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 1 IS NEW EUROPE BACKSLIDING? DALIBOR ROHAC 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 2 IS NEW EUROPE BACKSLIDING? DALIBOR ROHAC Figure 2. Real GDP Growth Rate Across Visegrád Four 6 5 4 wth ro 3 GDP Annual G 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 3 IS NEW EUROPE BACKSLIDING? DALIBOR ROHAC 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.