Transformational Diplomacy after the Cold War

Britain's Know How Fund in Post-Communist Europe, 1989-2003

Keith Hamilton

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134123063
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Diplomacy & Treaties
• Index: Politics & International Relations

This book examines the 'Know How Fund', Britain's bilateral technical assistance programme in post-communist central and eastern Europe, devised in response to the end of the Cold War.

The Know How Fund (KHF) was the technical assistance programme which Margaret Thatcher's government launched in the spring of 1989 to encourage Poland's transition from communism to democracy and free-market capitalism. It was subsequently extended to other countries of central and eastern Europe and might be considered a novel experiment in what the US secretary of state, Condoleezza Rice, would later term 'transformational diplomacy'.

Drawing upon still-closed records of the Cabinet Office, the Department for International Development (DFID) and the Foreign and Commonwealth Office, this book explores the political origins of the KHF. In particular, the author examines its influence upon the transitional process in the lands of the former Soviet bloc; its part in attenuating the potentially destabilising effects of revolutionary change in Europe; the interdepartmental cooperation and rivalry to which its administration gave rise in Whitehall; and the links forged between officials and the worlds of business, finance and academe in project design and implementation. The volume offers new insights into Britain's reactions to the collapse of communism in central Europe and the Soviet Union; the role of aid in the making and conduct of British foreign policy; and the significance of New Labour's establishment of DFID as a separate government department.

This book will be of much interest to students of British Foreign Policy, Diplomacy Studies, European history, Post-Communist Transitions and IR in general.

1 Exciting times

We are living in exciting times for Eastern Europe. We want to do all we can to give things a push in the right direction.

Ann Lewis, assistant head, Eastern European Department, FCO¹

We must respond rapidly and generously. She [Margaret Thatcher] did not wish other Europeans to beat us to the draw.

Charles Powell, private secretary to Margaret Thatcher²

The sovietisation of central and eastern Europe in the aftermath of the Second World War was as much an economic as a political accomplishment. Communist command economies, divorced from free market mechanisms, were imposed upon countries whose economic and social structures the Soviet Union sought to integrate with its own. Existing administrative, commercial and legal institutions were meanwhile either destroyed or adapted to suit the needs of party and ideology. With the Red Army in occupation of most of Europe east of the Elbe, British diplomats were rarely able to do more than speculate about Soviet intentions and protest when the principles enunciated at Yalta were flouted or ignored. In a paper of 12 March 1946, detailing the way in which the Russians were remoulding the economies of the lands they occupied, John Coulson of the Foreign Office's Economic Relations Department argued that Britain had few if any means with which to counter this process. ‘The best we can do’, he concluded, ‘is to hold the door open – or to hold enough doors open – for the East Europeans to catch frequent glimpses of a more attractive and more prosperous world in the West and to be encouraged, when the occasion offers, to pass through.’³ The idea that the Soviet satellites could, or would, eventually be drawn away from Moscow's grip by what Charles Powell later termed the ‘great magnetism inherent in the economic strength of the western system’ was one that was to surface time and again in British diplomatic thinking during the next forty years.⁴ Yet such thoughts were tempered by the knowledge that any direct threat to the status quo might, as in 1956 and 1968, provoke a hostile Soviet reaction which could in turn threaten the peace and security of the whole of Europe. There were also doubts as to whether Britain could in its dealings with the region afford to adopt a stance independent of its partners and allies.⁵

Even in 1974, in an era of East-West détente, the Planning Staff of the Foreign and Commonwealth Office (FCO) considered that British interests in the region were ‘insufficient to justify the diversion of resources from more remunerative employment or the running of risks’, and the pursuit of a more robust policy there was envisaged only in the context of the Atlantic alliance and the European Community.⁶ The Helsinki Final Act of 1975 and the subsequent follow-up meetings of the Conference on Security and Cooperation in Europe (CSCE), nonetheless, provided British and other Western diplomats with a platform from which to challenge hard-line communist rule in the East.⁷ Their hopes were not extinguished by the 1981 crackdown on the opposition Solidarity movement in Poland. The Soviet Union remained a formidable military threat. But British diplomats inclined increasingly towards the view that the communist economies of the East could never deliver the sustained productivity growth of their Western neighbours, and that without reform the collapse of state socialism was, if not imminent, inevitable.⁸ Indeed, by 1983 pressure of business, including the need to monitor developments in Hungary and Poland, led to the division of the FCO's Eastern European and Soviet Department, and the appointment of John Birch, formerly counsellor in the British embassy in Budapest, as head of a new Eastern European Department (EED).⁹ Margaret Thatcher, who as prime minister visited Hungary in the following year, may have been disappointed to find how far, despite the recent legalisation of small private firms, the country was from having a free market economy. However, as she recalled in her memoirs, this was her ‘first foray in what became a distinctive British diplomacy towards the captive nations of eastern Europe’.¹⁰

The election just one year later of Gorbachev as general secretary of CPSU and his initiation of glasnost (openness in administration and a relaxation of censorship) and perestroika seemed in any case to suggest that there was greater scope for promoting reform. The EED was eager to adopt a more proactive approach towards the Eastern bloc. A despatch to Warsaw of 5 September 1985, signed and drafted by Birch on behalf of Geoffrey Howe, the then foreign and commonwealth secretary, defined Britain's aim as the weakening of the Soviet Union's control over its satellites and their ‘gradual evolution away from the current Soviet pattern’. Howe hoped that ‘creative ferment’ in eastern Europe would constantly but quietly challenge the dominant role of communist parties and Soviet authority there. If the east Europeans were to adopt a more liberal economic system then, he thought, they would find it less advantageous to remain within a protective bloc.¹¹ However, when in the late 1980s the pace of change quickened, especially in Hungary and Poland, it soon became clear that more fundamental legal and institutional reforms must be attempted if the former satellites were ever to be transformed into Western-style democracies with free market economies. Tough monetary and fiscal policies would have to be applied in order to prevent liberalisation spilling over into high inflation or balance of payments crises, and safety nets would have to be provided to cushion such social side-effects of change as unemployment. Moreover, along with foreign capital, the reforming states of the region would require new skills, new attitudes and an understanding on the part of administrators, managers and politicians of how democracies and free markets functioned. Without these, the reform process could easily falter and the region might be plunged into a period of instability from which its western neighbours would derive no benefit. Aid, initially conceived of in terms of financial and developmental assistance, was regarded as one way in which the Western governments could encourage and sustain change. But in addition to this, in the spring of 1989, the FCO proposed that the British government should sponsor what amounted to a programme of economic, political and social regeneration through the transfer firstly to Poland, and then to the rest of central and eastern Europe, of Western ‘know-how’.

A sop for Poland

The idea of establishing a Know How Fund to assist change in central and eastern Europe was the brainchild of Ann Lewis, who in 1989 was assistant head of EED. But the notion evolved in response to events in Poland, and its inception was influenced by the desire of Thatcher that Britain should play a leading role in helping the Poles and other central and east European nations to make the transition from communism to liberal democracy. The future of communism in Poland had been in doubt ever since the summer of 1988. A miners' stoppage in August had led to consultations between government and workers' groups and the formation of a new reformist cabinet. When Thatcher visited Poland early in November she emphasised the need for political change if economic reform were to have a chance of succeeding, and she promised help from Britain if and when the Polish authorities took the necessary steps. In a speech, which was considered by some in the FCO to link Western help ‘too specifically to the process of political dialogue’ and insufficiently to progress with economic reform, she said that once Poles provided the commitment, the resolve and the perseverance to break through to success, their friends would be ready to help in practical ways: by supporting a programme with the IMF; by offering credits; by rescheduling debts; by encouraging investment; by establishing joint ventures; and by increasing contacts of every sort between our governments and peoples.¹² Meanwhile, there could in Thatcher's opinion be no separate deals with Moscow, such as the Americans had in mind, assuring the future security of the Soviet Union in return for greater economic and political freedom in central and eastern Europe.¹³

The message was clear and it became increasingly relevant to Poland's situation as the reform process accelerated in the winter of 1988–89. In February 1989 round table talks began between the Polish government and its opponents, effectively led by Lech Wałęsa, the co-founder of the Solidarity trade union movement.¹⁴ These resulted in the re-legalisation of Solidarity and the announcement, early in April, of wide-ranging economic reforms and the holding of elections for the Sejm (parliament) in which more than a third of the seats would be freely contested. There was also to be a freely-elected senate and a new office of president. Nevertheless, the Poles still had to contend with a slowdown in growth, rocketing inflation (between December 1988 and December 1989 consumer prices grew by 640%), a convertible currency crisis, shortages and imbalances in the production and supply of goods, and serious environmental problems. Their economy was in urgent need of restructuring, yet ending state subsidies and forcing industry to become more market-orientated implied a degree of austerity and a level of unemployment which might prove publicly unacceptable and therefore politically unsustainable. The Polish authorities evidently expected that once they had demonstrated their commitment to reform they would be able to secure financial assistance from the West, more especially agreement on the further rescheduling and reduction of their enormous foreign debts. They had borrowed heavily during the 1970s and subsequently built up substantial arrears on interest payments to official creditors. By 1989 they had a convertible currency foreign debt of US$39 billion, the equivalent of about two thirds of Poland's gross domestic product (GDP), and interest payments alone amounted to 30% of the country's hard currency earnings. Poland had taken the initial steps towards negotiating an adjustment programme with the IMF. Yet as Christopher Hulse, the head of EED explained in a letter to Warsaw of 28 March, neither Britain nor its partners were likely to be in a position to offer substantial economic assistance to Poland in the absence of such a programme and in the present circumstances there seemed little likelihood of that materialising. The Poles had adopted measures to encourage foreign investment and joint capital ventures, but they had hardly begun to tackle their underlying macro-economic problems. Real incomes were still high, there was a growing budget deficit, and there was no end in sight to subsidisation and high inflation.¹⁵

These and the difficulties experienced by Poland's neighbours were considered at a seminar which EED hosted on 21 March, following a proposal by William Waldegrave, the FCO minister responsible for eastern Europe.¹⁶ Its participants, amongst whom were academics, publicists, parliamentarians and officials of other Whitehall departments, recognised that without a massive financial injection the West's scope for promoting reform was limited. Robert Cooper of the FCO's Policy Planning Staff was less than complimentary when he subsequently remarked that there ‘was a great lack of brilliant ideas for solving Poland's problems’, particularly from non-FCO participants.¹⁷ But his observation accurately reflected the difficulties faced by those seeking to assist the Poles and their central and east European neighbours without either propping up existing regimes or provoking a reactionary clampdown. Whitehall officials thus rejected any return to the generous credit policies of the 1970s, which had seemed to hinder rather than stimulate change, and they insisted that there could be no major financial assistance without economic reform and the negotiation of an IMF programme. If a political gesture were required with which to acknowledge progress in the round table talks, then they suggested that the Poles might be offered ‘a sweetener, such as a small credit for a single project, preferably in the private sector’.¹⁸

Benevolence on this scale was unlikely to satisfy the prime minister. Encouraged by the progress made in Poland towards the achievement of a political consensus, she nonetheless feared being outpaced by other Western governments in the scramble for influence in the East. This was made only too apparent when on 17 April the United States president, George Bush, announced an ill-defined and overvalued package of measures for Poland, including trade preferences, access to American investment capital, and support for debt rescheduling.¹⁹ Two days later, on the evening of the 19^th, Thatcher told Howe that she felt the Poles had already taken the ‘necessary steps’ towards reform to justify British aid, and made plain her dissatisfaction that ‘we were losing the leadership role we had established in Poland’. Furthermore, she observed, the ‘Americans had been quicker off the mark. She would like to see work on this accelerated with very early recommendations to Ministers.’ Britain would have to respond ‘rapidly and generously’; she did not wish to see other Europeans ‘beat us to the draw’.²⁰

The prime minister's personal commitment to promoting change in central and eastern Europe and her tendency to regard Britain's allies and partners as rivals for influence in the region could not easily be ignored. Yet, as Howe explained, the US$1 billion tag which some American commentators had put on the president's offer was a ‘chimera’, and it was in any case important to avoid any move that might risk compromising Polish debt negotiations with the IMF and the Paris Club (the informal group of financial officials which provided services for indebted countries). Howe also hastened to assure Thatcher that the FCO had matters in hand.²¹ British diplomats were fully alive to the fact that central and eastern Europe was regarded as an area into which ‘as far as possible, resources should be redeployed from other areas and functions of low priority’²² Moreover, several of those attending the seminar on 21 March had displayed a competitive attitude towards the still communist East similar to that expressed by Thatcher. While they accepted that central and eastern Europe was peripheral to British interests, they recognised that the West as a whole had an interest in the long-term stability of the region and they voiced their concern at the prospect of West Germany exercising a predominant influence there. They also recommended that the British government should look further at the ‘provision of expertise in political/legal areas to help in the establishment of proper democratic structures’.²³

Lewis, who had done much to organise the seminar, took up this theme in a letter of 12 April to Peter Harborne, the head of chancery at Budapest. After informing Harborne that FCO ministers had recently agreed that more generous funds would be available for programme expenditure in the region, she added that EED had been gradually coming round to the idea that the best way they could achieve their ‘primary objective’ of encouraging economic efficiency and political liberalisation in eastern Europe was by transferring there ‘our expertise over a whole range of subjects which will be new to them but in which we have vast experience’. In addition to management training and expansion into the financial and monetary sectors, she thought these ‘might include the establishment and running of political parties, how to run an election campaign, parliamentary institutions and procedures, the workings of an upper house, the rule of law and an independent judiciary, [and] arbitration in industrial disputes’. The aim, Lewis asserted, ‘is to target our efforts in this area better so as to maximise the contribution we can make to democratic development in Eastern Europe’.²⁴ Such projects could also be used both to take advantage of the new freedoms in which Gorbachev seemed ready to acquiesce, an...