Rising Inequality in Egalitarian Societies

In conversation with our editor Ferenc Laczo, Mitchell Orenstein, Professor of Russian and East European Studies at the University of Pennsylvania, discusses post-communist transitions.

Ferenc Laczo: Let us begin our conversation with what is perhaps the central question in your new co-authored book Taking Stock of Shock. You provide an evaluation of the social impact of the post-communist transition, which you call a bifurcated transition. What makes the transition such a Janus-faced one in your view and were there perhaps specific misrepresentations of the post-communist transition you were trying to correct with this new publication?

Mitchell Orenstein: I think the best way to answer this question is that we started by observing that evaluations of the post-communist transition are sharply divided. One evaluation is what we call the J-curve narrative: the idea here is that there was a short recession, things may have gotten a little bit worse after the end of communism, but by and large, and especially for those countries that reformed, they got much better soon. Today, people are doing fine and are much better off than before. The post-communist transition is essentially over – we often get asked why we are even writing a book about it. There is an acknowledgement here that there may have been some social costs, but these were supposedly far outweighed by the benefits. The other perspective, which is an official perspective in Russia, for instance, and President Putin has done a lot to submit this narrative, is that the 1990s were a time of total chaos and disaster. It was a socioeconomic collapse, a catastrophe of epic proportions. Many countries have not fully recovered. They need an authoritarian strongman to put things right and need to resist the West and these types of reforms. There are indeed very sharply divided views within and outside the post-communist region on what happened.

Strangely, these are also reflected in different social science disciplines, so certain disciplines, like economics, tend to be more on the side of the J-curve narrative, while other disciplines, like ethnography, tend to be on the side of what we call the disaster capitalism approach in a nod to Naomi Klein. The two of us come from different perspectives – Kristen Ghodsee being an anthropologist who has worked more on the Balkans, myself having worked on Central Europe and being a political scientist – and we had quite different perspectives about what has happened and used different approaches and data sources.

We thought what we were going to do in this book was to gather a massive array of data that came not only from economics, but also from political science, from demography as we both have an interest in social policy and demography, and also from ethnography. And that we are going to pull this together synthetically through creating a big data set, which is now available online at takingstockofshock.com, and that this would allow us to prove that one of these theories is right – either there has been a J-curve transition or there has been a disaster capitalism sort of transition.

What we have found, to the surprise of both of us, was very strong evidence for both of these perspectives on transition.

In other words, we could not really disprove either of them, it simply depends on which countries you are talking about, which regions you are talking about, which cities you are talking about, which individuals you are talking about.  Within a country like Hungary there are some cities that have endured a J-curve transition and are doing quite well. There are other cities that are doing terribly, and where the population probably has not got back to where they were in 1990, for instance, in terms of employment. That is a main message of the book.  

We see this in Central Europe where the Visegrád countries tend to be the better performing ones although with regional differences within them. But by and large, you see life satisfaction increasing, you see average GDP per capita rising, and many other indicators would indicate a kind of J-curve. But you also see indicators, particularly elsewhere, in most other post-communist countries, that there has been a very significant crisis which in many cases has not been resolved. You see, for instance, extremely high mortality rates that afflicted many countries and are still elevated in countries such as Russia and Bulgaria. You have seen many countries lose a fifth of their population and are slated to lose more. Out-migration has been a controversial issue that we take on in this book. There are some countries whose population may end up being half of what it was prior to the end of communism which we think indicates a failure of transition and a disaster for these countries, although that is in itself a controversial statement.  

The main argument is that the reason that this has happened is because of a vast increase in inequalities.

Some people definitely took advantage and did great, while other people ended up destitute and often dead as a result of these transitions, which most likely caused millions of excess deaths according to demographic statistics.

You have already highlighted that this book has resulted from interdisciplinary collaboration – you come from political science and your co-author Kristen Ghodsee works primarily as an ethnographer.  I was wondering whether I could ask you a bit more about any special negotiation going on between the two of you. Was there any difficulty writing a joint book? What have you gained by combining the various disciplinary perspectives?

We did not begin this project completely in agreement about things, but I think we ended it more in agreement. But for sure this was a discourse between different perspectives. Essentially my view was very much colored by the experiences I had as a political science working in the Visegrád countries, which I mentioned are the best-case scenario for these things.  My experience and my fieldwork indicated that a lot of countries had what was more or less a J-curve transition – in the Czech Republic and Poland, for instance, that perspective often held up.  Some of the countries that are now EU members, although not all, did pretty well overall, even if with significant issues and gaps, and even if it took a lot longer in many cases than people think. That guided my perspective; I certainly didn’t think that the transition was a total failure.

My colleague, Kristen Ghodsee has done most of her work in Bulgaria, which is a very difficult case and a very difficult country where the majority of people are dissatisfied or unhappy about the way things have been going and suffered much more than elsewhere and continue to do so. Her perspective as an ethnographer was very much shaped by both country and disciplinary perspectives. That is why we were testing these things out. It really came out of a debate between us that one perspective was maybe truer than the other, and we thought the way to resolve this would be to gather more data. 

It is really important to point out that different disciplines have totally different perspectives on transition. They are relying on very different data, and they are running very different methods and questions. For instance, economics has been heavily focused on average GDP growth and average per capita GDP growth, and to some extent on inequality.  But averages used in the economics field are insufficient for talking about distributional issues. In other words, a country could have higher average GDP per capital, like Hungary had for many years, but most people could be losing income if you have a lot of people gaining income at the top – say you have some extremely highly paid jobs that come into the major cities and 15-20% of the population benefits from that while the rest could be sinking.  

Moreover, what we found in looking further at the economic literature is that economists tend to believe that their own data is faulty – economists have in fact widely published that their own data on the transition is faulty. The reason for this is that the baseline data of what things were like in 1989 is incompatible with the way we measure GDP, for instance.  The communist governments all used a different type of measure for total production that was net material product. It had to be converted to GDP and it was not done well. It is difficult if not impossible to do well, or at least there have been debates in the academic literature for decades about how exaggerated or not the transition recessions were. There continues to be little agreement about this fundamental issue.

We thought that we need to really look carefully and triangulate all this data coming from other fields.  We looked seriously at public opinion data, which is not often done. Interestingly, what we have found is that there is not good comparable public opinion data for all post-communist countries, as there is for economic or demographic data.  In the view of my co-author, that is because it seems that the people who were making decisions did not really care what people thought about the transition. That would be one way of looking at it. But also from a methodological standpoint, in political science and economics there is a huge distrust of public opinion data, people think it fluctuates for all sorts of different reasons, it is very subjective, and it does not really tell us anything specific. However, we think it is very valuable and we did a big effort to try and collect all the data on what people think about market economy and democracy. That kind of question was periodically asked in Hungary, for instance, but it was not always asked in Tajikistan or Turkmenistan or even in the Balkans.

What we are trying to do in the book and why I think a lot of people are going to react to this book is because it tries to get the data in the different social sciences to talk to one another. That is a huge project that really is at its early stages.

As we are over thirty years away from the beginning of the transition, it is interesting to note that there is no consensus view in the social sciences about what has happened after 1989. 

We try to present that first consensus view about what has happened, and our interpretation is based on the rise of different types of inequalities.

You focus rather extensively on the human costs of transition. Reading your book is, in some sense, quite depressing as you address the staggering rise of poverty, the deep demographic crisis, the issues related to outmigration and the decline of social trust after 1989-91, among others. What do you see as the major costs of the transition and how exactly did they manifest? Which groups in society were hit particularly hard, who were so to say “the losers of the transition”?

The losers of the transition to some extent are the people who ended up impoverished.  Branko Milanović has shown in his work on global inequality that to determine how well you did, it matters more where you are born, what country you are born into than where you were in the income distribution. There were whole countries that really suffered enormously. I will just give one of the most prominent examples: Ukraine. 

We found eight countries in the post-communist region that by 2016 had not return to 1989 levels of production – that is 27 years later.

That is what somebody from the United Nations, from UNICEF called a biblical collapse in income. It is something that they will be writing about for several thousand years in the history of European countries like Ukraine or Serbia and similarly in Tajikistan. There are a number of countries like that, and they are not always the ones you think about. Some of the star reformers, like Latvia or Georgia, also end up being below where they had been economically.

Who suffered? I think predominantly the older and less educated members of society. From an economic perspective, women suffered more than men, rural people more than urban ones. All these pre-existing divides that you would expect really determined one’s chances. And people suffered very, very badly. There are estimates of millions of excess deaths. One of the ways to think about the transition is where it rates among other catastrophes that have befallen Europe.

From an economic perspective, according to the Maddison Project which has been reading economic growth over decades or centuries, this is the worst ever recession by a group of countries in the modern era.

There has never been a recession worse than the post-communist recession. From an economic perspective, it dwarfs the Great Depression, and it is not even close. In countries like Czech Republic or Hungary the recession that occurred was roughly comparable to the Great Depression, maybe a little bit less severe. But in countries like Ukraine or Tajikistan, it was many times greater, by our estimates probably some six to ten times. In the average or middle post-communist country, it was still greater than the Great Depression by a couple of times.

Will the transition be remembered as comparable more to wartime experiences? It is more comparable, I think, even if not as bad as what happened in Europe in the Second World War or the First World War, but it is up there in that kind of category of major catastrophes. There is truth, unfortunately, to that disaster capitalism kind of view that this is the worst economic outcome of anything that has ever happened. And frankly, a lot of people should be embarrassed who came up with doing it.

The result also indicates that it is not going to be over anytime soon. Countries are going to remain in a transition or post-transition phase for a very long time. The transition will ultimately be remembered as this massive debacle in a lot of countries – a biblical forty years in the desert or so. It is interesting that some countries that have spent almost as long in “transition” by now as they did under communism.   

At the same time, there is also going to be a legacy of transitions that is remarkably positive, where people had enormous opportunities that simply would not have been possible before. They are doing much better. Maybe they are living abroad, maybe in London, they are getting educated, can travel, and can speak freely.  

The odd thing about the post-communist transition which makes it incomparable to other major debacles in the world, is that you have a major socio-economic catastrophe at the same time as a major success.

There just are no other events like that. When there is a major catastrophe like a war or depression almost everybody suffers. During the Great Depression rich people jumped off the roofs of buildings because they lost everything. However, in the post-communist transition, some people are suffering the worst economic crisis in the modern era while their neighbors are doing great. 

That legacy of inequality is going to shape the politics of these countries for many, many decades. It will shape the overall experience of this part of the world in ways that are debated. It is very difficult for researchers to get their heads around it because of the dissonance between these two opposite things that were happening at the same time.

I certainly wish to ask you more about the political consequences, but before I would do that, let me ask you another question about framing. You cover a host of countries, you have all this rich data that relate to altogether 29 cases. You are studying more than 400 million people from the Visegrád countries all the way to Central Asia. I was wondering whether you could say a bit more about the diversity between the countries and what they still have in common. What are the legacies of communism that unite them even today, and that in turn means that it makes a lot of sense to study them in one frame?

Some people want to interpret this as a kind of regional move back to normality, where Central Europe rejoins Europe, Central Asia returns to Asia or rather to the poor developing countries. And I think there is a certain amount of return to diversity. However, it raises the question how come communism was able to lift all these countries, how was it able to produce in retrospect fairly positive economic results for many countries, or rather better results than they had afterwards.

You could look back at communism and say communism may have held back a country like Hungary or the Czech Republic, but in retrospect did a lot for Tajikistan or Serbia or Latvia or Georgia.  The fact is, of course, that Tajikistan did not really have that much to do with a country like Hungary. They are not tied together too much except by a few common historical experiences, such as the Mongol invasion and communism – which by the way, are pretty similar in terms of their geographic scope.

Why look at all these countries together, should not they be viewed separately? I guess the answer would be “yes, they should be.” But what we are trying to do is to assess the results of the collapse of communism, and of course communism took place in all these territories, and it did have diverse results and it is that diversity which we are trying to unpack.  And I think there are some common features of communism, there are common things going on. I think one has to be careful with the narrative that everything is fine in the Visegrád countries because things are not that fine in many ways.

What we’re finding politically is that there is a lot of people who are dissatisfied with markets and democracy even in the more advanced cases.

It is for the same sort of reasons: essentially it is because of vast increases in inequality.On average, the changes elevated a third of the population to much better circumstances than they were before, but have not really benefited the majority, or are taking a very long time to trickle down to benefit the majority.

One of the key findings of the book indeed seems to be that growth and disenchantment have, somewhat curiously, gone hand in hand in the post-communist region. Would you care to elaborate why you think that has been the case? A more specific thing I have noticed is that you claim that unlike for instance in Russia, social spending and growth have gone hand in hand in the Visegrád countries and the social consequences of the transition have thus been clearly preferable in these places. However, in terms of their rather limited commitment to the market economy and democracy and in terms of the level of anger and resentment felt towards the transition period, members of Polish or Hungarian society do not appear to be that different from their Russian counterparts today. How would you explain that remarkable similarity?

One thing that we talk about is the breakdown of public trust. If you have never looked at public opinion, as economists generally do not throughout the period, then you would never notice that people were disenchanted with the system.  Communism left a legacy in Central Europe, as well as elsewhere, of egalitarian beliefs. People tended to be more accepting of state intervention for egalitarian purposes than in, say, the United States, maybe more similarly to Germany. In general, there was a high level of egalitarian belief systems.

This did not always come through when we asked people “do you believe in markets?” People would say “Yes, I believe in markets.” But then you would ask them “Do you believe the government should guaranteed a job for everybody?” and they would again say “Yes, I believe that.”  In other words, people’s views about these general ideas about markets and democracy were not always confirmed by their views about more specific policies that would make them up.

By creating massive inequalities, the transition went very, very much against public sentiment.  

Probably, on average, if you went with what people said they wanted in 1990, they wanted more of a third way, they wanted something like market socialism, they wanted something that looked a little bit more like Germany in terms of high redistribution, but also dynamic markets.

That is not what they got.  What they got typically was the distribution of property and assets by privatization, which everybody ultimately saw as corrupt.  Perceptions of corruption went through the roof everywhere and they are much higher than they were in the communist period. Even though communism was known to be pretty corrupt and there are lots of jokes about that, people generally perceive corruption to be twice as bad, five times as bad now as it was back then. We think that is largely because the privatization process did not appear to be fair – it appeared that some people just grabbed everything and stole it. So that created a situation in which people did not really trust in the basis of society. There was also a huge outpouring of criminality at the time. We show that crime rates increased, murder rates increased in tandem with poverty rate throughout the region.  

That left people with the sense that the people who were in power had not got there because they were such geniuses. In our country, we think you are rich because you started a great business. In Central Europe, it is more common to think that you stole something.  That does not create basic trust in society, and we can indeed measure that through trust variables where the rates are extremely low. Even people who say, “I’m doing fine” – and a lot of people are doing fine particularly in the Visegrád countries – often also think that “my household circumstances are better, but I don’t think the society I live in is fair, and I do not think people are getting a fair shake.” That is because of real experiences, real inequalities.

Populists have had a field day in mobilizing the opinion that the elites are there not for any particularly good reason and are not benefiting the average person. Those sentiments are strong because, to a large extent, they are true and capture an important aspect of the transition.

Interestingly, in a lot of countries you see the people who have left tend to be a lot more liberal than the people who stayed, which speaks of a big brain drain – a lot of very successful people just left these countries. In a lot of cases, countries are made up of voters who are relatively left behind. My colleague, Daniel Kelemen talks about how in Hungary it is important for the Orbán regime to have an escape valve for people to leave – a lot of people who get tired of living under that particular government can just go. That leaves behind a population which tends to be more accepting, more disgruntled but more accepting of an authoritarian approach.

I think that is why when the European Bank for Reconstruction and Development first did public opinion polling, which was not until 2006 and that is some 17 years after the beginning of the transition, somebody there said, “we should actually poll people on what they think about market reforms” because they probably realized that the polls that were being done were not being done everywhere.  Even the Pew Surveys which are often looked at in the West tend to focus on the Visegrád countries plus a couple others, like Bulgaria and Russia. They would show much worse results if they covered countries more broadly. So EBRD thought in 2006 that they have got to ask people what they think and found that only one third of the people in the broader region actually supported market reforms and democracy. That is pretty poor considering that the EBRD at the time believed that they had succeeded massively, that the countries were finally doing amazingly well. They tried to put the best face on that result.

We show in the book how international organizations try to shape the narratives and create this J-curve narrative of transition, which is very distorted, just like the disaster capitalism narrative. The reason is that most people did not benefit the way they thought they would, and even if they did benefit, they still think that there are serious problems in society and things are not the way they should be.

One of the reasons why this is such an important book today is that it offers quite a critical perspective on capitalism after the fall of the Soviet regimes without accepting anti-Western nativist authoritarianism. Let us close our conversation today with two large questions: what might have been done differently after 1989-91? Second, what might be some of the key lessons of the post-communist transition for today?

I have never bought into the view that it was all inevitable. There are obviously things that could have been done differently. We had several people review our book for publication, one of them was clearly more connected with a neo-liberal perspective on things and objected very strongly to the comparison we draw in the book between China’s and Vietnam’s economic results and those of the Central European countries. János Kornai, the famous Hungarian economist very strongly believed that communism could not be reformed. Yet in China and Vietnam it was reformed successfully, or you could say transformed in a more gradual fashion over several decades without suddenly getting rid of every single state enterprise, but rather by creating a new dynamic private market and private enterprises and then gradually shrinking down the size of the state. At the time of the transition, China had a lower GDP per capita than Russia, and today is much, much beyond Russia.

There is no question to me that the lesson of China and Vietnam are that dualism, meaning a dualistic private capitalist and socialist economies, combined with gradualism was a better transition strategy.  

There are certain excuses that are often made by neo-liberal economists that China was at a lower development level. That is true but was also true before and China did not grow.  The other objection, which I think is a more serious one, is that they did not democratize and maybe the post-communist transition is what was possible under democracy. I think that is wrong too.

I think the lesson in the last thirty years has been that all the post-communist countries have been extremely dependent on the rest of the world for capital, and they have been extremely vulnerable to international advice. Had the international organizations proposed a dualistic model of gradual reform they could have kept these countries on target for these thirty years. The reason that they did not was simply because the reformers were radical anti-communists and wanted all the communists out, they wanted all the “red directors” out. They were market fundamentalists who believed that markets would cause massive enterprises to spring into life. They were disappointed.  I think that model was broadly applicable to a place like Poland, and a couple other places, but it was not widely applicable. For most people, it would cause massive suffering. I think there are a lot of different policies of gradualism that could have worked better.

However, I should say in the book we do not get too far into that issue, and we did not really mean to focus on it. We want to launch a debate about this, so it is great that you asked this question. We have views about this, but if you are a social scientist and trying to prove it, it becomes kind of difficult because there are a lot of things going on at the same time. There are geographic factors, there are economic reform factors that all overlap, cultural factors that overlap with political factors. It is a long discussion to have. Some people will reach different conclusions about why it has happened this way.

We just want to focus on what happened in this book because you cannot explain why it happened if nobody agrees on what happened in the first place. 

Our book is really meant as a first step to a bigger debate about why this happened. We think we are now in a position to debate different perspectives.

We do have to focus on the effects of the transition because they were deleterious and I mean extremely deleterious – deleterious would be an understatement if I told you that we were talking about an event which was six times worse than the Great Depression. It is not until we can get both the negative and positive sides accounted for that we can begin to say why it all happened.

The main answer to me would be that it is because that is the way neoliberal capitalism works in a diverse group of countries that you cut loose and subject to market forces. Some maybe will thrive while others will fail. However, I do not know if anyone said that was going to happen at the outset. It may seem obvious to us now, but at the outset if you had said to a country: you have had all these advantages under communism, but we are going to cut you loose and now you could end up like Luxembourg or like Rwanda, and we cannot help you, would you have chosen this approach? That is not, of course, what was asked at the time.

What they said instead was that we are offering you a market paradise, everything is going to get better, you are going to be living great. You just have to do all these things we tell you perfectly and then everything is going to work out amazingly well. And if you ended up more like Rwanda, that is really your own fault.

I think we really need to revisit that type of economic advice and I think the biggest impact for this book should be on the field of development economics. Our book should become part of a rethinking of some of the strategies that have been applied.

The transcript has been edited for length and clarity.

In collaboration with Karen Culver.

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