against ‘blindly copying foreign experience’.
After passing through a slough of economic despond in the early 1990s the first tier of former Communist states re-emerged on a more secure foundation, able to attract Western investors and envisage an eventual ascent into the European Union. The relative success of the Polish or Estonian economic strategies when compared to the fortunes of Romania or Ukraine is obvious to any visitor—indeed, at the level of small business activity or even public optimism, the more successful eastern European countries have fared better than former East Germany, for all the latter’s apparent advantages.
It is tempting to conclude that the more ‘advanced’ post-Communist states like Poland—or the Czech Republic, Estonia, Slovenia and perhaps Hungary—were thus able in the course of a few uncomfortable years to bridge the gap from state socialism to market capitalism, albeit at some cost to their older and poorer citizens; meanwhile a second tier of countries in the Balkans and the former Soviet Union was left to struggle in their wake, held back by an incompetent and corrupt ruling elite unable and unwilling to contemplate the necessary changes.
This is very broadly true. But even without Klaus or Balcerowicz or their Hungarian and Estonian counterparts, some former-Communist states were always going to do better than others in the passage to a market economy: either because they were already embarked upon it before 1989—as we have seen—or else because their Soviet-era distortions were not as pathological as those of their less fortunate neighbours (the comparison between Hungary and Romania is telling in this respect). And of course the miracles of economic transformation on offer in the capital cities of certain countries—in Prague or Warsaw or Budapest, for example— are not always replicated in their distant provinces. As in the past, so today: the real boundaries in central and eastern Europe are not between countries but between prosperous urban centers and a neglected and impoverished rural hinterland.
Rather more revealing than the differences between the post-Communist experiences of these lands are their similarities. In every country, after all, the new ruling elites faced the same strategic choices. The ‘market- economic romance’, as Russian Premier Viktor Chernomyrdin termed it dismissively in January 1994, was universal.[348] So, too, were the general economic objectives: liberalization of the economy, transition to some form of free market and access to the European Union—with its seductive promise of foreign consumers, investment and regional support funds to ease the pain of dismantling the command economy. These were outcomes that almost everyone sought—and in any case there was, as it seemed to most informed opinion, no alternative.
If there were deep differences in public policy in post-Communist societies, then, it was not because of any widespread division of opinion over where these countries had to go or how to get there. The real issue was how to dispose of resources. The economies of the Communist states may have been distorted and inefficient, but they included vast and potentially lucrative assets: energy, minerals, arms, real property, communications media, transportation networks and much else. Moreover, in post-Soviet societies the only people who knew how to manage a laboratory, a farm or a factory—who had experience of international trade or of running a large institution—and who knew how to get things done were the Party’s own people: the intelligentsia, the bureaucracy and the
These were the people who would be in charge of their countries after 1989 no less than before—at least until a new, post-Communist generation could emerge. But they would now be operating under a new guise: instead of working for the Party they would be in various political parties competing for power; and instead of being employed by the state they would be independent operators in a competitive market for skills, goods and capital. When the state sold its interest in everything from drilling rights to apartment blocks, these were the men (and they were mostly men, Ukraine’s future prime minister Yulia Timoshenko being a notable exception) who would do the selling—and the buying.
Capitalism, in the gospel that spread across post-Communist Europe, is about markets. And markets mean privatization. The fire-sale of publicly owned commodities in post-1989 eastern Europe had no historical precedent. The cult of privatization in western Europe that had gathered pace from the late Seventies (see Chapter 16) offered a template for the helter-skelter retreat from state ownership in the East; but otherwise they had very little in common. Capitalism, as it had emerged in the Atlantic world and Western Europe over the course of four centuries, was accompanied by laws, institutions, regulations and practices upon which it was critically dependent for its operation and its legitimacy. In many post-Communist countries such laws and institutions were quite unknown—and dangerously underestimated by neophyte free- marketers there.
The result was privatization as kleptocracy. At its most shameless, in Russia under the rule of Boris Yeltsin and his friends, the post-transition economy passed into the hands of a small number of men who became quite extraordinarily rich—by the year 2004 thirty-six Russian billionaires (‘oligarchs’) had corralled an estimated $110 billion, one quarter of the country’s entire domestic product. The distinction between privatization, graft and simple theft all but disappeared: there was so much—oil, gas, minerals, precious metals, pipelines—to steal and no-one and nothing to prevent its theft. Public assets and institutions were pulled apart and re-allocated to one another by officials extracting and securing quite literally anything that moved or could be legally re-assigned to private parties.
Russia was the worst case, but Ukraine came a close second. Kuchma and other politicians were elected with huge cash backing from ‘businessmen’ in the form of down payments on future income: in post-Soviet Ukraine, as these people well understood, power led to money, not the other way around. Public goods, state loans or subsidies passed directly from the hands of government to the pockets of a few clans, much of it then transiting on to private accounts overseas. The new ‘capitalists’ in these countries did not actually make anything; they merely laundered public assets for private benefit.
Nepotism flourished, much as it had under Communism but for far greater private gain: when Ukraine’s Kryvorizhstal, one of the largest steel plants in the world—with 42,000 employees and an annual pre-tax profit of $300 million (in a country whose average income was $95 a month)—was belatedly put up for sale in June 2004, no-one in Kiev was surprised to learn that the successful ‘bidder’ was Viktor Pinchuk, one of the country’s wealthiest businessmen and the son-in-law of the Ukrainian President.
In Romania and Serbia, state assets suffered a similar fate or else were not sold off at all, local political chieftains riding out the initial talk of privatization and preferring to maintain their power and influence the old way. Like Albanians at about the same time, Romanians seeking instant market gratification were offered pyramid schemes instead, promising huge short-term gains without risk. At its peak one such operation, the ‘Caritas’ scam, which ran from April 1992 to August 1994, had perhaps four million participants—nearly one in five of the Romanian population.
Like ‘legitimate’ privatization, these pyramid schemes (they were common in Russia, too) mostly functioned to channel private cash into mafias based in old Party networks and the former security services. Meanwhile, fourteen years after the fall of Ceausescu, 66 percent of Romanian industry was still in state ownership, although some of the more profitable and attractive enterprises had changed hands. Foreign investors remained for many years understandably wary of risking their capital in such countries: the prospect of substantial returns had to be offset against the chronic absence of legal protections.
Elsewhere in Central Europe the balance of risk favoured foreign investors, if only because the prospect of EU membership was accelerating the necessary institutional reform and legislation. Even so, much of the initial privatization in Hungary or Poland consisted either of the transformation of Communist-era black market activities into legitimate business; or else a quick sale of the more obviously viable bits of state enterprises to local entrepreneurs backed by foreign cash. Three years after the revolution only 16 percent of Poland’s state-owned businesses had been sold into private hands. In the Czech Republic an ingenious voucher scheme, offering people the chance to purchase stock in state enterprises, was supposed to transform the citizenry into a nation of capitalists: but its main effect over the next few years was to lay the groundwork for future scandals and a political backlash against rampant ‘profiteering’.
One reason for the distortions attendant upon privatization in post-Communist Europe was the virtual absence of Western engagement. To be sure, Moscow or Warsaw was initially awash in young American economists offering to teach their hosts how to build capitalism, and German firms in particular showed an early interest in relatively upscale Communist companies like the Czech car manufacturer Skoda.[349] But there was virtually no engagement by foreign governments, no Marshall Plan or
