On May 24, the 43-year-old conservative lawyer, Andrzej Duda, a fresh face on Poland’s political scene, defeated incumbent Polish President Bronislaw Komorowski by a narrow margin in the presidential run-off vote. Duda’s victory, based on a platform of economic populism, reveals a deepening disaffection with neoliberal economic reforms not just in Poland, but throughout Eastern Europe. First Russia and then Hungary embraced statist and nationalist economic policies that broke with the free market policies of the past two decades. Now Poland, one of the six largest economies in the European Union, appears ready to take this path too.
It would be highly symbolic if Poland abandoned neoliberalism, since it has been Eastern Europe’s trendsetter for neoliberal reforms. In 1990, then Finance Minister Leszek Balcerowicz, battling the legacies of communism and facing the prospect of hyperinflation, orchestrated a nearly overnight switch from a socialist economy to a market-based one under his “Balcerowicz plan.” Prices, once controlled, were liberalized. Trade, once monopolized, was freed. Currency, once rigid, was suddenly convertible. Enterprises, once state owned, were sold or transferred to private hands.
Balcerowicz and other reformers in Eastern Europe did not expect public acceptance of neoliberal reforms to last long. They instead anticipated that the sudden and dramatic changes they initiated would create massive economic upheaval and in turn, trigger political turmoil. They fully expected an angry public to vote them out after a year or two. But understanding how important the reforms were, they pushed them through as quickly as possible. They planned to jolt a market economy to life before politics lurched back to the status quo. Yet our recent research, which will appear in a forthcoming academic article, shows that the “window of opportunity” for neoliberal reforms in Eastern Europe stayed open for decades longer than most experts had expected.
Indeed, standard measures of liberal economic reform, such as the economic freedom indexes of the Fraser Institute or American Heritage Institute, unequivocally conclude that post-Communist Eastern European countries experienced spectacular progress toward “economic freedom” from 1990 through the mid-2000s before the momentum of reform began to taper after the 2008 global financial crisis. Previous theories of transition, which predicted that the period for radical reform would last only a short time, clearly missed some of the real causes behind the endurance of neoliberal reforms, particularly the international incentives for change.
After the global financial crisis, a wave of discontent drove a few Eastern European governments to buck the advice of the international financial institutions and support nationalist, statist economic policies instead. We think that the driving force behind these reforms was “competitive signaling.” In 1989, Eastern European countries opened up at a time when economic liberalization was already in progress in most developing countries for the better part of a decade. China began to liberalize its economy in 1979, and received a wave of foreign direct investment. Eastern European governments of all political stripes understood that, to get foreign money, they had to do the same.
In order to “signal” that they were open to investment, Eastern European governments liberalized their economies and enacted many aspects of the standard Washington Consensus, a post-Cold War recipe for faster growth that advocated free-market and pro-globalization reforms. In addition to competing with developing countries in Asia and Latin America, 27 new post-Communist countries opened up their economies at the same time and, as a result, had to compete with each other as well. To set themselves apart, these countries experimented with avant-garde neoliberal reforms not widely adopted elsewhere, such as pension privatization, the flat tax, and severe cuts in corporate tax rates. While most of these reforms coincided with a significant rise in foreign investment, they served the wealthy more than the poor, heightening inequality.
Ultimately, East European leaders got what they wanted: tremendous inflows of foreign capital. Tens of billions of dollars flowed into the Central and East European and Eurasian countries in the 2000s, making the region briefly the largest target of investment in the world, outpacing Asia in both per capita and absolute terms.
But then, the party ended. In 2009, Eastern Europe suffered what economists call a “hard stop.” Investors did not pull out money, but to cover losses at home, they suddenly stopped putting money into Eastern Europe, causing a massive drop in growth rates far more substantial than that seen in other developing countries. Reliance on trade and investment from the European Union made Eastern European countries uniquely vulnerable to the crisis in the floundering Eurozone. Neoliberal austerity policies adopted in both Western and Eastern Europe prolonged the crisis.
After the global financial crisis, a wave of discontent drove a few Eastern European governments to buck the advice of the international financial institutions and support nationalist, statist economic policies instead. It was at this point that Eastern European voters began to grow disenchanted with neoliberal reforms. To them, these policies stopped producing their promised benefits: inward investment and rapid growth. The negative consequences attributed to neoliberalism suddenly seemed more significant. Income and wealth inequality had skyrocketed throughout the region. Poland’s Gini index, which represents the amount of national income that would have to be redistributed to achieve equality, rose from 26.9 percent in 1989 to 33.7 percent in 2008, according to the World Bank. Many less developed rural regions in all Eastern European countries failed to achieve the prosperity found in core cities such as Prague, Warsaw, or Moscow. Certain sectors of the population were hard hit, including young families, the elderly, and disadvantaged minority groups such as Roma. Many countries paid a heavy price in terms of lost jobs, unemployment, and outbound migration, with countries such as Romania and Ukraine losing more than 10 percent of their population between 1989 and 2008. The size of Bulgaria’s population dropped by more than 20 percent from 1988 to 2013. The much-feted neoliberal success stories, Latvia and Lithuania, also lost more than 20 percent of their population as industry collapsed and workers sought employment abroad.
After the global financial crisis, this wave of discontent drove a few Eastern European governments to buck the advice of the international financial institutions and support nationalist, statist economic policies instead. Russia took an early lead in the mid-2000s after President Vladimir Putin began to revive the power of the Russian state and pull strategic enterprises, such as Gazprom (natural gas) or Yukos (oil and gas), back into the hands of the state. Russia built a number of state-led industrial conglomerates that now dominate its economy. Yet few Eastern European countries looked at Russia as a model until after 2008.
Then in Hungary, once a leading neoliberal reform country, Prime Minister Viktor Orban, who returned to power in 2010, pulled the plug on pension privatization, created new taxes on foreign banks and chain retailers, and intervened to convert foreign currency mortgages back to the national currency at a major cost to foreign banks. His government began to establish national conglomerates and foster a national capitalist class with close ties to his political party. He also began to bring the media under state control. Many in Eastern Europe attribute Hungary’s rapid economic recovery to these statist economic policies, undermining a key argument for neoliberal reforms.
And now Poland has elected a president who wants to follow the Hungarian model. Many of the key reforms that Duda campaigned for—such as a tax on foreign banks and retail chains or delaying Poland’s entry into the Eurozone—came straight from Orban’s playbook or were like-minded policy proposals. Duda stated clearly on national television that he wants to follow Orban’s path on economic policy.
For 20 years, Eastern European governments believed that neoliberal reforms were necessary to keep the gravy train of foreign investment coming. This was a powerful incentive to keep liberalizing the economy. But the recent global economic crisis changed all that. In several countries, neoliberal reforms are now quite justifiably associated with a massive bubble in real estate prices, slow growth, inequality, and lack of opportunity for many. Several governments are experimenting with a new set of economic policies that stress national sovereignty over international integration and emphasize the heavy hand of the state over a surrender to market forces. But it is not clear whether these economies will perform better under a more statist approach.
In Eastern Europe, neoliberal ideas still influence traditional policies such as free trade, tight control of inflation, and fiscal prudence, but governments no longer use avant-garde neoliberal policies as competitive signals to lure investors. As a result, neoliberalism no longer dictates the direction of economic policy change in Eastern Europe.
All eyes, now, are on Duda. If his Law and Justice Party wins parliamentary elections in October, succeeds in changing the course of economic policy, and takes Poland to greater economic prosperity, then we may see a new economic era emerge in Eastern Europe, in which neoliberal policies are replaced by statist ones that aim at fuller employment, greater social security, and state-directed investment. Eastern Europe—once a poster child for free market reforms—will be seen as a region that has learned the “limits” of neoliberalism. Given its extraordinary experience with both communism and market reform, these lessons may cause other countries to take note.