How Hungary and Poland have Bid Farewell to Transition
Although the economies of Hungary and Poland have by now completed their post-1989 transitions and have reached the developed economy status, their politics have derailed completely from the high expectations of the 1990’s. This very “un-Hollywood ending,” however, is rooted in their history and should have been expected.
Oleh Havrylyshyn, the late Ukrainian-Canadian economist, IMF official, and Ukrainian Deputy Finance Minister, was one of the giants in the “community” of Western professionals who enthusiastically dedicated themselves in loco to Central and East European post-1989 transition from communism to democracy and market economy, and later EU membership for a more select group of countries. I consider myself a member of that community, even though my contribution was certainly quite modest in comparison to Oleh Havrylyshyn’s. His superb book, Present at the Transition, published shortly before his death in 2020, makes an invaluable contribution to transition literature, particularly in assessing which transition strategies have generated the best outcomes. Using ample data, he proves beyond any shadow of doubt that those countries, such as Poland and Hungary, that pursued “big bang” reforms, sometimes pejoratively referred to as “shock therapy,” have generated the best results, defined as fast economic growth and relative income equality. As a result, “big bang” reformers have essentially reached by now the developed economy status. The countries of Eastern and Southern Europe which had generally opted for “gradual reforms,” ended up with inferior results on all three counts. The superiority of the “big bang” over “gradual” remains to this day disputed by many economists, including some Nobel Prize winners.
According to Havrylyshyn, “…the problems [Poland and Hungary] face now and for the foreseeable future are much the same as those faced by older democracies.” He admits that some “slippage” has taken place in those countries, but sees it as a “minor” problem, analogous to the populist and nativist tendencies in certain West European countries. Unfortunately, Havrylyshyn greatly underestimates the dimensions of the “slippage.” While it is true that transition has ended in both countries, the ending has turned out starkly different from what was expected in the early 1990’s. The news from these two countries has become essentially monopolized by the increasing acrimony with the EU Commission on the issue of the rule of law, resulting in a disbursement freeze from the Recovery Fund. Last month, the Polish Constitutional Tribunal ruled that local Polish law overrides EU law, while Hungary has ceased being a functioning democracy years ago. As a result, such authors as Daron Acemoglu of MIT have called for an immediate expulsion of both countries from the EU. Clearly, the current stalemate with the EU Commission is not sustainable and some denouement must take place soon.
Although the backsliding from transition reform is not confined to Poland and Hungary, the farewell to transition in these two countries is particularly depressing and bitter. The beginning of their reforms predated the fall of the Berlin Wall, stirring up enthusiasm in the Bush administration, which then led Western efforts to backstop their reforms. This sense of “dizziness with success” permeates the Support for East European Democracy Act of 1989 (SEED Act), which unfortunately very people remember today. The Act defined a broad vision for US support (“SEED Program”) for economic and political transition in Poland and Hungary. “The SEED program shall be comprised of diverse undertakings designed to provide cost-effective assistance to those countries of Eastern Europe that have undertaken substantive steps toward institutionalizing political democracy and economic pluralism,” stipulated the SEED Act. The SEED Program committed the US government to promote, among other actions, macroeconomic stabilization, access to international financial institutions, foreign direct investment in the form of government-funded private equity, and others. In exchange, Poland and Hungary were required to embrace free elections within a multi-party system, freedom of speech, free press, independent judiciary, full market liberalization, privatization, property rights, and others. Thus, the SEED Act defined the basic “deal” between the liberal West and Central European transition countries – financial assistance and institution-building support in exchange for full adoption of a Western liberal system, rooted in the Enlightenment. The essence of this deal was subsequently adopted by the EU Commission in the negotiations of association and enlargement agreements with Central Europe and the Baltic States.
So how are Poland and Hungary performing today on the SEED Program? A review of the data on the evolution in the quality of their institutions in the 2015-2021 period paints a decidedly grim picture. The 2015 elections marked Poland’s transfer of power to the populist right-wing Law and Justice party, headed by Jaroslaw Kaczynski. Although Viktor Orban had become prime minister of Hungary already in 2010, his Fidesz party won a landslide victory in 2014. According to Freedom House, the US think tank which tracks the state of democratic health and civil liberties in 29 countries of Central Europe and Central Asia, Hungary’s overall score plunged from 64 (out of a maximum of 100) in 2015 (“semi-consolidated democracy”) to 45, placing it among “transitional or hybrid regimes,” a grey zone between democracy and authoritarianism. This was the result persistent undermining of “…the country’s institutions, including the political opposition, the media, and above all, the courts, continuing its uninterrupted authoritarian streak,” writes Freedom House. Poland’s institutions have fared only slightly better. Its score dived from 80 in 2015 (“consolidated democracy”) to 60 in 2021 (“semi-consolidated democracy”), as the Law and Justice regime has “systematically undermined the rule of law and established tight control over the country’s institutions, including the Constitutional Tribunal, the Supreme Court, the National Council of the Judiciary, management of common courts and the prosecution, and, crucially, the public broadcaster.” The grim data from Freedom House is echoed in equally grim news from Transparency International, a Berlin-based think tank dedicated to tracking public sector corruption world-wide by means of the “corruption perceptions index.” Thus, Hungary’s index dropped from 51 (out of maximum 100) in 2015 to 44 in 2020, while Poland’s index fell from 63 in 2015 to 56 in 2020. Such countries as Botswana and Costa Rica are deemed today less corrupt than Poland.
There is no doubt that the depressing image of Hungary and Poland that emerges from Freedom House and Transparency International data is very distant what must have been the intent of US Congress in voting the SEED Act in 1989. The fact is that both countries have betrayed the SEED Program and no one can reasonably argue that they are still liberal democracies. Their institutions have been subverted from within by regimes which are rooted in cultures and traditions which are inimical to the tradition of the Enlightenment. Despite some well-intentioned proclamations by the mayors of Warsaw and Budapest, it is difficult to be optimistic about any meaningful change in the direction of liberalism in the near future. The current state of affairs will likely worsen further.
Many observers ascribe the rise of right-wing populism in Poland and Hungary to economic dislocations resulting from “neoliberal” policies in the transition to market economy. This is the view of Gergely Karacsony, the mayor of Budapest, who wrote recently in Project Syndicate, “Just as the rise of illiberal parties in the oldest Western democracies, so too the democratic involution in Central and Eastern Europe stems from structural problems, including the spread of injustice and social inequality. These problems owe much to the mismanagement and abuse of the privatization process and the transition to a post-1989 market economy.”
This is an incorrect analysis of the origins of right-wing populism in Hungary and Poland. While may be true that the post-1989 transition has generated some income inequality, particularly between the major urban centres and the countryside, it is also undeniable that both Hungary and Poland, having opted for “big bang” reforms after 1989, belong today to the wealthiest and fastest-growing countries in the entire post-Soviet sphere. Other post-Soviet “big bang” reformers include the Czech Republic and the Baltics. All social groups in these countries, including the rural population and the retirees, have benefited from economic growth, while the phenomenon of “oligarchy,” associated with the gradual reformers such as Ukraine, has been generally eschewed.
The rise of right-wing populism in Hungary and Poland is primarily the result of hysteresis. These countries have simply not been able to overcome the burden of history, even though the post-1989 reformers made a valid attempt to do so. This is undoubtedly a delicate issue for the more liberally-minded elites of Hungary and Poland, but it must nevertheless be confronted. While Hungary and Poland are obviously “European” in a geographic sense, the key question is whether they are “European” in a cultural and philosophical sense, and whether it was at all reasonable to expect them to become liberal democracies. The post-1989 reformers in Hungary and Poland (and elsewhere in Central Europe and the Baltics) adopted the slogan of the “return to Europe” in their quest for integration with Western Europe. Originally coined by Vaclav Havel, the Czech “philosopher-president” in the 1989-2003 period, the slogan was intended to imply a return to a “community of values” which Central Europe was allegedly part of prior to WWII and the arrival of the Red Army in 1945. A “return to Europe” may have had some historical justification in the case of the Czech Republic, as Czechoslovakia was the only multi-party democracy in Central Europe in the inter-war period, while Hungary and Poland practiced various degrees of authoritarianism, spiced with nationalism, religious obscurantism, and antisemitic overtones. Thus, it is difficult to find a rationale for either Hungary’s or Poland’s “return to Europe” in their inter-war governance, which in turn had deep roots in their pre-WWI authoritarian institutions. Prior to WWI, most of ethnic Poland was part of Tsarist Russia, while Hungary was obviously part of the Austro-Hungarian empire. Thus, while the West European institutions gradually progressed towards liberalism in the aftermath of the Enlightenment, the formative contemporaneous institution for what is today Poland and Hungary was serfdom, as documented by Daron Acemoglu and James Robinson in their famous book Why Nations Fail. These countries experienced nothing analogous to the Glorious Revolution, the French Revolution, or the Dutch “Golden Age.” As a result, liberalism remained essentially unknown in Hungary and Poland until the post-Soviet transition, while the bulk of Polish and Hungarian populations remain ignorant of Enlightenment to this today.
Nevertheless, the Polish and Hungarian post-1989 reformers were obviously sincere in seeking a “return to Europe” in the belief in their ability to introduce liberal institutions in defiance of the burden of history. An excellent example of such aspirations is Poland’s 1997 Constitution which was fruit of four years of drafting by the political parties represented in parliament at the time. As described in depth by the Mark Brzezinski, the in-coming US ambassador to Poland, in his excellent book The Struggle for Constitutionalism in Poland, the 1997 Constitution enshrined the primacy of parliament as well as the practice of judicial review by an independent Constitutional Tribunal. As the right-wing populists were not represented in parliament at the time and were not involved in the drafting of the Constitution, they aimed their guns at the principle of judicial independence right after the 2015 elections. Unlike Poland, Hungary did not adopt a totally new constitution in the post-1989 transition. Signalling the country’s new direction under Orban following the 2010 elections, the Fidesz-controlled parliament adopted a new constitution in 2011 by means of a simple majority. A failure in the post-1989 transition to adopt a modern, liberal constitution, requiring a supermajority for any change, was a crucial error committed by Hungary’s reformers.
Given the sad ending to the post-1989 transition in Poland and Hungary, it must be unfortunately concluded that the efforts of the post-1989 reformers to introduce and consolidate liberalism have failed. It is impossible to say whether those efforts could have been at all successful in the face of hysteresis. However, I believe that the post-1989 reformers could have done a great deal more in their quest to consolidate liberalism. In the case of Poland, I will mention only two crucial structural errors which, while well-intentioned, had the outcome of significantly strengthening the right wing populists. The first one is the Concordat agreement between the Polish government and the Vatican, signed in 1993 and ratified by Polish parliament in 1998. The Concordat provides for a closer “cooperative relationship” between state and church, while bestowing upon the church various privileges, such as the primacy of Catholicism in Poland, teaching of religion in public schools, public subsidies for the church, and an extremely favourable tax regime for the church and affiliated institutions, such as church-controlled talk radio. The church emerged in post-1989 Poland with very high authority and prestige, particularly among the rural population, as well as a vision of its role in society which radically diverged from the more modest vision pursued by catholic churches in Western Europe. Thus, the church had no qualms about becoming involved in electoral politics and making known its disdain for the secular values of the EU. As a result, the post-1989 reformers felt the Concordat was needed to “pacify” or “co-opt” the church in face of the “return to Europe.” The Concordat, however, was not only unnecessary, but turned out to be a Faustian deal. An expectation that the church would keep out of electoral politics, such as by instructing church-goers to vote for Law and Justice as is currently the case, was simply an act of naiveté and historical ignorance. The Concordat has resulted, among other things, in religion teaching in public schools taking precedence over English or computer science, without mentioning the teaching of Enlightenment history. It would have sufficed to look at the aftermath of the 1929 Lateran Treaty between the Vatican and the Italian state, which essentially transformed the church into a pillar of the fascist regime.
Another crucial error committed by the Polish post-1989 reformers was their anti-urbanization policy. According to the 2020 World Development Indicators, Poland’s urbanization rate declined from 61.3% in 1990 to 60.0% in 2019, in contrast to the general urbanization trend of the EU from 69,4% to 74,7% in the same time period. There are several explanations for Poland’s bizarre de-urbanization. First, the post-1989 reformers felt morally obliged to deliver some “restitution” for the sorrowful plight of the rural population under central planning, which had been underpinned by the extraction of resources from the countryside for urban industrialization. The main instrument of this “restitution” has been a distortive and highly preferential tax regime for rural areas, which obviously serves as a powerful disincentive to urbanization. Now it is the countryside that extracts resources from the urban population. Other disincentives to urbanization include a failure to invest in affordable housing in major urban areas and preferential tax treatment for Foreign Direct Investment in rural areas. Not surprisingly, the anti-urbanization policy has turned out to be another Faustian deal, as right-wing populism and nativism, backed by the church, thrive in the countryside, while the major urban centres, which are the anchors of Poland’s fledgeling liberalism, are stuck with stagnant populations.
The Hungarian post-1989 social landscape is quite different from Poland’s, as religion was never a major factor, while demographics have always been much more urban due to Budapest being the biggest urban centre in Europe between Berlin and Moscow. The bane of Hungary since WWI has been fierce nationalism in the aftermath of the Treaty of Trianon of 1920 in which Hungary lost two-thirds of its territory. While it is not immediately obvious what the post-1989 reformers could have done to alleviate that unfortunate phenomenon, perhaps a broad educational campaign on the history and values of the Enlightenment, linked to the “return to Europe,” might have deflated it. However, the Hungarian reformers were also responsible for serious policy mistakes in the first decade of this century, particularly a chaotic fiscal policy and inadequate fight against corruption.
The current stalemate between the EU Commission on the one hand, and Hungary and Poland on the other, cannot continue. West European political elites, including probably the new German government, and West European taxpayers, are no longer prepared to tolerate transfers to those countries in the face of their open defiance of EU law. The case of Hungary is fairly straightforward, as the Orban regime has been evidently preparing spiritually and strategically for a post-EU future. In addition to enjoying a consolidated relationship with Putin, Orban has been assiduously courting the American Right. A gathering of right-wing personalities from around the world, held in Budapest this fall, was attended by former US Vice President Mike Pence, while the talk show host Tucker Carlson broadcast for several nights from Budapest last August. Orban’s other American admirers include such publications as the National Review and the New York Post. In fact, Orban may be dreaming of an “illiberal axis” of Trump-Putin-Orban in the event of a Trump victory in the 2024 US elections. In the meantime, however, it is clear that there is no place for a regime like Orban’s in the EU and Hungary must be expelled as soon as possible. It is up to the Commission and its legal counsel to devise an expulsion strategy.
Poland presents a more nuanced case. The persistent assault on the rule of law by the Law and Justice regime has resulted in international isolation, while domestically the country is hovering on the brink of violence. However, as the recent decision by Poland’s Constitutional Tribunal is fundamentally incompatible with EU membership, a resolution of the current crisis in EU-Poland relations is also urgently called for. As part of this resolution, the Polish people should have a chance to pronounce themselves on EU membership. Opinion surveys suggest that some 80% of Polish public is in favour of EU membership, but it is not clear to what extent the public understands the conditionality of membership as defined in the Treaty of Lisbon and the 2003 Accession Treaty. The Polish public tends to associate EU membership with transfer payments to Poland. Thus, the Commission should seek an agreement with the Polish government on a referendum on membership which would clearly spell out the key conditions of membership, such as the precedence of EU law over domestic law. If the Law and Justice regime refuses to agree to such referendum, the same expulsion process as in the case of Hungary should be applied to Poland.
As Oleh Havrylyshyn argued in his book, the post-1989 transition for the “big bang” reformers has ended, but necessarily with a “Hollywood ending.” In the case of Poland and Hungary, the ending is very sad for all of those who shared the exhilaration embodied in the SEED Act. However, the Enlightenment vision and optimism of the SEED Act were clearly unjustified. Hysteresis has won.
Martin Miszerak is a Lecturer at the Business School of Renmin University in Beijing. In the 1990’s, he served as a privatization adviser to the Polish government and later as non-Executive Chairman of a major Polish bank and CEO of a government-sponsored private equity fund.