Volume 9 Numbers 1/2

Winter/Spring 2000

 

Symposium on Postsocialist Pathways: Transforming Politics and Property in East Central Europe
By David Stark and Laszlo Bruszt
(Cambridge University Press, 1998)

Networking
Aviezer Tucker

Postsocialist Pathways is significant, among studies of postcommunist transition in East Central Europe, in concentrating on the examination of postcommunist networks instead of markets and governments. But its account of postcommunist networks is misleading because it tells only part of the story. In addition, some of the normative policy prescriptions that follow the analysis seem strained. The first half of the book reprints articles published in the early nineties about the fall of communism in Hungary, the early debate on privati-zation in that country, and a comparison of the earliest privatization strategies in Hungary, East Germany, and Czechoslovakia. These chapters are well written and researched, though they would have benefited from reexamination in hindsight: Who was right and what went wrong? The second half of the book presents a new and original thesis regarding the significance of networks in the postcommunist economic transition. The authors argue that there is no single model of transi-tion that can and should be followed everywhere. Instead, they invoke path dependence: each transition continues and should be based on what preceded it, on the existing economic-political networks that are in place. Instead of choosing a free market or a strong state as the engines of change, transition can be entrusted to the existing interfirm networks: "Defying the forced dichotomy of market versus hierarchy, they [actors] create new property forms that blur the boundaries of public and private, blur the organiza-tional boundaries of firms, and blur the boundaries of the legitimating principles through which they claim stewardship of economic resources" (p. 7). The significance of networks for understanding the transition process is undeniable. In addition, the authors suggest that "some of the interorganizational property forms that buffer networks of firms from selection pressures . . . provide the organizational slack preserving assets in the short run for innovative restructuring in the next round" (p. 7). They further argue that the survival of the networks can lead to innovation, and that spreading risk may lead to risk taking in the next round of the transition. They regard the networks, therefore, as a power for good that should be recognized and encouraged. In a larger context, the book promotes the view that the endorsement of capitalism does not imply the Anglo-American model of free markets. Viable alter-natives, for example, the nonmarket capitalism of Germany, Japan, and South Korea, can be emulated elsewhere. This opinion was popular about a decade ago, among various sociologists, political scientists, and communitarian political philosophers, such as Charles Taylor, who suggested a corporatist model of civil society, where communities would mediate between the citizen and the state, as an alternative to Anglo-American liberal individualism. The crisis of the East Asian economic model and the extraordinary success of the American economy since 1992 call these theories into question. The book accurately describes the later phase of East European communism. The poor performance of the economy and the dwindling resources of the state led to attempts to decentralize the command economy by giving managers greater autonomy. Still, decentralization did not result in greater efficiency because managers were distrustful of the market and were experienced chiefly in bargaining with the government to maintain soft-budget constraints. Additionally, paternalistic social and political consid-erations blocked reforms from above. Each prescriptive model of transition has had to look for an "Archimedean point" by which to "lift" the transition process. Stark and Bruszt note correctly that liberals extol the virtues of a market that does not yet exist, just as those who assign to the state the task of restructuring the economy must come to terms with a weak and incoherent state. They propose instead to build on what already exists, namely, networks. Since networks are connected with the state, the state is embedded in society: "The embedded state is permeated by the personal ties of the informal networks; but because the internal oper-ations of the state are immunized by the powerful accountability of its bureaucratic rationality, these are ties that do not bind" (pp. 123-24). Most of the specific discussion of networks refers to the relations between managers of firms: "Socialism produced a gross caricature of an industrial structure, much of which must be dismantled. But it produced a structure of industrial enterprises nonetheless, much of which can be restructured to perform efficiently and effectively. . . . Socialism produced, within that indus-trial structure, networks of social relations of reciprocity and associative ties. These networks were unintended consequences of the attempts to 'scientifically manage' an entire national economy. . . . The existence of parallel structures in the informal and interfirm networks that got the job done under socialism means that instead of an institutional vacuum we find routines and practices, organizational forms and social ties, that can become assets, resources, and the basis for credible commitments and coordinated action" (p. 128). This analysis is quasi-metaphysical. "Socialism," as ideology and ideal, created nothing. People created, maintained, and composed the pre-1989 order, and they-their norms and habits-remain long after the ideology is gone. True, the formal structure of the command economy was shadowed by informal exchanges between managers of semiautonomous firms. But that is only a small part of networking. In totalitarian regimes, the state regards civil society, any kind of nonsupervised network, as a threat. Yet, relatively speaking, the state itself was weak because it was shadowed by the most powerful network in society, that of the Communist Party, and especially that of the communist cadres, the nomenklatura. The network of managers tended to be a part of the network of communist cadres, connecting managers with government bureaucrats, because it was nearly impos-sible to rise above middle bureaucratic and managerial levels without party approval, a process known as kadrovani in Czech, or cadre making. Upper mobility in general (university admissions, promotion, assignment of jobs) was dominated by political not economic consid-erations. Within the network of communist cadres was a core network of secret-police operatives that extended, through networks of informers, into all corners of society. And within the secret police, another core network worked for the KGB and reported directly to Moscow. These networks were designed to control each other; the Communist Party controlled society, the cadres controlled the party, the secret police controlled everybody, and the KGB network controlled the domestic secret police. This system of control operated during the era of terror. During late communism, disci-pline slackened. Network members began to exploit this arrangement for personal profit. The higher up one was in the hierarchy the more one could steal from the state. The highest echelons of the nomenklatura and secret police had access to the West, where they could purchase a wide range of commodities and services without fear of exposure. Other networks in society were those of the black marketeers (supply and distribution) and the small networks of dissident intellectuals. The power of these networks seemed disproportionate to their actual capac-ities because they functioned in deconstructed societies of atomized individuals. Stark and Bruszt's emphasis on studying networks is absolutely right. But they miss their true character in ignoring the fact that we are dealing here with the communist cadres and nomenklatura, the secret police and the black marketeers. The claim that these networks "got the job done" requires qualification. The book's theoretical characterization of post-communist politicians is as idealized as is its picture of the networks. Ideally, democratically elected politi-cians are embedded in society and accountable. But postcommunist politicians tend to be different from politicians in traditional democracies. First, their temporal horizons can be quite short. Some approach politics as a get-rich-quick scheme; they quickly accu-mulate bribes and kickbacks and then retire. They care little whether they are voted back into office in the next elections. Second, postcommunist electorates are politically inexperienced. They do not always under-stand exactly what politicians are doing and how corruption affects them, and they are easily manipu-lated, especially through television. Though some of the print media in East Central Europe maintain a high standard of reporting, analysis, and professional integrity, few outside the urban intelligentsia read such papers and journals. The deals that crooked networks make with the politicians who cannot be held accountable, the bribes and kickbacks for influencing economic decisions on subsidies, privatization, and monopoly rights, account for many of the results of the postcommunist economic transition. Stark and Bruszt assert that fuzzy property rights spread risks and create opportunities for negotiations which can, in turn, enhance public accountability and business innovation. On the contrary, they create opportunities for the networks and political elites to share the proceeds of asset stripping. The managers mismanage and steal and then pay bribes and kick-backs to the politicians and bureaucrats to get subsidies, which are then mismanaged and stolen, and so on and so forth, until the economy is bled to the point where it is impossible to continue anymore, but by then the managers and the politicians have enough to retire on. There is no proof in the book that spreading risk leads to innovation. As the authors demonstrate, the Hungarian networks were the most dense and horizontal, due to the autonomy granted to managers under late communism. They document well the emergence of cross-ownership of firms, banks, insurance companies, as well as the creation of satellite firms around big conglomerates. The satellites are managed or owned by managers of the conglomerates, who exploit ambiguous ownership and insider knowledge (and undoubtedly stolen capital). As Stark and Bruszt argue, the managers artfully allocate liabilities; if the business fails, the mother company bears the loss; if it is prof-itable, the managers reap the benefits. Once the conglomerates have hemorrhaged enough capital they need cash infusions from the state to avoid having to shed workers, and those subsidies have to come from taxing honest businesses, from foreign loans, by raising interest rates, or by printing money. Another phenomena, not discussed in the book, is asset strip-ping by these satellites achieved either by creating a series of subsidiaries that cannibalize each other, until the assets disappear in an untraceable foreign bank account somewhere; or by simply selling company assets to family and friends at below-market prices. The introduction of bankruptcy and accounting laws in Hungary created a wave of bankruptcies and a banking crisis. When the government bailed out the banks, the latter just continued to lose money, as before, by lending money to their networks rather than to new, promising businesses. The Hungarian government squandered $3 billion in the process without any improvement in the productivity or competitiveness of the economy, all the while crowding out potentially profitable businesses from the capital market and raising interest rates (pp. 152-53). To feed the networks, the state took international loans and cut its budget for welfare. Stark and Bruszt claim that this fiasco occurred because the state, rushing to the market, ignored the networks and, consequently, augmented risk sharing with risk shedding for the networks. But the collapse can be more reasonably traced to the maintaining of communist-era business practices. The networks cannot survive without subsidies for the simple reason that the communist cadres who became managers for political reasons have little or no business skills. They were trained to operate under monopoly conditions and, as Stark and Bruszt note, they bargain incessantly with the state bureaucracy for subsidies and protectionism. Official recognition and negotiation with the networks would not have improved matters. Politicians were hardly so naive as not to realize where their subsidies were going. After all, some of them were also connected with or "embedded" in the networks through corrup-tion. Still, the greatest oddity in this book is the suggestion that the Czech government produced better economic policy than the Hungarian because the former recognized the networks that the latter ignored. Stark and Bruszt demonstrate that the libertarian rhetoric of former Czech prime minister Vaclav Klaus had nothing to do with his policies. Despite the pres-ence of a bankruptcy law, which did not exist in Hungary, there were hardly any bankruptcies until 1997. The Czech state subsidized the country's networks through the National Property Fund and the state-owned banks that granted loans according to network connections rather than on the basis of economic considerations. But the book does not recog-nize that these measures merely postponed the restructuring of the market until the bleeding of capital from the economy, along with its inefficiency and noncompetitiveness in comparison with Poland and Hungary (which had gone through painful restructur-ings earlier), reached a level in late 1996 where the state could no longer afford to continue paying subsidies. Thereafter, the Czech economy has been in a recession until today, when, under a socialist government, unem-ployment has hit 10 percent and the northern parts of the country (mining and heavy industry) are in severe crisis. Further, the authors pay no attention to the corruption of the political parties that influenced many of the economic policies of the Klaus government. For example, they quote Klaus's 1993 "pragmatic" policy statement that improving the corporate governance of state-owned enterprises was more important than priva-tization. But new managers were actually selected on the basis of political loyalty to Klaus's party, not skills. The book analyzes correctly how the famous Czech voucher privatization was politically motivated and resulted in complex patterns of cross-ownership, where the state owned indirectly through the banks most of the "privatized" properties. This type of priva-tization prevented restructuring and kept pumping subsidies into failed industries. Still, Stark and Bruszt ignore the most notorious elements of the Czech scheme: the government kept the most valuable monopolies, the so-called strategic assets, under its direct control and then rented them out for bribes and kickbacks. The telecommunication monopoly is a good example. What brought down the government in 1997 was the admission by the managers of Klaus's party that they controlled $10 million in a Swiss bank, originally received as "donations" relating to the "privatization" of the telecommunication monopoly. Since the privatization process did not clarify property rights, it created ample opportunities for stripping the assets of firms and stashing them abroad. For example, the authors note that most of the privatized firms are owned by investment funds, many of which are owned by state banks. They underestimate the significance of inside trading in the privatization process. The networks, most notably the former secret police, provided investment funds with inside information about assets and liabilities that was not publicly avail-able. The book contains a long discussion of the possible managerial role of investment funds, disre-garding the fact that the largest investment funds have been stolen by the managers and no longer exist. For example, the largest investment fund was Harvard Investment, managed by a wealthy Czech, Viktor Kozeny. After stripping assets to the tune of about a billion dollars and bankrupting his fund, Kozeny took Irish citizenship and now lives in the Bahamas. In its prime, the Harvard Fund (named after Kozeny's alma mater) had bribed half of the Czech cabinet. Clearly the book is much stronger in its analysis of Hungary than in its claims about the Czech Republic. There are no references in the book to any Czech-language source, not even to the publications of the most important and prolific Czech economic soci-ologist, Jiri Vecernik, which have appeared in English. Stark and Bruszt see Czech policy as coherent in comparison with Hungary. They ignore the Czech policy revision that resulted from the failure of the first wave of voucher privatization, when the government initiated the creation of investment funds to concen-trate ownership. The second policy switch occurred in 1996, when resources for subsidies ran out. Consecutive Czech governments have been forced, since 1996, to initiate the kind of shock therapy that the Horn government in Hungary was forced to undertake earlier and for similar reasons. The book claims that the Hungarian transition was less coherent than the Czech because the Hungarian constitution gave the government greater power. A powerful government may shift its policies freely, without deliberation or consultation. By contrast, the Czechoslovak Constitution with four representative bodies and the Czech proportional representation system and an independent central bank purportedly creates weaker governments that must deliberate more extensively about policies. Undoubtedly, the Klaus government continued to subsidize housing and transportation and created, deliberately, a policy of full employment and absence of bankruptcies. Still, there is no proof that these poli-cies resulted from deliberation. For example, the book claims that the Czech trade unions were strong because they were united. The authors fail to mention that the unions are united because they are continuous with the old, communist trade unions. They claim that "the prehistory of postsocialist Czech labor politics has one relevant date: November 27, 1989. On that day, grassroots committees led the general strike that deliv-ered the final blow to the Communist regime. The only such general strike in the 'revolutions of 1989,' this collective action survives in the collective memory: The present trade unions owe their legiti-macy to this successful strike" (p. 183). That is simply untrue. The two-hour general strike that took place ten days after the student demonstration that started the revolution was initiated by the leadership of Civic Forum. Students and other Civic Forum activists went to the factories to agitate and spread the call for a strike. Some local-strike committees were indeed involved, but they had nothing to do with the trade union. After the success of the revolution, the prin-cipal figureheads in the unified trade union (which changed its name) were replaced, but most func-tionaries, as in the government bureaucracy, remained in place. Consequently, the union leadership does not initiate confrontations with the government. The organizational culture of communist bureaucrats dictates following government instructions, and, in any case, workers distrust their union leaders. For example, in one of the very few cases of a sector strike, of teachers, in 1998, the government simply ignored the union, and the strike collapsed after a few days because distrustful workers did not follow the instruc-tions of their union leaders and went to work. Bargaining from this position of weakness, the trade-union leaders struck a deal with the government: they preserved their properties and privileges in return for following government policy and accepting low wages for workers. Workers' rights were indeed institutional-ized in law, but that was partly due to international conventions that the government signed in preparation for joining the European Union. As in other cases of constitutionally and legally assured rights, such as the constitutional rights to labor and housing, the law is declarative rather than normative. From the vantage point of ten years after the fall of communism in East Central Europe, the main thesis of the book, the path dependence of transition, is doubtful. The networks of the nomenklatura have been early winners everywhere in the economic tran-sition because of their dense networks, access to insider information, the absence of the rule of law, and the inexperience and corruptibility of the political elite. But the networks cannot survive without subsi-dies and protectionism. In addition to mismanaging their firms, the networks also steal massively and bleed the economy. The economy deteriorates even further when the state, unable and unwilling to discipline the predatory networks, is forced to tax heavily and charge high interest rates or to deny credit to honest busi-nesses. Since there are only so many foreign loans the state can receive before collapsing the currency, external constraints force all governments, regardless of ideological hue, sooner (Hungary) or later (Czech Republic) to cut subsidies. These cuts drain and dry up the financial swamps that feed the networks, creating unemployment while the market is restruc-tured. Unfortunately, by that time, the networks, like termites in the African savanna, have already stripped the cadaver of the command economy to the bone.

Aviezer Tucker is deputy editor of the East European Constitutional Review. He is the author of The Philosophy and Politics of Czech Dissidents: From Patocka to Havel (Pittsburgh University Press, forthcoming)

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