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The Soviet Union and Eastern Europe—The Roots of The Crisis (Part Two)

Robert Brenner12 February 2016

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In the second part of his 1991 essay on the decline of the Eastern Bloc Robert Brenner provides a prescient analysis of the likely outcome of the political and economic crisis in Eastern Europe and the Soviet Union. He correctly predicts that the future for the region would resemble less the post-war experience of Western Europe and would more closely follow the trajectory of the nations of the Global South. The essay originally appeared in the March/April 1991 issue of Against the Current and is reproduced here for the first time. Read the first part of this essay on the nature of exploitation and accumulation in the Soviet and eastern bloc bureaucratic systems and the beginnings of its crisis.

Brenner is the author of many important interventions in world economics including: 
The Boom and the Bubble, Merchants and Revolution, and The Economics of Global Turbulence.

Hoping to capitalize on radical changes in Eastern Europe in order to undercut conservative opposition to his own reform program, Mikhail Gorbachev clearly miscalculated the strength of the hurricane he was unleashing. By allowing Polish citizens to challenge the hegemony of the state bureaucracy, he made it very difficult to halt similar challenges elsewhere in Eastern Europe, in the Baltic States, and indeed in the Soviet Union itself.

That hurricane gathered speed throughout the rest of 1989. Following the Poles, the Hungarians quickly moved to plan their own elections. But perhaps the decisive moment came when the Hungarian government agreed to allow East German citizens to leave Eastern Europe by opening its border to Austria. This step could not have been accomplished had Gorbachev not explicitly approved it.

Once the East Germans had secured access to the West indirectly, how could they be prevented from gaining it directly? Soon hundreds of thousands of East Germans were tearing down both the Berlin Wall and their own bureaucracy. It is clear that the old East German (DDR) bureaucrats were initially set on repression. But, at one of the most dramatic junctures in the whole revolutionary process, with the DDR internal forces poised to disperse the Leipzig masses, Gorbachev and the Russian military men in East Germany made it clear they would not back up the old regime. Within weeks the old CP rule in the DDR had collapsed.

There was a similar process in Czechoslovakia, marked both by a regime-splintering general strike of the Czech working class and a convenient announcement by the Gorbachev government that the Warsaw Pact invasion of Czechoslovakia in 1968 had been wrong. Soon the poet Vaclav Havel was leading the government and Dubcek, hero of 1968 and martyr to the Soviet invasion of that year, had been restored. Only in Rumania was the revolutionary process, once begun, at all difficult or extended.

Perhaps the most striking aspect of the East European revolutions is the ease with which they overturned the old regime, once its major prop was removed. It is now evident that the bureaucracies there never established deep roots in their societies, and that they maintained themselves almost entirely by force, including the periodic armed intervention of the Soviet Union. Once this external buttress was removed, the regimes collapsed.

Outside of Rumania, then, the revolutionaries of Eastern Europe achieved victory with breathtaking, unprecedented speed. The increasingly intense, intransigent, and violent resistance of the old ruling strata—a common feature of almost all of the great revolutions—was completely absent. This is a sign not only of the minimal political legitimacy of the old ruling strata, but of their extreme demoralization.

The extraordinary fact is that broad sections of the ruling bureaucracies, especially in Hungary and Poland but perhaps also in the USSR and elsewhere, had not only lost faith in their system but had actually decided on an attempt to restore capitalism. This is almost unprecedented: revolutions from above are rare enough; even more unusual are the rulers who give up their domination with such (relatively) uncertain prospects in the new order to come.

Given the disarray of the old ruling elites, it was not necessary for Eastern Europe’s masses to mobilize, as they have historically had to do in great revolutions. We have not, as yet, witnessed the classic revolutionary process in which radicalization intensifies in response to resistance at each successive stage in the conflict—and in which at each successive stage one after another of the politically more moderate and socially more privileged forces falls away.

Politically moderate and relatively privileged forces have managed without much difficulty to retain the leadership of the mass movements throughout the first, destructive, anti-bureaucratic phase of the revolution. They will therefore almost certainly succeed in setting their mark on its first constructive phase, introducing at least the formal, socio-legal framework for the establishment of a private property capitalist system.

Their goal is a new order where their contribution will be more properly recognized; they are, therefore, the primary proponents of the capitalist market. Freed from subjection to the old order and allowed to sell their human capital on the market to the highest bidder, they hope to reap the benefits that they believe the old bureaucracy unjustly denied them. It is their fond hope that the establishment of capitalist private property will flood Eastern Europe with Western capital.

Capitalist Restoration Or Underdevelopment

Though the new balance of power in the East currently favors this emerging strata of professional and technical intelligentsia, conditions are far from favorable for setting up capitalisms that will develop the productive forces and raise living standards there, beyond Germany and possibly Czechoslovakia.

Conditions are even less favorable for the combined development of capitalism, democracy, and freedom in this region. Bringing in capitalist private property will require dismantling the greater part of existing industry, which cannot compete on the market. Mass unemployment will result, while the collapse of production will make it impossible to finance the social safety net. Establishing any potentially competitive manufacture will require very cheap labor and thus a significant reduction in wages.

The East European working classes are unlikely to passively accept the enormous sacrifices of what will undoubtedly be a very extended "period of adjustment." And the new ruling cliques there are unlikely to hesitate in adopting any authoritarian political forms required to impose the "necessary" austerity. Walesa is already talking about this in Poland.

There is therefore reason to expect that there will emerge in the longer run the renewed mass working-class struggles that are a necessary condition for the rebuilding of a left and the restrengthening of the ideas of socialism, both within the region and on a world scale.

Unless massive working class revolts occur, capitalist property relations could be fully restored in much of Eastern Europe over the next several years. This is not to say that the process will be easy. After all, even with the best will in the world, Margaret Thatcher has been able to privatize perhaps 10-15% of the British economy in her years in power; the East Europeans are aiming for something like 75%.

Moreover, in Eastern Europe, the problems are obviously much greater, precisely because there is not yet a capitalist class and a capital market through which to carry out the process. Units will have to be sold off or given away, but to whom and at what price? How can one know the value of firms when there is no already-existing market? Who, in any case, are the capitalists going to be?

Members of the old bureaucratic class were not entrepreneurs, so its members are hardly prepared to preside over a dynamic development of the productive forces. Even the former factory managers—used to operating in a system driven by politics rather than competition—are hardly prepared to assume roles as risk taking, capital advancing, technical innovators. Great sales to foreign capital will be politically dangerous for any government, no matter how much it really wants them. But if the firms are simply given over to the former managers or even the workers who today run them (highly unlikely), how are the other citizens who are not managers or workers in a given firm to be compensated?

Privatization, then, will be fraught with conflicts. Still, unless the working class forcefully reenters the picture, these conflicts will occur among a multitude of special interests struggling for a piece of the pie rather than struggles against the process itself Nonetheless, for the moment—if not necessarily for long—there seems to be a relatively broad consensus throughout the society, including the working class, on breaking up the old system and moving to the market

Privatization will be least difficult in East Germany, where West German capital will simply assume control of potentially competitive units, while the rest—the great majority—will be allowed to die a quick and painful death. Yugoslavia has moved far in this direction along its own distinct path. Poland and Hungary are also well on their way.

All of these nations have either introduced or are in the process of introducing the following structural changes: making their currencies convertible, freeing trade with the West, establishing a market for capital, decontrolling prices and allowing them to be determined by the market, eliminating government subsidies to inefficient enterprises, and—the kicker—privatizing state owned means of production.

Czechoslovakia has not yet gone very far down this path. But in principle, the government has resolved on restoring capitalism. The Soviet Union alone represents a very different case, as we shall see.

Still, it is one thing to transform a bureaucratic system of social relations into a capitalist system of social relations. It is quite another thing to make capitalism actually work well. With the exceptions of East Germany—which will be swallowed by the West German economy—and possibly Czechoslovakia—whose economic history is closer to Western than Eastern Europe—massive dislocation will produce precious little economic growth, let alone increased living standards.

East European economic development will be stymied by abysmally low productivity. Even the most productive East European manufacturing—to be found in East Germany—operates at well under half the productivity levels found in the advanced West; less productive East European manufacturing in Poland, Hungary, and the USSR rarely operates at more than one-third the Western level.

Things reach their worst state in the most modem industries. Last spring, for example, East Germany’s largest electronics group—Robotron—introduced a new AT personal computer at the Leipzig fair, with a price of 37,000 East German marks. A similar computer in the West costs only 2,000 West German marks.

It is because of disparities like these—and what they imply—that even the more prosperous regions of Eastern Europe have living standards which are, at best, half those in the advanced West. Comparable ratios for the rest of the region stand at one-third or less.

Solving this productivity problem places Eastern Europe in a double bind. It needs to take advantage of the world division of labor to acquire western machinery and western techniques so as to raise output per input. But the region's low productivity makes exporting difficult, which in turn depresses imports. In hard currency terms, the combined exports of the whole region, containing 136 million people (not including the USSR), were about 1/3 of Hong Kong’s, 4/5 Korea’s, and the same as those of Taiwan.

Eastern Europe’s massive debts—which make the West wary of lending East European states the capital they need for Western imports—further exacerbate the problem. Poland’s foreign debt today is $40 billion, Hungary’s is about $20 billion, and Yugoslavia's is perhaps $17 billion.

A huge part of these countries' export earnings are siphoned off by debt payments, leaving little remaining capital for the import of machinery. For example, Poland's debt is 470% of its annual exports. Such nations will have a hard time convincing Western banks to provide further advances, especially in light of their recent experience with non-payment in Latin America.

What about foreign direct investment? Here we come back to the fundamental double bind: since this region is so lacking in comparative advantage, on what basis can anyone expect to invest here and sell on the world market?

The plant and equipment is essentially worthless for a Western producer intent on exporting to the world market. Transportation is underdeveloped and communication is very backward. Infrastructure as a whole is in disrepair Labor appears to be skilled, but this is largely an illusion; labor has been trained to work on plant and equipment which are many decades out of date and therefore possesses essentially outdated skills. Massive retraining will be necessary.

Given this context, Eastern Europe’s prospects for development under the impact of the market must be met with skepticism. It is true that subjecting all of the units in a national economy to competition—as is happening today in Poland and will soon happen in Hungary—will precipitate a certain shakeout favorable to more efficient allocation. Firms failing to supply goods demanded on the market will go out of business or be forced to enter other lines; market discipline will thus tend to curb somewhat the old massive tendencies to gluts and shortages. But the key problem—inducing investment—will remain. Profitable manufacturing for export is not on the horizon.

Consequently, the most clear-thinking and hardline free marketers are betting everything on a radical reduction in the costs of East European labor. This is the real meaning of de-regulation, privatization, and marketization. At the advice of Harvard economist Jeffrey Sachs, already famous in Latin America for overseeing the demolition of the Bolivians' meager standard of living, the Polish government has adopted a plan for the transition to capitalism overnight This plan calls for ending subsidies to state industry and cutting the safety net, thereby dramatically raising unemployment and, as a consequence, intentionally lowering wages by 20%.

Yet, it is hard to see how this brutal neoclassical program is going to do anything but create a depression. Admittedly, the depression should help reduce inflation and bring down wages. Herbert Hoover proved that depressions can indeed accomplish those goals. But why should depression lead to development?

The free marketers, in their dogmatic commitment to the market’s “automatic adjustment” mechanisms, seem to be overlooking two things.

1. Declining demand/intensifying competition. The obverse side of radically declining employment and radically declining living standards is plummeting demand. How can protocapitalists be induced to invest when the home market is collapsing? To make matters worse, Poland's adoption of free trade will flood the country with imported goods. Why Western manufacturers, in contrast to Western import merchants, should find intensified competition in a contracting market at all attractive for their investment funds remains a mystery.

2. Comparative advantage does not derive from cheap factors. It must be constructed. Even if Poland and the other East European states now contemplating International Monetary Fund (IMF) type “stabilization” programs do achieve much lower wages—a big if—cheap wages do not in themselves bring development.

It is true that in every case of successful Third World development, wages were low. But if all that development required was cheap labor and freedom from state interference, the Third World would be filled today with advanced capitalist utopias rather than capitalist economic nightmares. Very few Third World countries have succeeded in taking the capitalist road to development, and most of those that have succeeded did so in ways that are anathema to the IMF.

In particular, the development of Korea and Taiwan took place through massive political economic coordination, as well as competition. The state fostered giant conglomerates, which controlled a huge range of industrial potentials and involved the merger of finance and manufacturing. The state initially intervened directly to protect these industries from foreign competition and to hand them subsidies. Moreover, the state repressed and controlled the working class within the factories, on the labor market, and with respect to its role in government.

Flushed with revolution and generally hostile to statism, the populations in the remade Eastern Europe are therefore less attractive candidates for capitalist exploitation than one might imagine. The new regimes’ anti-statism will tend to prevent them from creating the complex set of government-influenced institutions required for development today. And at least initially, they will lack the repressive authoritarian apparatuses that have been needed to insure stability and profits though most of the developing world.

As a result, Eastern Europe is more likely to suffer a fate akin to that which capitalism has visited on much of the Third World than to enjoy the privileged capitalist conditions of the tens of millions of citizens of Scandinavia and Northern Europe.

The region’s political prospects can thus be quite dearly stated. Its new ruling groups have little choice but to impose vicious austerity as the only possible road to a nonetheless dubious development. Everything will depend on the emerging balance of class forces, and most especially the combativity of the working class.

To the degree that collective solutions organized on a class basis fail to emerge, one should not be at all surprised to see a turn to solutions organized on very different bases—“primordial ties” of nationality, ethnicity, and religion and directed not so much against too-powerful domestic class opponents as against “external enemies” such as Jews. This is the ground on which authoritarian politics thrive, as Lech Walesa in particular has demonstrated all too well.

The fundamental question, then, is whither the working class? Polish workers have already unleashed a series of increasingly serious strikes against the government's austerity program, which has slashed wages by 20-25% and spawned unemployment of 52%.

The most significant strike so far has been the rail strike, which threatened to paralyze the country last May. Since then, there have been major farmers' protests, miners' strikes, and, most recently, a strike of Warsaw's public transport workers. But the problem that is already powerfully—if as yet only implicitly--confronting these workers involves formulating a credible alternative to capitalism.

“Socialism” as they know it has been thoroughly discredited. While a significant section of what became the Solidarity leadership once considered themselves revolutionary democratic socialists, they long ago relinquished that perspective in favor of a commitment to Scandinavian-style social democracy. Even as they comfort themselves with that ludicrously utopian goal, they are busy overseeing a Milton Friedman-style “stabilization” program of the sort more reminiscent of Pinochet's Chile than Palme’s Sweden.

East European workers may, all too soon, be once again facing the prospect of having to either reinvent a socialist ideal that has for all practical purposes been obliterated in the region, or, alternately, face the sort of politico-economic regime that workers of the Third World have long had to endure.

The Distinctive Trajectory of the USSR

Ironically, the revolutionary process in Eastern Europe is today well on its way to determining the course of events in the Soviet Union itself. Gorbachev allowed the self- determination of nations and the end of one-party bureaucratic rule in Eastern Europe. Is it surprising that the emergence of corresponding demands within the Soviet Union is now placing Gorbachev's continued rule very much in doubt?

In retrospect, it is clear that Gorbachev's initiation of a radical process of reform in the Soviet Union occurred very “late.” The domestic crisis—identified by the reformers as “stagnation”—had matured at least as early and had become at least as acute in the Soviet Union as in Eastern Europe.

But it took the Soviet elite at least a decade longer than their East European counterparts to resolve on a process of radical reform. This reflects major underlying differences in social structure and historical evolution between Soviet society and those of the rest of the Eastern bloc—differences which continue to play themselves out today.

Most obviously, the Soviet bureaucracy—the product of indigenous revolution and counterrevolution, not outside intervention from above—is much more firmly rooted than its East European counterparts. Less obviously, but perhaps equally significant, the working class of the Soviet Union, while lacking the post-World War II history of militant, sometimes revolutionary struggle characterizing its East European counterparts, for that very reason also lacks their history of defeats and, in the critical case of Poland, demoralization.

It is the combined, often covert resistance of sections of the bureaucracy and the working class—two forces that despite their mutual antagonism share a common opposition to capitalism—that has posed what has far been an insuperable obstacle to Gorbachev’s rearm from above.

Gorbachev’s program—summed up by the now well-known concepts of glasnost and perestroika—aimed to create an alliance with the technical and cultural intelligentsia as well as with skilled sections of the working class. It hoped to win the support of these layers for perestroika—economic reform involving the decentralization and marketization of the economy—by offering them glasnost—more cultural and political freedom and potentially greater participation in government.

But while glasnost has to some extent been implemented, perestroika is totally stalled. Moreover, given perestroika's erstwhile failure, the political reform processes unleashed by glasnost are rapidly undermining Gorbachev's rule. The result today is deepening economic paralysis and political disintegration, a trans-societal deadlock and an accelerating crisis of the most fundamental sort,

Political Reform

While glasnost has transformed the political environment in the Soviet Union giving Gorbachev and his followers certain short-term support and space to breathe—it has also created the condition for fundamental challenges to Gorbachev’s authority.

Today in the Soviet Union, almost anything and everything can be discussed. Mass demonstrations can be organized. Official recognition of the right to elect candidates and to form autonomous parties has not yet brought democracy, but it has certainly legitimized the struggle to democratize the society.

It must be emphasized that the party still manages to control national political institutions. Economic resources for political organizing remain extremely unequally distributed. Access to the press is still the preserve of the government and the loyal opposition. The secret police remains in place. Nonetheless, the new climate has made an enormous difference, perhaps to the ultimate detriment of Gorbachev.

Above all, the oppressed nationalities have used Gorbachev’s implicit recognition of self-determination in Eastern Europe to launch struggles for independence in one autonomous republic after another. These growing demands for independence pose an immediate threat to the integrity of the Soviet Union.

Glasnost has also paved the electoral rise to power in big cities like Leningrad of extremely pro-market forces that are declaring their independence from the Communist Party and their desire to break from the Soviet Union. In some ways these forces buttress Gorbachev's own moves toward the market and capitalism. But their more immediate effect may be to further erode his political control, already corroded from within by the disintegration of the Communist Party.

Gorbachev’s aim has been to fully capture the party, reform it, and use it as the instrument of his policy But using glasnost to secure control over the party contradicts the very essence of the party, rendering it ineffective for Gorbachev’s ends.

The party was the instrument through which the bureaucracy organized itself to rule the society; it could only serve that end so long as the political factions inside the bureaucracy were willing to settle their disputes within the party’s confines.

But Gorbachev’s glasnost is partially destroying the party as an effective instrument of bureaucratic rule, thereby undermining the party as his source of power and authority. While Gorbachev is successfully eradicating many of the “Old Guard,” anti-reform bureaucrats holding positions of power in the party, he is relying on massive pressures from outside the party in society at large to do so. What remains of the party can no longer serve as the representative of the bureaucracy against society, let alone either coordinate the bureaucracy as a whole or resist the mounting centrifugal influences matched against it.

As Gorbachev goes about destroying the party’s function as organizer of the bureaucracy as a whole—as mediator of its factions and interests over and against society—he increasingly puts himself in the position of having to organize his own party against many others. The split of Yeltsin was the first—and rather spectacular—expression of this emerging situation.

Soon Gorbachev will face the political organization of many more forces than those previously obliged to find expression through the party and its leader These will include not only old party conservatives who do not want to risk a transition to capitalism. They will also include such a potentially subversive organization as the populist, anti-Semitic Pamyat, already a significant mass party in the USSR today. Hitherto, the forces represented in Pamyat were obliged—like most everyone else—to wheel and deal inside the party. But glasnost has assured that when the economic reform program—and the economy as a whole—go bankrupt, the political arena will be prepared to facilitate an enormous upheaval.

Economic Reform

Gorbachev has had two fundamental choices with respect to the economy: gradual decentralization and marketization, possibly resulting in capitalism, or, conversely, an immediate transition to capitalism, such as that being tried in Poland. Each of these options has almost insurmountable problems, the first, primarily economic, the second, fundamentally political.

Since 1987-1988, Gorbachev has implemented a not very-innovative reform policy, featuring more autonomy over investment decisions for individual enterprises. But this policy—like similar policies tried in Hungary Poland, and, most extremely, China—has suffered the same central contradiction characterizing those earlier efforts.

The bureaucracy’s relaxation of control reduces the economy’s already limited capacity to coordinate the activities of its myriad enterprises and to have supply fit demand. On the other hand, the introduction of the market—where, as in the present Soviet case, the firms are not freed to live and die by the market, appropriating their profits and/or going out of business—fails either to create incentives to improve or to develop an adequate method for bringing supply and demand into harmony.

Reform via only partial marketization and decentralization ends up, as in Eastern Europe, in turning stagnation into crisis. It is doing so today in the USSR at an accelerating pace.

The alternative to such piecemeal reform is an all at-once transition to capitalism. Were the latter to be “successfully” carried out, it would face the Soviet Union with pretty much the same problems of development that Poland is now facing. But the political opposition to such a course is much greater in the Soviet Union than in Poland.

Opposition comes in part from well-entrenched bureaucrats who would find their positions jeopardized and their futures put in doubt were there a transition to capitalist production. But it comes, even more crucially, from workers who are, at the very least, opposed to the wage reductions, corrosion of social security, and rising unemployment that the market will bring.

Today’s Crisis

Today, Gorbachev’s advisors are calling the present situation “catastrophic.” It is not difficult to see why. The piecemeal economic reform has already failed, the government lacks the power to impose a fast transition to capitalism, and opposition forces of various sorts are threatening to bring down the government. Gorbachev and his followers appear to believe they have only one way out—to secure massive Western aid so as to buy off the working class until the move to fully-fledged capitalism is well underway.

But given the financial condition of the Western powers—notably the United States—and the already enormous demand for funds coming from Eastern European countries such as East Germany—which has first call on West Germany's resources—this option is limited at best. It is expected, for example, that West Germany will have to come up with some $50 billion for East Germany’s development. The USSR is some twenty times bigger than East Germany, and its economy is not as advanced. The sum required might therefore approach $1 trillion.

While it would be absurd to predict with certainty what will happen next, one can point to three likely roads ahead. One leads to disintegration under the impact of national revolts and right wing, anti-Semitic, authoritarian-populist resistance. The second leads to a crackdown from above, perhaps sponsored by the army and the KGB. The final alternative—at this moment only a dim light on the horizon—leads to working-class resistance and socialist revolution.

The first part of this essay discussed the nature of exploitation and accumulation in the Soviet and eastern bloc bureaucratic systems and the beginnings of its crisis.

Filed under: economics