There was a bullish mood in Berlin in November 2014, as the authorities marked the 25th anniversary of the Wall’s demise; elsewhere in the region, however, the celebrations were more subdued. The new capitalist era in Central and Eastern Europe has now lasted well over half the life-span of the centrally planned economies, yet there is no clear consensus on how its outcomes should be appraised. An examination of the entire region—from Dresden to Donetsk, Tallinn to Skopje and Sofia—lies beyond the scope of this essay, which will concentrate instead on a more limited group of nine countries: the former German Democratic Republic (gdr), the Visegrád states (Poland, Hungary, Slovakia, the Czech Republic), the Baltic nations (Estonia, Latvia, Lithuania), and Slovenia. These states were put on the fast track towards integration with the European Union from an early stage: East Germany was absorbed by its western neighbour in a matter of months, while the others joined the eu at the first opportunity in 2004, having first been brought under us military command within nato. Slovenia and Slovakia adopted the euro, in 2007 and 2009, respectively; Estonia, Latvia and Lithuania have all followed suit since the onset of the Eurozone crisis; Poland, Hungary and the Czech Republic retain their own currencies.

Altogether, this is a group that has received highly favourable treatment from Western governments and firms in terms of aid, debt relief and foreign direct investment. If the post-communist transition was going to be a success anywhere, it should surely be in this batch of countries. What follows will briefly sketch their positions within the Soviet-led Council for Mutual Economic Assistance (comecon) and the determinants that shaped their initial trajectories—exogenous pressures, including foreign debt, investment and geopolitical positioning, as well as endogenous strategies—before examining the range of social and economic outcomes.

The East European economies had been part of comecon’s vast trading zone, with direct access to a market almost half a billion strong, and occupied a place near the top of its division of labour, importing raw materials from the Soviet Union in return for high-end finished goods—machine tools and it were specialities in the gdr, auto vehicles in Czechoslovakia, food-processing and ship-building in Poland.footnote1 Outside the Warsaw Pact, Yugoslavia had developed strong trade relations with West Europe, and Slovenia was its most developed and prosperous republic. The most heavily industrialized countries in the state-socialist bloc, Czechoslovakia and the gdr, had already begun to reach the limits of their investment-led, central-planning model in the 1960s; technology started to lag behind the levels of the capitalist core. In the 1970s, Poland, Hungary, the gdr (with special credits from the Federal Republic) and Yugoslavia—along with the ussr—resorted to what seemed like cheap external financing from the West to improve the range of consumer goods available to their citizens. But the global economic frailties of the late 1970s hobbled this strategy, and the cost of servicing the national debt increased sharply in the 1980s as a result of the Federal Reserve’s interest-rate hikes. The communist states were obliged to resort to austerity policies, intensifying the discontent of their citizens.

Experiments with ‘market socialism’ had already been started in Yugoslavia, where economic decision-making was highly decentralized. Among the comecon countries, Hungary and Poland—where small-scale private accumulation was legitimized and state-owned enterprises were increasingly autonomous—had gone the furthest down this road before 1989. Dissident circles in these countries were moving in a (neo-)liberal direction, converging with influential currents within the existing state technocracy to formulate what has been described as a ‘utopian vision of capitalist transformation’.footnote2 These intellectual trends help explain why the eventual process of systemic change at the end of the 1980s proved to be so easy. Important sectors of the power bloc—especially managers of state-owned companies and parts of the technocracy and the intelligentsia—had already reoriented themselves towards capitalism; they would occupy key positions in the revamped state structures, the media and private business. They also supplied the new political parties with many of their cadres. The two principal icons of neoliberal policy-making in the region, Poland’s Leszek Balcerowicz and the Czech Václav Klaus, both worked for economic research institutions under the communist regime and had maintained loose contacts with opposition circles. They embodied the alliance between technocrats and the liberal mainstream of the dissident intelligentsia that would be at the heart of the transition to capitalism in the 1990s.footnote3

The strategies followed by domestic elites after 1989 hinged to a large extent on the degree of autonomy that they enjoyed from outside forces. The gdr lay at one end of the spectrum: there, it was external bureaucrats from the Federal Republic who controlled the process after reunification, integrating the gdr into the Deutschmark zone with hardly any public debate.footnote4 The one-to-one exchange rate established on 1 July 1990 implied a drastic revaluation of the old gdr currency. Sold to the public as a gesture of welcome that would enhance the value of East German savings, this measure had a devastating impact on the Eastern manufacturing sector, which was quite unprepared for the inflow of cheap West German imports and lost much of its domestic market virtually overnight. Full integration into the Federal Republic brought with it not only the full panoply of West German legislation, but also ec membership with its acquis communautaire.

After the gdr, the Baltic states adopted the most radical neoliberal reforms once they had secured their independence in 1991. The pressure here was not strictly speaking external, but subjective: for the new governments in the region, the priority was to sever economic links with Moscow as quickly as possible. The introduction of national currencies formed part of this strategy: all three countries opted for extremely rigid exchange rates in a bid to secure international acceptance. Estonia and Lithuania even established currency-board regimes, which eliminated any room for manoeuvre in the field of monetary policy.footnote5 Nationalist considerations also influenced their approach to the sale of public assets. The Estonian and Latvian governments opted for direct sales to foreigners as the first option, distribution of share vouchers to citizens as the second. As Dorothee Bohle and Béla Greskovits observe, this policy had a strong ‘de-Russifying’ thrust: ‘Permitting massive management–employee buy-outs, especially in the privatization of larger enterprises, would have inevitably empowered ethnic Russian managers and workers, while Western strategic owners were seen as less of a threat to sovereignty.’footnote6 In both countries, ethnic Russians were denied citizenship rights, and could thus be excluded from voucher privatization schemes.

Of the Visegrád countries, Hungary’s room for manoeuvre was limited by its high debt burden, owed to Western banks. For the next two decades, governments of both centre right and centre left devoted themselves to obtaining as much hard currency as possible, offering every inducement to attract foreign direct investment as the basis for growth. A short-lived attempt at recalibration in 1993–94, to give more priority to domestic capital, was abandoned after heavy pressure was applied by the imf and the European Bank for Reconstruction and Development (ebrd), both of which froze their assistance for Hungary until its government fell into line.footnote7 Poland, too, had accumulated heavy foreign debts, but Warsaw policy-makers received very different treatment to their Budapest counterparts. As the largest country in the group, with a population of 38 million—substantially greater than those of Hungary, the Czech Republic and Slovakia put together—Poland was seen as the main geopolitical prize by Washington and Bonn, both a linchpin of the new regional security order and an economic role model, to be given every possible help by the imf and World Bank. Much of the Polish debt was in fact owed to these institutional creditors rather than private banks, as in Hungary’s case, and 70 per cent of it was written off in 1991. Polish governments therefore did not have to imitate Hungary’s breakneck pursuit of fdi in the early 90s: between 1992 and 1995, Hungary attracted $9.4 billion of foreign investment (accounting for almost 6 per cent of gdp), while the much larger Polish economy attracted $2.5 billion (just over half a per cent).footnote8