JEL Classification

Providing an insightful answer to what Central and Eastern Europe (CEE) actually is, is not straightforward. Berend (1986) distinguishes three sub-regions within CEE: the area which is usually referred to as Eastern Central Europe comprises the countries sharing the Carpathian Basin and the Polish plains; the second is the Balkan; and finally what he refers to as Russian Eastern Europe. Szűcs (1983) on the other hand uses a more historical definition of Eastern Europe: the region between the Western part of the Roman (Frankish) Empire and the Byzantine Empire that was influenced by both as attested by the division between Catholicism and Orthodoxy, Latin letters versus Cyrillic alphabet or in the relation between state and citizens.

The three regions of CEE were all subject to some dominant external influence that can serve as possible explanation for their specific social and political characteristics. In the Balkans, this influence is identified with the Ottoman Turkish rule lasting half a millennium, while for Russia and its neighbours it is usually the Mongolian invasion and the Byzantine influence that comes into mind. For Eastern Central Europe, the set of external factors are more heterogeneous: about half of the area, previously under Roman and Frankish rule, had the legacy of Roman Law and Catholic Christian institutions and ideals. The rest of Eastern Central Europe had to import these institutions and state forming principles from the West during the last centuries of the Early Middle Ages. But by the time these newly formed Catholic kingdoms adopted Western-type feudalism, arguably only superficially, it was already beyond its zenith in Western Europe.

Whether the economic and social development of the CEE region is considered as a delayed development or a unique path mainly depends on how much we believe that the local societies were capable of adopting Western European institutions. Some initial developments—such as the relatively fast conversion to Christianity and the successful entry into the commercial circulation of Europe during the thirteenth to fifteenth centuries—confirm the delayed development argument (Szűcs 1983; Topolski 1981; Wandycz 2001). But the low degree of urbanisation with an ethnically fragmented (mostly foreign) and weak citizenry, the ultimate failure of local political elites to establish a firm base for centralised monarchies and nation states points out the contradictory nature of this medieval transition. Between the sixteenth to the eighteenth century, the previously strong medieval states of Eastern Central Europe lost their independence to their more developed or militarily stronger neighbours.Footnote 1

Another view is represented by Wallerstein’s (1976) world system theory that enjoyed great popularity in Eastern Europe during the 1970s and 1980s. Wallerstein claims that the Western European markets integrated all parts of the world in the course of the sixteenth to eighteenth centuries, which led to an uneven interregional exchange of resources. The demand for agricultural goods and raw materials in the increasingly urbanised core area of the new world economy (Western Europe and later North America) allowed the nobility of the periphery to acquire the economic strength needed to counteract and revert any social and political movements that could have weakened feudalism (Szelenyi 2004).

The First Round of Modernisation

With some simplification, one could consider the last 200 years of the CEE region as a series of failed or partially successful attempts to catch up with Western Europe in terms of economic performance and well-being. Most historians would agree that, whatever the underlying reasons are, CEE could not keep up with Western Europe in terms of population growth and urbanisation until the second half of the nineteenth century. While the westernmost parts of the region—such as Austria, the German states east of the Elba river, Bohemia and to a much lesser extent Western Hungary—had already undergone a small-scale industrialisation by the 1850s, it was the regaining of political independence and the formation of nation states that triggered the first, partially successful convergence period of the region. Yet, while Western Europe had many centuries to develop from the beginnings of capitalism in thirteenth-century Italy to the Industrial Revolution of the nineteenth century, in CEE this all had to happen in the course of a few decades. This also meant that old feudal institutions, such as nobility and serfdom, occasionally coexisted with an emerging class of industrial and agricultural wage workers and entrepreneurs leading to what is often referred to by Eastern European historians as a “congested society” (Berend 2003).

The idea that the CEE countries follow a special path has been most effectively popularised by Gerschenkron (1962). His seminal essay on economic backwardness identified certain typical characteristics of modernisation in peripherical countries ranging from Germany to Japan. First, unlike the early capitalist countries like Britain or the Netherlands, these countries lacked financial markets (stock exchange, bonds market) that could have financed industrialisation directly. Consequently, investment banks as intermediaries played a prominent role. But the success of banks in financing industrialisation was conditional of the existence of a middle class wide enough to produce enough savings (France, Germany, Austria and Bohemia). Where the population did not have adequate savings for the banks to collect (Hungary, Romania, Russia), the state had to take a more active role in industrialisation and engage in infrastructural investments, as demonstrated by the increasing budget deficit in these countries in the second half of the nineteenth century. Yet, as Gerschenkron notes, even though in Eastern Central European countries industrialisation became self-sustaining after a while, an active role by the state did not encourage individual business activities and proved a lasting phenomenon.

But did the region succeed in catching up to Western Europe? Convergence requires that the per capital national income in CEE countries grew on average faster than in the core European countries. Katus (1970) estimated the national income in Hungary increased by 2.5–3.0 per cent per annum in the 1870–1900 period, which translates to roughly 1.4–1.5 per cent per year in per capita terms (Bolt and van Zanden 2014). The economic growth was of similar magnitude in other CEE countries, namely in Romania (1.35 per cent) and Poland (1.56 per cent). This growth exceeded per capita economic growth in the United Kingdom (1.10 per cent), France (1.38 per cent) in the same period and was roughly comparable to Germany’s 1.56 per cent per year growth.

What can explain this apparent success? The first to note is that these countries underwent major institutional changes in the period. The abolition of serfdom with the preserved dominance of large estates freed up a large pool of cheap unskilled labour. This was paired with new economic laws including private property laws, legalisation of selling land, corporate laws (Prussia 1843, Austria and all German states 1860) that reduced the risks of individual investors (Pistor et al. 2003). Furthermore, the development of the financial sector, paired with a relative abundance of foreign capital resulted in an easy access to capital. In line with the Solow model (1956), these favourable changes shifted the maximum attainable income level for these countries and economic growth started, albeit due to the diminishing returns to factors of production, this growth must have been temporary. This phenomenon is basically what is referred to as “economic miracle”, a phase of fast but transitory economic growth.

Whether the period of convergence could have continued remains unclear, with the shock of World War I disrupting the process of catch up, but the economic growth did not seem to have slowed down significantly prior to 1910 in the region. Altogether, there seems a consensus among economic historians that if there was a real chance for lasting and perhaps even complete convergence between the two halves of Europe, then it was during this period.

State-Socialism: An Exogenous Shock or a Stage in Development?

The reader may be surprised why the interwar period is not discussed in this text. Besides limitations in space, my motivation to skip this roughly 25-year-long period is that the few years of economic revival in the 1920s was quickly cut short by the Great Depression and a global tendency of isolation. Yet, the interwar period offers a glimpse into the post-World War II future of the region: an increase of government intervention, ranging from strict control of labour unions to state-owned firms and cooperatives gaining monopoly over the trade of agricultural goods.

Perhaps the most fundamental question is whether we should consider state-socialism as an exogenous factor, in other words an unfortunate accident in Eastern European history or rather classify it as a natural stage in the attempt of the region to catch up with Western Europe. Marx saw the communist revolution as the logical consequence of the historical development in the most developed countries and would likely not have imagined Russia to become the first officially communist country in the world. The historical dominance of the state in economic development and the weakness of civil society resulted in low resistance to the state-socialist transformation after 1945. Hence, even though state-socialism and a single-party political system was forced upon the nations of CEE by Soviet troops, the fundamental ingredients, namely statism and central planning, fell on fertile soil in the region.

Another precedent of the post-war state-socialist period was the Stalinist industrialisation of the USSR in the 1930s, serving as a model for all Eastern European communist regimes after 1945. The quick industrialisation of the Soviet Union was then considered as obvious evidence of the viability or even the superiority of central planning. This view, however, was contested heavily from the 1970s, when the apparent difficulties of CEE economies clearly showed how inefficiently state-socialist economies allocated their scarce resources. This critical view is forcefully represented by Rosefielde (1996) who argues that the initial estimates of the Soviet economic growth were strongly biased upward and the industrialisation only achieved the impoverishment of the people. This assessment was supported by new data published by Khanin during the late 1980s that illustrated the highly inflated nature of the official soviet economic statistics (Harrison 1993). While officially national income grew 89.5 times in the USSR in the 1928–1987 period, Khanin showed that the increase was just 6.9-fold. Yet, not all consider state-socialism a complete failure. Allen (2003) claims that even with a moderate growth of aggregate consumption well-being still increased in the 1928–1940 period due to urbanisation and an apparent increase in life expectancy. Indeed, the great degree of social mobility (due to the destruction or demotion of the former elite) could temporarily make the impression of significant improvements in welfare, even in the absence of any production efficiency gains.

As for CEE countries, the rapid industrialisation and social mobility of the 1950s was quickly replaced by a slowdown of economic growth, partly as a result of the mismatch between market forces of demand and supply and partly due to the imperfect information available to the planner. Additionally, the existence of a soft budget constraint, due to the willingness of the owner (the state) to move in and bail out firms that were operating at loss, removed all motivation for pursuing economic efficiency (Kornai 1986). As a result, after an initial fast growth, which can be attributed to the post-World War II reconstruction, state-socialist countries could not sustain the initial pace of investments and their reforms in mass education did not translate into better economic performance in retrospect (Vonyo 2017b). This creates the impression that socialism was viable only in the short run and was destined to fail ultimately (Szelenyi and Szelenyi 1994).

But socialism had a more profound effect that is likely to affect the prospects of economic convergence and political integration of the region into the European core. Alesina and Fuchs-Schuendeln (2007) use survey data on former East- and West-German citizens to look for differences in the attitude towards government and social policies. They find that former East-German citizens favour state intervention and redistribution significantly more than their western counterparts and these differences may last for decades. Another consequence of socialism is shown by Boenisch and Schneider (2013) who also make use of the East-West German division as a natural experiment. Their results indicate that former East-German citizens accumulated more informal and less formal social capital than West-Germans. If their finding can be generalised, we can expect reduced prospects of civil society that could serve as a check on governments in these countries, leading to strong centralisation tendencies in the coming decades.

Conclusion

What makes the CEE region especially interesting to a social scientist, including economists, is that while it shares many common characteristics with Western Europe, it is still significantly poorer and less developed. While the history of CEE cannot technically be considered as a natural experiment, it can still be very useful to understand the source of economic success and failure. This is especially attractive in the light of the New Institutional Economics which stresses the role of informal institutions in development (see North 1990; Landes 1998; Williamson 2000). The CEE region offer plenty of possibilities for the interested scholar to measure such institutional characteristics, without the need to control for large climatic, biological or geographic differences like in Africa or Asia.