the building of consensus through debate, negotiations and compromise,” explains Gowan, who is professor of International Relations at London Metropolitan University. The legal state where the “rule of law” was supposed to reign has to be established by means of an “open society” or “civil society”; again slogans popularized by “movers and shakers” at the time, such as George Soros. The reality, however, was quite different. Sachs rejected Darendorf’s “open experimentation” in a free society. He feared it would lead the populace down the wrong road toward reform.

Another option for reforming centralized economics into examples of Western capitalism was offered by the eminent banker Alfred Herrhausen, who advocated a less radical and more “gradualist” introduction of “market capitalism” into Eastern and central Europe. The mainstay of this policy was to keep the old Soviet Union intact as an economic entity. This was considered heresy by the Americans and subsequently ruled out. This idea would have enabled the” target” region to maintain trade ties with its main and former export market in the East while at the same time moving new Europe generally or gradually toward free market capitalism in the West. Sachs believed this might also lead the flock dangerously astray.

The other plan, as Gowan points out in his book, was an American one that involved a huge restructuring of the EU’s own institutions and called for the dismantling of the common agricultural policy, or CAP, in order to open up Western European markets to central Europe ‘s agricultural exports. Or as Gowan mentioned in a recent interview, “It was to give the region a strong insertion into the markets of Western Europe.” However, Brussels was simply not ready to implement its own reforms. Basically, what Brussels told central Europeans in the early 1990’s, was “‘we’re not going to allow your exports in,'” Gowan said.

Another alternative was proposed by Jacques Attali, a top advisor to French President Francois Mitterrand and the founder of the European Bank for Reconstruction and Development. The bank was meant to be a model institution for regional development. Essentially, its role was meant to provide financing and private capital inflow to help build infrastructure, thereby creating employment locally while maintaining the new Europe ‘s industrial base more or less intact, which in turn would stimulate “home grown” growth. But this also ran against the vision of the shock therapists who sought to dismantle entire industries in the region to allow foreign multinationals to restructure and retake “redundant” factories bought out and run by EU companies in the “old” Europe.

“The fact of the matter is that there’s a huge impoverishment of a very large number of people” in the new Europe, Gowan says. “This fact is covered over by a discourse” that talks about success and failure and deliberately conceals “the terrible destruction of economic assets” that took place in the region, he adds.

Sachs’s economic model targeted the entire Eastern Europe. This model was in line with an Anglo American compact on how to transform the region. Its main experimental patient was Poland, where the economists’ “shock therapy” theories were parroted by officials from the International Monetary Fund, the World Bank, and the U.S. — all singing the virtues of Sachs’ policy.

The mantra was this: foreign direct investment (FDI) “creates jobs, enhances products, generates economic growth, and raises the standard of living. It brings new technologies, new management techniques, new markets, and better ways of doing business.” A full assault on domestic production was part of the main game plan. This occurred in all sectors of the post communist economies.

In the consumer goods sector, it was most visible. Polish after shave, Czech cologne, etc. suddenly began to disappear from shop shelves. According to Gowan, between 1989 and 1991, Hungary saw imports from Western European multinationals double. In Poland, the largest market in the region, they rose in the same period from 18.2 percent to 31.6 percent of total imports. This “crowded out” local producers and put them out of business. Gowan writes:

“The export bonanza was the result of more than export credits. It was strongly subsidized by Western governments through export credits and credit guarantees to their own exporting firms … these supports were presented as aid for the target countries of the export drive.”

During the 1990s, while the I.M.F. and the World Bank were demanding that central European governments remove subsidies to their agricultural sectors, the EU was flooding the region with heavily subsided farm products from its farmers. This nearly wiped out the Polish and Hungarian peasantry, which was relatively self-sufficient and profitable during the communist era. Due to these dumping policies, the largest opposition to further EU membership came from Polish farmers and their Hungarian colleagues. This “protest vote” was channeled into support for the “populists”, among them, Andrej Lepper of the nationalist “self-defense party” and his comrades in arms the “Polish peasant party.”

Furthermore, throughout the height of shock therapy of the early 1990’s, trade barriers were removed as advocated by the high priests of trade liberalization. The now discredited and nearly defunct World Trade Organization ordered massive dumping into the region, which resulted in Czech and Polish pork producers being inundated by highly subsided EU ham and bacon. These policies made central Europe ‘s agricultural sector “redundant,” according to Gowan. To make matters worse, in the early 1990’s, the EU imposed a virtual ban on all beef and cattle imports from the central European region due to an incidence of swine fever in Hungary.

In the wake of the euphoria associated with the bloodless “velvet revolution” I sat in a Prague beer cellar, or pivince, along with other reporters, diplomat-spies. In front of me was Vladimir Dlouhy, who is today an economic consultant for Goldman Sachs and for the ABB Corporation. Back then, the former Czechoslovak minister of trade was one of the key players in implementing “market friendly” reforms in the Czech-Slovak republic.

He explained to us the virtues and complexities of the government’s coupon or voucher privatizations. I listened intently to his incantation bewildered by all this. A few years on, the scheme was exposed for the sham it really was. It turned out for many Czechs who invested their savings in the coupon privatization that these grand schemes were elaborate swindles. Some background on this: as Gowan’s book points out, after the wall fell central Europe desperately needed access to Western capital. In order to get it, central Europe had to open up its market to foreign investors and raise and attract capital into the region.

As part of these “mercantilist” policies, the “holy trinity” of the W.B.-I.M.F.-EU “targeted” countries like Hungary, the Czech Republic, and Slovakia opened their whole industrial sectors to foreign investors and said to the EU “take what you want,” as Gowan puts it. These neoliberal policies, however, favored multinational corporations based in EU member states and were implemented with the help of a support system for Brussels-based big business lobbies at the expense of local industry. New Europe ‘s governments had to privatize much of their industry and sell it off to foreign interests as fast as possible. These stratagems were known as “coupon privatization.” Commenting on the differences of this scheme between these states, The Economist pointed out:

“Each country has gone its own way. The Czech Republic has concentrated on vouchers in order to move fast. Hungary has focused on sell-offs in hopes of encouraging efficient management, but this has gone badly wrong in places. Poland started with sell-offs, but found the process slow and is now moving to vouchers. Somehow, it all comes down to the same thing: because there is virtually no accumulated capital in private hands, the state ends up paying for most privatizations. Since it is all new, the rules are often imprecise or simply lacking altogether” (Nov. 18, 1995).

As the weekly newsmagazine mentions above, the privatization policies were rather opaque and mismanaged and often resulted in prized domestic assets such as energy, transportation, or manufacturing being sold off for huge profit to foreign interests. Naturally, the loin’s share of profits from these dubious transactions went to crooked government officials, former communist party wheelers, and other cronies running the privatization programs. This left local pensioners and “small investors” out in the cold with practically worthless state-issued coupons to cash in for a pittance of their original worth.

In addition, the process was rife with corruption and resulted in millions of Czechs, Poles, and Hungarians losing their savings invested in state-owned yet foreign-run companies. The Western concept of “corporate governance,” where management is supposed to accountable to the shareholders, was totally absent in the privatization process and seemed meaningless to the EU technocrats who oversaw the process. Much of this was revealed in extensive regional media coverage in the late 1990’s.

After the big heist of national assets by foreigners was over, in 2000, the World Bank, I.M.F. technocrats, and neoliberal ideologues came to Prague to behold and admire the decades of neoliberal policies that have since born mostly bitter fruits for the majority of new Europe ‘s populace. Yet back then, there were still no signs of imminent political earth tremors we see in Hungary today. So a “steady as she goes” approach was taken to further reforms and integration of the new Europe into the EU’s economic sphere of influence.

Following the recent disturbances in the Baltics and parts of the Balkans, which sent shivers down the spines of portfolio managers dealing in “emerging markets,” it has become apparent that the region suffers from a bad case of privatization fatigue and the side effects of unbridled speculative greed. The message is clear: 20 years after the fall of communism appetite for more reform has waned. In fact, the region has swallowed all it can take for now. The W.B.-I.M.F.-EU “holy trinity” has pushed central Europe to the brink of an Argentine-style collapse.

Michael Werbowski is a graduate of post communist studies from the University of Leeds, UK. Read other articles by Michael.

7 comments on this article so far ...

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  1. Grzegorz Lindenberg said on February 25th, 2009 at 12:15pm #

    I do not think you ever visited an EE country during comunism. I do not think you understand what has been going on here in the last 20 years. Just one example. You write: “the process was rife with corruption and resulted in millions of Czechs, Poles, and Hungarians losing their savings invested in state-owned yet foreign-run companies”. This is total nonsense. There were no Poles with savings invested in state owned and foreign run companies for a simple reason: there is no way for Poles at least to invest their savings into state owned companies. And I have never heard of millions of Poles losing their savings in any way in the last 20 years.
    I understand you dislike market system that was introduced in Poland. I am sick and tired of such people, who have lived their whole life in affluent societes and still they deny Eastern Europeans their right to higher living standards. If you have briliant ideas how to run a country than begin with experimenting in your own, ok? Do not mess around with ours – it already had 50 years of communist experiments.

  2. Michael Kenny said on February 25th, 2009 at 2:00pm #

    Unlike many trans-Atlantic articles on Europe this one actually bears some resemblance to the European reality! Mr Werbowski is, as far as I can tell, Canadian, which may well explain that. Three things need to be borne in mind. First Mr Werbowski is describing events that occurred 10 -15 years ago, before these countries became members of the EU. Unlike today, they had no say in the EU decision-making process and were thus in no position to head off decisions which were unfavourable to them. Second, the situation is not really much worse in the former communist dictatorships that anywhere else in Europe or, indeed, the developed world, for that matter. The idea that it is is being hyped essentially by the American “emerging market” gurus, whose bad, neo-liberal, advice, essentially, caused the problem, who were booted out of Eastern Europe when the EU arrived and now have an axe to grind with both of the above. Third, the EU economies are so intertwined that the Member States simply couldn’t allow any of their number to go down since that would, in practice, drag them all down. They will thus have to find the resources to prop up any weak Member State, and not just in Eastern Europe.

    The blessing of all of this is that the 1990s situation Mr Werbowski describes is now past history. Neo-liberalism is dead as a dodo. The American model has failed and all of Europe, not just the former communist dictatorships, is slowly turning back to the good old European social market economy which served us so well.

    By the way, Ralf Dahrendorf wasn’t a Social Democrat. He was a Free Democrat (i.e. the neo-liberal pro-business party).

  3. Marton Zsenei said on February 25th, 2009 at 4:10pm #

    To Grzegorz Lindenberg: you should not speak for East Europe. I was born and I am living in Hungary.
    Some facts: In a country of 10 million the one to 3 million are living under the minimal living standard.
    1oo 000 children starve. (in the country once named goulash communism)
    Almost the whole Hungarian industry eliminated or bought out by westerners. For example: once we had 11 sweet factory in the country, now we have one and it is in Austrian hand. You can know about the Ikarus bus factory: once the half of the Soviet Union used our buses. Now it is closed down.
    65 people freezed to death in Hungary in December, Januar, which was unheard before.
    As you can read in wikipedia:
    ” …Many Hungarians are nostalgic about the Kádár era, due to the dramatic fall in living standards caused by the adjustments to a capitalist economy in the 1990s. …”
    So please does not speak the higher living standard.
    The first of all, when we have chosen the capitalism and why it should if it comes with it the “dramatic fall in living standards.”
    Here is a Hungarian joke:
    What did the Hungarian people wanted in 1990?
    Socialism without nomenklature.
    And what we have got: the capitalism of the nomenclature.

    To be continued.

  4. lichen said on February 25th, 2009 at 5:43pm #

    Yeah, the average living standard dropped when the people were betrayed and forced into an even more brutal capitalism than was practiced in the west at the time; a few became rich, but many more were thrown into the streets of Russia, Poland, Hungary…

    And no, neoliberalism is not dead quite yet; In France and Italy, Greece…the social movements are doing battle with right wing governments that are intent on making more brutal cuts in social spending and privitizations.

  5. Cincinnatus Town said on February 25th, 2009 at 7:46pm #

    Thanks for this article. Re-reading The Global Gamble, I’m struck at how prescient Gowan was in this book. No surprise that his recent piece on the Economic crisis – http://www.newleftreview.org/?page=article&view=2759
    – is such a comprehensive summary of its origins and of the policy prescriptions being advanced by those charged with saving finance’s control of capitalism as a first priority.

  6. russell olausen said on February 25th, 2009 at 11:23pm #

    Interesting, the comment on the death toll due to freezing.Have a look at N.A. and European continents temperatures; its not hard to see great hardship in these temperatures. Give freezing, equal rights to boiling.What I mean is lets help these deprived Iron Curtain residents to the basics of survival.Lets give them the lump of coal the globalists are so desperate that they get.Bad joke.I pity anybody who took our financial masters advice and I’m sure anyone saving to retire would agree.

  7. lloyd rowsey said on February 26th, 2009 at 6:37am #

    Thank you, M.W. Absolutely first rate.

    What happened at the same time in Albania? Parallel but relatively independent developments?