Transformation at Work : In the New Market Economies of Central Eastern Europe [1 ed.] 9780857026071, 9780761952312

Citation preview

Transformation at Work

Copyrighted Material

Copyrighted Material

Transformation at Work in the New Market Economies of Central Eastern Europe

Anna Pollert

SAGE Publications London. Thousand Oaks. New Delhi

Copyrighted Material

© Anna Pollert 1999 First published 1999 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, transmitted or utilized in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without permission in writing from the Publishers. SAGE Publications Ltd 6 Bonhill Street London EC2A 4PU SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320 SAGE Publications India Pvt Ltd 32, M-Block Market Greater Kailash - I New Delhi 110 048 British Library Cataloguing in Publication data

A catalogue record for this book is available from the British Library ISBN 0-7619-5230-6 ISBN 0-7619 5231-4 (pbk) Library of Congress catalog card number 99-73844

Typeset by Anne Sweetmore Publishing Services, Witney, Oxon Printed and bound in Great Britain by Athenaeum Press, Gateshead

Copyrighted Material

C ontents vii

Preface

V1l1

List of Tables Acknowledgements

ix

Abbreviations

x

Introduction: Researching Transformation

Part 1 The Setting Chapter I Historical Legacies I - From Empires to Nation States

13

Chapter 2 Historical Legacies I I - Diversity of Command Economy Experience

34

Chapter 3 Theories of the Command Economy and Transformation

50

Part 2 The State and Capital Chapter 4 'Transition' Crisis in Central Eastern Europe

73

Chapter 5 Making Capitalism without Capital

97

Chapter 6 Western Capital in Central Eastern Europe

III

Part 3 Labour Chapter 7 Trade Union Politics and Worker Representation

1 33

Chapter 8 Developments in Industrial Relations

1 56

Chapter 9 Case Study - Lost Opportunities at the Heart of Czech Engineering

1 77

Chapter 1 0 Case Studies - Retail Service and Consumer Goods Manufacturing

208

Afterword - The First Decade of Transformation

227

Appendices

230

References

235

Subject Index

253

Name Index

259

Copyrighted Material

To Joe, Jessie and Sam

Copyrighted Material

Preface

Transformation at Work explores key issues of post-communist transformation. Rather than assuming that 'success' in transformation is an unproblematic con­ cept, it questions the values which are often hidden in the burgeoning 'transforma­ tion ' literature and reveals its own concerns as the development of industrial rela­ tions and labour representation as key elements of change. The title Transforma­ tion at Work has a double meaning: it refers to the history, economics and politics of transformation, as well as the lived experience of transformation at work. The book brings together the historical, socio-economic and political background of transformation, the broad problems of how workers and their organisations re­ spond to the change from command to capitalist economies, and case studies of how managers, workers and trade unionists experience these changes within their organizations. The book's focus on the Visegard countries - the Czech Republic, Poland, Hungary and Slovakia - draws attention to some of the early applicants to an enlarged European Union and examines how the 'new' Europe relates to the advanced market economies. It analyses both similarities and national differences in the political and economic backgrounds of these countries and their emerging industrial relations systems. The perspective moves from the macro- to the micro­ levels, encompassing the multidisciplinary approaches ofhistory, political economy, industrial relations and sociology. The principal aim ofthe book is to contribute to a debate on transformation which, rather than seeking the ' right kind of capital­ ism', examines more closely the problems of democratic regeneration and trade union representation as an intrinsic part of this process. The issues and arguments are of relevance to those concerned with democratization and transformation both in the post-communist world and further afield.

Copyrighted Material

List of Tables

Table 4.1 Macroeconomic developments in post-socialist economies, 1 989- 1 992. Table 4.2 GOP Change in Visegrad countries, 1 992-1997. Table 4.3 Export growth rates of Visegrad countries. Table 4.4 Total employment change (annual average percentage change) and regis­ tered unemployment, 1 993-1 997, Visegrad countries and selected South East Europe (for comparison). Table 4.5 Registered unemployment rates by sex in Visegrad countries, 1 993, 1995, 1 996. Table 4.6 Private consumption 1 992- 1 997 (annual percentage increase) and real wages (percentage change over same period of preceding year. Table 4.7 Expected and actual inflation at time of 'Reforms'. Table 4.8 Foreign trade balance with world economy, 1 993-1 995 (in billion dol­ lars). Table 5.1 Methods of privatization for medium and large enterprises at end of 1 995 in Czech Republic, Hungary and Poland, percentage of total. Table 5.2 Czech Republic's macro-problems, 1 994-1 996. Table 6.1 FDI inflows into Visegrad and selected countries of Central and Eastern Europe and their importance in the host economies, 1 99 1 - 1 995 . Table 8.1 Number of strikes in Czech Republic, Hungary and Poland, 1 99 1 - 1 993 . Table 8.2 Judgement of financial situation in 1993 compared with 1 988, Czech Republic. Table 10.1 Percentage employment by sector Visegrad countries, 1 989, 1 992. Table 10.2 Percentage of employment accounted for by women in broad sectors and selected service branches, Visegrad countries 1 989- 1 992.

Copyrighted Material

Acknowledgements

This book originates in a research project financed by the Economic and Social Science Research Council's 'East-West Programme' on workplace restructuring in the Czech Republic from 1 993 to 1 995. Thanks to Irena Hradecka and Marie Cermakova, of the Institute of Sociology at the Czech Academy of Sciences, for their work with me on the Czech case studies. I would like to thank all those companies who co-operated in providing me access to conduct the case studies, and the managers, workers and trade union officers who gave up their time to talk to me. Many thanks to C MKOS and member trade unions for their valuable assist­ ance in supplying me with information and interviews. Thanks also to members of the Institute of Economics of the Czech Academy of Sciences, for providing me with documentation and to many others whom I spoke to in the course of my research in the Czech Republic. At the wider level of research on Central Eastern Europe, thanks to the International Labour Organization's Central and East Euro­ pean Team in Budapest, and to many others concerned with Central East Euro­ pean transformation with whom I have had fruitful exchanges of ideas. Special thanks to my father, and to Bill Kaye, for reading the manuscript and making valuable comments. As always, the ideas expressed and any mistakes remain my responsibility.

Copyrighted Material

Abbreviations

ASZOK AWS

CEE CEFTA CESA CMEA CP CMKOS C SFR

C ZKOS C SSD CRZZ EU EBRD E SZT FDI GATT GDP HR HRM

HZDS I LO IPF

Autonomous Trade Unions' Confederation (Hungary) Solidarity Electoral Alliance, an alliance of 'right' parties formed in Poland around Solidarity to run in the September 1 997 general election. It became ' Solidarity Electoral Action Social Movement' when it became a party in November 1 997 Central Eastern Europe 1 992 Central European Free Trade Agreement between C SFR, Poland and Hungary Council of Economic and Social Agreement (Czech Republic) Council for Mutual Economic Assistance: the trading bloc of the former Soviet bloc, with agreed prices and quantities Communist Party Czech and Moravian Confederation of Trade Unions Czech and Slovak Federative Republics (name ofpost- I 989 state before Czech and Slovak Republics split on January I, 1993) Also still called Czechoslovakia Czech and Slovak Confederation of Trade Unions Czech Social Democratic Party Communist Central Council ofTrade Unions (Poland) until 1 98 1 European Union European Bank for Reconstruction and Development Intellectual Workers Trade Unions Association (Hungary) Foreign Direct Investment General Agreement on Trade and Tariffs Gross Domestic Product Human Resources Human Resource Management, interpreted here as an approach emphasizing individualizing the employment relationship, and marginalizing collective employee organization and representation. Practices include: individual contracts, performance related pay, total quality management, team work ing and task flexibility Movement for a Democratic Slovakia (populist party headed by Meciar) International Labour Organization Investment Privatization Fund

Copyrighted Material

xi

Czech koruna (crown) Christian Democratic Union-Czech People's Party (Czech Republic) Confederation of Trade Unions of the Slovak Republic KOZ-SR Cultural Workers' Union (Czech Republic) KUK LIGA Democratic League of Independent Trade Unions (Hungary) Hungarian Democratic Forum (the conservative post- 1 990 MDF democratically elected government) Foreman, Czech Republic Mistr National Alliance of Workers' Councils (Hungary) MOSZ National Association of Hungarian Trade Unions M SZOSZ North Atlantic Treaty Organization NATO North American Free Trade Association NAFTA National Council for the Reconciliation of Interests (Hungarian NCRI national tripartite body) Newly Industrialized Country NIC National Investment Fund. Fifteen N I Fs were established in NIF Poland in 1993 to manage a mass privatization programme via consortia of international and Polish firms, to act as holding companies to restructure around 500 enterprises to be distrib­ uted between them Civic Democratic Party, Czech Republic ODS Civic Democratic Alliance, Czech Republic ODA Organization for Economic Cooperation and Development OECD Reformed Polish Communist Trade Union Confederation OPZZ (formed in 198 1 from CRZZ) Payment By Results PBR Phare Poland and Hungary Assistance in Restructuring Economies (origins of acronym for wider European Union assistance for research and ' know-how' in Central and Eastern Europe) Partners in Transition PIT Polish Socialist Party (pre-communist) PPS PPR Polish Workers' Party (the name for the Polish Communist Party formed in 194 1 ) Performance Related Pay PRP PZPR The Polish United Workers' Party, formed in 1 947 when PPS forced to merge with PPR Slovak Democratic Coalition, main opposition to SDK HZDS, and leader of post- 1998 Slovak government coalition Democratic Left Alliance (Polish ex-communist socialist party) SLD ST Shock Therapy State owned enterprise SOE Solidarity NSZZ Polish Solidarity Trade Union SZEF Trade Unions' Cooperation Forum (Hungary) Former communist National Council of Trade Unions, Hungary SZOT Kc KDU-C SL

Copyrighted Material

xii

UN UW

VHJ Visegrad countries

United Nations Freedom Union. Polish neo-liberal party which joined the Solidarity Electoral Alliance after the 1 997 election to form a coalition government 'ryrobni hospodarska jednotka', 'production economic unit' the Industry Association of firms in former Czechoslovakia The 'Visegrad Four' of the former Czech and Slovak Federal Republics, Poland and Hungary, a term created after their prime ministers met on February 1 5, 1 99 1 at Visegrad to pledge co-operation to speed reintegration into Europe

Copyrighted Material

Introduction : Researching Transformation

The last decades of the twentieth century brought momentous changes to world political-economic configurations. From the mid- 1 970s, totalitarianism ended in Spain and Portugal; in 1 989, the entire centrally planned command system of the Soviet bloc began to crumble; in 1 990, the leader of the African National Con­ gress in South Africa, Nelson Mandela, was released from prison, auguring the fall of the Apartheid system; and in Chile, after sixteen years of Pinochet's mili­ tary regime, democracy returned. Across the globe, and in different contexts, the words 'transition' and 'transformation' took on a new currency. They meant dif­ ferent things in different places, but everywhere, the terms had connotations of progress and democratization. Researching transformation raises important theoretical issues about the na­ ture of change: we need to clarity the nature of the collapsed regimes, how and why they crumbled, the nature of change and continuity. We should examine the values and types of pre-occupations which inform our questions about the direc­ tion of these historical shifts - is there an assumed, or prescribed, end-point of change, or could there be various outcomes? This book is a contribution to this broader debate. Its focus is post command economy change, and within this, one area: that of Central Eastern Europe (CEE). But it raises questions which are rel­ evant to wider theory and analysis of contemporary social transformation. This is partly because all the transforming economies have been following the same neo­ liberal economic policies of 'structural adjustment' . Thus, critiques of the experi­ ence of CEE may resonate with similarities in other contexts. But analysis oftrans­ formation anywhere needs to engage with similar theoretical debates about ways of understanding change, ideological assumptions about its nature, policy alterna­ tives and the interests they serve, and about problems of research methodology and ethics. The literature on post-communist transformation has been dominated by neo­ liberal economics, pre-occupied with market adjustment and ' progress' in 'transi­ tion'. But since the mid- 1 990s, the concept of 'transition' came under sustained critique for its naive and teleological assumption of a known blue-print of change. The heady days of free-market triumphalism were sobered by the evidence of recession, corruption and slow recovery in the post-communist world; even the conventional concerns with economic adjustment and privatization (e.g. Frydman et aI., 1 993, Estrin, 1 994) shifted to include the state, albeit only as the facilitator of the market. Other disciplines, such as history and sociology, now attained greater legitimacy, as problems of corporate governance, which advocates of the elixir of private ownership had failed to anticipate, demanded deeper investigation (e.g.

Copyrighted Material

2

Transformation at Work

Frydman et aI., 1 994, 1 996). Official publications, such as the United Nations Economic Commission on Europe on the 'Transition Economies', and the annual European Bank of Recon­ struction and Development 'Transition Reports' reflected this shift in perspective, their tone changing from upbeat optimism to greater circumspection. But a more fundamental, theoretical critique of 'transition' as trapped in a simplistic, free­ market myth presented the first serious challenge to the dominance of neo-c1assi­ cal economics. The concept of 'transformation' became more fully explored with other disciplinary traditions, such as anthropology, sociology, political science and history. A 'crisis' literature now appeared, as both critique of and prescription for resolving the economic decline ofCEE (Saunders, 1 995). Theory became elabo­ rated to emphasize that change in CEE would partly build on 'embedded' social legacies (Bryant and Mokrzynski, 1 994), but also, that the end-state of capitalist change could emulate a number of possible models of capitalist competitive suc­ cess. The best known critique of the free-market paradigm has emphasized the active role of the state in restructuring, invoking the South East Asian model of rapid industrialization as an alternative route to transformation (Amsden et aI., 1 994). This has broadened into wider comparative analysis of industrial develop­ ment and transformation, the role ofthe state, and the variety of roles it might take in different models of capitalism (Chang and Nolan, 1 995a, Dittrich et aI., 1 995). This book shares with these critical accounts the emphasis on historical legacy, continuity as well as change, in transformation. It shares too the condemnation of the waste and suffering caused by enforcement of free-market dictates. But it is also a critical departure from what has become one of the new alternative ' ortho­ doxies' in the transformation l iterature - the 'new institutionalism', which alludes to historical 'embeddedness', but takes us no further back into the past than the forty-odd years of state central planning. History is multi-layered and the strata go deep: the recent systems which are now in transformation were themselves built on centuries of change, and there are institutional and cultural legacies which are mediated from earlier times, and which re-emerge later. Without such insights, one's theoretical tool kit for explaining change, and making intelligent forecasts as to further developments, is hampered. This study therefore attempts a more ex­ tended treatment of historical legacy, albeit in the schematic form enforced by limitations of space. A further feature of this book is that it takes issue with the literature on trans­ formation which is locked into the paradigm of finding a 'better' kind of capital­ ism. In particular, the South East Asian 'rapid industrialization' model has be­ come a fashionable alternative to that of the free-market. This is criticized not only because of the problems of transferring one historical process into another con­ text, but because of the poor theorization of the state in this literature's discussion of the 'developmental state', including absence of discussion of state accountabil­ ity, and total silence on gender equality. This book departs from the assumption that the key intellectual and policy problem for analysing transformation is finding the 'right kind' of capitalism. It starts with the premise that there can never be a 'right kind' of capitalism, since capitalism is endemically an unstable system based on conflicting interests in the

Copyrighted Material

Introduction

3

relations of production. There can only be varying types of regulation and accom­ modation between labour and capital to reach transient forms of relative stability, with the state as central intermediary. Crisis and social conflict are normal condi­ tions of the system. Analysis of transformation needs to address the articulation of antagonisms and modes of compromise. In so doing it must include, but go be­ yond, economic change, to processes of democratic accountability, economic dis­ tribution and the quality of society, including working lives. Hence, the focus of this book is not one which exercises policy makers concerned with successful business and financial arrangements, since it is not the 'health' of any capitalist compromise in terms of its competitive success which is of interest, but the kind of emerging capitalism the people in CEE are facing and how they respond. This book's central concern is the emergence of the relationship between capital and labour, and in particular, the development of labour organization and representa­ tion. This requires a mUltidisciplinary approach, using history, economics and politics, together with sociology and industrial relations. This approach to trans­ formation analysis attempts to explore. How did the book come about? Research has material, as well as ideological roots, and much of it depends on funding. The fact that there is comparatively little writing from the labour perspective is a reminder that most research grants are policy-led, and 'know-how' tends to be technical, business and finance oriented. This book owes its origins to the British Economic and Social Research Council, which initiated a large research initiative in response to the collapse of the Soviet­ system, the ' East-West Programme', in which I obtained a grant to conduct a project on workplace change in Czechoslovakia. Research also has its biography. My parents came to Britain as refugees from Czechoslovakia in 1 949; I spoke Czech, and, for family reasons, had an interest in CEE. As a sociologist, the oppor­ tunity to investigate the historic changes in Czechoslovakia, applying qualitative case study methods in Czech, was a unique challenge. I thus conducted fieldwork in Czech from 1 993 to 1 997. Finally, research also has a political dimension; origi­ nally, I had intended to study the Czech and Slovak Federative Republic (CSFR), but after its split in 1 993, found that research in the Czech Republic was more than enough to cope with. At the same time, broader analysis encompassed a wider field, to include Poland, Hungary and Slovakia - the so-called Visegrad countries. This book is thus both a comparative study, and one which highlights the Czech RepUblic. Needless to say, there is a tension here, between comparative breadth and local depth, but it is precisely such bold movement between levels which is required to gain both the sweep and the lived experience of transformation. One may ask, why focus on the Czech Republic? In retrospect, there are also interest­ ing benefits in the accident of history which made me focus on this country. It arguably provides a unique case of change in fortunes, from an exemplar of free­ market 'success' lauded by neo-c1assical pundits for its rapid 'transition' in terms of privatization, to one of deepening economic and political turmoil as the conse­ quences of this dogma unravelled. The alleged 'Czech Economic miracle' was overtaken by commentaries on the slow pace of enterprise restructuring, major problems of corporate governance and disappointing growth. Events here were illustrative of wider problems of untrammelled free markets ripping into CEE. At

Copyrighted Material

4

Transformation at Work

the same time, its history demonstrated the importance ofa long view of the past: its brief, but significant, departure from the rest ofCEE in early twentieth-century parliamentary social democracy - an inheritance neglected by the neo-liberal com­ mentaries - left its mark, and brought some surprises in later political develop­ ments, as the Klaus government fell into disrepute. Finally, the example is inter­ esting for a wider analysis of labour movement developments, for it provides a scenario of relatively advantaged entry to capitalism, both from the vantage of a relatively wealthy industrial legacy and low current unemployment, and from the position of labour representation, in which unions have been more unified and homogeneous than in Poland and Hungary - (we discuss the aberrant position of Slovakia until the 1 998 elections later in the book). In this, the Czech Republic provides a 'best case' scenario for examining the problems faced by labour in capitalist transformation. The treatment of transformation in this book is both historical and theoretical. History is extremely compressed, but nevertheless includes those dimensions which are considered formative of the social structures we are exploring: the experience of imperialism, the importance of national independence, patriotism and national­ ism, and differing war-time and inter-war experiences. At the same time, the im­ mediate past - in this case, the 'communist' system - needs to be examined both historically and theoretically - again only concisely, but with sufficient insight to prepare the ground for the analysis of change. As we reach the contemporary period, transformation needs to be located both spatially, politically and economi­ cally. In short, the 'political-economy' of change is explored - a perspective which is at once theoretical and empirical. The 'politics' of change is about power rela­ tions, while its 'economics' delineates material developments and relations, as policies, ideologies and practices interact. The approach needs to be both macro, and micro, the range from the global economy, to individual nation states and right down to enterprises and shop floors. The macro and micro views of transformation are essential for grasping how social structures interact with social agency and human action. Structural explana­ tion addresses how institutional parameters shape change; agency analysis explores human choice, strategies, attitudes, consciousness. Together, they comprise a rounded sociological perspective. The structure-agency debate provides transfor­ mation analysis with the means to examine an open-ended contest for change, with no pre-ordained destination. Thus, the discussion about globalization here raises questions about the room for manoeuvre for the nation state, and how within the state, changing capital-labour relations are both the products of and the shapers of wider changes elsewhere. This is why the scope of transformation research ranges from debates about and within the World Bank, to debates among policy makers, among enterprise managers and shop floor workers and unions. The analysis of transformation in any context confronts a number of general problems. There is the problem of transience, of interpretation of events as they unfold, and re-interpretation as they pass into history. Events move on so fast, that no sooner is something committed to print, it is outdated. There is the dilemma of when to wait and update on the latest development, and when to stop and general­ ize. So, caution is required for each partial intervention into a moving canvas.

Copyrighted Material

Introduction

5

There are also methodological issues which are common to wider international research, but which are writ larger in the context of transformation. There is the matter of language; speaking and reading the native language of the country being studied is an advantage, since translation always adds another dimension to the research process. Symbolically, to speak the local language, or demonstrate that one is at least making the effort, in any research context is always important, the more so in the context of post-communism, when a stream of Western researchers observing transformation in CEE can be seen as another example of the West flexing its muscles in an unequal power relationship with an Eastern 'object' of observation. As a Westerner knowing Czech from childhood, I came to the CEE research situation equipped with Western (in my case, British and West European) percep­ tions, assumptions, and questions. I had to explain where I was coming from con­ ceptually and ideologically, and become familiar with how this differed from local perceptions. Further, there was much which was unfamiliar, since language has changed, with new vocabulary, connotations, and hidden associations, the past having left its political marks. The unwary user can be misunderstood, unwittingly use ideologically loaded terms, and misinterpret expressions. More widely, 'language' can be understood in the wider cultural sense of con­ ceptual apparatus and assumptions. I soon learned that the expectations based on British experience of workplace research had to be revised in the light of case study research of the post-communist enterprise in transformation. While I ex­ pected questions about work experience would be met with answers largely con­ fined to the workplace, I learned that, in the context of transformation, respond­ ents spontaneously veered from their immediate work environment to much wider social and political matters. In spite of my attempting to steer the semi-structured interviews back to industrial relations and the experience of work, interviewees wanted to talk about 'transformation' - a broad topic involving the enterprise, a whole nation and a whole system. With the scale of wider social change uppermost in everybody's minds, micro-problems and experiences were constantly mingled with macro ones, the past with the present, and the present with the future. In the field of industrial relations, in any comparative research, varied institu­ tional terms pose technical and historical questions of interpretation which need unpacking. In the context of change in an entire socio-economic system, these questions are multiplied. These are further complicated by the appearance of West­ em management techniques, not to mention jargon, whose local meaning provides a minefield for misunderstandings. In the fieldwork used for this book, the solu­ tion was to find local sociologists as collaborators to act as language and meaning mediators. This developed a process of 'triangulation', in which interviews were conducted in Czech by myself, a local sociologist and the interviewee(s) - usually an individual, sometimes a group. The questions and answers were bounced be­ tween the three, allowing clarification of meanings, and often exposing different assumptions which might otherwise have been missed with only a Western or a local sociologist asking questions. Sometimes my enquiries appeared odd both to my colleagues and interviewees, at other times, replies appeared startling to me but not my colleagues - and so on. On the other hand, there were exchanges when

Copyrighted Material

6

Transformation at Work

there appeared to be no ' East-West' gulfin experience, and a surprising degree of familiar ground. Communication was also assisted by the fact that, being familiar with the basic Czech which was spoken at home, I had a feel for local humour, jokes and nuances; indeed, both I and my Czech coJIeagues were sometimes sur­ prised at the degree of cultural understanding between us. Nevertheless, language was an issue which always had to be approached with care and sensitivity. While clarification could develop over time in open-ended interviews, words were set in print in structured questionnaires. In the case of the postal survey of Czech trade unions reported here (Waddington and Pollert, 1 997), the basic structure of a British questionnaire had to be carefully adapted and honed to local conditions, a process of collaboration with a local social scientist attuned to technical and ideological difficulties in the choice of words. This leads to the wider issue of research collaboration itself. Experiences across countries can vary enormously. Some have found locally based teams of academic collaborators who have taken on research, such as a large project in Russia under the ESRC East-West Programme (Clarke and Fairbrother, 1 993). In my case, I found Czech social scientists over-committed in an explosion of research con­ tracts on transformation - a problem which may have been confined to Prague, where I centred my research. Although there was a tradition of industrial sociol­ ogy, this was entirely different from the contemporary Western one of exploring industrial relations and the labour process: it resembled the American role of in­ dustrial sociology, as in Ford, of social control, although in CEE, most sociolo­ gists simply conducted enterprise surveys on various issues which would be con­ sidered part of the personnel arena in the West today. By the time I began research in 1993, there were few of these remaining in academia, and I was fortunate to find two who were interested in pursuing my project with me. In addition to the difficulty of finding co-workers, there are problems of apply­ ing new research methodologies in unfamiliar contexts. Qualitative sociological research, and the use of semi-structured, open-ended interviews, were central to my case study method. This was virtually unknown in CEE (except for in Hun­ gary, where Burawoy and colleagues worked), and the method had to be explained to local sociologists. The system of 'triangulation' kept control of the research situation, however, the line between the balance between openness and thematic discipline which must be steered in a semi-structured interview, and an open con­ versation, was not always maintained. Moreover, my colleagues sometimes got carried away and stepped out of their research shoes, asking leading questions and offering personal judgements. The difference in training and experience had wider implications for mutual expectations between research collaborators. The lack of dialogue, and an in­ equality in both material and intellectual resources between West and East European researchers for forty years, have left a cultural and material gap. There could be suspicions on both sides: from the local researchers in the East, there could be concerns about Western research motives, voyeurism and exploitation. For Westerners, there could likewise be lack of comprehension and trust about potential colleagues' pasts and their political histories were not always easy to comprehend. How relevant, for example, was an academic's previous record as a

Copyrighted Material

Introduction

7

CP member, non-member, or active dissident for suitability and reliability as a researcher? There were no easy answers to these questions. Trial and error in a completely unfamiliar situation were part of the research learning process. A lesson quickly learned was that enterprise research access in the Czech Re­ public was very difficult. Of course, this problem is far from unique; interview access is becoming harder for all sociological and industrial relations research, particularly when research interests require access to both management and la­ bour. However, in post-communist Europe, access has varied both nationally and over time. From the beginning of transformation, comparing notes with other re­ searchers in both CEE and Russia, it became evident that enterprise access was much harder in the Czech Republic than elsewhere. My own collaborators, who had previous excellent access to state enterprises, now found the doors closed to them; with privatization, managers were extremely defensive and wanted no re­ searchers, partly because of financial secrecy and partly because researchers, par­ ticularly those associated with the West, were sometimes confused with other visi­ tors, who might be poaching scarce managerial talent. This early research aversion in the Czech Republic became worse over time; I lost two case studies as a result. On the other hand, once I had gained access, repeat visits developed into much better access both to the shop floor and managers. A further problem is that research access has become financially compromised. Researchers are increasingly paying for research access to managers, a trend started (in the Czech Republic, at least), by institutions such as the World Bank. Ordinary researchers are priced out of the market by institutions for whom money is no problem. The access difficulty underlies another characteristic of researching transfor­ mation: more than in most sociological fieldwork in my experience, I discovered that research did not always go according to plan. Outright refusal of access was only one aspect; more commonly, mundane organizational problems delayed progress, such as the under-developed telephone network, in which numbers con­ stantly change, or key interview subjects were called away at the last minute. After travelling several thousand mites and finding the week's research programme al­ tered, one had to make the best of things. Often, there was a silver lining: during one week of failed enterprise visits, I had more time to develop contacts with the trade unions and C MKOS - a circumstance which proved invaluable for a broad­ ening of the research programme from the enterprise, to national union confedera­ tion level - a turn of events which is reflected in this book. Researching transformation entails ethical problems. If a political-economic perspective is adopted, then organizational analysis must be amplified with docu­ mentary evidence from annual reports, newspapers and journals. This meant that maintaining company anonymity becomes difficult: a case study enterprise with a pseudonym can become instantly recognizable through documentary references, and without falsifYing these, the names cannot be camouflaged. After careful con­ sideration, it was decided that the real names of companies would have to be used and that the lack of anonymity would be compensated by the value of serious, objective research to policy and practice. For example, in one company, I wrote an executive report which included critical findings on problems of poor communi-

Copyrighted Material

8

Transformation at Work

cations, which was circulated by management as a contribution to improving its policy. A further problem of researching transformation is that of research availabil­ ity. Doubts about the reliability of published statistical data are well known, al­ though the quality is improving. In addition, research on transformation is still in its early days, and even if it has mushroomed recently, the quality of analysis is uneven. Findings tend to be dispersed, often in mimeos, conference papers which one can hazard upon only by chance and a variety ofjournals. There is a continu­ ing gap between official, formal information, which still conceals as much as it reveals, and informal information. In this context, anecdote and informal exchange gain importance in the research process, and in fieldwork, sensitivity to the occa­ sional unguarded revelation, which may provide more valuable insights into trans­ formation than an hour's formal interview, must be watched for. Anecdote and suggestion require cautious treatment and cannot be interpreted as fact without wider confirmation or documentary corroboration. Nevertheless, they are not nec­ essarily less reliable forms of information. Further, sometimes the existence of rumours - whether accurate or not - must be noted as research findings in their own right, not for the facts they reveal, but for the insights they provide into atti­ tudes and morale. Finally, there is the problem of dissemination. Language and national bias may emerge in transformation research, with work translated into or written in English becoming dominant. There is a real problem of availability and accessibility of research outcomes to local policy makers and wider audiences. If those in trans­ forming societies are excluded from much of the new 'transformation' academic industry, it is playing a very limited role in deepening analysis of the process. The book proceeds as follows. Part I provides the setting, in which we trace the historical legacy of the Central and Eastern European countries on which we focus - Czechoslovakia, Hungary and Poland - from empire (Chapter 1 ) to their similar, although nationally differentiated command economy experiences (Chap­ ter 2). The Setting is rounded off theoretically in Chapter 3, with an examination of theories of what the Soviet-type system was, together with problems of termi­ nology, why it collapsed, and approaches to analysing capitalist transformation. This proceeds with a critical review of the ' new institutionalists', the 'national business systems' approach and the South East Asian model, and concludes with considering transformation in terms of the debate concerning globalization and the nation state. An overarching theme is the need to consider class - that is, the relations of capital and labour. In Part 2, the roles of the State and Capital in transformation, are examined in the comparative context of the ViSegrad countries, but with greater attention to the Czech Republic. Chapter 4 examines the evidence for the unnecessarily deep slump resulting from the neo-liberal stabilization, liberalization and privatization pack­ age and processes which relegated CEE states to a peripheral, dependent rela­ tionship to Western Europe and the global economy. This discussion draws on Amsden et a\.'s critique of CEE 'transition' policies, but challenges their implicit ambivalence about whether to blame the World Bank or national governments. The discussion of how far nation states can manoeuvre within the confines of

Copyrighted Material

Introduction

9

international policy dictates is further considered, as well as how far there is chal­ lenge from within institutions such as the World Bank to neo-liberal dominance, and from where such challenges originate. Class relations again appear as the miss­ ing dimension. In Chapter 5, the focus is narrowed to consider how privatization mostly meant trying to ' make capitalism without capital', and what the conse­ quences were both for corporate governance, for the political process and for the limited nature of enterprise restructuring. Only multinational companies had the means to inject sufficient capital for major enterprise change. Concluding this section, Chapter 6 examines foreign investment, the types of companies and sec­ tors in which multinational companies are active, their investment strategies, and their behaviour regarding employment and industrial relations. Part 3 focuses on Labour, and analyses its role in and response to transforma­ tion both at the macro and the micro levels. Chapter 7 examines the emerging politics of interest representation, and the evolution of trade unionism and collec­ tive bargaining. The analysis considers the significance of tripartism in the trans­ forming economies, and the changing meaning of trade unionism. Discussion of labour representation structures and experience leads in Chapter 8 to industrial relations developments during the first ten years of transformation, and the chang­ ing climates of social consensus and conflict. In particular, the gradual decline of social peace in the Czech Republic, the growth of a more confrontational climate and a period of political radicalization, are traced. In the final two chapters, I look at the micro-level of enterprise case studies. Here, the issues raised throughout the book, of privatization, enterprise restructur­ ing, local and multinational companies, the role oftrade unions and the experience of workers on the ground, are explored in lived experience. Pay and work, the quality of occupations and skills ofworkers, their hopes and disappointments, and the relations between managers, workers and trade unions, are explored. This is approached by a ' vertical slice' through the organization, from company to local and line managers, to workers and their union representatives. Tracking the change, I return to these enterprises in subsequent visits over several years. Chapter 9 explores a company at the heart both of Czech engineering and of command economy over-development of heavy industry. It is an example of the failure of foreign investment to arrive, and of endogenous restructuring in which the state kept out of restructuring, but re-entered the scene via the back-door, through pro­ viding government contracts. Chapter 1 0 looks at services and the consumer goods industry, and compares both endogenous restructuring and foreign ownership, and the effect of different nationality on multinational companies' restructuring poli­ cies. First, in the retail service department store sector, a locally owned store and a US owned one - later taken over by a British company - are compared. Second, a multinational joint venture in the food and drinks industry is considered and how far its restructuring strategy benefits the local company - both in its own terms of capitalist survival, and in terms of workers' occupations and em­ ployment. In conclusion, I assess where ten years of transformation have left the majority of people of the 'new' capitalism of CEE, and speculate about their prospects for shaping their future. The book throws light on the experience of a profound system

Copyrighted Material

10

Transformation at Work

change in Central Eastern Europe over the past ten years. It is also a case study in transfonnation which will be of interest to all those who are concerned with this process in other parts of the world.

Copyrighted Material

PARTl The Setting

Copyrighted Material

Copyrighted Material

1 Historical Legacies I

-

From Empires to

Nation States

The significance of nationhood The political economy of Central and Eastern Europe (CEE) today, and the iden­ tity of its labour movements, cannot be fully understood without insight into the historic importance of nationhood to these countries. Class development and rela­ tions, the struggles for independence and democracy, and the formation of labour movements were inextricably tied up with the experience of imperial domination and nationalist opposition. Today, the search for national and regional identities continues, and it is still not clear how far the 'New Europe' will converge towards a unified European social and economic model, or follow a path of fragmentation. The question is far from new, especially for the countries of 'post-communism ' . The Czech Republic, the focus of this study, Slovakia, Hungary, and Poland which form the wider context - were all pawns in centuries of European imperial designs. No understanding of contemporary 'post-communist' transformation is complete without placing the most recent forty-odd years of social development into a much longer historical frame. The Visegrad Four are a small, but politically and economically highly strate­ ' gic, part of the 'post-communist' map of emerging market economies. I n fact, while their alleged economic and political progress (with the exception of Slovakia) are the ostensible criteria for their early accession to an enlarged NATO and EU, they have been geographically crucial to Europe since the eighteenth century: the current Czech Republic, Slovakia and Hungary were at the heart of the Habsburg Empire. Poland, between the Baltic to the north and the mountains to the south, was historically critical in its position on the east-west axis of Europe between Prussia and Russia, and its size and very existence altered as the two great powers carved into it. Today, their integration into Western capitalist political and eco­ nomic power blocs are important to European stability. Yet as nation states, they 2 are recent and very fragile , not least because the very importance of their regional locations encouraged either annexations, or the formation of largely artificial boundaries which did not stand the test of time. Their historic legacies have a complex layering which has always been selec­ tively drawn upon in the active reconstruction of the past by various social and political interests. The interplay of material circumstance, human agency, power relations and accident, defies simplistic concepts such as 'path dependency' (see Chapter 3 for discussion) as explanations of national variation today. Such recent

Copyrighted Material

14

Transformation at Work

'new institutionalist' accounts register the importance of historical legacies to present transformations, but generally confine themselves only to the twentieth century, and to the 'communist' legacy within that. This excludes the preceding periods which shaped the cultural, political and economic basis on which the post1948 'communist' systems were built. The fol lowing account, which in its brief­ ness cannot do justice to the nuances of historic interpretation, aims to outline the sources of national political and economic diversity, explain some of the differ­ ences in ' communist' experience, and the different economic, political and labour movement contexts for capitalist transformation. The emphasis is on the Czech lands, which means that discussion ofnation and empire focuses on the Habsburgs, with Poland greatly telescoped.

The age of empire The Habsburgs and nationalism: Czechs and Magyars Czech and Magyar history are bound together in the Habsburg empire, their na­ tionalism exploited - as all others were - by the imperial aim of maintaining power. In spite of common themes, their experience diverged. The Slavs, including the Czechs, joined the ranks of the submerged peoples, while the Magyars were among the dominant nations of the Empire along with the Germans (Taylor, 1988: 35). The Czechs became an urban, industrialized nation by the mid-nineteenth century, while Hungary remained primarily agrarian, its politics and economics dominated by the landed classes. Czech culture retained traces of democratic Hussite Protes­ tant culture and its nationalist revival was intimately connected with industrial and urban development - hence its middle class character. Located in the heart of the Austrian lands and in the stream of Austrian liberal politics and quasi-social de­ mocracy, it developed its own social democratic identity. Magyar nationalism was not only that of a dominant nation, but based on the rival groups of the great landed aristocracy and the new middle class of former small country gentry, who both used nationalism to protect their class privileges. Czech nationalism was anti­ German rather than anti-Monarchy and saw the Habsburgs as protection from German dominance. Magyar nationalism was a fickle force, switching to monar­ chism when this suited class interests, and aimed to impose Magyarization on national minorities. It was a nationalism with long roots in the past and the landed nobility, which the Habsburgs had never even temporarily crushed, unlike in Bo­ hemia. This history hindered an intellectual, middle class leadership from taking over at the start of the twentieth century. In Hungary, the notion of a ' Hungarian Nation' surfaced in idealist aspirations for freedom during the liberal democratic revolutions of 1 848. By the early twentieth century, it had returned to its origins, divided between the class survival of the great landed aristocracy and the bureau­ cratic monopoly of the gentry. This weakened the attempt to establish a liberal democracy under the leadership of Michael Karolyi in the formation of the Hun­ garian Republic in 1 9 1 8, which lasted only six months (Taylor, 1988: 245; see below p. 24).

Copyrighted Material

From Empires to Nation States

15

The Habsburgs began their dynasty as Archdukes of Austria and in the fif­ teenth century, a Habsburg was 'elected Emperor, as a harmless nonentity after previous turmoils' (Taylor, 1 988: 1 2). Real expansion began with Charles V, elected Emperor in 1 5 1 9, who, 'wielding the weapon of dynastic marriage' took in the Netherlands, Spain and the Indies, most of Italy, and in 1 526, extended dynastic influence via his brother Ferdinand, who became King of Bohemia and King of Hungary. The Habsburgs' mission was greatness, and despite the threats of exter­ nal conquest and internal disintegration, survived until the twentieth century by exploiting class and national divisions. Its chief enemies were the other empires, and from within, the dominant nations of the Germans and the M agyars, being forced to concede compromises to the latter. The subordinate Slav nations were dealt with by ' divide and rule' . The southern Slavs, including the Croats (with their goal o f an independent IIIyria) and the Serbs, were dealt with by encouraging Magyar nationalist domi­ nance. Nearer Vienna, the Czech nationalist threat in the form of Protestantism Bohemia having its own Hussite church - was overcome by Habsburg alliance with the Jesuits and the Counter-Reformation in the seventeenth century. Bohemia was brought under total imperial domination after its nobles' unsuccessful attempt to break away from the Habsburg monarchy, and their defeat by the imperial army at the battle of the White Mountain in 1 620. This wiped out the Czech nobility, after which Czech Hussite culture was submerged within the Austrian 'cosmopoli­ tan Baroque culture of the Counter-Reformation' (ibid., 1 988: 1 5) and Bohemia, previously a semi-independent kingdom like Hungary, was reduced to a mere administrative unit. Thus, early Czech nationalism was crushed by religious and military conquest. Although Czech identity and language persisted among the peasants, the ad­ ministration was still dominated by German, as it was throughout the Empire: in 1 8 1 5, there were 50,000 Germans and 1 5,000 Czechs in Prague, and even after 1 848, 'respectable' Czechs spoke German. N ationalism developed in the early nineteenth century as an urban, middle class movement, led by intellectuals; some hankered for a return to ancient historic kingdoms (ibid., 1 988: 34), but others, such as Palacky, favoured a moderate federation of people ' where all nationalities should live freely under the protection of Habsburg power' (Taylor, 1 988: 74). Even this was too much for the Habsburgs: all that the monarchy conceded to nationalism after the 1 848 revolution was equality between Czech and German as official languages and promises ofa responsible parliament in Prague (ibid., 1 988: 74). In any case, remaining within the Habsburg Empire was regarded as the lesser of evils compared with subordination to German nationalism, or submersion by a Russian universal monarchy, as proposed by some Pan-Slav mystics. Crucially, Czech nationalism was anti-German rather than anti-Monarchy; the Czech Left's support ofliberal revolution saw the Habsburgs as protection against absorption in a national Germany (Hobsbawm, 1 975: 1 7). After a relapse into absolutism during the 1 850s, the Habsburgs were weak­ ened after defeat in the war against Prussia in 1 866 and rising middle-class nation­ 3 alism added to political crisis. Meanwhile, after the abolition of land-rent as the key Habsburg concession to the peasantry after the 1 848 revolution, the peasants

Copyrighted Material

16

Transformation at Work

were no longer tied to the soil. They flooded into cities, becoming the new indus­ trial working class, so 'the towns at last took on the nationality of the countryside' (Taylor, 1 988: 34). Class conflicts took national form. The old established capital­ ists and artisans were German, the new capitalists and unskilled industrial workers were Czech. Czech nationalism became a mass movement led by liberal demo­ cratic strata rooted in the industrial progress of the 1 860s: Czech banks, theatres and mass cultural organizations, such as Sokol (formed in 1 862) were established during this period (Hobsbawm, 1 975: 9 1 ). With the absence of a landed nobility, Bohemia became 'middle class from top to bottom' (Taylor, 1 988: 245). The im­ portance of the liberal democratic stratum to social change, including intellectu­ als, has persisted through from Masaryk to the dissidents of the Prague Spring and the Velvet Revolution. Hungary's fortunes within the Habsburgs differed, and by the nineteenth cen­ tury, led to a different scenario. It's great landed nobility maintained its political presence throughout. Determined to escape the fate of their Bohemian counter­ parts, the landowners rebelled against the Habsburgs in 1 707 and deposed their 4 Habsburg king (Taylor, 1 988: 1 6) . Partly through military luck, with Habsburg forces diverted in the Spanish War of Succession, partly through their wealth and economic importance to the dynasty, and partly through the diplomatic interven­ tion of the noble, Alexander Karolyi, they won a semi-independent statehood in the Peace of Szamar of 1 7 1 1 . This compromise preserved Hungary's feudal Diet, its separate existence and the privileges of its landed class, in return for recogni­ tion of the Habsburg ruler as king (ibid., 1 988: 1 7). By the time of the revolution of 1 848, Hungarian demands for national autonomy could not be easily dis­ missed, as in Bohemia. The revolution, which was captured by moderate mag­ nates, radical country squires and intellectuals, such as its leader, Kossuth, achieved semi-autonomous statehood (ibid., 1 988: 66). Although the Habsburgs subse­ quently cancelled the Hungarian reform laws of March after invading the country, and crushed the revolution by using Russian forces in 1 849 (Hobsbawm, 1 975: 1 9), the historic thread of semi-autonomy never disappeared. It was picked up again by Bismark in the 1 860s, whose successful wars against Austria ( J 864, 1 866) were aimed at preventing Austrian Germans from upsetting Prussian supremacy in the new German Empire. As part of his strategy to weaken the Habsburgs, he supported Hungarian autonomy within the Habsburg empire, and aided the 'Com­ promise' of 1 867, which gave the Magyar gentry an entire Hungarian state ma­ chine, in return for their continuing support for the Habsburg army and foreign affairs (Taylor, 1 988: 1 42, 1 99). From now on, the Habsburg dynasty became a Dual-Monarchy of Austro-Hungary (Hobsbawm, 1 975: 7 1 ). Yet Magyar nationalism was never simple or stable. Although originally built on the unbroken strength of the great landed aristocracy of 'magnates', these were not always nationalist. Infact, they supported the Habsburgs in return for Vienna's protection oftheir class privilege. Generally content to be part ofthe cosmopolitan Austrian elite, they only became Magyar nationalists when imperial policy op­ posed their interests. Their nationalism was politically conservative and was re­ kindled when the Habsburgs made progressive reforms. In the eighteenth century, when, under the influence of the Enlightenment, Joseph I I abolished serfdom and

Copyrighted Material

From Empires to Nation States

17

distributed land to the peasants, the landowners reacted with nationalism and suc­ ceeded in diluting land reform. In the 1 860s, the magnates had developed into agricultural capitalists and again they became Hungarian nationalists, now to pro­ tect their grain prices via tariff barriers with Austria, blaming the Austrians for their peasants' rural misery (Taylor, 1 988: 208-209). Another, more progressive nationalism had a different class base. As we saw, the leadership of the 1 848 revolution consisted of a coalition of moderate mag­ nates, middle gentry and middle classes. They sought to neutralize the revolution­ ary demands of the radical students of Budapest, who, while challenging the dy­ nasty, also threatened the gentry by demanding abolition of the Robot, without s compensation . Kossuth and the gentry appropriated the radicals' nationalist pro­ gramme, but with the crucial departure that although the Robot was to be abol­ ished, the gentry would be compensated by the state (Taylor, 1 988: 67). Although the March 1 848 Hungarian reform laws were later revoked (see above), the Robot system crumbled, with profound implications for the social structure and the nature of Hungarian nationalism. Paradoxically, abolition of the Robot, which was expected to ruin the mag­ nates, helped them become agricultural capitalists and run their estates more effi­ ciently. With lump sum compensation, they acquired capitalist enterprises, while the emancipated peasants provided a large rural proletariat to work the land (ibid., 1 988: 8 1 ). The capitalist magnates - always a conservative force - altered their loyalties between nationalism and monarchism as it suited their capitalist class interests. The small gentry, who had hoped to be saved by state compensation for the peasants' emancipation from their labour obligations, were ruined after all. Their compensation was too small to set them up as capitalists, and unable to work their land, they were forced to sell it to the magnates6 • However, the creation of the vast Hungarian state bureaucracy following the 1 867 creation of Dualism, provided the dispossessed gentry with new opportunity. Forced into the towns, they found employment in running the vast H ungarian state machine, which gave them status and a new base for power. Their qualification for dominating state administration was their Magyar nationality and language, since Hungarian was the criterion for civil service j obs, just as in Bohemia, the national­ ists had made Czech, as well as German, the entry qualifications. The Magyar gentry' s role in this expanded bureaucratic middle class produced a contradictory stance towards nationhood: on the one had, they aimed to defend Magyar supremacy over other nationalities in Hungary. On the other, they needed the Habsburg em­ pire to defend the system which guaranteed their own careers, and hence also shifted their allegiance back to the monarchy, provided their internal affairs were not interfered with (Taylor, 1 988: 206). They were far more concerned to exclude the magnates and the rise of other national middle classes, than to challenge the monarchy and spread nationalism as a mass, popular movement. Their national­ ism was much more qualified and exclusive than that of the Czech middle class. Hungarian history thus produced a distinctive social structure. At one end was a vast peasantry which was enfranchised in 1 848, and within it, a rich peasantry which bought the land of the poor peasants. These, having won security of tenure after the 1 848 revolution, developed conservative peasant parties to defend their

Copyrighted Material

18

Transformation at Work

new-found privilege. The poor peasants became the urban and a rural prole­ tariat of developing capitalism. At the other extreme were the huge estates with their capitalist land owners. Between these, the former gentry became a new urban middle class. As for nationalism, this took another twist. While the middle classes curried favour with the Habsburgs in the later nineteenth cen­ tury, the magnates, who had thought Dualism would favour them with high places in government, were disappointed, and eventually turned against the dynasty, stopping support for the Habsburg army (ibid., 1 988: 207-209; 226). Unlike Bohemia, with its large middle class and urban proletariat, H ungarian social and political interests remained strongly dominated by the land - by peasant parties and the landed aristocracy - with a relatively recent middle class. H ungarian nationalism served different class interests at different times; it was an opportunistic and inconsistent nationalism, shifting allegiance back to the monarchy when this was more favourable. These differing paths of nationalism and the Habsburg response to both class and national pressures, produced different climates of political democ­ racy. No European regime was able to withstand the social impact of the nine­ teenth-century Great Depression, the pressure for the spread of the franchise after the Paris Commune of 1 87 1 , the socialist agitation of the 1 890s and the 7 impact of the Russian 1 905 Revolution • In Austria, where Victor Adler united the many social democratic groupings into the Austrian Social Democratic Party when the Second Socialist International was formed in 1 889, reforms were made, although middle class nationalism opposed the spread of the fran­ chise. Paradoxically, it was not the middle class nature of nationalism which brought reform. Rather, it was the continuing riots and counter riots between G ermans and Czechs which, threatening to destroy parli amentarian ism, prompted the Habsburgs to broaden the franchise in 1 907, to try and break the electoral deadlock by bringing in the non-propertied classes in Bohemia (Hobsbawm, 1 987: 92). In the Hungarian case, where Magyar domination of other nations had priority over social reform, the resentful and excluded magnates were brakes on democratization. Tactical compromise with the aristocracy was the domi­ nant political force. Although Francis Joseph followed the common imperial practice of cultivating an all iance with the peasants and common people against the threatening middle classes and aristocrats, the growing crisis of survival of the Habsburg dynasty made him desperate for financial support for mili­ tary affairs from the magnates. In 1 906, in return for the Magyar magnates abandoning their nationalist cause and supporting a common Habsburg army, Francis Joseph conceded to their demands for preserving aristocratic privi­ lege and dropped universal suffrage (Taylor, 1 988: 226). The limited fran­ chise was left unchanged when Great Hungary fel l in 1 9 1 8, lasting into the 1 920s, when it was only extended to small-holders, still leaving out political interest representation for the industrial and rural workers. Thus, by the beginning of the twentieth century, there were vast contrasts between the Czech and Hungarian parts of the Habsburg empire: the first was a relatively egalitarian society with a strong middle class, a broad franchise

Copyrighted Material

From Empires to Nation States

19

and politics dominated b y liberal democracy. The second had huge inequali­ ties of wealth, a narrow base ofnationalism dominated by competing ruling classes, and political exclusion for the mass of the people. These differences shaped en­ tirely different nation states when the Habsburg empire finally collapsed.

Poland Poland is the quintessential case of how shifts in territory and nationhood have been pawns to predatory empires. A Polish state actually existed as far back as AD 966, but by the fourteenth century, the Piast dynasty was encroached upon by expansionist neighbours: Germans pressed from the West, the Czechs expanded the Bohemian kingdom and took Silesia in the south, and the Prussians pressed from the Baltic in the north (Kolankiewicz and Lewis, 1 988: 3). From the seven­ teenth century broad areas were absorbed by Russia to the east, and by the eight­ eenth century Russia controlled the Polish Diet (the Sejm). Escalating conflict with Russia ended with partition in 1 772, which forced Poland to cede some third of its territory to Russia, Austria and Prussia. Further Russian aggression finally provoked an uprising in 1 793-94, whose crushing resulted in the total annihilation of the Polish state in the partition between Russia, Prussia and Austria in 1 795 . Warsaw lay under Pruss ian domination, while the boundary of the Russian portion lay close to what became known as the Curzon line in 1 920, and the border de­ 8 cided at the end of World War 11 . Poland did not exist as a territorial entity for the next 1 20 years until 1 9 1 8 (ibid., 1 988: 6). During the nineteenth century, although partitioned and lacking statehood, the Poles participated in growing popular participation in politics and the spread of nationalism. However, nationalist uprisings in 1 830 in Russia, in the Prussian and Habsburg territories in the 1 840s, and again in 1 863 in Russia, were met by rein­ forced imperial control (ibid., 1 988: 7). Attempts to build national identity within existing political frameworks, via education, literacy and cultural organization were likewise repressed. Only in the Habsburg area was greater Polish self expression and even some political autonomy conceded, and it was here that a broad peasant movement gained some parliamentary representation (ibid., 1 988: 8). Such con­ cessions suited the German Habsburg electoral strategy within, but at the same time, it made Poles firm supporters of the Habsburgs as a defence against tsarist absolutism and the harsh Germanization of their neighbours, with Galicia seen as the model ofa future republic (Taylor, 1 988: 1 6 1- 1 63 ). Yet the territory absorbed by Prussia benefited from the rapid growth of German industry, while the Polish part of Russia accounted for a quarter of the empire' s total production. It was in these regions that the spread of industrialization established a proletariat, labour organization and the influence of socialist politics. The issue of nationalism and the reconstruction of a Polish state was a com­ plex problem, especially for the left. Initially, national autonomy was opposed in favour of socialist internationalism by the social democrats; the First International view was that the Slavs could be absorbed into a revolutionary Germany, and in that part of Poland which was in the Habsburg empire (Galicia), into the growing

Copyrighted Material

20

Transformation at Work

Austrian social democratic movement (Taylor, 1 988: 1 92). During the period of the Second International, the relationship between internationalism and the na­ tional question became more pronounced, with a growing nationalist current among Polish socialists (Nettl, 1 969: 39). The issue became a maj or concern of Polish revolutionaries, such as Rosa Luxemburg, who broke away from the Polish So­ cialist Party, formed in 1 892. This had adopted a compromise position, sympa­ thetic to growing Polish nationalism as a minimum programme, but international­ ist in its maximum revolutionary aim. Luxemburg formed a breakaway socialist party in 1 993, with an uncompromising programme of revolutionary internation­ alism opposed to a struggle for Polish independence as a diversion from socialism for the working class (ibid., 1 969: 49). The Polish ' question' continued to divide the Second International and was a dominant debate within the German Social Democratic Party as well as among Polish socialists until the end ofthe First World War (see Nettl, 1 969). As we shall also see in the case of Austria-Hungary, the question of multi­ nationality of territory always clashed with the concept of the ethnic-linguistic nation state, pitting internationalism of some type against aspirations for nation­ hood. The Poles had lived with Bielorussians, Ukrainians and Germans for centu­ ries, with Jews constituting a major proportion of urban populations. In the new Poland of the Second Republic declared in 1 9 1 8, Polish was spoken by barely two thirds of the inhabitants (Kolankiewicz and Lewis, 1 988: 9). A further complica­ tion for the politics of the new state was the fact that the maj ority of Poles had faced two imperial dominators, Prussia and Russia, not one (as the Magyars or the Czechs had with the Habsburgs). Consequently, after the collapse of the Russian Empire in the 1 9 1 7 revolution, and the collapse and defeat of the Prussian and Habsburg empires in 1 9 1 8, there were political divisions in the leadership of the new Poland as to who had been (and continued to be) the worst enemy, Prussia or Russia. With such long periods of subj ugation and division, it is not surprising that Polish political life has been subject to a certain obsession with historical example whose consequences are not necessarily positive. It may be suspected that one reason for the role that a strong historical awareness plays in Polish politics is the sheer complexity of the problems which Poles have to face, the disaster and the disappointments which so many Polish leaders and their politics have run into, and the difficulties of coming up with viable new solutions (Kolankiewicz and Lewis, 1 988: 1 7). From the preceding account, this comment could equally well apply to the experience of Habsburg Europe.

The inter-war republics War has fractured and redrawn the barriers between the peoples of central Europe for centuries. The recent ' communist-bloc' was created as the post Second World War western governments and their Soviet Union allies - chiefly Churchill, Stalin and Franklin D. Roosevelt - carved up Europe between them at the Yalta Confer-

Copyrighted Material

From Empires to Nation States

21

ence in 1 945. But the nation states which comprised the Soviet zone of influence were comparatively recent - and already fragile. They were created as the First World War victors modelled the end of Imperial Europe on the basis of largely artificially constructed independent nations at the Versailles Treaty of 1 9 1 9 . In the demise of the Austro-Hungarian Empire, the new state of Czechoslovakia gained territory, by joining to the Czech lands the areas of Slovak and Ruthenian people of former Greater Hungary - (, Slovakia' never existed) - while present-day Hun­ gary lost Transylvania to the successor state of Rumania, and Croatia to the ex­ panded Serbia of the new Yugoslavia, to which was also added formerly Austrian Slovenia, and the small tribal kingdom of herdsmen of Montenegro (Hobsbawm, 1 994: 33). The construction of alleged ethnic-linguistic nation states was partly propelled by the nationalist movements which had opposed imperial dominance for centuries, but more directly, they were encouraged by the war victors in the simultaneous defeat and collapse of the Russian, Habsburg and Ottoman Empires. The peace settlement imposed by the major surviving powers - the USA, Britain, France and Italy - was dominated by tactical considerations in re-drawing Europe, most urgently, the need to control Germany and the threat to western capitalism of revolutionary Russia: Making the world safe from Bolshevism and re-mapping Europe overlapped, since the most immediate way to deal with revolutionary Russia, if by any chance it survived . . . was to isolate i t behind a ' q uarantine belt' (a cordon sanitaire, in the contemporary language of d i p l omacy) of anti-communist states ( H obsbawm,

1 994: 32).

The creation of independent states from territory which had been under Rus­ sian control ensured their hostility to Moscow; these were the Baltic republics (for which there had been no historical precedent), Poland and a Rumania whose size had doubled from its gains from the Habsburgs and Russian Bessarabia (ibid., 1 994: 32). While the re-creation of Poland after 1 20 years of non-existence had a historical basis, the constructions of Yugoslavia and Czechoslovakia from the Habsburg Empire had none. They were based on 'a nationalist ideology which believed in both the force of common ethnicity and the undesirabi lity of exces­ sively small nation-states . . . . . As might be expected, these shotgun political mar­ riages did not prove very firm' (ibid., 1 994: 3 3). In fact, the new nation states were just as multi-ethnic and multi-linguistic as the empires they were meant to super­ sede: the Poles constituted less than two thirds of Poland, the Rumanians just over two thirds of Rumania. The national pluralism ofAustria-Hungary was reproduced despite the new states' nationalist theory: Czechoslovakia contained Czechs, Slovaks, Germans, Magyars, Ruthenes, Poles and Yugoslavia had Serbs, Croats, Slovenes, Bosnian Moslems, Magyars, Germans, Albanians, Rumanians and Macedonians (Taylor, 1 988: 274). As the 1 990s proved, these new versions of the old device of holding together people with different national identities were as fragile as ever. Economically, there were wide differences between inter-war Poland, Hun­ gary and Czechoslovakia. In 1 930, Poland was basically agrarian, with only 20 per cent of the population employed in industry. Hungary too was agrarian, with agricultural products and exports benefiting from good climate and soil; only 25

Copyrighted Material

22

Transformation at Work

per cent ofthe labour force was employed in industry and mining in 1 94 1 (Jeffries, 1 993: 276). Czechoslovakia contained two contrasting economies, with the Czech lands urbanized and industrialized, and Slovakia agrarian, constituting 23 per cent of the population of the new republic, but only 8 per cent of industrial output. Even with such disparities, Czechoslovakia was more industrialized than Poland in 1 930, with an average 3 5 per cent ofthe population employed in industry and 45 per cent in mining and manufacturing, compared with 1 8 per cent in Poland and 22 per cent in Hungary (Jeffries, 1 993 : 245, Myant, 1 989: 1 ). Its inter-war wealth was also high: in 1 938 per capita national income was 75 per cent that of France, and 1 0 per cent higher than Austria's (Jeffries, 1 993: 245). Politically, with the exception of Czechoslovakia, the inter-war period was one of unstable, right-wing governments. The general growth of the radical-right in Eastern Europe after World War I was largely prompted by fear of revolution being brought back by soldiers and prisoners of war returning from Russia. It was also fed by war exhaustion and extreme poverty, and the glorification of milita­ rism by some strata after the brutalization of World War I (Hobsbawm, 1 994: 1 1 6- 1 29).

Czechoslovakia With its middle-class nationalist basis, Thomas Masaryk, a solitary Czech profes­ sor, won legitimacy in political leadership for the independence movement. He was not originally a nationalist. Iconoclastic towards romantic and inaccurate Czech claims of historic Bohemia and hostile to the illusions of Pan-S1avism, he hoped for a federalist, democratic reform of the Habsburg empire. Masaryk' s conversion to the cause of national independence and destruction of the Monarchy in 1 9 1 4 came after i t became evident that a Habsburg unity of people was unrealistic, with the Habsburgs unreformable. Moreover, the success of the Czechoslovak nation state in 1 9 1 8 owed much, as argued above, to making it 'a European necessity' for peace and the prevention of communism (Taylor, 1 988: 257). Masaryk was the first emigre leader to convince the allies that a liberal democratic state could stave off Bolshevism from post-war Europe. This task was assisted after the formation of the Czechoslovak Legion in Russia, most of which not only remained untainted 9 by Bolshevism, but fought the Bolsheviks (ibid., 1 988: 264). Masaryk's fortui­ tous return via America to Europe after visiting the Legion set the seal on the national project; with support from American Slovaks for a Czech-Slovak federa­ tion, he won Woodrow Wilson for his version of national 'self-determination' in a nation state of Czechoslovaks (ibid., 1 988: 265). 'Slovakia' had never existed historically, and its inclusion in Czechoslovakia was partly a device to do some­ thing for two million Slovaks with the imminent demise of Great Hungary (Taylor, 1 988: 264). Nationhood was not 'self-determination' but nationalist invention, just as the encouragement of a South-Slav movement after this produced the for­ mation ofa further nationalist invention, a united Yugoslavia. The results need not be repeated here. The artificiality and ultimate fragility of the new Czechoslovakia was there at

Copyrighted Material

From Empires to Nation States

23

its initiation. The new state was imposed on the Slovaks, who had little in common with the Czechs; a Catholic country, the chief expression of nationalism was voiced by Roman Catholic priests as anti-Semitism, while its Protestants had looked to Germany rather than Prague for support. The search for a common language had been abandoned in 1 848 and the Slovak secular middle class had been co-opted by the Magyars (Taylor, 1 988: 202, Zinner, 1 963 : 1 2). The economic difference in lo 1 9 1 8 between the advanced industrial Czech Lands and agrarian Slovakia pro­ duced divergent educational and class developments. These tensions were sup­ pressed by Czech centralization both during the First Republic and then further complicated by attempts at economic equalization by rapid Slovak industrializa­ tion under 'communism' . They re-emerged in 1 968, when Slovak antipathy to­ wards Czech dominance partly motivated the challenge to the Czech-dominated CP, and again in 1 993 - although by then, anecdotal evidence suggests that it was rivalry in political leaderships, rather than mass national differences, which forced the final divorce. The progressive, liberal parliamentary democracy ofthe First Republic ( 1 9 1 81 938) owed its character to the economic and political legacy of the Czech lands. Containing 70 per cent of the Austro-Hungarian Empire's industrial capacity, the pre-First World War Czech working class was organized and politicized (Bloomfield, 1 974: 24, Korbel, 1 977: 50). The Czech Social Democratic Party had been formed in 1 878 (Zinner, 1 963 : 25), but in addition to a tradition of hu­ manist welfare social democracy, the labour movement had broad exposure to Marxist teaching and revolutionary socialism. Masaryk himselfhad close connec­ tions with Russian revolutionaries while in emigre leadership ofthe independence movement, although his own moderate and gradualist interpretation of democracy (for which he is better known) brought him into opposition to the Bolsheviks and the October revolution, and led to state neutralization of more radical leanings in the Czech labour movement. Nevertheless, during the first five years of the Re­ public, a Ministry of Welfare enacted 1 5 7 progressive decrees, including the re­ duction of the eleven hour day to eight hours, accident and sickness insurance, pensions and paid holidays and workers' education and cultural activities. Work­ ers' demands for participation in management were partly answered in the legali­ zation of workers' committees with consultation rights on health and safety, dis­ pute resolution and auditing of books, first in the mines, and later for all enter­ prises with over thirty employees (Korbel, 1 977: 60). Industrial militancy in the Czechoslovak labour movement shared the generalized radicalization of the pe­ riod, with strikes, hunger marches and the call for a General Strike in 1 920 (Korbel, 1 977: 50). However, further action and whatever support there was for the revolu­ tionary tradition were suppressed by moderate social democracy, under the ration­ ale of defence of the Republic. Despite the advanced development ofthe Czechoslovak labour movement and democracy, union and political fragmentation weakened both. Although union membership in Czechoslovakia grew throughout the inter-war period, it continued the pattern of division from the Austro-Hungarian period, by nationality, political party and craft. In 1 93 7 there were eighteen trade union centres which organized 485 unions, with a further 224 unions unconnected to any centre (Bloomfield,

Copyrighted Material

24

Transformation at Work

1 974: 24). This early weakening may go some way to explaining why industrial militancy is not a notable tradition, with moderation still characterizing the Czech labour movement, and why unions trailed other social groups, such as middle class intellectuals, in political struggles. Yet the Social Democrats, who won 36.8 per cent of the vote at the first national election in 1 920, and arguably the progressive forefront of the liberal independence movement, feared that the twenty to thirty other political parties could destabilize the coalition government of National Unity comprising Social Democrats, the National Socialists, the Czech Republican Party and the Agrarian Party (Zinner, 1 963: 1 9). Such fears stifled debate, and ossified organizational and political development. Thus, while tolerant social democracy is regarded now by many Czechs as a core element of the First Republic inherit­ ance, it is worth considering how far this early political paralysis affected its democratic, critical development. A tendency to compromise contributed to its later subordination to the CP, but more recently, in the period of post-communist political conservatism, it raises the question of why it took so long for any re­ ascendancy of the Social Democratic Party, which only gained significant pres­ ence in the 1 996 general election. But if inter-war liberal democracy had its limits regarding political exchange, it distinguished Czechoslovakia from its totalitarian neighbours, such as Poland and Hungary, by providing room for the legal establishment of the CP, which became significant both in electoral and membership terms (Harman, 1 974: 28). In Hungary, the CP led a weak existence in exile or prison under the dictatorship from the 1 920s onwards, whereas in Poland, it was a minority in the trade unions and the working class more generally, compared with the Polish Socialist Party. In Czechoslovakia, an unforeseen irony of creating a nation as a buffer against Bol­ shevism, was that its very liberalism created favourable preconditions for CP le­ gitimacy and expansion, even though it neutralized labour movement radicalization. CP strength always posed the interpretative dilemma of whether the 1 948 Czecho­ slovak tum to 'communism' was a coup, or a 'passive revolution' (Bloomfield, 1 974). In the other countries we are considering, the post-war Soviet liberators, and the CP, were much more unequivocally impositions from outside. With the consoli­ dation of CP power, there were few serious political rivals except the social demo­ crats in Czechoslovakia, whereas in Poland and Hungary, there were many more political interest groups, such as the Peasants and Smallholders, with which the CP later had to contend. These early political contrasts can be traced through to much later developments: a CP with monolithic hold in Czechoslovakia, and many more challenges to pursue a 'local' route to communism in Poland and Hungary. I roni­ " cally, the Czechoslovak liberal democracy partly provided the foundations for the tightest CP hold, which ran right through until the Velvet Revolution. However, the strength of the CP in Czechoslovakia requires greater under­ standing of its ambiguous nature. It was established, as e lsewhere in Europe, after a split in the Social Democratic Party between 'moderate' supporters ofnation­ alist, bourgeois democracy and ' radical' social ist internationalists. However, the process of the separation and the continuing influence of moderate social democratic ideology within the new Czechoslovak CP, arguably coloured both its nature and its relationship with its supporters, possibly with lasting effects even

Copyrighted Material

From Empires to Nation States

25

after its ' Bolshevization' . The split in the Social Democrats was a long drawn-out affair lasting for two years, with the ' left' hesitant to split the party, and in no hurry to call for radical tactics among the 'masses' . Its leader, Smeral sought 'for a mass party dedicated to the implementation of traditional social democratic aims, but weak in revolutionary fervour' (Zinner, 1 963 : 29). The strategy was successful: when the separation finally was forced by the 'nationalist' faction in 1 920, an estimated two thirds to four fifths of the social democratic electoral support went with the ' left' . However, the very popular success ofthe ' left' lay in its moderation and resistance to dictats from the Com intern to join the Third International and not until Lenin intervened in October 1 92 1 , did they finally submit to forming the Czechoslovak CPo However, observers questioned whether this had much effect on a labour movement for whom national independence and anti-authority remained the key elements: The Czech worker grew up in national struggle against the authority of the state and any authority at all.. .. the path to the Czech worker...does not lead through assertion of authority and discipline from the outside (quoted in Zinner, 1 963: 39).

This dogged commitment to individual freedom remains central to workers' senti­ ments today, as our later case studies illustrate. The Czechoslovak CP continued to avoid Comintern intrusion until 1 929, concentrating on parliamentary activity. But in spite of its strong electoral support, it failed to attract new members, while the communist trade unions, which had split from the social democratic ones at the time of the party split, were much weaker than the reform unions (Zinner, 1 963: 49). Indeed, as Zinner ( 1 963 : 59) argues, a characteristic of the Party's position in Czechoslovakia was the discrep­ ancy between electoral support, which never dropped below three quarters of a million, and actual membership, which never exceeded one third of a million and fluctuated wildly. Thus, while in voting terms it had the largest mass base in Eu­ rope except for Germany before 1 932 (Zinner, 1 963 :60), this could denote sup­ port for its local social democratic traditions and its appeal to egalitarian values, rather than the official line from Moscow (ibid., 1 963 : 67). The year 1 929 denoted a dividing-line in the CP's history during the First Republic, with the appointment of Klement Gottwald, who now led the Party on Comintem lines. Electoral support dropped by 20 per cent; membership, which started at 3 50,000 in 1 922 and continued to drop with internal Party crises, plum­ meted with Bolshevization to 24,000 members and never rose during the 1 930s to above 75,000 - probably as a result of ideological disagreement with the new line (Zinner, 1 963: 63). From now on, the Czechoslovak CP shared the vagaries of Third International, swinging from the 1 929- 1 93 5 sectarian refusal to co-operate with 'bourgeois' social democratic parties, to the 1 936- 1 939 Popular Front with anti-fascist organizations - which came too late to stem the growth of pan-Ger­ manic nationalism in the 1 930s (Bloomfield, 1 974: 27). Nevertheless, it was dur­ ing this second period, and during the Second World War itself, when the CP under Gottwald had swung away from class politics to those of patriotism and defence of the Republic, that the party gained greater popular support. However, the nature of that support, and the political agendas understood by it, remain am-

Copyrighted Material

26

Transformation at Work

biguous. Those who have identified the post-war 1 948 take-over by the Commu­ nists as a ' Passive Revolution' (Bloomfield, 1 974) have emphasized the degree of genuine support for the party, despite the final passivity of the masses when the leadership took control, while others emphasize the manipulative political ma­ noeuvres and final coercion (Korbel, 1 959, Zinner, 1 963, Harman, 1 974).

Hungary The declaration of a Hungarian Republic in 1 9 1 8 was divided in the nature of its nationalism, which had always vacillated in its adherence to the Empire, and a surviving aristocracy providing a strong power bloc opposing the Republic and favouring the restoration ofthe monarchy. 'The 'Magyar nation' was composed of civil servants, country squires, and rich peasants . . . . Magyar nationalism was too deeply rooted in history and social circumstance to be led by an academic middle class' (Taylor, 1 988: 208). The nationalist leader, Michael Karolyi (an aristocratic descendant of Alexander Karolyi), took over as provisional president, but from a weak position - in sharp contrast with his Czech contemporary, Masaryk, with his firm middle class base. He had similar aspirations of a compromise between the multi-ethnicity of the Habsburgs and nationalism: the destruction of Habsburg rule with Great H ungary as a federation of equal nationalities - albeit under Hun­ garian leadership. But Magyar nationalism would never tolerate equality with the 'subordinate' Slavs, while Rumanian, Serb and Croat nationalism, which had been whipped up in the classic 'divide and rule' tactic of imperial dominance, would not readily succumb to even benign Magyar ' leadership' . Karolyi's doctrine of national equality proved his demise. The aristocracy saw Karolyi as betrayer of Historic Hungary, since he rejected the nationalism of Magyar supremacy and planned land reform and democratic franchise (Taylor, 1 988: 244). Middle class support was insufficient to ward off the hostile aristocracy, and was itself pressu­ rized by the Left. With Slovakia already lost to Czechoslovakia, and the allies forcing Hungary to cede a large area of central Hungary to Rumania, Karolyi lost legitimacy in terms of nationalist sentiments and resigned in 1 9 1 9. At the same time, the post-war revolutionary movement which spread through the defunct empire (and which established Red Vienna) was not neutralized with social democratic reform, as in Czechoslovakia. The pattern of social polariza­ tion, which marked Hungary from the greater egalitarianism, moderation and com­ promise of the Czechs, now sharpened class conflict. Mass unemployment and near starvation in Budapest strengthened the Social Democrats, but these were themselves outbid by the revolutionary communists (Macartney, 1 962: 205). From the attempted bourgeois, nationalist independence movement there emerged a short­ lived revolutionary rising under Bela Kun in March 1 9 1 9. But the communist re­ public lasted for only six months. Class support was weak, with the peasants alien­ ated by policies of nationalization, rather than redistribution, and flagging support from the urban and industrial populations. After the failure of promised Russian help, Kun fled to Vienna, and in the political chaos, Rumanian troops entered Budapest, new frontiers were established, and after a pause during which the AI-

Copyrighted Material

From Empires to Nation States

27

lies waited for a ' suitable' regime to take over, the Treaty of Trianon was signed, with non-Magyars going their separate ways, and Magyar resentment at the per­ ceived injustice of Hungarian territory shrinking from 325,4 1 1 square kilometres, to just 92,963 (ibid., 1 962: 207). The social traj ectory of Hungarian nationalism, then, produced entirely differ­ ent results from the Czechs. Trianon Hungary now became a right-wing, mil itary 2 regime, under the regenc/ of Admiral Horthy. Post-war experience produced extreme social polarization; the economy had been further weakened by the Ru­ manian occupation, decline in crucial agriculture, loss of markets and capital flight during the political instability. The propertied classes were embittered, while the industrial and rural proletariats, for so long oppressed and disenfranchised, were radicalized. Their representatives were brutally suppressed, and Communist Party, Social Democrat, and trade union members were forced into exile, imprisoned and persecuted by bands of ' White Terrorists' . Any pretence at constitutional govern­ ment was destroyed by the resulting Social Democrats' boycott of parliament, leaving only a rump of small conservative and peasant parties (ibid., 1 962: 2 1 1 ). This legacy of polarization, which itself can be more clearly understood in terms of the conservative landed interests in the preceding Habsburg era, left an important mark. Hungarian labour movement radicalization combined with subju­ gation left a far more combative inheritance than the Czech legacy, and this can be traced right through to the 1 956 revolution. The subsequent reforms which were to characterize the Hungarian command economy era were themselves largely con­ cessions to this labour militancy, and as the ensuing analysis will show, this reform inheritance had its impact on the post- 1 989 capitalist transformation. For ten of the inter-war years, from 1 92 1 to 1 93 1 , a conservative administra­ i3 tion based on a newly formed coalition of the Smallholders' and Christian Na­ tionals' parties in the ' Party of Unity' under Bethlen, benefited the wealthier small­ holder, while excluding the poorer ones and peasants. This was accomplished by restoring the pre-war franchise in the elections of 1 922, which included a restricted number of smallholders, on whom the new party depended, but excluded the rest. The government trod a careful path between placating the wealthier smallholders and not alienating the large landowners too greatly. Thus land reform occurred, but land re-distribution was modest, and the large landlords could keep the best land, disposing only of the most infertile or inaccessible. The landless peasants gained little, and the agricultural workers were banned from forming combina­ tions (ibid., 1 962: 2 1 8). This government's main aim was patriotic and revision of the Treaty of Trianon boundaries. While conservative and authoritarian, it was less tyrannical than its predecessor and the Social Democrats were granted amnesty and given the same rights as other parties. The trade unions had their confiscated funds restored and could pursue 'their l egal activities ' , but in return, the Sociali sts had to adopt , . . . an expressly Hungarian attitude' on foreign political questions, to abstain from political strikes, to confine the activities of the Unions to the strictly non-political field, and not to extend their agitation to the agricultural workers (ibid., 1 962: 2 1 8). The Right Radicals of the former White Terror were neutralized by absorption

Copyrighted Material

28

Transformation at Work

into an expanded government service, echoing the Habsburg era in wh ich the bureaucracy was fi lled with disenchanted strata. The success of the Bethlen government was stable only during the moder­ ate economic improvement which fol lowed co-operation with A l lied demands to respect the Trianon Treaty, better trade and capital loans and a s light rise in l iving standards. However, the severity of 1 930s Depression wiped out these gains: agriculture collapsed, unemployment rocketed, and politi cal up­ heaval returned. After Bethlen ' s resignation in 1 93 1 , the Radical Right ex­ ploited the discontent of strikes, demonstrations and revolts of small farmers and sacked civil servants, and in 1 932, the Regent Horthy handed power to its leader, Captain Gyula Gombos, a fanatical racist, anti-semite - (he was later forced by Horthy to recant on this) - and fascist. Gombos originally coined the term ' Axis' for a future all iance of Hungary, fascist Italy and Nazi Ger­ many, in which he conceived of a German annexation of Austria and restora­ tion of Hungary' s historic frontiers (ibid., 1 962 : 223 t . The fragile post Ver­ sailles Treaty nation states now became pawns between H ungary' s ambitions for S lovakia and lost Rumanian territory and Germany's appetites for much more, with the Munich Agreement leaving them to sort out their squabbles while looking on as Germany annexed the Sudeten land. In Hungary, a leader­ ship embittered by lack of Western interest in its preoccupation with the Trianon boundaries, turned further ri ght, with a fascist programme and in­ creased anti-Semitism. This resulted in growing electoral support, with the fascist Arrow Cross and its allies emerging as the second l argest party in 1 939 (ibid., 1 962 : 229). The landed interests and polarized class legacy thus swung inter-war H un­ gary from brief, but radi cal revolution to fascism and alliance with Nazi Ger­ many, whi lst the political Left and labour movement including the CP, the Social Democrats, and trade unions, were suppressed. The experience of some modicum of l iberal democracy lasted only ten years during Bethl en ' s govern­ ment. The stark contrast with Czechoslovakia laid a very different basis for the later establishment of CP dominance.

Poland The pol itica l j igsaw and national ist complexion of Poland's inter-war Second Republic was dominated by its legacy of being torn between two empires. Popular anti-Russian sentiments were a key factor in preventing support for the Russian Revolution and the weakness of the CPo Simultaneously, how­ ever, historical divisions between those who were more anti-German or more anti-Russian, created pol itical instabil ity within an overall right-wing gov­ ernment. In 1 9 1 8, General Pilsudski, who was released from German prison, took unofficial leadership. Essentially anti-Russian, he led Pol ish forces against the attempted ' l iberation ' of Warsaw in 1 920 by Soviet troops (Kolankiewicz and Lewis, 1 98 8 : 1 0). Anti-German sentiments were the other half of Polish nationalism; Dmowksi, a ' nationalist and clericalist and whose overall policy

Copyrighted Material

From Empires to Nation States

29

was one based on respect for and mistrust of German power' challenged the Pi lsudki camp in a period of sharp ideological and ethnic conflict ended by Pilsudski's coup in 1 926. Poland ' s military regime became even more repres­ sive after Pilsudski's death in 1 93 5, when some 'semi-fascist and anti-semitic ele­ ments entered Polish public life' (ibid., 1 988: I I ). Characterized by some as a police state, Poland's anti-liberalism crushed the Left, in which the Polish Socialist Party, rather than the Communist Party, was the stronger. As in Hungary, suppression, not neutralization, of the labour movement, characterized this period. The contrast, however, was in anti-German policy, espe­ cially after Hitler's electoral victory in 1 93 3 . Here was an area of common ground with the Czechs. With the rest of Eastern Europe becoming client states to Ger­ many, only Czechoslovakia and Poland stood out in opposition. But despite the lack of help from the west, Poland rejected overtures of assistance from the Soviet Union, which would have involved a Soviet military presence reminiscent of the eighteenth century, leaving Poland vulnerable to the German invasion, which finally came in 1 939.

Political developments, the Communist Party and the Second World War Czechoslovakia The Second World War was a period of underground CP ascendancy and labour movement centralization in Czechoslovakia. Had the short liberal democracy of the First Republic not been abruptly destroyed by the German occupation in 1 939, it is arguable that the labour movement fragmentation left by the Habsburgs might have developed into a pluralist political and union structure, and that Stalinist strategies of Comintern dominance over the CP would not have succeeded. As it was, the Second World War provided the conditions both for the major rise in support for and organization of the CP, and the centralization of the disparate trade union movement. The reasons for the ascendancy of the CP during the war are both organiza­ tional and ideological; with the leaderships of both the Social Democrats and the CP abroad, the former lost credibility in its refusal to encourage mass resistance to the Nazis, while the latter was the best political organization to develop a wide­ spread illegal underground. Despite the CP's loss of support after denouncing Benes, the President in exile, during the Hitler-Stalin pact of 1 939-1 94 1 , it estab­ lished itself as the main defender of the Republic, with the most powerful base in Slovakia but also in the Czech Lands (Zinner, 1 963 : 73, Bloomfield, 1 974: 34). Of key significance to a future unified trade union movement was the establish­ ment under the Nazi Protectorate of resistance groups within the state controlled National Federation of Employees set up in 1 94 1 in a forced amalgamation of all existing trade unions (Bloomfield, 1 974: 35). Fascism therefore paradoxically overcame, by administrative means, the organic pluralism of trade unionism and provided the basis for labour movement unification. The foundations were laid in 1 943 with the illegal creation of URO (Ustfedni rada odboru, the Central Trade

Copyrighted Material

30

Transformation at Work

Union Council), and precursor of ROH (Revolucni Odborove Hnuti, the Revolu­ tionary Trade Union Movement), which was formed when the war ended. URO and the CP generally built popular support in building broad, unified organs of resistance in which they took control. While the First Republic had fulfilled the Western Allies' intentions in 1 9 1 8 of a non-communist European model of national self-determination, this had not stopped the spread ofCP influence within it. The Social Democratic Party had not taken the lead in resistance, and left the path open to the underground CPo When the liberating Red Army arrived in 1 945, unlike Poland or Hungary, where the CP was extremely weak, in Czechoslovakia the ground was already laid for its full entrenchment.

Hungary During the Second World War, Hungary was entangled in Germany's designs on South East Europe, and while initially not militarily involved, was forced to be­ come so when, in 1 94 1 , Britain declared war on Hungary and in 1 942, Germany demanded full mobilization. But the continuing internal divisions in Hungary, re­ flected in a succession of different leaders appointed by Horthy to the Minister Presidency, led to sharp shifts in policy and allegiance to the Nazis. The CP re­ mained suppressed, but for two years, there was some space for civil l iberties and the labour movement. In 1 942, Horthy himself was convinced the Allies would win, and still sought favour with them. He replaced the leadership with one which gave H ungarian Jews protection unparalleled in the rest of Europe, allowed free­ dom to anti-Hitlerites and the non-Communist Left and opened secret negotiations with the Allies, with whom he concluded a secret pact of surrender when their troops reached the Hungarian frontier. However, in 1 944, liberalization was aborted with the advance of the Soviet armies, to whom the allies had assigned South East Europe and Hitler's demand for greater loyalty from a regime whose loyalty was now suspect. He offered Horthy a choice: either co-operate with Germany, or un­ dergo occupation. Horthy chose the first, and appointed a collaborationist govern­ ment (ibid., 1 962 : 233). All anti-Nazi parties were dissolved, their leaders arrested or driven into hiding. All the Jews outside Budapest - some 450,000 were de­ ported to concentration camps where the majority perished. By the end of the war, a ' Provisional government of Democratic Hungary' had been assembled in 1 944, whose government signed an armistice in which all terri­ torial gains made since 1 938 were renounced. Horthy recovered some freedom of action, and stopped the Jewish deportations before they reached Budapest. How­ ever, his hopes for liberation from the West were superseded by the reality that it was Soviet troops who now represented Allied victory in H ungary. In 1 947, a further Peace Treaty was signed, formally restoring the Trianon frontiers. Politi­ cally, lack of development of the CP both before and during the war, and the persistence of other parties and interests, particularly those based on the land, meant the liberating Soviet Union and CP faced a complicated political map in order to win or force allegiance after the war. -

Copyrighted Material

From Empires to Nation States

31

Poland Six million of Poland's population of 35 million died during the Second World War, the highest proportion of deaths in any one country. Not all was due to Nazi slaughter: two million were deported from the Soviet occupation zone between 1 939 and 1 940, of whom at least half died within a year oftheir arrest (Kolankiewicz and Lewis, 1 988: I I ). The fortunes of the CP were quite different from the Hungarian experience, where it languished underground, or the Czechoslovak one, where it flourished underground. Here, it was dissolved, restored and betrayed - hardly a propitious base for future popularity. Among industrial workers, the Polish Socialist Party (PPS) was the maj or organization; the CP was absent because Stalin had dissolved it in 1 93 7-38, mistrusting it and seeing little political use for it (ibid., 1 988: 1 2). Matters altered after Poland was forced into an unwilling partnership as military ally with Russia, after Germany attacked the Soviet Union in 1 94 1 . Thereafter, another communist party, the Polish Workers' Party (PPR) was installed, the new name intended as less Soviet-oriented. Besides its anti-Nazi role, it was intended to establish a Soviet-friendly alternative to the western-oriented domestic patriotic movement loyal to the Polish government in exile in London, and prepare for a post-war Poland under Soviet influence. As it turned out, the PPR was not assisted by Moscow at the crucial moment of the Warsaw Uprising in August 1 944 : an armed uprising against the occupying forces was supported by the PPS, the Peas­ ant Party and the main resistance movement of the Home Army and backed by the PPR based Union of Polish Patriots. Its demands were clearly radical, including agrarian reform for large estates, socialization of key industries, participation of workers in the management of enterprises and workers' control of industrial pro­ duction. The Germans defeated the uprising and destroyed the city, killing 240,000 inhabitants and deporting 630,000. Then, in early 1 945, Russian troops eventually occupied the city (ibid., 1 988: 1 3, Harman, 1 974: 35). The post-war settlement under Soviet influence altered both the borders and the ethnic and religious complexion of Poland. It gained most of Eastern Prussia and the area south of the Oder and east of the Neisse river, but lost the ethnically mixed areas towards Bielorussa and the Ukraine, according to Soviet wishes. It was some 20 per cent smaller than before, although industrial gains included Up­ per Silesia with its coal mines and minerals. As with every border change of the formerly ethnically-mixed Europe, there were major population shifts, many en­ forced: the Germans were removed from their areas, and Poles were transferred from western Bielorussia and Ukraine. For the first time in its history, Poland became ethnically uniform, with only half a million minorities in a population of 24 million Poles. Paradoxically, in view of the CP take-over, this made Poland a more exclusively Catholic country than before, allowing the Church to take on the mantle of the Polish nation and gain a mass popular base (ibid., 1 988: 1 4). The inconsistencies of Stalinism thus not only undermined communism with the labour movement, but, ironically, its ethnic policies created its major opposition for the future - the Catholic Church. In sum, the long and complex history of empire, nationalist movements, inter-

Copyrighted Material

32

Transformation at Work

war and war experience produced legacies in what was to become 'communist' Central Europe in which there were common themes: class relations were interwo­ ven with struggles for national self determination, and the designs of the imperial powers. As for national labour movements, these were largely propelled by anti­ imperial, anti-state and anti-authoritarian views, and their political parties were no less affected by the national issue. Tension between nationalism and international­ ism always pulled and finally split the Social Democratic parties, and in the CP, there was always the tension between Moscow and national leaderships and loyal­ ties. Yet there were also wide national differences which over the centuries, had produced different economic and political paths. The Czechs and Hungarians had in common a shared history within the Habsburg Empire, but their different trajec­ tories shaped different social compositions and objectives to their nationalist move­ ments. For Poland, democratic agitation was associated with an oppressed peo­ ple's search for liberation from two major imperial powers, Russia and Prussia. Following the destruction of empires in the First World War, the inter-war repub­ lics proved very different for Czechoslovakia, Hungary and Poland and laid dif­ ferent foundations for the post- I 945 establishment ofthe 'socialist' system. Alone, Czechoslovakia maintained a liberal, parliamentary democracy for twenty years and this experience of the First Republic has been a key reference point of collec­ tive memory ever since. Elsewhere, coercion became the norm. During the Second World War, the preconditions for post-war CP ascendancy greatly differed : in Czechoslovakia, it had overtaken the Social Democrats and prepared the ground for take-over, but in Poland and Hungary, there were political rivals and it had a far harder task to establish contro\ . The differences, as well as similarities, in the next forty years ofCP rule, were themselves to lay different foundations for capi­ talist transformation.

Notes I . Apart from the Russian republics, this includes, to the north, the Baltic states, to the east, Belarus, Ukraine and Moldova, and to the south Romania, Bulgaria, Albania and the former Yugoslavia. 2. The separation of Czechoslovakia into two states in 1 993 is one example. The frag­ mentation of the European map during the 1 990s forms a wider picture of the aftermath both of other artificially constructed nation states - such as Yugoslavia - and the splitting of the Soviet Union. Secessionist nationalist movements in the Russian Republics, such as Chechenia, testify to continuing splintering which is arguably part of a wider nationalist revival seen not only in Europe, but elsewhere. The wider debate as to whether this is a political and ideological response to globalization is outside the scope of this work. 3. The feudal 'robot' system whereby peasants had to give labour to their noble in return for their land use. 4. They took their opportunity after the Habsburg victory over the Turks in the second Turkish siege of Vienna in 1 683. After this, the Hungarian landowners were l iberated from the Turks, who were cleared from Hungary by the Habsburg armies by the end of the seventeenth century.

Copyrighted Material

From Empires to Nation States

33

5. Without the labour or the peasantry, the gentry would have been unable to work their land, and driven off it. 6. This furthered land concentration. Between 1 867 and the end of the century, one hundred thousand independent landowners vanished, while over one third of Hungary was owned by the magnates, and one fifth by three hundred families (Taylor, 1 988: 1 99). 7. Even Tsarist Russia introduced some democracy (Hobsbawm, 1 987: 84-88). I n Prussia, Bismark responded t o the threat o f socialist movements in the 1 880s b y reforms, including an elaborate system of social insurance. 8. The Curzon line was a line of territorial demarcation between Russia and Poland proposed by the British foreign secretary, Lord Curzon. Poland rejected it and subsequently gained larger territories. In 1 939 a boundary similar to the Curzon line became the frontier between German and Soviet occupied Poland, and in 1 945 became recognized as the fron­ tier between Poland and the USSR. 9. The Czechoslovak Legion was formed as a military volunteer unit by Czech and Slovak soldiers while stationed in Russia. Many were simply deserters from the Austro­ Hungarian imperial army who were unmotivated to fight the Russians on behalf of the Habsburgs. Most simply wanted to go home, and some came into open conflict with the Bolshevik army, who were unwilling to allow them passage. However, some, such as the writer laroslav Hasek (author of 'The Good Soldier Svejk') remained in Russia and joined the Red Army, although he later returned to his bohemian and anarchist roots (see ' I ntro­ duction' to Hasek, 1 974: xiii). 1 0. In the Czech Lands, 40 per cent of the population were employed in industry and 35 per cent in agriculture; in Slovakia, 1 9 per cent worked in industry and 60 per cent in agriculture. I I . Economic reasons - the greater industrial development and prosperity of Czecho­ slovakia which permitted greater material concessions and thus bought compliance - fur­ thered the tight hold, and are discussed further. 1 2. The role of Regent was created as provisional head of state in the context of the national dispute over the successor to the Crown. Few wanted a republic, but the question of whether the monarch should be the Habsburg Charles, or whether post- I 9 1 8 Hungary should 'fill the throne by " free election'" split the country between ' Legitimists' (pro­ Habsburg) and 'anti-Legitimists' (Macartney, 1 962: 2 1 2-2 1 4). 1 3 . The main policy uniting these was their anti-Legitimist stance (ibid., 1 962: 2 1 4). 1 4. Wider European negotiations in 1 934 cemented the Axis relationship: no rap­ prochement between the Little Entente of Czechoslovakia, Rumania and Yugoslavia, which existed to resist Habsburg restoration, and Hungary, to form a bloc against Germany, was feasible (Taylor, 1 988: 277). While Mussolini's plans to thwart H itler's expansion of a bloc of Italy, Hungary and Austria were accomplished after the overthrow of the Austrian democratic republic in 1 934, after Hitler's occupation of the Rhineland, it became clear that Germany would soon accomplish the role assigned for her in Gombos's blueprint: the occupation of Austria, which took place in 1 938. His other plans, however, backfired: Hitler had no intention of restoring Hungary's historic frontiers, and even threatened its existing independence. In the following years, foreign policy was essentially dominated by attempts 'to pluck for herself the fruits which Germany's growing power brought within her reach, while escaping the dangers' (Macartney, 1 962: 224-227).

Copyrighted Material

2 Historical Legacies II

-

Diversity of Command

Economy Experience

Post-war Communist Party consolidation and Stalinist terror The policies pursued by the Communists everywhere in CEE after the war fol­ lowed a similar pattern. While entering coalitions with anti-fascist parties to fonn 'bourgeois democratic ' regimes, the CP gained key strategic positions of state, even where they were in a minority, and gained effective control of the political apparatus (Harman,

1 974: 35).

Other mass parties were weakened or taken over.

In Poland, resistance to the Stalinist regime was prolonged; from the Right, there was military harassment in the early days from the Home Anny, and from the Left, from the PPS and trade unions. The largest party, the Peasants, increasingly spoke out against the regime (Harman, per cent of votes in

1 945

1 974: 95).

However, the PPS (which gained

compared with the communist PPR's

21

64

per cent) was

subordinated to a new leadership, and the old leaders were harassed or faced im­ prisonment after they came out of war-time hiding. The new PPS was eventually forced to merge after long resistance with the PPR in were expelled.

In

1 948

1 947

and

82,000

members

Poland effectively became a one-party state under the

Polish United Workers ' Party (PZPR) (Harman,

1 974: 38).

In Hungary, where

The Russian ' liberators ' faced no sympathizers, the strategy was more cautious, with initial co-operation with the Social Democrats; but these too were induced into alliance with the CP, and the largest majority in the coalition government, the Smallholders, were manipulated to expel key members as ' fascists ' , so reducing their vote. With the CP now in a stronger electoral position, the Polish pattern was repeated: the Social Democrats were forced to merge in

1 948,

and objectors ex­

pelled. The other parties, the Smallholder and Peasants still stood, but as CP pup­ pets, and Hungary was proclaimed a ' People ' s Republic', under CP control, in

1 949

(Macartney,

1 962: 237).

In Czechoslovakia, the CP benefited from the liberal democracy of the First

1 946, in 38 per cent of votes, and

Republic, and successfully sidelined Social Democracy during the war. In the first national election after eleven years, the CP won

while the Left comprised only half of the coalition government of all anti-fascist parties, this placed it in a strong position to consolidate power (Zinner,

1 84).

1 963 :

It appears as something of a paradox that the only country of CEE which

enjoyed inter-war parliamentary democracy, eventually ended up with the most monolithic CP. The 'paradox' disappears on closer examination. Although the First Republic is now drawn upon as a major historical moment, it was fragile and short­ lived - twenty years being hardly long enough to replace several hundred years of

Copyrighted Material

35

Diversity of Command Economy Experience

imperial domination. However, the nature o f the 'monolithic' hold o f the C P and of compliance is controversial. Zinner

( 1 963: 1 00),

for example, argues that while

the Red Army was initially ecstatically welcomed in

1 945,

this gave way to fear.

His analysis of CP entrenchment suggests both popular support and intimidation came into equal play. Bloomfield also claims the CP 'enjoyed genuinely wide­ spread support amongst the industrial working class ' , but that the Party used ad­

( 1 974: 1 98 1 948 take-over

ministrative methods to crush opposition by ' right' Social Democrats

203).

Equally, there has been debate as to the interpretation of the

by the Communists. Some, such as Bloomfield

( 1 974) characterize it as a ' Passive

Revolution' , and emphasize the degree of genuine support for the Party, despite the fmal passivity of the masses when the leadership took control. Others (Korbel,

1 977,

Zinner,

1 963)

emphasize the typical pattern of manipulative political ma­

noeuvres and final coercion, and identify it as a 'coup ' , not a workers ' uprising. The evidence points to careful police preparations to enforce order and maintain tight control over the population, a stage-managed workers ' demonstration and total control of the media, which broadcast non-stop support for the coup (Harman,

1 974: 47). To gain popular support, the party exploited the visceral nationalist sentiments which turned out to be more deeply embedded than those of democracy: the an­ cient animosity between Czechs and Germans. In the Sudetanland, the Nazi' s had successfully won German votes, and its German-speaking inhabitants were hated by the Czechs for collaboration with the Germans - some deservedly so, but oth­ ers not,

40,000 having been sent to concentration camps for their opposition 1 974: 42). After the war and the return of this annexed area to Czecho­

(Harman,

slovakia, the CP, far from encouraging reconciliation and internationalism, whipped up calls for revenge and organized the deportation of German speakers (and Hun­ garians) from the new Socialist Republic, which was now to be a Slav state. The CP strategy of importing and deporting ethnic populations in 'national unifica­ tion' drives was not unique here; as we saw, it was used in Poland in the 'restored' German territories. However, in Czechoslovakia it was a crude tactic to buy local support as expulsions, land and home confiscation were adroitly used to provide avenues of advancement for Czechs, in the vacated jobs, housing and land. Throughout these countries, CP consolidation grew on the basis of initial im­ provements in material conditions, careerism and opportunism, with the Party the essential channel for social mobility, demanding readiness to obey instructions in return for posts in the state apparatus, educational advancement and other privi­ leges. There was also room for some genuine popular support; in most countries, the

1 945- 1 948

period was one of re-building war-tom cities and industries and

rising living standards. Behind this, however, there was always coercion. Total control was achieved by the party taking over the major security apparatus of the state, such as the police, which was then used to purge all other organizations (Harman,

1 974: 36).

The coercion became more naked after

1 948 as living standards fell and social

consent receded. The production drive and expansion of arms and heavy industry intensified on the basis of higher work norms, punitive measures against absentee­ ism and any kind of resistance, wage cuts, and in Hungary, threats of forced labour

Copyrighted Material

36

Transformation at Work

camps. The measures did not succeed in raising productivity, so the number of workers was forcibly expanded, primarily by drawing them from the land. This had the further deleterious effect on both urban and rural living standards of dam­ aging agricultural production; the remaining peasants had few incentives to pro­ duce food for the new urban labour force, and had to be cajoled and pressurized to raise production, including taxation, quotas and collectivization campaigns (Harman, 1 974: 62). Economic development followed a new 'imperial' develop­ ment, this time subordinated to the Soviet Union, and the global competition with the command economy system and advanced capitalism; the familiar sectoral dis­ tortions of the economy ensued, with the sacrifice of consumer goods and services to arms and heavy industry, and CEE becoming an economic satellite. Politically, independence and opposition were brutally ' liquidated' . The expe­ rience of Tito in Yugoslavia, who broke from Stalin in June 1 948, was regarded as a warning of other potential ' defections' . In Poland, Gomulka, who favoured a 'Polish road to socialism' which appealed to the peasants, and other CP ministers were imprisoned, and Stalinist land collectivization policy started. In Hungary, the lifelong CP member, Rajk, and other leading communists, who likewise had at­ tempted a 'Magyar road' to communism, were executed on trumped up charges, and later (before his re-instatement), Kadar was also imprisoned and tortured. Bulgaria followed the same pattern. In Czechoslovakia, where the purges began a year later, ten government ministers and the CP General Secretary, Slansky, were put on show-trials and executed in 1 9 5 2 . Everywhere, hundreds or thousands were secretly deported to labour camps, imprisoned or executed. The purges broke con­ tinuity with the old party members . For example, in Czechoslovakia, which had the largest pre-war CP, by 1 953 only 1 .5 per cent of members had held party cards from before the war (Harman, 1 974: 59). The course of events changed after Stalin's death in 1 953, and Krushchev's denunciations of his crimes in 1 956. Henceforth, coercion re-appeared in response to revolt, but in a trajectory chequered by concessions to ' national specifics' and economic reforms. These were a substitute for political reform of the party-state apparatus, which monopolized power to the last, in an attempt to maintain politi­ cal legitimacy in the recurrent crises of the command economy (Batt, 1 99 1 : 5 ) . The problem o f economic reform from the late 1 950s up to 1 989 i s central t o the fmal crisis of the centrally plarmed command economy.

Revolt, reform and crises of Communist rule Throughout CEE, a similar pattern of economic reform after 1 9 5 3 developed, al­ though the rhythm of changes differed with national experience, changes in the Moscow leadership and mutual learning or imitation. Poland and Hungary fol­ lowed similar paths of early revolt and reform. Their inter-war years of authori­ tarianism ironically left legacies of opposition interests from both the nationalist right, and from peasants and smallholders, and both shared historic hostility to Russia. As primarily agrarian economies, they experienced most privation during forced industrialization and plummeting living standards in the 1 950s. Poland and

Copyrighted Material

Diversity of Command Economy Experience

37

1 Hungary first rose in 1 9 5 6 • I n both countries the later economic ' reforms ' and experiments in relaxation of central controls were partly tactical concessions to prevent further revolt. Czechoslovakia differed: its industrial development provided the command economy system with the means for making major material concessions so that real wages began to recover in the late 1 950s: prosperity was bargained for politi­ 2 cal conformity . In addition, as we saw in the previous chapter, the inter-war years had provided the CP with the opportunity to gain more of a popular foot-hold than in the other two countries, incorporate a tame social democracy and leave fewer opposition groups. Revolt against the system did erupt - but later. By then, the Czechoslovak authorities had watched economic reform as a response to revolt in Poland and Hungary; unconvinced of its economic or political success, they opted for neo-Stalinist authoritarianism instead. Czechoslovakia was the last bastion of CEE to fall (not counting southern Europe and the Soviet Union), and then through mass demonstrations of students, intellectuals and workers, not gradual political bargaining with an established opposition.

Revolt and reform in Poland and Hungary In Poland, forced industrialization during the 1 950s depressed living standards by 1 0 per cent while production entered deepening crisis. Even worse was the agri­ cultural crisis, which reduced living standards further. The countryside had lost a million people who moved to the expanding towns, and although forced collectivi­ zation only affected 6 per cent of peasant holdings, the policies to increase the agricultural surplus for the state destroyed peasants' incentives to produce, so that harvests declined (Harman, 1 974: 95). In the early 1 950s, all opposition, includ­ ing proposals from reformers within the party for a 'Polish Road to Socialism' with greater concessions to the peasantry, was crushed. Gomulka and other propo­ nents of these ' heresies' against Stalinism were removed from office and impris­ oned as traitors (ibid., 1 984: 96). However, by the mid- 1 950s, the Moscow line under Khrushchev encouraged local rulers to permit limited reforms to weaken local hostility. This process prompted intellectuals, writers and j ournalists to em­ bark on a critique of current policies, which fomented splits within the party bu­ reaucracy. In the growing ferment of new aspirations, small wage concessions to the poorest workers and continuing discontent among the majority, opposition to the political apparatus became more open. The Polish 1 95 6 uprising began with a strike in Poznan for better wages, which spread to a city-wide demonstration. Workers ' councils were spontaneously formed. Fearing the unrest might spread further, a section of the bureaucracy proposed the reinstatement of Gomulka as PZPR leader whose popularity was enhanced by his imprisonment during the Stalinist period, and who could provide the necessary means of re-establishing social control. This gamble proved successful. Gomulka won a powerful follow­ ing against further ' Left' demands from the peasants, whom he had placated by halting further collectivization, and from a pact with the Church, which provided a further reactionary brake. Confusion and splits weakened the opposition. The sub-

Copyrighted Material

Transformation at Work

38

sequent workers ' and intellectuals ' - the ' October Left' - demands for economic and political reforms were thwarted by Gomulka' s conservative policies. The work­ ers' councils movement, which Gomulka had originally favoured as a weapon for the reforming wing of the bureaucracy to use against its opponents, was subordi­ nated to the party apparatus, infiltrated by party watchdogs , reduced to participa­ tion in administrative details and [maily officially subordinated to Party and trade union control in

1 958

(Harman,

1 974: 1 14-23,

Kolankiewicz and Lewis,

1 988:

1 22). The precursor to crisis was similar in Hungary. There was no economic assist­ ance from Russia in the industrialization drive; coal production fell, leading to a fuel and electricity shortage, new plant could not be used, and neglect and demor­ alization on the land led to food shortages. Stalin' s death ushered in a period of battle between the reform group and the old Stalinist faction of the HSWP, during which new debates and raised aspirations accelerated momentum of opposition. The resulting social polarization went much further than in Poland. The new concessionist approach began with the re-instalment of Nagy as Party leader in

1 953, and a short-lived period of a

' Magyar-road' to communism, including ces­

sation of collectivization and forced industrialization, and greater religious and political freedom. This was aborted in

1 955,

when the original Stalinist, Rakosi,

expelled Nagy from the Party, and returned to office. But expectations raised by Nagy' s reforms were not to be stopped. However, the wave of dissent among Party intellectuals and workers was not contained, as it was in Poland after the Poznan uprising under Gomulka' s reforms. Krushchev replaced Rakosi with another ' hard­ liner', Gero, whose policy was confrontational. On 2 3 October

1 956,

a peaceful

demonstration in Budapest demanding political, social and national freedom, was brutally suppressed by shooting into the crowd; it turned into a revolutionary situ­ ation with an escalating crisis of state, as army depots opened their doors, people armed themselves and daily life became controlled by 'revolutionary councils' in towns, villages, collective farms and factories power (Harman,

1 974: 1 37- 1 87

for

details). Concessions included recalling Nagy to head a coalition of Smallholders, Social Democrat and National Peasant parties, while Gero was replaced by Kadar, a former ' national' road communist. This lasted one week. While the Soviet government promised to negotiate on the removal of its army of occupation, it actually called for reinforcement, which entered the country on

30

October, and surrounded Budapest and other towns. Nagy appealed for help

from the United Nations, but the West did not intervene; it was preoccupied with the Suez crisis, but in any case, in

1 945, it had agreed with Russia not to intervene 1 974: 1 64). The Soviet army at­

in matters internal to the Soviet bloc (Harman, tacked on

4

November. Armed resistance held out, reinforced by a long General

Strike, but by the end of

1 956, the uprising was fmally defeated (details ibid., 1 974: 1 64-1 82). Around twenty thousand people had died. Workers' council mem­

bers were arrested, and the councils themselves destroyed. Nagy and other minis­ ters fled to the Yugoslav embassy for sanctuary, and were abducted by the political police as they left, having been falsely promised safe passage. Eighteen months later the government announced their execution. In the meantime, Janos Kadar was appointed leader, with promises of concessions, including greater personal

Copyrighted Material

Diversity of Command Economy Experience

39

freedom, more contact with the West and more production of consumer goods (Macartney, 1 962: 243). Following 1 95 6 , both countries embarked on economic reforms and some political concessions. In Poland, following the 1 956 uprising, certain aspects of a ' Polish road' were retained, such as the persistence of small peasant farming, the extensive role of the Church and some freedom to intellectual life, in an otherwise strict adherence to central rule (Kolankiewicz and Lewis, 1 98 8 : 1 6). In Hungary, the extremity of the 1 956 crisis elicited the Kadarist reforms, beginning with the relaxation of directive planning, a reduction in the number of enterprise plan indi­ cators and introduction of employee profit sharing. In 1 968 the New Economic Mechanism (NEM) reduced central planning to setting aggregate targets using indirect levers, such as prices, taxes, the cost of credit, tariffs and import licences, within which enterprises devised their own plans (Jeffries, 1 993: 278). As early as 1 972, a decree on joint equity ventures was introduced for the fmancial and ser­ vice sectors. The NEM also marked a relaxation of Party control of industrial relations. A partial interest-representation role was returned to trade unions, in which workplace-level collective agreements allowed trade unions to negotiate bonuses and benefit schemes and make certain modifications to the legal require­ ments of the Labour Code, although wage regulations remained with the ministry (T6th, 1 997b:

33 1 ). In general, the NEM went through phases of retrenchment

and relaxation. Re-centralization was imposed in 1972-77, with a renewed em­ phasis on investment and growth, partly in response to the oil shock of 1 973-74, fmanced by imports and loans. During this period, while large enterprises were to expand at any cost and benefited from special concessions, small ones were tightly controlled or even merged into larger ones. It was partly in response to this that the non-regulated sector, including both legal and illegal economic activity, expanded (ibid., 1 993: 280, 29 1 ). In Poland, the 1 956 disturbances were the first of further protests against price

increases and depressed living standards. Following the 1 960s policy of attempt­ ing to reverse slow growth by a switch from consumption to investment, there were riots in 1 970, after which Gomulka was replaced by Gierek, whose expan­ sionist strategy embarked on raising consumption and production via imports, and building huge greenfield-sites

(wielkie organizacje gospodarcze or large economic

organizations) financed by Western loans (Blazyca, 1 992: 1 84). Emulating the Hungarian NEM, reform included internal self-management ofemployment, wages, price fixing, investment and range of output. The whole policy caused its own crises of foreign debt and balance of payments problems, demonstrating the clas­ sic shortage-economy symptoms of hoarding, enlarging capital stock rather than modernizing and failing to meet targets (Jeffries, 1 993: 293-296). Here too, by the mid- 1 970s, there was policy reversal, with a drastic decline in imports and invest­ ments, forced exports of food, associated rises in prices, and a re-centralization of control in 1 976: again, this did not prevent price-rise riots in 1 976, and 1 980, and at the same time, a resurgence of the self-management movement in 1 970, 1 976 and 1 980 (Hardie and Rainnie, 1 996: 72). As output fell between 1 97 8 and 1 982, so consumption declined by 15 per cent (ibid., 1 993: 295). Opposition entered a crucial phase in 1 980-8 1 : strikes broke out in summer 1 980, and almost led to a

Copyrighted Material

40

Transformation at Work

general strike, until this was aborted by Lech Walesa. Nevertheless, the party-state leadership collapsed and the unofficial trade union and social movement, Solidar­ ity, became officially registered, followed by a mass exodus from the Party (Kolankiewicz and Lewis, 1 98 8 : 70). Concessions followed, including the 1 9 8 1 Law on Self Management of State Enterprises, which was an attempt to pacify the rising self-management movement - only to be suspended under martial law in the 3

same year . Economic crisis afflicted Hungary too. In 1 977-78, the HSWP acknowledged that the reversal of the NEM had contributed to insolvency and in 1 979 a ' stabilization programme ' began, cutting investment to improve the trade balance, while protecting consumption (Batt, 199 1 : 8). NEM reforms were resumed, with the splitting up of large enterprises and encouragement of the private sector. The system of internal contracting or ' Enterprise Work Partnerships' (VGMKs in Hun­ garian abbreviation) in state enterprises facilitated by enterprise collective agree­ ments, was legalized in 1 982 (Stark, 1 986, Neumann, 1 989). This enabled work groups (with a maximum of thirty) to hire equipment at negotiated rates after work hours and fulfil contracts, either with their own enterprise, or with permission, with outside ones. The system, which was partly a response to labour shortage, and partly a mechanism for increasing wages, involved around 14 per cent of all employees in 1 986. Its predictable side-effect was slacking during regular work hours, a further increase in the already large informal sector, as well as resentment by those who were excluded. It developed a ' core-periphery' enterprise employ­ ment pattern in which the privileged core were the internal contracting group who earned more, and the periphery of workers excluded from these extra sources of income - a pattern which has allegedly left a legacy of segmentation after capital­ ist transformation (Neumann, 1 997). A further step towards workplace self-man­ agement was introduced in 1 985 with Enterprise Councils, which were introduced in large and medium enterprises of over 500 workers (excluding the largest in economically strategic sectors such as energy, arms and transport). Composed of an equal number of representatives of workers and managers, together with the Party, trade union and Communist Youth League, the council elected the managers and staff, but the ministry retained the right of veto for aspiring directors. In enter­ prises with fewer than 500, the employees' general assembly hired and fired the managers, but although there was no official ministerial intervention, informal political pressures still operated (Jeffries, 1 993 : 28 1 ). The Enterprise Councils continued to play a powerful role, at least in law, until the new labour Code of 1 992, which introduced new Works Councils elections (Hethy, 1 995c: 84 and Chapter 8). Later reforms involved the gradual introduction of market mechanisms into the economy and greater openness to the West. In 1 986, a bankruptcy law was enacted (although in 1 987, only three companies were liquidated and 30 per cent of the state budget still went to supporting unprofitable finns); in 1 987, the bank­ ing system was re-organized with the National Bank of Hungary resembling a western central bank, indirectly controlling five commercial banks, and the first joint stock company was established, with freely marketable shares. Joint equity ventures were extended to manufacturing in 1 9 8 5 , when it became possible for

Copyrighted Material

Diversity of Command Economy Experience

41

foreign ownership to exceed 5 0 per cent. At the beginning of 1 989, a new com­ pany law allowed the general establishment ofjoint stock companies whose shares could be offered to the general public and foreigners, with the aim of creating a competitive capital market, for which the new Budapest stock exchange (the first in the region) was opened in January 1 989 (ibid., 1 993: 284). Hungary also had a liberal foreign trade policy, with 270 enterprises having their own trading rights within the Council for Mutual Economic Assistance (CMEA) in 1 986, and from 1 988, any state enterprise or co-operative could trade with the West, providing it had registered with the Ministry of Trade (ibid., 1 993: 287). Despite these reforms and the stabilization attempts, the underlying problems of lack of growth - or growth being paid for by spiralling foreign debt - bedevilled Hungary throughout the 1 980s. Inflation rose, and living standards declined for a third of workers, and remained stagnant for the rest (Jeffries, 1 99 3 : 276). Mean­ while, political crisis deepened. Decentralization of economic control had weak­ ened central control over the economy, leaving the reformist leadership trapped by the party-state hierarchy, whose political reform was blocked by the Brezhnev regime (Batt, 1 99 1 : 1 0). Kadar's legitimacy had been severely shaken by the 1 970s reform reversals and alienated the leadership from a growing extra-party opposi­ tion of economic experts who formulated more radical reform in 1985 (ibid., 1 99 1 : 1 1 ). In 1 988, Grosz, who was more receptive to the new technocratic groups of reformers, took over as General Secretary while the reformist wing of the Party grew under the leadership of Irnre Pozsgay. The symbolic break with the past was marked by a historical commission in 1 988, which reversed the orthodoxy that the 1 9 5 6 uprising had been a 'counter-revolution' and characterized it as a genuine 'popular uprising ' . With this, not only was the conservative faction of Kadarism finally discredited, but the whole system of one-party rule. In 1 989 the HSWP agreed fmally to transition to a multi-party system, and prepared for talks with opposition movements (Batt, 1 99 1 :

1 3).

In Poland, failed reform provoked coercion, but even this eventually succumbed to the quest for social pacification, and fmally led to the negotiating table in 1 9 89, as in Hungary. Meanwhile, in 198 1 , economic crisis, revolt and the collapse of Party rule were met with martial law. Under Jaruzelsky, Solidarity was banned and an austerity programme imposed: consumer goods shortages became severe, ra­ tioning was widespread, and the state imposed food price increases. At the same time, the regime looked to Kadarist Hungary as a model for eliciting social con­ sent by economic reform, such as fmancial and market mechanisms intended to decentralize the plan (Batt, 1 99 1 : 8). They were aborted by militarism: the re­ introduced self-fmancing enterprises were subordinated to army commissars, and 'self management' was delayed until the end of martial law in 1 983. Even then, the worker elected workers ' councils had little real power, and their power to nomi­ nate and dismiss the director was excluded in the 1 ,3 7 1 key enterprises which employed 80 per cent of the workforce, (Jeffries, 1 993: 298). After 1 983, a few more market mechanisms, including a bankruptcy law, were introduced, but the central allocation of materials remained. With the basic problems of negative growth and foreign debt as serious as ever, in 1 987, a further set of economic restructuring reforms were proposed, again with attempts to develop participatory methods, and

Copyrighted Material

42

Transformation at W9rk

by the late 1 980s, attempts at further decentralization gave the workers ' councils wider control over the enterprise (Kulpiilska et al., 1 994: 1 1 5). Nevertheless, the reforms were not seen as very credible either by Party hardliners or the opposition, from a regime which had imposed martial law (Batt, 1 99 1 : 1 0). In 1 986, Jaruzelski proposed a better implementation of reforms in a 1 986-1990 Five Year Plan which would revolve round energy and material savings, increase exports to the West and restore domestic economic equilibrium. While this was to introduce greater enter­ prise and fmancial freedom, such as choice of which banks to use - banking was to be more competitive - the proposed stabilization was to reduce subsidies and cause a 40 per cent rise in consumer goods and services. To implement such reforms with social consensus, a referendum was held in November 1 987, but this failed to

get the required 5 1 per cent of eligible voters ' approval. 4 Consequently, the eco­ nomic programme was to be more gradual, with price rises planned for 1 988 intro­

duced in stages. However, gradualism did not prevent growing labour unrest by spring 1 98 8 over rising prices and demands to re-Iegalize Solidarity

(Jeffries,

1 99 3 : 300). As in Hungary, Party control began to disintegrate in the late 1 980s. Economic decentralization, when fmally introduced, weakened central control and the sig­ nificance of Party connections. The outbreaks of labour unrest in 1 98 8 in response to the high inflation rate, and the fact that Solidarity was still not legalized, were met with a mixture of wage concessions, tighter control over labour disputes, re­ centralization of economic decision-making combined with state rights to close enterprises and dismiss managers - none of which quelled mounting political dis­ satisfaction. Talks promised with Solidarity' s leader, Lech Walesa, for October 1 988, failed to materialize, but, just as pluralism was being discussed in Hungary, so by January 1 989 in Poland, pressure for Solidarity's re-legalization forced the Party to agree in principle to trade union pluralism; discussion with Solidarity began in February and the Round Table Agreement reached in April. Solidarity was re-Iegalized; in the June 1 989 election while the lower house, the Sejm, re­ tained a communist maj ority with 65 per cent of seats reserved for the Polish United Workers ' Party, the new upper house, the Senate, was to be freely con­ tested. Solidarity won overwhelmingly, and entered government. As Batt puts it:

The final impasse at which Poland and Hungary had anived by the late 1 980s was stalemate in the strategy of social control. . . .The economic crisis and increasing incoherence of the political structure undermined the regimes' ability either to re­ press or to co-opt opposition, but they were successful in preventing the upsurge of mass social unrest ( 1 99 1 : 1 4).

Industrial reform, the Prague spring and retrenchment: Czechoslovakia The divergent path of Czechoslovakia has already been noted in terms of its legacy of capitalist parliamentary democracy and industrial strength, and the ambiguous subordination of social democracy to communist party hegemony. Its divergence continued in sustained resistance to economic reform during the 1 970s and 1 980s, compared with its neighbours. Its early trajectory, in the 1 950s, differed because

Copyrighted Material

Diversity of Command Economy Experience

43

there was no 1 95 6 uprising during the era of post-Stalinist revision; the revolt in Plzen immediately after Stalin ' s death in 1 95 3 was met with unreconstructed Stalinist coercion and thereafter, the CP under Novotny was never forced into reform by mass unrest. Until the early 1 960s, exports of heavy industrial goods to Russia and its s atellites paid for imports which largely made up for the fall in food production experienced elsewhere; real wages grew by 60 per cent from 1 9 5 0 to 1 9 60 (Harman, 1 974 : 1 9 3 ) . Economic reform w a s , nevertheless, resorted t o once industrialization else­ where in the Soviet bloc challenged Czechoslovak exports . As growth halted, so a ' New Economic Model' was wheeled in with experiments in relaxing central planning to shore up a failing economy and preserve political legiti­ macy. In the late 1 9 50s, enterprises had already been amalgamated into asso­ ciations (VHJs, vyrobni hospodarska j ednotka) with some concessions to de­ centralized management. Their aim was to reduce the inefficiency of central planning by allowing smaller units to organize investment, target achieve­ ment and overcome the duplication of many small firms, while encouraging integration in new industry complexes. While subsequent reforms re-central­ ized by further amalgamation as trusts, the VHJ principle was retained through regional and inter-enterprise network links and a degree of managerial au­ tonomy alongside the hierarchical system, allowing trusts to determine their own output with financial incentives (Myant, 1 9 89: 1 1 7) . The state intended to retain overall control over investment and consumption, but increasingly through the use of indirect fiscal instruments and a combination of a mixture of fixed and free prices (Jeffries, 1 99 3 : 247). But the overall aim was to raise investment, and for the m ajority of workers, wages were held static or cut (Harman, 1 9 74: 1 9 5 ) . As in Poland and Hungary, the reforms failed to achieve their purpose; prices rose, investment took on distorted forms which avoided modernization and created hoarding. Again, as elsewhere, evident failure fo­ cused critique, which began to come out into the open, and broaden from the purely economic to the social. Within the Party, the struggle for power be­ tween the radical reform and Novotny wings ensued, with the former enlist­ ing the support of students and intellectuals, and eventually succeeding in installing Dubcek, the Slovak Party leader who, while now a radical, had will­ ingly supported the Stalinist show-trials. (Slovak nationalism was an impor­ tant element in fomenting opposition to Novotny, a Czech, in early 1 9 6 8 , although once Slovak posts had replaced federal ones i n the party bureauc­ racy - achieving nationalist aims of greater autonomy - allegiance reverted to the conservative groups within the Party, with far less Slovak pressure for further democratic reforms than were witnessed in the Czech lands. [Harman, 1 9 74 : 2 1 1 ] ) The Russ ian leaders fully expected that this policy would reign in gathering unrest, but in spite of his efforts to fulfil this role, Dubcek failed. Throughout the spring and summer of 1 96 8 , dissident intellectuals and writ­ ers raised mass pressure for democratization, with petitions such as the M ani­ festo of 2000 Words, efforts to revive the Social Democratic Party and estab­ lish independent youth groups (ibid., 1 974: 1 99 ) . No oppos ition was organized as t h e W a r s a w p a c t t r o o p s o cc u p ied

Copyrighted Material

44

Transformation at Work

Czechoslovakia in August 1 968. Dubcek was arrested, taken to Moscow and returned to Prague. However, there was prolonged opposition to the new collaborationist regime from the media in illicit broadcasts against the occupa­ tion, intellectuals in samizdat publications, student demonstrations and, by the Autumn of 1 968, increasingly by workers, in strikes, demonstrations and work­ ers ' council factory occupations . But although a general strike was threatened, with armed Russian control in place and the Polish and Hungarian examples hav­ ing hardly been encouraging, trade union leaders were not prepared to organize further resistance or threaten their own position (Harman, 1 974: 23 1 ). Similarly, opposition among all but a minority of Party reformers evaporated, and in April 1 969, Husak took over as leader to oversee the systematic repression and perse­ cution of all 1 968 dissenters and return the country to ' normal' . No further 'ex­ periments ' with enterprise (workers ') councils were permitted, command plan­ ning returned, and any post-invasion innovations were stamped out (Jeffries, 1 99 3 : 247). From 1 968, ' normalization' was imposed. The C P was purged o f reformists in 1 97 1-72, and the stranglehold of neo-Stalinists was reinforced throughout the 1 970s by the economic failures of Hungary and Poland, where reform was seen not as the response to crisis, but as its cause (Batt, 1 99 1 : 1 7). The unswerving resistance to any tampering with the centralized command economy system had few internal challenges: in the late 1 970s, a few ' sets of measures' for a more flexible course were mooted, but crushed. It was only chal­ lenge from outside, with Gorbachev ' s accession to power in the Soviet Union in 1 98 5 , perestroika and a more open approach to CEE in 1 987, that reform became possible. Husak himself was not averse to modest reform, and introduced the State Enterprise Act, passed in

1988, which replaced the old VHJs with ' state

enterprises ' , with decentralization measures similar to those introduced in 1 968, including elected enterprise councils (albeit under ROH control) with powers to appoint the director. However, Husak's successor as General Secretary on his retirement in December 1 9 87, Milos Jakes, was a hard-liner long committed to the period of ' normalization ' , and rejecting any analogies with 1 968, imposed a conservative path symbolized by his ousting of the reformist Prime Minister, Strougal, in 1 98 8 (Batt, 1 99 1 : 1 9, Jeffries, 1 99 3 : 250). The autocratic party sys­ tem did no better in improving growth and efficiency than the reform regimes, but cautiously avoided foreign borrowing and loss of control over macroeconomic balances which they experienced. The price was neglect of infrastructure invest­ ment and stagnant living standards, but for the bureaucracy, this was well worth the political power which centralization shored up. Political stability was safer than in the reforming economies, where some measure of engagement with the opposition had opened the agenda for the requirement for political legitimacy. In Czechoslovakia, outward conformity and compliance sufficed, since there was no quest to win deeper social support. The regime, although unable to improve living standards, was still able to guarantee full employment, a welfare state and subsidized prices and could always point to troubled Poland or Hungary where things were worse. Social control through censorship, surveillance, bribery or naked coercion continued unchallenged - until the demise of the communist regimes next door.

Copyrighted Material

Diversity of Command Economy Experience

45

Command economy private sector legacies Before concluding this exploration of the historical setting of transfonnation, a word is needed about the private sector legacy. Post- 1 989 privatization policies were grafted onto different experiences of the private sector' s co-existence with the centralized planned economy, leaving different layers of experience, nostalgia and ideological support for its resurrection in new small business, or the privatiza­ tion of state enterprises. Whether through its continuing presence during the state planning era, or through the experience of its forcible crushing, beneath the ap­ pearance of outward compliance, there remained the strong attachment to the pri­ vate property sphere. This was culturally expressed in the inner exile to the private experience of household, family and friends, and more concretely satisfied in the major legitimate area of private economic activity, the small country home and garden or vegetable plot, which were lovingly cultivated. In Poland and Hungary, private or quasi-private production remained in the important agricultural and small-holding sector, while in Czechoslovakia, on the other hand, it was virtually eliminated. In Poland, the small-enterprise private sector was well developed in agricul­ ture: the 1 944 land refonns left small average sized holdings of 6.4 hectares, and the reversal of forced collectivization in 1956 left these largely intact, so that by 1 9 86, 72 per cent of arable land was in individual land holdings, and only 1 8 per cent in state farms. In 1 9 8 5 , 78 per cent of agricultural output was from the private sector (Jeffries, 1 993: 3 0 1 ) . But the fonnal fact of private peasant ownership was overlaid with the economic impact of state targets and pricing. This contradiction added to the resentment of a peasantry straining at the bit for greater freedom, and helped the allure of the concept of a free market after 1 989. In the non-agricultural sector, a more pennissive attitude to the private sector prevailed during periods of economic refonn. Estimates of private sector activity vary from 1 0 per cent of the non-agricultural labour force and 7 per cent of industrial output in 1 987 (Jeffries, 1 993 : 304). During the 1 987/8 round of refonns, it was proposed to treat the pri­ vate sector on an equal footing with the state and co-operative sectors in tenns of taxation and access to credit (ibid., 1 993: 305). Private enterprise thus always had some presence; but this was confmed to the small finn - the very sector on which much of Poland' s post- 1 989 growth was built. However, the rather patchy experi­ ence of private sector activity in the industrial sector was likely to leave a more ambiguous attitude among workers. In Hungary, even where fonnal state ownership dominated on the land, eco­ nomic decentralization introduced market mechanisms. In the 1 945 land refonns holdings of over 57 hectares were confiscated and redistributed. But forced col­ lectivization during, 1 949-56 led to reconcentration. The 1 956 revolution led to two thirds of members leaving the collective farms, but re-collectivization (which relied on persuasion and incentives) took place in 1 95 8-62. This left a private sector much smaller than Poland's, but nevertheless responsible for 34 per cent of gross farm output in 1 985 (Jeffries, 1 993 : 286). Furthennore, fonnal property fonns belied a different practice from the late 1 950s onwards . Economic refonns re­ moved central control of state farms: in 1 957, compulsory delivery targets were

Copyrighted Material

46

Transformation at Work

abandoned, mandatory plans were scrapped in 1 9 66 and in 1 96 8 , and diversi­ fication into industrial activities was permitted. From the 1 950s, agricultural co-operatives, in which members owned half the land, dominated the sector and produced 50 per cent of gross agricultural output, such as food processing. So in Hungary, the effects of state ownership were modified by the practice of allowing wider market freedom, and together with the huge agricultural grey economy, pro­ duced private entrepreneurship of the land. Beyond agriculture, the private sector was always given more freedom than in the other centrally planned economies, with around 34 per cent of net material product from the non-state sector (includ­ ing co-operatives) in 1 984; by 1 988, an estimated 20 per cent of total investment was in the private sector, 1 0 per cent of retail sales, and 5 per cent of industrial output (Jeffries, 1 993: 289). If one includes the system of internal contracting in firms, the leasing of state property, the emergence of private guest houses (permit­ ted in 1 988) and the vast informal economy, the figure is much higher - but the net impact is difficult to estimate. Hungary's long experience of both small business and capitalism facilitated the gradualist path to transformation for which it is dis­ tinguished. In both Poland and Hungary, a foundation of experience in private enterprise already existed in 1 989, probably predisposing to illusions in precisely the free-market policies proposed by the architects of privatization policies. Upon this could be built other inducements for workers to involve themselves in the privatization of their own workplaces, such as employee share ownership. These were more significant elements of privatization programmes than

in Czechoslova­

kia, where there was far less recent private sector experience. When private ownership was re-introduced in Czechoslovakia, it entailed the most radical overhaul of the tightest state controls of CEE. Forced collectivization took place in the 1 950s, leaving only 3 per cent of arable land and 1 0 per cent of gross farm output in the private sector, although the co-operative sector was much bigger, accounting for two thirds of total farm land (Jeffries, 1 993: 252). This was a massive repression of the previous small-holding system: in agriculture, after years of imperial concentration of land, the land reforms of 1 92 1 had created ten­ ure in small holdings, with two thirds of agriculture in farms of 5 to 20 hectares. In the non-agricultural private sector, there was similar subjugation, even by CEE standards: during Stalinism, self-employed craft workers and industrial producers were eliminated, and of 383,000 small companies, only 47,000 remained in 1 9 5 6 (ibid., 1 993: 253). Although some relaxation occurred i n 1 982 and 1 988, there was virtually no private sector of non-agricultural output in 1 9 8 8 . Thus, post- I 989 privatization appealed for different, but no less compelling reasons here than in Hungary and Poland. The complete suppression of private ownership and produc­ tion during the command economy, combined with reminiscence of an earlier suc­ cessful capitalist legacy were strong incentives for change. Private ownership, then, was not a complete novelty of post-communism. In each of the countries under discussion it existed to varied extents, leaving a collec­ tive memory. Not surprisingly, the prospect of the resurrection of this sector al­ lowed the project of privatization to be seen as the salvation of restructuring, rid­ ding enterprises of their past inefficiencies as they put their houses in order. Poland, Hungary and Czechoslovakia each, then, experienced different routes

Copyrighted Material

Diversity of Command Economy Experience

47

of refOInl and experimentation with the command economies. These, in tum, can be understood in terms of much earlier historical experiences, going back to their Second World War and inter-war experience, and before this, their experience in imperial Europe. In Czechoslovakia, the legacy of advanced industrialization and social democracy - themselves formed during the Habsburg years - had the para­ doxical outcome of one of the least reconstructed systems of Communist Party central control in Central Europe. In Poland and Hungary, totalitarian inter-war years, themselves the historic consequences of competing power relations after different experiences of imperial domination, ironically led to greater plurality of organized opposition to Communist Party rule, especially large landed and peas­ ant interests, and in Poland, the Catholic Church. Revolt, concessions and reform, with a good deal of borrowing of example between the two countries, ensued. In both, the end of the command system came with schisms in the ruling elites, and negotiated compromise with the opposition. Yet there is more to the diverse national experiences of this region than these consequences for the precise nature of command economy party/state control. There are both institutional and cultural differences between the countries, and commonalities for what had been a ' mitteleuropa'. In spite of the homogenization of the Soviet model and totalitarian destruction, beneath the surface, cultural tradi­ tions went on, mediating the experience of the command economy, and leaving their distinctive marks as the foundations for transformation (Tatur, 1 995: 1 68). Among these institutional legacies remains a Central European tradition of educa­ tion, skills and qualifications similar to the German one, in which specialization, technical expertise and theoretical knowledge, are traditionally valued. These have never really disappeared, and the centralized system which overlays them also built upon them. Regaining these, and wider national identities may be part of the process of re-creating civil society and democracy. At the same time, the national legacies mean there is also something distinctive about these countries regionally precisely because of their centrality in Europe, and their potential use by stronger economic and political power blocs as buffer zones between them, and new markets and production zones close to the West. These issues continue to dominate their transformation, and it is for this reason that their post- 1 989 changes must be understood both as systems-changes from command to market, but also in their central political-economic insertion in Eu­ rope. For this, analysis of transformation must incorporate geo-political analysis. Finally, the history of nations and nationalism provides a more sombre dimen­ sion. There is a grey area between nationhood as a source of independent citizen­ ship, and nationalism as xenophobia. From the point of view of the concerns of this book with the experience and prospects for democracy and labour interests, national histories could veer in either direction. In South Eastern Europe and the former Soviet Union, where the violence of ethnic hatreds tore up former Yugosla­ via and fomented civil wars in Russia in the early 1 990s, and the rise of nationalist populist parties, such as Russia's Liberal Democratic Party of Zhirinovsky, is al­ ready testimony to how quickly the re-emergence of nationhood after enforced unity and conformity, can degenerate into populist demagogy and murderous be­ haviour. But nationalism in more ' civilised' form also led to the 1 993 ' Velvet

Copyrighted Material

48

Transformation at Work

Divorce' of Czechoslovakia. Ethnocentricity - rising for differing reasons every­ where at the close of the twentieth century - has burst out even in what is regarded as the more democratic havens of the Czech Republic, where racist attacks on any perceived 'outsiders' - against migrants, people of colour and Roma, have been witnessed in the late 1 990s (The Guardian, November 20, 1 997). In Poland, there has been a resurgence of conservative, populist nationalism, backed especially by the resurgent Solidarity in the 1 998 elections, but most graphically in the expres­ sion of Catholic-mediated and anti-Semiticism, in the well publicized erection of crucifIxes outside the Auschwitz concentration camp in the summer of 1 998, and the battle to keep them there (The Guardian, September 2, 1 998). This resurgence of nationalism is an example of how layers of history can be selectively mobilized by political interests, and illustrates why it is so important to retain a long historical perspective, to combat distortions and learn from the past. In Central Europe, what had been patriotic struggles for national self-determina­ tion and freedom from imperial oppression, was adroitly utilized by Stalinism to win support, as we saw in the case of whipping up Slav nationalism in Czechoslo­ vakia. But this was not exceptional: as Haynes argues, ...these regimes were built around nationalist categories. The very idea of 'social­ ism in one country' was based upon a strategy of national development. Indeed, the communist regimes prided themselves that they were better representatives of 'the national interest' than the preceding private bourgeoisies which had been weak in the face of foreign capital ( 1 996: 477).

The twist in this for the present day, however, is that critics of communist oppression appropriated this language of nationalism for their own use, as the alliance of Solidarity and the Catholic Church did in its struggles for freedom in the 1 980s. Nationalism and nationalist intolerance continued to exist just beneath the surface during the command economy era, and their revival post- 1 989 can be seen as a potent force to deal with the disappointments with capitalism, with the added confIdence of a political vacuum on the Left. This nationalism can be seen not as . . . . some irrational form of atavistic tribalism or some regression to the past, but as a living force that the old regimes had maintained and reproduced and which now seemed to offer solace when nothing else did. In particular, the destruction and discrediting of any genuine left wing alternative by its ideological association with the past history of Stalinism acted to pull the whole political spectrum to the right (Haynes, 1 996: 477).

In considering citizens' response to the outcomes of capitalist transformation, the prospects for civilized democracy must be set in the context of the possibility that nationalism may be of more immediate appeal than developing democrati­ cally accountable forms of representation, including trade unions. When we come to review these developments in Parts 3 and 4 of this book, it is in some ways remarkable that as much progress as we delineate has been made. There are al­ ready national variations in the development of democracy. The country focus of this book, the Czech Republic, offers perhaps one of the more promising pros-

Copyrighted Material

Diversity of Command Economy Experience

49

peets, with its more secular, industrialized tradition and strong identification with its relatively tolerant phase of social democracy during its First Republic. But the experience of accommodation to a series of oppressive regimes also makes for conservatism and compromising attitudes which could cut both ways: either to­ wards greater public freedom, respect of difference and co-operative social regu­ lation, as the dissident intellectuals encouraged, or intolerance, as more right-wing forces may ably encourage.

Notes I . There were earlier revolts in 1 953. A workers' demonstration in Plsen, Czechoslo­ vakia, was suppressed. This was also the major East German workers' uprising (Harman, 1 974: 69-85). 2. The legacy of imperial subordination cannot be forgotten in previous examples of Czech compliance, both to Nazi occupation, and to the Communist takeover. Thomas Masaryk's philosophical commentaries noted a Czech habit of humiliation, a willingness to bargain dignity to assure material existence, and a fear of taking responsibility - prod­ ucts, he saw, of three hundred years of imperialist domination (Korbel, 1 977: 82). 3. Martial law was in operation from 1 3 December 1 98 1 until 2 1 July 1 983 (Jeffries, 1 993 : 298). 4. Of the 67 per cent of the electorate who voted, 66 per cent approved the economic and 69 per cent the political reforms, but they only constituted 44 per cent and 46 per cent of the total potential electorate (Jeffries, 1 993: 300).

Copyrighted Material

3 Theories of the Command Economy and its Transformation

Theories of the legacy After forty years, the system of one party rule and state central planning in the Soviet bloc collapsed. In spite of the wide body of observers on both Right and Left who pointed to its waste, inefficiency and oppressions, none predicted this sudden demise. With hindsight, a stylized account depicts a chain of events from Perestroika in the USSR to CEE, as attempts to fmd political solutions to the en­ trenched economic crises of the Soviet bloc system undennined the system itself and brought the collapse of the crumbling state command apparatuses of country after country. Gorbachev's refonns started in 1 98 5 ; their example pennitted the Polish and Hungarian regimes to confront their crises of growth by concluding round-table agreements with their oppositions in the spring of 1 989, leading to the victory in June of Solidarnosc in Poland, and to Hungary opening its borders with Austria (Callinicos, 1 99 1 : 5). From here, human migration opened the floodgates of exchange of experiences and new hopes. Via Austria, a wave of emigration of East Gennans to the West began, accompanied by demonstrations. Gorbachev's refusal to sanction the use of force against them forced the East Gennan govern­ ment to appease the population by opening the Berlin Wall on November 9. Next, the people of neighbouring Czechoslovakia, one of the most insular enclaves of the Stalinist system, began to respond: on 1 7 November, the students demonstrated and the subsequent vicious suppression provoked a massive response which, in the absence of Soviet support for further repression, led to the capitulation of the old regime in the 'Velvet Revolution'. From here, the tide of collapsing regimes swept further South and East, to Bulgaria, Romania and Albania and eventually back north, taking Perestroika beyond its intentions of salvaging an ailing system to its fmal destruction and the break-up of the USSR in 1 99 1 . These were the visible events. Beneath them, of course, lie the years of a crisis­ ridden system outlined in the previous chapter. How do we interpret this end of an era? For the triumphalists of the free market, the political implications of the end of the Cold War were simple: Western capitalism had been vindicated, socialism was fmally dead and finished. Further analysis of the previous system was redun­ dant, since it was so obviously doomed, and the past should be buried as quickly as possible to be replaced by the market economy. For the remaining unreconstructed Stalinist Communist Party (CP) members, the revolutions of 1 989 also marked an end of the socialist project. But for others on the Left who never regarded 'really existing socialism' as remotely akin to socialism as the self-emancipation of the

Copyrighted Material

51

Theories of the Command Economy working class - a movement ' from below' (Callinicos,

1 99 1 : 1 8) - there

remains

nevertheless a wide area of debate as to the nature of the defunct system, and the reason for its overthrow. This is not the place to elaborate on this complex debate, yet a brief foray into this territory is necessary for theoretical clarification of our approach towards transformation. For a linked discussion on the terminology for the previous system, please see Appendix

1.

Trotsky 's conception of Stalinism as a ' degenerate workers ' state' nally published

( 1 965, origi­ 1 937), maintained the social and economic base of workers ' power,

despite the fact that the working class had been politically supplanted by the bu­ reaucracy. For this orthodox position,

1 989 must denote a change in class relations

from ' socialism' - however deformed - to capitalism, and in this sense it too sug­ gests the end of the socialist experiment. But for those who never identified the system of partyIstate control as ' socialist', the ' revolutions' of

1 989

signified the

end of a particular form of social relations, but not the eradication of socialism. The depiction of the Stalinist system as ' state capitalist' (Cliff, n.d., approx.

1 963)

took issue with Trotsky' separation of economic from political disempowerment of the working class, by arguing that once the working class was alienated from the means of production, the relations of production had reverted to a type of capital­ ism, in which the ruling bureaucracy which controlled and appropriated the social surplus, had become a new ruling class. From this vantage point,

1 989

did not

denote a systemic change, but merely a shift in the form of capitalism. The ques­ tion this raises, however, is whether this enormously broad defmition of capitalism provides the theoretical leverage to grasp the distinctiveness of the old system, or whether it levels down history to such a rough common-denominator, that it ceases to have much use. From its inception in

1 947

until

1 989,

the ' state capitalist' analysis had a cru­

cial political role, as well as advancing theoretically from formal Trotskyism, which arguably became less and less tenable as no ' political' shift to reinstate the work­ ing class to its revolutionary position appeared on the historical horizon. The ' state capitalist' perspective pointed out that such ' degeneration' of the revolutionary aims of self-emancipation had occurred, that the social relations of production had returned to capitalism, and attempts to cling on to some vestiges of ' socialism' became an exercise in sophistry. The emphasis of analysis on the centrality of workers ' control of production and distribution and the dangers of substituting democratic process and self-activity with the Party, kept alive an uncompromising concept of socialism very different from the discredited authoritarian regimes which claimed that title. Politically, it provided the theory for a revolutionary socialist position which was distanced from CP ' fellow travellers ' and others on the Left who were apologists for the oppressive regimes and acts of the Soviet Union, East Europe and Maoist China. Nevertheless, in the writer's view, the theory's inability to countenance the possibility that state centrally planned command societies were sufficiently dis­ tinct from capitalism as to warrant a specific explanation of their survival - as well as their demise - makes it a blunt instrument at a time when more sophisticated analyses were developed. Its inadequacy surfaces in the argument that the revolu­ tions of 1 989 vindicated the 'state capitalist' analysis (Callinicos,

Copyrighted Material

1 99 1 ). The origi-

52

Transformation at Work

nal prediction that, being another version of capitalism, the system would only be overthrown by the working class, was not fulfilled, while the revised version, that what has taken place was merely a political shift with a 'sideways' move from state capitalism to integration into world capitalism, fails to acknowledge the ma­ jor upheavals which are taking place in the political, economic and employment relations systems of the countries involved. The theory needs refming to allow for the possibility that within a materialist perspective, that is, one which regards the material basis of the relations of pro­ duction as fundamental to the defmition of the social system, it is possible to con­ ceive of a system which had not fully reverted to capitalism. A wide body of writ­ ings begun in the 1 950s and continuing into the 1 990s has developed the analysis of the centrally planned economies as distinctively irrational systems (Granick, 1 954, Nove, 1 979, 1 983, Kornai, 1 959, 1 980, 1992, Ticktin, 1 992, Burawoy, 1 985, Burawoy and Hendley, 1 992, Filtzer, 1 992, Clarke, 1 993a, 1 993b). In the Marxist tradition, Ticktin ( 1992), distinguishes between any system which produces a ' sur­ plus product' (the portion of the social product not used for the immediate satis­ faction of producers), and capitalism, which produces ' surplus value' which is controlled and expropriated at the point of production in the drive to accumulate capital. In the centrally planned economies, a ' surplus product' was created and appropriated by the ruling elite; however, its actual production was never under the control of this elite. It is here that a distinctive system is conceptualized which departs from the theory of 'state capitalism'. The latter does not examine the fact that, whereas in capitalism, anarchy in relations of production is associated with planning at the level of relations in production, in the state command economies, the planning system produced distortions which created anarchy in the production process which systematically thwarted the efficient extraction of the surplus (c.f. Burawoy and Krotov, 1 992: 1 8-19) . Put another way, the pursuit of profit did not successfully dominate production. As Clarke argues ( 1 993a: 8), ' the distinctive feature of the capitalist mode of production is the subordination of social produc­ tion to the expanded reproduction of capital. . . the decisive question in the case of the Soviet Union is whether social production was subordinated to the law of value' . The centrally planned economies were not subordinated to the profit motive; even if the influence of international capitalism impinged on them, this was mediated via the plan, which fundamentally altered the relations of production. If this system was not capitalist, what was it? Ticktin ( 1 992) conceptualizes a limbo-like system, teetering on self-extinction, in a historically unique tension between attempts by both labour and capital to form classes, and their inability to do so. The ruling elite's incomplete control over the production and appropriation of the surplus, meant it strove towards, but did not achieve, becoming a class. It is worth quoting in full: The elite has consequently controlled the surplus product but to a limited degree only. The system is therefore partly driven by the elite's need to become a class. To change into a class, the ruling group needs to establish full control over the surplus product and hence over the extractive process itself. The instrument by which the elite has constructed ,its control is the administrative-command apparatus or, as it

Copyrighted Material

Theories of the Command Economy

53

has come to be known, 'the plan ' . The essential point, of course, is that the plan has never actually functioned in the manner intended. The elite, therefore, has never been able to obtain the economic results it needed for its own reproduction or for the viability of the system itself. The reason goes back to labour and the lack of control over the labour process (Ticktin, 1 992: 6 1 ). At the same time, the working class was unable to develop effective opposition to the ruling elite, because of extreme social atomization in the workplace (Ticktin, 1 992: 27-32; also Burawoy, 1 985, Filtzer, 1986). This was fomented by the pen­ etration of party control of the unions and the omnipresence of the secret police forbidding the formation of worker collectivities - (both possible under totalitar­ ian capitalism) - but specifically, the muddying of opposed interests of workers and employers in the system of individual bargaining over norm fulfilment and alliances between workers and managers, typical of enterprise bargaining with its relevant state ministry over its production plan. This analysis of the administrative command economies as caught in a state of suspended animation of class forma­ tion seems, to the present writer, a more compelling starting point for the analysis of current transformation as a break in the impasse, and the beginning of class formation - although not necessarily with the old elite becoming a new nomenklatura ruling class, but with a number of possibilities, including the formation of an in­ terim 'managerial elite' dominating the emerging capitalism (Eyal et aI., 1 997). It differs from the class perspective of 'state capitalism', in pointing to post- 1 989 capitalism as breaking a class dead-lock, rather than a mere continuation of class society. And in registering the undefmed as well as unstable character of potential class relations in the centrally planned system, it allows for the fact that the re­ gimes were not overthrown by the working class (Callinicos, 1 99 1 : 1 9), but disin­ tegrated under pressure from varied alliances of students, dissident intellectuals, workers, and managers. The particular form of internal decay in the ' Soviet mode of production' which differs from the recurrent crises of over-accumulation in capitalism lay in its enor­ mous waste. Ticktin describes this as 'the use, or lack of use, of the surplus prod­ uct in a manner that fails to lead to a product; in other words, labor (is) expended without any result' ( 1 993 : I I ). Under capitalism, waste in terms of use values is not decisive, since the system is concerned with exchange values. Thus, arms pro­ duction may be useless in the first sense but highly lucrative in the second and, as some have argued (Kidron, 1 970), crucial to stalling the over-accumulation of capital at particular periods. However, in the Soviet system, which is driven by the plan not the profit motive, waste in use-values was damaging to the economic resources of the system, creating both sectoral distortions, accumulations of ob­ jects produced for nominal plan fulfilment whether they served a purpose or not, and the notorious shortages. It is Kornai ( 1 980) who is best known for identifYing the sources of this waste and coining the telling epithet, ' the shortage economy' . Claiming an eclectic per­ spective drawn from Marx, Schumpeter, Keynes, Hayek, neoclassical economics and Western institutionalists ( 1 992: xx) he has exposed the unintended informal processes unleashed by the formal central planning project, as a rational response

Copyrighted Material

54

Transformation at Work

in self preservation by enterprises to the plan targets set by state ministries. The distortions and inefficiency which became economically institutionalized into the vicious circle of the 'shortage economy' have become well known (summarized in e.g. Burawoy and Krotov, 1 992, Thompson and Smith, 1 992) and gave rise to the lack of control over production by the ruling elite referred to by Ticktin and others . Briefly these involved 'plan bargaining' between the enterprise and the Ministry over plan allocation and fulfilment, the absence of either profit or loss disciplines on enterprise resources or performance ('soft budget constraints '), the practice of enterprise hoarding of materials and labour to safeguard optimum plan fulfilment, the consequent shortages at a macro level, and the self-fulfilling circle of further hoarding as a hedge against shortage and uncertainty - and so on, to further short­ age. At the enterprise level, scarcity, irregular supplies, frequent plan changes, poor quality materials and components and severe labour shortages were normal conditions, propelling the system of informal bargaining between management and individuals or work-groups. Managers had to rely on workers ' skill, ingenuity and willingness to ' storm ' to meet plan targets, and obtained co-operation by avoid­ ing confrontation and conferring concessions over work practices. Low work ef­ fort and further loss of management control were incurred by the obfuscation of the wage-effort bargain by the politicization of rewards and the need to yield to key workers; both shortages and immediate pressures to fulfil the plan discour­ aged investment in efficiency improvements, since the time-lag in settling-in would cause temporary output falls, while once established, they threatened an increase in plan norms (Filtzer, 1 992). In short, the central planning system undermined control over the production process itself, leading to poor quality, shortage, dislocated economic co-ordina­ tion and uncertainty. Obviously, analysis at the systemic level should not obscure national variations. For example, in countries such as Hungary where experimen­ tation with small business began early on, the informal economy (which devel­ oped to some extent everywhere) became a significant adjunct to central planning. Basing his research on Hungary, Stark ( 1 989, 1 992b) showed how the informal economy burgeoned in response to the distributional failures of bureaucracy and how Hungarian enterprises responded to shortages and uncertainty by creating their own internal second economies of work partnerships. There remains debate as to how far the command economy was a specific ' Soviet mode of production' , and how far it was an unstable, historically unique form of exploitation, as elaborated by Ticktin. Kornai 's analysis tends towards the first, with its examination of the institutional self-reproduction of the system, al­ though his later analysis pays greater attention to tension, instability and fractures within the power elite ( 1 992,

33--45),

and failures in the ideological control appa­

ratus (49-62), concluding that:

. . . . refonn is doomed to fail: the socialist system is unable to renew itself intemally so as to prove viable in the long run. So the time for really revolutionary changes does come in the end, eliminating the socialist system and leading society towards a capitalist market economy (Komai, 1 992: xxv).

Copyrighted Material

Theories of the Command Economy

55

Of more relevance to understanding why the system collapsed is the debate about how much emphasis should be given to the role of outside forces and how much to internal institutional dissolution. The 'state capitalist' explanation for its long-term economic dislocation was seen not in the dynamics of a ' shortage economy' , but in terms of the pressure of Cold War politics on sectoral distortion towards arms production, and hence the expansion of the capital goods sector at the expense of others. When it comes to discussing the immediate reasons for the system' s fall, crisis is characterized as 'a concentrated version' of the enormous upheavals in the West of the 1 970s and 1 980s (Callinicos, 1 99 1 : 57-59). Simi­ larly, Hardie and Rainnie ( 1 996: 3) dismiss analysis framed in terms of the sys­ tem's unique internal dynamics as ' exceptionalist' explanation, and adopt the state capitalist view of the upheaval in terms of the insertion of these economies in world capitalism, and the changes taking place in that system. Kornai's ( 1 992) analysis, on the other hand, stresses the internal decay of the system; since he views capitalism as an equilibrium model towards which the east should aspire (Kornai, 1 995), it is hardly likely that he would point to its anarchy and crisis as major factors in the doom of the shortage economy. Nevertheless, the relationship of the command economies with the outside capitalist world is ac­ knowledged to have played a role in intensifying economic distortions. The drive of the arms industry is mentioned (Kornai, 1 992: 1 74), but Cold War politics are discussed only in terms of the rationale for forming the CMEA in 1 949, with the Soviet Union ' ringed by a hostile political environment' (ibid., 1 992: 335), rather than in its economic impact on sector development. However, the focus on how international debt was created (ibid., 1 992: 333-355) is relevant for current un­ derstanding of some CEE countries' debt crises: backwardness led to constant ' investment hunger' which in turn led to ' import hunger' . This could only be financed by forced exports, which were produced at any cost - a system always available by further softening budget constraints in the export sector, but which gave a further twist to the vicious circle of permanent excessive demand to pay for exports at the macro-level, and intensified chronic shortages, which deepened the crisis of competitiveness with the West, and deepened international debt. A theory of the final collapse of the command economy mode of production, which recognizes both the distinctive internal crisis of the system and changes in world capitalism, would provide some leverage as to why the end of an era took place when it did. Although no justice can be done to so complex an issue here, it is clear that whilst growing integration into an increasingly globally integrated world economy was what prompted the pressures for reform leading to Perestroika, both the internal contradictions of attempting economic liberalization of the com­ mand economy without dismantling the political elite, and the deepening reces­ sion in the West came together (Clarke, 1 993b: 43). A growing international debt crisis led to the Soviet Union suffering both from its Third World trading partners reneging on their debts, its inability to raise credit, and its worsening terms of trade, with a drop in the price of its staple export - oil. Yet these latter issues were only the last straw which broke the camel's back - the historical contingencies which began the breakdown of the system, and started the domino-like collapse of the regimes of CEE. As Clarke argues referring to the Soviet Union.

Copyrighted Material

Transformation at Work

56

While the crisis in external trade relations played a central role in precipitating the domestic crisis, the form and development of that crisis was determined not by external factors, but by the internal dynamics of the system ( 1 993b: 45).

Theories of transformation We tum now to recent theoretical approaches to transformation to capitalism. Neo­ classical theory and the damaging consequences of its policies for CEE have now been challenged by a wide range of critiques, notably Amsden et a1. ( 1 994), Bryant and Mokrzynski ( 1 994), Chang and Nolan ( 1 995a), Saunders ( 1 995) and Gowan ( 1 995, 1 996). This literature has made a vital contribution to puncturing the early complacency of the teleological 'transition' discourse of a mythical free-market end-point for post-'communism', and fmnly established the need for an open­ ended concept of 'transformation' . Within this critical stream, two theoretical per­ spectives have dominated the literature: the 'new institutionalists' and the ' struc­ turalists' . Among the first, the major contribution to the analysis of transformation is the emphasis on historical legacy and 'path dependence' of change, as opposed to the ' tabula-rasa' assumptions of transition. Among the second, the emphasis is on highlighting different national institutional patterns of capitalism, or ' business systems' rather than one essentialist model, to which transformation could tend. In particular, laissez-faire capitalism is contrasted with state directed development. The two perspectives overlap in disputing a universal, convergence model of glo­ bal capitalism. The weakness in both models, as we shall elaborate below, is the neglect of agency and absence of labour in analysis. We end the chapter by linking the critique of institutionalism and structuralism with wider theoretical debates about transformation in the context of 'globalization' .

The 'new institutionalism ' While not a homogeneous 'school' , the binding characteristic of the institutional­ ist perspective is the highlighting of different institutional arrangements and their historic roots in particular legacies. However, the analytic framework tends to be confmed to the nation state, rather than extension to wider capitalist dynamics, as in a Marxist historical materialist approach, and this becomes a major limitation. In Western sociology, the perspective has informed debates about competing em­ ployment and production models, largely in terms of different national education, training and industrial relations traditions (Maurice et aI., 1 986, Lane, 1 989). This has been a valuable contribution to understanding national diversity, and how in­ ternational or supra-national (such as European Union) models of regulating the employment relationship are mediated by different national contexts. On the other hand, the approach poses the risk of underplaying the forces of globalization. The 'new institutionalist' perspective in recent 'transformation' literature draws its tradition from Karl Polanyi ( 1 944), whose strength lies in the emphasis on the institutionally embedded nature of social change (hence also its slowness), and the

Copyrighted Material

Theories of the Command Economy

57

need for both analysts and policy makers t o build upon past legacies, rather than reject them (see for example Bryant and Mokrzycki, 1 994). However, the now fashionable use of the ' path dependence' of change has its dangers. Stark ( 1 992a) uses it to counter simplistic free-market assumptions that all of CEE fol­ lowed a simple blue-print convergence model of 'designer capitalism' . Instead, the different country privatization strategies were path dependent on their national legacies, especially the patterns of command economy disintegration which pro­ duced the raw material for transformation. However, the limitations of the use of 'path dependence' or 'context dependence' (Whitley, 1 995: 1 2) are a lack of his­ torical development, together with a tendency towards determinist argument which underplays political agency and choice and exogenous contemporary pressures. Stark ( 1 992a), for example, provides a highly speculative account of the historical forces which shaped different privatization strategies in CEE in terms of the type of previous ' communist' legacy being overthrown; while it provides an intuitively attractive explanation, it is not empirically accurate or systematic. For instance, he interprets the Czechoslovak popular give-away voucher privatization system in terms of the government's commitment to provide a simulated market system to transfer ownership to private hands, and sees this stemming from the lack of ex­ perimentation with the market before the 'Velvet Revolution' , and its complete break with the past ( 1 992a: 5 1 ). This view, however, is only partially correct: it omits the fact that there was major controversy over the type and timing of priva­ tization, and the early failure of the voucher system. This succeeded not because of any building on past legacy, but because of the entry in 1 99 1 of the Privatization Investment Funds, especially Harvard Capital and Consulting, whose advertising of lucrative monetary returns on voucher points after a year, quickly increased public interest (Coffee, 1 996: 1 23). This example of selective interpretation merely touches upon the complexity of history. The previous two chapters have given some idea of just how many legacies were interwoven in this part of Europe. The concept of ' path dependence' begs the question of which path, out of a multiplicity of historical processes is being ' followed' . The allusion to historical legacy needs to register the complexity of history. In the discussion of transformation of command economies, sensitivity to different layers of the past, as well as to national differences, is crucial, since the future is to some extent shaped by contests over the re-interpretations and selective resurrections of different aspects of the past, as well as strategies to­ wards the future. More generally, as part of the wider shortcomings of exclusive preoccupation with the social embeddedness of economic behaviour, the concept risks the neglect of the ' exogenous' forces from international economic and politi­ cal pressures. In economics, the institutionalist perspective became a liberaVradical critique of neo-classical assumptions in social science and was spearheaded in the US by Williamson ( 1 975), who drew attention to the intervention in market transactions of other organizational dynamics: the corporate hierarchies created by firms to internalize transaction costs in bureaucratic power relations. His work, however, was criticized by Granovetter ( 1 985), whose essay on the social ' embeddedness' of modern economic behaviour has became a key reference for the 'new institu-

Copyrighted Material

58

Transformation at Work

tionalists' . Williamson is upbraided for his 'pervasive functionalism' ( 1 985: 505) in still operating within a free-market framework by treating 'social structural in­ fluences on market behaviour as exceptions ' ( 1 98 5 : 495), rather than the rule. Granovetter stresses the ' extent to which business relations are mixed up with social ones' and the importance of ' networks of personal relations' connecting firms ( 1 98 5 : 507 and 496). Yet this version of institutionalism is as confmed to a functionalist, equilibrium model of capitalism as the model it criticizes: rather than Williamsons ' 'markets ' and 'hierarchies' creating the balance, it is now the micro-processes of group interaction which maintain the social order. This implicitly ideological conception is reproduced in the otherwise radical contribution of the institutionalist perspective on the former command economies, in which the work of Stark and Nee has been influential in revealing the micro­ social processes of the informal economy. Stark and Nee' s ( 1 989) approach to the study of ordinary life in the centrally planned economies, including resistance to state power ( 1 989: 1 5 ) , was part of a radical departure from conventional ' Sovietology' s ' concern with elites and Party discourses, and has provided vital insights into the informal economy, how informal systems have limited the power of the state ( 1 989: 1 6) and the importance of social networks ( 1 989: 367). But the approach is not set within a political economy of capitalism which acknowledges its conflicts, but an implied normative perspective of capitalism as a stable ad­ vance on the command economy. Thus, while informal activity in the command economy was viewed in its contradictory role as both complementary to its opera­ tion, and also as undermining that system, in the new capitalism, it is presented as functional towards a new capitalist functional harmony. Stark and Nee present the informal economy as developing new forms of economic co-ordination in the So­ viet system and CEE - especially leading to the germs of a new market system ( 1 989: 2 1 ) . Nee's approach to China's market reforms in fact returns to the mar­ ket-hierarchy paradigm of Williamson in seeking new institutional regulations for markets (Stark and Nee, 1 989: 22). Stark' s ( 1 992b) study of the informal economy in Hungary, while valuably revealing the relative autonomy of subordinate groups from the state, points towards suggesting how the illegal hidden economy is a nascent, legitimate, private sector market economy or, following Szelenyi ( 1 989) a ' socialist mixed economy' (Stark, 1 992b: 64, Stark, 1 996: 996). Although ag­ nostic as to the kinds of social class alignments which might evolve from this (Stark, 1 992: 66), the perspective implies a market economy as the ' natural' end­ point. Ideologically, the ' network' version of institutionalism, following Granovetter, poses no real challenge to the neo-classical approach, although it seems an alternative. The network obsession of the American version of 'new institutionalism' has become so focused on the importance ofmicro-social processes, as to ignore macro­ forces. Equally worrying is a tendency for an approach which started as a socio­ logical perspective on social process, to end with a static preoccupation with taxonomies of property form (Radice, 1 995: 1 14). Stark ( 1 996) postulates new, 'mixed' property forms in Hungary, with a hybrid system of inter-enterprise share ownership and a blurring of the public and private sectors in 'recombinant prop­ erty' , partly as a result of the previous grey economy legacy. But although owner-

Copyrighted Material

Theories of the Command Economy

59

ship complexity is an advance on the neat contrast between 'private' and 'state' suggested in neo-classical models and has been substantiated by others (e.g. Whit­ ley, 1 998), the label does not take us very far in understanding the economic dy­ namics of these firms, nor is the assumption of 'path dependency' substantiated. Cross-ownership is not unique to Hungary; it has developed in the Czech Republic as an unintended consequence of voucher privatization (Chapter 5), and in Hun­ gary, the incremental, contested and politicized privatization process may, in a different way, also be partly responsible for overlapping property ownership (Henderson et aI., 1 995). Nor is 'recombinant property' unique to post-commu­ nism. In mature capitalism, complex ownership via collaboration between the state and private firms, and alliances between MNCs (which may include state finan­ cing) in large consortia, are a prevalent strategy to maximize competitive advan­ tage (Radice, 1 99 5 : 1 29). To argue that in the Hungarian post-command economy, the causative factor is informal networks and the ' organizational reflexivity that is possible when actors manoeuvre across a multiplicity of legitimating principles and strategically exploit ambiguities in the polyphony of accounts of work, value, and justice' (Stark, 1 996: 995), is simply an assumption based on a focus on ap­ parent micro-social processes, which ignores wider economic constraints and motives (see Radice, 1 99 5 : 1 14 for similar critique of ' new institutionalists'). As one critic observes, the ' recombinant property' relations which Stark ( 1 996) ex­ plains by people's network activities, can be explained by the policies of privatiza­ tion largely 'precipitated by Western advisors and international organizations who forced this kind of policy on the Hungarian government' (Fligstein, 1 996: 1 078). Further, ' it is not clear why property rights would matter to these reorganizations, which are being driven not by mixed ownership patterns, but by firms trying to find markets in which they can be competitive either locally or internationally. The problem for these finns is competition, not property rights' (ibid., 1 996: 1 079). While property rights are seemingly the bedrock of capitalist accumulation, we shall see how in transformation, this need not be the case (Chapter 5). Notions of 'embeddedness' and 'path-dependence' now attributed to Ameri­ can ' new institutionalism' are welcome rediscoveries of history, but are hardly original: historical materialism and sociology have been here for some time. But the fascination with micro-economic relations can be seen as a development of a wider vogue which developed in American social science, of replacing capitalist social relations with networks, be they those of inter-finn networks of ' post Fordist' ' industrial districts' flourishing on ' flexible specialization' (Piore and Sabel, 1 984), or Granovetter's ( 1 985) small groups. It is the thesis of a benign and progressive ' third-way ' to capitalism or socialism, in which ' post-Fordism' supersedes 'Fordism' . Debate about capitalist development is cast as a contest between the two paradigms of production, with the more ' advanced' parts of the world pursu­ ing ' flexible specialization' , with the rest consigned to old mass production. Class conflict disappears in a web of co-operative communities and productive networks (critiques include Williams et aI., 1 987, Pollert, 1 988, Rainnie, 1 99 1 ) . In its appli­ cation to CEE transformation, the networks obsession neglects macro-processes of political and economic power and the re-insertion of this region into global capitalism (Braczyk et aI., 1 995, Hardie and Rainnie, 1 996). The 'path-depend-

Copyrighted Material

Transformation at Work

60

ence' approach usually linked to it, can be arbitrary and unclear about how histori­ cal legacies are mediated, and over-deterministic in ignoring contemporary proc­ esses of both structural constraints and strategic choice of actors which are guided by global competition, rather than building on the past. This said, institutionalist analysis is not a priori limited to these shortcomings, if the micro-parts observed are related to a wider whole, as in historical materialist analysis, whose method attempts to relate different levels of analysis to each other. The main strength of the institutionalists' contribution to the analysis of post-com­ mand economy transformation, is the mapping of how and why social change is incremental because of deeply structured inherited economic and social relations. It also tends to engage with debates about building on and with the past legacy, rather than just rejecting it. One example of debates within this perspective is research which explores how the legacy of the industrial associations - the Ger­ man and Polish ' combinate' and the Czechoslovak VHJs, influence the transfor­ mation process. These were self-contained industrial communities in which local firms were mutually dependent for supplies, but also formed local pacts of economic co-ordi­ nation to limit the uncertainties of the shortage economy. Hirschhausen ( 1 995) argues that the multi-functional former combinate cannot survive in a market economy, and they should be fragmented - albeit with employees ' , as well as the state' s , directors ' and new owners ' approval - with only the viable units retained. McDermott' s ( 1 997) study of VHJs, on the other hand, suggests that the destruc­ tion of old networks not only damages social peace, but also valuable informal knowledge and supply ties. This is endorsed by our study of the effects of frag­ menting the interlinked

C KD Praha (Chapter 9). At the same time, he shows that

when MNCs interested in parts of the VHJ had to contend with the linked whole, including indebted firms, they backed away from joint ventures - which again, our own case study of

CKD found. Hayri and McDermott ( 1 995) attempt to offer a

model of bank credit and state control which could work with, rather than against the former structure, without breaking it. But although failing parts of VHJs were kept afloat for a while in this way, the eventual victory of the fragmentation policy, together with lack of co-ordinated state industry policy, meant potentially viable units were eventually branded as unviable, and went to the wall. Both models are in a sense unrealistic, the first in suggesting that there need be no losers in forcible fragmentation, and the second, that a new policy for restructuring which considers the long-term gains of retaining inherited interdependencies, can be fostered in a neo-liberal competitive environment. On the other hand, both sides of the debate offer partial truths: that autarchic communities designed for the command economy had to change; but the forcible break-up of industry association supply networks was not necessarily rational for restructuring, since they often resembled a modem diversified corporation, and could use managers ' knowledge of entrepreneurial behaviour, fostered by their past strategic behaviour in the rivalry between sectors, enterprises and plants competing for scarce resources (Radice, 1 995 : 1 29). Researching organizational change inside enterprises, and between enterprises and communities in the Czech Republic, Soulsby and Clark also observe the im­ portance of managerial knowledge from command economy days for present-day

Copyrighted Material

Theories of the Command Economy

61

change (Soulsby and Clark, 1 996a). They also emphasize how the past fosters continuity, as former managerial elites defend their careers and power (Clark and Soulsby, 1 996, Soulsby and Clark, 1 996b, Soulsby and Clark, 1 998), and, sup­ porting McDermott, how social and economic interdependence of community and enterprises in industry association towns lock enterprise restructuring into much wider social obligations (Clark and Soulsby, 1 998). Many of these insights on institutional continuity within enterprises are confirmed in our case studies, and extend into the industrial relations area. Micro-analysis which is more closely tied into a wider political economy from a Marxist perspective shares the institutionalists' interest in the embeddedness of current social transformation in the shortage economy legacy, but registers how new contradictions emerge with encroaching capitalist relations. Examining how enterprise-level work relations were changing in Russia in the early 1 990s, Burawoy and Krotov ( 1 992) discuss the resilience of the ' Soviet-style' economy in terms of a new combination of the anarchic characteristics of the old and new systems: the anarchy of relations in production (Burawoy, 1 985) of the command system per­ sists, but is now combined with the anarchy of relations of production of capital­ ism (Burawoy and Krotov, 1 992: 35). Market instability now combines with the old problems of production - a situation demonstrated in the Czech enterprise case studies considered further on here. In other words, a new twist in economic instability and contradiction is analysed, rather than a new stability on the road to a 'normal' market economy. In a similar vein, Burawoy and Hendley ( 1 992) argue that with Perestroika, further micro-analysis of enterprise production relations must develop the 'classic' shortage economy model of the enterprise/ministry cleavage as the main friction point of plan bargaining. Now, intra-enterprise divisions, as new mini-businesses emerged, create a more complex and competitive bargaining system with the state, exacerbating, rather than replacing, the problems of plan bargaining. Again, this analysis proves correct in other contexts: the division of large conglomerates, such as C KD in the Czech Republic, into competing plants, brought new competition and mistrust between them. Micro analysis is presented within a wider context of political economy in which neither capitalism nor the command economy legacy appear as free from institutional conflict and disarray.

Structuralism, national business systems and the South-East Asian model Not all who subscribe to the institutionalist perspective share the focus on infor­ mality and social networks. An approach which has evolved from the comparative analysis of different 'state-business relations' in Western Europe and East Asia has developed a model of different 'business systems' in which nationally diverse institutional arrangements, particularly the relation between the state and fmancial institutions, shape distinct and competing models of capitalism (Whitley, 1 992). Its importance for the analysis of post-communist change is that it directly chal­ lenges the unidirectional policy model of laissez-faire capitalism by providing empirical examples of other forms of successful capitalist growth, in which the state played and still plays a decisive role. The South-East Asian model of indus-

Copyrighted Material

62

Transformation at Work

trial development has become prominent not only in discussion of CEE transfor­ mation, but, as with the debates on so-called 'japanization', at a global level. Amsden et al. ( 1 994) pioneered the detailed comparison of CEE free market policies with the late industrialization route of the Asian Newly Industrializing Countries (NICs). The main lesson drawn is that backward economies cannot catch up with world capitalism without the state actively constructing institutions for capitalist devel­ opment. Left to laissez-faire policies, state owned enterprises cannot survive with­ out aid to restructure and modernize, while whole sectors are likely to suffer through unlimited trade liberalization and require strategic combinations of export subsi­ dies and import tariffs. Amsden et al. ( 1 994) provide a cogent critique of the damage done to CEE by neo-liberal structural adjustment programmes (discussed in the next chapter), while the emphasis on capitalist diversity challenges both simplistic convergence ' in­ dustrialization' or 'modernization' models, but also the simplification of fashion­ able panaceas such as dichotomous transitions from 'Fordism' to 'post-Fordism' (Whitley, 1 995: 13). However, there are a number of theoretical difficulties with these approaches. Most fundamental is the confmement of the analytical frame­ work to the nation state. As with the institutionalists discussed above, the concept of 'path dependence' maintains the focus on national legacies as central to analy­ sis. Empirically, the perspective again presents the problem of what is nationally endogenous, and what is exogenous. The very notion of a national 'business sys­ tem', even as an 'ideal-type' form of analysis, obscures non-national cleavages which may be just as relevant for transformation, such as those between different corporate cultures within nation states, transnational competition between multi­ national companies, or attempts at supranational convergence, as via EU integra­ tion policies. A second problem is an inadequate use of this 'national' framework (given its theoretical importance) in the application of this approach to post-communist CEE. For example, in the contributions to Dittrich et al. ( 1 995), national legacies only go back to the command economy period, with no discussion of how the earlier inheritance shaped those very command economy variations. For example, Cen­ tral European training systems were built on a dual state and enterprise run Ger­ man model, with high levels of theoretical and specialist training, including the need for technical expertise for managers. Even if these were distorted under the command system, such qualification systems and career paths are key components of enterprise transformation. Yet even where training is incorporated (Czaban and Whitley, 1 998: 50), it is discussed only in terms ofa particular contingency during the shortage economy which led to a super-abundance of skilled workers, without consideration of the significance of its institutional characteristics. This literature also shows a surprising insensitivity to national diversity among foreign MNCs organizational and management practices, and how this interacts with host sys­ tems. For example, a comparative study of different enterprise forms' develop­ ment in Hungary which includes foreign investment (Whitley, 1 998), makes no allusion to the country of origin ofMNCs, which are merely called ' foreign' - this, in spite of the fact that Whitley ( 1 992) has written about the significance of na­ tional institutional difference among MNCs.

Copyrighted Material

Theories of the Command Economy

63

There are further problems with the way the 'business systems' approach to post-communist transformation has been applied. One is the reference to models of ' rapid industrialization' to countries which are already industrialized, and where the challenge is to overcome the legacy of the command and shortage economy. Overcoming these distortions poses a different set of problems from those of in­ dustrial development from largely peasant and subsistence economies. Another problem is that the literature has been largely prescriptive and poses a contradic­ tory set of arguments. On the one hand, it stresses variation of legacy and no one 'best-way' of capitalism since the emerging form will be a complex, and possibly unique, 'path-dependent' evolutionary process. But on the other, it posits one par­ ticular model, that of South- East Asian rapid industrialization (Whitley, 1 995: 26), as the best model for transformation in CEE. Linked with this is the theoretical quandary of institutional transfer of any 'best practice' model of capitalism (see for example Elger and Smith, 1 994 on the 'japanization' model). This is particu­ larly problematic in view of the link between the 'business system' approach and that of 'path dependence', which acknowledges the influence of local legacies on institution-making. The tremendous ideological and political obstacles to transfer­ ring Asian 'state capitalism' - as Harris ( 1 986) described both the Asian NICs and the Soviet-type system to emphasize their affmity - back to countries which have only just rejected the undemocratic command economy is glossed over by both Amsden et a1. ( 1 994) and Whitley ( 1 995: 1 5), who merely refer to the 'problem' of the lack of a legitimate, ' strong' state in CEE, as though it could be engineered back again. They do not discuss how state planning could be democratically ac­ countable in the context of a transformation in which democratization was a key motive for change; rather, while it is acknowledged that the state-led 'plan ra­ tional' model of South-East Asia was authoritarian (Henderson et aI. , 1 995: 83), the dilemma about its applicability to CEE is not whether this is distasteful or not, but that democracy could unhinge it:

...post-communist Hungary has emerged with a democratic polity (unlike the East Asian N ICs in the aftennath of their equivalent historical ruptures) with all that implies for contested processes of institution building . . ... may in itself be a limita­ tion on the extent to which a plan rational political economy can emerge there. (ibid., 1 995: 85). The vagueness about state power ultimately stems from a technocratic view of the state which evades the issue of class interests (see for a similar critique Hardie and Rainnie, 1 996: 1 4) . It is variously described as a co-ordinating apparatus, ' strong' , 'weak' , ' legitimate' , or ' illegitimate' and able to 'mobilize collective commitment (Whitley, 1 995: 1 5- 1 6), but it appears, as with Amsden et a1. ( 1 994) as a neutral bureaucracy. There is no defmition of the political, economic or armed power-base of the state, of its relationship with capital or of its accountability. Beneath this lack of theorization, there are ideological assumptions. The state's presentation as neutral, belies the implication that it should regulate and secure the interests of 'successful' transformation - that is, the interests of a healthy capitalist economy. For example, in Schmidt's introduction to ' Industrial Transformation in Europe' (Dittrich et aI., 1 995: 8) - a study of transformation in which the East

Copyrighted Material

64

Transformation at Work

Asian model is prominent - he focuses on the 'multiple roles that institutions can play in structuring more or less effective systems of economic co-ordination and stability' , revealing the basic assumptions of capitalism as a system of economic equilibrium and progress. Lack of theorization of the state together with the transference problem are linked to a weakness already noted in the 'path dependence' approach: historical selectivity. The treatment of South-East Asian development evades politically and socially awkward facts - aspects which would be unappetizing for those seeking democratic reform. Some commentators plead for the essence of the 'best' or most appropriate aspects. Chang, for instance ( 1 995: 385), alleges that the idiosyncra­ sies of East Asia should not preclude drawing the distilled lessons for Eastern Europe, since all countries are 'special cases' anyway. Yet among the protagonists of the model there is a reticence about the fact that rapid industrialization took place under totalitarianism, a process Amsden herself documented in earlier work ( 1 989). Amsden et al.'s ( 1 994) prescriptions for CEE acknowledge the authori­ tarianism of the strong state, but they are very coy about the details of the armed state in imposing the much lauded industry policies of the 'developmental state' of South Korea. In Harris's ( 1 986) study of the NICs, militarism as a core component of indus­ trial growth is properly revealed, which casts it in a different light as a model for CEE. For South Korea, the Cold War was crucial both in terms of American aid, and in terms of establishing a military regime in the 1 950s which demanded con­ tinual sacrifice. 'The military-sustained dictatorship, and dictatorship, an acceler­ ating rate of investment and output' (Harris, 1 986: 35). The Cold War established a war machine in Korea, and it was a military coup in 1 96 1 (towards which the Americans turned a blind eye) which placed General Park at the helm of the Golden Age of growth with its first Five Year Plan (Amsden, 1 989: 48). Analogies with CEE attempting to establish democracy as well as capitalism in the 1 990s are hardly appropriate. However, there are other historical omission which weaken the transferability argument. Beside the centrality of the military regime to growth, was the development of the chaebol (the diversified business group). Again, the seamy side of this devel­ opment has been glossed over in recent discussions of 'rapid industrialization' Yet as Amsden's 1989 work revealed, the rapid capital accumulation of the chaebol during the 1 950s, (without which it is doubtful that later growth would have been possible (ibid., 1 989: 63) was achieved both through massive US foreign aid and major political bribery with state endorsed economic corruption. The state ... allocated aid entitlements in exchange for political campaign contributions . . . .the windfall gains from aid provided the basis for the emergence of an altogether new entrepreneurial element. . . . During the period when venality was pervasive (the First Republic, 1 948-1 960), political connections led to an uneven distribution of the spoils. Fortunes, therefore, were amassed, the "gravy train" starting with sales of Japanese property at below market prices (Amsden, 1 989: 39).

Fraud, bribery and corruption were the basis of the chaebol, with 'the cradling of enterprises in illicit wealth' (ibid.: 40). Later, the state used both incentives and

Copyrighted Material

Theories of the Command Economy

65

coercion to exhort growth from these business groups. Turning now to Russia and East Europe, is this model of accumulation feasible or desirable? The corruption element exists in the form of emerging business mafias (especially in Russia), while there is plenty of evidence of rapid enrichment of parts of the old nomenklatura, as well as new groups, through privatization in Eastern Europe. But there is little to suggest they are contributing to a viable form of capitalism; on the contrary, they are undermining corporate governance, invest­ ment and national capital accumulation (see Chapter 5). But these are not the pro­ cesses being advocated either by Amsden et al. or others anyway, who have dis­ tilled only state planning and regulation from the NIC experience. Second, with­ out capital injections to CEE equivalent to the inflows of aid in Korea, there is nothing like sufficient investment for turning SOEs into the equivalents of chaebols. This dimension, too, is omitted from the comparative debate on East Asia. Third, an institutional feature associated with Korea's growth and one over­ looked by recent accolades about the 'egalitarian nature of east Asian societies ' (Jacques, 1 996), is its income inequality. According to Amsden ( 1 989), its reputa­ tion for egalitarianism stemmed largely from land reform in the 1 950s and became

. . . increasingly undeserved as industrialization has advanced. Korea has unusually high levels of aggregate economic concentration and of wage inequality by inter­ national standards (p. 38). Linked with this is the issue of gross sexual inequality, a matter which has been ignored in current debates about late industrialization. While Korea's rapid real wage growth is well known, less publicized is its gendered polarization:

Korea has the dubious distinction of having one of the highest gender wage gaps, an honor shared by Japan. On average, Korean women earn less than half of what men earn (Amsden, 1 989: 1 0). The position of women in Korea, and their indispensable role in rapid industri­ alization, is never mentioned in reflections on transferring the NIC model to East­ ern Europe. Along with other models of development, Korean industrialization benefited from an unlimited labour reserve of rural women. Amsden ( 1 989: 203) cites a study of development focusing on the role of supplies of unlimited labour in depressing wages to subsistence, and raising profits. One such source of labour was women:

. . . there are the wives and daughters of the household . . . . the transfer of women's work from the household to commercial employment is one of the most notable features of economic development (Lewis, 1 963 : 403). In Korea, gender wage differentials, due both to women's educational exclu­ sion, and to discrimination in the labour market, contributed to a bifurcated labour market which was crucial to growth:

Korea's outstanding real wage increases and unrivalled gender wage disparity are

Copyrighted Material

66

Transformation at Work related to one another insofar as an unlimited supply of women workers has al­ lowed Korea's bifurcated wage structure to achieve dual ends. One end is the main­ tenance of internal competitiveness in labor-intensive industries, which employ primarily females. The other is the entry into more skill-intensive pursuits on the basis of a relatively well-paid, highly motivated, male labor aristocracy (Amsden, 1 989: 204).

In terms of CEE historical legacy alone, a surplus of cheap, rural female labour is not a feature of the shortage economy inheritance. Hidden unemployment through enterprise labour hoarding provides a completely different scenario from an agrar­ ian or peasant economy. Attempts to reduce women's previously high labour force participation rates by excluding them from the labour market as one way to avoid unemployment (see, for example Einhorn, 1 993, Moghadam, 1 993) attests to a labour market situation with no comparison to a NIC. Viewed from both a policy and moral angle, if this bifurcated labour market structure was as crucial to rapid growth as state planning in the NICs, its advocacy would hardly be acceptable to women in any democratically transforming economy today. While there may be some common institutional features to both East Asia and CEE - particularly the relatively high training and education base - the omission of these other aspects of historical legacy obscures the real historical process of rapid industrialization, leaving the element of state planning in an artificially abstract light. The proposition of 'best-way' structural models is not only historically selec­ tive; it is also short-lived, as the events of political and trade union opposition to new labour legislation in South Korea demonstrated in 1996/97. Declining growth and profitability not only prompted firms to internationalize and establish produc­ tion units in regions where labour costs were now cheaper than Korea's, such as Britain; internally, new laws were also being introduced to create a more ' flex­ ible' , deregulated labour market in the name of globalization and threats from free-market competitors to the East Asian 'miracle' (Guardian, January 8, 1 997 and January 1 6, 1 997). If this is the major challenge to the Asian Tigers, it high­ lights the need to view world capitalism as dynamic and ever changing, with new terms of competition shifting the position of individual nation states all the time. But such a view is contrary to a business-system view, which implies stable, 'best­ practice' models. The subsequent financial 'melt-down' and catastrophic economic crisis of the whole of South and South-East Asia in 1998 demonstrates than no part of the world can escape becoming victim of currency speculation, so that 'the world is left with a small but growing risk of slump, a plainly malfunctioning financial system and no commonly agreed means for countries to develop them­ selves' (Observer, September 6, 1 998, p. 2 1 , Will Hutton: ' Bankrupt World'). The case for greater state planning, the maintenance of state subsidies, and industry policies have been made by others who do not necessarily adhere to the South-East Asian model. These make similarly scathing attacks on the free-market policies advocated by the World Bank, the IMF and Western advisers, but with the analogy of post-war European industry policy and social democratic state inter­ vention (see for example Landesmann and Abel, 1 995, Kennerley, 1 995, Aiginger, 1995). Yet, in spite of a wide earlier literature on European models of active indus­ try policy which could be developed in the CEE context (e.g. Katzenstein, 1 985),

Copyrighted Material

Theories of the Command Economy

67

it is the Asian Tigers - the far more fashionable role model both in the wider management and business system literature - which has dominated the challenge to the free-market trajectory in CEE (Chang and Nolan, 1 995b, Lo, 1 995, Chang, 1 995, Dittrich et aI., 1 995). Policy debate should draw on broader social demo­ cratic experiences and frame debate in terms of the insertion of CEE in a global political economy, and highlight the role of labour as the agency of change.

Institutionalism, the nation state and globalization In this final section exploring theoretical approaches to post-communist transfor­ mation, the critique of adopting any specific national capitalism as a model for transformation is set within the wider debate about the analysis of the nation state and the process of globalization. This debate revolves around the degree to which the world economy is increasingly driven by transnational forces, leaving little role for national sovereignty or national capitals, or, the opposite thesis, as ad­ vanced by Hirst and Thompson ( 1 992, 1 995, 1 996), how far nation states continue to shape an international, rather than a globalized economy. In terms of the trans­ formation of CEE, the debate has implications for the room for manoeuvre of both national governments and national labour movements in the region and the theo­ retical and policy relevance of prescribing any national solution - South-East Asian or otherwise - to global processes. For Hirst and Thompson, the nation state remains a viable unit of analysis and action. According to them, the rhetoric of 'globalization' is an exaggeration of global integration, which is proffered both by the neo-classical Right, as the ulti­ mate borderless free market, and by the Marxist left, for whom, it is alleged, it implies political paralysis, because it rules out national solutions to global crises. The 'nation state' perspective, by contrast, postulates a number of national, sub­ national and supra-national (in the form of trade blocs such as NAFTA and the EU) forms of 'governance', which, while needing improvement, regulate the inter­ national economy. For industrial development, the nation state perspective is, of course, the 'business system' perspective already discussed. Radice ( l 998a: 1 2) identifies three forms of strategy from such an approach: a neoliberal strategy, a protectionist strategy and a state developmental strategy following the East Asian model. But while such labels illuminate policy conflicts in the region, their viabil­ ity cannot be assessed without a wider consideration of evidence of the nation­ state perspective. One problem with the debate on globalization is that it has become framed in an 'either-or' polarization of positions. There is, for example, widespread evi­ dence for greater global regulation of monetary relations, and the increasing transnationality of capital and labour (McMichael, 1 996, Radice, 1 998b). On the other hand, the concept of globalization needs to be handled with care, as nation states do intervene in and mediate that process (Radice, 1 998a). Greater clarity might be achieved if, instead of false polarization between nation-statism versus globalization, they were regarded as simultaneous processes. Radice suggests that, instead of viewing globalization sequentially as a successor to a prior system of

Copyrighted Material

68

Transformation at Work

states interacting with each other (as Hirst and Thompson do) the histOlY of capi­ talism can be seen as a 'complex combination of tendencies towards both ' glo­ balism' and 'nation statism' ( 1 997: 248; for fuller exposition Radice, 1 998b: 2 64272). Empirically, the meaning of globalization is fraught with difficulties: there is evidence of increasing integration of fmance capital, yet for foreign capital invest­ ment, while capital is increasingly international, there is evidence that it is not as foot-loose as an extreme globalization perspective would suppose. International capital is not uniform or static: contemporary capitalism provides examples both of companies which are merely 'multinational' , with home bases dominating ac­ tivity, and others that are truly transnational - particularly those from historically internationalized economies, such as Switzerland or the DK (Radice, 1 997: 249). Countries have different histories of internationalization and companies vary in terms of motivation for becoming multinational, management style and organiza­ tion, degree of centralization and there is wide debate on sources of variation in terms of nation of origin and sector influence (for discussions of the literature, Marginson, 1 994, Ferner, 1 997). Hirst and Thompson's claims for the continued existence of national super­ vision of world economic activity via international bodies such as the G3 (Europe, Japan and North America) or large trading blocs, such as the ED, (Hirst and Thompson, 1 995: 430), is at least ambiguous. If anything, the need for supranational bodies arguably demonstrates the opposite process, of declining nation states, rather than their continuation through aggregation. And as far as national government control in shaping economic policy, it might be more useful to frame the discus­ sion in terms of its content, rather than its origins. Here, the evidence of the 1 980s and 1 990s is that, while the nation state continues to have power over policy, the content of those national economic policies is increasingly to support the transnational scope of capital (Radice, 1 997: 258). The hegemony of monetarism and neo-classical economics among governments today marks the priority given to widening the scope of global competition. For CEE, the implications are uncer­ tain because of the complexities of globalization: deeper world integration gener­ ates greater inequalities of wealth and power within and between countries, both within the wider Europe and the 'new' CEE. At the same time, the fluctuation of fortunes for fums and sectors creates different circumstances for political inter­ ventions by the nation state (Radice, 1 998a: 13). If the middle-ground conclusion is that limited intervention at the national level remains an option despite the forces of global integration, this raises the question of what kind of political intervention, and in whose interests? The whole debate on globalization, and its relevance for perspectives on transformation and national development, returns to the earlier questions of theorizing the state. While the concept of 'state governance' for the 'public interest' is mooted by writers such as Hirst and Thompson, the goal for this 'public' is never examined, although the unquestioned message is capitalist success in a competitive environment (cf. Radice, 1 997: 257). The implications for the nationa! losers, as well as the national win­ ners of this race are lost in a benevolent discourse of international regulation, in which conflict, either between classes, or competing capitals and nations, is ab­ sent. It is only a matter of fmding ' the political ideas and imagination to span the

Copyrighted Material

Theories of the Command Economy

69

gap between the global and the national' (Hirst and Thompson, 1 995: 433). The state is again presented as a pluralist organ of governance and a means of distrib­ uting power (Hirst and Thompson, 1 995: 433), the regulator of social action (ibid., 1 995: 435) and even a ' community of fate' (ibid., 1 995: 420). Neither classes, labour nor capital are alluded to, hence the class nature of the state is never ad­ dressed as a debating point, let alone the empirical evidence that since the 1 980s, the role of most nation states has been to shift power and wealth from labour to capital (Radice, 1 997: 257). The problem, then, with the institutionalists, the structuralists, such as Amsden et al. ( 1 994) and the nation statists, is the uncritical assumption that capitalism can be a rational and equitable system, providing that the right 'type' is found, and due note is taken of the embedded legacies on which transforming societies must build their models. Historical and contemporary evidence recording the frequent and highly organized opposition between the interests of democracy and capitalism is minimized or ignored by all three versions of the same perspective. We are left with either a unitarist vision of capital and labour sharing the same goal, or a pluralist one, in which conflict between employers and workers is acknowledged and can be regulated by social democratic means, but in the ultimate interests of capital. Class conflict within nations, regions, enterprises and communities over the direction of capitalist transformation and who benefits from it are thus written out of the agenda of enquiry or relegated to 'problems' of social order - just as in the neo-classical view. By the same token, intervention in the form of labour inter­ nationalism is excluded, whether in developing formal industrial relations institu­ tions, such as multinational companies' European Works Councils, or examples of international trade union campaigns, such as the demonstrations in March 1 997 of over 50,000 European Renault and other automobile trade unionists against job cuts (Guardian, March 1 2, 1 997, p. I I and March 1 7 , 1 997, p. 1 7).

Summary The theoretical perspective of this book, which can be broadly defmed as histori­ cal materialist, shares with institutionalist analysis the recognition of the impor­ tance of history. But it takes a much longer view of history than that usually adopted by the 'new institutionalist' perspective on post-command economy transforma­ tion. It is for this reason that the historical contextualization of transformation adopted here started tracing the legacy of CEE back to the age of empires. The approach also shares with what might be called 'structuralists ', the view that the state centrally plarmed command economies was a system with its own, self-repro­ ducing structures and dynamics, which were systematically different from capital­ ism, and therefore distinct from 'state capitalism'. It also shares the recognition of difference in systems of capitalism, and therefore uses the open concept of 'trans­ formation', not 'transition'. However, as with examining the past, so with exploring the future, a key con­ cern is how the small patch we are observing articulates with the wider world. The focused national lens needs to be used along with the wide-angle global one, and

Copyrighted Material

70

Transformation at Work

the concern with capitalist transfonnation is not this or that 'best' national capital­ ism, but how the process of change is driven by global processes, as well as the policies of governments. Beneath this view, however, is an understanding of the conflicting class interests within capital. Ultimately, the focus of the book is the quality of the capitalism· evolving in CEE in tenns of this opposition, as experi­ enced in the evolving employment relationship and the quality of working life. But this is to run ahead to Part 3 . I n Part 2, we examine more closely the state-capital relations o f transfonning CEE. The next chapter takes the wide-angle lens, and examines the economic collapse of CEE after 1 989, the political and economic driving forces behind this, and the region's insertion in the global, and particularly, the European economy. Drawing considerably on Amsden et al.'s ( 1 994) critique of the neo-liberal poli­ cies responsible for this, the discussion develops further the question of the rela­ tive strength of global forces and the space for manoeuvre by individual nation states in shaping their transfonnation paths.

Copyrighted Material

PART

2

The State and C apital

Copyrighted Material

Copyrighted Material

4 ' Transition' Crisis in Central Eastern Europe

Acknowledging the crisis At best, Eastern Europe's futile reliance on privatization and market forces to re­ structure has resulted in lost time and missed market opportunities . . . . At worst, doing nothing has contributed to the erosion of skills and the deterioration of prom­ ising enterprises . . . (Amsden et aI., 1 994: 7).

By early 1 996, there was talk by official bodies such as the United Nations (UN) that 'transition' was on its way to 'recovery'. However, the optimism about re-birth was more muted than in the first few years after 1 989, when the path of neo-liberal reform adopted by most of the states in the former communist-bloc was expected to deliver not only rapid economic restructuring, but with it, 'the unleashed energies of the East (would) be channelled into peaceful and construc­ tive purposes' (Sachs, 1 990: 23, 1 992). Some 'pain' was expected, but the con­ cepts of 'transformational depression' and 'transitional recession' (UN, 1 994a: 98, UNECE, 1995: 72) soon became part of the new language of official commen­ taries. What the architects of 'shock therapy' (ST) had failed to calculate was the depth of depression and economic dislocation consequent on its seemingly simple plan for the future, and the growth rates needed to return to the pre- 1 989 status­ quo - let alone to reach the capitalist West. Thus, the European Bank for Recon­ struction and Development (EBRD) reported that only Poland and Slovenia were close to regaining what was lost during the early 1 990s, and it would take at least a further 2-4 years to return to pre-reform levels (EBRD, 1 995 : 1 72). Moreover, to maintain the minimum of 4 per cent annual GDP growth to ' catch up', the tran­ sition economies would require investment levels at around 20 per cent of their GDP. Even though the high 'human capital' assets of CEE might bring stronger productivity improvements for new investment than would be expected in devel­ oping countries, (EBRD, 1 995 : 74), "'catching up" with income levels in OECD countries within a generation would call for substantial sacrifices indeed' (ibid., 1 995: 73). In 1 996, the upbeat tone of the UNECE, which noted 'actual GDP growth exceeding forecasts by 1-2 percentage points' with an average ofjust over 5 per cent, still conceded that for Eastern Europe as a whole, GDP was still 1 5 per cent below 1 989 ( 1 996: 5 3-57). The GDP declines in the early 1 990s and the sudden massive drops in real wages are illustrated in Table 4. 1 : for Poland, 1990 was the crunch year for ST, with over an I I per cent drop in GDP, and 24 per cent slide in real wages. In Hungary, this came a year later, again with above I I per cent GDP drop in 1 99 1 ,

Copyrighted Material

74

Transformation at Work Table 4.1 Macroeconomic developments in post-socialist economies,

GOP per capita*

Country/ year

Change GDP (%)

Change real wages (%)

Ext. debt bill*

Trade balance bill*

1 989-1 992. Annual change in exports (%)

Poland 1 989 1 990 1 99 1 1 992

1 603 1 382 1310

0.2 - 1 1 .6 -7.6 -0.5 to 2

8.3 -24.4 --0.3 -3.6

0.4 -3.8 -6.0

5.7 --0.6 -2.6

0.2 24.7 - 1 8.5 9.7

Hungary 1 989 1 990 1 99 1 1 992

2376 2336 2077

0.4 -3.3 - 1 1 .9 -4 to -6

0.7 -3.7 -4.0 3.9

- 1 .9 -0. 1 -4.9 -7.4

0.9 1 .2 -0.4

0.3 0.6 5.1 4.1

3970 3898 3299

1 .4 - 1 .4 - 1 5.9 -7 to -8

0. 1 -5.4 -25.2 10. 1

-3.8 0.5 - 1 .8 - 1 .8

-1 . 1 0.4 -0.9

-2.0 - 1 0.5 5.6 3.2

CSFR 1 989 1 990 1 99 1 1 992

* I n 1 980 US$. Source: Amsden et aI., 1 994, p. 32-33, Table 2. 1 , selection of Vi�egrad Countries and macroeconomic indicators.

the same year the C SFR suffered an almost 1 6 per cent drop in GDP and 25 per cent fall in real wages. Yet, while its relative recession was worse than elsewhere, as the figures for per capita GDP show, it started from much more prosperous beginnings, making absolute misery less than Poland's or Hungary's. Its smaller convertible currency external debt also gave it a more favourable start for transfor­ mation. After the worst of the slump, in 1 994 there was recovery everywhere, although Hungary remained behind. It took the Czech Republic longer, in spite of its early 'progress in transition' (privatization and macroeconomic stability), and by 1 997, it had fallen well behind (Table 4.2). While commentaries perpetuated the view that the 'transition' policies were Table

4.2 GDP change in Visegrad countries, 1 992- 1 997 (percentage

change over same period of preceding year). GOP change Country

1 992

1 993

1 994

1 995

1 996

Czech Republic Hungary Poland Slovakia Eastern Europe

-6.4

-0.9

2.6

5.2

4.1

1 .3

-3.0 2.6 -7.0 -5.7

--0.8 3.8 -4. 1 - 1 .6

2.9 5.2 4.8 4.0

2.0 7.0 7.4 5.4

1 .3 6. 1 6.9 4.1

4.0 6.9 6.5 2.8

1 997 (Jan-Dec)

Source: UNECE, 1 996, Table 3 . 1 . 1 , p. 54; UNECE, 1 998, No. I , Table 3 . 3 . 1 , p. 83.

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

75

responsible for GDP improvement, they nevertheless conceded that these could be temporary, and were based on external demand for exports (Table 4.3). However, these were dependent on a fragile upturn in the West: The central factor behind economic growth in eastern Europe was the expansion of exports, mainly as a result of a strong upturn in domestic demand in the industrial­ ized countries, particularly in Germany and the United States . . . .. The prospects of sustained growth are by no means certain, as they crucially depend not only on the future course of domestic policies, especially in the domain of savings, investment and financial stability, but also on a number of external factors, such as the continu­ ation of export expansion and improved access to western markets. The lack of investment funds, reflecting low savings levels, modest levels of foreign invest­ ment and official assistance, high interest rates, and inefficient financial interme­ diation, is probably one of the most binding constraints on growth in the medium­ tenn perspective (UNECE, 1 995: 7 1 -72).

By 1 996, UNECE noted 'a high (and increasing) vulnerability of the transition economies to cyclical developments in western Europe, and the slowing down of industrial output growth in the second half of 1 995 may partly reflect this' ( 1 996: 53). With Germany in deepening economic recession expressed by 4.7 million unemployed in 1 997, the impact of such ' cyclical' developments could be dire. Optimism about recovery was also qualified by the nature of growth and trade. The basis of CEE export growth was in 'raw materials and some standardized and relatively low processed commodities', a pattern reflecting demand in the West, but chiefly, 'the current structure of comparative advantage of the East European countries, which appears to lie in relatively labour-intensive, energy-intensive, and natural resource-based products' (UNECE, 1 996: 56). For fmished consumer goods, this was confmed to clothing and footwear, exported within a subcontract frame­ work of outward processing trade which left producers dependent on their clients (UNECE, 1 996: 1 1 0; also, Chapter 6). It was also recognized that the expectation of a major rescue by foreign capital for the entire post-communist region was also l not forthcoming: compared with other developing countries, the FDI in the area was no larger than the stock in Argentina in 1 994 (UN, 1 995b: 99), with 69 per cent of this in the Czech Republic, Hungary and Poland (ibid., 1 995b: 1 00). What the GDP figures show is that, apart from Poland's and Slovakia's sus­ tained growth, elsewhere it was haiting, or declining. In any case, economic slump Table 4.3 Export growth rates of Yisegrad countries. Total export growth rates Country Czech Republic Hungary Poland Slovakia

1 993

1 994

1 995

50.5 - 1 6.8 7.2 45.3

8.0 20. 1 2 1 .9 22.5

1 9.6 1 7. 3 34.4 33.5

Note: Growth rates distorted in 1 993 for the Czech Republic and Slovakia, due to 'new' trade between them following split ofCSFR in 1 993. Source: UNECE, 1 996: I I I , Table 3.5.4.

Copyrighted Material

Transformation at Work

76

or growth are, of course, just one aspect of gauging transfonnation. They are cer­ tainly no indication of any improvement in consumption, living standards or em­ ployment. These, as the following shows, declined drastically after 1989.

The human costs of the transition programme Employment and unemployment Capitalism was bound to bring about a reduction in employment, as the disguised unemployment of the shortage economy became open. But the decline throughout central and eastern Europe by almost 16 per cent during 1990-94 (Table 4.4) was primarily because of the deep and prolonged recession (UNECE, 1996: 82). Re­ covery has been halting for Eastern Europe as a whole: after brief growth in 1 994, it dipped again, and by 1 997, had only increased by 0.3 per cent over the sluggish previous year (UNECE, 1 998, No. 1 : 1 1 7). Only in Poland, did employment grow consistently, though slowly; elsewhere it stagnated, declined, or fluctuated, as in the Czech Republic and Slovakia (Table 4.4). Registered unemployment shot up to an average 14 per cent in 1 993 for the whole of Eastern Europe and still re­ mained at 1 1 .6 per cent in 1 997 settling at the West European recession-hit average (UNECE, 1 997: 1 1 7). Hungary's unemployment has remained at 1 0.5 per cent; Slovakia's is higher, and Poland, while showing a big improvement on its 1 6.4 per cent of 1 993, only dropped to Hungarian levels in 1 997. Only the Czech Republic's official unemployment remained at the remarkably low level of 3 per cent, although rising after the economy sank into crisis (of which more in Chapter 5), to 5 per cent in 1 997, and over 8 per cent in 1 999. The juxtaposition of data on employment change and registered unemploy­ ment shows that there is not always a correspondence between these trends. For example, in 1 995 in Albania, employment declined, but so did registered unem-

Table 4.4 Total employment change (annual average % change) and registered unemployment, 1 993-1 997, Visegrad countries and selected south-east Europe (for comparison). Employment change (% over previous year) Country Albania Bulgaria Czech Rep. Hungary Poland Romania S lovakia E. Europe

Registered unemployment, 1 993-97 (% at end of period)

90-94*

93

94

95

96

93

94

95

- 1 9.4 -25.7 -9.6 -26 . 1 - 1 4.9 -8.5 - 1 5.7 - 1 5.6

-4.4 - 1 .6 - 1 .6 -5.0 -2.4 -3.8 -2.6 -3.0

1 1 .0 0.6 0.8 -2.2 1 .0 -0.5 -0.4 0.1

-0.6 1 .3 2.6 -1 . 1 1 .8 -5.2 2.2 -0.5

-3.3 0. 1 0.7

22.0 1 6.4 3.5 1 2.6 1 6.4 10.4 1 4.4 1 4. 1

1 8.0 1 2.8 3.2 10.4 1 6.0 1 0.9 1 4.8 1 3.6

13.1 1 1.1 2.9 1 0.4 1 4.9 9.5 13.1 1 2.5

1 .9 - 1 .2 0.8 0.4

96

97

12. 1 1 2.5 3.5 1 0.5 1 3 .2 6.3 1 2.8 1 1 .8

*Cumulative change over the period. Sources: UNECE, 1 996, Tables 3 .3 . 1 , p. 83 and 3.3 .2., p. 88; UNECE, 1 997, Table 3 . 3 .2, p. 1 1 5 ; UNECE, 1 998, N o . I , Tables 3.5 . 1 , p . 1 1 8 and 3.5.3, p. 1 23 .

Copyrighted Material

13.4 1 3 .7 5.2 1 0.4 1 0.5 8.8 1 2.5 1 1 .6

'Transition ' Crisis in Central Eastern Europe

77

ployment. Apart from the general problems of reliability and different technical criteria of labour force data, changes in employment may reflect many processes including changes in the participation rate of the potential labour force, while changes in registered unemployment reflect a complex process, including differ­ ent criteria for claiming unemployment benefit. These issues are discussed in the context of the Czech Republic. Interpretation of the low level of registered unemployment in the Czech Re­ public involves several factors: favourable starting conditions for transformation, active labour market policy, a rapid rise in service sector employment and growth of the small- and medium-size enterprise sector (UNECE, 1995: 1 09). However, it is also likely that considerable hidden unemployment persists: early in transition, companies were shielded from closure in a paradoxically state-interventionist policy in the otherwise free-market drive. Bankruptcies were delayed, with firms allowed to take on non-repayable debts as part of an inter-firm debt system, with firms owing each other 1 3 0 billion crowns ($4.4 billion) or 14 per cent of GDP (Czech National Bank figures, Economist, November 1 3 , 1 993). A law also barred state owned enterprises from declaring bankruptcy while being privatized, even though from March, 1 994, 6 1 per cent of767 industrial enterprises were insolvent (CEBW May 27, 1 994). Meanwhile, while l .7 billion dollars were allegedly collected by the National Property Fund from sales to foreign and local investors by 1 994, almost half of this was used to pay off the debts of privatized state enterprises (ibid., 1 994; also Ekonom, March 3 1 , 1 994: 1 7- 1 9). State subsidization of ailing state firms, particularly in the heavy engineering sector, which suffered both from the collapse of CMEA markets and from unpaid bills by customers (of which more in Chapter 9), delayed major closures and allowed breathing space for restructur­ ing and possible foreign joint ventures. Meanwhile, although price deregulation in 1 99 1 left 1 994 real wages 1 9 per cent below their 1 988 level, (CEBW, May 1 3 , 1 994, Czech Statistical Office, May 1 994), a wage regulation policy forcibly lim­ ited enterprise wage costs. Low wage bills thus permitted a continuation of former labour hoarding, which, in the absence of productivity-enhancing new technology, was a rational managerial survival strategy (Flek and Buchtikova, 1 993, Nesporova and Kyloh, 1 994). However, none of this was part of a concerted industry policy; rather, it was a temporary measure to keep the social peace. As Part 3 of this book demonstrates, this had no lasting effect either on the economy, or social consensus. Although unemployment still remained relatively low in 1 997, it was on an up­ ward path. Besides, the overall figures have always masked regional differences: the 'monostructural' regions dependent on one industry have suffered, such as the coal mining areas of north-west Bohemia and north Moravia, the metallurgy area of north Moravia and Kladno district west of Prague, and the electronics industry in north-east Moravia and parts of eastern Bohemia. Thus, while in 1 994 Prague unemployment was below 1 per cent, it was between 6 and 1 0 per cent in the eastern part of the country, parts of north and south Moravia, and north and north­ west Bohemia. The regional disparities are becoming more rather than less polar­ ized with time (Hiner and Andrle, 1 994: 1 1 8). Official Czech unemployment levels also conceal other processes, such as the largely enforced retirement of workers beyond retirement age and premature

Copyrighted Material

78

Transformation at Work

retirements, a reduction in unemployment benefits in terms of eligibility and dura­ tion, worsening labour force participation rates, emigration (including border migrants to Germany and Austria) and strict criteria for benefits eligibility: those eligible for benefits of the registered unemployed declined from four fifths in 1 99 1 , to less than two fifths in 1 992 (UNECE, 1 994: 89). Women also disappeared from the labour force as a result of incentive to take longer maternity leave, and because of deteriorating state nurseries and child care (UN, 1 994b: 1 97). The Czech unem­ ployment benefit system is also less generous than elsewhere: maximum duration of benefits is 6 months, compared with 3 to 1 2 months in Hungary (depending on length of employment), 1 2 months in Poland and eighteen for those employed for at least 25 years (women) and 30 years (men), and 6-9 months in Slovakia. The disincentives to register as officially unemployed are thus strong, and may further depress the figures. However, evetyWhere, unemployment benefits have been revised and cut. In Poland, although length of benefits is better than elsewhere, the level is the worst, after its halving in 1 99 1 to 36 per cent of the average wage (UNECE, 1 994: 89). In 1 995, benefit rates were best in Hungary - arguably because of union pressure on the socialist government - where they were 75 per cent of previous earnings for the first 3 months of unemployment, 60 per cent for the next nine, with a minimum tied to 96 per cent of the minimum wage. In the Czech Republic, as well as the short benefit period there is no legal minimum level, and rates are poorer than in Hungary, with 60 per cent of the previous wage for the first 3 months and 50 per cent for the next three (for details of benefits systems, UNECE, 1 996, Table 3.3.4, p. 94). In most countries, eligibility criteria have been tightened up, so that the proportion of unemployed receiving it has declined: in Slovakia, it declined from nearly three quarters in 1 99 1 , to less than a quarter in 1 994 and in Hungary it more than halved to 37 - even lower than the 44 per cent in the Czech Republic. Only in Poland did the share of unemployed claiming benefit actually increase to 58 per cent in 1 995 (UNECE, 1 996: 95). As in Western Europe, the same groups suffer disproportionately from unem­ ployment, except for the case of Hungary (Table 4.5). The main reason for this is that in Hungary most of the decline in employment was concentrated in male domi­ nated agriculture, heavy industry and construction. However, the low figures could also be due to women's disappearance from the labour force, for example through Table 4.5

Registered unemployment rates by sex in Visegrad Countries, 1 993, 1 995, 1 996. September 1 995

September 1 993 Country

Total

Male

Female

Total

Male

Female

Czech Rep. Hungary Poland Slovakia

3.2 1 2.9 1 5 .4 1 3 .7

2.5 15.1 1 3 .5 1 1 .7

4.0 1 0.5 1 7.8 1 6.8

3.0 1 0.3 1 5 .0 1 3.2

2. 1 1 1 .2 1 3 .3 1 1 .8

3.9 9. 1 1 7.0 14.9

September 1 996 Total

Male

Female

3.2 1 1 .0 1 3 .5 1 2.2

2.4 1 1 .6 1 1 .4 1 0.5

4. 1 1 0.3 1 5.9 1 4.2

Sources: UNECE, 1 994, Table 3.4.6, p. 89; UNECE, 1 997, Table 3.3.5, p. 1 1 8.

Copyrighted Material

79

'Transition ' Crisis in Central Eastern Europe

Table 4 . 6 Private consumption 1 992- 1 997 (annual percentage increase) and real wages (percentage change over same period of preceding year). Real wagest

Private consumption* Country Czech Rep. Hungary

92

93

15.1

2.9

-0. 1

1 .5

95

96

97

93

94

95

96

97

5.3

6. 1

6.4

1.9

3.7

7.7

7.7

1 2. 2

7.0

(4. 5)

(6. 6) - 7. 1

-3.4

0.5

3.1

-6.3

-0.7

0.6

3. 6

8.6

-0.4

3.2

4.0

1 1 .3

7.0

-5. 1

4. 1

6.5

-3.6

3.0

3.8

1 0. 3

6.2

(-0. 1)

(4. 3)

94

0.7

(0.2) Poland

2.3

5.5

4.3

(4. 4) Slovakia

5.4

1 .2

*Private consumption: UN ECE, 1 996, 1 992-95 figures from national statistics and direct communication from national statistical offices. UNECE, 1 998, 1 994-97 (figures in italics), same source as other report, but ' private consumption expenditure' now defmed as 'expenditures incurred by households and non-profit institutions serving household'. tNominal wages deflated by producer price index. Source: UNECE, 1 996, Table 3.2. 1 3, p. 75 and Table 3.2. 1 4, p. 76; UNECE, 1 998, No. I , Tables 3.3.9, p. 1 00 and Table 3.4.5, p. 1 1 6.

extended child-care leave - although why this should affect Hungary more than the Czech Republic, where similar processes have occurred, is not clear. In the other countries, women suffer both higher rates than men (and higher shares of total unemployment than their representation in the labour force), and there is very high youth unemployment. In CEE, the highest shares of female unemployment are in the Czech Republic and Poland, where nearly 60 per cent of unemployed were women in 1 996, and in Poland this went up by 4 per cent between 1 995/96, when unemployment actually fell (UNECE, 1 997: 1 1 7). The high rates of female unemployment compared with men's in the Czech Republic and Poland have not changed since 1 993: in the Czech Republic, women's rate of unemployment is twice that of men. In all these countries, youth unemployment (those under 25) is responsible for about one third of the unemployment, while long-term unemployment (those un­ employed for over a year), accounts for 30 per cent in the Czech Republic, 40 per cent in Poland, and over half in Hungary and Slovakia (UNECE, 1 997: 1 1 8). Average living standards in terms of private consumption and real wages (Table 4.6) continued to fall in Hungary until 1 997; In Poland and Slovakia, they ' both rose after 1 996, while in the Czech Republic, which appeared to be doing much better until 1 995, consumption dropped drastically after the crisis in 1 997, and growth in real wages almost halved from the previous year, as a result of austerity measures, which we discuss further in the next chapter. Where there have been improvements in consumption and living standards, these must be seen in the context of the massive cuts in real wages in 1 990/9 1 , and the decline in public welfare and subsidies, so we are still only considering catch­ ing up in living standards with pre- 1 989 standards. Poverty has also grown; pre­ transition poverty existed, but the number of poor has increased among the eld­ erly, the disabled, unemployed, part-time workers and those with large families.

Copyrighted Material

80

Transformation at Work

At the same time, inequality of wealth and income has risen enonnously (Haynes, 1 996: 474). A further sign of the human cost of the transition programme is a drop in the birth rate across the region, suggesting widespread conclusions that it is unwise to have children in the current circumstances. Diet and health have also deteriorated. These were already poor during the command economy era, with a high intake of bread and fats contributing to weight problems, heart disease, anae­ mia, low birth weight and high infant mortality rates. As average incomes have fallen, and with the growth of poverty, diet has worsened and for the poorest, has begun to fall to below WorId Health Organization minima. The links between poor diet and disease have grown, with a rise in mortality and child health problems. And contrary to transfonnation hopes that environmental problems would improve, these have worsened as pollution controls have taken second place to other eco­ nomic priorities, and environment-related diseases have also increased (Haynes, 1 996: 475). There is little to show, after ten years, that the transition agenda has been a success either in economic or human tenns. Organizations such as the UN and EBRD have adhered to the mainstream thesis that, despite some setbacks, the fun­ damentals of the free market programme will eventually bear fruit. But a highly critical literature has now developed cogent challenges to this orthodoxy (Amsden et aI., 1 994, Chang and Nolan, 1 995a, Saunders, 1 995, Dittrich et aI., 1 995, Dobrinsky and Landesmann, 1 995). Despite the theoretical problems of the insti­ tutionalist and structuralist approach discussed in the previous chapter, Amsden et ai. provide one of the most damning attacks on the policies adopted in CEE. Oth­ ers amplify the national institutional details of the debate, as well as the political­ economic dynamics of the disaster. Glyn, for example, ( 1 992, 1 995) examines free market and deflationary policies in Poland and CSFR in the 1 990-9 1 period, and the dissipation of workers' economic sacrifice which could have contributed to enterprise profits, and an upward spiral of restructuring. Adam ( 1 993, 1 994, 1 995) traces the damage of restructuring policies to the economies of CSFR, Poland and Hungary. Gowan ( 1 995) focuses on how the policies regarding CEE 's insertion into global capitalism, particularly within the European Community (EC), created a harmful dependency relationship for the transfonning economies, with the market's ' invisible hand', actually creating the space for the highly political 'visible hands' of Western states and capitalist interests to shape the position of the post-communist countries in the global economy. Drawing these arguments to­ gether, we evaluate the structuralist critique, and return to the issues of class analy­ sis and globalization in tenns of developing alternatives.

CEE slump and the critiques of shock therapy Amsden et al. 's ( 1 994) portrayal of the post- 1989 trajectory ofCEE and the fonner Soviet Union as a transition from 'Pseudo Socialism to Pseudo Capitalism' is an indictment of neo-classical transition models based on a mythologized pastiche of nineteenth century capitalism. Their thesis is that, by historical standards, CEE has embarked on an already outdated model of transition which contains the seeds of

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

81

its own destruction, consigning it to a secondary place in the world economy. The greatest cost of this policy has been the failure to use the potential of the institu­ tions that actually existed in early stages of transition, especially inherently viable State Owned Enterprises (SOEs), which could have been restructured to face world competition with state planning and investment, and benefited from the existence of a skilled labour force whose education and training were on a par with the Tiger Economies. The wastage began with the policies of price deregulation, removal of state subsidies, strict wage controls, consequent fall in real wages, decline in [mal de­ mand and consequent massive slump. As observers such as Adam show, the timing of the impact of these policies varied across the Visegrad countries, according to their different starting points and variations on free-market strategy. Hungary had a large foreign debt, but had engaged in market reforms since the 1 960s and by 1 990, 80 per cent of consumer goods were without price controls; Poland too had experimented with reforms, and also had foreign debt; Czechoslovakia emerged from a highly centralized and repressive regime, but with strong exports, little foreign borrowing and low debt. Poland and Czechoslovakia each embarked on rapid ST, although the latter in modified form, as we discussed in terms of low Czech unemployment, while Hungary opted for gradual transformation: but all three adopted restrictive monetary policies in an attempt to bring about a balanced budget and to control inflation. In all three, this contributed to the slump. While Hungary had liberalized prices over a long period, the Polish 'one shot' package of removal of price controls and production subsidies was implemented in 1 990 and in the C SFR, in 1 99 1 , although in more moderate form, with price controls remaining on rents, certain foodstuffs, energy and transport (Adam, 1 993 : 629). Price shocks in the latter two countries were simultaneously amplified by immedi­ ate foreign trade liberalization, and massive currency devaluations to encourage exports and curb imports (Adam, 1 993: 629, 1 994: 608). Hungary again was dif­ ferent in achieving currency convertibility gradually, so that its exchange rate was not a major contributor to inflation, although it failed to use this advantage, be­ cause of its restrictive monetary policy and approach to bankruptcy. Nevertheless, as Table 4.7 shows, ST contributed to far higher inflation in Poland and C SFR than policy makers had predicted, with Hungary showing the difference in not using that method. In spite of differences in approach between ST and gradualism, and in terms of success in controlling inflation, the slump was experienced across the CEE region. The impact of decline in real wages and [mal demand was a drastic drop in output. Table 4.7

Expected and actual inflation at time of ' Reforms'.

Country Poland ( 1 990) Hungary ( 1 99 1 ) CSFR ( l 99 1 )

Expected annual inflation rate (%)

Actual annual inflation rate (%)

90- 1 00 34 30

249 32 54

Source: Selected Vi�egrad countries from Amsden e t a!., 1 994: 3 5 .

Copyrighted Material

82

Transformation at Work

Although Poland began to show recovery in GDP after 1 992 both Hungary and the CSFR still showed drops at this time (Tables 4. 1 and 4.2). The direction of causality of the slump is subject to much debate; the 'ortho­ dox' explanation is that the slump was caused by the collapse of CMEA trade in 1 990-9 l . Thus, the OECD argued that: the overwhelming impact of external shocks represented by the collapse of the CMEA cannot be denied. In 1 99 1 , exports ITom former CMEA partners of Central and Eastern Europe to the ex-Soviet market declined in volume by more than 30 per cent. This volume effect, represented by the dramatic contraction of CMEA markets, is considered to be the main cause of the output decline. According to some calculations, this volume effect alone can explain most of the fall in output in Hungary and the former C SFR and about one-third of the decline in Poland (OECD, 1 994: 43).

Amsden et al. ( 1 994: 39) hold a similar view, although arguing that industry policy could have ameliorated the situation. Glyn ( 1 992, 1 995), however, argues, that recession had other causes. Pointing out that exports to the West following the decline of CMEA trade compensated for the loss of former markets, he argues that the decline in [mal demand was caused by the laissez-faire waste of a brief but important period of potential profitability. He focuses on the lost opportunity for profit making during the early 1 990s after enterprises were allowed to raise prices and peg wages - profits which could have been ploughed into growth (Glyn, 1 995 : 1 1 8). One way such potential profits could have been realized would have been through increases in enterprise investment, but this did not happen, because of the climate of uncertainty, the high interest rates, and, among some managers, self­ interested motives in doing little to improve profitability (ibid., 1 995: 1 1 9). Only ' very high levels of government spending could have put the sacrifices of reduced wages to use for reconstruction' (ibid., 1 995: 1 20). Without this, final demand went down, production and productivity declined, and a few months after the brief window of opportunity in 1 990, profits dipped. Instead of an upward virtuous circle of investment and restructuring, there was a downward spiral into slump. The case study of the heavy engineering company, CKD, elaborated later, can be seen in the context of this policy of inertia. The analysis of recession in Hungary by Adam ( 1 995) equally points to lack of state intervention. While teal wages did not decline as dramatically here, the state's ' hands-off approach did nothing to counter the climate of uncertainty and the 'credit crunch' in which a vicious circle of enterprise indebtedness, mainly to com­ mercial banks, created high lending rates which, in tum, prevented restructuring that could have helped enterprises climb out of debt and insolvency (Adam, 1 995: 994). There were other contributory factors to recession: Hungary suffered more than its neighbours from the collapse of CMEA trade, and its agricultural sector suffered a 42 per cent output decline from 1 989 to 1 993, as a result both of domes­ tic privatization policy, loss of trade and decline in aggregate domestic demand. However, a final element in the downward spiral was the draconian bankruptcy law of 1 992: instead of the state aiding restructuring, it set a law which required finns to file for reorganization if they could not meet debts in 90 days. If the

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

83

creditors all agreed to a finn's solvency plan, it could get a maximum of 90 days moratorium for financial restructuring; if the creditors could not agree or the re­ structuring could not be achieved, the finn faced liquidation. Although the legisla­ tion was subsequently recognized as too strict and was amended, the damage was done: some estimates attributed 3 to 5 per cent fall in GDP to this cause alone in 1 992 (Adam, 1 995 : 997). As the UNECE studies, Glyn and, Amsden et al. note, and as the ST policy advisers predicted, recovery initially took place through export-led growth to the West - by 24.7 per cent in Poland in 1 990, and by 5 . 1 per cent in Hungary and 5.6 per cent in Czechoslovakia in 1 99 1 (Table 4.3). But this rise, while facilitated by the low exchange rate, was largely a response to the collapse in domestic demand, and would not necessarily last. Further problems emerged: when real wages began to stabilize after 1 992, trade balances went into deficit as imports rose. The defi­ cits were partly due to consumer preferences for Western goods, but also omi­ nously, as Amsden et al. predicted ( 1994: 4 1 ), due to greater dependence on West­ ern intermediate and capital goods imports, which were replacing domestic pro­ duction. Amsden et al. rightly predicted that: . . . . the danger of an abrupt shift towards exports was that if and when the domestic market recovered, capacity would suddenly be shifted back to home sales. Exports would then collapse at a time when rising domestic income encouraged high im­ port demand. To give stability to export promotion required investments in export capacity ( 1 994: 1 1 0).

While the specific allusion here is to the Polish steel industry, it is prescient of growing problems of trade balance deficit in post-command economies (see Chapter 5 for Czech trade deficit in late 1 996/97). Although the early evidence does not conflnn a collapse in exports, it does testifY to a surge in imports, as currencies appreciated again, and inflation boosted domestic prices so their advantage against imported products was eroded (0 ECD, 1 994: 44). All the countries showing growth experienced balance of payments deficits, some with slight improvements, others with further deterioration (Table 4.8). While the stucturalist analyses above point to mistaken policy decisions, there is a danger that the overall location of Central Europe as a region in the European and world order, is forgotten. Critiques which take up the issues of power, and the politics of national and supra-national capitalist interests are essential to analysis. Table 4.8

Foreign trade balance with world economy, 1 993-95 (in billion $).

Country

1 993

1 994

1 995

Czech Republic Hungary Poland Slovakia

-0.3 -3.7 -4.6 -0.8

-0.7 -3.9 -4.3 0.1

-3.8 -2.6 -3.9 0. 1

Source: UNECE, 1 996: 1 09, Table 3 . 5 . 3 .

Copyrighted Material

84

Transformation at Work

Nations and superpower politics in early transformation The question of what, if any, policy alternatives the governments of each trans­ fonning count!)' had, returns to the nation state versus globalization debate. Amsden et aI., as well as Adam and Glyn all point to the responsibility of national govern­ ments in following the precepts of monetarist macroeconomic policies, although Western policy advisers and financial institutions were key policy forces. This implies they had some room for manoeuvre. Amsden et al. postulate the national alternative of emulating the Asian late industrializers ' 'developmental state' . As argued in the previous chapter, there are three major problems with this view: first, the general transference problem to different institutional settings; second, the political objections to the model whose problems are obscured by lack of theoriza­ tion of the state and historical selectivity; and third, the underestimation of glo­ balization. A perspective which is neither fatalistic in tenns of accepting some universal capitalist 'force', nor fanciful in tenns of some alleged autonomy of the nation-state, needs to examine the historic power processes surrounding transfor­ mation - and the space for intervention within this, if it exists. A close examination of the political as well as economic processes shaping Central European transfonnation in the crucial early 1 990s highlights how West European and American interests entrenched the damaging neo-liberal agenda. Gowan's ( 1 995) analysis endorses Amsden et al. 's critique of trade liberalization's damage to local economies, but his approach is both more political and more glo­ bal. It reveals how Western interests subordinated the region into a dependency relationship with Western Europe. His contention is that the destruction of the CMEA was not simply an 'inevitable' factor of the decline of the communist po­ litical-economic bloc, but an intrinsic element of the ST strategy, which included a spatial positioning of CEE in Europe favourable to the designs of key Western powers - chiefly the US, the IMF and the World Bank. Echoes reverberate of the previous centuries' imperial struggles for dominance, and the strategic issues of the post-World War settlements of this central region of Europe.

An interim trading zone versus trade liberalization Initially, France and Gennany pressed for a different geo-political model from that backed by the US and Britain. Mitterand favoured an interim trading zone which would maintain some of the fonner trade links for the East as the best means of building towards a European confederation from the Atlantic to the Urals - a policy supported at the time by Gennany, then keen to cultivate strong trading links be­ tween a unified Gennany and Russia. It was to plan such a process that a French­ led European Bank of Reconstruction and Development (the EBRD) was envis­ aged. Against this vision, the American administration favoured the breaking off of the most Western economies of CEE which became known as the ViSegrad group, and hence fracture the CMEA, speed through a shock transition to capital­ ism in these 'advanced' countries, and absorb them both economically and politi­ cally into the Western sphere (Gowan, 1 995 : 5 8-59). This would supposedly

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

85

create a buffer between West and East which would prevent the unified pan-Eu­ rope of the French vision. The subsequent early invitation of the Visegrad group into NATO in 1997 (a political debate too complex to enter into here) supports the view that there were political and military concerns in the US perspective, with parallels with the 'cor­ don-sanitaire' of the 1 9 1 8 Versaille Treaty. In Gowan's view, the US model won the day, largely because it gave adequate scope to German interests, in particular anchoring the Visegrad countries to the German economy. There is little docu­ mentation about this early period of international negotiations of the 1 990s, but it was immediately after Mitterand's 1 990 New Year speech, in which he outlined his vision of a pan-European union, that Sachs wrote the article in the Economist, which became a neo-classical mission statement Arguably as a refutation of the French vision, he cast any form of East European Payments Union or trading bloc as 'a poor man's club', since 'The answers to Eastern Europe's needs lie mainly in integration with Western Europe' (Sachs, 1 990: 28). The naive simplicity of this proposition became evident. The assumption was that the end of subsidies, a credit squeeze and tight monetary policy, including wage controls, would stimulate enterprises to restructure and embark on trade-led growth in the new internationalized market. But the 'market' could not force en­ terprise-level recovery, macroeconomic policies could not sustain an export drive, and 'trade liberalization' was a euphemism for double standards for East and West, with the EC retaining crucial trade protections (discussed below). On the issue of micro-level restructuring, it was evident that without the possibility of credit or capital investment, which even the OECD acknowledged was, 'particularly hin­ dered by an underdeveloped fmancial sector' ( 1 994: 1 9), the scope for restructur­ ing was narrowed to reducing labour and its price. This left the chief instrument for export growth at the macroeconomic level, with exchange controls favourable to exports - a policy which was short-lived. Trade liberalization was not just about a new regionaVeconomic alignment of CEE, but was the credo of the World Bank, without which capitalist transforma­ tion was impossible. The damage done to existing industries by cheap imports was much greater in the hard period for exporters of the 1 990s, than it was in the 1 960s for the emerging exporters of the NICs (Amsden et ai., 1 994: 99). It was also ironic that, while trade protection measures, such as import surcharges, quotas and tariffs, were condemned in CEE as distorting trade liberalization (OECD, 1 994: 40), major foreign investors, such as Volkswagen in Czechoslovakia, demanded protection from imports in their own markets. The Visegrad countries co-operated in the removal of protection: while the C SFR and Hungary imposed import sur­ charges and consumer goods import quotas in 1 990, they agreed to lift these. It was only after subsequent import surges from the West that several re-imposed import restrictions, based on sectors or products (OECD, 1 994: 42-44). Poland went further; in the early phase of transition, there was actually a pro-import bias in terms of cheaper borrowing from abroad for imports compared with local loans for domestically supplied goods (Amsden et ai., 1 994: 1 00). In the first half of 1 993, there was an overall 7 per cent increase in the value of imports to the Visegrad countries compared with the corresponding period in 1 992 (Gowan, 1 995: 24).

Copyrighted Material

86

Transformation at Work

Trade subordination of the Visegrad countries to Western Europe As the evidence of supra-national pressure unfolds, the assumption that there was room for nations to manoeuvre becomes shakier. The World Bank prohibited state­ led pro-export policies, such as preferential credit to encourage companies to use the best domestic suppliers to improve their quality, or other incentives for import­ competition (Amsden et ai., 1 994: 10 I ). This is where double standards by the advanced capitalist world to increase their markets complete the picture. Western governments provided what were effectively export credits and credit guarantees to their own exporting f1nns in the form of 'aid' to target countries (Gowan, 1 995: 24). The then EC likewise acted politically to protect its market. The Europe Agree­ ments between the EC and Poland, Hungary and the C SFR (the 'Partners in Tran­ sition' or PITs) were signed in December 1 99 1 and heralded as 'going far beyond a free trade area' (OECD, 1994: 7 1 ) and appearing to be in the PITs' favour. They were in fact heavily skewed to favour the EC and exclude CEE's key export sec­ tors - agriculture, textiles and apparel, iron and steel and chemicals (Messerlin, 1 992: 1 1 3, Batt, 1 994: 45). While the Visegrad countries were required to get rid of their None Tariff Barriers (NTBs) by the GATT and the OECD, the EC built anti-dumping and other trade protections, including NTBs, into trade agreements. While these restrictions were gradually to be lifted over a ten-year period, with the EU abolishing all remaining trade barriers on industrial products except textiles, and granting further concessions on agricultural products on a reciprocal basis (EBRD, 1 995: 176), this is arguably a very belated equalization, responding more to the criteria for future accession of CEE to the EU, than to its immediate needs in early transition for more open markets in the West. A fmal nail in the subordination of CEE to the EU, were the Europe Agree­ ments' 'rules of origin' for CEE products. These ring-fence the PITs in terms of whom they can develop supply-chain manufacturing links with, before exporting (or re-exporting) a fmal product to the ED. This was expressed in terms of where 'value-added' carne from: imported inputs from countries outside the EC itself (including other Visegrad countries, the wider CEE or the former Soviet Union) could not exceed 40-50 per cent of the value of production, imposing a ' local content' requirement of any single Visegrad exporter to the EC of 60 per cent (Messerlin, 1 992: 128, Gowan, 1 995: 28, Smolik, 1 995). In a world of globalized production for the West, this limited international production links for CEE east­ wards along former CMEA lines or elsewhere internationally, creating a depend­ ence on the EU. The 'hub and spokes' metaphor for the West European centre and the Eastern periphery is apposite (Gowan, 1 995: 6). .

The pro- Western political bias Was there a regional policy alternative to immediate CEE integration into Western Europe? The debate as to whether an East European payment union modelled on the type of trade arrangements used in post-Second World War Europe sparked major controversy (Flemming and Rollo, 1 992, see especially Havrylyshyn, 1 992).

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

87

Some have echoed Sachs, maintaining that the vestiges of a CMEA would have created a vicious circle of protectionism and retarded restructuring (Messerlin, 1 995). Others have argued that the lessons from Western Europe's post-war recon­ struction programme, in which both Marshall aid and some protectionism via bi­ lateral trade between recovering countries, should have been applied to Eastern Europe (Worswick, 1 995, Kennerley, 1 995, Aiginger, 1 995). However, in the con­ text of the free market climate of the closing decades of the twentieth century, these possibilities were not given a serious hearing. The Western neo-classical consensus found and sponsored eager allies in the political elites of CEE (of which more below). Both Klaus, then the finance minister of the C SFR and Balkerovicz in Poland, favoured the destruction of the CMEA (Gowan, 1 996: 1 32). Their eagerness for a 'return to Europe' and the race to be the most Western and first into the EU, undermined the concept of a 'Visegrad Four' both econom­ ically and politically, as well as a new 'central European' national identity (Batt, 1 994: 3 5). The February 1 5 , 1 99 1 pledge at Visegrad for co-operation to speed re­ integration into Europe gave way to the reality that ' competition has been at least as important as cooperation' among them (ibid., 1 994: 43). In spite of their subse­ quent signing in 1 992 of the Central European Free Trade Agreement (CEFTA) to symmetrically liberalize trade, major rifts occurred - most notably the break-up of Czechoslovakia in January, 1 993 - but even the aim of increasing intra-central European trade was largely over-ridden by each country's preference to trade with the West. Despite the political and ideological preferences for being ' Western', many enterprises have sought revival of eastward trade with the former Soviet Union. At the same time, disappointment with the slowness of Western Europe to open up to the East rekindled interest in further trade liberalization within CEFTA by 1 996 (interview with Hungary's Prime Minister Gyula Hom, BCE, December, 1 995 'The Annual' : 1 8). Meanwhile, champions of the free market, such as Sachs, have bemoaned the meanness of the West, while George Soros, millionaire philanthro­ pist and fmancier of the Central European University and the Open Society Foun­ dation in CEE, spoke of the failure of Europe to 'reach out' to the East as the 'greatest disappointment' of the post- 1 989 opportunity, castigating the 'miscon­ ceptions' of laissez faire theory as 'social Darwinism' (Soros, in BCE, December, 1 995 'The Annual' : 24). What this human face of capitalism fails to confront is why capital should be guided · by moral, rather than market principles, without sanctions to do so. As it was, there were double standards for the East and West. Lengthy discussions of the right mix of carrots and sticks to ensure compliance by Eastern governments sits beside an almost complete silence about the carrots and sticks needed to make Western governments comply (Gowan, 1 995: 1 3).

The power of the World Bank The Bretton Woods institutions provided the material bedrock to the ideological stranglehold of free market dogma on CEE change, as Amsden et al. demonstrate, devoting an entire chapter to 'Pseudo-Privatization and the World Bank'. At the

Copyrighted Material

88

Transformation at Work

microeconomic level, the World Bank always equated restructuring with privati­ zation and although it had provided loans during the command economy to Hun­ gary, after 1 989 its structural adjustment loan conditions 'prohibited lending to public sector manufacturing ' (Amsden et aI., 1 994: I I ) and required a reduction in Government industry subsidies, with no distinction made between ailing and prom­ ising enterprises, since enforcing ' financial discipline' was supposed to be the cure. Industry planning organizations, such as the Polish Industrial Development Agency, were whittled down to technical assistance only - and even this was cur­ tailed (ibid., 1 994: 1 1 7). The World Bank gave support to CEE fmance and priva­ tization ministries, but none to ministries of industry, because these were consid­ ered tainted with former state planning. The planning capabilities of the state were channelled, with fmancial assistance from Bretton Woods institutions, into the privatization process, not into industry planning, with the irony that government privatization agencies, 'accomplished what was assumed to be impossible in the name of restructuring: they ranked state-owned enterprises according to their fu­ ture promise based on information provided by professional management consult­ ants' (ibid., 1 994: 14). Thus, the skills and information to evaluate enterprises, which might have been used in a state development policy, were used in a state orchestrated privatization process in the name of ' the market' . Public sector de­ velopment banking offering ' long-term loans . . . . at preferential interest rates' (ibid.: 1 20) was also prevented, and private commercial banking encouraged instead. Bretton Woods hostility to state involvement with restructuring in CEE was driven by obsession with unbalanced state budgets. 'Fiscal stringency, in tum, was elevated above all other goals as being necessary to prevent inflation and to facili­ tate Eastern Europe's repayment of its international loans ' - which were huge (ibid., 1 994: 1 1 8). Czechoslovakia was the exception, with a foreign debt in 1 990 of only $4.4 billion; but Poland's was $48 .5 billion and Hungary's $2 1 .3 billion (UNECE, 1 995, Table 3.6.2: 1 3 8). For these latter two countries, dependence on the World Bank and the IMF rules was enormous. The multilateral banks could reward or punish. The difference between Poland's and Hungary's treatment by these institutions, and the constraints placed on their domestic policies, testify to the power of the fmancial stabilization agenda. Poland, in exchange for demonstrating that it could reduce its current account deficit and prioritize financial stabilization, received favourable treatment and for­ giveness for some of its debts. Its reduction from a $2.3 billion deficit in 1 993 to $944 million in 1994 was rewarded, with a blind eye turned towards the fact that in 1 993-94, ' the bulk of external finance obtained by Poland was in the form of non­ payment of interest on commercial debt and receipts from unreported cross-bor­ der exports, chiefly to Germany and Ukraine' (UNECE, 1 995: 142). Poland's IMF approved stabilization programme won it debt cancellation from $47.2 billion at the end of 1 993 to $4 1 .9 billion at the end of October 1994. Following this, for­ eign exchange reserves increased and improved the possibility of an upgrade in the country's international credit rating' (ibid., 1 995: 1 4 1 ). By contrast, Hungary's debt, although smaller than Poland's, grew to $28.5 billion in 1 994 as a result of heavy borrowing and growth in the current account deficit to $3-4 billion or 1 1 per cent of GNP in 1 994, from budget balance in 1 992 (ibid., 1 995: 1 4 1 ). We

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

89

cannot enter the details of this fiscal crisis (largely associated with the slump and growth of the grey economy), but suffice it to say that any state expenditure in­ tended by the left-leaning coalition after its 1 994 election victory, was reigned in by austerity measures required by the IMF and its concern about the current ac­ count deficit's effect on 'the confidence of the investment community' (ibid., 1 995: 14 1 ). Hungary was not even offered debt rescheduling (Gowan, 1 995 : 54), and although it has attracted about half of the region' s FDI, inflows of foreign capital have largely been absorbed in servicing debt, and financing the current account deficit (UNECE, 1 995: 1 4 1 ). External debt and the strings attached are as critical as FDI to restructuring, when global fmancial institutions can dictate the terms. Czechoslovakia, whose external debt rose, but only to $9.4 billion in 1 99 1 , stuck to an impeccable stabilization programme, thus gaining the blessing of the Bretton Woods institutions in terms of legitimacy and credit worthiness in the eyes of world capital. Its reputation for stability and a balanced budget won it upgraded international credit rating in 1 994, and classification by the EBRD as one of the most 'advanced' countries in terms of 'transition indicators' : degree of privatiza­ tion, hard budget constraints on enterprises, price liberalization, and openness of trade (EBRD, 1 995: 1 1 ). It was rewarded by the Bretton Woods institutions: the ' favourable financial situation prompted the authorities to liquidate all debt to the IMF and to announce plans for making the koruna convertible' (UNECE, 1 995: 140). However, whether such stamps of approval helped the Czech economy is another matter (Chapter 5). There is thus overwhelming evidence to support Amsden et al. 's thesis that multilateral bankers have narrowly limited the choices of transformation ( 1 994: 1 1 5). Yet, in terms of the tension between nation-state alternatives and globaliza­ tion's constraints, the analysts sit on the fence and fail to make clear who bears most responsibility, or whether their critique targets national policy makers, or the World Bank, to alter its neo-classical dogma. They imply that govemments should change tack in postulating a 'developmental state', yet expose how hamstrung they are, ending in an ambiguous theoretical position. What is missing is any sense of the process which links the two: social opposition and inner policy conflicts. Beneath the institutional surfaces, the forces which activate conflict are on the ground, in the relations between capital and labour. Civil society and labour as active agents are absent from their writing and the only agency which acts on structure remains locked in a top-down social engineering approach. People on the ground are not part of the equation, other than as legitimizers of, or obstacles to change.

Tensions in the free market consensus Despite the dismal picture of World Bank and IMF neo-liberal dominance, a fatal­ istic acceptance must be set against both national opposition and the internal con­ flicts within these vast mutlilateral organizations. Firstly, it should not be assumed that there were no challenges from outside, at national level. In the aftermath of 1989, although few still considered a 'third way' of 'market socialism' as a possi-

Copyrighted Material

90

Transformation at Work

bility, some advocated a greater role for labour and the state in consensus building. In Hungary, partly because its earlier market reforms gave it a head-start, a gradual transformation to capitalism was chosen, including a voice for labour in tripartite consultation (Chapter 7) and there was even discussion of worker ownership, al­ though this receded as an option (Adam, 1 995: 989). In Poland, the Balcerowicz ST programme of 1 990 was opposed by a number of economists and by 1 992, some ministers called, although without success, for an active state-led industrial policy (Adam, 1 994: 6 1 4). As Chapter 8 shows, there was also widespread spon­ taneous Polish worker opposition to the effects of slashed living standards. In Czechoslovakia, a small group of Social Democrats argued against the market as the exclusive vehicle of transformation, and proposed a state industry policy in which the skills and knowledge of the Forecasting Institute of the previous regime could be combined with the general rules and tools of markets to aid planning (Adam, 1 993 : 640). However, after the overwhelming victory of the right-wing ODS (Civic Democratic Party) in the 1 992 election, the Forecasting Institute - a haven of social democratic opposition - was closed down, and with it, a major source of articulate opposition. Its economists were forced to disperse, some con­ tinuing their work in the newly established Institute of Economics in the Czech National Bank, while some went abroad to work in organizations such as the ILO. Even so, tripartite debate on key policies meant that labour had some voice within the direction of capital and the state. Political views over the first ten years of transformation have been highly vola­ tile, with swings of the electoral pendulum between more 'right' and 'left' govern­ ments suggesting confusion and disappointment, not consensus. It is true that, de­ spite the pockets of opposition outlined above, immediately after 1 989, the glo­ bally hegemonic New Right found fertile ground in deep disillusion with central­ ized state planning. Illusions about capitalism drew on historical legacies of a strong middle class and capitalist culture in Czechoslovakia; pro-market tenden­ cies in Polish agriculture (which had never been collectivized); and small business culture in Hungarian family farming and the craft and trade activities of the large grey economy, which flourished with the relaxation of rules for private business in the 1 980s. Neo-liberal economics in the West also had a profound effect on intel­ lectuals and policy makers in CEE, especially in the more open economies of Hungary and Poland, where travel to the West was more frequent. In Hungary, Kornai's analysis of centralized state planning contributed to suspicion of all large enterprises as prone to passivity and greed for subsidies, and the idealization of the free market as an alternative (Amsden et aI., 1 994: 1 64-1 66). Even in the restructured ex-communist parties, their more reformist sections were technocratic in orientation, their leaders largely made up of 'pragmatic survivors who see no virtue in the old and no alternative to the new' (Haynes, 1 996: 477). When they came to power, there was no serious policy alternative to the free market model. But dissent never disappeared. Disillusion with the transformation process has led to shifts in the political tides: in Poland and Hungary in 1 993 and 1 994, re­ formed communist or 'socialist' parties won the elections, but since these made little difference to the overall neo-classical policies, further demoralization swung sympathies against them, so that by 1 996, various populist parties began to rise in

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

91

the opinion poll ratings, and by 1 997, right-wing coalitions had returned. In the Czech Republic, the popularity of the right took longer to dispel, but by June 1 996, the Czech Social Democratic Party (C SSD) re-emerged as a major opposi­ tion force to the ruling conservative coalition in the parliamentary election, and won the election in 1 998. The old social democratic tradition going back to the First Republic had not, after all, died, although how far it is able to implement more state-interventionist policies and include labour's interests, depends, as else­ where, on wider shifts in the global political spectrum and labour movement pres­ sure. Outside challenge to the free-market consensus is not the only form it can take. Within multilateral organizations themselves there is competition between domi­ nant capitalist models, and between different lobbies and interest groups. This is acknowledged by Amsden et aI., who argue that the 'strong neoconservatism' of the Bretton Woods institutions stem ' from the United States ' s crisis of self confidence . . . in reaction to the rise of the East Asian late industrializers' ( 1 994: 5). While there are problems with the proposition that US neoconservatism is a defen­ sive reaction to recent outside economic threats, since it has a longer history which is linked to a wider rise in neoliberalism, the allusion to the challenge of East Asian economic success is justified. The issue of state intervention in develop­ ment has confronted the 'Washington consensus' both because of the economic success of South East Asia, the evidence of failure of the neo-classical structural adjustment programmes, and subsequent threat of ' social unrest' elsewhere in the world. The Bretton Woods organizations' relationship with transformation is thus more complex than a one-way act of dominance, powerful though this is: legiti­ macy can be retained, or lost, and must be fought for. A key internal challenge within the World Bank has been Japan, which was the principal co-fmancier of World Bank loans by the early 1980s; by 1 984 it became the second biggest shareholder in the World Bank after the US; and by 1 992 it became the second biggest shareholder (along with Germany) in the IMF (Wade, 1 996: 7). In the 1 990s, it overtook the US as the world's largest manufacturing economy, and became the world's biggest source of foreign investment. The battle over policy dominance started in the late 1 980s, when the Bank criticized Japa­ nese support for state industry policy in its aid programmes for undermining its central tenets of liberalization and privatization. The Japanese government retali­ ated by requesting a World Bank study of East and South-East Asia, in order to demonstrate that something was to be learned from state-led development (Wade, 1 996: 4). The study appeared as The East Asian Miracle: Economic Growth and Public Policy (World Bank, 1 993), but it was sterilized by editorial revisions and an anodyne document emerged, endorsing the traditional World Bank 'market­ friendly' policies. Nevertheless, not all traces of the Japanese pro-industry policy were eradicated, and the issue of state intervention rumbled on. Wade suggests ( 1 996: 5) that the Miracle study could be precursor to later shifts in policy, despite the art of 'paradigm maintenance' which are driven by internal power politics and career pressures to conform to 'Bank thinking' (ibid., 1 996: 3 1 ). The manner in which the Bank continues the struggle against the arguments for state interventionism can only be inferred from its publications, which suggest that

Copyrighted Material

92

Transformation at Work

it is neither immune to competing capitalist models, nor to labour's response to the impact of its policies. In 1995, one year after the ' Miracle' study, the World Bank World Development Report, the Bank's most high-profile publication, legitimized industrial relations and collective bargaining - hardly the favourite of neo-liberals - as the lesser of evils, compared with state intervention. Labour, having been absent in the ' transition' discourse, now appears in the Report's opening passage: Work - safe, productive and environmentally sound - is the key to economic and social progress everywhere . . . .As such, work is a more than worthy subject of this, the eighteenth annual World Development Report. It focuses on the incomes work­ ers receive, the risks they face, and the conditions under which they work. (World Bank, 1 995: iii).

The report covers the need for 'social safety nets', help 'to equip workers for change' and industrial relations and collective bargaining, where the role for Gov­ ernments is confmed to setting 'the legal and regulatory frameworks within which trade unions and firms can operate and in ensuring that those frameworks encour­ age their positive contributions to development' (World Bank, 1 995: iii). How­ ever, the union-friendly rhetoric is couched within an affirmation of globalization and the free market. The Report, it is stated, responds to 'two distinct global trends: reduced government intervention in markets, and the increased integration of trade, capital flows, and the exchange of information and technology. In such a climate of profound change, basic decisions about wages and working conditions are driven by global competitive pressures ' (ibid., 1 995: iii). The Report favours decentral­ ized bargaining and industrial relations as part of the market mechanism, which is valid providing competition (both in labour markets and for products) is not un­ dermined: 'the right choices involve using markets to create opportunities, taking care of those who are vulnerable or are left out, providing workers with the condi­ tion to make their job choices freely, bargain over their conditions of work, ' (ibid., 1995: 8). As Part 3 shows, this decentralized bargaining is precisely the pattern being established in CEE. Bank precepts mean protection and bargaining must operate with, not against free markets. Nevertheless, allusions to protection in the informal sector, child labour, anti-discrimination, and even the minimum wage suggest that the Bank is worried about its legitimacy (ibid., 1 995 : 74). The 1 995 Report is a discourse on limiting the 'pain' of development through limited state legislation and collective bargaining. Its subtext is an alternative to state development policy and the endorsement of 'market-based growth paths ' (ibid., 1 995: 2). Rather than fully acknowledging failure in its structural adjust­ ment programmes, the Bank notes 'stagnation or decline for many in the Middle East, Latin America, Sub-Saharan Africa, and, most recently, the formerly cen­ trally planned economies ofEurope and Central Asia' (ibid., 1 995: 1 1 8). It presents two potential trajectories, one of increased inequality - the 'divergence' scenario, and one of 'inclusion and convergence' (ibid. : 1 1 8). The 1 996 United Nations Human Development Report similarly found that economic growth had failed for a quarter of the world's people, leading to a global polarization, with eighty nine countries now worse off than 1 5 years ago (quoted in The Guardian, July 1 6, 1 996, p. 1 1). The spectre of growth in East Asia and the Pacific, whether measured

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

93

by industrial wages or real GDP per capita, appears in the background of both the 1995 World Bank and the 1996 UN reports, and raises the implicit challenge of state industry policy. The 1995 World Bank report, continuing the theme of the Miracle study, mentions those South-East Asian policies which are compatible with the market-friendly view - investment in human capital, 'good use of interna­ tional markets, especially for expanding exports' and 'strong support for family farming' (World Bank, 1995: 3), but omits the state policies which do not fit the market-friendly picture, or adapts them as 'supporting the expansion of economic infrastructure and social services' (ibid., 1995: 4). If work and workers were 'discovered' in the 1995 Report, partly as a means of acknowledging the danger of social unrest and partly as a way of offering free collective bargaining as a hedge against state legislation and ' interference', by 1996, they were dropped again. The following World Development Report, ' From Plan to Market' (World Bank, 1996), is devoted entirely to the transition in the former centrally planned economies, making no mention of workers, industrial relations, or trade unions. It is back on track on the familiar free market mantra of privatization, liberalization and stabilization. Workers remain only as residual el­ ements as possible losers - victims for whom salvation is in ' policies and meas­ ures that encourage sustained growth' (World Bank, 1996: 8). State legislation is confined to enabling the market to operate, controlling crime and corruption (now recognized as part of the ' transition') and imposing fmancial discipline. That the 1996 Report focuses on post command economy transition is itself a development worth noting; up till then, commentary on post command economy transition has been clustered around the OEeD, the UN and the EBRD. Public concern with workers one year, and their relegation to obscurity in the next, suggests World Bank confidence in neo-classical hegemony remains. How­ ever, how far the 1997/98 fmancial melt-down and economic crisis in South-East Asia, and fear of its ' contagion' to the rest of the world in a global slump, dents the hegemony of free-market thinking now remains to be seen. It becomes increas­ ingly difficult to deny that the mounting fmancial and economic chaos is the result of the anarchy of unregulated fmancial markets and the vicious circle of collapsing confidence exacerbated by the IMF neo-liberal 'remedies' of crippling loans, new debt burdens, and deeper slide into slump. Not only have the structural adjustment programmes failed, but once prosperous economies have been sucked into an im­ ploding spiral by the same laissez-faire economics which have dominated the glo­ bal system for twenty years. The threat of social back-lash indicates that social turmoil both within the World Bank and other bastions ofpower, and on the ground remains a constant force for instability and change.

Re-enter labour in the transformation debate In the wider burgeoning 'transition' literature of the 1990s, the invisibility of la­ bour and minimal publications on industrial relations, labour markets and training reflects the continuing dominance of the free-market preoccupation with stabilization and privatization (Frydman et aI., 1993, Earle et aI., 1 993, Frydman

Copyrighted Material

94

Transformation at Work

and Rapaczynski, 1 994, Estrin, 1 994), and, following recognition of the latter's failure to deliver restructuring, with corporate governance (Frydman, Gray and Rapaczynski, 1 996). There is little more attention to labour as an active constituent of the transfor­ mation process in the institutionalist approach to business systems (Whitley, 1 995, Henderson et aI., 1 995) or in Amsden et ai. ( 1 994). While attention to the state, and to the state-business relationship, are important advances on the neo-classical approach, lack of attention to the capital-labour relationship obscures wide varia­ tions in possible alternatives, and the role of democracy. Weak theorization of the state leaves the idea of the developmental state as a modernization mission run by a meritocratic elite bureaucracy and discussion about the relationship between economic growth, democracy and authoritarianism is framed in terms of state au­ thority and whether social discipline is achieved by coercion or legitimization (Amsden et aI., 1 994: 1 82- 1 87). Thus, the state' s ' level of authority' has . . . .a very specific character in Western European cases. It rests not only upon the state's legitimacy but also a functional cooperation between the formal state and civil society. Democracy and political liberalism, respect for individual freedoms, separation of powers, and the rule of law have been accompanied by a high degree of social discipline and by a deeply internalized respect for state institutions . . . The gradual inclusion of citizens in politics, and the development of social discipline can be understood as the internalization and legitimization of norms that otherwise would have to be enforced (Amsden et aI., 1 994: 1 87).

These assertions of social 'internalization' are not, however, accompanied by sociological or historical research. For CEE, building a developmental state is again perceived only in terms of state legitimacy, which is hampered by the legacy of external oppression from nineteenth-century imperialism and pseudo-social­ ism. Success is viewed in terms of the skills of the elite in overcoming these, the building of a meritocratic bureaucracy and overcoming diversionary pressures by ' interest groups' such as workers, managers, pensioners or farmers: 'the problem is thus whether an institutional design and/or course of policies exists that can minimize the state's vulnerability' ( 1 994: 1 94). The dismissal of the democratic process as interference in development is not only out of touch with the crucial impetus for democratization in the 1 989 revolu­ tions; analytically, it is as simplistic about the nature of the capitalist goal of trans­ formation, as the free market 'transition' discourse. While the dominant neo-lib­ eral view in CEE assumes that market reform and democratic reform are part of the same process - a proposition which is rapidly leading to disillusion the ' developmental state' perspective asserts a sequential path from ' success­ ful' capitalism to democracy. However, the possibility that means shape ends, that the process of capitalist change and the nature of social class relation­ ships within it, shape the ends in terms of the type of negotiated system of capitalist regulation which follows, is left entirely out of account. Yet the experience of post-war European experience shows that labour had a major impact on the state and modes of economic reconstruction, with national differences in capitalist growth and productivity, and different trajectories of so-

Copyrighted Material

'Transition ' Crisis in Central Eastern Europe

95

cial democratic politics, economic strategy and industrial relations (Melling and McKinlay, 1 996). In particular, it has been argued that labour's strength accompa­ nied industrial success after 1 945 in both Sweden and Germany. Their models of social democracy, in which neo-corporatist industrial decision-making backed by extensive provision of welfare and industrial relations rights, highlight the active role of labour in a successful partnership between capital and labour. Lash and Urry' s ( 1 987) comparative study of economic performance argues that the organ­ ized working class was the motor for Swedish social change from the 1 930s, while in post-war Germany, although the labour movement was not so strong, it was effective in initiating a welfare state and the system of co-determination was cen­ tral in promoting a high-wage, high-productivity growth path. Streeck' s ( 1 99 1 ) research on German industrial relations found wage pressures forced employers to adapt to high quality markets capable of sustaining high wage levels, while legally enforceable employment protection promoted internal flexibilities and a commit­ ment to invest in training and retraining. The role of labour in capitalist economic performance more recently, particu­ larly in Britain, also demonstrates the importance of its proper incorporation into economic debate (Green, 1 989, Coates, 1 994). In 1 955, the UK's GOP was sec­ ond to that of the US. By 1 982, it was lower than the USA, Sweden, Germany, France, Belgium and Netherlands. Among the forces to be blamed, labour and trade unions were considered a major contribution to decline, through lack of co­ operation, 'low-trust' and confrontational attitudes (Coates, 1 994: 28). Trade un­ ion leaders were under heavy criticism from the 1 970s onwards for having 'too much power', and 'running the country' and neo-classical economists, spearheaded by Olson ( 1 982), held that anything standing in the way of free markets - special interest groups such as powerful unions and large professional associations - pre­ sented dangers of monopolistic power (the parallel with Amsden et aI., who come to the issue of 'interest group' interference from a completely different position, points to the ultimate exclusion of labour from both analytical directions). The major refutations of the neo-classical interpretation of economic decline have fo­ cused on Britain's dominance by fmance rather than industrial capital, while insti­ tutionalist analysis has pointed to a poor training system compared with a number of European models (Prais and Wagner, 1 983, 1 988, Standing, 1 988, Lane, 1 992) and the lack of an active state compared with Germany or Japan. Critiques of the folklore of the alleged 'bloody-mindedness' of the British worker as responsible for UK low productivity have pointed to the ageing capital stock and poor man­ agement practices (Nichols, 1 986). Both American and British research supports the view that organized labour has a positive impact on productivity, with unions forcing a strategy of continuous modernization and improvements - a high-pay, high-productivity, rather than low-pay, low-productivity route (Nolan, 1 992, Coates, 1 994: 1 14). Applying these European debates to transformation in CEE, Wilkinson ( 1 995) takes as warnings the free-market low-skill and low-pay British and US routes to economic progress, and argues the case for high labour standards, rather than unregulated labour markets, as the best guarantors of successful transformation. This is a start to a serious inclusion of labour as an active force in transformation.

Copyrighted Material

96

Transformation at Work

Before turning to labour, however, the remainder of Part 2 examines in more detail the nature of the capitalist regimes which have emerged over the past ten years. The next chapter examines the process of state divestment of large fums in the privatization process which has, in the main, tried to make capitalism without capital, in that formal property change has preceded any restructuring and far from aiding that process, has often hindered it. After a brief review of the various priva­ tization programmes of the Visegrad countries, the focus turns on the Czech voucher privatization scheme, which created major problems of corporate governance, and helped throw this promising ' transition' candidate into economic and political tur­ moil. The evidence shows that it is new investment, particularly by foreign compa­ nies, and not property form, which is significant for restructuring. The presence of MNCs in the region is one vital factor in shaping the nature of the evolving capital­ ism here. The other, however, is the political and economic power vested in exist­ ing managers, or the new political/financial elites - usually part of the old nomenklatura.

Notes 1 . The UN World Investment Report' definition of CEE is much wider than the spe­ cific reference to the Visegrad countries used here, and includes all of Eastern Europe, the Baltic states and the CIS. 2. I am indebted to Peter Gowan for this observation.

Copyrighted Material

5 Making Capitalism without Capital

The many roads to privatization According to neo-classical orthodoxy, liberalization - or the imposition of fman­ cial discipline - would force enterprise restructuring, with or without change in ownership. Such 'reactive restructuring', involving labour shedding, wage reduc­ tions, plant closures and the hiving off of social assets in response to hardening of firms' budget constraints was executed in the majority of firms early in the ' transi­ tion', irrespective of privatization (Carlin and Aghion, 1 996: 374; World Bank, 1996: 45). Yet, according to market dictum, property rights are nevertheless regarded as the necessary ' second step' 'at the heart of the incentive structure of market econo­ mies' (World Bank, 1 996: 48). Privatization was supposed to reform enterprise management and there has been a voluminous literature on it (Frydman et aI., 1 993, Frydman and Rapaczynski, 1 994, Earle et aI., 1 993, Estrin, 1 994). Accord­ ing to case study research (including my own interviews in the Czech Republic), most people in early transformation were keen believers in the property rights dictum, convinced that fmding 'true owners' would indeed rectifY their enterprises, and the economy as a whole. In each country, the construction of privatization policies was a highly politicized process, orchestrated by the state, and shaped largely by concerns with gaining political legitimacy. As Henderson et al. ( 1 995) show in the Polish case, state agencies and ministries became embroiled in power struggles to control the privatization process, as they changed from controlling to enabling institutions. However, in the end, the results were the same: the nominal transfer of ownership with no means to restructure what are usually neglected and debt-ridden firms, and control vested in enterprise managers, bankers or invest­ ment funds, whose power derives either from rapidly made spoils (often moved out of the country), or from their earlier position, which continues to rely on bar­ gaining with, or seeking protection from the state (Haynes, 1 996: 47 1 , Tatur, 1 995: 1 67). In this process, disillusion has set in, as too has the delegitimization of the state, which, as most commentators agree, was already weak and lacking in legiti­ macy at the start of transition under the cloud of the party/state past. Broadly, among the Visegrad countries, the most commonly used methods fall into three categories: sale to outsiders (the dominant method in Hungary), the voucher scheme as a popular give-away to the majority population (the dominant method in the Czech Republic, started though aborted in Slovakia after 1 994, and adopted in Russia) and a mixture of schemes in Poland, including ' liquidation'

Copyrighted Material

98

Transformation at Work

and a more recent mass-privatization scheme. In addition, restitution to former owners and management/employee buyouts are also used. In terms of formal prop­ erty transfer, privatization has advanced furthest outside the Visegrad Four (in Lithuania, for example, 60 per cent of medium and large enterprises measured as a share of value of former state owned fums), but among them, it is highest in the Czech Republic, followed by Hungary (Table 5. 1 ). In Hungary, the privatization process began in late 1 989 and early 1 990 in a case-by-case, 'spontaneous' approach, initiated by enterprise councils which, in practice, were run by enterprise managers (Frydman et aI., 1 993: l 30). Although this system became more regulated after the Law on Protection of State Property, and the creation of the State Property Agency in 1 990, the pattern has remained 'treatment of each transaction on its own terms rather than adoption of a set of strict rules applied to all of them' (ibid., 1 993: l 30). The process of privatization in Hungary was beset with institutional confusion and government power strug­ gles, with changes in emphasis dictated by economic and political crises: in 1 992, an Employee Share Ownership Scheme (ESOP) was introduced, but around 80 per cent of privatization income came from foreign investment. By 1 993, when the economy was in deeper crisis and the government was keen to buy popularity, a voucher scheme similar to the Czech one was introduced and the proportion of privatization through foreign investment fell to 50 per cent, as between I and 1 .5 million people joined the coupon scheme (Henderson et aI., 1 995: 1 0 1 ). This popu­ list ploy, however, led to a reduction in privatization revenues to the state, and with an ongoing fiscal crisis, the remedy was several major utilities sales to foreign buyers. The end result of the vagaries of the privatization process left below half

Table 5.1

Methods of privatization for medium and large enterprises at end of 1 995 in Czech Republic, Hungary and Poland (percentage of total).

Country Czech Rep. t By number By value: Hungary By number By value Poland By number

Sale to outside owners

Management -employee buyout

Equal access voucher privatization

32 5

0 0

22

55

38

40

7 2

3

14

Restitution

Other*

Still in state hands

9 2

28 3

10 40

0 0

0 4

33 12

22 42

6

0

23

54

*

Numbers in bold show dominant method in each country (data as end of 1 995). *Includes transfers to municipalities or social insurance organizations, debt-equity swaps and sales through insolvency proceedings. tNumber of privatized firms as a share of all fonnerly state--owned firms. Includes parts of finns restructured prior to privatization. 'Value of finns privatized as a share of the value of all formerly state--owned firms. Data for Poland unavailable. * Includes assets sold for cash as part of the voucher privatization programme through June 1 994. Source: World Bank, 1 996, Table 3 .2, p. 53.

Copyrighted Material

Making Capitalism without Capital

99

sold to outsiders (among which foreign firms played an important role), with a high proportion of enterprises still in state hands . Complex and diffuse cross own­ ership has continued further since privatization, leaving the incumbent manage­ ment elites with considerable control (Frydman and Rapaczynski, 1 994: 1 09- 1 1 1 , Whitley, 1 998). Polish privatization has been halting, with a range of privatization techniques, and public support for it declining (Frydman et aI., 1 99 3 : 1 77). As in Hungary, the initial government priority was to stop uncontrolled appropriation of state assets by ' insiders ' (ibid., 1 993: 1 8 1 ). Thereafter, using the model of the big privatiza­ tion share sell-offs in the UK , attempts were made to sell shares of previously 'corporatized' enterprises (state companies commercialized as share companies) through public offerings or internal buyouts (ibid., 1 99 3 : 1 8 1 ) - a method which proved disappointing, largely because neither institutional investors nor a stock of private savings existed to buy the shares (Hardie and Rainnie, 1 996: 1 26). Later, a sectoral approach described as a ' soft' industry policy resulted in the most suc­ cessful firms of a sector being sold off, as in Hungary, with the residue left with the state (ibid., 1 996: 1 29). A second method used was the sale or leasing of state assets without prior commercialization, called ' liquidation ' , because the former enterprise ceased to exist (Frydman et ai., 1 99 3 : 1 8 1 ). The method of leasing, via paying instalments over a period of five to ten years, with the participation of a substantial proportion of enterprise employees, proved one of the most popular and widespread methods of privatization (Hardie and Rainnie, 1 996: 1 27). But workers had little real control, in spite of forma1 employee share-ownership, largely because of the weakness of their trade unions: indeed, the fact that they were share­ holders was used as an argument to prove that they did not need unions, so that employee ownership became another smooth way to nomenklatura privatization (Tatur, 1 9 9 5 : 1 77). With the majority of property still in state hands, and the neighbouring Czech voucher scheme lauded as the fastest way to mass privatization, in 1 993, a mass privatization programme was agreed, in which fifteen National Investment Funds (NIFs) were established and were to be managed by consortia of international and Polish firms, to act as holding companies to restructure around 500 enterprises to be distributed between them. Each NIF would have 33 per cent of an enterprise's shares, leaving 2 7 per cent to be equally distributed as minority holdings to other NIFs, and the remainder held by the state and 1 5 per cent given to the enterprise employees. By mid 1 99 5 , contracts had been awarded to the NIFs, and the 300 companies shared out between them (ibid., 1 996: 1 27- 1 28). After the ousting of the Democratic Left Alliance in September 1 997, the incoming coalition of the Solidarity Electoral Alliance (A WS) and the neo-liberal Freedom Union (UW) planned to speed through plans already suggested by the previous government to sell off 1 00 state firms, while the UW pressed for faster privatization throughout the economy to raise the private sector share of GDP from 65 per cent ( 1 997) to 90 per cent by 2000

(BCE ' The

Annual ' , 1 997/98: 26).

The Czech privatization experience has been the most widely debated in CEE both because it was regarded as the success story of mass privatization, but also because it presented a case of bold experiment on ownership structure, corporate

Copyrighted Material

1 00

Transformation at Work

governance and subsequent impact on restructuring (Coffee, 1 996: I l l ) . The Large Privatization Act of February 1 99 1 set legal stipulations for the privatization projects of the 5,400 state owned enterprises (SOEs), which were to be a combination of standard methods, (e.g. auctions, direct sales,) and the voucher system (UNECE, 1 994: 1 66). Of the standard method, direct sales were originally discouraged, be­ cause it was argued that only past members of the nomenklatura or former black­ marketeers would have access to sufficient funds (Mejsti'ik and Burger, 1 993); nevertheless, at the end of the first wave of privatization (January 1 993), 45 per cent of proposals were for direct sales (ibid., 1 993: 1 3 ) and at the end of December 1993, 32 per cent of enterprise units were privatized through direct sales (UNECE, 1 994: 1 66). However, in terms of overall privatization, the voucher system was the fastest and the single largest method of privatization, responsible for 50-60 per cent of Czech National Assets (UNECE, 1 994: 1 66). This was implemented in two 'waves ', the first completed at the end of 1 993, and the second conducted in 1 994. The scheme entailed first the transformation of SOEs into joint stock com­ panies (,commercialization' or 'corporatization'), and the shares of these offered for investment vouchers. Every citizen over eighteen could buy a voucher book of 1 ,000 investment 'points' for 1 ,000 crowns (about one week's wages), and could either directly exchange these for shares in companies, or hand over part or all of the vouchers to an Investment Privatization Fund (IPF), which acted on their be­ half, with the voucher holders becoming shareholders of the IPF when the privati­ zation wave was completed. What none of the various approaches to privatization could resolve was the bald fact of trying to create capitalism without capital. None of the changes in ownership brought new investment, even ifnew 'know-how' could be more cheaply gained by management training. Enterprise restructuring was minimal, prompting the 1 995 World Economic and Social Survey to observe that, The macroeconomic performance of the transition economies became the prison­ ers of microeconomic disappointments. The question of policy makers in the tran­ sition economies was inevitably drawn to the question of enterprise behaviour. However different the speed and depth of economic reform, one key problem was common to all the countries in the transition. In none of them, even in the countries most advanced in their journey to a full-fledged market economy, have economic agents conformed to the model that the policy makers had in mind as their goal when they launched the reforms (UN, I 995a).

Czech privatization and the minefield of corporate governance Nowhere was this comment better illustrated than in the Czech Republic - then still lauded as the jewel of market transition. Among the initial concerns about Czech mass privatization were the questionable competence of the Ministry of Privatization in assessing the value of different privatization projects and the lack of new capital or know-how in a process of nominal state property divestment without new input (for discussion see Frydman et aI., 1 993, Kotrba, 1 993, PlanEcon,

Copyrighted Material

101

Making Capitalism without Capital

1 99 3 , Mej stfik , 1 992- 1 993, Mejstfik and Burger, 1 99 3 , Klvacova, 1 993, PlanEcon Report, 1 993). These basic problems were soon overshadowed by the unanticipated and poorly legislated rise of ownership concentration in the IPFs. IPFs were formed spontaneously early in voucher privatization, spear­ headed by the controversial Harvard Capital and Consulting (HC&C) I whose promises of guaranteed high returns to potential investors persuaded an ini­ tiaIIy apathetic public to embrace voucher privatization (Coffee, 1 996: 1 1 7). Joined by other IPFs, both ' independent' and bank managed, financial insti­ tutions came to dominate privatization. In the First Wave of the voucher scheme, 72 per cent of all investment points were entrusted to IPFs and the eleven largest ones accumulated more than one third of all investment points (UN, 1 993: 1 67). Although IPFs attracted fewer investment points in the Second Wave of 1 994, with 65 per cent of the total points, these organizations remain the main share holders. IPFs are limited to 20 per cent enterprise ownership, but further concentration is possible through a web of cross-ownership (Matesova and Seda, 1 994: 25, Kenway, 1 994). While some regarded IPFs as a welcome solution to the problem of ownership dispersion, others signalled a future of corporate governance which at best, was unclear (Matesova and Seda, 1 994, Takla, 1 994) and at worst, a poor combination of the 'outsider' system of US and British corporate governance, where fmancial institutions and trading in an active stock exchange are the major means of control, and the German 'insider' system which is heavily bank centred with thin equity markets (Marginson and Sisson, 1 994: 29). The first system was hampered by the poorly regulated Czech equity market, whose lack of transparency allowed a string of behind-the-scenes trading, leaving over half of all trade taking place outside the primary market (BCE, April 1 997: 50). As for the development of a committed ' insider' system, while some IPFs expressed an interest in taking control of com­ pany boards, banks, which are often the principal managers of IPFs, were found not to want an active role and lacked qualified representatives for board member­ ship (Matesova and Seda, 1 994). Their representatives on boards of directors ap­ peared to fall into three groups: those with little clue about the company in ques­ tion; those concerned only with personal gain from the company; and only one group - those with specialized knowledge relevant for improvement - which could promote restructuring (Ekonom, May 26, 1 994). Such fmdings were endorsed by more recent interviews held with company managers in the mid 1 990s, who ex­ pressed the view that fund representatives lacked any strategy or business plans, and that many resisted giving strategic directions to avoid involvement in any failure (Coffee, 1 996: 1 53). Further research found that many IPFs had no long­ term company commitment; in many cases, IPFs were attempting to supervise too large a portfolio of companies and suffered information overload. In such circum­ stances, they either handed over responsibility for decision-making to enterprise management, or, where they wished to show a strong hand, fired senior managers. Coffee's evidence (supported by case studies in this book) suggests that replacing one management team with another could become a substitute for any real strate­ gic direction for restructuring: ,

Copyrighted Material

1 02

Transformation at Work

. . . . the tendency to replace successor managers has continued, and some view it more as an indication of the board's inability to take any alternative step in re­ sponse to continued unprofitability (Coffee, 1 996: 1 54).

The voucher system thus incurred a conflicting role for IPFs: some were collective portfolio investment institutions concerned merely with the market price of their shares and their dividends, others were direct investors who were supposed to act as responsible owners (UNECE, 1 998, No. 2: 1 04). This particular ambiguity forced new regulation for IPFs in mid- 1 996, to allow them to choose whether to be port­ folio investors and be subject to tighter rules, or transform themselves into public limited companies, and avoid the regulation. Many opted for the latter (ibid., 1 998: 1 05). However, this did not deal with the most damaging aspect of the emergent hybrid insider/outsider system of corporate governance, which was the contradic­ tory motivation of bank controlled IPFs towards the enterprises in which they held shares. For while the banks controlled most of the IPFs, they did not themselves hold, directly or indirectly, significant equity stakes in the newly privatized com­ panies of their IPFs. Instead, they received a management fee as the IPF ' s agent, but did not share equity appreciation. This led to a fundamental conflict of inter­ ests within the IPFs, between the banks' interests as creditors, and as share holders with interests in long-term enterprise restructuring (ibid., 1 998: 1 08). The banks cultivated what most benefited their creditor relationship with the newly priva­ tized companies, producing a potential barrier to the search for other means of seeking money for restructuring, such as raising equity. The lack of legislation to create ' fire-walls' between the banks as lenders and the IPFs as share holders, created the possibility or probability of ambiguous mo­ tivation by IPF representatives on company boards. Research indicated that, with the shortage of business expertise, many bank controlled IPFs used bank employ­ ees as their company representatives, and only one, owned by the investment com­ pany Ceski Spoeitelna, had a clear rule not to use its parent company's employees on the boards of other companies it owned (Coffee, 1 996: 1 5 1 ). Further, the domi­ nance of banks' lending interests spawned dissenting factions on company boards as to which bank should be used as primary lender (ibid., 1 996: 1 54). Added to these convolutions was the fact that during mass privatization, the banks them­ selves were being privatized, with an unanticipated degree of resulting cross-own­ ership of banks owning each other via their IPF subsidiaries. Despite subsequent legislation to limit this, some have argued that the government tacitly co-operated with bank collusion in mutual cross-acquisition, as a protection against the suc­ cessful independent IPF, HC&C, from acquiring control of a major bank - a pos­ sibility which the state feared could lead to the 'looting' of bank assets (Coffee, 1 996: 148). That this was no idle fantasy, given the limits of legislation, was illustrated by a major fmancial scandal known as 'tunnelling' , a practice by which IPF s siphoned off assets from companies and robbing potentially healthy companies and their share holders. One example which drew attention to this practice was the reduc­ tion in an investor' s stake in Trend, an IPF which bought into Kotva, a Prague department store and one of the case study companies in this book. The case was

Copyrighted Material

Making Capitalism without Capital

1 03

examined, and several Trend directors, as well as Kotva management board members, were imprisoned. Meanwhile, Kotva shares were transferred to a Cypriot-based company, and since the directors of the IPF still had voting rights, they could continue ' tunnelling' from behind bars (BCE, May 1 997: 52). As our case study shows, this department store had been highly successful prior to privatization, in the mid 1 990s. Sadly, by 1 997, it was embroiled in post­ privatization scandal. Similarly, the US owned Stratton Investments, which in 1 995 was hailed as introducing industrial expertise and an example of strategic enter­ prise restructuring as it bought majority holdings in eight major companies (BCE, December 1 995/January 1 996: 52), emerged nine months later as no more than an astute asset-stripper, after merging with HC&C in 1 996 (BCE, October 1 996: 38). In the Czech case, initial superficial appearances of a return to its inter-war model of a German-style bank stake-holder system of corporate governance, turned out to be passive, inefficient or perverse company management. In the context of secrecy and speculation in an unregulated stock market, it led to 'power games being played, not industry being restructured' (BCE, May 1 996: 1 2). The bank lending boom, including poor credit decisions, together with fraud, led to eleven banks collapsing in the Czech Republic between 1 994 and 1 996 (BCE, September 1 996: 68). The dangers of insider collusion in the German system are not set offby long-term stake-holder interests in the context of a developing, volatile economy; in this context, the stock market transparency of the Anglo-Saxon system of out­ sider control might be more fruitful for the investment crucial to restructuring (BCE, October 1996: 49, 'Banking Survey'). As Zeman, the leader of the Czech Social Democratic Party (CSSD) argued, with lack of domestic capital and bank credit interest rates of around 1 6 per cent a year, voucher privatization led to the worst of all worlds of short-term horizons combined with a private sector weighted down by debt (BCE, 'The Annual' 1 9961 1 997: I I ).

Private accumulation, corruption and political embroilment Poor corporate governance has been part of the cause of failed transformation. It also provided ample scope for corruption and personal enrichment, without en­ couraging restructuring as the strategy for capital accumulation. It is fair to say that economists wedded to the notion that privatization is the necessary, if not sufficient, basis for restructuring, also noted the necessity for the state's role in legis lating for financial reform and corporate governance (Frydman and Rapaczinski, 1 994) and that the OECD's concerns with standards of probity in the region prompted the setting up of SIGMA (Support for Improvement in Govern­ ance and Management in Central and Eastern Europe) in 1 992, with support from the European Union's (EU) Phare Programme . However, as various privatization schemes have unfolded throughout the region, it has become obvious that not only has legislation failed, but that the legislators themselves were part of the problem. The routine malpractices of Czech privatization is only the tip of the iceberg of post-command economy corruption, which combines both the customary cheating of capitalism with the legacy of plan bargaining in which personal, informal deal-

Copyrighted Material

1 04

Transformation at Work

ings between managers and state bureaucrats was endemic. An annual world sur­ vey of perceived corruption levels by the aptly named agency, 'Transparency In­ ternational' (claiming to help governments tackle their corruption problems), found that in 1 997, of 52 countries, Russia emerged as fiftieth, while CEE occupied the middle ranks (BeE, December 1997/January 1 998: 26, 'Economic focus: corrup­ tion'). At the extreme is organized, violent crime, most notorious in the Russian 'mafia', but more widely, 'fraud, bribery corruption, influence peddling, political patronage and unethical business are endemic in the Czech Republic, Hungary, Poland and Slovakia' (BeE, December 1 995/January 1 996: 9). In countries without democratic progress, political patronage and corruption have been entrenched and endorsed by the state. Slovakia's dubious distinction among the Visegrad Four of an alarming lack of democracy, which damaged its chances of joining the EU and NATO (BeE, December 1 997/January 1 998) pro­ vides a contemporary example. The dangers of a nomenklatura business cabal congealing after the Slovak abandonment of voucher privatization in favour of management buy-outs, was initially minimized by journals generally favourable to free-market reform now disconcerted by the failures of Czech voucher pri­ vatization. These initially considered the Slovak approach 'grossly unfair, possi­ bly corrupt, certainly political, but it should work' (BeE, May 1 996: 1 3 , my emphasis). One year later, BCE took a very different stance, pointing out the cJientelist relationship between the new managerial elite of the Association of Employers' Unions and Alliances (AZZZ) enriched by the management buy-out scheme and the Movement for a Democratic Slovakia (HZDS) government, with Meiar's AZZZ acolytes controlling economic policy and the National Property Fund, benefiting from legal and fiscal favours and building a growth boom on huge foreign borrowing amounting to 48 per cent of GDP by 1 997. Now, quite apart from the moral aspects of the Meiar regime, concerns appeared that nepo­ tism was economically dysfunctional, leading to an investment hunger reminiscent of the command economy; estimates for 1 998 were that servicing the foreign debt would use up 30 per cent of the 1 998 state budget. Meanwhile, rumours emerged of mafia-like involvement in the huge VS steelmaker (Slovakia's second largest employer responsible for 9 per cent of GDP and 1 2 per cent of exports), with a mysterious decline in profit and 'haemorrhaging of money' in 1 997 (BeE, De­ cember 1 997/January 1 998: 47 'Survey of Slovakia' ; on a nomenklatura entrepre­ neurial class, see Eyal et aI., 1 997: 62). Where democracy is better developed, many cases of corruption at least came to light. In Poland, although business legislation is regarded as outdated and cor­ ruption occurs, a vigilant press, and the continuation from the pre- 1 989 era of a Court of Auditors tends to eventually reveal and penalize it (BeE, February 1 997: 38, ' Survey of Poland'). In Hungary, major scandals have involved senior political figures, such as the former privatization minister, Tamas Suchman, who had ex­ erted pressure on the staff of the State Privatization and Holding Company to hire a consultant who received illegal payment in 1 996, and was fmally subjected to a parliamentary commission (OMRI Daily Digest, February 1 9, 1 997). However, the Czech Republic, with its shady IPF dealings and banking crashes, boasts some of the greatest corruption; one of the most notorious cases was the so-called

Copyrighted Material

1 05

Making Capitalism without Capital Table 5.2

Czech Republic's macro-problems, 1 994-1 996.

GDP growth Trade deficit Current account deficit Capital account surplus Foreign direct investment Foreign portfolio investment

1 994

1 995

1 996

2.6% $0.7 bn $0. 1 bn $0.2 bn $O.9 bn $O.S bn

4.S% $3.7 bn $ 1 .4 bn $S.2 bn $2.6 bn $ 1 .4 bn

4.4% $6.0 bn $4.5 bn $4. 1 bn $ 1 .4 bn $0.7 bn

Source: National Statistics, Patria Finance, quoted BCE, April 1 997: I S .

'Liznergate' , in which Lizner, the head of the Centre for Voucher Privatization was arrested in October 1 994, caught in the act as he carried a brief-case of K 8.3 million ($320,000) a bribe from a businessman in a privatization deal of a dairy (OMRI Daily Digest 1 3 .9. 1 995). He was sentenced in October 1 995 to seven years in prison for taking bribes and abusing public office, a fme of one million koruny and banned from holding public office for ten years (OMRI Daily Digest, October 1 9, 1 995). Even more damaging were the media allegations which arguably broke the camel' s back of Klaus's government in December 1 997: the ODS had seem­ ingly accumulated a secret fund of $5 million in Switzerland, as a result of dona­ tions, forbidden by Czech law, as bribes from Czech and foreign companies for privatization deals (RFEIRL Newsline, December I , 1 997). -

Failures of the free market miracle: economic and political crisis in the Czech Republic The response of international capital to growing Czech financial scandal was un­ forgiving. While the free-market proselytizers castigated Poland for slow privati­ zation, and Hungary for poor macro-economic indicators, they were nevertheless forced to admit that foreign investors were less concerned with these issues than with the relative safety of their regulated stock markets. The Czech Republic 's early acclaim as the first entrant of the post-command economies to the OECD and first ' A' investment rating by Standard and Poor in 1 995 (BeE, December 1 995 'The Annual' : 1 3), was a short-lived stardom. One year later, concerns were expressed that ' Czech equity markets (were) lagging far behind other Central Eu­ ropean markets in attractiveness, mainly because foreign institutions (did) not trust the working of the market' (head of Austrian Creditanstalt Investment bank quoted in BeE, May 1 996: I I ). Financial crisis and the parlous state of voucher privatiza­ tion escalated into a full-blown economic crisis, in which faltering growth, a mush­ rooming trade deficit of 8.6 per cent of GDP in 1 996 (the eighth highest in the world) and a year of financial scandals including bank crashes, began to frighten global capital (BeE, May 1 997: 1 9) both FDI and portfolio capital dropped (Table 5.2). Czech privatization had not brought restructuring. While the trade deficit was blamed by some on a consumer boom in imported goods, the real problem was lack of competitiveness of exports (Amsden et ai., 1 994: 1 1 0 and discussion in -

Copyrighted Material

1 06

Transformation at Work

Chapter 4 here). The pertinence of lack of industry policy became glaring in the case of the Czech crisis and growing evidence that apparently successful transformation was built on sand, began to dent the Civic Democratic Party's (ODS) political influence. In the election of June 1 st 1 996, although the ruling ODS remained the single largest party with 29.6 per cent of the votes, the opposi­ tion C SSD, came a close second with 26.44 per cent. This was the beginning of a slippery downhill slope for Klaus. By September 1 996, an opinion poll found for the ftrst time the C SSD just ahead of the ruling ODS with 26.3 per cent to 26.2 per cent scores. In April 1 997, the government belatedly acknowledged the depth of its economic failures, with a series of emergency measures, including a Commis­ sion for Securities to oversee the capital market, to draw up new legislation and prosecute more swiftly, and a series of austerity measures to reduce the budget and trade deftcit (BCE, May 1 997: 1 9). With foreign conftdence in the currency plum­ meting, the Central Bank used up hard currency reserves to stabilize the crown, but was forced to devalue it by 1 0 per cent in June 1 997. Internal political crisis ensued, with the resignation of the Finance and Industry ministers in May (BCE, June 1 997: 1 7), government reshuffles and criticisms that political fudging pro­ vided no solutions from both the opposition C SSD and President Havel (Guard­ ian, May 28 1 997, p. 1 1 , RFEIRL Newsline, May 30, 1 997), and the narrow sur­ vival by just one vote of Prime Minister Klaus in a vote of conftdence in June (Guardian, June 12, 1 997, p. 1 6). But opinion polls found an inexorable decline in public conftdence; in May only 35 per cent of Czechs had conftdence in the gov­ ernment, only 1 0 per cent believed the country's transformation had been success­ ful, and 40 per cent thought Klaus should resign (Institute for Public Opinion Research, May 1 9, 1 997 and Factum Agency in RFEIRL Newsline May 20 and 2 1 , 1 997). Lack of direction and failure to reach agreement within the governing coalition brought the fmal political debacle. In November 1 997, the Christian Democrats (KDU-C SL) and the Civic Democratic Alliance (ODA) left the coalition with the ODS, and on November 29 President Havel asked the government to resign. The following day, Klaus formally handed in his own and his government's resigna­ tion, further weakening conftdence in the Czech currency and stock market. The immediate cause of his downfall came from within the coalition and the ODS itself; but as in the political crises of the fmal days of the command economy, it was failures in the entire political-economic process which forced the party elites to cede power. Although Klaus was re-elected as ODS chairman, he was widely discredited, with 74 per cent of public opinion poll respondents believing he should resign from politics (RFEIRL Newsline, December 1 2, 1 997). President Havel's appointment of the governor of the Czech National Bank, JosefTosovsky, as prime minister in the new caretaker government, sidelined both Klaus and the ODS, which was increasingly divided on broad direction and willingness to participate in a coalition. (RFEIRL Newsline, December 1 7, 1 997). An early general election was held in June 1 998, in which the C SSD won with 32.2 per cent of the vote, with the ODS winning 27.7 per cent, followed by 1 1 per cent for Communist Party of Bohemia and Moravia and 9 per cent for the KDL-C SL (RFEIRL Newsline, June 22, 1 998). However, with only 74 seats to the C SSD, and 63 to the ODS, and no

Copyrighted Material

Making Capitalism without Capital

1 07

viable coalition to form a majority government, the political prospects remained unstable. It took one month before President Havel fmally named Zeman, the leader of the C SSD, as Prime Minister on 1 7 July, and a functioning government was only possible with a so-called 'opposition agreement', in which Klaus (still head of the ODS) promised not to derail the minority government's policies, in return for taking the roles of speaker in both the upper and lower chambers of parliament, and the headships of key cornmittees (RFEIRL Newsline, July 20, 1 998). Whether the new government has any more room for manoeuvre than the Polish or Hungar­ ian 'left' governments is, of course, a moot point - unless the wider neo-liberal consensus begins to shift in Europe and globally. Yet a social democratic govern­ ment could alter the climate of relations between the state, capital and labour, and increase the legitimacy of the trade unions and tripartism. Despite the problems of lack of capital or know-how, the unleashing of poor corporate governance and the new opportunities for corruption, the search for 'bet­ ter' privatization has continued in CEE, with some claiming to have learned from others' mistakes. The Polish NIFs are supposed to be more regulated and focused than the Czech IPFs, with each having significant stakes in only 30 of the 500 companies privatized through vouchers, compared with around 200 of the 1 ,500 voucher privatized company per IPF in the Czech case (BCE, May 1 996: 1 3). However, Polish privatization has still been castigated as 'too slow', with 3,700 of 4,000 companies still owned by the state in 1 997 (BCE, April 1 997: 1 1). Plans to make pension funds new investors in 60 of the largest state companies were re­ garded as a partial solution, but were linked with the politically sensitive issue of pension reform, and would still be fmally fmanced by the population's long-term savings - and so run into the same ceiling on capital investment as other schemes without new equity. The Czech currency crisis of 1 997, followed by economic and political crisis, was subjected to post-mortems, in which the privatization scheme and poor corpo­ rate governance were regarded as major contributory factors (UNECE, 1998, No. 1 : 75-82). The recognition that it is fresh equity which is needed for restructuring was fmally forced on the Czech government as it struggled with crisis; after years of populist rhetoric that the voucher scheme was people's capitalism without sell­ ing the family silver to 'foreigners'. The summer 1 997 emergency measures in­ cluded proposals to ' fmish off privatization by selling companies to direct inves­ tors' (BeE, May 1 997: 1 9). IPFs not only wanted to sell their shares to foreign owners, but were increasingly encouraged to do so by company managers await­ ing the fmal 'true owner' to appear in the form of a foreign corporation: many Czech companies reserved 30 to 40 per cent of their shares for sale to a single shareholder (Coffee, 1 996: 1 56).

The real issues for restructuring and control: new capital, sectoral legacy and managerial experience The general irrelevance of ownership rights to restructuring seems to have been lost on policy-makers still searching for the 'right' privatization, but not on the

Copyrighted Material

108

Transformation at Work

academic community. Evidence from an overview of case studies on restructuring between 1 99 1 and 1 993 (Carlin et ai., 1 994 and 1 995) showed that all types of company, whether state owned, privatized, privatized by 'insiders' or 'outsiders' , engaged in reactive restructuring (meaning labour shedding, wage reductions, plant closures and hiving-off social assets), as a result of hardening budget constraints. Polish research in 1 990-9 1 showed state enterprises engaged in restructuring which went further than cost cutting to limiting inventories, tough negotiations with sup­ pliers, broadening of markets and extending product range. However, the 'reactive restructuring' of ST was damaging without investment, as discussed in the previ­ ous chapter: even in promising sectors and where management teams demonstrated long-term strategy, the effects of ST caused company decline. In Poland, this was found in supposedly internationally competitive sectors such as furniture and foot­ wear (Estrin et aI., 1 993 : 24); in the former C SFR, profits went down after the stabilization package, although fewer firms failed because of the paradoxically neo-corporatist legislation to prevent bankruptcy. It was shortage of funds, partly because of tough credit, which prevented progress, not property form (Pankow, 1 993). Recent research in Hungary likewise found that ownership was of minor significance for restructuring; rather, it was enterprises' fmancial health whether state owned or private - which determined the type and degree of change (Whitley, 1 998). In general, deep restructuring (substantial new investment, changes in technol­ ogy and/or management structures) was 'stronger in majority foreign owned fums' (Carlin and Aghion, 1 996: 374, italics in original). These early results were repro­ duced in later country studies; in Hungary, only privatized foreign owned fums showed signs of deep restructuring (Carlin and Aghion, 1 996: 379). Other studies have attempted to assess whether restructuring was affected by a distinction be­ tween 'insider' (workers and/or managers) and 'outsider' owned privatized fums. In Poland, three quarters of the 2,000 enterprises privatized through the 'liquida­ tion' method were 'insider' owned (Earle and Estrin, 1 996). The neo-classical prejudice that the ' social partners' would engage in 'destabilizing' activities to obstruct restructuring is challenged by case studies which found that when the Solidarity union was reinstated in state enterprises after the Round Table talks of 1 989, its members were active in enterprise reform in electing new worker coun­ cils, which in tum, re-elected or replaced new directors (in 20 out of 23 cases) on the basis of their commitment to take quick action to restructure the enterprise (Pank6w, 1 993). In Hungary 40 per cent by value were in 'outside' ownership, and in the Czech Republic, voucher privatization resulted in investment funds and in­ dividual voucher holders owning about half of medium and large enterprises by value, with only a negligible role for ' insiders' (Carlin and Aghion, 1 996: 374). But later results on any effects of 'insider' (,outsider' distinctions on restructuring were inconclusive, except for 'outsiders' in the sense of foreign owned fums. De­ tailed case studies of ten enterprises in food processing and textiles in the Czech Republic, found signs of deep restructuring only in foreign owned fums and one management buy-out (Capek and Mertlik, 1 996). Otherwise, as we have seen, 'outside' ownership in IPF blockholders often proved to be an obstacle to restructuring, not only due to ownership dispersion,

Copyrighted Material

Making Capitalism without Capital

1 09

but because of ambiguous interests. Carlin and Aghion suggest that the only rea­ son 'outsiders' may be more able to restructure than ' insiders' is because it is easier for them to raise equity ( 1 996: 38 1 ). This appears to be due to investors' perceptions and prejudices against ' insiders ', rather than anything to do with ' in­ siders" motivation or ability to restructure. As our own case studies will illustrate, ' insiders' (workers and some enterprise managers) were enthusiastic and informed about the possible lines of restructuring, but were prevented by lack of funds and conservatism among upper echelons of power. The overall fmdings for CEE, then, is that foreign capital, especially FDI, was the defming ingredient for 'deep' enterprise restructuring between 1 990 and 1 996 (Carlin and Aghion, 1 996). The crucial factors are, not surprisingly, availability of affordable investment funds, which foreign owners can provide, strategic manage­ ment, which has no necessary connection with ownership, and company legacy of success or failure. However, sector is also a key variable. MNCs tend to invest in already promising sectors, and whether in state hands or under local ownership, some sectors began on the route to capitalism in better shape than others. In the Czech Republic, for example, sectors which had a legacy of hard-currency ex­ ports, such as industrial glass, were well equipped with Western technology even before 1 989, and some companies, such as Skhirny Kavalier, successfully switched to Western markets, and became profitable with an experienced management team from former days. As our case studies show, in the retail sector, while major re­ structuring occurred in the US acquisition, Kmart, (though not necessarily of a successful sort, as we shall discuss), in the still state owned Kotva, which had the inheritance of a State Enterprise favoured with extra state investment, successful restructuring occurred under the direction of the former management team, only to be marred by the corruption faci litated by voucher privatization. In case studies of pre-privatization restructuring in Hungary, the sectors where finns seemed to be doing best were brewing, heavy chemicals, plastics and confectionery, while the worst were defence and glass (Estrin et aI., 1 993: 26). Where companies have embarked on any more than employment reduction, it is worth noting that the concept of 'deep' restructuring should not be regarded as particularly radical. In Hungary, Whitley's sample of 27 organizations in 1 993, and the follow-up in 1 8 of them, showed that, across all ownership types, change was incremental and conservative: peripheral units were disposed of, but in their central activities, neither new products nor new markets were pursued. The same applied to employment structures and policies (Whitley, 1 998: 23). In the Czech Republic, both my own and other case studies have found that, even when new managements have been installed to replace those tainted with the past, the com­ pany and sectoral expertise of the 'old-guard' is still needed, and many former managers are recalled to apply their former knowledge (Soulsby and Clark, 1 996a). In sum, as well as access to funds, sectoral success and managerial know-how has been more relevant for restructuring than property rights. Specialist company knowl­ edge, experience in supplier networks and customers, provides incumbent man­ agement with a strategic advantage in restructuring and providing leadership. However, whether managerial experience necessarily leads to capitalist restruc­ turing, and if so, by what means, remains a matter for further research. Managerial

Copyrighted Material

1 10

Transformation at Work

experience may lead to control, but the type of control remains controversial. Some argue for a theory of a new 'post communist managerialism' , in which a new mana­ gerial 'power elite' is based on its 'cultural capital' and remains unchallenged by a consolidated class based on ownership (Eyal et aI., 1 997). Further research in Hungary on the complex factors which affect the degree of management inde­ pendence from owners suggests this remains an indeterminate and evolving proc­ ess, with a possible increase in the late 1 990s of FDI owners' control over strate­ gic issues, but a loosening of owners' control in state and employee owned firms. Ownership influence on operational issues appeared 'as much a product of fman­ cial distress as of ownership type' (Whitley, 1 998: 1 1 ). There is also the concept of a new 'political capitalism', which points to the bargaining relations between economic actors (largely management elites, including MNCs) and the state, using informal pressures, exclusive access and personal networks (Tatur, 1 995: 1 67). This model is closely allied with 'clientele capitalism' and 'draws attention to the articulation of enterprise interests and political parties, in order to create personal power bases for political power (ibid., 1 995: 1 67). Elements of both these models emerge in the interweaving of party politics and patronage in the Czech Republic, not only in the visible scandals, but also in routine ways which are demonstrated in the case study in the Czech engineering industry below. How far these models of variations of the enterprise/state bargaining legacy remain the case, how far the presence of foreign capital subordinates these incipi­ ent patterns to the power of MNCs, and the hybrid forms which various combina­ tions might create, remains for future research. The next chapter turns to foreign capital and maps the rationales, sectoral pen­ etration and behaviour of FDI in CEE. It argues that MNCs benefit from invest­ ment in CEE as a new market, a future export platform to the EU, and as a valuable source of labour which is both well trained, skilled and cheap. Less clear is how far the host economies and their employees benefit from this.

Note I . Despite the ignominy of its founder, Kozeny, who was forced to flee the Czech Republic in 1 994 under the threat of an indictment for malpractice, HC&C remains an active and seemingly successful IPF (Coffee 1 996: 1 1 7).

Copyrighted Material

6 Western C apital in Central E astern E urope

Foreign capital in CEE Given the importance of foreign capital for enterprise restructuring, what is the extent of FDI in the region? Focusing on the ygegrad countries, we begin here by reviewing government policies towards foreign investment before and after 1 989, western companies' rationales for FDI, and its inflow and impor­ tance to the region. Since the mid 1 960s, especially since detente in the mid 1 970s, many East European companies had been linked to foreign capital by joint ventures and in­ dustrial co-operation agreements, with hard currency technologies paid for by lo­ cal products. These policies were central to modernization strategies, especially since the economic downturns of the early 1 960s, and were central to world-mar­ ket orientation of some segments of industry in countries such as Poland and Hun­ gary, where, however, they also incurred the growth of hard-currency indebted­ ness. From the 1 980s onwards, along with a world-wide relaxation towards FDI among host countries (including larger less developed countries such as Mexico and India), in CEE, legislation was also passed allowing equity stakes by foreign owners, so that post- 1 989, there was some continuity with previous policies ( Radice, 1 995: 285). After 1 989, the expectations in the West, as well as hopes in the East, were for a rapid exploitation of the new investment opportunities for Western capital with the fall ofcentral planning, in view ofthe deepening transnationalization of the global economy. While the main objectives for the East were for essential capital injections and technology, now, the need for international competitiveness also made the acquisition of capitalist management, marketing and financial skills essential. Incentives for foreign investment have included reduction in profit tax, in Bul­ garia and the former C SFR if foreign equity is over a certain limit, or total or partial tax holidays in some countries, often 1 00 per cent for up to five years in designated sectors, again subject to a minimum offoreign equity share (ibid., 1 995 : 287). However, privatization policies towards FDI have differed. Throughout CEE, FDI has been encouraged by host governments in strategically important sectors, and companies needing foreign investment to survive competition. It was encour­ aged most in H ungary, where it had a longer legacy and large-scale privatization company sell-offs took place. By contrast, in Slovakia a populist approach to the management buy-out scheme which replaced the voucher process was cool to­ wards foreign participation. Thus, ofthe 767 privatizations in 1 995/96, only seven

Copyrighted Material

1 12

Transformation at Work

favoured foreign applicants (BeE, December 1 995 'The Annual ' : 32; BeE, De­ cember 1 997/January 1 998: 44). Expectations of vast inflows of foreign capital to CEE were not met: annual inflows remained at $6.5 billion in 1 993 and 1 994 and by the beginning of 1 995 the total FDi stock was estimated at $22 billion (the same as Argentina), or 5.2 per cent of the region's GOP (UN, 1 995b: 99). However, by the end of 1 995, inflows had doubled to an estimated $ 1 2 billion, driven partly by major privatization projects and also, economic recovery in some countries, such as Poland and the Czech Republic (UN, 1 996: 64). By late 1 995, the CEE region accounted for 5 per cent of world inflows, compared with I per cent in 1 99 1 (ibid., 1 996: 64). The distribu­ tion of FDi in CEE has been uneven - the vast majority in Hungary, the Czech Republic and Poland (69 per cent of the region's stock in 1 994; UN, 1 995b: 1 00), reflecting these countries' industrialized legacies, and attractiveness to western capital in tenns of privatization, markets, locations and political stability. The 1 995 increase in inflows was spurred largely by major privatizations, with $3 .5 billion into Hungary and $2.5 billion into the Czech Republic. The 1 995 Hungar­ ian jump was largely the result of a large utility and telecommunications sell-off, and 60 per cent of the Czech inflow was due to the sell-off of SPT Telecom, and a major oil refinery (UN, 1 996: 66). The FDi inflow to the Czech Republic declined again to $ 1 .4 billion in 1 996, reflecting the fact that there was no major foreign privatization in that year, but possibly also its other economic problems. Trends in non-privatization inflows of western capital appear to coincide with domestic eco­ nomic recovery in the Visegrad countries: data show that once GOP growth is positive, FDi picks up (whereas in Russia, FDi appears to lead output growth; UN, 1 996: 66). Non-privatization FDi is much greater in Poland than in Hungary and the Czech Republic, and has shown a steady increase alongside growth in GOP; inflows to the latter two countries are expected to stabilize below that of Poland, after the last wave of privatizations (UN, 1 996: 66). Indeed, while Poland re­ mained an unattractive market for FDi in the early years of transfonnation, be­ cause of its relative poverty compared with Hungary and the then C SFR, by 1 997, buoyant growth was finally making the size of the Polish market attractive to for­ eign investors: Poland's population was 39 million in 1 996, compared with, for example, Hungary's 1 0.5 million and the Czech Republic's similar population. Although still poorer than these countries (Polish GOP/capita in 1 995 was $3,050, compared with Hungarian $4,273 and Czech $4,340), consumption has increased with higher disposable income and greater credit facilities (see Chapter 4, Table 4.6; also BeE, December I 996/January, chart ' Europe's Emerging Markets /97). Thus, in 1 996, $4 bill ion entered Poland in sectors such as cars, and trucks (with Poland regarded as becoming the car manufacturing hub of CEE), home computers and retail, bringing total FDi stock to $ 1 0 billion, and catching up with Hungary's $ 1 3 billion (BeE February 1 997 'A Survey of Poland' : 43). The trends in FDi from 1 99 1 to 1 995 are shown in Table 6. 1 . The major aim of Western investors has been the attraction of new markets in CEE, especially in view of recession in Western Europe, and the rapid growth areas of consumer non-durables such as tobacco (BAT, Philip Morris), detergents (Henkel, Proctor and Gamble, Unil iver), and food and drink (Nestle, B SN ,

Copyrighted Material

1 13

Western Capital in Central Eastern Europe

FDI inflows into Visegrad and selected countries of Central and Eastern Europe and their importance in the host economies, 1 99 1 - 1 995 ($million and percentage). Table 6.1

Stock

Inflows

%GDP 1 994

Country

1 99 1

1 992

1 993

1 994

1 995

1 994

1 995

Albania Bulgaria

56

20 42

58 55

53 1 06

70 1 35

1 30 263

200 398

7.2 2.6

CSFR

600

1 103

1462 291

1 479 678

654 2349 1715

878 1 144 1875

2500 3500 2510

2508 6434 4879

5008 9934 7389

7.0 15.6 5.1

40

77 700

94 700

340 1 000

373 2000

55 1 2400

924 4400

199

203

250

890

1 1 40

1 .9 0.9

1 966

3657

6600

6603

1 2757

20808

33565

Czech Rep. Hungary Poland

Romania Russian Fed.

Slovakia

Total*

7.2 3

*Total is to show all FDI in region and is for all 24 countries in UN 1 996 Table I l . l 0, not sum of FDI shown here. Vi�egrad countries in bold; countries outside are included to illustrate contrast in FDI flows and stocks. (Source: UN 1 996, Table 1 l . 1 0 , p. 64; for CSFR UN 1 995b, Table 1 1 . 1 1 , p. 1 0 1 ).

Parmalat, Pepsico) . The expanding service sector has also provided new op­ portunities for FDI in business, financial and personal service, such as insur­ ance, banking, management consultancy and accounting. Although services have not attracted as much foreign investment as manufacturing, because of the under-development of these sectors, the impact of F D I has been propor­ tionately greater. For example, in Hungary, FDI transformed the insurance sector in three years; by 1 99 5 , foreign capital accounted for 65 per cent of ownership in this sector, and 63 and 33 per cent respectively in the Czech Republic and Poland (UN, I 995b: 1 1 1 ). FDI has also entered airlines (Air France in the Czech Repub l ic), reta i ling ( U S Kmart, Dani sh Delvita), fast-food (McDonald's) and advertising (Radice, 1 99 5 : 294). However, not all of these investments remained in place, reflecting the volatility of the transnationalization process in terms o f factors such as host government policies and the global strat­ egies of inward investors: Air France withdrew from its alliance with the Czech airline, ( SA, in March 1 994, after failure to agree with the government' s plans over the future of ( SA (UN, 1 995b: 1 1 5 ), and, as one of our case studies shows, Kmart pulled out of all its thirteen department store acquisitions in the Czech and Slovak Republics, following its US domestic losses, and sold them to the English supermarket chain, Tesco, in March 1 99 6 (BCE, May 1 996: 32). Market growth has also prompted FDI in the backward infrastructure sector: the largest FDI to date in the region was in telecommunications with the 27 per cent stake in Czech SPT Telecom by PTT Telecom Netherlands and Swiss PTT U o intly called TelSource) in 1 99 5 (BCE, December, 1 99 5 ' The Annual ' : 27). Simi­ larly, Deutsche Telekom is active in Belarus, Hungary (where its joint ven­ ture with Ameritech and Matav constituted the single largest investment in that country), the Russian Federation and Ukraine (UN , 1 99 5 b : I I I ) .

Copyrighted Material

1 14

Transformation at Work

While finding new markets is the major FDI strategy in consumer non-dura­ bles, for consumer durables requiring skilled labour, the attractions of low-cost production in developments of the international division of labour (Frobel et aI., 1 980), is a key rationale for CEE expansion. Not all such activity involves the risks of FDI, however (Dicken, 1 998 : 233), and Western MNCs can move in to industries whose companies have been decimated with the collapse of the CMEA and foreipn competition. With the 1 990-93 recession, in textiles, clothing and footwear , lost home and CMEA markets and competition from cheap Asian im­ ports, CEE production dropped to 1 0- 1 5 per cent of pre- 1 989 levels. Recovery after 1 994 depended on subcontracting for West European labels, with the EU becoming Central Europe's most important trading partner for clothing and tex­ tiles: subcontracting accounted for 80 per cent of Poland' s clothes exports and 50 per cent of the Czech Republic's, with most going to Germany (BCE, December 1 995 'The Annual ' : 6 1 ). For some clothing companies, the process entailed modernization, as Western firms provided machinery conforming to their qual­ ity standards. However, they usually also supplied their own fabrics, which further undermined the indigenous textiles industry (ibid., 1 995 : 6 1 ). Furthermore, subcontracting to cheap labour is a transient phenomenon, as Western manufac­ turers seek lower labour costs - usually further east, to countries such as Ukraine and Romania. At the same time, however, some CEE clothing companies have succeeded in developing their own labels, and emulated the Western eastward subcontracting pattern, have themselves internationalized: by 1 995, Hungary's Styl was subcontracting to Ukraine, where wages are only 26 per cent of H ungary's, and Romania, and was considering the CIS, while Poland's Pr6chnik subcontracts to Belarus (ibid., 1 99 5 : 6 1 , UN, 1 99 5b: 1 07). Subcontracting and similar arrangements which minimize commitment and risk to Western firms, such as licensing, are not confined to low capital investment sectors, such as clothing. It is also common in chemicals, automotives, food, and increasingly, in precision engineering, computers and software (BCE, November 1 994: 30). In the Czech Republic, it was reported that 50 per cent of exports to Germany and Austria were based on such arrangements, with transport proximity a maj or facilitating factor, with similar patterns occurring elsewhere (ibid., 1 994: 32). The problem for subcontractors is that they not only face the risk of contract cancellation, but do not benefit from technology and know-how transfer, where these are expensive items for the Western client. Some companies, such as CKD in the Czech Republic (one of our case studies), maintained contractual relation­ ship with German companies such as Siemens and AEG in the hope of eventually establishingjoint-ventures. In this case, these proved to be false hopes. Once again, we see forms of the dependency relationship evolving a 'hub and spokes' pattern, as discussed in Chapter 4. For direct investment, CEE has become a low cost production base for heavy industry and engineering too, such as the vehicle industry (General Motors, Volkswagen, Fiat, Suzuki, Daewoo), power engineering (the Swiss-Swedish elec­ trical engineering conglomerate, Asea Brown Bovery (ABB); Siemens), glass (Glaverbel, Pilkington) and chemicals (Rh6ne-Poulenc) (Radice, 1 995: 295). Eu­ ropean MNCs planning production rationalization on a European-wide scale have

Copyrighted Material

Western Capital in Central Eastern Europe

l l5

been drawn to CEE's proximity to the EU, as well as early accession, which gives it the edge over other low-cost locations (UN, 1 996: 65). Thus, for example, ABB's CEE expansion, driven by its competition against Asian and US rivals, is built on low wage costs (with Polish and Czech rates about one tenth of wages in German subsidiaries) and the growing CEE market for ABB products to supply building the regional infrastructure of railways, airports, industrial plants and energy sup­ ply (BCE, April 1 996 ' Foreign Investment Survey' : 44). Between 1 990 and 1 994, 40,000 ABB jobs were lost in Western Europe and North America, while in CEE, Russia and Eastern Europe, there was growth of64 subsidiaries and almost 23 ,000 jobs, the greatest investment being in Poland ( 1 3 plants, 7,000 workers), the Czech Republic (6 plants, 7,000 workers) and Russia ( 1 4 plants, 3 ,000 workers) (BCE, April 1 996: 44). Further examples of FDI seeking low-cost production include furniture production (Ikea, Schieder), white goods (Electrolux), and car compo­ nents (Audi, Ford) (Radice, 1 995: 295). West European MNCs comprise some three-quarters ofFDI stock in Hungary and Bulgaria, two thirds in the Czech Republic, Poland, Slovakia and Slovenia, and over half in the Baltic states (UN, 1 996: 65) and the EU is also the most important trading partner for CEE. Germany is the single largest investor in CEE (and Russia), with 23 per cent of all FDI in the region (BeE, December 1 996/ January 1 997 'German Survey ' : 48). However, apart from two major acquisitions - DM I A billion for Czech Skoda in 1 99 1 , and Deutsche Telekom's part in the consortium which bought 30 per cent of H ungary's telecommunications mono­ poly, Matav, for $875 million in 1 993 - German F D I has been cautious and incremental. Seimens has gradually increased its investment in Poland (BeE, December 1 996/January 1 997 'German Survey' : 49) and experience in the Czech Republic of attempts to set up joint-ventures with AEG (as the case study of C KD shows, Chapter 9), shows preference for arms'-length contractual relationships where uncertainty prevails. The US is the second largest investor to CEE (ac­ counting for 1 5 per cent of its inward stock); Japan has so far shown little activity (only I per cent of the region's FDI stock) and has been overtaken by East and South-East Asian FDI, particularly Korean, which has expanded its earlier interest in skilled, low-cost production in EU locations such as Scotland and Wales, to Eastern Europe, with Poland its prime target, followed by Romania (UN, 1 996: 65; BeE, February 1 997 'A Survey of Poland ' : 42). MNC interest in CEE, both as a market and a low-cost production base for the EU, has prompted major competition in the strategically important automotive sector. In 1 99 1 , Volkswagen's (VW) $850 million acquisition of Skoda beat rival bids by Citroen, Renault, Volvo and GM, and in 1 992, Fiat bought Polish FSM both to produce its C inquecento model for the EU, and to gain control ofthe large domestic market. Similar motivation drove Korean Daewoo to buy Polish FSL in 1 994, to gain a foothold in that country and make it its European car manufactur­ ing headquarters, and then, in 1 995, to invest $ 1 billion in FSO, with whom GM already had a co-operation agreement (BeE, December 1 995 'The Annual ' : 5 7). In response to this, and to maintain its own hold in Poland, GM set up a greenfield manufacturing site (ibid., 1 995: 57). FDI activity has continued in Poland: in 1 997, Japan's Toyota was investigating Silesia to build a greenfield site for domestic

Copyrighted Material

1 16

Transformation at Work

and eastern markets, while Germany's Mercedes Benz invested DM800 million in a plant near Gorzow to make steering systems (BeE, February 1 997 'A Survey of Poland' : 45). There is some evidence of a slight shift in the level of discretion for CEE companies towards foreign bidders since the early 1 990s, when national 'crown jewels' were sold offor entered joint-ventures, such as Hungary's sale ofTungsram to General Electric, its airline Malev's link with Alitalia, the Polish chocolate and snack maker E. Wede l ' s sale to Pepsico, and the Czech j oint ventures of Volkswagen-Skoda, and Nestle/BSN with chocolate and biscuit manufacturer Cokohidovny. Since then, Western capital has found it more difficult to buy up profitable local companies. Examples include the successful Czech industrial glass company, Skhirny-Kavalier. With a legacy of hard-currency exports to the West, acquisition of state-of-the-art Japanese technology while still under the state com­ mand economy and strategic ownership after privatization, in which glass sector­ specific IPFs took it over, it built on its previous strengths. It had competitively priced quality products, increased exports to the West (50 per cent to Germany), and, after careful study of merger options with competitors such as Germany's Schott and US Coming Glass, decided to remain independent (BeE, September 1 995: 1 1 ). Similarly, the Czech engineering company, Skoda-PI zen, itself interna­ tionalized, and established subsidiaries in former East Germany, Russia, China, Brazil, Iran and the US (BeE, April 1 996 'Survey Foreign Investment' : 46). BCE's investigations (September 1 995: 1 0) suggest that management policy in CEE has become much more discriminating in terms of types of alliances sought and the benefits of new markets or access to technology. Governments have taken longer to choose multinational investors, particularly in infrastructure developments. For example, negotiations for Czech SPT were lengthy and achieved a much higher price than Hungary's Matav, partly because the Czech government had formu­ lated a more coherent and monopolistic acquisition. Similarly, it took two years for the Czech government to agree on the International Oil Consortium (Royal Dutch shell, Italy' s Agip and US Conoco) acquisition of two oil refineries (BeE, September 1 995: 39, 1 0). However, in the face of the huge power of major multi­ nationals once they are established in the area, the power of the nation state to influence the direction of restructuring is limited, as we illustrate in the case of VW in the Czech Republic. (The sectoral distribution and some of the key global companies active in the ViSegrad countries in 1 995 are illustrated in Appendix I I).

FDI and restructuring Despite the broad generalization that greatest restructuring has been accomplished by foreign companies, there is little systematic research which explores whether there are clear patterns emerging in terms of MNCs' country of origin effects on host firms, and the types of management, organizational and workplace change taking place. Nor is the critical question being addressed as to whether transnational activity in the region is helping to promote sustainable local economies, or whether mere assembly operations in MNCs' global operations are relegating the region to

Copyrighted Material

Western Capital in Central Eastern Europe

1 17

an unskilled, subordinate role in the international division of labour. This leaves us with piecing together information which does not necessarily ask these ques­ tions, but indirectly contributes some insights into the answers. By key measures of performance, such as sales and exports, companies with Western FDI have done better than domestic firms. In Hungary, where 9 1 of the top 200 companies have foreign ownership and 65 are majority foreign owned, sales of foreign affiliates increased by 47 per cent over 1 992/93, while domestic firms only by 3.5 per cent. In the Czech Republic, foreign affiliates among the 250 largest companies increased their turnover by over 20 per cent in 1 993, compared with 1 0.7 per cent for domestic firms (UN, 1 995b: 1 08). Exports have also been better, in spite of the fact that in the short term, capital imports by MNCs may have a negative effect on balance of trade; in Hungary, firms with foreign links in­ creased exports in all industries by 32 per cent over 1 992-93, while domestic firms' dropped by 8 per cent, and in the same period exports per employee were four times higher in foreign affiliates than in domestic firms (ibid., 1 995b: 1 1 2). Similarly, in Poland, while the average share of exports in sales for foreign affili­ ates was 1 5 per cent in 1 993, it was only 1 0 per cent for domestic firms. In some companies, FDI actually turned purely domestic sales into competitive exports: thus, Proctor and Gamble's 1 990 acquisition of the Czech detergent manufacturer, Rakona, turned it from a purely domestic producer into an exporter to fourteen countries (ibid., 1 995b: 1 1 3). While it is not always possible to separate invest­ ment effects from the fact that MNC's have 'cherry picked' those companies and sectors which were already successful, and usually in export sectors, foreign capi­ tal 's access to investment, technology, know-how (including marketing and man­ agement skills), as well as markets, all provide competitive advantage. Regarding the difficult-to-measure variable of productivity, some have argued that the importance of FDI in the Hungarian economy compared to other CEE countries accounts for its growth by some 1 3 per cent in 1 993, 1 8 per cent in 1 994 and 1 7 per cent in 1 995 (Austrian consultants Czipin and Partners, BCE, Decem­ ber I 994/January 1 996, ' Survey Hungary ' : 42). This is compared with the Czech Republic (with much lower FDI, and slower restructuring) where productivity was still in decline by I per cent in 1 993, and grew only to 3 per cent in 1 994 and 9 per cent in 1 995. However, productivity measurement and comparison is risky, and, as a British study has argued (Nichols, 1 986), tells little about restructuring which improves design, the organization of production and efficiency. In CEE, such productivity increases, where they do occur, may be achieved by ridding companies of previous labour hoarding - but this has been done without FDI by all companies as part of 'reactive restructuring'. It is possible that with foreign invest­ ment, this is accompanied by technical change and improved efficiency, but with­ out research into the restructuring process itself, such assumptions cannot be taken for granted. Once details emerge of the rationale's behind MNCs' 'deep restruc­ turing', the nuances as to what benefits the parent company and what improves local capital 's viability, become more complex - let alone what the impact on local employment levels and the quality of skills and work. The ripple-effect from foreign investors within their sectors may also spread beyond the immediate production environment, in terms of improving business services, spreading -

Copyrighted Material

1 18

Transformation at Work

management know-how, and by imposing competitive pressure on suppliers, dis­ tributors, wholesalers and retailers in their sector. But this is not necessarily so. Enterprises acquired by MNCs are restructured in accordance with the priori­ ties of the companies' regional and worldwide operations. As such, clear strate­ gies are put in place on production rationalization, supply sourcing, marketing, and management training and reorganization. The priority given to capital invest­ ment for modernization depends on sector and the MNC's globalization strategy. In the case of infrastructure investment, such as telecommunications, commitment to government modernization targets has brought rapid increase in network lines and digitalization, as well as management training in Czech SPT (BeE, September 1 995: 47). On the other hand, where market access is driven by introducing the investor's brand names, as well as increasing market share in the host country's existing products, as in the food industry, improving production may not be the main priority. Nestl6/BSN, who voted to increase dividends from its Cokoilidovny investment from Kc 5 in 1 993, to Kc 40 in 1 994, despite declining sales, gave themselves an early return before restructuring had created growth (BeE, April 1 996: 52). The Western MNCs were also accused of using the Czech Cokoilidovny existing sales network to sell their own brand names at the expense of local prod­ ucts, whose sales dropped, adding to the survival problems of the local company rather than resolving them. Another strategy, as will be seen in the case of the British-Czech joint-venture in brewing, is to use the kudos value of the local product - Czech beer - as an addition to its existing market portfolio. Here, the FDI priority is to focus on marketing and to increase market share, with minimal change to production. Little or no investment in technical change is made, which is left to local financing by bank debt, while profits are used to increase market share by buying more companies (see Chapter 1 0). Nevertheless, restructuring in terms of skill modernization and management training, particularly in the previously neglected areas of HRM, finance and mar­ keting, is regarded as one ofthe premiums ofFDI. All foreign investors in our case studies, as well as those reported in journals such as BeE, both locate their own management teams in the target company for several years, and finance sending local managers for training to the parent company. However, there is little discus­ sion in the transformation literature on the details of this process or the benefits of such training or change, the assumption being that all that is Western is beneficial, and all that is Eastern is best forgotten. In the literature on multinationals, there is a body of research which indicates several systematic differences in the effects of MNCs according to which country they are based in: US MNCs tend to be central­ ized and formalized in their approach to restructuring, with strong headquarters policy control; Japanese companies tend to rely on establishing a strong presence of expatriate managers, maintaining an 'ethnocentric' approach; and a European model suggests 'socialization' through 'acculturation' of key decision makers (Ferner, 1 997: 20-23). One of the key problems of this research for MNCs in CEE, where between three quarters and two thirds of FDI is European, is the fact that most of it has concentrated on US and Japanese investment, and ' European' companies are aggregated into a meaningless generalization. One potential ap­ proach to the CEE context is to develop the 'national business systems' treatment

Copyrighted Material

Western Capital in Central Eastern Europe

1 19

of MNCs, which relates national modes of corporate governance to MNC behav­ iour (Ferner, 1 997: 27). The 'outsider' Anglo-Saxon model (see Chapter 5, and Marginson and Sisson, 1 994: 29-3 3) tends to produce companies which concen­ trate on short-term financial performance, and which internalize financial risks, through complex formal financial control systems. The ' insider' German system, in which long-term bank credit and family ownership encourages evaluation in terms of long-term performance, tends to produce companies in which financial controls are less significant than more complex processes of expertise, technical efficiency and production-related criteria of performance. Thus, while British and American MNCs tend to have elaborate systems of budget setting and monitoring, German MNCs, rather like Japanese ones, tend to rely on informal, face-to-face assessment and control (ibid., 1 997: 27). When we come to the CEE host compa­ nies, what is of significance, is that the pre-command economy systems were close to the German model, and have persisted. One would therefore expect that Ger­ man, and other European MNCs with similar institutional systems, would find the CEE environment congenial to perpetuate the local approach, whereas American and British ones would attempt to import their own model. A similar analysis applies to MNCs' treatment of skill and work re-organization. Institutionalist analy­ sis would suggest that Anglo-Saxon companies would tend towards general, flex­ ible skills, with little formal accreditation (which includes the 'generalist' man­ ager, as well as the shop floor worker), whereas the German system (as well as the French) places much stronger emphasis on formal apprenticeship, theoretical as well as practical knowledge, and formal accreditation. At this stage of research on CEE transformation, case study research on these issues is rudimentary, and surveys on restructuring tend to lump together MNCs as 'foreign' (Whitley, 1 998). The case studies of US and British MNCS in the Czech Republic explored in Part 3 of this book tend to support the above thesis, but unfortunately, no German companies were included. At the same time, secondary findings, such as those on C okoladovny, suggest that sector may be as important a variable as country of origin of MNCs: NestIe/BSN (Swiss and French) displayed concerns with market gain and short-term financial returns, strategies which may over-ride national factors and which may be typical of the food industry. The literature on MNCs suggests that the employment effects of FDI can be both detrimental and beneficial (Marginson, 1 994: 67). The impact of FDI re­ structuring on employment levels is almost always negative, and in the context of the legacy of labour hoarding this may be especially so. C okohidovny closed four of its fifteen plants in a strategy common throughout the concentrated food sector, to narrow product ranges to a few key brands. Tungsran in Hungary cut 8,500 jobs after it was bought by General Electric, although it recruited 1 ,000 new employees in 1 994 with the success of its new product of energy-saving light bulbs (UN, 1 995b: I 1 3 ). In some cases, however, FDI may create jobs locally, as in Daewoo's Romanian auto joint-venture, projecting an increase from 3 ,900 workers to 6,200 by 1 998 (ibid., 1 995b: 1 1 3). However, since the very process of globalization is never static, such local projections should be read with caution. In the case of Skoda-VW, expansion has not taken the form oflocal Czech employment growth, but turned to a greenfield assembly plant in Russia in 1 995, to compete regionally

Copyrighted Material

1 20

Transformation at Work

in low-cost Skoda models with Korean investors such as Hyundai and Daewoo, and another assembly plant in India in 1 996 (BeE, November 1 995 : 25, BeE December 1 996/January 1 997 'The Annual' 1 996: 8). Of equal importance to labour as employment levels, is the impact of FDI restructuring on pay and the quality ofjobs, where MNCs can drive a hard bargain and have an 'exploitation effect', or improve conditions (Marginson, 1 994: 67). In CEE, Radice ( 1 995: 229) suggests that foreign owned companies tend to pay higher rates than local firms, although this seems to be more the case in managerial grades (including skilled engineering and technical occupations), where labour is creamed off, rather than in production grades. While reliable macro-information is lacking, case studies suggest that in semi- and unskilled jobs, such as in confectionery and retail, and even in the skilled end of brewing, MNCs make a careful assessment of the average market rate, and pay at, or only very slightly above this. This means that low pay is a sectoral issue and is as characteristic of foreign multinationals as it is of local firms. Where there are problems of high labour turnover, as in the Czech retail sector, or in telecommunications, where in 1 994 the turnover rate in Czech SPT's 24,900 low paid employees was 25%' (BeE, September 1 995: 47), the problems of poor training and poor service will not be resolved without pay increases. In manufacturing, the question of pay must be set in the context of the overall investment strategy of incoming Western capital regarding the type of production operations and skill levels being established. The key issue in the literature on multinational companies' impact on labour, is whether it merely promotes low­ skill assembly operations, or whether it provides benefits up- and down-stream in an entire manufacturing system, including design and research and supplier net­ works in the local economy. The establishment of off-shore production facilities importing components for re-export, with no benefits to the local economy, is a common strategy in the international division of labour (Frobel et aI. , 1 980), and characteristic of many greenfield FDI sites in Hungary (BeE, April 1 996: 42). For example, in the automotive sector, GM's arrangement with Polish FSO was a sin­ gle assembly plant with only a few thousand jobs (ibid., 1 996: 44). Greater commitment to the host economies is subordinate to the global market constraints of the company and its sector. This was vividly illustrated in the dis­ pute between VW and the Czech government and trade unions over its investment plans in its 70 per cent majority owned joint-venture with Skoda. Promises to invest DM7. 1 billion in a new engine plant, in exchange for a two-year tax holiday and a government commitment to pay off Skoda's old debts, were broken in re­ sponse to the 1 993 slump in the car market: the plant was cancelled, engines were to be imported from Germany, and the planned production target of 450,000 cars was cut to 340,000 by the end of the decade (BeE, March 1 995 'Together for­ everT : 8). At the same time, local suppliers were squeezed to cut costs, and the largest were forced into Western partnerships: around 60 joint-ventures and greenfield sites were established, with 1 5 wholly bought by Western firms such as ASB. While this spread of FDI into the supply network might be regarded as beneficial, the aim of VW was not to improve quality, but to guarantee bulk sup­ plies at low costs: many suppliers complained that they supplied at below cost,

Copyrighted Material

Western Capital in Central Eastern Europe

121

while they passed on the cost problems to workers by lay-offs (ibid., 1 995: 9). However, high skill areas were never locally developed: design and development, and complex electronics parts such as air-conditioning and power steering, were imported, and as newer, up-market models are produced, the local content will decline further (BCE, April 1 996 ' Foreign Investment Survey': 45). Thus, even where local supplier networks are maintained with FDI, the prob­ lem of local low-skill content remains and is likely to increase. This merely rein­ forces the trend that most ofCEE's exports to the West are based on low-technol­ ogy goods (as well as raw materials). As is well known in patterns ofglobalization, most multinational companies retain their R&D in their home countries (Marginson, 1 994: 66): Daewoo Electronics, while locating production in CEE, decided to retain R&D. In the automobile industry, where R&D is increasingly in component suppliers' sophisticated electronics research, this pattern will contribute to CEE's exclusion fTom high-tech production. CEE is already falling behind OECD coun­ tries in R&D, where both government and local companies are short of money: while the OECD average spending on R&D was 2.2 per cent of GDP in 1 993, in Hungary it was 0.78 per cent in 1 995 - down from 2.3 per cent in 1 988, with similar levels in Poland and Hungary (BCE, December 1 996/January 1 997: 27). Only some foreign companies, such as the British pharmaceutical firms Bristol Meyers Squibb, have built on the highly educated labour potential of CEE by setting up research institutes in Hungary, Poland and the Czech Republic, follow­ ing its manufacturing investment (ibid., 1 996-97: 27). The consequences, then, of FDI for the transforming economies are mixed: without it, new capital, know-how and technology would be difficult to come by, and as it is, the inflow has been disappointing. The stability of FDI in the region depends on the benefits of staying, and costs of moving elsewhere. MNCs only invest in the interests of their global operations and the benefits to the local economy are the subject of continuous fTiction between the investor on one side, and gov­ ernment and trade unions on the other. As for the impact ofFDI on the competitive environment, with some MNCs acquiring the major concentrations of production in some sectors, and pursuing yet further mergers, they have consolidated, rather than broken, conglomerate structures fTom state planning days. At the same time, the general effect of foreign capital has been wider than the immediate production or service environment, in terms of diffusion of management practices and ideas. Finally, the employment effects are ambiguous: the impact of FDI on pay, work­ ing conditions and skill levels, as in other parts of the world is likely to have both detrimental and beneficial effects.

Multinational companies and labour Hungary, which has had the highest level of FDI, also provides us with the widest range of case studies on MNCS and foreign joint-ventures (JVs). They highlight the strategic approach of MNCs to FDI in terms of market access, low labour cost and industrial relations approaches to achieve these ends. As other research on FDI shows, corporate culture as well as foreign investors' national industrial

Copyrighted Material

1 22

Transformation at Work

relations strategy influence the extent to which MNCs export their home prac­ tices, or adapts to local ones. B ut nationality is not a rel iable guide to atti­ tudes to trade unions, as the very m ixed p icture which emerged from a com­ pany survey by the Hungarian metal and electrical workers' union, VASA, in 1 994 (see Appendix I ll ). However, as Western research also shows, a key further distinction for indus­ trial relations is between greenfield sites, where employers have a free hand to institute policies 'from scratch' - usually in high-unemployment enterprise-zones, and established enterprises, where some form of labour organization and embed­ ded traditions already exist. In addition to the market access rationale, the case studies strongly indicate the strategic priority of maintaining a cheap but well trained labour force in CEE (Neumann, 1 993a: 9). Three companies provide contrasting pictures in 1 992, and two can be followed over time: Magyar-Suzuki, the JV formed in 1 99 1 with a Japanese company, manufacturing cars in a greenfield site in a depressed region (taken up later by Mak6 and Novoszlith, 1 995 and T6th, I 997a); Merlin-Gerlin­ Vertez, a French JV formed in 1 99 1 in the electrical component sector based ini­ tially in both Budapest and a provincial town (taken up later in T6th, 1 997a); and a Swiss confectionery MNC in Budapest and the provinces. 2 The policy of Suzuki in Esztergom resembled that ofNissan at its greenfield Washington plant in Tyneside, north east England. It similarly utilized the finan­ cial incentives of an 'enterprise zone' , established its own local supply chain (which was crucial in terms of the 'Europe Agreement' for EU exports discussed in Chap­ ter 4), imported its own culture, including morning gymnastics, and creamed-off the most skilled, young and fit workforce in a high-unemployment labour market (Garrahan and Stewart, 1 992). There were three times more applicants than places at Magyar-Suzuki in a region with 20 per cent unemployment (compared with the national 14 per cent average). Only workers with specialist qualifications (although Hungarian workers were subsequently regarded as 'too skilled') and aged between 20 and 25 (although this was later 'relaxed' to 30) were recruited (Neumann, 1 993b: 1 6). Suzuki was similarly intent on either a weak union or non-unionism and worker compliance. Whereas Nissan signed a 'single union' agreement with the AEEU which left no meaningful role to the union (Stephenson, 1 996: 2 1 8), Suzuki suc­ ceeded in excluding the union altogether, by refusing it entry to its premises (Neumann, 1 993b: 1 7). However, it was less successful in importing a Japanese work schedule and culture of company commitment than Nissan in England. This became dramatically apparent in 1 992, when the first group of apprentices on a six month training course in Japan showed they were not to be a naive, cheap Central European workforce happy to accept the latest capitalist management technique, but instead went on strike over pay and conditions. They showed clear awareness of wage parity issues, rebelling against receiving less than other Asian guest work­ ers, and finding the Suzuki working day one-and-a-halfhours longer than the Hun­ garian, wanted overtime pay. Perhaps embarrassed into action, the company even­ tually yielded (Neumann, 1 993b: 1 5). It was against this background, and the fact that returning strikers attempted to establish a trade union, that the company established a communication-only works

Copyrighted Material

Western Capital in Central Eastern Europe

123

council i n 1 992. But the dispute left a taste for obstinacy among the workers to­ wards the work intensity and enthusiasm expected of them, suggesting the deep roots of the former individual and group system of informal worker control prac­ tices (Burawoy, 1 985). Attempts to break local cultural norms by the Japanese firm included a new pay system, with bi-annual individual appraisal based on reach­ ing the monthly production target, and an ' attendance bonus', designed to combat the habitual absenteeism associated with work in the informal agricultural sector. Grudging compliance to other innovations, such as quality circles, left the researcher observing that 'the innovativeness ofthe "pig-headed" Hungarian worker does not always fit in with Japanese principles' (Neumann, 1 993b: 1 7). Later in 1 993, follow-up research noted that the works council had managed to adopt some worker representation functions, such as improved ventilation and free transport to work, but not in the critical area of wages. Although these had been initially increased above local labour market rates, by 1 993, young workers' pay had slipped back to only slightly above the national minimum wage. The un­ ion still failed to establish collective bargaining rights, with management firmly convinced that hours, effort and productivity were to be the only criteria of reward and intransigent towards workers' demand for an industry-level agreement, (Mak6 and Novoszath, 1 995: 266). Nevertheless, the metal workers' union outside began to recruit more members, attempted to annul the 1 992 works council election, which was i llegally held earlier than the date set by the Labour Code (T6th, 1 997a: 1 74) and entered a contlictual period in 1 993-94. However, in spite of the union gaining 36 per cent of a new works council vote, and demanding wage nego­ tiation rights, Suzuki simply ignored this, and continued to use the works council as a substitute for the union. The case thus illustrates a calculated collision course and imposition of a rigid model which appears to be fomenting opposition. There can therefore be no assumption that a 'green' labour movement (in terms of the capitalist employment relationship) is any worse at resisting Japanese or lean production work practices, than a 'mature' 'new-realist' union approach in the West: on the contrary, despite high unemployment, the H ungarian workforce demonstrated strong resistance to high exploitation. While capitalist managers might blame the ' lazy' Eastern European ways, it is interesting that in this case, the un­ ions were merely asking for compliance with the law, and Western social-partner­ ship - both regarded as essential for convergence with the West. The French electrical engineering JV, Merlin-Gerlin-Vertez, illustrates a con­ trasting corporate culture of attempting greater adaptation to the Hungarian envi­ ronment by 'cultural exchange' , not only in Hungarians visiting France, but French learning Hungarian. The policy of using expatriates for senior strategic manage­ ment, but a Hungarian for the actual ciperation of industrial relations, illustrates a policy of adaption to local norms, rather than imposition of an entire production­ HR system, as in the Japanese case. Consistent with a preference for regulated ' social partnership', both Merlin-Gerlin-Vertez and the Hungarian-Swiss con­ fectionery JV accepted trade union organization, annual collective agreements and a codified pay system based on job evaluation (T6th, 1 993 : 2 1 , Berko, 1 99 3 : 25). How real, or tokenistic ' social partnership' was in these cases is, however, a moot point. In both, major employment cuts occurred without obj ection from the

Copyrighted Material

1 24

Transformation at Work

unions, although the companies attempted to avoid disruption by some redeploy­ ment and 'natural wastage' . The introduction of new wage systems, which in the case of Merlin-Gerlin-Vertez, got rid of former seniority differentials, ignored local objections. And while all these companies awarded pay rises to all categories of workers (which increased differentials between the shop floor and manage­ ment), this did not prevent the Swiss JV from reneging in the following years on its promised inflation indexation: in 1 992, there was a zero wage increase, and in 1 993, one of 1 0 per cent - with inflation roughly double. Nevertheless, the exist­ ence of the institutions of collective bargaining in these companies, compared with their exclusion at Suzuki, provides at least the basis for developing trade unionism. Follow-up research at Merlin-Gerlin-Vertez showed continuing bar­ gaining between management and union, with the union chair on the company pay-roll, the union winning the works council election in 1 993 and union recogni­ tion granted at its new greenfield site in 1 995 (Toth, 1 997a: 1 72). In Hungary, the dual system of trade union and works councils (as explained further on), appears to be settling into a pattern similar to Germany, where in practice, unions dominate works councils. Where there is no union, employers tend to avoid works councils as well. Nevertheless, in an immature and fragmented trade union system, works councils provide a lever for management control over industrial relations, The current institutional rramework enables management to select, or at least to influence, with whom to negotiate, or to avoid negotiations altogether. . . Management has considerable scope to control or at least to influence works council elections in order to marginalize or derecognise the union, and has a strong incentive to do so

when pursuing a relentless cost-cutting strategy . . . Moreover, over-legitimizing the works council by accepting it as a bargaining partner may contribute to the marginalization of union organization (T6th, 1 997a: 1 76).

The Hungarian experience tends to validate fears among the unions elsewhere in CEE, that institutionalizing works councils in a weak labour movement envi­ ronment may undermine the trade unions. While the Japanese and European examples point to different approaches to transforming national command economy legacies, cultural contrasts should not be overdrawn, as the VASA union survey suggests. What is striking is the similar­ ity in the nature of industrial conflict in JV s where a determined strategy of labour cost reduction is being pursued. Despite different labour market backgrounds, with high unemployment in Hungary and negligible levels in the Czech Republic, and differences in inward investors, two similar disputes occurred. They highlight similar company strategies to depress labour costs by sub-contracting and the (predict­ able) extreme vulnerability of unions to resist. The cases are the only examples of strikes in MNCs in the first five years of transformation, the first in Hungary's national airline, Malev, in 1 992-93, and the second in the flagship Czech IV, Volkswagen-Skoda, in 1 994. The country of origin ofthe companies loses signifi­ cance as similar tactics of exploiting the local need for FDI were used. In the Hungarian case, the dispute was with the national carrier, Malev and its JV part­ ner, the US Lockheed Aircraft International, with the later inclusion of Alitalia in

Copyrighted Material

Western Capital in Central Eastern Europe

1 25

the core airline operation; none were anti-union firms, yet all were ruthless here. In the Czech case, VW had the German national institutional framework of unioniza­ tion and co-determination; again, these traditions had little purchase in t EE. In both cases, the disputes were triggered by grievances with the restructuring process itself, entailing a number of similar themes: the selling of the country's best companies on the cheap, reneging on company promises and outsourcing previously in-house work on less favourable terms than before. As is often the case, neither strike was embarked on eagerly, but reflected the accumulation of disappointments and embitterment over a wide range of issues. The disputes dif­ fered in duration, but neither were long: at Malev there were two phases, the first, a protracted confrontation over privatization and the formation of the maintenance - JV itself in 1 99 1 -92, and the second a two-day strike over pay in 1 993. At VW­ Skoda it was no more than a one-hour token stoppage in 1 994 over lay-offs. This difference partly reflects the greater industrial muscle of aircraft maintenance staff, who could paralyse the airline and airport. On the other hand, the auto assembly workers benefited from union unity, while the airline workers suffered from union division. At Malev, the first dispute was prompted by the company's decision to sub­ contract its maintenance work to a new JV, to be formed with a 50 per cent part­ nership with Lockheed. The policy - probably inspired by the worldwide fashion ofoutsourcing ' non-core' operations - was supposed to cut costs, while benefiting from US investment and modernization. The initial controversy revolved around workers' entitlement to information on, and involvement in, the privatization process - a problem which simply did not arise in the Czech Republic, where privatization excluded workers. Disagreement escalated over legal irregularities in the estab­ I ishrnent of the JV and workers' fears that the evasion ofproper privatization proc­ ess would eliminate their employment and share-ownership rights (Hethy, 1 995: 92). They were incensed at their exclusion from the privatization process, and feared deskilling, job loss and being sold out as cheap labour to the US firm (Mak6 and Novoszath, 1 995 : 268 ( Promises followed that due consultation would take place over such issues, but when the JV Aeroplex of Central Europe was signed as a Jait-accompli over the heads of the unions in January 1 992, the unions were predictably outraged, the betrayal embittering future relations. At this stage, de­ spite the Malev workers threatening not to join Aeroplex, they submitted since they would simply have lost their jobs. Further resistance was hampered by splits in the unions; originally, 80 per cent of the airline's workers were unionized, with 1 ,500 in MSzOSz and the rest of the 3,500 employees in LlGA and other inde­ pendent unions. After the division, those remaining in the parent Malev remained with MSzOSz and pursued different interests, particularly when the latter was pri­ vatized with a 35 per cent share sold to Alitalia in 1 993; at Aeroplex the outsourced maintenance workers joined an independent union, while the pilots and cabin­ crews formed separate unions (Mak6 and Novoszath, 1 995: 269). In 1 993, relations were 'normalized' at Aeroplex (after the sacking by the US manager of the active trade unionists), and a pay rise negotiated for the workers. However, the next dispute arose because the outcome of the outsourcing strategy did not live up to the parent company's expectations. Malev and Alitalia were

Copyrighted Material

1 26

Transformation at Work

dissatisfied with the speed and quality of Aeroplex's maintenance, although they expected costs to remain low. Aeroplex employees saw matters differently: in view of the new skills and work intensification demanded by dealing with new aircraft and greater air traffic, they challenged Malev's original cheap labour, high quality outsourcing tactic and demanded a near 200 per cent pay rise (Mak6 and Novoszath, 1 995: 272). Although this was gradually whittled down to 90 per cent, negotia­ tions with Aeroplex reached deadlock, and in August a seven day cooling off pe­ riod was followed by a strike threat. Malev threatened to bring in English mainte­ nance workers unless the strike threats were lifted, upon which the Aeroplex workers ceased work with 1 00 per cent support. Had the Malev pilots, who pursued a wage rise two months earlier with a warning strike, acted together with the maintenance workers, both groups would have benefited. As it was, it was only due to the soli­ darity of the International Transport Workers' Federation, followed by support from MSzOSz and the Federation of Workers' Councils, that the strike breaking stopped. In the end, the Aeroplex workers, who had in any cases suspended the strike after three days for fear of jeopardizing air safety, accepted a 35 per cent rise. Both Malev and Aeroplex, although themselves locked in unresolved con­ flict, had pursued a ruthless policy of depressing wages, which they successfully achieved, benefiting both from their strength as foreign JVs, and from the divi­ sions and weakness of the union movements they confronted. Sub-contracting as a cost-cutting strategy was similarly the fuse for the 1 994 VW-Skoda dispute in the Czech Republic and occurred even before VW expanded its original 1 99 1 stake of 3 1 per cent in Skoda to 70 per cent in 1 995 ( Financial Times', June 2, 1 995). Industrial relations here were a crucial signal to other workers employed by MNCs, involving an organized, elite industrial group, earning 40 per cent above the Czech national average, and organized by the metal workers' un­ ion, KOVO, one of the strongest and most active unions. Together with suppliers, VW-Skoda workers comprised 4 per cent of the Czech labour force. However, they faced a formidable adversary, with the JV enjoying a near monopoly of pro­ duction and the market in a sector which accounted for 22.5 per cent of all FDI in the Czech Republic (Charap and Zemplinerova, 1 993). The token one-hour stoppage of October 1 994 by 7,000 of the 1 7,000 direct workers was triggered by the laying off of 850 workers, the company's refusal to find them internal re-deployment, and increasing use of non-union sub-contract labour, which undercut union rates by one quarter (Prague Post, October 5, 1 994). As in the Malev dispute, the wider background was a betrayal of commitments regarding the privatization and restructuring process; whereas in the Hungarian cases this concerned worker exclusion from their legal right to involvement in setting the terms of the JV, at VW-Skoda it was union anger at breaking the bar­ gain that, in return for agreeing to a labour cut from 2 1 ,000 to 1 7,000, the com­ pany would build a new engine plant, raise production to 450,000 cars by the end ofthe decade with OM 7. 1 billion investment and a loan of OM 1 .4 billion. As part of this policy, it had promised to maintain or raise the skil l content of the surrounding supply chain in the local economy. In both disputes, the workers were concerned that new ownership would not damage employment levels, terms and conditions, or quality of work, but on the contrary would assist the process of '

Copyrighted Material

Western Capital in Central Eastern Europe

1 27

cl imbing out of technological backwardness. They were pursuing the much publi­ cized promises of deregulation and FDI in capitalist transition. As all analyses of development and FDI testify, both governments and workers were in an extremely weak bargaining position with global capital; without foreign investment they could not modernize, or they had to accept the terms on which it was offered. Skoda was in desperate straits in 1 990, with $500 million debts and no money for expansion, so the worry was not what would happen with takeover, but what would happen without it (BCE, March 1 995: 7). VW beat the other bid­ ders because of its expansion plans. The reality of globalization, of course, proved promises had to succumb to the market. VW's 'agreement' both with the state and the unions, had no contractual basis, and fol lowing the crisis in the motor industry in 1 993, it responded by slashing 9,000 jobs worldwide, closing one of its three SEAT plants in Spain, and imposing a four-day working in Germany. VW's Czech investment plans were halved to OM 3.8 billion, with no loan for a new engine plant. German engines were now to be used instead of Czech, the production tar­ get cut to perhaps 340,000 cars, and supply costs (60 per cent of company costs), were to be squeezed by insisting on western firms forming JVs with local suppli­ ers, on the assumption that they would provide cheaper bulk orders and be tougher on wages. Thus, the cost-cutting strategy would affect not only direct employees, but conditions in the entire supply chain; one local component manager was re­ ported as saying ' Skoda wants to take things as cheaply as possible . . . I don 't even want to talk about what they said might happen if we don't keep our prices down' (BCE, March 1 995: 9). Besides the cut-back at the main plant, what concerned the unions was the use of cheap, non-union sub-contract labour inside. VW planned to locate greenfield supply JVs at its Mlada Boleslav premises, taking 'just-in-time' production into spatial control. Suppliers were offered long-term contracts, in return for constant surveillance by the ' Pentagon' (as the unions described the military-like control of headquarters). Space for JVs on subcontract to VW-Skoda would even be pro­ vided inside the factory - something Western unions, and KOVO, resisted. Hence, the unions' fear of eventual substitution of sub-contract labour from the JVs, directly onto the assembly-line and suspicion that the lay-off of 850 might be the thin end of the wedge. Whereas Malev deployed the coercion of importing British strike breakers thus provoking international union outrage and solidarity - VW used the welI­ tested and less visible threat of moving production elsewhere. Against a one hour stoppage, it cited Mexico, where wage costs were the same as Czech, as a possibil­ ity. With Prime Minister Klaus chiding the unions for attempting to intervene in the company's long-term strategy which was 'not the union's role' (CEBW, Octo­ ber 2 1 -27, 1 994), both the government and the unions capitulated. The defeat illustrates the extreme weakness of organized labour in even this profitable divi­ sion of VW, j udged by the company president in 1 993 as the only one capable of undercutting Japanese competition (BCE, March 1 995). With skilled Czech work­ ers still only costing one tenth of the average German VW wage, it highlights again the centrality of cheap, skilled labour in the transforming economies of CEE to their competitive advantage. Even if relative world skil l levels could provide

Copyrighted Material

128

Transformation at Work

CEE workers with considerable bargaining strength, relative world costs in the international divis ion of labour prove a compell ing intimidatory weapon. The timbre of coercive language can be gauged from a Skoda spokesman: I'm not sure if the workers know this, but we have to work harder every day to make sure we retain our price advantage. We have high productivity, but the gap between our high productivity and low wages is closing. Wages are going up, so we have to move faster. There are places in China and India that are offering a workforce at $3G-40 a month [one tenth of Czech wages, AP] (BCE, March 1 995: 1 0).

The case studies show that while there are undoubtedly company and national differences in approach to FDI in transformation, in times of radical restructuring, it suggests that it makes little difference whether a company's home-practice uses 'social partnership' in routine industrial relations, or prefers union exclusion. This, of course, calls into question the meaning of 'social partnership' as a model to­ wards which European MNCs are converging in a New Europe.

Summary To end this section on the state and capital, we reiterate its main points: contrary to the hopes and expectations of laissez-faire policy makers, and the populaces who placed faith in them, the transformation of the post-command economies has led to massive recession and crisis. Subsequent privatization policies have tried to make capitalism without capital, and much of the financial and corporate misman­ agement has done more harm than good, and contributed to economic and politi­ cal crisis, as was vividly illustrated in the Czech Republic. FDI has brought in new capital, and more profound restructuring, although even this is incremental, with MNCs conservative in their investment strategies, which, as in all developing econo­ mies, are naturally dominated by their corporate growth concerns, and not those of the host economies. When the region is set in its recent re-insertion into the global and European capitalist political-economy, the evidence points to economic ' survival' premised on a subordinate position in the global division of labour, and within Europe, a dependent position far from the mirage of ' integration' on an equal footing. This process was shaped by global capitalist political and economic constraints im­ posed by the World Bank, the IMF and the EU. Nation states did, however, play some role, showing varying degrees of consent, enthusiastic in the case of Poland and the Czech Republic, more muted in Hungary, and opposed by populist nation­ alism in others, such as Slovakia. Compliance was rewarded and deviance pun­ ished. In future, it may well be that CEE governments will try further to challenge the World Bank's ' Washington consensus', and legislate for greater state involve­ ment in public funding and industry policy. Yet, to view alternatives either as obedience to the priorities of globalization or in terms of nation-state intervention is too simple. Analysis of national, neo-corporatist policies without close attention to the nature of labour institutions and organization, such as Amsden et al. 's pre­ scriptions, entirely misses the role of class conflict in the nature of the state,

Copyrighted Material

Western Capital in Central Eastern Europe

1 29

dismisses the class nature of state technocrats, and the fundamental difference for populations between authoritarian and democratically accountable states. If na­ tional governments attempt opposition via greater state intervention and industry policies, they require more than simply an electoral mandate: democratic proc­ esses of socially accountable policy need to be developed, and for this, civil and labour organization require legitimation, development and voice. Labour needs to enter the picture in other ways. The concept of 'globalization' must itself be deconstructed as a process both of competing capitals and of state, capital and labour relations. Multilaterals such as the World Bank are neither in­ different nor invulnerable to social upheaval, as testified by concerns with the ill effects of its structural adjustments programmes when 'unacceptable' levels of deprivation arise. In practice this vulnerability is an opportunity for intervention by organized labour. This can have multiple expressions, in industrial relations, civic organization and via national governments which can be pushed from below to shift policy away from free-market precepts. In the wider process of globaliza­ tion, international labour organization is a harder task, given the weakness of na­ tional labour movements. The analysis of transformation at national level cannot, then, be confined to the capital-state relationship: labour, its organization and interest representation, and the processes of consent, compliance and conflict must be probed. It is to these developments that Part 3 turns.

Notes I . These were the region's most important cheap-labour exports to the West (Radice 1 995: 295). However, the typical form of global sourcing in these sectors is subcontracting, so with internationalization, trade moved from exports of finished products to integration into MNCs' European subcontracting arrangements 2. Although Japanese investment in CEE is minimal, accounting for only I per cent of FDI in 1 995-96, it is nevertheless valuable to explore, both because it may presage further investment and because it provides an opportunity to examine attempts to diffuse practices of 'lean production ' in a command economy industrial relations legacy. 3. Neumann ( 1 997: 20 I ) notes that Ministry of Labour (under the Socialist Govern­ ment) was in 1 996/97 discussing amending the Labour Code to harmonize with EU 'trans­ fer of undertakings' legislation to protect workers in cases of change in ownership.

Copyrighted Material

Copyrighted Material

PART 3

Labour

Copyrighted Material

Copyrighted Material

7 Trade Union Politics and Worker Representation

The politics of trade unions and workers' councils Throughout post-war CEE, the system of communist labour relations followed a similar model of 1 930s Soviet ' socialist emulation' , with trade unions as political 'transmission belts' and their president automatically a member of the Party Cen­ tral Committee, with direct contact with the state apparatus (Hethy and Kyloh, 1 995: 7). The planned-economy enterprise bargaining system was an alliance of unions with management against the state, to extort the best plan and most re­ sources. Inside the enterprise, the unions were integral to the hierarchic adminis­ trative apparatus and supervised political correctness, together with CP cells. En­ ergy concentrated on output, plan fulfilment and operational problems and after the war, the unions spearheaded the industrialization drives: in Poland, a 1 949 statute specified the chief task of trade unions as the stimulation of the working class to carry out production plans, increase productivity and intensifY competi­ tion for the constant improvement of the national economy (Hardie and Rainnie, 1 996: 70); in Czechoslovakia, unions organized 'production challenges' , ' shock brigades' and ran national productivity competitions to 'rebuild the Republic' (Bloomfield, 1 974: 1 32). However, as we saw in the discussion of revolt and reform (Chapter 2), the uniformity and despotism of the Soviet model did not obliterate the experiences of post-war workplace radicalization, or stop outbreaks of opposition to the party/ state machine, price rises and falling living standards. Without legitimate expres­ sions in trade unions, these were channelled into the self-management movement and workers ' councils - attempts which were contained by concessions at various crisis points which instituted party controlled Enterprise Councils. These reforms left their mark on different orientations within the labour movement to self-repre­ sentation, particularly in Poland and Hungary. In Poland, the aspiration for self management as a 'third-way' to both the com­ mand system and capitalism, remained a radical strand at the workplace. Solidari­ ty's Left (whose activism went back to 1 968 student activists) took the opportu­ nity of the strengthening of workers' councils through the decentralization reforms of the later 1 980s, as an opportunity to form Self Management Republic Clubs in 1 98 1 as a possible model for a Polish social democratic left alternative, while the conservative, pro-capitalist wing, grouped around Walesa, wanted capitalism and

Copyrighted Material

134

Transformation a t Work

recognition of Solidarity as a trade union. The split was eclipsed during martial law by the campaign for Solidarity's legalization, and after 1 989, the Walesa group took control, and expelled the left (Nowa Lewica, April 1 995). In Hungary, the NEM of 1 968 conceded that divergent interests might exist even in communism and the term 'reconciliation of interests' was coined and conceded greater scope for collective bargaining at the workplace, and thus established a model of regula­ tion of conflict earlier than elsewhere (Hethy, 1 995a: 79, Csak6 et aI., 1 994). At the same time, the workers' self management movement remained. In 1 989, two major tendencies competed for hegemony in the workers' council movement, similar to the split in Polish Solidarity: one suggested they should be vehicles for workers' ownership via democratization and decentralization, the other that they should become Western-type trade unions to oust the old communist ones. The contro­ versy ended when the right-wing MDF coalition won the first free election of 1 990, and the National Confederation of Workers' Councils (MOSZ) killed-off the idea of workers' self management and became part of the new pluralist trade union system (Andor, 1 996: 70). At another level, however, the enterprise council legacy continued to play an important role in workers' interest representation during capitalist change. Indeed, their elimination became a key element in imposing capitalist control of the enter­ prise. In Poland, the 1 98 1 Law on Self-Management remained in place in the 1 990 Law on Privatization (Frydman, Rapaczynski, Earle et aI., 1 993 : 1 59), and they remained maj or workers' institutions with veto powers which could block privati­ zation of SOEs. However, this was soon undermined by government strategy to reduce resistance to privatization by offering workers inducements to participate in it, while weakening their collective strength. After 1 99 1 , statutory workers' councils were dissolved in 'corporatized' (state-owned joint-stock or limited li­ ability) companies and replaced with workers' preferential share ownership, wage ,l rises (through a 20 per cent reduction in the restrictive ' popiwek excess wage tax), and, as elsewhere in CEE, some management representation (ibid., 1 993 : 206, Hardie and Rainnie, 1 996: 1 34)). The 1 993 Pact on State Enterprises in Trans­ formation, was a complex agreement covering the instruments and processes of privatization, the financing of state enterprises and legislation on social issues, such as establishment of a Guaranteed Wage Fund which would compensate em­ ployees if an enterprise became insolvent, a social insurance fund, and reform of the Labour Code in health and safety areas (Hausner, 1 995: 1 1 0-1 1 5). It was partly a response of social compromise to the wave of strikes in 1 992, but mainly a strategy to gain agreement on comprehensive privatization and thus elimination of the bulwark of workers' strength - the state enterprise. In return for privatiza­ tion, workers were to obtain the right to 1 0 per cent of free shares, another 1 0 per cent at preferential rates, membership on the Supervisory Board and a representa­ 2 tion of one on the Board of Directors . The Pact foundered after the government which had created it was ousted by the Democratic Left Alliance (SLD) in 1 993 (see below). Privatization did not increase dramatically, so that by 1 995, 5,400 enterprises were stil l in State hands (64 per cent of the 1 990 number). This left a substantial sector of the Polish economy still operating with the statutory system of workers' councils.

Copyrighted Material

Trade Union Politics and Worker Representation

1 35

However, the concerns that workers' councils were an impediment to capital­ ist transformation seem largely to have been misplaced. There is evidence to sug­ gest that Polish workers had strongly internalized support for capital 's interests, and that the councils did not express separate workers' interests (Havlovic and Moore, 1 997 :-262, Ost, 1 996). How far this situation will remain is a moot point in 1 998. In the meantime, the right-wing coalition government formed after the Sep­ tember 1 997 election revived the pre-occupation with speeding through privatiza­ tion, with the free-market Freedom Union (UW) keenest, and the more populist Solidarity-based A WS more divided over the issue (BeE, ' The Annual' 1 997! 98: 26). In Hungary, Enterprise Councils were re-elected in 1 990 and remained until state enterprises were corporatized (i.e. became share companies), prior to priva­ tization. These could influence enterprises' business strategies, elect and dismiss chief executives, and after a 1 99 1 decree, had a duty, together with management, to inform workers of privatization plans and their implications for wages and wel­ fare (Hethy, 1 995c: 85). The enterprise council legacy had an important role in raising workers' expectations on their legal rights of information and co-determi­ nation in restructuring issues, which could provoke disputes if these were breached - as in some of the MNC disputes cited in the previous chapter. However, as in Poland, enterprise councils were abolished with privatization, and replaced by worker representation on a third of the Supervisory Boards' seats (Hethy, 1 995c: 84). In contrast to Poland and Hungary, the role of workers' councils had far less importance in post-communist Czechoslovakia. Post-war factory councils, along with the brigade system, were incorporated early on as organs for raising ' socialist consciousness' (Cziria, 1 989: 83) and cynicism towards 'pseudo-participation ' became widespread (Fisera, 1 978: I I , Vlacil, 1 99 1 ). In the liberal economic re­ forms ofthe mid 1 960s, workers were reluctant to adopt yet more powerless enter­ prise committees (Selucky, 1 988: 49), although once these ideas took hold in the summer of 1 968, democratically elected workers' councils and demands for self management went far beyond the original intentions of limited workers' participa­ tion rights and continued after the August Soviet invasion. The post- 1 968 ' normal ization ' again imposed tight bureaucratic control, and even after the 1 988 State Enterprise act re-invented Enterprise Councils, these were under the firm grip of the communist unions, the ROH. They were dissolved again in April 1 990. As elsewhere, Supervisory Boards were instituted and the 'worker collective' was initially given half the seats (Rychetnik, 1 992: 1 2 1 ), although this was re­ duced to a third under the privatization legislation ofthe Commercial Code. Hence, the lack of reforms and short-lived Autumn 1 968 experience of industrial democ­ racy meant that, unlike in Hungary and Poland, workers had fewer expectations of ) legal rights in decision-making in the privatization process . The initial appeal of popular involvement in privatization via the voucher scheme diverted them both from seeking to influence the process at work, and even from having much interest in employee share options - issues which were much more critical in Poland and Hungary.

Copyrighted Material

1 36

Transformation at Work

The changing role of trade unions While workers' councils and co-detennination were defeated, even the prevalent right-wing governments in the early years of transfonnation had to concede to the liberal capitalist principles of fonnal institutional representation for labour in in­ dependent trade unions: in all post-communist countries, new legislation amended the old Labour Codes and has confonned to international labour standards on freedom of association, the right to strike and (fonnally at least) the right to free collective bargaining - in Hungary in 1 989 and Poland and Czechoslovakia in 1 99 1 (Hethy, 1 994: 32 1 , Lad6, 1 994, Thirkell et aI., 1 995: 1 4, Csak6 et aI., 1 994: 60, Kulpinska et aI., 1 994: 1 1 0, Burianek et aI., 1 994: 94, Pollert, 1 998). Collective bargaining has of course taken on a new significance from its past under party-union control, when annual agreements were confined to social issues such as training, health and safety, housing, kindergartens, distribution of holidays and transport to work (Petkov and Thirkell, 1 99 1 : 1 24). Legal provision under the Labour Code had been the central tool of employment regulation, together with the highly codified national wage tariffs system, which was based on seniority, qualifications and sector. In practice, at enterprises level, wages were allocated from a wage fund, and distributed by the departmental manager and foreman to individuals or collectives, a process which involved infonnal 'bargaining' in the case of skilled and strategically important individuals or work groups, but could be dictatorial for weaker groups (Burawoy, 1 985, Haraszti, 1 977). The command economy incentive systems had much in common with capitalist control methods, although always strongly ideologically driven by the Party. The original Soviet model emphasized in the Five year Plan begun in 1 929 used the principle of 'so­ cialist competition', in which brigades competed in cost-cutting and efficiency, and used collective fonns of reward and motivation. Later in the 1 930s, individu­ alism gained favour with Stakhanovite drives in efficiency, similar to the Taylorist emphasis on effort and minute divisions of labour to increase worker productivity. It was in this period that ' worker heroes' as leading workers became key to the production drive (Petkov and Thirkell, 1 99 1 : 29). Despite these various fonns of controlling the labour process, at the macro-level, the shortage economy distorted the ultimate aims of 'socialist' efficiency and industrialization (as discussed in Chapter 3). At enterprise level, workers' pay packet held a different significance for living standards from the wage in capitalism. A low-wage system with narrow differen­ tials was supplemented by a relatively large social wage provided by State benefits and subsidies, which supported a basic standard of living. At the same time, both ' fringe' benefits and wages were politicized. There were income privileges for Party members and higher wages in heavy industry and mining, sectors ideologi­ cally esteemed as building the ' Peoples' state' and perpetrating the image of the male heroes ofthe manual working class. Real income differences were also based on the well-known system of infonnal mechanisms, such as extra earnings in the infonnal economy, the internal contract system in Hungary, and infonnal wage bargaining, making for the typically individualistic and atomized shopfloor. With the arrival of capitalism, these practices did not disappear overnight.

Copyrighted Material

Trade Union Politics and Worker Representation

137

Nevertheless, price deregulation, removal o f State subsidies, company hiving off of social assets such as cheap housing and recreation facilities, quickly meant that the wage took on the same importance as in the capitalist West. In this context, and with the formation of independent unions, wage bargaining took on a new ur­ gency, of defending plummeting living standards, and carving out new labour markets, as over-developed sectors, such as heavy industry declined, and new ones, such as services, expanded. For the new unions, a problem (which emerges in the case studies recorded in Chapters 9 and l O) is the survival of former individualis­ tic worker strategies, which are now encouraged with the rapid diffusion of West­ em capitalist techniques of individualizing the employment relationship. The dan­ ger exists for the nascent labour movement, and the success of future collective bargaining, that old atomization will make a seamless transition to new individual­ ism. On the other hand labour has demonstrated that it will not submit passively either to new demands from multinational companies, or to the neo-c1assical tran­ sition agenda, as the instances of industrial unrest show (Chapters 6 and 8).

Union division and political immersion The restructuring oflabour representation has been an expression of a new politics of trade unionism. The old communist trade unions have been democratized and there has been a proliferation of new ones (Moerel, 1 994, Kyloh, 1 995). Change has taken place both in inter-union power relations and in union relations with political parties and the state. The new union structures after 1 989 fell into three broad groups: the reformed former communist trade unions, such as M SzOSz (National Confederation of Hungarian Trade Unions) in Hungary and OPZZ (All Polish Trade Union Alliance) in Poland; the newly created unions, which include Solidarity NSZZ, and in Hungary, LIGA (League of Independent Unions) and a number of others; and the former unions which were democratized with newly elected leaderships and regulations, but retained old structures and even buildings, such as the Czech and Slovak Trade Union Confederation, CSKOS. The roots of division lie in the pre- 1 989 revolt and reform period in Poland and Hungary, which inadvertently stimulated the formation of anti-communist, independent unions, the basis of later union competition. In Poland, the threat of Solidarity to the social order stimulated General Jaruzelski to set up a rival, single worker organization by forming the OPZZ from the original communist Central Council ofTrade Unions (CRZZ) in 1 9 8 1 182, during martial law. Solidarity, forced underground, harboured further grudges against OPZZ, which became the benefi­ ciary of its seized assets. When it came to legalizing Solidarity in the 1 989 Round Table discussions, Jaruzelski's trump-card to retain power, was to immediately provoke inter-union division by interpreting union 'pluralism' as giving which­ ever union was larger at enterprise-level, representation rights for all. The issue of assets (including money and property, such as union centres and holiday resorts), was only partially resolved in some compensation to Solidarity in 1 989190, and still continued to be deeply contentious in 1 996 (Bartosz, 1 996: 4 1 ). Although there is some evidence that inter-union co-operation exists at workplace level (Kloc,

Copyrighted Material

1 38

Transformation at Work

1 993, cited in Hardie and Rainnie, 1 996: 92, Bartosz, 1 996: 44), the two union centres remain deeply hostile, with Solidarity presenting itself as more 'genuinely Polish', and OPZZ characterized as the 'martial law bastard' (ibid., 1 996: 44). In Hungary, the political reforms in 1 988 under the last communist N emeth government allowed trade union pluralism and two new confederations were formed in addition to the traditional communist SZOT (National Council of Trade Un­ ions), in 1 988/89: the Democratic League of Independent Trade Unions (LIGA) in 1 988, the Federation of Workers' Councils (MOSZ) - the off-shoot from the work­ ers' council movement, and a small group, Solidarity, which remained insignifi­ cant (Andor, 1 996: 70). However, these were not recognized for consultation pur­ poses in the new tripartite National Council for the Reconciliation of I nterests (NCRI) established in 1 988, and recognition as well as political hostility became bones of contention (Csak6 et aI., 1 994: 64). Further fragmentation developed with the division ofSZOT into four confederations in 1 990 (Andor, 1 996: 70): the Confederation of Autonomous Trade Unions (ASZOK), the Confederation of Intel lectual (or white collar) Trade Unions (ESZT), and the two largest con­ federations, the public sector based Co-operation Forum of Trade Unions (SZEF) and the dominant National Association of Hungarian Trade Unions (MSzOSz). Rivalry now divided these successor unions as well as the new and old (Csak6 et aI., 1 994: 69) and weakened the ability of organized l abour to challenge maj or restrictive economic policies when they were enforced. Only in Czechoslovakia was there no competition between 'new' and 'old ' ; here, the old unions were replaced by new ones i n 1 989 (Myant, 1 993, Hethy, 1 994). A peaceful transition was implemented by a co-ordinating body formed out of the 6,000-odd strike committees from the General Strike of27 November 1 989 which helped overthrow the communist regime. In March 1 990, with the backing of strike threats from large factories, an All-Union Congress abolished the old Revolutionary Trade Union Movement (ROH) and established a democratic Czech and Slovak Confederation of Trade Unions (CSKOS), in which a Czech-Moravian and a Slovak chamber were created in April (CMKOS and S-KOS ), and a sepa­ rate entity took over and distributed the ROH assets between the confederations and the unions (CSKOS, 1 992, Myant, 1 993). CSKOS became the largest union body, consisting of 63 member organizations - 2 1 federal, 20 Czech-Moravian and 22 Slovak unions, organized on industrial or occupational lines. In addition, a 1 4-union, 1 00,000 strong Confederation of Art and Culture (KUK) was formed, a 50,000 strong Trade Union Association of Bohemia, Moravia and Slovakia with old communist party leanings formed in 1 99 1 , a Christian Democratic grouping, and, as in several other countries in CEE, autonomous unions for particularly pow­ erful groups such as train drivers. In spite of a new, democratically elected leader­ ship, there was continuity in organizational structures and, at some lower regional and most workplace levels, union personnel as well (Brewster, 1 992). Member­ ship too initially remained stable, with CSKOS claiming nearly seven million mem­ bers - 80 per cent of the active labour force - in 1 990, although this soon began to decline, with overall density dropping to between 68 per cent for manual workers and 50.8 per cent belonging to CSKOS in 1 99 1 (Myant, 1 993). However, while inter-union rivalry did not plague the new system, the separation in January 1 993

Copyrighted Material

Trade Union Politics and Worker Representation

1 39

of the CSFR into separate Czech and Slovak states - the final denouement of the ' shot-gun' marriage of 1 9 1 8 - upset union developments as federal structures had to be liquidated for independent Czech and Slovak institutions, C MKOS and KOZ-SR. The problem of inter-union confederation division has thus dominated the de­ velopment of industrial relations in Poland and Hungary which has been dogged with confrontations over legitimacy, representativeness and union assets (MacShane, 1 994 : 343, Hethy, 1 994: 3 1 7). By contrast, in Czechoslovakia and latterly the separate Czech and Slovak Republics, union competition has not been a major issue, although new union confederations have also been formed. In Po­ land and Hungary, the deep ideological antagonisms between reformed commu­ nist and new unions has also found political expression in the blurring of politicalI industrial relations roles and party political alignments, which has precipitated internal union conflicts of interests (Thirkell et aI., 1 99 5 : 1 7). The politicization oftrade unionism is most marked in Poland, where Solidari­ ty's active political role in the democratic revolution raised its mass appeal to messianic stature, while its accession to the political elite in government and its pro-privatization and free market stance deeply compromised its worker represen­ tation role as a trade union (Deppe and Tatur, 1 997: 249). It was for this reason that Solidarity 80 split off from Solidarity NSZZ in 1 990, ignoring the Round 4 Table agreement and returning to the original trade union constitution of 1 980 • Its high point was during the Upper Silesian miners' struggles against rationaliza­ tion and closures in 1 993, and it continued to oppose the ' left' government's free­ market policies. However, it was much smaller than the union/movement/party Solidarity NSZZ, which drew strength from its anti-communist rhetoric, its politi­ cal profile and the populist charisma of Walesa, who was re-elected as Solidarity president in 1 994. The OPZZ faces less internal tension as to its identity, but has also been compromised as a trade union. Initially, it became a real workers' union, since Jaruzelski's ploy to use it as a tame weapon to neutralize Solidarity back­ fired, as OPZZ became independent of management, starting with the organiza­ tion of the Lenin Works in Nowa Huta under the leadership of M iodowicz, chairman of OPZZ from 1 984 to 1 990 and a former Solidarity member. This ex­ ample spread in ' social committees' at section and factory level, to regional and industry organization (Bartosz, 1 996: 40). However, its ability to organize work­ ers - already undermined by division from Solidarity - was derailed by its own politicization after the ex-communist socialist party, the SLD, emerged as victor in the 1 993 elections. The OPZZ had been among 35 other organizations which had established the SLD in 1 99 1 192, and with 70 union members of parliament, was open to subordinating workers' interests to those of the SLD's policies of economic and political stabilization (Hausner, 1 995: 1 2 1 , Bartosz, 1 996: 43). With the SLD following the same neo-c1assical policies as its predecessor (bar some slowing-down of privatization), the OPZZ's political loyalty condemned it to im­ potence as a union; although it possibly moderated some policies and succeeded in giving workers a bigger stake in privatization, it capitulated to 'economic ne­ cessities' such as the dismantling of social services and reduction ofpensions (ibid., 1 996: 44). In effect, the political polarization and loyalties ofthe two unions meant

Copyrighted Material

1 40

Transformation at Work

that they switched sides after the change of government (Dittrich and Haferkemper, 1 995 : 1 48). In Hungary, union character and political allegiances have a different history. Whereas Solidarity in Poland grew as a mass political opposition to the old re­ gime, the LlGA and Workers' Councils emerged as rank and file challenges to management-incorporated trade unionism at workplace level, and enjoyed grass­ roots support, well qualified and committed leaders and a willingness to enter confrontation where necessary (Deppe and Tatur, 1 997: 250). They were trade unions first, anti-communist second. Yet their latter identity attracted the patron­ age of the liberal and conservative parties, the AFL-CIO, the US Treasury and the World Bank for possible co-operation (Andor, 1 996: 72); such political tutelage undermined radical, rank-and-file policies, such as the Workers' Councils' de­ mands for employee ownership as the answer to privatization, and pushed the new unions politically to the right. Militant unionism was politically conservative. The opposite happened with the reformed communist unions. On the one hand, SZOT's legacy was management incorporation and even resembled company unionism after the 1 980s decentralization reforms, which gave enterprises substantial au­ tonomy (Deppe and Tatur, 1 997: 249, Toth, 1 994). Yet while its successor unions perpetuated the legacy of incorporation in state enterprises, they were more op­ posed to the conservative government's introduction of hard budget constraints and privatization than the new unions, and j oined their managers in bargaining with the state for extra resources. Although this resembled the old plan-bargaining alignments, in capitalist transformation it acted in defence of workers' interests. Further, because of the mass base of the main successor, MSzOSz, it had greater representative strength, and was more of an industrial threat to the government. While the new unions had footholds in some sectors (railways, local transport and public health) and some companies, they failed to encroach on their opponent's territory, and lacking muscle, failed to grow, while their rival, although originally enjoying less legitimacy, gained support from its opposition to government policy and from its greater weight. As in the case of Poland, the government exploited the rivalry: the Antall government's strategy was to weaken MSzOSz , by assisting the new unions, and in doing so, pushed the reformed communist union further to­ wards the socialist opposition parties (Hethy, 1 995: 95). Only in the Czech Republic is the union confederation deliberately politically non-aligned; the only union leader who entered the 1 996 parliamentary election stood as an independent, although informally, closer links have grown with the Social Democratic Party as the unions gradually radicalized from the mid 1 990s onwards. These specific institutional inheritances of division compound the much wider problems of reconstructing workers' interest representation in the restoration of capitalism. Independent trade unionism has not re-appeared on the crest of a con­ fident labour movement, but one at a low ebb of European recession, union marginalization and fragmentation. While western international labour institutions support the nascent East European movement through advice, inclusion in interna­ tional confederations and secretariats (Mac Shane, 1 994 : 345), solidarity at lower levels is less forthcoming, with CEE cheap, skilled labour posing a constant threat

Copyrighted Material

Trade Union Politics and Worker Representation

141

to Western jobs and pay. For the transfonning unions there i s the ideological di­ lemma that capitalism has been the goal of democratic struggle. As one Czech union leader put it, the unions are 'schizophrenic' : they must 'support the refonn process' but 'do not like certain aspects' . For the unions whose raison d'etre was the defeat of communism, such as Solidarity or Podkrepa in Bulgaria, once that aim was achieved it became difficult to find direction. For the official Solidarity, the embrace of capitalism has riddled it with contradictions as representatives of labour. On the other hand, the refonned communist unions had the different prob­ lem of carving out a new identity, and, faced with members surfeited on political ideology, had to find a language untainted with excessive fervour, devalued tenns and slogans in general (Mac Shane, 1 994: 359). Meanwhile, with an ideological vacuum for building trade unionism into a workers' movement, nationalism and xenophobia are potent alternatives (Sylwestrowicz, 1 995: 35, Haynes, 1 996: 478, Deppe and Tatur, 1 997: 246).

Tripartism: paternalist neo-corporatism? Because of the danger of social unrest, and in order to encourage new institu­ tions of stability and democracy, bodies such as the International Labour Organi­ zation (itself a tripartite body) encouraged the development of tripartism in the transfonning economies. Even conservative governments in Hungary and Czecho­ slovakia recognized early on that it was in their own interest to forestall social upheaval and share the responsibility for maj or economic sacrifices with 'social partners' (Hethy and Kyloh, 1 995: 6), while later on in Poland the 1 994 Social 5 Pact was an attempt to legitimize privatization and restructuring • For the trade unions, too, tripartism was a useful step in re-Iegitimization. It made them visible. Further, top-level, state activity was easier and faster to implement than the longer and more complex task of lower-level refonns, and fitted with their new political role in the absence of mass involvement in political parties (Thirkell et aI., 1 995: 1 5), as well as reproducing fonner party/state union involvement. Hungary was the pioneer of tripartism in 1 988, when the Nemeth government recognized SZOT for consultation purposes, and in summer 1 990, when the Na­ tional Interest Reconciliation Council (NCRI) was institutionalized, all four suc­ cessors to the old union, plus the two new ones, together with nine employers' organizations, were invited onto the Council to enter consultation for the Annual General Agreement (Hethy, 1 995: 82). The establishment of tripartisrri obliged the government to consult with the social partners on social and economic policy, delivered the basic features of a 'social safety net' (the minimum wage, social and labour market policy, unemployment benefit) and fonnulated the basis of new employment and collective bargaining legislation in the new 1 992 Labour Code (see Hethy, 1 995 for a detailed account\ It was the NCRI' s successful settlement of the October 1 990 crisis of the taxi and lorry drivers' blockade (triggered by a sudden rise in the petrol price) which brought tripartism to real prominence in Hungary, and some argue that without this, it would have remained in the shadows (Hethy, 1 995: 88). Subsequently, when MSzOSz threatened the only general strike

Copyrighted Material

1 42

Transformation at Work

of the transition years, in May 1 99 1 , against threatened price increases in energy, transport and other basic necessities, the national channel of iegitimate social dia­ logue put enough pressure on the government to force concessions (Andor, 1 996: 7 1 ). However, in spite of its contribution to 'social peace', the NCR! did not contain real corporatist substance in permitting union intervention in the priva­ tization and economic transformation process (Deppe and Tatur, 1 997: 252). The tendency for government to control tripartism was exacerbated by union rivalry, which diverted energy from concerted bargaining with the state. But in spite of apparent state control, the real weakness of tripart ism lay in its lack of room for manoeuvre when a government attempted social democratic policy. When the so­ cialist government more sympathetic to social partnership came into office, it buck­ led under external pressure to enforce austerity measures, and followed the same neo-liberal policies as its forerunner rather than come to a compromise with la­ bour through genuine dialogue. After 1 995 tripartism was greatly attenuated, its remit narrowed from general social policy to public sector employment (Deppe and Tatur, 1 997: 264). In the CSFR, a national tripartite council, the Council of Economic and Social Agreement (CESA), was formed during the liberal phase of Civic Forum in Octo­ ber 1 990, at federal and republic levels, based on the co-operation of the maj or union confederation, CSKOS and the professional confederation, KUK. It began as a federal institution, but after the 1 993 split of the CSFR, separated into Czech 7 and Slovak National Councils. The three partners comprised seven government ministers (including the prime minister and the minister of finance as the chair), seven trade union representatives (six elected by CMKOS and one by KUK) on the basis of one representative for every 600,000 union members, and seven mem­ bers ofthe Council of Business Associations ofthe Czech Republic (KORP), bring­ ing together the large business associations and private entrepreneurs. In contrast to the H ungarian developments, the institutionalization of tripartism was not ham­ pered by union division and rivalry which could be exploited by the state. Like its Hungarian counterpart, the CESA had only an advisory, consultative function with no legal status or real influence on fundamental government policies (Orenstein, 1 994: 1 7), but it differed in having fewer other formal tripartite institutions, such s as Hungary' s Social Security Boards . Regional tripartite bodies arose spontane­ ously in 1 992, especially in declining economic areas, such as northern Moravia and Ostrava, but with no formal links with the national tripartite structures (Brokl and Mansfeldova, 1 993, Mansfeldova, 1 995). The Annual General Agreement, first introduced in January 1 99 1 , was the forum for the social compromise package for a low-wage, low-unemployment policy: the unions were given a seat at the tripartite table, with social policies to cushion the fal l in real wages and the impact of unemployment. But in return, they were expected to make financial 'sacrifices' . There were thus struggles over the minimum wage, over a wage tax policy (as with the Polish 'popiwek'), wage in­ dexation and social and employment policy. But the unions won successes, such as the Law on Collective Bargaining of December 1 990, which established 9 the right to free collective bargaining , the right to strike and protection from dismissal as a result of striking. As in Hungary, the government attempted to

Copyrighted Material

Trade Union Politics and Worker Representation

1 43

introduce works councils modelled on the German system, but in this case, was prevented by united union opposition, on the grounds that such a dual worker representation system would weaken an immature union movement. The Czech CESA came under increasing strain following the 1 992 election victory ofthe conservative Civic Democratic Party (ODS) under the leadership of Prime Minister Klaus. The government used its constitutional right to over-ride the General Agreement, including the renewal of tight wage regulations, against the wishes of unions and many employers, and failed to honour the 1 993 General Agreement to legislate for broadening industry-wide agreement to enterprises which were not themselves signatories to them. The unions thus refused to sign the 1 994 General Agreement until a compromise was reached, giving limited broadening of branch agreements. Similarly, a compromise was reached over threats to remove civil servants and other public sector employees from union representation rights. By 1 995 it was clear that the government was increasingly keen to dismantle the tripartite structure and to withdraw from future ones. The 1 994 General Agree­ ment was the last one signed, following annual deadlocks over major issues; after this, there was failure to agree, the interval between meetings of the tripartite bod­ ies became longer and longer and they lost any operational value, particularly as the Government sent low-level officials without the authority to make decisions. However, after 1 997, faced with deepening crisis, pressure from the social partners and strike threats by unions increasingly disaffected with falling real wages and failures of the reform process, the government reinstated tripartism. The new tripartite body established in autumn 1 997 was now called the Council for the Economic and Social Accord, with the same scope as its original forerunner, but 'o with a renewed structure aimed at reviving its activities . Whether the Social Democratic government elected in the June 1 998 elections is any more able to establish social dialogue than the Hungarian Socialist Party remains to be seen. Poland was a latecomer to formalized social dialogue in order to overcome resistance to further free-market measures and privatization. The fate of tripartism has swung precariously with the vagaries of party politics, demonstrating at an­ other level the integration of the political process and trade unionism in that coun­ try. In 1 993, the Solidarity-led government edged towards a tripartite consensus on the future oftransformation by establishing a ' Social Pact' , which offered guar­ antees of minimum security in return for continuing the economic 'reforms'. The trade unions were sceptical, Solidarity NSZZ preferring to use its privileged po­ litical position in direct intervention within the government and OPZZ fearing loss of credibility with its members if seen to associate too closely with the govern­ ment. It also doubted whether a Pact would alter transformation strategy, or merely legitimize it, as it did in Hungary. The government itself was split between those who supported the Pact as a means of yoking Solidarity, which was in a more militant labour phase, to the reforms, and those who opposed it, believing it could weaken parliament and offer the opportunity for an alliance between employers and workers to challenge the ST route by demanding lower taxes, higher subsi­ dies, or lower interest rates (Hausner, 1 995: 1 1 1 ) . Finally, in February 1 99 3 , sepa­ rate agreements were signed in the Pact on State Enterprises in Transformation, between the Confederation of Polish Employers and the Minister of Labour and

Copyrighted Material

1 44

Transformation at Work

Social Policy on the one side, and three union groups - NSZZ Solidarity, OPZZ and seven remaining unions. Unlike the other two countries, where tripartism did have some, albeit limited, influence on social policy and labour legislation, in Poland the Pact immediately lost credibility, since in May 1 993 Parliament passed a vote of no confidence in the government which had devised it. With the election ofthe ' left' SLD in 1 993, parts were altered, particularly those on privatization, as a result ofOPZZ pressure to increase the proportion of shares for employees at preferential rates. The future of tripart ism under the SLD-Ied government was henceforth interwoven with three factors: first, the ' left' government was more favourable to the official face of tripartism, but, as in Hungary, continued with the neo-liberal reform programme, and was thus as concerned to protect capital's prerogative as with establishing social peace; second, Solidarity could now sound oppositional in fighting the 'post communists', but was as unwilling to co-operate with the OPZZ in tripartite nego­ tiation as ever; and the OPZZ, while more willing to act as 'social partner', fre­ quently put its political role within the SLD before its union role, as discussed above. After the 1 993 election, the Pact was re-Iaunched in November 1 993, but with Solidarity withdrawing on the grounds of the government' s changes to the Pact' s privatization clauses. It was re-invented in February 1 994 as the Tripartite Commission on Socio-Economic Issues, with Solidarity rejoining, having dispensed with some of its hostility to corporatist intervention after losing its government privileges. Observers such as Hausner ( 1 995: 1 1 7) have expressed scepticism about the representativeness of the Tripartite Commission, with some influential unions absent because they did not sign the Pact. Following the government swing back to the right in 1 997 after the Solidarity Election Action (AWS) victory and its coali­ tion with the neo-Iiberal Freedom Union, the fate of tripartism was again in ques­ tion. With these varied experiences of tripartism across these three countries, what conclusions can be drawn about its nature? The Polish case suggests a halting, half-hearted embrace of its formal principles. Even the Hungarian case, with its much longer heritage of bargaining, endorsed the formal principles of social part­ nership, while concentrating efforts on limiting its role to consultation and infor­ mation, to the exclusion of negotiation and decision-making (Csak6 et aI., 1 994 : 68). The weakness of trade unions as bargaining partners emerged in the choice they were given: either submit to incorporation, shift outside into political pres­ sure groups, or enter politics directly. In the Czech Republic, CMKOS could not adopt the last strategy because of its party-political strategy ofneutrality, and was forced into the pressure group role in escalating clashes with the government. I n Hungary, the trade unions tried to bolster their position via direct political inter­ vention, blurring the roles of the elected parliament and the tripartite council, with the latter sometimes resented as a 'rival' to parliament (Hethy, 1 995: 92). Union political influence was also overtly wielded, through the involvement of trade un­ ion leaders as parliamentary members, and covertly, by back-door influence ped­ dling. However, this has also been a two-way process, with parties influencing union policy. The resort to other means of influencing the political process suggests that

Copyrighted Material

Trade Union Politics and Worker Representation

145

tripartism i n C E E is not developing along the German model o f ' societal' regula­ tion of ' liberal' co-operative neo-corporatism, in which real bargaining between parties - trade unions, employers and the state - takes place at both national, re­ gional and branch levels. Rather, the development is of 'paternalist' neo-corporat­ ism, in which trade unions are included in the political process, but under ultimate government control (Tatur, 1 995: 1 65). While this is not to be confused with ' au­ thoritarian state corporatism ' , there are authoritarian implications, as the behav­ iour of both the Klaus and the socialist Hom governments showed when tripartism was simply ignored in order to force through government measures. However, as Tatur argues, ' Paternalist' corporatism does not force manifest class conflict into the discipline of authoritarian rule. It can rather be understood as an institutional means of inter­ est aggregation and regulation, where the preconditions for the organization of class interests are weak (ibid., 1 995: 1 65).

This analysis, which rests on a view of the immaturity of capitalist class forma­ tion, registers both the disorganization of iabour, but also the politicized nature of the interwoven state and emerging capitalist elite. Rather than there being a state and economically-based capitalist class as the other parties to neo-corporatist bar­ gaining, both the new state administration and the new employers are rooted in old nomenklatura networks (ibid., 1 995 : 1 67). One should also add that many trade union leaders - in spite of the careful vetting to exclude former CP leaders from the national union leadership - are also likely to be at least familiar with these networks. Thus, while ' paternalist' neo-corporatism rightly points to union weak­ ness in tripartism, it also implies deeper and wider blurred interest representation, in which informal connections, as well as older alliances between employers and unions, cross the boundaries of distinct class interest representation. This characterization builds on an understanding of the command economy legacy. However, it needs to be set in a wider political economy. As argued ear­ lier, the very authoritarianism of governments in overriding tripartite agreements is itself a symbol of national subordination to international capitalist pressure and the limits of social democracy in a global world. Whether or not such free-market pressure has the approbation of the national political party involved (as with con­ servative parties), or not (as with ' socialist' parties), makes little difference. A powerful statement of the limits of national tripartism is expressed in Krastyo Petkov's Foreword to a 1 997 ILO report on trade union experience in Central Europe, (In this way) the international financial institutions use the national institutions for legitimization of the agreements and conditions for structural reforms, credits, in­ vestments, state budgets etc. The rest of the national actors, among them trade unions, play secondary and complementary roles in the policy that is supposed to open the way for the reforms and to maintain the social peace. But the responsibil­ ity for the results and consequences of this policy is transferred to the national actors. International financial institutions take no direct responsibility for the re­ forms. The centre of decision making has shifted outside the countries of our re­ gion. The right to choose has been reduced to a choice between governments, equally

Copyrighted Material

146

Transformation at Work

dependent on the international financial institutions. Tripartism has turned to a form of "dialogue", where trade unions and other dependent actors are counted only as supportive structures for neoliberal reform (Aro and Repo, 1 997: xvi).

How far this pessimistic conclusion remains true depends on the relationship between the national level of trade unionism and development in industrial rela­ tions on the ground.

Industrial relations fragmentation and the problem of the unorganized While tripartism and the continental European models of centralized, national and sectoral bargaining have been encouraged and formally embraced in most coun­ tries, beneath this is a system of a fragmented enterprise and workplace industrial relations. Fragmentation is both a continuation of command-economy enterprise unionism, and the post- I 989 revulsion against central control which prompted unions to build a system oflegal\y and financially autonomous workplace branches. These generally take three-quarters of union dues ( l per cent of members' net pay), leaving union centres short on income (in spite of their property assets) and on information on their membership. A hybrid process of industrial relations trans­ formation has thus emerged, of national tripartite arrangements at one extreme, and decentralized workplace relations at the other. What is strikingly absent or weakly developed, is the intermediate level of industry level bargaining. In Hungary by 1 994, only 1 5 multi-employer collective agreements had been signed since 1 989, with a downward trend - bar an indeterminate slight upturn in 1 996 (T6th, 1 997b: 3 37). In the Czech Republic, although employers' organiza­ tions developed fairly early on, these set only minimal standards on pay and con­ ditions (as in what remains of them in Britain). In 1 997, 29 industry-wide agree­ ments covered only about 20 per cent of Czech employees (CMKOS, 1 998). In addition to their declining number, the practice of their extension to other employ­ ers has also declined: in 1 993, their coverage was extended to 1 9 1 employers beyond the scope of relevant employers' federations, but by 1 995, this had dwin­ dled to only 1 2, and by 1 996, the practice was entirely abandoned (Pollert, 1 998). In Poland, even after legal regulation came into force in 1 994, bargaining at any 11 level, including the sectoral, was weak (Casale, 1 997: 8) . The general trend to­ wards decentralization is greatest in Poland, where over 90 per cent of union rep­ resentatives report local level basic pay agreements; in the Czech Republic, this is 70 per cent, in Hungary, 65 per cent and in Slovakia, 60 per cent. Other compo­ nents of pay, such as productivity and shift premiums and overtime, are even more decentralized and only holiday pay tends to be regulated at higher levels (Aro and Repo, 1 997: 1 36). The reasons for the weak intermediary level of industrial relations lie with the under-development of employers' associations and lack of interest by companies, especially multinational companies (MNCs), in industry-wide agreements (c.f. Britain, Sisson, 1 983). Politically, decentralized bargaining has been tolerated as the most market-friendly and least state interventionist form of industrial relations

Copyrighted Material

Trade Union Politics and Worker Representation

147

by neo-liberal governments and employers; as we saw in Chapter 4, even the World Bank Development Report, otherwise pressing for neo-liberal 'reform' , favours decentralized bargaining as the best antidote to state labour regulation, providing it does not interfere with labour markets (World Bank, 1 995: 8). At the same time, the unions, having concentrated on national relations with the state for the first decade or so of transformation, are beginning to focus on the workplace to regain numbers (and therefore finances), rather than the industrial branch. This leaves a major organizational problem of weak co-ordination and communication between the centres and atomized workplace branches. Union representation at the workplace raises more legislative difficulties in some countries than in others. In Hungary, the amended Labour Code of 1 992 regulated the participation rights and electoral rules of the new works councils system which determined trade union representation rights in collective bargain­ ing. The highly fragmented enterprise level bargaining system is weighed down by complex representation laws for multi-unionism. The Labour Code stipulates a hierarchy of these rights relating to different union representation levels in the works council elections, by percentage of votes. This basically means that the union with the strongest representation has the broadest range of issues open to bargaining, including the annual collective agreement, while the less representa­ tive unions have a narrower scope of rights (see Casale, 1 997). The works coun­ ci Is themselves formally only have information and consultation functions, although in practice they can usurp the union negotiating role. In Poland, the 1 974 Labour Code is still in force, although amended several times: in 1 99 1 , the Act on Trade Unions provided for freedom of association and trade union recognition, while later than elsewhere in CEE, new laws on collective bargaining were passed in 1 994. With two major union confederations, legislation deals with multi-unionism by measures of national, rather than workplace, repre­ sentativeness. At workplace level a more voluntarist approach to multi-unionism requires joint agreement on concluding a collective agreement, and legislation is vague as to what happens if there is failure to agree (Aro and Repo, 1 997: 25). In the Czech Republic and Slovakia, with j ust two maj or national confedera­ tions (CMKOS and KOZ-SR) and the cultural workers' confederation, KUK, the issue of multi-unionism was of less significance for legislation than elsewhere, and where several unions are present in an enterprise, a voluntary system of re­ solving representation rights was chosen. Despite the fact that legislation seeks to promote bargaining by providing legal '2 instruments for union recognition , de-unionization threatens the long-term estab­ lishment of labour representation. The common problem for trade unions is the shrinking oftheir stronghold, the state sector, and barriers to union organization in the growing private sector - a situation familiar to Western labour organizers. In both Hungary and Poland, the marked growth of self-employment, micro-compa­ nies bordering on the informal economy, and the informal economy itself, contrib­ ute further to de-unionization (Deppe and Tatur, 1 997: 266). Everywhere, avoid­ ance or violation of industrial relations legislation is widespread. Union membership decline has many causes: the unions can no longer provide enterprise welfare and recreation facilities, these having been sold off and priva-

Copyrighted Material

148

Transformation at Work

tized, and in some cases, provided by sophisticated company paternalism. There are anti-union employers, especially in the small private sector, and widespread union marginalization policies - thus reducing union effectiveness, and reinforc­ ing worker indifference. Structural change has shrunk the unionized large enter­ prise state sector, and expanded small private firms and services, where unions have no bases. The growing mass ofunorganized workers in CEE is one of the major features of capitalist transformation. Along with the vulnerable native workforce there is the growing phenomenon of unprotected migrant labour, from East to West. The whole East - West chain has engendered a new dimension of both legal and illegal migrant labour, and with it, lucrative labour agencies as well as 'mafias' organiz­ ing migrant work gangs (Wallace et aI., 1 996: 276). The system supplies a vulner­ able, flexible labour force, not covered by local employment protection law, with­ out political rights and liable for dismissal as soon as residence permits are with­ l3 drawn • In what has been described as a 'buffer zone' between East and West Europe of the four ViSegrad countries, an estimated half a million workers com­ mute daily across the border to Western Europe (mainly Germany), while guest workers into CEE are drawn from further east, with the average Ukrainian wage at US $ 1 0-1 5 per month, compared with about US $200 in the Czech Republic (Wallace et aI., 1 996: 273). The movement creates different ethnic groupings of migrants in different countries: in Poland, they are mainly from Ukraine, Belarus and Russia, in the Czech Republic, from Poland, Ukraine, and to a lesser extent, Russia and Slovakia, and in H ungary they are from Romania and Ukraine (ibid., 1 996: 274). The increase in legal migrant labour in the Czech Republic indicates the growth of this phenomenon: in just 9 months from 1 5 .3 . 1 993 to 3 1 . 1 2. 1 993, Czech work permits to foreigners roughly doubled, from 5,753 to 1 0,559 for Poles, and from 2,827 to 7,745 for Ukrainians (10M, 1 994: 1 6). This is in addition to the likely much larger illegal migrant worker population without permits, which re­ quire complex and lengthy negotiation. It is very difficult to put a figure on the new growth in migrant workers. From the trade union stance, however, they form another group of 'outsiders' who are rarely considered for membership recruitment. Racism may be an element here, but there are other processes militating against strategies for their inclusion in workplace union branches; many are extremely transient, as in the construction industry; there are language barriers; and many foreign workers have typically short-term goals to earn a maximum in a short period, which may conflict with the long-term interests of local workers. The growing issue of migration is one which has scarcely been addressed, either by the unions, or by the transformation litera­ ture, but which will have to be examined and acted upon if further divisions and forms of exclusion are to be prevented.

Comparative data on the experience of coUective bargaining The only comparative survey to date on the experience of trade union negotiators l4 in CEE is a 1 995/96 enterprise-based study of Bulgaria , the Czech Republic,

Copyrighted Material

Trade Union Politics and Worker Representation

149

Hungary, Poland and Slovakia (Aro and Repo, 1 997), which provides a few super­ ficial indications of recent developments (for detailed review, see Pol1ert, 1 999). This highlights declining union presence, although some countries with the most serious membership loss, such as Poland and Hungary, also showed new members were joining. Interestingly, apart from Hungarian representatives, between 30 and 40 per cent reported increased union 'influence', with similar percentages experi­ encing no change, despite declining numbers. The meaning of ' influence' was elaborated with the survey' s attempt to typologize union-employer relationships: almost half reported 'partnership and opposition ', which suggests an end to the command economy legacy of union-management partnership, but 'open confron­ tation' was rare everywhere. Although subjective perceptions of the bargaining 'atmosphere ' were unenthusiastic, with the vast majority reporting it as only 'ac­ ceptahle' rather than good, the majority reported that they reached compromises. How far these 'compromises' entailed real collective bargaining, or mere rubber­ stamping of existing legislation, remains in doubt (Casale, 1 997: 2). Without case study amplification, these survey findings tell us little. Most of these confirm the survey findings that pay now dominated the bargaining agenda where compromises were reached, but on the issue of 'partnership ', most studies show union co-operation with management restructuring plans, and at best, nego­ tiation on redundancy conditions and company re-organization. There was no op­ position to, and often support for, labour shedding (JIL, 1 993, H6thy, 1 995c: 1 02, Mak6 et aI., 1 995, G