Transition or Transformation? Marcel Tomášek

I / State Capture

After transition (the conceptual framework in which changes lead to “democratic consolidation” and are limited to the rearrangement of the political realm and the fundamentals of its functioning) and transformation (the framework in which changes are brought about extensively by “communist legacies” with associated “path-dependency” in politics, the economy, and society), the third and somewhat overlooked wave of conceptualizing social change in Central and Eastern Europe (CEE) is associated with state capture,1 along with less frequent concepts such as premature consolidation2 and restoration3, which in varying degrees point to the limited capability of transitory regimes to evolve in the direction of advanced free-market societies as a result of the action of rent-seeking mechanisms and associated vicious circles. The early notions of transition and transformation did not conceive the stage of the process of change characterized by distortion and the constant postponement of the fulfillment of essential transitory goals.

Once crucial democratic institutional infrastructure has been firmly established and the point of no return to an authoritative/communist regime has been passed, the next phase starts, in which economic issues come to the forefront—economic and social modernization of the country and the shift in perspective toward advanced free-market democracies become the leading motive in the transition context. CEE countries initially abandoned the old economic and social system at this stage. During its somewhat chaotic disintegration and collapse, “a free market without adjectives” emerged. CEE countries advanced relatively rapidly toward poorly regulated free-market economies suffering from a variety of structurally-produced pathological phenomena that in terms of qualitative understanding were not too dissimilar to the long-term phenomena affecting Latin American countries. These phenomena result from the overlap of socioeconomic and political interests that affect the regulation and institutional buildup of newly constructed socioeconomic and political systems. Their intensity has clearly varied and their presence has primarily influenced the extent and degree of economic restructuring and the number of genuinely restructured and properly functioning enterprises.

At this time of change, the development of economic and political institutions is arrested at a specific stage when it is in their interest to maintain the characteristics of “temporary transitory order” and delay the transition to advanced free-market democracy; this leads to a crucial violation of the rationality of reforms. In this manner, “transitory order” becomes a distinctive systemic type existing in its own right, differing from both advanced free-market democracies and pre-1989 real socialist regimes. These deformations, distortions, specific mechanisms, and rationality characteristic of such a “transitory order” are usually conceptualized either as exemplifying the deformation of the “communist legacy” or distortion caused by “corruption”—i.e., within conceptual frameworks related to the second wave of conceptualizing changes in Central and Eastern Europe (transformation). Taken as an entire complex of phenomena and practices, however, they represent a social reality that is more adequately analyzable from the viewpoint of the state capture approach, falling under the third wave of conceptualizing changes in Central and Eastern Europe (the first wave being analytically and conceptually associated with transition and the second wave with transformation).

The subsequent stage of social change correcting state capture in “transitory order” appears to be part of this last conceptualization wave which is usually described as Europeanization. The fulfillment of the original goals and the moment of “switching” to advanced free markets of the Euro-Atlantic type are conditional on the process of Europeanization.

Transition Or Transformation

II / Europeanization

During the process of facilitating the development of the free market—a process which at the same time involved an unprecedented redistribution of resources (privatization) in postcommunist economies—the institutions of economic and political transition reached a stage in which institutional forces found it in their interest to maintain the transitory features of the socioeconomic and political system, thereby depriving it of crucial, self-preserving elements of the free‑market capitalism characteristic of Euro‑Atlantic economies. Thus in attempting to replicate Euro‑Atlantic economic and political patterns, postcommunist societies reached a stage in the 1990s when, despite implementing an extensive set of reforms associated with the free-market/democratic society model (speaking in terms of legislation and institutional arrangements), the social, economic, and political structures in place actually diverged from the Euro-Atlantic model, instead constituting a distinctive, self-sustaining “transitory phase.” The structural and functional forms that were expected to be temporary have actually become more permanent over time. Rent-seeking tendencies in postcommunist politics and economies were firmly imbedded in the unconstrained and unregulated overlap between these two spheres, leading to an institutional lock-up which prevented the full shift to an advanced free-market society of the Euro-Atlantic kind. The successful completion of transition to a Western European-like advanced free-market system in postcommunist countries depends on the degree of integration within the EU and on associated interference by the EU in distorted and deformed functional patterns that characterize the “transitory order.” For a long time it appeared that the self-sustaining culture typical of the economic sphere in terms of its overlap with politics could hardly be substantially altered through factors and agents existing within the internal context of CEE countries. It seems that this vicious circle can only be broken in a decisive way through the intervention of external factors: firstly, EU legislative requirements and other prerequisites that were supposed to be fulfilled in the process of accession of CEE candidates to the EU and, secondly, “spill-over” from the old EU 15 countries leading to the development of entrepreneurship and direct foreign investment (FDI).

It was generally understood that EU expansion was to proceed only at the moment when new candidates had successfully accomplished full transition to free-market democracy and had adopted the corresponding socioeconomic and political order. In this regard, the crucial point is that those countries in Central and Eastern Europe which achieved a more complete and full-scale transition did so only in the course of—and due to—their actual incorporation into the EU. In this respect, the persisting fragments of “transitory order” and practices associated with it, which should have been eliminated through Europeanization, resulted in a backlash and led to a buildup of political forces representing these rudimentary elements of “transitory order” even at the European level (continuous prevalence of the Euroskeptic camp in the ranks of Czech and Polish MEPs in the European Parliament, which even resulted in the establishment of a new Euroskeptic parliamentary group). It becomes clear that problems with aligning with the practices and arrangements of advanced free-market societies, as represented primarily by the old EU 15, can affect the course of EU development itself (endangered and prolonged ratification of the Lisbon Treaty due to political clashes over its ratification in the Czech Republic and Poland).

III / Tunneling/Asset Stripping

“Tunneling” is a specific term that originated in the Czech Republic, describing activities generally referred to as asset stripping. Within the original Czech context of transition, it referred to a whole range of methods of taking advantage of the circumstances of a semi-privatized economy (state-controlled banks with countless investment privatization funds managing and controlling the shares of millions of individuals), ostensibly without the violation of laws. In particular, this applies to the period from the beginning of the 1990s until accession to the EU. The phenomenon of tunneling shaped ensuing economic change in a crucial manner and affected the establishment of the free-market economy not only in terms of draining away resources from the pockets of taxpayers and collective investors (depending on the privileged access of those concerned to resources exposed through neglected legislation) but, even more crucially, because it prevented and delayed the establishment of respect for owners’ rights, the essential precondition for the development of an authentic free market. Precisely in connection with the phenomenon of tunneling, the question of reevaluating the unequivocal distinction of public and private in the transitory context in Central and Eastern European countries emerges.

In advanced free-market systems, illegal activity in economic life tends to occur on an individual basis, which is in contrast to the situation in transitional economies, where illegal and shadowy economic activities lie very close to the fundamentals of the new socioeconomic order and are an everyday practice. This is not incidental; illegality implies a violation of legal codes or a bridging of the prerogatives associated with particular positions and functions, yet such codes and prerogatives are barely present in Central and Eastern Europe; in fact, they have only been instigated or imposed through action at the EU level. Still, this is not simply a casual relationship. The extensively informal and shadowy character of the economy under the conditions of prolonged transition and the constantly delayed fulfillment of transitory goals may be described in more systemic terms.

As a consequence of the legal weakening of the category of state/collective ownership in favor of private ownership (in the sense that state/collective ownership has been too frequently privately exploited depending on individuals’ social access and disrespect for the rule of law and ethical norms), economic transactions stopped being clearly distinguishable along the lines of state/collective versus private or group interest. The newly emerging postsocialist world has been characterized by a variety of areas and mechanisms of nontransparent transactions which would be regarded as clearly illegal in the Western context, but which in the Czech Republic contributed substantially to the “establishment” of private capital and its speedy injection into the newly established free-market system.

This illicitly generated capital corresponded to the conditions of privatization conducted without sufficient amounts of internal capital, and resulted in devastating practices for the emerging economic milieu (i.e., procuring credit from the management of semi state-owned banks, buying on credit without repayment, not using credit for the declared purpose). This variety of phenomena may be viewed as a form of the nationalization of investment risks, since they were made possible extensively through the credit “policies” of banks subjected to state “control,” or rather noncontrol, as well as the bankruptcy of smaller private and cooperative banks or pension funds, and subsequent bailout by the state, or through direct contributions from the state budget. This semi-legal repertoire of “entrepreneurial” practices was complemented by openly illegal methods of capital acquisition, such as import duty evasion through the declaration of diesel oil as heating oil, or other sophisticated import tax evasion schemes that were employed through­out all sectors of the economy.

The key question is as follows: Can the free market attained in this manner change fast enough to align with advanced free-market regimes common in the Euro-Atlantic zone (ones which have the ability to curb and contain illegal and shadowy activities)? It appears that it has been in the interest of those players who emerged in the initial phase of change to prolong the prevalence of the specific “temporary economic order” between socialism and the free-market, as this continued to allow them to maximize their advantage of privileged access to a tremendous amount of privatized state and collectively managed property following privatization (individual small shares from voucher privatization managed on behalf of owners by investment privatization funds). This specific structure of interests has been reflected in the political sphere and to a large extent shaped the policies of even the most reform-oriented political parties.

IV / Shock Therapy

Economic reform following the collapse of communist regimes and the related processes of pluralization and democratization brought with them a sequence of steps that could hardly be avoided—the introduction of restrictive monetary policy, liberalization of prices and trade, the endeavor to achieve internal convertibility of currency, tax reform, and, last but not least, privatization. Although debates regarding the exact sequence, pace, and extent of these reform measures were quite fierce at the time, viewed after the fact it transpires that most Central and Eastern European countries at one time or another undertook these measures, although the timelines of their implementation differed. Of these steps, probably the only one that has so far been discussed extensively and analyzed profoundly—as it was undertaken in distinct forms—is the process of privatization. Precisely in view of this, it is possible to point out the paradoxical character of the discussion on shock therapy at the time and to simultaneously show its pseudoideologizing character. Regarding the privatization of larger enterprises, the so-called “large privatization,” two fundamental approaches presented at the time may be outlined: (1) privatization into the hands of particular owners and those actually operating the enterprises—in the initial stages of privatization this mostly involved foreign investors; (2) the alternative approach—most commonly linked to voucher privatization. In discussions at the time, the alternative approach was viewed as being more representative of shock therapy and the liberal ideal, since it seemed that by merely waving a magic administrative wand it would apparently be possible to broaden the ownership of state enterprises very rapidly, thus accelerating privatization and “avoiding the preprivatization agony of state-owned enterprises and opening the way to fast restructuring.”

Understood as overcautious, the classical form of privatization into the hands of concrete investors, known from the Western European context of the 1980s, was seemingly too time consuming, administratively demanding, and costly, and was thus perceived as representing the “gradualist approach” which was placed in contrast to the approach of shock therapy. In view of the two major waves of voucher privatization in the first half of the 1990s that covered the majority of enterprises, the privatization undertaken in the Czech Republic was considered to be an almost ideal embodiment of the shock therapy approach. And yet, at the end of the day—or to be more precise at the end of the 1990s—it became apparent that Poland and Hungary had undergone far-reaching privatization resulting in the frequent involvement of foreigner investors. This allowed for the survival, restructuring, and renewed development of numerous enterprises, or the establishment of new enterprises, in contrast to the Czech Republic, where the formal character of privatization into portfolios of privatization funds owned by state-dominated banks, or other privatization funds, resulted in shares of hundreds of thousands of small individual shareholders being tunneled out by the management of funds or directly by the management of enterprises that had only formally been privatized. Although the simple shock solution was the fashionable iconic image of liberal reform measures, their ideological and voluntarist fulfillment too frequently led to doubtful results.

V / Regulation

Comparing developments in Russia and the Czech Republic, Laszlo Bruszt speaks of the consequences of state regulation that have been too willingly neglected, characterizing and explaining how a property structure emerged that allowed for the exploitation of its position in terms of weakening the free market character of the economy. The question of the unintended consequences of neglected state regulation in the Czech Republic is at the center of the debate on the changes in the early 1990s as critically marking the character of the Czech road to capitalism essentially to the present day. The architects of Czech privatization have openly acknowledged that they deemed intentional neglect of state regulation to be a suitable feature for initiating and boosting the free-market type of economy in the postcommunist socioeconomic and political context (e.g., Tomáš Ježek: “Economists must come before lawyers,” and Václav Klaus: “There is no such thing as dirty money”). In view of these “unexpected” consequences in the Czech context and on the basis of pronouncements of the key architects and implementers of privatization schemes, it may be claimed that this, in Bruszt’s understanding unintentional, neglect of state regulation was a feature of the intended sequence of changes within the economy and the construction of a new economic order taking shape in the prolonged transitory regime. Even as it was becoming clear that this new economic order is only partly reconceivable with the patterns of the designated goals of a free-market economy, the necessary adjustment measures were deliberately delayed and hindered and finally, at the moment of implementation, usually scaled down to constrain their effect (e.g., the regulation of the Czech capital market as advocated by Tomáš Ježek after he came to terms with the need of a self-preserving regulation in free markets).

Following the logic of the systemic-crisis argument taken from the neo-Marxist theoretical analysis of the functioning of the postwar and contemporary capitalist state,4 it may be suggested that the essentially ambiguous way in which Western European governments have been functioning has had a parallel in the dubious nature of transition processes in CEE. This parallel has become a unique tool for analyzing the mechanisms of transitions. In the context of the systemic crisis account of the Western European socio-economic-political system and its functioning, it becomes clear that the rationality of the transitory order is distorted in a manner that bears certain similarities. If the normative roles attached to the legitimation subsystem in Offe’s explanatory framework are to be for us associated with the normative ends of a transition (transition plan = copying and reanimation of the Western socio-economic-political structures) it is revealed that the stability of transitory order has been maintained on the expense of normative constants of the transition plan (delaying and distorting Western European-like structures and practices under the pretext of the need for autonomous self-development of free-market guidelines). The state in a transition context is in an ambiguous position as in Offe’s framework, even though the distortion pressures are reversed—the state’s mission is commodification. However, the economic subsystem experiences dubious momentum and the crucial push goes in a reversed direction—toward nationalization of investment risks and capital acquisition. The easiest “escape” from the inconsistencies resulting from this principal arrangement represents an alteration and distortion of the normative ends of the transition; this can easily be done since the normative ends delineating the transition agenda can be presented on the level of general statements for the public in an uncompromised form and, simultaneously, at the level of expert and technical discourse it may turn out to be an entirely different story satisfying the particular political-economic arrangements and reflecting concrete interests (e.g., in the Czech case this incongruity has been most easily identifiable in the case of the government led by the Civic Democratic Party in the 1990s).

The main forces behind this “distortion” are related to those elements on the economic and political landscapes of the individual CEE countries that became actors and agents in the chaos of privatization and postprivatization and the partly restructuralized conditions of the economy and are not capable of switching to the regular modes of free-market behavior and political competition prevalent in the Western European context.

It may be suggested that even from the viewpoint of a traditional interpretation, Habermas’ and Offe’s framework includes such practices as the state covering some of the investments that the private sector is clearly profiting from, or even extending its activities further. However, the point of distinction rests in the fact that these decommodification practices primarily touch shared infrastructures and other collectively produced preconditions of further overall economic development, while in the transitory context, the decommodification drive of the state is actually directed toward covering individual investment risks and capital acquisition precisely in the core of the private sector. This is even more of a sign of a crisis of rationality, since in the transitory context the main declared goal of the state is commodification. This twisted relationship between economic and political-administrative systems continues to affect the legitimization system as the normative ends of the transition are put in doubt and openly questioned.

Transition Or Transformation 2

Illustration

I / Marcel Tomášek, “Conceptualizing Waves of the Sources of Socioeconomic Change in the CEE.” Marcel Tomášek, “Metamorphosis of the Civic Democratic Party’s Attitudes to European Integration: On the New Cleavage in the Czech Party System,” Céline Belot, Bruno Cautres (eds.), Politique européenne 16/2005 Vers une européanisation des partis politiques?, L‘Harmattan, Paris, Budapest, Turin 2005, p. 127–156.

II / Transitory regime in the Light of the Systemic Crisis Argument, the table combines A) Jürgen Habermas, Legitimation Crisis, Heinemann, London 1976; Claus Offe, Contradictions of the Welfare State, The MIT Press, Cambridge 1984; and B) The previous reference as adapted for the transitory context: Marcel Tomášek, “Systémová konsolidace transformačního režimu—prodlužovaná dočasnost jako systém: Transformační režim v ČR z pohledu analýzy krize racionality západoevropského sociálního státu,” ed. J. Kebele, S. Pscheidt, Konsolidace vládnutí a podnikání v České republice a v Evropské Unii I; Umění vládnout, ekonomika, politika, Matfyzpress, Prague 2002, p. 424–434; Marcel Tomášek, “Privatisierung, Post-Privatisierung und der Rechtsstaat: Das Beispiel der Tschechischen Republik,” ed. Ch. Boulanger, In Recht in der Transformation: Beitrage zur Debatte, Berliner Debatte Wissenschaftsverlag, Berlin 2002, p. 62–77.

Note

1 / See, among others, Joel Hellman, Geraint Jones, Daniel Kaufmann, “Seize the State, Seize the Day: State Capture, Corruption, and Influence in Transition,“ World Bank Policy Research Working Paper 2444, 2000.

2 / Andrzej Richard, Czy transformacja się skończyła?“ Institut Badań nad Gospodarką Rynkową, Warsaw 1996.

3 / Edmund Wnuk-Lipiński, “Reform, rewolucja, restauracja: trzy cechy transformacii postkomunisticznej,“ ed. Aleksandra Jasinska-Kania, K.M. Slomczynski, Władza i struktura społeczna, IfiS PAN, Warsaw 1999.

4 / Claus Offe, Contradictions of the Welfare State, The MIT Press, Cambridge 1984; and Jürgen Habermas, Legitimation Crisis, Heinemann, London 1976

Bibliography

Bernard Chavance, Eric Mocnin, “Emergence of Path-Dependent Mixed Economies in Central Europe,” ed. Gernot Grapher, David Stark, Restructuring Networks in Post-Socialism; Legacies, Linkages, and Localities, Oxford University Press, Oxford 1997.

Juan Linz, Alfred Stepan (eds.), Problems of Democratic Transition and Consolidation: Southern Europe, South America and Post-Communist Europe, John Hopkins University Press, Baltimore and London 1995.

Joel Hellman, Geraint Jones, Daniel Kaufmann, “Seize the State, Seize the Day: State Capture, Corruption, and Influence in Transition,” World Bank Policy Research Working Paper 2444, 2000.

Joel Hellman, “Constitutional and Economic Reform in Post-Communist Transition,” East European Constitutional Review 5/1 (1998), p. 45–57.

Andrzej Rychard, “Czy transformacja się skończyła?” Inztitut Badań nad Gospodarką Rynkową, Warsaw 1996.

David Stark, László Bruszt, Postsocialist Pathways. Transforming Politics and Property in East Central Europe, Cambridge University Press, Cambridge 1998.

Edmund Wnuk-Lipiński, “Reform, rewolucja, restauracja: trzy cechy transformacii postkomunisticznej,” ed. Aleksandra Jasinska-Kania, K. M. Slomczynski, Władza i struktura społeczna, IfiS PAN, Warsaw 1999.