By Mike Haynes
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1989-2009: celebrations muted by the disappointments of the present

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What happened to the illusions that free market capitalism would bring democracy, social justice and equality to the societies of Eastern Europe? Mike Haynes reports
Issue 341

British tourists are commonplace in the former Soviet bloc today. Cheap flights take you to Prague or Budapest. You can spend a weekend in the Baltic states or even make it to Moscow and St Petersburg. The beer is cheap. For stag nights and last minute flings the prostitutes are numerous and cheap. It is easy to combine a visit to some of the finest sights with some of the worst. And many do. Out of sight, out of mind.

In Western Europe migrants from these countries are common. We meet them every day working in bars and hotels, on the farms and in the factories. Supermarkets in

Britain have special sections for Polish food. In the poorer parts of the cities small shops specialise in Eastern European foods for those far from home.

In the richest areas of Western cities, “their” elites rub shoulders with “our” elites, competing to buy the best housing. And if the Eastern European rich are rather poorer this year and the migrants fewer, the closeness of the links that exist would still have been hard to imagine in 1989 when the Berlin Wall fell.

Today the former Soviet bloc is a mass of contradictions and how we cut through them is a matter of controversy. This question remains urgent, not because of the past but the present. Today many of these countries, which were supposed to be marching towards the future, have been hit hard by the global crisis. Instead of emerging market economies some cynics have coined the term submerging economies for them.

The old Soviet bloc was made up of the countries of Poland, East Germany, Czechoslovakia, Hungary, Romania and Bulgaria and the USSR. Today East Germany is no more, the USSR is split into the 15 successor states and the Czech and Slovak republics have divorced. Further south the former Yugoslavia has fragmented and Albania remains barely known. Together roughly 400 million people live in these states.

In the Cold War these societies were run by classes trying to compete with the West. For Moscow and the leaders of the states most closely tied to it, this meant building up their own heavy industries and making the population pay the price. Living standards were low and life more dour than in the West. Political freedoms were few. Despite these states being called “socialist”, workers were held down everywhere.

They did not even have the right to form genuine trade unions.

So long as these states worked their rulers could boast of their successes and hold back discontent by a combination of fear and concessions. But in the 1980s things began to go seriously wrong. The economic system ground to a halt. To unblock it, regime reformers had to open up a space for change. But they quickly lost control and the space was filled by people demanding something bigger.

When the end came in 1989 it was fast. Between September and December state after state collapsed and the depth of the crisis began to feed back into the USSR which too began to disintegrate, a process completed in 1991.

For the millions who came out onto the streets, first to protest and then to celebrate, it seemed as if a new age was dawning. Vaclav Havel started 1989 a political prisoner of the Czechoslovakian state. By the end of the year he was its president. Not since the Roman Empire’s fall, he said, had such a momentous change occurred in Europe.

But was this really so? Socialists differ over how to make sense of the changes since 1989. Many – too many – identified socialism with top-down control, state direction and the myth that these societies were somehow “planned” to meet human need. For this group the shock of the transition was devastating. Their world fell apart. Critics on the left who argued that these states were never socialist, and who pointed to the repression, oppression and exploitation of workers, were less confused.

This is what Socialist Review argued at the time. It was not even that in these states there was some kind of degenerate socialism – there was no socialism at all, whatever the headlines said. The exploitation of workers in the old Soviet bloc was driven by the need to compete with the West to build up economic and military power. What existed were forms of state capitalism. It was understandable then that so few of the population wanted to keep them.

Supporting the challenge of 1989 was therefore important. Dictatorship and rigid social and political control collapsed and a new political space opened up. In it people could and did challenge the old rulers and their privileges and began to look for alternatives. But the pressure for change from below was contained, and not least because people were confused about what they were fighting against and what the alternatives were.

This allowed for what we call a conversion of power to take place – a shift from more state-based forms of capitalism to market-based forms in which workers would continue to be exploited as they had been in the past. But even in this analysis the scale of the changes has been huge.

Confidence trick

If you could not lament the passing of the old, it was equally not possible to welcome the new, because the transition was to a degree based on a confidence trick. The revolutions of 1989 were stolen. What the mass of the people who protested in 1989 wanted was a more genuine democracy, fairness, justice and equality. Today those hopes stand as much as an indictment of the present as of the past.

Nowhere is this more obvious than in Poland, where from 1981 to 1989 the Solidarity movement opposed the regime. At one point it had the support of 10 million workers. For Solidarity, at least initially, the future was about self-government, self-management and a society for all.

“In its policy the union will be governed by the principle that the terms of transition must guarantee the real income of the less prosperous part of society,” said a 1981 document. “While acting with equal concern for each citizen we will accord solicitude to the poorest.” Today, however, Poland, although it is in better economic shape than its neighbours, is perhaps the most unequal society in Central Europe.

The problem was that people had a limited sense of how a more equal and prosperous future could be obtained. Deprived of any alternatives, most imagined that this would come with Western-style market capitalism. Some, not least many leaders of Solidarity in Poland, embraced a pro-market, pro-Western future with a combination of good intentions and naivety. Others knew better.

In Russia one economist and politician, Gavril Popov, put it this way: “Now we must create a society with a variety of forms of ownership, including private property, and this will be a society of economic inequality…The masses long for fairness and economic equality. And the further the process of transformation goes the more acute and the more glaring will be the gap between these aspirations and economic realities.”

Today we can see the results. The societies of the old Soviet bloc have changed: they have opened up. But the hopes that all would benefit have proved false. Change has brought gains – socialists should always beware of disparaging the opening of a political space, however contradictory. But against the few who have gained a lot, many more live in continuing poverty and under strain. This is why the celebrations of 1989 have been muted everywhere, overwhelmed ironically by the scale of the problems and disappointments of the present. Today Central and Eastern Europe are the regions that seem to have been hit hardest by the current global crisis.

This is not the first deep crisis these countries have faced. The transition from so-called “communism” in the 1990s also produced serious economic crisis. What were called “transition recessions” were far deeper than was first imagined and in many places they lasted much longer. Recovery began first in Central Europe but even here by 2000 only half the countries had reached their 1989 levels of output. In the states of the former USSR the crisis was much deeper and much longer still. But it was argued by their new rulers that the short to medium-term pain was necessary for the long-term gain. This was the message that came from the West too, whether from the big institutions or from their army of advisers who moved east.

In Central Europe a second wave of transition began when the door was opened to these societies joining the European Union. Politically a pro-Western orientation had been consolidated through membership of Nato. Now their economies had to be further changed to meet the conditions for economic integration.

The EU was presented as an anchor to which they could be tied for better conditions and the prize was their final acceptance as modern European states. The great divide in Europe would shift east to the borders of the old USSR as a prosperous “new Europe” was created. But the enthusiasm for actual membership appeared more muted in 2004 when Poland, the Baltic states, Hungary, the Czech and Slovak Republics and Slovenia joined in 2004 and the same ambiguities were evident in 2007 when Romania and Bulgaria joined.

The transition has only delivered on part of the promises made in 1989. Poverty is widespread and unemployment is serious even in the official statistics, which neglect those who have been squeezed out of the workforce. Contrary to the story often told, new openings for the young have not been available everywhere and youth unemployment was a serious problem even before the current crisis.

Workers have benefited from access to more and better goods but wages went down before they went up and work conditions have not improved as much as was hoped. Those who work in Western subsidiaries often have better conditions than those in local plants but they are still worse than in Western Europe. A significant part of the attraction of the region to multinationals is the lower wages and poorer conditions.

Inequality levels are similar in some countries to those in Western Europe, higher in Poland and highest of all in the former USSR. In 2005 Russia had 27 billionaires and 100,000 millionaires. But so skewed is the wealth there that this handful of people have captured an enormous share of the income and wealth of this country of 140 million people.

Sometimes the best indicators of the ambiguities of a situation are the less obvious ones. In this region some have voted with their feet and migrated west. Death rates rose in Central Europe but then fell. In the former USSR they still remain high as people succumb to premature death in middle age. Birth rates across the region are low.

The result is that populations are shrinking. By 2025 there will be 3 to 5 percent fewer people in Poland and the Czech and Slovak Republics, 13 percent fewer in Hungary and 18 percent fewer in Bulgaria. In Russia the fall may be 20 percent or more. These negative trends reveal people’s lack of real confidence in the future as well as their deeper concerns about the present.

Politically the situation has remained confused. Western-style democracy now exists in Central Europe. But it is a thin democracy. Parties compete with one another on a limited basis to elect governments which differ little in practice. After the euphoria of 1989 many people, faced with the bad conditions, have retreated inwardly so that there is a widespread disengagement from politics. This is not to say that nothing happens. On occasion there have been big protests and governments have not had it all their own way in pushing through the changes they want. But political confusion over what alternatives there are is to be found everywhere. This tends to benefit the right more than the left. Opportunist and populist politicians have tried to seize their chance on many occasions. To break this pattern there has to be much more engagement from the bottom up.


But if the first decade was difficult, in the new century it appeared, at least in economic terms, as if these countries were recovering strongly and some even booming. The deeper difficulties of the 1990s meant that longer-term growth rates were less impressive. Competitive growth is a bit like trying to climb a mountain. If you fall off it is impressive to climb back to where you were but it will take a lot more effort to catch up with those climbers who did not fall off.

But it was still claimed that these countries had found the secret of success and would keep climbing and catch up with those ahead of them. These climbers were often given high marks for the way they appeared to be climbing. Now it was argued, thanks to EU rules, they were doing it properly and would not fall off the mountain again. Alas, in 2008 this is exactly what many did as the winds of the world crisis loosened their grips and footholds. Today some are dangling on the end of the rope, fearing that no one wants to help pull them up again.

The approach that brought apparent success and then failure was simple: open up as much as possible to the global economy and hope that you will be pulled up with it. In Central Europe this meant becoming part of supply networks for Western multinationals, drawing in foreign investment. For some countries, especially the smaller ones, foreign trade makes up 80 to 90 percent of their output. Exports became linked to Western European demand and under the control of firms headquartered elsewhere. Cars are typical. Western companies moved into some countries and in the new century car production doubled in the Central European transition countries. For a country like Slovakia car production makes up 20 percent of its total output.

Finance was opened up too. Eighty percent of banks in Central Europe are now foreign owned. German, Austrian and Swedish banks became dominant. As the financial bubble rose these banks began to follow the practices that created havoc further west with the additional problem that people often took out loans not in their own currencies but in euros. This creates enormous problems if the value of the currency you are paid in falls against the euro. Repaying your debts inevitably consumes more of your income. Governments then pushed this further by untying the hands of foreign investors and using the incoming investment to help cover the fact that these countries were importing much more than they were exporting.

When it all began to go wrong in 2008 it was quickly apparent that, far from being a barrier to crisis, this approach made these states more vulnerable. In the autumn of 2008 country after country was sucked into a financial crisis. Their currencies came under pressure, foreign investment began to dry up and debt repayments became due. Governments were forced to turn to the global financial institutions.

The EU tried to help and the IMF bailed out Belarus, Latvia, Hungary, Romania, Serbia and Ukraine, and the stronger Polish economy has been advanced a major additional credit.

But Western help came at a price. These countries now found limited sympathy. While in the US and Western Europe governments responded by trying to halt the economic slide, in Eastern Europe the terms of aid required them to tough it out and cut back even more. Although the policies were far from consistent there is now talk of a new European divide. These countries count for less in Brussels and they were given less support to buck the global shifts. Within the East politicians and commentators shifted from boasting about how good their economies were to bemoaning their weaknesses.

But this is little comfort to their populations as unemployment continues to rise. Migrants too have returned, pushed out by the economic crisis in the West, and the funds that they sent home have diminished. In early 2009 there were a number of riots in some countries as people experienced the first shock of the crisis. But although they frightened observers and governments they have not seen a significant shift to the left. In Hungary the biggest gains were made by a far-right party which attacked the gypsies and other minorities in the country.

Beyond the EU, further east, the approach was rather different. Here it was less a question of integration into Western supply chains as component and finished good producers than as suppliers of raw materials. For those states which had raw materials that were in demand – most obviously oil and gas – the new century also saw rising prices and improving conditions.

After a major crisis in 1998, which knocked down hopes that the market was succeeding in Russia, the economy began to boom. Optimists claimed that it had finally turned although the Russian state now played a more prominent role. The pessimists pointed to the windfall of rising oil prices and the peculiar financial dealings and corruption which meant that huge resources still flowed abroad.

In 2008 the pessimists were proved right as the price of oil fell and the financial crisis caught up with Russia and some of its near neighbours, such as Belarus and Ukraine. Even some of the richest oligarchs had to turn to the state for help for their companies.

Overall the output of the Central and Eastern European countries will likely fall 5 to 10 percent this year. But this is an average. Poland, bigger than the other new EU members with a population of some 40 million, a smaller trade share and stronger banks, is less exposed. Others, to use a phrase of the Economist magazine, like “overheated Latvia, chaotic Ukraine and debt sodden Hungary”, are not so lucky.

1989 was a momentous year. It seemed to mark the failure of one system. Two decades on, few would have thought that 2009 would so obviously raise the same questions about its replacement.

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