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Transition and EU enlargement

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By Paul Hare [p.g.hare@hw.ac.uk, paulhare10@gmail.com]

For about forty years, from the late 1940s until 1989, Central and Eastern European countries were under communist rule, with an economic system based on central planning rather than markets and market-based institutions. The region was both politically and economically dominated by the Soviet Union, which itself lasted until 1991. Germany back then was divided into East (communist, authoritarian) and West (capitalist, democratic), the division reinforced by the infamous Berlin Wall, erected in 1961. In the political terminology of the time, Europe was divided by the Iron Curtain, a very real and very thoroughly policed boundary between East and West.

What is quite remarkable, though, is how rapidly – following the collapse of communist regimes over the years 1989-1991 – all this dreadful past has been forgotten.  For instance, in my own university I find that our students know less and less about Europe’s communist past, with surprisingly many never having heard of the Iron Curtain. Indeed I sometimes wonder what these students would make of Cold War era spy movies, and suspect the answer is ‘not a lot’. It appears that our schools, in the UK that is, teach lots about the Second World War and very little about the troubled years that followed.

Partly because of this, I decided a few years ago to write a book about my experiences in Eastern Europe over the course of my career as a professional economist. The book was actually aimed at serving three functions: (a) to remind readers that Europe had a communist past, and to convey a flavour of what it was like, economically; (b) since I had visited many interesting and little known places in the region, to recount some of my travel tales; and (c) to convey something of what economists do when they visit different countries to carry out studies, offer policy advice, and so on.

The result was my book, Vodka and Pickled Cabbage, first published in 2010, and covering my travels in eastern Europe from my very first visit to Hungary in 1968. It is appropriate, therefore, that I’m writing this while sitting in Budapest, my favourite city, as a guest of Budapest Corvinus University, formerly the Karl Marx University of Economic Sciences.

Sadly, my original publisher soon went into liquidation, and after many months I gathered that no one seemed likely to pick up the pieces to keep my book, and many others, in print. Hence earlier this year I finally concluded that the only way forward was to reissue the book myself, using the nice self-publishing software now available through Amazon. This proved surprisingly easy, and the 2012 edition of my book is now available both as a paperback and for the Kindle, on Amazon sites around the world. Since I never wrote the book to make my fortune, it has always been possible, too, to download the text for free either from my own personal website, or from an area studies website in the US. Through these channels, I gather that several thousand copies have been downloaded.  But do feel free to buy a copy!

Now, one of the themes in my book was the process whereby ten of the transition economies in Eastern Europe eventually became members of the EU – eight countries joining in 2004, two more in 2007. More countries are in the pipeline, with Croatia set to join next year (2013). While countries like Hungary saw joining the EU as part of a political project to re-join the Western system of alliances (NATO, OECD, etc.), and expected it to happen quickly, the reality was much more complicated and difficult (economists who are used to thinking in comparative static terms please note). It actually took 15 years. To quote from Chapter IX of my book,

‘This sounds like a very long period, and no doubt, for some of the countries anxious to rejoin the western system of economic and political alliances as rapidly as possible, that’s how it must have felt.  Nevertheless, it was a very complex process, involving several important stages.  Much of the complexity, and hence the duration of the process, was probably unavoidable.

Roughly speaking, the main stages – some of them partly overlapping – were as follows: (a) initial euphoria over the end of communism; (b) trade liberalisation and the Association Agreements; (c) economic reforms and gradual adoption of the acquis communautaire; (d) the formal negotiations; (e) ratification and accession.’

Stage (a) is the  period when communism fell and the old institutions of central planning were simply shut down or abandoned. The new democratically elected politicians were impatient to ‘join Europe’ right away, and resented any suggestion that they might not be ‘ready’. But they had little experience of operating a market-type economy, and their countries had weak or no market-economy institutions in place. Hence all sorts of reforms were needed to build up the right institutional framework, and stage (b) greatly supported that process. Socialist era trade practices collapsed remarkably quickly, and a reorientation of trade towards EU markets proved surprisingly successful. Stage (c) built on this solid foundation, with the EU and other organizations – World Bank, IMF, OECD, EBRD, and others – providing diverse technical assistance to help the process along. The acquis communautaire (“that which has been agreed”) is the full set of rules and regulations governing the operation of the EU and its member states, probably by now running to over 80,000 pages of text! Even before any formal negotiations got under way (stage (d)), most countries were busy incorporating much of the acquis into their domestic legislation and economic practice.

As a result, the negotiations got off to a good start, but still took several years to go through the more than 30 chapters of the acquis, agreeing on how to implement them, with various temporary and transitional arrangements. Most contentious were the chapters on agriculture, the budget, and regional policy (involving the EU’s structural funds), though political chapters to do with justice and having a well functioning democracy remained areas of difficulty even post-accession. Once all chapters were ‘closed’ (i.e. agreed), the accession protocol could be drawn up and this then had to be ratified both by the acceding states, and by all the existing member states. Not surprisingly, even this final stage (e) could and did occupy a couple of years.

But we got there in the end, and I personally felt very emotional when the countries I’ve known and loved for several decades finally became part of the EU. That’s where they belong, part of the European family (albeit, sometimes, quite a squabbling family).

Further East, in the countries of the former Soviet Union, shifting from central planning to a market-type economy proved even more difficult. There was little or no memory of life in a market economy, and developing the vital new institutions to support markets was a poorly understood process. The need for the state to guide institution formation in the public interest took years to gain broad acceptance, and in the meantime, the private sector often filled institutional ‘gaps’, sometimes in quite nasty and undesirable ways.

Thus when I first visited St Petersburg (then still Leningrad), we advised the city council to support the establishment of a court or arbitration body to settle business disputes between private parties. They clearly thought we were crazy, and had no interest in receiving such ‘boring’ advice. What then happened in the early 1990s, though, was a rather grisly process: many businessmen engaged in disputes with business partners and associates simply ended up shot! The murder rate in Russia rose for a while, quite predictably, and only fell back to ‘normal’ (if I may put it that way) when most productive assets had been ‘successfully’ redistributed (sometimes this was a polite way of saying, ‘stolen’), and when new arbitration bodies and courts were gradually established and made to work.

Part of the problem here was that the institutions we take for granted in our own economies mostly work away quietly in the background of our lives, so it is easy to forget how important they are. How often do we pay much attention to property rights and contracts, for instance? And how much of what we do, economically, depends on trust, honesty, hard work and an underlying culture that supports these attributes. But not much about all this finds its way into most of our economics textbooks!

Now it’s time to go out to meet a friend and colleague from the Central European University, also based here in Budapest, for a lunch of some of my favourite Hungarian food…….

[Editor’s note: Paul Hare is Professor of Economics (Emeritus) at Heriot-Watt University, Edinburgh. There is a new publication edited by Paul Hare and Gerard Turley due out on 31st March 2013, Handbook of the Economics and Political Economy of Transition, Routledge]

From: Pp.4-5 of World Economics Association Newsletter 2(5), October 2012 http://www.worldeconomicsassociation.org/files/newsletters/Issue2-5.pdf

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