V. Economy and Justice

Communists aim for the realisation of an Umma, i.e. a “community based on the shared faith and the implementation of its law” (Ernest Gellner). Unlike Islam and the other Abrahamic religions, the communist faith is based on a secular scripture. The works of Karl Marx and other Marxist “classics” (Lenin among them) are to bring man not closer to God but to a just society.

The writings of Marxism-Leninism contain several dogmas, which are all based on the rejection of the market. Those who consider the voluntary exchange of goods as the cause of all injustice theoretically advocate for the utopia of communism, which is free of exploitation and therefore just; in reality, however, they advocate for a society in which the management of scarcity replaces economic activity.

Nonetheless the historical success or failure of the communist states can and should be disputed. If one asks about the implementation of the socialist idea under Soviet socialism, this success must be considered immense, especially in the economic field. The communists indeed replaced the market with a new economic order which, according to the teachings of Karl Marx and Friedrich Engels, did not know private ownership over the means of production.

Since 1989, reversing this “fatal success” has meant no less than the destruction of the structure of the socialist economies. Although what must be kept in mind, of course, is that for the economic basis of the transformation countries to survive the system change, the destruction could not happen in one fell swoop. The general public in the countries concerned grasped this fact more accurately than the majority of Western analysts because people in the post-communist countries had themselves experienced the dark absurdity of the socialist project: Socialism would represent the “longest and most difficult path

from capitalism to capitalism.” The forthcoming transformation would resemble “the transformation of a fish soup into an aquarium.” The “transformation of the aquarium into a soup pot” that preceded it an eternity ago would have been easier. The economic system change could be compared to the conversion of road traffic from left to right while traffic is moving.

Those who could not come up with better metaphors conjured up “normality” or “life in a normal country,” which they opposed to the “anomie” of communist everyday life. After decades of socialism, the economic transformation therefore proceeded under the slogan “no experiments.” It was a matter of imitation of the Western economic model that was associated with modernity and prosperity, which were considered the foundations of a just society. The hope that the “return to normality” would be painless or at least short, arose from the conviction that under the surface of socialism the pre-totalitarian capacities of society had survived.

The uncertainties at the beginning of the system change were reinforced by the fact that hardly anyone was able to give an accurate assessment of the condition of totalitarian economies. Although, for example, the GDR economy had been researched by economic institutes of the Federal Republic for decades, the absurd assumption that it was one of the best in the “Eastern Bloc” was widespread among German experts. This ignorance, caused by national self-complacency, later contributed to wrong decisions in the process of German reunification.

Similarly unjustified were the judgments made in the West about the other post-totalitarian economies, because the macroeconomic indicators and other data provided by the socialist institutes had hidden the real conditions for decades. The centrally planned economy had known neither economic accounting nor normal money, nor autonomy from politics. Only the confrontation with the market brought serious conclusions about the actual strength of the centrally planned economy. The result was devastating: in the post-communist countries, virtually no internationally competitive consumer goods were produced, their industrial parks were archaic, and their infrastructure was in a deplorable state. In order to get rid of this legacy, huge efforts were needed.

Transforming the socialist economy into a market economy meant liberalising, stabilising, and privatising it.

liberalising, stabilising, and privatising

Liberalisation included allowing free economic activity, releasing prices that had previously been set by the state, and opening national borders for the import and export of goods, services, and capital. However, liberalisation was not allowed to enable free wage-setting in state-owned enterprises, as even economically justifiable rapid wage increases in a few profitable enterprises would have undermined the fight against the inflation that had been an inevitable consequence of the price of liberalisation. In other words: in the initial phase of the transformation, the simultaneous liberalisation and stabilisation of the post-totalitarian economy was only possible at the expense of the employees. Stabilisation was also served by the reduction in government spending, which had both negative social and political effects, because, for the economically weak – and in a society without private ownership, they represented the overwhelming majority – it was difficult to cope with a strict financial policy.

Under these conditions, the aforementioned hope for early normality in the market economy became the important political capital of the transformation. The stronger the “legitimacy advance” of the market economy (the “legitimacy in anticipation”), the more consistently the painful reforms could be carried out, and the more prolonged the time frame became in the first period of the economic transformation.

In this time window of reform, the invisible hand of the market acted far from any notion of justice, sometimes slowly, sometimes quickly, but always ruthlessly consistent: those who had nothing to offer received nothing. It was at least a two-year period of extreme price increases, sharply falling real wages, mass unemployment, numerous insolvencies and a dramatic fall in gross domestic product. Broad levels of the population, such as the employees of state farms, lost their jobs permanently, which is why entire regions began to depend on lousy support provided by the state. In these regions, the homo sovieticushad no chance at all to transform into a citizen.

Admittedly, the market economy also brought normal money and consumer goods for the first time in decades. Meanwhile, however, the store shelves that filled up at breath-taking speed did not create the desired prosperity, but rather the appalling realisation that in a poor country, poor people had been released into freedom.

Before a modern market economy could have been established, the legitimacy advance for a new system had disappeared. This closed the first and opened the second window of the transformation: that of market balance. However, even this success, which in historical terms was tremendous, did not create a spirit of optimism. Most people simply had no reason to be satisfied, even though inflation was under control, the increase in unemployment as well as the decline of the gross domestic product were halted, and the economy began to grow. In spite of the dissatisfaction of the people, however, the new, fragile balance stabilised at a low level; there was no question of prosperity.

Meanwhile, society, at a breathtaking pace, split up into economic winners and losers of the system change. The middle class, which forms the social basis of civil society and democracy, only emerged in the medium and long term. In contrast, the class of the nouveau riche, who were often mentally overwhelmed by the moral imperative of leading a modest or at least inconspicuous lifestyle, consisted of those who profited most quickly from the gradual solution of the third task of the economic system change – privatisation.

The privatisation had two dimensions. The so-called small one was mainly concerned with small businesses in the service sector and could be completed within a few months or years as there were relatively many people who could buy a small shop or company from the state. This is where the bases of the future middle class took shape.

The so-called large privatisation, in contrast, concerned on the one hand a few “prime cuts” of the socialist economy, which were usually distributed among the new entrepreneurs who were once part of the communist state apparatus. On the other hand, the heavy industry, which the communist state had been most proud of, was to be privatised. After about a decade, this privatisation of technologically backward companies, plagued by hidden unemployment and the inability to compete on the international market, resulted in a share of state ownership typical of modern market economies.

The great hopes that were associated with the so-called popular privatisation remained unfulfilled. The state did indeed sell off the shares of its companies. The experiment of “just privatisation,” however, benefited only those who, thanks to their

large privatisation

networks within the state apparatus, were able to raise the capital with which they could purchase shares cheaply.

In the 1990s, it was still often assumed that the spectacular de-industrialisation of Eastern Germany was unique and had been caused by the sudden West German competition and by the conversion from the GDR currency to the DM at a one-to-one ratio, which could not be justified economically. In the meantime, however, it has become evident that other post-socialist economies, which had low labour costs, rarely managed to maintain their industries in the market economy, too. In principle, this only succeeded when large foreign corporations took over the ailing companies and invested in them.

However, foreign investment prevented the development of domestic companies, which, after decades, proved to be problematic. Indeed, the economies of Central, Northeast, and Southeast Europe have partly developed into the extended work bench of large foreign groups and companies. Despite their now often flourishing economies, they may fall into the trap of moderate development once their previous growth promoters – low labour costs and EU subsidies – have been exhausted.

The economic reform measures initially caused the gross domestic product to decrease by at least 20 per cent; in some post-Soviet states, where the transformation of the economic system had not been carried out consistently, this slump reached even more than half of their previous economic output.

It was clear from the very start that for people who lost their jobs and had no prospect of new employment as a result of privatisation, the successful recovery of their company was no consolation. Nor could they be impressed by the argument that without privatisation it would not only have been them but all employees to lose their jobs. The revolutionary aim to move from a centrally-planned to a market economy was hence associated with extremely high social costs and major political risks. The politicians who faced this task had to expect that economic reforms would cost them votes. The question of how to approach these reforms was therefore of great political relevance and was answered in two ways.

The first answer was provided by the so-called gradualists, according to whom the necessary economic reform measures were to be taken in small steps, always taking care that the weak

society would not be burdened with the costs of the reforms. In contrast, the supporters of the so-called shock therapy – sometimes referred to as “big bang” or “jump into the market economy” – advocated a more aggressive and determined approach. These experts recommended that price liberalisation, the opening of borders to foreign trade, and currency convertibility, coupled with painful stabilisation measures, be carried out in one fell swoop. The supporters of “shock therapy” argued with the logic of the political mood, according to which the legitimacy in anticipation at the beginning of the transformation should have been used politically.

Those countries that chose “shock therapy” seemed to have proved to be the winners of the economic transformation. Even if the governments of those countries, such as that of Václav Klaus in the Czech Republic in 1992-97, had initially succeeded in keeping the social costs of the reforms low, the pain of transformation ultimately caught up with them too. As a result, the societies whose political leaders took the “gradual” path were also confronted with the negative social consequences of transformation. The bulk of the painful reforms then came at a time when legitimacy in advance disappeared, thus paralysing the government’s willingness to reform.

The frequently voiced criticism of the “big bang” strategy – the argument that it provoked social protests that in turn threatened to destroy political stability – also fell short. Of all countries, it was in some of those which had already explicitly spoken out against “shock therapy” at the beginning of the 1990s, that social protests took on the most dangerous dimensions and forms. In this context, one should remember the strikes in Ukraine in 1993 or the miners’ marches to Bucharest at the end of the 1990s, which brought Romania to the brink of political chaos.

Yet in the end, it was neither the choice of “shock therapy” nor of gradualist strategy that decided the economic success of the post-communist system transformation. Rather, it depended on the consistency and skill of those in power to maintain the market-economy transformation even when resistance to these reforms grew among the population. The decisive factor was the determination of the politicians. The chosen reform strategy was right if it was adapted to the conditions of the respective country. Notably, the post-Soviet states often did not have a legitimacy in

shock therapy

functioning market economy advance for the new system that would have provided the governments with the opportunity to widely open the reform period.

The establishment of a modern market economy takes decades, almost as long as the planned economy itself has existed. Even the development in the lucky new German “Länder” shows that this assessment is not too pessimistic; even there, despite outside support that unique to economic history, it has not been possible, after three decades, to raise its economic performance to the level of West Germany.

Nonetheless, a clear distinction can be drawn between the success and failure of economic transformation. There are two criteria for this. In the first years of the transformation, a country could be considered economically successful if it managed to establish a functioning market economy. In this sense, there is unanimous agreement that the Central and North-Eastern European states are successful, unlike most of the South-Eastern and Eastern Europe states. The criterion of prosperity again is important for fundamental success. Prosperity should increase so that no mass emigration is necessary for economic reasons. This level of prosperity has not been achieved anywhere, not even in the new German “Länder.” The criterion of rapid growth (where Poland scores best: growth in this country averaged four percent per year after communism) is important and meaningful, but it does not meet society’s justified demands on transformation.

It was at least the time window of prosperity that was slowly opening in the young post-communist democracies. This third period of economic transformation began around the same time as the accession to the European Union became possible. The basis for this was provided by the constant high growth rates and the subsidies from the EU budget, which were quite modest, at least in comparison with the new German “Länder.” The high unemployment rate reduced massively, unfortunately also because of the migration of millions of workers to the rich EU countries; a process which has increased rapidly since 2004. Due to the Union’s regional funding, the public infrastructure improved continuously and rapidly.

As some post-communist countries – the Czech Republic, Poland, Hungary, Estonia – got closer to the level of prosperity of the poorest old EU members at the end of the second decade of the new century, it became clear that the transformation would take

an almost endless amount of time. Their fourth time window – that of justice – was opened. In Poland, the government of the Law and Justice (PiS), elected in 2015, declared unequivocally that it wants to finally put an end to “post-communism”– understood as a system in which structures still deriving from communism prevail. Due to the biologically determined “departure” of the generations socialised under communism and the widespread experience with the western EU countries, self-criticism of the state is on the rise. The deficits of the judiciary and the health care system are of great importance for citizens and the political parties promise reforms.

The road to justice has proved to be of varying lengths, which should not be surprising considering the different economic starting situations of the post-communist countries. In particular, a distinction between the former people’s republics and the former republics of the Soviet Union must be made. The economies of the latter were dependent on cooperation with the other Soviet republics to a far greater extent than was the case with the colonies of Soviet Union. For the Soviet republics, the collapse of the communist system came along with the end of their pseudo-federal state, hence they had to redefine their new economic space in the course of the transformation.

Belarus is one of the exemplary countries that failed in this task at the beginning of the 1990s. This country, which was one of the most economically developed Soviet republics of the Soviet Union, has suffered from sales difficulties after the dissolution of the USSR due to the opening of the borders of the former Soviet republics to foreign goods. However paradoxical it may sound, the most effective “domestic exporter” of the Soviet Union got into the greatest economic difficulty precisely because it had been able to produce desired goods under the old system.

Compared to the post-Soviet states, the former “people’s democracies” have much smaller problems to overcome. They “merely” have to completely restructure their economies. What made it easier for the Central European economies was that they had been more oriented towards trade with the West than the Soviet republics. Their geographical locations also puts them in a better position because it is easier to integrate the Polish, Eastern German, or Hungarian economies into the Western markets than the Ukrainian or Kazakh ones.

Another difference between the post-totalitarian economies at the beginning of the transformation was that some were

bankrupt while others showed a balanced macroeconomic

development. The economies of the GDR, the People’s Republic of Poland, and Hungary were bankrupt, and by 1989 had long been unable to service their foreign debts. In contrast, Czechoslovakia was, from a macroeconomic point of view, in fairly good condition: its inflation rate was low and foreign debt was almost non-existent. Furthermore, the post-Soviet republics were by no means considered bankrupt at the beginning of their existence.

In addition to the Czech Republic, Slovakia, and Slovenia, as well as the three former Soviet republics of Lithuania, Latvia, and Estonia, of all countries, those that went de facto bankrupt under communism became new EU members on 1 May 2004, certainly in some recognition of their good economic performance. These examples show that ultimately, the quality of economic policy is more decisive for the success of the economic system change than the macroeconomic starting position of the respective country. It is obvious that this success is almost exclusively evident in those countries that belong to the Western cultural world. The countries of Central and North-Eastern Europe seem to have the ability to correct the mistakes made during the transformation. They adapt their economic policies to the demands of everyday life without losing sight of the strategic goal, which is to build amodern economy. By contrast, most Eastern European countries, where governments tend to repeat the mistakes of their predecessors, are less capable of such a balancing act. Thus, it seems that economic success, in addition to good economic policy, also has a cultural background. The fact that the quality of economic policy in the same cultural area can vary does not change this perception.

Perhaps the clearest manifestation of this situation is the economic development of the new German “Länder.” In 1990, they seemed to have found the best conditions for a successful economic transformation in reunified Germany. In 2020, however, their economic situation can be assessed only as “fair to middling.”

In the GDR, the Kremlin at times massively supported the so-called reformers in the Communist Party. The conspirators around Egon Krenz and the head of the state security service Erich Mielke secured Gorbachev’s approval before they overthrew

Erich Honecker from the position of the leader of the Socialist Unity Party of Germany (SED) in October 1989. From then on, the GDR had to go down the road of reforms doomed to fail in the manner of perestroika.

The renewed leadership of the GDR must have considered that such a development of the “community of socialist states” might have meant the loss of its right to exist. This resulted in the necessity of a cautious policy, especially in the field of the national question. Only a few weeks after Honecker’s deposition, however, the necessary caution was thwarted by an accidental event: on 9 November 1989, the Berlin Wall fell. In the GDR, the national question became acute.

All historical experience with the previous systemic crises indicated that window of opportunity for the German colony of the Soviet Union would not last long. The fall of Gorbachev was considered very likely. Everywhere in the peripheries of the communist empire, where the sense of national interest was strongly developed, democratically legitimate governments were formed in a rush to initiate the system change. In this context, the GDR was a special case, because the system changes and the national sovereignty diverged. A minority of the resolute supporters of German unification feared that the reform process might push reunification into the distant future. They asked why the GDR should be transformed into a better state, when that part of the German people that had been neglected after the Second World War, had democracy, the so-called “social market economy” and prosperity waiting for them west of the Elbe River? They argued that the window of opportunity in foreign policy, which would perhaps soon be closed again, should not be used for the transformation but for the reunification of Germany.

Only after the fall of the Wall did this minority gradually become a majority. While the government of Hans Modrow asked the Federal Republic for credits his state needed to survive, the Round Table prepared reform proposals, and the first institutions of the now truly democratic GDR were established, more and more politically active Eastern Germans demanded reunification under the leadership of Chancellor Helmut Kohl. Even his proposal at the end of November 1989 to complete German unity after the accession of the democratised Eastern Bloc states to

the Berlin Wall fell

dissolution of the GDR the European Community was overtaken by pressure from the streets.Instead of fundamentally reforming the GDR, the government of prime minister Lothar de Maizière agreed with the government of Chancellor Kohl on the conditions of reunification.

Only a small minority of Western Germans were resolutely opposed to reunification. In a television discussion, Rudolf Augstein, the editor-in-chief of the news magazine “Der Spiegel,” admonished their representative – writer Grass – with the words: “Günter, that train has left the station.”

The dissolution of the GDR on 3 October 1990 opened up the reform window throughout Germany, during which the status of the new “Länder” in the Federal Republic was permanently determined. In contrast to the other peoples, the historically moving naivety of the East Germans was not revealed in their belief in the rapid emergence of “normality” and prosperity, but rather in the hope that they would master the system change in a united Germany. This hope proved to be historically moving insofar as it had made German unity possible. After 3 October, however, the Eastern Germans had no opportunity to exert any decisive influence on the organisation of their “Länder,” let alone the federal government. When the weak and the strong “merge,” the latter determines the horizon of the necessary decisions. The fact that the two may belong together in one way or another does not change this.

The legal system of the Federal Republic of Germany was adopted, and the massive import of elites from the old German “Länder” was set in motion. This stabilised the unified country, which is why only the economic transformation still held real uncertainties.

In the new German “Länder,” the transformation brought an exorbitant increase of unemployed people and countless insolvencies, but due to the adoption of the stable DM, this development was not accompanied by any remarkable inflation. In the first years the Eastern German economy shrank by more than a third, industrial production by two thirds, and three-quarters of industrial jobs disappeared.

The social hardships were mitigated by the welfare state, huge transfer payments, and the migration of about 800,000 people to West Germany (only within the first two years after reunification). As a result of the currency conversion the time

of prosperity began. The Eastern Germans could afford Western clothing and household equipment and, in this respect, resembled the citizens of the old Federal Republic. At times, it seemed as if they had themselves hit the jackpot by renouncing a transformation. Despite migration, unemployment, and de-industrialisation, a spirit of optimism spread, which gave the impression that the currency change, which was disastrous from an economic point of view but seemed politically necessary, would not cloud the views of the “flourishing landscapes” announced by Helmut Kohl. The “social market economy,” conjured for decades in the old German “Länder,” also seemed to hold the right answer in the German East to the central question of modern societies in the West: that of justice.

As a reminder, at about the same time, the window of market balance opened up in the other countries, which often meant for those concerned the petrification of their social decline and the farewell to the hopes for rapid prosperity and growth. However, people in the New German “Länder” soon realised that their situation would not improve in the foreseeable future. As a result, a second wave of young, well-educated and mostly female workers, who saw no prospects at home and did not want to be a burden on the welfare state (this is a key indicator of citizenship), moved to Western Germany. All in all, more people left the New German “Länder” than left the GDR before the construction of the wall in 1961.

Altogether, the special path of the new German “Länder” meant that the windows of reform, of balance, and of prosperity were opened simultaneously in 1990. From today’s perspective, “simultaneous” means “economically unfounded.” The first window was closed in the mid-1990s, which can be regarded as “premature.” In doing so, the question of justice was reduced to the equalisation of wage and pension levels in both parts of Germany as well as to the immense transfers of money to the East. The pecuniary understanding of justice, which is widespread in the “old German Länder,” does not necessarily apply to other countries.

However, the German economic transformation did not consider the fact that no country has ever simply become the “extension” of another one, nor did it reveal a realistic perspective for when the transfers should end.To this day, Germany’s inner unity has not been achieved, despite the fact that the country

had an almost infinite amount of time and resources for a careful, rational transformation.

Recommended literature

Sachs, Jeffrey, Poland’s Jump to the Market Economy, Cambridge (MA)/ London 1993.

Balcerowicz, Leszek, Socialism, Capitalism, Transformation, Central European University Press, 1995.