14 May 2014

Transition: Whence and Where to? – Ukraine and Elsewhere


It is hard to find one single word to describe all that happened in the eastern part of Europe twenty-five years ago when the communist regimes collapsed. Economists and political scientists tend to use the term reform for the profound changes of that time. But this term lacks clear contours. A piecemeal change within the same socio-economic system can be classified as a reform, but a (near) complete overhaul of the system can not. Take the Hungarian case: the Communist government under Kádár, the long-time Communist leader of the People’s Republic of Hungary, introduced top-down experimental measures in the economy (not so much in politics) during the 1960s and 1970s, with the intention of streamlining, and thus perpetuating, the regime. Here, we can apply the term reform. The regime obviously wanted to reform rather than replace the system. Even the functionaries of the Kádár regime themselves talked of economic reform” – and they were right.
 
But that is ancient history now: planned economy regimes, reformed or otherwise, yielded to the market economy in or around 1990. What happened at that time obviously was much more than reform of a system. In fact it was just the opposite: a whole socio-economic system had to be replaced, as fast as possible, and market economy (“capitalism”) is a par excellence negation of any variety of state socialism. Reform, thus, is a misnomer for an upheaval of that magnitude. Another term in frequent use is regime change. It sounds more appropriate than reform; but, again, does not fully reflect the depth of the changes of those heroic years. The overthrow of the Saddam regime in Iraq in 2003, for example, amounts to a regime change; it certainly was much more than just a simple replacement of a government. The fall of an entrenched regime can indeed open the door for thorough systemic change. But whether that happens is not certain: a profound social transformation, triggered by a regime change, is but one of the possible outcomes after the downfall of a long-lasting political regime.

The Germans refer to the thorough transformation of the Communist East as Wende (“change”). I find this term a bit neutral and technical for such an historic break in a society’s life path, but at least it alludes to a new situation.

Eventually, the term transition has become widely accepted in literature. In the parlance of international financial institutions such as the European Bank for Reconstruction and Development (EBRD, London) or the World Bank (WB, Washington), former planned economies are classified as transition countries, that is being in the process of becoming a fully fledged market economy and parliamentary democracy.

Transition process, transition economy: these terms are now commonly used, even if not all of us find them fully appropriate. Transition, alluding to the flow of events, is certainly better than reform or change or other neutral technical terms. Genuine social changes however take time. This is why József Antall, the first Hungarian Prime Minister elected by a free Parliament in 1990, pointedly used the term rendszerváltozás instead of rendszerváltás; the first can be loosely translated as “the process of the change of system” as opposed to the second that simply means “change of system”. The time dimension is central to Antall’s concept of socio-political change: the process proceeds in fits and starts; it may get stuck, or even go into reverse.
 
With the above in mind, you can see why reservations about the term transition are justified. It sounds like a non-ideological, technical term indicating a shift from one particular state to another. Well, try applying it to a living society and you are in for complications. Transition, transit: from where, to where? Again, take the case of Hungary, and the customary definition of transition as a process from a planned economy to a market based one and as the replacement of a one- party undemocratic regime with parliamentary democracy. Now, in both respects would return not be a more appropriate term, considering Hungarian history? Yet, return is rare in the language of political science or in the media. One reason for that may be that there are few people around who lived in the capitalist society of pre-war Hungary. Those who were under the age of forty in 1990, at the historic moment of the political regime change, did not hear much about “capitalist and bourgeois” Hungary. What they were taught in state schools was negative: the concept of interwar Hungary as a backward country served the self-legitimacy of the Communist regime. The official Marxist view magnified the problems and belittled Hungary’s interwar achievements. But it is not only Marxist ideology which neglects these antecedents: the international research community and political commentators also tend to overlook the fact that Hungary, similarly to some of its neighbours in the region, has already been a market economy, even if in a semi-peripheral manner.
 
Transition or return? Do words matter at all? Well, let us take one interesting aspect of social change: convergence toward a more advanced neighbour. In the case of Hungary, the perennial benchmark is Austria. Recent economic history research proves that the Hungarian level of economic development was closest to that of Austria in the years before the Second World War: in the late 1930s, Hungary’s per capita income level was as high as 75 per cent of Austria’s – higher than any time before, even within the Austro-Hungarian Monarchy. Many Hungarians in fact would love to return to that historic state of affairs, if only in terms of relative material advancement. One can interject that Hungary’s catching-up with its western neighbour was partly due to Austria’s series of crises in the 1930s; still, closing the gap also tells about Hungary’s economic achievements of the period. History can also help us judge the country’s economic transformation after the political regime change. The fact that Hungary was already a market economy in the pre-1945 period, and that at that time Hungary’s level of economic advancement was relatively close to Western standards must have had an impact on people’s expectations in 1990. It is important to understand that Hungary in 1990 not only inherited legacies from the four-decade-long Communist rule but also from the period before that: twentieth century capitalism in other words also bestowed intellectual, infrastructural, human capital and other legacies to the later generations. This is also true for other nations in the region, like the Poles, the Czechs and the Slovaks.
 
But the rest of the broader region had a different past. Countries entered the new era in diverse conditions with respect to their societal knowledge base and value systems. While in the Czech(oslovak) Republic, East Germany and Hungary “only” forty years elapsed between the last year of the market order and the first year of the democratic regime, things were different in Russia or in Ukraine, and elsewhere in the former Soviet empire that was forcefully taken out of its historical conditions in early 1920s. In these latter cases only octogenarians can have had any personal memories about the way markets function. Seven decades are just too much for tacit knowledge and skills to survive. Obviously, there are many other aspects that distinguish the CEE countries from the former Soviet republics in terms of their systemic transformation; but the existence or lack of personal knowledge about markets, collective memory of a constitutional order, and a certain legal-institutional continuity were important factors influencing policy choices at the time of the system change. Take the issue of privatisation of publicly owned assets – a key policy dilemma in the early 1990s all over the region. In CEE countries policymakers could seriously consider a) returning the assets to legal owners (restitution) and b) full or partial compensation as two potential techniques of privatisation. These avenues to privatisation were simply closed in the former Soviet Union where seven decades of Communist rule effectively had excluded them as options. Restitution and legally justified compensation would require administrative preconditions such as proper land registries and reliable legal archives. They did not exist under the Soviets, nor did such civic institutions of a contract-based society function in exemplary fashion under the Czarist regime before the First World War either. To boot, the records that managed to survive civil war and turmoil were corrupted during the long rule of the Communists when naked power and negligence among other eventualities shaped property relationships. Compared to that, in the CEE region the return to a certain settled, unambiguous ownership order was a more realistic goal. Also, it was hoped that the restoration of entrepreneurial freedom would quickly unleash creative business energies, partly based on business skills and market knowledge retained deep within the family. The swift reappearance of a traditional middle class, and the recreation of a vibrant entrepreneurial stratum were also expected or rather hoped for. The presumption was that the building of a market system in Hungary would not be starting from zero: the Socialist regime in its last decade of existence had even legalised the creation of proto-businesses in the form of small hybrid enterprises, and it did not suppress after-hours economic activities, conducted within or parallel to the bureaucratic state-owned companies. These organisational innovations in the 1980s were presumed to have inculcated the spread of entrepreneurial spirit. But, to the surprise of many, once the Communist regime did in fact collapse in 1990 the long-term effects of such hybrid forms of quasi-entrepreneurship turned out to be detrimental to genuine entrepreneurship and to proper risk-taking mentality. The upshot of this is that historical antecedents have had important consequences on policy options. In South and Eastern Europe the socio-economic transition could not be but shock-like, while in the CEE region a more gradual transformation remained a possibility. However, the transformation of the structure of economic activities and of property conditions turned out to be rapid in the case of Hungary which analysts used to classify – mistakenly – as gradual. The official statistics on gross domestic product (GDP) recorded a shocking 17 per cent contraction in Hungary during the transformation crisis in 1990 through 1993. But this drop looks mild compared to what happened in Ukraine, Russia, Moldova and other former Soviet republics where output halved in the same period. Such a tragic collapse in GDP may be in part due to statistical errors: official output under the Communist regimes was probably grossly over-reported, while the contribution of the nascent private sector after the regime change may have been under-reported. But still the fact remains that the former Soviet republics, once regarded as middle income industrial societies, lost a significant part of their wealth and income during the first decade of their drastic socio-economic transformation (“transition”). The new system meant a material decline for most of society, and a huge increase in private wealth for a few; at least this is how most people perceived it. Research data proves indeed that such subjective evaluation is not far from reality.
 
The social situation was made worse because of the clash of high (and unmet) expectations and the dire realities in most countries. The unavoidable and continuing disenchantment necessarily had and will have consequences on economic policy. Whatever the doctrinal platform of any given government is, it still has to deal with the fact that people expect to “catch up” with richer countries. This is not a new phenomenon: the desire to keep up with better-off neighbours has traditionally been engraved in societies of the region. However, the economic performances of the countries mentioned have been too modest to meet the material expectations of the public; certainly not strong enough to elevate the level of material wellbeing to anywhere near the rich West – the traditional benchmark in Eastern Europe.
 
With such antecedents, it is not surprising that after the financial crisis of 2008, aversion to the market model and the appeal of populism became stronger all over the region. Support for the “transition to market economy” declined in all the mentioned countries, in some cases dramatically, compared to the 1991 data, according to opinion polls conducted by Pew Research. The national differences are striking. In Poland, for instance, public support for the market economy was as high as 80 per cent, and it remained high (71 per cent) by 2009, corresponding to dynamic growth in the Polish economy during that time. The same 80 per cent applied to Hungary in 1991, at the time of the Antall government, but by 2009 a drastic change in attitude was seen: the percentage of those in favour of capitalism had fallen to 46 per cent, the largest fall in support in all the countries surveyed. Still, to the east of Hungary, support for the market order is even lower: the Russian data saw a drop from 54 to 50 per cent during the same period; in Ukraine a drop from 52 to a mere 36 per cent: the lowest figure across the entire region. Still, with the exception of Ukraine and Hungary, the majority of people seem to support the transition (or return) to capitalism.
 
One should also be careful not to draw too many parallels between Hungary and Ukraine based on the similarity of the Pew Research data. The record fall in support for a market economy in Hungary is not enough to liken Hungary to Ukraine, since the expectations about capitalism were different in both countries at the very start of the historic changes, and social and economic conditions have followed different paths. As for the Hungarian socio-economic transformation, the Kádár regime left behind a very long shadow. The social structure and value system of the 1960s and 1970s, as well as the national debt that financed “Goulash Communism”, had a long lasting effect on the transformation process of Hungary. In 1990, we hoped for a more determined break with the past. Then we had to realise that entrepreneurial activity turned out to be weaker than expected: though the number of those classified as entrepreneurs is high in contemporary Hungary, the figures are misleading as many of those so classified are in fact entrepreneurs in name only, and don’t carry out serious business activity at all. In a similar fashion, the return to the capitalist mode of production in agriculture, and in the countryside in general, made a rather slow start despite the optimistic expectations at the time of the regime change. Many of the former flagship industrial firms were also unexpectedly destroyed during the first years of the transformation in the face of competition from abroad.
 
There are thus ample reasons for Hungarians to be disenchanted with the new era; the tolerable material wellbeing under Kádár and the complicated nature of the transformation process have been the two most important factors behind the decline of support for the market order since 1990. Strong economic growth and improvement in the quality of life could counterbalance the negative cognitive tendencies – but Hungarian growth has never been roaring, and the second decade of the transformation turned out to be less successful than the first, unlike in Poland and the Baltic republics where the early shocks were followed by a sustained period of strong growth performance. It is of course open to discussion whether in these latter cases it was economic progress that led to the relatively high and stable support for capitalism, or was it rather the values, views and attitudes in those countries that contributed to the good economic results.
 
The material and social complications since the beginning of the regime change in Hungary and in other CEE countries have been dwarfed by those experienced in countries to the east and south of Hungary. The long list of economic crises and of inner social and political tensions in Ukraine testify that the term “transition” understates the hard choices and tough challenges that people and office holders have faced during the process of transformation. Still, international institutions keep measuring the progress of the mentioned countries against ideal Western norms – see the so-called transition indicators, for example, constructed and published by the European Bank for Reconstruction and Development. The concept is simple: their analysts grade the achievement of the transition countries on a one-to-five school-like scale. Well, grade five (= excellent) will never be granted to any real life transition country: only an ideal market economy can earn the highest grade. But how can you fairly grade the legal and social transition performance of a post-Soviet country where history has not allowed the survival of a civic (“bourgeois”) middle class; and where privatisation and marketisation would invariably lead to the ascent of “oligarchs”.
 
The term “oligarchhints at feudalism. This may seem an exaggeration, yet the collapse of the state-controlled economic system led to a mess in which feudal structures also surfaced in Russia or in Ukraine. The societies are multilayered: there are, naturally, persons who have already mastered the rules of the market, the young are born into the market system. But others may feel that the pre-capitalist era is back: excessive wealth for the few, poverty for the masses. Under such conditions, much of society turns to the state (“the good king”) for protection against the oligarchs at large.
 
You may find the above description an exaggeration and you may be right. But the same Pew polls indicate that the overwhelming majority of societies in post-Soviet states approves a leader with strong hands to put things in order. At first, this expectation was not met; witness the chaotic years of President Yeltsin. After the first decade of Russia’s “transition”, Putin came to power with the promise to restore order and to put the country on a growth path. Russia certainly was much behind the Visegrád countries where the economies started to grow much earlier, from about 1992 and 1993. Putin swiftly got rid of the system of checks and balances – which is again a return to a previous historical pattern. But the economy started to grow so much that the annual 5 to 7 per cent GDP growth seemed to legitimise the Putin regime at home and even abroad.
 
Let us add, however, that the financial crisis of 2008 hit Russia hard; since that time, Russian growth has struggled to top the one percent mark. Such a growth performance is not sufficient to solve the structural challenges facing that huge country.
 
Ukraine is an even harder case. Ever since its regime change, there have been question marks attached to its long term existence as a genuine entity. After the recent events in Crimea, uncertainties over the long-term fate of Ukraine have only been magnified. But even if national entity is guaranteed via big power relations and by the international order, it is still unclear when and whether the country will ever have an integrated nationwide market.
 
Nation building, an overarching goal that tops any other tendency can become a source of growth energy; see the lessons from the Baltic, Slovene or Slovak case. So far, Ukraine has progressed on a different path. As of this writing, one cannot identify any immaterial factor that would immediately accelerate its economic progress.
 
To conclude: countries follow various avenues of social changes, and there is no reason to presume that they are all headed in the same direction. But that should not come as a surprise. Once upon a time, the Communist ideology postulated a universal pattern of progress towards a (not clearly defined) ideal society, still it was obvious from even a casual look that the homogenising regime of the Communists proved unable to overwrite the historically determined particularities of the many nations of the region. Artificial entities did not last very long: look at what happened to Yugoslavia, Czechoslovakia and to the Soviet Union as soon as direct political control from above evaporated.
 
History matters. The process of a genuine systemic change (and not just a regime change) is as much a return to former situations as a transition to a certain model of market economy. If that is true, a powerful question arises: what to do with newly created entities that do not possess a common past? In the case of Ukraine (and perhaps of Belarus) lack or weaknesses of historical memories and common social patterns, shortage of human capital embodying tacit civic knowledge are weakening factors, superimposed on known fragilities in the structure of the economy. Transition indicators do not easily condense such complexities. What the analysts at EBRD will most probably register is that the institutional and other relevant aspects of Ukraine are not showing signs of improvement after the overthrow of the corrupt president. But why would they improve? Genuine improvement stems from the success of the systemic change which, in turn, depends on two key conditions: first, that the evolving order is in harmony with historical antecedents (“return”) and, secondly, that it fits snugly into the rules and institutions of contemporary capitalism (“transition”). The lesson learnt is that a nation must meet both conditions to be successful.



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