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This page intentionally left blank
From the Soviet Bloc to the
European Union

The Soviet Union’s dramatic collapse in 1991 was a pivotal moment in the
complex history of Central and Eastern Europe, and Ivan Berend here offers
a magisterial new account of the dramatic transformation that culminated
in ten former Soviet bloc countries joining the European Union. Taking the
OPEC oil crisis of 1973 as his starting point, he charts the gradual unraveling
of state socialism in Central and Eastern Europe, its ultimate collapse in the
revolutions of 1989, and the economic restructuring and lasting changes in
income, employment, welfare, education, and social structure which followed.
He pays particular attention to the crucial role of the European Union as well
as the social and economic hurdles that continue to face former Soviet bloc
nations as they try to catch up with their Western neighbors. This will be
essential reading for scholars and students of European and economic history,
European politics, and economics.

ivan t. berend is Distinguished Professor of History at the University of

California, Los Angeles.
From the Soviet Bloc to the
European Union
The Economic and Social Transformation of
Central and Eastern Europe since 1973

ivan t. berend
CAMBRIDGE UNIVERSITY PRESS
Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo

Cambridge University Press

The Edinburgh Building, Cambridge CB2 8RU, UK
Published in the United States of America by Cambridge University Press, New York

www.cambridge.org
Information on this title: www.cambridge.org/9780521493659
© Ivan T. Berend 2009

This publication is in copyright. Subject to statutory exception and to the

provision of relevant collective licensing agreements, no reproduction of any part
may take place without the written permission of Cambridge University Press.
First published in print format 2009

ISBN-13 978-0-511-50082-4 eBook (Adobe Reader)

ISBN-13 978-0-521-49365-9 hardback

ISBN-13 978-0-521-72950-5 paperback

Cambridge University Press has no responsibility for the persistence or accuracy

of urls for external or third-party internet websites referred to in this publication,
and does not guarantee that any content on such websites is, or will remain,
accurate or appropriate.
 Contents

List of figures page vii

List of tables ix
List of boxes xi
Preface xiii
Introduction 1

1 The economic factors in the collapse of state socialism

and the new international environment,
1973–1989 6
Economic crisis, slowdown, and technological transformation
in the West and lack of adjustment and decline in the
East after 1973 7
The absence of opportunities for technology transfer 27
The new international environment: end of the Cold War
and the “new world order” 38
The “Washington consensus” 42

2 Radical transformation and policy mistakes: dramatic

economic decline in the early 1990s 50
Deregulation and macroeconomic stabilization 50
Marketization 53
Privatization 57
Policy mistakes and decline 65

3 Toward better times: the European Union and its policy

of eastward enlargement 79
The European Union’s interest in enlargement and integration 81
The acquis communautaire and membership in the Union 88

v
vi contents

The European Union’s impact on the transformation of future

candidate countries 102
The European Union of twenty-seven countries 105

4 Recuperation and growth: the role of foreign direct

investment 107
Capital inflow and foreign direct investment 108
Complementary specialization within the international
production network 124

5 Economic restructuring: transforming main sectors,

economic recovery, growth, and weaknesses 134
Restructuring the economy: infrastructure and services, the most
dynamic sectors 134
Agriculture 144
Industrial restructuring 153
Restructured foreign trade 164
Economic recovery and growth 168
Economic weaknesses 173

6 Transformation and social shock 177

Longing for Western life and starting to adopt it 177
The social pain of transformation 182
Societies in shock 195

7 Lasting changes in the structure of income, employment,

welfare institutions, education, and settlement 205
Living standards, unemployment, and poverty 205
A withering welfare state 213
Changing demographic trends 221
Educational changes 226
Structural changes in society 231
Settlement structure: unchanged urbanization level, but changing
cities 246

8 Epilogue: the future of catching up in the European

“melting pot” 255
Bibliography 267
Index 288
 Figures

1.1 Consumption of electricity, 1990 (based on Mitchell, 1998) page 24

1.2 Telephone lines/100 inhabitants, 1980 (Ehrlich and Révész,
1991: 83) 24
1.3 GDP growth rates compared, 1950–1973 and 1973–1992
(Maddison, 2001: 186) 35
1.4 GDP growth rates between 1973 and 1990 (based on
Maddison, 1995a; 2001) 36
1.5 Regional disparities, GDP/capita 1989 (based on Maddison,
2001) 36
2.1 The private sector in Central and Eastern Europe, 2004
(Jeffries, 2004: 166, 208, 245; EBRD, 2003: 16) 65
2.2 Transformational decline in five countries, 1989–1993 (based
on Mitchell, 1998) 75
2.3 Hungarian agricultural decline, 1989–1992 (EBRD, 1996) 76
2.4 Inflation rates in Central and Eastern Europe, 1989–1995
(EBRD, 2000) 76
2.5 GDP/capita, nadir, early 1990s (Maddison, 1995a; 2001) 77
3.1 The EU’s financial assistance to Central and Eastern Europe,
2000–2006 (based on European Commission, 1999) 99
4.1 Total foreign direct investment in the former Soviet bloc
countries, 1989–2004 (EBRD, 2005b: 19) 115
5.1 Employment in the service sector, 2005 (Economist, 2005b) 139
5.2 Total energy consumption/capita, 2004 (Economist, 2005b) 140
5.3 Agricultural employment, 1980s and 2004/05 (Economist,
various years) 145
5.4 Deindustrialization, 1990–2004 (Economist, 2005b) 154
5.5 Increased role of foreign trade in Central Europe (four
countries), 1990–2005 (Economist, 2005b: 34) 166

vii
viii list of figures

5.6 Reorientation of Central and Eastern Europe’s trade,

1989–2005 (Economist, 2005b) 167
5.7 GDP/capita, 1989–2002 (EBRD, 2003: 56) 170
5.8 The role of small and medium-sized companies (up to 100
workers), 2004 (Dyker, 2004: 308–09) 175
6.1 Poverty (population with less than 35–45 percent of average
wages), 1989 and 1995 (UNICEF, 1994: 2; Milanovic, 1996) 189
7.1 Real wages, 2003 (1989 = 100) (United Nations, 2004: 167; Van
Kempen, Vermeulen, and Baan, 2005: 45, 67) 209
7.2 Poverty ($4.30/day), 2001 211
7.3 Ratio of people to hospital beds, 1993–2003 216
7.4 Social protection expenditures, 2003 (in €) (Eurostat, 2005a) 219
7.5 Births outside marriage, 2004 (Eurostat, 2005a; Maddison
1995a; 2001) 223
7.6 Decline in fertility, 1900–2004 (Rallu and Blum, 1991) 225
7.7 Enrollment in universities, 2004 (Van Kempen, Vermeulen, and
Baan, 2005: 82, 134, 159, 193) 229
7.8 Occupational structure, 1975–2000 (based on Maddison,
1995a; 2001; United Nations, 2002) 234
7.9 Deurbanization: number of urban inhabitants, 1989–2004 247
8.1 Central and Eastern Europe’s economic backwardness in
historical perspective, 1820–1989 (Maddison, 1995a: 228) 256
8.2 Annual growth rates, 1993–2003 (based on Maddison, 1995a) 259
8.3 Comparative economic growth, 2005 (Economist, 2005a) 260
 Tables

Table 1.1 The spread of the telephone in Europe (in thousands) page 15
Table 1.2 Per capita GDP of Central and East Europe as a percentage of
Western European GDP 34
Table 1.3 Comparative GDP growth rates/capita 35
Table 1.4 The growth of GDP/capita compared (1973 = 100) 36
Table 1.5 Regional disparity, GDP/capita (regions as a percentage of the
West), 1950–1998 37
Table 2.1 Industrial output and animal stock in 1993 as a percentage of
1989 74
Table 2.2 Decline of GDP/capita in transforming countries in the early
1990s 77
Table 3.1 Budget commitments of the European Union 2000–2006, in
billion €, 1999 prices 99
Table 4.1 Cumulative inflow of FDI 116
Table 5.1 The service sector in the Central and East European economy,
2005 138
Table 5.2 Total energy consumption/capita in 2004 141
Table 5.3 The role of agriculture in the economy in 2005 145
Table 5.4 Industry’s role in the economy in 2004 154
Table 5.5 Labor productivity, 1990–2007 164
Table 5.6 Gross industrial output, 2003 165
Table 5.7 EU-25’s and Germany’s role in Central and East European
foreign trade in 2004 167
Table 5.8 GDP growth, percentage change from previous year, 1994–2007 169
Table 5.9 GDP growth rates between 1993 and 2003 170
Table 6.1 Decline in consumption in ten transition countries,
1989–1994/95 188
Table 7.1 Unemployment (as a percentage of civil labor force), 1995–2007 208

ix
x list of tables

Table 7.2 Fertility rate: children per woman 224

Table 7.3 Occupational structure as a percentage of economically active
population 234
Table 8.1 Central and Eastern Europe’s (nine countries) GDP/capita as a
percentage of Western Europe (twenty-three countries) and the
overseas West (four countries) 256
Table 8.2 GDP/capita in PPP ECU 262
 Boxes

Box 2.1 The Gdańsk Shipyard – the most Polish factory page 69
Box 3.1 The Albanian “pyramid scheme civil war” 80
Box 4.1 The European Bank of Reconstruction and Development 111
Box 4.2 Central and Eastern Europe: Volkswagen land 125
Box 5.1 A forgotten country: Moldova 150
Box 5.2 The largest minority in Central and Eastern Europe: the Roma 155
Box 6.1 How to become a billionaire in ten years: two rich men in
Hungary 182
Box 6.2 The richest Poles: Jan Kulczyk and Zygmund Solorz-Żak 184
Box 6.3 Homeless people flood Budapest after 1990 191
Box 7.1 Kings knock at Balkan doors 237
Box 7.2 Communists reinventing themselves as nationalists? The case
of Slovakia 241
Box 7.3 Changing the skyline: a new type of urban architecture 250

xi
Preface

Between 1990 and 2003, I worked on and published an informal trilogy

on the complex history of Central and Eastern Europe during the nine-
teenth and twentieth centuries (I. Berend, 1996; 1998; 2003). Now I am
going to present a volume on the exciting economic and social history of
postcommunist transformation of these countries that led to their join-
ing the European Union. The beginning of the story, however, goes back
to 1973, the year when a gradually emerging, long-lasting, and fatal cri-
sis became manifest, signaled a turning point, and undermined the state
socialist regime, leading to its collapse in 1989. Without understanding
that period and its main problems, one cannot understand the post-1989
transformation process and its difficulties.
Some readers might be familiar with my 1996 Cambridge University
Press book, Central and Eastern Europe 1944–1993: Detour from the Periph-
ery to the Periphery. The last two decades I discussed in that earlier book will
be covered again in this volume. This reexamination is necessary because
of the quarry of information I mined during the past decade and a half,
the huge reservoir of new statistical and scholarly research, including my
research on the most striking and controversial new development of the
world economy, globalization (I. Berend, 2008).
The historical perspective on developments after the collapse of state
socialism is equally important. It facilitates deeper research and a clearer
historical picture of that period. Last but not least, the post-1973 Central
and East European trends in this book are compared to the Western eco-
nomic trends: the drying up of its special sources and the halt of postwar
exceptional prosperity. The West, however, embarked on a new road and
responded positively to the challenge of globalization. This comparison
contributes to a better understanding. This work, consequently, presents a
novel approach to the history of the last decades of the twentieth century
and a more complex view than the one that I wrote more than a decade ago.

xiii
xiv preface

The sudden historical transformation of Central and Eastern Europe

inspired a large amount of research and publications. Many of the works
discussed either certain periods of that history, or certain countries, and
even more often some elements of the complex story such as the pro-
cess of privatization, the role of foreign investments, rising poverty, elite
change, etc. The new feature of this volume is its complexity, covering
the entire region of seventeen countries and the combined economic and
social process of an uncharted historical road. Furthermore, I have put the
region’s transformation into the framework of Europe and of its East–West
relations.
This history is yet unfinished. Writing about the unfinished present
is like shooting at a moving target. Besides, contemporary history also
poses another difficulty. Paradoxically enough this is the overwhelming
richness of information. Millions of facts, figures, pieces of information,
and highly diverse, contradictory, and controversial evaluations make the
picture confusing and sometimes result in a lack of transparency. The
puzzle here is how to put these millions of pieces together or, using another
metaphor, how to build the mosaic picture, in which small pieces are
positioned in such a way that they depict the complexity of the real world.
It is a real challenge.
I feel, however, some special encouragement and advantage. The rise of
state socialism, its crisis, the 1956 Hungarian Revolution, the attempt at
reform, its partial success, strong limitations, deep crisis and final failure,
the feeling of the must of change and the longing to join Europe were all
part of my personal life. Furthermore, between 1973 and 1993, I was a
minor actor in the story I am going to write about. I participated in the
reform process, and in the late 1980s chaired a committee of economists
and worked out the first transformation, marketization, and privatization
plan for Hungary. I was a member of an international advisory committee
on transformation for three more years, and in the years I was working
on this book I have been member of a European Union-initiated internal
advisory Economic and Social Council of Hungary.
Does it mean that I can write this history wie es eigentlich gewesen, as it
really happened – as Leopold von Ranke defined the goal of history writ-
ing? Most contemporary historians harbor doubts about this possibility
in general, and speak about serious limitations of cognizance and cogniz-
ability. Presenting the transformation’s decade-and-a-half-long complex
economic and social history, the emerging new order in statu nascendi
may, however, help a better understanding of the present and also the
future of the region. That is the goal of this work. My interpretation, my
 preface xv

view on the events, may – I hope – contribute to a collective effort to

discover the truth.

Every study is the result of a collective effort. I am grateful to all of my

fellow economic historians, statisticians, and sociologists who published
inspiring works over the past decade and a half on various aspects of the
Central and East European transformation. Without their results I would
have not been able to cope with the immense task of writing this complex
and comparative history of economic and social changes.
As always in the past eighteen years, I received inspiration and assistance
from the University of California Los Angeles, my working home, which
helped my research with its intellectual atmosphere, frequent debates,
and conferences. Teaching also gave major inspiration and a permanent
incentive for further research. Last but not least I should like to mention the
outstanding collection of UCLA’s Young Research Library and the research
grants of the Academic Senate that helped my work tremendously.
This book gained its final form with the contribution of my friend,
David Summers, who made a superb job of copyediting the typescript. I
am also highly grateful for the anonymous reviewers and the professional
staff of Cambridge University Press for their essential advice and careful
preparation of the publication.
My heartiest thanks go to Kati, my wife, whose love, friendship, and
intellectual contribution have had an indescribable role in accomplishing
this book.
Introduction

The year 1989 has become known as the annus mirabilis, or miraculous
year. And, indeed, what happened that year was neither predicted nor
believable. It surprised the world. State socialism, which had established its
isolated bridgehead in Russia after the Bolshevik Revolution of 1917, spread
and conquered Central and Eastern Europe after World War II. Besides
the Soviet bloc in the eastern half of Europe, it gradually incorporated
nearly one-third of the world by the 1980s. The Soviet Union emerged
as a superpower with an enormous army and nuclear arsenal. In times
of crisis that threatened the system in other countries, such as the 1953
Berlin revolt, the 1956 Hungarian Revolution, the Prague Spring in 1968,
or the Afghan crisis in 1979, the Soviet military machine did not hesitate
to intervene and “save” socialism. The international military balance of
power during the Cold War decades kept the postwar world order intact
and, as everybody believed, unchangeable. Moreover, in 1975, the Helsinki
Agreement reaffirmed international acceptance and guarantee of the status
quo.
By the late 1980s, however, historical changes had rendered impossible
a brutal military solution to such crises. Not even hardliners risked open
confrontation and the use of force. In situations where force seemed the
ultima ratio, they refrained from using it and capitulated. And, in 1989,
state socialism peacefully collapsed in Poland and Hungary over the course
of a few months, and then throughout Central and Eastern Europe within
six weeks. This process concluded with the collapse of the Soviet Union
itself in 1991. The miracle of peaceful revolution destroyed state socialism
because nobody was ready to defend the regime. The elite prepared to save
its position by giving up power, or at least part of it, through major reforms
and compromises.
The year 1989 thus became a historical landmark of twentieth-century
Europe. In retrospect, the situation offered no alternatives, and the

1
2 from the soviet bloc to the european union

transformation from the late 1980s, as Timothy Garton Ash noted, “pro-
ceeds at break-neck speed with a quiet democratic revolution” or, in his
coinage from the words revolution and reform, “refolution” (Garton Ash,
1989).
What happened in Central and Eastern Europe in 1989 was, however,
not only a break with the postwar socialist past. The countries of the region
followed a different historical path from that of the advanced West in most
parts of the twentieth century: economic nationalism, self-sufficiency from
the 1920s, authoritarian dirigisme during the 1930s and early 1940s, and
later a Soviet-type non-market system with central planning. From the
early 1930s and then during the entire period of the 1950s to the 1980s, the
countries of Central and Eastern Europe belonged to isolationist regional
alliance systems led first by Nazi Germany and then by the Soviet Union.
The unsolvable crisis of the 1970s and 1980s dramatically strengthened
opposition to the state socialist regime and contributed to its collapse.
Moreover, 1989 marked the end of a long revolt, from both the Right and
the Left, against the West. Instead the trend turned to adjustment and
“Joining Europe!” This slogan of 1989 targeted the replacement of the
failed system that was unable to cope with the challenge of globalization.
The countries of the region longed to follow the successful West and
introduce its integrationist open market system. They wanted to be part
of the European Union.
At the same time, the European Union itself experienced slowdown
and crisis beginning in the late 1960s and early 1970s. It sought to regain
its vitality, to reestablish its competitiveness, and to cope with the chal-
lenge of globalization. Western Europe was the only major player in the
rapidly globalizing world system without an economic “backyard.” Latin
America and large parts of Asia became part of the production networks
of the United States and Japan, respectively, and assisted their economic
performance.
After 1989, the European Union was immediately ready to integrate
and incorporate Central and Eastern Europe in order to stabilize peace
on the continent and to build its own nearby production network. To
achieve that, the Union was ready to direct and assist the transformation
of Central and Eastern Europe, and to accept ten ill-prepared, former
communist countries as EU members in the near future. The enlargement
of the Union and the preparation for further enlargement in the Western
Balkans were important for the economic interests of the old member
countries of the European Union. The enlargement strengthened the EU’s
production network and stabilized the continent. The metamorphosis of
Central and Eastern Europe is, therefore, also a chapter of the history
 introduction 3

of the European Union. Both East and West became winners through
integration.
Central and Eastern Europe’s transformation was thus determined by the
dual characteristics of the turn of the millennium in Europe: globalization
and the European Union’s response to its challenge.
The first chapter of the region’s transformation was essentially complete
by the time ten of its countries were accepted to the EU in the new anni
mirabiles of 2004 and 2007. The countries adjusted to the requirements
of the West, abolished their dictatorial regimes and their state-owned,
non-market systems, and rushed to introduce parliamentary democracy
and free market economies. They abandoned gradualism, took risks, and
made serious mistakes on an uncharted road, but in a decade and a half
successfully changed their situation. The social cost was dear, and social
pain, increased poverty, and income disparity affected wide layers of their
societies. Even demographic trends worsened. The social shock, caused
partly by the change of systems, but even more by radically changed values
and culture, is not yet over and characterizes both winners and losers alike
in these societies. It renders the political situation fragile, and it opens
the door to the sort of populist-nationalist fundamentalism which spread
through the region in the early 1990s, especially in the Balkans, and then
reemerged again in Poland, Slovakia, and Hungary as late as 2006 and
2007.
A significant contribution to the rapid transformation of the region
was the European Union’s insistence on compliance with its legal and
institutional requirements (acquis communautaire), combined with more
financial assistance than was received under the postwar Marshall Plan,
and an even higher amount of direct investments. The EU offered its
markets and modernized the telecommunications and banking systems
of the transforming countries. Central and Eastern Europe adjusted to
the requirements of the free market and became an important part of the
production network of old EU countries. An old dream came true, although
the countries of Central and East European region are not yet equal partners
in the formerly exclusive European club, and the new members often
consider themselves second-class citizens in Europe.
The Central and East European income level, as a consequence of its
different historical past, is much lower – from one-half to one-quarter of
that of the established members of the European Union – and the region’s
economy is highly dependent on the West and Western investments. The
social patterns of the new and prospective Union member countries also
carry the heavy burden of an unfortunate past. The region consequently
has a subordinate position in globalization. Will they break through and in
4 from the soviet bloc to the european union

time become prosperous equals? Will they achieve European Union levels
in terms of such basics as income level, labor productivity, infrastructure,
consumption, and modern social-occupational structures and attitudes?
Successful transformation does not mean merely full adjustment to the
market system and the requirements of the European Union. In a broader
sense it also requires adjustment to modern Western values and behavioral
patterns, and achievement of advanced income levels similar to those in the
West. Catching up with the EU-15 in this broader sense is a long historical
march that requires a competitive economy based on domestic innova-
tion, appropriate social and educational institutions, advanced domestic
banking and the availability of venture capital, and a wide array of small-
and medium-sized companies. Only the very first steps have been taken to
establish all of that, and only in a handful of countries.
The process, however, has already begun. If it succeeds, Central and
Eastern Europe will organically incorporate into a larger entity: Europe.
The caravan of Central and Eastern Europe is on the move. The possibility
of catching up with the West, which has motivated these countries from
the early nineteenth century, has become a realistic goal for the first time
in history, though it will be neither a quick nor an easy one to achieve.
A positive outcome will require generations and is not a given or even
evident at this stage of development. The door is wide open. Some of the
countries will enter. Others will not, or will cross the threshold only much
later.
This book covers the area of Central and Eastern Europe. At this
point, I need to clarify what I mean by that.1 The eastern half of the
European continent, often called Eastern Europe, Central Europe, or
Central and Eastern Europe, has a huge variety of definitions. Without
summarizing a century-long debate and the various interpretations of
the region from Leopold von Ranke ([1824] 1909) to Jenő Szűcs (1983),
I am going to discuss the region that in earlier centuries was located
between the German, Russian, and Ottoman empires, and which interwar
German authors called Zwischen Europa, or “in-between Europe.” History
in this zone began half a millennium later than in the Western Carolingian
Empire; Christendom conquered most of it in the ninth and tenth cen-
turies, but this zone remained the frontier of Christian-feudal Europe for
centuries, open to “barbaric” attacks from the East (N. Berend, 2001;

1 I use the terms Southern Europe and Mediterranean Europe interchangeably to mean Greece,
Italy, Portugal, and Spain, while Western Europe means Austria, Belgium, Britain, Denmark,
Finland, France, Germany, Ireland, Liechtenstein, Luxembourg, the Netherlands, Norway,
Sweden, and Switzerland.
 introduction 5

2007). Unlike the western half of the continent, the region remained
agrarian until World War II. Nation building remained unfinished, and
borders and state formations have changed right up to the present, as
multiethnic states divide and split apart. Most of the countries of the
region belonged to huge multiethnic empires for up to five centuries, and
they remained ethnically mixed, politically authoritarian, and oppressive
against minorities.
In many ways, however, and in spite of important similarities, this
region is different from the “East par excellence,” as Szűcs (1983) called
Russia. It is difficult to generalize about the various countries because they
belonged to three empires in the middle of the nineteenth century, formed
ten states in the interwar decades, and comprise seventeen countries today.
One can differentiate between two distinct subregions, Central Europe
and the Balkans, which exhibit significant differences. They, nevertheless,
were and are characterized by basic similarities. All of them lost indepen-
dence between the late fourteenth and eighteenth centuries and became
incorporated into huge neighboring empires and, after regaining inde-
pendence, they all formed part of the Nazi German Lebensraum and then
the Soviet bloc in the twentieth century. Nowadays, they are all equally
countries “in transformation.” The historical trajectories of Central and
Eastern Europe thus differ significantly from the West and, in many senses,
from neighboring Russia and Turkey, as well (I. Berend, 2005).
This is a region which has existed as a historical unit for a millennium,
but it might begin to disappear as a distinguishable entity if the transfor-
mation successfully continues, and if the countries of the area prove able
to rise to the level of the West in the space of one or two generations.
 chapter 1

The economic factors in the

collapse of state socialism
and the new international
environment, 1973–1989

The collapse of a regime always has more than one cause. In my interpreta-
tion, however, among the various international and domestic factors that
led to the collapse of state socialism in Central and Eastern Europe, basic
economic facts were primary. Accordingly, we must first unravel, out of
the numberless threads that make up the fabric of history, the dramatic
changes in economic processes brought about by the shock to the world
economy caused by the oil crisis of 1973.
The economic base of state socialism was visibly undermined from the
1970s on, accelerating its collapse. For a full understanding of this process,
it is important to give a relatively detailed explanation of the international
economic situation, the Western reaction to a changing economic world,
and the Eastern inability to adjust to it. These developments are not only
the main factors in the collapse of socialism, but also explain the require-
ments and trends of postcommunist transformation. This is, therefore,
the proper point of departure for analyzing the two crucially important
decades around the turn of the century.
The year 1973 was indeed the beginning of a new chapter of greater
European economic history, which, in the case of Central and Eastern
Europe, led to the collapse of their state socialist regimes. It should be
noted, however, that this chronological division is also somewhat artificial.
As I explain below, the slowdown in economic growth and productivity
in the region and around the world had been unfolding gradually over a
longer period of time. Moreover, major political and economic crises had
hit the Soviet bloc countries quite a few times already before. Neverthe-
less, I still begin with the politically motivated oil crisis of 1973, which
made dramatically manifest this development’s gradually accumulating
limitations and emerging predicament.
6
the economic factors in the collapse of state socialism 7

Economic crisis, slowdown, and technological

transformation in the West and lack of adjustment
and decline in the East after 1973

The West
In the fall of 1973, the seemingly “endless” postwar prosperity in Europe
came to an abrupt halt. As many contemporaries speculated, the sud-
den change might have been accidental, generated by a political drama –
namely, the October 1973 Yom Kippur War in the Near East – followed by
the boycott decision of the Organization of Petroleum Exporting Coun-
tries (OPEC). Crude oil prices soared from $2.70 per barrel in 1973 to
$9.76 by 1974. Another political drama, the Iranian Revolution of 1979,
generated a second “oil crisis” in 1979–80, and, taken as a whole, oil prices
increased tenfold. This new development eroded the hope and prospect of
adjustment.
From that time, nothing worked as usual. Economic growth stopped,
prices and unemployment sharply increased, and Keynesian demand-side
economics – according to which additional demand, and strengthening the
purchasing power of the population through job creation and state invest-
ments, could enable governments to cope with economic crisis – became
unable to cure the stagnation and decline any longer. In fact, it generated
even higher inflation. The Philips curve, the classic “law” describing the
inverse relationship between inflation and unemployment, i.e., increasing
inflation decreases unemployment and vice versa, also stopped working as
inflation and unemployment rose together. What followed was a sudden
slowing down and decline accompanied by high inflation and unemploy-
ment. This odd pairing of stagnation and inflation led to the introduction
of a new economic term: stagflation.
Why did Keynesian economics, which worked for roughly forty years,
fail? Why did all the usual economic trends suddenly change? Was it the
mysterious long-term Kondratiev cycle that has its 20- to 25-year upturn
and then 20- to 25-year downturn, one following the other since the late
eighteenth century? Was it the cycle’s downturn which had arrived like a
German train, right on schedule, following the postwar quarter-century
of high prosperity? We have several more exact explanations, including a
role for an overheated, exceptional boom, which gradually compromised
itself. As Andrea Boltho stated:
The year 1973 represented a watershed . . . a very sudden break with the past,
but the trend towards a deteriorating performance had already set in earlier. In
a way, the success of the 1950s and 1960s had laid the preconditions for at least
some of the failures of the 1970s. (Boltho, 1982: 28)
8 from the soviet bloc to the european union

Herman Van der Wee also underlines the close connection between the
high prosperity and its end by noting that the gross capital stock per
employee in France, Germany, the Netherlands, and Britain went from
$78,440 to $208,211 between 1950 and 1973 (in 1990 values):

[T]remendous over-investment [took place] in the traditional industrial sectors

of the modern consumption economy during the 1960s, causing massive over-
capacity. This over-investment and overcapacity in the West was accentuated by
the industrialization process in the Eastern bloc and the Third World, a process
which was often concentrated in identical sectors . . . the enormous investment
in the secondary and tertiary sectors held out the prospect of a shortage of
foodstuff, raw materials and energy. The turning of the terms of trade in favour
of primary producers from the beginning of the 1970s came as a result of this
growing imbalance. (Van der Wee, 1986: 90)

The price of energy and raw materials increased significantly before the oil
crisis, and by as much as 63% in 1972–73, while the rate of inflation in
Germany reached 7% in that year. The economy became overheated and
industrial output in the advanced West increased by 10% that year.
A quarter-century of excessive growth and skyrocketing consumption
led to the saturation of consumer goods markets. As part of this trend,
exports also became more difficult, and their growth slowed. Mass pro-
duction, a key factor of prosperity, became less and less sustainable. Robert
Brenner commented: “The advanced capitalist world entered into a crisis
well before the end of 1973, experiencing falling profitability, especially in
manufacturing and increased rate of inflation” (1998: 138). For example,
between 1965 and 1973 the aggregate manufacturing profitability of the
seven wealthiest countries of the world declined by 25 percent.
In reality, the change in 1973 was not abrupt, and it was assisted by
non-economic factors, among them mistaken policy interventions, which
confused the usual trends. Clouds began gathering during the boom years.
From the late 1960s, labor markets changed and, especially around 1968,
led to the end of corporative cooperation between employers and employ-
ees, a major stabilizing factor in the postwar period. In Michael Piore and
Charles Sabel’s explanation, both the workers’ environment and their atti-
tudes changed. Virtually full employment, the need for a reserve which
can enter and leave the market, and a shortage of labor that initiated
immigration strengthened the position of employees. The transformation
of the labor environment went hand in hand with a generation change:
“a new generation matured in the postwar prosperity, without memories
of the Great Depression . . . the freedom from such constraints encour-
aged protest.” Collective self-restraint, the authors continue, disappeared.
In France, wages were indexed to cost of living. The Italian Statuto dei
the economic factors in the collapse of state socialism 9

Lavoratori and the German Arbeitsförderungsgesetz gradually made wage

levels and purchasing power independent of the labor market (Piore and
Sabel, 1984: 167). Social unrest and rising political turmoil in overheated
economies led to wage explosions in Germany, France, Italy, and several
other countries.
This was accompanied, however, by employer responses and price
increases to compensate for wage increases; as a consequence, a wage–price
spiral pushed prices up. Domestic political upheavals, a mini-revolution
in France in 1968, social disturbances in Germany, and the “hot autumn”
in Italy in 1969 led to rapid increases in wages and social expenditures.
The 1969 Italian contract stipulated a 19 percent wage increase for indus-
trial workers, and public spending grew from 30 to 50 percent of GDP.
In France, wages rose more quickly than GDP every year between 1968
and 1973. Prices also soared and rigorous fiscal measures were introduced
in June 1972 (OECD, 1987: 129). In Germany, the rate of wage increases
doubled in 1969–70. In France, a gradual inflationary spiral had emerged
during the period of high prosperity and full employment, and became
strongly visible between 1968 and 1970:

As early as the mid-1960s, it was evident that a slowdown of growth did not
bring about any appreciable slowdown in price rises . . . The rise in oil prices at
the end of 1973 only hastened a phenomenon that was already emerging more
and more clearly. (Caron, 1979: 322)

The international monetary system, as a consequence of mistaken policy

intervention, was also shaken. The immediate cause of the change was the
deterioration of the United States’ competitive position in international
markets, which generated a significant increase in its balance-of-payments
deficit. The Johnson administration avoided increasing taxes to finance
the Vietnam War. Inflation had jumped to 6 percent in 1970. The dollar
was devalued, and then the Nixon administration practically ended dollar
convertibility in August 1971. The Bretton Woods agreement at the end
of World War II, which had created stable exchange rates for a quarter-
century, collapsed. Since the dollar was the international reserve currency,
Europe was strongly challenged, and the floating exchange rate “made
the price of goods in international trade hostage to forces only distantly
connected to national economic performance – and almost impossible
to forecast and control” (Piore and Sabel, 1984: 173–74). The collapse of
Bretton Woods had widespread negative consequences. Stability, on which
mass production was based, dramatically weakened:

not just inflation but the business cycle grew increasingly volatile . . . With
the commitment to par values removed, agents had no reason to regard an
10 from the soviet bloc to the european union
acceleration of inflation as temporary. When governments stimulated demand
in the effort to offset a recession, this provoked compensating wage increases;
aggregate demand policies therefore elicited inflation rather than stabilizing
output. (Eichengreen, [1994] 1996: 61)

Finally, in the instable international economic situation another mistaken

policy intervention made the crisis complete. Under inflationary pressure,
the American Federal Reserve Board decided to increase interest rates: Fed-
eral Reserve discount rates increased from 5.5% in 1977 to 13.4% by 1981.
Banks’ prime rates jumped from 6.8% to 18.9%. The advanced industrial
countries declined into a deep recession. Less developed, indebted coun-
tries, which had tried balancing their economies with foreign credits in the
1970s, had to refinance at steeply increased rates because of their repay-
ment difficulties. Repayment often became impossible. The International
Monetary Fund (IMF), because it lacked sufficient funding from the rich
countries, was unable to maintain the liquidity of the international bank-
ing system. Severe austerity measures became unavoidable and the circle
was closed: “the economic disorder began as a crisis of supply then turned
into a crisis of demand” (Piore and Sabel, 1984: 183).
The entire 1970s and even the early 1980s became a period of high, often
double-digit, inflation in the world economy. A quarter-century of excep-
tional boom, full employment, and stability was followed by a decade of
instability, slower growth, and occasional setbacks. Between 1950–73 and
1973–83, consumer price increases in the leading Western economies more
than doubled (from an annual average of 4.2% to 9.4%). In the Mediter-
ranean region they more than quadrupled (from 4.0% to 18.4%). World
price levels had also more than doubled, reaching 233% of 1973 levels by
1982. Unemployment, averaging 2% to 4% in Western and Mediterranean
Europe between 1950 and 1973, jumped to 12% by 1984–93, and reached
more than 7 million people in Europe (Maddison, 1995a: 84).
Based on ninety-four countries with 98 percent of the world’s popula-
tion, the average annual rate of growth, i.e., the increase of produced goods
and services, dropped from 3.4% between 1950 and 1973 to –0.1% between
1973 and 1987. Economic growth in the sixteen most advanced countries
of the world economy slowed significantly: after complete stagnation in
the first three years after 1973, average GDP in these countries increased
by only 20% in the first decade after 1973. The volume of imports had
dropped by 7% by 1975, and then increased by 18% in the first decade
after the oil shock. In the same period, the terms of trade, i.e., the rela-
tion between import and export prices, declined by 20% in the advanced
countries (Maddison, 1985: 13).
the economic factors in the collapse of state socialism 11

The leading economic powers were no longer the engines of European

economic prosperity. The old, declining sectors of the Belgian, British, and
French economies sank into crisis: the combined coal output of the three
countries decreased by 40 percent between 1980 and 1983. In the same
period, the combined textile production in Belgium, Germany, France,
Italy, the Netherlands, and Britain dropped to less than half of the produc-
tion levels of the 1960s (Fischer, van Houtte, and Kellenbenz, 1987: 117,
135). At its lowest point, industrial output had declined by 13 percent from
these levels.
Exports, previously one of the most important driving forces of eco-
nomic growth, were hit hard. During the first post-1973 decade, exports
slowed to between roughly one-third and one-half of the previous rates
(Maddison, 1989: 139). During the 1970s, the average rate of return on
fixed capital in some countries, especially Britain and Italy, dropped below
the real interest rate. This had never happened before in modern industrial
history. After decades of fluctuation-free growth, these developments were
shocking. What at first glance appeared to be a temporary consequence of
a political conflict, the oil crisis, soon turned out to be an organic part of
the economic process with deep internal roots. Kondratiev and the cycle
theories were rediscovered.
Despite the evidence, however, it was still difficult to realize that the
period of high prosperity was over. It is worth quoting an OECD report
from 1974:

There is little evidence of any general slowing down in the rate of growth . . . [It]
is a strong presumption that the gross domestic product of the OECD area may
again double in the next decade and a half. (OECD, 1974: 166)

Even in 1977, a special OECD study, the McCracken report, concluded

that “the poor showing of recent years was likely to be only temporary and
that a return to strong growth was possible” (OECD, 1987: 53). In reality,
it was not. The stagflation of the mid to late seventies was thus not an
accidental event generated by political turmoil, but rather a characteristic
cyclical phenomenon, a consequence of overinvestment in an overheated
economy accompanied by market saturation for new staple consumer
goods. The market had shrunk dramatically. Gross annual investment,
which had increased by 6.7% between 1960 and 1973, decreased to 0.7%
between 1973 and 1982. Private final consumption, which had grown at
a rate of 5.4% per year between 1960 and 1973, slowed after 1973 to an
increase of 2.3% per year in the West.
The depression of the mid-1970s, nevertheless, besides being a period
of stagnation and decline, was a structural crisis. Nikolai Kondratiev,
12 from the soviet bloc to the european union

the economist who called attention to long cyclical waves in modern

economies, offered an “initial hypothesis” to explain similar phenomena:

the . . . long cycle is associated with the replacement and expansion of basic capital
goods, and with the radical regrouping of, and changes in society’s productive
forces. (Kondratiev, [1922] 1984: 94–97)

Inspired by Kondratiev’s theory, Joseph Schumpeter offered a more con-

vincing interpretation of the long cycle, which, he explained, is connected
with

an “industrial revolution” and the absorption of its effects . . . These revolutions

periodically reshape the existing structure of industry by introducing new meth-
ods of production – the mechanized factory, the electrified factory, chemical syn-
thesis and the like; new commodities, such as railroad service, motorcars, electric
appliances; new forms of organization – the merger movement; new sources of
supply . . . new trade routes and markets to sell in . . . While these things are being
initiated we have brisk expenditure and “prosperity” predominates [alongside
an avalanche of consumer goods, articles of mass consumption, and increased
purchasing power] . . . and while those things are being completed . . . we have
the elimination of antiquated elements of the industrial structure and “depres-
sion” predominates. Thus there are prolonged periods of rising and falling prices,
interest rates, employment and so on, which phenomena constitute parts of the
mechanism of this process of recurrent rejuvenation of the productive apparatus.
(Schumpeter, 1976: 67–68)

In Schumpeter’s interpretation, the “whole set of technological changes” or

industrial revolutions generates pressure for adjustment. Those firms and
groups representing the older technologies and methods that are unable to
change will disappear in time. Readjustment is difficult and a relatively slow
process, especially because demands for investments, credits, and new skills
may not be immediately satisfied. This causes a period of economic turmoil
and recession. The significant slowdown and destruction are nevertheless
“creative,” since they clear the way for new technologies and methods.
The former leading sectors of the economy become obsolete and the new
leading sectors, based on new technologies and organizational principles,
emerge, and the whole process brings about a restructuring of the economy.
Once most sectors of the economy have been transformed by the new
elements, a new wave of prosperity follows.
This interpretation suggests that the long downswings are essentially
“structural crises” or periods in which we see the decline of the old and the
dawn of the new technological regimes, the decline of the old and the dawn
of the new leading and export sectors. This entire economic fluctuation is
inherent in the market system and in free market competition, which gener-
ates endless inspiration and drive to introduce more competitive methods
the economic factors in the collapse of state socialism 13

and products to conquer larger markets and achieve greater profits. Extra-
economic factors, such as wars and political upheavals, also contribute to
this process. These fluctuations are thoroughly international and hit all
countries except those that are entirely isolated from the world economy.
What happened in the 1970s clearly fits into this interpretational frame-
work. Those branches of industry that had developed the fastest during
the postwar prosperity now suffered the most. The coal, iron, and steel
industries, shipbuilding, and other sectors were downsized substantially,
and some, such as the Swedish shipbuilding industry, were briefly on the
verge of closing altogether. The Belgian mining industry declined by half
between 1970 and 1979, and construction fell by one-third. Between 1970
and 1980, the share contributed to the gross value added of total industry
by traditional industries – construction and building materials, iron and
steel, traditional engineering, wood, paper, textiles, and clothing – declined
in Germany by 40%. Small wonder that investments, which increased by
6.4% annually between 1960 and 1973, dropped to 1.8% between 1975
and 1979. By 1979, the German manufacturing labor force, counted in
work-hours, had dropped 20% below the 1970 levels.
The structural crisis of the world economy hit Western Europe especially
hard because of its arrival at a turning point in its postwar development.
Western Europe’s postwar economic miracle had certain peculiar factors:
during the early postwar years, and until these countries reached their
potential levels of output in the early 1950s, their economies were charac-
terized by high growth rates typical in reconstruction periods after major
turmoil such as war or depression (Jánossy, 1971).
During the later 1950s and 1960s, the region profited highly from its
extensive development model, based on an increase in the factors of pro-
duction: “brute force” capital accumulation, restructuring the labor force
by shifting from lower-productivity agriculture to higher-productivity
industries, and increasing the labor force by an average 1 percent per
annum. Additionally, using the existing stock of technological knowledge,
mostly transferred from the United States, bolstered this trend.
Western Europe also profited from its inherited institutions including,
among others, its advanced banking system. The postwar development
was also embedded in newly created institutions after the war: partly in
Bretton Woods, which fixed international exchange rates and created a
stable financial environment, but mostly by building up corporative social
partnerships (Sozialpartnerschaften), agreements between labor unions
and employers, which made possible wage and price moderation. Keyne-
sian regulated markets, state assistance, and integrating national markets
also played an important role.
14 from the soviet bloc to the european union

The sources of this extensive development and its institutional frame-

work, however, dried up and became inappropriate by the early to mid-
1970s. The impacts of the oil crisis, structural crisis, and the exhaustion
of sources of extensive development combined and necessitated difficult
adjustment. It required a set of new institutions, because “the same insti-
tutions of coordinated capitalism that had worked to Europe’s advantage
in the age of extensive growth now posed obstacles to successful economic
performance” (Eichengreen, 2007: 6–7).
The heart of the adjustment was the creation of new leading sectors based
on new technology to replace the declining old leading sectors. Mere tech-
nology transfer, using existing American technological knowledge, was no
longer possible. Europe had to turn toward the so-called intensive growth
model, based much less on production factor inputs, and much more on
new technology created by innovation, i.e., research and development.
After the 1973 oil crisis and the beginning of marked decline, the dawn
of a new technological era, a new Schumpeterian “set of technological
changes,” was also signaled. The invention and early distribution of the
personal computer in 1974 symbolized the new wave of technological rev-
olution. While the old sectors declined, some of the new ones experienced
impressive increase. Electricity output, in contrast to coal production,
continued to grow. Between 1973 and 1983 it increased 67 percent in
Europe. As a consequence of a revolutionary mechanization, electricity
consumption in European Union households grew 77 percent during the
last quarter of the century to 1,637 kWh/person (B. Mueller, 1965: 179;
Eurostat, 1971–80: 176; 1998–99: 422).
The changing energy infrastructure and technology were exhibited in
the rapid increase of nuclear power capacity, which characterized Europe
throughout the second half of the century. In the fifteen member countries
of the European Union, nuclear energy production reached 28% of total
energy output at the end of the century. In some of the countries, nuclear
energy became the most important energy source: in France, more than
78% of primary energy production was nuclear, but several other countries
also registered a 30% to 60% share of nuclear energy in total energy
consumption (Eurostat, 1998–99: 412).
The telephone spread to nearly all households during the last quarter
of the century (table 1.1); additionally, cellular phones were introduced
and spread rapidly in the European market. In the mid-1990s, besides the
nearly 265 million fixed telephone lines, more than 23 million cellular
phones were also in operation, and in a few years the number of cell
phones surpassed the number of fixed lines throughout Western Europe.
A developed telephone network established the base for the spectacular
the economic factors in the collapse of state socialism 15

Table 1.1 The spread of the telephone in Europe (in thousands)

Year Telephone lines in use 1950 = 100

1950 22,146 100

1973 116,886 528
1993 264,533 1,194

Source: Based on Mitchell, 1998: 765–79.

spread of personal computers during the last quarter of the century in

Europe. By 1995, Western countries already used 200 to 300 computers per
1,000 inhabitants. In Italy, Greece, Spain, and Portugal, the rate did not
reach even 100 per 1,000 people.
Several European countries embraced the Internet immediately after
its invention: in 1995 in Finland, there were more than 42,000 Inter-
net hosts per 1 million inhabitants; in Norway, Sweden, Switzerland, the
Netherlands, and Denmark between 10,000 and 20,000 per million; and in
most other Western countries between 3,000 and 7,000. The Internet grew
ever more popular: in 1998, 12 people out of every 100 used the Internet
in the OECD countries, but two years later the rate was 26 per 100.
The automobile revolution, already important in Europe after World
War II, intensified during the 1970s–1980s. In the sixteen Western and
Southern European countries, fewer than 78 million cars were in operation
in 1973, but there were more than 151 million by 1993. By that time nearly
every second person had a passenger car (447 per 1,000 inhabitants, which
was in sharp contrast with the 1950 figure of 22 per 1,000). The European
car market became saturated (B. Mueller, 1965: 211; Eurostat, 1998–99:
200).
These last decades were a period of extensive freeway construction as
well: by the mid-1970s, the freeway network linking seventeen West Euro-
pean countries stretched 22,000 kilometers; by 1987 it had expanded to
37,000 kilometers (Hoffman, 1990: 173). At the end of the century, it
reached nearly 50,000 kilometers.
Civil aviation had become a major form of mass transportation in
postwar Europe, but in the last quarter of the century it grew again by three
to four times. In 1974, more than 100,000 million passenger-kilometers
were flown by national airlines and, by 1990, roughly 300,000 passenger-
kilometers. In the mid-1990s, on average 415 million air passengers traveled
in the European Union countries annually, and 1,618 million freight-tons
per kilometers were transported (more than 1,200 times more than in
1950) (Mitchell, 1998: 724–27; Eurostat, 1977:103; 1998–99: 205).
16 from the soviet bloc to the european union

New technology radically transformed the old sectors as well. Although

electrification and dieselization had already begun, the steam engine pre-
served its leading role in the European railroads until the early 1960s. By
the end of the century, however, steam locomotives had virtually disap-
peared, replaced mostly by diesel locomotives, but also by electric trains.
In Germany this transformation was accomplished by the end of the 1980s:
41 percent of the railroads were electrified, and all other lines used diesel
engines.
The spread of personal computers partly signaled the mechanization
of offices, since, in the first stages of their use, that is where computers
were first implemented. Another invention which appeared first in offices
was the fax machine. By 1995, nearly 8 million fax machines were in
use in Europe, more than 95 percent of them in the West. In Denmark,
Austria, France, Britain, the Netherlands, Norway, Sweden, Finland,
and Switzerland, roughly 30 machines per 1,000 inhabitants signaled
widespread use.
Taken as a whole, the new products based on new technology became the
driving force of rising consumerism in the late twentieth century. On the
other hand, differentiating between old and new industries grew increas-
ingly difficult because of the renewal and revitalization – or “hybridiza-
tion” – that took place in several old sectors through the introduction
of new technologies. Certain sectors of engineering, for example, became
closely connected with electronics. This revolutionized and renewed the
car industry. Innovations resulted from further intersectoral technological
links between mechanical engineering, precision engineering, electrical
engineering, and electronics and communications. The merging of these
four fields became known as “mechatronics.”
Structural adjustment, building up new leading sectors in high-tech
industries and downsizing old ones in mining, textile, clothing, and iron
and steel, was the most important trend in Western Europe from the late
1970s onward. It was accompanied by a managerial and organizational rev-
olution. This was the time when American organization and management
techniques were broadly applied in Europe. This provided an incentive to
develop further division of labor, especially by separating and profession-
alizing various kinds of services from production.
Services gained momentum: while the number of employees in man-
ufacturing declined by 10 percent in Germany between 1970 and 1980,
the number of people working in the service sector increased by nearly
23 percent (Bernini Carri, 1995: 238). In the fifteen countries which soon
came to form the European Union, more than 52% of gainfully employed
people worked in industry, agriculture, and construction, with less than
the economic factors in the collapse of state socialism 17

48% working in various services in 1973. Signaling the service revolution

that followed, by 2000, less than 33% of the population worked in indus-
try, agriculture, and construction, and more than 67% were engaged in
services (United Nations, 1975; 2002).
Nevertheless, intensive growth based on innovation lagged behind that
in the United States, where 3% to 4% of GDP was invested in research and
development (R&D). Britain reached only half of the American investment
level in R&D, and the other European countries had an even lower share.
In the crucially important computer industry, the United States spent
five times more on R&D than all the West European countries combined
(Eichengreen, 2007: 257). As a consequence, Europe’s international posi-
tion in R&D-intensive sectors worsened after 1973 (OECD, 1987). Europe
lost ground to international competition – mostly to the Americans and
Japanese – in technology-intensive products. European companies held
only a 9% share of the world market in computer and data-processing
products, 10% in software, 13% in satellites and launchers, and 29% in
data transmission services (ibid.: 213). In terms of world trade of products
in R&D-intensive branches of industry, the combined share of France,
Germany, and Britain decreased from 36% to 31% between 1965 and
1984 (Duchene and Shepherd, 1987: 36). In the mid-1980s, American and
Japanese output of information technology was valued at $250 billion,
while the joint output of the seven leading European countries was valued
at only $66 billion.
Although Europe lost ground in the manufacture of high-tech products,
and while the European Economic Community dropped from 88% to 75%
of the average output of the advanced OECD countries in this area between
1970 and 1985, the Community did gain ground in low R&D-intensive
branches of industry. Its level of production in this area increased from
98% to 115% of the OECD average (OECD, 1987: 214, 254).
Although it trailed the United States, research became a big industry in
Western Europe. The French, German, and Italian research systems were
based not only in universities, but also in big state-run research institutions:
the Max Planck Society in Germany had sixty institutes, built around
internationally known scientists. This network was 90 percent financed by
the federal state, one-third of which was earmarked for basic research. The
French Centre National de la Recherche Scientifique was organized into
seven scientific departments and two national institutes, run by a National
Science Research Council organized into forty-five disciplinary panels.
Its laboratories were located on university campuses, employed 10,000
researchers, and received half of the budget for basic research (OECD,
1987: 106, 108).
18 from the soviet bloc to the european union

A significant part of gross domestic product was spent on R&D through-

out Europe. In the West, it was financed partly by governments and partly
by private companies. Government expenditures were connected with the
rapidly developing university training and research, but above all with mil-
itary preparation. At the height of the Cold War, for example, worldwide
annual defense expenditure topped two-thirds of a trillion dollars. Major
scientific efforts were directed toward defensive and destructive weapons.
Governments employed and financed armies of scientists and engineers
who worked on developing radar, jet aircraft, rockets, computers, and the
atomic and hydrogen bombs, and in the space programs. Government lab-
oratories as well as contracted institutions and private companies worked
on military projects. During the 1960s, the American military R&D bud-
get varied between $7 billion and $8.5 billion per year. In the 1960s–70s,
roughly half of the American budget was spent on military expenditures.
This share was essentially the same in Britain, while France spent one-third
and Germany between one-fifth and one-tenth of its budget for defense
R&D.
Government-financed R&D represented about half of the R&D expen-
ditures in market economies, while private companies financed the other
half. Giants such as IBM and ITT built up the Watson and Bell laboratories,
respectively. The computer, aerospace, drug, and semiconductor industries
spent 5% to 7% of their sales, and 80% to 90% and more of their profits,
on R&D in the early 1980s. These expenditures reached $3,000 to $4,000
per employee. Multinational empires such as General Motors, Ford, IBM,
and General Electric had an R&D budget of $0.8 to $2.2 billion per year.
In the late 1970s, roughly 600,000 scientists and engineers were employed
in R&D in the United States, and about 300,000 in France, Britain, and
Germany combined.
The countries of the European Community, however, on average spent
the equivalent of one-sixth of their own industrial R&D funds on joint
research, which internationalized technological development (OECD,
1987: 113). Industrialized research gave a tremendous boost to tech-
nological development, and brought to maturity the greatest results in
technology. At the Lisbon meeting of the European Council in 2000, the
European Union set the goal of transforming Europe into the world’s most
competitive science-based economy by 2010. At the halfway mark, the
implementation of that program was behind schedule.
Rapidly rising labor productivity, measured in terms of production value
per worker-hour, clearly expressed the gradual adjustment to the new tech-
nological revolution in the West. In the world’s six leading economies,
including four European countries, labor and capital productivity
the economic factors in the collapse of state socialism 19

increased annually by 1.74% and 0.46%, respectively, between 1913 and

1950. This relatively moderate productivity increase, however, was fol-
lowed by a 4.84% and 0.73% annual increase between 1950 and 1973.
Industrial productivity improved only 1% to 2% per year before 1950,
but by 5% to 6% during the following quarter of a century in France,
Germany, and the Netherlands. On average, a West European worker pro-
duced between $2 and $4 (1990 value) GDP per hour in 1913; this increased
to $16 in 1973 and $25–$28 GDP in 1992.
In 1950, the advanced European countries’ productivity level was 40%
to 60% of that of the United States, the technology leader; it rose to
70% by 1973, and 87% in the early 1990s. After another decade, labor
productivity of Europe reached 95% of the American level, with countries
such as France, Germany, the Netherlands, Ireland, Norway, Belgium, and
Luxembourg surpassing the American level (Eichengreen 2007: 379).
This impressive development was accompanied and significantly
assisted by the integration of Western Europe. First, the foundation of the
European Coal and Steel Community in 1951, and then of the European
Economic Community – later renamed the European Union – in 1957,
played a decisive role in restructuring the West European economies.
Within a decade of its foundation, the Community created a customs
union, and gradually moved toward a single market and free flow of labor
and capital, with a common central bank and currency, the euro:

The formation of the Single Market led to the rationalization and consolidation
of industries previously fragmented along national lines. It made it attractive
for extra-European producers . . . The EU attracted 21 percent of Japanese FDI
[foreign direct investment] outflows in the late 1980s . . . The proportion of US
FDI destined for Europe rose from 39 to 45 percent, while intra-European Union
FDI as a share of total EU FDI outflows rose from 31 to 51 percent. (Eichengreen,
2007: 346)

The integration process was initiated by six countries in the 1950s, but
the community became permanently enlarged after 1973. In that year,
three countries – Britain, Ireland, and Denmark – joined the founding
six, and during the 1980s, after the collapse of authoritarian dictatorships
in Southern Europe, Greece, Portugal, and Spain were accepted. By the
mid-1990s, Sweden, Finland, and Austria had joined, bringing European
Union membership to fifteen.
The European Union launched a deliberate cohesion policy to assist the
less-developed regions, which received significant contributions to help
them draw level with the others. A massive catching-up process emerged
in the Mediterranean countries and Ireland. As regards technology and
20 from the soviet bloc to the european union

structural renewal, an average worker in Ireland and Mediterranean Europe

produced $2.89 of value per hour in 1950, and roughly $10 by 1973,
reaching the Japanese level, and nearing the West European one, in the
early 1990s. By 1992, an average worker in Spain and Ireland produced
$20 in value and, together with Greece and Portugal, an average $18 of
value per hour (Maddison, 1995a: 70; 1995b: 247). In the early twenty-first
century, Ireland was among the most productive countries in Europe and
had nearly reached the American productivity level.
During the final quarter of the twentieth century, an integrating Western
Europe entered the age of globalization and began regaining its strength
by adjusting to the challenge of a rapidly globalizing world economy. The
European Union’s role in the process, however, was strongly connected to
the Eastern half of the continent. Before I return to this major change, in
a later part of this chapter on the new international environment, let me
juxtapose the post-1973 Western trends with those in Central and Eastern
Europe.

The East
The impact of the oil crisis and the structural crisis which emerged hit the
entire world economy. Following the pattern of the 1870s–’80s as well as
the 1930s, the peripheries were most affected. The unique phenomenon
of the 1930s, when the Great Depression failed to influence the isolated
Soviet Union, was not repeated during the 1970s and 1980s. The Soviet
bloc countries were no longer isolated from the world. Half or more
of the foreign trade of Poland, Romania, Hungary, and Czechoslovakia
was trade with free market economies. State socialist Yugoslavia, which
did not belong to the Soviet bloc, was even more tightly integrated into
the world economy. The relatively small or medium-sized countries were
strongly dependent on foreign trade. In the mid-1970s, exports made up
nearly half of the Hungarian GDP, and from one-fifth to one-quarter of the
Polish, Yugoslav, and Romanian GDPs. The international decline of the old
leading sectors, as elsewhere in the world, rendered some export products
unmarketable, and brought sharply reduced prices for most of the others.
The effect on Central and Eastern Europe was exaggerated because of
the structural policy of the industrialization drive of the 1950s and ’60s.
The command economies built up traditional coal, iron, steel, and heavy
engineering branches as their leading sectors, based on technology that was
obsolete even then. During the 1960s, they added basic, heavy chemical
industries but not the corresponding processing branches. With a delay of
one hundred years, Central and Eastern Europe built its own Manchesters
and “Black Countries” in Katowice and Dunaujváros, in the infamous
the economic factors in the collapse of state socialism 21

“Black Triangle” spanning the borders of East Germany, Czechoslovakia,

and Poland. Their industries were heavily energy-intensive because of
obsolete technology: in 1980, energy intensity in the region, i.e., the amount
of energy used to produce one unit of product, was nearly eight times that
of the European Union.
As a consequence, pollution was seven times higher. The Soviet Union,
calculated to the same output unit, had 2.5 times’ higher pollution than
the United States during the 1970s. Czechoslovakia – “the most environ-
mentally devastated country in the whole of Europe” – and Bulgaria were
ranked among the top ten in sulfur dioxide emissions (Turnock, 2002: 66,
96; Carter and Kantowicz, 2002: 187, 190; Pavlı́nek, 2002: 119). In rela-
tion to income level, sulfur and nitrogen dioxide emissions were nine times
higher in Hungary than in the European Union. Poland was the sixth high-
est air-polluting country in Europe. In Polish Silesia, the concentration of
respirable dust surpassed the OECD levels by nearly six times, and the
concentration of benzopyrene in the air was ten times higher (Dingsdale
et al., 2002: 161, 167, 172; Hertzman and Kelly, 1996: 73–74, 77).
The old-fashioned technology and economic structure made the nega-
tive consequences of the structural crisis much more serious in Central and
Eastern Europe than in the West. The structural crisis in this region was
also much more bound up with the crisis of the extensive growth policy
than was the case in postwar Western Europe. Socialist economic policy
was strictly based on forced capital accumulation, i.e., accumulating a
great part of the GDP by suppressed wages and consumption. This was the
base of high rate of investment that was combined with huge labor input,
with the application of existing, somewhat obsolete (mostly Soviet, East
German, and Czechoslovak) technology. Capital formation from the 1950s
to the early 1970s jumped from the prewar 6% to 25–30%. For quite a while,
unlimited labor resources in the agricultural countries of the region, and
the mobilization of female labor, allowed a 6 percent annual increase in
the labor force. Imported technology from the Soviet Union and the more
industrialized bloc countries such as Czechoslovakia and East Germany
also made possible the use of existing technological stocks to generate
rapid growth. The institutional system of centrally planned economies,
with maximal state intervention behind the shield of dictatorial political
regimes, helped keep wages and consumption low and labor unrest vir-
tually impossible. The institutional system thus promoted an extensive
forced growth policy; one commentator noted that:

The centrally planned economies of Eastern Europe were able, initially at least,
to perform tolerably well. The institutions of the command economy had several
22 from the soviet bloc to the european union
limitations . . . but they were best suited to the circumstances of catch-up growth.
(Eichengreen, 2007: 5)

This situation changed, however: the sources of extensive growth policy

were exhausted in the better-developed Central European countries during
the 1960s–’70s. Forced capital formation based on suppressed wage levels
and living standards, the exploitation of agriculture via the compulsory
delivery system, and huge labor input were no longer possible at the same
level. A political factor increased the limitations: after the riots and revo-
lutions in the ’50s and ’60s, the regimes had to pacify their populations.
The best way to achieve that was to increase consumption and revitalize
agriculture through higher prices for food products. Capital formation
had already dramatically declined in the mid-1950s: from 25% to 13% in
Czechoslovakia and from 25% to 15% in Hungary. Later it recuperated
and remained relatively high, but at significantly lower levels than before.
Restructuring labor by collectivization and industrial job creation dried
up labor resources from the 1960s–’70s onward. The agricultural popula-
tion reached 40% and 53% of the active population in 1950, but dropped
to 18% and 24% by 1973 in Czechoslovakia and Hungary, respectively.
The industrial labor force of the time grew to 35% to 50% of the active
population in the Soviet bloc countries.
Extensive growth policy no longer worked. This was clearly demon-
strated by the stagnation and decline in Czechoslovakia between 1961 and
1963, and by the severe imbalance in the Hungarian economy in the early
1960s. By that time, both countries’ governments recognized the need
for reforms and replacement of the extensive growth model. Yugoslavia,
after the split with the Soviet Union in 1948, gradually turned toward
building an independent model of socialism and also began changing the
Soviet type of centrally planned economy. Yugoslavia, Czechoslovakia, and
Hungary introduced reforms in 1965, 1967, and 1968, respectively. Com-
pulsory plan indicators were abolished, market prices were introduced in
certain areas of the economy, and companies were motivated by profit and
markets. The introduction of market influences targeted higher efficiency
and better adjustment to the world economy.
This reorientation, despite some positive results in Yugoslavia and
Hungary, basically failed. In Czechoslovakia, the Soviet-led Warsaw Pact
military invasion in the summer of 1968 eliminated the reform orienta-
tion, including the reformed economic system just introduced. Hungary,
under strict Soviet control and helped by conservative domestic opposi-
tion, temporarily halted reforms in 1972–73. In Tito-led Yugoslavia, inter-
nal limitations resulted in barriers on the road to introducing intensive
the economic factors in the collapse of state socialism 23

growth strategies. Other countries of the Soviet bloc did not even initiate
a new orientation in their economic strategy.
The crisis after 1973 made the failure of the economy manifest in most of
the countries. The conservative regimes, however, continued the traditional
ideologically determined Soviet policy. Hungary was almost alone in its
open recognition of the need for a change of model during the late 1970s.
Let me quote from my own lecture at the May 1977 General Assembly
meeting of the Hungarian Academy of Sciences:

the resources of extensive industrialization and economic development are

exhausted . . . The only way for further development is the mobilization of the
intensive sources of economic growth, the technological-organizational and
productivity factors. (I. Berend, 1978: 200–01)

The Hungarian government’s declaration of a new long-term economic

strategy at the end of 1978 was the first acknowledgement in postwar
history of the need to replace import-substituting industrialization policy
with export-oriented growth. High productivity, technological innovation,
and competitiveness were included in the core of the new strategy. The
reform orientation of Hungary and Poland was also clearly expressed
when they joined international institutions such as GATT (the General
Agreement on Tariffs and Trade; 1973 and 1967, respectively) and the IMF
(1982 and 1986, respectively). However, in spite of the radicalization of the
Hungarian and Polish reforms in the 1980s, the possibility for profound
change remained limited.
Some experts of the Soviet-type economic regime, such as János Kornai,
maintained that the system was not reformable. He argued that:

[S]o long as the classical system can be sustained . . . it has a degree of stability
and robustness, whereas the system undergoing the contortions of reform is
inherently unstable . . . The reform destroys the coherence of the classical system
and proves incapable of establishing a new order in its place . . . [N]owhere has
it been able to survive lastingly. (Kornai, 1992: 571, 573)

Regardless of whether reforms and “market socialism” were feasible, in

Central and Eastern Europe sufficient reform and replacement of the exten-
sive, import-substituting growth model with the intensive, export-oriented
model did not happen. As a consequence, neither the Soviet Union nor
its satellites were able to adjust to the new technological requirements
of the communications and service revolution after 1973. Under strict
Soviet control, and led by orthodox communist ideological principles, the
region was unable to follow the rapidly changing international economic
conditions.
24 from the soviet bloc to the european union

7,000
6,000
5,000
4,000
3,000 kWh/capita

2,000
1,000
0
West Central Romania Bosnia
and
Eastern
Europe

Figure 1.1 Consumption of electricity, 1990

90
79
80
70
60
50
40
28
30
20
7.4
10
0
USA European Central and
Union Eastern Europe

Figure 1.2 Telephone lines/100 inhabitants, 1980

One way to measure how much technological backwardness was pre-

served in Central and Eastern Europe is to compare annual per capita
electricity consumption. At the end of the century, European countries
fell into three groups. The Nordic countries reached the highest level
(Sweden and Finland 14,000–17,000 kWh). The advanced West European
countries, such as France, Germany, Britain, Austria, Belgium, and
Switzerland, consumed 6,000 to 8,000 kWh per capita, while the less-
developed countries of Central and Eastern Europe consumed 3,000 to
5,000 kWh. Some Balkan countries lagged further behind: Romania’s 2,621
and Bosnia-Herzegovina’s 675 kWh per capita consumption, respectively,
reflected an era long disappeared from the rest of Europe (figure 1.1).
Another index measuring technological development was the spread
of the telephone, which gained extraordinary importance in an age of
communications and computer revolution. In 1980, when the United States
had 79 telephone lines per 100 inhabitants, and the Nordic countries and
the European Union had 45 and 28, respectively, Central and Eastern
Europe, on average, had only 7.4 lines (figure 1.2). In addition, the lines
the economic factors in the collapse of state socialism 25

were often out of order and it took hours to get a dial tone (Ehrlich and
Révész, 1991: 83). As late as 1987, Moscow could not receive more than six
long-distance calls simultaneously, while long-distance calls to other parts
of the country had to go through Moscow (Mastanduno, 1992: 1).
The computer age, heralded in 1974 with the appearance of the personal
computer, did not arrive in Central and Eastern Europe. The ratio of
personal computers, between 5 and 50 per 1,000 people, reached only
about 5% to 20% of the Western level. The number of fax machines in the
early 1990s reached only 1 to 8 per 1,000 inhabitants, and only 5 percent
of the fax machines used in Europe were in Central and Eastern Europe.
The service revolution, which dramatically increased the division of
labor and labor productivity, also stopped at the borders of the region.
While service employment increased to roughly 60 percent of the active
population in the West by 1980, in Central and Eastern Europe two-thirds
of the population were blue-collar workers and farmers.
Why did technological and structural renewal lag in the region? To
answer this question, one must first consider the causes and prime movers
of the permanent renewal of technology. Technological changes, explains
Schumpeter, are inherent in a capitalist market economy and competitive
market environment. In his interpretation, innovations are

new combinations of existing factors of production, embodied in . . . new firms

producing either new commodities, or . . . [an as] yet untried method, or for a
new market . . . [Innovation is] not any more embodied typically in new firms,
but goes on, within the [existing] big units . . . It is not the knowledge that
matters, but the successful solution of the task sui generis of putting an untried
method into [hitherto untried] practice. (Schumpeter, 1928: 31, 34, 40)

The central figure in this process, the hero who must overcome the diffi-
culties of changing practice, is the entrepreneur. Innovation is a genuine
characteristic of competitive capitalism, which “not only never is but never
can be stationary”;

The fundamental impulse that sets and keeps the capitalist engine in motion
comes from the new consumers’ goods, the new methods of production or trans-
portation, the new markets, the forms of industrial organization that capitalist
enterprise creates. [The new combination] revolutionizes the economic struc-
ture from within, incessantly destroying the old one, incessantly creating a new
one. This process of Creative Destruction is the essential fact about capitalism.
(Schumpeter, 1976: 82–83)

Market and entrepreneurial interests, the engines of innovation and

technological progress, were lacking in state socialism. Innovation and
technological development are also dependent on modern managerial
26 from the soviet bloc to the european union

and organizational development. The modern economy has been char-

acterized by permanent managerial and organizational revolution since
multifunctional companies and Fordist production organization were
introduced in the early twentieth century.
The Soviet economic model imposed in the Soviet bloc countries after
World War II resulted in a rather different and static managerial and organi-
zational system than in the West. All the previously existing multidivisional
companies were abolished and each division was separated or merged hor-
izontally with similar divisions. All industrial firms were detached from
marketing. The central planning offices and the numerous branch eco-
nomic ministries and their subordinated agencies acted as central offices.
They dictated the performance of the companies by compulsory plan indi-
cators and monitored their fulfillment. Alec Nove compared the ministers
and deputy ministers of the branch economic ministries to “senior busi-
ness executives” in the West. A few dozen ministers and deputy ministers,
however, were not able to run huge industrial branches as real top managers
since they were responsible for several giant companies. Bureaucratic man-
agement was unavoidable (Nove, 1966: 64–5). The company manager was
responsible only for the execution of central decisions, and had nothing to
do with strategic, long-term decisions.
During the 1960s, company reorganizations created exceptionally large
firm units in Eastern Europe; it was the period of a socialist “merger
mania,” with the explicit goal of creating a single nationwide company in
each branch of industry or trade: one company with thousands of branches
for car repair, one company with thousands of gas stations, another one
for any kind of electric repair and maintenance, a nationwide company for
the production of beer, silk, oil, etc. The pattern was the same in the retail
trade – a single company for paper goods, shoes, supermarket retailing,
etc. Firm concentration grew extreme with the absolute domination of
giant companies (Ehrlich, 1993; I. Berend, 1979).
Nevertheless, state socialism was unable to create modern managerial
firms according to the development trend of the twentieth century, but
instead operated with a managerial bureaucracy strictly subordinated to
politics and party decisions. Real top managerial activity was thus replaced
with highly bureaucratic government activity totally separated from mar-
ket influences (Yudanov, 1997: 404, 410). In sum, market-driven innova-
tions directed by independent entrepreneurs, crucially important to the
Western market economy, were missing in the state socialist non-market
system.
As noted above, there is another important factor that should also be
mentioned: in the twentieth century, innovation itself was industrialized
the economic factors in the collapse of state socialism 27

in market economies, and research became a big industry, mostly

monopolized by multinational companies, which financed 70% to 80%
of the R&D expenses of the advanced world.
The Soviet Union and the state socialist countries also built up huge basic
research networks of their academies. Even in relatively small countries,
such as Czechoslovakia, Hungary, and Bulgaria, basic research networks
employed 7,000 to 15,000 researchers and staff in 30–40 research insti-
tutes. Academic basic research, however, was only loosely connected with
research in application and development, which was ten times more expen-
sive, on average, than basic research. Although the Soviet Union had a very
advanced military R&D program, it was hermetically separated from the
civilian economy and had very little impact on it, unlike in the West, where
consumers benefited from the products of military R&D, such as lasers and
Teflon. The region was thus, as always before, dependent on technology
transfer.

The absence of opportunities for technology transfer

The less-developed or medium-level Central and East European
economies, like all other countries of the world in this category, were
never technology leaders. In their entire modern history they have been
follower countries, which adopted new technology mostly by technology
transfer.
Technology imports took on various forms. New technology was
imported as a “complex bundle of knowledge which surrounds a level
and type of technology.” On this basis, David Charles and Jeremy Howells
speak about the transfer of “embodied” knowledge (in physical products,
plant, and equipment), and of “disembodied” knowledge of know-how,
information, patents, technological services by engineers from abroad, and
learning (Charles and Howells, 1992: 3–5).
Technology transfer has important commercial and non-commercial
forms. As an example of the latter, the transfer of public health knowledge
and instruments are widespread. In the second half of the century the
World Health Organization (WHO) became an important agent of this
transfer. The same is true in agricultural technology, where the United
Nations Food and Agricultural Organization (FAO) plays a similar role.
“Free knowledge” is spread via scientific journals, publications, schol-
arly meetings, and conferences. Technological and scientific capacities are
also built up by education abroad. As in the eighteenth and nineteenth
centuries, when American students studied at European universities, so
in the second half of the twentieth century 300,000 foreign students
28 from the soviet bloc to the european union

studied at American universities annually, half of them in science and

technology. On-the-job-training abroad and site visits also facilitate tech-
nology transfer.
Commercial transfer of technology is more important and direct. One of
its effective forms is the construction of fully functioning firms in a foreign
country, equipped with the newest technology and assisted by the donor’s
experts. Subsidiaries, established by multinational companies throughout
the globe, represent this form and receive the latest technology transfers.
This kind of transfer is sometimes realized by cost-sharing joint ventures.
It is often combined with training of local workers. One should also not
forget technological transfer by “reverse engineering,” in which a product
is taken apart and copied. Finally, technology is transferred by industrial
espionage.
Belonging to the group of importers of new technology has its own
advantages and disadvantages. The technological leader has all the advan-
tage of the first comers in worldwide competition. The followers, however,
can save a great deal of the cost of research and development and are able
to adapt the most modern technology and inventions. Technology trans-
fer is often responsible for faster growth in less-developed countries and
may be a major factor of the catching-up process. It would nevertheless
be mistaken to consider technological transfer a given. Robert Solow calls
attention to the difficulties encountered in the spread of new technology.
The financial requirements are evident,

but simply to have the resources available for investment is not a guarantee of
development. Resources must be matched by the opportunity to use them . . . the
social capacity to assimilate advanced technology. (Solow, 1966: 480)

Among the main prerequisites, he lists the competence of local scien-

tists and science-trained engineers, an army of skilled craftsmen, the
problem-solving competence and information-producing apparatus, the
adaptation to prevailing forms of social and economic organization, and,
last but not least, appropriate political conditions and modern, aggres-
sive entrepreneurship in the receiving country. Moses Abramowitz (1971)
speaks about the “social capability” of adopting technology and manage-
ment. The weakness of these prerequisites blocked the road of technology
transfer and created a greater disparity among countries.
Were these forms of technology transfer possible in state socialist Central
and Eastern Europe? Some of the above-mentioned basic prerequisites,
especially the well-trained and educated labor force, were present, but
some significant others were missing, such as problem-solving, aggressive
entrepreneurship and management. Nevertheless, and with certain limits,
the economic factors in the collapse of state socialism 29

the area would be able to receive and adopt modern technology. The
main obstacles for technology transfer were not internal, but external
factors, such as the American-initiated and -controlled ban on the export
of modern technology to Soviet bloc countries.
The policy of banning exports to the Soviet bloc was instituted with
the beginning of the Cold War. The United States had introduced manda-
tory licensing of exports already in 1947. In September 1948 negotia-
tions began with Britain and France, and in 1949 the Organisation for
European Economic Co-operation took over coordination of export con-
trol. In November of that year the Coordinating Committee for Multilateral
Export Controls (CoCom) was established. Operations began on January
1, 1950, and all NATO member countries, plus West Germany, Canada,
and later Portugal, Japan, Greece, and Turkey, became part of it. CoCom
had weekly meetings with the participation of middle-level officials. The
US State Department and US Department of Defense were always repre-
sented, while the other countries sent representatives from their ministries
of commerce. The basis of control and banning was established by the
United States Export Control Act (1949) and then the Battle Act (1951),
which empowered the president to block exports of “any articles, materials,
or supplies, including technical data.” CoCom operations and information
were classified during the first period and decisions never made public. In
1952, the CoCom list contained 400 major categories, and later on about
150,000–200,000 items were on the list, which was periodically reviewed
and updated.
During the 1970s and 1980s, all telecommunications technology,
biotechnology, computer technology including software, and cutting-edge
new technology was on the list, and their sales were banned. In 1982,
President Reagan’s Executive Order 12356 prohibited foreign researchers
and graduate students from certain areas of research and training and
sought to “classify the product and dissemination of on-campus scientific
work.” The Department of Defense required several scientific conference
organizers to withdraw papers on sensitive subjects and to exclude non-US
citizens from certain presentations (McDaniel, 1993: 112–13).
The CoCom policy, the first export ban during peacetime in history,
despite periods of relaxation during the 1960s and part of the 1970s, suc-
cessfully prevented technology transfer to the Soviet bloc. In July 1974, a few
months after the oil shock, a task force was established under the chairman-
ship of J. Fred Bucy, the executive vice-president of Texas Instruments, and
it presented its final report, the Bucy Report, in February 1976. It became a
guideline for further export control and significantly strengthened restric-
tions in the face of a new technological-communications revolution. It
30 from the soviet bloc to the european union

included technology with a potential “dual use” – civilian and military –

which made it possible to block most modern technology exports, since
“virtually every material, product, or technology can be defined as hav-
ing a dual use.” Moreover, the report stressed the importance of hinder-
ing infrastructural development because “a highly capable infrastructure
prepares a country to be a receptive host for subsequent revolutionary
advances it may acquire.” It recommended preventing the development
of “cultural preparedness” on the part of the Soviet bloc countries to
exploit advanced technology: “the widespread use of the computer, even
in commercial application,” it maintained, “enhances the cultural pre-
paredness of the Soviets to exploit advanced technology” (Mastanduno,
1992: 193–94).
The report was accepted by the US Department of Defense in August
1977. It shifted controls from products to technology. The “critical technol-
ogy list,” created by the Department of Defense, contained fifteen groups,
which incorporated computer technology, automated real-time control
technology, guidance and control technology, microwave and sensor tech-
nology, and virtually the entire “contemporary techniques, including
videodisk recording [and] polymeric materials” (Mastanduno, 1992: 215).
From 1981, the definition of “defense priority industries” was so broad that
machine tools, truck production, microelectronics, and metallurgy, as well
as technical data, management and organization skills, and scholarly com-
munication among scientists were equally banned (McDaniel, 1993: 11).
The CoCom policy was thus not only a strategic embargo prohibiting the
trade of products of direct military importance. From the later 1970s on,
the United States-led policy launched explicit economic warfare against
the state socialist countries, aiming to weaken their entire economies.
This control, although sometimes less strict and sometimes ignored by
the Western allies, basically worked. The reluctant allies, even neutral
countries who opposed the concept of economic warfare and disliked
the American diktat, were practically forced to go along with the United
States. During the 1950s, cooperation was a prerequisite for access to
American aid. Later on, firms and countries which did not comply were
blacklisted. The US Department of Commerce composed a blacklist as
early as 1949. Sweden, not even a member of the CoCom agreement, was
also forced to cooperate by the threat of restrictions on access to American
technology and components. The American administration vetoed the
German Standard Electric Lorenz’s sale of a digital exchange system for the
Hungarian telephone network in the 1980s in a similar way. The embargoes
on telecoms and computer networking systems were still in force in the
spring of 1991, even after the collapse of the communist regimes, when the
the economic factors in the collapse of state socialism 31

European allies argued that trade in these technologies was badly needed for
the modernization of the transforming economies of the former socialist
countries.
Lacking their own industrial R&D capacity and thwarted in their
attempts at achieving technology transfer, Central and East European
countries were cornered and unable to restructure their economies. The
obsolete economic branches and export sectors were preserved. As a clear
indicator of technological stagnation, labor productivity also stagnated
during the post-1973 decades. Labor productivity in the region was tra-
ditionally low. In 1950, it only just reached the pre-World War I Western
level. Between 1950 and 1973, labor productivity doubled, and even tre-
bled, in some of these countries, but one worker-hour still produced only
$5–6 of GDP, which hardly changed until the 1980s. In the Soviet Union,
the productivity level declined by 14 percent and dropped to roughly one-
fifth of the Western level, which by that time had already reached $25–28.
Moreover, Spain, Portugal, and Greece, with a productivity level similar to
that of Central and Eastern Europe in 1950, and about $10 in 1973, also
increased their productivity level to $20/hour by the early 1990s. Stagnating
labor productivity in the East was contrasted by rapidly rising productivity
in the West and South of Europe.
Lenin’s prophecy was turned upside down. After the Bolshevik revolu-
tion, he declared in his Immediate Task of the Soviet Government (1918)
that “the fundamental task of creating a social system superior to capi-
talism . . . [is] raising the productivity of labour” (Lenin, 1974: 415). Cap-
italism proved to be superior and defeated state socialism in the labor
productivity race.
Productivity was not even a main concern in state socialist Central
and Eastern Europe, since it formed a self-sufficient economic bloc. Most
export items of countries in the region were sold in the isolated market of
the Council of Mutual Economic Aid (CMEA, or Comecon), established in
1949. This market was safe and had been highly protected since the 1950s.
The non-competitive market, characterized by permanent shortages and
fixed state-managed trade agreements, served to defend the economy of
the Soviet bloc and had nothing to do with real markets and market
demand. Until the early 1970s, Comecon trade comprised two-thirds to
three-quarters of trade conducted by member countries. Trade with free
market countries was marginal.
However, as the troubled Comecon market became less able to offer the
required goods, more socialist countries had to look to the Western free
markets. In turn, they had also to sell on the competitive markets. From
the late 1970s and during the 1980s, with two or three exceptions, most
32 from the soviet bloc to the european union

of these countries had about a 50–50 split in Comecon versus free market
trade. Their non-competitive economy was challenged. It proved unable
to adjust, with tragic consequences.
Although it was not immediately evident what kinds of changes were
transforming the world economy, the bureaucratic and centralized man-
agement system was itself an additional obstacle to adjustment. Lack of
market influence and entrepreneurial interest played a crucial role in the
extremely slow reaction of the socialist governments to the changing inter-
national economic environment. Even the government of reform-oriented
Hungary stated

that the crisis disrupting the capitalist world economy would leave Hungary and
other socialist countries unaffected – that it could be halted at the frontier. Quite
a long time passed before it was realized that the factors behind the crisis were
not temporary or rooted in political sanctions. (I. Berend, 1990: 232–33)

Most of the countries simply waited, without taking any action, and lost at
least five years before they understood the need for a response. The Polish
reaction was more detrimental than no action at all. The administration
of Edward Gierek after 1970 attempted to overcome economic troubles
through a policy of accelerated economic growth via hyperinvestments.
During the first half of the 1970s, investments increased by 133%, and
in 1975 Polish GNP increased by 29%. However, this took place without
structural changes or technological renewal. In other words, Poland fur-
ther expanded the obsolete, outdated industrial sectors of its overheated
economy. The country, formerly an energy exporter, became an energy
importer by the end of the 1970s (I. Berend, 1996: 229).
The effect of delayed and often mistaken reactions was exacerbated due
in part to the erosion of Comecon trade. Lack of adjustment led to a rapid
deterioration in the terms of trade, the countries’ ratio of export to import
prices. During the first five years after 1973, the Central and East European
countries suffered growing trade deficits because of a 10% to 20% decline
in the terms of trade. By 1985, countries which were heavily dependent
on imported energy suffered a 26% to 32% decline in terms of trade. In
other words, these countries had to boost exports by at least one-fifth,
and sometimes one-third, in exchange for the same amount of imports
(United Nations, 1990). One should also not forget that a decline in terms
of trade, a growing gap between rising import prices and lagging export
prices, already characterized the entire state socialist period: Hungary, for
example, had a 50 percent terms-of-trade loss between 1938 and 1989.
Since Comecon member countries followed the traditional/ideological
extensive fast-growth policy, they were trapped by ever-increasing trade
Other documents randomly have
different content
 CHAPTER XII.

Thanks to my darling's devotion, to her unwearied attentions, to

her foresight and care of me, I was strong enough to leave my cabin
on the third day following my restoration to consciousness.
During that time many inquiries were made after my health by
the passengers, and Mary told me that the greatest curiosity
prevailed fore and aft to see me. So misfortune had made a little
ephemeral hero of me, and this, perhaps, was one stroke of
compensation which I should have been very willing to dispense
with.
The second officer of the ship, a man of about my height and
build, had very kindly placed his wardrobe at my disposal, but all
that I had chosen to borrow from him was some linen, which,
indeed, I stood greatly in need of; but my clothes, though rather the
worse for salt water, were, in my opinion, quite good enough for me
to wear until I should be able to buy a new outfit ashore.
At twelve o'clock, then, on the third day I rose and leisurely
dressed myself, and then sat waiting for Mary, whose arm to lean on
I preferred to any one's else.
She came to the cabin presently, and when she had entered I
folded her in my arms with so deep a feeling of happiness and love
and gratitude in me, that I had no words to speak to her.
 It was when I released her that she said—"Since God has heard
our prayers, dearest, and mercifully preserved us from death, shall
we thank Him now that we are together, and say one prayer for my
dear father, who, I firmly believe, looks down upon us and has still
the power to bless us?"
I took her hand and we knelt together, and first thanking her for
reminding me of my bounden duty, I lifted up my heart to Almighty
God, Father of all men, who had guarded us amid our perils, who
had brought us to the knowledge and love of Him and of each other,
by the lesson of hard trials and sorrowful privation.
And I would ask you to believe that I do not relate such
circumstances as these from any ostentatious wish to parade my
piety, of which God knows I have not so large a store that I need be
vain of showing it; but that I may in some poor fashion justify many
good men in my own profession who, because they are scandalised
by persons among us that are bad, are confounded with these by
people ashore who imagine the typical sailor to be a loose,
debauched fellow, with his mouth full of bad language and his head
full of drink. I say earnestly that this is not so; that a large and
generous soul animates many sailors; that they love God, pray to
Him, and in many ways too rough, maybe, to commend them to
fastidious piety, but not surely the less honest for the roughness,
strive to act up to a just standard of goodness; and that even among
the bad—bad, I mean, through the looseness of their morals and the
insanity of their language—there is often found a hidden instinctive
religion and veneration and fear of God not to be discovered in the
classes ashore to which you may parallel them. Nor, indeed, do I
understand how this can fail to be; for no familiarity with the mighty
deep can lessen its ever-appealing grandeur to them as a symbol of
heavenly power and majesty; and the frequent fear of their lives in
which sailors go—the fury of tempests, the darkness of stormy
nights, the fragility of the ship in comparison with the mountainous
waves which menace her, the horror of near and iron coasts—I say
that such things, which are daily presented to them, must inevitably
excite and sustain contemplations which very few events that
happen on shore are calculated to arouse in the minds of the
ignorant classes with whom such sailors as I am speaking of are on
a level.
When I quitted the cabin, supported by Mary, I found myself in a
very spacious saloon, most handsomely furnished and decorated,
and striking me the more by the contrast it offered to the plain and
small interior of the Grosvenor's cabin.
The table was being prepared for lunch: smartly dressed stewards
and under-stewards trotted to and fro; there were flowers on the
table, vases of gold fish swinging from the deck, a rich thick carpet
underfoot, comfortable and handsome sofas; a pianoforte stood
against the mizzen-mast, which was covered with a mahogany skin
and gilded; two rows of lamps went the length of the saloon; and
what with the paintings on the cabin doors, the curtains, the rich
brasswork about the spacious skylights, the bright sunshine
streaming in upon the whole scene and kindling a brilliance in the
polished woodwork, the crystal on the table, the looking-glasses at
the fore end of the saloon—I fairly paused with amazement, scarcely
conceiving it possible that this airy, sunshiny, sumptuous drawing-
room was actually the interior of a ship, and that we were on the
sea, steaming at the rate of so many miles an hour towards England.
There were a couple of well-dressed women sewing or doing
some kind of needlework and conversing on one of the sofas, and on
another sofa a gentleman sat reading. These, with the stewards,
were all the people in the saloon.
The gentleman and the ladies looked at us when we approached,
and all three of them rose.
The ladies came and shook hands with Mary, who introduced me
to them; but I forget their names.
They began to praise me; the gentleman struck in, and asked
permission to shake me by the hand. They had heard my story: it
was a beautiful romance; in short, they overpowered me with
civilities, and made me so nervous that I had scarcely the heart to
go on deck.
Of course it was all very kindly meant; but then what were my
exploits? Nothing to make money out of, nothing to justify my
appearance on the boards of a London theatre, nothing to furnish a
column of wild writing to a newspaper, nothing to merit even the
honour of a flattering request from a photographic company. I very
exactly knew what I had done, and was keenly alive to the absurdity
of any heroizing process.
However, I had sense enough to guess that what blushing
honours were thrust upon me would be very short-lived. Who does
not thank God at some time or other in his life that there is such a
thing as oblivion?
So we went on deck; I overhearing one of the ladies talk some
nonsense about her never having read or heard of anything more
deliciously romantic and exciting than the young sailor rescuing a
pretty girl from a wreck and falling in love with her.
"Did you hear that, Mary?" I whispered.
"Yes," she answered.
"Was it romantic?"
"I think so."
"And exciting?"
"Dreadfully."
"And did they live happily ever afterwards?"
"We shall see."
"Darling, it is romantic, and it is exciting, to us, and to no one
else. Yes, very romantic now that I come to think of it; but all has
come about so gradually that I have never thought of the romance
that runs through our story. What time did we have to think?
Mutineers out of Wapping are no polite garnishers to a love story;
and romance must be pretty stoutly bolt-roped not to be blown to
smithereens by a hurricane."
There were a number of passengers on deck, men, women, and
children, and when I ran my eye along the ship (the Grosvenor
would have made a neat long-boat for her) and observed her
dimensions, I thought that a city might have gone to sea in her
without any inconvenience arising from overcrowding. In a word, she
was a magnificent Clyde-built iron boat of some four thousand tons
burden, and propelled by eight hundred horse-power engines; her
decks white as a yacht's, a shining awning forward and aft; a short
yellow funnel, towering masts and broad yards, and embodying
every conceivable "latest improvement" in compasses, capstans,
boat-lowering gear, blocks, gauges, logs, windlass, and the rest of it.
She was steaming over a smooth sea and under a glorious blue sky
at the rate of thirteen knots, or nearly fifteen miles an hour. Cool
draughts of air circled under the awning and fanned my hollow
cheeks, and invigorated and refreshed me like cordials.
The captain was on deck when we arrived, and the moment he
saw me he came forward and shook my hand, offering me many
kindly congratulations on my recovery; and with his own hands
placed chairs for me and Mary near the mizzen-mast. Then the chief
officer approached, and most, indeed I think all, of the passengers;
and I believe that had I been as cynical as old Diogenes I should
have been melted into a hearty faith in human nature by the
sympathy shown me by these kind people.
They illustrated their goodness best, perhaps, by withdrawing,
after a generous salutation, and resuming their various employments
or discussions, so as to put me at my ease. The doctor and the chief
officer stayed a little while talking to us; and then presently the
tiffin-bell rang, and all the passengers went below, the captain
having previously suggested that I should remain on deck, so as to
get the benefit of the air, and that he would send a steward to wait
upon me. Mary would not leave my side; and the officer in charge
taking his station on the bridge before the funnel, we, to my great
satisfaction, had the deck almost to ourselves.
"You predicted, Mary," I said, "that our lives would be spared.
Your dream has come true."
"Yes; I knew my father would not deceive me. Would to God he
had been spared!"
"Yet God has been very good to us, Mary. What a change is this,
from the deck of the Grosvenor—the seas beating over us, the ship
labouring as though at any moment she must go to pieces—
ourselves fagged to death, and each of us in our hearts for hours
and hours beholding death face to face. I feel as though I had no
right to be alive after so much hard work. It is a violation of natural
laws and an impertinent triumphing of vitality over the whole forces
of Nature."
"But you are alive, dear, and that is all I care about."
I pressed her hand, and after looking around me asked her if she
knew whether this vessel went direct to Glasgow.
"Yes."
"Have you any friends there?"
"None. But I have friends here. The captain has asked me to stay
with his wife until I hear from home."
"To whom shall you write?"
"To my aunt in Leamington. She will come to Glasgow and take
me home. And you?"
"I?"
I looked at her and smiled.
"I! Why, your question puts a matter into my head that I must
think over."
"You are not strong enough to think. If you begin to think I shall
grow angry."
 "But I must think, Mary."
"Why?"
"I must think how I am to get to London, and what I am to do
when I get there."
"When we were on the Grosvenor," she said, "you did all the
thinking for me, didn't you? And now that we are on the Peri I mean
to do all the thinking for you. But I need not say that. I have
thought my thoughts out. I have done with them."
"Look here, Mary, I am going to be candid——"
"Here comes one of the stewards to interrupt you."
A very civil fellow came with a tray, which he placed on the
skylight, and stood by to wait on us. I told him he need not stay,
and, addressing Mary, I exclaimed—
"This recalls our farewell feast on the Grosvenor."
"Yes; and there is the boatswain watching us, as if he would like
to come to us again and congratulate us on having found each other
out. Do catch his eye, dear, and wave your hand. He dare not come
here."
I waved my hand to him and he flourished his cap in return, and
so did three or four men who were around him.
"I am going——" I began.
"You will eat your lunch first," she interrupted.
"But why will you not listen?"
"Because I have made my arrangements."
"But I wish to speak of myself, dear."
"I am speaking of you—my arrangements concern you—and me."
I looked at her uneasily, for somehow the sense of my own
poverty came home to me very sharply, and I had a strong
disinclination to hear what my foolish pride might smart under as a
mortification.
She read my thoughts in my eyes; and blushing, yet letting me
see her sweet face, she said in a low voice, "I thought we were to
be married?"
"I hope so. It is my dearest wish, Mary. I have told you I love
you. It would break up my life to lose you now."
"You shall not lose me—but neither will I lose you. I shall never
release you more."
"Mary, do let me speak my thoughts out. I am very poor. The little
that I had has gone down in the Grosvenor. I could not marry you as
I am. I could not offer you the hand of a pauper. Let me tell you my
plans. I shall write, on reaching Glasgow, to the owners of the
Grosvenor, relate the loss of the ship, and ask for payment of the
wages that are due to me. With this money I will travel to London
and go to work at once to obtain a berth on another ship. Perhaps,
when the owners of the Grosvenor hear my story, they will give me
a post on board one of their other vessels. At all events I must hope
for the best. I will work very hard——"
"No, no, I cannot listen!" she exclaimed, impetuously. "You are
going to tell me that you will work very hard to become captain and
save a little money; and you will then say that several years must
pass before your pride will suffer you to think yourself in a proper
position to make me your wife."
"Yes, I was going to say that."
"Oh, where is your clever head which enabled you to triumph
over the mutineers? Has the shipwreck served you as it has the poor
steward?"
"My darling——"
"Were you to work twenty years, what money could you save out
of this poor profession of the sea that would justify your pride—your
cruel pride?"
 I was about to speak.
"What money could you save that would be of service when you
know that I am rich, when you know that what is mine is yours?"
"Not much," said I.
"Would you have loved me the less had you known me to be
poor? Would you not have risked your life to save mine though I had
been a beggar? You loved me because—because I am Mary
Robertson; and I love you because you are Edward Royle—dear to
me for your own dear sake, for my poor dead father's sake, because
of my love for you. Would you go away and leave me because you
are too proud to make us both happy? I will give you all I have—I
will be a beggar and you shall be rich that you need not leave me.
Oh, do not speak of being poor! Who is poor that acts as you have
done? Who is poor that can enrich a girl's heart as you have
enriched mine?"
She had raised her voice unconsciously, and overhearing herself,
as it were, she stopped on a sudden, and bowed her head with a
sob.
"Mary," I whispered, "I will put my pride away. Let no man judge
me wrongly. I talk idly—God knows how idly—when I speak of
leaving you. Yes, I could leave you—but at what cost? at what cost
to us both? What you have said—that I loved you as Mary Robertson
—is true. I know in my own heart that my love cannot dishonour us
—that it cannot gain nor lose by what the future may hold in store
for me with you, dear one, as my wife."
"Now you are my own true sailor boy!" was all she said.

* * * * *

I began this story on the sea, and I desire to end it on the sea;
and though another yarn, which should embrace my arrival at
Glasgow, my introduction to Mary's aunt, my visit to Leamington, my
marriage, and divers other circumstances of an equally personal
nature, could easily be spun to follow this—yet the title of this story
must limit the compass of it, and with the "Wreck of the Grosvenor"
my tale should have had an end.
And yet I should be doing but poor justice to the faithful and
beautiful nature of my dear wife, if I did not tell you that the plans
which she had unfolded to me, and which I have made to appear as
though they only concerned myself, included the boatswain and the
poor steward. For both a provision was contemplated which I knew
her too well to doubt that she had the power to make, or that she
would forget: a provision that, on the one hand, would bring the
boatswain alongside of us even in our own home, and make him
independent of his calling, which, to say the least, considering the
many years he had been to sea, had served him but ill, and still
offered him but a very scurvy outlook; whilst, on the other hand, it
would enable the steward to support himself and his wife and child,
without in the smallest degree taxing those unfortunate brains which
we could only hope the shipwreck had not irreparably damaged.
Thus much, and this bit of a yarn is spun.
And now I ask myself, is it worth the telling? Well, however it
goes as a piece of work, it may teach a lesson: that good sailors
may be made bad, and bad sailors may be made outrageous, and
harmless men may be converted into criminals by the meanness of
shipowners. Every man knows, thanks to one earnest, eloquent, and
indefatigable voice that has been raised among us, what this country
thinks of the rascals who send rotten ships to sea. And it is worth
while to acquaint people with another kind of rottenness that is
likewise sent to sea, which in its way is as bad as rotten timbers—a
rottenness which is even less excusable, inasmuch as it costs but a
trifling sum of money to remedy, than rotten hulls:
I mean rotten food.
Sailors have not many champions, because I think their troubles
and wrongs are not understood. You must live and suffer their lives
to know their lives. Go aloft with them, man the pumps with them,
eat their biscuit and their pork, and drink their water with them;
lodge with crimps along with them; be of their nature, and
experience their shore-going temptations, the harpies in trousers
and petticoats who prey upon them, who drug them and strip them.
And however deficient a man may be in those qualifications of
mind which go to the making of popular novels, I hope no person
will charge such a writer with impertinence for drawing a quill on
behalf of a race of men to whom Britain owes the greatest part of
her wealth and prosperity, who brave death, who combat the
elements, who lead in numerous instances the lives of mongrel
dogs, who submit, with few murmurs that ever reach the shore-
going ear, to privations which blanch the cheek to read, that our
tables and our homes may be abundantly furnished, our banking
balances large, and our national importance supreme.

THE END.

LONDON: PRINTED BY WILLIAM CLOWES AND SONS, STAMFORD STREET

AND CHARING CROSS.
 Transcriber's Notes

Punctuation and spelling were made consistent when a predominant preference was
found in the three volumes of this novel, or to remedy simple typographical errors;
otherwise they were not changed.
Dialect and other non-standard spellings have not been changed.
Spaces before the contraction "'ll" (for "will") have been retained. Such spacing was
inconsistent in this volume
Ambiguous hyphens at the ends of lines have been retained.
Page 107: "gauge" was misprinted as "guage".
Page 180: "so that speaking one of these vessels" was printed that way.
Page 213: "never was there less bombast" was misprinted as "their"; changed here.
 *** END OF THE PROJECT GUTENBERG EBOOK THE WRECK OF
THE GROSVENOR, VOLUME 3 OF 3 ***

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