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Point out the dire economic state of Eastern Europe today, and Western economists will assure you that these societies are simply experiencing 'teething problems' on the path to development.
John Gibson believes that the problems go far deeper than that, to the root of the market system itself

Lots of pain, but no gain

Western economic pundits are suggesting that 1993 could be the year in which Eastern Europe and the former Soviet Union will begin the steady march to economic growth. After four years in which aggregate production has fallen by around a third across the region, they believe that the proverbial green shoots are beginning to poke their way through the rubble. Poland is set to record a growth in output this year, with Hungary and the Czech Republic not far behind. Even in Russia, we are told, things are looking up. With Yegor Gaidar, the International Monetary Fund's favourite Russian, back in tandem with Boris Yeltsin in the Kremlin, more Western aid is promised and a medium-term recovery is forecast.

A recent IMF report put this scenario for growth in a global context favourable for economic recovery. The collapse of communism and the opening up of large areas of the world to the market, combined with a period of peace and technological innovation, will lay the basis for a period of sustained economic growth. Peter Norman, economics editor of the Financial Times, summarised the report: 'Powerful and predominantly positive forces at work in the global economy suggest that the present time is a period of dynamic change rather than a weary recovery from recession.' (24 September 1993)

In this scenario, the economic travails of the East are the pains of transition. The more rapid the collapse in the East, the argument goes, the better for the people in the long run. The message is: no pain, no gain. The American Express Bank Review echoes this view: 'Poland, the first to introduce radical reform and first to suffer a severe recession, is also leading the recovery.' Commenting on the political and economic crisis in the Ukraine, the Economist lectured: 'The predicament of Ukraine points up the bankruptcy of economic gradualism in revolutionary times.' (11 September 1993)

The IMF and others are right to consider developments in Eastern Europe and the former Soviet Union in the context of the world economy. But a more realistic assessment of the nature and condition of world capitalism suggests that the stagnation of the early 1990s represents the real shape of things to come in the East.

Why can't capitalism develop Eastern Europe? Capitalism is an economic system based on production for exchange with the sole purpose of maximising profit. It has an inherent tendency to create new markets and to try to raise the efficiency of production. These things occur, however, in an unplanned and anarchic fashion, which means there is a disintegrative and destructive side to them. In the conditions of Eastern Europe today, the disintegrative side is dominant.

The key to understanding this situation lies in the relationship between the combined and uneven development of world capitalism. Add to this the impact of the current slump, and the future of the old Eastern bloc under capitalism looks very grim indeed.

Capitalism has created a combined world economy and world competition. This means that the rules of the game are laid down by the most productive economies - those which can produce goods in the shortest time, such as Japan, Germany and America. Every other country has to try to match this productivity, otherwise their goods can't compete. This means that combination does not take place on a harmonious or cooperative basis, but is established through competition. The result is a division of the world between winners and losers at a national and international level.

The countries of the old Stalinist world experienced this with a shock when they opened up to trade with the West in 1989. Unable to compete, the old methods of production and established trading arrangements were disrupted, resulting in a rapid drop in output. Measured in physical terms, Russian output has fallen by a third since 1989. The east German economy, the strongest in the old Eastern bloc, collapsed by a similar amount after economic union with its powerful Western neighbour in 1990. From a capitalist point of view, much of the old stock was redundant, unless it could be rationalised and restructured. But this could only happen with a large injection of Western capital. At one fell swoop, the countries of the old Eastern bloc were turned into dependent economic colonies.

The argument of Western market economists is that, following foreign investment, in time vigorous market economies will flourish in Eastern Europe. Ultimately, they say, societies similar to those in the West should emerge. This not only ignores the nature of combination under capitalism, it also ignores the fact that the development of global capitalism is uneven as well as combined.

Capital is not spread evenly around the world. It flows where it can make the highest returns. The old Stalinist world is attractive because of its low wages. But, on the other hand, infrastructure is a mess, and in any case there are plenty of places in the world with low wages. So, for example, German car manufacturers often prefer to invest in southern Europe rather than eastern Germany because the infrastructure is better, even if the wages aren't as low.

The predicted large injection of Western capital into the East has failed to materialise. The cumulative total of foreign direct investment in Eastern Europe between 1989 and 1992 is $11.4 billion. A further $5-6 billion is expected this year. Compare this with the $126 billion invested worldwide last year and it becomes clear that there is no investment bonanza taking place.

The experience of the third world gives the East little cause for hope. The areas of the third world which have developed most since 1945 are those that have been the sites of trade and investment for the advanced capitalist countries - Latin America and East Asia in particular. Of the $40 billion invested last year in developing countries (the third world), for example, $37 billion went to these two areas alone. As the experience of Africa shows, there is nothing inevitable about economic development.

The problems caused by uneven capitalist development are reinforced by the nature of the world economy in the twentieth century. Unevenness has been compounded by the sluggish character of capitalism, of which the slump today is an extreme expression. The stagnation of the Western economies, and the measures taken to offset this, have a major influence on how the Western club manages the world economy. From the flow of loans and capital to the management of trade and interest rates, the countries of the old Eastern bloc, along with the third world, are at the losing end of an international system dominated by the needs of the advanced capitalist powers.

No capital shortage

The breakdown in production caused by the slump is having a bad enough impact in the West - in the advanced capitalist countries unemployment is projected to reach 36m next year. In the East, where the talk is of unemployment of 30 per cent in the years to come, there is already widespread malnutrition.

As has been argued previously in Living Marxism, the problem in the world economy today is not a capital shortage. After all, there has just been an investment boom in the stock markets. The problem is rather that the average return on capital investment is typically low. This is what ensures a grim future for Eastern Europe.

In those industries where a high return is assured, large investments will occur. For example, in the oil and gas industries of the former Soviet Union large Western investments are either contracted or completed. Reputedly $42 billion was invested or promised in the past 18 months (Financial Times, 29 September 1993). However, the sluggishness of economic development rules out any possibility of an all-rounded development of capitalism in the old Eastern bloc. Instead, a fragile capitalism is developing, prone to collapse and dependent on state support.

The ever-optimistic IMF is predicting growth in Poland, Slovenia, Hungary and Albania this year, and growth in all the countries of Eastern Europe by 1994. Even were this true, it wouldn't be saying much given the scale of the collapse that has occurred. But in fact it is unlikely to happen. All three of the 'market leaders' in Eastern Europe, Poland, Hungary, and the Czech Republic, have been hit hard by developments in the West.

Just as the IMF was predicting economic growth in Hungary, the Hungarian finance minister announced that, contrary to earlier forecasts, GDP would fall by between two and three per cent this year. Exports in the first half of the year fell 27 per cent on the previous year, and the budget was $2 billion in the red, in part due to a large subsidy to agriculture needed to keep production at existing levels. And just as the Austrian GiroCredit Bank was hailing the Czech Republic as a possible 'new tiger' (after Taiwan and other Asian success stories), Volkswagen announced a big cut in its investment in Skoda, causing shock waves in Czech society, where the joint venture was seen as a model for others.

The IMF and free market enthusiasts in the East, such as the Czech Republic's Vaclav Klaus, think these are teething difficulties. They call the post-Stalinist countries 'societies in transition'. Transition to what? Transition to something like Western capitalism, they say. They highlight the creation of private property rights, the privatisation of large sections of industry, and the liberalisation of prices. Such changes, they believe, will lay the basis for a steady capitalist development.

This will not happen. The discussion presupposes that the old Stalinist societies are moving towards some model of capitalism. The best case scenario presented is something like the Newly Industrialised Countries (NICs) of East Asia. But the old patterns of capitalism will not repeat themselves. In particular, a rerun of the NICs is ruled out because the context is entirely different. They are predominantly small economies. Their development began in the postwar economic boom, and was consolidated with the help of significant Japanese investment at the early stages of the world recession in the seventies. Crucially, their strategic importance to the USA in the Cold War boosted their economies and provided a political framework for controlling the working classes.


In reality, a very different transition has already occurred in the East. What we see in Eastern Europe now is the future. There will be changes, of course, but the pattern of largely stagnant economies, dominated by the market yet still reliant on the old state sector, is the future of capitalism in the region.

Free marketeers blame hangovers from the old system for the current stagnation of Eastern Europe. But the barrier to development is the absence of any dynamic within capitalism. Indeed, the lack of a dynamic within the capitalist economy means that it has to rely on non-market mechanisms to survive. In 1989, we were told that the free market would sweep away the state sector. Nothing of the sort has happened. Across the old Eastern bloc, capitalism exists in a parasitic relationship with the state sector, which still includes most major industries. Whatever forms of ownership prevail, large state subsidies to industry are still the rule.

An illustration of the centrality of the state is the method by which most privatisations of large state enterprises have occurred: sales to management and workers. In Russia, this has been the predominant method. On average, in a given privatised enterprise, 70 per cent of the shares are owned by managers and workers. Once nominally privatised, however, little has changed. If the plant is in debt, or losing money, the only options are closure or further state subsidies. The Russian government is continuing to subsidise, stoking up massive inflation. Unless the government closes large swathes of industry, it will have to carry on as it is doing now.

A similar process is evident in Poland. The recent collapse of the pro-market government in Poland focused attention on popular alienation. Less commented upon was the fact that the economic policies of the government had been abandoned before the September elections. A mass privatisation programme was scrapped when it became clear that this would mean closing most industries.

The illusory side of 'shock therapy' in Poland was exposed recently by Peter Murrell in Post-Soviet Affairs (Vol9 No2, April-June 1993). While prices were freed and trade was liberalised, state subsidies were not abandoned. Murrell revealed that policies of state support for industry were reimposed almost as soon as the experiment in shock therapy began in 1990. By the summer of 1991, the IMF had suspended its endorsement of the Polish government's policy.

None of this means that market principles don't dominate the economies of the East. They do. The old system of bureaucratic planning has gone and production for exchange is the modus operandi of the economy, the state sector included. The working class can testify to this. The opening up of their economies to the laws of the market has put food on the shelves, but at prices they cannot afford on their uncompetitive wages.

Going backwards

The market rules the societies of the East, but their continued reliance on the state illustrates the lack of dynamic within capitalism. So catastrophic has been the change that the former Soviet republics are moving to re-establish their old trading arrangements. Almost all of the 15 republics have put their names to a new economic union. Similarly, Slovenia is desperately trying to re-establish economic links with the old Yugoslav market after its failure to compete in the EC.

The lack of dynamic within capitalism is creating a situation where society survives by living off its resources in a very destructive fashion. For example, Western companies are making a killing in the oil and gas industries of the former Soviet republics (see page 31). Nevertheless, the energy sector is collapsing. In oil, output is now at least 50 per cent below the 1980s peak, and Russia may be importing by 1995. This is not because the wells are running dry, but because investment is at a trickle. The wear and tear of the basic assets of the oil refining industry is currently estimated to be running at 80 per cent. This pattern is repeated across Russian industry. Last year, investment fell by 44 per cent. Overall, investment has fallen twice as much as production since 1989. And production has fallen by at least a third since then.

The countries of the old Eastern bloc will remain stagnant and decaying at the periphery of the world economy. Capitalist development is occurring, and will continue to do so, but in an uneven and fragile fashion: pockets of wealth will develop alongside pools of poverty; localised booms might occur, only to be followed by rapid collapse. As a consequence, the post-Stalinist societies will have to survive by living off the past: their accumulated capital stock; cheap labour; and, if they have any, raw materials for trade. The current sufferings of the people are not the pains of transition, they are just pains.

In Yerevan, Armenia, tree-lined avenues are plundered for firewood
Reproduced from Living Marxism issue 61, November 1993

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