Extreme Free-Market “Shock Therapy” in Postcommunist Eastern Europe Was a Disaster

Free-market ideologues claimed that economic “shock therapy” would turn communist states into models of prosperity. Instead it triggered a recession deeper than the Great Depression and fostered the ultranationalist right in countries like Hungary and Poland.

Scholars both within and outside Central Eastern Europe are revisiting the postcommunist transformation strategies of the 1990s. (Jaap Arriens / NurPhoto via Getty Images)

With the rise of the nationalist right, liberal intellectuals in Central Eastern Europe have started to revisit self-critically the postcommunist transformation strategies of the 1990s. “We were stupid,” was the blunt conclusion of the late Polish philosopher Marcin Król. Król’s thesis was that the liberal strategists neglected the social consequences of transformation. In his view, this insensitivity prepared the ground for a nationalist backlash.

The first essays on this issue were aimed at domestic audiences, but social scientists from outside the region have also begun to engage in a similar process of soul-searching, albeit with a slight time delay. Taking Stock of Shock: Social Consequences of the 1989 Revolutions by Kristen Ghodsee and Mitchell A. Orenstein is an intervention in this debate.

The Balance Sheet

The two US-based researchers bring different disciplinary approaches to their study: Orenstein specializes in issues of political economy and has also done studies for the World Bank, while Ghodsee is an anthropologist whose focus is on gender issues. The book’s geographic scope is very broad, encompassing the whole region from the former German Democratic Republic — which is usually absent from comparative research on the post-socialist countries — to the Central Asian successor states of the Soviet Union.

Ghodsee and Orenstein focus on the social impact of capitalist transformation, but also conclude Taking Stock of Shock with a chapter on its political consequences, which they characterize as the “patriotism of despair.” In their attempt to identify the social failures of capitalist transformation as the root cause of the rise of nationalism, the authors strike a parallel with the liberal self-critical analyses we have mentioned. However, Taking Stock of Shock rarely quotes those analyses, and confines its scholarly references to publications that have appeared in English.

Ghodsee and Orenstein identify two competing international narratives. One is the mainstream success story, which insists that there was a lasting upturn after the inevitable downturn caused by radical shock therapy. They call this the J-Curve perspective. They refer to the alternative viewpoint as the “disaster capitalism” approach, which highlights the grave deterioration of many socioeconomic indicators, such as mortality or out-migration. The authors see evidence that can be adduced in support of both perspectives across Eastern Europe.

In the first section of the book, Ghodsee and Orenstein look at economic reform strategies and their uneven economic and distributional impact. They identify the international financial institutions (IFIs) and their key economists as the prime movers of the capitalist transformation strategy.

These institutions promised there would be an upturn after deep initial pain. They advocated rapid privatization as the key plank of economic reform plans that were conceptually shaped by the so-called Washington Consensus. Monetary stabilization and institutional restructuring also formed part of such plans, while there would be limited, targeted programs to mitigate their social costs.

There is a gap in the book’s treatment of this process. Ghodsee and Orenstein do not discuss the social interests that lay behind the transition strategies based on high-speed privatization, which included both domestic aspirants to the role of a capitalist bourgeoisie (such as directors of the existing state-owned firms) and transnational capital. Nor do they address the role of local social and political actors in detail.

While the influence of the IFIs as gatekeepers for access to international finance did condition policymaking quite significantly in the postcommunist states, domestic interests also had a substantial impact. Local experts, who usually originated in the technocratic institutions of state socialism, drafted most of the transformation programs. Many of these local “reform economists” shared the vision of the IFIs, and they found common cause with the technocratic and anti-political visions held in dissident circles.

The policy process thus had a profoundly technocratic and socially exclusionary character, which created resentment. Some of the key domestic neoliberal reformers, such as Poland’s Leszek Balcerowicz, remain highly controversial figures today.

Scars of Transition

Ghodsee and Orenstein state that the recession which accompanied the postcommunist transformation was much deeper than expected, and they compare it with the US Great Depression. For the group of countries that were least badly hit — mainly the Visegrád states (Czechia, Hungary, Poland, and Slovakia) — this is an accurate comparison. However, for the median post-socialist economy, the recession was even deeper and more prolonged, with a 40 percent drop in GDP per capita compared with 30 percent in the United States after the Wall Street Crash.

In the worst cases, such as Ukraine, GDP plummeted by 60 percent in the 1990s. The states that were hardest hit during the transition — mainly post-Soviet and post-Yugoslav ones — have yet to match their 1989 GDP levels. Ghodsee and Orenstein conclude that it would be more accurate to speak of a “transition catastrophe” in these instances. Some neoliberal economists have contested these figures by referring to unofficial economic activities that they believe are underestimated. But as Taking Stock of Shock emphasizes, we can confirm that there were deep recessions by estimating output losses in alternative ways.

Growing income inequality aggravated the effects of the transformation recession, with a minority of the population harvesting most of the fruits of economic recovery. In their radiography of inequality, Orenstein and Ghodsee focus on the individual distribution of income (Gini coefficient) and the income share of the top 1 percent. Both indicators show a significant increase of inequality, at least up to 2005.

In some successor states of the Soviet Union and Yugoslavia, the resulting inequality has been particularly strong. One country stands out in this respect: resource-rich Russia. In 2015, the top 1 percent of Russian income earners received 20.2 percent of all incomes.

At the other end of the income scale, poverty increased massively. As Ghodsee and Orenstein note, the shift to targeted transfers, the phasing out of subsidies, and the deterioration of social services worsened living conditions for vast sectors of the population. Taking Stock of Shock does not discuss the functional distribution of income — the evolution of profit and wages shares, and the question of profit remittances — which leaves more explicitly class-related distributional issues outside the book’s focus.

At the conclusion of their economy section, Ghodsee and Orenstein provide a map of the relatively good and bad post-socialist economic performers. The better performers are in Central Eastern Europe, the worst in the post-Soviet and post-Yugoslav spaces. As the authors point out, the growth performances of countries that carried out neoliberal reforms rapidly were not significantly better than those of “slow reformers”: in fact, the latter had the advantage, contrary to predictions.

The studies that Ghodsee and Orenstein find most convincing attribute varying levels of performance to geographical factors. According to such reasoning, a key determinant of economic success is proximity to the West and the foreign direct investment (FDI) flows that result from this. This perspective attributes good GDP results in the post-Soviet space to the possession of oil and gas revenues.

However, this is a rather apolitical reading of the map. It is hardly a coincidence that all of the “transition catastrophe” cases were located in the post-Soviet and post-Yugoslav areas. In these countries, the processes of capitalist transformation and state disintegration went hand in hand, which had a massive impact. In addition to this factor, there are visible historical continuities that we can observe with earlier core-periphery relations, affecting the pattern of investment.

Demographic Consequences

When Taking Stock of Shock looks at the demographic consequences of capitalist transformation, the authors start with the most fatal consequences: temporary mortality increases and the related decreases in life expectancy. The sharpest fall in life expectancy came in the early 1990s, during the most intense years of transition, with a slow increase from that point on.

To some extent, the demographic picture replicates the economic one. We can find the most dramatic falls in life expectancy in post-Soviet countries, although this phenomenon was primarily concentrated in the European successor states rather than the Central Asian ones. Russia did worst, with life expectancy declining by 6.8 years between 1989 and 1994. The experiences of Latvia, Ukraine, Estonia, and Belarus were not much better.

Widespread alcoholism, which did not play the same role in Central Asia, aggravated psycho-social stress and the collapse of health services in Europe’s post-Soviet countries. In Russia, Ukraine, and Belarus, it took an especially long time for life expectancy to recover. By 2016, life expectancy in Ukraine was still barely 1.3 years higher than it had been in 1989. This was the worst performance in the region, with Russia and Belarus not doing much better.

While the increased levels of mortality and decreases in life expectancy are indisputable, many neoliberal economists have denied that these developments are related to the reforms of the transition period. But Ghodsee and Orenstein refer to a number of studies that have established, for example, a correlation between faster privatization and increased mortality rates. Levels of fertility also collapsed under the changed circumstances.

Large-scale emigration was another important demographic consequence of this period. This trend has been especially pronounced in Southeastern Europe, but we can also observe its impact in the Baltic countries, the Southern Caucasian region, and Central Asia. Its geographical distribution thus only partially replicates the economic one. Despite its comparatively weaker economic performance, Russia has actually attracted migrants from many of the Soviet Union’s other successor states because of its higher wages and more varied economic structure.

Ghodsee and Orenstein concentrate on the story of migration from East to West, noting that younger and better educated people have been more likely to follow this path. This population drain has left whole regions almost deserted. The remittances sent back by workers overseas may have brought some respite, and scarcity of labor power has sometimes pushed wages up a bit on the home front. However, mass emigration also means the loss of skills and expertise, and migrants from the postcommunist states often find themselves working in jobs that are below their qualification levels.

Popular Perceptions

Taking Stock of Shock goes on to discuss the subjective perceptions of capitalist transformation, drawing on ethnographic research and opinion polls. Ethnographic studies, conducted partially in factories and partially in villages and towns, bring us voices from below. Much of the research has recorded feelings of humiliation and lost dignity. An older former collective farm worker concisely summed up these feelings in a statement that the book cites: “Now you are trash, not a human. If you don’t work, who considers you a person?”

This goes hand in hand with a loss of collective sociability, as Ghodsee and Orenstein point out:

Many citizens believe that this collective identity or shared poverty was replaced by a crude form of selfish individualism that was orthogonal to the values that they grew up with.

Expectations for a better future under capitalism were not fulfilled for the rural population or the popular classes in urban areas. Many blamed themselves for their predicament.

The interpretation of opinion polls over the space of three decades is not a straightforward undertaking, since the questions being asked have changed, along with the understanding of key notions like “market economy” on the part of respondents. At first, many associated this term with prosperity, but after experiencing the darker side of capitalism, their understanding became more critical.

Surveys trace increasing levels of disenchantment with key economic and political concepts of the transformation during the early years of crisis, followed by a certain recovery of public confidence in those concepts before the financial crisis of 2008 temporarily fostered a more critical mood once again. The uneven geographical spread of discontent overlaps to a significant extent with the socioeconomic performance of different countries, with levels of discontent strongest in the post-Soviet states and Southeastern Europe, and less pronounced in Central Eastern Europe.

For example, in Central Eastern European countries (including the former GDR), more than 70 percent of respondents said that they approved of “the change to a market economy” in a 2019 survey. There were two countries covered by the survey where a majority did not approve: Ukraine and Russia. Approval of the shift to a “market economy” has tended to dwindle in Russia since 1991.

In Central East European countries, with the exception of Hungary, approval rates for the “change to a multiparty democracy” were also above 70 percent — higher in 2019 than in 1991. Public sentiment was more skeptical in Lithuania, Bulgaria, Ukraine, and Russia. Ukrainian respondents were particularly discontented in the wake of the financial crisis.

In Russia, Ukraine, and Bulgaria, only about one-fifth of the respondents thought the transition had “benefited average people.” Poland and Czechia were the only countries where more than half of those surveyed believed this to have been the case. Polls also show that there is usually wide support for a strong state that supports weaker social groups. As the authors conclude: “Only a minority of the post-communist population accepted the new social contract, which seemed to be based on little more than raw greed, exercised under conditions of limited legal restraint.”

Protest and Populism

In their summary of ethnographic research, Ghodsee and Orenstein stress that disadvantaged groups have frequently resigned themselves to their situation. However, there are several cases of social protest movements that have emerged against the odds in countries where the socioeconomic results of the transition were rather disastrous. These waves of mobilization often had limited results because they did not find allies in the political arena. Nevertheless, they have the potential to endanger the established power structures.

In the wake of mass demonstrations in the Middle East in 2011, 38 percent of the respondents in a Russian poll conducted by the Levada Center thought that similar revolts would be possible in Russia. We can understand nationalist mobilization strategies from above, such as the rise of imperial nationalism in Russia, partly as an attempt to deflect popular opinion away from social tensions and inequalities.

Ghodsee and Orensten address the issue from another perspective, seeing the rise of populism or nationalism as a reaction to the social consequences of transformation. The social character of this political reaction thus remains somewhat ill-defined in Taking Stock of Shock. By using the term “patriotism of despair,” the authors appear to consider the losers of the transition process as the main social base for resurgent nationalism. However, they do not explicitly identify the social forces behind this political phenomenon, which has been especially marked since the Great Recession.

Research by scholars like Gábor Scheiring or Maciej Gdula has demonstrated that the social and electoral bases of the nationalist right in countries such as Hungary and Poland extend well beyond the transition “losers.” In Hungary, for example, it has attracted support from sections of domestic capital that were unhappy with their subordinate role in the accumulation process.

In their book Social Class in Europe, Cédcric Hugrée, Étienne Pénissat, and Alexis Spire observe that the dominant classes in Central Eastern Europe are only dominant at the national level, while occupying a subordinate position from an international perspective. They describe this contradictory position as being that of “dominated dominant classes.” A significant part of this class fraction in Hungary threw its weight behind Viktor Orbán’s Fidesz, which adopted a policy of selective economic nationalism when it came to power in 2010.

Ghodsee and Orenstein only briefly mention the economic dimension of nationalist projects in Taking Stock of Shock, concentrating on their social policy programs instead, where they identify three key elements: (1) pronatalist family policies, (2) a turn toward universalism rather than targeting social benefits at particular groups, and (3) a focus on the so-called “deserving” poor (in other words, the working poor) rather than the poorest layers of the population.

The authors are right to underline the importance of social policies for these projects, but there are some issues with the picture that they draw up. They refer mainly to the social policies of the Law and Justice party in Poland to illustrate a trend toward greater universalism. However, the universalist aspect is stronger in Poland than it is for other nationalist governments in the region. In countries like Hungary or Russia, the departure from neoliberal social policies has been more limited than Ghodsee and Orenstein suggest.

After the Transition

Looking to the future, Ghodsee and Orenstein plead for a socially rebalanced capitalism:

Going forward, policymakers, scholars, and politicians must acknowledge the bifurcated experiences of transition — dynamic growth and higher life satisfaction accompanied by mass impoverishment, mass out-migration, and mass distrust in public institutions.

They find some basis for the way ahead in the proposals of a recent World Bank report on the post-socialist countries for better labor protections, more universal social policies, and more progressive taxation. Such measures would certainly ease the social situation. However, they still would not address the underlying factors of uneven capitalist development.

Overall, Ghodsee and Orenstein provide us with a succinct, critical, and nuanced radiography of the social consequences of capitalist transformation in Eastern Europe and Central Asia. In that sense, the book lives up to its title: Taking Stock of Shock. Their analysis of the factors and forces that have shaped that transformation is rather less convincing. In particular, they tend to underestimate the role of emerging domestic elites in formulating both the reform strategies of the 1990s and the neo-nationalist corrections of recent years.

The growth of nationalist forces does not simply arise from the grievances of the transition “losers.” We can also ascribe this phenomenon to an attempt on the part of domestic capital to recalibrate its subordinate role in the accumulation processes. In the years to come, strategies to address the consequences of capitalist transformation cannot limit themselves to more inclusive social policies: they must also address the politico-economic factors that have shaped the region’s trajectory.