EASTERN EUROPE
W HILE production in
Russia will fall a further 15% this year, and Ukrainian production by even more, the former satellite countries of central and eastern Europe seem to have reached the bottom. The Polish economy "took off' in 1992 and has estimated growth rates of 4% per year since 1993. The Hungarian, Czech and Slovak economies grew by 2-3% in 1994.
However, this new growth is not stable. The Hungarian economy grew in 1993 but stagnated in 1994 after the Socialist Party (the former ruling party) and its liberal coalition partners introduced austerity measures after returning to power in the May 1994 elections.
The decline in production is most marked in industry. Even where production as a whole is beginning to increase, the new growth is almost exclusively service-generated. The decline is qualitative as well as quantitative. Among the sectors most hard-hit are the Bulgarian software and Hungarian electronic industries. In the old days, the CMEA (the Soviet bloc common market, or COMECON) allowed a certain division of labour and specialisation between the countries, yet rather than encouraging these industries to catch up with Western technology, the transformation since 1989 has virtually wiped them out.
Governments from Prague to Tblisi share the view of international organisations such as the World Bank, International Monetary Fund and the OECD, that foreign investment is the only way to increase the technological level of industry in the region.
In some cases, foreign investment is modernising industry and export-earning capacity. One example is the automobile industry in Poland, Hungary and the Czech Republic — although Volkswagen broke most of their investment promises to the Czech government when the mother company announced heavy losses in 1993.
In general though, real development cannot be left to foreign investment. As in other regions of the world, the main goals of foreign investors in Central and Eastern Europe are to capture local markets, and to exploit low labour costs (there are examples of Western investors buying a competitor in order to eliminate him. Even in sectors such as foodprocessing, where foreign investors supposedly give access to new products and technologies, research and development is invariably concentrated in the metropolitan countries, especially because the austerity policies implemented by all the governments in the region have meant cuts in research and education budgets.
All this means that East European industry is becoming increasingly dependent on western-owned or designed technology.
### Service sector
The service sector, on the other hand, has developed in all the countries of Central and Eastern Europe. This has satisfied more of the needs of the population, or at least that part of the population who can afford it. In addition, competition from the private sector has forced public sector services to become more dynamic, and to begin to interest themselves in the consumer.
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International Viewpoint #262 December 1994
The services which have developed most however, are those which do well in a capitalist society: Advertising, banking and financial services, and so on.
At the same time, public sector services have suffered under the austerity programmes imposed by governments. The health system, for example, has suffered severe cuts in all countries, and male life expectancy has dropped four years in Russia since 1989, while infant mortality has risen from 17/1000 in 1990 to 19/1000 in 1993.
The Russian pharmaceuticals industry contracted 60% between 1989 and 1991, and a further 12% in 1992. The demand for medicines is so great that over half the country's needs are now imported. Less and less of these imports are paid for by the State health service. This leaves the responsibility to private importers, motivated mainly by profit. These companies can make more money from non-prescription medications for minor ailments than by importing medicines not available locally, but which help control and cure serious ailments such as diabetes, asthma, cancer and tuberculosis.
### Physical means
While the collapse in production may be over, at least in central Europe, the fundamental restructuring of the physical means of production is still under way, and the future shape of these economies is difficult to predict. Apart from the Czech lands of Bohemia and Moravia, pre-1939 capitalism in central and eastern Europe was dependent on Western Europe, dominated by the export of raw materials or materials with only a small part of value added.
In the capitalist system, these countries have two comparative advantages: a qualified labour force, and low labour costs (wages and social security). Optimistic economists say that careful exploitation of these two factors will enable these countries to insert themselves in the world division of labour at a relatively high level. Pessimists believe that the region will find a similar place in the world economy to that which it occupied before 1939.
Their rulers, and to a large extent the populations of central and eastern Europe, see their long term salvation in adhesion to the European Union. But they will find the conditions for joining the club different from those applied to Spain and Portugal. The generous subsidies of the Common Agricultural Policy have been largely abolished, and new members will receive only limited support from the structural funds for regional development. Nor does "post-Maastricht" Europe offer any guarantees for improving the standard of living of the masses or reducing unemployment.
The ex-Soviet Republics face an even less certain future. Russia is in the strongest position, with its oil and gas reserves, and the major part of the soviet State apparatus. Most of the other states still depend on decisions taken in Moscow on rouble reform, price liberalisation and increases in the price of energy. With the exception of Turkmenistan, all the ex-soviet republics depend on Russian oil for their energy needs. Although a Ukrainian State is being put in place (and is not yet sure of existence) it will be some time before there is a distinct Ukrainian economic space. The (partially Russian-encouraged) political conflicts of many of the republics do not inspire the confidence of foreign investors, and, given its strategic importance, Russia has attracted most of the limited aid allocated by the imperialist countries
In many respects, the economic relations between the republics are even less fair than at the time of the USSR. Theoretically federal institutions have collapsed, and the gap has been filled by openly Russian bodies. Several of the other republics are increasingly mere protectorates of Russia's "near abroad".
The restoration of capitalism has two interdependent elements: the destruction of the old system and the construction of new structures and systems.
The destructive phase, according to the Belgian economist Jacques Nagels,! makes the means of production "available" by removing them from State control, cancelling planning, liberalising prices and foreign trade, and beginning the transfer of State property to the private sector. The work force too is "made available" by abandoning full-employment policies once and for all, giving managers the right to sack workers, and abolishing or replacing the parts of the social security system which tied workers to one employer.
With variations from country to country, the old system has been essentially destroyed in central and eastern Europe, especially in the Visegrad group (Poland, Slovakia, Hungary and the Czech Republic) where the private sector produces at least 40% of the Gross National Product (the total value of
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goods and services produced in a country. Market relations have penetrated into all areas of economic life. This means the radical dismantling of the old system. While the political elite accepts the "rules of the game" imposed by the World Bank and the IMF, the bureaucracy as such has lost its homogeneity. Most bureaucrats are busy building an individual place in the capitalist future as bankers, entrepreneurs and bourgeois politicians. Some have recycled themselves as "workers' bureaucrats" at the heads of ex-Communist parties and trade unions (nowadays often more "left-wing" in their statements and actions than the ex-Ps, especially in Hungary and Poland, where these parties recently formed govern-
Political power, which takes the form of parliamentary bureaucracies in all the countries of central and eastern Europe, is a key force working clearly and exclusively for the restoration of capitalism.2 Leaving aside the mass of day-to-day problems these governments face, there are two major obstacles: the difficulty of privatising the largest State companies and the banks, and the absence of a stable bourgeoisie.
Privatisation is indeed difficult in countries where there are not enough savings to buy State industries. So privatisation means accepting that foreign capitalists will play an essential role in the economy, and even in countries such as Hungary, which have made this choice, the process is a long one.
The alternative is some kind of free or subsidised distribution of property, typified in the Visegrad group by the Czech Republic. While 70% of industry has been formally transferred to the holders of various citizens' investment coupons, the new system of ownership is far from clear. Two out of three citizens invested their coupons through an investment fund, most of which are owned by banks (themselves privatised by coupons). The head of the coupon stock exchange was recently arrested for manipulating the computerised system to allow certain coupon funds to "buy"
1. Jacques Nagels, 'Du socialisme perverti au capitalisme sauvage', Editions de l'Université de Bruxelles, 1991.
2. Even in central Europe, it is not clear whether the neoliberal strategy will, sooner or later, require that limits be put on parliamentary democracy. In Poland at least, Karol Modzelewski from the Union of Labour (a re-groupment of the left wing of the Solidarnos movement) predicts that the neo-liberal strategy has already provoked the refusal of a majority of the population, and that such a strategy can only now be enforced by anti-democratic means. See K. Modzelewski, 'Ce qui est arrivé à Solidarité', in Le Monde diplomatique, November 1994.
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"For Russia, the transition process is still ahead.
The new bourgeoisie live from day to day: rather than manufacturing they prefer to invest in commerce, or a hundred and one forms of
International Viewpoint #262 December 1994
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speculation..." shares at a rock-bottom price, in order to sell them immediately — for real money -to managers of state enterprises and other investors.3 So the 6.5 million citizen-investors are far from being owners of the economy!
The bourgeoisie in these countries is too weak to present a common strategy beyond allowing each of its members to amass as much money as possible as quickly as possible. This means that medium and long term political strategies are either developed by the politicians autonomously of their economic backers (as in the Czech Republic) or by IMF and World Bank officials who have imposed themselves as supervisors of economic policy in countries such as Hungary and Poland.
Things are less clear in Bulgaria and Rumania, both largely agricultural economies before World War II. Bulgaria's partial industrialisation was intimately linked to integration with the USSR, with which it carried out 80% of its foreign trade. The collapse of the soviet economic bloc, the war in Yugoslavia, the blockade of neighbouring Serbia, and a high foreign debt have made Bulgaria the most unstable country in the region. In neighbouring Romania, not only did much of the bureaucracy remain in place after the execution of Ceaucescu, but the pauperisation of the population under that dictatorial regime has made it reluctant to make any further sacrifices in the supposed "national economic interest". Nevertheless, the dynamic in both countries is the same as in the richer Visegrad group, with two or three years delay.
The republics of the Commonwealth of Independent States (CIS) are at quite a different stage. The constructive phase has not really started, and the economic situation can still be characterised as "neither plan nor market". For example, Russian leaders claim that they have privatised 70% of industry, a record matched only by the Czech coupon privatisation. In fact, this privatisation is based on a compromise with the managers of arge factories, who exploited an optio in the privatisation law to distribute 51% of shares to their employees at a very low price. They also convinced many workers to invest their coupons in the company where they work (in the Czech Republic most coupon holders preferred to invest in well-known companies, or banks).4 Many of these managers are now buying up these shares for themselves or on behalf of foreign capital or new Russian millionaires. Privatisation maybe, but we are still a long way from capitalist property relations.
### Speculation
For Russia, the transition process is still ahead. The new bourgeoisie live from day to day: rather than manufacturing they prefer to invest in commerce, or a hundred and one forms of speculation, in the search for short-term profits. Managers of State-owned oil and gas industries have the same attitude, in that they have placed thousands of millions of US dollars abroad, rather than repatriating "their" export earnings. One of the consequences of this is that, while Russia has had to negotiate the re-scheduling of its foreign debts, Russian companies and individuals place over US$1,000 million abroad every month. New Russian millionaires are acquiring sizeable holdings abroad: in Britain they are part of the property and antiques markets, while their children attend the most prestigious of Britain's private schools.
The Russian Mafiosi collect their own taxes: one recent study suggests that 80% of private enterprises and banks pay protection money, sometimes as much as 20% of their turnoverS The mafia does not hesitate to use force to ensure payment: more than twelve bankers have been killed over the last two years, without anyone convicted of their murder. Not surprising considering that, according to Moscow's chief of police, 95% of his officers are "more or less" corruptible? The gangrene of corruption has infiltrated the judicial system, the political elite, and even the highest ranks of the armed forces. An official inquiry into corruption launched in 1992 (supported by the World Bank and the G7 leading capitalist powers) has had to be abandoned due to a lack of co-operation from the Russian authorities.8
The political system in Russia can be characterised as semi-authoritarian. The legitimacy of the latest constitution is more than dubious: the results of the referendum on its adoption were clearly "arranged"' to ensure a majority of positive votes. For the moment the bourgeoisie profits from this disorder to enrich itself, in a state which the former dissident Vladimir Bukovski calls "kleptocracy" — the rule of thieves. 10
Sooner or later, however, the bourgeoisie and the political elite will decide that the market economy requires more order in society. The introduction of capitalism will require more authortarianism, and more barbarity. *
3. Mladá fronta dnes, 19 November 1994.
4. Interview with Grigori Yavlinski in 'Les Echos de Russie et de l'Est', March 1994. See also 'Russian Privatisation', The Economist, 1 March. 1994.
5. 'Russian reforms: too late to stop?', Business Week, 14 February 1994.
6. Financial Times supplement on Russia, 27 June 1994.
7. 'Russia's mafia: more crime than punishment", The Economist, 9 July 1994.
8. Probe into capital flight from Soviet Union shelved, Financial Times, 7 February 1994.
9. 'Les mystères d'un dépouillement peu orthodoxe', Le Monde, 15 November 1993.
10. The dissident who reckons there's nothing to be done', Financial Times, 4/5 September 1993.
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