The Political Economy of Transition in Central and Eastern Europe

The Light(s) at the End of the Tunnel

Jens Bastian

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138344440
• eBook ISBN: 9780429797231
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1998, this volume contributes to the debate after the fall of the Soviet Union on the transition of Eastern European, former Soviet countries to a market economy. The transition was an enterprise as daring in practice and historically unprecedented as it is an analytical laboratory subject to constant reflection. The first two chapters address foreign direct investment in Central and Eastern European countries. The rebuilding of social insurance systems is then addressed, with a focus on state pension schemes. The subsequent two chapters examine the political and demographic features of transition countries, highlighting media reform as a key aspect for the consolidation of a democratic, law-based, market economy and society. Focus then turns to Poland, the country which is considered to display the most progress in the political economy of transition. Finally, the controversial issue of the electoral successes of former Communist parties in Central and Eastern Europe is discussed.

1
Introduction

Jens Bastion

When European Union accession negotiations formerly opened in March 1998 with Poland, Hungary, the Czech Republic, Slovenia and Estonia, a symbolic milestone among countries of Central and Eastern Europe was reached. In the words of the Polish Foreign Minister, Bronislaw Geremek, anchoring these countries in the West means to “regain our natural place” (IHT 18.04.1998). The passage towards achieving this objective is anything but an ‘easy ride’. Sequencing the re-integration of post-communist states into western institutions such as the EU will be a momentous challenge, while a sense of Realpolitik is simultaneously in high demand. Representatives such as Geremek, who survived the Nazi occupation of Poland during World War II, escaping the Warsaw ghetto at age 11 with his mother, are not a Pollyanna. While their determination is undaunted, the chief negotiators from the first round of applicant countries - the Czech Republic, Hungary, Poland, Slovenia and Estonia - have had to learn, at times the hard way, that they cannot expect any favors from a Union, which is itself rather painstakingly seeking institutional reform and monetary convergence ahead of Eastern enlargement Hence, negotiations on what promises to be an arduous path to the European Union are expected to extend into the next millennium. There is no firm date for future membership in the EU, let alone in EMU.

Along this path die individual countries from Central and Eastern Europe knocking on the Union’s door are in a constant process of self-assessment regarding die performance of their transition processes. This exercise in scrutinizing their political economies seeks to convey a mission statement to a variety of audiences: their respective populations, the neighboring countries and international organizations. The inquiry centres around the following issues: Where do we stand eight years after the events of 1989/90, and what “corridor of transformation” (Misztal 1996, p. 136) do we still have ahead of us? In other words, the desite to join the EU, and subsequently EMU, will impose a straitjacket in various spheres of their respective political economies. Constraints in fiscal policy-making, central banks shifting their exchange-rate regimes from currency pegs dominated by the dollar to systems more closely linked to the introduction of the Euro, democratic benchmarks in areas such as the treatment of ethnic minorities, as well as administrative requirements in the fields of civil service training, auditing procedures and effective budget management comprise a momentous legal, intellectual and organizational task. Such an undertacking is simultaneously becoming a disciplining device on the region’s emerging markets. Economic policy makers are using prospective EU membership as planning targets, for instance in the field of convergence criteria. In short, anticipated EU membership enhances rewriting economic ground rules far beyond trade patterns and portfolio investment.

The term political economy of transition in this volume investigates how observed differences in institutions affect political and economic outcomes in various social, economic and political systems of Central and Eastern European countries. It also examines how the institutions themselves change and develop in response to entrenched legacies of the past, uncertainty of outcome as well as opportunity structures and manifest constraints. The political economy of transition thus discusses issues of critical importance for Central and Eastern Europe: Why does foreign direct investment matter? What determines social insurance reforms? How does the media establish its independence and affect the anchoring of liberal democracies? Are former communist parties nothing else then ‘dressed-up as sheep’? The subtitle of this edited volume - The Light(s) at the End of the Tunnel - is an image of, and metaphor for, the contingencies of political economies in Central and Eastern Europe. Its rather favorable assertion, namely that illumination is in sight for - at least some - transition countries, is a recognition of the manifold performance achieved in post-communist societies since 1989/90. It is also an explicit statement against gloom and doom scenarios. Examples of such achievements are detailed in the various chapters, and increasingly receive the recognition they deserve. They concern, for instance, that

• (i) Europe’s two fastest-growing economies (excepting those rebuilding from war) are in transition countries: Poland’s economy grew by 6.9 percent in 1997 and Estonia’s expanded by 8 percent Furthermore, Poland has steadily continued to reduce inflation, from 2S0 percent in 1990 to almost 14 percent in mid-1998. In consequence, such performances have not gone unnoticed to European institutional investors with fixed-income funds. Polish, Hungarian and Czech markets are starting to be considered as an increasingly liquid alternative and as diversification for fund managers; but also as future members of the EU and EMU. In 1997 Hungary saw hefty foreign inflows to its stock market, helping make the Budapest Stock Exchange the world’s second-best performer, after Moscow.
• (ii) Central European countries are making a return to international capital markets in growing numbers. At the end of March 1998, the National Bank of Hungary placed a five-year, $300m eurobond. The offer was Hungary’s first in US dollars since an issue of floating-rate notes in 1994 and followed a five-year, DM750m floating-rate bond issued in early 1998. The proceeds from the eurobond will be used for the early repayment of $670m of World Bank loans, thus lowering Hungary’s debt servicing costs. Polish zloty and Czech koruna bonds are equally becoming part of Western European investment banks’ expanding proprietary portfolio in countries of Central and Eastern Europe. Hungary’s telecommunication utility Matav Rt. as well as the oil-and-gas concern MOL Rt. are rising in Western European funds’ portfolios.¹
• (iii) With countries such as Poland, Hungary, Estonia and the Czech Republic establishing a strategic presence in the three main currency sectors (US dollar, German mark and the Japanese Yen), and improving their foreign exchange reserves, they are not as dependent anymore on international financial institutions (IFIs) such as the World Bank, the IMF and the EBRD for financial assets.² Moreover, with the advent of Economic and Monetary Union gaining currency, and Poland, Hungary, the Czech Republic, Slovenia as well as Estonia beginning EU accession negotiations, bond emissions denominated in Euros are only a matter of time for these countries.
• (iv) Given their credit ratings by international rating agencies such as Standard & Poor’s and Moody’s, the two leading US agencies, an increasing number of transition countries in Central and Eastern Europe can now attract more favorable credit conditions on international capital markets. Moody’s, for instance, placed Hungary’s rating on review for a possible upgrade in April 1998. It is currently rated at the lowest investment grades BBB-. However, significant improvements in budget deficit reductions, curtailment of consumer price inflation and containing current account imbalances justify a revision of credit ratings.
• (v) Countries in Central and Eastern Europe must wonder at times what labels are being introduced, and [later] dropped, in order to pigeon-hole them from a Western perspective. The inflation of terminology may be as much a sign of confusion, as it illustrates the ‘moving target’, which observers in Washington, Paris, London, Berlin, Brussels or Tokyo are trying to make sense of. The magnitude of changes taking place in Central and East European countries invites investors and analysts to re-invent their own political and economic geography. The panoply of terms include: post-communist, transition/transformation countries, emerging markets, fast-track countries, and most recently, graduate reform countries of Central and Eastern Europe. The range of options stretches the arch even further. When US investment banks talk about Extended Pan Europe, they include the whole of the EU, non-European economic and monetary union members, plus Switzerland, Norway and some countries to the east of Germany.

These achievements and developments have a number of features in common. The most striking is that while Cold War divisions may persist in some politicians’ minds, institutional investors are quietly - and for the most part effectively - redrawing the Continent’s map as they move Central Europe out of the realm of ‘emerging markets’ and into the periphery of Europe proper. However, as Lord Dahrendorf has noted with a view to post-communist transition, the trajectory towards prospering market economies and stable liberal democracies “leads through a valley of tears” (Dahrendorf 1997, p. 94). In other words, fee terms transition and transformation are not understood as a linear passage towards stated objectives. Rather, the variety of contributions in this volume see such processes as fraught with ambivalence in economic, political, legal, administrative, social and cultural spheres as well as coming to terms with entrenched legacies of the past In short, contemporary policy-making in Central and Eastern Europe is characterized by contingencies, is open-ended, and includes - for fee foreseeable future - numerous implementation deficits. These include, inter alia,

• (i) Industrial production is still mainly geared towards domestic markets. Countries such as Hungary and Estonia have proven track records as open economies encouraging foreign investment while others, such as Poland and Romania, have been more hesitant about privatization and more protective of domestic industries. As Eastern European economies become integrated with Western Europe competition is sure to increase in the internal European market raising temptations to control market access from outside.
• (ii) Inter-company indebtedness being very high, many industries are short of investment and teetering on the brink of bankruptcy. This situation is acerbated by financial systems that are frequently governed by under-capitalized state-owned banks with large amounts of bad assets and non-performing loans. Even countries with a comparatively better performance record in the political economy of transition are facing considerable challenges in their banking sector. Komercni Banka, for instance, fee biggest Czech bank by assets in 1998, raised provisions for its non-performing loans, which have increased to 30 percent of total loans. Financial structures are thus in dire need for reform. After adjustment for international standards on loan provisioning, not one of die five first-round EU applicants from Central and Eastern Europe - die Czech Republic, Hungary, Poland, Slovenia and Estonia - can boast a banking sector the size of a medium-sized Western bank.
• (iii) Stock exchanges in former communist countries are under-capitalized. The Warsaw Stock Exchange, for instance, is capitalized at a mere $15 billion. Outside of Budapest’s listed market, the region offers few stocks large enough for institutional investors to purchase in sizeable blocks. The portion of the debt market open to foreigners is worth about $18 billion in Poland and just $10 billion in Hungary, compared to about $100 billion in Greece. When German investors bought into Czech koruna bonds in early 1997 as a ‘safe’, high-yielding alternative to Bunds, they badly burned their fingers when the then Klaus government let the koruna drop by some 20 percent amid an economic crisis and speculative attacks on the currency.
• (iv) Equity markets are underdeveloped, and transition economies offer few debt securities with maturities longer than five years. Fear of speculative ‘hot money’ has prompted many of the region’s countries to place restrictions on foreign investment in their local debt markets. Hungary, for instance, restricts foreigners from investing in government securities with a maturity of less than a year. Trading in currency forwards and options is only possible in the Czech Republic.
• (v) Existing bankruptcy regulation is often not, or half-heartedly implemented. Concerns like these risk alienating fund managers. Especially for equity markets the implementation of coherent bankruptcy provisions are essential. Where this is not the case, mainstream European fund managers see die region’s markets and legislation as still too shallow, volatile, and just plain risky for long-term investment.

The contributions in this volume are subdivided into eight chapters, some of which cover similar topics from different angles. The contributions are a sample of the magnitude of die task and die ambivalence of the results achieved so far in transforming die political economy of former communist countries. The first two contributions by Bod and Enzmann address the complexities of foreign direct investment in Central and Eastern European countries. From different points of departure, they converge in the assessment that transition countries require huge sums to (re-)build the economic infrastructure of telecommunications, transport networks, energy, water and waste treatment, as well as financial services reform in banking privatization, introduction of private pension funds and liquidization of medium-term benchmark bonds. The infrastructure investment needs of the 10 EU candidate countries from Central and Eastern Europe alone have been estimated at more than Ecu 180bn ($197bn). Equally, the legal and administrative frameworks required to attract and absorb foreign capital have to be taken into account Governments throughout the region are becoming more sophisticated and more aware of the competition for foreign investment As both authors show, they are learning that foreign investment brings, and requires more than just capital. It also provides and demands technology, managerial skills and further access to global markets.

In chapter four, Bastion addresses one of the crucial aspects of political economies in Central and Eastern Europe: rebuilding social insurance systems. More specifically, state pension schemes are under severe resource pressures since the transitions have started in former communist countries. Finding and implementing a progressive replacement of so-called pay-as-you-go schemes has led countries such as Hungary and Poland to introduce new private, mandatory systems within a multi-pillar pension architecture. Here the aim is to either replace or combine a reformed pay-as-you-go system with mandatory private pension funds and a regulated voluntary private system. It is further argued that the multiplicity of retirement savings is one of the most important driving forces in the future evolution of capital markets in Central and Eastern Europe. The irony of the argument presented is that pension reforms being undertaken in transition economies may even be able to offer some - reluctant - Western European governments lessons in the implementation of social security reform.

The subsequent two chapters seek to turn the attention of the reader to the political, democratic features of transition countries. Hahn as well as Lingner highlight an aspect of post-communist countries whose development is a key benchmark for the consolidation of a democratic, law-based market economy and society: media reform. Crafting democracies includes the fertile ground of public information and debate about the direction, scope and normative underpinning of the changes taking place in Central and Eastern Europe. The availability of a rich variety of print media, state-sponsored and privately organized radio and television stations is a reflection of the populations in Poland, Hungary, Romania or Bulgaria engaging in, and aspiring to anchor civitas sociales. Such an endeavor requires new media legislation, the clarification of ownership structures, distribution provisions and a degree of internationalization. In other words, media reform in Central and Eastern Europe is essentially about media politics, and how citizens seek to regain a sphere of public involvement in matters concerning their daily livelihoods.

Jaworski and Rapacki focus their contribution on the country, which is considered by most observers as displaying the greatest degree of progress in the political economy of transition: Poland. Its macro-economic indicators are noteworthy. Poland is the first country to have succeeded in returning to the output levels of 1989. Furthermore, with respect to the EU enlargement process eastwards, Poland is by far the most important country in the region. Compared to the other Central and East European countries currently negotiating EU membership, Poland is larger in size (312.000 square kilometers) and population number (38.S million) than the combined total of Estonia, Slovenia, the Czech Republic and Hungary. However, as Jaworski and Rapacki’s contribution underlines, the domestic debate about Poland’s ‘return to Europe’ is not a foregone conclusion.

The final chapter of the volume undertakes to illuminate a still rather controversial issue in the political economy of transition: the electoral successes of former Communist parties in Central and Eastern Europe. As Bastion argues, in some cases such parties have been voted into public office - presidencies and/or governments - in others they have subsequently been driven back to the harder botches of parliamentary opposition. Poland now has a President, who was a communist minister of sports in 1989, and a Prime Minister, who was a leading activist in die opposition Solidamosc movement To what degree former Communist parties have succeeded in comprehensive and credible change remains a matter of intense debate in East and West For some observers this issue concerns the moral currency of transition, for others it highlights die capacity of societies to arrive at an understanding of the events leading to the annus miraculis in 1989/90. What is nevertheless becoming clearer in the course of the past decade is that former Communist par...

Table of contents

• Cover
• Half Title
• Dedication
• Title
• Copyright
• Contents
• Tables
• List of Contributors
• Abbreviations
• 1 Introduction
• 2 The social and economic legacies of direct capital inflows: the case of Hungary
• 3 Investment promotion in the Czech Republic, Hungary and Poland
• 4 Introducing private pension funds in transition economies of Central Europe
• 5 The development of independent media in Central and Eastern Europe
• 6 Print media in Romania: Struggling for independence and democratic change
• 7 Development trends and economic policy-making in Poland
• 8 From former to post: Communist parties in Central and Eastern Europe