Is Liberalism Dead in Central Europe?

The disturbing return of socialism and authoritarianism in the former Soviet bloc.

Marian Tupy from the January 2007 issue

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Yet there is evidence that, whatever their misgivings about the transition process, Central Europeans continue to prefer the free market to socialism. At the end of 2003, the Gallup Organization polled more than 12,000 people in the E.U.’s new member countries about their “identities and values,” including their beliefs about the roles of the state and competition in the economy. In the Czech Republic, 59 percent of the respondents either totally agreed or tended to agree that “the state intervenes too much in our lives”; 65 percent in Hungary, 59 percent in Poland, and 73 percent in Slovakia concurred.

Similarly, 63 percent of Czechs, 63 percent of Poles, and 65 percent of Slovaks either totally agreed or tended to agree that “free competition is the best guarantee for economic prosperity.” In Hungary free competition was backed by a smaller 47 percent of the respondents but still more than the 39 percent who opposed it.

The people polled were also asked to evaluate the statement, “Economic growth must be a priority [for our country], even if it affects the environment.” Considering the prejudicial phrasing, it is notable that in all four countries more people agreed than disagreed with the statement. In the Czech Republic, the ratio was 42 percent to 35 percent, in Poland it was 37 percent to 27 percent, in Hungary it was 44 percent to 32 percent, and in Slovakia it was 38 percent to 37 percent.

My own experience visiting Slovakia during June’s parliamentary elections cast doubt on the notion that economic reforms were the chief reason for the illiberal backlash.

Everyone I spoke to complained about one thing: widespread corruption among public officials. An election analysis by the Bratislava-based Institute for Public Questions has confirmed that corruption was among the Slovak electorate’s top concerns and that the majority of the population had “no profound resentment or disagreement” with the outgoing government’s economic reforms. Rather, voters were outraged by ongoing corruption.

Granted, it used to be worse. When Vladimir Meciar was prime minister, from 1994 to 1998, grand larceny was the order of the day. To give just one example, a steelmaking giant in Eastern Slovakia was “sold” to one of the prime minister’s cronies, Alexander Rezes. Prior to the sale, Rezes received a heavily discounted loan from Meciar’s government with which he bought the company. Rezes then dutifully channeled some of the profits back to Meciar, who used much of the money for political campaigning.

Today’s acts of corruption are generally smaller, but they are also more sophisticated and more widespread. They tend to coalesce around government procurement. Officials go through the motions of subjecting contracts to competitive bidding but then choose the company that offers an attractive kickback. Subsidies, highway building, I.T. upgrades, and feasibility studies at government ministries are especially popular sources of riches for officials, their families, and their friends.

Many of them then use their ill-gotten wealth to build expensive houses and buy fancy cars. The combination of ostentatious spending that far exceeds officials’ salaries with freedom of the press has been explosive. In 2005 Ludovit Kanik, a Slovak government minister responsible for streamlining the welfare state, was forced to resign after a newspaper reported that his brother and business partner stood to benefit from a large state subsidy. That same year, Czech Prime Minister Stanislav Gross resigned when he was unable to explain how he came to possess a luxury apartment, the price of which was clearly far beyond his official income.

The Corruption Perception Index, calculated by the German group Transparency International, provides good evidence that, some 16 years after the end of Communist rule, corruption is still a serious problem. By its measurements, the level of corruption hasn’t changed in Hungary since 1998, when the group started collecting data, while in Poland and the Czech Republic it has gotten noticeably worse. Slovakia showed some improvement under the post-Meciar government, but not enough to keep it in power.

Bloat and Bribery
Corruption is widening as well. On the local level, enterprising mayors and city councilors throughout Central Europe have turned politics into a gold mine. Building permits are an especially attractive source of extra income. A local businessman who wants to build a factory or a warehouse, for example, has to petition city officials for a permit. Land designated for construction is much more valuable than land designated for farming. So a businessman will bribe the mayor or a majority of the city councilors. That way, he can buy a piece of “agricultural” land and have it redesignated for construction. Even after paying off the local politicians, the windfall profit is large enough to make the transaction worthwhile.

The root cause of the corruption isn’t hard to find. In Central Europe, the state remains the most important consumer in the economy. According to Eurostat, the E.U.’s statistical arm, government spending as a percentage of gross domestic product (GDP) in the Czech Republic fell from 50 percent in 1994 to a still sizable 45 percent in 2005. In Poland it fell from 48 percent in 1995 to 43 percent in 2005. In Hungary it actually rose from 50 percent in 1999, the first year for which data are available, to 51 percent in 2005. The official numbers for Slovakia show a deceptively large reduction from 58 percent in 1994 to 37 percent in 2005. In fact, much of this drop can be attributed to a change in the methodology by which Slovakia measures government spending. The Bratislava-based Hayek Foundation estimates that the real reduction in state spending between the end of the Meciar era in 1998 and his return in 2006 was just 2 percent to 4 percent of GDP.

Considering the size of the public sector under communism, it isn’t surprising that the state played a major role in Central Europe’s economies at the start of the transition process. In 1989 the private sector generated 5 percent of GDP in the Czech Republic, Slovakia, and Hungary, and 30 percent in Poland. By 2005 the private sector generated 80 percent of GDP in the Czech Republic, Slovakia, and Hungary, and 75 percent in Poland. Yet government spending has not declined commensurately.

The private sector has reacted to the government’s persistently large role in the economy in a predictable way. Despite generous public funding, most of the region’s major parties receive large private donations. Major financial groups, such as ING in the Czech Republic and the Penta group in Slovakia, bankroll the political establishment, including rival parties with programs ostensibly opposed to one another. Private political contributions are common throughout
the world, of course, and are not inherently corrupt. But they have a more corrupting influence on the democratic process in Central Europe, where government transparency, legislative oversight, and judicial independence are underdeveloped.

The campaign finance system does provide a degree of predictability and stability. Companies and politicians expect that donations will be rewarded by government contracts and vice versa. Stability goes overboard, though, when a particular group of corporations feels left out. Some of the region’s past political crises erupted after disgruntled businessmen decided to throw their financial support behind political upstarts. The rise of Smer in Slovakia, for example, was partly due to the massive financial support the party received from wealthy businessmen, such as Juraj Siroky and Vladimir Poor, who felt they had been denied their “fair” share of public contracts.

Corruption produces more than public anger and cynicism. It undermines values—honesty, trust, thrift, self-reliance, hard work—that are important for the smooth functioning of the market. It is tragic that many ostensibly liberal politicians in the region have not lived up to the principles they espoused. Like Latin America’s nominally pro-market politicians of the ’90s, they have helped discredit liberalism through their actions.