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
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
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
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
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
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.
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