Globalization Under and After Socialism
The Evolution of Transnational Capital in Central and Eastern Europe
Besnik Pula

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Introduction

The reigning image of state socialist economies as they existed during the second half of the twentieth century is that of fully closed, autarchic systems. Today, by a number of measures, including dependence on foreign direct investment (FDI), export specialization, and the dominance of transnational corporations (TNCs) in the local economy, the ex-socialist economies of Central and Eastern Europe are among the most globalized in the world. Was the socialist past merely an obstacle these countries needed to overcome to join the global economy? Or, did socialism instead lay the groundwork for the region’s present-day globalization? Globalization Under and After Socialism tackles this puzzle through an analysis of institutional reform and globalization in the East European ex-socialist economies from the 1970s through the first decades of the twenty-first century. Specifically, I focus on what are today known as the Central and East European states. The geographical designation of Central and Eastern Europe has varied usages. In this book I include Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovenia, and Slovakia. The historical sections also discuss Yugoslavia, Albania, the German Democratic Republic (GDR), and the Soviet Union, but these cases receive uneven and partial attention. The term “East Europe” is used more broadly as a designation for the ex-socialist states of Europe.

The ex-socialist economies would seem to represent some of the world’s most unlikely places for the emergence of transnationally integrated economies. Indeed, by most accounts, the legacy of socialist industrialization was a burden that needed to be overcome rather than a basis to advance the region’s political and economic transformation. Could institutional developments in the area of trade, technology, and international economic cooperation during the socialist era have in fact laid the basis for the region’s globalization? This book aims to argue precisely that, showing how trade and reform policies during the socialist period created the organizational and institutional basis for the region’s economic globalization in the 1990s and 2000s, and that history has much to do with where these states stand today in the global economy.

What has East Europe’s globalization looked like, and why does it matter? The fall of Communist Party rule in East Europe after 1989 unleashed one of the greatest experiments in economic reform in modern history. In a moment of exuberance, analysts declared the victory of capitalism and liberal democracy, even that the world had reached “the end of history” (Fukuyama 1992). Economic reforms, many designed with the aid of Western advisors, aimed at implementing markets in ways that would radically reshape the formerly centrally planned systems. A burgeoning academic literature grew around the problem of transition, a powerful organizing concept that was soon embodied in international financial institutions such as the European Bank for Reconstruction and Development (EBRD), established for the specific purpose of financing and monitoring East Europe’s transformation. For the EBRD and others, one of the main organizational tasks in relation to the newly anointed transition economies became the benchmarking of “transition,” with the region’s past quickly fading into the background and standardized quantitative indicators of an idealized market economy model used to measure the region’s progress. In academic debates, as well, for a considerable period, the legacies of socialism dropped from view. When spoken of they were described largely in negative terms—obstacles that had to be overcome if democracy and markets were to be implemented successfully. This left the impression that the trajectory of postsocialist states and economies had much to do with what their politicians did, but very little to do with where their institutions and economies came from.

In making these remarks, my aim is not to take the opposite view—that is, to glorify the socialist past or ascribe it undue merit for a future its bearers neither envisioned nor intended. Instead, my goal is to present an empirically nuanced and theoretically attentive argument on what about socialism did matter in the making of postsocialist economies. The focus on globalization is not arbitrary. Indeed, I show that the origins of East European globalization are to be found in the socialist experience. That is, the prevailing feature of present-day Central and East European economies, their reliance on FDI and the depth of the transnational integration of their key industries, was a process whose development was laid out during institutional reforms these states undertook in the 1970s and 1980s, as they attempted to gain access to, and better integrate with, Western trade, finance, and production. The experience of that period laid the groundwork for the region’s future transformation and the patterns of postsocialist development that emerged in the early twenty-first century.

Suggesting that the structural conditions for Central and East Europe’s globalization were laid out during the socialist period is not an effort to remove contingency and politics from the picture or to present a linear and evolutionary narrative of change. Indeed, the making of globalized economies was infused thoroughly by the political choices made by successive (socialist and postsocialist) political elites; moreover, different paths of integration with the global economy have had divergent outcomes for domestic institutional development. From this general perspective, then, I take a historical-institutionalist view on the transformation of socialism. The familiar themes of institutional stickiness, path dependence, cumulative causality, and unintended consequences pervade the analysis. Rather than the “transition” view of equal starting points where all ex-Communist states and societies enjoy equal opportunity in benefiting from globalization, the historical view taken here shows that starting points to globalization were not the same and that, in that game, some already had a head start. More regionally and historically informed analysts acknowledge this. What this book does is take a comparative and historical approach to identify what exactly about the experience of socialist industrialization made countries different in organizational and institutional terms, and how that mattered causally. Ultimately, in Central and Eastern Europe the question is not if states globalize their economies, but under what terms do they do so and in what role are their industrial capabilities cast in the twenty-first century international political economy? This new international role ultimately shaped their domestic institutional development. The path of getting there marked the political crossroads these countries found themselves at during the early 1990s and forms some of the dilemmas of future development these countries face today.

The Argument in Brief

I explore two sets of outcomes in this book. The first are the region’s differentiated capacities for rapid transitions from socialism to transnational capitalism through an FDI-driven investment and export policy. I argue that the origins of these capacities lay in the structure of ties that these economies began creating with TNCs beginning in the 1970s. It was 1970s reform socialism, I argue, that first laid the groundwork for the transnational capitalism of the 1990s and 2000s. The exhaustion of Stalinist industrialization, world economic opportunities in the 1970s, and the politics of reform within the socialist countries intersected in ways that led socialist states toward variants of import-led growth models that depended heavily on Western finance and export markets. While these growth models faltered in the 1980s, they created crucial ideational and organizational legacies that proved critical after 1989.

The political revolutions of 1989–1992 and the final collapse of the Soviet-led international socialist economic bloc turned East Europe decisively in the direction of market reform. The experience of import-led growth led the economies of Central and Eastern Europe toward developing industrial enclaves that were relatively competent world-market actors. These created the basis for the region’s turn toward FDI and the making of what some have called its “manufacturing miracle” (Bohle and Greskovits 2012) of the 2000s and 2010s. These unevenly distributed capacities launched the region’s first postcommunist divergence as it began its uneven and differentiated integration into the globalized economy of the twenty-first century.

The nature of domestic economic regimes and the emerging international market roles constitute the second outcome examined in the book. While often described as a homogeneous political-economic region, the analysis in Chapter 5 shows important distinguishing features of political economies in Central and Eastern Europe as they integrated into global production chains via flows of foreign capital, industrial restructuring and institutional reform, and accession into the European common market. Here, it shows that the degree to which political economies were export- or domestic-market oriented, the degree to which market reform became politically tempered, and the mode of the economy’s incorporation into transnational production chains determined whether the economy assumed an assembly platform or intermediate producer role. These roles are consequential for the role transnational capital has within national economies, but more importantly for the articulation between transnational capital and domestic production regimes. Put differently, I show that transnational capital plays a very different role in each type of economy’s postsocialist “dependent development” (Evans 1979): In assembly platforms, transnational production remains largely isolated from the broader economy, whereas in intermediate producers, domestic firms appear as formidable partners and competitors to TNCs thereby enhancing the spillover effects of transnationalization to the broader economy. While radical openness toward transnational capital became Central and Eastern Europe’s mantra in the 2000s and 2010s, it is in politically negotiating the terms of transnational capital’s entry and the role of state policy toward domestic producer groups that comes to define differences between states like Slovenia, Hungary, and the Czech Republic.

Organization of Globalization Under and After Socialism

This book makes its case in the following way. Chapter 1 discusses approaches to East European socialism, globalization, and postsocialist transformation. In considering world-systems, institutionalist, and transitological approaches to East European globalization, I propose my own comparative and historical institutionalist framework that sees the region’s world economic integration and institutional transformation in terms of a series of cumulative but nonlinear “punctuated evolutions.” Chapter 2 traces the historical origins of East Europe’s industrial development as it became excluded from US-led postwar international economic arrangements. It discusses the intensification of trade within the international socialist bloc through the establishment of the Council for Mutual Economic Assistance (Comecon) and the changing economic relations between the Central and East European states and the Soviet Union. The chapter assesses the importance of intrasocialist trade for East European industrialization, highlighting varying patterns of industrialization and national political responses to Soviet domination. This historical background informs the comparative analysis in Chapter 3, which examines causes for the exhaustion of Stalinist industrialization, changing opportunity structures in the world economy, and efforts to reform domestic institutions. In particular, the chapter explores the rise in the 1970s of import-led growth models of industrial upgrade, showing variation across socialist bloc states’ engagements with the capitalist world to reflect a variety of domestic and international political priorities. The chapter documents how import-led growth led to the protoglobalization of East European industry as it began to participate, however marginally, in chains of transnational production that cut across the East-West political divide.

Chapter 4 documents the continuities between East European industrial protoglobalization in the 1970s with foreign investment inflows in the early 1990s. It does so by shifting attention from the state to the level of industrial sector and enterprise, to examine patterns of industrial cooperation and specialization that emerged during the era of import-led growth. What emerges as a key asset for East European economies after 1989 are organizational capacities to implement arrangements for the transnational production of goods and to access Western markets. The origins of this capacity lie in the reforms of the 1970s, when East European economies implemented a new model of interfirm cooperation that involved horizontal integration with Western TNCs in the form of product licensing, joint production, and joint research and development (R&D), and vertical integration of East European industry into supply chains with Western industry. These interfirm ties proved central for industrial restructuring after 1989 because they generated an organizational learning experience among both Western firms and East European enterprise that laid the foundation for TNC-driven globalization in the 1990s and 2000s.

Chapter 5 assesses the significance of industrial transnationalization through the 1990s for the international economic roles that the region’s countries occupy in the twenty-first-century global economy. While legacies of transnational production provided a structural advantage for countries adjusting to globalization, political choices made during the reform period of the 1990s were also important in the manner in which legacies were mobilized toward postsocialist developmental goals. Rather than follow patterns of structural determination that drew from past decades, the period presented a number of critical junctures that pushed postsocialist economies along divergent paths of transnational integration and institutional adjustment to globalization. In the process, the states of Central and Eastern Europe assumed one among three possible roles in international market integration: assembly platform, intermediate producer, or combined. The chapter presents a counterintuitive finding, that those countries that pursued globalization the hardest became the largest relative losers, becoming increasingly dependent on the capital and technological capabilities of TNCs while seeing the relative decline of domestic skill and technological capacity. Among other countries, large domestic markets kept globalization at bay, thus differentiating economies on their levels of global integration. The analysis in this chapter thus challenges homogenizing depictions of Central and East European economies to show that the economic and institutional outcomes of their globalization have been neither unidirectional nor homogenizing, but determined by both industrial legacies and domestic political contingencies.

Chapter 6 examines comparatively the contingencies of the postsocialist period and the choice of reform orientation during two critical junctures, in 1989 and the late 1990s. The political analysis of this chapter demonstrates how choices of reform orientation in the making of Central and East European political economies were cumulative and path dependent. In the 2000s, FDI-driven development became the norm in most countries. However, the degree to which countries had worked to cultivate domestic capital during the early reform period proved crucial. In cases where postsocialist industrial restructuring relied most heavily on FDI, states eventually lost the advantages of skill formation and endogenous technological development that they had built during the socialist era. By contrast, in cases where postsocialist governments made efforts to cultivate domestic capital and industrial competitiveness, the economy developed greater capacities for sustained global competition and generated political economies supportive of innovation and skill formation through educational policies and pro-worker employment laws. This transpired even in cases where governments initially pursued policies of supporting domestic industry but began in the 2000s to turn increasingly toward FDI, highlighting the importance of institutional residues of past policy choices in the making of postsocialist political economies and the impact on local institutional change of the timing and mode of entry of TNCs. In the Conclusion I remark on the region’s developmental challenges after the 2008 global financial crisis and the euro crisis.