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Peter Gowan

Western Economic Diplomacy and the
New Eastern Europe

Hobbes once remarked that if you are forced at gunpoint to go through a
door, you are still free to go through it: you can be forced and be free. For
most of us today this is a perversity that smacks of Stalinism. But what if
someone throws walls around you on three sides and then leaves you to
decide for yourself what to do? Are you still free to determine your future,
assuming that the wall builder has at least as much right to build the walls as
you do? Issues of this sort come to mind from a study of current Western
economic policy towards the new regimes in Eastern Europe. But unfortunately most conventional discussion of the topic either fails to spot the walls
or assumes that they are natural structures deriving from the very substance
of market economics, rather than the work of political hands. As a result,
conventional wisdom does not for a moment doubt that the peoples of
Eastern Europe have at last entered the realm of freedom and selfdetermination. The following survey of West–East economic diplomacy
suggests that while the people of Eastern Europe may have rid themselves

of Hobbes’s freedom, the world they are entering is not adequately
captured by such notions as political sovereignty and self-determination; markets as free spaces liberated from politics; and Western
diplomacy as the spirit of liberalism abroad.1
East–West Economic Relations before the Regime Changes

The unstated premiss of most of the news about current East–West
economic relations is that the West has had little or nothing to do
with Eastern Europe in the past. So we are left with one definition of
the situation: a beginning of relations, a start of help; and one problem to debate: is the help enough? In reality, of course, the West had
a complex and highly structured economic relationship with Eastern
Europe before the summer of 1989, albeit a predominantly conflictual
one. To appreciate today’s new policies, we must very briefly remind
ourselves of this background.
The relationship embraced the following elements: (1) An embargo on
exports to Eastern Europe organized through Cocom, a body without
legal status, but no less effective for that, run from the basement of the
US embassy in Paris; while publicly presented as a system of sanctions
against the export of military technology to the Warsaw Pact, it was,
in fact, a generalized instrument of technological warfare, covering
half of all items traded on the world economy. Western states which
broke this export blockade would be punished by the USA. (2) A
system of tariffs, quotas (quantitative limitations) and outright bans
on imports of a very wide range of goods from the Warsaw Pact
countries to the EC and other Western states. (3) Some limited trade
and cooperation agreements between the EC and individual East European states, notably Romania and, in 1988, Hungary. These allowed
more favourable treatment of imports to the EC, though by no means
removing the very substantial barriers. They also, particularly in the
case of the pioneering Hungarian agreement, gave special rights to EC
companies in these countries. There was also an industrial trade
agreement with Czechoslovakia, mainly to allow certain Czech exports
wanted by the EC to enter the Community. (4) Poland, Hungary,
Romania and Yugoslavia, as members of the IMF and the World
Bank, were already to an extent subject to invigilation by these
strategic financial institutions. (5) All the East European countries,
with the exception of Romania and to a lesser extent Czechoslovakia,
were heavily indebted to Western governments and private banks.
The heaviest debt burdens were those of Poland (now $41 billion) and
Hungary (now $11 billion). This debt burden had started to
accumulate in the 1970s at a time when Cocom controls and import
barriers had been to some degree relaxed, only to be reimposed with
new severity at the start of the 1980s. (6) Against this general
background, there had been a consistent Western policy since
the early 1970s of insisting on the establishment of bilateral relations between the EC and Western states on the one hand, and

This article will examine only the policy towards Poland, Czechoslovakia, Hungary,
Romania, Bulgaria and, briefly, the USSR, and will exclude Yugoslavia, Albania and
the GDR.


But during the 1980s the criterion for discrimination has become the degree of openness to the capitalist world in domestic economic arrangements. The key political actors in this field are. and Romania was singled out for special treatment. while the intergovernmental battles within the institutions remain for the most part shrouded in secrecy. Political Actors and Historic Choices This catalogue demonstrates that economic relations between the Comecon states and the world capitalist market were. But the OECD is an intergovernmental discussion forum rather than a political actor. No significant new policy departures towards Eastern Europe that involve financial questions are supposed to occur without first receiving the IMF’s seal of approval for the given East European state’s eligibility. and therefore. the Western states themselves. and are. Similarly. but international civil-servant types who command few column inches in the press. governed by political institutions in the West. it delegated the authority to implement Western trade and aid policy toward Eastern Europe to the EC Commission. This illusion is sustained by the fact that the public spokespeople for these bodies are not the leaders of states at all. (7) There was finally the military confrontation. last summer. The overall gatekeeping body is the IMF and its sister organization. the World Bank. never accepted multilateral links between Comecon and the EC. in other words. the governments of the OECD countries—most importantly the United States and West Germany. This meant that the military drain on resources took a far heavier toll in the Warsaw Pact than in the West for the simple reason that gross domestic product in those states was far smaller than GDP in the West—probably about one third the size. The latter. proposed by the French government before the Strasbourg EC summit of December 1989 (whose constitution was signed in the spring of 1990). The West. will not be fully 65 . The International Institute of Strategic Studies in London maintained throughout the 1980s that there existed a rough parity of ground. of course. in the field of economic relations. in both of which the USA has an ultimately controlling voice. air and sea forces in the European theatre. Flanking the Commission are two intergovernmental banks: the European Investment Bank (EIB) and the newly established European Bank for Reconstruction and Development (EBRD).individual Comecon countries on the other. the USA has an ultimately controlling voice in Cocom. At first these objectives were primarily in the militarydiplomatic field. Linked to this was a determination on the West’s part to discriminate between the East European countries according to the responsiveness of each to Western political objectives in the region. otherwise known as the ‘Group of 24’ (G24). But these foreign offices and finance ministries decide such matters in conclave in a number of multilateral institutions with a seemingly non-political role. The main institutional forum for policy discussion and harmonization across the whole field of economic relations with Eastern Europe is the OECD.

Europe. writing in the EC’s house journal Europe in January. 66 .operative until autumn 1991. what should these objectives be? Up until now. January–February 1990. the EC itself retains jurisdiction over trade and cooperation policy towards Eastern Europe on the part of the Twelve. as Western governments have shown in their treatment of China in the 1980s. . provided that there is sufficient political will on both sides. In the words of the 1984 Hindley Report on behalf of the EC’s Committee on External Relations concerning relations with China: ‘The development of relations between the Community and China . It is through these bodies that the relationship of the East European states to the world economy is decided.’3 Before examining these issues in more detail. 13. stated clearly the political case for Western governments to handle policy towards Eastern Europe through such multilateral bodies: ‘Economic institutions. above all by handling them within and through the multilateral organizations described. can ask for changes as part of an economic development programme’ that other more patently partisan bodies could not easily demand. p. regardless of the continuing non-capitalist character of their economic and social systems. A-2 74/85. primarily a technical issue but a political one: there are no insuperable technical obstacles to a Comecon-type economy participating fully in these institutions. And the strategic issue has been: should the West seek to use its immensely powerful resources for economic pressure in order to pursue objectives within the new East European states. 2 3 PE Doc. a technicist cloak has been thrown over open debate about these enormously important questions. especially ones that are considered politically benign and not political in nature. however. by being multinational. it is worth considering here briefly another remarkable example of this technicist muffling of debate: that concerning the West’s supposed support for the Gorbachev administration in the USSR. by being “neutral”. and if so. shows that different economic systems are not a major hindrance to close economic and political relations. He goes on: ‘The multinational structures that operate between the private and public sectors can be a very useful buffer and negotiator for a lot of things that are going to have to be done. or a capitalist social transformation? If democracy was the West’s principle. and whose efforts are perceived as having improved well-being among recipients .’2 The political transformations in Eastern Europe last year have presented the West with one great issue of principle and another of strategy. these states could have been welcomed into the world economy by now. . The question of principle is this: what should be the basis for ending the state of economic warfare towards Eastern Europe— political democratization. . in fact. It is important to stress that the degree to which any state-trading countries are integrated into the institutions of the world market is not. Felix Rohatyn. the influential New York banker from Lazard Freres. . Finally.

And so on. and that the USA should wait for moves towards a free-market system.Helping Gorbachev Defeat Gorbachevism There seems to be universal agreement not only that the Cold War has ended over the last twelve months. albeit on an entirely new basis. Yet all the key barriers to Soviet involvement in the world economy remain in place. that providing assistance which would shore up the existing economic structure would be money wasted. in the words of the EC Commissioner in charge of the programme. 19 March 1990. sweeping embargoes on exports to the 4 The Financial Times. The one area where it seemed the US Administration might be flexible was in the field of US–Soviet trade: the Administration has been under a great deal of pressure from those sections of US capital strongly interested in the Soviet market. in June the USA rejected the granting of MFN status. The US government’s actual policy has been summarized by the Financial Times’s Peter Riddell: ‘There is a strong feeling in Washington. In fact. the ‘economic preconditions of democracy’. The tariff barriers continue. and it has genuine fears about losing the battle for this prize to West German business. combined with a policy of continued blockade and economic warfare. What’s more. but that the Bush Administration is doing everything it can to help the current Soviet leadership. but his goal has been to rebuild the Soviet economy on a non-capitalist basis. Bush indicated that the USSR would probably be granted Most Favoured Nation Status (MFN) at the June summit and would also be allowed to gain observer status at GATT. and preserve a regional trading bloc there. They agreed upon a rhetoric of support for Gorbachev. Western counter-strategy was set in place at the 1987 Venice summit of the Group of Seven. Clearly. He has also hoped to regain influence within Eastern Europe. the agreement establishing the EBRD specifically prohibits the USSR from borrowing significant amounts of money from the new bank for the next three years. involving an overall 45 per cent tariff on Soviet exports where they are not banned outright. Gorbachev has for five years been attempting to gain Western support for his policy of political relaxation and domestic economic restructuring. The EC has also made a point of ruling out the possibility that the USSR may be offered an Association Agreement. Therefore.’4 Thus the Cocom list is to be stringently maintained against exports to the USSR. Gorbachev’s strategy has been to use his enormous political following in the West to gain the kind of economic concessions that would revive the Soviet economy and achieve these objectives. both in Congress and the Administration. The G24 package of measures for Eastern Europe specifically excludes the USSR until it adopts. 67 . and the trade pact signed there is of little or no economic significance to the USSR. at the Malta summit in December 1989. despite promises of minor relaxations at the Bush–Gorbachev summit in Washington.

in fact. Indeed new barriers are being erected to deny the Comecon countries access to the resources of the multilateral institutions of the Western economic system. 6 See The Financial Times. and on Soviet agricultural-product needs for US agribusiness. But we should note that Cocom remains very much alive. and the East European states are still far from being able to participate fully in the world capitalist economy as far as imports from the West are concerned. and then look at what may be described as the positive initiatives of the West towards the new governments. To gain the easing of these controls and the lifting of the barriers. this has not.’ 68 .7 5 Trade liberalization faces strong opposition within both the Administration and Congress. especially the FRG. After very acrimonious debates between the USA and various West European states. and so on. but only if the former allow the USA to police their economies to ensure that the extra liberalized goods are not subsequently re-exported to the USSR. Otherwise.5 The trade pact’s main provisions are for granting US companies the same rights in the USSR that they enjoy in Western countries: respect for patents and copyright.6 Old Controls and New We will next examine first the degree to which the West has so far been prepared to relax the controls carried over from the earlier period. the number of goods blocked from export to Eastern Europe. the pact simply sets up information on US agricultural products available for Soviet purchase.USSR have enormous consequences for Gorbachev’s domestic economic and political options. happened. the Cocom countries seem ready to cut by about half. 19 March 1990. Although one might have assumed that with the arrival of new democratic regimes in Eastern Europe. Bush failed to consult his Senate Financial Committee before making his trade offer to Gorbachev in Malta. faster accreditation. as opposed to the USSR. All this was one of the preconditions for the USA granting MFN status to the USSR. governments in Eastern Europe must embark on a domestic social transformation of a scope not seen since the Sovietization of the region in the late 1940s. fuelled by the military-industrial complex. and then at imports from Eastern Europe. We will look first at exports to Eastern Europe. And even this deal required a prior threat from the Soviet side of blocking the renewal of their grain contract with the USA before Bush agreed to sign. guarantees against discrimination. 7 The Financial Times reported on 4 June 1990 that ‘the West is more united than ever over the need to retain the shadowy Co-ordinating Committee for Multilateral Export Controls (Cocom). The West’s exclusionary policy towards the East European states’ involvement in the international trading system has not been scrapped. rights to media access for advertising and to carry out market research. The USA seems ready to relax the technological blockade against East European countries. the old Cold War controls would have been dismantled by the West as a matter of course. And there is no intention whatever to abolish Cocom.

textiles or coal. Bulgaria. Hungary’s current-account deficit with the West in 1989. the Treaty commits the EC only to ‘remove or liberalize the quantitative restrictions it applies to Polish exports by 31 December 1994 at the latest. desperate to increase their export earnings. The terms of the EC’s trade agreement with Poland and Hungary are hopelessly restrictive for both these heavily debt-burdened states. but an efficiency measure for Western Europe itself. Hungary holds debt of over $14 billion for a population of only 10. subject to exceptions. Instead of swiftly opening the EC to exports from the debt-strangled Polish economy.4 billion. GSP has been granted for only one year. the first year of operation of the trade agreement negotiated in 1988. As to the extent of the embargo on Polish exports to the EC after 1994. but GSP does not extend to items barred or subject to quotas. at enormous cost to domestic living standards.5 million people. 29 May 1990. Poland has borrowed some $48 billion from the West. Update.’ Furthermore.ICC/A. Czechoslovakia’s $6 billion debt is small in relation to its economic capacity. is the only East European state officially and unilaterally to suspend repayments of principal on its debt. 69 . External Relations X. according to the neoclassical economics of the capitalist market. Article Four indicates that textile restrictions will also continue to apply. At the start of 1990. To illustrate this.One of the most urgent ways in which the West could help the new states of Eastern Europe would be to actually apply the liberal international trade principles it preaches: in other words by ending all blocks and embargoes on imports from Eastern Europe. has paid off all significant debts to the West. Yet no such full trade liberalization has taken place. Article Three of the Treaty makes clear that products covered by the European Coal and Steel Community will not be included in the liberalization measures: in other words Poland’s coal and steel exports will still be restricted. steel. totalled $1. and therefore does not allow free trade in key sectors like agriculture. this will be decided through negotiations between Poland and the EC in that year. also heavily indebted to the tune of about $11 billion. Poland and Hungary are not only the most heavily indebted Comecon 8 Commission of the European Community. This would not. be an act of altruism. p. the EC granted Poland and Hungary its Generalized System of Preferences (GSP)—concessions the EC offers to Third World countries enabling them to export to the EC on slightly better terms than OECD countries like the USA and Japan. And furthermore. to be renewed or revoked at the start of 1991.8 The Debt Burden Hungary and Poland have been the two states most heavily in debt to Western institutions. we can take the most liberal trade agreement so far reached with any East European country: that with Poland ratified in October 1989 between the EC and the new Solidarity government of Prime Minister Mazowiecki. 7. and its credit rating in the West is the highest of all the East European economies. ‘EC–East Europe Relations’. has paid off some $39 billion and is left with a total debt of some $41 billion. while Romania.

the rescheduling agreed for Poland has been extremely limited in its time frame. it will be repaid over a fourteen-year period. On 16 February. only $9 billion of Poland’s $41 billion debt is owed to private sector banks. 9 The Financial Times. would have been to write off a very large chunk of this public debt. Not a single dollar of Poland’s or Hungary’s debts have been written off. he also urged that Poland’s creditors should considerably reduce the debt burden itself. 23 February 1990. An obvious policy for the West. Communist regime—there was now a new democratic start. they were also the first to commit themselves to a capitalist future with a liberal-democratic polity. till March 1991. Even the British government has in the last few years written off £1 billion worth of Third World debt owed to Britain. Furthermore. Therefore no one in the West would suffer in any significant way if this debt. And the debt had. Hungary has proceeded much further than other East European states down the road to an open financial market. after all. There are ample precedents for such a response. That indeed is the only explanation for the current policy towards Poland and Hungary.4 billion of arrears. above all by making them desperate for roll-over credits and bridging loans. Yet no such exercise in what the bankers call ‘debt forgiveness’ has taken place. Most of their debt is owed to public rather than private bodies in the West. but knows that any public demand for this would provoke a catastrophic financial crisis caused by a flight of Western capital (Paper presented to Europe House Seminar. The political system is therefore uniquely vulnerable to losses of confidence on the part of Western capital. the government desperately wants a rescheduling agreement as a minimum measure. for long an overwhelming constraint on initiatives to drag these economies out of their crises. It is a unique situation and thus ideological precedents need not have been a serious political embarrassment to Western governments.10 Western public policy on the debt issue has been geared to both avoiding a crippling breakdown of the Polish and Hungarian economies in the short term.states. the Group of 24 agreed that Poland could stop any payments of principal (the original sum borrowed) or interest on debts owed to Western public bodies.9 The Hungarian government has not felt itself strong enough to demand a debt moratorium. But the interest owed has not been cancelled. G24 also agreed to reschedule $3. There is one great advantage in having a debt noose around weak countries: you can control them politically. They also asked the private-sector banks to follow suit as far as interest was concerned. At the beginning of February. 10 70 . Director-General of the Hungarian Ministry of Trade. been incurred by the old. for example. Polish Prime Minister Mazowiecki demanded from members of the European Parliament in Brussels that Poland should be freed entirely from its need to make debt repayments. built up by the end of 1989. were cancelled. 29 June 1990). which in turn require them to negotiate terms with the IMF and other Western financial institutions. or at least draw up a comprehensive and radical rescheduling package. Hungary’s debt is not being tackled—rescheduling of the debt does not appear to be on the agenda. then. and maintaining the full weight of the longterm debt burden. According to Dr Peter Balazs.

The IMF then gives the go-ahead for other Western institutions to offer loans and investment projects to the government concerned. all that has changed: commitments to concrete steps down the capitalist road are now a sine qua non of IMF approval for the release of new funds from Western public institutions. acute shortages of hard currency. This form of East–West trade has traditionally been quite common. The outcome of these negotiations is a letter of intent from the East European government. Thus the EC’s September 1989 Trade and Cooperation Agreement with Poland specifically binds the Polish government not to seek to promote countertrade. arrangement to stop. Kadar’s Hungary and Poland. The imf’s New Terms for Opening the Gate It has. But with the collapse of the Soviet bloc. of course. followed by an eventual approval of the package by the IMF’s Executive Board. and have sought agreement from East European governments to end the practice. Western governments have made it very clear that they now want this trading. involving agreements to exchange a given volume of East European exports for an agreed equivalent of imports from the West. it to the organization in the form of a letter of intent at the end of 71 . access to other Western multilateral agencies is barred. and the bottlenecks caused by an inability to secure key imports all the more acute. make the search for exports all the more urgent. and the continued barriers to free trade with the West. There are two key criteria for membership: what is the country’s foreign-policy alignment? Can it supply adequate statistical information about its economy? Some East European states have been members of the IMF for a decade or more: notably Ceausescu’s Romania. One way round this problem is counter-trade: various forms of barter. and at no time did the IMF remotely consider making social transformation to capitalism any sort of precondition for allowing access to Western funds. Thus Poland drew up its socalled Balcerowicz Plan in collaboration with the IMF. The effect of this new policy is take from the East European governments one means of escape from a position of total dependence on the political institutions of Western financial management. But not any more. amounting to more than 30 per cent of East–West trade in the early 1980s. This has been the pattern both in the case of Yugoslavia in the autumn of 1989 and in Poland’s case in December 1989.High levels of debt. then presented. Without a clean bill of health from the IMF. The IMF’s preferred mode of operation is to engage in a period of negotiation with the government concerned over the latter’s domestic economic and social strategy. a new and very tough hurdle has been placed before the governments and peoples of Eastern Europe. In other words. At various times they required IMF involvement in order to handle their international financial problems. never been a legal requirement for countries to have capitalist economies in order to join or do business with the IMF. and while the West was never keen on this method—for ideological reasons and because it may enable Third World countries to lessen their dependence on Western financial bodies—they were quite ready to tolerate it.

the MPs threw it out. It should be understood that what the West is offering is not something unusual. Thus East European governments are pushed towards obtaining new Western loans from the public sector. infrastructure projects and aid. So the IMF refused to agree terms. half of this total being earmarked for Poland. The IMF loan was made conditional upon the government ending the cheap rents that most Hungarians pay for their homes. and it had to be formally approved at the IMF Executive Board meeting on 4 February. At the same time. with private-sector Western banks holding back from involvement in Eastern Europe unless given legal guarantees by the governments concerned that such private finance will be insured in hard currency against risk of loss.1989. we should bear in mind the fact that Eastern Europe is by far the biggest investment opportunity on offer to the West’s private capital since postwar reconstruction. which is too advanced to qualify) over the next three years. a long-time IMF member. new lending for infrastructure development and further investment is extremely hard to come by. Hungary was not allowed to take up a further $1 billion loan from the European Community.12 In February 1990 the World Bank announced it would lend $5 billion to Eastern Europe (excluding Czechoslovakia. Rent subsidies therefore had to go. the IMF arranged a standby credit with Poland at the start of the year. 23 February 1990. made clear 11 The Financial Times. 12 72 . The IMF has been locked in debate with the Hungarian government over similar arrangements throughout the first half of 1990. But the Bank’s president. Also new is the institutional framework for carrying it through: the role of the EC and the potential future role of the EBRD—the first major multilateral institution not effectively controlled by the US. Whether this new focus on Eastern Europe is at the same time draining funds commensurately away from the Third World is a topic of debate. Up until the spring elections in Hungary. The government resisted. the government introduced a bill in the Hungarian Parliament ending subsidies. The Hungary–IMF negotiations in the early part of this year throw light on the type of disputes that can take place. Since the regime changes of 1989. the IMF insisted. but until this was settled with the IMF. and this was the signal opening the way for other international loans and for World Bank lending. It is also true that the quantitative scale of the funds available may be larger than that on offer to most Third World countries. the credit rating of all the East European countries has declined. The direct issue was a modest loan of £200 million. What is new is the scale of the social engineering objectives linked to these instruments in the East European case. but simply the normal battery of instruments available to players in the world economy—stand-by credits.11 The Diplomacy of Social Engineering Given the terrible debt burden still dominating countries like Poland. Mr Barber Conable. In any case. loans. the government was locked in disagreement with the IMF. and in the spring of 1990 IMF teams began discussion with Czechoslovakia and Bulgaria about their membership while also renewing dialogue after a long period of hostility towards Romania. Hungary and Bulgaria.

Specifically. 15 The US government sees the EIB. EC Commission Communication.15 Another direct EC field is in the signing of Economic Cooperation Agreements with individual East European states. Mr Conable wants to open up the East European economies to Western trade and investment. But the Commission is revising the formal framework of such credits to link them. The third dimension of EC involvement will be through the preponderant stake held by the twelve members in the new EBRD. In 1989.that this money ‘will focus on restructuring all facets of the economy and market-oriented change’. saw its role as concentrating on infrastructure projects. above all the USA. and wants legislation and institutions there for free markets. But the EIB is to be phased out of East European business because of hostility from a number of states. as the leading institution for infrastructure development. to be guaranteed by the EC budget. Initially money is being focused on transport projects in Poland and telecommunications in Hungary. Part of the price paid to the Americans for the creation of the EBRD seems to have been the phasing out of the EIB’s East European work. its institutions speak for the twelve member states in the traditional fields of EC competence. The September agreement with Poland declares that it is directed to ‘supporting structural changes in the Polish economy’—in 13 The Financial Times. The economic cooperation part of the agreement with Poland is the paradigm of EC policy in this field. In its purely EC role. The same bottom line for new agreements of all sorts with Eastern Europe has been adopted by the EC. 1 February 1990. EIB was authorized to lend ECU 1 billion to Poland and Hungary over a three-year period. 23 February 1990. as discussed above. 14 73 . while accepting that these must be geared to assisting the private sector’s growth in the countries concerned. and he underlined that the World Bank was working for a new system in Eastern Europe ‘vesting economic decision-making in the individual and in private enterprise’. would be a major player in East European investment projects. But on the other hand. to backing ‘market oriented reforms’. for bankruptcies and for unemployment. over which it has no direct control. trade and economic cooperation agreements with non-members. the Community is offering loans from both the European Investment Bank and from the European Coal and Steel Community. since the summer of 1989. an EC institution. above all. the EC Commission has been made into an executive agency acting on behalf of the Group of 24. but EIB had been planning also to lend to other sectors in these countries. usually as part of general trade agreements. which it does control. The President of EIB.14 The Commission had hoped that the European Investment Bank (EIB).13 East European governments need not apply unless they accept these terms. On the one hand. The EC plays three distinct but overlapping roles in current economic diplomacy towards the East. Mr Ernst-Gunther Broder. the OECD countries. as a direct challenger to the World Bank. as far as Eastern Europe is concerned.

‘the Commission will take steps to identify areas where such aid can be most useful. The plan envisaged a total of some ECU 600 million for 1990. and the remaining 300 million from other G24 members. Poland must agree to a series of liberalization measures: there must be no discrimination against EC companies in the granting of import licences for goods entering Poland. no discrimination against EC companies operating in Poland over the giving out of hard currency to pay for imports. but for a very tiny part of them. including the transfer of profits and repatriation of capital’ (Article 18). which turns out to be training for ‘executives. Hungary: Assistance for Economic Restructuring’). while the plan envisages taking into account the preferences of the recipient countries. The relevant EC regulation declares that the projects funded ‘must benefit the private sector in particular’. nevertheless. to receive the aid. ‘Operation Phare’ The Group of 24 Western states decided on 1 August 1989 to empower the EC Commission to coordinate aid for Eastern Europe. But the Commission made clear on 1 February that such aid would not be forthcoming unless the countries concerned committed themselves to ‘economic liberalization with a view to introducing market economies’. privatization. 100 million from individual EC member states.’ In other words. Poland and Hungary must switch parts of their own budgetary resources towards projects that back the private sector of their economies. the other countries of Eastern Europe put in applications for G24 aid under the Phare programme. On 26 September the Commission presented its Action Plan to the second coordinating meeting of the Group of 24. To round off its effort. and international invitations to tender for contracts must be offered to EC firms (Article 16). 1 February 1990. of which 200 million will come from the EC budget. But the EC documents reveal that this is not money for the Hungarian and Polish economies as a whole. In the first weeks of 1990. Furthermore. the regulation makes clear that the aim is for this aid to be made up largely of counterpart funds: in other words. At that stage the aid was to be limited to Poland and Hungary. ultimate authority for the aid-allocation decisions will be kept in the hands of the EC and not the elected governments of Eastern Europe. and the Commission expects such trade and economic cooperation agreements to be signed with Bulgaria. the EC will be offering ‘vocational training’. Commission of the European Communities. Meanwhile. Help must be provided for EC firms wishing to establish themselves in Poland. Finally. Czechoslovakia and Yugoslavia by the end of this year. which is ‘especially urgent’ in the fields of banking and finance. The plan is known as ‘Operation Phare’ (acronym for ‘Poland. managers and students’ linked to the vital need for ‘economic reform’. instructors. Romania.other words. 74 . A similar agreement was signed with Hungary in 1988. Poland must help Western firms with ‘investment promotion and protection.16 After gaining what it considered to be adequate assurances 16 Communication.

75 . The really big decisions about the future of this sector are 17 At the EC Foreign Ministers’ meeting on 18 June. controls and inducements to respond to the domestic social and political tensions and pressures in each individual state. In other words. while the remaining funds. The original document laid before the EC’s December summit makes clear that one of its central objectives is to ‘assist moves to marketoriented economies and structural adjustments’ in Eastern Europe. Czechoslovakia. these states will certainly be fully integrated into the institutions of the world economy.on this score. Only in this way can the latter fine-tune their combinations of sanctions. This privatizing mission has now been set in concrete in the EBRD’s legal constitution: at least 60 per cent of the funds disbursed under the Bank’s aegis must be directly devoted to private-sector development. especially between the USA and West European states. each with its own bilateral relation with the West’s institutions. The projected new European Bank for Reconstruction and Development (EBRD). and is judged secure in political as well as social and economic terms. the planning of the process whereby each of these states will be integrated into the global and regional division of labour will largely be determined outside the borders of the states concerned. And secondly. suggested by the French government. one of the most vital sectors for most of these states is agriculture. backed by the EC’s December summit. Commissioner Frans Andriessen won majority support for a recommendation to the Group of 24 that Romania should be excluded from G24 aid because of the character of its government (The Financial Times. But the fundamentals of that policy are not in dispute. First. When that transition has taken place. 19 June 1990). the entire operation depends upon Eastern Europe remaining politically fragmented into separate states. the key decisions on which projects to approve and which to reject remains firmly in the hands of the Western institutions. the GDR. Romania and Yugoslavia. has been a source of bitter disputes. It is the first major multilateral institution within the international financial system in which the USA does not exercise a controlling vote: in so far as the twelve EC members act together.17 In short. they can dictate the Bank’s policy. But two additional points about this process are worth stressing. To take a simple example. and finally given legal approval by its forty-one member states (including such paragons of liberal-democratic virtue as King Hassan’s Morocco) in June of this year. must be geared towards indirect assistance for the private sector. this programme amounts to a direct intervention into the heated political debates within Eastern Europe over the scope and shape of privatization. devoted to public-sector infrastructure projects. the Commission decided on 3 May to recommend that the Phare programme for Hungary and Poland be extended to cover Bulgaria. The New Planning The entire framework of Western policies and institutions for the privatization drive in Eastern Europe is designed to result in the shortest possible transition to capitalism in these states.

these states are too backward to become members of ‘Europe’ in the foreseeable future. . The new government’s political authority has been immensely strong but is being undermined by the week. Indeed. The European Council meeting of EC heads of government. Exactly the same pattern will be repeated in most of the other key branches of these economies. enormous strains have started to govern the internal politics of the state concerned. Increasingly desperate pleas for the removal of Western financial pressure have been ignored. finished as far as Eastern Europe is concerned. there are strings attached: the EC ‘will expect decisive steps to have been taken towards systems based on . . And the fate of the sector in Eastern Europe will very largely be decided by such bodies as the EC and the EBRD. therefore. for in the words of one EC Commissioner. economic liberties. Association status will ‘relate to performance as well as commitments’. has cut living standards by some 40 per cent so far this year—an austerity drive of unparalleled scope in postwar international history. but the terms of association remain to be spelt out. we might briefly examine these effects to date. In every case where the West’s policy objectives have been carried some way into domestic life. where the IMF drive is literally fragmenting the state. 76 . It has been stressed that Association status is not a prelude to the states of Central and Eastern Europe becoming members of the so-called ‘European Community’. The Balcerowicz Plan. What we do know is that the granting of this status is by no means automatic.’ While the G24 aid will be available for countries committing themselves to capitalism. given that institutions like the EBRD conceive their function as being to plan the shape of the private sector in the East. it is presented as an alternative.18 The Political Impact of the New Diplomacy The effects of the diplomatic effort I have described here are already deep within the new political systems of the East European states. Tensions within the political elite have now burst 18 Quotations are from ‘Europe Information’ produced by the Commission. They felt such agreements would help to ‘promote political stability’ in Eastern Europe. Association status should allow freer trade with the EC. Planning is not. named after the deputy prime minister in the Mazowiecki government but fathered by the IMF. The Polish case is a sombre warning of what may be in store in the rest of the region. asked the Commission to work out the terms for future Association Agreements between the EC and the various individual East European states. Solidarity. but in new decision centres located in the West. The really big strategic issues will still be decided by planning.not taken in the market but by public bodies. since the policy it is implementing strikes at the heart of its legitimacy —its claim to embody the tradition of the Polish working-class movement. held on 8–9 December 1989. 1 February 1990. Leaving aside Yugoslavia.

the old Communist Party establishments with new leaders and policies. The personnel ruling these political groups are. Direct political intervention was therefore used to back the opposition parties in both states. and Walesa is giving voice to this despair. while in March the Bulgarian government took the step—unique in the region—of obtaining a moratorium on its repayments of principal on its very large debt. The Free Democrats’ poor election result brought a swift Western response in the form of a move against the victorious party: financial institutions immediately withdrew funds and financial backing from the Hungarian economy. if the only political movement with popular roots is torn apart. The hope seems to have been to apply Chancellor Kohl’s tactics for the GDR elections. 77 . but in Romania there are strong indications of an attempt to destabilize and split the National Salvation Front. Yet this failed to achieve success: the National Salvation Front overwhelmingly triumphed in Romania.forth in a bitter struggle between Walesa and the government and parliamentary leaderships of Mazowiecki. The Democratic Forum contains not the slightest hint of leftism. and a prime Western—or at least American—objective in both countries has evidently been to achieve just that through the spring elections. the one political group in Hungary unequivocally in favour of a wrenching. and the Bulgarian Socialist Party (the reformed Communist Party) won an overall majority in Bulgaria. yet it is not trusted in the West to carry through the kind of harsh austerity and restructuring programme thought necessary. These moves have in turn produced a deep split within the Democratic Forum. Thatcherite turn towards capitalism. But the West’s resources of financial and economic diplomacy have been weaker in these two countries: Romania does not have significant debts. in effect. Whitehall’s denial was unconvincing. the newly victorious Democratic Forum has been plunged into a crisis deriving from the West’s backing for the Free Democrats. of in effect telling the voters to back the parties with access to Western funds: the Bulgarian opposition leader bluntly declared that he had been told by British Foreign Secretary Hurd that the Communist Party would not get a penny from the West if it won the elections. In Hungary. There is a very real prospect of the breakdown of the new liberaldemocratic order itself in Poland. In Romania and Bulgaria. there has been no overthrow of the Communist Parties. Geremek and Michnik. The real content of this open war within Solidarity is revealed by the strikes that erupted on the railways and in the Gdansk Shipyard in May: the workers feel utterly betrayed by the policy of what they took to be their own government. with demonstrative American funding and guidance being proffered to the Romanian Liberals and the Bulgarian coalition of opposition groups. targeting President Iliescu: the EC’s swift decision to cancel its aid package to Romania following the June clashes in Bucharest is evidence of this. The West has not felt able to challenge the validity of the election results themselves. Democratic Forum leader Antall’s initial attempt to denounce these moves and appeal to the West soon gave way to offering the Free Democrats a coalition government and the presidency of the country.

Civic Forum’s election manifesto is a very different document from the Thatcherite policies of Hungary’s Free Democrats.19 and therefore. Indeed it is widely shared by the various new political leaders in Eastern Europe. film studios. Democratization could permit theatre groups. publishing houses. Thus during the Communist period the prevailing regimes furnished generous subsidies to the arts. It stresses the need for a strong domestic base as a counterweight to foreign capital. but also to favour one capitalist model over another. after the elections. The notion of a more-or-less homogeneous civil society throwing off the oppressor state and making a technical-economic switch to ‘free markets’ backed by a largely united democratic popular will. Western financial leverage is far weaker in the credit-strong Czechoslovak case. namely the laissez faire.Only in Czechoslovakia does there seem to be some consonance between Western diplomacy and democratic will. among the latter. Yet the divisions within Civic Forum over the best response to the West’s pressure for a drastic. It is a remarkable fact that Rupert Murdoch and Robert Maxwell are now extending their media empires to Eastern Europe—in Maxwell’s case despite his notorious role of toady to the previous rulers. communal. music circles. has 19 Civic Forum’s 10 April election manifesto calls for various forms of ownership: municipal. diplomatic drive for ‘shock therapy’ was not at all what the current leaders of the new regimes could have expected or wished for. The financial pressures applied by Western institutions are helping to foster the climate in which all public subsidies must be ended and industries found suitable for privatization. it should be said.20 An East European Third Way? The evident enthusiasm of Western policy makers for capitalism is. But the unbending. including. both favouring the Civic Forum. as well as joint-stock and private companies. of course. 78 . At the same time. cooperative. only to be expected. But it is already clear that this will not happen if all public subsidies are withdrawn and cultural institutions privatized. painful social transformation are already out in the open and are likely to sharpen and deepen as the months go by. research centres and the like to contribute to the rebirth of a vital and pluralistic civil society. the impact of Western diplomacy will strike within the dominant political group. including. newspapers. cultural magazines. The cumulative effect of Western policy is not only to encourage progress towards capitalism. and the Communist Party’s showing as the second strongest electoral force stands as a warning not to launch the country down Poland’s helter-skelter. 2 ° President Havel attempted. to remove Finance Minister Klaus by appointing him head of the National Bank. six regional opera companies flourished during the 1980s. and for strong trade unions to soften the impact of marketization. what were previously thought of as cultural resources. higher education and the media. many leaders of the erstwhile Communist Parties. the better to control them. as in the Polish case. for a ‘thoughtful social policy’. But Klaus felt strong enough to insist on retaining his ministerial post. But even here the West’s policy is generating tensions. coercive. Even in crisis-ridden Poland. monetarist model.

backed by a professional middle class whose aspirations were frustrated in the world of Brezhnevism. The failure of attempts at market reform in Kadar’s Hungary and in Jaruzelski’s Poland were failures of weak and compromised regimes. Czechoslovakia and Bulgaria remain both productive and popular. The state farms and cooperatives of Hungary. devoid of genuine socialist credentials and commitment. Indeed Western specialists do not doubt the continuing strength of collectivist institutions and values in Eastern Europe. market socialism of some sort will be the end result of the process. authoritarian state is being fashioned to force through the transition to capitalism. The fact that the new regimes. say. they have not been eliminated save in Poland—the country where the former rulers themselves pioneered the turn to capitalism. I have treated Western diplomatic efforts as a united force. Czechoslovakia and Hungary. means that the backbone must be supplied from external diplomatic sources. The Social Democrats. public ownership and social citizenship in the post-Communist states of Eastern Europe is not an acceptable option for Western policy makers. have championed a social-market model of development. as opposed to the 79 . Throughout this survey. it is not the support of actually existing capitalists. A strong. along with the Christian Democrats. But what if market socialism were adopted by a strong. provided they are able to operate as normal states integrated into the institutions and division of labour of the world capitalist economy. And they know very well that the current support for capitalism in Eastern Europe is superficial in the basic sense that it is no more than a policy idea. the wing of the American Democratic Party led by Senator Gephart has been more critical. There are many aspects of welfare and social provision which enjoy widespread support. While the former ruling parties languish in various degrees of discredit. lack the buttressing of entrenched. of people with a real stake in the circuits of capital. Particularly striking has been the acquiescence and collusion of the social democrats of Western Europe in the West’s entire drang nach Osten. authoritative government in. (By contrast. There is thus the risk that if the edifice of controls and exclusions from the world economy is dismantled today and the drive for capitalism in these states fails tomorrow. though strongly backed in the main by the intelligentsia in Poland.proved naive. Czechoslovakia today? A coupling of pluralist democracy. On the main issues discussed here.) Much of this drive has passed through a European Community in which the Left controls a majority within the European Parliament and in whose Commission the presiding genius is a French socialist. Workers throughout the region are resorting to trade-union action to defend their jobs or to demand a stake in the enterprises for which they work: new and old unions vie with one another to attract this new worker militancy. that unity has indeed been impressive. already existing capitalist institutions and social processes. There is no technical obstacle to a successful pursuit of market socialism in these societies. while Western economic diplomacy will have been disarmed.

27 June). The former surfaced in May when strikes broke out in Poland: the IMF made a tasteless attempt to disclaim responsibility for the entire package of Polish government measures. yet they have not raised their voices against the demand that entry into the world economy be conditional upon sweeping privatizations. in a future Europe so dominated by the strength of Germany. with unification assured. while Bush and Thatcher stress the virteus of laissez faire. NATO is the key instrument through which their political influence in Western Europe is secured. If the West’s current diplomatic effort succeeds in Eastern Europe. have been unhappy with the continued pursuit of economic warfare against the USSR. At the same time. 80 . The Italian and French governments. it also wishes to be able to bring into play a stable Eastern Europe. Such differences of emphasis reflect different state interests.21 For the USA (and Britain). Therefore the collapse of the Gorbachev government and its replacement by a more anti-Western 21 In June. of state interest and of ruling ideology. including the USSR. Mitterrand has envisaged NATO’s survival as resting inside a new. and voices were raised criticizing the folly of driving for capitalism at the price of sacrificing democracy and political stability in the region. on the other hand. The French government has also been far more ready to accept the newly elected governments of Romania and Bulgaria than have some other Western governments. The Christian Democrat/Socialist leaders in Western Europe are prone to pay lip-service to social-corporatist themes. It is strengthened by the existence of a possible threat in the East. Bonn granted the Soviet government a first $1. the Bonn government is now eager to gain Soviet acceptance of the new balance in Europe. strong pan-European security framework in which the East is included as a friend rather than enemy. directly linked to Soviet acquiescence in aspects of reunification (The Guardian. But divisions have nevertheless surfaced in the West in recent months —difference of expediency. above all the trust of Western capital. there will be little chance of a strong social-democratic movement in that part of the continent: the political cleavage will far more likely pit against one another the parties of liberal capitalism and the authoritarian populist and nationalist movements. The French government not only wants to bind Germany into the EC.7 billion loan. and has dangled the prospect of credits before the Soviet government in an effort to achieve this. In countries like Czechoslovakia and Hungary these parties were indistinguishable from the Right programmatically while lacking all the virtues of the parties of the Right for implementing such programmes. but implementation is to await the report of a team of Western financial experts on the progress of Soviet market reforms. In this perspective. reeling from the historical consequences of German unification. Bonn received the green light to extend a further $15 billion of credits to Moscow.Thatcherite market. The failure of the Western social democrats to champion the cause of the East Europeans has been accompanied by a derisory showing for the democratic parties of Eastern Europe in the round of spring elections. wishing to maintain the integrity of the Soviet state and to ensure that it remains a strong player to act as a counterbalance to Germany in the new politics of Europe. and weakened by a pan-European collective security community including the USSR. At the July G7 meeting in Houston.

but using the mechanisms both of market regulation and redistributive social policies. Treating internal and external politics as largely autonomous spheres does not allow us to capture the real dynamics of change in Eastern Europe today. or the aborting of the projected CSCE conference. But if such schemes 81 . These overarching political interests incline the American government (and Thatcher) towards a tough stand against any concessions to the USSR until a government emerges there unequivocally committed to capitalist restoration. The ‘third way’ is quite simply a plea for starting from the existing situation in Eastern Europe today: democratic political systems. its restriction of the notion of political power in international affairs to the application of military force and juridical authority. but neither are they willing to extend substantial economic concessions to Moscow. Some commentators declare that the West is simply being realistic in seeking to establish a system that works—capitalism—rather than engaging in yet another utopian experiment—some ‘third way’. implying that the ‘third way’ involves just this. That role is made possible by the West’s coercive power of exclusion from a world economy managed by political institutions in the hands of the leading capitalist states. Neither Bush nor Thatcher can afford to be seen as responsible for Gorbachev’s downfall. Yet ideas about a ‘third way’ involve precisely a stand against plunging Eastern Europe into the greatest vortex of social engineering seen in Europe since the end of the war.leadership would not be a disaster. exclusions from the institutions of the world economy will be lifted. and the instruments of economic blockade will be put to one side. a fortiori. And. though not abolished. In so far as the governments in the East respond adequately to Western objectives within their own societies. The Myth of the Depoliticized World Market Whatever the outcome of these disputes. just as immediate debt repayment problems may be eased but overall debt obligations maintained. and its consequently formal-legal conception of sovereignty and self-determination. And they characteristically add that the entire history of Communism proves the danger and folly of grandiose experiments in largescale social engineering. Capitalism can most certainly be restored in Eastern Europe. The starting point for a realistic grasp of this process must involve an appreciation of the central political role of the Western states in the internal affairs of the East European states. both these events would indeed strengthen the shaky case for maintaining NATO. Holistic schemes for social engineering can indeed work. its image of the world economy as a naturalized market. Neither would a failure of the Two Plus Four talks. that policy would apply to Romania and Bulgaria as well as to the rest of Eastern Europe. the politics of the new Eastern Europe cannot be adequately understood through the concepts of conventional liberal thought—the latter’s categorical severance of economics from politics. combined with an economy dominated by the public sector. It is further strengthened by the West’s maintenance of the instruments of economic warfare developed in the Cold War.

‘Where Are You Marshall and Monet?’. This is indeed precisely the dynamic of the doctrinaire experiment launched by the IMF in Poland at the start of the year. It will bring into focus these seemingly peripheral and technical multilateral organizations that work in the shadows between the borders of national political systems so brilliantly lit up by the media. 82 . and imposed coercively from the top. not least among social groups who most fervently supported Solidarity in the early 1980s. if understood politically. they may generate explosive social tensions with the likelihood of authoritarian political consequences. The one organization with political authority. for an account of the strains that are being imposed on Poland’s nascent democracy by Western policy. 22 See Edward Mortimer. and has a defensive or regulatory quality. will enable us to grasp the practical meaning for people of what is happening in Eastern Europe today. is now being torn apart by these social tensions. today. merely an ancillary buttress to this power over world economics: it steps in to preserve this system of domination. Military strength is. this survey has implied a fundamental problem already familiar to those concerned with North–South relations: by what right do a handful of capitalist states assert their political power over the world economy? It is in this field of what conventional liberal thought presents as a depoliticized world market.are forced through helter-skelter. largely hidden. without cautious trial and error over alternative means. that the West’s decisive political power lies. the grouping of erstwhile advisers to Walesa under the name of Solidarity. while authoritarian populist currents hostile to both liberalism and democracy are gaining strength. The Financial Times. and the reconstruction of our ways of thinking about the relationships between economic and political institutions.22 On a more general level. 10 July 1990. a new globalization of categories like self-determination and popular sovereignty. Only a new cosmopolitanism. without background experience.

83 .

84 .