Economic Transformation Research Paper

1. Transformation Into The Market Economy: Concepts, Models, Myths

More than ten years after the collapse of the central planning economy, transformation analysis is still analysis is still characterized by controversial concepts and models, misconceptions, and myths. A short review of these delusions is inevitable.

1.1 The Concept Of Transformation Into A Market Economy

Transformation into a market economy involves a process in which the Central and Eastern European countries, having drifted to the periphery of the world economy after 1945, transform their economic systems from central planning into market economy, in step with the transition of highly industrialized countries.

Consequently, transformation into a market economy involves a threefold process:

a fundamental change of the economic and social system, that is, the elimination of the central planning system and the building up of the market economy;

an economic catch-up of former socialist countries;

and

an adjustment to the highly industrialized countries’ transition from a Fordist-type mass production into a ‘post-Fordist’ type flexible production.

1.2 Models Of Transformation Into A Market Economy

Highlighting the individual subprocesses and complexity of transformation into a market economy is of significance because at the moment unidimensional models prevail in the analysis of transformation into a market economy. Two such models have become widespread: the model of delayed development and the model of stages.

The model of delayed development assumes that, with a significant delay in time, subsequent to 1990 the countries of Central and Eastern Europe started following the same course of development as trodden by highly industrialized countries ever since the mid-1970s. Among others, Dostal and Hampl (1996), Enyedi (1996) and Gorzelak (1996) are all of the opinion that in the 1950s and 1960s basically similar models of extensive economic development became prevalent in highly industrialized countries and socialist countries. In the early 1970s, they think, the courses of these developmental models began to move away from one another. On the one hand, from this time on, highly industrialized countries left this course and the Fordist mass production characterizing the extensive period, and adopted an increasingly flexible production, thus shifting to the so-called intensive (or ‘post-Fordist’) period. On the other hand, socialist countries went on to maintain their earlier economic development model. What is more, they even intensified it to an ‘over-extensive kind of development,’ as Dostal put it.

Due to the discrepancy between the models of development, by the 1980s the gap between the Western and the Central and Eastern parts of Europe had widened and the process finally led to the collapse of the socialist system in 1989–90. In the wake of this political breakpoint, each single country in Central and Eastern Europe sank into a deep ‘transformational recession’ and they got out of it only in the middle of the 1990s. Dostal, Hampl, Enyedi and Gorzelak think that, from this economic turning point, i.e., from the end of the transformational recession and the beginning of a consolidation of market economy, the Central and Eastern European countries have also been following the post-Fordist flexible production model.

At this point the critical remark needs to be made of the model of delayed development: namely that it completely neglects the fact that despite certain similar features in terms of extensive economic development, there are fundamental differences between a central planning system and a free market economy. Moreover, it must be stressed that delay in development processes is not tantamount to a mere time delay, but also involves economic, social, and regional distortion of the processes, for the shapes these processes take in the former socialist countries are rather different from their Western counterparts.

In contrast to the model of delayed development, the other unidimensional model, that of stages, does not focus on historical continuity, but on the momentum of breaking away from the previous development course. Fassmann (1997) says that the model of stages may be divided into three stages. The first one is the initial state of affairs of transformation into market economy, namely the period of central planning. The next stage is an intermediary stage: a gradual breakdown of the central planning system and a parallel building up of the market economy. The third stage of the model includes stabilization of the market economy. In Fassmann’s view, the intermediary stage may be further divided into two substages. One of them is the period of transformational measures, in which the elite in control of transformation into the market economy makes the most important economic decisions (e.g., decisions concerning the liberalization of the economy, the privatization of state-owned property, the discontinuance of government subsidies, etc). The next stage is a later period of transformational phenomena, a time when the results of economic political measures become manifest in practice (e.g., in restructuring foreign trade, the changes of ownership statuses, increased unemployment, and emerging enterprises).

All the above said notwithstanding, fault is also found with the stage model. Following the scheme of causality, it is seen that the model overemphasizes the role of its actors and attributes the regional processes of transformation into a market economy to a single factor: the activity of the participants of transformation. This is to say that on the one hand, the stage model neglects the—incredibly long-lasting, in some cases several centuries old—regional disparities, which had a significant impact on the regional processes of the transformation into the market economy after 1990. Another factor the stage model overemphasizes is the significance of the goals and ideals of the elite that steers the transformation into a market economy. Though these objectives undoubtedly influenced the participants’ activities, it does not follow that the actual reality of transformation into a market economy would or should have any kind of palpable objectives or a final status whatsoever.

1.3 The Myths Of Transformation Into A Market Economy

The individual subprocesses and complexity of transformation into a market economy are worth stressing also, because certain myths still make their influence felt in research. In the first place there are three particularly powerful myths: the overvaluation of the regional policy pursued in the socialist era, the unique historical character of the transformation into a market economy, and the significance of global processes.

In the period between 1960 and 1990 the political leaders of the countries of Central and Eastern Europe declared an egalitarian regional policy, which claimed to reduce dramatically or even eliminate regional disparities. However, there was an enormous gap between the declared objectives and reality: the socialist regional policy based on a completely centralized redistribution of development resources—presumed to be purposeful—yielded fictitious results. As Meusburger and Klinger have pointed out, the socialist regional policy somewhat mitigated regional disparities between living standards and residential infrastructure but it was simply incapable of reducing the disparities in really tough local factors, in particular in the field of human resources.

Discernment is further impeded by the fact that in the countries of Central and Eastern Europe before 1990 regional statistics were frequently and deliberately manipulated, forged, and framed in categories incomparable to those used in highly industrialized countries. Socialist regional policy rather obscured and concealed the internal regional disparities of the countries of Central and Eastern Europe, instead of reducing or eliminating such disparities. An uncritical acceptance of the self-image offered by socialist regional policy and an overestimation of its performance imply the danger that the regional consequences of transformation into the market economy are studied from a false point of view, and that the effects of regional disparities brought along from the socialist era, which have a significant impact on transformation into market economy, are neglected.

The second myth related to the transformation into a market economy (namely, the overvaluation of the unique historical character of the transformation process) is an unintentional ‘children’s disease’ of transformation research. It does not follow, from the mere fact that transformation from a central planning system into a market economy is a unique process of economic history, that this process cannot be described and interpreted within the framework of concepts and processes characterizing the economy of highly industrialized countries. The prime reason why this myth is to be considered dangerous is that it depicts the processes that arose after 1990 as if they were something completely new in the region.

Just to give an example: for ideological reasons, in the countries of Central and Eastern Europe there had been no unemployment in the socialist era. To be more precise, excess manpower was employed—from state subsidies—at factories. Actually, there already was significant hidden unemployment in the 1980s, but the official socialist policy declared it nonexistent. After 1990, hidden unemployment suddenly became manifest, as a result of emerging market conditions and opening the economy to the world market. In consequence, unemployment figures skyrocketed in each country of Central and Eastern Europe, something that was conceived as a new and unprecedented process, and as a rule, new phenomena were frequently interpreted as symptoms of the newly emerging regional disparities. Based on analyses of East Germany and Hungary, Csefalvay (1997) pointed out that the regional pattern of unemployment was nothing new at all—rather it rested on the different processes forcing people, regions, and countries to the periphery—and these had existed already in the socialist era.

The third myth of transformation research includes the overvaluation of the role played by global processes in the regional processes of transformation into a market economy. This myth takes the planet Earth for a mere arena of general processes, and presumes that such processes should appear in every country and region sooner or later. Historical experience shows, however, that the Earth is not an arena for global processes, rather it is a multifaceted mosaic of regions with divergent economic strength and development opportunities. Plenty of the processes that emerged in Central and Eastern Europe in the course of its transformation into the market economy and have been taken for global processes actually differ markedly from the processes characteristic of highly industrialized countries.

An extremely fast tertiarization took place, for instance, in all the countries of Central and Eastern Europe after 1990. While the rate of people employed in the service provision sector remained below 45 percent before 1990, the corresponding figure was between 55 percent and 60 percent in the mid-1990s. In economic and regional studies it has become a matter of doctrine to consider an increase in the rate of employment in the tertiary sector as one of the major indicators of postindustrial development, and to see a close connection between economic progress and the high proportion of people employed in the serviceprovision sector. However, in Central and Eastern Europe the sudden increase of the rate of people employed in the service provision sector was not an indication of postindustrial development at all; it was merely the outcome of a succession of winding ups and the closing down of nonprofitable socialist factories, a single, rapid, and dramatic deindustrialization. The example of Central and Eastern European countries is indicative of the fact that there may be very different explanations behind tertiarization—a process considered to be global. On the one hand, the assumption that a high rate of people employed in the tertiary sector involves a high capability of economic performance does not hold true for Central and Eastern Europe, for here GDP per capita is less then 50 percent of the average in the European Union. On the other hand, the underlying reasons for deindustrialization, which actually induce tertiarization, are markedly different. While in Western Europe these processes are triggered by a relocation of mass production, in Central and Eastern Europe the main reason is the disintegration of socialist industry. Finally, another significant difference is that in Western Europe the process of tertiarization took several decades, but in Central and Eastern Europe it required only a few years.

2. The Consequences Of Transformation Into The Market Economy In Central And Eastern Europe

All the subprocesses of transformation into the market economy—like the change in the economic system, catch-up, and the process of adjustment— resulted in peculiar regional consequences in the different countries of Central and Eastern Europe.

2.1 The Regional Processes Of Transformation Into The Market Economy

The change that took place in economic system, the disintegration of the centrally planned economy, and the evolution of the market economy—particularly the privatization of government-owned enterprises and the liberalization of trade—triggered a dramatic revaluation of the individual regions. Thus, subsequent to 1990, three regional processes of extreme importance took place simultaneously. In the centers of former socialist large-scale industry, privileged before 1990, the elimination of inefficient plants resulted in the evolution of crisis zones. Simultaneously, since mass dismissals affected primarily those who had low qualifications, the areas poor in human resources sank down to the level of a periphery. Finally, selective dismissals suddenly raised the value of large cities, for these have favorable human resource features and they are centrally located. With respect to their process in the course of time, the majority of these events of regional concern took place in the first half of the 1990s, thus most Central and Eastern European countries have left this stage behind.

Another subprocess of transformation into the market economy includes the efforts made for catching up with the economic achievements of the West. This endeavor took shape in two fundamental regional processes: in the strengthening of the nation-state concept at a high level of organization and in a loosening of the earlier closed borders of nation states. The concept of the strengthening of the nation state at a high organizational level and the renaissance of nation states in Central and Eastern Europe—and in particular in South Eastern Europe—are generally explained by a revival of ethnic conflicts. Even though ethnic conflicts are deeply rooted in the history of these countries, catch-up efforts are highly perceptible in the present renaissance of nation states. This is something to do with the fact that the different countries of the region had set their admission to the European Union as a primary goal. However, it soon turned out that ‘nonproblematic’ small states had much greater chances for an early admission than states under internal ethnic tensions or those loaded with seriously underdeveloped regions (i.e., the peaceful separation of the Czech Republic and Slovakia in 1993). Nevertheless, the renaissance of nation states is still a rather controversial phenomenon. This is because Central and Eastern European countries have achieved independence and sovereignty—after many decades or for the first time in history—exactly at the time they have to give up an increasing number of elements of sovereignty as a result of Europe’s increasing integration and to the benefit of a supranational level of organization.

The other regional consequence of catch-up processes involves the loosening of earlier strictly-closed borders, which ran its course in a similarly controversial manner in Central and Eastern Europe. Though political motifs had significant roles in this process as well—just think of the demolition of the Berlin Wall and the Iron Curtain in 1989—economic incentives went deeper. With borders closed no European integration or economic catch-up may be realized. Only free crossing—the flow of resources, capital, goods, labor force, and information—may create chances for Central and Eastern European countries for a catch-up with the West. In Central and Eastern Europe, however, the majority of borderland areas have become mere passageways of the crossroads type except for the single area of the Austrian-Hungarian border region, which has turned into a rapidly growing economic zone. Capital, labor force, and information all find their ways through such crossroads as well. However, the flow of resources is not targeted at the borderlands themselves; they merely pass such regions and go on to farther located centres.

Finally, the third subprocess of transformation into the market economy includes adjustment to the transition of highly industrialized Western countries. This also triggered differentiated regional processes in Central and Eastern Europe. In the last two decades of the twentieth century the industrialized countries of the West saw a transition characterized—at least from the point of view of the adjustment Central and Eastern European countries—by two fundamental processes: the penetration of flexible production methods and the relocation of the labor force and cost-intensive mass production. Thus Central and Eastern European countries have got three alternatives from which to choose for adjustment. Fordist reindustrialization means the acceptance of relocated high-tech industrial mass production from highly developed countries. Another way is given in the post-Fordist neoindustrialization or the promotion of naturalizing flexible production methods. The third alternative offers the possibility of developing post-Fordist central regions primarily by strengthening the transfer of capital and knowledge in the large cities. From among these three alternatives for Fordist reindustrialization, or the settlement of labor-intensive industrial production, is unambiguously predominant, while post-Fordist neoindustrialization and the evolution of post-Fordist regional centers are isolated phenomena in Central and Eastern Europe.

2.2. The Regional Pattern Of Transformation Into A Market Economy In Central And Eastern Europe

The best known and the most popular regional pattern of Central and Eastern European transformation into the market economy was created by Gorzelak (1996). In Gorzelak’s view the losing and winning regions of transformation from centrally planned economies into market economies follow the traditional west vs. east developmental division of Central and Eastern Europe suit. The losing regions along the eastern borders of Poland, Slovakia, and Hungary constitute a single continuous underdeveloped zone he calls the ‘eastern wall’. In contrast to these, the winning regions are located mainly in the western part of Central and Eastern Europe. If the winning cities are connected by a fictitious line, the form of a ‘boomerang’ is given, commencing from the port of Gdansk, proceeding towards the west through Poznan and Wroclaw to Prague and then, following the curve of the boomerang to pass Brno, Vienna, and Bratislava down to Budapest. However, this boomerang is not a consistent formation because the Budapest–Bratislava–Vienna triangle has a special role within it. This is the region where the speediest transition to a market economy was experienced and which had become growth regions already by the middle of the 1990s. The northern arm of the boomerang, however, is more of a fictitious supplementation of this developmental zone, while Warsaw and Lodz have been left out of its merely on account of their geographical distances.

Already its shape suggests that this ‘boomerang’ wishes to be a counterpart of the well-known western ‘blue banana’ (i.e., the primary economic zone of European urbanization that stretches from southeast England through the Ruhr area to the large agglomeration in South Germany and North Italy) and therefore assumes that such a developed zone evolved in Central and Eastern Europe after 1990. As a critical remark it must be mentioned, however, that the two zones significantly differ from each other in several respects. On the one hand, the highly industrialized zone of the ‘blue banana’ of Western Europe is not a recent development on our map, for the region at issue has always been the innovative driving force of Europe, whether the point is the spread of literacy in the early Middle Ages, Reformation in the seventeenth century, or industrialization at a later period. As against this, the cities of the ‘Central European boomerang’ have not invented but received many of these innovations from the ‘blue banana’, moreover, with a considerable delay in time.

Another significant difference is that the cities of the ‘blue banana’ are interlinked with myriad economic and social ties; the economic and social relations of the cities making the ‘boomerang’ are rather feeble, though historical development was similar to the western region. The reason is that the cities of Central and Eastern Europe have never focused on one another; on the contrary, each of them has always had a western orientation. Prague, for instance, was linked with Berlin and Nuremberg, while Budapest focused on Vienna and Munich.

3. What Has The Future In Store?

At the turn of the millennium the majority of Central and Eastern countries are over the hump of the most sensitive period of transformation into the market-economy, the period which required the greatest social sacrifices. Private property has prevailed in the economy, the most important institutions of the market economy have been established, foreign working capital has flowed into the countries and the economy has stabilized. Transformation analysis has been more or less capable of following these changes, though a few questions remain unanswered. In the operational market segments, for instance, we have uncertain knowledge first and foremost of the housing and labor markets. There is the issue of a missing coherent ‘grand theory’ which would be able to give a consistent framework to the explanation and interpretation of the regional processes and consequences of transformation into the market economy.

However, in the beginning of the twenty-first century the above issues are not the only questions to deal with. Radical new issues will have to be faced by Central and Eastern European countries. One of the most serious challenges of the first few decades of this century will certainly include European integration, and more specifically their admission to the Union. This is a challenge that will certainly trigger whole trains of changes both in the western and in the eastern regions of Europe.

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