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Central Europe: The political economy of capitalist restoration

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The process of capitalist restoration in Eastern Europe has been underway for five years. As well as the practical task of reorganising the workers’ movement in these countries Marxists have to come to grips with that process theoretically.

Keith Harvey explains the problems thrown up by this unique historical event focusing on Hungary, Poland and the Czech Republic

Stalinism has experienced its death agony since 1989. With its demise, the old degenerate workers’ states (DWS) in Central Europe1 were pushed onto the fast track of capitalist restoration. While this course was usually initiated by a leading faction of the ruling Stalinists it was decisively accelerated only when anti-Stalinist bourgeois forces came to power.

A major turning point was reached when these restorationists turned their back on central planning by dissolving national planning agencies and making the enterprises individually responsible for their own level of output. With this measure the DWS were transformed into moribund workers’ states (MWS): degenerate workers’ states that have restorationist governments in power which are actively demolishing the foundations of the planned economy.2

The objective of all governments inside the MWS is clear: the complete destruction of the system of command planning and the transformation of the economy into a functioning capitalist market economy.

For the last four or five years the governments of Central Europe (Poland, Hungary and the Czech Republic—CSFR) have possessed been committed to this task, differing only over the pace, methods and what constitutes “acceptable costs” of the transformation for various classes in society.

But although substantial headway has been made by all three governments up to the end of 1994, none of them had supervised the completion of the process. This article examines the results of their efforts to date and the remaining tasks that they must complete before they can celebrate their final victory.

The essence of capitalism
When the Berlin Wall came down the evangelists for the free market focused the attention of the masses of Central Europe on the short term benefits of capitalist restoration.

Few of the propagandists, if any, dwelt upon the difficulties of replacing one social system by another. As the 1990s unfolded, however, the picture changed.

Bringing capitalism to life in countries where it was uprooted over forty years ago has been problematic. The social consequences and the pain for the majority of the people in Central Europe has long been evident. Much has been written on this subject by Marxists. But relatively little has been said by the far left about the theoretical and conceptual side of this unique historical experience. How does capitalism impose itself upon an alien social system once the political conditions are favourable for this, as they have been since 1989? What contradictions do the would-be capitalists encounter and overcome in the process?

Our method of analysis, rooted as it is in an understanding of Marxist political economy, is sharply at odds with the eclectic or partial approaches of the current academic literature. Here capitalism is simply either equated with the existence of a roughly free market in the sale and purchase of goods and services or stress is laid upon privatisation, which is held to be identical with social transformation.

We emphasise, by contrast, the whole circuit of capital, irrespective of the legal form of ownership of the productive units. We are concerned to chart the emergence of a system of surplus value production, underpinned by a financial sector that reinforces profit maximising production not hinders it, and topped by a recognisable mechanism for the competitive reallocation of the bulk of surplus value as capital back into the most productive enterprises.

Capitalism has existed in a variety of concrete historical forms. Levels of state ownership vary immensely as do levels of productivity and the imbalances within and between economic sectors. Capitalism can be wracked by crisis or experience feverish prosperity. But by abstracting from these features we find the essential components.

Capitalism is a system of generalised commodity production. It is a system in which all the material prerequisites of production and distribution, including labour itself, take the form of exchange values. Capitalism is a system in which the means of production are privately owned. As Ernest Mandel has noted, private ownership is:

“not only a legal category but above all an economic one. It means that the power to dispose of the productive forces does not belong to the collectivity but is fragmented between separate firms controlled by distinct capitalist groups.”3

The commodities that are produced are produced for sale on an unknown and unlimited market, regulated by competition in an attempt to corner the market.

The driving force behind this phenomenon is the urge to maximise profit, which is the aim of capitalist production. The financial institutions, under the direction of the larger capitalist nations and which are responsible for overseeing the transition to capitalism in Central Europe, are clear about this. As the European Bank for Reconstruction and Development (EBRD) said in its 1994 annual report:

“The privately owned enterprise is the basic element of the market economy. Ownership has many dimensions . . . but central here is the right to the surplus income after costs and taxes have been met, i.e. the next profimts. Owners of private enterprises, therefore, wish to maximise profits.”4

So as to maximise profit, costs must be constantly lowered and the chief way of realising this is to produce and sell more, using less effort.

But this, in turn, ensures that production runs ahead of the market. This imperative to maximise productivity and profit dictates that capitalism is a system in which production is geared towards the accumulation of capital. In other words, profit is not, in the main, unproductively consumed but ploughed back into production as more capital, to steal a technological edge on rivals or to enlarge the sphere of production and increase the numbers being exploited.

The law that regulates this system of production is the law of value. This ensures that the exchange of commodities takes place according the amount of socially necessary labour time contained within them. Unlike a system of petty commodity production5 the law of value operates under capitalism through the formation of prices of production by competing capitals, the movement of capital between sectors with different levels of productivity and, through this, the equalisation of the rate of profit between sectors and the destruction of unproductive capital.

The transition from the bureaucratic command economy of a DWS towards a capitalist market economy passes through the stage of the dual economy of a MWS.

Here the non-capitalist state sector still dominates but the capitalist law of value struggles for dominance over the laws of bureaucratic non-capitalist accumulation.6 In this struggle the law of value broadens and deepens its influence over the country’s economic activity. In the first place it does so through the further growth of the original private sector as well as the expansion of the previously illegitimate, if tolerated, grey economy. But this sector was small and hemmed in. Real progress is made only with the exposure of the MWS to international trade and the importation of foreign capital.

The decisive economic levers of the DWS—measures which that kept the law of value subordinated—included the state monopoly of foreign trade (controlling the movement of goods, capital and currency abroad). Foreign trade and investment (joint ventures or wholly foreign MNC owned) accelerate with the abolition, or radical reduction, of the state monopoly over capital movements after 1989.

Without doubt the external impact of the law of value is decisive for the transformation process. Only through price and trade liberalisation can the formation of prices of production and the determination of socially necessary labour time inside the DWS take place.

Once established new capital is unrelenting in its demands. By its nature it is not satisfied until it subordinates the production of its inputs to the rule of capital as well as the marketing/distribution agencies as well.

But the law of value faces its biggest challenge in the restructuring of state-owned industries. These accounted for the bulk of economic activity in the DWS at the beginning of the transition and have to be transformed into state-owned “joint stock companies” and/or private companies which gear production to profit maximisation.

Whatever the point of departure for the spread of the operation of the law of value, once the barriers are down this law spontaneously seeks to overcome all obstacles to its domination.7 The path and sequencing of the measures leading to the triumph of the law of value are different for each country. But a concrete study of each country must reveal whether the law of value operates in the process of formation, accumulation and destruction of competing capitals. When this situation prevails then a country has completed its transition to capitalism.

Free falling, hard landing: 1989-92
Before 1989 the ruling Stalinist regimes inside the DWS had, to differing degrees, already transformed the nature of economic direction: from command planning and direct physical resource allocation to indirect planning via a series of closely connected monetary and fiscal mechanisms —direct subsidies, controlled prices, investment credits, negative interest rates.

In this sense, indirect planning was still central planning, whereby planning agencies set definite targets for the pace and content of economic development.

The restorationists in the MWS have to bring even this degree of direction to an end. The final stage of the degeneration of the workers’ states begins with the destruction of the centralised planning and supply structure. Henceforth, the economy is no longer actively organised by the institutions of bureaucratic planning. The effect of this dismantling, in the absence of a new dominant bourgeoisie, is enough to ensure a spectacular collapse of material production. Nevertheless, through this slump period the dominant sector of the state-owned economy continues to function—even if at a much lower level— on a non-commercial and non-capitalist basis.

Once the central planning agencies were abolished the path was clear for the imposition of stabilisation programmes by the respective governments.8

The crucial task of these programmes was to re-impose money as a measure of value. The DWS had allowed money creation to run far ahead of output and in the final crisis years of the command economies hyperinflation broke out or was a serious threat. Inflation makes the function of money as a measure of value impossible. As one recent study has argued:

“Accounting for and monitoring economic activity through the measure of money become impossible. A firm’s accounts bear no relationship to its output or its profitability, nor have public agencies any mechanism to control or even measure their expenditure. Borrowing and lending become impossible, unless people are allowed to use foreign currencies.”9

Without correcting this, the transition to capitalism is not possible. In every conceivable form of capitalism the surplus product has to take the form of surplus value. But surplus value cannot appear directly, as it can in a natural economy, or even in a petty commodity mode of production. It has to appear through its transformation into money in a process of commodity exchange. Price liberalisation acts to restore money as a measure of value as does trade liberalisation—both of which act to bring the products of the DWS into direct comparison with the price structure of commodities of the capitalist economies.

This programme is a precondition for the further emergence of capitalist social relations of production. But it is not identical with it. For this, the capital-wage labour relationship must emerge. In Marxist terms the labour process must become at the same time a valorisation process.

For capital to emerge, the minority of enterprises in the DWS which are “commercially viable” must have their surplus product turned into surplus value. Secondly, value-destroying production must be stopped. Thirdly, marginally productive output must be restructured to survive and grow under the new social relations.

For example, it was estimated by one study that:

“in 1990-91 only between 7%-22% of industry in Poland, Hungary and CSFR could make a profit under prevailing conditions of international competition. Some 60% of enterprises would need restructuring to attain a profit and between 18%-33% were actually generating negative value added.”10

The main contradiction of the stabilisation period, for those who wish to restore capitalism, arises from the fact that it is not clear how much of existing production can be rendered profitable.

In order to give themselves a chance of future surplus-value creation the restorationists have to work through a real contradiction: the bulk of material production in the MWS can become surplus value-generating production only on condition that its existing unprofitable character is sustained and reproduced for some time in the transformation process. A too-resolute imposition of the law of value on the labour process would destroy the possibility of future surplus value creation. In Marxist terms this represents a contradiction within the two-fold character of all production between its nature as a labour process and its character as a valorisation process.11

Apart from important monetary stabilisation measures in the years 1989-91, the further imposition of the law of value was restricted to the formation of new enterprises, mass privatisation of small services and some (very small) foreign investment.

Economic behaviour and decision making often acted more to preserve existing actions from the operation of the law of value than to promote it. Broadly speaking, we can say that this period in Central Europe was characterised by four main tendencies.

First, all three countries experienced a sharp industrial slump in the wake of the collapse of established markets within the CMEA. Poland’s industrial output declined 1.4% in 1989, a massive 26.1% in 1990, and a further 11.9% in 1991.12

In Hungary there were four straight years of decline between 1989-92, with 1991 likewise registering the worst fall with an 18.8% drop in industrial production. Heaviest hit were extractive industries and metal production.

Parallel to this fall, unemployment increased. Initially this was due to the failure of those leaving full-time education to secure a job but increasingly the ranks of the unemployed were swelled by those laid off. In Hungary the industrial workforce declined from 1.2 million in 1989 to 0.8 million in the trough of the slump in 1992.12 In Poland industrial employment fell 22.7% between 1990 and 1992.

The second characteristic of this sub-phase was a rapid growth in inflation (especially in 1990-91), inter-enterprise debt, bank credit to loss-making factories, and the level of the governments’ budget deficits. Inflation’s rise was a natural result of a rapid expansion of the money supply in conditions of industrial slump.

In Poland the money supply expanded by 55% in 1992.13 This increase by the Central Bank was sanctioned in order to cover the mounting inter-enterprise debts and government credits. In the Czech and Slovak Republics inter-enterprise debt tripled between the end of 1990 and the end of 1991.

By the summer of 1992 it was equivalent to 25% of all bank credit. In Poland such enterprise debt was equivalent to 103% of all bank credits to the non-financial sector in 1991 and was only 5% lower in 1993.15 A similar situation prevailed in bank loans. At the end of 1991 more than 60% of bank loans were non-performing in Poland.

Thirdly, in those years of crisis no new fixed investments on any scale took place in the state-owned enterprises (SOEs); rather, the reorganisation of production took place on the old technical foundation. Labour productivity fell in these years as the old disciplining factors (e.g. the party organisation) disappeared and output fell faster than the rate at which labour was sacked16. Consumption predominated over fixed investments in the SOEs indicating that the accumulation process was not yet governed by the accumulation of capital.

Finally, these measures were reflected politically in the fragmentation of the bureaucracy as it ceased to be a ruling party but retrenched within the industrial enterprises and banks. A new system of property rights was designed, some laws were enacted, but at this stage the social content (the remnants of the DWS economy) remained largely at odds with the legal form.

If the capitalist mode of production was simply a form of petty commodity production then the stabilisation programmes would have represented the completion of the transition process. After all, a free market in goods and services was introduced, including for labour power. Money as a measure of value was restored. Traditional shortages were ended by bringing prices into line with supply and demand.

But capitalism means more than just a system of commodity exchange. A further, crucial, stage is necessary. The task of this second stage is to make the production process conform to the new market imperatives. The EBRD puts it this way:

“Operational restructuring involves the adaptation of existing enterprises to product market reforms, through adjustment in labour and capital inputs, and in volume, design and composition of outputs; while financial restructuring pertains to the re-contracting or conversion of loans, including those that are non-performing, and asset liquidation.” 17

The moribund workers’ states after 1992
The economy of a MWS is structurally dislocated. There is a growing profit-oriented private sector (a system of “many capitals”), which consists of newly found private enterprises in the hands of domestic owners, Joint Ventures, branches of foreign capital, as well as commercially restructured former state enterprises.

In addition, there is a sizeable grey sector of the economy which delivers informal goods or activities but does not appear in official statistics.

The non-state sector is strongly represented in retail and wholesale trade, personal and business services and light industry oriented to consumer goods.

The non-capitalist state sector, on the other hand, dominates large-scale industry together with the energy and transport sectors. Many of these enterprises not only operate at a loss but they are not even geared to the goal of profit-making. Some of them retain their monopoly power and are therefore not forced to change under the impact of competition.18

Others are so big that the state protects their unprofitable existence in order to prevent social unrest. Still more are protected because ways may be found to make them commercially viable in the future, or simply because a sector of the old bureaucracy successfully obstructs their overdue liquidation. As long as the old state sector is dominating the whole economy—that is, as long as the non-capitalist laws of this sector regulate the accumulation process of the bigger part of the economy and hold the other sector in dependence and subordination—so long the character of the system remains that of a MWS.

In a DWS capital and wage labour are not a diverse unity which condition each other’s existence in the process of surplus value creation. Rather, they are mere technical divisions within a system of material production, living and dead agents respectively within the labour process.

For capital to crystallise out in opposition to wage labour, money needs to be used as a measure of the amount of socially necessary labour worked up into the physical assets, the means of production and raw materials.

But the restoration process runs up against a real problem here: namely, how to value these objects of production? How much are the fixed assets, the new constant capital, worth? Without finding a solution to this problem there can be no real possibility of forming costs of production and prices of production.19

Without this the market cannot establish average levels of productivity for the national economy. Nor can the efficiency of domestic enterprises be measured against international capitalist competition.

In short, the unfolding of the law of value is hampered and even obstructed in the state sector.

The main function of the drawn-out “commercialisation” and privatisation processes in the MWS is to establish the values of the various components of capital and thereby allow restructuring to proceed on a “rational” basis (from the point of view of the market).

Meanwhile what is happening to the other half of the wage labour-capital relationship? In the DWS labour was not “free” in the sense of being organically separate from the other means of production and qualitatively different in type.

Workers had an immediate relationship with the means of production. This expressed itself in the almost absolute job security20 as well as in their right to many social services provided via the workplace. Workers were also paid in full irrespective of the levels of output or whether there was any output at all. By contrast, under capitalism, “an effective labour market concentrates the costs of adjustment on a subset of the labour force: the unemployed.”21

The existence of a “reserve army” of the unemployed is an essential element of the process of turning labour into a commodity in the fullest sense, since it ensures competition and helps ensure that the price of labour does not depart too far from its value. In a DWS workers did not represent variable capital, purchased and productively combined with constant capital to produce surplus value. In the course of capitalist restoration labour has to be transformed into a commodity—labour power.22

This “commodification” of labour in the MWS is a two fold process.

First, both the workers’ legal rights and the many social services that are provided free to the workers attached to an enterprise must be stopped or turned into commodities themselves.

For example, in Czechoslovakia it has been estimated that social welfare provided by the employer was equivalent to 5% of the wage bill. Health provision, welfare, sports, childcare and holidays were often provided free or heavily subsidised by the enterprise. The restorationists aimed to end this and turn these into commodities or targeted services provided by insurance schemes financed out of taxes on wages.

Secondly, the goods and services23 that exchange against the workers’ wages and which enter into the determination of the value of labour power must become commodities. Their own value must be determined by the amount of socially necessary labour time for their production. In the DWS a large number of these goods were heavily subsidised. In the CSFR it was estimated that state subsidies to consumer goods amounted to 15% of the wage bill.24

In a DWS the price of labour was determined in advance through the use of “scientific tables” which set out the reward structure for all kinds of labour.25 Differentials were kept very narrow. By a transformation in the conditions of sale/purchase of labour power, the means are established for a real market determination of the value of labour power. For the process of capitalist restoration this is essential. The proportions between “necessary” and “surplus” labour within the valorisation process, as described by Marx in Capital Volume One have to be established. This is a pre-condition for surplus value production.

Privatisation’s progress

In 1989 Poland had around 8,770 large state owned enterprises (SOE) which were responsible for the vast bulk of material output. In Hungary there were about 2,000. In addition the state owned many thousands of shops and other small scale enterprises. In Hungary in 1990 there were 10,423 such companies: today 90% of these are in private hands. In the Czech republic the sale of 22,000 small SOEs was completed in 1992 as were a similar number in Poland.26

If capitalism is to emerge the decisive transformation has to occur in the large SOEs. While the privatisation of these SOEs in the MWS is not the same as capitalist restoration—it is not the goal itself—it is an important means to achieving the goal.

The destruction of a single-owner system of the main means of production and its replacement by a system of “many capitals” is essential to the process of capitalist restoration: indeed, the law of value cannot function decisively, capitalism cannot emerge, without the existence of many capitals.27 Whether the transformed state itself becomes a key owner among the many capitals is not decisive.

Privatisation is everywhere preceded by “commercialisation”. In the first instance this means the creation of a legal form for the private enterprise, setting out the description and legal title to a set of limited assets (land and fixed capital, inventories and raw materials).

At this stage in most cases ownership remains in the hands of the state. Very often commercialisation does not really transform the labour process into a valorisation process. However, for a growing minority of cases it is not excluded that “commercialisation” may indeed result in effectively profit-oriented enterprises. This seems to have been the case for Polish shipbuilding and steel for example. Nevertheless, for many SOEs “real” privatisation is a necessary step for several reasons.

In the first instance it helps to raise capital. By mobilising the savings of the population through mass voucher privatisation schemes money, in the form of idle savings, can be transformed into capital.

Over 8 million Czechs and Slovaks paid $30 each for their book of vouchers in 1992/93. In addition, some SOEs are auctioned to foreign or domestic capitalists. In the Czech Republic the first wave of privatisation was completed involving 1,900 of the large SOEs by the end of 1992. The book value at the time of the launch was estimated to be $23 billion but the sale realised only $13 billion.28

To establish a competitive capitalist industrial sector in Central Europe out of the large SOEs a lot of new fixed investment will be necessary, in order to raise the average levels of productivity to international standards. Some enterprises might be restructured sufficiently— simply by mass-sackings and the intensification of labour—that they can become temporarily profitable, especially when the national market is protected to some extent by tariffs. But for many this will not be possible. Where will the capital for fixed investments come from?

In all three Central European countries29 the main banks—the major or only source of credit to industry—tightened their lending criteria some two or three years into the transformation process. This left privatisation as the only alternative source of fixed investments.

The second major social pressure pushing in the direction of privatisation was the desire to enforce “corporate control” on a state enterprise. In the MWS the vast majority of enterprises are managed by the same people that ran them under the Stalinists when they were DWS. To be transformed into an “agent of capital” in the labour process, real effective pressure needs to be exercised on the managers to make them change their behaviour. In the DWS they acted in concert with the representatives of the workers they employed to adapt the plan norms that were handed down from above, to their own interests.

Since this collusion went vertically up the line of bureaucratic directives as well, breaking the established relationships of control is a key aim of the new governments.

The most effective way to do this is by transferring property rights to outside owners. These then have an interest (profits) in subjugating labour to capital and carry a risk (financial failure) if they do not do so. The other route to achieving capitalist management in MWS enterprises is by re-training managers, boosting the reward structures and granting them complete power over the direction of labour and the use of resources. Some sort of weak capitalism might emerge from such a process of internal transformation but a more vibrant capitalism will need private outside control.

Thirdly, privatisation helps to legitimate the restoration process in the eyes of those who lose out from the process of transformation—the working class. A majority of workers in Central Europe have been put through the mincer since 1990. Their new political rights have come with a hefty price tag: mass unemployment, erosion of real wages, sharper labour discipline and a loss of social services.

The pain is clear but the gain is not so obvious to the millions who have the right to vote the restorationists out of office. So mass privatisation programmes are designed to enlist the mass of alienated workers into the process. The fact that mass “give-away” programmes have formed a central part of the various mixed privatisation packages is also due to the evident distrust the workers feel towards the members of the former bureaucracy.

And with good reason. In Hungary and Poland early privatisation programmes amounted to little more than the Stalinist leaders helping themselves to the choicest morsels. So mass privatisation seeks to allay their fears of corruption and nepotism while promising an individual solution to their economic plight, further eroding their class consciousness in the face of the transition.

Privatisation in Central Europe has taken many different forms.30 Some SOEs have been auctioned off individually or in groups; some are given away to the public. Many are “liquidated” which involves breaking up an enterprise’s assets and selling or leasing the best bits to the workers, or to other owners, for use as a building block of a new enterprise.

The privatisation process has proceeded some distance in the Visegrad countries but by the end of 1994 the majority of large to medium enterprises were still to be sold off.

By the spring of 1994 in Poland only 32% of the 7,000 SOEs commissioned for privatisation in 1990 were in private hands.31 Poland was to embark on a new round of mass privatisation in the autumn of 1994, starting with about 450 large to medium SOEs in good financial condition as a result of earlier restructuring. It was repeatedly postponed due to political infighting within the government and the first auctions began in mid-December 1994.32 In CSFR, 1,471 SOEs were sold off in the second half of 1992 and the shares distributed in May 1993. A second wave of mass privatisation embracing 2,000 SOEs was due to be completed by the end of 1994.

Privatisation has gone furthest in Hungary with nearly 60% of the SOEs in private hands. In 1990 nearly 2,000 SOEs were put into the State Property Agency for privatisation. By mid-1994 569 were in private hands and in a further 167 the state retained only a minority stake. Added to this over 400 more were “liquidated”.

The end result of the various schemes of privatisation—including the mass privatisation programmes—is to concentrate enterprise ownership into the hands of a handful of large blocks of capital. In the mass voucher schemes the bulk of the vouchers originally dispersed in the hands of millions of citizens have been quickly brought together into Investment Funds. These are controlled in part by state-owned and privatised banks. In short, the privatisation process has allowed the same formal owners to radically change the content of their ownership while enlisting new (foreign and domestic) partners in the process.

The role of finance
The question of capitalist restoration cannot be solved at the level of enterprise ownership and enterprise restructuring alone. To impose the law of value as the dominant economic regulator on the economy the financial institutions have to be transformed as well. Indeed, the end result of the privatisation process has been once again to focus attention upon the fate of the banks in the transformation process.

Given the nature of the planning system in most of the DWS by the mid-1980s, it was inevitable that in the process of capitalist restoration major changes would be necessary in the relationship of the banks to the industrial enterprises. Planning by physical output indicators had largely given way to a system of planning over the accumulation process through regulated prices (including for investment goods), the use of subsidies and the extension of investment and commercial credit.

The utterly non profit-maximising nature of this credit system was summarised in the system of “soft budget constraint”33 that the banks operated with the loss-making enterprises; a system by which loss-making (often value-de stroying) production would attract value (in the form of subsidies) produced by other sectors of the economy in order to sustain full employment.

After the destruction of the central planning agencies bureaucratic non-capitalist accumulation was upheld in a purely passive form by monetary measures. Mainly this took the form of building up inter-enterprise debt (IED) —i.e. a cycle of non-payment for supplies and finished goods—and continued central bank credits to illiquid enterprises. A complete collapse of production in the MWS was thereby forestalled.34

The EBRD complained in October 1994 that:

“The main device of governments and banks for delaying liquidation of enterprises has been retention in state ownership and continued access to credit as a form of implicit and off-budget subsidy, not formally related either to payroll or protection . . . In many cases it appears that priority may have been given by banks to loans for enterprises to pay wages while little attention has been given to the enterprises’ credit worthiness.”

But in the “stabilisation sub-phase” of the transition this was an inevitable measure—a real contradiction—for those who wanted to restore capitalism. The collapse of CMEA and the consequent slump in output (1990-92) gave rise to a general, if temporary, crisis of liquidity of most enterprises which effectively disguised the underlying viability of some firms. Stabilisation meant precisely that: stabilising material production at existing levels in order to preserve the possibility of future valorisation. Far from profit-maximising output the sanctioning of loss-making credits and IED amounted to an accumulation process characterised by the extended reproduction of loss-making production in the old state sector.

The absolute value of IED in Poland was still rising in February 1993 when the number of “un-creditworthy” enterprises doubled over the April 1992 figure to 4,666—that is, 50% of all SOEs. In turn the banks rolled over this debt in the form of further credits and finally the central government absorbed this escalation of bad loans into the burgeoning budget deficit in the 1990-92 period.

This generalised support for loss-making SOE production was intimately related to the process of privatisation. In order to induce potential investors to participate in the process of mass privatisation in April 1993 the Czech government adopted a new Bankruptcy Law. This guaranteed that no privatised firm could be bankrupted for a whole transitional period after privatisation had been completed and shares distributed (which can be six months after they are bought). Then, under the new law, the firms can file for protection for another six months. Given the second wave of mass privatisation was not due for completion of the sale stage until the end of 1994, and given that the prospect of this sale obviously informs the government’s behaviour in regard to proceedings against the first wave firms, one can see how drawn out the process of capital destruction really is.

Naturally, the governments could only acquiesce in the further build up of IED and poor bank loans in the stabilisation sub-phase of the transformation. But after 1992 the restructuring gets underway in earnest in Central Europe. Large-scale privatisation accelerates or begins, the fall in industrial output bottoms-out, recovery starts and the collapse in investment tapers off.

In the course of 1992/93 the level of IED stabilises. There is a gradual tightening of the criteria for bank lending to ailing enterprises and we enter the next stage of broadening the operation of the law of value in the MWS—the retirement and commodification of bad debt held by the enterprises and by the banks.

This is an important measure since it enables the process of new production to be separated off from the burden and legacy of old production. Without central government intervention to change this situation then very little can be done. This is because in the DWS and MWS the banks and enterprises were mutually dependent on each other. The sheer size and weight of bad debts on the banks’ balance sheets ensured that it was easier to continue to expand these debts than call them in. To do otherwise would be to almost certainly liquidate the banks.

Debts held by a bank are an asset and if these were accepted as irrecoverable then the banks’ assets would collapse. Only an influx of new capital to the banks from outside could transform this situation. In some cases this new capital is provided by imperialist institutions such as the EBRD and even, in the case of Poland, the IMF. In other cases it is provided by setting aside some of the revenues from privatisation as in the Czech Republic and Hungary.

In essence the process of IED alleviation amounts to a nationalisation of debts running alongside the privatisation of fixed assets.

Different countries have found different solutions to this problem. In Hungary the issue was handled centrally by one agency in the first wave of privatisations. In Poland a 1993 law gave the banks incentives to deal with the problem directly with the affected enterprises. By the end of March 1994 agreements had been reached in this way between the Polish banks and their debtors covering 87% of bad debts by value. Gradual retirement of this debt clears the way for a turnaround in bank lending policy.35

Profit maximising loans, not extending debts, have become the norm. But as of mid-1994 the EBRD concluded that, although in the Visegrad countries and Slovenia progress had been made in providing the banks with incentives to act commercially:

“. . . this process has not come to completion in any country in the region.”36

Success in restructuring at least a part of the commercial banking system duly served to arouse the interest of foreign finance capital. Dozens of branches of EU and US banks opened in the big cities of Central Europe and many traditional commercial banks managed to attract some international investment funds. Poland became an especially attractive location as a result of the government’s success in its protracted negotiations with its international banking creditors on debt relief.37

Capitalism restored?
The decisive moment in the transition to capitalism comes when the law of value asserts itself against capital in the most final way possible—its destruction through bankruptcy.

Yet the process of destruction is at the same time a process of capital centralisation and accumulation. The weak and least productive capital is devalued and absorbed by the stronger capitals and new investment is allocated on a commercial basis to the profitable enterprises.

Under capitalism the resolution of the crisis of profitability takes the form of bankruptcy. In the first sub-phase of the transformation process, during stabilisation, the use of bankruptcy laws served to protect loss making enterprises from being destroyed. The legislation was in general used by debtors to gain protection from creditors’ claims. No bankruptcy laws in this phase allowed for creditors to initiate bankruptcy. In this way the state acted to prevent the law of value being imposed, so blocking further progress in the transition to capitalism.

One writer surveying the Czech experience in 1994 noted of the Czech bankruptcy laws:

“The Czech government, through its anti-bankruptcy measures, has prevented orderly reorganisation and exit. This perpetuates an environment in which there is no measurement of success by profitability, subsidies to large loss makers are continued, and the state absorbs large costs to the detriment of better programmes.”38

While the financial strength of several banks has been improved in the course of 1993 and 1994 by debt retirement schemes the banks have not yet used this new found strength to enforce the law of value against the unviable firms. The EBRD in October 1994 states:

“While balance sheets of Polish banks have been strengthened, the task of restructuring the physical operations of the enterprises has yet to begin in full.”

Of the Hungarian experience to date the EBRD concludes:

“The two recapitalisation programmes have restored, at least temporarily, the capital base of the Hungarian banking system, but have contributed relatively little to enterprise restructuring (in both financial and real terms). Only a limited number of restructuring plans have been accepted to date.”39

The spontaneous, purely economic, movement of capital is insufficient to ensure the destruction of capital since bankruptcy is a conflict between capitals, between creditor and debtor. Hence, the state must assert this aspect of the law of value from outside the circuit of capital to resolve this conflict in favour of the underlying economic logic. The working out of the law of value in the form of crisis must be imposed, or rather unleashed, by a conscious political act.

The EBRD accepts that the laws for the destruction of capital exist but after a study of their use up to mid 1994 they concluded:

“Even Poland and Czech Republic have been cautious in implementing bankruptcy. Only Hungary has gone very far, and there too administrative constraints have given many enterprises a stay of execution.”

In the Czech Republic between October 1992 and November 1993 there were 993 bankruptcy procedures initiated, but only 30 firms had been declared bankrupt by the end of 1993.40

In the concrete conditions of Central Europe the crunch will come in the form of competition between the new private owners of the enterprises (the Privatisation Investment Funds—PIFs).

In the search for operating capital to invest and restructure the labour process of the most productive of the privatised enterprises the PIFs will have to sell vouchers in order to find the necessary capital.41 It is only possible to find such capital for a fraction of the privatised enterprises, thus prompting a spate of closures and bankruptcies.

The road to capitalist restoration is long and hard. As one institution charged with overseeing this unique historical mission has noted:

“Some of the early euphoria and simplistic messages have subdued. Most now understand that the process can be neither instantaneous nor painless.”42

It is often difficult in theoretical analysis to pinpoint exactly the historical moment of qualitative transformation. By the very nature of the problem it is only possible to be sure some time after the process has been completed. Inevitable time lags in the compilation and publication of the relevant empirical material ensures this if nothing else. In this article we have tried to lay out the methodological framework within which any final judgements about specific countries can be reached.

In summary we have sought to establish that a country has reached the end of the restoration process when the following conditions prevail:

• price and trade liberalisation, monetary reform;

• range of legal structures and institutions defining and enforcing effective property and contract rights;

• a functioning system of corporate control by real owners of the enterprises which forces managers to act as agents of capital in the labour process;

• a functioning system of new commodity production in all sectors of the economy; new fixed investment to expand or revamp production technologies undertaken by new owners on commercial basis informed by market signals which indicate productivity and profitability;

• the extension of commercial and investment credit by the banks (which are the main or sole source of new capital in the short term) on a profit maximisation basis;

• the commodification of all credit including debt and involving a widespread use of devalorisation of enterprise debt (through use of government bonds and debt write-offs); the ability to buy and sell this debt;

• an effective system of enforced destruction of unproductive capital through general use of bankruptcy laws which will promote the further centralisation of capital through a competitive capital market.

But what kind of capitalism is it that emerges from this process? We call it “newly restored capitalism” (NRC) in recognition of its special historical roots, nourished as they are by the ashes of the MWS. NRC represents a particular combination of “modified” capitalism as it emerges not from feudalism, but from a post-capitalist social formation. This means necessarily that NRC is crisis-ridden, backward and “over-regulated”.

The share of state ownership in industry will be higher even than in the most “state-capitalist” counties in Europe (e.g. Austria, Sweden). The capital-adequacy-ratio43 of most commercial banks in NRC does not match the usual western standards. State responsibility for big loss-making enterprises far outstrips everything that is usual in OECD-countries. The labour markets remain distorted and rigid in important ways.

In all these respects NRC will show features of capitalism both in embryo and in extremis. Similar degrees of state ownership can be found in backward third world countries. Sub-standard bank guarantees and high levels of non-performing loans usually are found during periods of deep capitalist recession and depression. Extensive state interventionism can be observed during periods of war or war-oriented regimes even in imperialist countries.

But newly restored capitalism is capitalism, nevertheless. And, set against the criteria outlined above, we have to conclude that none of the Visegrad countries have yet achieved it.

Up to the autumn of 1994 the judgement on Hungary and Poland at least was “nearly but not quite”. In both countries the private profit-oriented sector was proving to be dynamic part of the respective national economies. In both countries a majority of GDP is generated in the private sector. Banking reform has gone a long way in both countries and in Hungary bankruptcy, especially in 1992/93, was implemented to destroy a lot of enterprises.

But in both countries, above all Poland, the governments and banks held back from imposing the necessary restructuring discipline on the physical operations of the remaining bulk of loss-making enterprises in 1994.

The Czech Republic has an added problem. There is a larger capital market due to the more extensive mass privatisation programme which created and then concentrated large amounts of equity in privatised enterprises into fewer hands. As yet, however, the new capital markets are not functioning to allow competition between blocks of capital for access to limited capital funds. Hence, the process of capital accumulation is being impeded.

These final barriers are not substantial ones in the absence of a working class determined to call a halt to the whole experience and reverse it.

The remaining difficulties do not primarily arise from the conflict between the new capitalists and the workers. They emerge from the difficulty in fashioning a mechanism through which the competition between capitals can take place.

The property relations of the degenerate workers’ states were, despite the corrupt bureaucracy which ruled them, gains for the working class. Given the extremely advanced stage of destruction of these relations simple defence of existing institutions is not enough to prevent the arrival of capitalism. New institutions, including large elements of the planning apparatus, will have to built from scratch. At this point the concrete tasks of the political and social revolutions are almost indistinguishable.

In Central Europe the workers have freed themselves from one set of chains only to find another set tightening its hold. A new period of learning, of awakening to the evils of capitalism lies ahead. The task of socialists is to make this period as brief as possible.

1 This article is based on a study of Hungary, Poland and the Czech Republic since 1989 although the methodological framework has wider application.
2 Whether or not this government is entirely made up of openly bourgeois parties, entirely of bourgeois workers’ parties (Social Democratic or Stalinist) or contains both types, is immaterial to the basic definition of it as a MWS.
3 E. Mandel Marxist Economic Theory, London, 1968. Hence, public ownership (including central state-owned industries) is a form of private ownership providing that the state acts as an agent of capital, that is, as one of the “fragmented” and distinct capitalist groups.
4 European Bank For Reconstruction and Development (EBRD), The Transition Report, London, October 1994, p5
5 Here the law of value operates directly in that commodities that exchange with others immediately embody a value equivalence.
6 In short, the political economy of Stalinist planning which at its heart is a system of production governed by the reproduction of full employment of labour, over production of means of production and underproduction of the means of mass consumption.
7 Of course, although the law of value is spontaneous the fact is that certain property (i.e. legal) forms and institutions must emerge consciously alongside the deepening of the law of value. No mature system of capitalism can operate without the necessary laws (and a state to enforce them against competing claims) outlining property rights, contractual obligations and enforceable rules for entering and exiting the market place.
8 Poland’s “Big Bang” was the first and most dramatic in January 1990.
9 Labour Markets and Social Policy in Central and Eastern Europe; the Transition and Beyond, N Barr (ed), London, 1994, p10.
10 Quoted in Privatisation in Eastern Europe S. Estrin (ed), London,1994, p5
11 See K. Marx, Capital (Vol 1), Harmondsworth, 1976, Chapter 7 for a full discussion by Marx on the significance of this distinction.
12 Figures taken from EBRD op cit. CMEA, or Comecon, was the trading bloc between the USSR and Eastern European countries.
13 See the Report of the National Bank of Hungary, 7/1994.
14 Even in 1993 it grew by 20%.
15 See J. Winiecki, “East-Central Europe; a regional survey”, in Europe-Asia Studies, Vol 46, No4 1994, p709-734.
16 In Poland industrial productivity fell 19% in 1990/91 and 15.5% in Hungary between 1990-92.
17 EBRD, op cit, p49.
18 In Poland the water, gas and electricity SOEs were exceptions to the general condition of the SOEs. From 1991 they made large and rising mass of profits as they raised their prices gradually towards world prices and were immune from international competition in the domestic market. The corollary of this situation was, however, that the energy input prices of the rest of industry grew greatly and thus exacerbated their generally unprofitable condition throughout the stabilisation phase.
19 Differing capitals have different organic compositions which broadly correspond to their differing levels of productivity. Those enterprises operating with above and below average levels of productivity for the industry or economy in question are saving or wasting, respectively, socially necessary labour. It is the average that conditions the social value of a commodity. Prices of production are determined by the costs of production plus average profit. Prices of production necessarily diverge from the individual value of the commodity. Those with above average productivity will achieve a portion of surplus value commensurate with its productivity and prompt the flow of capital into these areas.
20 Although there was movement between jobs and employers.
21 Quoted in N. Barr et al, op cit, p14.
22 This process is slow, impeded by the alliances between the enterprise managers and the workers as well as skill and other market imbalances (eg rigidities in the housing market that prevent workers moving to find other jobs).
23 These are, of course, commodities in form only in a DWS. See E Mandel, op cit, Chapters 15, 16.
24 As a result, consumption of necessities was far higher in the DWS than income per head would allow for
25 Some 60% of the wage was based on the basic job evaluation. The rest was determined by a complex system of bonuses, exceeding work norms and co-efficients based on regional needs.
26 Since 1990 the numbers of new small scale private enterprises have mushroomed in all three countries. In Hungary, for example, small joint stock companies increased eightfold between 1989 and 1993 and the number of one person “businesses” has trebled to 773,000.
27 Put another way, this transformation is one of turning a purely technical division of labour between branches of production under the same owner, into a social division of labour corresponding to a regime of competition between rival capitals.
28 It has been reckoned that the amount of money that can be mobilised by the savings of the working class of central Europe and turned into capital is but a fraction of the estimated “book value” of the assets of the SOEs, perhaps as little as one-tenth. The real market value of assets depends in the end on estimates of future profitability; but the obstacles in the way of guessing what that may be in any one SOE are immense. All this could only be sorted out after privatisation, leaving asset worth now to be decided by administrative fiat—the sale of vouchers at predetermined prices.
29 Visegrad is the town in Hungary where the three Central European MWS signed a trade agreement in 1989.
30 S Estrin (ed), op cit, London,1994.
31 About 1,770 SOEs were intended to remain indefinitely in the hands of the state. For recent figures see Rzeczpospolita Nr. 141. 20 June 1994, as quoted in Presseschau Ostwirtschaft, Vienna, August/ September 1994.
32 Balkan News and East European Report No 81, 11 December 1994.
33 A term first used by Hungarian economist Janos Kornai.
34 EBRD, op cit, p46
35 The aim of all the schemes is to bring the banks’ financial structure up to the accepted level of international capitalist banking operations, the so-called Basle agreement, which states that banks must have a 12% capital adequacy ratio.
36 EBRD, op cit, p15.
37 The so-called Paris and London Clubs.
38 Brom and Orenstein op cit 1994 p899. In addition to the use of bankruptcy laws to prevent the law of value destroying capital, other measures existed which hit in the same direction. Chief among them was the generalised use of tax deferment by the Polish government to avoid bankruptcy of firms.
39 EBRD, op cit, pp64-65.
40 The ERBD argued that: “liquidation of unprofitable enterprises has been avoided”.
Moreover: “The main devices of governments and banks for delaying liquidisation of enterprises has been retention in state ownership and continued access to credit as a form of implicit and off-budget subsidy, not formally related either to payroll or protection.” Ibid, p46
41 The intentions of the new owners are clear. One of the big five Investment Privatisation Funds (IPFs)—Harvard Capital—aims to replace management in one-third of the 51 companies in which it has a stake in the Czech Republic and cut employment by one third too.
42 EBRD, op cit, p(i).
43 The ratio of bank reserves to loans, set at 12% in the Basle Agreement.