[ NATO COLLOQUIUM ]

Colloquium
1996


Keynote
Speech:

Central and Eastern Europe:
Economic Transformation, Social Cohesion
and Social Dialogue

Lajos Héthy

Political Secretary of State
Ministry of Labour, Hungary


In Central and Eastern Europe six to seven years have passed since the political change in 1989-90. In this period, economic transformation towards the market economy has made clear its social consequences. At first these consequences were simply neglected, while ready-made recipes were taken over from Western politicians and experts as to how to stabilize the economy and to build up the institutions of the market economy. Illusions were wide-spread that such reforms would turn any Central and Eastern European country overnight into another Austria, Germany or Sweden. It was taken for granted that societies, or at least their majorities, would automatically support the reforms aimed at pulling down the wall between the two parts of Europe. Initial euphoria following the revolutions in some countries tended to compensate or hide the emerging social tensions, too. The social consequences, at this time, are now mostly visible - or at least predictable - in almost their full dimensions. When referring to them as "consequences", "implications" we have economic transformation in mind as a major generator of what is going on in the societies of the Central and Eastern European countries.

Economic Transformation

The economic difficulties of the region are deeply rooted in the past. In the period 1973-93, average GDP per capita growth was 28% in the world, coupled with a considerable shift of wealth. While Western Europe enjoyed growth of 50%, in Central and Eastern Europe the average annual drop of GDP per capita was 0.8% - with a total 20-25% sharp decline in 1990-94, i.e. after the political change. This drop - comparable only with the Great Economic Depression of 1929-33 - led to the shrinking of the region's share in world industrial output and trade. It should be added: the region's falling productivity declined further in the early 1990s, as the drop in employment was less dramatic than the decline in industrial output and GDP. (Hungary's productivity in 1973 was one third, now it is one fourth, of the Western European level.) Severe imbalances of budget, trade and payments occurred in most countries (with few exceptions, such as the Czech Republic).

The new governments entering into power after the political change were faced with the tasks of economic transformation. These involved the following processes:

  1. macro-economic stabilisation;
  2. economic restructuring;
  3. establishment of the institutions of the market economy;
  4. privatization.

All these interrelated separate processes constitute what is called - or thought to be - market-oriented reforms. Macro-economic stabilisation - a necessity for any economy in a crisis situation related with imbalances of the budget, trade and payments - has no direct links with the economic system of the given country, whether it is a planned or market economy, or an economy "in transition", i.e. in a stage in-between. It is because of the complexity of economic transformation that people tend to identify their growing burdens - rooted primarily in stabilisation - with market-oriented reforms (and that is why "reform" has become a "word of cursing" in several countries of Central and Eastern Europe).

Economic strategies - despite their differing names, such as "shock therapy" in Poland and "gradual reforms" in Hungary in the early 1990s - were rather uniform, involving: 1) liberalisation (of prices, imports etc.); 2) tight monetary and fiscal policies; 3) restrictive income policies, primarily strict (administrative or fiscal) control over wage growth, aimed at the reduction of real wages; 4) efforts to cut social expenditure to reduce budgetary deficits; 5) devaluation of the national currencies to improve the balances of trade; 6) privatization of state assets. In economic strategy, conceived under the pressure of the crisis and promoted also by the international financial organizations, the IMF and the World Bank, no marked differences existed: what was differing from one country to another, or in one time period or another, was the individual government's commitment to proceed with such strategies or to try to evade or delay them.

For the economies, these strategies proved in general to be beneficial: the severe imbalances were corrected or at least eased in several countries, GDP growth restarted (in Poland already in 1992, in the Czech Republic and Hungary in 1994 etc.) and much needed restructuring was launched. The importance of services (commerce, transport, non-material services such as banking) grew all over the region (in both GDP and employment) while that of traditional industries (such as construction, iron, metal and engineering) declined. Real "success stories" are the growth of telecommunications (hindered earlier by Cocom prohibitions and lack of capital), or of automobile production and related industries and services, both as a result of the penetration of multinationals into the region. Considerable shifts occurred from internal trade within the region (earlier COMECON trade) to trade with the Western industrialized economies.

These positive developments, however, seem to have their weaknesses:

  1. traditional high quality production and labour (such as Hungary's optical and medical instruments) became the victims of restructuring and privatization, often meaning not so much the selling of state assets but rather the selling of markets;
  2. growing trade with Western Europe was mostly based on exports of food, raw materials, iron etc. "like that of the developing countries", as remarked by a Czech expert;
  3. job creation by FDI mostly meant the creation of low skilled and poorly paid jobs. In addition, structural change was seriously hindered by the lack of capital. While in the former Eastern Germany FDI per capita in 1993 was estimated to amount to 5,900 US dollars, in the rest of the region it amounted to 30 (!) US dollars. (Even in Hungary, where half of the total FDI was directed, it amounted to only about 600 US dollars per capita.)

Social Division and Tensions

Political stability and social peace can be based on social cohesion: on a social structure, as it is perceived in the region, in which a strong well-to-do "middle class" co-exists with thin layers of "rich" and "poor". The disquieting question of our days is whether economic transformation has been working in this direction, i.e. reinforcing (creating) a strong middle class and thus promoting social cohesion, or just the other way round, in the direction of social fragmentation and polarization?

As for the first period of economic transformation, I'm afraid new divisions and tensions have appeared in the societies of Central and Eastern Europe, weakening instead of strengthening social cohesion. This period has opened up new (earlier non-existing) opportunities for certain social groups (for entrepreneurship, for the accumulation of capital, for political power, etc.) while it has added to the burdens of other social groups: it has, as is often said, its "winners" and "losers". In the context of GDP drop and shrinking income, the number of the former is necessarily far below that of the latter. That is why - especially in the initial years of GDP drop in the region - social unrest or even social explosion appeared as an imminent risk for the fragile new democracies.

  1. High level unemployment
  2. While in 1990, at the time of political change, the rate of unemployment (disregarding hidden unemployment i.e. "unemployment within the factories") was practically zero, it has risen to above 10% in most countries of the region - at least in those countries where economic stabilisation and reforms gained impetus. (In 1994 in Hungary it was 10.2%, in Poland 14.4%, in Slovakia 13.3%, etc. A notable exception is the Czech Republic with its 3.8% rate in 1994.) Long-term unemployment has been growing: such unemployed are uneducated, unskilled and often belong to ethnic minorities (e.g. gypsies). Its appearance added to the already strained social expenditure and its growth was coupled to a parallel deterioration of the related social care.

  3. Deteriorating real income positions
  4. The early 1990s were characterized by high level inflation (the rate in Poland was 685% in 1990, 70% in 1991, it was 56% in the Czech Republic, 61% in Slovakia, 35% in Hungary in 1991. These hardly tolerable rates considerably decreased by 1995, to 30% in Poland, 9.5% in the Czech Republic, 10.7% in Slovakia, but remained 28% in Hungary). Inflation, an extremely complex phenomenon, was generated by the liberalisation of prices, overspending by the state, the depreciation of national currencies, the GDP drop which was not followed up by a similar drop in consumption and wages, etc.

    Real wages declined all over the region in the early 1990s. Just to mention the wage-earners' most difficult years: the real wage drop in the Czech Republic and Slovakia was 24-27% in 1991, in Bulgaria it was 42% in 1991, in Hungary it was 7% in 1991 and another 12% in 1995, in Russia it was 30% in 1990, 40% in 1991, 60% in 1992. It was justified by macro-economic stabilisation, but reduced real wages also meant reduced wage costs in the competition for foreign capital. To achieve it, governments - with the exception of Hungary - resorted to strict tax-based income (wage) policies imposing heavy punitive taxes over nominal wage growth at the enterprises, in the context of the rapid growth of consumer prices. In the mid 1990s real wage growth restarted in several countries (including the Czech Republic and Poland) and tax-based income policies were abandoned in most of Central Europe in 1995.

    Growing tax burdens and eroding social benefits add to the general deterioration of real income positions. The reforms of the social welfare system - pensions, social benefits, health service and education - touches negatively upon the population: social benefits in general are reduced, devaluated by inflation, earlier free of charge public services have to be financed from personal income and compensation is provided - in principle - only for the group of really needy. Social benefits if targeted often miss their targets - i.e. the population in the lowest income brackets - as official data on income are far from being reliable in the presence of considerable invisible income.

  5. Growing income differentials
  6. Without intending (or having the capacity) to provide a systematic overview of the societies of the region, based on sound evidence, some new divisions and tensions can be described as follows.

    1. The development of the private sector has resulted in the appearance of thin layers of "newly rich" whose legitimacy is often questioned by other social groups, as - it is said - their social position has much less to do with their entrepreneurial performance than with their skills to make use of a situation, in which privatization is hastily pushed forward while legal regulations for the functioning of a mostly private economy are inadequate or missing. Such skills, it is also said, have their roots in the past positions and connections of the "nomenklatura". Irritation concerning the newly rich is strengthened by their "prestige consumption" as opposed to the often extreme poverty of others and - in some countries - their links with Mafia type criminality.

    2. As restrictive income policies impose burdens primarily upon wage-earners - as wages and salaries can be best controlled by the state - there exist growing tensions between wage earners and other social groups (entrepreneurs living on capital income). A further related division originates from the existence of visible and invisible (sometimes illegal) income: those relying on the latter are in a much better position than those relying on the former. These dividing lines, however, are far from being distinct, as social groups tend to apply a multi-tier strategy in earning their living (relying on a combination of differing types of visible and invisible income). If they are successful, such a combination leads to high income, if not it is hardly enough for survival (e.g. long term unemployed live on a combination of social benefits, occasional black work, the cultivation of their gardens, etc.)

    3. With privatization - and the penetration of multinationals and other foreign companies - there is a growing difference between managerial salaries and those of the white and blue collar rank-and-file. Such differences (not only in salaries, but severance payments etc., fixed in individual manager contracts) cause tensions primarily in the still state-owned (or mostly state-owned) companies where the companies' performance can often be debated. In Hungary e.g. salaries in banking, oil industry and energy production are a target of sharp criticism.

    4. The relationship between the employees of the competitive sphere (business organisations) and public services is also burdened with tensions. On the one hand, the competitive sphere lost a large number of jobs, but was compensated by higher wages, on the other hand, public services (education, health service) suffered moderate job losses as yet, but their wages kept lagging behind. In Hungary, e.g. employment in the competitive sphere declined by 1.5 million in the first half of the 1990s, while very few jobs were lost in public services in the same period. The reduction in real earnings was however 18% in public services and below 10% in the competitive sphere in 1995. Public services now demand higher wages and try to resist the reduction of their staff: efforts in which they receive less and less support from the workers (and unions) in the competitive sphere.

    5. Economic restructuring has led to the disappearance (or shrinking) of some traditional industries and to the growth of others: while some industries (chemicals, energy) could retain their earlier privileged positions in income, other earlier privileged industries (metallurgy, iron and steel, mining, arms production) suffered serious losses. In connection with the development of business services certain professions (e.g. economists, accountants, consultants, lawyers) have bright perspectives, while other earlier more prestigious professions (such as engineers, professors, or even civil servants) seem to have a vague future.

  7. Increasing poverty
  8. Growing poverty is a most sensitive outcome of economic transformation and related processes; although the methods of its measurement can be and are much debated, it is beyond any doubt that its dimensions have been growing for the past couple of years. While in 1990 the ratio of those living under the "poverty line" (i.e. on incomes below the minimum costs of living) was estimated to be around 10% (in countries like Hungary or Russia), in the 1990's the same ratio as estimated amounted to 25-30%. (In some countries of the former USSR the majorities of societies are poor according to the official statistics.) Among the poor there are not only unemployed and pensioners, but workers, army officers, etc. Unemployment and poverty, coupled with depressed income positions, seems to be geographically concentrated in "crisis regions".

    Income differentials, calculated by the Gini coefficient, come close to the level of Western European countries. Nonetheless it should be noted: identical income differentials at a depressed GDP per capita level are socially much less tolerable than at a high GDP per capita level. In the former case they involve poverty while in the latter case they mean modest standards of living for the lower deciles. (In 1993, GDP per capita in the USA was US dollars 24,300, in Austria 19,100, in Hungary 5,960, in Poland 4,670, in Moldova 2,215.)

    Public (social) policies, pursued by the governments, have been trapped in a vicious circle: on the one hand, there has been a growing demand for more social protection on the part of the "losers" or "victims" of economic transformation, while on the other hand less and less financial resources could be mobilized for such purposes. This trap can be well illustrated by employment policies and their financing: when unemployment appeared on the horizon - in the reforms' more advanced countries in 1990-91 - all governments designed ambitious systems with great emphasis on active labour market policy measures and with generous benefits for the unemployed, but the actual growth of unemployment has been followed up by a shrinking of resources for active policy, a deterioration of benefits and a decline of the employment budget's share in GDP. Social policies are squeezed, however, not only by increasing demand and shrinking finances, but by the ineffectiveness of the past welfare system. That is why at present, social policy reform is high on the agenda of several governments (with the strong support of the international financial organizations).

Social Dialogue

Taking into account all these social tensions, Central and Eastern Europe has remained a surprisingly peaceful region of the continent. Fortunately, social tensions and conflicts could be managed by the institutions of the emerging pluralistic political and labour relations systems - or were eased by other factors such as the important black or grey economy - and no major nationwide social conflicts emerged. (Here let us ignore the tragic civil war of mostly ethnic origin in former Yugoslavia.) While in some countries political demonstrations, strikes, etc., have been rather frequent in some periods (Bulgaria, Poland, Romania), other countries have been successful in maintaining social and industrial peace (Czech Republic, Slovakia, Hungary). In Hungary, in the six year period after its Strike Act (1989), only about 100 cases of industrial action were registered, i.e. an annual average of 15-17 cases, in addition, most of them were insignificant warning strikes (of 2 hours).

Beyond the political actors and institutions of the pluralistic parliamentary democracy (which we have no intention of discussing here) social dialogue - its participants and institutions had a crucial role in maintaining social peace: their key role is underlined simply by the fact that the major burdens of economic transformation have been imposed on workers, employed or unemployed, on present and past wage earners, i.e. pensioners. Thus the importance of social dialogue can be derived from the fact that transformation places the majority, including the earlier "ruling class" as it was qualified in the Marxist ideology, into an especially vulnerable position. Its tolerance, if it can be negotiated, is an essential building block of social cohesion, or at least of social peace.

Social dialogue has had its own special features in the region. Institutionalized tripartism i.e. the dialogue of the government, labour (unions) and employers (capital) - a revival of neocorporatist streams - has a key place in it. Its appearance was based on:

  1. the governments' efforts to seek public support for their economic austerity measures, to evade a possible "social explosion", via social dialogue;
  2. the social partners' (unions' and employers') efforts to prove and secure their legitimacy and membership support;
  3. the "corporatist" traditions of the past monolithic political system; and
  4. the (tacit) expectations of international organisations (the ILO, the World Bank, the European Union) becoming more and more aware of the importance of the "social dimensions" of the ongoing changes.

Because of the obvious background motivation beyond it, i.e. tripartism is to have a role in easing social tensions, its functioning has been closely related with changes in income distribution, i.e. with governmental policies and the preparation of legislation.

In Hungary, the Németh government established the first tripartite institution in the region: a National Council for the Reconciliation of Interests (NCRI), in 1988, having more than seven year continuity to date. In Bulgaria, a National Commission for Co-ordination of Interests (NCCI) was set up in 1990. After its dissolution by the neo-liberal Dimitrov government in 1991, it was succeeded by a similar National Council for Social Partnership (NCSP) in May 1992. Finally - on the basis of the new Labour Code - a National Council for Tripartite Partnership (NCTP) was established in January 1993. In post-revolution Czechoslovakia, tripartite Councils of Economic and Social Agreement were convened at both federal and republican levels and a tripartite General Agreement was concluded in early 1991. It had a follow-up and fluctuating career in the Czech and Slovak Republics. In Poland, a tripartite State Enterprises Pact was negotiated in 1992 and a tripartite National Negotiating Commission was proposed. A Tripartite Commission on the Control over the Implementation of the State Enterprises Pact (TCCIP) was established in spring 1993 followed up by the establishment in 1994 of the Tripartite Commission on Socio-Economic Issues (TCSEI). Russia joined these developments in 1992 by creating a Tripartite Commission on the Regulation of Social and Labour Relations.

The tripartite institutions' functioning has been related with a) governmental decision-making, b) the preparation of legislation and c) the settlement of nationwide conflicts of labour (such as the taxi and lorry-driver blockade in Hungary in Autumn 1990). Income policies - wages, social benefits, and their financing, taxation etc. - have become a central issue of tripartite negotiations and agreements. Most tripartite agreements in the region touch upon income distribution, including the Bulgarian agreements (since 1990), Czechoslovakia's General Agreement in 1991, Hungary's tripartite agreements related with the annual state budgets (in 1991, 1992, 1993 and 1994), Poland's 1995 Charter of Social Guarantees, Russia's recent tripartite agreement, etc.

Such agreements, as they set limitations for the decision-making authority of the government as well as of legislatures, have become targets of criticism: in the approach of some liberal political theorists such neocorporatist limitations on legislation are unacceptable. These practices involve deals in which self-constraint by the governments is exchanged for public tolerance. They touch upon only a relatively narrow sphere of the authority of both governments and legislatures and do not justify fears that neocorporatism would endanger pluralist parliamentary democracy. It should be noted: all tripartite agreements in the region are either general - touching upon principles - or extremely concrete - settling definite political measures. But in the latter case the range and importance of the measures is limited.

In the dialogue with labour, tripartite settlements are but the tip of the iceberg: the implementation of the agreements achieved can be based on the foundation of collective negotiations and agreements. Most countries of the region have enacted laws regulating collective bargaining and agreements, the actors of the process as well as the settlement of collective labour conflicts. The major pieces of legislation include Hungary's Strike Act (1989) and Labour Code (1992), Czechoslovakia's Act on Collective Bargaining (1990), the Polish Acts on Trade Unions and Collective Dispute Settlement (1991) and Bulgaria's Labour Code (1993) etc. Legislation, however, was often adopted hurriedly before substantial issues of bargaining had been fully defined and conditions for effective bargaining established. Doubts persist about the representativeness and organisational effectiveness of both unions and employers at enterprise, sectoral and national levels, in the public and first of all in the emerging private sectors. Collective labour relations have been losing importance. The economic processes of transformation such as the rapid growth of small and medium size enterprises and the privatisation of state owned enterprises tend to undermine both unionization and collective bargaining. A most disquieting symptom of our period is the obvious shrinking of unions and bargaining at enterprise and sectoral level beyond the imposing facade of tripartism at the national level.

The effective functioning of tripartism in the region is dependent on several interrelated preconditions. First, within the constraints of the emerging political structures and economic system, a sufficient "space" must be available for tripartite agreements in the economic and social policy field. Second, the actors - governments, labour organizations and employer bodies - must have the capacity to make and adhere to such agreements. Third, all the actors must be sufficiently imbued with philosophies of cooperation and take a pragmatic approach to the possibilities for agreement. They must also to a degree share political objectives and ideological values concerning the functioning of the emergent economic system. Finally, formal tripartite institutions must be established as a site for negotiation between the actors. Today several of these preconditions are very often missing: a fact which raises doubts as to its effectiveness.


In Central and Eastern Europe no responsible politicians or political forces question the necessity of economic stabilisation and transformation. The major dilemma is: how to secure public support for such measures? As no convincing answer seems to exist for this question, governments and governing political parties, especially in pre-election periods, tend to shy away from the necessary - it could even be said unavoidable - measures on the basis of the philosophy: "let us wait for better times". Better times, however, are unlikely to come if the necessary austerity measures are delayed or rejected. All possible efforts should be made, however, to find those ways and means, by which social cohesion and peace - or at least tolerance - can be maintained. Social dialogue opens up such a way.


 [ Go to Index ]  [ Go to Homepage ]