Toward a Market Economy

Developing free markets and republican governments initially brought misery to Russia and the rest of eastern Europe. The conditions of everyday life grew increasingly dire as salaries went unpaid, food remained in short supply, and essential services disintegrated. In 1994, inflation soared at a rate of 14 percent a month in Russia, while industrial production dropped by 15 percent. Hotel lobbies became clogged with prostitutes because women were the first people fired as governments privatized industry and cut service jobs. Unpaid soldiers sold their services to the Russian Mafia. Ordinary citizens lined the sidewalks of major cities selling their household possessions. “Anything and everything is for sale,” one critic noted at the time.

The new system of government was not without pluses. People with enough money were able to travel freely for the first time, and the media were initially more open than ever before. Some workers, many of them young and highly educated, emigrated to more prosperous parts of the world, further depleting the human resources of the former Communist states. At the same time, as the different republics that had once composed the Soviet Union became independent, the hundreds of thousands of ethnic Russians who had earlier been sent by the state to colonize these regions returned to Russia as hated refugees, putting further demands on the chaotic Russian economy.

Amid chaos, the former Soviet Union itself became, in the words of one critic, a vast “kleptocracy” as the country’s resources continued to be stolen for individual gain. An economist described the new scene as “piratization” rather than privatization. In this regard, one Polish adviser noted, democracy and a successful economic transition went hand in hand, for without a powerful representative government, former officials would simply operate as criminals. Corruption fed on the Soviet system of off-the-books dealing, tax evasion, bribery, favoritism, and outright theft. Additionally, because industry had not benefited from technological change or competition, free trade often meant closing factories and firing all the workers.

For many in the former Soviet bloc, the first priority was getting their economies running again on new terms. Given the spiraling misery, however, many opposed the introduction of new market-oriented measures. With the collective farms up for sale, most farmers on them faced landlessness and starvation. The countries that experienced the most success were those in which farmers already sold their produce on the open market or in which independent entrepreneurs or even government factories dealt in international trade. Hungary and Poland thus emerged from the transition with less strain, because both had adopted some free-market practices early on. They set up business schools and worked to attract foreign capital, anchoring themselves securely to the world economy.

A region-wide brain drain followed in a rush of migration from eastern Europe to western Europe, often involving those with marketable skills. “I knew in my heart that communism would collapse,” said one Romanian ex-dissident, commenting sadly on the exodus of youth from his country, “but it never crossed my mind that the future would look like this.” The everyday advantages of living in western Europe included safe water, adequate housing, personal safety, and at least a minimal level of social services. Although western Europe seemed to follow a neoliberal course of reduced spending on welfare-state programs, most benefits had disappeared entirely in former Communist countries. Day-care centers, kindergartens, and homes for the elderly closed their doors, and health care deteriorated. In these circumstances, the benefits of citizenship in western European countries were a powerful attraction.