Systemic Change in Cooperation Partner Countries:
More than five years have passed since the great politico-economic transformation began in Eastern Europe. In some parts of the region, these years have seen an increase in the diverse opportunities that the collapse of communism opened up for the emergence of democratic systems, for social pluralism, and for the transition to market economy. They were linked with the liberation from Soviet domination, with the evolution of a new relationship between East and West, and with intensive efforts to establish a modified cooperation system in Europe.
But in many respects, the years since 1989/90 have also shown that the transformation of communist-style politico-economic systems into democracies and market economies is much more difficult than was assumed in the East or the West in the early days of the transformation process. Successes contrast with failures. Different national courses of development have led to significant distinctions in the re-structuring process.
In some countries, the ongoing changes have bolted away from all state guidance and control and are forging ahead in the form of largely spontaneous turmoil. All this makes it more and more difficult to paint a valid picture of the status of and prospects for economic transformation in Eastern Europe. Consequently, this paper, too, must restrict itself to identifying some specific aspects and discussing some yardsticks which might expediently be applied to assess the status and progress of the transformation processes.
The Complexity of the Transformation TaskIf economic transformation in the post-communist countries is to succeed, some extremely complex transformation problems will have to be resolved - under heavy millstones in the form of (in some cases) devastating inherited burdens. This complexity arises first of all from the fact that the transition to new economic conditions, in particular, the changeover to stable, socially-accepted and efficient market economies, must take place in unison with three other major restructuring processes.
This transition will only succeed if a positive interaction can be achieved between economic change and the other principal adaptation processes. These are:
A close correlation exists in particular between political and economic transformation. On the one hand, the conversion of the political system into a democracy has to be accompanied by economic successes that make themselves felt in the standard of living of the population and thus make the restructuring politically acceptable to a democratic majority. On the other hand, an economic transformation that enhances the well-being of the people can succeed only if the political and legal systems establish propitious background conditions for economic activity.
Thus, any successful economic metamorphosis requires the presence of "political capital" which comprises three principal elements:
Economic RestructuringThe restructuring of the economic conditions is an extremely complex procedure involving at least five difficult sub-processes:
Some of the sub-objectives of economic transformation may, however, be contradictory, and indeed, such clashes regularly occur in practice. In particular, there is a virtually unresolvable conflict between the impact of a resolute macroeconomic stabilisation policy on production and employment on the one hand and the implementation of reforms to the economic system on the other. (1)
In this context there is a danger of a vicious circle forming, which can be described as follows: progress in the change of system requires macroeconomic stabilisation; economic stabilisation imposes more and more severe burdens on the population, especially in the form of rampant unemployment; these hardships in turn jeopardise the societal consensus and incite the population to protest responses such as strikes, swings to the (in most cases post-communist) opposition parties in national and regional elections, or alternatively to political apathy; this civic protest interrupts or at least slows down the change of system and macroeconomic stabilisation.
The likely consequence of this, in turn, is that the social situation of the population again fails to improve and that public approval for economic reforms dwindles still further. Only if the "political capital" is substantial, if the social repercussions of the stabilisation measures are successfully cushioned (for example if assistance is forthcoming from the West to help cope with the adverse impacts of stabilisation), and if the opposition is willing to continue the transformation policy in principle after coming to office, only then is there any hope of being able to break out of the vicious circle.
The complexity and interdependence of the tasks involved in the transformation process have frequently prompted questions as to the proper strategy to be pursued in bringing about the necessary changes: in what order should the reforms be implemented? Should the political or the economic transformation be tackled first? And (taking the restructuring of the economy as a process in itself), what sequence merits priority within the "magic triangle of transformation objectives" - macroeconomic stabilisation, institutional transition, or microeconomic adaptation? And finally, what pace should be set for the transformation, should preference be given to "shock therapy" or to a "gradualist" approach?
One of the major difficulties involved in the search for the most expedient strategy is, of course, that the transformation of a socialist political and economic system into a democratic and market-economy model along Western lines is a unique venture that is without precedent in history. Accordingly, a transformation theory had not been formulated nor paradigms established, nor experience gathered elsewhere. What is more, the countries in transformation have done little to cross-fertilise each other by means of learning processes.
As a result, many of their decisions have been and still are based on the "trial and error" principle. In the meantime, numerous theories of transformation have been put forward, dealing with the "sequencing" and pace of restructuring. However, their practical relevance is severely curtailed by the fact that most of their analytical approaches presuppose a strong state as the central protagonist of transformation. In many countries, especially in the states of the CIS, however, transformation is occurring more as a spontaneous process than as a steered process. With such uncertain terms of reference, success and failure depend less on strategic designs than on the weight of the inherited burdens, on the constellation of the conditions pertaining at the outset, on the response of the outside world, and on the specific nature of the interdependence of politics and the economy in the transition process.
Inherited Burdens and Other Starting ConditionsAny discussion of the burdens hampering the countries in transformation must start off by pointing out that the close correlation between economic and socio-political developments means that not only the economic but also the political and social heritage of the defunct socialist system have a retarding effect on the transformation of the economic conditions in the post-socialist countries. Of special importance in this context are the politically and economically dysfunctional effects of the serious deficits in public power and authority, of the feeble development of democratic forces (and here in particular the tardy emergence of political parties), and the predominance of personal over institutional aspects in politics.
Another factor impeding economic change is that there is little of the effective social self-organisation that is essential for the development of social momentum and the controlling of conflicts in democratic market economies. And finally, the collapse of communism as an ideology has left a more or less pronounced lack of guiding social values and standards of conduct. Although communism had lost the allegiance of the minds and hearts of the people, it was still an important element of social intercourse and "everyday ethics". In many of the post-socialist states, the consequences have been brittle social coherence and an inclination towards anomic and even criminal forms of conduct. It is thus clear that there is a whole bundle of inherited socio-political burdens that are combining to make the reconstruction of the political system arduous, contradictory and inconsistant - in terms of the constellation of political forces - and to obstruct institutional consolidation and public acceptance of the market economy system.
This problematic political heritage goes hand in hand with complex economic encumbrances. Bureaucratic structures and regional and sectoral interest groups remain intact and are making it even more difficult to restructure the economy and transform the economic system. In particular the socialist system of ownership proved from the very beginning to be a serious obstacle to the transition to a market economy. Other cardinal features of the old system such as paternalism, egalitarianism, and the distorted perception of work performance conditioned by the incentives system under the administrative planned economy had inculcated patterns of economic behaviour that do not exactly promote the change to a market economy. But above all it was the actual structures of the Eastern European economies, dilapidated from decades of neglect, that meant that any attempt to change the system was bound to trigger severe economic and social shock waves that harbour potential for serious political conflicts. The following, especially, fall under the heading of the "structural heritage":
A comparison of the behavioural and structural heritage of the various economies in transformation in Eastern Europe shows that, despite many similarities, there are also some considerable differences from country to country. In this context, the starting conditions in Poland, Hungary and Czechoslovakia already appeared much more propitious from the very beginning than they were in Russia and the other states of the CIS, and the results of their transition to date fully corroborate that initial appraisal.
However, the different relative weights of the burdens inherited from socialism are compounded by other, specifically local, conditions at the onset of transformation in the various countries:
It is generally true that the weaker the economic situation, the less the "political capital". Equally, the more resistant the old administrative structures are to change, the more distorted and obsolete the capital, production and employment structures will be with respect to the opportunities opened up by a market economy, the more remote the foreign trade organisation will be from the world markets, and the more hostile the local economic culture will be to a market environment; the more difficult it is to resolve the tasks involved in transformation. This applies virtually irrespective of whatever transformation strategy is actually attempted.
If a gradual approach is taken, poorer conditions heighten the danger of the transformation process running aground before it has really got under way, as in the case of Ukraine. And if a radical approach is taken, the concussion triggered by the initial "direction shock" (2) is felt all the more strongly, making it all the more probable that the measures introduced will have to be stretched, diluted or even retracted.
The Central European Countries as the Pioneers of TransformationThe divergence that has already become apparent between the various countries in transformation holds true for all sectors of the reconfiguration, in particular for the degree of macroeconomic stabilisation achieved (measured above all in terms of the reduction in inflation rates), the progress made in privatisation, the pace with which market-economy institutions are set up, and the headway made in adapting the economy proper (structural change). It is consistently evident that the countries which have made the greatest progress in their transformation process are also the ones which have been most successful in overcoming the transformation-induced recession. (3)
Measured in terms of the degree of politico-economic restructuring achieved and the economic recovery to date, a number of zones distinguished by the intensity of the transformation process can by now be discerned, albeit with fuzzy boundaries and with considerable differentiation still necessary within each zone. Clearly in the top zone of the declining intensity scale are the five states of East Central Europe: the Czech Republic, Poland, Hungary, the Slovak Republic and Slovenia (ECE/5 states).
Here, despite all the difficulties, transformation has made significant progress, and the general economic situation has also improved considerably in the meantime. The other end of the scale is also quite clearly defined: all countries affected by wars or civil wars and which are beset by chaos and rampant decline (the former Yugoslav and Transcaucasian Republics, Tajikistan). The leading ECE/5 states also have many impediments from the past to overcome, but they also benefit from a number of more favourable conditions:
Since 1994, all ECE/5 states have been experiencing positive growth, and Poland is now in its third successive year. The transformation-induced recession has also been considerably less severe in these countries, the drop in gross domestic product (GDP) since 1990 totalling only about 15 percent. Considering that in terms of per capita gross national product the Czech Republic and Slovenia are now not too far behind Greece and Portugal, this indicates that the ECE/5 states are on their way to catching up economically with the weakest members of the EU and thus to becoming, in economic policy terms, "normal European problem children".
Further to the growth achieved in GDP, other factors meriting a favourable assessment are the return to growth in investment and the moderate trends in annual inflation rates, which were reduced to levels between 10 percent (Czech Republic) and (32 percent) Slovak Republic in 1994 and which can now be described as by all means "in keeping with transformation". (5)
On the other hand, there are a number of adverse macroeconomic trends in evidence in the ECE/5 states:
Favoured by the benign starting conditions outlined earlier, the ECE/5 states were able to introduce a whole bundle of transformation-policy measures and even to implement some of them relatively quickly: abolition of price controls, a harder financial and monetary policy, mutual convertibility of currencies, and liberalisation of foreign trade. Important steps were also taken in the transition towards a market economy system: phase-out of central planning institutions and methods, development of instruments for indirect steering of the economy, establishment and/or extension of a two-tier banking system (central bank/commercial banks).
Also of special importance was the rapid commencement of privatisation (especially "small business privatisation"), even if there are numerous problems still to be overcome in this context. (6) For instance, "large-scale business privatisation" is still progressing only very slowly, is riddled with interventionist measures, is being distorted by subsidies, and is not inducing enough structural change.
Where privatisation has already started to take effect, the efficiency of business activity is frequently stifled by inadequate capitalisation, limited entrepreneurial know-how, insufficient controls ("corporate governance"), and restrictions on competition. These deficits in privatisation entail the danger of future insolvencies and at the same time imply that the ECE states' prospects of sustained economic growth are dependent upon a real consolidation of the private sector. The changes of government in Poland and Hungary that brought post-communist (de facto social democratic) parties into power were not without their repercussions on the content and pace of reform policy in those countries.
Shifts in emphasis and some deceleration effects were inevitable. However, there has been no change of course back to administrative forms of economic control. As long as such changes in economic policy do not involve too much interventionism, changes in government as a result of general elections may even have a stabilising effect on the transformation process, because they head off public discontent and channel it in a way that is normal in any democracy.
The three Baltic states - Estonia, Latvia and Lithuania - are attempting to catch up with the top five, with some major successes in stabilisation and systemic change, even if they still have to climb out of much deeper transformation-induced recessions. (7)
Despite numerous short-term adaptation problems - and contrary to many prognoses (even by Western observers) - the process of extricating the three states from the old Soviet economic conglomerate has had a beneficial effect on the Baltic region, not least thanks to the considerable "political capital" bonus associated with independence and to the smooth and rapid reorientation of external economic relations to the north and west. In Bulgaria and Romania, by contrast, the transition has been slow and not very effective, though not without some encouraging prospects for stabilisation and systemic change.
Russia and the Other States of the CIS as Stragglers in the Transformation SteeplechaseBecause of geographical dimensions and its geopolitical weight, Russia is a special case in itself. Certainly the most advanced country undergoing transformation among the states of the CIS, its evolution towards democracy and market economy is being hampered by a multitude of adverse factors. These include:
At any rate, the prospects for Russian economic policy being tightened up and given a clearer conceptual profile, or for progress being made in the institutional reorganisation of the Russian economic system have hardly improved since the December 1993 elections. Admittedly, the acute confrontation between the old Supreme Soviet and President Yeltsin has been remedied, and the new constitution also gives the Russian President extensive powers in the field of economic policy.
However, left-wing and right-wing opponents of reform command considerable influence in the new State Duma, while the reform front performed unexpectedly badly in the elections and, what is more, is disunited in itself. And as regards the significance of the new constitution for economic policy, the plethora of powers it grants to the President are looking more and more like pseudo-competencies in the shadow of the immense weight wielded by sectoral and regional interest groups. It is thus no wonder that Yeltsin is attempting to side-step the constitution and the government with the aim of extending the dimensions and the functions of the presidential apparatus in economic affairs.
On various occasions in 1994/95, Yeltsin and Chernomyrdin have again spoken out in favour of continuing with market-economy reforms, and privatisation has made some significant progress by now. However, it is frequently associated with practices that are legally unfounded or even criminal. But what most makes privatisation to date appear more formal than factual is that monetary and fiscal policy as practised at present is geared towards satisfying the enterprises' demand for subsidies, relegating banks to the role of distribution points for state-ordained loans, and that there are no functioning financial markets that could put pressure on the production units to improve efficiency. The same financial markets would, however, also have to be capable of mobilising the capital required for modernising the obsolete capital stock and for the urgent restructuring of the economy. (8)
Thus, privatisation can help improve systems policy only if it is complemented by an attempt to make a new start in monetary and fiscal policy. Such a new beginning has been proclaimed on various occasions and was most recently made a part of the agreement reached with the IMF in mid-March 1995 on a loan to the tune of $6.25 billion. Chernomyrdin, too, has repeatedly advocated a stricter monetary and fiscal policy, but implementation has always failed to follow the proclaimed intentions.
What is more, many concrete actions taken, from the ongoing practice of subsidising enterprises and sectors that would otherwise be threatened with collapse (to the co-option of reactionary politicians into the government), would tend to indicate that economic policy is more likely to continue in the future, too, to pursue a lobby-dictated and socially-compatible gradualist approach rather than to attempt any stability-orientated and institutional breakthroughs.
The hopes which for some time now have been placed on industrial-policy intervention are likewise to be seen in this context. Their aim is to cushion the rapid structural upheaval that is currently going on in Russia in the form of drastic drops in production in the arms industry and in broad sectors of civilian machine manufacturing and light industry and which in some regions is threatening to take on the proportions of a full-scale deindustrialization with serious social consequences (unemployment, impoverishment).
In most of the other states of the CIS, transformation is even further behind than in Russia. Here, too, comprehensive transformation projects have been devised for individual sectors but great difficulties are being experienced in implementing them, threatening in some extreme cases to paralyse the entire project. On the other hand, these countries also share with Russia the crucial drawback to any deliberate rejection of a reform course: there is simply no promising alternative to a more or less resolutely pursued policy of systemic change.
For one thing, it is quite obvious that intensified interventionist measures - for instance across-the-board price controls, wide-ranging subsidies for unprofitable production units or selective administrative intrusions - tend to generate "functionally weak hybrid systems" (Egon Tuchtfeldt) that are at best not particularly efficient, at times even counter-productive. But a complete return to the old regime of planned-economy socialism would be even less of a valid option. The shortcomings of the "administrative command system" have become too evident, the political pre-requisites for a planned economy could not be restored, and opposing vested interests have by now grown too strong.
The economic pre-conditions for a planned economy - the availability of reserves for the pursuit of political priorities and to compensate for the inefficiency that is typical of the system - have likewise ceased to apply. But of course, the lack of any fundamental alternative to a policy of reforms does not rule out administrative intervention in the transformation process nor changes of course or zigzags in economic policy, be they born of economic necessity or in response to persistent political barrage from reactionary forces.
Conclusions and Security ImplicationsThe different statuses attained in transformation to a market-economy system and in economic consolidation in the countries in Eastern Europe influence and are themselves reflected in the domestic and foreign policies of the states concerned. Thus, different stages of progress are evident in political transformation, in particular differences in the extent to which democratic systems have been established and political stability achieved.
Significant differences are also apparent in the degree to which new national identities have evolved, in foreign-policy interest constellations, and, related to the latter, in the extent to which convergence with Western Europe has been achieved or is intended, whether in the form of closer relations with individual Western European states or with alliance systems and politico-economic communities such as NATO and the European Union.
Altogether, four groups of countries can be distinguished, and though each group exhibits further differences within itself each can be characterised by many similarities across all aspects of economic, social and political life: Russia, Russia's "near abroad", Central and Eastern, and Southeastern Europe, and ex-Yugoslavia.
Especially problematic from the security aspect is Russia's inclination to re-define itself if not as a competitive great power, then at least as a regional leading power. However, it would be mistaken to construe for Russia too close a correlation of interdependence between progress made in the transformation of its politico-economic systems, i.e. the evolution of democracy and a market economy, and its performance on foreign-policy issues. The question as to the potential for and the dimensions of a new great power role for Russia is relatively independent of any progress made in transformation and is just as significant and cogent to reactionary, national-conservative politicians as it is to reformers.
The implications that the ongoing changes in Eastern Europe entail for the Western alliance systems ensue from the fact that the loss of a clearly defined adversary and the associated loss of a clearly defined defence mission have also brought a loss of function on the part of NATO. At the same time, the interests of the Western countries are diverging, in particular there is a growing discrepancy between European and US interests, for example with respect to the proper approach to be adopted in Bosnia and Herzegovina, relations with Iran, the question of Russian membership of NATO, and developments in world trade.
To be sure: the situation in the East of Europe is generally agreed to be insecure. But opinions and perceptions differ as to the nature and dimensions of this insecurity. Some see the political conditions in the region as a whole as unstable - not least in the light of the return of leftist governments to power (Lithuania, Poland, Hungary, Bulgaria). Others stress possible economic setbacks as insecurity factors. But many are united in fearing the future course of development in Russia, some focusing more on the destructive potential of a country beset by disintegration, crime and environmental risks, others worrying more about perceived trends towards authoritarian, militaristic and expansive forms of conduct.
These new insecurities in the east and the quest especially by the countries of Eastern Europe for membership of NATO have given rise to a heated debate about the expansion of NATO towards the east. Three defence experts of the Rand corporation - R. Asmus, R. Kugler and S. Larrabee - have attempted to structure this debate.
They distinguish three ways in which the Western defence alliance could expand: (9)
To conclude: Unfortunately, an assessment of the status of transformation and of the economic situation in the East of Europe is of little help to the decision-makers in the Western world in their review of these options. The future functions of NATO and in particular the question as to an expansion to the East are primarily political decisions.
Today, as the Finnish diplomat M. Jakobsen sees it, NATO is attempting to pursue two incompatible objectives at the same time: (10) "It is treating Russia as a reliable partner and it is promising the Central and Eastern Europeans that it will protect them against Russian aggression". Here, indeed, a political dilemma is evident: the economic and political situation in Eastern Europe and the status of systemic transformation give grounds for concern about consolidation of democracy and the market economy, but by isolating Russia the extension of NATO could exacerbate precisely that insecurity that the expansion of the Western alliance is intended to allay.
Cf. C. Meier, Der politisch-ökonomische Transformationsprozeß in Ostmitteleuropa - eine Zwischenbilanz im Herbst 1993, in: Forum Institut für Management (Ed.), Produktionsmöglichkeiten in Polen, Ungarn und der Tschechischen Republik, Heidelberg 1993, pp. 1-7.