27 September 2000, Volume 2, Number 18The West's Relations with Eastern Europe Since 1989
Usually we know what we want and often believe that we also know HOW to get it. This relates to individuals and groups of people such as organizations, societies, or governments. However, despite our belief that we know how to obtain what we wish, sometimes we fail. International relations, just as daily life, is no stranger to this phenomenon. Let us, for instance, look at the West's relations with Eastern Europe since the collapse of communism.
Nowadays nobody seriously argues that foreign assistance is irrelevant in respect to the systemic change which Eastern Europe has been going through since the fall of communism. Yet, the Western world's attitudes and policies towards fundamental political and economic changes in the region leave much to be desired. Western politicians appear to believe that a mixture of economic assistance and verbal encouragement are sufficient to guarantee the successful change of communist regimes into liberal democracies based on a market economy.
The assumption is difficult to understand. Consider the fact that economic assistance for Third World states since the 1950s has thus far produced poor results; consider also that there is much evidence that the transformation of a Third World state into a Western-type regime seems to be much easier to accomplish than the transition from communism to a liberal democracy. Third World economies are, to a considerable extent, market economies based on private ownership. Yet, there has so far been little success in bringing about their transformation into modern, Western-styled economies with high living standards and a comfortable degree of "welfarism."
Why then should the East European states be more successful with their systemic change than most countries in Latin America, Asia, and Africa? Why are many commentators in the West optimistic when they talk about transformation in Eastern Europe, and pessimistic about the future of the Third World? Many East Europeans, on the other hand, believe this Western optimism to be misplaced.
To illustrate: Back in 1991, "The Economist" (21 September) magazine argued: "During the communist years, small groups of economists throughout Eastern Europe had always quietly studied Western economics under their desks." This fact, the magazine believed, made the transformation of the command into a market economy in those countries an almost certain success. "The Economist" was thus assuming that theoretical know-how possessed by a few persons is almost sufficient to cope with the fundamental metamorphosis. If this were the case, by now the Third World would already have ceased to exist. Experience of a market economy, as opposed to theoretical familiarity with the concept, is not even mentioned as a factor in connection with the systemic change of post-communist countries. And neither are political will and the ability to achieve the desired goals even mentioned.
It is often pointed out that to function efficiently, a modern market economy relies on institutions and rules established over literally centuries, property and contract laws and the courts to enforce them, accounting and bankruptcy rules, tax codes, pension and unemployment systems, labor laws, and the supervision of banks and financial markets. Until recently, none of these has been present in Eastern Europe, let alone modern communication and transport systems, which are simply still non-existent to a large degree.
In addition, the game rules of the contemporary Western business community, domestic and international, are almost completely unknown to Eastern European politicians and their constituents alike. It is not that these principles were forgotten or abolished after the imposition of communism; but one is hardly exaggerating when stating that they never existed there, with the exception of the Czech lands. In other words, when the feudal system was gradually transformed into a liberal democracy and market economy in the West, a similar process did not occur in Eastern Europe.
A lack of previous experience with a market economy and liberal democracy are the most serious obstacles to successful systemic change in Eastern Europe for the foreseeable future. This factor, however, appears to be only vaguely perceived in the West. On the contrary, it is thought that the introduction of a certain number of Western institutions, technologies, and capital into Eastern Europe would be sufficient to guarantee success. However, the Third World practice demonstrates clearly that this step more often than not creates but a facade, behind which there is still a great deal of poverty and very little real democracy.
By now we know that technology is not culturally indifferent; that in terms of quality two products manufactured according to the same technology, say in Germany and Russia, would be most unlikely to be of the same standard. And we know, well in advance, which of the two would be of lower quality and for what reasons.
Many people in the West seem to believe that poor people are poor only because of entrenched poverty from which there appears to be no escape, and that relief may come only from the outside, in the form of Western capital. To put it differently, what Eastern Europe allegedly lacks is capital to deal with the transition to a market economy and welfare state. The corollary is that credits, loans, and subsidies ought to be extended to Eastern Europe and this would be sufficient to guarantee success. The approach overlooks the enormous debts owed by Third World and former communist states to the West, which demonstrates that borrowed capital can be -- and often is -- squandered. Why should it be different now?
The answer supplied by the advocates of capital assistance is that in the past this type of aid nonetheless did occasionally work, and they cite the examples of the U.S.'s assistance to Western Europe and Japan to rebuild their war-destroyed economies through large capital loans and credits. Although these are valid examples, they cannot automatically be assumed to apply to Eastern Europe. As far as Western Europe is concerned, economic assistance was extended to countries that previously operated as modern market economies; the task was aimed at rebuilding them. In the case of contemporary post-communist Eastern Europe the situation is altogether different. The task envisaged is -- the Czech Republic aside -- not to rebuild destroyed capitalism, a market economy, and a liberal democracy but to establish them firmly for the first time, nearly from scratch. It is the argument of this article that the West's assistance to Eastern Europe since 1989 was not as effective as it could have been, had the West been aware of what the post-communist states needed most to attain these goals and HOW to bring about their achievement.
But to start with: Many Westerners wonder why should one bother about these countries at all? On what grounds should Western taxpayers support financially systemic change abroad which, plausibly, should not be their concern. Is it a duty of the West to come to the rescue of the East? If it is not, then, for what reasons ought it, nevertheless, be done: political, military, economic, moral or, perhaps, a combination of some or all of them?
Furthermore, is it really in the interests of the West to see a liberal democracy and market economy flourishing in Eastern Europe, it is asked in Western countries. And if not, should the help to the region be extended anyway just because charity is a noble cause in itself? Opponents of aid being extended to Eastern Europe contend, however, that charity begins at home, where it should be earmarked for the unemployed, or for job creation in one's own country rather than transferred abroad.
With the collapse of communism, the downfall of the Soviet empire, and the break-up of the Soviet Union itself, the danger of another world war, has disappeared, it is also argued. According to this view, the Soviet military threat to the West does not exist any more. Unlike in the past, Moscow is presently mainly preoccupied with its own domestic problems; its current efforts are concentrated not on external but internal matters. Russia, the successor state of the Soviet Union, nowadays is economically in crisis and militarily severely weakened -- evidence of the latter being its troops' miserable performance in Chechnya, where the Russian soldiers failed to defeat a seemingly poorly trained and equipped citizen force of a country inhabited by less than a million people, whereas the population of Russia is above 150 million. If, so the argument goes, with the disintegration of the Soviet Union, the security problem has also vanished, and this should make it possible for the West to concentrate on its own ecological, social, and economic problems, to name but a few.
Advocates of the aid, on the other hand, claim that it is in the West's long-term interest to extend it in order to bring about the forging of an enduring democracy in the East. They argue, for example, that Russia -- dispossessed of the Ukraine, now an independent state -- is clearly much less of a military threat than it used to be. Ukraine is a large industrialized country with a population of more than 50 million people, and without it Russia is drastically weakened both militarily and economically. For that reason, the argument goes, the West must ensure that Ukraine will never become a part of Russia again. For similar reasons, other East European states should also become a lasting component of the democratic world. The combined economic and military power of these countries is meaningful and therefore they must not fall under Moscow's domination ever again.
There is also an economic reason for aid being extended to all former communist countries. It is asserted that if the assistance does not materialize, impoverished East Europeans will cross the borders with the West in large numbers, thereby creating a refugee problem at a time when unemployment in the European Union is already high. A great influx of economic refugees would only exacerbate that problem which, in turn, may have political repercussions. One of the consequences might be a substantial raise in the influence of extreme nationalist, anti-immigrant parties, a phenomenon which is already visible and steadily mounting. To avoid it, it is claimed, one would be wiser to grant refugee-generating states financial aid as a preemptive measure that is less costly both economically and politically. Immediately after the demise of communism, the richest countries of the West promised $45 billion to Eastern Europe over three years between 1989 and 1991. By the summer of 1991, only 11 percent of the total commitment was disbursed (Berend, 1995, p. 142). This is hardly impressive. Western aid that was actually disbursed, including private investment, totaled $18 billion by the end of 1993. In fact, it was considerably less than that, since a huge capital outflow in the form of payments of interest and principals and of profits and capital withdrawals occurred at the same time. Therefore, in reality one can talk about a net capital OUTFLOW from the region. For example, net capital outflow from Hungary, a country which gained the most investment from the West, reached $6 billion during that period (Berend, 1995, p. 143). It follows that foreign assistance thus was not sufficient to sustain the desired result, and could not play a determinant role in helping a smooth transformation.
To overcome the enormous cost involved in the transformation of communist countries into liberal democracies and market economies, which is beyond the financial resources of any individual state, assistance organized by a group of nations is a distinct possibility. One would have thought that the 15 Western democracies of the EU -- most of them rich and adjoining Eastern Europe -- would take the lead in extending a helping hand in their own interest. It is undoubtedly in the EU's interest to see Eastern Europe politically stable, democratic, and economically flourishing. And yet its assistance, though meaningful, is not impressive. It appears that neither the EU nor the West at large "have had a clear idea of how to assist the consolidation of democracy and they have been too protectionist and too ungenerous with their aid to stimulate the necessary dynamism in the new market economies" (Berend, 1995, p. 142).
Since 1989, several institutions have been set up to deal specifically with post-communist systemic change such as Poland-Hungary Aid for Restructuring the Economy (PHARE), established by the European Union. The U.S. Agency for International Development (USAID) created a new entity to manage aid to the new recipients in Eastern Europe, called the Bureau for Europe and the New Independent States. Unlike the former, it works more with non-governmental organizations. Also, an international bank, modeled on the World Bank, was established for the purpose of financially assisting East European countries (Wedel, 1995, p. 47). Hopefully, these institutions will turn out to be better suited to a leading role than the IMF and the World Bank with respect to fundamental change as a whole. It goes without saying that special circumstances require special institutions to address them.
Yet what is conspicuously missing among all the institutions established with the purpose of addressing Eastern European problems is an institution designed to deal specifically with issues not directly related to the economy. What I have in mind is an international organization in the field of education, broadly conceived to address most aspects of public life deemed important in the course of systemic change. Its task should be to change traditional habits, ideas, and activities that are inappropriate, ineffective, or counterproductive to the quest to forge a sustainable democracy and a welfare state based on a market economy. Is it not strange that there is an American University in Paris, but none in Warsaw, where it is more needed to expose the local population to Western ideas, especially in the field of social and economic sciences, jurisprudence, business, and management? Even if resistance is to be expected in some parts of the region to establishing these Western educational institutions, reluctance to do so could be overcome with incentives. To continue to act in the old ways under changed circumstances is more often than not a recipe for failure. Vested interests and inertia should be broken, and the sooner the better, since time works in their interest: discredited at the outset of the communist fall, they already started to reassert themselves and to regain some of their lost former strength. But one must also be aware that it is an illusion to believe that such forces can be totally obliterated in the foreseeable future.
Institutionalized assistance, organized with the purpose of bringing new skills and modes of activity to the region, is definitely a lot more important in the long-run than financial aid is. It cannot be expected that the influx of foreign capital to Eastern Europe will last forever. However, new habits, ideas and expertise -- once acquired -- would exist indefinitely, superseding those which made that part of Europe economically backward and politically unstable. In the long run, perspective gains attained in that way would be worth more than direct financial aid for both the West and the East. Once the region prospers economically there no longer will be a need to assist it financially. Furthermore, it will result in stepped up trade between Eastern Europe and the rest of the world, resulting in an increased standard of living, thus benefiting all countries involved. This, in turn, enhances the chances for democracy not to be a short-lived phenomenon, but an enduring feature. A combination of an economically prospering and democratic Eastern Europe should lead to a reduction in arsenals and a cut in military expenditures which can then be spent on other purposes, such as social security, education, health infrastructure, transport and communication, to name but a few.
The second kind of assistance, in the form of direct foreign investment, though badly needed at the outset of systemic change, becomes less important after a while. Initially, the demand for foreign capital, technology, new management skills, and marketing was high in Eastern Europe, but even then it was not crucial for domestic economic growth. Evidence shows, for instance, that the Czech Republic, which received much less direct foreign investment in absolute figures, made more progress to a market economy than Russia; the latter's results achieved hitherto are not very impressive (Csaba, 1995, p. 290). In terms of investment, domestic savings are more important than an influx of foreign capital, as the example of the newly industrializing countries of Asia clearly demonstrates. In these countries, over 85 percent of accumulation had to be saved domestically, and the implications for economic growth and development are manifestly straightforward (Csaba, 1995, p. 290).
This is not, however, to argue that the cumulative impact of foreign private investment, know-how, grants, and foreign debt relief linked to performance, as well as assistance coming from international organizations such as the IMF and the World Bank, does not matter much (Gomulka, 1995, p. 343). On the contrary, it matters greatly if it is spent cost effectively. The activities of George Soros, an American philanthropist, seem to be a case in point. By 1993, he alone established foundations operating in 23 countries with a total budget of $300 million (Sunley, 1996, p. 10). These foundations operate mainly in the field of education, culture, mass media, science, and humanities, filling an important gap in an area crucial to the overall successful completion of systemic change, but under-appreciated, and, hence, neglected by Western governments.
As to fundamental transformation, the most powerful single leverage the West has to see Eastern European countries heading the way it wants, is the EU or, more precisely, an opportunity resulting from the fact that most, if not all, former communist states wish to join it. The union is a political and economic institution of wealthy, democratic countries. The East Europeans' desire to join it stems less from those political reasons that brought about the union's formation and more from economic "reasoning." Most East Europeans are persuaded that membership in the EU will almost overnight solve the economic problems inherited from their communist past. They also believe that this will immediately bring about high standards of living comparable to those in the West.
Whether this perception is realistic is not an issue here. What matters is that it gives the EU an enormous influence in Eastern Europe, which it could -- and should -- utilize in a way beneficial to itself, as well as to its Eastern neighbors. Thus far the European Union has played its cards rather poorly. Soon after the collapse of communism it should have produced a timetable for all potential candidates, with a detailed list of necessary and sufficient conditions required to become a member. The timetable is important and it should not be a long-term one for two reasons. First, if accession were delayed for, say, one generation or about 25 years, it would lose much of its attraction, because East Europeans will not want to wait that long to see the first tangible results. Under the old regime, they were told time and again that it would take many years to achieve economic prosperity. They simply do not want to listen to the same story again.
Second, one must also bear in mind that a timetable designed for a long period may not bring about the expected results. In order to complete systemic transformation it ought to be done rapidly. Otherwise it may stop halfway, inter alia due to the unavoidable pain caused by it. There is no doubt that a long duration of fundamental change seriously affects its very chances of success. Conversely, the shorter the transition period, the greater the chances of its ultimate success. It is not only that a long transformation prolongs suffering, anxiety, and insecurity in many individuals, but it also reinforces the vested interests of remnants of the former regime -- persons and institutions -- profiting from the volatile situation. It follows that the revolution must be completed swiftly or it may fizzle out.
In respect to establishing a viable democracy and a prosperous market economy in Eastern Europe it is, however, less important whether one day some countries of the region will indeed join the EU. What must be borne in mind is that now is the opportunity to induce them to do so. Once democracy and capitalism strike deep roots there, it will become almost irrelevant whether they are in or outside the EU, as by then they will have reached a point of no return. In any case, it will be almost as irrelevant for democracy's strength as Norway's membership in the union or lack of it is for that country now. But as to the economy, there is no doubt that membership in the union would be beneficial to the former communist countries.
It took the European Commission as long as seven and a half years since the communist downfall to invite, in July 1997, five East European countries (the Czech Republic, Hungary, Poland, Estonia, and Slovenia) to begin talks on the first wave of expansion. The EU set three main criteria for beginning accession talks: political, which meant stable institutions that guarantee democracy, the rule of law, human rights, and the protection of minorities; economic, which meant a functioning market economy that can withstand competitive pressure from other European Union countries; and the ability to take on the obligations of membership, in particular, implementing the common legislation of the European Union. Of the 10 Eastern European applicants only the above mentioned countries were regarded as capable of meeting the criteria in the mid-term, while Slovakia, Bulgaria, Romania, Lithuania, and Latvia were not. Eventually, it was decided to begin accession talks with all candidates, though Romania's and Bulgaria's chances of access in the near future are clearly remote.
But even in times of economic hardship man does not live by bread alone. Security is the next item on the agenda of Eastern Europe's new independent states. For this purpose, most of them are eager to join the North Atlantic Treaty Organization (NATO). The postcommunist countries of Eastern Europe still perceive Moscow as a serious threat to their recently regained independence and several hastened to apply for NATO membership.
This, in turn, gives the West another excellent opportunity to ensure that systemic change in the region continues to take the right course. Although democratic rule thus far has not been a formal pre-condition to join, it should be made so henceforth. Also, an economy based on market principles and friendly relationships with their neighbors should be explicitly declared as the other necessary condition to join the organization. There is evidence that implicitly, things have been taking this course for some time now. But the sooner these conditions are officially institutionalized, the stronger the chance that their purpose would be achieved. Ambiguity may be part of the diplomatic game, but sometimes it may also become self-defeating.
Initially, Russia opposed the eastward expansion of NATO, fearing that it would diminish its own security. After several years of protracted negotiations with NATO officials and Western heads of government, Moscow reluctantly agreed to the expansion of NATO into East-Central Europe under certain conditions. A deal was reached in Moscow in May 1997. Soon after, a NATO-Russia Act was signed by Russian President Boris Yeltsin and his Western counterparts, including a pledge by the alliance that it has no intention of stationing substantial forces permanently in the new member states. Two years later, in March 1999, the Czech Republic, Hungary, and Poland joined the Western military alliance ("The Australian," 16 May 1997).
In an effort to ease Russian concerns, NATO refrained from deploying divisions or stationing nuclear missiles in the new member states ("The Australian," 15 May 1997). It also formally acknowledged that Russia must be engaged in the management of European security. This is an important shift in the direction of making NATO not just a military alliance but a system of collective security. The NATO-Russia Act, signed in Paris, gives Moscow full consultation rights with the alliance through a NATO-Russia Council. The U.S. describes this "a voice, not a veto," allowing for the maximum possible consultation and joint decision-taking ("The Australian," 28 May 1997).
It appears that the West's relations with Russia as regards security issues are better and proceed faster than the economic ones, though it is the latter which still requires more cooperation, as well as Western aid and know-how. Sufficient to say that by the end of 1995 Russian foreign debt reached $124 billion, thus overtaking Brazil as the most heavily indebted country in the world (Hedlund and Sundstrom, 1996, p. 910).
To sum up: from the above discussion it clearly follows that although the West has the means to largely ensure that the political and economic transformation of Eastern Europe move in the direction desired by it, it lacks the vision and, above all, willingness to pursue these aims wholeheartedly. There are two reasons for this: the cost involved and an unawareness of what the East needs most today.
In respect to cost, its sheer size makes Western politicians apprehensive of any significant enlargement, least they lose domestic electoral support. And that factor, it seems, matters more than anything else. As a result, the West's capital assistance to the region will probably not be considerably stepped up above levels reached by the late 1990s. Once the military threat from Moscow and the likelihood of a world conflict diminished, the average Westerner and his or her elected political representatives became complacent, and hence less keen to spend large amounts on matters related to international security. Experience shows that only an immediate and unmistakably clear military threat is likely to change this mood. And that threat is mercifully not looming. But sadly, also negatively affecting Western readiness to aid the East.
Furthermore, the West seems to believe that money alone can solve all, or almost all, problems involved with the ongoing fundamental changes in Eastern Europe. This, however, is not the case. In the long-run it is not money, not even new institutions and laws, but human beings' habits, ideas, know-how and modes of activity that matter most. That has been hitherto the least understood element of the equation and, therefore, the almost entirely overlooked factor in the West's dealings with Eastern Europe since communism crumpled there. It seems that for change to occur in Eastern Europe, change must come to Western Europe too.
The author is associate professor in the Department of International Relations, University of the Witwatersrand, Johannesburg, South Africa.
"The Australian" (1997)
Berend, Ivan T. (1995), "Alternatives of Transformation: Choices and Determinants: East-Central Europe in the 1990s" in Beverley Crawford (ed.), Markets, States and Democracy: The Political Economy of Postcommunist Transformation (Boulder: Westview Press), pp. 130-149.
Csaba, Laszlo (1995), The Capitalist Revolution in Eastern Europe: A Contribution to the Economic Theory of Systemic Change, Aldershot: Edward Elgar
"The Economist" (1991).
Gomulka, Stanislaw (1995), "The IMF-supported Programs of Poland and Russia, 1990-1994: Principles, Errors, and Results," in "Journal of Comparative Economics," no. 20, pp. 316-346.
Hedlund, Stefan And Sundstrom, Niclas (1996), "The Russian Economy After Systemic Change," in "Europe-Asia Studies," September, Vol. 48(6), pp. 887-914.
Sunley, Johnathan (1996), "Post-Communism: An Infantile Disorder," in "The National Interest," Summer, no. 44, pp. 3-15.
Wedel, Janine (1995), "U.S. Aid to Central and Eastern Europe: Results and Recommendations," in "Problems of Post-Communism," May-June, Vol. 42(3), pp. 45-50.