The transition from communism to capitalism following the revolutions of 1989 were unprecedented. Generally speaking, post-Communist states suffered a transformation crisis in moving from state socialism and a planned economy to a free and global market, resulting in hyperinflation, unemployment, and lower standards of living. Why was this? Judt, in his seminal Postwar: A History of Europe since 1945, sees the post-Communist states as embracing the new neoliberal ends and means, but experiencing problems in the execution of said means—bluntly, the disposition of resources was hijacked by formerly Communist elites who exploited privatization for personal gain.
Judt’s diagnoses can be traced to an underlining structural problem that has its roots in the Communist state. Ultimately, the post-Communist market transformation failed because it was still in the shadow of the Soviet structures. Politically, the elite remained in power, and were even more unchecked in their crime and corruption. Economically, the post-Communist states only changed on a superficial level, while keeping in essence the same inefficient and top-down structure as before. What was needed was a break—whether from foreign aid and investments or domestic political actions did not matter—but such a break did not occur. Instead, the corruption of the Soviet was passed on to its successors states. Russia will be used as the primary example here to examine the structural progression (or lack thereof) of Eastern Europe and its relationship with the political economy.
The post-Communist government can be seen as a continuation of the Communist structure; though the Party was gone, Party members (i.e. the intelligentsia, bureaucracy and nomenklatura) were the only ones who had the necessary managerial experience and knowledge, and hence survived to lead the post-Communist state. The same structural nepotism and corruption that characterized the Communist governments could flourish again, but for greater stakes now.
A clear parallel can thus be seen between the Communist and post-Communist state in their failure to structurally adjust in the face of economic crises. Here, the unwillingness of the Communists to tackle the root can be seen–the “reforms” emphasizing consumerism in the 1970s were simply an attempt to placate the masses and avoid true structural reform. The problem for Yeltsin was that he inherited a structurally corrupted Russia, in near social and economic chaos.
From the dismissive term of a “market-economic romance” from Russian Premier Chernomyrdin in 1994, one can infer the universality of the neoliberal goals of liberalization, privatization, and access to the EU in post-Communist Europe. The post-Communist governments had two main options to achieve their goal: the “big bang” or “shock therapy” approach, a radical and rapid transformation to a free and capitalism economy, versus the “gradualism” approach, where inefficient sectors were dismantled and social benefits were prolonged.
By and large, shock therapy was the preferred approach. Gradualism, perhaps the more stable policy, was rejected by international financial institutions and Western governments, formalized under the Washington Consensus policy package. These post-Communist states were suddenly forced back into the world market for the first time since WWI, and without modern political, economic and managerial structures, obviously could not compete with industrialized nations either in foreign or domestic markets. Crucially, this foreign intervention did not mean aid or investments. Indeed, a $27 billion pledge from 24 countries to assist economic stabilization and restructuring was simply never paid. This led to a transformation crisis, where entire industries collapses, industrial output and living standard declined, while unemployment, poverty and inflation soared. The former Soviet Bloc would need 20 years to reach its 1989 income level.
Of course, the post-Communist economic reforms can be seen as an attempt to tackle the structural problems—but with the continued existence of the greater political and economic structures inherited from the Soviets, such reforms would be exploited and rendered useless. For example, Russia was still using its archaic banking structure that continued to extend credit to bankrupt firms. Therein lies an important difference between West and East Europe: capitalism in West Europe emerged over four centuries with the necessary laws and institutions to prevent its exploitation. Capitalism in East Europe often occurred overnight, and were ripe for abuse by a small elite familiar with Soviet misconduct. This exploitation was perhaps exemplified in Russia, where privatization turned into kleptocracy, as insiders with political clout cornered the markets through corruption. Small privatization did however lead to the structural rise of the service sectors, although this paled in significance to the rise of the oligarchs and the destruction of the middle class.
Without the necessary structure to support it, Yeltsin’s shock therapy did not create a middle class but a small oligarchic elite. Reform resulted in soaring prices and plunging living standards, but on a macroeconomic level, the monthly turnover increase from $18 million to $1 billion while foreign reserves went from $100 million to $1.5 billion. Despite this (or perhaps because of this), Yeltsin was losing support from regional leaders and his own party, eventually leading to the end of “market romanticism” in Russia. More so than any other country, Russia was the successor of Soviet structure and thought. The level of corruption, the failure of democracy, and the lack of Russian identity in the post-Communist state would lead to a new surge in nationalism and nostalgia (see: The Far-Right Rises in Europe). Following Yeltsin, Putin’s decidedly authoritarian approach and massive popularity has more in common with the Soviet style than the neoliberal one. It could be argued that in the end, the transformation crisis and structural failures of post-Communist Russia only cemented the shadow of the Soviet.
The original academic essay this article was based on can be read on the author’s blog.