ECONOMY

“Twenty-five years after the Berlin Wall came down, a sense of missed possibilities hangs over the countries to its east. Amid the euphoria that greeted the sudden implosion of communism, hopes ran high. From Bratislava to Ulaan Bataar, democracy and prosperity seemed just around the corner…”[1]

Transition

In late 1989 Eastern European countries broke up from the Soviet Union, threw off communism and commence to establish marked-oriented economies based on a large private ownership relying on the support of democratic institutions.

Both people and political and economic leaders wanted to “return to Europe” as a reaction against the failures under communism and the following urge to rejoin Western economies. To do so, they aimed to dismantle the vestiges imposed by the Soviet Union at huge economic and human cost, as a result, of the postwar division of Europe in West and East.

Economical context before 1989

In order to understand the patterns of change, it’s important to take into account both economical and historical circumstances that head the transition.

Regarding the economic sphere, each and every country had a centrally controlled economy, where the government own mainly all properties. Planners rather than markets fixed prices. Services weakened while heavy industry predominate. As a consequence, satisfying population was not a preference. For example, to get an apartment in the 1980s, the waiting time was between fifteen and thirteen years in Poland and up to twenty years in Bulgaria. In East Germany if you wanted to buy a car, you’d to notice the order fifteen years in advance.

In polity, all were authoritarian nations ruled by a unique governmental party that won more than the 95% of the votes in “elections”. However, Yugoslavia and Albania took orders from Moscow which in order to overwhelm popular uprisings sent tanks to Czechoslovakia and Hungary.

People found goods unavailable at official prices due to a lack of imported goods, longer queues and shortages.

The communist inheritance

“Each day brings new problems, and each day we realize how interrelated they are, and how difficult is to establish the proper order in which to deal with them”. Vaclav Havel, 1991.

The burden posted by the inheritance of communist made difficult the process of economic transformation. David Lipton, an economist from the Moore Capital Strategic Group in Washington underlines two relevant factors:

The first one was that laws, institutions, and ownership structure under communism differs in many aspects from what a modern, capitalist economy requires. Thus, nearly everything needed to be transformed.

Second, after approximately forty years communism failed to sustain itself, leading into low living standards, industrial crash and financial chaos and anxiety.

Furthermore, there were considerable differences among countries in the region.

Economic, political and social transformation must be carried on in a context of deep economic crisis, inexperience managing a new capitalist economy, corruptible political institutions, the reemergence of historical enmities, and often great ethnic fissures.[2]

Economic performance

The tactical difficulties of creating a market economy reshaping the economies of the East were profound. Was it possible to privatize state enterprises, eliminate monopolies, intervening the banking system and the tax system in a context of financial crisis characterized by the absence of realistic prices?

The major tasks the “shock doctrine”[3] face were:

• Going through a process of macroeconomic stabilization, both external and domestic. For example, modernizing industry.

• Implementing economic liberalization measures rewriting some laws.

• Introducing major institutional changes such the contraction of state performance in the economy in favor of private sector reinforcement and building new capitalist institutions.

This measures corresponded to the Washington consensus, to the patterns of action suggested by the G-7 countries, and on the top, the International Monetary Fund (IMF) and the World Bank. The aim of the program was the adoption of patrons to free trade and prices, cut inflation, create competition, privatize state enterprises, balance budgets, establish market institutions and construct social welfare programs.

The opening to the West

An opening up to the West countries was an important part of the transformation process. They put an especial emphasis on economic integration through free trade, closer political ties and active participation of foreign firms in local economy. Western trade become a really important purveyor for economic growth due to large investments, the influx of new loans and the foreign debt service. At the same time, liberalization of trade put pressure on domestic enterprises increasing competition and providing vital finance for urged imports of technologies and capital.

Due to this measures exports of many eastern countries have widely increased. In Poland, for example, exports to the West rose from $8.5 billion in 1989 to about $13 billion in 1991.

GDP growth

Economic growth has taken a firm hold in the most reform-oriented Eastern countries.

In most places, state-owned industrial dinosaurs gave way to private firms, which now produce 70 % of output. Industry shrank, and services swelled from 36 to 58 percent of output on average. In no other region has international trade grown as fast, with exports plus imports soaring from 75 to 114 percent of GDP on average. From trading largely with each other, the eastern states have reoriented towards the markets of Europe. By 2012, exports to the EU made up 69 percent of the total in the median East European country and 47 percent in the median former Soviet republic.

For instance, Uzbekistan grew slightly faster between 1990 and 2011 than the median country elsewhere in the world (Norway). While Norwegian GDP per capita increased by 45 percent, Uzbekistan’s rose 47 percent. Bosnia and Herzegovina—where income grew by more than five times—was the third fastest in the world between these years. Albania, which grew 134 percent, came 16th and Poland, growing 119 percent, 20th. All three outpaced such growth engines as Singapore and Hong Kong.

[1] “Creating a market economy in Eastern Europe: The Case of Poland”. Jeffrey Sachs, David Lipton, Stanley Fischer and Janos Kornai.

[2] “Normal Countries: The East 25 Years After Communism”, Andrei Shleifer and Daniel Treisman.

[3] Term coined by Naomi Klein, a Canadian journalist critic with the processes of capitalist transformations that followed the School of Chicago scheme.