Towards Democracy and Competitive Economies: Divergent Pathways, Shifting Goals and Looming Reversals

Tr@nsit Online

A quarter of a century has passed since the collapse of European Communist dictatorships. We can now set the actual development of these countries against the predictions and prescriptions then made on their future trajectory. By now, most of those sweeping generalizations have to be qualified. Obviously, many of these past policy prescriptions had abstracted from the political, social and economic realities of these so called “transition countries”.


Towards Democracy and Competitive Economies: Divergent Pathways, Shifting Goals and Looming ReversalsA Review essay on Philipp Ther’s book: Die neue Ordnung auf dem alten Kontinent – eine Geschichte des neolilberalen Europa, Suhrkamp, Berlin 2014, English edition likely to be published in 2016.

Both the political and the economic “transition theories” are intellectual heirs to “modernization theory”. Just as countries modernizing, the ex-communist countries in “transition” would follow a single, well determined path towards the sole and well defined end-stage of a well working economy and a well working, perfect democracy. This path would have been trodden in past “waves” of modernization and democratization (for example in Latin America). The ex-communist countries would now be set upon the same pathway, thus joining in a global and more or less inevitable trend, leading to the worldwide dominance of democracy and of market economy. There would be no need or place for any counter model of political or economic organization.

If we abstract from the actual diversity of present democracies and market economies, and if we thus define democracy and market economy in very broad terms, and if we take the very long term view on trends that existed at least in the past, that claim does not seem misplaced. Over the past two centuries, the number of democracies has expanded to now encompass more than half of the existing independent states. The competitive market economy has indeed become the universal norm with a sprinkle of countries like North Korea and Venezuela being odd exceptions.

But such a sweeping generalization might tempt us into an overly optimistic assessment of further prospects of already wealthy countries; and on the prospect of an ultimately all inclusive regime of worldwide democratic governance. There are troubling signals that should caution us against simply projecting into the future the trends of the past. As Larry Diamond has pointed out, the worldwide trend towards democracy had been reversed since 2006. While it is true that similar reversals followed upon prior “waves of democratization” we cannot be that certain that today’s reversal too, will prove to be a temporary one only.

The sweeping generalization of an inevitable forward-march of a single type of democracy and market economy is also at odds with the actual development of the various Post-Communist “transition countries”. Reviewing their actual development since the demise of Communism, we have to conclude that their evolution has failed to follow that single path prescribed by economic and political transition theories.

One such political theory, based on the notion of “path dependence”, would have us assume that the mode of change from a Communist to a democratic regime would be decisive, with the further evolution of the political system largely determined by this regime change being either a “negotiated” one, or a violent, revolutionary one. Yet – as we may realize by now – in the long term, the various modes of regime change had hardly made for any difference. The situation in Poland which had experienced a “negotiated, round table regime change” does not differ very much from the present situation of the Czech Republic where the regime change had been abrupt and non-negotiated.

As predicted by theories, economic and political conditions at the outset did indeed have some lasting impact. But these did not prove decisive in turning a country in one direction or another. Presently, the prospects of the Baltic Republics with their less than benign initial conditions compare to their advantage to developments in Hungary, where much of the capital of originally favorable conditions has been wasted.

With some claim to plausibility, another theory has pointed to the central function of political and economic institutions. But if we look at political institutions as such and not at their social underpinnings, we find them to be quite similar across all of the transition countries. All of them are parliamentary democracies. All hold elections at regular intervals. All are members of the Council of Europe which acts as guardian of European democracy. Nonetheless, one can hardly claim democracy in FYR Macedonia or in the Kosovo being akin to democracy as practiced in – for example – Slovakia.

In the battle between economic theories and ideologies, the one of the advantages of “shock therapy” is open still. As some still do, one might argue that “shock therapy” had been successful in Poland. Yet it had clearly failed in Russia, while Slovenia has done well economically (at least up unto quite recently) though refusing to take the medication prescribed by the “shock therapists”.

Evidently, ex ante political and economic theories on what will or should happen in “transition” thus fail to come to grasps with factors truly decisive for a more or less positive outcome. Historians, looking back on the various “transitions” thus seem better placed than economists or political scientists to discern what made for these differences in performance. Historians look at things “bottom up” from the actual developments on the ground; and not “upside down” from the lofty perspective of abstract theories. Nonetheless, historians too, will have to employ some generalizations, and will approach the vast material under investigation with some notion of what is truly relevant. But these notions do not coalesce into rigid theories. Historians thus may follow raw instincts but also leads provided by the unexpected.

In looking back on 25 years of “transition” and to changes in Europe as such, the historian Philipp Ther uses this “bottom up” approach to good advantage. Some of his most cogent conclusions are based on personal experience. One is described right in the very first pages of his book in order to substantiate the claim that “transition” did not just start in 1989, but at a much earlier stage in the 1970ies, in the time of then flourishing détente, with Communist states attempting to link their already faltering economies to the dynamic markets of the “West”:

On a trip with his parents, the young Philipp Ther had arrived at an already crowded camping site in Budapest / Hungary. There were two rows of candidates lining up for the few still available places on the camping ground. The shorter line, formed by “Westerners”, was served immediately as these “Westerners” could pay in sought after, convertible currencies. The longer line was formed by those from Communist brethren countries who could pay their fees just in less valued “Eastern” currencies. Resentfully, they had to wait their turn after all the “Westerners” had been served. Like experiences were common in Communist countries. They eroded the legitimacy of the political regime. Indeed, and based on this view from below, transition has begun well before 1989.

An equally relevant insight of Philipp Ther is also based on direct personal experience; this time with the “Polish markets” as they had sprung up in Berlin and in other places immediately after the downfalls of Communist regimes. They demonstrated and honed the entrepreneurial spirit of an emerging Polish middle class that – later on – would provide the broad base for the astounding economic success of Poland.

To this account on entrepreneurship I might add one from my own experience as “senior political counselor” at the London based “European Bank for Reconstruction and Development – EBRD. At that time my daughter, a television journalist, had produced a documentary on an enterprising young Chinese travelling from Peking to Moscow on the Trans- Siberian Railway. He had stuffed his railroad compartment with jogging shoes, play stations and other items eagerly sought by consumption – starved Russians. He sold his ware from the window of the railroad car and the remainder upon his arrival in Moscow. The television documentary also showed the same Chinese on his trip back to Peking, reading the London “Economist” in his railroad compartment. He was alone in this compartment. No enterprising young Russians joined him, ready to sell in China items like furs or jewelry Chinese were likely to desire. Obviously, a broad class of Chinese entrepreneurs stood ready to seize any chance of commercial success. This class had no counterpart in Russia. By now, China is soaring ahead in expanding and diversifying its economy. Russia has failed to do the same and runs the danger of reverting to being a mere “petro – state” with a shrinking industrial base.

In an internal EBRD meeting I mentioned this television report on the Chinese businessman so as to point to the central function entrepreneurship was bound to have in the process of economic transformation. The echo from the other participants was muted. I sensed that my suggestion was considered a bit beside the point. In any case, indicators on entrepreneurship had never been among those indicators that were collated in the composite “Transition Index” (in use from 1994 to 2013). That index ranks countries according to how well they advanced in reforms the bank thought essential for expediting economic transition: privatization of firms, price and trade liberalization, competition policy etc.

The EBRD Transition index is proof that assistance (at least the one offered by the EBRD) was guided by an ex – ante theory; the theoretical assumption being that actions in a few selected fields like privatization and liberalization would determine the pace and success of economic “transition”. Yet the real figures and the actual experience with EBRD projects should have quickly raised doubts as to the soundness of that assumption. Anyone with a deeper involvement in the actual economies of the “transition countries” would have found absurd a “Transition Index” ranking that, at one instance, accorded better grades to FYR Macedonia than to Slovenia.

Also, reflections on lessons learned from it own projects should have made EBRD aware that the formal act of privatization alone was not sufficient to transform a firm into a desirable investment target. In a dispute over a forthcoming “Transition Report” devoted to banking, I had vainly argued that for savers and investors, a state owned bank – let’s say in the Czech Republic –might very well prove a safer haven than a recently privatized Russian bank. Running counter to the core philosophy of the EBRD, that caveat was ignored in the final version of the report which argued that privatization alone made the difference between a solid, good bank and a risky, bad one.

Is so happened that exactly at the time of the publication of the Transition Report on banks and on their privatization, a massive loss wiped out all of the profits the EBRD had ever made since its founding. The losses were due to the failure of a recently privatized Russian bank, the EBRD had invested in heavily.

Not the privatization of the bank had proven decisive for making a profit and for avoiding losses. Other things were more relevant: the knowledge, expertise and skill of the owner and of the managers; their ethics and sense of responsibility; the training and honesty of staff, the general business climate that bank was imbedded in. In short: decisive was the amount and quality of human capital.

The concept of “human capital” is a very broad one. As mentioned, entrepreneurship does certainly add to the stock of human capital. So do assets that are easy to gauge like the quantity and quality of education and of technologic expertise. Yet “human capital” also includes assets less easily quantified: political elites that act responsibly and that also can be held accountable, limits to corruption, a tradition of respect for – and rule of law; and finally and probably most importantly, a tradition of solid and successful statehood. Some of these essential assets are also subsumed in the overlapping concept of “social capital”, that is the stock of trust and capacity for cooperation that has to underpin all long term successful political and economic ventures.

Certainly, human and social capital is more essential inputs into successful transition than the mere addition of external capital. Yet it is difficult to discern that sub – element of social- and human capital (or the lack thereof) which would have made for the crucial difference in the way transition moved along in the ex-communist countries. A historian like Philipp There with his bottom up approach will find it easier to take up a lead and to follow a trend of cascading, interdependent events; while political and economic theorists will founder in their attempt to subsume all of these events under on single theory.

So what are the main findings of the historian after surveying the results of 25 years of “transition” and of changes in Europe as such? Is it even possible to arrive at some of such more general conclusions? Philipp Ther does believe so. These are his conclusions:

If one excludes the post-Soviet states, but includes the Baltic Republics and if it is measured in terms of average per capita Gross Domestic Product, economic transition has been a success. After a deep crisis in the years immediately after the end of the Communist era, a process of catching up had set in; with most of the transition countries inching closer to the European average. Quite recently, the Czech Republic had, for example, overtaken Greece in term of per capita GDP. Increases in average life expectancy tell the same story of catching up and moving closer to the West- European standard.

The assistance of the European Union, first the prospect and then the actual membership in the Union, proved decisive; not only in terms of providing motivation; but also through massive financial transfers. Both in absolute numbers of the sum total of all transfers combined, as well as in terms of assistance per capita, this help by the European Union now dwarfs the one provided through the US Marshall Plan after 1948. The 2005 to 2013 EU budget for Poland might serve as an example. It provides for transfers amounting to altogether 67 billion Euros.

However, the rewards of economic progress were distributed quite unevenly. If one looks at the total population of all transition countries (as does a 2013 study by the “inequality expert” Branko Milanovic), two fifth of this population are now worse off than they were in 1990; whereas only one fifth finds itself in a more favorable position. But countries vary widely according to the present level of income inequality. In the Czech Republic income is distributed more evenly than in Austria or Germany; whereas income inequality in Russia reaches Latin – American levels.

As seems the norm world – wide, in transition countries too, a gap in living standards exists between the urban and the rural areas. But this gap has dramatically widened after the 1990. Cities like Prague and Warsaw now surpass Berlin in per capita GDP, whilst the Slovak capital Bratislava ranks fifth place among the world’s wealthiest cities. Warsaw counts 551 cars per 1000 residents – against a mere 400 in Vienna. In some of the rural areas of Eastern Europe, on the other hand, per capita income hardly rises above the level registered in countries considered “very poor” by World Bank standards.

The rural population was not the only group to suffer from transition. Working mothers lost much of the help once provided by crèches (the number of crèches fell by half in Warsaw) and women lost ground in other respects too. Also, a number of ethnic minorities found they worse off. Communist regimes had striven for the integration of the Roma and Sinti part of their population by providing stable employment and housing. These efforts were abandoned after 1990.

After toying with notion of a “Third Way” immediately after 1990, all of the European ex-communist countries soon followed neo – liberal prescriptions in the setting of their economic and social policy. Alternatives found no traction, not even in places where different social concepts had been rooted in national tradition. One of these was the Czech concept of “lidkost” (“humaneness”); another one the ideal of a Yugoslav – type of workers self-government as it had guided the Polish “Solidarnosc” after 1981.

With their adherence to neo – liberal social and economic policies, many transition countries even leaped ahead of developments in the Western parts of the continent. They did so, for example, by introducing a “flat rate” (that is a non-progressive, non-redistributive income tax) or by basing their pension system (at least in parts) on privately created savings. In this turn towards neo – liberal social concepts, the Western part of Europe followed the East a bit later, with the Democratic Left being unable to provide a counterweight. Philipp Ther argues that this policy change in the West had been prompted – at least to some extent – by examples set in East/ Central Europe. At least in Austria, that claim seems plausible as the earlier introduction of a flat rate income tax in neighboring Slovakia had motivated conservatives to propagate a similar tax regime for Austria.

As of 2000, the West and the East of Europe thus followed, and thus were transformed by the same social/ economic policy of neo – liberalism. The same political agenda is now being imposed on Europe’s South. With its slowing economic dynamics and with its blocked political systems, the European South has now taken the role once assigned to the East /Central European countries. Today, these Central/ Eastern European countries may still offer to their citizens and to the outside world the prospect of a further catching up with the wealthier and politically more stable parts of Europe. Yet the “South” has difficulties in providing the same perspective. It has become the European problem region und must suffer the indignity of the unflattering epitaph PIGS (Portugal, Italy, Greece, Spain). Some see the South as resistant to profound changes as the Communist regimes had proven to be when vainly trying to modernize and reform in the time between the mid Seventies and the late Eighties. Per capita GDP in the Italian South (“Mezzogiorno”) now equals the average Polish per capita GDP.

Europe’s North and South, East and West have jointly followed, or have been forced to follow the very same neo – liberal policy prescriptions. Some of the consequences have been similar across the continent. Over vast stretches, markets have supplanted and thus weakened the state. Individualism has eaten into communitarianism and social solidarity. Ever more rapid changes and heightened insecurity have found their counterpart in politics that exploit distrust and fear.

Yet all of that had not led to greater homogeneity in the family of European states as neoliberal economic and social policy had impacted differently on these states. That has made for differing outcomes.

In Germany, it resulted in the emergence of a low wage sector and in vast excess savings due to a current account surplus of now more than seven percent, due to weak consumption, and due to an astounding decline in public and private investment. In Latvia it had resulted in a steep economic decline now followed by an equally rapid economic surge. The price for that was a massive net emigration of Latvians. Would a similar percentage of Greeks emigrate, receiving countries would have to accommodate three quarters of a million Greeks. As it is, Greece was pushed into a deflationary spiral of unprecedented economic decline with the load of external debt growing to reach unsustainable proportions.

Instead of moving closer together, the member states of the European Union have moved further apart. The debtor countries resent the creditors, and arrogantly overbearing Germany in particular. Internal politics have become more brittle too. Radical parties on the Left and on the Right – but mainly on the Right – have become actively hostile to the whole project of European integration. This has impacted on internal and external politics of EU member states. Nationalism gains ground at the expense of European cohesion and solidarity, weakening the capacity for common action in times when such common action would be urgently needed in face of the competition of an emergent China and the open aggression of Russia.

Transition has come to an end, and this not mainly because some of the relevant countries now have come close to the general European level of wealth , with their politics not too different in form and content from what is the norm in the Western part of the continent. Transition has come to an end because the target of transition is no longer that unique, attractive and well defined. What should one opt for? A status now prevailing in Italy? Or a status like in Germany? Should one aim to duplicate the conservative/ liberal, anti-European model of the United Kingdom; or the still more state centered model of France? Or should one discard all of these models as Hungary has done under the leadership of increasingly authoritarian Prime Minister Orban and attempt to curtail political and economic freedom?

Even if one were to find theoretical solutions to these queries, it would remain more than doubtful whether one would then be able to translate them into actual politics. Philipp Ther believes the tide to have turned away from neo -liberalism with leftist parties again becoming more prominent in Europe and with some of the neo liberal flag – ship projects like the flat rate tax regime and the privatization of pension systems being abandoned in Central/ Eastern Europe. Even if Philipp Ther were right in this prognosis – and I fear that he is not – no practicable, alternative political / economic project has emerged that could take the place of neo – liberalism. Its discursive hegemony remains unchallenged.

In his book on the new order on the old continent, Philipp Ther covers vast ground indeed: a history of the past 25 years, East and West, politics and economics, accounts from personal experience mixed with reflection on abstract theories. A three pages register of names, a four page register of geographic locations, a 16 page bibliography and notes covering no less than 43 pages are testimony to the fact that he has not done so lightly. Nonetheless, there is a price to pay for such ambition. He is highly selective in choosing the objects of his investigation. Eastern Germany and Poland come under close scrutiny, while the Czech Republic, Hungary and Slovakia much less so. Romania and Bulgaria plus the other countries of the West – Balkan are hardly given a glance. The Ukraine is being dealt with in a chapter that had evidently been added in view of the vast implications of the present Russian assault on that country’s integrity. Russia itself gets some furtive mention; the rest of the ex- Soviet Republics none at all.

The position and influence of the United States is ignored, as are the NATO, issues of external security, and questions raised by the more general European geo – strategic context.

Is that price of selectivity in the treatment of countries and issues one that is too high? Would we have been better served by a more narrow description centered on fewer subjects and objects? Sometimes paintings have to be done on a wide canvass and with a broad brush. The picture painted by Philipp Ther meets such a need.

Philipp Ther is Professor for Eastern Europe History at the University of Vienna. He was awarded with the nonfiction Book Awared 2015 by the Leipziger Buchmesse. 2004-2005 he was a Körber Visiting Fellow at the IWM.

Thomas Nowotny teaches political science at the University of Vienna in Austria. He has been Austrian diplomat, private secretary to Austrian Chancellor Bruno Kreisky, senior political counselor to the European Bank for Reconstruction and Development, and consultant to the OECD (Organization for Economic Co-operation and Development).


Larry Diamond, “Facing up to Democratic Recession”, Stanford, 2014
In prior reversal after “waves of democratization” the reversal came in the newly democratic countries. This time though this reversal in some of the new democracies (like Russia, Hungary or South Africa), is being accompanied by the thinning out and loss of legitimacy of democracy in Europe and North America. (see also Collin Crouch “ Post-Democracy”)
As the only one among International Development Banks, the European Bank for Reconstruction and Development (EBRD) provides assistance not just tied to an economic conditionality; but also to a political one, making assistance contingent also on further “advances towards democracy”. Hence the political counselors to monitor the actual implementation of this engagement. It is not very intense – to say the least.
One could argue that in Russia the system of a centrally planned economy substituted the state as entrepreneur for a largely absent indigenous entrepreneurial middle class
I myself had attempted – and probably not very successfully – to quantify the impact of social capital upon the process of economic “transition”. (See: Nowotny, T. et al., “Social Capital in Transition”, EBRD Working Paper, 2001)
See also the book by Francis Fukuyama on the „The Origins of Political Order. From Prehuman Times to the French Revolution“ (2011).
With the GDP adjusted by the purchasing power, thus increasing the level of GDP, where costs of living are low
The process of catching up was interrupted by the world economic crisis that set in as of 2008. In the East-Central European countries catching up has resumed by now. Progress and prospects are less even for the successor countries of former Yugoslavia
That does not apply to the non-Baltic successor republics of the Soviet Union. Russia experienced a drastic reduction in average life expectancy in the 1990ies and recovered from this decline just by 2010.
But not wealthier Vienna.
Also due to the collapse of rural based small industry like saw mills or dairies; and the decline of agriculture.
Here again, one should beware of over-generalizing. In Slovenia, neo-liberalism is intermixed with some neo-corporate elements. Notwithstanding the extreme neo-liberal rhetoric of its longtime Prime Minister Vaclav Klaus, the Czech Republic had steadfastly maintained its system of strict rent control.
That convergence in economic and social policies and the mutual re-enforcement in adherence to this single model is termed “Co Transformation” by Philipp Ther.
An epitaph as misleading as the term BRICs used for merging into one and the same group countries as different from another as in Brazil, Russia, India and China. As in the case of the BRICs, in the case of the Southern European countries too, economic prospects and policies differ profoundly. Up until to its crisis based on the collapse of real estate speculation, Spain had advanced very rapidly and moved ever closer to the European average, whereas the EU founding member Italy had suffered from a broad based decline since twenty years at least.