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After the Wall Fell: The Poor Balance

Sheet of the Transition to Capitalism
Branko Milanovic
Published online: 18 Apr 2015.

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To cite this article: Branko Milanovic (2015) After the Wall Fell: The Poor Balance Sheet of the
Transition to Capitalism, Challenge, 58:2, 135-138, DOI: 10.1080/05775132.2015.1012402
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Challenge, 58(2):135138, 2015

Copyright Taylor & Francis Group, LLC
ISSN: 0577-5132 print/1558-1489 online
DOI: 10.1080/05775132.2015.1012402

After the Wall Fell: The Poor Balance Sheet

of the Transition to Capitalism

Downloaded by [Branko Milanovic] at 06:35 18 April 2015

BRANKO MILANOVIC
Many Western economists were rapturous about the prospects for
Eastern Europes transition to rapid growth and solid democracy
once the Berlin Wall fell in 1989. The march to capitalism was
to be paved with gold. Most of the nations did poorly. Here is the
disappointing scorecard.
As I was leaving Berlin less than a week before the twenty-fifth anniversary of
the fall of the wall, and as celebrations there were going strong, I decided to
look at the balance sheet of transition countries (even if the term is no longer
fully adequate) over the past quarter century. I am originally from one of them,
I worked on most of them in the 1990s, and I discussed and documented the
Great Depression there in my 1998 book Income, Inequality and Poverty During the Transition to Market Economies. So I was going back to a familiar terrain.
What naturally comes to mind to an economist is to look first at how these
countries have done in terms of economic growth. To fix the ideas, let us call the
countries that are yet (in 2013) to reach the level of real income of 1990, measured by real GDP per capita, clear failures. Then, let us call the countries that
grew more slowly than the average of rich OECD (Organization for Economic
and Cooperative Development) countries, that is, at less than 1.7 percent per
capita per year, relative failures. They are so because they are not converging
to the rich countries income levels. The third group consists of countries that
are just about keeping up with the rich world and have been growing at between
1.7 and 2 percent per capita. Finally, we come to the success cases, countries that
grew by at least 2 percent per annum per capita over the twenty-five-year period.
Branko Milanovic is presidential professor at the Graduate CenterCity University of New
York and senior fellow at the Luxembourg Income Study. He was lead economist in the
World Bank Research Department for almost twenty years and senior associate at the Carnegie
Endowment for International Peace in Washington. Milanovics main area of work is income
inequality, in individual countries and globally. He has published articles in Economic Journal,
Review of Economics and Statistics, and Journal of Political Philosophy. His most recent book
is The Haves and the Have-nots: A Brief and Idiosyncratic History of Global Inequality (2011),
selected by The Globalist as 2011 Book of the Year.
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Milanovic

Note that the requirement of growing by 2 percent per year during a quarter
century is not particularly onerous, nor is such an achievement very stirring:
you would need thirty-five years, almost two generations, of such growth to
double per capita income. (All growth rates are in per capita terms, derived from
GDPs, based on 2011 International Comparison Project PPP data, and downloadable from the World Banks World Development Indicators, at http://data.
worldbank.org/data-catalog/world-development-indicators.)
How does the picture look? In the bottom group, absolute failures, we
have seven countries with a combined population of almost 80 million (20
percent of the population of all transition countries). They are, in order of
the extent of their failure: Tajikistan, Moldova, Ukraine, Kyrgyz Republic,
Georgia, Bosnia, and Serbia. All except Ukraine (note that our data end in
2013) have been involved in civil or international conflicts. None is likely to
reach its 1990 income any time soon. Basically, they are countries with at least
three to four wasted generations. At current rates of growth, it might take them
some fifty or sixty yearslonger than they were under communism!to go
back to the income levels they had at the fall of communism.
The relative failures include four countriesMacedonia, Croatia, Russia,
and Hungary. Because of the large size of Russia, they comprise 160 million
people and represent the dominant of our four groups. Some 40 percent of
transition countries populations live there. Their growth rates have been less
than or around 1 percent per capita.
Those that are managing not to fall further behind the rich capitalist world
are five: Czech Republic, Slovenia, Turkmenistan, Lithuania, and Romania.
They include 40 million people (10 percent of transition countries total). Their
growth rates have been between 1.7 and 1.9 percent per capita annually.
Finally, we come to the success cases, those that are catching up with the
rich world. There are twelve countries in this group, and in increasing order
of success they are: Uzbekistan and Latvia (average growth rate of 2 percent),
Bulgaria (2.2 percent), Slovakia and Kazakhstan (2.4 percent), Azerbaijan,
Estonia, Mongolia, and Armenia (around 3 percent), Belarus (3.5 percent),
Poland (3.7 percent) and Albania (3.9 percent). The population living there
amounts to 120 million (almost a third of the total).
If we concentrate on success cases, several of them (Azerbaijan,
Kazakhstan, and Uzbekistan) are resource-rich economies whose success is
entirely explained by the exploitation of hydrocarbons, gold, or other
minerals. The real capitalist successes are only five: Albania, Poland, Belarus,
Armenia, and Estonia, which grew by at least 3 percent per capita per annum,
almost twice the rate of rich countries and without the obvious help of
natural resources. Armenia is particularly remarkable since its original period
of transition was rocky due to the war with Azerbaijan.
If in addition to growth, we broaden our gaze to income inequality, there
we have extremely high increases in some countries like Russia (which, with a
rather sluggish overall growth, produced very modest decreases in poverty),

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After the Wall Fell

137

the three Baltic countries, and Georgia. In all of them, inequality measured by
the Gini index increased by more than 10 points, which is twice as much as it
increased in the United States between the mid-1980s and today. On the other
hand, Central European countries registered rather small Gini increases and
currently have stable low-to-moderate inequality levels, very much in line
with the rest of the OECD. The data for Central Asian countries are not
reliable, but they most likely underwent a significant increase in inequality.
Further, if we also require that a successful transition to liberal capitalism
imply, in addition to the catch-up with the rich world and rather moderate
increase in inequality, a consolidation of democracy, and we go back to our list
of five success cases, we must, on account of unconsolidated or inexistent
democracy, drop Belarus and Armenia. (In 2012, Belaruss Polity score for
democracy, on a scale from
10 to 10 is
7, and Armenias 5.)1 That leaves
us with only three successes: Albania, Poland, and Estonia. Albania had a somewhat less than exemplary transition to democracy, and it still may not be included
in the list of the fully consolidated democracies (although its current Polity score,
like Estonias, is a high 9). Data on pretransition inequality are nonexistent for
Albania, so we really do not know how much inequality increased there.
Most peoples expectations on November 9, 1989, were that the newly
brought capitalism would result in economic convergence with the rest of
Europe, a moderate increase in inequality, and consolidated democracy.
These expectations are fulfilled most likely in only one country (Poland)
and at the very most in another, rather small two. Their total populations
are 42 million, or some 10 percent of all former communist countries. Thus,
one out of ten people living in transition countries could be said to have
transitioned to the capitalism that was promised by the ideologues who
waxed about the triumph of liberal democracy and free markets.
In this short piece, obviously, I cannot go into political developments that
were also much worse than expected, nor into wars that continue and have
cost a conservatively estimated 250,000 lives so far (from Nicholas Sambaniss
database on ethnic conflict, sent to the author in a personal communication).
nor into major declines in life expectancy in Russia and Ukraine, nor into
sluggish or negative population growth rates in most former socialist
European countries, nor into all pervasive corruption and kleptocracy.
Let me just focus on one often overlooked fact. It is most strikingly
illustrated with respect to Russia. Probably for the first time since the early
1800s, Russia has gone through a quarter of a century without leaving any
trace on the international world of arts, literature, philosophy, or science.
One does not need to mention Russias Silver Age of the early 1900s,
nor a number of writers who, often in opposition to the regime, produced
some of the best literature of the twentieth century (Akhmatova, Pasternak,
Grossman, Sholokhov, Solzhenitsyn, Zinoviev). One does not need even to
dwell on scientific progress in the USSRindeed limited to the military or
military-used productionto realize that nothing similar happened in the

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Milanovic

past twenty-five years, which is indeed a sufficiently long period to draw

conclusions. Capitalism was not kind to Russias arts and sciences.
The same is true for smaller countries like Poland, Hungary, Yugoslavia,
and Czechoslovakia, which, between 1945 and 1990, produced important
poets, writers, philosophers, and artists. I might not have followed fully the current intellectual trends, but I really cannot recall, with a few exceptions (and
there I confess to my own bias), anyone from Eastern Europe who has made
an intellectual or artistic imprint on the world in the past twenty-five years.
The exceptions, in my opinion, are almost all from the former Yugoslavia (here
is my bias): Emir Kusturica (film), Goran Bregovi (music), and Slavoj iek
(political philosophy). Interestingly, all have roots in the nonaligned Titoist
Yugoslavia and often draw inspiration from it. For example, Bregovis music
would not exist if he had to limit it to one of the new countries (i.e., former
republics). To that very subjective short list I might add the Bulgarian political
scientist Ivan Krastev. (Obviously, I am not including researchers who might
have done excellent work on their own countries. I am interested in those
who had influence beyond their borders, that is, some international impact.)
Another glaring absence is that of interesting and important political
leaders. I do not include here Vladimir Putin, who is obviously important
but whose influence, while in my opinion positive in the first five to six years
of his rule, has been increasingly negative since. Political leaders of the new
states are hardly known to their own populations, much less to the others. I
think it is a fair guess that, except for Putin, 90 percent of the population in
transition countries would be unable to name a president or prime minister
of any transition country other than their own. Midget countries have produced intellectually midget leaders who either rule by iron hand (Nursultan
Nuzerbayev in Kazakhstan, Islam Karimov in Uzbekistan), have created a
dynasty (Aliyevs in Azerbaijan), have been in power for some thirty years
(as in Central Asia and Milo Djukanovi in Montenegro), or just mindlessly
repeat mantras coming from Brussels or Washington.
So, what is the balance sheet of transition? Only three or at most five or six
countries could be said to be on the road to becoming a part of the rich and
(relatively) stable capitalist world. Many are falling behind, and some are so
far behind that for several decades they cannot aspire to go back to where they
were when the wall fell. Despite philosophers of universal harmonies such
as Francis Fukuyama, Timothy Garton Ash, Vaclav Havel, Bernard Henry Lvy,
and scores of international economic advisers to Boris Yeltsin, who all fantasized about democracy and prosperity, neither really arrived for most people
in Eastern Europe and the former Soviet Union. The wall fell only for some.

NOTE
1. Polity, downloadable at http://www.systemicpeace.org/polity/polity4.htm, is a database that
empirically studies characteristics of political regimes, including democracy.