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ReOrient: Global Economy in the Asian Age
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Andre Gunder Frank

What Went Wrong in the "Socialist" East?

WHAT WENT WRONG in the Socialist East? The usual answers range from "everything" by opponents to only "Stalinism" or even "nothing" according to erstwhile believers and/or supporters. The answers cover policies or ideologies and periods ranging from the first Soviet government and revolution in 1917 [or even earlier from the birth of Marxism in 1848] to those of the last government and reforms of Mikhail Gorbachev since 1985. About this last Soviet period also, the answers range from the "if it ain't broke, don't fix it" position of those who thought nothing much was wrong to that of pronouncing the whole "system" as unworkable. Many critics in between, like Gorbachev (1987) himself, recognized failures and the need for some change like perestroika, but not complete transformation. Other critics, however, regard Gorbachev's reform efforts to fix things as themselves misguided and literally counter- productive. Some of these critics argue that were it not for Gorbachev's own policy errors, the Soviet Union and its economy could have survived for some time if not indefinitely. Among these critics are Ellman and Kontorovich (1992) and Menshikov (1990, 1992) to whom we return below.

All these answers and others like them to be reviewed below are at best half truths, of which the old adage has it that they are worse than none at all. All these answers fall very short because 1. they focus primarily if not exclusively on ideological reasons attributed to "socialism", and/or 2. they are concerned primarily with "organizational" and policy failures inside the Soviet Union and Eastern Europe, and 3. they leave real world economic reasons out of consideration completely or essentially. 1/ I contend that the answer to the question of "what went wrong" must be sought much more in the material reality of our one world economy than in any ideological discourse about "socialism" or even policy in the former Soviet Union and Eastern Europe.

To begin with, these regions entered the competitive development race under the "socialist" flag with an enormous historical handicap in their starting positions within the world economy. From a real[istic de-ideologized] world economic perspective, the efforts in the Soviet Union and Eastern Europe were [much] less to build "socialism" as to catch up. For a while, they seemed to succeed -- before they failed. However, not so much the now universally faulted and rejected ideological "socialism" or political "planning" but much more the historical economic differences and still contemporary relations between the two parts of Europe in the world economy is responsible for the backwardness of the East.


The division of Europe into a more developed "West" and a less or under-developed "East," as well as a "Central Europe" both geographically and economically in between, stems at least from the 16th century -- or the 9th (Frank 1992b,c). (Szcs 1983:133) observed that "a very sharp line was in fact to cut Europe into two parts from the point of view of economic and social structure after 1500." The dividing line has run remarkably close to the Elbe River and "Iron Curtain" of the 40 years following World War II for a long time. "It is as if Stalin, Churchill and Roosevelt had studied carefully the status quo of the age of Charlemagne on the 1130th anniversary of his death"(ibid.).

This apparently long standing economic structural and therewith political and cultural division of Europe has been perpetuated to this day -- and promises to continue yet for some time to come. This historical and contemporary economic reality appears ironical only in terms of the more common political and cultural interpretations of the divisions in and of Europe and the now excessively optimistic aspirations of many of its inhabitants. The irony is that many of the "Second World" East Europeans who sought to join the "First World" West will find themselves in the "Third World" South instead.

Thus, historically Eastern Europe, albeit culturally European, was never economically developed like Western Europe. Therefore, their people have little historical claim to become West European now. Only part of the Eastern part of Germany, the Bohemian and Moravian parts of Czechoslovakia, and in some sense part of Hungary, Slovenia and maybe part of Croatia in Jugoslavia in Central Europe plus perhaps the Baltic republics were historically similar to Western Europe.

Little wonder then that these countries sought to break out of this bind through "socialist" development. [Recall that Lenin himself defined the essence of "socialism" as "electricity plus soviets," but that he then immediately abolished the latter]. For a while and against "all odds," including post- war Marshall Plan help restricted to Western Europe and continued Western CoCom and other embargoes against the East, the East also seemed to succeed. 2/ They had the massive increases in electric, coal, steel and oil production to show for it. Then in 1957, the Soviet Union was the first to launch Sputnik and so outpaced the United States also in the "production" of engineers as to put a real scare into the Americans. Few people regarded Krushchov as a hollow boaster when a few years later he said "we will bury you" - in the competitive development race in the world economy. Little East Germany advanced to the world's 9th industrial power. By various indeces of economic production of steel, energy, etc. and human capital or social welfare [health and education] several countries in Eastern Europe narrowed the gap and in some cases even overtook countries in Western, not to mention Southern, Europe in the 1950s and 1960s (Hofbauer and Komlosy 1992). In the 1970s, the Soviet Union and Eastern Europe still held their own and maintained the recently narrowed gap in this world economic competition. Eastern Europe did so, however, at the cost of running up debts to the West, when recessionary lower growth rates in the West fed western loans to the East and allowed eastern borrowing from the West. The Soviet Union achieved some kind of parity in the arms race and significant successes in space. In the 1980s however, the Soviet Union and Eastern Europe all missed the technological train - and lost the race.

Thus, when it all came out in the wash, 70 years in the Soviet Union and 40 years in Eastern Europe of politics and ideology of "socialist development," literally not to mention the "development of socialism," seem not to have substantially and definitely changed the economic positions of these regions, neither relative to each other, nor relative to Western Europe. Thus, over the entire postwar period taken as a whole, the East-West gap and the relative positions within the East changed but little.

Indeed, there is some question of whether these 40 years even changed their internal class structure much. If there was any change of position or of class structure it was mostly the decline of Bohemia, Moravia, Hungary, Slovenia and perhaps the Baltics in Central and "Socialist" Europe relative to the rise of parts of Spain, Italy, and Greece in "capitalist" Southern Europe. Industrialization, of course, modified the class structure everywhere in Europe, but apparently not more and perhaps less in the East than in the West and South. Therefore, only the above mentioned regions in Central Europe now have a fighting chance to recuperate their historical positions in Europe, and that in competition with Southern Europe. Public opinion in Southern Europe already shows itself very aware of this threat, while in Central and Eastern Europe it still appears even unaware of the problem (Hofbauer and Komlosy 1991, 1992).


Now, the same political and ideological changes in Eastern Europe through which its people aspire to join the First World in Western Europe threaten instead to place Eastern Europe economically in the Third World -- again, for that is where it was before. Poland has already been Latin Americanized. The earlier dependent agricultural [and only temporarily, oil] export economy par excellence of Romania will be lucky and thankful if it can even recuperate that position, now in competition with Bulgaria, which developed agribusiness for export during the "socialist" regime.

The same problem obtains a forteriori in the Soviet Union. A few parts of Russia and the Ukraine were westernized by Peter the Great and industrialized by him, Witte, and Stalin. But most of the former Soviet Union at best still has a third world economy, like Brazil, India, and China, which also have industrial capacities, especially in military hardware. The Transcaucasian and Central Asian regions are not even likely to be Latin Americanized, but rather economically more Africanized or, God forbid, politically Lebanonized like the former Yugoslavia. From there, war and "ethnic cleansing" may soon srpead elsewhere through the Balkans, and already offers a bitter foretaste of the foreseeable future for many of the peoples.

Many of these regions now face the serious prospect, like Africa, of being marginalized out of the [admittedly exploitative] international division of labor. Their natural resources have been squeezed dry like a lemon for the benefit of industrial development farther north, and now the regions and their peoples can be discarded. President Boris Yeltsin represented this position among Russians. On the other hand, it is understandable that the peoples of the southern regions, who were and felt exploited in the past, now demand othe4r relations. So is the appeal to [or discovery of] "traditional" ethnic and national identity and inter-ethnic strife in response to aggravated economic deprivation, such as 30 per cent unemployment in parts of Central Asia already during Soviet times. However, political "independence" and inter-ethnic strife in Central Asia or Central Africa now can afford their peoples little economic benefit in the future. On the contrary, the erection of politically motivated ethnic and other barriers to economic interchange, and even exploitation, threatens to convert them separately and altogether [back] into backwaters of history.

The revolutions of 1989 in Eastern Europe and the breakup of the Soviet Union were not so much responses to supposed differences between economic and political policies between the "socialist" East and the "capitalist" West. These revolutions were more the consequences of their participation in a single world economic system and its present world economic crisis. This world economy and crisis evoked important similarities of economic policy in the East with those in the West and especially those of the South in Latin America, Africa and parts of Asia.

The world economic crisis spelled the doom of the "socialist" economies, much more than their "socialist planning" "command economy," which is now almost universally blamed for the same. Not unlike the "Third World" economies of Latin America and Africa, the "second world" economies of the Soviet Union and Eastern Europe were unable to bear the pace of accelerated competition in the world economy during this period of crisis. Like every previous one, this economic crisis forces one and all to restructure economically and to realign politically. It is true that economic command organization and political bureaucracy were instrumental in depriving economies in Eastern Europe and the Soviet Union from the flexibility necessary for adaptation to the world economic crisis and the technological revolution and restructuring, which that same crisis engendered elsewhere. However, many Third World "market" economies and sectors in the industrial world and especially the United States also failed. In the meantime, Japan Inc. and the East Asian NICs relied on important state political economic commands to promote their technological advance and adjustment.


So we may return to the question of "what went wrong?." Far from looking for the answer only or even primarily in the "internal" structure, policies or "socialist" ideology of the Soviet Union and Eastern Europe, we must seek it in the structure and development of the world economy in general and in the recent world economic crisis and its present 5th recession in particular.

Regarding Eastern Europe, the 1970s and 1980s - and indeed again the 1990s - make amply clear that "socialism" was largely irrelevant to their failure. For East European policies - and the resultant experiences - were hardly any different than those of the "capitalist" Latin American debtor countries, which failed equally.

In the 1970s, the countries of Eastern Europe (and "socialist" countries everywhere) switched from ISI import substitution to "import-led growth." They then sought to fuel their growth by importing technology and capital from the West, which they intended to pay for by exporting the derivative manufactures back to the West and the world market. Actually, this "import led growth" strategy of exporting manufactures to import technology by the East European NICs was only the supply constraint/ scarcity economy version of the self same "export led growth" strategy. That was to import technology in order to export manufactures, and it was followed by the demand constrained surplus economies of the East Asian and South American NICs. Moreover, the East Europeans continued with their export promotion to the Soviet Union and each other.

Unfortunately for them -- and for the peddlers of ideological models for success -- the East European NICs failed no less than the South American ones did, and a few South East Asian ones to boot. No doubt, there were domestic reasons for all these failures, as well as world economic ones. The latter, in a word, were caused by the world economy in crisis, which permitted only few successes to penetrate the protected and recessionary import markets in the West and the world generally.

The "solution" everywhere was to run up debts instead. In the 1970s, moreover, crisis-reduced domestic investment demand in the West made credit financed exports to the South and the East all the more necessary and welcome. So the banks, awash with investible money, loaned and loaned. Debts piled up in the South American and East European NICs alike, and in some South East Asian ones, like Philippines and Indonesia, as well. This debt economy prospered until the renewed recession in 1979-82 made the "solution" into yet another problem. The recession obliged closure or restricted access to this South/East casino and its replacement during the 1980s by Reaganomic American roulette in the US casino instead (Frank 1988b).

Those who now find ideological comfort or even discomfort in the failure of "really existing socialism" and the "success" of world market export led growth would do well to make the following comparisons with "really existing capitalism":

In the 1970s, the same export/import led growth strategies were adopted by Communist Party led governments in the East (Poland, Romania, Hungary) and Military Dictatorships in the South (Argentina, Brazil, Chile). Thus, neither differences in political ideology nor in economic "system" were sufficient to spell significantly different political economic policy responses to the world economic crisis. The same economic strategies with reliance on foreign debt then generated the same [debt] crisis within the crisis. Significantly, they began in Poland in 1981 before the more usual dating in Argentina and Mexico in 1982.

Then in the 1980s, the same debt service policies on the IMF model were adopted and implemented by Communist Party led governments in the East (Poland, Hungary, Romania, Jugoslavia) and by Military Dictatorships, other authoritarian governments, and their successor democratic governments in the South (Argentina, Brazil, Mexico, Philippines). There were variations on the theme of debt service, but it is difficult to correlate, let alone explain, them by reference to the political color or ideologies of regimes or governments: The most stellar pupil of the IMF was Nicolae Ceaucescu in Romania, who actually reduced the debt until the lights went out, first for his people and then for himself. In Peru, on the other hand, the newly elected President Alan Garcia defied the IMF and announced he would limit debt service to no more than 10 percent of export earnings. Actually, they were less than that before he assumed office. Then, they rose to more than 10 percent under his presidency. Real income fell by about half, and the novelist Vargas Llosa sought to succeed to the presidency after moving from the political center left to the extreme right. But what does that mean, if anything? Alberto Fujimori won the presidential election through his opposition to Vargas Llosa's economic program, and then turned around and applied the very same policies in what became popularly known as "Fujishock."

Communist General Jaruselski in Poland and the populist Sandinistas in Nicaragua also implemented IMF style "adjustment" and "conditionality" on their people. Both did so without the benefit of pressure from the IMF, since Poland was not a member and Nicaragua had no access to it. In Nicaragua, there was "condicionalidad sin fondo," that is conditionality without the Fund and without any bottom or end to the Sisyphus policy. Hungary had the most reformed economy and the most liberal political policy still led by a Communist Party in the Warsaw Pact. Yet Hungary paid off the early 1980s principal of its debt three times over -- and meanwhile doubled the amount still owed! That is more than Poland or Brazil or Mexico, which on the average paid off the amount of debt owed only once or twice, while at the same time increasing its total only than two times. No matter, the Solidarnosc government that replaced General Jaruselski and the Communist Party in Poland then benefited from IMF membership and imposed even more severe economic sacrifices on its population than its predecessors. In Hungary's first free election, all parties promised to follow the IMF prescriptions after the election.


The Soviet economy was supposedly more isolated and independent than the East European ones. However, the Soviet economy also was integrated in the world economy through the East Euopean ones on which it was dependent for industrial goods, as well as being directly linked into the world economy. Therefore, even in the Soviet Union domestic economic organization and policy were not the only or even the main reasons for its economic failure. To illustrate where and why those who argue as much are mistaken, we may exanmine the argument of a writer who does not like most others simply ignore, but who considers "external" influences and the rejects them as insignificant.

Thus, Fred Halliday (1992) offers a singular answer to "what went wrong?" Not "socialism," nor even "capitalism." It was "A Singular Collapse." He argues correctly perhaps that "no explanation in terms of a single factor is possible." However, that does not warrant claiming as he also does that "internal weakness of the system [which] played a major role" compared with the "international factors ... of relevance" [p.121]. Among these factors of relatively minor relevance, Halliday specifically includes competition in technology and Afghanistan, which he tries to blow down as so many alleged straw men, but quite unsuccessfully so. On the one hand he admits that "it was a failure to compete internationally that, on top of the internal crisis, led to the post-1985 changes in the U.S..S.R." [p.133] Yet on the other hand he claims that "this interstate competition, comprehensive as it was, is not sufficient to explain how, why, and when the communist system collapsed" [p.137].

Halliday [p.126] erroneously concludes "it was not the 'market,' in any direct sense, of intervention within these societies and economies, that contributed to their demise." How not? Halliday [p.129] correctly notes that the rise in the price of oil gave the USSR a windfall profit. However, he conveniently disregards that the same imposed an unexpected stormy cost for oil importing countries in Eastern Europe and that the renewed decline in oil - and gold - prices since 1981 deprived the Soviet Union of the much needed foreign exchange. It was generated by the oil and gold exports, which were over 90 percent of its hard currency earners in this market, which according to Halliday did not intervene in Soviet economy or society!

Moroever as already noted, the Soviet Union, like the East European NICs, pursued export economic strategies of promotion no less than others, only with less success. The deepening economic crisis in the economies of Eastern Europe also affected the Soviet Union. It was dependent on them for imports of essential manufactures from Eastern Europe that they produced with technology, which they had to but increasingly could not import in turn from Western Europe. Thus, both the external and thereby the internal economy of the Soviet Union was affected by the economic crisis in Eastern Europe at the same time that it was already directly hard hit by the decline since 1981 of the prices of gold and oil and gas. This denied the Soviet Union the foreign exchange necessary to by-pass Eastern Europe and buy directly from the West.

Then Halliday considers but also virtually dismisses the significance of the arms race in general and "Star Wars" in particular. "Important as it is, there are reasons to qualify the import of the arms race explanation as the major factor behind the Soviet collapse" [p.127]. How so? "The very high rate of [Soviet] military expenditure as a percentage of GNP is but another way of saying that GNP itself was rather low. .... In absolute terms the U.S.A. was outspending the U.S.S.R. The focus must, therefore, be as much on the efficiency and allocative mechanisms of the civilian or as on the claim of the military on GNP" (p.128). On the face of Halliday's argument alone, it could equally well the other way around: GNP was already low and growth rates were declining and then stagnated in the 1980 (Ellman and Kantorovich 1992). Therefore, it could equally well be argued that the increased military expenditures coming on top of declining foreign exchange earnings affected efficiency and allocative mechanisms negatively or at least impeded their betterment. In that case and contrary to Halliday, both the "market" and the "arms race" did indeed intervene in Soviet economy and society.

However, it should be noticed but hardly ever is that the "Second Cold War" arms race itself was also market driven! To begin with, the Second Cold War was started by U.S. President Carter in mid-1979 several months before the Soviet Union invaded Afghanistan. It involved the NATO agreement to increase military expenditures by 3 percent a year after inflation, the "double track" decision to place American Pershing II and Cruise missiles in Western Europe, and to play the "China card" against the Soviet Union. The Soviet invasion of Afghanistan in December 1979 followed when perhaps the Soviets miscalculated that they had no more detente to lose anyway. They were wrong, since the American response political and also military response and escalation was much stronger than expected, even in America [only in recent days new revelations were published of massive CIA intervention and finance] Why? Not by happenstance or other accident did all this begin in 1979 precisely during the beginning of another economic recession that lasted until 1982, the longest lasting and most severe one since World War II -- until the present one that began in 1989. In every recession since World War II, every administration before and since Carter also escalated military engagement and/or expenditures, as President Bush did again against Panama and Iraq (Frank 1991b).

The 1979 economic recession and inflation, probably more than the Iran hostage crisis, cost Jimmy Carter the election and ushered Ronald Reagan into the presidency. He called the Soviet Union an "evil empire" and started "Star Wars" with the express purpose, documented by Sean Gervasi, of outspending the Soviet Union to its knees. So there is the half-truth in his spokespersons' claim to have won the cold war. But Reagan did not invoke this ideological/ political/ military policy before instituting the remainder of "Reaganomics." This was no more than the continuation or escalation of the "monetarist" and "supply side" policy already inaugurated by Jimmy Carter, when he [and not Reagan] abandoned Keynesianism in 1977 and appointed Paul Volker to head the Federal Reserve in the 1979 recession to manage Reganomic monetarist policy all through the 1980s.

The costs of the crisis and especially of the 1979-82 recession were shifted onto the backs of those who could least afford their burden and least defend themselves in the West, and especially in the South and East -- of the world economy! The monetary and fiscal policies and debt service were the instruments, Desai (1992) pointed out. However, he neglected to go on to point out as well that the debt crisis - which broke out during the 1979-82 recession in Poland in 1980/81 - removed the South and East from availability as borrowers of last resort to prop up demand in the economies of the West. A replacement was needed, and it was found in the United States, which by 1986 replaced all others as the world's largest debtor.

The instrument was still the same monetary and fiscal policy, except that now it was called "Reaganomics" and functioned through "military Keynesianism" or "Star Wars." Reagan's renewed increase of military expenditures [coming on top of Carter's] generated the famed American "twin deficits" in the federal budget and the foreign current account. This U.S. deficit spending was necessary not only to keep the American economy, but to keep the entire Western economy afloat during the 1980s. This world economic imperative and the always uneven distribution of its costs benefitted parts of the West, including Western Europe, Japan and the East Asian NICs who were dependent on the American market. However, it was this same world monetary and fiscalicy that pushed Latin America, Africa, Eastern Europe AND the Soviet Union into an economic depression, which is already more severe than that of the 1930s. A major, but always unmentioned, difference between the Soviet Union and United States in the 1980 was that the former had no one to bail it out of bankruptcy, while the latter received massive capital contributions from Western Europe and Japan, and involuntarily through debt service from Latin America, to plug up the American foreign trade and domestic budget deficits, which were generated by Star Wars.3/

So, Halliday and many others could not be more mistaken in claiming that the [world] market did not intervene in Soviet economy or society. Halliday like so many others claims instead that "the central feature of the collapse" was "the ideological dimension ... [that] was in some ways decisive" pp.137,138]. "The central feature of the collapse...[was] the collapse [of] underlying self-confidence ...first among the leadership and then within the population as a whole" [p.135]. That supposedly led to Gorbachev's purportedly capricious change of heart. Yet, Gorbachev himself asserted time and again that there was no alternative to perestroika in view of the serious problems faced by the Soviet ecoy. Of course, these were vastly aggravated by the pressures emanating from the world economy of which it was a part. Thus, in the opening pages of Chapter 1 of his book Perestroika, Gorbachev (1987:17-19) explained its "origins":

Perestroika is no whim.... Perestroika is an urgent necessity.... The country began to lose momentum.... Analyzing the situation, we first discovered a slowing economic growth ... to a level close to economic stagnation.... A country that was once quickly closing on the world's advanced nations began to lose one position after another ... [in] scientific and technological development, the production of advanced technology.

Both the Soviet Union and especially Eastern Europe began by marketizing the industrial and commercial state monopolies and permitting them large measures of private monopoly power instead. The result was, of course, that they raised prices to consumers and intermediaries, which meant inflation. At the same time, inflation was and mostly still is fed by burgeoining state deficits, which are covered by running the money printing presses faster and faster to cover these growing deficits. Significant causes of these were the increased arms expenditures during the "Star Wars" era and those generated by higher purchase prices from and support subsidies to the state and/or privatized enterprises that rsie their own prices and/or run at a loss. The result had to be a breakdown of the supply system and runaway inflation. Instead of serving the consumer - not to mention the worker - better, liberalization, both before and since the "revolution," has ground the economy to a screeching halt. Since 1989 and especially 1991, the breakup of COMECON and the dollarization of trade within and between Eastern Europe and the former Soviet Union of course also disrupted demand and supply and therefore drastically reduced production and employment.

The conversion of East European and former Soviet trade from transferable accounting rubles to hard cash dollars only exacerbated the problem of their mutual economic dependence. The medium term economic result can only be that the short term domestic economic depression and unemployment in each country is exacerbated by the international decline of its export markets elsewhere in the region and the impossibility of replacing them by export markets in the West and South. East German industry, of course, lost all of its export markets in the East already as soon as it adopted and required payment in the strong D mark. It was particularly dependent on these exports to the East after its capacity to export to the West was all but eliminated by heightened competition and lagging technology during the 1980s. No wonder, the export dependent economy of East Germany is in depression. Dollarization and regionalization among republics within the former Soviet Union and Jugoslavia and elsewhere extends the same problem inside these "countries." Again, the new ideology and politics is also replacing the old international economic organization before it can be replaced by another new one. Therefore, another economic irony is that, after the cancellation of its foreign debt, the next best thing Eastern Europe could get from the West would be a fund of convertible currencies to maintain its earlier international trade network among each other and with the former Soviet Union until it can be replaced by more multilateral East-West trade in the long run.

Yet, these policies and measures were also "mistaken" responses to economic exigencies over which the Soviet Union or its political leadership, and a forteriori in Eastern Europe, had scarce control before their revolutions and virtually none at all since then. Now they are completely beholden to world market forces and Western institutions like the World Bank, IMF, and "missions" such as those of Jeffey Sachs. That is, politics was NOT in command all that much. Especially and ironically, politics in East was and is not in command. If any politics was in command at all [in the East], it was and is the politics of the West! Neither was or is ideology in command, despite the "in the final analysis" claims to that effect by Chirot, Desai, and even Hobsbawm. 5/

However, the short term economic irony is that the transition is accelerating economic decline in the East in part at least because this transition is being promoted at the worst possible time. For the world economy is falling into severe recession again in the West, which exacerbates the difficulties of transition in the East. In 1990 already, production declined an average of 20 per cent and spelled severe depression and galloping inflation in the East. In 1991 and 1992 even more of the same flllowed. However, this inflation is measured in terms of the national currencies, which become worthless. Accordingly, these economies are being "dollarized" or "D-markized." Therefore, the real market value of their properties and goods is suffering a classical and severe deflation in terms of these world currencies, with very little of which property, land and skilled labor in the East can be and is bought by Westerners "for a song." The value/price differences between the East and the West due to their unrealistic exchange rates generate widespread "free" market corruption in, and especially the massive smuggling of valuable raw materials out of, the East. The same denies needed foreign exchange to the states and their enterprises, and this, in a vicious downward spiral flow, generates still greater devaluations of the Eastern national currencies -- until they and their economies go down the drain altogether. [Ironically, the dollar is increasingly valued only in the socialist or ex-socialist East and the underdeveloping South, while it is declining in value elsewhere on the world market]. .... Thus, the policies of accelerated economic integration and marketization of the East are again more effect than cause; and insofar as they cause anything, their effects are again rather the opposite of those supposedly intended. Perhaps more significantly still, the industrial economies of the West, in Europe and elsewhere, are increasingly able to transfer a major part of the costs of adjustment to the world economic crisis to the "second world" East as they already have to the "third world" South. In so doing the "second" world is also being "thirdworldized." This is where deliberate policy does come in, however. It is most dramatically visible in the West German colonialization of the ex DDR, which is reminiscent of the carpetbaggers who went from North to South after the latter's defeat in the civil war in the United States. The West is systematically eliminating real and potential competition from the East by forcing even economically sound enterprises into financial bankruptcy and/or buying them up at artificially lowered bargain basement prices (Schneider 1990). The interminable missions of "expert advice" and IMF policies that already depressed the economies of the South and East in the 1980s now are even more legion in the East and only promote this bankruptcy further. They counsel "getting the prices right" by increasing the domestic "market" prices of all commodities, including basic consumer goods, to Western "world" levels -- but excluding the price of wage labor and not counting their prices in dollars or marks!

Unfortunately also, ideologically promoted privatization is no remedy for the ills of the Central/Eastern Europe, any more than stabilization and privatization policy have been in Latin America and elsewhere. Indeed, during the present world wide recession, these privatization policies can only socialize and aggravate poverty further. The current privatization craze is just as economically irrational and politically ideological as was the earlier nationalization craze.

The ultimate consequences of all these policies East and West are dubious at best. In the short run, the accelarated incorporation of the East into the world market has two ironically contradictory results: On the one hand, the East is still unable to compete effectively and all the less so by having lost the partial protection that "socialism" affored it and its people. On the other hand and even so, some of the agricultural, raw material, and cheap industrial production is perceived as a threat in and to the West, particularly in the present recession plagued Western Europe.

In the longer run, the incorporation of Eastern Europe and parts of the former Soviet Union into a European economic zone or bloc may help Western Europe weather the storm of the world economic crisis by strengthening its ability to compete against the Japanese led East Asian and the U.S. led American regions. The very regionalization and possible bloc formation of the world economy is itself a consequence of the same world economic crisis (Frank 1981, 1986, 1988a,b). While talking multilateralism at GATT and elsewhere, de facto economic trends and de jure political economic policies have promoted the regionalization of the world economy as the result of heightened competition during this -- as also the previous -- world economic crisis. The EEC and its policies for a regional market after 1992 are only its most institutionalized expression. Western Europe may lose some of the American market on which it is so dependent. Europe will also face increasing competition on the world market from Japan and, with a devalued dollar, from the USA itself. Therefore, Western Europe will increasingly need more (traditional?) markets in Eastern Europe and the former Soviet Union, and perhaps in the Middle East and Africa. My The European Challenge (Frank 1983/84) already argued that, notwithstanding any supposed ideological obstacles, the EEC could and should be extended de facto to include Eastern Europe, even if the latter is and would continue to be dependent on Western Europe. That process is now in full swing, and the elimination of ideological obstacles thereto is more its effect than its cause.

In this regard, it is useful to remember as already noted, that economic colonization of Eastern Europe by its neighbors in the West has a centuries long history.

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