Twenty-five years after the fall of the Berlin Wall, the biggest surprise is how badly most of the post-communist nations have done since. There was a general expectation back then that most of these countries would step out from tyranny and rejoin the European club of prosperous nations. Most of us did not appreciate the corrosive power of distrust and how long it would take to heal the mental scars caused by it.
Branko Milanovic, an economist at the City University of New York, measured the wreckage in a recent essay on his blog, Global Inequality. He looked at the growth rates of post-communist countries and broke them down into four groups.
In the bottom group are basket-case nations that haven’t even recovered the level of real income they had in 1990, as measured by real GDP per capita. These failures include Ukraine, Georgia, Bosnia, Serbia and others – about 20 percent of the post-communist world. “Basically,” Milanovic writes, these “are countries with at least three to four wasted generations. At current rates of growth, it might take them some 50 or 60 years – longer that they were under communism! – to go back to the income levels they had at the fall of communism.”
The next group includes those nations that are merely moderate failures, with per capita economic growth rates under 1.7 percent a year. These are nations like Russia and Hungary that continue to fall steadily behind the West – about 40 percent of the post-communist world by population.
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The third group includes those with growth rates between 1.7 percent and 1.9 percent. These countries, like the Czech Republic and Slovenia, are holding steady with the capitalist world.
Finally there are the successes, the nations that are catching up. This group includes Poland, Azerbaijan and Kazakhstan. But Milanovic points out that many of these nations are growing simply because they have oil or something valuable to dig out of the ground. There are only five countries that have emerged as successful capitalist economies: Albania, Poland, Belarus, Armenia and Estonia.
To put it another way, only 10 percent of the people living in post-communist nations are living in a place that successfully made the transition to capitalism. Ninety percent are living under failed transitions of one sort or another. This fact is already yielding screwed up politics in places like Hungary and Russia and will shape the 21st century.
Why did some countries succeed while others failed?
First, leaders in some countries simply made better political decisions. Most of these countries enacted economic reforms, like deregulating prices and privatizing nationalized companies. Some nations like Estonia and Poland enacted reforms radically and quickly, while others tried to do them gradually or barely at all – with expensive security blankets for protected interests. The quick and radical group saw a slightly bigger output drop over the near term but much more prosperity over the long run.
Then there is the level of institutions. Many Western advisers focused on the headline reforms – writing new constitutions and creating stock markets. But Larry Lawson, an economist who worked with the Poles and Ukrainians, points out that these nations lacked the basic building blocks we take for granted. Before you have a stock market, for example, you have to have publicly available data about companies, credit records and accounting systems.
Finally, and most important, there is the level of values. A nation’s economy is nestled in its moral ecology. Economic performance is tied to history, culture and psychology.
Poland, for example, had been invaded throughout its history, yielding a pragmatic, survivor ethos. The Poles had a keen desire to initiate reforms on their own. Poles also had a clear sense of justice and injustice, since they had seen the Russians do things the wrong way on their own territory. They placed a high value on education and social mobility.
Other countries lacked this cultural brew. Worse, life was marked by fear, by arbitrary power, by suspicion that people are watching you, by distrust. People raised in this atmosphere of distrust have trouble forming companies and associations. They are more likely to be driven by a grab-what-you-can logic - a culture of corruption and appropriation. They are more likely to hunker down and become risk averse.
Many of the ailing countries are marked by distant power relationships. Those with power –even in an office or neighborhood – are aloof and domineering. Those without power hanker for security at all costs. They’re nostalgic for the imagined stability of communism. When everything seems arbitrary and crooked, people tolerate strongman rule.
The lesson of the past 25 years is that democratic prosperity is built on layers of small achievements 10,000 fathoms deep. Communism ripped at all that bottom-up society-making and damaged the psyches of its victims. Healing from those wounds is gradual. Progress is not guaranteed.