Prima facie, the relationship between neoliberalism and Eastern Europe and the former Soviet Union appears simple. Before 1989, the region embodied the antithesis of neoliberalism. Then, it ‘transitioned’ rapidly from ‘communism’ (or ‘state socialism') to neoliberal capitalism. This story is not entirely fictional, but in this chapter, we explore several threads that complicate it. We ask: precisely what changed, in the organization of society, and in the ruling ideas? Did these changes mark the advent of a new, neoliberal policy regime, different from other ‘varieties of neoliberalism'? Why was the post-1989 shift towards neoliberal capitalism, and not to some other form? Were neoliberal ideas and policies imported ‘from the West’ or did they develop out of a process of East–West interchange, as argued, for example, by Bockman and Eyal (2002; see also Bockman, 2011; Gagyi, 2015)? Despite our considerable sympathy for the ‘interchange’ argument, we suggest that it places excessive weight on the networks themselves, with insufficient attention to the concurrent worldwide shift to neoliberalism: from Keynesianism/Fordism in the ‘First World’ and from import-substitution industrialization in the ‘Third World'. This drama can be discussed in two registers. In one, we are speaking of an evolving world economy, in which similar pressures generate similar shifts in all regions. In the other, we factor in the geopolitical power hierarchy, namely, the Second World was experiencing major crisis and dislocation as a result of debt crisis and Soviet imperial breakdown; this afforded the opportunity for a variety of actors to press for neoliberal transformation in the interests of geopolitical realignment. These actors included Western policymakers, business leaders, and think-tanks, but also their friends in the East, particularly in nations (such as the Baltic States) that were keen to strengthen diplomatic and military links with the West.
Before we address these questions, we should clarify our usage of the term neoliberalism. It can be used as an academic f-word, generating polemical heat but not much analytical light (Springer, 2016). As one recent commentary warns, it has come to connote omnipresence and omnipotence, as if it were an all-enveloping force or zeitgeist (Eagleton-Pierce, 2016, p. 12). We don't see neoliberalism as a panurge, but neither do we think it should be restricted to a tightly circumscribed set of ideas or policies (cf. Kozul-Wright and Rayment, 2007; Palley, 2005; Stiglitz, 2002) or to the machinations of a ‘thought collective’ (Mirowski, 2013, 2016; Mirowski and Plehwe, 2009). We see it, rather, historically, as a loose set of ideas and policies (typically including a commitment to market ‘self-regulation’ and tariff reduction, a monetarist analysis of inflation, supply-side theory, and the deployment of ‘enterprise models’ that allow arms of the state to be run like businesses) which, after gaining support among elites in the 1970s, has come to define the current phase of global capitalism.
In the 1970s, the previously dominant and comparatively statist economic paradigms – Keynesianism and national planning in the West, import-substitution industrialization in the South, and Soviet-style state capitalism – came under increasing pressure, for two principal reasons. One was that the concentration of capital, having seemingly reached an apex in the national monopolies of the mid-twentieth century, was advancing increasingly at the trans-national scale (Dale, 2004). The multinational company (MNC) emerged as the dominant institutional form of enterprise, setting new standards in cost, efficiency and market power and gaining crucial advantages over nation-bound rivals. MNCs were able to harvest economies of scale; they could locate particular processes in sites with the strongest advantages, and closer to markets; and they could parlay geographical mobility into bargaining power vis-à-vis political jurisdictions. These advantages boosted their profitability relative to nationally-based firms, but their rise simultaneously intensified competition on the global scale. In response, MNCs lobbied governments to reduce corporate taxation and to lift regulatory constraints (Davidson, 2010).
The second reason was the failure of Keynesian and other statist techniques to reverse the growth slowdown and the return of crises. Whereas in the 1960s and early 1970s, per capita annual global growth averaged around 3%, the corresponding figure for the three decades since 1980 has been only around half that, and financial crises have grown in frequency. In conditions of declining profitability and heightened international competition, governments – whether conservative, liberal or social-democratic – pushed through austerity measures, attacks on trade union organization and ‘reformed’ welfare systems to suit business interests. Such offensives were typically justified pragmatically or with reference to specific policy interventions (e.g., monetarism), but over time they came to be viewed as incarnations of a global policy/ideological shift.
Neoliberalism has thus come to define the latest phase in the evolution of capitalism, one characterized by a structural reorientation of the state towards export-oriented, financialized capital, strong commitments to privatization and market-emulating governance systems, and a profound antipathy to social collectives and redistribution (Mudge, 2008; Peck et al., 2010). And if neoliberalism was born in part from globalization, it has also itself become globalized. That is not, however, to imply homogeneity or non-reversibility. Neoliberalism takes ‘variegated’ forms, and even in the neoliberal era, forms of state capitalism continue to exist and thrive – notably in ‘communist’ China and Putin's Russia (Economist, 2012; Kurlantzick, 2016; Nagel, 2012). Let us turn now to look at Eastern Europe and the former USSR.
In respect to the region under consideration, the étatiste phase of the global economy is generally identified with ‘communism’ or ‘state socialism', assumed to have commenced in 1917 (or 1948 for Eastern Europe) and to have ended in 1989–91. In fact, matters were more complex, at both ends. The Soviet Union was positioned outside, and in competition with, what Kees van der Pijl has called the ‘liberal-capitalist heartland’ (Pijl, 1998). For some of the nineteenth and much of the twentieth centuries, the ‘catch-up’ attempts by challengers to the liberal heartland powers, relying as they did on the direct mobilization of people and allocation of resources, constructed forms of state that were proactive in economic development. These structures flourished above all when intense geopolitical competition coincided with economic de-globalization, and where backward economies led by modernizing elites engaged in catch-up industrialization – for example, 1930s Germany and Japan, or the Asian ‘Tiger economies’ from the 1950s onwards. De-globalization – the breakdown of international trade and capital flows – spurred the nationalization of domestic economies, while militarism drew states into an economic coordination role of the arms industry and other strategic sectors. For the Soviet Union and its allies, these factors, combined with geopolitical competition on the basis of economic backwardness, locked them into a distinctive economic structure characterized by an emphasis on heavy industry, a high savings ratio, allocation by administrative decision and an extensive use of political incentives and ideological appeals geared to raising output. These features, Oskar Lange and others have noted, were not peculiar to ‘socialism', but were characteristic of ‘war economies’ in general (Lange, 1970, p. 102).
Viewed thus, the Soviet war-economic model did not come into existence until the late 1920s. It developed in response to pressures that were fusing nation states and capital across the world. By way of illustration, consider the Hungarian war economy of the late 1930s and early 1940s. Although the role of the state in economic decision making grew following the Sovietization of Hungary in the late 1940s, the notion that this represented ‘a total economic and political about-face is misleading'. Hungary, as Martha Lampland observes, experienced ‘no techno-political rupture between administrative practices of the state and planned economy between the late 1930s and late 1940s’ (Lampland, 2016, p. 162; see also Berend and Ránki, 1985).
Although technologically backward compared to the ‘liberal heartland’ economies, and relatively poorly equipped to establish successful MNCs, the Soviet-type regimes were in many respects strikingly modern. They were trade-oriented and never autarkic – as Sanchez-Sibony has shown for the Soviet Union, whose commercial policy ‘bespoke accommodation and an abiding desire for participation in a western dominated liberal world order from which the Kremlin derived tremendous material benefits’ (Sanchez-Sibony, 2014, p. 253; see also Frank, 1977). They mobilized their citizenries in the service of rapid economic growth and a future-oriented ideology. They applied science and technology systematically to the production process and Taylorist techniques to the labour process; and they imposed performance targets on employees within all social institutions (foreshadowing, incidentally, the ‘target culture’ of UK academia today, with its proxy metrics and performance management regimes (Brandist, 2016; Fisher, 2009)). These processes realized what Lampland has described as the ‘full commodification of labor’ (Lampland, 1995, p. 5), as well as ‘rampant economism’ and the ‘intensive individuation of persons’ through shopfloor competitions (Lampland, 2016, p. 270; on working-class resistance to these processes, cf. Haraszti et al., 1977; Pittaway, 2012, 2014).
Soviet-bloc central planners were continuously comparing their economies’ ‘performance’ against Western benchmarks, and introducing successive waves of market reforms in the attempt to ‘catch up and overtake’ the West. Restructuring and revising of structures of accumulation, including relations between enterprises and the state, technology policy and labour relations, was a constant feature. Labour processes were periodically ‘rationalized'. Planning systems were modified, slimmed down or overhauled, with incentive structures being adapted to place premiums on the efficiency of resource and equipment utilization and on quality of output as against sheer quantity. Experiments were introduced that involved the delegation of greater degrees of initiative to enterprise managements, or which encouraged profit-seeking or export-promoting behaviour (on market reforms in the Soviet bloc; cf. Bockman, 2011; Fabry, 2018; Gagyi, 2015; Shields, 2012). According to some authors, in certain cases, notably Hungary's ‘goulash communism’ of the 1970s, the degree of liberalization was such that it represented an early form of neoliberalism (Halmai, 2011, p. 116).
These reform programmes, and associated clashes between managers (and associated functionaries and academics) who pressed for them versus managers (et al.) who resisted them, provided an environment conducive to the growth of what would later become ‘neoliberalism with East European characteristics'. This culture existed in statu nascendi in the 1960s and 1970s but grew exponentially in the 1980s when economic crisis and relative decline, together with Moscow's imperial travails, led to a crescendo of calls for reform. Gradually and inexorably, the Soviet model hollowed out from within, and ideas of a ‘socialist market economy’ and political pluralism gained ground. These developments help explain why the late-1980s transformation appeared so straightforward. Powerful players, including company directors, functionaries and economists, had already reoriented towards liberal capitalism. As Chris Harman observed, it did not require a great deal of pressure for the entire edifice to collapse: ‘the old people at the top raved about betrayal and even fantasised about telling their police to open fire. But key structures below them were already run by people who, at least privately, accepted the new multinational capitalist common sense’ (Harman, 1990, p. 66).
In a sense, then, Bockman and Eyal are right to propose that ‘East European reformers were converted into adherents of neoliberalism long before 1989 by participating in transnational dialogue and through jurisdiction battles over the role of economists under socialism’ (Bockman and Eyal, 2002, p. 311). Following Latour, they identify a field of actor-networks – in essence, meetings and conferences – at which, from the 1960s onwards, economists from East and West drew inspiration from one another's ideas and reports. The dialogue was dominated by Western institutions, but it is impossible to divide it into ‘an active, Western “author” of neoliberal ideas and policies and a passive, East European “recipient”’ (Bockman and Eyal, 2002, p. 311). Few, if any, East European economists promoted neoliberalism as we understand the term today; nor, for the most part, did their Western counterparts. However, most were steeped in neoclassical theory, and they found in the ideas and idioms of Western economics resources to bolster their arguments for market reform and the decentralization of planning. Hence, in 1989–91, the package of stabilization and liberalization policies – with the epithet ‘neoliberal’ increasingly frequently attached – that was implemented across the region was perceived by East European reformers as directly continuous with the lessons they had learned over preceding decades. Many of the policymakers and advisers who rose to power and influence in the transition period, moreover, had earlier taken part in East–West conferences and academic exchanges. Examples include Russian Prime Minister Gaidar's team of economists, two of the Hungarian government's top advisers, or the ‘Georgetown Gang’ – the Latvian-American neoliberals who captured the economic policy levers in Latvia (Berzins and Sommers, 2011; Bockman and Eyal, 2002, p. 342; Fabry, 2018).
The rapidity with which neoliberalism was embraced in the policy and economic elites, then, attests to the prior existence of an East–West epistemic community of economists and policymakers (Bockman, 2011; Bockman and Eyal, 2002). However, this has to be placed within the wider context outlined above: the global shift from statism, and the specific interest of Western power centres in pursuing neoliberal change in the East as a means to dissolve Soviet economic and political structures and to yank Eastern Europe out of Moscow's orbit.
This latter factor is emphasized by Peter Gowan in his account of the neoliberal incursion. Eastern Europe's market for policy ideas, he argues, ‘suddenly opened in 1989 [and] was swiftly captured by an Anglo-American product with a liberal brand name'. It promptly ‘established a virtual monopoly on advice in most target states in the region’ (Gowan, 1995, p. 3). In this, Gowan understates the degree of crisis-induced ideas-shopping that existed already in the 1980s, and fails to appreciate the degree to which the legitimacy crisis faced by statist regimes – worldwide – provided propitious terrain for the neoliberal thrust. The strength of his account, on the other hand, is its awareness that the Western powers had learned an old truth from their previous imperial experience: debt crisis provides a golden opportunity to supervise the reorganization of a country's socioeconomic structures in their own interests.
In 1989–91, Eastern Europe and the Soviet Union emerged as a ‘new frontier'. Officially launched in January 1990, when the Solidarity-led government in Poland introduced the ‘Sachs-Balcerowicz Plan', the neoliberal recipe for the ‘transition economies’ centred on macroeconomic stabilization, liberalization of domestic prices and trade, privatization and the introduction of targeted welfare provisions, and the construction of a market-enabling legal framework (Åslund, 2002; Blanchard, 1991; Lipton and Sachs, 1990; Sachs, 1990). Also known as the ‘big bang’ or ‘shock therapy'1 programme, the plan became hegemonic in public and academic debates, and was applied throughout the region in the 1990s.2 Its theoretical justification was supplied by some of the ‘best and brightest’ Western economists, including Olivier Blanchard, Stanley Fischer, David Lipton, Jeffrey Sachs, Larry Summers, and Anders Åslund (Mankiw, 2003, p. 257; see also Ellerman, 2005). Although most of them had limited knowledge of Soviet-style economies, let alone any practical experience worth mentioning, they were hailed as ‘experts’ by mainstream media and subsequently ‘unleashed’ on the capital cities of the region armed with their ‘one-size-fits-all plans', the thinly disguised aim of which was to advance the cause of corporate globalization. Their ideas received backing from ‘radical economists’ in the region, such as Leszek Balcerowicz in Poland, Václav Klaus in the Czech Republic, or Yegor Gaidar in Russia, who became key proponents of neoliberal reform. While post-communist elites were amenable to a transition to liberal capitalism, their conversion was not always straightforward, and occurred in a context informed by economic and political coercion, exemplified by Western governments and international financial institutions’ insistence on austerity and rapid privatization as conditions for further loans, as well as extensive investment in the ideological underpinnings of neoliberalism, in particular by the European Union, USAID, and Western-based corporations and think-tanks (Hardy, 2008; Shields, 2012; Wedel, 2001; Zeniewski, 2012).
If programmes of ‘shock therapy’ grabbed the headlines, in practice the neoliberal roll-out took a differentiated form, for example, in terms of the speed and sequencing of reforms, strategies of privatization, and in connection with geo-economic realignments, in particular vis-à-vis the EU. In 1990s Ukraine, the prescriptions of the World Bank and International Monetary Fund were rejected. Its privatization programme was tilted towards local interests and against foreign investors, particularly in ‘strategic’ industries. In Poland, management buy-outs were the main method; privatization occurred gradually in the early 1990s, before a sharp acceleration in 1995–96 (Drahokoupil, 2009, p. 40). The Czech Republic, like Russia, preferred the relatively rapid method of privatization by voucher, with regulations that favoured enterprise outsiders but not foreign investors (Drahokoupil, 2009, p. 69). It initially received plaudits from the World Bank and IMF, but its much-trumpeted promise of a dispersed ownership structure came to nothing. Instead, and contrary to expectations, most vouchers were snared by a handful of Investment Privatization Funds, many of which underwent de facto nationalization when they were unable to repay loans to state banks, before those same banks were sold off to foreign financial institutions (Genov, 2010, p. 57).
More generally, relations between states and capital did not gravitate towards a single model. In parts of the region, the collapse of government institutions during the transition converged with a neoliberal commitment to ‘roll back’ the state to permit a high degree of ‘state capture’ by comprador oligarchies and other business interests. This contributed in Serbia and elsewhere to ‘wild capitalism', in which rules and regulations are attenuated and ignored by corporate elites (Upchurch and Marinkovic, 2011), while in Ukraine, political parties have tended to act overtly as vehicles for business interests (Bojcun, 2011). In Russia, the state bureaucracy survived the transition largely intact but became penetrated – and at one stage appeared to be captured – by business interests that thrived on monopolistic and rent-seeking practices (Sakwa, 2010). The moment of the greatest power over the Russian state by business leaders was the mid-1990s. The relationship was then disrupted, first by the rouble crash of 1998, then by the ascendancy to power of Vladimir Putin in 2000. Under Putin, Russia became less neoliberal in certain respects – for example, some strategic enterprises were effectively nationalized. The tutelary authority exerted by the regime over business elites was vigorously reasserted, in a restructuring of state–capital relations (Pirani, 2009).
The extent to which Putin represented a new departure, however, should not be exaggerated. As elsewhere, neoliberal agendas have been pursued not only via macro-level stabilization and liberalization programmes, but also in the field of public policy, notably social welfare and fiscal administration (Pirani, 2009). In this, Stephen Collier's study provides rich materials. Critical of accounts that portray neoliberal transition as coherent and macroeconomic programmes of total marketization and commodification, Collier prefers a Foucauldian approach that apprehends neoliberalism ‘as a form of critical reflection on governmental practice’ (Collier, 2011, p. 2). The reform process, in his view, following Venelin Ganev (2005), was everywhere tentative, incoherent, and contradictory, and the key vector of neoliberal advance was not macroeconomic programmes but the attempt to create mechanisms of quasi-competition in public sector situations (voucher programmes for schools, monetization of social welfare payments, incentive pricing for regulated industries, mechanisms of quasi-competition in locations where competitive markets cannot function, etc.). They were able to draw on Soviet-era practices of bureaucratically managed competition, and in so far as they were influenced by Western sources, these tended not to be headline-grabbing visits by US advisers, but proceeded along subtler or circuitous routes. For example, the reforms to regional budget administration that Collier studied in Rostov ‘were adapted from a template that had been developed in a USAID-funded project on tax reform based in Moscow’ (Collier, 2011, p. 166).
Further to the west, Brussels came to ever-greater prominence as the key sponsor of neoliberal reform. Having played a subordinate role to the US and international financial institutions in the earlier phase, the EU now became a major player (Raik, 2004; Shields, 2012; Wahl, 2004). The central aim of its development programmes (such as PHARE, SAPARD and ISPA) was to prepare Eastern European countries for EU membership by promoting and monitoring the progress of economic liberalization, structural adjustment and institutional reform. More momentously, two projects that aimed to consolidate the neoliberal project in Western Europe were extended to the new member states in the East.3 One, the Single Market, aimed to restore Europe's global competitiveness via the liberalization of previously protected sectors (for example, services, utilities and telecommunication), supplemented by further rounds of privatization. The other, monetary union, aimed to remove barriers and reduce transaction costs and, additionally, created a stick with which to force Eurozone states to reduce public spending through the restrictive monetary policy inscribed in the convergence criteria of the Maastricht Treaty and the Stability and Growth Pact. However, EU enlargement was not only pursued for economic interests, but was also connected to security interests and contributed to the creation of new ‘insiders’ (new EU member states) and ‘outsiders’ (Ukraine, Belarus and other ex-Soviet republics) (Smith and Swain, 2010, pp. 25–28; Smith and Timár, 2010, pp. 117–118). While EU and NATO enlargement were backed by economic and political pressure and blandishments from Western institutions, Eastern European elites were generally content to play along. In Hungary, for example, parliamentarians voted unanimously to sign the Lisbon Treaty, without any debate in parliament; the entire process took seven minutes.
According to neoliberals, stabilization and structural reform would combine to usher in a Schumpeterian process of ‘creative destruction’ through which the previously unproductive sectors of the centrally-planned economies would disappear, making way for new, innovative entrepreneurialism that would provide the basis for a period of sustained economic growth and for a flourishing of liberal-democratic values (Schumpeter, 1975). Given the new market environment, trade liberalization would encourage inflows of foreign capital, which in turn would spark an export-driven surge, with relatively low wages and proximity to Western markets providing a competitive advantage. This ‘market-based approach to development',4 it was assumed, would permit a rapid reintegration into the world economy, which, in turn, would lead to economic growth and higher living standards (Gros and Steinherr, 1995; Sachs, 1994, p. 25). The ‘transition’ was also heralded as a civilizing mission, which would enable the peoples of Eastern Europe to enjoy greater individual ‘freedom’ and to ‘rejoin Europe'. As the late Hungarian writer and politician Miklós Vásárhelyi, enthused in 1989:
There will really be a Europe again. The countries of Central and Eastern Europe will finally get an opportunity to unite with the West. We will begin to live under the same conditions. It will take time, but socially, politically, and economically we will achieve what the Western countries have already achieved. The doors are open now. (cited in Gwertzman and Kaufman, 1990, pp. 225–256)
In fact, the doors opened in a highly selective fashion. Some countries joined ‘Europe', others did not. A few areas joined the ‘global city', boasting skilled labour and high productivity, but larger swathes joined the ‘global sweatshop', featuring low-quality jobs in the primary sector (Genov, 2010, p. 210; Smith and Timár, 2010, pp. 118–120). In Russia, Muscovites live as if on a different planet from their compatriots in the ‘mono-cities’ of the rustbelt. Many parts of the former Soviet Union, including Russia and Ukraine, experienced a regression in their place within the international division of labour, with a shift from producing high-skilled manufactures towards semi-manufactures, agricultural goods, and energy and mineral extraction (Burawoy, 2001; Mykhnenko and Swain, 2010). Latvia, although encouraged by Western institutions to focus on the ‘creative industries', made its mark instead as a transit and transaction point for asset-stripping, raw material exports and money laundering, as well as a major exporter of labour power (Berzins and Sommers, 2011).
Considered as a whole, with Poland the only exception, the 1990s turned out to be a ‘lost decade’ (Mitra et al., 2002). Even a relatively robust economy such as the Czech Republic took 18 years to return to the ratio of GDP vis-à-vis the EU average that it had registered in 1989 (Holubec, 2010, p. 46). Elsewhere, the situation was even bleaker. Georgia, Moldova, Ukraine, and much of the former Yugoslavia experienced catastrophic declines in economic output (in the case of the latter, this was exacerbated by civil war, NATO bombings and economic sanctions). Russia succumbed to an economic meltdown unprecedented in peacetime. Between 1992 and 1998, its GDP declined by almost half and industrial production by over half, while its grain harvest fell beneath even its level of 1913. Money disappeared from much of economic life such that, by early 1998, half of industrial sales were completed through barter (Pirani, 2009, pp. 47–53; Stiglitz, 2002, pp. 133–165).
Following the transition, unemployment and precarious working conditions became a chronic feature of the region's economies, as the job security associated with ‘actually existing socialism’ disappeared (Kornai, 2006, pp. 227–232). Double-digit inflation scythed through families’ savings in Russia, and in Belarus, Bulgaria, the Baltic States and beyond. Real wages for workers plunged on a scale that surpassed that of the Great Depression (Genov, 2010, p. 138). In 1999, real wages were still lagging behind their 1989 levels in all countries except the Czech Republic. In Hungary, which experienced the loss of 1.5 million jobs (almost one-third of the workforce), real wages were 19% lower, while in many other countries (including Bulgaria, Lithuania, Macedonia and Ukraine) they fell further still; and in Russia, real wages in 1999 stood at a paltry 38% of their 1989 levels (Genov, 2010, p. 138). Fractured along political lines and struggling with falling membership rates, trade unions were poorly positioned to resist the assault (Crowley, 2008; Crowley and Ost, 2001; Iankova, 2002; Vanhuysse, 2006).5 As a result, inequality and poverty rates skyrocketed, in some cases reaching Latin American levels.
The consequence of this attack on livelihoods was a devaluation of human life itself. In countries like Russia, mortality rates soared, particularly in regions where income differences were the widest (Wilkinson, 2005, p. 118). By 2006, the average Russian man was only expected to live until 65, down from 68 in the 1980s.6 No other industrialized country has ever experienced such a reverse (Pearce, 2010, p. 125). Women, meanwhile, suffered disproportionately from unemployment and the dislocation of families. Ethnic minorities, in particular the Roma, were hit hard by soaring unemployment, poverty and precarious labours (Ringold, 2000; Ringold et al., 2005). Even as sections of society were becoming increasingly dependent on welfare provisions for their survival, spending on welfare and social protection was cut by governments across the region, irrespective of their location on the political spectrum. This was justified by an increasingly explicit and institutionalized stigmatization of the ‘lazy’ and ‘undeserving’ poor (Makovicky, 2013; Stenning et al., 2010; see also Bodnár, 2007; Kovács, 1998; Ladányi, 2002). Faced with immiserization and social regression, many people had little choice but to refocus on informal economic practices on the fringes or outside the market economy, or to emigrate to Western Europe (Makovicky, 2014; Smith and Rochovska, 2007; Stenning et al., 2010).
Neoliberal accounts have failed to provide convincing explanations of these developments. Instead, they have remained ad hoc or, at worst, descended into apologia for ‘market fundamentalism'. To most advocates of radical market reform, the failures and disappointments of transition-associated adjustment in the 1990s were ‘unexpected’ (Zagha et al., 2005, p. xii). In the early 1990s, Kornai noted, with a sense of astonishment, that no ‘forecast of … serious recession’ was found in the early theoretical writings that outlined the transition programme (cited in Amsden et al., 1994, p. 18). Others have ex post facto sought to downplay the colossal slump in economic output, insisting that ‘a substantial part of the big recorded decline, probably about half, was not real', and that the economic decline that did take place was due to factors exogenous to the market system, notably the legacies of communism such as corruption and ‘rent-seeking behaviour’ (Åslund, 2007, p. 63).7 Comments like these are suggestive of a widely-noted inability of neoliberal scholarship to account seriously for the contradictions of the transformation.
The elixir of economic growth, according to neoliberal theory, would be foreign direct investment (FDI). In the early 1990s, FDI inflows were relatively meagre, but they started to soar from the mid-1990s, and from 1996 FDI stock as a percentage of GDP in Central and Eastern Europe surpassed the world average. To attract foreign investors, many states approved ‘flexible’ labour laws, low taxation on capital, laws ensuring the protection of private property and the right to expatriate profits. In addition, foreign investors were lured by the combination of well-educated workers, higher-than-average profit rates in key economic sectors and geographical proximity to core capitalist states in the EU. As The Economist mused in 2005,
investors … love the new [EU] members for their low wages, high productivity and simple taxes. Build a factory here and you get EU access at far less than average EU costs. According to the Boston Consulting Group, if you want to sell refrigerators or cars in western Europe, it can be cheaper to make them in Poland than in China. (Economist, 2005)
The flow of foreign capital to Eastern Europe and the former Soviet Union enabled capitalists in the core economies to spur a ‘race to the bottom', by forcing workers in their home countries to accept lower wages and conditions. As a Research on Money and Finance (RMF) report shows, the principal beneficiary was German capital, whose main source of growth in the 2000s was through the accumulation of a current account surplus, achieved through pressures on wages and conditions at home (by using the stick of ‘outsourcing’ production to workplaces to Eastern Europe), rather than productivity growth (Lapavitsas and Research on Money and Finance (RMF), 2010).
If in the neoliberal narrative foreign capital and transnational corporations take the starring roles, the empirical record is underwhelming. For example, the ‘FDI model’ employed by Serbian governments between 2000 and 2008 failed to increase international competitiveness, producing unstable and unsustainable growth instead (Upchurch and Marinkovic, 2011). Hungary was notably friendly to foreign investors – its method of privatization explicitly favoured transnational corporations (Drahokoupil, 2009) – and between 1990 and 1998 it attracted more inward investment per capita than any of its neighbours, yet its economy grew more slowly than theirs (based on data from Csaba, 2000; Myant and Drahokoupil, 2011, p. 279). Moreover, as Fabry notes, its dependence on foreign capital left it highly exposed to the 2008 global economic crisis, because current account balances were negatively impacted by profit repatriation practices, because its foreign currency-denominated debt was extremely high, and because its economy was highly dependent on exports to core EU states (Fabry, 2011; see also Pogátsa, 2009; Szalai, 2010). Similarly, the Baltic States pursued radical market reforms (including low corporate taxation, strict adherence to macroeconomic stability and weak social protection) from the outset, in an attempt to break economic ties with Moscow as rapidly as possible (Becker, 2016). However, as Bohle and Greskovits note, most foreign investment in ‘complex industries’ (chemicals, machinery, equipment) went to the Visegrád Four (Poland, Czech Republic, Hungary and Slovakia) and hardly at all to the Baltics (Bohle and Greskovits, 2007a). In contrast, Slovenia, which had adopted the most gradual approach to economic transformation, ‘brushing aside promptings from Jeffrey Sachs and his co-thinkers to pursue the same radical course as countries like Estonia’ (Becker, 2016, p. 42), managed to construct a ‘neo-corporatist’ regime, combining successful macroeconomic performance and democratic inclusion with the most generous welfare state in the region (Bohle and Greskovits, 2007a, 2007b). More generally, there was surprisingly little correlation between economic performance and FDI inflow. In 2003, FDI stock as a percentage of GDP was fairly high in Hungary (58) and Czech Republic (50), but relatively low in Poland (27) and Slovenia (16). (In comparison, the EU average was 33; China 16; the USA 13; Japan 2.) Substantial capital flows (legal and illegal) entered the Baltic States and other states, like Bulgaria and Romania, following their accession to NATO and the EU. However, they served to inflate the bubbles in financial and real estate markets that were to burst in 2008.
In these ways, the specific forms through which neoliberalism was ‘rolled out’ and consolidated in the 2000s contributed to the vulnerability of the region to the 2007–08 global financial crisis.
The global financial crisis commenced in 2007 as a ‘crisis in the heartland’ of global capitalism with the bursting of the subprime mortgage bubble in the USA (Gowan, 2009). At the time, cautious optimism about the prospects of the economies of Eastern Europe and the former Soviet Union prevailed among economists and policymakers. As late as October 2007, the IMF projected average GDP growth in ‘emerging Europe’ to fall moderately, from 6.4% in 2006 to 5.2% in 2008, and maintained that the ‘significant wage differential vis-à-vis western Europe and strong productivity growth would continue to support the competitiveness’ of the region (International Monetary Fund, 2007, p. 91). As it turned out, the IMF's projections were way off chart.
The crisis hit Eastern Europe and the former Soviet Union along two different channels (Dale and Hardy, 2011; Smith and Swain, 2010). First, the ‘global deleveraging’ (massive contraction of lending) that followed the collapse of Lehman Brothers in autumn 2008 meant that investors retreated to ‘safe havens’ in core capitalist states, thereby making it more difficult for peripheral economies to finance their sovereign debts. In Hungary, Romania and Ukraine, this led to speculative attacks on the local currencies, forcing governments to seek financial assistance from the IMF. Second, a ‘Great Recession’ gripped the global economy, reducing demand for exports and causing a downward spiral of falling production, trade and employment. In export-dependent economies such as Estonia, Hungary, Latvia and Slovakia, exports plummeted and capital inflows dried up, leading to sharp falls in output in 2009.
The depth of the crisis varied depending on the scale of housing bubbles, dependence on exports and size of public sector deficits, but the region as a whole was highly exposed due to its inherent weakness, compounded by the wholesale adoption of neoliberal policies. Poland was least affected by the economic crisis. In 2009, its economy actually grew by 2.6%, although this was relatively meagre compared to previous years’ figures. The fact that Poland had a floating exchange rate and that its economy was not exposed to a housing bubble fed by foreign banks certainly softened the impact of the crisis. Moreover, it ‘also benefited from a large domestic market and the presence of export sectors, such as automobiles, that benefited from anti-crisis interventions to boost demand in Western Europe’ (Smith and Swain, 2010, p. 4). However, Poland's success in weathering the global economic storm should be treated with caution. Its modest economic growth masks high rates of poverty and unemployment, and growing wealth inequalities.
At the other end of the spectrum, the Baltic States experienced a harsh shock. Their currencies and banking systems collapsed, resulting in GDP contractions of nearly 15% in 2009. Unemployment rates soared to as much as 20% (Latvia), contributing to a second wave of emigration as people attempted to escape poverty (Berzins and Sommers, 2011). Hungary, another poster boy of neoliberal transformation, was also badly afflicted. As detailed by Fabry (2011), economic growth was stagnating already before the onset of the global crisis, and its budget deficit was touching 10% of GDP. Hungary's economy was doubly exposed. First, foreign currency lending (in particular in Swiss francs and Euros) accounted for as much as 85% of all loans; these became precarious when the value of the forint plunged. As the forint depreciated, many borrowers were forced to sell their homes or cars, while others faced hefty hikes in mortgage payments (Bryant, 2010). The second source of vulnerability was the Hungarian economy's heavy dependence on FDI and exports to Western markets, both of which came to a standstill as the crisis deepened. As Hungary's malaise deepened, the crisis transformed into full-blown political crisis. In March 2009, Gyurcsány – who had gained notoriety following the release of a secret speech in which he admitted his government had ‘lied morning, noon and night’ in order to win the general election of 2006 – was replaced by Gordon Bajnai, as head of a semi-technocratic government. Despite increasing signs of social and political instability – by early 2010, unemployment stood at 11.4% (the highest figure for 16 years), and fascist paramilitaries of the Hungarian Guard (Magyar Gárda) were terrorising ethnic minorities, gays and lesbians, and ‘communists’ – Bajnai's government pushed ahead with a new round of austerity measures in an effort to ‘regain the trust’ of international financial institutions and foreign investors. These efforts, however, did not regain the trust of the people. In the 2010 general elections, the previously governing parties were trounced.
Another severely impacted country was Ukraine. In the years prior to the crisis, FDI had spiked, in part due to rising capital flows to the region in general and also due to the liberalization of financial markets that followed the 2004 Orange Revolution (Bojcun, 2011; Mykhnenko and Swain, 2010). The FDI surge enabled Ukrainian exporters and households to finance, respectively, expanded production and consumption, but, compounded by the high price of hydrocarbon imports from Russia, resulted in deepening public sector and trade deficits. When the crisis struck, foreign investors withdrew their holdings en masse, forcing Julia Tymoshenko's government to seek financial assistance from the IMF and six foreign states, including Russia, in order to cover the 2009 state budget. The social consequences of the crisis helped to catalyse a political upheaval, which spilled over into tensions with Russia and thence to civil war.
We began this chapter by noting that the transition from comparatively statist formations to neoliberalism occurred in response to a seismic shift in state–capital relations (‘globalization') and the return of economic crises in the mid-1970s and early 1980s – and, relatedly, legitimation problems faced by the previously dominant political-economic regime (‘Keynesianism'). From 2008, the world economy has experienced renewed crisis, and the now-dominant political-economic regime (‘neoliberalism') confronts its own legitimation problems. Yet signs of its demise are nowhere to be found. Instead, pragmatic Keynesian and authoritarian populist adaptations have been the order of the day.8 The first of these was exemplified by the rediscovery of deficit spending – but above all in the USA and China, not in our region of study, where governments preferred pro-cyclical economic policies, in the hope that these would ‘satisfy investors’ and expedite accession to the Eurozone (Becker and Jäger, 2010). By contrast, the second, authoritarian populism, has enjoyed a spectacular uplift in Eastern Europe. Across the region, neo-conservative and fascist movements have gained a hearing for their cocktail of chauvinistic sentiment (anti-gay, anti-women, anti-minorities, xenophobic, anti-Semitic and, above all, anti-communist), militarism and Euroscepticism (Makovicky, 2013; Tamás, 2013, 2015). Recent years have seen a rising frequency of attacks on ethnic minorities and LGBT people, and electoral breakthroughs for fascist, Roma-baiting parties in Hungary (Jobbik) and Slovakia (Ludová Strana–Naše Slovensko), as well as the embrace of ‘illiberal’ policies and practices by mainstream political parties (e.g., the Orbán and Putin regimes in Hungary and Russia, respectively).
How might we theorize the relationship between authoritarian populism and neoliberalism? To the extent that the former is illiberal and the latter liberal, they appear antithetical. At the outset of Eastern Europe's transition, the case for ‘shock therapy’ was explicitly connected to the fear that, given the social costs of adjustment to be inflicted on a large section of society, the quicker the medicine was applied, the better. Recalling the struggles to implement structural adjustment in Latin America in the 1980s, Western advisers were alive to the danger that neoliberal restructuring may precipitate opposition from disaffected groups. ‘Populist politicians', warned Sachs, ‘will try to hook up with coalitions of workers, managers and bureaucrats in hard-hit sectors to slow or reverse the adjustment’ (Sachs, 1994, p. 23; see also Lipton and Sachs, 1990). Proponents of neoliberal reforms therefore stressed the need for a strong state, which, as Kornai described, could ‘set the economy right with a firm hand’ while keeping ‘populist’ pressures in check (Kornai, 1990, p. 207; see also Lipton and Sachs, 1990, p. 87).9
In the neoliberal imaginary, stable liberal-democratic regimes preside over free markets and tolerant civil societies, but in practice these desiderata are difficult to combine. Neoliberalism arose in battle against labour and anti-systemic movements; in defeating them, it expedited tendencies to social and geographical polarization, and the corrosion of the public sphere. Corporatist and social-democratic traditions of collective will formation found themselves subordinated to the logic of market choice, politics became individualized, and communities fissured and fragmented. In this context, neoliberal politicians were inevitably tempted to court nationalist and authoritarian forms of populism. An early instance of this was theorized by Stuart Hall in Britain. With the breakdown of ‘the corporatist consensus’ – whether in the form of One Nation Tory paternalism or the links to the trade-union bureaucracy through which Labour had attempted to master the crisis – he argued, the balance of forces within the ‘“unstable equilibrium” between coercion and consent which characterizes all democratic class politics’ shifted ‘decisively towards the “authoritarian” pole'. This shift was organized ‘from above', but it was yoked to ‘and to some extent legitimated by a populist groundswell below', one that took the shape, for example, of moral panics around such issues as ‘race, law-and-order, permissiveness and social anarchy'. These served simultaneously to disrupt the communities of solidarity on which anti-neoliberal movements depend and to harness populist consent to displays of authoritarian governance that buttressed Thatcher's market-fundamentalist crusade (Hall, 1980, 1985).
A similar dialectic has been at work in Eastern Europe. Albeit to different degrees in the various states, a region-wide backlash against the effects of neoliberalism has been guided along authoritarian populist (and, relatedly, nationalist-conservative) channels. This backlash is, in a sense, a populist outcry against neoliberalism, particularly as upheld by the experts, journalists and politicians associated with what Tariq Ali dubs ‘the Extreme Centre’ (Ali, 2015). But although authoritarian populism garners support from individuals who are protesting against experiences of dispossession and disenfranchisement, and although, when in power, it will override and rescind certain policies and practices associated with neoliberalism, overall it represents not a fundamental rupture but an inflection. Political leaders such as Georghe Funar – the mayor of Cluj, who, in the early 1990s, opposed foreign investment from a conservative-ethnicist viewpoint – are not the norm (Petrovici, 2010). Far more common is the attempt – exemplified by the governments of Szydlo in Poland or Orbán in Hungary – to steer populist sentiment against foreigners, the freedom of movement of labour, or the bureaucrats of Brussels, none of which is an indispensable element of an identifiably neoliberal form of capitalism (on the fusion of authoritarianism and neoliberalism elsewhere in the wake of the global economic crisis, see Bruff, 2014; Tansel, 2016).
In this chapter we explored the transition of Eastern Europe and the former USSR from ‘communism’ (or ‘state socialism') to neoliberal capitalism, conceptualizing this process in relation to wider changes in the world economy and the international state system. ‘Proto-neoliberal’ ideas and social forces, we showed, were already present in Eastern Europe and the former USSR prior to 1989. In the following decades, successive waves of neoliberal reforms were implemented by domestic elites, with the support of Western policymakers, business leaders and think-tanks, as well as international organizations such as the IMF, the World Bank and the EU. As events since the 2008 crisis have demonstrated, the logic of the transformation was not simply to liberate the countries of the region from the shackles of ‘communism’ or to unleash latent entrepreneurial talent, as emphasized by neoliberals, but to open up the economies of the region to the exigencies of global capital, while restructuring and bolstering the power of domestic elites. The outcome has been growing disillusionment and public discontent with simplistic attempts to install a market economy and Western-style liberal democracy, as well as with the political forces, at home and abroad, that have pushed this process along. The capitalist triumphalism of the early 1990s has everywhere given way to the dystopian realities of an authoritarian, restrictive and reactionary mode of neoliberal capitalism.
1. As Naomi Klein has shown, the term can be traced to Milton Friedman, who used the term ‘shock treatment’ to describe the market reforms introduced by Chilean dictator Augusto Pinochet. According to Friedman (Friedman and Friedman, 1998, p. 592), the speed, suddenness, and scope of the economic shifts would provoke psychological reactions in the public that ‘facilitate the adjustment'.
2. Some scholars have questioned the idea that neoliberal ideas became hegemonic among policymakers in the region after the transition (see Ganev, 2005). However, the facts on the ground speak otherwise. As a 1996 IMF study noted, between 1990 and 1995, 25 out of 26 ‘transition economies’ introduced neoliberal reforms (Fischer et al., 1996).
3. In 2004, eight ex-Soviet bloc states (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) gained membership in the EU. They were joined by Bulgaria and Romania (2007) and Croatia (2013).
4. The term is taken here from the liberal Hungarian economist László Csaba, who defines the central feature of this approach as resting on the idea that the market represents ‘the fundamental coordinating mechanism through which the vicious cycle of poverty can be overcome’ (Csaba, 2007, p. 101).
5. The relative weakness of labour in Eastern Europe is reflected by two statistics. First, union density in new EU member states (24.6% on average) is significantly lower than that of the old member states (38.6% on average). Second, since 1990 to the present, strike rates in Eastern Europe have been significantly lower than in Western Europe (Crowley, 2008, pp. 7, 10; Vanhuysse, 2006).
6. Worldbank Data.
7. Indeed, as Swain et al. have noted, since the demise of the Soviet bloc, there has been spectacular growth in academic literature on ‘corruption’ and the discourse of ‘anti-corruption’ has frequently been invoked in Eastern Europe and the former USSR to justify further neoliberal reforms (Swain et al., 2010).
8. This is not to deny the existence of progressive movements in region. For example, in 2009, trade unions waged large protests against austerity measures in the Czech Republic, Latvia, and Lithuania. Further to the south, Macedonia has been rocked by massive anti-government protests in the last two years, forcing the government of Nikola Gruevski to resign in 2015. However, despite these positive signs, market fundamentalism and authoritarian populism still remain the order of the day throughout the region.
9. As critics have pointed out, this strategy diverged markedly from the ‘minimal state’ extolled by libertarian strands of neoliberal theory.
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