Le conflit entre l'oligarchie et la démocratie dans les sociétés en transition

Dans cet article, l’économiste Lajos Bokros, ancien directeur de la Banque mondiale et ministre des Finances de la Hongrie en 1995-1996, examine le contexte politique et économique de l’évolution des « sociétés en transition » d’Europe centrale et orientale et évalue le changement de modèle qui a entraîné la démocratisation et le développement de l’oligarchie. L’article a été publié dans 
The Analyst
, une nouvelle revue trimestrielle sur les principales évolutions politiques, économiques et sociales en Europe centrale et orientale.

It was a foggy and uncertain morning twenty-five years ago when the world changed. Hardly anybody noticed that something had happened and there was no expectation of a meaningful shift in the international atmosphere. Although it was claimed to be in a state of social and economic slump by Western analysts, the Soviet Union of Brezhnev seemed steady and destined to exist forever. The Soviets seems to have had an unshakable grip on Central and Eastern Europe, and they also held some remote bridgeheads (in Mongolia, Cuba, Vietnam, Angola, Ethiopia, South Yemen, etc.). The other superpower, the United States, struggled helplessly to have its captive citizens released from the theocracy of Iran. Jimmy Carter, the most human rights-conscious president this huge country ever produced, contemplated the fate of an economy that had lost its momentum and suffered from inflation, with a society wading in disappointment. The world had been through the second global oil crisis and no one knew when the third would come. 

There was a general feeling of hopelessness over a bipolar world that seemed sure to stay divided forever, and this feeling did not diminish, even though at certain places on the frontiers, freedom movements occasionally held up a torch of resistance. Even so, some changes happened that suggested a fundamental turn in the political status of the world. 

In December 1979, the Soviet Union occupied Afghanistan. Later on, this adventure would prove fatal for the Soviet regime. But at the beginning, the western world viewed this violent and unilateral expansion of the Soviet sphere of influence with powerless rage. 

In the summer of 1980, the Solidarity Independent Trade Union Movement was formed in Poland, which started to undermine the monolithic regime of the party state, in terms of both organization and ideology. 

On the other side of the bipolar world it represented a change of the same magnitude when President Carter returned the Panama Canal zone to the people of Panama. As a sovereign state, Panama was the imperialist product of the United States, realizing its might at around the turn of the previous century, vibrant with strength and aspiring to become a great power of the world. The elimination of the canal zone was a symbolic sign of the end of Yankee colonialism. 

In July 1979, the army of the Sandinist Liberation Front marched into Managua. Since the Cuban revolution, this was the first case when the United States did not intervene to save a corrupt rightist dictator. 

When Saigon fell in 1975, it became obvious that Communism could no longer be contained by sheer military force. The U.S. understood that Latin America, always considered a natural sphere of influence under the Monroe doctrine up to that time, could no longer be held merely through militant anti-Communism and an anti-Cuban approach. A fight was to come, for the heads, the hearts and the souls. 

On 4 May, 1979, Margaret Thatcher came to power in Britain with a radically liberal agenda. Her liberal policy was seen as a serious promise for the economic and social restructuring of a declining Britain, and for the modernization of the country. However, at the very beginning, the international significance of her program was far from obvious. 

In terms of world policy, the decisive turn was certainly the victory of Ronald Reagan in the American presidential election. The world did change in 1980[1].

The fundamental nature and fate of the Soviet regime 

To this day, hosts of western analysts believe that the policy of Reagan was the most important factor in the downfall of the Soviet empire. Although it is obvious that the Star Wars program posed a significant challenge to the Soviet Union, it has become clear by now that the “evil empire,” as Reagan himself termed the Soviet world, collapsed firstly because of its own internal inability to develop, and secondly, as a result of the “enlightened errors” of Mikhail Gorbachev and his colleagues?[2]. The contributions of Thatcher and Reagan did not cause the downfall of the Soviet Union, but helped enormously in building the theoretical model of the new economic and social regime following the political changes in Central and Eastern Europe. 

With some simplification, the fundamental economic and social structure of the Soviet-type system can be characterized by the following five factors. First, the economy is based on the denial of the market, it shows the lack of the autonomy of companies as the base units of production, a direct consequence of the dominant position of state property. Second, the Soviet economy was geared towards growth, in an effort to catch up with and outperform the capitalist economies. This gave the justification for its existence. Third, the growth and catching up were not meant to take place within the global market world economy, gradually and increasingly incorporated into it, but rather within the framework of an alternative, non-market world economy (COMECON), mostly independent from the market world economy. (This involved industrialization by import substitution instead of export-driven growth). Fourth, this inward-looking, self-reliant model deemed centralization as the most efficient structure, not only in economy but also in social life. Thus, instead of the “anarchy” created by democracy, it insisted on the leading role and power monopoly of the “vanguard,” the Communist party. Last but not least, the centralization of political activities required the central regulation of culture, ideals, values, and the movement of subjects, which very often also involved mobilization and direct control. (Internal passports were always used during the existence of the Soviet Union. Going abroad was never a citizen’s right. Controlling the physical media of culture was not a difficult task in the era before the internet.) 

Such a closed society, especially if it has enough military power to destroy the world several times over, cannot be opened from the outside. What is needed is that the fundamental internal conditions of existence should change and the factors of legitimacy should melt away. This is what happened during the eighties. 

The policies of restructuring (perestroika) and openness (glasnost) espoused by Gorbachev were meant to respond to the fundamental changes of internal conditions. However, this was no longer possible without leading to the regime terminating itself. It became obvious to enlightened Soviet leaders that economic growth and catching up were no longer possible in isolation, outside the increasingly less constrained world market economy (which, once again, was going through a process of liberalization gradually, but steadily), that developed more and more interconnections (became more globalized) partly because of liberalization and partly due to technological development. 

Main tendencies of the development of the core states in the world market economy 

By the beginning of the eighties the economic growth model followed up to that time in the leading countries of the world market economy was no longer sustainable. This was because of the oil shocks of the seventies, the increasing inflation together with slowing growth, and the collapse of the international financial system that was based on fixed exchange rates tied to the dollar. 

This model was based on the following major factors: 

Monopolistic state ownership (Europe), or at least state regulation severely restricting competition (USA, Japan) in “strategic” branches of the economy (power generation, coal mining, natural gas supply, telecommunications, railroad and air transportation, large banks, insurance, in some states steel and automotive industries, etc). 

The primary role of the state in defining the aims of economic development, specified by industries, sometimes all the way down into products. In the United States this role was limited to the military-industrial complex, in Germany it worked through the institutional system of social partnership, while in Latin Europe it was represented by state holding organizations integrated with the planning agencies and having a wide range of ownership rights. In Japan, this activity was managed by the powerful Ministry of International Trade and Industry (MITI). 

Primary agriculture secured by protective tariffs, with increasing income support and over-production. The core states of the world market economy almost unanimously refused participation in the free trade of unprocessed food products, except Britain, which first of all maintained a system of favoured trade with its former “white colonies”, secondly with its other former colonies inside the Commonwealth. 

Free flow of capital, primarily in the manufacturing industry through increasing internationalization, and mutual direct investments. In the most developed regions of the world market economy (United States, European Community, Japan), direct international capital inflow and acquisition of ownership was possible in “non-strategic” industries, primarily in manufacturing, at the time widely believed to be the driving force of development. 

The national currencies were almost fully convertible in current account transactions among companies. At the same time, cautious, lopsided and very sluggish liberalization was going on in the movement of people, and in the capital account. It is an important and often overlooked circumstance that the national currencies of western countries, considered “hard currency” from an eastern point of view, had not really been convertible without restrictions in the thirty years following the Second World War. This process was completed only in the 80s, with regard to every type of payment. 

Liberalization and globalisation in the world market economy 

In terms of the world economy, the liberal turn of the eighties in many respects meant a return to the development that had been interrupted after the First World War, that era having been the peak of a “long century” of increasingly liberal flow of goods, capital and people, despite occasional setbacks[3]. A series of taboos were overthrown in quick succession. Encouraged by what Margaret Thatcher accomplished, governments in quite a few developed and developing countries set out to stabilize the economy, and to curb inflation by implementing much more stringent fiscal and monetary policies than before, sometimes even income policies. Privatisation was put on the agenda and even became a buzzword, not only in the traditional competitive sector, but also in the field of public utilities and in banking, industries ridden with natural monopolies. 

The significance of the liberal reforms of the eighties, inspired by Anglo-Saxon countries, mainly lies in the fact that they were not only designed to make the internal structures of the impacted national economies more flexible and to renew their market institutions, but that they resulted in making the entire world economy more flexible. It was generally hoped that the world market economy itself, once in the stage of liberalization, would contribute to the growth of national economies to a much higher extent than before. 

There is much analysis and debate about the benefits brought by the liberalization that started at the beginning of the eighties and covered the entire world, and the globalization that was triggered by it and accelerated by the IT revolution[4]. This paper will not even attempt to take a position on this issue. My aim here is only to show that during transition the liberal challenge of a world going through globalization had a decisive impact on the civilization model chosen by the former Soviet world, which was turning away from an economy based on rejection of the market. 

A change of models in Central and Eastern Europe: a step back, a step in-between or a step forward? 

On the outskirts of the empire, the liberal intelligentsia, which always looked to the west for a role model, quickly realized that the grip of the Soviets was loosening. At first, the activities of Gorbachev invoked the opportunity for a Socialism with human face. However, the intensifying competition of the political market prompted the participants of the democratic public life that was now in the making to start working on presenting a credible alternative for economic and social development. Although lots of alternative scenarios popped up at the level of wishful thinking (self-management of workers, shareholder socialism, the third way, etc.), only one opportunity seemed credible: to adopt the model of the “existing capitalism,” with no waste of time. The peoples of the small countries of Central and Eastern Europe were aware of the benefits of the West. They themselves wanted to live like their counterparts in the West. If this required the adoption of the western economic and social model, the majority of these societies had no serious objections to it. 

The forward-looking pattern could have been countered by a backward-looking one. There were intellectuals in every country who wanted to return to the point where “development was arrested” when the Communists had taken power. However, it was not easy to define at which point development had stopped, which stage of the past deserved to be considered as the peak of the former development. The “variable past” is perhaps best reflected by the debates dragging on about reprivatisation. Violent changes of property ownership were characteristic of almost every era of the twentieth century before Communism, so any stage of the past could be written off at will. 

The adoption of “existing capitalism” as the only realistic model was greatly facilitated by the failure of those half-hearted reforms, kept within the framework of the system, which were initiated in two relatively open and market-friendly countries of Central Europe after 1968 – Poland and Hungary. In these two countries, the economic reforms survived the crushing of the Prague Spring and greatly contributed to the spectacular improvement of consumption and living standards until the breakout of the first oil crisis. Between 1968 and 1973, both countries lived quite well on the processing of cheap Soviet raw materials into industrial products of relatively acceptable quality, using the advantages of the famous rouble-dollar conversion. But this growth model lost its momentum by the mid-seventies. The political re-centralization that ensued, the withdrawal of the essential elements of corporate autonomy, precluded Polish and Hungarian companies from overcoming the drastic increase of energy costs by leaps in technological modernization, by an almost totally free inflow of goods and capital and by the production of world-class products. The half-enlightened Communist governments did not dare to expose the companies or the consumers to the strong and quickly changing winds of the world market. It was at that time that the policy of maintaining artificial welfare financed by sovereign loans taken from abroad began in both countries. (In Poland, the “cheap” foreign loans mostly went to finance corporate development projects, while in Hungary they were used to finance consumption directly, the benefits of the “premature welfare state”). 

Although the benefits of higher living standards and more freedom enjoyed by Poland and Hungary were not to be underestimated, the model of unfounded welfare increasingly financed by foreign loans was not sustainable. Both countries became heavily indebted and the financial burdens caused by loan amortization undermined the political basis of the model based on artificial welfare. An open economic and social crisis broke out in Poland, which led to a military takeover in 1981 and later resulted in international insolvency. Although Hungary managed to avoid open financial bankruptcy – mainly on account of the much more efficient, net-exporting agricultural sector and by permitting small enterprises to operate – growth did slow, and by the end of the eighties it practically came to a halt. 

When the Hungarian and the Polish models ran out of steam, it became clear that there was no viable scenario “in between,” either. The only option left was to adopt the model of a competitive market economy and parliamentary democracy, inspired by the liberals. Liberalization in the world economy and the worldwide spread of democracy provided a very supportive background for these efforts. 

Liberalization 

It is a fundamental characteristic of non-market economies that the autonomy of economic agents is very much restricted (or nonexistent), which precludes making “freely reasonable” and therefore efficient decisions in either production or consumption. With no autonomy in production or consumption, prices become distorted. They do not carry any information regarding the relative rarity and production costs of goods, thus the economy is not integrated by the market; the intervention of some non-economic institution – a commanding party or planning office – is required. The coordination of economic activities by an office (bureaucratic coordination) is certainly an advantage politically, as it justifies the existence of such an office. The non-market world economy will not disintegrate, unless the co-existing market world economy offers a more attractive alternative, not only for the office-dependent society, but also for the leaders of the offices (the nomenclature)[5]. 

Dismantling the rule of the party is liberalization in itself. When the party no longer has a role in coordinating economic activities, the autonomy of economic agents increases significantly. This mainly means three things. First, the still state-owned enterprise will have to operate freely in the future, i.e. it will determine for itself how much it wants to produce of which goods, how much to buy, what to sell and to whom. Secondly, every citizen is free to start an enterprise, therefore the establishment and termination of new enterprises will become an everyday reality. Thirdly, the prices that indicate the relative rarity and costs of the products are shaped freely, i.e. they will reflect actual demand and supply, including the domestic price (interest) and the foreign price (exchange rate) of money, the most important product of all. In this sense, liberalization is market creation itself, one of the fundamental pillars of the new world[6]. 

However, since the Central and Eastern European political changes are “inorganic,” i.e. they stem from abruptly disrupted development, liberalization did not have a leg to stand on without assistance. It could not lead to the establishment of market institutions instantly and on its own. Market players are needed for a market economy, and democrats for a democracy. And after forty to seventy years, these types were in short supply in the region. In terms of civilization, the Soviet system was quite successful, as it developed the “homo sovieticus”, the kind of person who is dependent on the state, has no autonomy, and behaves as a frightened subject of the state, devoid of dignity. The homo sovieticus could not just suddenly turn into a successful entrepreneur or efficient corporate executive. 

This rigidity had serious consequences regarding the behavior of economic agents. Having been accustomed to soft budgetary constraints, the majority of state enterprises still did not believe that being efficient and profitable in the market was really important. Bankruptcy or liquidation were not a credible threat to them. Most of them trusted in the state to throw them a life-ring, should they start drowning in the sea of accumulated debt. And they proved right for a long time in many, many countries. The post-communist socialist and neophyte bourgeois democrats of Bulgaria, Romania, Ukraine and Russia made alliances to save the unviable enterprises, the only outcome of this struggle being that in each country, inflation was let loose, the state budget collapsed, intercorporate debt grew, and a general culture of non-payment emerged. And once this vicious circle sets in, it is extremely difficult to break up. The Baltic and Visegrád states were really lucky not to let these problems run rampant. The key was stabilization, which is the most important, albeit not sufficient condition for enforcing the responsibility and financial discipline required for a market economy. 

Stabilisation 

Liberalization is a double-faced (micro and macroeconomic) phenomenon, i.e. it impacts the entire national economy as well as the individual economic agents. However, stabilisation is basically a macroeconomic task, since it is mostly aimed at regulating aggregate demands in the entire national economy, the total volume of income. Some of the highlighted components in its toolset are the three branches of general economic policy: monetary, fiscal and income policy, which have a direct impact on the behavior of economic agents, companies (producers) and households (consumers). 

In those countries where liberalization made significant headway before the political changes (in the former Yugoslavia and Hungary), or took place very quickly, almost as a shock (in Poland and the still undivided Czechoslovakia), the macro-level financial stabilisation became an urgent need. The main reason was that liberalization did not instantly and automatically make the budget constraints of the producers hard, i.e. there was still demand in the economy not covered by income. The former distorted economic conditions kept recreating excess demands, not justified by income, something which fed the economy of shortage. On the other hand, they also reproduced the volume of excess and unmarketable products reflected by the accumulation of monetary overhang. A non-market economy does not have supply side adjusment, while the most important condition for such adaptation, market-abiding conduct, did not develop spontaneously overnight after the political changes. However, without such conditions, liberalization tends to send prices sky high, and hyperinflation will set in. To curb that, it is necessary to keep money creation, budgetary spending and income deriving from wages, under control. In the vanguard countries of reform, the sufficiently fast application of stabilisation, in a comprehensive manner and concerted with other elements of changes, accomplished all that successfully[7]. 

The quick and parallel liberalization and stabilisation that followed the political changes was extremely successful in the one-time elimination of the burdensome legacy, income without money and money without income, i.e. in eliminating excessive demands. That way, the volume of shortage and slack that was accumulated due to misallocation of resources in the former distorted economic structure, i.e. the “stock problem,” was resolved well. However, given the rule of producers (state enterprises and underdeveloped small enterprises) that could adapt to a supply-driven economy only weakly, or not at all, these tools in themselves were not sufficient to prevent the re-accumulation of shortage and slack. In other words, the “flow problem” was not resolved. A comprehensive revolution, now mainly but not exclusively microeconomic in nature, namely privatisation, was indispensable for that[8]. 

Privatisation 

Regardless of their professional qualifications, the intelligentsia of the system change immediately realized that the final overthrow of Communism would depend on the fast dismantling of state ownership and the quick diffusion of private ownership. There is a certain Marxist legacy in that, which holds that in determining the structure of society the most relevant factor is the ownership of the means of production. In a non-democratic political framework this is more or less so, since if an alternative political power cannot be built up, the almost exclusive rule of state ownership indicates the impossibility to build up an alternative economic power. In this sense it is clear that the diffusion of private ownership and market-based competitive economy is one of the most important guarantees of a democratic political regime itself. 

In those countries where, as a result of the revolution, totally new leading political groups acquired governing power, privatisation was therefore not only an instrument to improve corporate efficiency, but also a stand-alone political objective. This was most conspicuously manifest in Czechoslovakia after the Velvet Revolution, where – for fear of a communist restoration – the fresh political class started quick and mass privatisation immediately. However, for lack of internal capital accumulation before the political changes, the only possibility for a mass privatisation, with speed, was the free distribution of assets[9].

For lack of a significant volume of household savings and without a significant amount of domestic (financial) capital accumulated before the political changes, there was only one genuine alternative to free distribution of assets, namely asset acquisition by foreigners, either in the form of direct or portfolio investments. However, any new political elite had to take a deep breath to accept that through traditional selling, the more valuable portion of the assets of the nation would, by necessity, become foreign property. The leaders of the Baltic states who wanted to get rid of the Soviet political legacy at all costs, and felt that Finnish–Scandinavian capital was their own in some respects, were able and willing to cross this political and psychological line. Coupled with an extremely consistent liberalization and rock-hard financial stabilization based on hard currency, this has become the decisive element of the exemplary transformation of Estonia. In addition, when the existing state-owned companies were sold, the main principle of the exemplary Estonian privatisation was not primarily the purchase price, but the amount and quality of the newly invested additional capital (quality meaning here its proven ability of corporate management). 

It is a real tragedy of history that before the political changes, the anti-market economics in the communist countries excluded internal capital accumulation, while the bank deposits of the household sector, most of which involved forced savings, were eliminated by the high inflation following the liberalization. In the overwhelming majority of the former Soviet member states that gained independence after the disintegration of the Soviet world, in Slovakia, which was detached from the Czech Republic, and in all the states of the former Yugoslavia, a federation that fell apart by itself, the new national political class was unable to accept the leading role of foreign capital in privatisation. They found the idea of building up a national bourgeoisie much more attractive. The concept of mass privatisation, an idea that seemed popular in the beginning, became a starting point offering huge benefits for the economic strengthening of the new political classes. 

The development of oligarchy in Central and Eastern Europe 

There is an entire library of professional literature on why the voutcher-type privatisation did not meet the expectations from an economic point of view[10]. On the other hand, there is little discussion about why it was so attractive for the new political class and what role it played in the development of the transitional social structure. 

One of the obvious social consequences of mass privatisation is that at first it by all means strengthens the power of the insiders, which they will try to turn into lucrative connections and/or monetary capital as soon as possible[11]. The old-new managers usually acquired major packages from the shares of the corporatized ventures, and by uniting their forces, they could buy out the shares of the small owners at very low prices. It is important to realize that this first, quick round of capital concentration was not supported by any reliable information about the real values of the companies, or any capital market regulation enforcing transparency, thus, in the general anarchy dominating the economy, the insiders had an easy job[12]. 

In the new republics mesmerized by the belated gaining of sovereignty, such as Slovakia and Croatia, then in Serbia, Romania, Bulgaria in the Balkans and finally in Eastern Europe first and foremost in Ukraine and Russia, the national oligarchy emerged at an incredible speed[13]. Those who emerged from insider positions as managers, to become owners overnight, found their way to the managers of financial institutions still controlled by the state, the leaders of local governments, and the governments currently in power. If their company found itself in a difficult market situation or with deteriorating internal efficiency, they could immediately negotiate for themselves some kind of fiscal subsidies, a waiver of public dues, or new credits never to be repaid. They privatized the properties (assets) of their companies, while their debts (liabilities) were socialized. They could do this easily, by emphasizing the need to save jobs, to protect domestic capital and national property. In addition, in each country with an oligarchic structure – at least in the beginning, but in many places ever since – the competition of foreign capital, in many cases even the competition of domestic enterprises, small enterprises included, was ruled out. 

Russia offers a model for the emergence of the oligarchic structure in society and its fast consolidation. In addition to lack of the domestic capital, there were two additional factors that assured an extremely favourable climate for the establishment of an oligarchy. On the one hand, Russia is extremely rich in energy sources and industrial raw materials. Being based on the natural monopoly of underground resources, the extractive industries and mining are much easier to appropriate without competition than activities with no such monopoly, for example, the manufacturing industry. In addition, the acquired natural resources will yield a rent-type, continuous income. On the other hand, after the disintegration of the Soviet Union, the leaders of the new Russia insisted upon the illusion of their remaining power, with tooth and nail. They would never allow foreign capital to acquire a leading role in any branch of Russian economy, least of all in the extractive industries considered of strategic importance. On the contrary, they dreamed of establishing multinational companies owned by Russians and ultimately becoming the engine of the new Russian economic might in global terms. President Yeltsin deliberately orchestrated even the liberalization in such a manner that the winners were the insiders and his political supporters in most cases[14]. 

Probably, the decade of rule of Boris Yeltsin directed the development of Russian economy and society into a dead end for another century. Once – despite all the spectacular internal fights – the oligarchy has formed a closed social order, this entity, similarly to the former Soviet regime, cannot be broken up by external forces. In a closed and almost self-sufficient giant economy, where the extractive industry provides a constant rent for the survival of the oligarchy and for the public servants who now depend on them, the oligarchy will soon buy out the Parliament and the publicity. The “checks and balances” system found in democracies does not work. Consequently, society itself gets disappointed with democracy and cries out for a strong man all the time. All that can be done is to wait for another historical moment of grace when the obvious economic and social decline creates the psychological basis for a new political turn[15]. 

A second round of political changes in Central and Eastern Europe 

The small countries living in the civilization sphere of influence of the European Union are lucky. On the one hand, they are very small, by world market standards, on the other hand, they do not have significant domestic resources of energy and raw materials. That means there is no rent-type stream of income that could be acquired and then monopolized by a closed oligarchy. 

As is well-known, there were many small countries where attempts were made to establish an oligarchic social regime. In Slovakia, Vladimir Meciar helped the republic of “cronies” for a long time. In Croatia, under the decade-long rule of Franjo Tudjman, the war efforts provided favourable conditions for the consolidation of the local lords, the state administration entangled with the military suppliers, and the group of bank and corporate managers emerging from mass privatisation. However, for lack of additional resources providing a constant yield, there was not enough force to consolidate the regime of oligarchy for good, to buy up the institutes of democracy. And if the latter are operating, there is still a chance for a “second round of political changes” if the fallback compared to neighbouring countries is noticed. 

After serious economic and, in some places, political crises, this second wave reached Bulgaria and Romania in 1996 and 1997, Slovakia in 1998, Croatia and Serbia in 2000[16]. Since then, the successive democratic governments have struggled, with more or less success, with this terrible double legacy, the combined legacy of the communist system and the oligarchic attempt that has proved a dead end. The most important accomplishment is that although belatedly, the liberalization, now carried out comprehensively, has broken the oligarchic structure. The import competition of foreign goods and the settlement of foreign enterprises have swept away the wealth and influence of ineffective domestic oligarchs. Some of the oligarchs did stay, quite a few of them, but it is not they who determine the direction of economic and social development. Although they find ways to win public procurement tenders, to secure favourable legislation in exchange for some money, to buy ministers, party leaders and elected representatives, the basic compass and framework of civilization is the European Union, the structure is defined by the legal system and publicity derived from the Union, the increasingly more liberal competition of the world market economy and the hope – coupled with fears from the global challenge – that the region will catch up with the West quickly, in terms of living standards and, perhaps, in a moral sense as well. 

If this free, competition-based world market economy, that re-creates democracy on a daily basis and is now going through globalization once again, did not exist, there would be nothing to catch up with. 

 

Footnotes 

[1] In 1978, the policy of opening started in China under the direction of Deng Xiao-Ping, which was extremely cautious at first and primarily made its debut to the world by forming two special economic zones, Shenzhen and Xiamen. Perhaps, the initiators of the project did not realize themselves what would be the truly global significance of their enterprise 25 years later. 

[2] This is how Mikhail Gorbachev himself summarized his opinion in a private conversation in 1998, when I asked him what he had in mind after he came to power. He admitted that he never wanted to terminate the Communist regime, he only wanted to get rid of its inhuman characteristics. His main purpose was reforming the Soviet economy along the principles of the market economy, without giving up state and collective ownership. But obviously, he could not have his cake and eat it. Realizing the contradictions of the Soviet regime, Mikhail Gorbachev consciously rejected violent solutions, and thus became by far the most outstanding (in a positive sense) historical figure of the 20th century. 

[3] See Martin Wolf: Why globalization works. Yale University Press, 2004. chapters 6-7. 

[4] One of the better studies written against liberal world economy and globalization is John Gray: False Dawn: The Delusion of Global Capitalism, London, Granta, 1998 

[5] Ralf Dahrendorf: Reflections on the Revolution in Europe. Random House, New York, 1990 

[6] Mancur Olson: Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships. New York, Basic Books, 2000 

[7] Although the general picture is correct, the countries in question have reached substantially the same outcome via very different paths. The Baltic countries, Slovenia and Croatia were in a relatively easy situation, since when they created their own states they had an opportunity to introduce their own currencies. This provided an excellent chance to announce stringent monetary policy and to establish national banks not ridden with the burdensome heritage of the past. Poland and Czechoslovakia applied the classical shock therapy. After high-level initial devaluation they stabilized the exchange rates of their old national currencies. With the exception of Poland and Hungary, none of these countries have inherited significant foreign debts or domestic public debts. After the political changes Poland succeeded in canceling a significant portion of its debt with its foreign creditors. In the wake of the liberalization introduced at the end of the eighties, Hungary did not need a classical shock therapy, while the old-new political class postponed the application of traditional stabilisation until a fiscal crisis become imminent by the mid-nineties. 

[8] There is a broader and a narrower interpretation of the concept of privatisation. In a more restricted sense it only means handing over the former state enterprises to private owners, which complies with the traditional western definition. However, when we talk about handing over not only a few (major) state enterprises, but several thousand enterprises that make up and dominate an entire economy, then privatisation does not only mean micro-structural changes, but a radical transformation of the dominating patterns of behavior, the taking root of new, market-abiding norms of conduct, the adaptation to a supply-driven economy, which is an extremely important consequence for the macro-level efficiency of general economy policy as well. A case in point here is the Hungarian stabilisation, which was very successful mainly because by 1995 the Hungarian enterprises had been able to respond to the austerity of stabilisation quickly and flexibly. 

[9] It is a grimace of history that although the so-called voutcher privatisation was first formulated in Poland, it was never applied in Poland as a major form of privatisation. The main reason was that the Seim, the Polish House of Representatives, debated on the specific ways for coupon privatisation for so long that in the meantime almost half of all companies in Poland went bankrupt and the sale of assets after a liquidation procedure became the basic form of privatisation. However, as most of the corporate assets were melting away fast, acquisition of the shares of companies of questionable value was no longer an attractive option, even if they were offered free. Free distribution of assets never became a major form of privatisation in Hungary, either. Here the old-new political class was never fearful of a communist restoration, since in the spontaneous privatisation of the era before the political changes it was precisely the members of the old nomenclature who played a leading role. The first democratic Hungarian government also realized that due to the high level of foreign debt, the only way to distribute the assets for free would be to nationalize corporate loans. However, the continued increase of the national debt was not an attractive option for the enlightened government. 

[10] Here is a brief list of the main deficiencies: typically, mass privatisation leaves the old, mostly incompetent managers in their positions, moreover, through atomizing the national property it will strengthen their positions in the beginning, it does not result in the involvement of new capital (the new owners have no money and foreign investors are not welcome, since they would have to share their power with the investors), there is no reliable knowledge about the quality of the companies, therefore investment and trading in the capital market is more like gambling, thus due to a lack of external investors there is no technological upgrade, strict work organization or advanced market research, consequently, the former state-owned enterprises are not transformed into state-of-the-art and competitive capitalistic enterprises, ones that would create jobs, export, tax revenues and economic growth. 

[11] From this regard we should make a distinction between the Czechoslovakian and Yugoslavian models of mass privatisation. In Czechoslovakia the voutcher type of mass privatisation emerged, which made it a citizen’s right to receive a portion from the shares of companies involved in the program. In Yugoslavia the former companies with worker’s self-management became corporations, thus the shares directly became the property of the employees. This latter scenario favoured insiders even more. 

[12] If insiders were unable to obtain a controlling share in a company they knew well, they simply established a trading enterprise or two, and these latter became the exclusive suppliers and customers of the company they managed. Overbilling to the supplier and underbilling to the customer was an excellent way to ensure that not only any eventual profits, but also the value of the assets of the company should flow to the new enterprises directly owned by the insiders and attached to the new companies unilaterally and adversely. Apart from this technique, spontaneous privatisation had many other forms, totally legitimate and incontestable in the legal system at the time. 

[13] There were attempts to develop an oligarchic social structure in each former Socialist state. However, in the Baltic states, in Poland and in Hungary, these attempts failed at the very beginning. In the Baltic states the foreign capital that represented a new civilization quality knocked down the former Soviet nomenclature at once. The fact that members of the nomenclature were mostly ethnic Russians and consequently, strangers in the eyes of the new states made this even easier. In Poland and in Hungary, the first democratic governments enacted very stringent statutes in the field of bankruptcy and liquidation to prevent non-payment and to eliminate intercorporate debt, which broke down beyond repair the power of the old nomenclature, somewhat strengthened in the spontaneous privatisation. Although the specific forms of bank consolidation usually favoured the majority of the enterprises that emerged not on account of market efficiency, rather through political influence, the free lunch soon stopped when the banks and insurance companies were mostly bought up by reputable and affluent foreign strategic investors. The development of an oligarchic social structure was finally prevented when most of the public utilities were also sold to high quality foreign enterprises with adequate capitalization. This is extremely important, because in a very small and open economy, poor in natural resources and subject to comprehensive liberalization, public utilities constitute the only group of companies whose control by the owners could be, with soft regulation, converted into a monopolistic rent that would feed the new oligarchy continuously. 

[14] After the political changes the regime of import licensing was long preserved in Russia. Whoever received a license for the import of attractive western products, much sought after in a market of shortage, could make extremely high monopolistic profit within a short time. Those who made a quick fortune that way had better chances to buy up the shares of companies in the energy sector. Then the oligarchs who acquired the energy producing companies quickly established financial institutes and now they could collect the savings of the household sector to finance their own investments, instead of the failed state banks. The establishment of oil companies and other corporate empires assuring monopolistic profit was greatly assisted by the infamous “loan for equity” program, in which the Russian government encumbered the shares of valuable corporations, to create new revenues for the shrinking revenue side of the state budget and to replace the never repaid private loans. 

[15] Despite any appearance to the contrary, instead of weakening it, the presidency of Vladimir Putin has strengthened the oligarchic regime operating as an enclosure. It is an important change that the anarchy of Yeltsin, manifest in recurring crises and financial failures, has been replaced by an era of responsible fiscal management and the stable rouble. The sky high oil prices provide a very favourable back-wind to the development of the Russian economy, from which the middle class can once again benefit as well. 

[16] It is a still open historical question whether in Ukraine, president Yushchenko will manage to break up the very tough oligarchic structure or become a captive of it himself. See the relevant study of Oszkár Füzes: The Ukraine potential, published in the first issue of The Analyst, June 2005. 

The article was published in The Analyst
, a new quarterly focussed on the key political, economic and social developments in Central Eastern Europe.