Socialist Worker

Eastern Europe's exposure to crisis

The global recession has devastated the former Stalinist countries of Eastern Europe. Andreja Živkovic looks at the nature of these economies and the roots of their problems

Issue No. 2184

The economic crisis that has swept Eastern Europe and Russia was the ghost at the feast at last year’s celebrations of the anniversary of the 1989 revolutions.

The overthrow of the one-party regimes in 1989 was widely seen, even by many on the left, as a victory for the free market over central planning and socialism.

Many insisted the revolutions would usher in an era of prosperity and growth – not the economic devastation that exists today. So what happened?

First, the so-called communist states of Eastern Europe were not socialist. At the core of socialism is the idea that working people can only achieve freedom through their own activity, by taking back the production of society’s wealth and subjecting it to democratic control to serve human needs.

By contrast the Stalinist one-party states of the Eastern bloc were not based on popular revolutions or workers’ control, but on the victories of Stalin’s Red Army against Nazi Germany.

Indeed Soviet forces either refused to assist grassroots liberation struggles or actually crushed the popular organs of resistance that began to appear in countries such as Bulgaria or Germany as Nazi power crumbled.

Obedience to Moscow was the criterion for post-war Communist Party membership, leading to an influx of careerists and former Nazi collaborators, especially where the communists had been a minority party, as in Romania.

The economies of the Eastern bloc were modelled on that of Stalinist Russia. Workers in these regimes – as in Russia – were exploited by a new ruling class of state officials and managers.


These were “state capitalist” economies – driven not by competition between individual firms, but by military and economic competition with the West.

In fact, after the Second World War all states intervened heavily in economic life – nationalising industries, channelling investment into priority sectors and protecting key industries from direct competition on the world market.

So the Eastern Bloc was not the aberration that is painted today but was at the extreme end of a continuum of forms of economic organisation all over the world.

The centralised state capitalist regimes were able to achieve higher growth rates in the 1950s and 1960s than their more market-based Western competitors. But, by diverting investment from production to military spending, the regimes’ growth laid the basis for later stagnation.

Within the closed state capitalist economies of the Eastern bloc – even for an economy the size of the former USSR – there were limits to the internal resources that could be diverted into accumulation.

Rulers repeatedly tried to solve the problem by forcibly holding down workers’ consumption to increase the rate of investment. This could only go so far – and the response was always eventually either revolt or revolution – Berlin in 1953, Hungary in 1956, Poland in 1970-1 and 1980-1.

So the state capitalist regimes were forced to become more involved in the world market, to turn to massive borrowing to finance the imports of technology that would enable them to compete with the West. This started in Yugoslavia in the 1950s, and spread to Eastern Europe by the 1970s.

But this left the state capitalist countries doubly exposed. On the one hand, they were now dependent on the rhythms of the world economy for further growth.

On the other, dependency on the world market for inputs for production and for export markets meant they were left without any means to re-direct resources within the domestic economy if the sources of growth dried up.

And so it was to prove. The project of export-led growth was destroyed by the great global recessions of 1974-5 and 1980-1.

Moreover, despite their increasing involvement in trade, the state capitalist countries were outflanked by the international economic networks that had grown up in the post-war boom.

By the 1970s, no purely nationally organised capitalism could hope to marshal the resources needed to prosper in a global market where

multinationals with state-backing in the US, Europe and East Asian vied for control over global markets.

Increasingly dependent on the world market to finance growth, but unable to compete in the same global market, the state capitalist states stagnated in a debt-trap for much of the 1980s, before finally collapsing.

Former Communist Party bureaucrats enthusiastically embraced the ideas of neoliberalism. The idea of opening up to foreign capital was seen as a solution to the problem of investment.

Previously, imports of technology had led to large trade deficits as exports struggled to keep up with imports, resulting in rising foreign debt.

Foreign Direct Investment (FDI) was touted as the way to improve the export capacity of the economy to repay debt.

As General Wojciech Jaruzelski – architect of the coup against the Solidarity trade union in Poland at the beginning of the 1980s – noted in 1989, the promise of the market was the only way in which the workers could be induced to accept the full costs of restructuring for international competition.


Once it was clear that the 1989 revolutions against the one-party regimes had stopped at the gates of the factories, ministries and army barracks, and that the bastions of power remained intact, the ruling class could throw away its party cards and seize control over former state property through insider privatisation.

State officials became consultants to Western multinationals and sat on the boards of Western banks and subsidiaries, while managers were well placed to create lucrative satellite firms around privatised enterprises.

The elite certainly did very well out of the new economic situation, but living standards for the vast majority plummeted dramatically during the 1990s.

And while privatisation lined the pockets of managers and officials, it did not solve the old investment problem. The first wave of privatisation involved the cherry-picking of the most competitive bits of manufacturing, for example car production.

But integration into the production networks of the multinationals did not necessarily spur the development of local trade.

The second wave of privatisation saw foreign capital move into wholesale and retail trade, transport and communication, financial services and banking.

State monopolies became private monopolies. But these “nontradable” sectors do not contribute to exports.

Instead this form of investment tended to suck in rising levels of imports. In this way foreign flows of investment and credit spawned a highly unstable form of growth, based on ballooning private debt and trade deficits, and dependent on constant inflows of cheap credits.

This is clearest in the recent consumption booms in Bulgaria, Romania, Serbia, Croatia, Hungary and the Baltic states.

So the boom of the 2000s was built on sand. And the depth of the slump shows the scissors of the export crisis and the credit crunch.

The slump is deep in those areas that produce for the multinationals – the Czech Republic, Hungary, Slovakia and Slovenia.


But it is catastrophic where growth has been mainly based on consumer and credit bubbles such as Ukraine and the Baltic States.

The debt crises of the 1970s and 1980s have returned with a vengeance, accompanied by unsustainable trade deficits. West European banks have a regional exposure equivalent to £994 billion and regional debt for 2009 stands at £257 billion.

Terrified by the prospect of default leading to a new wave of bank failures, Western states pump in cheap money to prop up the Western banks. As the mirage of stability conquers panic, speculative finance is returning to feast on “emerging markets”.

A new house of cards is being built. It is the workers East and West who are each being asked to pay twice over, both for the debts of the Western banks and for a new round of speculation.

As in the West, public sector workers and pensioners across the region face wage freezes, while millions face unemployment and the poverty line.

The debt crisis also opened the door to the return of Russia. After the financial crisis in 1997-8, the Russian state re-nationalised key energy assets and used these to contest Western economic and military influence over the region.

It waged war against Georgia in 2008 and cut off gas supplies to the Ukraine last winter. It is now offering billions of dollars to debt-ridden Serbia to counter IMF and western influence in the Balkans.

Eastern Europe is once again prey to the economic and military competition of rival imperialisms.

Hence the resistance is not just against the struggle of rival capitalists to make workers pay for the crisis, but also the proxy wars stoked up by the imperialist powers.

For this reason, socialists have had to re-revive the old slogan – “Neither Washington nor Moscow, but international socialism!” 

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Tue 12 Jan 2010, 18:09 GMT
Issue No. 2184
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