Transformation and Structural Change:
Central and Eastern Europe's Post-Communist
Adjustment in Historical Perspective
Ivan T. Berend
Introduction

The transformation of Central and Eastern Europe after thehalf-century communist experiment is one of the mostimportant historical events of turn-of-the-century Europe andthe emerging new world order. The transformation is a complex
phenomenon with far-reaching political, social, cultural andeconomic aspects. A great number of scholars have analyzed
the bumpy road of the former one-party systems andcentrally-planned,
state-owned
economies
towardparliamentary democracy and private, market economies. A
whole library might be filled with the already existing
literature of "transformatology."
I do not attempt to repeat or summarize this vast litterature.
My presentation is going to focus on the long-term, determinant
undercurrent of the structural changes of the Central andEastern Europen economies. Although 5-6 years are not longenough to appropriately evaluate these long-term processes, theemerging new trends, the transformation in the making, may
give valuable and essential information about the new chapterof the region's history in statu nascendi. The main question I
am going to analyze is the following: can Central and Eastern
Europe successfully adjust to the requirements of thetechnological-structural transformation of the world economy?
The main characteristic of our age that became manifest fromthe mid-1970s is the change of the old technological regime
and its replacement by a new one, or, using the term thatseveral economic historians prefer to use: the dramatic progressof the "Fifth Industrial Revolution." Most of the phenomena of4Transformation and Structural Change

major shocks and turmoils of the end of century world
economy might be described by the Schumpeterian "structural
crisis," the "creative destruction" of technologicaltransformation. In my interpretation, that was the main reasonof the deadly crisis of rigid state-socialism, which could not
adjust to the requirements of the age.
The symbolic year of the manifestation of the structural
crisis was 1973, the year of the first "oil crisis," and theappearance of the personal computer, a milestone oftechnological revolution. What was the impact of these changes
on Central and Eastern Europe?
Historical Backwardness and Changing Position

The region under examination, as is well-known, has along history of relative backwardness. My point of departure
here is a historical evaluation of Central and Eastern Europe's
bold and desperate attempts - in the nineteenth and twentiethcenturies - to take off from the backward periphery of theworld system and safely land in its core. The countries of theregion pursued this goal in various ways. For the half century
between the 1860-70s and World War I, they enthusiasticallycopied the Western pattern, introduced Western institutions,joined the international laissez-faire system initiated by GreatBritain, and launched an export-led industrialization policy.
They definitely achieved certain successes by modernizing
their economies. However, they could only slow down but nothalt their relative decline and the increase of the gap with theWest, which characterized the first half of the nineteenth
century. In 1820 and 1870, the countries of the region-according to Angus Maddison's newest calculations*1-reached only 58.1 and 48.8 percent of the West European
core's per capita GDP level respectively. In 1913, they declined
to 42.0 percent of the Western standard.
The semi-success (or semi-failure) generated a desperate
revolt against Western values and models. After World War I

Ivan T. Berend

5export-led industrialization was replaced by import-substituting
industrialization and laissez-faire economics was overturned byprotectionism and aggressive state intervention, occurring
simultaneously with harsh attacks against the previously
adopted parliamentary system and the introduction of various
types of authoritarian regimes. The comparative economic levelof Central and Eastern Europe, however, stagnated during thefirst half of the twentieth century. While slowing down itself toa significant degree, West Europe preserved its advantage
compared to the eastern half of the continent. The latter's
position hardly changed between 1913 and 1938, and totalled
44.1 percent of that of the West by the outbreak of World War
П.
The new revolt and the adoption of the Soviet model of aplanned economy and forced industrialization, made the East
European modernization dictatorships relatively successful for aquarter of a century. In quantitative terms, meaning per capita
growth, the historic trend changed and, for the first time inmodern times, this led to a somewhat narrowing of the gap with
the West. With an average annual growth of 3.9 percent,Central and Eastern Europe achieved the fastest growth rate in a
generally rapidly growing world between 1950 and 1973,
improving its relative position and seeming to leave behindmost of the other peripheral regions.
Central and Eastern Europe's per capita GDP
as percentage of the various regions of the world 1913-1973*
Western Europe
Overseas WestSouthern Europe
Latin America
Asia
AfricaWorld average

1913
42.0
29.7
88.8
102.8
209.8
270.8
97.8

1938
44.1
34.9
107.9
105.5
238.3
291.7
108.3

1973
46.6
35.7
95.2
120.9
341.8
450.7
132.6

*Angus Maddison's regional figures are based on the average of sample
countries. Western Europe is represented by 12 countries; the Overseas West (he6Transformation and Structural Change

calls it Western offshoots) is the aggregate of Australia, Canada, New Zeland, andthe USA; Southern Europe is the average of Greece, Ireland, Portugal, Spain, andTurkey; Central and Eastern Europe consist of Bulgaria, Czechoslovakia, Hungary,
Poland, Romania, the Soviet Union, and Yugoslavia; Latin America is represented
by seven countries; Asia by eleven countries (including China, India, Bangladesh,
Japan, Taiwan, and South Korea); Africa is represented by ten countries; the world
average is computed by the average of the above 56 countries.

From the last third of the nineteenth to the last third of thetwentieth century, Central and Eastern Europe could not breakthrough and remained basically at the same relative place; as
Maddison's figures demonstrate, it was the fourth-ranking
region with the fourth-fastest per capita growth. Although
Central and Eastern Europe rose well above the world average,
and was much further ahead of the peripheries of the world
economy (such as Latin America, Asia and Africa) in 1973 thanit was in 1938, it still could only claim a 1 : 2 proportion of theeconomies of Western Europe, and 1 : 3 to that of Western core
countries overseas. The "Second World" still remained theEuropean periphery dispite its neck-breaking drive to catch up
with the West.
During the last third of the twentieth century, the endeavor
to spectacularly catch up totally collapsed. The countries of theregion could not cope with the new structural crisis, could not
adjust to its requirements and slowed down from the late 1970s
on. During the 1980s the economic crisis deepened. Growth
was followed by stagnation and then decline. This was the
economic basis of a rapidly emerging political crisis whichconcluded in the collapse of state socialist regimes in 1989-91.
Since that time, the painful consequences of Soviet-typeindustrialization, the collapse of the isolationist Comecon
market, and the new efforts to change the economic model andrevert to pre-World War I laissez-faire and export-led
industrialization, all led to an additional 25 to nearly 50 percent
decline of GDP and industrial output. According to Maddison,
Central and Eastern Europe, as an annual average, reached aIvan T. Berend

7

negative growth of-0.8 percent between 1973 and 1992*2
Although they experienced several recessions, stagflationand economic turmoil, the Western core countries successfully
coped with the difficult task of adjustment to the structural
crisis and regained their vitality. Their annual average growth
between 1973 and 1992 reached 1.8 percent, nearly three times
more than that of Central and Eastern Europe. As aconsequence, the gap, or, more precisely, the abyss, has
expanded from roughly 1 : 2 to nearly 1 : 4 between Easternand Western Europe, and from roughly 1 : 3 to nearly 1 : 5
between Eastern Europe and the overseas West. For the firsttime in history, Central and Eastern Europe's per capita average
GDP fell behind that of Latin America. It's former advantageous
position vis-a-vis Africa eroded sharply as well. The average
Central and Eastern European per capita GDP dropped to
between one-quarter and one-fifth of the Western standards,
which had never happened in modern history. Their position is
far worse than it was at the beginning of the nineteenth century,
when Central and Eastern Europe reached about 60 percent of
the Western economic standard.
Even more important is the revitalization of the Western
economy, and the success of some of the Asian and otherformer peripheral countries, through the renewal of thetechnological base, i.e. the creation of a new communications
infrastructure, and the restructuring of industrial output andexports. In other words, growth was generated by a more orless successful adjustment to the requirements manifested in the
structural crisis.
It should be noted that some of the former peripheries inSouthern Europe and Asia quite successfully caught up with thecore during the end-of-the-century structural crisis. Spain,
Portugal, Greece, Turkey, and even Ireland, which had asomewhat lower average per capita income level than that of
the Central and Eastern European region in the middle of thetwentieth century ($2,025 compared to $2,604 in 1950), allgradually caught up with the West in an advantageous political

8Trans formation and Structural Changesituation. Having already profited from the Cold War division ofEurope, Southern Europe achieved a 4.8 percent annual
average growth between 1950 and 1973, and rose from 39.5 to49.1 percent of the western level. In the mid-seventies, theMediterranean periphery, in terms of average per capita GDP,surpassed its Central and Eastern European counterpart by amodest 5 percent. Between 1973 and 1992, after the collapse of
the dictatorial regimes in Spain, Portugal, and Greece, and, due
to the logic of the Cold War after their swift incorporation into
the European Community, the region reached an annual
average 2.2 percent growth rate, higher than the West during
these troublesome years of the world-wide recession. From alevel rather similar to Central and Eastern Europe between 1950
and 1970, they surpassed Eastern Europe during the last two
decades by nearly two times (179.5 percent) in per capita
average GDP. Spain and Ireland reached 72.2 and 72.6 percentof the West European level respectively.*3 Mediterranean
Europe and Ireland, former peripheries, are now catching up
with the Western core. According to well-based forecasts, Spain
may reach the western level in one-and-a-half decades.
The historical road of the former southern and eastern
European peripheries, which had a rather similar economic
performance during the two centuries between the 1770s and1970s, diverted dramatically.
Success or Failure of Adjustment
The reasons behind the historical drama in Central andEastern Europe are broadly discussed, and various, albeit often
contradictory, interpretations seek to provide convincing
explanations. Paul Marer speaks about a "misdeveloped
economy" or "new elements" of structural and institutional
misdevelopment during the state socialist decades.*4 The failureof state socialist modernization during the structural crisis of theseventies and eighties, and, consequently, the collapse anddecline of the economies of the countries of the region haveIvan T. Berend

9been an aftermath of previous "misdevelopment." In János
Kornai's interpretation, the steep decline of output and income,although "on the surface ... [is] similar to other cyclicalphenomena and structural transformations ... is somethingrather different ... its cause is the transition from socialism tocapitalism."*5 The transformational depression is inescapablebecause of "disruption of coordination," a transitory collapse of"enforcement of financial discipline," and of the pain of the"shift from the sellers' to a buyers' market" and in thecomposition of output and foreign trade.*6 From this diagnosis
follows the suggested therapy: "to end the decline one should
not go backward, but forward ... and accomplishing even fasterthe task still remaining."*7 The trauma and chaos caused by the
economic collapse, according to these interpretations, might berather remunerative since, as the Nobel-laureate economist
Gary Becker argues, "chaos is not all that bad," because order
will emerge out of chaos.*8
If the crisis is a repercussion of the "transition fromsocialism to capitalism," then even chaos is a positive
phenomenon. All the painful austerity measures and devastatingsocial-economic effects, in this argumentation, may beparalleled to the bitter pill that must be swallowed to cure thedisease. To arrive at the promised land, argue several experts,
the best way is to follow the most successful Western model oflaissez-faire and build the institutions of a self-regulating
market economy. These are well-proven and will indeed work.
The only questions are time, consistency, and patience. "If thepeople ... can endure the hardship that the policies ofstabilization, liberalization, and institution building inflict,"stated Michael Mandelbaum, "they will emerge at the otherend ... of the valley of tears, into the sunlight of western freedom
and prosperity."*9
According to this school of thought the first ray of sunlightilluminated the region in the summer of 1992, when Polisheconomic decline ceased and economic growth began. Poland
soon reached more than 4 percent annual growth, the highest

10Transformation and Structural Change

growth rate in Europe. Other countries recently followed:
Hungary reached a 2 percent growth of its Gross Domestic
Product, and the Czech Republic a 2.6 percent increase in 1994.
According to the forcasts for 1995, made by the European Bankof Reconstruction and Development in the fall of 1994, eleven
Central and Eastern European countries, virtually all of thecountries of the region (except some of the war-destructed
former Yugoslav successor states) will have positive growth-with Albania, Slovenia, Estonia, and Poland in the lead with 6
percent growth of real GDP. Poland (97 percent), Slovenia (94percent), Hungary (86 percent), and the Czech Republic (85percent) are inching toward the 1989 level of their Gross
Domestic Product. Slovakia, Croatia, and Romania also
surpassed 80 percent of their pre-1989 level.*10 Vaclav Klaus
proudly stated in February 1995: "The Czech economy andsociety have already entered what I call the earlypost-transformational stage, which is a stage where basic
transformation tasks have been fiilfilled."*11 Although most of
the successor states of the former Soviet Union, including
Russia, are still in decline, and their GDP dropped to less thanhalf of the 1989 level, exuberant reports were published in thesummer of 1995 depicting the Russian economy as havingbottomed-out; i.e., recovery was about to emerge.
According to this interpretation of transformational
depression, the end of decline and a positive growth ratealready represent the first signs of a soft landing at the otherend of the "valley of tears." Does this mean that, besides thestill present economic difficulties and still unfinishedmacro-economic
stabilization
andprivatization,
thepost-communist adjustment to the world economy is going
essentially well in the region?
Here we're come to the heart of the matter. How can wemeasure the success or failure of adjustment andtransformation? Are the progress of privatization and theincrease, rather than decrease, of output and GDP theappropriate parameters of measuring success? Nobody denies

Ivan T. Berend

11

the importance and positive role of these factors. The progressthat was made in marketization and privatization,*12 in curbing
inflation,*13 in restructuring foreign trade, and, finally, in halting
the steep decline of output and achieving economic growth,
definitely were great achievements of the transformation during
the last five years.
The essential question, however, is whether all thesechanges served the appropriate structural changes according to
the requirements of the turn-of-the-century international
economy. Several analysts argue that even the adopted
self-regulating Western market system was not tailored forCentral and Eastern Europe, and that "design capitalism" cannot
work because of the diverse historical-structural determinants
that create a kind of "pathdependency."*14 Tadeusz Kowalik, forexample, speaks about an inappropriate model that was
imposed by "shock therapy," which pushed aside the genuine
plan of Solidarity to establish a self-managerial system and a
Scandinavian type of social democracy.*15 Alec Noveunderlined the potential of a Keynesian model of state-led
transformation with a cautious gradualism that would better
serve transformation.* 16 I argued for a more organic
transformation by introducing a "regulated-market" and amixed economy with efficient, well-selected state interventions
in structural and investment policies, and a well-planned
combination of free trade and market protection to achieve
better results in structural adjustment.*17
The primary question of adjustment, however, is neither
the adoption of a laissez-faire model and shock treatment nor
state interventionism and gradualism. If one accepts the fact thatthe flux of the world economy, with its tremendous shocks,
recessions, inflations, new phenomena such as stagflation, andincreasing output without increasing employment, werecharacteristic signs of a major structural crisis, then the essenceof adjustment to the requirements of the "fifth industrial
revolution," and the "communications revolution," is a
structural adjustment. All the market incentives and private

12Transformation and Structural Change

initiative measures have to serve this central goal oftechnological-structural adjustment, of creating competitive
new industries and export sectors based on new technology, or
revitalizing old, ailing branches, making them competitive andacquiring new markets for their products that had generally lost
ground in international trade. (The latter was partly the casewith Canada and Japan during the interwar structural crisis,
when they gained significant ground in world exports byproducing and marketing textile and traditional engineering
products in the most competitive way, while these products
generally lost ground in the world market.)Technological-structural adjustment is not only an
economic task but a very intricate process with far-reachingrequirements.
Its complexity might be expressed by its prerequisites andinterrelationships with political institutions, societal
preparedness, including the general level of education, theflexibility of training and retraining, and the characteristics ofentrepreneurial attitude and social behavior. New technology
and industry definitely require a new type of labor force, highly
skilled and ready to be retrained to meet rapidly changing
requirements. Since physical work is broadly replaced byintellectual activities in the emerging "age of information," therole of higher education is exploding.
Adjusting to a structural crisis thus takes quite a long time.
Can we evaluate a process that is still only half-a-decade long?
Does it offer an appropriate perspective for making abalance-sheet? One cannot, of course, assume an "endresult". Nevertheless, the main characteristics of an emerging
era, as always in history, are best visible in statu nascendi. The
past years clearly show certain main trends and idiosyncrasies.
Did Central and Eastern Europe start on a good path toward
structural adjustment? Can we recognize the progressive
elements or, more precisely, the direction towards fiilfilling themain requirements of a complex socio-economic adjustment?
From this respect, the short history of the transformation inIvan T. Berend

13

Central and Eastern Europe has a rather mixed record.
Structural Changes in the Economy
Positive changes impressively appeared in the economic
structure of the former state socialist countries. A dynamic
development of the previously neglected service sector should
be noted first. According to a broadly accepted view, thebackwardness of services and infrastructure have become themajor bottleneck of economic growth and a successful
adjustment to the end of the century world economy in theregion. Marketization and privatization in post-1989 Central
and Eastern Europe led to a marked macro-economic
restructuring characterized by the decline of industry andagriculture and the development of services that changed thesectoral composition of GDP. Services exhibit now the fastest
growth rate and the most spectacular relative prosperity. "Muchof the expansion has taken place in retail and foreign trade, andprivately-supplied services, such as tourism, construction,
catering, finance, and insurance."*18 While, for example, theoutput of the material sphere, industry and agriculture,
decreased by 30 percent in Hungary during the first years oftransformation, the non-material sphere of services achieved a
5-7 percent growth. Trade, transport and non-material services
represented, as Eva Ehrlich and Gábor Révész calculated, 44.8
percent of total employment and 46.7 percent of Hungary's
Gross Value Added in 1989, but their share jumped to 55.7
percent of employment and 61.5 percent of the Gross Value
Added in 1993.*19 According to United Nations statistics, theshare of services as a percentage of Gross Domestic Productsimilarly increased in Poland and in the Czech Republic, from36 and 32 percent in 1900 to 53 and 50 percent in 1993
respectively. Paul Marer suggests that these figures were 56 and53 percent in 1994.*20 The same trend characterized the lessdynamically transforming Balkan countries as well: the share ofservices in Bulgarian GDP increased from 30 to 47 percent.

14

Transformation and Structural Change

Nikola] Ordnung called our attention to the striking facts thatbanking and insurance tripled their share in total employment
in Czechoslovakia during the first four years of transformation.
Tourism expanded from 24 to 100 million visitors between
1988 and 1994, and generated a boom in trade, hotel, restaurant
and banking industries.*21
As one of the most important elements of the expansion
and modernization of services and infrastructure, thetelecommunications system, which was backward, outdated
and paralyzed by COCOM restrictions before 1989 in Central
and Eastern Europe, received the biggest Western investments
in Hungary and Poland. German-American multinational
investors began modernizing the telephone systems of thesecountries, creating the basis for the belated triumph of thecomputer age. The fruits of these market initiatives will become
apparent in the decade to come.
Structural changes also strongly characterized thepreviously dominating industrial sectors of the former statesocialist countries. Since state socialist modernization failed
markedly because of a mistaken model based on an outmoded
branch and product structure of output and outdated
technology, the restructuring of the mezzo-economic level
acquired primary importance.
Restructuring partly occurred in a passive and defensive
way as a consequence of marketization and the opening up ofnational economies. Previously promoted leading branches ofstate socialist industrialization, such as iron and steel industries,and several branches of heavy engineering, lost their markets
and state subsidies. A withdrawing state stopped investing inthese branches, which then had to dismiss a great part of theirlabor force and decrease production. In several cases hugefactories and entire branches were closed. As a consequence,the percentage share of the outdated former leading branches ofindustry sharply decreased. Leading Czech and Hungarian
engineering industries lost their previous foreign (Comecon)markets and suffered a great decrease of exports. The export ofIvan T. Berend

15machinery, transport equipments and other capital goods
dropped to less than half of their 1989 volume in 1993 in
Hungary. The machinery and equipments represented 55
percent of Czechoslovak exports before 1989, but their sharedeclined to 25-26 percent during the early 1990s. These
industries lost a great part of their domestic markets as well,and experienced a significant decline of output. Whileindustrial output decreased by 36 percent in the Czech
Republic between 1989 and 1993, metallurgy andmetalworking dropped by 45 percent, and mechanical andelectro-engineering by 55 percent - all leading to important
structural changes of output. In Hungary, total industrial output
declined by 30 percent between 1989 and 1993, but metal andengineering industries dropped by 41 to 45 percent. Thispassive and defensive restructuring caused mainly bymarketization and privatization corrected the share of oversized,
non-competitive, technologically-outdated branches inindustrial production.
Parallel to this spontaneous restructuring were promising,although limited Western investments that established some
new industries and infant export branches in the western rim oftransforming Central and Eastern Europe. Multinational
companies played the pioneering role in establishing the
Hungarian automobile industry and modernizing the traditional
Czech and Polish automobile industries, as well as restructuring
the PoHsh chemical industry, Hungarian pharmaceutical firmsand Hungarian bulb production. The most promising elementsof restructuring were created by the emergence of Polish, Czech,
and Hungarian sub-contracting industries, the so-called screwdriver industries in the mid-1990s that were producing parts forWestern, mostly German and american companies.
The process of restructuring had important results not only
on the macro and mezzo-economic levels, but also on the
micro-economic, i.e. enterprise and product, level. The shift ofexports from Comecon to Western markets encouraged andeven mandated the improvement of several export items, and16Transformation and Structural Change

liberalized import competition has had a similar impact in thedomestic arena as well. Industrial consumer goods, for example,
unlike engineering products, could preserve their volume ofexport while markets were shifted from the previous
undemanding eastern Comecon region to the demanding andhighly competitive West. Hungarian foreign trade made asudden about face: eastern trade dropped back from 45 to 25
percent of its previous level while western trade grew from 54
to 75 percent of total trade during the first half of the 1990s.
While total exports diminished by 20 percent, exports ofindustrial consumer goods declined only by 2 percent in theearly 1990s in Hungary. Without major micro-structuralchanges, improvement in quality, cost of production,
assortments, etc., exports of these products would be unable topreserve their previous levels.
Regarding long-term structural economic changes,
however, the positive signs are strongly mixed with negative
trends. Although a spontaneous passive and defensive
restructuring (i.e. the sharp decline of outdated oversized
sectors of the state socialist economy) has an important positiveeffect on adjustment, the same process reflects a rather negative
trend in terms of end-of-the-century modernization
requirements. Foreign trade statistics, for example, reflect anegative structural change of exports from processed andsophisticated products to unprocessed goods and materials withhigh energy content. This phenomenon is not only exhibited by
the less advanced Balkan countries, but characterizes as well
the most advanced Czech Republic, Hungary and Poland.
While the volume of exports of engineering products andcapital goods declined by 56 percent, the export of fiiel andelectric energy increased by 26 percent in Hungary, the exportof raw materials and semi-finished products was able to retain
its previous volume in 1993. The collapse of exports ofengineering products in the Czech Republic was accompanied
by a relative increase of the exports of raw materials, fuels,
manufactured goods classified chiefly by material, and food:Ivan T. Berend

17

their share in exports jumped from 31 to 61 percent. "On thewhole," concluded Nikolaj Ordnung, "the structure of the
Czech exports moved closer to that of the developing
countries."*22 As a consequence of spontaneous, passive
restructuring, decline was much more dramatic in sophisticatedprocessing branches than in material and energy intensive
branches of Hungarian industry. "The visible losers are," stated
Ehrlich and Révész, " ... metals and machinery. Relative
winners, i.e. those who lost the least are food, wood andelectricity industries ... The winners in this branch-level
breakdown belong to less prestigious, or material producing
profiles."* 23 The same authors reported the virtual
disappearance of "a large part of historically developed
Hungarian work culture." Micro-economic structural changes
reflect the very negative trend of the disappearance of a nearlycentury-long industrial culture of sophisticated branches of
Hungarian engineering industry: employment in radio, TV, andcommunications equipment and apparatus dramaticallyplummeted by 72 percent; the production of medical, precision,and optical instruments lost 67 percent of its work force.*24
Promising high-tech branches of Hungarian industry could not
adjust, ultimately collapsing in bankruptsy. Ifit is true for the
Czech Republic and Hungary, the most advanced countries of
the region, it was even more so in the case of other, lessdeveloped former state socialist economies.
The future of structural adjustment depends on thepossibility of investment in modern sectors. The transformation
strategy unanimously adopted during the early 1990s in Central
and Eastern Europe was built on an assumed major capital
inflow into the region. That assumption was behind the idea of
introducing a laissez faire policy, opening the borders forforeign imports, giving tax exemptions for foreign investors, etc.
The first post-state socialist governments had entertained ardent
hopes regarding capital inflow that could cover roughly
one-third of the required privatization investments. It was amajor miscalculation.

18

Transformation and Structural Change

Central and Eastern Europe, after the collapse of the Soviet
Union and the conclusion of the Cold War, lost its crucial
political importance for the West. The first generous gestures,the $62.5 billion assistance pledged by the G-24 countries to
six countries of the region, was only partially disbursed. During
four years between 1990 and 1993, only $10.6 billion was
disbursed to five countries, with aid totalling $19.1 billion(adding in the Polish debt reduction of more than $8 billion).*25
Most of the hopes and promises stressed the importance ofprivate direct investments. During the first four years oftransformation the countries of Central and Eastern Europe
received barely more than $ 10 billion in direct foreign
investments, 80 percent of it channelled to Hungary and theCzech Republic. In 1993, the six countries received only $3.5
billion in direct investments. These amounts are disappointing.
However, 1994 and 1995, especially in the case of Hungary
represent a better result. Hungary is the biggest beneficiary of
the investments of the first half of the decade. Foreign capital
inflow totalled 3.8 percent of the GDP in 1993 instead of theassumed and forecasted 30-33 percent, but Budapest itself
received one-third of total foreign investments to Central andEastern Europe, and the Trans-Danubian city of Székesfehérvár,
a township of 100,000 inhabitants, gained more investments
than the Balkan countries altogether. In the Czech case-instead of the Hungarian 3.8 percent- the percentage of foreign
investment compared to GDP was only 0.8 percent; it was 0.6
in Slovakia, 0.2 in Poland, and 0.08 in Romania.
Central and Eastern Europe was not correspondent withmost other areas of the world regarding the role of foreignassistance. Southern Europe, the former Mediterranean
periphery, received incomparably far more from the European
Community. Compared to the extremely modest $36 and $30
per capita capital inflow to Central and Eastern Europe in 1992
and in 1993, Portugal received $173, Ireland $262, and the
Edinburgh summit in December 1992 agreed to transfer $ 195
billion to the new member countries during the second half ofIvan T. Berend19

the 1990s. It should be mentioned that the new Bundeslander,
the former East Germany, gained roughly $ 100 billion as anaverage annual capital inflow from the former Bundesrepublik
between 1991 and 1994. On a per capita basis, in contrast to theCentral and Eastern European $30, it reached $5,900.*26
If we broaden the comparative picture, we have to realizethat Asia and Latin America are much more attractive forinvestors than Central and Eastern Europe. Tiny Singapore itself
acquired 50 percent more capital between 1990 and 1993 than
did the six countries of the region put together. Brazil and
Mexico enjoyed a capital inflow of $100 billion each during
these years. The most telling example is the Mexican
financial-economic crisis in 1994, which generated an
immediate American action and an opening of $40 billion inassistance. Mexico received nearly twice as much in a week
than did the six Central and Eastern European countries
during the entire first half of the 1990s.
The countries of the region are thus left to their own
devices. Their resources, however, are rather shallow.
Accumulation and investments from domestic sources
decreased in the nineties. One should not forget that this was anatural consequence of the collapse of the Soviet modernization
model, which was based on a forced accumulation pattern. No
doubt, the central virtue of the Soviet model, the main attraction
for backward, agricultural countries, was the high rate ofaccumulation and investment generated by central planning,the destruction of market prices, and the stagnation or slow
increase of consumption levels.
Central and Eastern Europe thus has to face an unsolvabletask: to adjust to the transforming world economy by modern
structural changes, by creating a new infrastructure, newtechnology and new export branches, competitive on the world
market - without a sufficient amount of domestic and externalfinancial sources. The history of the area, maintains the
economic historian Scott Eddie, "suggests a highly pessimistic
outlook both in short-term and long-term ... [Theses countries]

20

Transformation and Structural Change

have to depend on their own resources for growth for a longtime to come. There seems little chance of escape from thevicious circle."*27
Does this mean that economic growth and relative
prosperity will be impossible to reach? Certainly not. Economic
growth has begun and will continue. Gross Domestic Productwill increase. A relative prosperity is around the corner,
especially if the world economy properly recuperates from therecent recession. WhatJkind of prosperity and growth will thus
be possible?
I can offer the lessons of Central and Eastern European
responses to the challenge of previous structural crises of the1870s-80s and 1930s. At that time, when the second and third
industrial revolutions in the mid-late-nineteenth century,
followed by the fourth industrial revolution during the interwar
years, challenged the fragile, partly modernized economies of
the region, and made the traditional leading sectors obsolete
and exports to the competitive world markets virtually
impossible, the countries of the region were unable to invest
and modernize their economies in an appropriate way. Hardly
any new export sectors emerged, and barely no structuralmodernization prepared the way for a successful adjustment.
Prosperity, however, still followed, and the crisis-ridden
countries not only reached the pre-crisis level of output andincome, but impressively surpassed them. In other words, they
became revitalized without structural adjustment. The region's
response was not an escape towards a higher stage of economic
maturity, but rather a "reverse escape" to preserve the obsolete
structures by isolation from the world market and competition
via regional arrangements. The agricultural areas of theAustro-Hungarian Empire increased economic growth basedon traditional sectors of output and exports, because the
Habsburg Monarchy turned to protectionism and imperial
self-sufficiency. The still agricultural countries of South-Eastern
Europe would repeat this pattern during the 1930s by way of aregional agreement system, orchestrated by Nazi Germany andbased onIvan T. Berend21

a series of bilateral agreements, which offered a safe market for
the non-competitive agricultural products of the East. Central
and Eastern Europe could thus cope with the short-term
negative side-effects of the structural crises such as highunemployment, declining output and exports and a huge deficit
in foreign trade, without adjusting to new technological andstructural requirements. Although "reverse escape" wasadvantageous in the short-term, it was rather destructive in thelong-run. Since the countries could not adjust, they preserved
their peripheral, dependent and backward status. They
remained more and more defenseless during the repeatedstructural crises to come, and they remained on the periphery ofEurope without narrowing the gap between themselves and theadvanced world.
Will history repeat itself again? Although the possibility ofa repetition of the old pattern can not be excluded, history
definitely offers alternatives. In reality, not only fast andsuccessful adjustments and failed attempts have characterized
the countries efforts to respond to the world economy's
challenge. A number of relatively backward countries that
could not adjust rapidly to the most advanced technology andeconomic structures have still found an exit from being trappedin the frozen old structures. During the structural crisis of theinterwar decades Japan and Canada, (and several successful
Asian countries in the 1970s-1990s) followed a strategy ofundertaking an output of products that were not the latest wordof the most advanced new technology and, had thus lost theirimportance in the most advanced countries. Producing thesetechnologically "expired" products, the less developed
countries could exploit their comparative advantages, theirlower wage levels and the geopolitical benefit of being near to
one of the leading economic powers of the world, and establish
close cooperation with it.
In this way huge capacities of the iron industry "migrated"from Germany to Japan, then to South Korea. A similar trend
characterized the less sophisticated branches of the textile22

Transformation and Structural Change

industry that were relocated to Japan, and then from Japan to
the neighboring "small tigers." The world market was filledwith cheap textile products from Hong Kong and Taiwan.
During the 1980-90s, China took over and gained ground in themarket of the core countries. The pattern is as follows: the"heart" of hi-tech industries, the newest products, a few steps
before the present, are always produced by the most advanced
core countries, the United States, Germany, Japan and someothers. Hong Kong, Taiwan, and South Korea that emergedwith a cheap output of traditional, mostly textile consumer
goods, now turned toward mass consumer goods production(the "second raw") of hi-tech branches such as TV sets,
personal computers, and other more sophisticated products, and"gave up" producing earlier, more "primitive" traditional ones.
China, again one raw behind, follows in their footsteps.
The secret of the success of these countries that started
from behind is their comparative advantage in the cost of
production, much lower wages, and rapidly increasing laborproductivity. The peripheries that were able to catch up with thecore increased their labor productivity by leaps and bounds.
Japan between the two wars - according to my calculations
based on the figures of Angus Maddison*28 - more thandoubled its labor productivity. Ireland, Spain, and China, during
the quarter of a century after 1973, also doubled the grossincome produced in one work hour. South Korea and Taiwan,in the same period, were able to increase their productivity levelby three times. It pays to note that the productivity level inJapan reached less than one-third that of Switzerland in 1913;
today, they have roughly the same level. The productivity of
Spain, in 1950, was 20 percent of that of the United States';
today it reaches 70 percent.
The strategy of follow up is based on close cooperation
with one of the most advanced countries, and on the efforts of
rapid changes of product mix if needed. Most of the successful
Asian countries that started from way behind used strong state
support, and combined domestic market protection with state-Ivan T. Berend

23

assisted export expansion.
Central and Eastern Europe did not follow this path andcould not increase labor productivity while trying to cope withstructural adjustment. During the decades since 1973, Czech
labor productivity, with slight ups and downs, stagnated. Poland
and Hungary reached a minimal increase of 7 and 13 percent
respectively. The productivity scissors, compared to theadvanced core, consequently increased, since the countries ofWestern Europe, as an average, increased productivity by 50
percent, and in some cases by more than 60 percent. Hungary's
relative productivity level is thus declining: in 1973 it reached
one-third, now only one-quarter of the West European standard.
Compared to Spain, the Hungarian level dropped fromtwo-thirds to one-third. (The Argentine, Brazil, and Mexican
productivity level exhibited similar tendencies; moreover, laborproductivity of Venezuela and Peru, as well as Russia, are 15 to30 percent lower than in 1973.)
Advancing from the "second raw" by increased laborproductivity and competitiveness in less sophisticated branches,
thus, has not yet characterized Central and Eastern Europe. The
potential alternative, however, might not be excluded,
especially because of the striking increase of labor productivity
in Hungary and Poland in 1994-95.
Which pattern will be repeated by history? If a historian
may risk any kind of forecast for the future - a slippery field forthe researcher of the past - the "reverse escape" pattern will be
repeated in the cases of all those Central and Eastern European
countries that won't be admitted into the European Union in
the decade to come.
Those countries which might be the majority of theregion's nations, that will remain outside, will show adevelopment in the traditional peripheral pattern without any
hope of joining the advanced core of Europe. In their caseAndrew Tylecote's forcast might be the reality: "Europe istending to polarize into a dynamic core and a less dynamic
periphery, the core being characterized by a tendency to rapid

24

Transformation and Structural Change

product innovation and low inflation, and the periphery by the
opposite ... The ex-command economies are taking their place,
inevitably, as a new periphery."*29
The peripheries, although they can and will increase theirincome, may lag behind since the gap between the advancing
core and the un- or semi-successM peripheries is consistently
and considerably growing: in 1913, intercountry income spread
was 10 : 1, in 1950, 26 : 1, and in 1989, nearly 40 : I.*30 Other
calculations reflect an even more dramatic opening of the
*31

gap.
Those countries that will be accepted by the European
Union, and the Western rim of Central and Eastern Europe
might have this historical opportunity to break out from thevicious circle of peripheral status, will get access to Westernmarkets and assistance and may repeat the Mediterranean"miracle". Five or six countries at the eastern border of Austria
and Germany, mostly relatively small with five to ten million
inhabitants, but, together with Poland, altogether not larger thansixty to seventy million people, may get this opportunity
because of a vital Western security interest. A relatively
declining humiliated and chaotic East and South-East Europe,with its explosive ethnic and minority conflicts as well as an
emerging nationalist extremism, might represent a dangerous
challenge for the West, especially for neighboring Germany,and demand a response to safeguard the eastern borders of theEuropean Union by creating a cordon sanitaire between its
eastern borders and the crisis-ridden East and South-East
Europe. Additionally, these countries with their relatively welltrained, well - educated, and relatively cheap labor force (with alabor cost of one-tenth that of Germany's) have started toemerge as a next-door subcontractor of western, most of all
German industry. If security and economic interests demanded
it and were recognized, the western rim of Central and Eastern
Europe, which made the best advance toward adjusting to theWest, and has a tradition of being the backyard ofGerman-speaking
CentralEurope,might
beconsolidated andIvan T. Berend

25

restructured in Western cooperation and by Western assistance,
and accepted as part of an enlarged Europe.
The first signs of this development have appeared on thehorizon.
Notes
1

Angus Maddison, Monitoring the World Economy
1820-1992, Paris: OECD, 1995.

I

Angus Maddison, "Explaining the Economic Performance of
Nations, 1820-1989" in: W. Baumol, R. Nelson, E. Wolf (Eds),
Convergence of Productivity. Cross-National Studies andHistorical Evidence, Oxford: Oxford university Press, 1994.
Angus Maddison, Monitoring ..., 1995.
Paul Marer, "Comparative Privatization
andRestructuring
Exoeriences and Prospects: Russia, China, and the Countries ofCentral Europe" in: I. T. Berend (Ed), Long-term Structural
Changes ... (forthcoming)
János Kornai, Magyar Hírlap, December 24, 1992.
János Kornai, " Anti-Depression Cure ..." p. 2.
János Komái, Magyar Hírlap, 1992.
Paul Marer id. mii.
Michael Mandelbaum,"Introduction"in:Sh.
Islam,M.
Mandelbaum(Eds),
MakingtheMarkets.
Economic
Transformation in Eastern Europe and the Post-Soviet States,
New York: Council on Foreign Relation Press, 1993. pp. 11, 15.

3
4

5
6
7
8
9

10

The Annual Report of the European Bank of Reconstruction andDevelopment,London: EBRD, 1995.

II

Nikolaj Ordnung, "Structural
Changes inaTransforming
Economy: The Case of the Czech Republic" in: I. T. Berend(Ed), Long-term Structural Changes ... (One cannot escape from
historical déja vu: Czechoslovakia was the first country in theSoviet Bloc that declared the end of the transformation from
capitalism to socialism in the mid-sixties and even changed its
constitution accordingly.)
The share of private sector in producing the GDP reached
60 to 70 percent in the Czech Republic, Estonia, Albania,
Hungary,12

26Transformation and Structural Change

13

14

15

16

17

18
19

20
21
22
23
24
25
26
27

28

Poland, and Slovakia; around 50 percent in Russia, Lithuania,
Slovenia, Croatia, and Bulgaria.
The Inflation rate is already a one-digit figure in Albania andCroatia, around 10 percent in the Czech Republic, Estonia,
Slovenia, and Slovakia.
David Stark, "Can Designer Capitalism Work in Central andEasternEurope?"in:Transition. The
Newsletter About
Reforming Economies, The World Bank, Vol. 3. No. 5. May
1992.
Tadeusz Kowalik, "Five Years After the Big Bang in Poland:
Achievements and Costs," in: I. T. Berend (Ed), Long-term
Structural Changes... (forthcoming)
Alec Nove, "Economics of Transformation: Some Gaps andIllusions" ,in: B. Crawford d), Markets, States, and Democracy,
Boulder: Westview press, 1995.
Ivan T. Berend, "End of Century Global Transition to a Market
Economy: Laissez-Faire on the Peripheries?" in: I. T.Berend(Ed), Transition to a Market Economy at the End of the 20th
Century, Mhnchen: Shdosteuropa-Gesellschaft, 1994.
Paul Marer op. cit.
Eva Ehrlichand Gábor Révész, "Structural
Changes in
Hungary, 1989-1994," in: I. T. Berend (Ed),Long-term
Structural Changes ....(forthcoming)
Paul Marer op. cit.
Nikolaj Ordnung op. cit.
Nikolaj Ordnung op. cit.
Eva Ehrlich and Gábor Révész op. cit.
Eva Ehrlich and Gábor Révész op. cit.
Krzysztof J. Ners and Ingrid T. Buxell, Assistance to Transition
Survey, Warsaw: Pecaet, 1995.
Krzysztof J. Ners and Ingrid T. Buxell, Assistance ..., 1995.
Scott Eddie, "The Transition to Market Economies. Lessons
from Hungary and the Case for Pessimism," in: David Good
(Ed), Economic Transformations in East and Central Europe,
London: Routledge, 1994, pp. 127-8.
Angus Maddispn, Monitoring ... pp. 248-49.

Ivan T. Berend

29

30
31

27

Andrew Tylecote, "Core-Periphery Inequalities in European
Integration, East and West," in: W.Blaas and J. Foster (Eds),
Mixed Economies in Europe. An Evolutionary Perspective on
their Emergence, Transition and Regulation, Aldershot, Hants,
Brookfield: Edward Elgar, 1992.
Angus Maddison, "Explaining the Economic Performance ..."
1994.
See Zsuzsa Férge op. cit.