WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

The Reality Check Series

In the transition from the communist regimes to parliamentary democracies and market economies, there are milestones which are preserved in the collective memory, such as the fall of the Berlin Wall in November 1989 or the failed coup in Moscow in August 1991. Our senior researchers were in a position to monitor the transition process as adult professionals from the very beginning. In this Series, we asked them the following questions:

Looking back at transition over the past 25 years:

• Which were the main surprises for you regarding developments?
• Which main tendencies would you expect to mark the next 10 years?

In the Reality Check Series, you will find their answers in the form of seven personal essays, which have been first published in a Special Issue of the wiiw Monthly Report No. 1/2016.

Peter Havlik: Expectations of transition and real outcomes in retrospect

Looking back a quarter of a century to December 1990, to the very beginning of transition, and reflecting on my personally expected outcomes and the actual current situation, I ventured to consult a compendium of papers which I edited in 1990 under the title Dismantling the Command Economy in Eastern Europe. With few existing peers looking closely at the region of Central and Eastern Europe at that time, wiiw was in an exclusive position to analyse the transition-related challenges as it enjoyed the advantage of both being in the vicinity and possessing intimate knowledge of these economies and societies. The above-quoted compendium of papers included chapters on ‘Transition from Command to Market Economies’ (co-authored by former wiiw Director Kazimierz Laski, who discussed the pros and cons of the ‘shock therapy versus gradualism’ while convincingly arguing against the feasibility of a ‘third road’ yet still recognising the plurality of ‘market economies’), on monetary and exchange rate policies, on East-West economic relations in view of the changes in the CMEA (the then still existing Council for Mutual Economic Assistance), on East-West energy prospects, and on unemployment and social security, as well as seven country case studies, including ones on East Germany, Czechoslovakia, Yugoslavia and the Soviet Union. These entities do no longer exist as states: there are now 24 new independent states in their place while East Germany merged with West Germany. For me, this was probably one of the least expected transition outcomes, as was in particular the subsequent extremely violent nature of the Yugoslav disintegration. Nor had I expected, on the other hand, the speed and the depth of the process of integration starting in the region soon thereafter, especially the fact that parts of the former Soviet Union would join the European Community, not to mention NATO membership – although a ‘return to Europe’ was high on the agenda in most post-communist countries in Central and Eastern Europe from the very beginning

Diversity from the very beginning

Regarding other personal expectations confronted with the transition outcomes, let me continue with a few additional quotes from my introduction to the above-mentioned volume: ‘historic traditions and starting conditions for a successful transition differ widely’ (Havlik, 1991, p. 1). This explicit recognition of diversity (which wiiw has been continuously stressing in contrast to the then prevailing ‘Washington Consensus1 implied not only the need for diverse transition strategies (not ultimate transition targets, these were ‘the establishment of a market economy and democratic political institutions’ – Havlik, 1991), but also the possibility of diverse outcomes, the latter implying that there was no guarantee for either a speedy and smooth transition or for its success. Using another quote from this book, I was convinced that ‘a return to communist dictatorship of the old sort is rather unlikely in the countries of Eastern Europe contrary to the disintegrating Soviet Union, where future developments in individual republics may go virtually in any direction’ (Havlik, 1991, pp. 1-2). Indeed, the spectrum of transition varieties which emerged in the region ranges from the more ‘successful’ transitions in the Czech Republic, Slovakia, Estonia and Poland to the more or less ‘failed transitions’ such as Bosnia and Herzegovina, Kosovo, Belarus, Turkmenistan, Ukraine and Uzbekistan. The latter group unfortunately confirms the expected variety of transition outcomes.

Legacy of the past, challenges to social consensus and fragile democracies

The next bundle of my personal expectations related to the challenges how ‘to cope effectively with the difficult legacy of the past and with adverse consequences of transition’ (Havlik, 1991, p. 2). I was also aware of the dangers associated with ‘the newly emergent nationalism, combined with a vacuum of functioning institutions’. Indeed, the establishment of ‘institutions and market mechanisms that are often granted in the West, but which either do not exist or were discredited in the East’ and the high social costs associated with the transition ‘endangering the maintenance of a necessary social consensus in the new and fragile democracies’ (Havlik, 1991) turned out to be even more challenging than I had expected. A quarter of a century ago, I certainly did not imagine that politicians like Kaczyński, Orbán, Zeman and Putin would be among the leaders winning democratic popular vote, that a unified Germany would be led by two East Germans (Federal President Joachim Gauck and Chancellor Angela Merkel), and that the daughter of an Evangelic pastor from the German Democratic Republic and a former KGB agent who operated in the same country in the 1980s would be the two currently mightiest and in their respective countries (still) most popular politicians in Europe.

A return to a Cold War setting?

Finally, the ‘decisive importance of Western support for the success of transition in the East’ (Havlik, 1991, p. 3) was also recognised. In the economic sphere this meant the abolishment of remaining trade barriers and providing financial aid including ‘at least a partial remission of existing debts’ (the latter was at that time particularly relevant for Hungary, Poland and the Soviet Union). The importance of Western technical assistance through the transfer of technology and management know-how via both technology imports and foreign direct investments was also underlined. Indeed, also the necessity to engage a ‘massive involvement of Western capital’ (Havlik, 1991) was recognised already at the outset. Last but not least, perhaps ominously, the book issued an early warning that ‘the social net in Eastern Europe might easily collapse and the West would be forced to erect new walls’ (sic!). Unfortunately, these fears seem now to be partly materialising – be it in the chaotic response to migration flows or Ukraine’s and Western conflicts with Russia. The latter in particular – de facto a return to a sort of Cold War after nearly three decades of ‘climate improvements’ – came to me as totally unexpected, perhaps even more so than the power of destructive forces of nationalism, populism and xenophobia in the region (and not only there). That the frozen conflicts in Abkhazia, South Ossetia, Nagorno-Karabakh and Transdniestria would last until this day, and that new conflicts such as the one in Ukraine could flare up with such intensity, I certainly did not expect either.

Catching-up, labour markets and social cohesion

Closing my personal ex-post reflections on the transition in Central, East and Southeast Europe, I may add some comments on selected economic outcomes, focusing on three areas: catching-up processes in economic development levels, labour market developments and trends in social cohesion (inequality). The Figure below shows the evolution of development levels (defined as GDP per capita at current purchasing power parities). As expected, the processes of catching-up have been uneven: they have been most impressive in Poland, Slovakia and Estonia (with a more than 30 percentage points reduction of the gap to the EU‑28 average). But they have been disappointing in a number of other countries such as Croatia, Macedonia, not to mention Ukraine. And compared to some expectations (not mine, but those of many colleague economists from Eastern Europe), the actual pace of catch-up remained much behind (for instance, in terms of per capita GDP, the Czech Republic still remains one third below the Austrian level, Slovakia two fifths below, and Hungary reaches just 55% of that level).

Evolution of development levels in CESEE

The persistence of stubbornly high unemployment (not the emergence – there was in fact substantial hidden unemployment in socialist economies) is particularly disturbing. The social exclusion of certain minorities (especially Roma) particularly in some Western Balkan countries and peaking youth unemployment rates represent a ticking bomb which may become even more dangerous than the homegrown terrorism in Belgium, France, Norway or the United Kingdom. Despite some remarkable successes (Slovakia and the Baltic states come to my mind), my personal quarter-century balance of transition is predominantly sober and mixed with a slight tilt to the negative, perhaps affected by the current developments in Europe, or by the foggy autumn weather.

References

• Dobrinsky, R. and P. Havlik (2014), ‘Economic Convergence and Structural Change: the Role of Transition and EU Accession’, wiiw Research Reports, No. 395.
• Havlik, P. (ed.) (1991), Dismantling the Command Economy in Eastern Europe, wiiw Yearbook III, Westview Press Inc, Boulder.
• Holzner, M. and S. Leitner (2012), ‘Economic Inequality in Central, East and Southeast Europe’, in: B. Milanovic (ed.), Globalization and Inequality, Edward Elgar, pp. 138-171.
• Piketty, T. (2014), Capital in the Twenty-First Century, Belknap Press; R. B. Reich (2015), Saving Capitalism: For the Many, Not the Few , Knopf.
• Rodrik, D. (2015), Economics Rules. The Rights and Wrongs of the Dismal Science, W.W. Norton.
• Vidovic, H. (2013), ‘Labour Market Developments and Social Welfare’, wiiw Research Reports, No. 392.