Is New Europe Backsliding?

POLAND, HUNGARY, SLOVAKIA, AND THE CZECH REPUBLIC 25 YEARS AFTER COMMUNISM

DALIBOR ROHAC

DECEMBER 2016

AMERICAN ENTERPRISE INSTITUTE Is New Europe Backsliding?

POLAND, HUNGARY, SLOVAKIA, AND THE CZECH REPUBLIC 25 YEARS AFTER COMMUNISM DALIBOR ROHAC

ince the fall of communism, Poland, the Czech The thrust of this report is descriptive. It compares SRepublic, Slovakia, and Hungary (also known as the performance of the four Visegrád countries on dif- the Visegrád countries1) have become an integral ferent metrics, including the economy, the strength part of the European community of liberal democ- of their institutions, and corruption. It also assesses racies. All four have become members of NATO and their positions on issues of mutual European—and the European Union (EU) and are enjoying a histori- Western—interest. Beyond describing trends, this cally unprecedented period of peace and stability. On a paper also tries to explain the slow progress, or back- wide range of metrics, from income and consumption sliding, in strengthening institutions and building to civil and political liberties, the Visegrád countries effective governance structures in the Visegrád coun- have come a long way since the fall of communism. tries. Putting in place inclusive institutions requires None of these improvements should be taken political commitment, not always easy in new and for granted. Populist and short-sighted responses to emerging democracies. In some environments, politi- the financial crisis have inflicted lasting damage on cians approach politics as a profitable venture, not as some Central European (CE) economies. On met- a form of public service. rics of corruption, Hungary, Slovakia, and the Czech Republic are performing worse than 10 years ago. These problems stem from a common source: the Economic Reforms and Competitiveness lingering weakness of Central European institutions. Throughout this paper, I use the term “institutions” The magnitude of the material and social progress in its original, economic sense—understood as “the seen in Central Europe since the end of the Cold War formal and informal rules structuring political, social, should not be discounted—even if the aim of this and economic interactions.”2 Weak institutions are paper is to discuss the pitfalls of their transitions to a shared feature of the four Central European coun- democracy and markets. Between 1990 to 2011, as tries, with a gap persisting in various measures of Harvard economist Andrei Shleifer and UCLA politi- institutional quality between the Visegrád countries cal scientist Daniel Treisman noted in Foreign Affairs,3 and the more advanced Western democracies. How- household consumption per capita across postcom- ever, it is important not to paint the picture of Central munist countries grew by 88 percent, compared with Europe with too broad a brush. The Polish economy, an average increase of 56 percent elsewhere in the for example, avoided a recession in the aftermath of world. In Poland, it increased by 146 percent, “a rise the global financial crisis of 2008 and for a long time that equaled South Korea’s.”4 But there is more: seemed much more successful than other Visegrád countries in strengthening the equality of its institu- The citizens of the post-communist states also travel tions and bringing corruption under control. more than ever before; they made almost 170 million

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Figure 1. GDP per Capita in PPP in Visegrád Four

$40,000

$35,000

$30,000

$25,000

$20,000

$15,000

$10,000 2000 2003 2006 2009 2012 2015

Czech Republic Slovakia Poland Hungary EU Average

Source: World Bank, International Comparison Program database, s.v. “GDP per Capita, PPP (Current International $),” http://data. worldbank.org/indicator/NY.GDP.PCAP.PP.CD.

foreign tourist trips in 2012. And back home, they pervasive shortages—worse than other economies of occupy larger apartments: since 1991, living space the region. Poland was also distinctly poorer than its per person has expanded by 99 percent in the Czech neighbors. In 1990, in purchasing power parity (PPP) Republic. . . . terms, gross domestic product (GDP) per capita in The Czech Republic, Hungary, Poland, Slovakia, Poland was roughly at par with GDP per capita in and Slovenia experienced what medical researchers Ukraine, lower than in Romania, and half that in the described in 2008 in the European Journal of Epide- Czech Republic. Since then, the Polish economy has miology as “probably the most rapid decrease in cor- grown steadily and was the only Visegrád economy to onary heart disease ever observed” after consumers avoid an economic downturn after the global financial began substituting vegetable oils for animal fats. . . . crisis in 2008–10. As shown by Figure 1, which cap- On average, life expectancy in the post-communist tures the evolution of per capita income in the four states rose from 69 years in 1990 to 73 years in 2012.5 Central European countries in PPP terms, the Polish economy now outperforms Hungary. The four Visegrád countries count among the Likewise, Figure 2 displays the average GDP growth most stellar successes of the transition—even con- rates for the four Central European countries over the sidering that their initial state was better than that past 15 years. While their economic performance at of many Soviet republics. In 1989, the Polish econ- the beginning of the 2000s was similar, Poland and omy was close to hyperinflation (with an annual Slovakia started to outperform their neighbors in the inflation rate of 3,000 percent) and suffering from past 10 years. Much of the difference is driven by the

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Figure 2. Real GDP Growth Rate Across Visegrád Four

6

5

4

3

GDP Annual G ro wth 2

1

0 2001–05 2006–10 2011–15

Poland Hungary Czech Republic Slovakia EU Average

Source: World Bank, “GDP Growth (Annual %),” http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2015&start=1961 &view=chart.

differential effect of the global economic downturn well as unemployment pay and procedures for layoffs, on these two countries relative to Hungary and the which were necessary for corporate restructuring. Czech Republic. From 1989 to January 1991, the bulk of consumer and producer prices were liberalized. Poland. Poland’s steady growth is the result of a These reforms did not differ widely from initial continuous commitment of successive Polish gov- reform package introduced in Czechoslovakia in the ernments to economic reforms.6 The first wave of early 1990s, but were more radical and came ear- reforms occurred early in 1990 under the leadership lier. They were also much deeper than the economic of Leszek Balcerowicz and is oftentimes described reforms in Hungary, which followed a more grad- as “shock therapy” or the “big bang.” These reforms ualist route. What is more, Poland continued on its eliminated subsidies to loss-making state-owned path toward competitive markets at times when its enterprises (SOEs), introduced bankruptcy proce- neighbors did not. In 1999, a reform of health care dures for such firms, enacted rules against the mone- financing was introduced, as well as a pension reform, tization of budget deficits, and instituted positive real directing a part of the social security contributions to interest rates and rules against the extension of loans investment funds. During the Great Recession, Pol- to nonperforming SOEs. Internal convertibility was ish growth did slow down. While the EU’s economy introduced—together with a fixed exchange rate—as contracted in 2009, Polish economic output grew by

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1.6 percent, down from over 5 percent a year earlier. come under stress because the Law and Justice Party Yet the Polish financial system was characterized by (PiS) made a range of extravagant spending promises low levels of private debt, which made it resilient to ahead of the last year’s election. One key deliverable financial shocks. The size of the economy and of its is a 500 PLN ($125) subsidy for all families, irrespec- internal market also made it less vulnerable to out- tive of their income, for their second child and every side developments than the small open economies of additional child until the age of 18. The party also the region. promised to more than double the tax-exempt share To some extent, that success was relative. Even if of household income. The annual cost of these pro- the rest of the European economy came to a halt and grams has been estimated at around $11 billion. Poland continued to expand at its 2010–14 growth rate, it would be another two decades before Poles Czech Republic and Slovakia. Czechoslovakia might see the per capita incomes that Germans embarked in the early 1990s on a program of price lib- enjoy. Meanwhile, Poland’s relative success fostered eralization, macroeconomic stabilization, and privat- a sense of complacency among the country’s leaders. ization. A vast majority of prices were liberalized in The previous governments of Donald Tusk (2007–14) January 1991, and a program of mass privatization using and Ewa Kopacz (2014–15) failed to take advantage of the voucher method was deployed across the country. the financial crisis as an opportunity to restructure After a short economic downturn, the Czech economy the economy. grew at respectable rates between 1991 and 1996. In 2014, instead of bringing entitlement spend- A widely recognized pitfall of the Czech tran- ing under control and devising a more efficient pri- sition was the emergence of “banking socialism.” vate pension system, the Tusk government simply During the mass voucher privatization, state-owned nationalized $51 billion of existing private pension banks became dominant owners of the newly privat- assets and used the funds to plug a hole in Poland’s ized Czech companies. This happened because banks’ public finances. The nationalization was justified on mutual funds bought vouchers from the population the grounds of low returns in the private-savings “pil- and established large ownership shares throughout the lar,” but it is difficult to avoid the impression that the economy. Simultaneously, the banking sector, domi- real purpose of the pension reform reversal was to nated by such state-owned banks, was the only source give a one-off boost to Polish public finances. Instead of capital to privatized enterprises. That hampered the of encouraging private investment in the financial much-needed restructuring of privatized companies. industry, regulators gave the state-controlled finan- As the Czech economist Eva Kreuzbergová noted: cial institutions the green light to buy up private banks, with the explicit objective of reducing the role [T]he overall dependence of the economy on banks of private and foreign capital in the country. When the coupled with their imprudent credit practices led state-owned insurance company PZU acquired Alior in particular to the prevalence of soft budget con- Bank, one of Poland’s most successful banks, Trea- straints and the incidence of various forms of moral sury Minister Włodzimierz Karpiński hailed it as a hazard. These iniquities emerged above all due to welcome step toward “repolonization” of the Polish the omnipresence of the state (specific encourage- banking industry.7 On top of these policy mistakes, ment to extend credit or general expectations that lingering issues include long-term, structural unem- the state would bail out the banks in case of trouble), ployment and a gradual attrition of the labor force, mixing of ownership and credit relationships within in spite of high levels of labor market flexibility, espe- the banks also due to the deficient legal and institu- cially when compared with the EU. tional framework.8 Poland’s public debt is firmly below the Maastricht limit of 60 percent of GDP (see Figure 3). In the com- In the second half of the 1990s, the accumulated ing years, however, Poland’s current fiscal probity will volume of nonperforming loans resulted in a financial

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crisis and led a social democratic government to “Tatra Tiger,” into the fastest-growing economy in implement a program of bank restructuring and pri- the EU. vatization, thus completing one of the main unfin- Similarly to Poland, the Czech and Slovak finan- ished tasks in the transition. However, the country cial systems were well positioned to withstand the has seen little reform initiative since then, which may Great Recession without major distress. In 2009, help explain its lackluster economic performance in Slovakia adopted the euro, which limited the extent recent years. to which monetary policy could have responded Beyond the initial reform package adopted by to the crisis. In contrast, monetary authorities in the common Czechoslovak state, Slovakia made lit- both Poland and the Czech Republic adopted rather tle progress with its own economic reforms until accommodative positions throughout the crisis, let- the late 1990s. Once home to much of Czechoslo- ting the Polish złoty and the Czech crown depreciate vakia’s heavy industry—exporting arms and heavy substantially relative to the euro, thus improving the machinery to the former Soviet bloc—Slovakia bore competitiveness of their export industries. In spite a disproportionate share of the costs incurred in the of the absence of exchange rate flexibility, Slovakia’s early days of the transition from communism. High economy saw a rapid recovery to its pre-crisis levels unemployment and a fall in real incomes led Slovaks by 2011, although growth in the number of new jobs to reject the reforms that were seen as imposed by has not accompanied this recovery. The unemploy- the Czech leaders, who were more pro-market and ment rate—which had dropped under 10 percent for pro-Western than Slovak politicians of the era. At a short period before the crisis—increased sharply the time of the country’s breakup in 1992, per capita to nearly 15 percent and has been falling very slowly income in Slovakia in PPP was a mere 62 percent of since mid-2013. More recently, because of the require- that in the Czech Republic. ments of eurozone membership, successive govern- Between 1994 and 1998, the Mečiar government ments have proceeded with fiscal consolidation to was involved in a privatization program of direct sales reduce the size of their public debt, which had been of companies to politically selected bidders at artifi- on an upward trajectory prior to the crisis (see Fig- cially low prices—a distinctly Slovak alternative to the ure 3). The consolidation relied on a slight reduction program of voucher privatization used in the Czech in public spending—which is already at fairly low lev- Republic. This was accompanied by a demand-side els by EU standards—and tax increases, leading the stimulus, financed by government borrowing and debt-to-GDP ratio to plateau at around 45 percent. loans extended by state-owned banks to recently pri- vatized companies, many of which had yet to undergo Hungary. Hungary, in contrast, was seen as one of serious restructuring. By the time of the election in the most promising transitional countries in Central 1998, the country was on the brink of a financial melt- and Eastern Europe in the early 1990s. Due to mar- down. The new government, formed by a coalition of ket reforms adopted in the 1980s, Hungary had direct pro-Western parties, restructured the banking sector, experience with private markets even before the col- brought the public deficit under control, and success- lapse of communism. Perhaps because of its favorable fully reopened the EU accession process. starting position, Hungary followed a path of gradual- The election of 2002 opened a window of oppor- ist reforms. While praised at the time by some econ- tunity for even bolder reforms. Slovakia’s novel tax omists,9 this likely contributed to the disappointing reforms, spearheaded by domestic reformers under economic performance of the 2000s (see Figure 2). the auspices of Prime Minister Mikuláš Dzurinda, The country’s structural problems persist today, most were seen by many Western observers as too radical. prominently in the labor market, which is character- However, the implementation of structural reforms ized by very low rates of labor force participation. alongside a simpler and leaner tax system incentiv- As seen in Figure 3, throughout the 2000s ized investment and turned Slovakia, nicknamed the Hungary’s fiscal situation progressively worsened,

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with public debt rising by almost 30 percentage a program of fiscal consolidation. Calculated as a per- points between 2001 and 2010. Simultaneously, Hun- centage of GDP, taxes rose, but noninterest expendi- garian households accumulated large debts denomi- tures declined slightly from Hungary’s business cycle nated in foreign currency, primarily in Swiss francs. peak from 2008 to 2012. The figures are stark in real By 2008, foreign-currency loans constituted almost US dollars: expenditures fell by $8 billion, and reve- 30 percent of GDP, compared with less than 10 per- nue fell by $4 billion. Due to the rapid depreciation cent in the Czech Republic and Slovakia. Of the four of the forint, the real value of government expendi- Visegrád economies, Hungary’s economy suffered tures and revenue fell despite nominal increases; the the most when its buildup of public and private exter- same was true of GDP. Inflation eroded the value of nal debt faced the global economic crisis of 2008 government transfers, where half of the decline in and 2009.10 expenditures took place. Hungary has traditionally The dramatic depreciation of the Hungar- had the highest public spending in the region, with ian forint relative to the euro and the Swiss franc public spending at 50.7 percent of GDP in 2015, com- in 2008 and 2011 increased the relative size of pared with 45.6 percent in Slovakia, 42.6 percent in foreign-denominated loans and led to an explo- the Czech Republic, and 41.5 percent in Poland. sion of nonperforming loans. The portion of non- The tax increases consisted primarily of ad hoc performing loans increased from around 2 percent levies imposed on the financial, telecommunica- in 2007 to 14 percent by 2011. The combination of tions, and retail sectors. Simultaneously, the govern- a global recession and currency depreciation made ment cut income taxes by introducing a 16 percent it more difficult for the Hungarian government to flat tax rate on wages, but the highervalue-added issue bonds, prompting it to request an aid package tax and other tax increases overwhelmed the cut, from the International Monetary Fund, the Euro- increasing tax revenues overall. The attempted fis- pean Union, and the World Bank. The standby loan cal consolidation involved nationalizing $14 billion of $15.7 billion approved in November 2008 was the in assets of private pension funds in 2011—a mea- first in a series of rescue packages provided to EU sure that increased revenue in the immediate short countries in financial distress. The crisis in the finan- term but is not a systematic remedy to the country’s cial sector had repercussions throughout the real deficit problem. economy. Hungary’s economy contracted by 6.8 per- In 2008, as part of a more systematic effort to bring cent in 2009 and has yet to resume pre-crisis growth public finances under control, Hungary created the rates. The average economic growth rate since 2010 Fiscal Council, a nominally independent body charged has been less than half of that in Poland (see Fig- with assessing the short-term and longer-term effects ure 2). Unemployment increased from 7.4 percent of policy changes on the government budget. In 2011, in 2007 to 11.2 percent in 2009 and has remained in after the Fiscal Council criticized the adopted tax double digits since. increases as unsustainable, the government of Viktor The government’s response to the crisis was Orbán stripped it of its powers and replaced it with unsystematic and often driven by populist impulses. a three-member panel with a much narrower man- Besides imposing a haircut of 25 percent on nonper- date. In December 2011, Hungary also adopted the forming loans, the government—without consult- Financial Stability Act, which beginning in 2015 put ing the financial industry—adopted legislation that in place an automatic formula that limits the growth enabled households to make one-off repayments of of nominal debt whenever debt-to-GDP ratio exceeds their foreign loans at a discounted exchange rate, 50 percent. forcing the resulting losses on banks. This measure The reverberations of the financial crisis through likely contributed to an environment of uncertainty Hungary’s economy were made much worse by its for foreign investors. The crisis increased the bur- long-standing structural problems, particularly its den of public debt and led the government to adopt low labor force participation rate ( just below 52

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Figure 3. Debt-to-GDP Ratio in Visegrád Four

90

80

70

60

50

40

Debt-to-GDP-Ratio 30

20

10

0 2000 2003 2006 2009 2012 2015

Poland Hungary Czech Republic Slovakia

Source: Eurostat, Tables by Countries, part 1 of General Government Data: General Government Revenue, Expenditure, Balances and Gross Debt, Spring 2015, http://ec.europa.eu/economy_finance/db_indicators/gen_gov_data/documents/2015/spring2015_ country_en.pdf. percent, compared with an EU average of around Rule of Law and Government 60 percent). That is driven by the heavy tax burden Accountability imposed on labor and by the minimum wage, which interacts with the tax system. In Hungary, firms typi- Could the economic performance across Visegrád cally underreport salary expenditures, supplementing economies reflect deeper institutional differences? official earnings with cash-in-hand wages. Increases A casual reading of evidence suggests that that may in the minimum wage—from €260 monthly in 2007 indeed be the case. World Economic Forum’s Global to €358 in 2016—are forcing firms to report a greater Competitiveness Report, among others, provides a portion of their salary expenditure, thus increasing complex assessment of the fundamental drivers of their tax burden, while the tax reforms of 2010–12 economic growth. These drivers include the quality have only partly reduced the significant employment of the macroeconomic environment, institutions, disincentives facing Hungarian workers and firms. human capital, and so on. The current edition of Furthermore, Hungary’s regulatory burden has tra- the Global Competitiveness Report ranks the Czech ditionally been heavy. According to the Global Com- Republic as the best of the four (31st) and Slovakia petitiveness Report, Hungary’s regulatory burden as the worst (67th).11 Legatum Institute’s 2014 Pros- currently ranks among the heaviest in the world at perity Index, which aggregates the drivers of eco- 128th out of 144—not an enticing environment for nomic prosperity and subjective well-being, places business and investment. the Czech Republic as best of the group (26th) and

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Figure 4. WGI’s Rule of Law in Visegrád Four Countries

1.5

1.3

1.1 e 0.9

0.7 Rule of Law Scor 0.5

0.3

0.1 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

EU-2004 Czech Republic Hungary Poland Slovakia

Source: World Bank, Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/index.aspx#home.

Hungary worst (45th).12 Finally, World Bank’s Doing rules of the economic game. Figure 4 summarizes the Business report, which measures the ease of business performance of the four Visegrád countries on WGI’s activity, places Visegrád between Poland (25th) and measure of the rule of law since the creation of the Hungary (42nd).13 measure in 1996. This is a composite indicator, rely- However, measuring institutional performance ing predominantly on survey data, which reflect the is not straightforward. These and similar indicators “perceptions of the extent to which agents have con- capture different facets of institutional quality.14 fidence in and abide by the rules of society, and in The commercially marketed ones aim to measure particular the quality of contract enforcement, prop- those aspects of institutions that may be of inter- erty rights, the police, and the courts, as well as the est to foreign investors. Others, such as the Corrup- likelihood of crime and violence.”15 While the indi- tion Perception Index by Transparency International cator is susceptible to swings in public opinion, it and National Democratic Governance by Freedom does show that, for the most part, the rule of law has House, try to measure relatively narrow—although been rising throughout the region. One exception important—aspects of institutional quality such as is Hungary, which is performing worse than in 1996 corruption and civic and political liberties. Only a and has dramatically declined on this measure since handful, including the World Bank’s Worldwide Gov- 2005. Nor has Slovakia seen a substantial improve- ernance Indicators (WGI) or the Fraser Institute’s ment on this measure since its accession to the EU Economic Freedom of the World, are informed by an in 2004. In contrast, Poland has seen steady progress understanding of institutions as formal and informal since its EU accession and, together with the Czech

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Figure 5. WGI’s Voice and Accountability in Visegrád Four Countries

1.5

1.4

1.3 e

1.2

1.1

1.0 ccountability Scor 0.9

0.8 oice and A

V 0.7

0.6

0.5 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

EU-2004 Czech Republic Hungary Poland Slovakia

Source: World Bank, Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/index.aspx#home.

Republic, seems to be slowly closing the gap with the Another influential measure of institutional qual- EU average. ity from World Bank’s WGI dataset is Voice and The World Justice Project offers an alternative Accountability. It captures “perceptions of the extent measure of the rule of law through its Rule of Law to which a country’s citizens are able to participate Index. The index relies on data from population and in selecting their government, as well as freedom of expert surveys about the public’s experiences with dif- expression, freedom of association, and a free media.” ferent facets of the rule of law, including constraints Figure 5 displays the performance of the four Visegrád on government power, corruption, openness, protec- countries on this measure. Hungary comes last in the tion of fundamental rights, order and security, reg- group, with the measure deteriorating dramatically ulatory enforcement, and civil and criminal justice. since Hungary’s entry into the EU in 2004. Because the index is recent, it does not yet allow for meaningful tracking of performance over time, and Poland. Although these indicators do not map policy it does not yet cover Slovakia. However, its current changes in real time, it is only a matter of few years edition shows a large gap between the performance until these metrics start to reflect a similar politi- of the Czech Republic (ranked 20th with an absolute cal shift observed in Poland in the aftermath of its score of 0.72 on a scale of 0 to 1) and Poland (ranked parliamentary election in October 2015. The leader 21st with a score of 0.71) and the performance of Hun- of PiS stated famously in 2011 that Viktor Orbán’s gary (ranked 37th with a score of 0.58).16 two-thirds parliamentary majority provided an

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example for the party to emulate: “The day will come state audit office, the fiscal council, the competition when we will succeed, and we will have Budapest in authority . . . , the ombudsman’s office, and the cen- Warsaw.”17 If anything, the post-election takeover of tral statistical office. all levels of public administration—including pub- licly owned companies, media, and the intelligence The new Hungarian constitution was approved service—was faster than in Hungary. The govern- thanks to Fidesz’s constitutional majority, with- ment also sought to drastically curtail the role of the out attempts to reach a broader societal or political Constitutional Tribunal, leading to a standoff with consensus, and ignoring local and international crit- the EU institutions that prompted the European icisms. The large parliamentary majority is able to Commission to launch formal proceedings within give a cachet of legality to any government decision— the EU’s Rule of Law framework—a euphemism for whether retroactive or preferential to specific individ- an investigation on whether Poland still meets the uals or groups.21 standards of the rule of law that are associated with EU membership.18 Corruption Hungary. Hungary’s decline on these indicators is not accidental. A number of authors, including Cen- Corruption, understood as the misuse of public tral European University’s András Bozóki19 and Hun- office for private gain, is an important aspect of insti- garian economist János Kornai,20 have argued that tutional quality. Corruption matters not so much Hungary has been moving away from the principles for its immediate economic effects—which seem of the rule of law and limited constitutional gov- modest22—but rather for its second-order impact on ernment under the watch of Prime Minister Viktor culture and on the political process. Shared cultural Orbán. Says Kornai: norms and expectations are important for economic development,23 and a corrupt society can quickly [T]he executive and legislative branches are no lon- develop a shared disregard for formal laws. ger separate, as they are both controlled by the ener- There is evidence that corruption is responsible getic and heavy hand of the political leader who has for lower levels of self-reported happiness in post- positioned himself at the very pinnacle of power: communist countries24 and that the experience Viktor Orbán. No worthwhile preparatory work on of unpleasant or corrupt business people fosters bills is being done either within or outside the walls anti-market attitudes in the general population.25 of Parliament. Parliament itself has turned into a law That, in turn, can encourage governments to tighten factory, and the production line is sometimes made the screws of populist overregulation, breeding even to operate at unbelievable speed: between 2010 and more corruption. This rigs the political and economic 2014 no less than 88 bills made it from being intro- order in favor of the few who have the resources and duced to being voted on within a week; in 13 cases it connections to navigate the system, at the expense all happened on the same or the following day. With- of the general public. In Central Europe, those few out exception, every single attempted investigation are epitomized by the nexus existing among big busi- of the background of a scandal that has just broken, ness, politics, and media. Unlikely to be the result of which would have been carried out objectively by a pure market forces but rather of a manipulation of parliamentary committee with the effective involve- the rules of the economic game, it fuels public dis- ment of the opposition, has been thwarted. “Reli- satisfaction with the postcommunist political order able” people close to the center of power occupy and, in turn, anti-system populism. One side effect decision-making positions even in organizations of a system that in the eye of the public favors a few which are not legally under the control of the exec- well-connected “capitalists” is the rising to prom- utive branch . . . : in the constitutional court, the inence of political groups that seek to challenge the

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“establishment” through populist rhetoric, often dis- Table 1. Prevalence of Corruption in CE connected from any understanding of the real drivers Countries of corruption. How widespread do you think the problem of corrup- Besides undermining trust in the institutions of tion is in your country? democratic capitalism, corrupt and nontransparent Widespread environments create an entry point for the Russian regime, keen to destabilize the region and increase its Hungary 89% influence over the politics in the countries of Central Slovakia 90% Europe. In Hungary, for example, the government of Czech Republic 95% Viktor Orbán reached a €12 billion agreement with a Poland 82% subsidiary of the Russian state-owned nuclear com- EU 27 76% pany Rosatom to build and maintain a large nuclear Finland 29% power plant in the town of Paks, with no public ten- der.26 The details of the deal—which will not proceed Source: European Commission, Special Eurobarometer 397: in light of Russia’s financial difficulties—were not dis- Corruption, February 2014, http://ec.europa.eu/public_ opinion/archives/ebs/ebs_397_en.pdf. closed and are classified for the next 30 years. The lack of binding standards requiring transpar- ency in the financing of political parties and cam- paigns, especially in Slovakia and Hungary, raises metric—thought that corruption was a widespread concerns about potential Russian interference. In problem in their country. the recent past, state-owned Russian banks have An even bigger gap existed between the Visegrád been reported providing loans to nationalist politi- countries and the West on the question of acceptabil- cal parties in Austria and France.27 In Latvia, it has ity of corruption (see Table 2). While 60 percent of been reported that the 2009 electoral campaign of Hungarians and 68 percent of Slovaks believed that the mayor of Riga, Nils Ušakovs—who is also the offering a favor in exchange for a service from the leader of the ethnically Russian “Harmony” party— public administration is acceptable, only 26 percent was funded by the FSB.28 Direct evidence of simi- of EU nationals do—and just 8 percent of Finns. Sim- lar activities in Central Europe is rare, although ilarly, 61 percent of Hungarians saw offering a gift as earlier in 2016, it was reported that Poland’s Inter- acceptable, and 39 percent considered offering a bribe nal Security Agency uncovered evidence that Slova- as acceptable. Of the four countries, Poland was the kia’s neo-Nazi party of Marián Kotleba had also been closest to the EU average on this question. receving funds from Russia.29 WEF’s Executive Opinion Survey, which serves as Just how corrupt are the four Visegrád countries? an input into the construction of the Forum’s Global The simplest survey-based measures of corruption Competitiveness Index, provides a slightly different ask respondents to assess how widespread corruption angle by focusing on the opinions of business exec- is in their country. Eurobarometer, the EU-wide opin- utives rather than the general public. Figure 6 sum- ion survey, featured this question in its 2013 special marizes how they view the importance of corruption poll on corruption, with results presented in Table 1. as a factor hampering business in the four Visegrád The average for the EU was sizeable, suggesting countries and in Finland, which is used as a bench- that corruption was perceived as a problem in “old” mark. The past six years suggest very little conver- Europe as well. The majorities affirming that cor- gence between the transitional countries and the ruption is widespread were much larger in the four low-corruption countries of Western Europe. Quite Visegrád countries. On the other end of the Euro- to the contrary, Hungary became markedly more pean spectrum, only 29 percent of those residing in corrupt over this period. Slovakia and the Czech Finland—the least corrupt country in the EU on this Republic record slight deteriorations as well.

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Table 2. Acceptability of Corruption in CE Countries

If you wanted to get something from the public administration or a public service, to what extent it is acceptable . . . To Do a Favor To Give a Gift To Give Money

Hungary 60% 61% 39% Slovakia 68% 50% 29% Czech Republic 53% 47% 19% Poland 28% 31% 11% EU 27 26% 23% 11% Finland 8% 6% 7%

Source: European Commission, Special Eurobarometer 397: Corruption, February 2014, http://ec.europa.eu/public_opinion/ archives/ebs/ebs_397_en.pdf.

Figure 6. Corruption as the Most Problematic Factor for Doing Business

20

15 e

10 Corruption Scor 5

0

2008 2009 2010 2011 2012 2013 2014 2015

Slovakia Czech Republic Hungary Poland Finland

Note: Respondents were asked to select five most problematic factors from a list, which included corruption, and rank them. The score on a scale of 0 to 30 reflects the overall ranking. Source: World Economic Forum, Global Competitiveness Report, various years.

Besides survey data, more sophisticated mea- popular Corruption Perception Index, the World sures of corruption exist, combining informa- Bank’s Worldwide Governance Indicators contain tion from surveys with observable attributes of the a metric called Control of Corruption, measuring legal system. Besides Transparency International’s the perceptions of the extent to which public power

12 IS NEW EUROPE BACKSLIDING? DALIBOR ROHAC

Figure 7. Worldwide Governance Indicators: Control of Corruption

1.6

1.1

0.6 ol of Corruption Indicator 0.1 Contr

–0.4 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

EU-2004 Czech Republic Hungary Poland Slovakia

Source: World Bank, Worldwide Governance Indicators, http://info.worldbank.org/governance/wgi/index.aspx#home. is exercised for private gain. It includes both petty at Poland’s Ministry of Defense was revealed. One and grand forms of corruption, as well as the cap- of the scandals involved purchases of various equip- ture of the state by elites and private interests. Fig- ment by the Polish elite commando unit GROM—the ure 7 shows the evolution of this indicator over time equivalent of the UK’s SAS or the Delta Force in the since its creation in 1996 for the four Central Euro- US. For example, the unit purchased 58 off-road vehi- pean countries as well as for the “old” EU (i.e., the cles that were unsuitable for military use. Other viola- EU prior to the 2004 enlargement). tions of the law have been uncovered elsewhere in the This indicator suggests a persistent gap between the military services. The Polish Anticorruption Bureau old member states and the Visegrád countries, as well (CBA) presented 39 separate charges against 22 indi- as a gradual deterioration in the “old” EU. A similar viduals with contracts totaling PLN 21 million.30 decline can be observed in the four Visegrád countries After the EU suspended the funding of three large since mid-2000s. The Czech Republic and Slovakia highway construction projects following allegations record improvements on this measure prior to EU of price-fixing among companies bidding on road accession in 2004, but not afterward. Poland seems to construction projects,31 Lech Witecki, the head of follow an opposite pattern, with improvements on this General Directorate for National Roads and Highways indicator in almost every year since 2004. (GDDKiA), was fired and is being prosecuted along with a number of other senior officials. Poland. Poland, unlike the other three Visegrad The most widely publicized Polish corruption countries, is also a country where publicized acts of scandal under the previous Civic Platform govern- corruption have been systematically prosecuted. In ment involved bribery by Hewlett Packard aimed at 2011, information about irregularities in procurement winning lucrative public contracts. In 2013, various

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branches of the Polish government, including the Sta- high-profile officials, only rarely have they resulted tistics Bureau and Ministry of the Interior, purchased in criminal prosecution. Of the EU countries, Slova- computers and information technology systems. The kia had the highest percentage of respondents who CBA has investigated around 100 distinct tenders for reported tailor-made specifications for individual corruption32 in contracts totaling several hundred companies on public tenders (84 percent) and col- million dollars. The scandal led to the resignation of lusive bidding (77 percent) as common practices on the head of the Statistics Bureau and investigation of the 2013 Eurobarometer business survey.37 In 2016, dozens of public officials. Prime Minister Robert Fico was revealed to be liv- ing in a luxury apartment at a below-market rent in Czech Republic and Slovakia. The Czech Repub- a building owned by Ladislav Bašternák, a business- lic’s record in uncovering and prosecuting procure- man who was under investigation for tax fraud. More- ment scandals is far less impressive. The country lacks over, Bašternák is a long-standing business associate a far-reaching legal norm forcing the government to of Interior Minister Robert Kaliňák. While in office, publish procurement contracts online. According to Kaliňák received payments from a company owned the European Commission, the energy sector, rail- by Bašternák.38 ways infrastructure, and postal services are the most prone to corruption.33 Military procurement in the Hungary. Even in this company, Hungary stands Czech Republic lacks transparency, too. In 2009, the out. As János Kornai observed, “A new term has been Czech government approved a massively overpriced introduced to everyday Hungarian: ‘Fidesz-közeli cég’, purchase of armored personnel carriers for the Czech meaning ‘a near-to-Fidesz company’. Such firms do armed forces. The purchase price per carrier was not belong to the party, but the sole or principal owner three times higher than for Portugal, which around of the company is a crony of the political center.”39 the same time bought a different batch of the same Cases of publicly known corruption, fraud, and vehicles with superior features and equipment from embezzlement dating to the 1990s have typically the same company.34 Allegations have been made stalled and resulted in no criminal sentences.40 The that the Czech politicians privy to the deal diverted prevalence of high-level corruption in the public sec- some of the profits for their own political parties.35 tor has led some observers to compare present-day Both the Austrian and the Czech police have opened Hungary to kleptocratic regimes such as Russia. The investigations into the case. In Prague, Marek Dalík, a book Magyar Polip (Hungarian octopus)41 argues that well-known lobbyist and former adviser to the Prime Hungary has become a full-fledged “post-communist Minister Mirek Topolánek, was sentenced in 2016 to mafia state,” with a centralized monopoly of corrup- four years in prison. tion maintained by the country’s political elite, which The city of Prague has seen several overpriced has superseded the chaotic decentralized dealings of infrastructure projects, indicative of potential cor- various oligarchs with corrupt government officials.42 ruption. The most prominent was the Blanka Tunnel Public procurement in Hungary is characterized Complex, a network of road tunnels in the north- by low levels of competition, with more than half of western region of Prague under construction since all public tenders featuring only one bidder.43 Fur- 2008. It was initially scheduled to open in 2011, but thermore, contracts are often awarded to companies opened in September 2015. The costs rose by over connected to Fidesz. One such example is Közgép, $400 million to $1.8 billion.36 Evidence of sloppy a company owned through a number of shell com- engineering and insufficient quality and cost control panies by Lajos Simicska, the former financial direc- by the urban authorities has been reported widely in tor of Fidesz. Between 2009 and 2014, Közgép was the Czech media. awarded public contracts worth $4.2 billion,44 mak- Likewise, although Slovakia has seen numer- ing it the most important construction company ous corruption scandals resulting in resignations of in the country. It built roads, railways, bridges,

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flood-control projects, and even nuclear storage channeling the products back into Hungary’s retail facilities. Repeated allegations were made about the market through phantom companies.49 The VAT rate firm’s financing of Fidesz’s political campaigns.45 on food products is among the highest in the EU. While such allegations are difficult to verify because According to András Horváth, a whistleblower, who of the company’s ownership structure and a lack of quickly became a subject of investigation by Hun- transparency in party financing,46 in an interview in garian authorities,50 the fraud led to a €3.2 billion 1994, Simicska revealed: shortfall in VAT revenue.51 The practice was noted by several US food and agribusiness companies, which It is necessary to solve the party’s financial situa- were asked for bribes by Hungary’s National Tax and tion in such a way so that Fidesz does not depend Customs Administration (NAV) to be able to partici- on external sources. . . . Because these are not char- pate in the scheme. itable organizations, from the time of its founding NAV officials reportedly tried to offer Ameri- Fidesz did not have outside supporters. We wanted can investors, including the agricultural company to avoid being beholden to domestic and foreign Bunge, a deal through which they could purchase groups, and for this reason had to develop our own expensive consulting services from Szazadvég Foun- sources of income.47 dation, a Fidesz-friendly think tank. In return, NAV would launch investigations into the finances and Mészáros & Mészáros (M&M), a construction VAT compliance of the companies’ competitors. company run by Lörinc Mészáros and his wife, is These reported attempts at bribery prompted the US another example. Mészáros is the mayor of the vil- Department of State to deny entry into the United lage of Felcsút, in which current Prime Minister States to six NAV officials, including Ildikó Vida, the Orbán spent part of his childhood. The company’s head of NAV. success in obtaining public construction contracts Corruption in Central Europe has many causes. has placed Mészáros, reportedly a close friend of One is that the governments lack the capacity to sys- Orbán, among the wealthiest individuals in Hungary. tematically monitor their employees’ behavior. That In December 2013, for instance, his company secured makes the probability of discovering corruption low. a contract worth $98 million to build a regional The low likelihood of discovery is not balanced by water network. National Water Management Direc- harsher punishments, as the economic theory of opti- torate (OVF) issued a public tender in the middle mal punishment would recommend.52 With weak of October and announced the results two months judiciaries and criminal proceedings often dragging later, with a final contract that is HUF 3.8 billion on for years if not decades, the overall deterrent effect ($17 million) more expensive than the advertised is very small. In 2014, not one investigation of sus- terms of reference. This came after a series of win- pected corruption was completed.53 ning bids in a number of other tenders, which often In Hungary and Slovakia, the independence and featured M&M as the only bidder. In 2012, Mészáros effective functioning of the judiciary remain pressing was also awarded the right to cultivate over 1,000 issues, compromising the progress achieved in recent hectares of state-owned land for 20 years along with years through improving legal norms against cor- other members of his family.48 ruption. In both countries, the judiciary is extremely Corruption cases in Hungary also include instances centralized, making it vulnerable to political inter- of tax fraud and the distribution of special favors by ference. Slovakia, in particular, has “the lowest score the government to politically connected groups. In of perceived judicial independence in the EU Justice 2012, allegations were made of widespread fraud in Scoreboard, as well as in the 2013–2014 Global Com- the collection of value-added tax (VAT), especially in petitiveness Report.”54 Following the PiS’s attack food products. The scheme involved fictitious export on the Constitutional Tribunal, it is plausible that a sales, which qualified for VAT reimbursement, while similar drift will be seen in Poland as well, making

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effective prosecution of high-profile corruption cases no obvious consensus has emerged among the four more difficult in the future. countries and sometimes not even within the coun- The prevalence of corruption in Central Europe tries themselves. The conflict in Kosovo provided the reflects the weakness of Central Europe’s institutions. first test of their commitment to NATO. The Czech As a rule, public sectors in postcommunist countries do Republic, Hungary, and Poland agreed to NATO’s mil- not operate with the institutional checks of advanced itary intervention. Slovakia, not a NATO member yet, Western societies. Even though there are sophisti- opened its airspace for use by NATO forces. All four cated formal rules guiding the decision-making pro- Visegrád countries then participated at the NATO-led cesses in the public sector, their application is often KFOR peacekeeping mission, with Poland making by tweaked to fit local circumstances. With weak insti- far the most significant contribution. Poland was also tutional underpinning, public sectors in these coun- among the first countries to recognize Kosovo after tries are bound to create a wealth of opportunities for it declared independence in February 2008. Hungary fraud, corruption, and embezzlement. followed in March, and the Czech Republic in May. Slovakia is still refusing to recognize Kosovo as an independent country. While the four countries have Visegrád’s Place in Europe participated in the NATO/ISAF missions in Afghani- stan and allied operations in Iraq, their participation With the exception of Slovakia under the leadership was modest and not always enthusiastic—reflecting of the semi-authoritarian Prime Minister Vladimír the fact that the US-led operations never enjoyed Mečiar (1994–98), the foreign policies of the four Cen- much public support in the Czech Republic and Slo- tral European countries have been firmly anchored in vakia. Harnessing the latent opposition to the war, the West since the end of the Cold War. The prospects Slovakia’s Prime Minister Robert Fico, who came to of joining the EU and NATO, for instance, were seen office in 2006, called the US intervention “unbeliev- as the single most important foreign policy priorities ably unjust and wrong.”55 for all four countries. In fact, creation of the Visegrád Russia’s war against Georgia in the summer Group in 1991 reflected these shared goals, as well as of 2008 was itself a source of divisions within the an understanding that coordinated action may help Visegrád countries. Officially, all four countries speed up entry into both organizations. condemned Russia’s aggression through their for- The cohesiveness of the group played a role in eign ministries and other channels. Yet some Slovak the NATO accession process. While NATO initially and Czech leaders presented a contrarian perspec- reacted negatively to the attempts of former War- tive on what was happening, exonerating Russia and saw Pact countries to join, after several years of out- blaming the Georgians. President Václav Klaus of reach and successful lobbying, at the alliance’s 1997 the Czech Republic, for example, claimed that “the Madrid Summit, NATO extended invitations to the responsibility of Georgia’s president, government, Czech Republic, Poland, and Hungary. Slovakia was and parliament, for starting this war is undeniable excluded from the first wave of NATO enlargement and clearly decisive.”56 Similarly, Social Democrat over concerns about its commitment to democracy. Miloslav Vlček, speaker of the Czech Chamber of Following Mečiar’s departure from office in 1998, Deputies (the lower house of the Czech parliament), Slovakia was invited to join the alliance with a larger blamed Georgian President Mikhail Saakashvili for group of Eastern European countries at the Prague the situation.57 In an even more bizarre instance of Summit in 2002. internal dissonance, Slovak Prime Minister Robert Since the successful entry of the four Viseg- Fico argued that Georgia’s government provoked rád countries into the EU and NATO, the Visegrad the Russian attack,58 while Slovakia’s Foreign Minis- group has lost at least some of its original purpose. try issued a strongly worded condemnation of Rus- On a number of pressing foreign policy questions, sian behavior.

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This tension in the countries between the official who has consistently defended Russia’s aggression diplomatic positions and the loosely pro-Russian lan- throughout the crisis,68 criticized the EU’s sanctions guage employed by some of their leaders became even regime,69 and at his May 2015 meeting with Vladimir starker after Russia annexed Crimea. Following Rus- Putin, he expressed hope that the sanctions would sian aggression, the European Union “condemned end soon.70 the clear violation of Ukrainian sovereignty and ter- Granted, the role of the president is largely cere- ritorial integrity by acts of aggression by the Russian monial in Central European political systems. How- armed forces as well as the authorization given by the ever, in Slovakia, Prime Minister Robert Fico, whose Federation Council of Russia on March 1 for the use government took part in the collective decision to of the armed forces on the territory of Ukraine.”59 impose sanctions on Russia, called sanctions “mean- Over the subsequent months it imposed a range of ingless”71 and “counterproductive, not addressing restrictions on diplomatic and economic cooperation, the problem in Ukraine,” adding that “the first and asset freezes, and other sanctions on Russia, with the second wave of sanctions led to an escalation of ten- assent of all four Central European countries. sions.”72 Similarly, Hungary’s Prime Minister Orbán Unsurprisingly, Poland condemned the annexation said that the EU was “shooting [itself] in the foot”73 of Crimea and Russia’s aggression.60 The Czech For- by imposing the sanctions. As mentioned in the sec- eign Ministry called the incorporation of Crimea into tion on corruption, Orbán’s government also negoti- Russia “completely unacceptable” and condemned ated a significant nuclear deal with Rosatom, Russia’s also the “so-called elections”61 in the Donetsk Peo- state-owned nuclear energy company, over the Paks ple’s Republic, held in November 2014, which “con- nuclear power plant. As a result, the prospect of the tradicted the most elementary democratic standards, sanctions regime being extended into 2017 appears with no participation of an international mission of increasingly bleak. observers, and their organization, without any par- Of late, however, the four countries have discov- ticipation of Ukrainian authorities, contravened ered a new source of cohesion in their reaction to the Minsk Accords of September 5.”62 Likewise, the the refugee crisis that swept across the European Slovak Foreign Ministry “condemned the violation Union in 2015. Hungary’s initial response consisted of sovereignty and territorial integrity of Ukraine of erecting a fence on its border with Serbia. Orbán’s through the acts of aggression on the part of Russian government also insisted on upholding the so-called military” and stressed that “these steps are an obvi- Dublin Regulation, which requires that refugees ask ous violation of the UN Charter and OSCE’s Helsinki for asylum in the first EU country that they reach. Act, as well as of Russia’s commitment to respect that In practice, however, that legal norm was not able to conclusions of the Budapest Memorandum of 1994.”63 withstand the magnitude of the inflow. Greek author- Hungary’s Foreign Ministry called the Crimean refer- ities lacked the capacity to accommodate the incom- endum “illegitimate and unlawful”64 and stated that ing asylum seekers, process their requests effectively, the annexation of Crimea “violated international legal and provide them with a treatment comparable to norms and deepened the conflict with Ukraine.”65 that offered by some of the EU’s wealthier countries, But underneath a seemingly united front, deep such as Germany or Sweden. tensions existed with a number of Central European In the face of the substantial and uncontrolled leaders publicly defending Russia’s actions, placing migratory flows across EU members and nonmem- their countries’ diplomats into awkward positions. bers—and of the disproportionate burden on Greece President of the Czech Republic Miloš Zeman com- and Italy—the European Commission proposed a pared the annexation of Crimea to Kosovo’s decla- system of quotas to resettle asylum seekers across ration of independence66 and emphasized that until member states. That was met with consternation in 1954 Crimea had never been a part of Ukraine.67 While all four Visegrád countries. At the initial EU Coun- he did not go as far as his predecessor, Václav Klaus, cil vote in September 2015, the Czech Republic,

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Hungary, Slovakia, and Romania voted against the by Central European governments, as well as by ordi- scheme, which was adopted by a qualified majority. nary denizens of the Visegrád region, comes at a time Poland, which had a pro-EU Civic Platform govern- when this part of the world is exposed to Russian pro- ment, voted for the scheme. Yet the new PiS govern- paganda of unprecedented intensity. That raises diffi- ment has been vocal in rejecting any possibility of cult questions about the future place of the Visegrád relocating asylum seekers to Poland, especially from countries within the Euro-Atlantic community of lib- Muslim-majority countries. Party leader Jarosław eral democracies. Kaczyński warned that the asylum seekers carried dis- eases, such as cholera and dysentery, “as well as vari- ous parasites, protozoa that are common and are not Conclusion dangerous in the bodies of these people, [but] may be dangerous here.”74 The refugee crisis contributed to The Visegrád countries are firmly among the winners the radicalization of Slovak politics in the run-up to of the postcommunist transitions in Central and East- the parliamentary elections in March 2016. Ahead of ern Europe. They have seen dramatic improvements the election, Prime Minister Fico vowed to “prevent in economic, social, and health outcomes; govern- the creation of a compact Muslim community in Slo- ment accountability; civil liberties; and their security vakia,”75 and the election brought into parliament a against external threats, guaranteed by NATO. How- plethora of fringe anti-immigration groups, includ- ever, none of these good outcomes should be taken ing Kotleba-People’s Party Our Slovakia, an openly for granted. Recent years have shown growing divides neo-Nazi party. In Hungary, Orbán’s government among Central European countries. Some, such as organized a referendum on October 2, 2016, to answer Hungary and the Czech Republic, have experienced the following question: “Do you want the European slow economic growth. Hungary in particular has suf- Union to be able to order the mandatory settlement fered from its government’s inconsistent and largely of non-Hungarian citizens in Hungary without par- populist response to the financial crisis that hit the liament’s consent?”76 Leaving aside the deliberately country in 2009. It has also performed worse than suggestive wording of the question, the referendum its Visegrád neighbors on several measures of insti- could not carry any legal weight because the resettle- tutional quality and corruption, backsliding on some ment scheme was a matter of European, not Hungar- metrics. This suggests that the rule of law and gov- ian law. The referendum was ultimately void because ernment accountability have not yet taken deep root of a low turnout, yet it attained its main goal: to in this part of the world. Finally, the Visegrád coun- deepen the divisions between European countries at tries’ commitment to the European Union and NATO a time when a united front was required to confront is weakening. Aside from gaffes and attempts to con- the bloc’s many challenges.77 tinue with business as usual with Russia, the four As expected, different European countries have countries are also on a collision course with Western different views about immigration and integration European partners over possible solutions to the EU’s of immigrants from culturally distant environments. refugee crisis. The danger of the ongoing standoff between “old” and Some of these worrying developments have a “new” Europe over the refugee issue lies in damag- common root: the failure of political elites to solid- ing the strength of the pro-Western anchoring of pol- ify and protect the institutions of liberal democracy. itics in Central Europe. Across Visegrád, the crisis has Instead of facing incentives to build an effective and been blamed, rightly or wrongly, on Angela Merkel’s accountable state, a temptation exists to use politi- “invitation,” extended to Syrians at a time when there cal power for short-term political and material gain. had already been over 600,000 pending asylum appli- Such self-seeking pursuits include corruption but also cations across the EU. The sudden wave of distrust of cover a range of legal activities, which divert public EU institutions and Western European governments resources into uses that do not benefit the public at

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large. Without strong formal mechanisms forcing About the Author Central European politicians to “do the right thing,” civil society activism and high-quality journalism are Dalibor Rohac ([email protected]) is a research the most promising bottom-up avenues that can pro- fellow at the American Enterprise Institute. vide discipline to the political class. At a low cost, the West can play an enormously valuable role there— as it did in the early stages of the transition when Acknowledgments Western-funded broadcasting and nongovernmen- tal organization activities helped steer public policy An earlier version of this paper was presented at the debates in a direction that eventually made all four of Transatlantic Renewal Roundtable in Budapest, July these countries part of the Western world. US and EU 9–10, 2015. I thank the roundtable participants, Jef- funding directed to journalists and civil society activ- frey Gedmin, and Gary Schmitt for helpful comments ists can also play a valuable role in countering Russian on an earlier version of this paper. Joe Gates and Sah- propaganda efforts. ana Kumar provided research assistance.

© 2016 by the American Enterprise Institute. All rights reserved. The American Enterprise Institute (AEI) is a nonpartisan, nonprofit, 501(c)(3) educational organization and does not take institutional positions on any issues. The views expressed here are those of the author(s).

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Notes

1. The name of the Visegrád Four, or the Visegrád Group, refers to a meeting of leaders Czechoslovak, Hungarian, and Polish lead- ers in the town of Visegrád in 1991. 2. See Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge, UK: Cambridge University Press, 1990). 3. Andrei Shleifer and Daniel Treisman, “Normal Countries: The East 25 Years After Communism,” Foreign Affairs, November– December 2014, https://www.foreignaffairs.com/articles/russia-fsu/2014-10-20/normal-countries. 4. Ibid. 5. Ibid. 6. See Hartmut Lehmann, “The Polish Growth Miracle: Outcome of Persistent Reform Efforts,” Institute for the Study of Labor, April 2012, http://ftp.iza.org/pp40.pdf. 7. See Martin Miszerak and Dalibor Rohac, “Poland’s Backsliding Began Long Ago,” Wall Street Journal, December 8, 2015, http:// www.wsj.com/articles/polands-backsliding-began-long-ago-1449608772. 8. Eva Kreuzbergová, “Dismantling Banking Socialism in the Czech Republic,” Charles University (Prague), Faculty of Social Sci- ences, 2006, 7, http://publication.fsv.cuni.cz/attachments/112_006_Kreuzbergova_aj.pdf. 9. Paul G. Hare, “Hungary: In Transition to a Market Economy,” Journal of Economic Perspectives 5 no. 4 (1991): 195–201, https:// www.aeaweb.org/articles?id=10.1257/jep.5.4.195. 10. The discussion of economic policy in Hungary in the aftermath of the Great Recession draws on material prepared for Dalibor Rohac, “Hungary,” in Alberto Alesina et al., Europe’s Fiscal Crisis Revealed: An In-Depth Analysis of Spending, Austerity, and Growth, Heritage Foundation, June 6, 2014, http://www.heritage.org/research/reports/2014/06/europes-fiscal-crisis-revealed-an-in-depth- analysis-of-spending-austerity-and-growth. 11. Klaus Schwab, ed., The Global Competitiveness Report 2015–2016, World Economic Forum, 2015, http://www3.weforum.org/docs/ gcr/2015-2016/Global_Competitiveness_Report_2015-2016.pdf. 12. Legatum Institute, “The Legatum Prosperity Index, 2015,” http://prosperity.com/. 13. World Bank, “Doing Business,” 2014, http://www.doingbusiness.org/rankings. 14. However, most of these indicators are tightly correlated, often with a correlation coefficients exceeding 0.8 or 0.9, suggesting that the specific choice of an indicator to use is not terribly consequential. 15. World Bank, “Worldwide Governance Indicators: Frequently Asked Questions,” 2016, http://info.worldbank.org/governance/ wgi/index.aspx#faq. 16. World Justice Project, Rule of Law Index 2015, 2015, http://worldjusticeproject.org/publication/rule-law-index-reports/rule- law-index-2015-report. 17. Neil Buckley and Henry Foy, “Poland’s New Government Finds a Model in Orban’s Hungary,” Financial Times, January 6, 2016, https://www.ft.com/content/0a3c7d44-b48e-11e5-8358-9a82b43f6b2f. 18. For more detail, see European Commission, “Commission Opinion on the Rule of Law in Poland and the Rule of Law Frame- work: Questions & Answers,” June 1, 2016, http://europa.eu/rapid/press-release_MEMO-16-2017_en.htm. 19. András Bozóki, “Occupy the State: The Orban Regime in Hungary,” Journal of Contemporary Central and Eastern Europe 19, no. 2 (December 2011): 649–63. 20. János Kornai, “Hungary’s U-Turn,” April 3, 2015, http://www.kornai-janos.hu/Kornai_Hungary’s%20U-Turn%20-%20full.pdf. 21. For examples of legal statutes adopted to help specific individuals or corporations, see ibid, 26–27. 22. Chris Blattman, “Corruption and Development: Not What You Think?,” November 5, 2012, https://chrisblattman.com/2012/11/05/ corruption-and-development-not-what-you-think/. 23. Douglass C. North, Understanding the Process of Economic Change (Princeton, NJ: Princeton University Press, 2010). 24. Simeon Djankov and Jan Zilinsky, “Life Satisfaction in Eastern Europe,” paper for the Journal of Comparative Economics confer- ence in Kiev, April 24–26, 2015.

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25. Rafael Di Tella and Robert MacCulloch, “Why Doesn’t Capitalism Flow to Poor Countries?,” Brookings Papers on Economic Activ- ity 40, no. 1 (2009): 285–332, https://www.brookings.edu/bpea-articles/why-doesnt-capitalism-flow-to-poor-countries/. 26. Andrew Byrne, “Hungary and Russia Confirm Nuclear Deal,” Financial Times, December 9, 2014, http://www.ft.com/cms/s/0/ 48dae3d0-7fc7-11e4-adff-00144feabdc0. 27. “Austria’s Far-Right ‘Courting’ Russia,” Local, November 25, 2014, http://www.thelocal.at/20141125/right-wing-freedom-party- visits-moscow-for-talks; and John Lichfield, “€40m of Russian Cash Will Allow Marine Le Pen’s Front National to Take Advantage of Rivals’ Woes in Upcoming Regional and Presidential Elections,” Independent, November 27, 2014. 28. The FSB is the Federal Security Service of the Russian Federation. Luke Harding, “Latvia: Russia’s Playground for Business, Poli- tics—and Crime,” Guardian, January 23, 2013, http://www.theguardian.com/world/2013/jan/23/latvia-russian-playground. 29. Wojciech Czuchnowski and Michał Wilgocki, “Kulisy zatrzymania Mateusza Piskorskiego z prorosyjskiej partii Zmiana. W Polsce miał się odbyć szczyt anty-NATO,” Gazeta Wyborcza, June 3, 2016, http://wyborcza.pl/1,75398,20175628,kulisy-zatrzymania- mateusza-piskorskiego-z-prorosyjskiej-partii.html. 30. Government of Poland, Central Anti-Corruption Bureau, “Central Anticorruption Bureau 2011 Performance Report,” Police Training Centre in Legionowo, 2012, http://cba.gov.pl/ftp/publikacje/2011.pdf. 31. Wojciech Surmacz and Violetta Krasnowska-Sałustowicz, “Fixing on the Roads in Poland,” Forbes, March 3, 2013, http://www. forbes.pl/fixing-on-the-roads-in-poland,artykuly,143374,1,1.html. 32. Radio Poland, “Wide-Ranging Corruption Scandal Hits Polish Ministries,” November 22, 2013, http://www.thenews.pl/1/9/ Artykul/153728,Wideranging-corruption-scandal-hits-Polish-ministries. 33. European Commission, “Czech Republic,” annex to EU Anti-Corruption Report, February 2, 2014, http://ec.europa.eu/dgs/ home-affairs/what-we-do/policies/organized-crime-and-human-trafficking/corruption/anti-corruption-report/index_en.htm. 34. iDNES.cz, “Výrobce pandurů si platil schůzky s politiky. Miliardovou zakázku získal,” February 17, 2010, http://zpravy.idnes.cz/ vyrobce-panduru-si-platil-schuzky-s-politiky-miliardovou-zakazku-ziskal-1rz-/domaci.aspx?c=A100216_210717_domaci_abr. 35. Wikileaks, “Pandura’s Box: Corruption Scandal Lifts the Lid on Czech Defense Procurement,” February 24, 2010, https://www. wikileaks.org/plusd/cables/10PRAGUE117_a.html. 36. Reflex.cz, “Vytunelovaný tunel Blanka bude stát ještě víc - 43 miliard. Půjde Bém na veřejné práce?” January 10, 2015, http://www. reflex.cz/clanek/zpravy/61530/vytunelovany-tunel-blanka-bude-stat-jeste-vic-43-miliard-pujde-bem-na-verejne-prace.html. 37. European Commission, “Slovakia,” annex to EU Anti-Corruption Report. 38. Ján Kuciak, “Exkluzívne: Kaliňáka vyplácala firma, ktorej akcionárom bol aj Bašternák,” Aktuality.sk, June 12, 2016,http://www. aktuality.sk/clanok/346567/exkluzivne-kalinaka-vyplacala-firma-ktorej-akcionarom-bol-aj-basternak/. 39. Janos Kornai, “Hungary’s U-Turn” (working paper), 7, http://www.kornai-janos.hu/Kornai_Hungary%27s%20U-Turn%20-%20 full.pdf. For the original, shorter version, see Capitalism and Society 10, no. 2 (March 2015). 40. Organized Crime and Corruption Reporting Project, “Hungary: Corruption Continues,” December 15, 2008, https:// reportingproject.net/prosecution/index.php?option=com_content&task=view&id=1&Itemid=1. 41. Bálint Magyar and Júlia Vásárhelyi, eds., 2 Magyar polip: A posztkommunista maffiaállam(Budapest: Noran Libro Kft, 2013). For the version adapted for English-speaking audience, see Bálint Magyar, Post-Communist Mafia State: The Case of Hungary (Budapest: Central European University Press, 2016). 42. For English-language reviews of the book, see Eva S. Balogh, “Hungarian Octopus: A Post-Communist Mafia State,”Hungarian Spectrum, November 16, 2013, https://hungarianspectrum.wordpress.com/2013/11/16/hungarian-octopus-the-post-communist-mafia- state/; and Jean Paul Herman and Lise Herman, “Hungary as a Mafia State?,”Books & Ideas, March 6, 2014, http://www.booksandideas. net/Hungary-as-a-Mafia-State.html. 43. European Commission, “Hungary,” annex to EU Anti-Corruption Report. 44. Zoltán Kovács, “Lajos Simicska and Közgép Are Doing Better,” Budapest Beacon, January 11, 2014, http://budapestbeacon.com/ economics/lajos-simicska-and-kozgep-are-doing-better/. 45. MTI, “Fidesz Politicians Allegedly Caught Discussing Közgép Involvement in Election Campaign,” Politics.hu, April 4, 2014, http://www.politics.hu/20140404/fidesz-politicians-allegedly-caught-discussing-kozgep-involvement-in-election-campaign/.

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46. While some rules governing party and campaign financing exist, very little transparency exists in the links between political par- ties and the foundations set up by them, which receive sizeable contributions from the private sector. See European Commission, “Hungary.” 47. Zoltán Kovács, “Meet Lajos Simicska: Fidesz’s Enigmatic Oligarch,” Budapest Beacon, February 10, 2015, http://budapestbeacon. com/politics/meet-lajos-simicska-fideszs-enigmatic-oligarch/. 48. Richard Field, “Felcsut Mayor Lorinc Meszaros Is Doing Better,” Budapest Beacon, January 19, 2014, http://budapestbeacon.com/ public-policy/felcsut-mayor-lorinc-meszaros-better/. 49. For more details about the scheme, see “VAT Fraud Hungary: The Case of Sovereign Sugar,” Budapest Sentinel, January 2, 2014, http://budapestsentinel.com/articles/vat-fraud-hungary-sovereign-sugar/. 50. Zoltán Kovács, “Police Search Home of NAV Whistleblower Andras Horvath,” Budapest Beacon, December 19, 2013, http:// budapestbeacon.com/public-policy/police-search-home-of-nav-whistleblower-andras-horvath/. 51. Atlatszo.hu, “Hungary’s Top Tax Auditor in Corruption Scandal,” November 25, 2014, http://english.atlatszo.hu/2014/11/25/ hungarys-top-tax-auditor-in-corruption-scandal/. 52. Gary S. Becker, “Crime and Punishment: An Economic Approach,” in Essays in the Economics of Crime and Punishment, ed. Gary S. Becker and William M. Landes (Cambridge, MA: National Bureau for Economic Research, 1974), 1–54, http://www.nber.org/chapters/ c3625.pdf. 53. Republic of Slovakia, Office of the Prosecutor General, “Štatistický prehľad trestnej a netrestnej činnosti za rok 2014,” October 20, 2015, 34 and 45, http://www.genpro.gov.sk/statistiky/statisticky-prehlad-trestnej-a-netrestnej-cinnosti-za-rok-2014-38c3.html. To be fair, in 2015, 118 were sentenced issued, mostly on grounds of bribery. See Republic of Slovakia, Office of the Prosecutor General, “Štati- stická ročenka o činnosti prokuratúry Slovenskej republiky za rok 2015,” March 10, 2016, 45, https://www.genpro.gov.sk/statistiky/ statisticka-rocenka-o-cinnosti-prokuratury-slovenskej-republiky-za-rok-2015-3931.html. 54. European Commission, “Slovakia,” annex to EU Anti-Corruption Report. 55. Reuters, “Slovaks Pull Soldiers from Iraq, PM Says War Wrong,” February 2, 2007, http://www.reuters.com/article/2007/02/02/ us-slovakia-iraq-idUSL0223773020070202. 56. Václav Klaus, “Přestaňme si lhát o Gruzii,” iDNES.cz, August 18, 2008, http://zpravy.idnes.cz/klaus-prestanme-si-lhat-o-gruzii- doi-/domaci.aspx?c=A080817_195217_nazory_dp. 57. Daniela Lazarová, “Czech Political Scene Split over Georgia,” Radio Praha, August 15, 2008, http://www.radio.cz/en/section/ curraffrs/czech-political-scene-split-over-georgia. 58. SME, “Fico: Vojnu vyprovokovalo Gruzínsko,” August 13, 2008, http://www.sme.sk/c/4019916/fico-vojnu-vyprovokovalo- gruzinsko.html. 59. European Union, “EU Sanctions Against Russia over Ukraine Crisis,” http://europa.eu/newsroom/highlights/special-coverage/ eu_sanctions/index_en.htm. 60. See, e.g., Ministry of Foreign Affairs of the Republic of Poland, “Statement on Incorporating Crimea and Sevastopol to the Rus- sian Federation,” March 18, 2014, http://www.msz.gov.pl/en/news/statement_on_incorporating_crimea_and_sevastopol_to_the_ russian_federation. 61. Ministry of Foreign Affairs of the Czech Republic, “Prohlášení MZV k rozhodnutí Ruské federace o připojení Krymu,” March 19, 2014, http://www.mzv.cz/jnp/cz/udalosti_a_media/prohlaseni_a_stanoviska/x2014_03_19_prohlaseni_mzv_k_rozhodnuti_ruske.html. 62. Ministry of Foreign Affairs of the Czech Republic, “Prohlášení MZV k tzv. parlamentním volbám v částech Doněcké a Luhanské oblasti,” November 3, 2014, http://www.mzv.cz/jnp/cz/udalosti_a_media/prohlaseni_a_stanoviska/x2014_11_03_prohlaseni_mzv_k_ tzv_parlamentnim.html. 63. Ministry of Foreign and European Affairs of the Slovak Republic, “Vyhlásenie MZVaEZ SR k aktuálnemu vývoju na Ukrajine,” March 4, 2014, https://www.mzv.sk/cestovanie_a_konzularne_info/detail/-/asset_publisher/Iw1ppvnScIPx/content/vyhlasenie-mzvaez-sr-k- aktualnemu-vyvoju-na-ukrajine. 64. Ministry of Foreign Affairs of the Republic of Hungary, “Ministry of Foreign Affairs of Hungary Regards the Crimean Referendum as Illegitimate,” March 17, 2014, http://2010-2014.kormany.hu/en/ministry-of-foreign-affairs/news/the-ministry-of-foreign-affairs-of-

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hungary-regards-the-crimean-referendum-as-illegitimate. 65. Ministry of Foreign Affairs of the Republic of Hungary, “The Ministry of Foreign Affairs of Hungary Regards Changing Crimea’s Status as Unlawful,” March 19, 2014, http://eu.kormany.hu/accessibility/the-ministry-of-foreign-affairs-of-hungary-regards-changing- crimea-s-status-as-unlawful (unavailable November 7, 2016), reposted at http://mfa.gov.ua/en/news-feeds/foreign-offices-news/ 20124-zajava-mzs-ugorshhini-shhodo-nelegitimnosti-zminu-statusu-krimu. 66. Jan Herget, Blanka Mazalová, and Martin Hromádka, “Zeman: Krym je jako Kosovo, každému se musí měřit stejně”. Český rozhlas, March 7, 2014, http://www.rozhlas.cz/zpravy/politika/_zprava/zeman-krym-je-jako-kosovo-kazdemu-se-musi-merit-stejne-- 1324282. 67. Miloš Zeman, “Naším úkolem je posílit Ukrajinu, říká exkluzivně Zeman” (interview with M. Zeman), Office of the President of the Czech Republic, https://www.hrad.cz/cs/prezident-cr/soucasny-prezident-cr/vybrane-projevy-a-rozhovory/nasim-ukolem-je-posilit- ukrajinu-rika-exkluzivne-zeman-11412. 68. Andrei Illarionov and Dalibor Roháč, “Former President Klaus’s Flawed Defense of Crimea’s Annexation,” World Affairs, http:// www.worldaffairsjournal.org/article/former-president-klauss-flawed-defense-crimeas-annexation. 69. Josef Kropecký, “Zeman: Sankce proti Rusku nefungují, roste mýtus obklíčené pevnosti,” iDNES, April 20, 2015, http:// ekonomika.idnes.cz/zeman-sankce-proti-rusku-nefunguji-roste-mytus-obklicene-pevnosti-1pe-/ekonomika.aspx?c= A150420_140536_ekonomika_kop. 70. iDNES, “Unie by mohla ještě letos zrušit sankce proti Rusku, řekl Zeman v Moskvě,” May 10, 2015, http://zpravy.idnes.cz/zeman- sankce-rusko-rozhovor-dg2-/zahranicni.aspx?c=A150510_092019_zahranicni_skr. 71. Gergely Szakacs, “Europe ‘Shot Itself in Foot’ with Russia Sanctions: Hungary PM,” Reuters, August 15, 2014, http://www.reuters. com/article/2014/08/15/us-ukraine-crisis-sanctions-hungary-idUSKBN0GF0ES20140815. 72. Trend, “Robert Fico zopakoval: Na Ukrajine ide o súboj medzi USA a Ruskom,” September 6, 2014, http://www.etrend.sk/ ekonomika/robert-fico-zopakoval-na-ukrajine-ide-o-suboj-medzi-usa-a-ruskom.html. 73. Gergely Szakacs, “Europe ‘Shot Itself in Foot’ with Russia Sanctions: Hungary PM,” Reuters, August 15, 2014, http://www.reuters. com/article/2014/08/15/us-ukraine-crisis-sanctions-hungary-idUSKBN0GF0ES20140815. 74. Marcin Goclowski, Agnieszka Barteczko, and Anna Koper, “Polish Opposition Warns Refugees Could Spread Infectious Dis- eases,” Reuters, October 15, 2015, http://www.reuters.com/article/us-europe-migrants-poland-idUSKCN0S918B20151015. 75. SME, “Fico chce zabrániť vzniku ucelenej moslimskej komunity na Slovensku,” January 7, 2016, http://domov.sme.sk/c/20070758/ fico-musime-zabranit-vzniku-ucelenej-moslimskej-komunity-na-slovensku.html. 76. Edith Balazs and Marton Eder, “Hungary Sets October Referendum as Orban Targets EU Quotas,” Bloomberg, July 5, 2016, http:// www.bloomberg.com/news/articles/2016-07-05/hungary-to-hold-ballot-on-eu-quotas-in-october-as-brexit-weighs. 77. See Dalibor Rohac, “Hungary’s Referendum Had More to Do with Russia Than Immigration,” CapX, October 20, 2016, http:// capx.co/hungarys-referendum-was-about-geopolitics-not-migration/.

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