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After the Wall Fell: The Poor BalanceSheet of the Transition to CapitalismBranko MilanovicPublished online: 18 Apr 2015.

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

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Challenge, 58(2):135–138, 2015Copyright © Taylor & Francis Group, LLCISSN: 0577-5132 print/1558-1489 onlineDOI: 10.1080/05775132.2015.1012402

After the Wall Fell: The Poor Balance Sheetof the Transition to Capitalism

BRANKO MILANOVIC

Many Western economists were rapturous about the prospects forEastern Europe’s transition to rapid growth and solid democracyonce the Berlin Wall fell in 1989. The march to capitalism wasto be paved with gold. Most of the nations did poorly. Here is thedisappointing scorecard.

As I was leaving Berlin less than a week before the twenty-fifth anniversary ofthe fall of the wall, and as celebrations there were going strong, I decided tolook at the balance sheet of transition countries (even if the term is no longerfully adequate) over the past quarter century. I am originally from one of them,I worked on most of them in the 1990s, and I discussed and documented theGreat Depression there in my 1998 book Income, Inequality and Poverty Dur-ing the Transition toMarket Economies. So I was going back to a familiar terrain.

What naturally comes to mind to an economist is to look first at how thesecountries have done in terms of economic growth. To fix the ideas, let us call thecountries that are yet (in 2013) to reach the level of real income of 1990, mea-sured by real GDP per capita, clear failures. Then, let us call the countries thatgrew more slowly than the average of rich OECD (Organization for Economicand Cooperative Development) countries, that is, at less than 1.7 percent percapita per year, relative failures. They are so because they are not convergingto the rich countries’ income levels. The third group consists of countries thatare just about keeping upwith the richworld and have been growing at between1.7 and 2 percent per capita. Finally, we come to the success cases, countries thatgrew by at least 2 percent per annumper capita over the twenty-five-year period.

Branko Milanovic is presidential professor at the Graduate Center–City University of NewYork and senior fellow at the Luxembourg Income Study. He was lead economist in theWorld Bank Research Department for almost twenty years and senior associate at the CarnegieEndowment for International Peace in Washington. Milanovic’s main area of work is incomeinequality, in individual countries and globally. He has published articles in Economic Journal,Review of Economics and Statistics, and Journal of Political Philosophy. His most recent bookis The Haves and the Have-nots: A Brief and Idiosyncratic History of Global Inequality (2011),selected by The Globalist as 2011 Book of the Year.

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Note that the requirement of growing by 2 percent per year during a quartercentury is not particularly onerous, nor is such an achievement very stirring:you would need thirty-five years, almost two generations, of such growth todouble per capita income. (All growth rates are in per capita terms, derived fromGDPs, based on 2011 International Comparison Project PPP data, and down-loadable from the World Bank’s World Development Indicators, at http://data.worldbank.org/data-catalog/world-development-indicators.)

How does the picture look? In the bottom group, absolute failures, wehave seven countries with a combined population of almost 80 million (20percent of the population of all “transition” countries). They are, in order ofthe extent of their failure: Tajikistan, Moldova, Ukraine, Kyrgyz Republic,Georgia, Bosnia, and Serbia. All except Ukraine (note that our data end in2013) have been involved in civil or international conflicts. None is likely toreach its 1990 income any time soon. Basically, they are countries with at leastthree to four wasted generations. At current rates of growth, it might take themsome fifty or sixty years—longer than they were under communism!—to goback to the income levels they had at the fall of communism.

The relative failures include four countries—Macedonia, Croatia, Russia,and Hungary. Because of the large size of Russia, they comprise 160 millionpeople and represent the dominant of our four groups. Some 40 percent oftransition countries’ populations live there. Their growth rates have been lessthan or around 1 percent per capita.

Those that are managing not to fall further behind the rich capitalist worldare five: Czech Republic, Slovenia, Turkmenistan, Lithuania, and Romania.They include 40 million people (10 percent of transition countries’ total). Theirgrowth rates have been between 1.7 and 1.9 percent per capita annually.

Finally, we come to the success cases, those that are catching up with therich world. There are twelve countries in this group, and in increasing orderof success they are: Uzbekistan and Latvia (average growth rate of 2 percent),Bulgaria (2.2 percent), Slovakia and Kazakhstan (2.4 percent), Azerbaijan,Estonia, Mongolia, and Armenia (around 3 percent), Belarus (3.5 percent),Poland (3.7 percent) and Albania (3.9 percent). The population living thereamounts to 120 million (almost a third of the total).

If we concentrate on success cases, several of them (Azerbaijan,Kazakhstan, and Uzbekistan) are resource-rich economies whose success isentirely explained by the exploitation of hydrocarbons, gold, or otherminerals. The real capitalist successes are only five: Albania, Poland, Belarus,Armenia, and Estonia, which grew by at least 3 percent per capita per annum,almost twice the rate of rich countries and without the obvious help ofnatural resources. Armenia is particularly remarkable since its original periodof transition was rocky due to the war with Azerbaijan.

If in addition to growth, we broaden our gaze to income inequality, therewe have extremely high increases in some countries like Russia (which, with arather sluggish overall growth, produced very modest decreases in poverty),

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the three Baltic countries, and Georgia. In all of them, inequality measured bythe Gini index increased by more than 10 points, which is twice as much as itincreased in the United States between the mid-1980s and today. On the otherhand, Central European countries registered rather small Gini increases andcurrently have stable low-to-moderate inequality levels, very much in linewith the rest of the OECD. The data for Central Asian countries are notreliable, but they most likely underwent a significant increase in inequality.

Further, if we also require that a successful transition to liberal capitalismimply, in addition to the catch-up with the rich world and rather moderateincrease in inequality, a consolidation of democracy, and we go back to our listof five success cases, we must, on account of unconsolidated or inexistentdemocracy, drop Belarus and Armenia. (In 2012, Belarus’s Polity score fordemocracy, on a scale from �10 toþ 10 is� 7, and Armenia’sþ 5.)1 That leavesus with only three successes: Albania, Poland, and Estonia. Albania had a some-what less than exemplary transition to democracy, and it still may not be includedin the list of the fully consolidated democracies (although its current Polity score,like Estonia’s, is a high þ9). Data on pretransition inequality are nonexistent forAlbania, so we really do not know how much inequality increased there.

Most people’s expectations on November 9, 1989, were that the newlybrought capitalism would result in economic convergence with the rest ofEurope, a moderate increase in inequality, and consolidated democracy.These expectations are fulfilled most likely in only one country (Poland)and at the very most in another, rather small two. Their total populationsare 42 million, or some 10 percent of all former communist countries. Thus,one out of ten people living in “transition” countries could be said to have“transitioned” to the capitalism that was promised by the ideologues whowaxed about the triumph of liberal democracy and free markets.

In this short piece, obviously, I cannot go into political developments thatwere also much worse than expected, nor into wars that continue and havecost a conservatively estimated 250,000 lives so far (from Nicholas Sambanis’sdatabase on ethnic conflict, sent to the author in a personal communication).nor into major declines in life expectancy in Russia and Ukraine, nor intosluggish or negative population growth rates in most former socialistEuropean countries, nor into all pervasive corruption and kleptocracy.

Let me just focus on one often overlooked fact. It is most strikinglyillustrated with respect to Russia. Probably for the first time since the early1800s, Russia has gone through a quarter of a century without leaving anytrace on the international world of arts, literature, philosophy, or science.One does not need to mention Russia’s “Silver Age” of the early 1900s,nor a number of writers who, often in opposition to the regime, producedsome of the best literature of the twentieth century (Akhmatova, Pasternak,Grossman, Sholokhov, Solzhenitsyn, Zinoviev). One does not need even todwell on scientific progress in the USSR—indeed limited to the military ormilitary-used production—to realize that nothing similar happened in the

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past twenty-five years, which is indeed a sufficiently long period to drawconclusions. Capitalism was not kind to Russia’s arts and sciences.

The same is true for smaller countries like Poland, Hungary, Yugoslavia,and Czechoslovakia, which, between 1945 and 1990, produced importantpoets, writers, philosophers, and artists. I might not have followed fully the cur-rent intellectual trends, but I really cannot recall, with a few exceptions (andthere I confess to my own bias), anyone from Eastern Europe who has madean intellectual or artistic imprint on the world in the past twenty-five years.The exceptions, in my opinion, are almost all from the former Yugoslavia (hereis my bias): Emir Kusturica (film), Goran Bregović (music), and Slavoj Žižek(political philosophy). Interestingly, all have roots in the nonaligned TitoistYugoslavia and often draw inspiration from it. For example, Bregović’s musicwould not exist if he had to limit it to one of the new countries (i.e., formerrepublics). To that very subjective short list I might add the Bulgarian politicalscientist Ivan Krastev. (Obviously, I am not including researchers who mighthave done excellent work on their own countries. I am interested in thosewho had influence beyond their borders, that is, some international impact.)

Another glaring absence is that of interesting and important politicalleaders. I do not include here Vladimir Putin, who is obviously importantbut whose influence, while in my opinion positive in the first five to six yearsof his rule, has been increasingly negative since. Political leaders of the newstates are hardly known to their own populations, much less to the others. Ithink it is a fair guess that, except for Putin, 90 percent of the population intransition countries would be unable to name a president or prime ministerof any transition country other than their own. Midget countries have pro-duced intellectually midget leaders who either rule by iron hand (NursultanNuzerbayev in Kazakhstan, Islam Karimov in Uzbekistan), have created adynasty (Aliyevs in Azerbaijan), have been in power for some thirty years(as in Central Asia and Milo Djukanović in Montenegro), or just mindlesslyrepeat mantras coming from Brussels or Washington.

So, what is the balance sheet of transition? Only three or at most five or sixcountries could be said to be on the road to becoming a part of the rich and(relatively) stable capitalist world. Many are falling behind, and some are sofar behind that for several decades they cannot aspire to go back to where theywere when the wall fell. Despite philosophers of “universal harmonies” suchas Francis Fukuyama, Timothy Garton Ash, Vaclav Havel, Bernard Henry Lévy,and scores of international “economic advisers” to Boris Yeltsin, who all fan-tasized about democracy and prosperity, neither really arrived for most peoplein Eastern Europe and the former Soviet Union. The wall fell only for some.

NOTE

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

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