Varieties of Post-communist Capitalism A comparative analysis of Russia, Eastern Europe and China (Studies in Critical Social Sciences, 157) 9789004413184, 9789004413191, 9004413189

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Varieties of Post-communist Capitalism

Studies in Critical Social Sciences Series Editor David Fasenfest (soas University of London) Editorial Board Eduardo Bonilla-Silva (Duke University) Chris Chase-Dunn (University of California-Riverside) William Carroll (University of Victoria) Raewyn Connell (University of Sydney) Kimberle W. Crenshaw (University of California, LA, and Columbia University) Raju Das (York University) Heidi Gottfried (Wayne State University) Karin Gottschall (University of Bremen) Alfredo Saad-Filho (King’s College London ) Chizuko Ueno (University of Tokyo) Sylvia Walby (Lancaster University)

volume 157

The titles published in this series are listed at brill.com/scss

Varieties of Post-communist Capitalism A Comparative Analysis of Russia, Eastern Europe and China By

Iván Szelényi Péter Mihályi

leiden | boston

Cover illustration: “The Illiberal International: President Putin, Prime Minister Orbán and President Xi”, created in 2019 by Hungarian artist Marabu. Library of Congress Cataloging-in-Publication Data Names: Szelényi, Iván, author ; Mihályi, Péter, author. Title: Varieties of post-communist capitalism : a comparative analysis of Russia, Eastern Europe and China / by Iván Szelényi, Péter Mihályi Description: Leiden ; Boston : Brill, [2020] | Series: Studies in critical social sciences ; volume 157 | Includes bibliographical references and index. Identifiers: LCCN 2019042159 (print) | LCCN 2019042160 (ebook) | ISBN 9789004413184 (hardback) | ISBN 9789004413191 (ebook) Subjects: LCSH: Capitalism--Russia--History--21st century. | Capitalism--Europe, Central--History--21st century. | Capitalism--China--History--21st century. | Russia--Economic conditions--21st century. | Europe, Central--Economic conditions--21st century. | China--Economic conditions--21st century. | Post-communism. Classification: LCC HB501 .S9895 2020 (print) | LCC HB501 (ebook) | DDC 330.917/17--dc23 LC record available at https://lccn.loc.gov/2019042159 LC ebook record available at https://lccn.loc.gov/2019042160

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. ISSN 1573-4234 ISBN 978-90-04-41318-4 (hardback) ISBN 978-90-04-41319-1 (e-book) Copyright 2020 by Koninklijke Brill NV, Leiden, The Netherlands. Koninklijke Brill NV incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi, Brill Sense, Hotei Publishing, mentis Verlag, Verlag Ferdinand Schöningh and Wilhelm Fink Verlag. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill NV provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, MA 01923, USA. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Preface  vii List of Figures, Tables and Boxes  xviii 1 Introduction  1 2 Legitimacy under Communism and Post-communism: Theoretical Background  13 1 When Is a Rule ‘Illegitimate’?  13 2 The Three Ideal Types of Legitimate Authority (and the Fourth)  19 3 Various Types of Traditional Authority  26 3 Varieties of Communism  37 1 Introductory Remarks  37 2 What Is/Was Communism? The Political Economy of the Classical System  39 3 Systems of Domination under Various Types of Communism  41 4 Reforming the Communist Economy  47 5 The Governance of State-Owned Enterprises  49 6 Stratification Regimes under Various Communist Formations  52 4 Reinterpretation of Inequalities and Rent-Seeking in Advanced Market Economies  65 1 Profits versus Rents  67 2 Changing and New Forms of Rents  69 3 Institutional Consequences of Rent  75 4 Class Reproduction through the Accumulation of Human and Cultural Capital  76 5 The Counter-Revolution of Nation States in the Name of More Equality  79 5 The Divergent Pathways Out of Communism  85 1 Introductory Comments: Distinguishing Three Pathways to Capitalisms  85 2 The Liberal Model  87 3 The Patrimonial Model  98 4 Market Socialism or Capitalism from Below?  107

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5 The Structure of Post-communist Societies during the First Phases of Transformation  127 6 Consolidation and Partial Re-convergence of Post-communist Pathways?  152 1 Eastern European Liberal Democracies: Successes and Crises, 2000–2010  152 2 The New Legitimacy and a New Political Economy: Illiberal Managed Democracy and Prebendalism  159 3 The Ideology of Post-communist Traditionalism  179 4 Liberal-Democratic Ways to Capitalism in Eastern Europe: The Emergence of Prebendalism?  189 5 Is China on the Road to Putinism?  198 6 Social Structure in Post-communist Societies in or on the Way to Prebendalism  208 7 Conclusions: Is Putinism a Model for Post-communism?  211 Bibliography  219 Name Index  236 Subject Index  239

Preface This book has been long in the making. As far back as the early 1990s, Iván Szelényi, one of the writers of this book, found himself drawn to the Varieties of Capitalism (VoC) paradigm. Inspired by this, he went on to contribute to Making Capitalism without Capitalists (Eyal, Szelényi, Townsley 1998). The principal hypothesis of that book was that post-communist capitalisms can only be understood through an analysis of the communist systems which preceded the transformation of these more than 50 countries into market economies. This concept was originally developed by David Stark (1996) in order to emphasise that post-communist capitalism was not merely, or primarily ‘built on the ruins’ of communism, but makes use of key elements of the communist past. It is built ‘from the ruins of communism’. Post-communist capitalism is an experiment without historical precedent. The private accumulation of capital, in all previous historical instances, had been preceded by centuries of transformation in which the economic system developed into a capitalist ‘mode of production’. A sizeable propertied bourgeoisie existed, for instance, in France or England during feudalism and members of the feudal nobility or aristocracy also frequently began to engage in capitalist activities. In the early decades of capitalism, the appropriation and enclosure of common lands by landowners facilitated the transformation of peasant economies oriented to self-sufficiency into capitalist commodity production systems, and turned ­former serfs or peasants into urban proletarians, the engine of capitalist industrial development. (To put this in Marxist terms: the capitalist mode of production was born within the ‘wombs’ of the feudal mode of production.) While accumulation of private wealth or capital during communism was not unheard of, it was negligible in comparison with other historical cases. There were also some attempts by managers or communist party officials to run public firms as if they were their own private enterprises (Hankiss 1990; Staniszkis 1990), but large-scale accumulation did not start until after the collapse of the communist political system. Hence post-communist capitalism is the first example of ‘making capitalism without capitalists’. Nevertheless – as one would expect from the VoC paradigm – there were various pathways from communism to capitalism (Stark and Bruszt 1998). The case that was closest to the classical way of ‘building’ capitalism was arguably that of China during the 1980s. There, capitalism was emerging ‘from below’ (Nee and Opper 2012). Family farming was gradually deregulated, and some farmers began to build large industrial and financial enterprises, the profits of

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which eventually made them into dollar billionaires. While the so-called township village enterprises (TVEs, see Oi 1992) did not enjoy particularly transparent ownership relations (much like the so-called ‘spontaneous privatisation’ that occurred in Eastern Europe) and might, therefore, have provided a route to personal enrichment for political cadres. Developments in Russia, and in almost all of the post-Soviet states (except the Baltic States which took an opposing path), resembled much more closely what Hankiss and Staniszkis term ‘political capitalism’. As early as 2000, Klebnikov was writing about Yeltsin as the ‘godfather of the Kremlin’. Following Klebnikov’s lead, Magyar (2013) discussing Hungary used the term ‘mafia state’. In Russia, then, capitalism was built ‘from above’, the new capitalist class being created by the grace of the new ‘tsar’, Boris Yeltsin, often from former highranking communist cadres. According to Magyar’s argument, Prime Minister Viktor Orbán acted as a ‘godfather’ in illiberal Hungary after 2010, allocating substantial wealth to his clients (in Magyar’s terminology, to his ‘extended family’). Responses to post-communist transformation challenges varied a great deal in Europe’s peripheral states (Bohle and Greskovits 2012). As the other author of this book, Péter Mihályi (1993a,b, 1994, 1996a, 2000, 2001a) demonstrated with his regional comparison in which he focussed on Hungary, a unique feature of post-communist transition: the crucial role foreign direct investments (FDI) played in privatisation of the enterprise sector. During the early 1990s, Hungary had far the largest per capita FDI until it was overtaken by Estonia and the Czech Republic in 2017. Szelényi and King called this capitalism ‘from the outside’ (King and Szelényi 2005).

…

As early as 2012, it was clear that earth-shaking changes were taking place not only under post-communism but in global capitalism generally. In the same period, Iván Szelényi had the good luck to deepen his intellectual engagement with Peter Mihályi. When we were both asked to review Thomas Pikkety’s formidable book Capital in the Twenty-First Century, we found out that, when it came to the most fundamental questions, we had more in common than we expected. That was the beginning of a most productive collaboration which resulted in our first joint book, Rent-Seekers, Profits, Wages and Inequalities (Mihályi and Szelényi 2019). When Szelényi came upon a somewhat outdated draft of Varieties of Post-Communist Capitalism he asked Mihályi, who had a superior knowledge of economics and more energy (being a mere 60 years of age as opposed to Szelényi’s 80 plus years) to join him in updating and rewriting it.

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2008 changed our views about global capitalism. While we both remain ‘globalists’, we have had to acknowledge that the global financial system has failed us badly. Capitalism has survived once again – as Josef Schumpeter (1883–1950) predicted it would do, again and again – but has done so in the way Max Weber (1864–1920) would have suggested, by becoming less ‘class-based’ and operating more on the basis of ‘rank’; or by being ‘re-feudalised’ to use Piketty’s more recent terminology. The rich are getting richer and the poor are getting poorer as the privileges of the preceding generation are more and more often passed on to the next one. The increasing inequality within nation states has received a great deal of attention. Blaming the increases in inequality on the top 1, or even top 0.1 per cent has become a mobilising force: ‘We are the 99 per cent’. Indeed, the top 1 or 0.1 per cent has been acquiring a larger and larger proportion of total incomes and has had more and more wealth at its disposal. In our book Rentseekers, Profits, Wages and Inequalities we had already cautioned against overemphasising ‘the top 1 per cent’. While we did not underestimate the extent and significance of the top 1 or 0.1 per cent’s accumulation of wealth, we wanted to emphasise that there is likely to be an even broader social closure in the form of a large privileged ‘rank’. Re-feudalisation, we argued, was unlikely to be limited to the top 1 per cent. Our main inference was that the crucial question is not the extent of measured inequality (income or wealth). Countries with a Gini index of around 0.2 or 0.4 can be economically dynamic and socially cohesive in equal measure.1 Beyond the ethno-racial, religious and gender-based social gaps, the key question is this: are these inequalities stemming from a mechanism which generates the greatest conceivable freedom of competition between workers vs. workers and capitalists vs. capitalists, or are they arising from rent-seeking, resulting in the exclusion of some players from the competition by those who are politically-connected. Inequality becomes a major social (and economic issue) if it is driven by rent. Rent-generated inequalities undermine the meritocratic legitimacy of liberal capitalism and the efficiency of capital investments. It is indeed the case that growth of incomes and wealth is fastest at the very top of the social hierarchy, but an increasingly rigid separation can also be observed between the top 10-20 per cent and the rest of society. We, in fact, added the subtitle The Top 20% to our book. In the most recent literature (Putman 2015; Reeves 2017) some American authors have also begun to write about the 1 The Gini index (or coefficient) measures the inequality among values of a frequency distribution (e.g., levels of income). A Gini coefficient of 0 expresses perfect equality, where all values are the same, a Gini coefficient of 1 (or 100%) expresses maximal inequality, where only one person has all the income or consumption, and all others have none.

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rise of a ‘new aristocracy’. Their central claim is that social fluidity or relative mobility is declining. Children born in the top 10-20 per cent are increasingly likely to end up on the top when they become adults. They inherit wealth from their parents or grandparents, they tend to attend elite schools, usually not accessible to the bottom 80 or so per cent and they increasingly marry partners from the same ‘upper middle class’ or ‘new aristocracy’. Such a decline in fluidity casts doubt on the meritocratic nature of modern capitalism. Data about the very top of the social hierarchy is scarce and not particularly reliable. In the top 10-20 per cent and even more so in the top 1 per cent, people are less likely to respond to survey questions. While evidence is strong that, on the very top, the increase in incomes and accumulation of wealth is part­ icularly strong, it ought to be investigated whether there is a corresponding ­decline in fluidity. It is conceivable that intergenerational reproduction for ­instance in the top 0.1 per cent is similar or even less than it is in the top 10-20 per cent. The data we gathered on billionaires in China, Russia and Eastern Europe seem to indicate a great deal of fluctuation, some skyrocketing from humble origins to the very top within a few years while others disappeared in jail, in exile or were murdered. Think of the rapid rise of LI Yanhong in China (Example 14), Roman Abramovich in Russia (Example 9), Lőrinc Mészáros in Hungary (Example 12) and the similarly fast fall from grace of BO Xilai, the former mayor of Chongqing, who was put on trial (Example 13), or Boris Berezovsky in Russia (Example 3) and Lajos Simicska in Hungary (Example 11). The rapid enrichment of the top 1 per cent has often been used by left-wing populists as a key argument against all forms of capitalism. Populism, if possible, is even more difficult to define than other labels used against enemies in political struggles to characterise political divides, such as liberals, conservatives, left or right. The concept, in use since the 19th century, has, during the past few decades, been used primarily as a pejorative term. Opponents are branded as ‘demagogues’ who are offering benefits, typically to less privileged groups, which they will not be able to deliver once they win elections. In this way they are excluded from the political discourse. Populists are often claimed to be ‘anti-liberals’ or ‘anti-democratic’. There is a library of literature arguing for and against left- or right-wing populism and making the case for measures to be taken to defend liberal democracy against both of them.2 Greatly simplified, the common feature of all populism is the emphasis it places on the conflict between ‘the people’ versus the 2 For a recent sophisticated argument for left-wing populism, see Chantal Mouffe (2018). For a famous case for right-wing populism (illiberal democracy), see Viktor Orbán's often cited

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‘the elites’. Various versions of populism differ significantly as to what they understand by these two terms. Again, crudely speaking, left-wing populists define ‘the people’ mainly in terms of those who are underprivileged economically and socially. (These can be ethnic minorities, members of the LGBTQ community, etc.) ‘The elites’ are usually economically or politically privileged. An early, classical example was the People’s Party (or Populist Party) in the United States, which was formed around 1890 mainly as a farmers’ movement which opposed the tycoons of the Gilded Age. In this case, the people were the poor; the elites were the new rich. During the 1892 presidential election, the People’s Party won – as a third party – a respectable 8.5 per cent of the votes, but had collapsed by 1896. Communist movements also tended to be in a limited way ‘left-populists’, defining their aim as a struggle between classes, for the proletarians and against the bourgeoisie. Communists, especially those espousing a Leninist-Maoist version of the movement, did not see themselves as representing ‘the ‘people’ in the sense that the Narodniks, (or anarchists) tended to do (Lenin 1913). For Leninists or Maoists, only proletarians who responded to the revolutionary consciousness ascribed to them by revolutionary theorists (as Marx and Engels put it in The Holy Family), were ‘the people’. The Marxists claimed that the Narodniks were just ‘populist’ demagogues, who, with their emphasis on the purity of the soul of Russian peasants, were even racist. Right-wing populists define people in ethno-racial terms. They see elites as being mainly the political establishment. These elites, before they rose to power, were the ‘ethno-racial’ others. The German National Socialist (Nazi) Party was a prime example of such right-wing populism. At a time when non-Aryans (such as Jews) dominated the elites, the Nazis maintained that Aryans were racially superior and were intended to lead the world. The Jews, therefore, should be defeated, if not eliminated. The Nazis’ aim was to achieve, at the very least, the creation of an ethno-racially homogeneous state, and possibly a world order of the same nature. The increasing inequalities assumed to have been produced by ­globalisation – particularly after 2008 – gave a boost to a new, left-wing populism. The ‘Occupy Wall Street’ movement was of this nature. With slogans like ‘The Rich Should Pay More’ they often advocated the imposition of very high taxes on very high-income earners, advice of Piketty’s which Francois Holland did attempt to implement. The activists attacked multinational firms which had managed to escape paying taxes by moving their headquarters to tax havens, program-defining speech (Orbán 2014) and for a recent comprehensive defence of liberal democracy see Galston (2018).

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and they attacked finance capital as an extreme case of tax avoidance and manipulation of the stock market and other financial markets. This left-wing economic populism attracted a great deal of attention, but it enjoyed relatively little political success. The most successful such new left-wing populist movement in the contemporary Western World so far has been that led by Bernie Sanders. Though he might have been successful against Donald Trump as the democratic nominee, given Sanders’ stronger support among the white working class, the group who gave the electoral advantage to Trump, he lost the primaries against Hillary Clinton in 2016. There were two reasons for this. First, Clinton asserted that Sanders would not be able to deliver on some of his promises, such as universal healthcare and free tertiary education. This portrayal of him as just a ‘populist demagogue’ did him no favours among the ­potential Democratic voters. Second, from day one, the Democratic Party establishment wanted a candidate with superdelegate support. Later, in addition to strong support from Big Money, Clinton received secret support from the Democratic National Committee (DNC) as Wikileaks demonstrated which gave her a further advantage. Wall Street was firmly behind Clinton in the Democratic primaries. This shows how in terms of Democratic politics the wealth and income on the very-very top is vital. Electoral campaign finance comes from the very top (in addition to the money coming from the pocket of the candidate himself – who will already be in the top 0.1 per cent – as in the case of Donald Trump). Before we move on to a discussion of right-wing populism, it is necessary to make an additional comment on globalisation. The drastic increases of inequalities we have discussed so far have been within countries. However, the world appears to be becoming less unequal if we measure inequality between countries and weight each country by its population. The big story is, of course, China (India similarly, though not to the same degree). Within China, inequality also jumped with the transition to a market economy, but poverty declined, and if one looks at real estate prices and jumps in the cost of elite education in major Chinese cities, a ‘new aristocracy’ is also in the making. While we lack unquestionable data with which to demonstrate it, we have made an attempt to show the relevance of the Putnam-Reeves hypothesis for post-communism under the title The Upper Middle Class: A New Aristocracy? Posing the Question for Post-Communist Hungary (Tóth and Szelényi 2019). It is conceivable that the gap between the privileged 10-20 per cent and the rest of society is growing in China (and possibly in India and Russia as well), but people at the bottom are experiencing improvements in their living standards and this is at least ­partially responsible for the unexpected political stability in these otherwise turbulent countries. In these questionably democratic regimes, a large ‘new

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a­ ristocracy’ may be co-opted.by the government. (China, of course, does not even pretend to be democratic.) We may now turn to the discussion of right-wing populisms – which we call ‘radical nationalism’. So far, these appear, (during the second decade of the 21st century) to have been the big winners politically. We ought, again, to begin with a qualification. The distinction between the two (left- and right-wing radical nationalists) is not set in stone. They often use each other’s rhetoric and even each other’s policies. The new left populism is far from immune from nationalism. Bernie Sanders could have won against Donald Trump since he also promised to ‘bring American jobs back’, and he repeatedly expressed doubt about ‘multilateralism’, for instance about transpacific and transatlantic trade agreements. His British counterpart in new left populism, Jeremy Corbyn, led the weakest possible campaign against Brexit. Corbyn even now would prefer to become the prime minister who renegotiates the terms of Brexit rather than the one that keeps Britain in the European Union. Even William Galston, whom we have cited already, who is a big defender of liberal democracy against nationalisms, concludes his paper: “Surmounting [the ills of liberal democracy] will require… political leaders who are willing… to serve the long term interest of their countries” (p. 18). Is Corbyn’s message that he will lead Britain out of the EU on the best possible terms for Britain (and logically the worst possible deal for the European Union)? That is enough, perhaps, about the nationalistic (or to put it more nobly, patriotic) twist of new left populism. So, what are the reasons for the success of the radical nationalist (or p ­ atriotic – we use these two terms as synonyms) new right? We have added the word ‘radical’ in order to emphasise the ethno-racial character of the ‘nation’. This extreme formulation is put forward by the ‘alt-right’, the political movement in the United States, which hankers after a return to a mythical all-white AngloSaxon United States. This is, of course, an unrealisable dream, but it has led to policies which seek to sustain the actual ethno-racial mix by at least limiting immigration if stopping it altogether is not an option. Refugees from Muslim countries are identified as a particular danger. When, in 2015, Trump announced his candidacy for president of the United States, this was central to his message: he would expel all illegal immigrants (at that point somewhere near 10 million in the U.S.), build a wall and keep all future would-be i­ mmigrants out. A significant limitation on all immigration (including legal immigration) was implied and has been implemented during his presidency. Trump’s key message, which posed a direct challenge to globalisation and all multilateral agreements was ‘Make America Great Again’, and ‘America First’. He has pulled out from the North American Free Trade Agreement (NAFTA), from the

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­ rans-Pacific Partnership (TPP), and now the European Union, formerly ‘ally T number one’, has become one of his enemies. Trump has applauded Brexit and threatened China (and even Russia) with a trade war. In his view, we need to return to a time when sovereign nations made ‘deals’ with each other and when multilateral cooperation, in the form of environmental agreements, UNESCO, NATO, regional trade cooperation and free trade zones were not the norm. It is evident that globalisation has come at a high cost. Capital is moving around the globe almost without restriction; this enables tax avoidance, which can undermine welfare states. While capital is mobile on a global scale, movement of labour has been confronted with significant restrictions. This has weakened trade unions and the capacity of labour to bargain collectively. As the world has become to some extent more egalitarian, jobs in core countries have been lost. Real incomes in certain sectors of the capitalist core (especially in manufacturing) have stagnated or even declined. Even highly qualified people in the core have had to face competition from former peripheral or semiperipheral countries (quite the opposite of what the World System Theory predicted); they are being obliged to compete with highly skilled migrants from countries like China or India. Cultures are also becoming more diverse. While some ‘assimilation’ has taken place, the US is no longer the ‘melting pot’ of old (Glazer and Moynihan 1970), where migrants eventually lost their languages. As Alba and Nee (1997) pointed out, the culture of the host nation has also incorporated elements of its immigrants’ culture. We are moving towards a multiethnic, multi-cultural and multilingual society. What we are seeing, in fact, is not the end of a significant demographic and social restructuring of the world, but the beginning. In the North-Atlantic region, unless there is large-scale immigration, lower birth rates and increasing longevity will lead to a shrinking economically active population. State-­ sponsored initiatives to boost birth rates, which are rarely successful, are costly and take decades to respond to labour market needs. Resolving the problem of declining tax revenues with robots is, for the time being, a futuristic fantasy. Meanwhile, the populations not only in Africa, but also in the Middle East, South Asia and most of Latin America are exploding. There is increasing cultural and existential anxiety in the core. People are rightly concerned that they might lose their jobs, or that, at the very least, that wages will stagnate or decline in real terms. They are finding themselves challenged both culturally and ethnically. They may have to accept that their children will marry someone from another ethnicity, that their society might become multilingual. They may have to acknowledge that their culture is not

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superior to other cultures and respect that other people practice their religion in different ways than they do, that they pray, dress and eat differently than they do. This will be the big challenge of the next two centuries. People troubled by such anxieties might find the idea of building walls (or least fences) to keep out ‘others’ appealing. They might feel they need strong states, strong militaries and strong leaders to defend themselves against these unknown others. They will vote, therefore, for Vladimir Putin, Matteo Salvini, Sebastian Kurz, and Viktor Orbán, and they will not feel inclined to challenge President Xi. Tomorrow they may vote for Marine Le Pen. This is what we called in an earlier publication – Szelényi and Mihályi (2018) – the ‘counter-revolution’ of the nation-state. Sovereign nation-states revolt against the perceived and real damages that globalisation produces and may produce in the future. We live in an epoch that, taking our cue from Machiavelli (1513), we could be justified in saying is dominated by the ‘politics of fear’. What is new about this contemporary politics of fear is that the Prince is not telling the people that they should fear him, (they would do better to love him or her) but rather that they should fear those he is defending them against. Moreover, they tend to believe that. Given this, what else can they do? While the economy is global, politics remains mostly (and in some ways increasingly) local. Global governance is weak or non-existent. There is virtually nothing the European Union can do if one of its countries violates the rules of democracy, rules of law or even human rights. The United Nations can do even less. They are often expected to intervene, but they virtually never do. What remains for sovereign nation states and their strong leaders, then, is to defend their people against outside enemies. In our book Rent-Seekers, Profits, Wages and Inequalities we suggested that what we are suffering from – and what led to the election of Trump – is the loss of rents that has been accumulating over decades as a result of economic protectionism and unequal global distribution of wealth and technology. Now the ‘West’ must learn how to compete with the ‘Rest’. This is a painful lesson, and, under these circumstances, the appeal of the radical nationalist populism is almost irresistible. Since the Great Recession of 2008, post-communism, which was expected, after the fall of communism, to ‘catch up’ with the core of the capitalist world, the ‘West’, has been affected by even more impulses. Russia is now in economic stagnation and China is slowing down. This is partly a consequence, but also partly a cause of the worldwide slowdown. The best days of globalisation – the period between 1990–2010 – are over. The things that characterised it (the expansion of world trade and FDI, the hunger of developing countries for

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­ ydrocarbons, the rapid advancement of information technology, etc.) all h seem to have weakened since 2010.3 After 1989, the former communist Central and Eastern Europe, east of the former USSR4 have put their hopes in the European Union, but since the 2008 euro crisis, the EU itself is struggling for survival. As said, the leaders of Russia and China are in big trouble. They are trying to compensate for this with imperial and military ambitions. De facto, Putin is in war in Ukraine since 2014. The consolidation of power in the hand of XI ­Jinping General Secretary of the Communist Party of China (CPC) and President of the People’s Republic of China (PRC), who is often described since 2012, as China’s ‘paramount leader’ and ‘core leader’ from 2016 has lead to an almost complete reconstruction of a totalitarian (communist? nationalist?) political system – not seen since the death of MAO Zedong in 1976. As China, thanks to 40 years of economic reform, has become a world power, more and more observers has started to worry what will happen in a world where China is becoming one of the great players (Kornai 2018). Hence, the aim of our book is to tell the story of how post-communist countries, which followed divergent pathways after the fall of communism, seem to be converging increasingly towards a radical nationalist, populist, or illiberal system. Francis Fukuyama (1989) was wrong when he predicted the end of history and the final victory of liberal capitalism. We do not want to make a similar mistake in this book and predict the convergence of the world, not even of the post-communist world towards illiberalism. Marx (1852) was right: people do make their own history. However, we should not forget the second part of his bon mot: they make it under the circumstances existing already, given to them and transmitted to them from the past.

…

The first versions of most of the chapters of this book were drafted between 2012–2015 with substantial help from native Bulgarian, Russian, Chinese ­speakers, who were students or post-docs at New York University Abu Dhabi

3 As The Economist (January 26, 2019) put it recently in a longer analysis, globalisation has given way to a new era of sluggishness, which they called ‘slowbalisation’. 4 After the 1917 revolution, the Union of Soviet Socialist Republics (USSR) was established in 1922 as a confederation of Russia, Belorussia, Ukraine, and the Transcaucasian Federation. The external and internal borders of the USSR changed many times subsequently until 1954. The term ‘Soviet Union’ was used in the Russian language as a pronounceable short form of the Cyrillic abbreviation of the USSR (CCCP).

(NYUAD), where Szelényi was teaching at that time.5 We are also indebted to the heads of NYUAD, Dean Hervé Cres, Provost Fabio Piano and Vice Chancellor Al Bloom, whose generous post-retirement research funding made it possible to publish several books (in fact six in six retirement years), including this one. NYUAD’s direct financial support allowed us to benefit from the editorial help of Anna Bentley, who worked meticulously for two months on the original manuscript of the present book. 5 Special thanks are due to LU Peng, Vladislaw Maksimov, Toma Pavlov and a student from Hong Kong who for security reasons did not want to be named.

Figures, Tables and Boxes Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7

The four types of domination in Weber’s works  20 Types of traditional authority in Weber’s works  23 The three-agent model.  51 Stratification regime under classical capitalism   56 Stratification regime under the classical (Soviet/Maoist) socialist system  57 Stratification regimes under reform communism (with some variation of China and the Soviet Empire)  61 Freedom House’s ratings of political freedom, 1991–2017  87

Tables Table 1 Table 2

Speed of ownership change in Eastern Europe  4 Economic growth in 56 existing post-communist or communist economies, 1989–2016  6 Table 3a–h The main sources of income and wealth in history  30 Table 4 A comparison of governance in SOEs and private companies  53 Table 5 Motivation of managers in market economy and in socialism  54 Table 6 Comparison of stratification regimes in Stalinist/Maoist socialist formations with classical capitalism  55 Table 7 Stratification regimes in reforming socialist formations with classical capitalism  59 Table 8 Different types of rents in the advanced economies  78 Table 9 Distribution of various forms of capitals in different late capitalist and transitional/transformational formations  128 Table 10 Re-stratification after transition  128 Table 11 Political and economic scorecard of the best and worst performing post-communist economies  169

Figures, Tables and Boxes

Boxes Example 1 Example 2 Example 3 Example 4 Example 5 Example 6 Example 7 Example 8 Example 9 Example 10 Example 11 Example 12 Example 13 Example 14 Example 15 Example 16 Example 17 Example 18

Viktor Chernomyrdin  133 Yuri Luzhkov  134 Boris Berezovsky  136 Mikhail Khodorkovsky  139 Sándor Csányi  140 Liu Yongxing  146 The Yang Dynasty  148 Rong Zhijian  150 Roman Abramovich  177 Oleg Deripaska  178 Lajos Simicska  196 Lőrinc Mészáros  197 Jack Ma  199 Li Yanhong  200 Bo Xilai  202 Gu Kailai  203 Zhou Yongkang  203 Wang Jianlin  206

xix

Chapter 1

Introduction This book is intended as a contribution to the ‘Varieties of Capitalism’ (VoC) paradigm, a theory which initially focused on North America and Europe (Hall and Soskice 2001), but was later expanded to East Asia and some other parts of the world. Relatively little theoretical and empirical work has been done on varieties of post-communist capitalism (VoC) (Hanke, Rhodes and Thatcher 2007). We aim to take this line of inquiry a little further. We also want to revisit the almost forgotten ‘Comparative Communism’ perspective (Montias 1970; Azrael and Johnson 1970; Mesa and Lagos 1974; Bertsch and Ganschow 1975; Kornai 1992). After the fall of communism in the ussr and Eastern Europe, ‘communism’ was discussed in overly general terms, as if it had been a single coherent system from 1917 onwards, identical, or at least fundamentally similar at different points in time and in different locations around the world. A better understanding of varieties of post-communist capitalism requires us to take an investigation of comparative communism as our point of departure. Peaceful regime change? In Eastern Europe, the political and economic ­transition – “the triumph of the West” as Fukuyama (1989) immediately labelled it – unfolded peacefully with very little loss of life.1 The only known exception to this was Romania, where more than a thousand people died, and around three thousand were injured during the weeks of the anti-Ceausescu uprising. The disintegration of the ussr, by contrast, was not peaceful as it is generally asserted. During the Soviet times, the borders between what are now 15 independent nations were defined as internal administrative-territorial limits. They were shown only on maps, but not clearly marked on the ground. Behind the territorial disputes, however, ethnic conflicts were hidden and suppressed for decades until the final collapse. The two most serious conflicts were the Azerbaijan-Armenia war between 1988 and 1994 and the five-day Russian-Georgian war in 2008. In Chechnya, within the territory of the Russian Federation, violent skirmishes have taken place on a practically everyday basis since 1991. In these ethnic conflicts, hundreds of thousands were killed, and the number of refugees may have reached one million. By and large, the same happened when Yugoslavia disintegrated between 1991, when Serbia and Croatia went to war, and 2008 when Kosovo unilaterally declared independence. 1 This discussion is based on an updated analysis of Mihályi (2014a).

© koninklijke brill nv, leiden, ���� | doi:10.1163/9789004413191_002

2

Chapter 1

The legal statuses of such territories (Transnistria, Nagorno-Karabakh, South Ossetia, Abkhazia and Kosovo) are still contested by the international community and, as a result, these countries are still waiting to be admitted into the United Nations decades later.2 Thirty years on, we can only claim that regime change was peaceful if we measure it on a global scale (comparing it, for example, with civil wars in Africa). It did not result in a world war on the scale of those the world experienced twice during the 20th century, but locally the loss of life and other sorts of human suffering were huge nonetheless. What has been achieved so far? In 1987, 26 socialist/communist countries stretched over 31% of the land of four continents. Their combined population amounted to 34% of the world’s total.3 As of the early 2019, beyond China which is a special case, only four countries remained genuinely faithful to the Marxist-Leninist doctrines: Cuba, Venezuela, Vietnam and North Korea.4 It was the disintegration of the ussr that triggered this historical transformation. The threat of an East-West confrontation, buttressed by outsized nuclear potential on both sides, disappeared almost from one day to the next. The transformation was, first and foremost, an almost synchronised systemic change in politics: from the unconstrained monopoly of the local communist party to one kind of democracy. Six countries of Central and Eastern Europe, three Baltic nations and 11 post-Soviet successor states of the ussr5 regained their independence from the long-lasting Russian yoke. Two divided nations – East and West Germany, as well as North and South Yemen – were reunited. 2 Full recognition of Macedonian independence had to wait until February 2019, when the country was finally admitted into the international community under the name of Republic of North Macedonia. 3 See Kornai (1992) Table 1.1. In a footnote to this table, Kornai remarked that at least seven more countries could have been listed as border cases (Guinea Bissau, Burma, Cape Verde, Guyana, Madagascar, São Tomé and the Seychelles Islands), because Marxist-Leninists ruled all them in one-party dictatorships and the countries enjoyed the political and military support of the Soviet Union. In the Marxist Regimes series, edited by Bogdan Szajkowski, another three countries were defined as socialist-oriented: Grenada, Surinam and the United Republic of Tanzania. In other words, the most extensive list consisted of 36 states. Pryor (1987). 4 For the sake of interest, it is worth noting that the Nepal Communist Party (ncp) is the ruling political party in Nepal. It was founded on 17 May 2018, from the unification of two Maoist parties. According to most observers, however, in its policies as a governing party there is nothing notable which would resemble to a ‘real’ communist party. 5 In 1992, following the dissolution of the Soviet Union, these 11 states formed the Commonwealth of Independent States (cis) as a regional intergovernmental organisation. As a result of sharp conflicts with Russia, Georgia withdrew its membership from the cis in 2008; Ukraine, which participated in the cis as an associate member, ended its participation in the cis’ statutory bodies in 2018.

Introduction

3

The geopolitical and military developments that took place were also important. In 1991, the Warsaw Pact was dissolved, then, in three batches, 12 Eastern and Central European transition countries became full members of nato, and even Russia started to build friendly contacts with the organisation.6 Once the Soviet Union had discarded its own, ‘compulsory’ version of the Marxist-Leninist ideology, the leaders of two other giant countries, China and India, saw a historical opportunity to do the same. Their example served as a signal to many smaller, fully or partially Marxism-oriented developing countries too. Institutionally, all states have tended to converge with their geographic neighbours: East Germany to West Germany, Central Europe to Western Europe, the Baltic countries to the Scandinavian countries, the Caucasian and some Central Asian republics to Turkey and Afghanistan, respectively. The same happened to the African socialist countries.7 The conclusion is clear. In the long run, both path dependency and geography seem to matter (Mihályi and Banász 2016). The dominance of state ownership in the enterprise sector disappeared quickly, especially in Central and Eastern Europe. In the larger and more important countries, the share of privately-owned firms in the production of gdp surpassed the 70 per cent level as early as the second half of the 1990s (see Table 1). In Russia, the private sector’s share of gdp reached 70 per cent by 1997, but then dropped to 65 per cent in 2006 and remained there until 2009. While we do not have strictly comparable data for China from the ebrd, it is noteworthy that according to a recent official Chinese communique the private sector’s share only surpassed 60 per cent of gdp in 2017.8 In the area of external economic relations, the degree of progress is reassuring. The majority of countries became members of the World Trade Organisation (wto) which is conducive to world market integration via trade and fdi. Without exception, they all became eligible for imf and World Bank loans and technical support; 10 countries became full members of the European Union

6 Russia started to cooperate in various ways with nato in 1991, and the relationship became stronger and stronger until 2008. Since Russia’s military action in Georgia (2008) and Ukraine (2014), the trend has been reversed. It is also worth noting here while considering Russia’s relationship with nato, that after the end of the Cold War, the traditionally neutral countries redefined their positions too. From the middle of the 1990s, Austria, Finland, Sweden and Switzerland allied themselves with nato through the Partnership for Peace program. 7 Among the 26 countries listed by Kornai (1992), the following eight were from Africa: Angola, Benin, the People’s Republic of Congo, Ethiopia, Mozambique, Somalia, South Yemen and Zimbabwe. 8 http://www.xinhuanet.com/english/2018-03/06/c_137020127.htm.

4

Chapter 1

Table 1 

Speed of ownership change in Eastern Europe (year when the share of private firms in the production of GDP first surpassed the 70 per cent level)

1995

1996

1999

Czech Estonia, Bulgaria Republic Hungary, Lithuania, Slovakia

2000

2002

2004

2007

Poland

Latvia

Romania Slovenia, Croatia

Source: Authors’ compilation from annual ebrd reports

(EU); eight countries succeeded in joining the Schengen Borders Code system which guarantees their citizens the right to unlimited travel within the EU. National currencies quickly became convertible. This allowed governments to eliminate the economic barriers of capital movements (for firms) and international travel (for citizens). Today, the old socialist system of multiple exchange rates, in which the official and the black-market rates differ substantially, can be found in only three places, namely Belorussia, Mongolia and Uzbekistan. Five countries – Estonia, Latvia, Lithuania, Slovakia and Slovenia – qualified to join the Eurozone. Another two, albeit tiny, countries – Kosovo and ­Montenegro – unilaterally introduced the Euro in their national economies. For ordinary consumers, the most significant benefit of the regime change was that, in a matter of two to three years, the intrinsic shortages disappeared (Kornai 1995, 2001) almost everywhere and a competitive economy was formed, in which firms operated with a hard budget constraint. While the economies are not as free, even today, as the early reformers desired, and the success of businesses and the material enrichment of families are still far from being entirely merit-based, these countries are incomparably more dynamic and fairer than they were 30 years ago. In terms of real convergence in productivity and living standards, progress made in catching-up with the developed market economies is variegated. Back in 1989/1990 everybody – both the academic experts and the people at large – had anticipated a much faster convergence. Once the shambles left by communist mismanagement is cleaned up, the economies must skyrocket, it was thought. In reality, even the best-performing countries lagged behind original expectations. If we look at the United Nations’ classification of Leat Developed Countries (ldc), 14 post-communist countries out of 47 still belong to this grouping.

Introduction

5

Hyperinflation was, as a source of economic hardship accompanying the transition, most painful for ordinary people. The collapse of the rouble zone led to three-digit inflation in all the successor states of the ussr except for the Baltic countries. The same shock hit people in Croatia and Macedonia, as the Yugoslav dinar disappeared. Through a different mechanism, Poland had its own initial hyperinflation story (around 600 per cent) over a year spanning parts of 1989 and 1990. Romania experienced high inflation in the 1990s. The highest denomination in 1990 was 100 lei, in 1998 100,000 lei. In early 2005 it was 1,000,000 lei. Much smaller, but still significant imbalances of supply and demand occurred as the Chinese economy transitioned from a planned economy to a more liberal sytem. The worst bouts were in 1988–1989 (contributing to the protests at Tiananmen Square in April–June of 1989) when prices grew by at least 20 per cent. In Hungary, the maximum rate of inflation was reached as a result of a moderate shock therapy (39 per cent in June 1991). Despite all the positive developments, today only a few post-communist countries can be called liberal democracies enjoying the same, or something close to the characteristics of well-functioning Western countries. Others are illiberal systems; some even call them autocracies (e.g., Russia, Belarus, Hungary and the central Asian republics); 11 countries are stuck in or have fallen back into a state of dictatorship (Table 11). After the lessons learned in two world wars during the 20th century, it is deeply worrisome to see that not a single country in the post-communist world is immune to nationalism, and that there are some countries, where racism is also on the rise. To substantiate the claims made above with growth figures, we used the publicly available, new version of the Maddison Project Database (mpd)9 for compiling benchmark living standards figures (from 1989 for obvious reasons, and from 2016 as the latest available) for 56 currently existing countries, which – for a shorter or longer period – were considered socialist countries by experts in the outside world.10 We could have made many types of comparisons, but chose to limit this introductory statistical exercise to a very simple metric. We divided the 2016 gdp/capita figures with the 1989 gdp/capita figures countryby-country (which is also a correct metric for productivity growth). 9

10

The main aim of the mpd is to provide data on gdp per capita for comparisons of relative income levels across countries. This is often called ‘real gdp per capita’ in the international comparisons literature, where ‘real’ refers to the series being based on a common set of prices across countries (purchasing parity prices). We could have included Chile in our list of post-communist countries, but the socialist regime symbolised by the name of President Salvador Allende existed there only for a very short time (1970–73).

6

Chapter 1

To pick a fast-growing country from Table 2, the per capita gdp level in China in 2016 was 5.2 times higher than in 1989. At the other extreme, the 2016 level of Ukraine’s per capita gdp was only 60 per cent of the country’s production in 1989. A further comparison across the extreme positions is also telling. Between Slovenia and Mozambique, the difference in per capita gdp was more than 50-fold in 1989. In 2016, Slovenia was still the most developed post-communist country in terms of per capita gdp, displaying “only” a 24-fold larger per capita output level than the greatest laggard of them all, Mozambique. Overall, the growth performance of these 56 countries was not stellar for a period of almost 30 years in the past. The (unweighted) average change for 163 countries covered by mpd was 1.8-fold, i.e., per capita incomes nearly doubled; but only 19 post-communist countries were able to surpass this 1.8 benchmark figure. If compared to the six fastest-growing developed market economies (dmes), such as South Korea, Taiwan, Ireland, Chile, Malta and Hong Kong, only five Asian post-communist countries produced comparable, i.e., better than world average results: Myanmar (former name: Burma), China, Vietnam, Cambodia and Laos. In eight post-communism countries (Ukraine, Zimbabwe, Georgia, Serbia, Madagascar, Moldova, Tajikistan and Afghanistan) the per capita level of output was actually smaller in 2016 than in 1989. This is plainly Table 2 

Economic growth in 56 existing post-socialist or socialist countries; gdp per head in 2016/gdp per head in 1989

Central and Eastern Europe (7)

Baltic countries (3)

Albania

2.3

Estonia

1.9

Poland Slovakia Bulgaria Czech Republic Romania HUNGARY

2.2 2.1 1.6 1.6 1.5 1.4

Latvia Lithuania

1.7 1.7

Former Yugoslavia (7)

Bosnia & Herzegovina Slovenia Croatia Macedonia Montenegro Serbia Kosovo

1.9 1.5 1.1 1.1 1.0 0.8 n.a.

7

Introduction

an economic disaster. The three countries which remained fully faithful to communist doctrines (Cuba, North Korea and Venezuela) displayed underaverage performance, if they publish growth data at all. Among the Central and Eastern European countries, only Albania, Poland and Slovakia produced good growth, while in Russia per capita gdp barely increased in 27 years. Given Russia’s sheer economic weight and its intense trade links with other cis countries, the miserable Russian growth figure is particularly noteworthy. Taking the 27-year period as a whole, the increase in the size of the US economy surpassed Russian growth by a significant margin. In 1989, the size of the Russian economy (within the present borders and using the underlying data of Table 2) amounted to 33 per cent of the US economy; by 2016 its relative size was only 20 percent – a drastic shrinkage arising from lower rates of growth and a shrinking Russian population. Our book has seven chapters. Our entire analysis relies heavily on Max Weber, because his concepts of legitimacy (domination) are particularly useful in helping us to understand the unique features of communist and post-communist societies. Thus, in the first substantive chapter, we review Weber’s theory of legitimation. While it is straightforward, we intend to make three contributions. (1) We emphasise that ‘illegitimate’ rule is an exceptional case for Weber. Illegitimate systems are unlikely to be sustainable in the long run.

Former ussr (12) European part

Asia (8) Central Asia part

BELARUS

1.9

TURKMENISTAN

3.2

MYANMAR

5.8

Armenia RUSSIA Moldova Georgia Ukraine

1.8 1.1 0.9 0.8 0.6

UZBEKISTAN KAZAKHSTAN AZERBAIJAN KYRGYZSTAN TAJIKISTAN

2.0 1.8 1.6 1.1 0.9

CHINA VIETNAM CAMBODIA LAOS Mongolia AFGHANISTAN

5.2 4.1 3.6 3.5 2 0.9

North Korea*

n.a.

8 Table 2 

Chapter 1 Economic growth in 56 existing post-socialist or socialist countries; gdp per head in 2016/gdp per head in 1989 (cont.)

Africa (14)

South America (5)

MOZAMBIQUE 3.3

Nicaragua

1.5

CONGO Cape Verde

2.2 2.2

Cuba* Venezuela*

1.1 1.1

SEYCHELLES

2.1

Grenada

n.a.

ANGOLA

2

Suriname

n.a.

ETHIOPIA

2

U. R. of Tanzania

1.8

Burkina FASO

1.7

Fast growing (8)

Slow growing (6)

Benin Sao Tome and Principe Guinea-Bissau Madagascar

1.5 1.4

Rep. of Korea 3.3 Taiwan 3.0

Japan Germany

1.3 1.3

1.1 0.9

Ireland Chile

2.6 2.5

France Greece

1.3 1.2

ZIMBABWE SOMALIA

0.7 n.a.

Malta Hong Kong

2.3 2.1

Switzerland Italy

1.2 1.1

Addenda: Developed market economies

Notes: Where the country name is written with capital letters, it means that the country is a post-communist autocracy or dictatorship. * Socialist country, still faithful to the Marxist-Leninist ideology. Source: Authors’ calculations, based on the Maddison Project Database (mpd) 2018, Table: rgdpnapc. Real gdp per capita data are expressed in 2011 US$, and they reflect 2011 as a benchmark for linking (suitable for cross-country growth comparisons)

Introduction

9

(2) The types of domination are ‘ideal types’; all actually-existing systems tend to be combinations of various types of authority. Legal-rational authority may have elements of traditional or charismatic domination, etc. (3) Weber is usually interpreted as describing three types of authority (traditional, charismatic and legal-rational). However, he did consider, at least once, a fourth type, one of domination by the “Wille der Beherrschten” (by the will of those subjected the authority). This will help us understand the combination of illiberalism with some sort of managed democracy under Putinism and other post-communist regimes converging to Putinism. The third chapter applies this Weberian approach to various types of communism: can communism ever be ‘legitimate’? We will hypothesise that Weber might have regarded some epochs of communism as illegitimate (despotic, to use Montesquieu’s term), but some communist states have come close to charismatic authority (with some traditionalist element). Our most provocative hypothesis is that at least some versions of reform communism experimented with a unique type of legal-rational authority, one based on ‘substantive rationality’. The fourth chapter is a reinterpretation of the sources of inequalities in capitalist market economies. We would like to ‘bring rents back in’, as it is a concept largely neglected by mainstream economics and sociology. We turn, in a way, from John Locke (1632–1704), Adam Smith (1723–1790) and Karl Marx (1818–1883) to David Ricardo (1772–1823) in search of a theoretically sound explanation of inequalities in developed market economies. While scarcity rent has already been identified and analysed by Ricardo, the concept of solidarity rent is the present authors’ innovation. Further sub-categories are then introduced in this chapter. The fifth chapter asks the question of what kind of legitimacy claims were made in the transition from communism to capitalism. While in the third chapter, we suggested that despite some variations of communist rule in different locations, over time, communism, on the whole, was a process of convergence. The gaps measured by social or economic indicators were greater in 1949, for instance, between Bulgaria and Czechoslovakia than they were in 1989. The same goes for China and Russia. With the collapse of communism, different historical trends appeared to re-emerge and the pathways from communism to diverge, at least during the first 10–20 years. Central Europe was closer to the Western ‘liberal’ model (though with Central European ‘characteristics’, i.e., with a bit of patrimonialism). Russia, after a very brief flirt with ­liberalism, took what we will call a patrimonial route to building capitalism, resembling in some respects pre-revolutionary, even tsarist Russian ­institutions.

10

Chapter 1

China took its own path, some calling it ‘socialism with Chinese characteristics’, others ‘capitalism with Chinese characteristics’. This path had at least a touch of Confucianism. The focus in the sixth chapter is on Vladimir Putin’s unique innovations for charting a new course for post-communist capitalism in Russia. Putin confronted the oligarchs who had received their wealth in patrimonial ways from Yeltsin, put them to loyalty tests, reallocated property from those who challenged his political authority to old and new loyal allies and converted what we call patrimonial fief into prebendal benefices. Putin’s legitimacy is also greatly enhanced by his traditionalist ideology which appeals to a broad consti­ tuency in Russia. Both the changes he has made in property rights (making private property less secure) and his emphasis on traditionalist, almost paleo-­ conservative ideology represent a sharp turn towards illiberalism while retaining some institutions of competitive (though managed) democracy. The seventh chapter is the conclusion. Here the central question is to what extent ‘Putinism’ is a generic model for post-communist capitalism. After two decades of divergence (1990–2010), we detect signs of some convergence around the Putinism model, and we also address the question of the sustainability of Putinism. President Xi of China and Prime Minister Orbán of H ­ ungary have so far come the closest to Putinism in the third decade of ­post-communist transition. Putin and Xi are both strong leaders who have concentrated a great deal of executive power in their own hands. They both prosecute their political opponents not on ideological grounds, but by accusing them of corruption and trying to reallocate property rights to those who are politically loyal to themselves. They both subscribe to an illiberal ideology, mainly emphasising ‘tradition’. Though Mr. Orbán has enjoyed impressive electoral success while Mr. Xi does not face a competitive elections, Mr. Xi, nevertheless has also established himself as the ‘father of the nation’. The key question in the concluding chapter is: are these unique features or is Putinism a model around which other (or even most) post-communist countries may converge? If that is the case, is Putinism sustainable? Is prebendalism with weakening of property rights adverse to capitalist development? Can Putinism resolve the question of who ‘succeeds’ the all-powerful leader, if the traditionalist institutions of succession are not available? Before we proceed to substantive analysis, we need to clarify at least two sets of concepts as we use them in this book. Communism/socialism vs. capitalism. There has been a heated debate within the Marxist tradition about the meaning of communism and socialism and whether any of the ‘actually-existing socialist’ societies deserved either the name of communism or socialism. Not wanting to engage in this somewhat

Introduction

11

Talmudistic debate, we use the terms communism and socialism, and subsequently post-communism, in descriptive ways, as Kornai (1992) does. Hence, we use the terms communism and socialism as synonyms, systems characterised by: a. the rule of one party, which legitimates itself with Marxism-Leninism; b. an economy which eliminated private ownership and which c. eliminated or at least greatly reduced markets as its integrating mechanism. Given b and c, communist economies are primarily rent-seeking, rather than profit-seeking economies, while capitalism is an economic system which primarily is profit-seeking. Capitalism may or may not operate with a political regime of competitive multi-party democracy. Central Europe, Eastern Europe, Central Eastern Europe, etc. In Sovietology, the European countries under Soviet domination were traditionally distinguished from the ussr as Eastern Europe. The notion of Eastern Europe, as a geographical-political entity tacitly including Central Europe, was, by the early 1980s, challenged by dissidents who wanted to emphasise the difference between Central Europe and Russia (or the Russian /Soviet empire, see Szűcs 1981). The notion of Central Europe, which was coined in the 19th century to describe the German sphere of influence (Germany, Switzerland, Austria and the rest of the Habsburg Empire), now tended to be reframed (and often renamed as Central and Eastern Europe) to mean countries west of the ussr, the buffer zone between the West and Russia. We initially found the concept of Central Europe appealing and co-­operation between the so-called Visegrad Four countries (the Czech Republic, Hungary, Poland and Slovakia) appeared at first to validate the idea of treating countries which had been part of the Habsburg Empire as a separate group. However, as the European Union expanded more towards the East, the post-communist countries began to form a European semi-periphery. Some of these countries expressed Eurosceptic views more frequently and some (Hungary the most so) were arguing for an opening up to the East. With the exception of Poland and the Baltic states, this implied complementing EU membership with closer ties to Russia. When confronted with the 2015 refugee crisis, these countries rejected multi-culturalism and openness to immigration almost in unison. (Both of these issues had been debated hotly in West but were generally still part of dominant liberal world-view.) After some soul-searching, we began to think about Central Europe as a nice, but for the time being suspended, if not failed, dream of ‘joining Europe’. From this point on, therefore, we shall use the term Eastern Europe to designate all countries west of the former ussr. We make no distinction between

12

Chapter 1

Southern Europe, or the Balkans and the former European satellites of the ussr, instead, labelling all of them as Eastern Europe. In line with this logic, we shall categorise the countries of the ex-Soviet states East and South of Russia as Central Asia. Russia, in turn, is going to be for us a category in itself. How socialist China or Vietnam in the late 20th or early 21st century worked or are working is a substantive question – chiefly because of the size of these two countries – which we will discuss in a later chapter at some length. We exclude from the analysis countries in Asia, Africa and Latin America (even Cuba) which in many ways fitted into Kornai’s description of socialism, but historically were not integral parts of the Soviet and Chinese communist empires.

Chapter 2

Legitimacy under Communism and Post-communism: Theoretical Background Using Weber’s theory of legitimacy, we aim to distinguish the ideal types of domination in order to use them as a base from which we can explain and discuss the various ways regimes legitimated themselves during and after communism. This will help us to see more clearly how countries entered into a legitimation crisis and to what extent this led to the collapse of communism. Then, as we move on to look at post-communism, we will trace the different ways capitalisms seek legitimacy. We cannot simply describe any concrete system with any of Weber’s ideal types of domination (or pure types of authority). This was also not Weber’s intention. As a neo-Kantian, Weber defined ideal types as mental constructs and therefore no empirical reality would fit any of these ideal types. In this book, we proceed in the spirit of Max Weber. It is more useful to ask which the dominant system of authority is, which the complementary systems are and how their weight is changing over time. This mix of various types of authorities  is also dynamic. It changes over time and this change is not unidirect­ ional. After the collapse of communism, many commentators expected post-­ communist countries to move to pure legal-rational authorities and the surviving traditional and charismatic components to disappear. In some cases, they were proved right, in other cases not. In post-communist regimes, traditional and charismatic authority play an even more important role in later stages than in earlier ones. Our purpose here, therefore, is to define Weber’s theory of legitimacy as we will use it in this book. 1

When Is a Rule ‘Illegitimate’?

Our point of departure is Weber’s distinction between power (Macht) and domination/authority (Herrschaft). The dispute over how to translate Herrschaft into English is indicative of the controversy about some of the issues of legitimacy. Talcott Parsons provided us with one of the first – at that time still incomplete – translations of Economy and Society into English. He

© koninklijke brill nv, leiden, ���� | doi:10.1163/9789004413191_003

14

Chapter 2

translated it in a very American way as ‘authority’1 (the German word for this, ‘Autorität’ is occasionally also used by Weber (1947) – implying the respectability of those who issue command, rather than emphasizing the asymmetry of power relationships between those who dominate and those who are subordinated to domination). At just about the same time, Gerth and Mills (1946) translated Herrschaft as ‘domination’. Parsons was a political conservative, while Mills was on the political left and Gerth, as a native German speaker, had an arguably deeper understanding of what Herrschaft meant. The issue of whether Herrschaft means authority or domination is of some importance when attempting to understand Weber’s work and especially his theory of legitimation. Weber himself was hesitant in his terminology. In his earlier drafts of Economy and Society, he used the term ‘Autorität’ quite often, but in subsequent drafts for what was eventually published as Chapters One to Four in the version of the book edited by Marianna Weber (Weber 1978) and in chapters obviously written later (sometime between 1919–1920, while the earlier versions were written around 1914 or before2) suddenly the word ‘Autorität’ almost completely disappears and Herrschaft becomes dominant.3 In order to understand why this is important we need to go back to the distinction between Macht and Herrschaft. In the chapters he wrote later (1919– 1920), Weber sets his mind to what the difference between the two forms of exercising influence on others might be. As he puts it so eloquently in the last version of the book, power (Macht) is the probability that one actor within the social relationship will be in a position to carry out his own will despite resistance (mwg, Band 23: 210).4 And Weber now has a clear definition of what Herrschaft is: “Domination (Herrschaft) is the probability that a command … 1 Astonishingly, Parsons does not translate the term Herrschaft once as ‘domination’. He is in pain when he has to translate Herrschaft from the German original – see now mwg, Band 23, 2013: 210 – where Herrschaft is so obviously not simply authority – a respectable exercise of power – so he invents the impenetrable concept “imperative control” (Weber 1947: 152). This captures the tone of the concept better than ‘authority’, but still misses the idea of ‘subordination’ in the notion of domination. 2 Edith Hanke is uncertain how to date the first formulation, but believes that it has to be dated before wwi, mwg, Vol. 22–4, 2005, p. 118. 3 Contrast mwg Band 22, Teilband 4 (written in 1914 or before) and mwg Band 23 (written in 1919.1920) where the term ‘Autoriät’ hardly appears. When, in the first published version of Economy and Society, Weber defined Herrschaft he put the term ‘Autorität’ in brackets and quotation marks. Herrschaft (“Autorität”), see Weber 1978: Vol. i: p. 212 or mwg, 2013, Band 23, p. 449. 4 In the draft written before the war Weber was already trying to emphasize that Herrschaft implies obedience to command: “… in our terminology domination shall be identical with authoritarian power of command” (Weber 1978: 946; Weber 2005: 135).

Legitimacy under Communism and Post-communism

15

will be obeyed”. This is about as clear as it can get. Hence Macht (power) + ­legitimacy = Herrschaft. (This is our formulation, for, to the best of our knowledge, Weber himself never reduced this to such a simple formula). What is critical for Weber’s theory of domination is the need for the one who dominates to be capable of achieving some level of ‘belief’ that he/she (or the system he/she represents) is at least under the given circumstances, the most reasonable one, or at least better than all possible alternatives. Those who obey orders do so – at least to some extent – ‘voluntarily’. No system of domination can sustain itself merely by customs, personal advantage or even effectual or idealistic attachment to the person who exercises authority: …[E]very genuine form of domination implies a minimum of voluntary compliance, that is, an interest… in obedience… …[C]ustoms, personal advantage, purely effectual or ideal motives of solidarity do not form a sufficiently reliable basis for a given domination. In addition, there is …a further element, the belief in legitimacy… [E]very system attempts to establish…the belief in its legitimacy. weber 1978: 212–213

Many important questions stem from this definition. For us, the crucial question is how to interpret the notion of belief. What kind of, and how strong a belief do those subordinated to authority need to hold in order to acknowledge domination as legitimate, and who should hold such ‘beliefs’? In order to appreciate Weber’s sophistication, one needs to understand his claim that the privileged groups are not superior to those under their domination. They merely base their claim for obedience on the myth of their superiority. In Weber’s words: “Every highly privileged group develops a myth of its … superiority. Under the conditions of stable distribution of power that myth is accepted by the negatively privileged strata” (p. 953). Hence those who obey orders typically suspect that those who dominate are justifying their superiority by a ‘myth’. Their belief, therefore, is likely to be rather ‘passive’. (This is quite possibly something we are contributing to Weber interpretation; we have, at least, not read it anywhere else yet.) The ‘masses’ (our term, not Weber’s) are unlikely to have a positive, or affirmative belief in their masters, rulers, leaders or bosses. They will believe that the domination imposed on them is justified since at this point in time the masses cannot find a realistic alternative. I do not have to love my master, king, husband, prime minister, ceo, Dean, department chair or whatever: that person will exercise authority over me as long as I believe this person is better than any of his or her alternatives.

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Arguably, it is a different story when it comes to the ‘staff’. (This is again our emphasis, and not common in Weber interpretations.) In every complex society, domination is exercised through a staff and unlike ordinary people (or the masses) the staff is supposed to have a positive, affirmative belief in the myths which justify/legitimate authority. Hence, if the staff loses its positive belief in the myth of domination the legitimacy of the system may be in crisis. In contrast, if the masses – who, as we have argued, have probably never had a positive belief in the legitimacy of those in power – begin to consider a possible alternative ruler/master, the system is facing only a ‘legitimation problem’. (We are, we think, the first to make this sharp distinction between a legitimation problem and a legitimation crisis.) It is crucial to understand that, for Weber’s interpretative sociology, the purpose of the concept of legitimacy is to interpret the various ways domination has operated through the course of human history. His task was to write a ‘genealogy’ (this is, of course, Nietzsche’s term; Weber does not use it). In the theory of rationality, Weber resisted the idea of calling a certain type of human action ‘rational’ and others ‘irrational’. Weber is similarly careful to use the terms ‘illegitimate’ as distinct from ‘legitimate’. As for identifying a social organization which had existed only for the past hundred or two hundred years (one ‘legitimated’ therefore by the rule of law and/or majoritarian approval of those subordinated to authority) as ‘legitimate’ and thinking about the rest of human history as ‘illegitimate’, nothing could have been further from Weber’s mind. For Weber, both ‘irrational’ action and ‘illegitimate’ social order were marginal or exceptional cases. He preferred not to ask, is this action rational, or is this social order legitimate, but rather to explore what the rationality of this action is, what the grounds of legitimacy of this order are. Just as in his theory of rationality, in his work on legitimacy Weber makes a critical distinction between ‘irrational’ and ‘non-rational’, ‘illegitimate’ and ‘non-legitimate’ types of actions/systems. As an interpretative social scientist, he resisted the temptation to call certain social actions ‘irrational’, but he had no problem in defining social actions as ‘non-rational’. (He also used the terms ‘effectual’ and ‘traditional’ as distinct from ‘rational’, and qualified the term ‘rational’, writing ‘instrumentally rational’ or ‘value rational’). Similarly, Weber uses the term ‘non-legitimate authority’ when he is describing the ‘Western cities’ (by which he meant European cities). The autonomy of Western cities implies an emerging ‘counter-hegemony’ (to use the Gramscian term), by replacing the notion of subject with the notion of citizen. The key question is: what ‘myth’ are those who exercise authority basing their claim to the people’s obedience? Is it based on references to legal- rational order, to tradition, or to the charisma attributed to the leader? A system based purely on coercion (Macht) was, as Weber saw it, unlikely to reproduce itself. All lasting power

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needs to create a myth for its legitimacy and foster a belief in this myth on the part of the masses or the ordinary people. For Weber, then, ‘illegitimate’ social order is something exceptional, not a lasting system, much as, in his view, ‘irrational action’ is not social action. All social action is meaningful: it will be either rational or, at the very least, ‘nonrational’. His question was: what were the various grounds on which those in position of authority could request obedience from those subjected to their authority in different epochs of history. The question was not, therefore whether this order is legitimate or illegitimate, but rather, what is the basis for this system’s claim to legitimacy. But before we proceed any further – with an exploration what the various kinds of systems of legitimation are – let us return to the distinction between the masses and staff and the question of who must hold what kind of belief in order to have a legitimate system. The relationship between ‘staff’ and ‘ruler’ (by ruler we simply mean the person/office issuing commands to be obeyed) is quite central to Weber’s theory of history. As history unfolds or ‘develops’,5 the relationship between the ‘ruler’ and the ‘staff’ changes. Indeed, in the most elementary form of social organization (still observable in the family), namely patriarchal authority, the ruler has no staff. In more complex forms – let us call it prebendalism – the staff has only rather limited claims to the means of administration (and property). Allocation of these is at the discretion of the ruler. In contrast, under patrimonialism, at least some of the means of administration (and, to anticipate our argument: some of the property rights) are appropriated, though with some limitations, by the staff. In what he calls bureaucratic or legal-rational authority, no individual (neither the person in authority nor his/her staff) has the right to employ coercion. The state has the monopoly on the use of coercion, though here we should add that the private property rights of all individuals and incumbency of office remain secure. We will elaborate further on this later in this chapter. There will, necessarily, be differences between the kind of belief the masses have in the legitimacy of the rulers, and the kind held by staff. Ordinary people or the masses usually do not have a particularly strong ‘love’ for their rulers. Throughout most of history, these rulers were simply their ‘masters’ and there to be obeyed, but not necessarily loved. The relationship between the people and their ruler is, therefore, rather negative. However, the staff is supposed to

5 Roth and Schluchter suggest that Weber has no theory of ‘evolution’. Instead, he conceived of ‘development’ over time (Roth and Schluchter 1979: 195–206; and Schluchter 1981: 1–5).

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have a closer, a more emotional relationship to their ruler. They must have a positive belief in the legitimacy claims. We hinted briefly at the possibility of such a thing as non-legitimate authority. As we pointed out, the prime example for Weber of non-legitimate authority is the Western city. Interestingly enough, in the German original – the text published posthumously – Weber did not use the term ‘non-legitimate authority’ (mwg 1999, Band 22–5: 59). We assume the term ‘non-legitimate domination’ was added as a subtitle for Chapter xvi “The City” (Weber 1978: 1212) by Marianna Weber, who edited the entire work for publication. Nevertheless, the term ‘non-legitimate authority’ (in line with the logic of non-rational as distinct from irrational) is a sensible one. What is the bottom line in the manuscript Die Stadt? Our short answer is this: the city which emerges in the West has one exceptional feature: it is an island in the ocean of traditional authority, an island which introduces a new principle; the principle of jus soli by offering Bürgertum, or ‘citizenship’ (and freedom from the master) for all those who spent a certain amount of time in the city. It introduces a new principle of ­legitimacy – territoriality – which is not accepted as legitimate in the surrounding ocean of traditional authority, where everyone’s identity is decided by jus sanguinis, i.e., by ancestry. ‘Stadtluft macht frei’ (the city air makes you free) is the ‘non-legitimate’ principle of the Western city, and is unknown in other cities in history (mwg 1999, Band 22–5: 105). It implied that someone who spent a relatively short period of time in the city and swore allegiance to it would become a ‘Bürger’, or citizen of that city, and that his master would no longer be able to reclaim him. Non-legitimate authority implies an embryo which begins to grow within the wombs of a previous system of domination. It is not legitimate yet, but has a reasonable chance of becoming legitimate. No determination is implied: non-legitimate authority does not necessarily become legitimate. Let us refer to a more recent example. Members of communes in the 1960s might have believed the way they were living – that might have involved promiscuity – could eventually become the norm, would become a legitimate way to live. This has not ­happened – so far – but that does not mean it was not a potentiality. Let us now summarize what we have said so far: legitimate systems are those in which the people subordinated to authority accept their subordination since they cannot define a better alternative and in which the staff of the person issuing orders has a firm belief that the master’s claims (myths for his superiority) are valid. Systems are illegitimate if they have to coerce those subjected to authority to obey orders, if they are obliged to jail, kill, and torture masses of people in a rather unpredictable way to obtain obedience. Illegitimate authority is unlikely to be sustainable in the long run. Legitimate order

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always assumes some degree (even if a weak one) of belief and voluntariness. People obey orders from an illegitimate authority only if they are afraid of what will happen to them if they do not comply, i.e., if they are concerned for their lives and their livelihoods. 2

The Three Ideal Types of Legitimate Authority (and the Fourth)

Weber makes a distinction between three ‘ideal types of domination/ authority’: – traditional, – charismatic, and – legal-rational. The distinction between the initial three types serves a dual purpose: – It is part of his philosophy of history. To put it brutally simply: history develops from earlier stages. (It is not ‘evolution’, since (i) societies can be ‘stuck’ at earlier phases of ‘development’, and (ii) interpretative social scientists have no way of claiming that later phases are superior to earlier stages.) – While the typology is mainly historical, it is also ‘trans-organizational’. Every actually-existing society can be interpreted as a mix of the three types of domination. Every actually-existing system will have some elements from all three ideal types. (Indeed, as we will try to show, from all four types.) We may live in a legally-rational social order, but political leaders may occasionally still have charismatic appeal, and in the family (or in our universities) we may be subjected to patriarchal authority. Nevertheless, in a lecture delivered in Vienna in the fall of 1917, Weber considered a fourth possible type of authority, and we will briefly deliberate on this. We may live in a legalrational order where the executive is not in its place by the will of those subordinated to authority (this is the case for instance when a king rules in a constitutional monarchy) or those who exercise political authority may not have majoritarian approval but they may operate with a predictable system of law. This is very much the essence of the Weberian approach (see Figure 1). Our task is to explore the nature of legitimacy in any society: to what extent is a society governed by legal-rational authority? Are there some elements of charismatic or traditional authority present in this social system? It is never a matter of either/or; a better question would be: what is the empirical mix in any concrete empirical reality? First, let us briefly review the three ideal types Weber presented to us in Economy and Society. We will then supplement it with the fourth type at the

20

Chapter 2 Obedience is due to

Law or preestablished rules

Legal - rational authority (3)

Designated by tradition

Traditional authority (1)

Figure 1

Ruler, selected by ‘Wille der Beherrschten’ (4)

Personal master

Based on personal charisma

Charismatic authority (2)

The four types of domination in Weber’s works. Source: Created by Authors

end of this section of the chapter. This classification is based on whom obedience is due to and on what grounds in the various systems of domination. It is important to note that the ontological status of the four types of authority is not quite the same. While traditional authority (1), legal-rational authority (3) and authority based on the Wille der Beherrschten (4) are stable forms, charismatic authority (2) is a ‘revolutionary’ (i.e., ‘transitional’) force. Legalrational authority does not necessarily imply the fourth form (Wille der Beherrschten) and it is not a precondition of the fourth form. After this clarification, we begin the discussion – as it is usually presented by Weber in Economy and Society – with a brief review of traditional authority. 2.1 Traditional Authority Let us begin with Weber’s mature definition of traditional authority: – “Legitimacy is claimed for and believed in by virtue of the sanctity of ageold rules…” (p. 226) – “The masters are designated according to traditional rules and are obeyed because of their ‘Eigenwürde’ (traditional status)”. (p. 226) – “This…rule is…primarily based on personal loyalty…” (p. 227) – “The person exercising authority is not a superior, but a personal master”. (p. 227) – “Obedience is owed not to enacted rules, but to the person…” (p. 227)6 6 All direct Weber citations in this section are from Weber (1978) throughout the remaining part of this chapter.

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This seems to be clear enough as an attempt to describe pre-modern or traditional societies. Weber goes a great deal further and characterizes various types/phases (given his dedication to ‘developmentalism’ we try to avoid terms like ‘stages’) of traditional authority. 2.2 Charismatic Authority Not much remains to be said about the second, transitional form of authority: charismatic domination. This is also straightforwardly expresse, quite obvious and, in some form or degree, is a concept applicable not only to archaic societies, but also to the world of the 20th or 21st centuries. Weber’s definition is clear: “The term ‘charisma’ will be applied to a certain quality of an individual personality by virtue of which he is considered extraordinary and treated as endowed with supernatural, superhuman, or at least exceptional powers or qualities. These… are not accessible to the ordinary person, but regarded as of divine origin or as exemplary…” (p. 241). People who subject themselves to charismatic authority consider the person wielding it to be extraordinary (almost superhuman or divine). Charisma, then, is not an innate characteristic of a leader, but one that is attributed to them by their followers. But why would the followers do this? Why would they consider another ordinary person as extraordinary, divine or exemplary? Weber has a good answer. People ‘create’ charismatic leaders in time of great transformation and crises when there is great need for a leader who can deliver miracles and resolve apparently unresolvable problems. Charismatic leaders offer hope to the hopeless and promise paradise on Earth. And what if they cannot deliver? They lose their charisma: If proof and success elude the leader for long…it is likely that his charismatic authority will disappear. (p. 242) [The charismatic leader gains and retains his authority]…solely by proving his powers in practice. He must work miracles…If the people withdraw their recognition, the master becomes a mere private person… (pp. 1114–1115) No wonder, then, that charisma is the ‘revolutionary force’: In traditionalist periods, charisma is the great revolutionary force… (p. 245) [B]ureaucratic rationalisation, too, often has been a major revolutionary force…But it revolutionises with technical means…’from without’…Charismatic belief revolutionizes men ‘from within’… (pp. 1116) In pre-rationalistic periods, tradition and charisma between them have ­almost exhausted the whole of orientation of action. (p. 245)

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Charisma is in the ‘eye of the beholder’, not a characteristic of the person who is regarded as charismatic. The term is borrowed from theology7 and indeed the pure types of charismatic leaders are the founders of great religious movements. Nevertheless, there are leaders who strive for and acquire the status of being charismatic even in modernity or even under legal-rational authority. Weber himself considers exceptional individuals in sciences or the arts to be charismatic. Whether they have real charisma, are they are pseudo-­charismatic leaders or they have only fake charisma is another question.8 We take an eclectic position here – Weber’s theory of charisma is an ideal type; as it does not really exist in a pure form it is reasonable to look for signs of charisma in nontraditional settings as well. One thing should be crystal clear: charisma is a type of domination, a transitory phenomenon. It stands between one form of traditional authority and another. Hence (arguably with the exception of the Roman Catholic Church – and even there with great difficulties), it is hard or impossible to pass charisma on from one leader to the next. Once a charismatic leader loses his/her charisma or has passed away, he/she is more likely to be replaced by a certain kind of traditional authority (see Figure 2). Or, on rare occasions, charismatic authority will be turned into legal-rational authority. 2.3 Legal-Rational Authority At first glance, it might seem that a definition of legal-rational domination will be simple and clear. It is only when we dig deeper, that it becomes a little more complicated. So how is ‘obedience’ attained under this form? – “…person in authority, the ‘superior’, is himself subject to an impersonal order… – …the person who obeys authority… obeys only the law… – …members do not owe obedience to [superior] as an individual, but to the impersonal order…” (pp. 217–128)

7 The term was probably borrowed by Weber from Rudolph Sohm, and from his two volume book on Kirchenrecht (1892). 8 There is a large literature on this subject. Edward Shills, in his 1965 “Charisma, Order and Status” takes Weber’s idea and tries to adapt it as a broader concept which can be applied to modernity, one may say even to the mundane world. Others have taken a different direction, questioning whether in modernity, charisma can be abused or faked, in the way Hitler or Stalin did or if it can be abused for commercial purposes. See Joseph Bensman and Michael Givant, (1975) and more recently Costa et al. (2007). Are Putin, Xi or Orbán charismatic leaders? This is a good question for social sciences in the early 21st century.

23

Legitimacy under Communism and Post-communism Types of traditional authority With staff

Without staff Patriarchy

Staff receives benefice Prebendalism (Insecure property)

Figure 2

Staff receives fief Patriomonialism (Secure, but inalienable property)

Types of traditional authority in Weber’s works. Source: Created by Authors

What is clear that obedience is not due to a personal master but to pre-­ established laws and rules and the person in authority is subject to the same laws  and rules as anyone else. The authority, therefore, is legal rather than personal. What makes it rational? – the fact that it allows rational calculation. The rules have to be pre-established, they cannot change at the discretion of the person in authority and it follows that legislation can never be retroactive (that would make rational calculation impossible). Rational calculation is critical for Weber: he goes on at great length to explain why traditional or charismatic authority is inconsistent with modern market capitalism. Traditional authority is not conducive to capitalist development, because: [T]he general character of the administrative practices [of traditional authority] … restrict the development of rational economic activity… [in the following ways]: – Traditionalism places…obstacles in the way of formally rational regulations, which can be dependent upon to remain stable and hence calculable… – A staff…with formal technical training…is typically absent. – There is a wide scope for actual arbitrariness… – [It had] an inherent tendency to regulate economic activity in terms of utilitarian, welfare or absolute value. (pp. 239–240) Charismatic authority is not conducive to capitalist development and it is actually an ‘anti-economic force’ because: Since it is ‘extraordinary’, charismatic authority is sharply opposed to rational and particularly bureaucratic authority…Bureaucratic authority is…rational…[by] being bound to intellectually analysable rules; while

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charismatic authority is specifically irrational in the sense of being ­foreign to all rules. (p. 244) …[C]harismatic want satisfaction is a typical anti-economic force… [it constitutes] an irregular, unsystematic acquisitive act. (p. 245) Hence the only form of domination that is consistent with the requirement of market capitalism is legal-rational authority. It could actually be called a system of ‘liberalism’. But what is the relationship between liberalism and democracy? What matters is that this is a system in which there is the rule of law, i.e., regulations which apply equally to all members including the persons in authority. But where do the laws or rules come from? As late as 1919–1920, Weber did not have a definite answer to this question: Legal authority rests on the acceptance of the validity of the following… ideas: – …norms [laws] may be established by agreement or by imposition (our emphasis),9 on grounds of expediency or value rationality or both. – ….law … [is]… a consistent system of abstract rules which …[was]…intentionally established… (p. 217)10 Hence rules or laws can be established by ‘imposition’ or can be attained by agreement (though Weber is silent about the critical issue: agreement by whom, and how such an agreement would have to be reached in order for the rule to be legitimate; he emphasizes only ‘intentionality’). To conclude, legal-rational authority may be a democratic polity or it may not. The question that has haunted political science since the 17th century, ever since the time of Thomas Hobbes and John Locke (namely the question: who is the source of law?) is not addressed in Weber’s typology of domination. For him the critical question is: what is the most suitable political system for capitalist development? It has to be liberal, but – by implication – it does not necessarily have to be democratic. Liberal autocratic (e.g., Pinochet in Chile) or authoritarian regimes (e.g., Gulf monarchies) have a reasonable record in achieving capitalistic aims as long as they are legal-rational. Or are they obliged eventually to turn to democracy? We may have a strong personal political commitment to such a project, but as social scientists we do not know. Some political theorists have argued (and this is contested by ­others) that democracy, which is by far the best ‘shell’ of capitalism (as Lenin (1917) put it). This was actually achieved by the anti-capitalist struggles of the working class, which forced capitalists to political compromises such as the 9 10

Our emphasis. All citations are from Weber (1978).

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welfare state and universal suffrage. As to whether capitalism needs d­ emocracy or not, whether democracy was forced upon capital by labour or is also the most efficient political tool for private gains, Weber reserved judgement. But one thing he was certain about: there is no capitalist economy without liberalism. This concept of liberalism implies: – rule of law and stability of laws (and inevitably a separation of executive – power from legislative power, no matter how legislative bodies are constituted), – equality before the law (which requires an independent judiciary) – security of private property rights. Weber was not as specific as we are now, but all this follows logically from his theory. 2.4 The Fourth Type of Domination: Wille der Beherrschten But the question of how liberalism is related to democracy was nevertheless on Weber’s mind, and this is why, in a 1917 Vienna lecture, he considered a fourth type of domination (rarely noticed in Weber scholarship11). The Neue Freie Press reported on this lecture in the following way: Schließlich ging er [meaning the lecturer, hence Max Weber] zu der Darlegung über, wie die modern Entwicklung der okzidentalen Staatswesen durch das allmähliche Entstehen eines vierten Legitimationsgendankens charakterisiert war, derjenigen Herrschaft, welche wenigstens offiziell ihre eigene Legitimität aus dem Willen der Beherrschten ableitet. mwg 2005, Band 22–4: p. 755

Unlike in his theory of legal-rational authority, legitimacy may now stem from the ‘will’ of the people. But Weber cannot help it: he is a liberal in despair (as Mommsen characterized him). After all, these people are the Beherrschten (they are subjected to domination), and the resulting system is still a system of Herrschaft rather than the realm of freedom. To conclude, Weber takes no stand about the question of what is the best ‘shell’ for capitalism: liberal autocracy (e.g., Singapore), enlightened autocracy which offers some legal stability – at least in business dealings (e.g., United Arab Emirates or post-Mao China) or liberal democracy. If we want to be honest – no matter how much we love ­liberal democracy – as social scientists, we still do not have a definite answer to this question. 11

Edith Hanke mentions this in her Introduction to mwg 2005, Vol. 24–4: pp. 86–87, but without elaborating on it. See also pp. 745–746.

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Weber’s 1917 lecture and his introduction of the idea of the fourth system of legitimation by the Wille der Beherrschten is particularly important since, surprisingly, in legal-rational authority Weber does not address the question of who the sovereign is or what the source of laws and regulations is. Weber neatly sidesteps this centuries-old theoretical controversy. Laws either emerge from consent (but he does not dwell on the question of who should consent to what…) or by imposition (and he does not address the question of who should have the right to impose the laws). So, to put it very simply: Weber states that legal-rational authority is a liberal principle (rule of established laws that apply equally to all, including the ruler), but he does not assume that it arrives in a democratic way. In our reading of it, the fourth system of legitimation is a somewhat ironic definition of democratic legitimacy. After all, this is legitimated by the will of those ‘subjected to authority’, not the will of ‘free citizens’. This is, therefore, a kind of Foucauldian ironic comment about what ‘will’ can be. Nevertheless, this was all articulated before the collapse of the largely-­ liberal German monarchical autocracy and before the Weimar experiment with liberal democracy. Let us also add that Weber was speaking about the ‘will of  those subordinated to authority’ in October 1917, a few weeks before he was  able to witness the illiberal autocracy which emerged as a result of the  ­communist revolution in Russia. It is possible that he was hoping that ­post-revolutionary Russia and the Weimar Republic would become liberal democracies. It is telling though, that when Weber rewrote his theory of legitimacy in 1919–1920, the ‘fourth type of legitimacy’ disappeared. Given the mess that the Bolshevik revolution had produced in Russia and chaotic nature of the Weimar Republic, Weber – probably wrongly – expected the solution to come from charismatic leaders, rather than Wille der Beherrschten. What a tragic mistake: while in the Euro-Atlantic region, at least, the dominant form of domination became ‘liberal democracy’, charismatic leadership led, in fact, to disaster. The authors of this book believe that a combination of legal-rational authority (liberalism) and Wille der Beherrschten (democracy), is arguably not a perfect, but still the best system of governance (as Churchill put it) humankind has invented so far. 3

Various Types of Traditional Authority

Let us return to the discussion of what Weber called ‘traditional authority’, something which is important for this book, and especially for Chapters 5 and 6. As we have pointed out before, Weber’s distinguishing between the various types of authority has two purposes:

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– It aims to offer a typology of social formation over time. (In a way this is a substitute for what Marx offered as a history of ‘modes of production’.) – At the same time, however, it can be used also as an analytic tool to dissect the ways domination operates in any social formation, including modern societies. While modern societies are primarily legal-rational authorities, they may maintain some traditional elements. It is not particularly controversial to suggest that patriarchal authority exists in modern societies, even under legal-rational authority. Nevertheless, the most provocative hypothesis of this book is our claim that other forms of traditional authority, such as prebendalism or patrimonialism may co-exist with a (usually deformed) system of legal-rational and democratic authority (therefore with the Wille der Beherschten). Now let us turn to the four pure types of traditional authority: patriarchy, sultanism, patrimonialism and prebendalism, and offer hypotheses about how they can be applied to an analysis of contemporary societies. 3.1 Patriarchy The concept of patriarchy is simple. So here we go: [Patriarchalism is] …the most elementary form of traditional domination where the master has no personal administrative staff. (p. 231) …The decisive characteristic [of Patriarchalism] is the belief of the members that domination, even though it is an inherent traditional right of the master, must definitely be exercised as a joint right…of all members. Hence the master is still largely dependent on the willingness of the members to comply with his orders…Therefore the members (Genossen) are not yet really subjects (Untertanen). (p. 231) This sounds like a good description of tribal societies, or, by the way, the families we happen to live in. And indeed, he elaborates it further to make sure it is clear enough that elementary form of patriarchy can be understood as ‘domestic authority’: “[Under]…elementary Patriarchalism…the patriarch’s authority carries strict obligations to obedience only within his own household… [I]t has only exemplary effect….or must resort to advice or similar means of influence” (p. 231). This is a sort of domestic authority … [Taking its point of departure from]…the belief in authority [that] is based on personal relations that are perceived as ­natural. This belief is rooted in filial piety…. The women are dependent ­because of the normal superiority …of the male… Paternal power… [is]

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not primarily based on actual blood relations… [It] is…power of disposition over property even after the …recognition that procreation and birth are connected. weber Vol. ii: p. 1001

The point we are trying to make is this: patriarchy is not merely an archaic form from the distant past. The concept – much like almost all Weber’s other concepts – is equally applicable to historical analysis or the analysis of contemporary institutional arrangements. The other forms of traditional authority operate with staff. Weber distinguishes three types of these. His terminology can be somewhat confusing. What it is especially unclear, is the meaning of the term ‘patrimonialism’. In the early draft, patrimonialism is a generic term. It refers to all three types of traditionalism. He, for instance, distinguishes ‘primary patrimonialism’ from ‘patrimonial state’ and the ‘prebendal form of patrimonialism’ based on benefices, rather than fief. Let us offer the following simplification of Weber’s complex analysis of the three forms of traditional domination (and hopefully bring some clarity to the conceptualization). 3.2 Prebendalism (the Purest Case Is Sultanism) In some cases [the members of administrative staff] are purely personal instruments of the master… [When authority] operates primarily on the basis of discretion [of the ruler], it will be called Sultanism…. Sometimes it appears that Sultanism is completely unrestrained by tradition, but this is never in fact the case. The non-­traditional element is not, however, rationalized in impersonal terms, but consists in an extreme development of the ruler’s discretion.12 Under this system the staff possesses the means of administration by the grace of the master and enjoys absolutely no security of property rights. Property is not inherited, cannot be alienated and can be reallocated at any moment should the ruler decide unilaterally to do so. Prebendalism (vassals receive benefices) is more narrowly defined. Under prebendalism, the staff only partially appropriates the means of administration of material property. The staff receives benefices: We shall speak of benefices insofar as the forms of maintenance…are always newly granted in a traditional fashion…they can be appropriated by 12

Weber (1978), pp. 231–232. See for contemporary applications Chehabi and Linz (1998).

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the individual, although not in hereditary fashion…When an administrative staff is …supported…in this form, we shall speak of prebendalism. (p. 235) While sultanism offers no security whatsoever, under prebendalism the incumbent of the office can expect to remain in office and retain property as long as he/she assures the master of his/her loyalty and offers valuable services to the master. 3.3

Patrimonialism (“Feudalism”, Vassal Compensated by Fief ) Under patrimonial authority…. the administrative staff appropriates particular powers…Domination of estate type thus involves (i)…limitation of the lord’s discretion in selecting his administrative staff and (ii)…often…appropriation by…staff of (α) the positions…(β) the material means of administration…(γ) the governing power. weber: 232

What is crucial is the way in which the ‘material means of administration’ is appropriated. Under patrimonial rule narrowly defined, the staff is rewarded by ‘fief’: “… [T]he fief is the vassal’s personal property for the duration of the feudatory relationship, however, it remains inalienable, since it is intended to preserve the vassal’s service capacity” (Weber: 1074). The property granted as fief typically may even be inherited, hence patrimonialism with fief offers quite secure property rights (and also security of office). In patrimonialism, both office and property is relatively secure. The rights of disposal of property are, however, still limited in comparison with private property; property is usually inalienable, not being usually even mortgageable. It is only given in order to preserve the vassal’s capacity to serve. This is the major difference between old and new forms of patrimonialism. Historically speaking, sultanism was the form of domination characteristic of the Ottoman Empire, the ideal type of patrimonialism is West European feudalism, the best historical example is the Russian service nobility (or Pomeshchiki). 4

The Sources of Income and Wealth – A Complete Historical Overview

As we have already indicated, when the two authors of the present book began to meet together, they became interested in the clear distinction between rent

30

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and profit. In Chapter 4, we will review the history of the idea of profit and rent, mainly focusing on capitalist economies. Here, we will make an attempt to offer a few hypotheses of how the nature of economic systems changed through human history by adopting and expanding Karl Polanyi’s typology of ‘economic integration’. Inspired by Polanyi (1957), we add to the rent and profit distinction the concept of reciprocity. Reciprocity played a crucial and occasionally a primary role in ancient economies. No modern macro-economic system is integrated by reciprocity, but in household economies reciprocity can be still important. The categories of ‘income’ and ‘wealth’ hereafter will refer to private incomes and private wealth. In other words, we disregard the fact that through history public or state wealth was slowly being accumulated in every society – although it was often quickly destroyed by wars and/or natural disasters. But in any case, with the help of Table 3 below, we make an attempt to apply our rent-based approach to all societies in history by distinguishing between the sources of income on the one hand, and wealth on the other. Table 3 

The main sources of income and wealth in history

3a Tribal societies Income Profits and wages

Rents

Reciprocity

(3) Tertiary

(2) Secondary

(1) Dominant

In tribal, circular trade (Trobriand Islanders) boat owners may collect rents, and sailors may collect wages.a

If a tribe is larger than In smaller, symmetrical extended kinship, the kinship- based societies. chief is likely to collect rents ‘disguised’ as gifts. Wealth Inheritance

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3b Classical slave societies (Egypt, Greece and Rome) Income Profits and wages

Rents

Reciprocity

(2) Secondary

(1) Dominant

(3) Tertiary

Non-slave, free citizens (even some slaves) operate profit-oriented businesses.

Slave-owners appropriate all products of slaves.

Though kinship is broken, network of slaves can offer mutual help.

Wealth Profits and wages

Rents

Reciprocity

(3) Marginal

(2) Secondary

(1) Dominant

There are profit-oriented enterprises with accumulated wealth, but they are marginal.

Rulers assigned monopoly rights to nobles, financiers and manufacturers

Free people inherit wealth and slaves without restriction.

3c Patrimonialism (West-European feudalism) Income Profits and wages

Rents

Reciprocity

(3) Tertiary

(1) Dominant

(2) Secondary

Urban citizens may employ wage labour and generate profit.

Landlords collect rent from serves in exchange for protection and agricultural land use.

Serves are allowed to have their own households and produce means for their survival.

32 Table 3

Chapter 2 The main sources of income and wealth in history (cont.)

Wealth Profits and wages

Rents

Reciprocity

(3) Marginal

(2) Secondary

(1) Dominant

Especially in free cities there are profit-oriented enterprises, with accumulated wealth but they are marginal.

Monarchs assigned monopoly rights to nobles, financiers and manufacturers.

Nobles were granted lands by the Monarch in exchange for military service.

3d Sultanism (Ottoman Empire) Income Profits and wages

Rents

Reciprocity

(3) Tertiary

(1) Dominant

(2) Secondary

Profit-oriented enterprises There is no are rare and have no competition for security. income, clients receive income from patrons.

Patrons also depend on clients (tax farming). Patrons earn incomes, as long as their clients collect the taxes for them.

Wealth Profits and wages

Rents

Reciprocity

(3) Marginal

(2) Secondary

(1) Dominant

There is no security of businesses, therefore even profit-oriented enterprises are not likely capable of accumulating wealth.

From rental income accumulation of wealth is possible, but there is no guarantee that this wealth can be passed onto the next generation.

There is no security of wealth. Inherited property can be kept, if the patron allows this.

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3e Twenty-first-century feudal autocracies (Gulf States, Saudi Arabia, etc.) Income Profits and wages

Rents

Reciprocity

(3) Tertiary

(1) Dominant

(2) Secondary

Guest-workers (migrants) receive wages, which is higher than in their home countries, but less than the Emirati employer reasonably is capable of paying for their services. Some guest workers (especially Indians) may co-own with local businesses and earn some profit.

Oil production is limited by opec to keep oil prices well over production costs, hence a great deal of income of oil producing countries is rent. Qatar and the United Arab Emirates (uae) are today among the wealthiest nations in terms of incomes earned by ‘natives’.

All Emiratis and relatives of the royal family in Saudi Arabia receive generous benefits (education, housing, unemployment benefits and various presents).

Wealth Profits and wages

Rents

Reciprocity

(3) Marginal

(2) Secondary

(1) Dominant

For guest-workers, wealth can only be accumulated at home from the relatively higher wages in the Gulf monarchies.

Guest-workers who are allowed to run businesses have to give half ownership to ‘locals’, such as the Emirati. Their only contribution to business is to collect half of the profit as rent and that can be accumulated as wealth.

Weak in inherited kinship. Guest workers cannot inherit wealth either in uae or Saudi Arabia.

34 Table 3

Chapter 2 The main sources of income and wealth in history (cont.)

3f State socialism (all stages) Income Profits and wages

Rents

Reciprocity

(3) → (2) From tertiary to (1) Dominant secondary During the classical stage, the attempts to eliminate private businesses were prevalent, but not fully successful. In the reform period, private organizations within state firms and small businesses outside the firms were tolerated.

Redistributors (­planners) dispose with the entire ‘surplus’ supposedly in the public interest.

(2) → (3) From secondary to tertiary During the classical state, family networks correct redistributive failures (e.g. family food production, housing construction); in the reform period production for markets is allowed to a certain extent.

Wealth Profits and wages

Rents

Reciprocity

(2) Secondary

(3) Tertiary

(1) Dominant

The top of the nomenklatura was relatively well-paid.

Private property is prohibited; rental income is rarely accumulated into wealth.

Most of wealth is accumulated in families (mainly housing).

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3g Liberal, market capitalism (all stages and forms) Income Profits and wages

Rents

Reciprocity

(2) → (1) From secondary (1) → (2) From to primary primary to secondary

(3) Tertiary

In colonial times, within the core nations, some wealth is generated by profit-oriented businesses. In the globalisation period, profit seeking is the main sources of income and wealth.

Important for families (child rearing), but in advanced and modern capitalist countries some or most of mutual help tends to be institutionalized and commodified.

In colonial times, incomes of large private business often came from colonies as rents. In the globalisation period, the rentseeking capacity of core countries is reduced. Oligopolies and monopolies also collect rent, which can be restricted by anti-monopoly laws. Wealth

Profits and wages

Rents

Reciprocity

(3) Primary

(2) → (3) Secondary, tertiary

(2) → (3) Secondary, tertiary

Successful businesspersons and ultra-wellpaid company managers can accumulate large private wealth.

Real estates (mostly housing), privileged access to good higher education (e.g. alumni rights).

Free-market economies are open, but family status can be inherited and with limitation of markets family reproduction is becoming more important.

36 Table 3

Chapter 2 The main sources of income and wealth in history (cont.)

3h Post-socialist, illiberal capitalist regimes (all varieties) Income Profits and wages

Rents

Reciprocity

From dominant (1) to secondary (2) In the quasi-liberal stage, profits and wages are important. As the system moves to illiberalism and competition restricted it loses importance.

From secondary (2) to dominant (1) The dominant trend in illiberalism is rent allocation to those who are loyal to the executive power.

(3) Tertiary Welfare state, which was underdeveloped under socialism, is further cut back. Kinship becomes more important again (childcare, care of the elderly).

Wealth Profits and wages

Rents

Reciprocity

(3) Tertiary

(1) Primary

(2) Secondary, but its importance is increasing

It is increasingly All major wealth comes impossible to accumulate from rent in illiberal wealth either from free regimes. market earned profit or from wages.

The super-rich individuals are typically firstgeneration, but their children begin to inherit wealth.

a See Malinowski (1922). While in kula trade, each transaction exchange is based on gift (reciprocity) and therefore economically meaningless or even irrational, after the whole cycle is completed it turns out to be economically rational. The first island receives goods they need, though during their journey it looks like all action is ‘irrational’ or ruled by ‘tradition’. Source: Authors’ compilation (Tables 3a–3h)

Chapter 3

Varieties of Communism 1

Introductory Remarks

Communism as Convergence and Some Later Divergence under Communism Marx and Engels believed that communist revolutions would occur in the most advanced capitalist countries. In fact, real, non-imported revolutions took place only in relatively backward agricultural societies. While we can say with certainty that none of these countries were advanced capitalist states, the initial conditions in each of these cradles of communist systems were rather different. For some time though, there were substantial convergences among these countries, mainly stemming from the institutional homology of all communist systems. Countries like Czechoslovakia, Hungary, the gdr or Poland, which were somewhat advanced in terms of industrial and urban development, had communist systems imposed on them from the outside by the ussr. These countries were arguably the biggest losers when the communist transformation took place, because the revolutions helped only the less advanced countries to catch up with the dmes, both economically and socially. As we mentioned briefly in Chapter 1, communist societies were one-party states in which the party legitimated itself with Marxist-Leninist ideology. All such societies eliminated private ownership of the means of production. All such societies had redistributively-integrated economies where market forces played a marginal role if they existed at all. Areas in which these countries converged: a. There was some convergence in the proportion of agrarian to urban population. For instance, the gap between Czechoslovakia and Bulgaria, Romania and Russia narrowed after 1949 at least until the mid-late 1960s. Even China experienced some growth and modernization until its senseless Great Leap Forward. b. There were important similarities in the social structure of all communist societies. ‘Politics was in command’ – as Mao said – and that meant these societies were stratified by rank rather than class, social inequalities declined and some of the traditional, feudal structures which blocked development were crushed (Gray 1974). c. There was some convergence in terms of ‘habitus’. People who lived in these societies learned how to navigate social life given the institutional homology. A new, ‘socialist man’ was in the making. 1.1

© koninklijke brill nv, leiden, ���� | doi:10.1163/9789004413191_004

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There were also divergences over time and across nations under communism. The ussr until the late 1920s was politically and economically different from the ussr which emerged after forced collectivization and Stalinist despotism. After the death of Stalin, significant changes took place in all aspects of Soviet society. As we show later in this chapter, there were variations in how the system was legitimated (or whether it was legitimate at all). The political economy and social structure of communism also varied over time and across nations, China and Yugoslavia being the most striking examples of divergence from the Soviet model after their initial convergence with it. 1.2 The Making of the Communist World Empire: 1949 Expanding on Polanyi’s theory, we suggest that from 1949 a ‘socialist world empire’ was in the making, one which separated the communist countries sharply from the capitalist world system. Immanuel Wallerstein (1974) and other ‘World System theorists’ tend to see communist countries as ‘capitalists’, since they are integrated into the semi-periphery of the world market. We find Polanyi more persuasive. He made a critical distinction between market- integrated world economies and redistributively-integrated empires. While Polanyi never wrote about a Soviet world empire, he did, on at least one occasion, acknowledge that the Soviet economy can be seen as a modern version of a redistributive economy. Furthermore, he held some interaction between the ‘world system’ and ‘empires’ to be conceivable. According to Polanyi (1963) such interaction happens through ‘ports of trade’. Soon after 1917, the ussr became a redistributively-integrated ‘mini-Empire’. It was ‘socialism in one country’ though it did interact with the rest of the world through foreign trade companies (ports of trade). The Soviet economy was basically autarchic as only a small fraction of Soviet national income was coming from foreign trade (Armstrong 1948: 368–383). More importantly, even this small exchange with the capitalist world market was ‘buffered’ by foreign entreprises that were government-owned and run. Foreign trade was part of the state budget; no losses or profits could be made in the process. Under these circumstances, changes in the world economy had virtually no impact on the functioning of the domestic Soviet economy. 1949 was the end of ‘socialism in one country’ when Stalin established a Soviet World Empire which brought all communist countries under his control. For the purposes of foreign trade transactions, the Soviet World Empire was, for a few decades, consolidated in the Council of Mutual Economic Assistance (cmea or comecon as it was colloquially called by the Western press). cmea was created in 1949 and officially dissolved in 1991. The members were primarily the European satellites of the ussr, though there were some European communist countries which never joined (Yugoslavia, for instance),

Varieties of Communism

39

some communist countries which dropped out early (such as Albania) and some non-European communist countries which participated at one point in time (like Cuba, Mongolia, or Vietnam). In 1950, China joined as an ‘observer’ and was eager to promote the ‘dream of a socialist world economy’, but in 1961 it cut its ties with the ussr and comecon (William Kirby 2006). Initially, the central idea of comecon was indeed to create a network of world-wide economic cooperation which was isolated from the capitalist world market. 2

What Is/Was Communism? The Political Economy of the Classical System

The official Soviet and Chinese ideology made a critical distinction between socialism and communism. They insisted that their countries were merely in a socialist epoch that would eventually develop into communism. In Soviet Marxist ideology, people under socialism are rewarded according to their work, while under communism each will receive goods and services according to their needs. (Incidentally, in his early writing, Marx used the socialismcommunism distinction in the opposite way. In the Paris Manuscripts (1844) he wrote about ‘crude communism’ where the means of production are in state hands. He identified socialism as a more advanced stage, in which the means of production would be under the control of the direct producers). As we mentioned briefly in the Introduction, in this book we do not enter into this Talmudistic debate. Taking our lead from Kornai (1992), we simply use socialism and communism as synonyms: we also use the terms interchangeably. Let us here elaborate on Kornai’s theory about the three main characteristics of what he called ‘the classical system’ of socialism/communism. The three main characteristics he identified (and we mentioned earlier) are: (1) the political monopoly of a one-party state that legitimates itself with the ideology of Marxism-Leninism, (2) the means of production being held exclusively in public (state) ownership, and (3) a redistributive-integrated economy, markets playing marginal, if any role.1 As a first approximation, this will serve, but it needs a little clarification. 1. Let us start with the controversy about each of the ‘three characteristics’. It is unclear when a party can/ought to be called Marxist-Leninist. Is the

1 Kornai uses the term ‘bureaucratic co-ordination’, but our adaptation of Polanyi’s (1957) concept of redistributive integration (Szelényi 1978) is more often used in the literature, so we will use Polanyi’s term in this chapter. The two concepts are synonymous.

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Communist Party of China (cpc) Marxist-Leninist? Daniel Bell (2008) half-jokingly suggested that by now it should be called the Confucian Party of China. Indeed, in the legitimation of cpc, it appeals to nationalism and traditional Chinese values rather than Marxism. Was the Communist party of the ussr Marxist? Western Marxists often questioned this; they regarded Soviet Marxism as a deformed version of the doctrine and identified themselves as ‘Western Marxists’ (Anderson 1979). 2. The meaning of ‘public ownership’ is also contested. In some of his writings, Marx (and many Marxists following him) understood public ownership as ownership by ‘direct producers’ rather than by the state. Kornai’s definition refers to state ownership. For some Marxists, so called ‘actuallyexisting socialism’ based on state ownership was ‘state capitalism’ (Kautsky 1919), ‘bureaucratic collectivism’ (Rizzi 1939) or a ‘transitional society’ between capitalism and socialism (Trotsky 1936) rather than ‘real socialism’. According to this position ‘real socialism’ is based on collective ownership (whatever that means) rather than state ownership; 3. Kornai assumed that state/public ownership can only exist under ‘bureaucratic coordination’. Michał Kalecki (1970), Oscar Lange (1936–37) but many contemporary Chinese theorists have questioned this assumption (SHI Zhing-Liang 1998; DU Runsheng 2005; YU Guagyuan 2005). These authors believe in the possibility of market socialism. By the mid-1930s, Lange, a committed socialist faced with the inefficiencies of the Soviet economy, attempted to propose a reform. While leaving the public ownership of the means of production untouched, he proposed using the market mechanisms in order to increase the efficiency of the system.2 The idea of combining public ownership with market coordinating mechanisms haunted the political economy of socialism for quite some time. Similar reform proposals were put forward during Khrushchev’s time by E.G. Liberman in 1962. The realities of the Chinese economy also cast some doubt on Kornai’s model. Some China specialists, like Philip Huang (2012), on the far left or Yasheng Huang (2008), on the liberal side, see China as an integrated market, but they both doubt that private property has become dominant; hence the economy is not capitalist. Huang estimated that by the end of the first decade of the 21st century, 70% of non-agrarian products were still being produced by the state sector, while the imf put the same figure at 30%. Nevertheless, both Philip  Huang and Yasheng Huang agreed that interaction between publicly owned firms is market-regulated. Yasheng Huang claims that privatisation of 2 See discussion of Lange in Kornai 2008: 51–53.

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41

e­ nterprises mainly took the form of various state-owned banks and ­corporations buying up stocks of publicly owned firms which had been put on the stock market. In the corporate sector, individual private ownership exists, but it is still secondary. Philip Huang (2012) also claimed that the overwhelming majority of the 50 or so Chinese multinational corporations listed in the Forbes 500 were, in fact, state-owned. If this is correct, then China, in the early 1980s, had implemented something like what Hungarian economist Márton Tardos (1975) called ‘holding companies’. It is even not obvious what the trend is: while there has been at least some privatisation of the corporate sector since the late 1990s, under President Xi the role of central government is increasing. The question of whether ‘market socialism’ is a ‘contradiction in terms’, or a real possibility is, therefore, still a matter for debate. In the next section, we explore the nature of domination under various types of communisms. Were any of the communist systems legitimate? If  so  which Weberian type of legitimacy is applicable to which version of communism? 3

Systems of Domination under Various Types of Communism

3.1 Was Communism Ever Legitimate? Were communist societies legitimate orders? From the point of view of liberal democracy, it would be easy to characterize communism as ‘illegitimate’, but such a position could hardly be attributed to Weber. If we can find instances of communist social order where there is sufficient ‘voluntary compliance’ by the Beherrschten, Weber would not hesitate to see that order as legitimate and would ask what the foundation of this legitimacy is. In some communist regimes there was not much ‘voluntary compliance’, order being maintained by systematic coercion. Even Weber would not hesitate to call the Stalinist terror during the 1930s and after World War ii as illegitimate: the use of coercion was systemic. The same goes for China under the last period of Mao’s rule. Other – historically less infamous – examples are Cambodia under Pol Pot3 and Ethiopia under Mengistu Haile Mariam between 1977 and 1987.

3 He was the General Secretary of the Communist Party of Cambodia from 1963 to 1981. Between 1975 and 1979 millions were killed in his attempt to build an agrarian communist society. Before he became the ultimate leader, he was seen by many as a charismatic figure, see David Chandler (1999).

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3.2 Charisma and Traditional Authority There have been, however, long epochs of communism where order was maintained without coercion, where some kind of communist Herrschaft has been established. But what kind of Herrschaft? Commentators have given various answers. Some communist leaders, at least at certain points in time, established a charismatic order (the most eminent example would be Fidel Castro (Richard Fagen 1965)), but arguably Lenin and following Lenin’s lead even Stalin4 managed to establish themselves as charismatic leaders for a certain epoch. The same can be suggested for Mao (Teiwes 1984). The ‘personality cult’ was an obvious tool in manufacturing charisma for the leaders. Whether the result was real charisma or just pseudo-charisma is debatable.5 Some have described communism as traditional (Heller, Fehér and Márkus 1983) or neotraditional authority (Walder 1988). All these theories offer insights and are useful tools to explore empirically various cases of communist societies at different points in history. Arguably, most communist orders have a strong charismatic appeal in their earlier periods (we have already mentioned Stalin, Mao and Castro). The propaganda machine obviously played an important role in manufacturing such charisma and in generating feelings of enthusiasm for (this was called ‘personality cult)’, and dedication to the leaders who promised to deliver ‘miracles’ through ‘revolutionary change’. As the leaders either failed to deliver miracles or died, the system faced the difficult task of either institutionalising charisma or passing it on to another leader. Some communist systems degenerated into illegitimate, despotic systems which made use of massive, systemic coercion (as arguably happened in Cambodia, during the mid-1930s in the ussr and during the Cultural Revolution in China). On some occasions, successors made a stab at carrying on the charisma of their predecessors. The best example of this is Stalin during the 1920s, when he faked a ‘last will’ of Lenin appointing him as successor, put the propaganda machine into operation, and created a personality cult around himself (all of which did deliver some degree of charisma to the young Stalin (Tucker 1973)). Nevertheless, it was usually the case that, with the passing of the original charismatic leader, communist societies struggled to achieve some other type of legitimacy. In some cases, there was even an attempt to create some version of a rather classical traditional authority. Such is the e­ stablishment of the Kim dynasty in North Korea, now in its third generation (Martin 2004). 4 See Robert C. Tucker 1973, on Stalin’s charisma until 1929. 5 See Bensman and Givant (1975), T.H. Rigby (1983) also uses the term quasi-synthetic Charisma for Charisma under communism.

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In others, there was an attempt to create some kind of neo-traditional or paternalistic authority based on an elaborate patron-client relationship. This system was legitimated by claims that the party leadership or the individual leader of the party was taking good care – better than anybody else could – of the Beherrschten. The nomenklatura system6 played a key role here. An official in the party or state bureaucracy could not advance in the nomenklatura without the assistance of a patron. In return for this assistance in promoting his career, the client would carry out the policies of the patron. Patron–client relations institutionalized by the nomenklatura system thus help to explain the ability of party leaders to generate widespread support for their policies. The Search for New Authority: Reform Communism Legal-Rational Authority with Substantive Rationality There were also attempts (for a while rather successful ones) to claim that communist orders – in contrast with the ‘instrumental’ rationality, or ‘irrationality’ of the market – offered a higher level of legitimacy. This was based on the rationality of their goals rather than on the means used to achieve them. Communism enjoys, in other words, a ‘substantive rationality’ – or as RigbyFehér (1992) put it: a ‘goal rationality’ in contrast to the ‘formal’ or ‘instrumental rationality’ of market capitalism which, being only formal, is an inferior in terms of rationality (see Konrad and Szelényi 1979). Hence any investigation of varieties of legitimacy (or illegitimacy) in connection with communism requires historically specific empirical investigation. Actually-existing socialist societies combined various elements of all of Weberian ideal types. In a concluding remark on the subject, let us make a provocative statement. While communism appeared to be the opposite of legal-rational authority (­after all, if we go by its own aspiration, the essence of the Marxian project was to overcome the instrumental or formal rationality of market capitalism, the ‘anarchy of the market’), there were elements of legal-rational authority in all phases of communist development. For example, communist societies felt obliged to draft constitutions. Curiously, they often pretended that they were 3.3

6 The term nomenklatura (originally a value-free Russian word, borrowed from Latin, meaning a list of names) was widely used in the Soviet Union. In all former socialist countries (including China!), it meant a category of people who held various key administrative positions in the bureaucracy, running all spheres of society: government, industry, agriculture, academia, etc., whose positions were granted only with the approval of the communist party of the country. Virtually all members of the nomenklatura were members of the Communist Party. Nomenklatura is a similar concept to the western ‘Establishment’ holding or controlling both private and public powers (e.g., media, finance, trade, industry, state and institutions). In other words, nomenklatura is a broader concept than ‘elites’.

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operating under ‘the rule of law’: in the more difficult periods, they tortured prisoners until they confessed to crimes punishable by laws, even though everyone knew that these prisoners had never committed those crimes. Unlike the Nazis, who usually simply shot their enemies (or sent them to gas chambers) and did not bother with complicated legal procedures, Stalinism, even at times when it arguably was illegitimate, created ‘show trials’, the best known being that of Bukharin. Unlike the Jesuit inquisitors who probably mostly believed that the accused had committed crimes and tortured the prisoners to ‘find the truth’, Stalinist prosecutors – we assume – typically knew the prisoners were innocent. They tortured them into confessing invented crimes so that they could then be legally executed, capital punishment being what the law prescribed for the confessed crime. This was, arguably, a case of ‘fake legal-rational authority’ under communism, especially under its Stalinist version. Maoism during the Cultural Revolution is an extreme version, there having been hardly any law, or legal procedure. Fundamentally, however, all communist systems were, by definition, ‘illiberal’. Rule of law was a rule by ‘substantive law’ as defined by the Party (this was ‘class law’, ‘proletarian law’, rather than formal law applicable to all).7 None of the communist regimes were democratic.8 Those in authority may have been formally elected by some body, but they were de facto appointed as members of the nomenklatura under the control of the executive, be it the Politburo (or the first secretary of the Communist Party), the Central Committee, or some lower level party organization. All these were constituted by the same logic, top down, by appointment. None of these systems subscribed to any of the key principles of liberalism: separation of the legislative, executive and juridical powers, and the security/sanctity of individual property rights. But it is sensible to suggest that such ‘fake legal-rational authority’ was complementing legitimation beyond charisma, traditional authority or goal rationality. The ussr underwent important changes in terms of its systems of legitimacy. After 1917, Lenin was, some argue, recognized as a charismatic leader

7 George Lukács (1923) 1968, in his Legality and Illegality elaborated the difference between the formalism of ‘bourgeois law’ and the class character of ‘socialist law’. 8 We use here the term ‘democratic’ in the narrow sense: to refer to the way people in positions of political authority are selected by their people. Usually the ‘citizens’, or ‘free men’, these people have the right to vote. Communists tend to see this as the principle of ‘bourgeois democracy’. Lenin, in his paper ‘Democracy and Dictatorship” (1918), calls bourgeois democracy the dictatorship of the bourgeoisie over the majority, while socialist democracy is the dictatorship of the proletariat, the dictatorship of the majority over the minority. Hence for Lenin, the question is not the selection mechanism but rather the class character of political rule.

Varieties of Communism

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(XIN Lu and Elena Soboleva 2014). The revolution, and especially the civil war which followed, was bloody and packed with instances of coercion. Nevertheless, once ‘the “eggs” which were needed to make the revolution had been “broken”’ and the civil war had been won, some commentators believed that the Leninist regime enjoyed a certain charismatic legitimacy.9 Lenin’s death created a legitimation crisis. Stalin made a desperate attempt to transfer Lenin’s charisma onto himself, but he could not count even on the obedience of the staff. He had to exile and murder key members of the staff of Soviet power: from Trotsky to Bukharin, Zinoviev and Kamenev. Collectivisation led to millions of deaths (Nove 1975: 180). By the late 1930s, the ussr was ruled through coercion on a massive scale. Stalin even eliminated the elite of his military intelligence. This bloody clash between the ruler and the staff was a clear sign that the regime was falling into illegitimacy. By Montesquieu’s definition it was turning into ‘despotism’, which is kept together by the ‘fear’ of authority felt by those subjected to it. It was ‘darkness at noon’ (Koestler 1940). Nevertheless, Stalin arguably re-emerged as a charismatic leader during World War ii. By early November 1941, the German forces were advancing fast to capture Moscow. There were already plans to dynamite the Kremlin rather than have it fall into German hands. But the usual military parade still took place on November 7 with Stalin waving from Lenin’s Mausoleum. This was a symbolically important event and within a month the Germans, who were by December 2 only eight kilometres from Moscow, were stopped and turned back. This was the first Soviet/Allied victory against the Wehrmacht. The people of the ussr and especially the soldiers of the Red Army were looking for a miracle and a charismatic leader to deliver it. Though charisma was attributed to Stalin in the end, Georgy Zhukov’s account (1971) reveals that Stalin made several major mistakes in commanding the Red Army. Victory, therefore, came not because of Stalin, but despite him. This second charismatic epoch of post-1917 ussr history did not last very long. Soon after the war, Stalin resumed his system of terror, thereby reestablishing his despotic and, in Weberian language, illegitimate rule. This lasted until his death in 1953. The ussr gradually imposed communism on all Central European countries between 1945 and 1949. Three of these countries moved towards a communist system ‘off their own bat’: Yugoslavia, which had had a strong anti-German partisan war from which their leader, Josip Tito

9 “On ne saurait faire une omelette sans casser des oeufs”. Translation: “One can’t expect to make an omelet without breaking eggs”. With these words in 1790, Maximilian Robespierre ­welcomed the horrific French Revolution that had begun the year before. http://fee.org/ freeman/detail/where-are-the-omelets.

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emerged as a charismatic national hero for many Yugoslavs;10 Czechoslovakia, where the communist party in 1946 won elections with 31.2% of the votes (Nohlen-Stöver 2010: 471) under the leadership of Klement Gottwald. While not much of a charismatic leader, he was democratically elected. Georgi Dimitrov in Bulgaria seemed to have had some charismatic appeal, too. Tito and Dimitrov tried to create a Federation of the Southern Slavs11 and join the two countries together, but internal disagreements and Stalin’s aspirations for total control over the Eastern Bloc meant that the ussr leader brought the plans for Balkan Federation to an end in 1948. The split between Tito and Stalin left Dimitrov without much choice but to follow the Stalinist line. Soon after this, in 1949, Dimitrov died and there was some speculation that he might have been murdered in the Soviet hospital where he was being treated for heart disease. Dimitrov, therefore, cannot be held responsible for the emerging illegitimate system of despotism. By 1948, Klement Gottwald had fallen in line with the Stalinist order and introduced despotic Stalinist rule. He, however, died right after the funeral of Stalin in 1953. China is a special case – as always. Having defeated CHIANG Kai-Shek, Mao emerged as a charismatic leader and managed to retain his charismatic legitimacy with some difficulty until his death in 1976. From 1948 until 1953, he followed the Soviet model closely.12 After the death of Stalin, China’s relationship with the ussr began to become more troubled, but it was in 1958, when Mao launched the Great Leap Forward, that China’s clear break with its great neighbour in terms of social and economic policy started. From 1961, the relationship became openly hostile and China began to design its own developmental strategy. This had many significant institutional differences from the Soviet model. One of the most telling examples is the Chinese communes. These were building in some ways on the tradition of Chinese village communities and were rather different from the Soviet kolkhoz. China also never separated the CP and the state, something that characterized the Soviet model. With these exceptions, between 1948/49 and 1956 most communist countries copied the Soviet model. Stalin did not trust the local communist leaders, but relied on those who were in exile in Moscow during the interwar years. The local population, on the other hand, did not place much trust in Stalin’s leadership choice. Bolesław Bierut, the arch Stalinist president of Poland, or Mátyás 10

11 12

For the story of complicated history of Tito/Yugoslavia and the ussr see Craig Lovitt 1958, and László Gulyás 2014. Both confirm that Yugoslavia was liberated by Tito’s partisans rather than Russian or Allied forcec and how important this was in the later split between Yugoslavia and the ussr. This is referred to as the Bled agreement 1947, see L. Stavrianos 1964. See the work of William Brugger (1974) on the early Soviet model in China.

Varieties of Communism

47

Rákosi, the first secretary of the Hungarian Communist Party, were leaders of this nature. During the years of Stalinist despotism, almost all of Central Europe was ruled by means of coercion on a grand scale. These were arguably illegitimate regimes, in which obedience was almost exclusively based on fear. As Nikita Khrushchev rose to power in 1953, he tried to remove some of the Stalinist leaders. His reforms included the appointment of Imre Nagy as Prime Minister of Hungary shortly after Stalin’s death in 1953. Mátyás Rákosi, meanwhile, was exiled to the ussr only during the summer of 1956. The hard-line Stalinist Bolesław Bierut attended the xxth Congress of the Communist Party of the ussr and died in mysterious circumstances shortly after Khrushchev’s secret speech. As early as 1956, the anti-Stalinist Todor Zhivkov had replaced Valvo Chervenkov, successor to Georgi Dimitrov and his brother-in-law. In the ussr and in Central Europe, the epoch after 1953 was a search for legitimacy, or to put it another way: an attempt to find a way to reform communism. The aim was to overcome the inefficiencies of redistributively coordinated/centrally planned economies, to create ‘socialism with a human face’, market socialism, a democratic form of socialism. Milovan Djilas (1957), in his path-breaking The New Class suggested that communism under Stalinist time was not a class-less society, but one which was ruled by a new class, the bureaucracy. The 1979 Konrád-Szelényi book, The Intellectuals on the Road to Class Power challenged this view. Indeed, in Stalinist/Maoist rule – be it in its charismatic epoch or in its despotic phase – the bureaucratic staff exercised the power not as a class, but as an estate or rank. While attempts to reform communism varied a great deal in The Intellectuals on the Road to Class Power, we hypothesized that there was a common element in the post-Stalinist legitimacy claim. The central idea was to move socialism from a bureaucratic order to a rational system: socialism was now perceived as a more rational social and economic order than the anarchy of market capitalism. We called this idea of rational order a ‘rational redistribution’, meaning a social and economic system where – at least in principle – decisions will be made by the most competent people rather than voluntaristically. The system was designed to appeal to professionals and beyond narrow professionals to intellectuals or the intelligentsia as a whole. We have interpreted this as an offer by the bureaucracy to share power with the intellectuals. 4

Reforming the Communist Economy

By the mid-late 1950s, there was an emergent consensus in communist countries (with the exception of Asian communist countries and Albania) that the

48

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classical model of communism needed reform and that, with appropriate reform, these countries could be turned into well-functioning economies and social systems. Three major types of reforms ensued, and countries made different choices as to which model they adopted: a. Rationalisation (optimisation) of redistribution, the centralist model. The ussr tended to shift in this direction during Brezhnev’s time. The clearest and arguably most successful case, however, was the gdr during the 1970s. The ussr started to drift away from this type of reform under Gorbachev who launched three political campaigns under the slogan of perestroika (restructuring), uskoreniye (acceleration) and glasnost (transparency). b. Combining redistribution with market forces: Libermanism. Reforms closest to this type were made in Hungary after 1963 under János Kádár, who introduced a combination of collective farms and small family farming especially successfully. Hungary had already tried this route in the years 1953–55 under Imre Nagy, and the early reforms of Gomułka in Poland followed a similar line. Poland began such reforms in 1956 in the first years of Gomułka, then shifted back to ‘rationalization’ under Edward Gierek and back again to a market-inspired track under Wojciech Jaruzelski. Under Alexander Dubček, Czechoslovakia could probably be described as a ‘market reformer’, but after 1968 it shifted back to the gdr model. With the fall of the Gang of Four, China turned sharply away from the Maoist model and, during the early years Deng Xiaoping’s reforms at least followed a cautious plan of market-oriented reform, not unlike Kádárist Hungary. c. The Yugoslav version of Libermanism: self-management. This had been initiated as early as the 1950s, and was theorised by Branko Horvat (The Political Economy of State Socialism, 1982), producing impressive results during the late 1950s and 1960s. In this context, different communist countries followed rather different reform strategies within the broad framework. The main lines of argument developed in the ussr were identified by two major Soviet economists: Evsei Liberman (Means to Raise the Profitability of Socialist Companies, 1956) who recommended creating market-mediated relationships with publicly-owned firms13 and 13

Evsei Grigorievich Liberman (1897–1981) was a Soviet economist who lived in Kharkiv, Ukraine. His main proposal, first developed in his dissertation and then summarized in a 1962 Pravda newspaper article, was to transfer decision-making power from the central government to the managers and staff of industrial enterprises, primarily by reducing the number of instructions imposed from above, and by substituting administrative fiats with incentives.

Varieties of Communism

49

Leonid Kantorovich (1912–1986) who suggested more sophisticated mathematical models to improve the system of central planning.14 Both Liberman and Kantorovich were critics of the ‘command style’ of central planning. It is unclear whether Liberman and Kantorovich were allies, complementary reformers or adversaries. According to some commentators Kantorovich, Nemchinov and Novozhilov – the main representatives of mathematical economics regarded as anti-Marxist by mainstream Soviet economists – used Liberman merely as a frontman for their ideas (Tremle 1968). Nevertheless, Kantorovich and his group can also be seen as having creating a more mathematical scientific base for central planning, while Liberman – academically/mathematically less sophisticated – focused on markets, profitability and the decentralization of management from Gosplan to the firms. In the so-called Kosygin reform of 1965,15 these two complimentary or conflicting approaches were merged. Arguably, this was a compromise between the marketist and centralist strategies for reform of the communist economies. The bottom line is that communism was a diverse system. Charismatic authority most likely held sway in some communist countries. (The ussr under Lenin, China under Mao, Cuba under Castro, probably Bulgaria under Dimitrov, and Stalin’s brief periods of charismatic rule.) After the death of a charismatic leader, countries tended to be ruled illegitimately or eventually experienced some rationalized authority and various types of reforms consistent with communism as a system of substantive rationality (as opposed to the ‘­formal rationality’ of capitalist market economies). 5

The Governance of State-Owned Enterprises

5.1 The Three Agent Model We will now present an earlier model of Mihályi (1993c) that describes ‘corporate governance’ in respect of a state-owned representative enterprise (soe). This framework highlights three protagonists: the charismatic leader, the state

14

15

Kantorovich developed the mathematical technique now known as linear programming in 1939, some years before it was advanced by George Dantzig. He authored several books including The Mathematical Method of Production Planning and Organization (Russian original 1939), The Best Uses of Economic Resources (Russian original 1959). He won the Stalin Prize early on, in 1949, then went on to win the Lenin Prize with V.S. Nemchinov in 1966, and the Nobel Prize in 1975. Alexei Kosygin (1904–1980) was Chairman of the Council of Ministers of the Soviet Union (i.e. Prime Minister) between 1964 and 1980.

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apparatus and enterprise management. As a generic model, it is constructed to analyse state-owned firms in all types of socialist systems (from Albania to Yugoslavia). The model has several features which differentiate it from other customary political economy models of the 1990s. It was customary to highlight two players: planners at the top, and corporations carrying out orders underneath. But in reality, there were three players whose interests were determining the functioning of the firms (enterprises) in the socialist system. The charismatic (totalitarian) leader, the state apparatus and the managers of their enterprise all acted like owners, and their partners treated them as owners too. These protagonists were linked vertically. The three players shared power among each other, but this sharing varied both in space and time. Visualisation of the model (see Figure 3) enables us to differentiate between time periods of socialism and examine variances among countries. For example, in the Soviet Union, Stalin gave little decision freedom to managers (Stalinist model). After Stalin’s death, the position of managers became stronger. In Hungary, Czechoslovakia, Poland and Yugoslavia after 1949 (Hungarian– Czech–Polish–Yugoslav model) managers enjoyed greater independence than their colleagues in the ussr. In the day to day running of the firms managers had substantial power even in the Stalinist model, while the state apparatus and political leaders took decisions chiefly regarding investments. In a market economy, there are strong incentives for the equalization of profit rates, and for the spread of successful technologies, and of leading and organizing forms. This was not the case in communist countries. There, the economy was characterized by firms operating at very different levels of efficiency. Our model is also able to explain this phenomenon. Two of the three owner groups (the charismatic leader and the party-state apparatus) did not consider enterprises as entities separate from each other. That is why efficiency differences were not important for them. Two firms of varying efficiency could be merged or separated at any time. In the classical socialist model, enterprises did not have market problems. Due to the shortage economy, there was always enough demand. The internal market was protected from imports and exchange rate policy was used to maintain the competitiveness of production. It was only when this secured market disappeared during the transition, that many economists understood how important this kind of protection had been. Contrary to the common belief, in the short run, the state was a good owner. It worked hard to secure markets for all firms and to protect them from foreign competition. It cannot be denied, of course, that this behaviour caused disastrous consequences for the economy in the long run.

51

Varieties of Communism a) Basic model Charismatic leader Party-state apparatus Enterprise management

b) Stalinist version

Charismatic leader

Party-state apparatus

Enterprise management

c) Hungarian–Czech–Polish–Yugoslav version Charismatic leader Party-state apparatus

Enterprise management Figure 3 The three-agent model Source: Mihályi (1993c)

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Comparison of State-Owned Enterprises and Private Firms in a Market Economy In a modern market economy, firms (big and small alike) are characterised by six common features (see Table 4). These characteristics did not apply to stateowned enterprises (soes) before the transition. soes did not actually differ much from budgetary institutions (like schools or hospitals), because firms were not independent legal entities in practice. Western experts often take the following simplified contrast as a starting point when they analyse the post-socialist period. In a socialist country, corporate managers are not professionals and they are interested only in carrying out the plans. They do not care about the profitability of the enterprise or the customers’ demands. While in a market economy, corporate leaders are interested in the successful operation of the enterprise, because their job and salary depend on it. Moreover, appointing the most suitable managers is more easily done due to the competitive labour market. In fact, this comparison is faulty and exaggerated. Even in the planned socialist economies, the motivation of managers was a substantial factor. In practice, the difference between firms in planned and market economy was not always that sharp (Table 5). Skill and motivation of management mattered in planned economies as well. 5.2

6

Stratification Regimes under Various Communist Formations

In our attempt to characterize the stratification regimes of various communist formations our point of departure is Pierre Bourdieu (1984, 1986) and his distinctions of the forms capital can take: (1) economic, (2) social, (3) political, (3) cultural and (4) human.16 Distributions of Various Types of Capital under Various Types of Communisms Before we proceed, we need some clarification about the meaning of the different forms of capital. We assume that economic and cultural capital does not 6.1

16

This reduction of Bourdieu’s typology of ‘capitals’ only to these forms is a somewhat doctrinaire reading. Bourdieu was ready to use innumerable forms of capital. We are inclined to strive for orderliness, something alien to Bourdieu. Particularly problematic is how to interpret symbolic capital, a term often used by him. We do not see symbolic capital as a separate form. In our reading, it is merely the capacity to convert one major form of capital into another. For instance, a person has symbolic capital when he is capable of converting political capital into economic capital.

53

Varieties of Communism Table 4 

(1)

(2)

(3)

(4)

(5)

(6)

A comparison of governance in soes and private companies

State-owned enterprises

Private companies

Separation of enterprises is formal, their assets and liabilities are not precisely registered. Enterprises can be merged or separated any time. The charismatic leader’s and the state apparatus’ responsibility for corporations is not defined. The management is responsible only for less important issues (e.g., hiring and firing). The three owner groups are simultaneously responsible for the daily operation of the enterprise. Scope of authority is not bounded. The one-man leader of the company is appointed by the state. The manager has unlimited rights to sign and to appoint. There are two other important players: the senior engineer and the chief accountant. The capital invested in the enterprise is indivisible. Investment is a definite allowance; it is hard to decrease it. Company names serve the interests of the central governance (for example marking of place or product).

Firms are independent legal entities. Their assets and liabilities are unequivocally separated from each other and from their owners. Owners have limited liability up to the amount of their invested capital. Creditors know that they cannot rely on owners in case of bankruptcy.

Source: Péter Mihályi’s compilation

Firms are controlled by bodies, which are chosen by owners. Owners cannot directly intervene in daily issues of the firms. Strategic decisions are made by the Board of Directors. Its members are appointed by shareholders. Decision rights of the Managing Director can be limited by the Board of Directors and the Supervisory Board. The invested capital is unrestrictedly redistributable for the owners, through the sale of the shares. Company names are sales and marketing instruments; they often correspond with the founder’s name.

54 Table 5 

Chapter 3 Motivation of managers in market economy and in socialism

Motivation

Explanation

Political and moral conviction Identification with scope of activities Power

Top managers accept the prevailing ideological order. Most managers work devotedly, and they are committed to their profession. Only people who are at least minimally attracted to power become leaders. Prestige Social prestige depends on the person’s place on the social ladder and the company’s size and importance. Financial benefits Compensation is proportional to the person’s place in the hierarchy and the company’s size and importance. Calmness Managers try to avoid conflicts with their bosses, suppliers, buyers or authorities. Fear from punishment Even top managers have bosses and other external monitoring authorities which have the power to penalise. Source: Based on Kornai (1993) p. 149 and Mihályi (2017)

need too much definition. Economic capital simply refers to the ownership of material assets while in our terminology, cultural capital is identical to what we called ‘trans-contextual orienting knowledge’ to use György Konrád’s term, or ‘theoretical’ (rather than practical) knowledge in Bourdieu’s terminology. We identify human capital as technical know-how, the volume of which can be measured by ‘productivity gain’, while cultural capital, being ‘trans-contextual orienting’ or ‘theoretical knowledge’ may or may not produce productivity gain. The distinction between social and political capital requires more reflection. In our interpretation social capital is the generic term. Social capital refers to investments into interpersonal relationships in hope of eventual return. Political capital is a special case of social capital, namely when these interpersonal relations are institutionalized and are restricted to personal relations in the political field: I have political capital when I expect my investments into interpersonal relations within political institutions (joining a political party, for instance) or with political leaders to bring me returns.

55

Varieties of Communism Table 6 

Comparison of stratification regimes in Stalinist/Maoist formations with classical capitalism

Social formations

Classical capitalism (legal-rational authority) Classical socialism (charismatic authority; Stalinism) Classical Chinese systems (charismatic authority; Maoism)

Stratification regime Rank

Class

+ +++

+++ + human capital

+++

− economic capital

Source: Authors’ compilation

We are now ready to offer in Table 6 a scheme for describing the nature of various societies with endowments of various forms of capital. What follows is an attempt to locate various social formations (starting with the classical forms of socialism, Stalinism/Maoism) within ‘fields’ defined by the distribution of various forms of capital as shown in Table 6. We add ‘classical capitalism’ as a sort of ‘default’ value. Let us comment on the schemes outlined above. First, in classical capitalism (or legal-rational authority) ‘economics is in command’. This is a society dominated by formal/ instrumental rationality in which ‘human capital’ (technical know-how rather than teleological knowledge) plays a secondary, complimentary role. As Marc Granovetter (1985) correctly pointed out, even in laissez-fair capitalism, the economy is – to some extent – ‘embedded’ though the transition from feudalism to capitalism. Polanyi clearly demonstrated this as a process of ‘disembeddedness’. The importance of personal relations and loyalty are substantially reduced. Social connections do matter, though typically it is the ‘weak’ and ‘non-institutionalised’ ties which matter the most. Under these conditions, excessive reliance on personal contacts is seen as corruption, or at least as outdated paternalism (Granovetter 1973). Kinship ties or membership of a political organisation is not supposed to be of major significance. While knowing the right people in the right places can make a difference, it is likely to be less significant than the capital one owns, be it either physical/moneyed or cultural/human capital (see Figure 4). Next, in sharp contrast to capitalism, is the classical system of socialism – be it the Leninist/Stalinist, or Maoist versions – in which social or political capital is the dominant form. Possession of economic capital is a handicap, if ­anything,

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Economic +++

Economic ++

Upper class

Economic + human ++(+)

Upper middle class

Economic+ (0) / human + (+)

Economic 0 / Human 0 (+), or (++)

Figure 4

Middle class

Lower/working class

Stratification regime under classical capitalism. Source: Created by Authors

and is not the source, but rather the consequence of power. We want also to emphasise the importance of social rather than political capital. Being closer to charismatic (rather than traditional) authority, what matters the most in this system is loyalty to the leader (the supreme leader or its local equivalents) rather than loyalty to the political organization. Hence unlike classical capitalism, where the weak ties (personal relations) are strong, under charismatic authority one attains favourable social position through strong personal relations (ties). Both the Leninist/Stalinist and the Maoist version were antiintellectualist to a certain extent, but they were more anti-meritocratic (Maoist China even more so, especially during the Cultural Revolution). In the Stalinist version of the classical system there were still some technocratic tendencies. Certain elements of the scientific-technological revolutions were present even at the heights of the Stalinist epoch (see Figure 5). While the Stalinist regime did crack down rather brutally on engineers (there was the infamous ‘Industrial Party Trial’ in 1930 against leading engineers) even at its peak, Stalinism emphasised the ‘scientific’ nature of socialism, and the ussr made some formidable achievements in science and technology (aviation for instance, though these advances eventually culminated in the ‘trial of engineers’, see Kendall Bailes 1980). We see the top party bureaucracy as a ‘ruling rank’, their ‘staff’ – many partystate bureaucrats and quite a few loyal party intellectuals form a ‘second rank’. Intellectuals without party affiliation together are grouped with most workers

57

Varieties of Communism

Social/political +++

Political ++

The first or ruling rank

Political +(+) Human ++(+)

Political 0, human + or Political 0, human +(++) Economic capital, political capital before communism or dissident intellectual cultural ++(+): class enemies

Figure 5

The second rank, bureaucratic or intellectual staff of the ruling estate The third rank, workers/peasants and unaffiliated intellectuals Class enemies

Stratification regime under the classical (Soviet/Maoist) socialist system. Source: Created by Authors

and cooperative peasants in the third rank, while former capitalists or members of the former political elite and dissenting intellectuals are ranked as ‘untouchables: “class enemies”’. The Maoist system was rather similar to the classical socialist one, except that loyalty to the leader was even more important, human capital even less appreciated, and cultural capital not appreciated at all. After the death of the charismatic leader, the system faced a legitimation problem. Khrushchev and similar figures were unable to attain the charismatic appeal of Lenin or Stalin hence they were seeking an alternative source of legitimacy. In the 1979 Konrád-Szelényi book, The Intellectuals on the Road to Class Power, it was hypothesized that during the 1960s charismatic appeal was replaced with the idea of ‘scientific socialism’. The Soviet style of reform ­communism was increasingly seeking legitimacy by being scientific. Socialism surpassed the ‘anarchy of the market’ by scientific planning (what we called ‘rational redistribution’). Maoism, on the other hand, was characterised, to the best of our knowledge, by a deeply ingrained anti-intellectualism. In Maoist China ‘the reds’ had the upper hand even more than in Stalinist Russia (Baum 1964). The early postMaoist reforms (of the late 1970s and early 1980s) also carried features of the triple alliance of bureaucrats with technocrats and direct producers (­peasants),

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but in the early Chinese reform concessions to the ‘direct producers’ (peasants) were given priority over concessions to the technocrats. 6.2 From Rank to Class Formation We will now follow Max Weber’s theory of social stratification and combine it with Bourdieu’s theory of distribution of forms of capital. The dominant interpretation of Weber is that he distinguished three sources of social inequality: one based on economy, one on prestige and one on power. We see Weber’s theory rather as one of historical sociology, making a distinction between societies based on rank (Stand)17 and class (Klasse). In exploring the transition to modern society, Weber was not that far from Marx. He saw this transition as a process from a society based on rank to a society based on class. Weber was also quite clear that class-stratification is based primarily or exclusively on economic distinction, while stratification by rank is driven by ‘honour’ or ‘prestige’, by loyalty to a personal master rather than impersonal rule (as it in the case in class stratification). Societies where economic capital is the dominant form are stratified by class. Societies where social or political capital is the dominant form are stratified by rank. This is an extremely useful way to think about the stratification system in historical and transnational comparison. Classical socialism – be it the Stalinist or the Maoist type – where ‘politics was in command’ created societies stratified by rank. As a shift occurs from classical socialism to reform communism, the power monopoly of the dominant rank begins to wither away, and class-formation begins. (Which classes are being formed will depend on what kind of capital is increasing in importance.) In the Weberian tradition we may add that pure types rarely exist. Even in classical capitalism there is often – if not always – a secondary system of stratification based on rank (Table 6). Weber (1978) called this the emergence of ‘social class’ as distinct from ‘pure’ (or ‘commercial’) class relations based solely on market conditions (Vol. i: 304–305). While pure classes can be seen as groups that are simply positively or negatively privileged in market situations, social classes are typically defined by patterns of social mobility and lifestyles and they resemble ranks. Social classes are not, therefore, purely economic categories. Weber saw some rank-like categories even in classical capitalism. This is at least one of the reasons why Weber disputed the Marxist claim about the intensification of class conflict: social classes, as the emergent new ‘rank order’,

17

As an English translation for the Weberian term ‘Stand’, ‘rank’ and ‘estate’ are both used widely in the academic literature.

59

Varieties of Communism Table 7 

Stratification regimes in reforming socialist formations with classical capitalism

Social formations

Classical capitalism (legal-rational authority) Reformed socialist systems (technocratic reform + second economy) Reformed Chinese socialism (1978–1980)

Stratification regime Rank

Class

+

+++

+++

++ (cultural + political) + (economic)

+++

Source: Authors’ compilation

weakened, rather than strengthened class conflicts, thus making a class-based revolution less and less likely. Let us compare the classical types of Soviet or East European style socialism and Maoist socialism with the various types of reform/communisms that came later (Table 7). The classical system – as pointed out earlier – was the closest to charismatic authority, given the importance of the supreme leader (Lenin, Stalin, Mao, Castro and Kim Il Sung). Unlike pure types, however, the charismatic authority leaders in classical socialism tended to operate with a staff, a bureaucracy. While in legal-rational authority, the means of administration (the modern bureaucracy) are appropriated by the modern state, under classical socialism there was a certain division of powers between the charismatic leader and the bureaucratic staff. This often resulted in a struggle between the leader and the staff, or at least certain fractions of the staff. Good examples of such struggles were the Chinese Cultural Revolution, the Stalinist purges of the party apparatus, or its crackdown on military intelligence. Given this, the relative autonomy of the staff – which is unusual under charismatic authority – made the social position of the Stalinist/Maoist bureaucracy ambiguous. As we already remarked, Djilas (1957) called the Stalinist bureaucracy a New Class, which may have been more a reflection of Tito’s regime after its break with Stalinism than a description of a pure Stalinist system. Trotsky (1936) might have been more accurate when he wrote about the rise of a bureaucratic caste. Trotsky’s view was that, with the revolution, the ‘worker’s state was established (since private property was appropriated), but with the raise of

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Stalinism this worker’s state had become ‘deformed’ as the bureaucracy established itself as a privileged caste. Trotsky’s emphasis on the elimination of private property, and hence his doubts about the existence of classes were reasonable and the term ‘caste’ is not an inaccurate one to describe the privileged position of the bureaucracy. Certainly, according to Weberian theory, the Stalinist bureaucracy could hardly be seen as a class (its power was primarily based in politics rather than in economics). It might have had economic privileges, but these were a consequence of its political power rather than the other way around. Nevertheless, the term ‘caste’ in Weber is preserved for a special case of Stand, namely when the boundaries between castes are reinforced by religious, or at least quasi-religious sanctions, such as prohibitions of sexual relations, implication of ‘impurity’ (ethnic-like difference) for the lower caste (hence the idea of members of the lowest castes being non-touchable).18 No such boundaries existed between the Stalinist/Maoist bureaucracy and society, hence it is more accurate to regard the bureaucracy as a ‘status group’ or as a rank (see Figure 6). When attempting to understand the social stratification of East European reform communism, the most helpful examples are Hungary (the Kádár regime between 1963 and the late 1980s) and Poland (as early as under Gomułka and again after the martial law of Jaruzelski) and to some extent Yugoslavia. Yugoslavia was a complicated case, given the ideology of self-management, nevertheless there was some ‘scientific planning’; or ‘scientific socialism’ even in Yugoslavia. Similar tendencies were present in the ussr, especially under Khrushchev and Gorbachev. There are even some indications of such developments being present during the Brezhnev years and in the gdr during the ‘technocratic’ 1970s liked so much by the young Rudolf Bahro (before he turned dissident). After the death of the charismatic leader, the Soviet style bureaucracy reached out to the technocratic intellectuals (to the whole of the intelligentsia, even) in its quest for new legitimacy, and during the 1960s – at least in the ­Konrád–Szelényi book we believed so – they were even willing to share power with them. The reformed system attempted to create a three-fold alliance: it ­substantially upgraded the importance of human/cultural capital (reaching 18

Weber makes a clear distinction between ‘classes’ ‘ranks’ (estates, Stand) and ‘castes’. While classes are structured according to their relationship to production and possession of material goods, and ranks can be described in terms of their consumption and lifestyles, castes are separated from each other by strong rituals and an emphasis on ‘purity’ See mwg, Band 22–1: 268–269. Later, he elaborates on the notion of ‘purity’. Castes are based on interethnic ritual separation (Fremdheit). Other ethnic groups are not clean, and physical contact with the other cast is prohibited, mwg i/23: 325.

61

Varieties of Communism

Ruling estate, political and intellectual elite

political

Middle strata, rank and file intellectuals and second economy entrepreneurs

cultural economic

No capital

Figure 6

Lowest rank : Unskilled workers/peasants with no access to second economy and low caste (poor Roma)

Stratification regimes under reform communism (with some variation of China and the Soviet Empire). Source: Created by Authors

out especially to the technocracy), but in contrast with the classical Stalinist system it gave some role to private economic capital (more in Hungary and Poland than in the ussr or other East European countries). In the purest type of Soviet-style reform communism, the bureaucratic rank retained, and given the decline in the power of the ‘charismatic leader’, even increased its power. Cultural capital now became clearly the second dominant form of capital followed by economic capital as the third ‘field’. In other words, with the reform of the Soviet-type of system, a tripartite alliance occurred where the dominant ruling political estate opened up first towards the technocratic (and humanistic) intelligentsia and then to the entrepreneurially oriented peasants, the peasant-workers or workers. This was what we conceptualised as the potential rise of a ‘New Class’ of intellectuals in our book, The Intellectuals on the Road to Class Power. With the benefit of hindsight, there were at least two important problems with this hypothesis: 1. As Szelényi had already acknowledged in his book Socialist Entrepreneurs (written in 1986,) history had falsified this hypothesis. The intellectuals never came to power. In Socialist Entrepreneurs, Szelényi developed an alternative hypothesis: the new class emerging is not the intelligentsia, but a new petty bourgeoisie. This also proved to be false, as after 1989 in Central Europe the ‘new petty bourgeoisie’ tended to be among the ­biggest losers, and what followed the collapse of communism was a brief

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period of political dominance by the cultural intelligentsia (think of V. Havel, Á. Göncz, J. Antall, A. Michnik, etc.) followed soon by the emergence of a new ‘grand bourgeoisie’ (Szelényi 2002). It is moderately embarrassing to us that these two predictions proved to be wrong. It turned out – to use E.P. Thompson’s phrase (1963) – that classes are ‘events’. The reality of classes is in their formation and disintegration. Fully formed classes probably never exist; classes are instead ‘potentialities’. In this sense the vision of ‘class power of intellectuals’ (or a late socialist formation where the dominant estate remained dominant, but relied heavily a strengthening new socialist petty bourgeoisie) was a potentiality only. 2. But there was an even more serious problem with the proposition of a new class whose power is based on cultural capital. Can class power be based on cultural capital? It is not clear what Weber’s answer to this question would be. In Weberian theory, class formation has to be based on ‘market situations’ hence on economic capital; social/political capital is the base for a rank order. But what about cultural (human) capital? In terms of stratification, regime cultural/human capital seems to be ­halfway between economic and political capital in terms of the ‘classness’19 of those in possession of it. Economic capital is the base of class formation since it is based on achievement rather than personal loyalty to the master; cultural or human capital can resemble economic capital as much or more than political capital. Hence it is not inconceivable to assume that class formation around human (or even cultural) capital is possible – after all human capital stems from achievement rather than from ascription. In the book, Making Capitalism without Capitalists (Eyal, Szelényi, Townsley 1998) the authors believed we had found the right solution. Human capital, by definition, means technical know-how (hence its value can be tested by actual productivity gain), so in an information society it can actually be the core of class power. But cultural capital is based on ‘teleological knowledge’ and cannot be tested against productivity gains. Hence cultural capital can hardly be the basis of lasting class power. Nevertheless, cultural capital plays a major role in social change. Revolutionary changes, fundamental changes in world ­outlooks are often, if not always, carried out by possessors of cultural capital. ­Weber had a ‘weak’ theory of social change. For Weber, the revolutionary force 19

The notion of ‘classness’ is consistent with the idea that class is an ‘event’. Classes never exist in pure form, but some collective actors tend to act more like a class, while others will act more like members of a community (hence their ‘classness’ will be at a lower point in a scale ranging from rank to class.

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is charisma, which comes close to a non-rational explanation of change. Nevertheless, history seems to suggest that revolutionary changes do come from intellectuals with cultural capital (from Voltaire to Leon Trotsky or Vaclav Havel or György Konrád) who may (or may not) have class power aspirations. Even if they have such aspirations, they cannot, however, hold onto class power once they overthrow the old order. It may be appropriate to invoke the German distinction between Bildungsbürgertum and Besitzbürgertum. German historiographers (Conze and Kocka 1985, and many social historians since the 1920s) have noticed that a peculiar feature of the ‘German Sonderweg’ – in particular east of the Elbe River – was the relative weakness of Besitzbürgertum (propertied bourgeoisie) and the relative strength of the Bildungsbürgertum (the ‘cultural bourgeoisie’). Possessors of cultural capital lead the revolutionary transformation to modernity. So, in this period when the communist system was breaking down, the revolutionary force was not charisma, but cultural capital. Nevertheless, cultural capital had a problem similar to that of charisma: the question of longevity. Possessors of cultural capital seem to be better equipped to abolish an old order than to retain power in the new one they have helped to bring into existence. As the new order is established, therefore, the ‘philosophers are on their way out’ and the ‘Machers’ (the owners of economic capital or simply those with political know-how) are on their way in. The reasons for this are many: genuine intellectuals get bored with politics and yearn to return to their computers, their archives and their laboratories. They also usually lack the aggressiveness of the members of the professional political class, especially if a political class coming from the new grand bourgeoisie or professional politicians using their political capital to turn themselves into the new rich (something ‘true’ intellectuals do rarely if ever). Reforms from above and from below. The early Chinese reforms (1978–1985) were rather different from the Soviet and East European reforms. During the first phase of the reform, China was trying to achieve a three-fold compromise. DENG Xiaoping, however, was more concerned with pacifying the peasantry as a first step, than with bringing intellectuals on board. Victor Nee’s 1989 article on ‘market transition theory’ was, therefore, right on target. The winners from the early reforms in China were undoubtedly ordinary peasants. Local cadres (and intellectuals) were not winning as much, at least relatively speaking, and may even have lost ground to what Nee called ‘direct producers’. Here, Nee has hit the nail on the head! We have hard evidence that during the first years of the reform, urban-rural inequality and cadre vs. non-cadre inequalities – quite substantial in Maoist time – were declining. The peasants did very well – the cadres did not do so well.

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The owl of Minerva spreads its wings only with the falling of the dusk, as Hegel (1820) succinctly remarked when writing about social theory. By the time Nee’s paper was published, the conditions on the ground had begun to change. With the emergence of township-village enterprises (tve),20 and the privatisation of soes by the late 1990s, the local cadres, later the princelings (children of high-ranked cadres) had created their own stake in the Chinese transformation. Nee’s critics (Andrew Walder 1996; and YU Xie-Emily Hannum 1996) correctly pointed out that cadres actually did quite well. Inequalities which had been declining for the first few years began to explode later on. The question is not, therefore either/or, but rather when, who won and who lost out under what circumstances. (Theodor Gerber and Michael Hout 1998; Elizabeth Brainerd 1998; Mikk Titma, Nancy Tuma and Brian Silver 1998; Lawrence Lau, Yingyi Qian and Gerard Roland 2000; Barry Naughton 1999). The contrast between the early reforms in Soviet type of regimes and postMaoist China could not be clearer and these differences were consequential. The changes in Soviet and East European type of regimes came from above and, with a short interlude in some countries during the 1980s, after 1989–1991 continued to be guided from above. During the early years, China was dramatically different – it was a transformation ‘from below’. In Russia, transition started with the privatisation of soes and it was largely managed by the centralgovernmental authority. In China market transition began with deregulation of the peasant economy. Central authority of course played a crucial role in ‘allowing’ this, but the new ‘capitalists’ were nevertheless petty farmers rather than owners of large corporations. And by the time, China shifted to a change ‘from above’ during the 1990s, substantial accumulation of capital had already taken place, and the nomenklatura bourgeoisie had to compete with a homegrown bourgeoisie that was already reasonably established. 20

During China’s first reform era, especially from 1978 through 1996, the former Commune and Brigade Enterprises became tves, as market-oriented public enterprises under the purview of local governments based in townships and villages. tves as a sector absorbed rural surplus labor released from farming and – perhaps unexpectedly – stimulated competition with state-owned-enterprises (soes) and drove the process of marketisation in the entire economy. http://www.oxfordbibliographies.com/view/document/obo-9780199 920082/obo-9780199920082-0128.xml.

Chapter 4

Reinterpretation of Inequalities and Rent-Seeking in Advanced Market Economies The purpose of this chapter is to renew the discussion of rents – first in general, then in the context of advanced market economies.1 In our search for a theoretically sound explanation of the phenomenon of inequalities and ‘abnormal’ or ‘extra’ profits, as they are often – and in our view imprecisely – labelled in current scholarly discussions, we have turned from Smith and Marx to Ricardo. While the question of inequality was central to the economics of the 19th century, 20th-century economists tended to neglect issues of inequality in incomes and wealth. When this topic once again became the focus of attention, for instance in the work of Simon Kuznets (1955), it was assumed that economic growth would automatically take care of it; as President Kennedy later famously said, “a rising tide lifts all boats”. During the past few years, the issue of such inequalities has been receiving increased attention, especially in the wake of Thomas Piketty’s unconventionally voluminous, but nevertheless hugely successful book, Capital in the Twenty-First Century (first published in French in August of 2013). According to Piketty, not only have inequalities increased since the 1970s, capitalism itself has begun experiencing a different kind of inequality: more and more wealth is now inherited. Capitalism has become patrimonial. In a sense, the system is being re-feudalized before our eyes. Piketty is essentially right, but for the wrong reasons. We can accept his assertion – made in his book and in many other places – that inequalities have been growing for almost half a century and we share his view that this is a major threat to the legitimacy of the liberal order at both the national and the international level.2 We are, however, deeply sceptical about his central explanation, namely that the excessive growth in profits, which slowed down growth and generated 1 This chapter is essentially a succinct summary of our earlier book, see Mihályi and Szelényi (2019). 2 It is another – though not unimportant – matter that the epoch between 1910 and 1970, when measured inequalities fell, was far from ideal. This period was burdened with, inter alia, the Great Depression, two world wars, and the Iron Curtain.

© koninklijke brill nv, leiden, ���� | doi:10.1163/9789004413191_005

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­ opular dissatisfaction over a considerable period, is the fundamental reason p for the present inequalities.3 Among the classical theorists, Weber was really the only one who saw capitalism as a set of diverse institutional forms unfolding gradually through history, He was, in this respect, a forerunner of the ‘varieties of capitalism’ paradigm. Although, according to Weber, one can spot economic organisations which qualify as ‘capitalistic’ virtually throughout human history, he did identify modern capitalism as a unique form. He did not offer an explicit definition of what these capitalist economic organisations were, but with a little reconstruction we can arrive at the following definition: a capitalist economic organisation is one that seeks profit in market exchange.4 Weber’s broad definition does allow us to distinguish at least three types of capitalistic systems. Modern capitalism achieves profit through production. Swedberg’s definition that there is a “feedback of profit into production” beautifully captures the nature of what Weber regarded as modern capitalism. Weber also referred to the political capitalist system that is ‘political in its orientation’. In such a system, in one way or another, political office is the source of profit. Thirdly, commercial capitalism is where profit emerges simply from market exchange without production playing a role. Marx came close to this tripartite distinction of various capitalistic systems. However, for Marx, the crucial institution of capitalism was private ownership rather than the price-regulating market. Private ownership based on the production of profits is the key to (modern) capitalism as we understand it. But Marx also saw that two other forms might exist, one of which was a dead-end street. The first of these forms is merchant capitalism, where profit is simply generated through market exchange. The second one is finance capitalism, where the ‘normal’ circuit of M-C-M’ (money – commodities – more money) is cut short as M-M’ (money – more money). This form is not always sustainable in the long run, as the world experienced during the 2008–9 global financial crisis.5 Financial or merchant capitalism is unsustainable in Marxist theory since surplus value can only be generated at the point of production, when 3 In Mihályi and Szelényi (2017), we deal with interpretations of the adjective ‘excessive’ at length. Piketty’s entire argument is based on his alleged discovery that r > g, where r is the average growth of profits and g represents the average growth of gdp/capita. We show that the r > g model is a statistical artefact arising from the intermingling of the concepts of profit and rent on the one hand, and capital and wealth on the other. 4 See a similar but somewhat more focused definition in Swedberg 2005: p. xxxv; also Weber 1978: 90–100. 5 For a recent post-mortem evaluation of the 2008 international financial crisis, see a collection of excellent papers in Mihályi (2018).

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capital buys labour power which consumes at a level that creates higher value  than its own. Burawoy and Krotov (1992) at one point called the post-­ communist Russian economy ‘merchant capitalist’ because, while it produced nothing, it generated income for speculative merchants – a system he believed was doomed to fail. 1

Profits versus Rents

As is well-known, Marx (1867) focused on profit-wage differentials in Volume i of Capital. In an attempt to elucidate the concept of exploitation, he proposed a model in which owners of capital were an ever-shrinking minority while a growing number of wage labourers received only the costs of the reproduction of their labour power. Marx wanted to show that property is not ‘theft’ (Proudhon 1840). He insisted that all market exchanges are exchanges of equivalents. It is not the capitalists’ personal greed that drives the institutions of exploitation and the extended capitalist reproduction process. Capitalists do pay the full price of their workers’ labour power (hence the costs of the reproduction of their labour power), but they keep their employees working beyond the hours necessary to cover these costs and thus appropriate the surplus created during those extra hours of work. In a closed economy, under perfect competition, the individual capitalist has no choice. He has to keep wages at a level which reproduces labour power, and he needs the surplus (profit) to reinvest in order to remain competitive with other capitalists. The low wages of the working class and the profit of the capitalists, therefore, fit into an equilibrium model. As Keynes once said, the capitalists of the late 19th century “were allowed to call the best part of the cake theirs, and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice” (Keynes 1920: 20). “In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth” (18–19; italics in original). Under these circumstances, therefore, the expanded reproduction process was a positive-sum game. Marx was thinking in these terms as well, although he obviously did not use the game theory. If all profit has to be reinvested, more profit may mean more jobs (which Marx did not consider in the mid-19th century) and/or may mean higher wages for workers (a means of generating sufficient aggregate demand). While Piketty expressly rejected Marx’s version of the labour theory of value and the theory of exploitation which follows from it, he tended to concur with Marx’s 20th-century followers in assuming that – apart from exceptional periods, when governments intervene with redistributive policies, or when wars

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destroy accumulated private wealth – wages remain relatively low all the time, while profits and accumulated wealth keep increasing. But why does the tendency towards unlimited capital accumulation and increasing inequality matter, if capitalists keep reinvesting profits in the production process and, in so doing, create more jobs? What is wrong with the capitalist mode of production, if technological progress has no intrinsic impediments? As Marx noted in a famous passage from Volume i of Das Kapital: “the productive forces resulting from co-operation and division of labour cost capital nothing. They are natural forces of social labour. So also physical forces, like steam, water, etc., when appropriated to productive processes, cost nothing. (…) Once discovered, the law of the deviation of the magnetic needle in the field of an electric current, or the law of the magnetisation of iron, around which an electric current circulates, cost never a penny”.6 So, if expanded reproduction is a positive-sum game for the economy as a whole, what is wrong with it? Marx’s original answer to this question – the theory of the declining rate of profit – developed in Volume ii of Das Kapital, sounded convincing in his time but has since been proven wrong. (This doctrine still has its believers, but most economists reject it.) We should note, in the interests of fairness, that Marx saw the declining rate of profit only as a “tendency”, alongside various “countertendencies”. Only Engels (who decided to publish Volume ii) elevated it to the status of a ‘law’. Once we step out of Marx’s model, which is based on the labour theory of value, we cannot dispute that cheap technology such as computers can bring about massive productivity gains, hence leading to increases in national income. This explains why profits did not decline, the world revolution did not happen, and workers’ real incomes have instead increased enormously since Marx’s time.7 Ricardo (1817), who lived two generations before Marx, was convinced that the concept of rent was an indispensable explanation for the inequalities he observed. As is well known, he defined rent as scarcity rent:8 an income derived from monopolistic ownership of agricultural land and mines. He considered rent-seeking to be a negative-sum game. Rents create no new wealth; instead, 6 Das Kapital Chapter 15. Section 2: 268. Our emphasis. https://www.marxists.org/archive/ marx/works/download/pdf/Capital-Volume-I.pdf. 7 One qualification, however, is justified. Profit-maximising behaviour can reduce wealth at the national level if we drop the assumption of a closed economy. A classic example is outsourcing (especially in the case of off-shore investments of capital gains), which can cut wages and create unemployment at home, though it still creates wealth globally and tends to reduce global inequality. 8 In economic textbooks, this is often called ‘economic rent’.

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they reduce economic growth and reallocate incomes from the bottom to the top. As Ricardo (1817) put it, “The rise of rent is always the effect of the increasing wealth of the country, and of the difficulty of providing food for its augmented population. It is a symptom, but it is never the cause of wealth” (40; our emphasis). This contrast between profits and rents is not at all trivial. Ricardo already noted the lack of clarity around this distinction: “[Rent] is often … confounded with the interest and profit of capital” (34). While Piketty challenges the ethical bases of observable inequalities of income and wealth, he preserves the framework of the mainstream, neoclassical theory of income distribution originally developed by John Bates Clark (1899). Clark thought that wages and profits reflect the marginal product of labour and capital, respectively. A person’s income is determined by his contribution to production – or, more precisely, by the marginal product of the ‘factor of production’ to which he contributes. It is truly a zero-sum game, with important consequences: (1) there is no ‘room’ for rents in this model, or (2) it must be assumed that rents are paid from net profits.9 Piketty accepts both propositions, though he does not say so. According to him, the neoclassical model is fundamentally right. When wage earners and capitalists share the entire annual national income fully between them, there is no injustice or exploitation: both classes get what they deserve.10 Piketty’s line of argumentation allows for only one exception: the compensation of the highest-paid executives of multi-billion-dollar corporations. He does note that these “super managers” receive more than they deserve, owing to their influence and power in the firms that employs them. However, this is, for Piketty, merely a small, undesirable, unnecessary distortion of the market economy. 2

Changing and New Forms of Rents

Ricardo believed that agricultural land was lamentably scarce. As such, its supply is inelastic, while demand for food steadily grows. Under these circumstances, landowners receive scarcity rent without producing more or better food, i.e., without producing any new value. Such rents channel resources away from ‘productive’ investments and cut the real incomes of wage and salary earners. Ricardo turned out to be wrong in part. First, he did not consider how 9 10

Marx came close to this view in Volume iii – which he also did not consider ready for publication. This may have been one of the reasons why his book was so well received in many mainstream macroeconomic departments.

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much the fertility of land could be increased. Secondly, and more importantly, the price/value of agricultural land declined as the Americas and Australia were incorporated into the emerging capitalist world economy. In fact, there is an abundant supply of uncultivated agricultural land around the globe even in the 21st century.11 Vilfredo Pareto (1916) broadened Ricardo’s notion of rent to include all sorts of real estate and all kinds of monopolies. In The Mind and Society, he made an interesting distinction between ‘speculators’ (foxes) and ‘rentiers’ (lions) – i.e., between those who seek profits and those who seek rents. In his view, a balanced market economy needs both foxes and lions; dynamism and innovation have to be counterbalanced by stability. More recently, Joseph Stiglitz (2012) pointed out that while scarcity rent does not really apply to agricultural land any longer; it certainly applies to residential property and other real estates. In some urban areas around the world, from London and Moscow to Shanghai and Singapore, tremendous wealth is generated merely from the scarcity of highly desirable locations. Today, the demand for housing no longer comes only from those people who live in a given city all the time, but also from the global wealthy who want to have houses in locations like the aforementioned globally attractive cities. Such privately held, consumption-oriented wealth becomes the property of a new urban ‘aristocracy’ which passes these assets down from generation to generation. In the US, the total value of the housing stock was estimated at 26 trillion dollars in 2015, more than the value of all the shares traded on the American stock market (The Economist, 20 August 2016). This land-ownership structure, in which property is concentrated in the hands of the wealthy, is reminiscent of the privileged estates’ control of resources during the era of feudalism. Indeed, this concentration is especially intense in the top 1 per cent or even 0.1 per cent of the social hierarchy. However, we would hasten to add that there is a relatively large patrimonial upper-middle class – say the top 10–20 per cent – which also benefits from all this if they happen to inherit property in the aforementioned cities. Moreover, it is worth noting that there is a self-reinforcing mechanism at work here. London, in the light of the Panama Papers, can stand as an example of how an influx of super-rich foreigners can drive up property prices, which in turn significantly increases the short-run return on such investments. But does such rent result only from land or real estate? When we speak of rent-seeking behaviour (as distinct from profit-maximising business investments), we are using a broader notion of rent than has been customary over 11

According to the fao’s definition, agricultural land covers only 33 per cent of the world’s landmass.

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the past 50 years. (See e.g., Tullock 1967; Krueger 1974; Buchanan et al. 1980; and Bhagwati 1982.) Max Weber’s notion of closure can be a useful way to conceptualise rent in this broader way. He distinguished ‘open social relations’, where participation is not denied to anyone who wishes to join, from ‘closed relationships’ where the participation of certain persons is prohibited, limited or subjected to conditions. According to Weber, closed groups manage to monopolise advantages by occupying scarce and desirable positions, or by making desirable goods and services scarce through clientelistic practices, e.g., the creation of cartels or monopolies (Weber 1978: 43–44). Today, scarcity rent is one of the explanations for the very high compensation packages offered to the best specialists. Firms (along with universities, hospitals, sports clubs, etc.) compete with their peers for stars. They do not want to lose a legendary ceo,12 professor, or athlete to a rival, as it could hurt their prestige and possibly their profits. They pay more and more, therefore, especially in countries where excessively progressive income taxes do not counterbalance such incentives. Closure in itself does not guarantee success at the firm level, nor for individual managers, but it is a great advantage vis-à-vis those who are excluded from competition.13 One of our contributions to the debate on rents is the – in our opinion, ­justified – introduction of the notion of solidarity rent. For example, membership of a trade union reduces wage differentials. While nationwide unions tend to fight for the highest level of employment, branch-based unions fight for the highest possible wages for all the workers in their branch. In particular, branch unions can push wages in their branches higher than prevailing market wages, and thus secure rent for their members. Through the highly sophisticated institution of collective bargaining, unions prevent the use of wage incentives which pay more to the best workers, teachers, or doctors – to the advantage of those who underperform. Arguably, the incomes of those whose jobs are protected by unions or professional associations are composed of two elements: wages or salaries, and rents. In developed democratic societies, one of the main functions of such associations has been to create conditions for rents. 12 13

Solow (2014) calls supermanagers’ rent a “sort of adjunct to capital”. At first glance, the Weberian concept of ‘closed’ and ‘open’ relationships looks identical to the proposition in Acemoglu and Robinson (2012), who coined the terms ‘exclusive’ and ‘inclusive’ societies. However, the two are not the same. The American authors – as the title of their book emphasizes – analyse the growth process at the level of nations. Weber speaks of ‘closed’ and ‘open’ relationships within a given economy – and this is the right approach if we are analysing inequalities within a given country. The same can be said about the dual concept of “open and limited access orders”, presented in North et al. (2012). Nevertheless, we strongly agree with their other assertion about the ubiquity of rent in every society, including the most advanced countries.

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When the power of trade unions was on the rise, solidarity rent helped to reduce inequality. However, in the context of the globalised world economy, their significance has declined,14 and this, in turn, has likely contributed to the stagnation of real wages for low-skilled manual workers in the manufacturing sectors of many advanced economies, the US in particular. Those who collect pensions in a pay-as-you-go system also receive solidarity rent, as do people who are on social welfare and those whose health insurance is paid by taxpayer contributions (as distinct from those who participate in a funded private-pension scheme, or whose healthcare benefits are paid by private insurance policies). Ideally, fiscal transfers always work as mechanisms of solidarity rent – as transfers from the rich to the poor. Moreover, given the logic of the demand side, solidarity rents can be economically beneficial since they can maintain or even boost consumption. This is a strong argument for unemployment benefits, but even conspicuous consumption can increase demand, create higher profits and wages, and hence contribute indirectly to wealth generation. The American sociologist, Aage B. Sørensen (2000) also offered a broad interpretation of rents: “Rents are payments to assets that exceed the competitive price or the price sufficient to cover costs and therefore exceeding what is sufficient to bring about the employment of the asset. The existence of rent depends on the ability of the owner of the asset to control the supply” (p. 1536). The association of rents with land is not required: “Rent will emerge on all productive assets that are in fixed supply and that actors need to maximise their wealth” (p. 1537). If we accept this framework, it follows that ownership of potentially rent-producing assets – such as licenses, credentials, and access to loans for starting one’s own business – is not restricted to capitalists. Those who do not own profit-generating capital still have the opportunity to accumulate wealth in other forms, such as pensions, as we have already mentioned.15 Thus, we define rent as the difference between what income would have been in an ‘open relationship’ and what it turns out to have been after the ‘closing’ of such relationships to certain individuals or categories of individuals. In simple algebraic form:

14

15

Between 1980 and 2013, average trade-union density in oecd countries fell from 33 per cent to 17 per cent. This decline was uniform across all member countries, with the notable exception of the Scandinavian countries and Iceland. https://stats.oecd.org/Index .aspx?DataSetCode=UN_DEN#, accessed on July 10, 2015. It is noteworthy that in The World Top Income Database, one of the bases of Piketty’s book, consumer durables and unfunded defined-benefit pensions are not taken into account.

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Income from closed relationship – income from open relationship = rent It may be difficult to measure all types of rents empirically, but their existence can be demonstrated by means of counterfactual reasoning. What would a closed group’s income have been if its members had been competing in open relationships? Within a distinct historical-political epoch – say, one lasting 20–30 years, in which average people can make comparisons between their own relative social position and that of others – rents can be temporary or enduring. An entrepreneur who invents a new technology may collect rent for a while, but eventually, his competitors will invest in the same (or a similar) technology, and his rent will disappear. The supply-and-demand mechanism will set the incomes of competing entrepreneurs. There are many spectacular examples of this: the success of Microsoft’s Windows operating system; the rise of mobile phones, which toppled copper-cable-based telephone companies from their privileged positions; and the shale revolution of the past decade, which has entirely reshaped the traditional OPEC-controlled oil industry. Taking our lead from Sørensen (and also Marshall 1920), we have identified three enduring sources of rents. First, some of the monopoly rents enjoyed by entrepreneurs are created naturally, since increasing returns to scale often make the costs of entering production within a given country prohibitive (e.g., network industries).16 Governments may create rents by issuing concessions to open mines or licenses to run tobacco and liquor shops. Second, there are personal rents on biological endowments, such as individuals’ genetic predispositions (e.g., special talents in popular sports or the arts). The third type is resource endowment at the level of firms and countries which exploit mineral wealth,17 as well as other types of geographical advantages such as access to open sea, sunny beaches, or snowy mountains, etc. This rent-based interpretation of the importance of the natural-resource sector can be further generalized. As the Hungarian economist János Kornai (2013) has argued convincingly, in other sectors (such as manufacturing or services), the most important markets are oligopolistic – perhaps even more so 16 17

In the context of globalisation, however, the number of companies is growing in every industry worldwide, and thus competition is actually increasing at the international level. For many years, the World Bank has been regularly publishing country time-series under the label Total Natural Resources Rents (%, of gdp), whereby rents are defined as the sum of oil rents, natural gas rents, coal rents, mineral rents, and forest rents. See http://data .worldbank.org/indicator/NY.GDP.TOTL.RT.ZS.

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than in the natural-resource sector. The most efficient firms harness higherthan-average profits through arbitrarily large mark-ups, or, to use our terminology, they exploit a scarcity rent. This is not merely a theoretical possibility. A recent US study (Furman and Orszag 2015) shows that the most profitable 10 per cent of firms have indeed pulled away sharply from the rest. Their return on capital invested has risen from more than three times that of the median firm in the 1990s to eight times. This – as the cited study suggests – is way above any plausible cost of capital and is therefore likely to be pure rent. This increasingly skewed distribution of statistically recorded profits (containing rents) could explain certain types of wage inequalities as well. When an industry includes only a few big companies, they do not have to compete as hard with one another in order to attract employees – and thus can end up paying their workers less than they would if there were true competition (­labour-market monopsony). However, the opposite mechanism may also work. Because of the rent-component hidden in these firms’ profits, they can afford to pay all or some of their employees more than the industrial average. There are usually two interrelated factors behind this: pioneering technology18 and economies of scale arising from the concentration of firms within any given country. In fact, both of these factors play a crucial role in generating revolutionary (or Schumpeterian) innovation. While this generalization may sound idiosyncratic for many economists trained on neoclassical equilibrium models, it is a commonplace in management-science literature that many ­important industries never have more than three significant competitors.19 This same school of thought also claims that the shares of the three leading companies in many markets reach a ratio of approximately 4:2:1. There is, therefore, a significant market-share difference even among the top firms. Data from the US Census Bureau also supports this claim. In 2012, the top four US firms’ average share of total revenue on a sector-by-sector basis was close to 50 per cent in the IT, telecommunications, and media sectors, 40 per cent in retail trade, and almost 40 per cent in the finance and insurance sector (The Economist, 26 March 2016). It is crucial to underline that state-created monopolies or oligopolies are not necessarily evil, as they are often justified by other social objectives rather than 18 19

As we explained earlier, this is a temporary advantage. This finding was first demonstrated by the founder of the Boston Consulting Group, Bruce Henderson (1976), then re-confirmed empirically by Reeves et al. (2012), using a much larger data set. Since then, successful companies like General Electric and others have lived according to this maxim. If they cannot be number one or two in an industry, they get out of that market and reinvest their resources elsewhere.

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social equity. For example, there are good and widely accepted reasons why the intellectual-property rights of pharmaceutical companies, individual innovators, and artists are defended by patents and copyrights. These are, in fact, closures in the Weberian sense. It is not surprising that Aghion et al. (2015) found positive and significant correlations in the US between innovativeness and top 1 per cent income shares. Similarly, it makes a great deal of sense to require state permission for firms to build nuclear power stations or even simple twostorey houses. It is also in the general interest that physicians have to acquire special occupational licenses (e.g., a university diploma) before they can start treating sick people. Other types of regulations (e.g., land-use bylaws in urban areas) can be assessed, if at all, only on a case-by-case basis. 3

Institutional Consequences of Rent

Rents have at least three institutional consequences. Firstly, certain types and some levels of rents are necessary for social cohesion and innovation in society. Such rents may be seen as ‘deserved’, but on some level, they are still ‘unearned’. The major legitimacy claim of market capitalism is meritocracy. At some point, the public will judge rents generated by any means to be ‘excessive’, if those who receive them ‘do not work for them’. Most people accept that some rent is due to drug manufacturers and innovators, but there may be a cap on the amount that is seen as ‘reasonable’, after which point any further rent will be considered ‘exploitive’. The same is true for social benefits. In civilised societies, most people accept that the poor (or disabled) should have some social support (even if it is ‘unearned’), but it may still be judged to be ‘too much’ after a certain point. Secondly, if individuals’ wealth comes increasingly from rent rather than wages or profits earned day after day in a capitalist enterprise, there is little institutional incentive to reinvest such rent. The nouveau riche and heirs to fortunes are tempted to waste the rent they have collected. Easy come, easy go. Profit-maximising entrepreneurs tend to invest their profits in optimal ways to fight off direct competitors. Rent collectors do not face competition; rent can be spent on ‘conspicuous consumption’. Nouveau riche entrepreneurs tend to use a chauffeur-driven Mercedes or private plane well before they can afford it, or well before they need it for business purposes. In a best-case scenario, ­second- and especially third-generation heirs will spend their inheritance on charity; in a worst-case scenario, it will go on conspicuous consumption. The absence of institutional mechanisms which motivate owners of wealth to use it in efficient ways can have devastating social and economic consequences.

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A lack of such mechanisms can lead to state failure and economic stagnation or even economic collapse. Thirdly and finally, in opposition to Piketty’s main line of argumentation, we contend that voters and political activists are chiefly concerned about the personal inequalities of income around them. They are thus much less concerned about the concentration of economic wealth and power in the form of publicly traded shares or family-owned companies, i.e., the relative wealth of capitalists in a class-based model. It is true that sensational formulations – for example, “48% of the world’s wealth is owned by 1% of the world’s population”20 – can quickly catch the attention of the media and, through the media, stick in the memory of social scientists (including Piketty, who often quotes such data). But such ‘facts’ do not tend to mobilise ordinary people (especially if people believe that such extraordinary wealth or income is compensation for exceptional individual achievements or talent, hence not inherited from earlier generations or acquired through the exclusion of competitors from the market place). People tend to be upset not by gaps between business people and wageearners, but rather by significant variations in wealth or incomes that can be attributed to inheritance or monopolistic exclusion of competitors. 4

Class Reproduction through the Accumulation of Human and Cultural Capital

The educational system is an important terrain of Weberian closure. Given the high cost of education, especially of elite education, the most highly-valued education is often inaccessible to youth whose parents cannot afford the often prohibitive costs. This problem is particularly prevalent in the US. At Ivy League universities, youth from white upper-middle- and upper-class families are overrepresented despite efforts to support the children of less privileged families. One obvious mechanism is strictly achievement-based entrance exams, on which children from more affluent families simply outperform those from average families. Less obviously, US colleges’ recent efforts to admit students not just on the 20

The renowned charity Oxfam (2015) timed the publication of its fresh research for the opening of the Davos economic summit, thereby skilfully capturing headlines at many news outlets. Another sensational formulation of this same report was that the “85 richest people on the planet have the same wealth as the poorest 50 percent (3.5 billion people)”.

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basis of measurable intelligence, but also on the basis of being ‘well-rounded’ (i.e., having taken ballet classes, performed in plays, founded clubs, volunteered time helping handicapped children, etc.) works in the same direction as well. Whereas there is some randomness in the distribution of intelligence, these sorts of extra-curricular activities tend to be the domain of upper-­ middle-class, private-school-educated children.21 Inheritance is a market-based institution which creates rent for its heirs. This can be the inheritance of wealth (including valuable real estate) or social status linked to education at elite universities, as we explained above. This is what Bourdieu (1970) called ‘cultural capital’, as distinct from ‘human capital’. Cultural capital does more to reproduce the ‘patrimonial middle class’ or ‘patrimonial upper class’ than it does to increase the productivity of the graduate. It may cost parents as much as $300,000 or $400,000 to get their children onto an Ivy League BA or BSc program, but that Ivy League degree will likely pass a kind of ‘noble’ status on to their descendants. Employers do not necessarily seek Ivy League graduates only because their technical skills are better, but also because hiring such people can add to the prestige of their institutions. The experience of the United States – in many ways the pacesetter for the capitalist economic system – shows that family formation through assortative mating further strengthens these tendencies (Greenwood et al. 2014). Since educated men tend to marry educated women more often than they did two generations ago, this inevitably leads to a concentration of income and wealth, which in turn helps these ‘privileged’ parents invest time and money in their children’s futures, literally from the day they are born. Children born to families in which both parents (and perhaps even the grandparents) hold university degrees outcompete their less privileged peers when it comes to climbing the educational ladder and later on the job market. ‘Helicopter parenting’ is the primary institutional channel through which social inequalities are regenerated. Thus it is that patrimonial capitalists are taking more and more ground – and not just the top 1 per cent, as Piketty suggests, but the entire upper-­middle class. Three successive cohort studies of 70,000 children born in the UK in 1946, 1958, and 1970 have also shown that childhood circumstances – as determined by their parents’ social status – profoundly influence life expectancies and lifetime inequalities, despite all the welfare measures introduced by successive British governments since 1946.22 21 22

The authors are grateful to Daniel Treisman for this observation. E.g., the meticulously collected data for the 1946 cohort suggest that women born in socially better-off families had a death rate about half that of everyone else born in 1946. Pearson (2016) pp. 301–302.

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There is an additional mechanism of closure in the educational system and that is credentialing. Education is often conceptualised in terms of humancapital investment. It is usually assumed that human capital invested in education will lead to productivity gains and higher incomes resulting from those productivity gains. Nevertheless, powerful professional associations (such as the American Medical Association or the American Bar Association) can manipulate the supply of occupations under their jurisdiction by promoting licensing examinations, thereby driving up incomes for those occupations by adding a rent component to market-equivalent incomes from work. Before summing up the points above, there is no need to list examples demonstrating that the term ‘rent’ is used with different meanings not only in common parlance but also in scholarly literature. In the spirit of Ricardo, Weber, and Sørensen, we consider all incomes rents if they stem from ownership of any assets, where access to such assets is closed for other economic actors. Our list in Table 8 comprises 13 forms of rent, but it is not exhaustive; depending on the institutional setup of a given country, additional categories could easily be included. Table 8 

Different types of rents in the advanced economies

A

Scarcity rents

Examples

1

Ricardian rents Natural monopolies based on… — increasing returns and/or network effect — locational monopoly

Agricultural land and mines

2 3 4 5 6 7 8 9

Airlines, Internet, mobile telephones, etc. Residential property, office buildings, hotels, etc. Innovations in business Facebook, Google, etc. Individual (genetic) endowments Sports and arts Competitive training Sports Social capital inherited from Entrance to Ivy League universities parents Market limitations through — limiting the entry to the Occupational licensing, cartels, market by incumbents lobbying and corrupt practices — state induced monopolies Innovations and new products (e.g. drugs) protected by intellectual property rights

Inequalities and Rent-Seeking in Advanced Market Economies Table 8 

B

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Different types of rents in the advanced economies (cont.)

Solidarity rents generated by

10 — nation states 11 — collective bargaining 12 — state induced welfare entitlements 13 — charitable institutions

Trade protection, immigration control and positive discrimination Local and national trade unions Healthcare and pensions provided by the social security system Aid and other forms of assistance provided within a country or internationally

Source: Mihályi and Szelényi (2019) p. 65

5

The Counter-Revolution of Nation States in the Name of More Equality

In 2008, an opposition politician in post-communist Hungary, Viktor Orbán, explained the exploding global financial crisis as the consequence of individual greed. At that time Orbán was already taking an anti-globalisation stance, advocating the primacy of national sovereignty against global market forces and national interests over individual interests. “This is a human-made crisis. To put it simply they stole, misled, lied, falsified or hid real facts in order to grab more money. The deepest roots of the current financial crisis can therefore be found in greed, in excessive yearning for acquisition”.23 Few liberals or advocates of Western-style open society took such statements seriously at that time. Two years later, Orbán was Prime Minister of Hungary and Greece had almost collapsed financially, nearly bringing down the Eurozone with it. Under the rule of Jarosław Kaczyński, Poland took an anti-EU stance, in 2016 Brexit began to pave the UK’s road out of the EU, in 2017/18 the Czech elections were won by a right-wing populist party (ano), and a state president in left-wing clothing, but with a similarly anti-EU stance was re-elected. In November 2016, Donald Trump with his ‘America first’ slogan won the presidential elections in the usa, and anti-globalisation, nationalist parties won elections in Austria

23

http://2010-2015.miniszterelnok.hu/beszed/kapzsisag_mertektelenseg_all_a_ valsag_hattereben.

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and in Italy, too. Is the rest of the world following Viktor Orbán, or the ‘Hungarian model’, as Mr. Orbán would like it to be seen? Not quite, but undoubtedly Mr. Orbán sensed the new direction world ­politics might go in and spelt out some of its parameters, labelling it quite insightfully ‘illiberalism’. In this chapter, we interpret this illiberal project as a ­counter-revolution of the nation-state against globalisation and the changing patterns of inequalities. Intriguingly, Marx and Engels (1848) understood the emergence of modern capitalism as a phenomenon in the force field between globalisation and the rise of the nation-state. “Modern industry has established the world market”, but at the same time capitalism also created the nation-state: “Independently, or but loosely connected provinces, with separate interests, laws, governments and systems of taxation, became lumped together into one nation, with one government, one code of laws, one national class interest, one frontier and one customs tariff”. As we have already argued in the preceding chapter, Karl Polanyi (1944) also explained the emergence of modern capitalism as resulting from the appearance of the integrated world market and the collapse of great redistributive empires. While Polanyi saw the expansion of market integration as an ­inevitable – and in the last instance progressive – process, he identified the need for “countervailing tendencies” (Polanyi 1944: 76.). Nation states need to correct the excessive and eventually even destructive forces of the world market by creating (national) welfare states. The history of capitalism, therefore, is the history of moderating efforts by nation states against the destructive forces of globalisation or the counter-revolutionary, chauvinistic practices of nation states to block the fundamentally rationalising and emancipatory impacts of globalisation (the latter one having been the dominant trend – at least in our view – over the past years/decades). The current epoch of capitalism, namely the one following the disintegration of the Soviet Empire, can be characterised by the further expansion of the forces of globalisation, which, beyond having its downsides, is primarily serving social progress around the globe. This new wave of globalisation undermines nation states and national sovereignty, and therefore unsurprisingly it is also an epoch of counter-revolutions by nation states, driven by particularistic, occasionally chauvinistic or even racist sentiments. The quote above from Mr. Orbán in 2008 is one of the first formulations of this counter-revolutionary project. But far more important for world history is Trump’s ‘America first’ slogan, Putin’s neo-imperial Russia dream, President Xi’s ‘One Belt, One Road’ initiative and, last but not least, the electoral successes of the far right in Europe (defending Christian culture against Islamisation, national sovereignty and

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ethnic homogeneity) in Poland, Austria and Italy, with strong performances in France, Germany, the Czech Republic and Slovenia. We call all of them ‘radical nationalist’. What are the key arguments of these radical nationalists against globalisation and, in Europe, against the European Union? We identified five of them. (1) In the US, in Western Europe, but to some extent also in post-communist Central Europe by now, there are social strata (at the bottom of the lowest deciles of quintiles of income distribution) whose real incomes have stagnated or even declined during the past few decades. This has indeed been caused by the unleashing of market forces globally, by exposing the working class in the core of the world system to competition by workers on the periphery. In our recently published short monograph (Rent-­ seekers, Profits, Wages and Inequality – The Top 20 Per Cent, 2019), we suggested that globalisation does have rent-destructive, emancipatory functions (among other less noble ones). Globalisation does reduce some of the world-wide inequalities, though it may increase other inequalities. Tariffs and other protectionist measures not only defend the capitalists of the core, but they increase the incomes and levels of employment of the working classes as well. Global free trade has led to a decline in real wage levels for some categories of workers in the core and a substantial increase in some wages and living standards in many countries on the periphery. In countries like China and India, the living conditions of hundreds of millions of people have improved. (2) Nevertheless, it is also true that, while the movement of capital around the globe has become rather freer, politics have remained local. Even in the European Union, the free movement of capital is not matched by a Europe-wide system of social welfare and taxation. (3) There is a ‘democracy deficit’ in the European Union; a lack of effective democratic control over the continent-wide movement of capital. (4) Participation in the democratic process is increasingly ‘professionalised’. In order to be able to make informed political judgements, a person really needs to have a college degree and to spend hours every day checking on recent political events. This frustrates ‘ordinary’ citizens, who are therefore attracted to anti-elitist, anti-party sentiments which support direct democracy. These citizens also feel a sense of alienation from Brussels’ ‘bureaucracy’. Populist parties and leaders have, as a result, experienced electoral gains, both on the political right and left. (5) The free global movement of labour has also become apparent over the past two to three decades. This has included the global (unprecedented) migration of highly educated youth. What is unfolding in front of our eyes

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is the greatest emancipatory achievement of humankind since the enlightenment. Tens of millions of people are on the road escaping wars, natural disasters and poverty. Some are economic migrants; their only aim is to create humanly acceptable conditions for themselves and their families. Is that a crime? Was the extraordinary growth of countries like the US and Canada not driven by ‘economic migrants’ from Ireland, Italy, and Eastern Europe? What we call here the counter-revolution of nation states is a package of (­unfulfillable) promises to ‘cure’ the five listed diseases above. And since four of the five promises cannot be kept, politicians have no choice but to lie. Brexit, as it was promised, cannot happen; the United Kingdom has no choice but to try to remain in the common market. When the chips were down, the majo­ rity of Greeks preferred to stay in the Eurozone rather than return to the drachma. Trump threatens to start trade wars, but he will, eventually, have to make concessions to China, Mexico, Canada and the European Union. Hungary and Poland will never quit the European Union (neither will the EU expel them) no matter how many elections Mr. Orbán or Mr. Kaczyński win. However, national governments can close their borders with fences or walls and restrict inwards and outwards migration with an iron fist. But let us not forget that the most prosperous countries of modern capitalism are countries of ‘migrants’, such as the usa, Canada or Australia (and incidentally most of, the Central European countries, like Poland, Hungary or the Czech Republic). These countries were successful not despite migration, but because of it. Look at the family trees of all of these countries’ Nobel laureates or major artists and you will get hard data on how useful migration has been and still is. Successful migration, of course, presupposes a migration policy which regulates the inflow on foreign population (but without ethnic or religious prejudices) depending on the demographic and labour market needs of the host country. Unregulated population floods, like the one that happened in Europe in 2015 and the one underway right now in Bangladesh ought to be avoided or at least anticipated. The rational (and humanitarian) solution is not building fences or walls at the national borders. What we need instead are bridges between ethno-religious boundaries, a common policy adopted (and financed) by the European Union and the United Nations. What we need is an internationally harmonised assessment (by experts with sufficient experience) of the refugee status of migrants. We also need internationally financed and well-maintained refugee camps where refugees can be housed until they can be distributed to the countries they aspire to and the countries which are ready to accept them.

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The free flow of labour is a great opportunity for globalisation and a major force of de-feudalization. Most of humankind today is suffering more from feudalism – ethic, religious, sexual prejudices and discrimination – and less from competitive capitalism (no matter how many problems competitive capitalism may pose). In India, Japan and Kazakhstan people are still often classified into castes. Even today, slavery is no unknown in the world. According to some estimates, there are still at least 40 million people in slavery who are working without compensation from their masters to ‘pay back’ the debts their family has accumulated. There are, of course, millions of sex slaves who have either been stolen from their families or bought from impoverished parents.24 In Central and Eastern Europe, and especially in Bulgaria, Romania, Hungary, Slovakia, Macedonia and Serbia, there is well-documented discrimination against the Roma population, many of whom live in extreme poverty.25 In China, people who were born in the countryside and who now live in Beijing and other major cities are treated as second class citizens. Several hundred million rural Chinese who are urban guest workers may not even get the basic government provisions for their livelihood because of how the hukou system is tied to their place of permanent residence. Similar arrangements are known from other East Asian countries.26 Let us cite Marx (and Engels) once more, this time from the Communist Party Manifesto: “The bourgeoisie by the rapid improvement of all instruments of production, by the immediately facilitated means of communications, draws all, even the most barbarian, nations into civilisation. The low prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensively obstinate hatred of foreigners to capitulate”. This certainly was not a prediction of what was to happen in the succeeding 150 or so years, when the killing of tens of millions of people were killed was driven by religious – ethnic hatred. Marx was overexcited by the technical innovation of his times and did not see the dangerous social consequences of 24 25 26

https://www.antislavery.org/slavery-today/modern-slavery/, accessed April 3, 2019. According to estimates of the Council of Europe, in these six countries about 7.5–9.9 ­percent of the population is Roma. Those estimates are highly unreliable since it is a matter of dispute who should be called, or labelled as ‘Roma’. Although the hukou system has origins in China dating back to ancient times, the system in its current form came into being in 1958. A similar registration system was known in the ussr from 1932 until the fall of communism. In present times, a similar household registration system exists within the public administration structures of Japan (koseki), Vietnam (hộ khẩu), and North Korea (hoju). In South Korea, the hoju system was abolished on 1 January 2008.

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globalisation. We can now predict with more certainty that by the end of the 21st century, this globe will be inhabited by a homo sapiens without specific, ethno-religious origin or skin colour. When a billion people tuned in to watch the marriage of Prince Harry and Meghan Markle, who by American standards would count as ‘African-American’, we were able to observe not only the ‘racial’ transformation of the royal family in the UK, but we could also see (in microcosm) the ethnic-racial change that is coming to humankind. Let us add one more note on the ‘democracy deficit’ in our globalised world, and especially in the EU. Without further federalisation of the European Union, the governance of democracy cannot, in fact, be resolved. Even today, however, the EU is a primary defence mechanism against anti-democratic tendencies in many of European countries (such as Poland or Hungary).

Chapter 5

The Divergent Pathways Out of Communism 1

Introductory Comments: Distinguishing Three Pathways to Capitalisms

In this chapter, we focus on the early stages of the post-communist transformation. In Chapter 3, we emphasised that various countries which had previously been communist have shown at least partial convergence. This chapter deals with early divergences that took place as communist countries entered capitalist transformation. In Chapter 6, we will offer a new hypothesis: after initial divergence, we have, since 2000–2010, observed a re-convergence of most postcommunist countries (with some notable exceptions), a shift away from the liberal democracy of the North-Atlantic region and the making of a new ‘illiberal’, or ‘autocratic’ post-communist version of capitalism. The transition from socialist redistributive economy to capitalist markets proved to be a rockier and much longer road than anticipated. The degree and character of difficulties countries faced during the transition depended on the nature of the pathways taken. The present chapter asserts a provocative set of hypotheses about the early stages of exit from communism: 1) Although both the post-ussr states and Eastern Europe have economic capital as the dominant form (much like capitalist formations), the countries which belonged to the former ussr – Russia, Ukraine, the Central Asian republics – have a stronger emphasis on political capital, while Eastern Europe does not appreciate human capital as much as capitalist formations usually do. 2) In China, however, political capital remains the dominant form. Political capital still calls the shots (casting doubt on the ‘capitalist’ nature of the Chinese formation). In this chapter we distinguish three major trajectories that various countries followed in developing new varieties of capitalisms: – Eastern European liberalism; – Post-ussr patrimonial regimes and – East Asian (Chinese and Vietnamese) transformation from below. After decades of at least relative convergence, it appeared that with the fall of communism, countries were following different trajectories. It seemed shortterm vs long-term ‘path dependence’ might be operating. Long-term path dependence implied a resurgence of the pre-communist past, hence the division

© koninklijke brill nv, leiden, ���� | doi:10.1163/9789004413191_006

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between post-ussr regimes (meaning Russia, Ukraine, Belarus, the Central Asian new republics, societies belonging to Eastern Christianity or Islam) and Eastern Europe (meaning the remaining European former communist countries, societies mainly dominated by Western Christianity) and of course China, which according to some commentators is gradually rediscovering its Confucian past. When David Stark (1996) first introduced the theory of path dependency for the post-communist transformation, he implied what we might call ‘shortterm path dependency’. The initial conditions – economic, social and political – pertaining at the point when communism broke down had a major impact on which road various countries took. The critical question was whether the former communist party was pushed out of power and the communist intelligence services eliminated (as happened in Poland, Czech Republic, Hungary and the Baltic States); or whether the communist party retained political power under a new name and with a somewhat new ideology, but largely with the same personnel and whether the security services also managed to retain a great deal of influence, (as happened in Russia, Ukraine, Belarus, Romania, Bulgaria and Serbia). The ‘Chinese way’, however, entailed the survival of the one-party-state, ruled by a communist party. Rather than distinguishing the ‘right way’ from the ‘wrong way’, in this chapter our primary aim is to explore what the different costs and benefits of the various pathways were at various stages of the transformation. As we start our analysis, we cannot and do not want to leave unmentioned an obvious source of quantitative information, systematically collected and disseminated by Freedom House, a not-for-profit research institute operating since 1941. The organisation’s annual Freedom in the World report, which now assesses the extent of political freedoms (PF) and civil liberties (CL) in more than 200 countries, is frequently cited by political scientists, journalists, and policymakers. In this approach, the normative character is apparent: more political freedom is desirable, less freedom or a shift towards a weakening of PFs is a negative development. According to the metrics of Freedom House, the rating of China has not changed one iota since 1991 (this explains the flat line at the top of Figure 7) and its level of PFs is the worst possible (= 7.0).1 Interestingly, but not surprisingly in the light of our analysis of the post-Yeltsin period, the rating of Russia goes in the wrong direction, getting closer and closer to that of China. By contrast, the unweighted average of 13 Eastern European countries displays a move in a positive direction (downward), although it is noteworthy that there 1 Vietnam has exactly the same mark (= 7) for PR throughout the entire period.

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The Divergent Pathways Out of Communism 8 7 Deterioration

6 5 4 3

Improvement

2 0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1

13 Eastern European countries

Figure 7

China

Russia

Freedom House’s ratings of political freedom, 1991–2017. Source: Freedom House (2019)

has not been any further improvement since 2002 (PF = 1.8). The country-bycountry ratings for Eastern Europe indicate that since 2014 the situation deteriorated in Hungary by two notches (the rating moved from 1 → 3), and by one notch in Serbia (2 → 3). To our surprise, the experts at Freedom House have not yet seen any reason to change the rating of Poland (= 1 since 1995), even though – as we explained earlier – the radical nationalist leaders in that country have introduced several measures since 2015 to weaken the rule of law and the stability of property rights. 2

The Liberal Model

The trajectory of Eastern Europe since 1989 has been dramatically different from the rest of the post-communist world. Furthermore, the history of the region unfolded quite differently during the first and the second decades of post-communism. In taking the path it has, the region has in part ‘imitated’ its western regions and in part drawn on its own historical reservoir. It has tried to do the impossible and restore the past; or to think imaginatively how, from that reservoir, one might invent a new Eastern European modernity, which initially was supposed to converge with the West European model (their slogan was: we are re-joining Europe). And indeed, the imitation of other countries was cruial. Germany reappeared as a role model soon after 1989. For Eastern Europeans, the first foreign language during communism was English, but with political change, they

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started rapidly to learn German. Later, however, it turned out that German business people spoke English well. As a result, the enthusiasm of Poles, Hungarians, etc. to learn German declined quickly. Joining nato, and the European Union in particular, (two English-speaking organisations) was to have extraordinary implications for the social and economic institutions of these countries. It is somewhat ironic, however, that the ‘new member states’ of Eastern Europe did not follow the European Union’s social model. They did not implement ‘social market economies’ (although this objective had been enshrined in the new, post-1989 Hungarian constitution and remained there until 2012), but copied the Chicago cookbook closely, obeying the Washington consensus, and implementing the kind of rather pure neo-liberal model that Ronald Reagan or Margaret Thatcher would have approved of. This might have been due to the influence of American advisors, who were busy drawing up blueprints for transition for these countries (though they may not have known all that much about them). Jeffrey Sachs has candidly told us that he drew up the 15 pages of the complete blueprint for Poland’s transition in one short night – between midnight and dawn – in Warsaw, in May 1989.2 This was, if we count correctly, only his third short visit to Poland (each visit having lasted just a couple of days). Russia was the other major post-communist country he gave ‘good’ advice to on how to fix their problems. Astonishingly, it appears that despite having so little local knowledge, Sachs did not make mistakes in Poland, or if he did, they were corrected by Leszek Balcerowicz, who became simultaneously Deputy Prime Minister and Finance Minister and was tasked with implementing this shock therapy. In retrospect, the Sachs-Balcerowicz duo did a formidable job. Poland experienced only a brief, though severe, recession in 1989–91, after which it switched to an impressive and sustainable growth trajectory. Poland, certainly, at least until 2015, was a sort of ‘miracle’. Russia was a different case. Either Sachs’ advice was not that great for Russia, or Russians did not follow what he recommended. Since the Soviet Union was, and Russia is the largest and most important country of the Eurasian post-communist region, it is imperative to spell out in detail what might have gone wrong there. According to Anders Åslund,3 after the fall of Gorbachev the reformers’ five greatest failures were (1) not getting control over the central bank and thus monetary policy; (2) not succeeding in breaking up the rouble zone quickly enough; (3) not deregulating the domestic prices and exports of energy quickly enough; (4) the absence of instant 2 See Sachs (1990) and Sachs (2005) p. 114. 3 Quoted in Mihályi (2014a).

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i­ nternational financial aid, a kind of Marshall Plan;4 and (5) the persistence of the old Soviet constitution and parliament. It was known right from the beginning that the initial conditions in Russia were extraordinarily difficult, more so than in Eastern Europe. The price distortions were more significant and intrinsic mechanisms of all-encompassing rent-seeking by soe managers had been formed well before the end of Socialism. According to Åslund, these facts in themselves called for not less, but more radical and more comprehensive reforms than in Eastern Europe to succeed. We tend to agree with him. Unfortunately, history never gives an opportunity to repeat a large-scale social experiment with newly calibrated parameters and with a modified prioritisation of sectoral policies. One important feature of the Eastern European liberal model was the way in which the soes were privatised. Countries differed in this respect. In some countries, a substantial segment of the large enterprises, if not the entirety of it, was sold at (reasonably) competitive tenders (more often in Hungary than in Poland or the Czech Republic) and, as a result, foreign direct investment (fdi) became the driving force of largely export-led development. Initially, there was voucher privatisation in the Czech Republic and Poland (and something resembling it also in Hungary), but the big story was the sale of the public sector to foreign investors, early deregulation of prices, the efforts made to render their currencies convertible, and reduction or elimination of import duties and export subsidies.5 2.1 The Political Economy of Post-communist Liberalism The liberal model implied fast liberalisation of the economy, fast and marketconsistent privatisation of soes and a significant or dominant role of fdi in privatisation. The managerial-technocratic elite was the primary domestic beneficiary of privatisation and the core of a new local grand bourgeoisie. A competitive, multi-party democratic system came into being with a contested but basically free media and protections for human rights. Each pathway we describe is an ideal type. There are substantial variations over time and across countries, and there are even historical and geographic differences within each trajectory. There are many shades and phases within 4 According to Åslund, the main problem was the reluctance of the Bush administration. They were not sure whether helping in a way commensurate to the need of the Russian economy was in America’s interest. Simply speaking, in 1991/1992, they were not convinced whether ‘this was really the end of communism’. 5 For a contemporary, comparative analysis of the Hungarian privatisation policies in the 1990s, when Hungary was widely considered as the pioneer of the post-communist transition, see Mihályi (1994, 1996a,b, 1997a,b,c).

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liberalism: Poland is different from Hungary, the Czech Republic from Slovakia. The most unusual case of liberalism is Slovenia – it at least initially followed a more gradualist approach, especially in terms of privatisation (Peternelj 2005; Šušteršič 2004). It was much slower in opening up to international capital than the other Eastern European countries and while state-owned enterprises were downsized leading to a sharp drop in employment, many firms remained in the hands of the management and the workers. Nevertheless, as of today, the similarities among the Eastern European countries in terms of their transformational trajectories are more pronounced than their differences. While the Baltic States (Estonia, Latvia and Lithuania) would also qualify as liberal, for historical reasons (their long incorporation into the ussr and their short history of independence) their story is different. For this reason, we not included them in this book. We also largely exclude the war-torn Western Balkan countries (Croatia, Serbia, Bosnia, Montenegro, Macedonia and Albania) from the current analysis. They seem to be swinging between a patrimonial and a liberal order. During the first decade of transition, the countries which were on a liberal trajectory faced challenges from two socio-economic crises: a. Due to the shocks of fast deregulation and privatisation, gdp dropped by some 20% in the first transitional crisis, and it took several years before it recovered (between 1995 and 2000).6 b. Mass privatisation combined with deindustrialisation and the free flow of Western imports quickly led to a sharp decline in labour market participation, reducing it to 50–60%. Labour market participation did not recover even after economies began to grow in the second half of the 1990s. To begin with, we will try to establish what trends were common to the whole region, and after that we will comment briefly on cross-national differences. The big picture is pretty clear. While commentators anticipated that the transition from redistribution to market economy would have its costs, those costs were far greater in real life than theory predicted they would be. The economy started to drop in Eastern Europe in 1990. It bottomed out in 1994 and had recovered to the 1989 levels by 2000. The extent of this sharp downturn was similar to the Great Depression of 1929–1933.7 6 Again, Slovenia was an exception; it was already on a growth trajectory by 2003, and it had the smallest transformational recession. 7 The drop in gdp during the first decade was even greater in the Baltic States. In Latvia, it was over 40 per cent (Dragutinovic et al. 2010).

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As Kornai (1980) pointed out, the socialist redistributive economy was an economy of shortage. In Eastern Europe there was an economy of shortage also in terms of labour: with their soft budgets constraints, the hunger of publicly owned firms for labour was insatiable. (The story in some parts of Russia and China was different due to geographic isolation and over-population.) However, transition to markets, privatisation of firms and hardening of budget constraints reduced the demand for labour. This reduction was particularly dramatic in the agricultural sector. As collective farms were turned into privately owned (or at least privately managed) businesses, former cooperative members lost their jobs and income opportunities. The emergent (usually quite large) new farms operated with a fraction of the labour the coops had used. The demand for labour was also reduced due to the restructuring of the composition of the economy by sectors. Soviet-type Socialism was a strategy of accelerated industrialisation, which often followed the patterns of the 19th century economy. Until the 1960s the stated aim of socialism was to create ‘countries of steel and coal’. During the last decades of socialism, the earlier excessive emphasis on heavy industry was moderated but still played a significant role. Therefore, the deindustrialisation that hit Western – especially the US – economy so badly during the 1950s and 1960s came to Eastern Europe and the former ussr with an even greater vengeance (but not to China as we will argue later on). The bottom line: during the liberal trajectory to market economy 20–30 per cent of jobs disappeared. The unemployment rate was a poor measure of the problem, (peaking at 4–19 per cent in 1994). The proportion of those who had been employed before the fall of communism and were left or were forced out of work after communism collapsed was in fact substantially higher. Some quit their jobs ‘voluntarily’. Higher-class women needed employment during socialism to complement the income of their husbands. If their spouses had been better paid they may not have decided seek employment. ‘Excessive’ employment in socialist economies was really driven by low earnings and the necessity for a second income. This became more pressing as the two-breadwinner family model became more and more widespread. If the family next door was living on two incomes, you would also feel the need to have a second salary in the family budget. Many who had lost their jobs involuntarily during the transition to capitalism took early retirement, collected a disability pension, or survived on the underground economy. They did not, therefore, appear on unemployment statistics. Several countries transferred the post-communist surplus labour into

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their retirement system.8 The retirement system had been poorly constructed even under socialism. It was not a funded system; it was a pay-as-you-go system. With a rapidly ageing population and low fertility, the socialist pension system was unsustainable. The post-communist ‘transfer of the surplus labour into retirement’ scheme only aggravated the already-unfolding retirement crisis (Elster et al. 1998: 212–214). Such overloading of the pension system created the impression that post-communist economies had inherited an overgrown, prematurely-born welfare state (Kornai 2008). The government’s task appeared to be to cut back ‘excessive’ welfare expenditures, although the social need was for an expansion of welfare provisions. A better measure of the labour market conditions is, therefore, the labour force participation rate. In this book, we are using the World Bank labour force participation rate, which is the percentage of the total population aged 15+ that is economically active. By contrast, the oecd uses a different indicator: the percentage of the population aged 15–64 which is economically active. In four out of the seven countries (Bulgaria, Hungary, Poland and Slovakia) the labour force participation rate dropped by 5–7 percentage points in just 10 years, 1989–1998. Slovenia was an outlier: there, labour force participation fell sharply during the early years of the transition to 53%, but by 1994 labour force participation stabilised around a respectable 58–60 per cent. We could not find systematic comparative data on labour force participation rates in these countries in the socialist epoch, but those rates were likely to be 20–30% higher even as late as 1980.9 This sharp drop in labour force participation was to some extent attributable to the disappearance of industrial jobs (for instance in the steel and construction industries and mining). People, especially men in their late 40s or 50s, not only lost their previously well-paid jobs but became permanently unemployed since they could not transfer or convert their earlier skills into ones useable in a post-industrial capitalist economy. This dual crisis – market transition/privatisation and deindustrialisation – had negative consequences through the mechanism of job destruction for the health conditions of the population. With the exception of the Czech Republic, life expectancy declined and mortality especially among middle-aged men 8 This was particularly true in Hungary, less so in the Czech Republic or Poland, see Herbertsson and Orszag (2003) p. 11. The cumulative cost of such genereous retirement schemes on average was about 9% of the annual gdp, in Hungary it was close to 20%. 9 These are the estimates for Hungary by Mária Augusztinovics (2005) pp. 435–435 and they are consistent with data presented by Kolosi and Róbert (2004) p. 49 and data from the Hungarian Central Statistical Office.

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increased during the first years of the transition. Unlike in post-ussr ­patrimonial regimes where this proved to be one of the worst and lasting disasters in demographic history (Stuckler, King and McKee 2009: 4), in liberal regimes there was only a moderate mortality adjustment, and in any case the mortality trends had already been reversed by the second half of the 1990s. The first decade of transition was also accompanied by a jump in poverty rates in these regimes. According to European Bank for Reconstruction and Development (ebrd) estimates, the proportion of the population under the poverty line increased almost 10-fold in the region between 1989 and 1998 (from 1.4 to 12 per cent, ebrd 2000: 16). In 2000, Szelényi (2013) collected data in which the only retrospective data on poverty went back to 1988, and his findings were similar. Only 1.8% of Bulgarians, who were already at least 14 years of age in 1988, remembered having lived in extreme poverty. This jumped to 16.3 % by 2000. Here are the same figures for the other countries: Hungary from 2.5 to 6.8; Poland from 3.1 to 6.2; Romania from 5.1 to 16.3; in Slovakia from 1.1 to 5.0. The liberal transition to capitalism also led to substantial increases in social inequalities (if measured by the Gini-coefficient) from the high 0.10s and low  0.20s to the mid/high 0.20s.10 However, in comparison with other pathways from communism, the increases in inequalities were, in general, modest and the Eastern European countries remained among the more egalitarian systems. The social and economic cost of the transition was far worse than predicted even by the more pessimistic economists. The explanation is straightforward. The shortcomings and mindboggling contradictions of Soviet-style central planning’s had been so prevalent that no learned economists expected anything but substantial efficiency gains from their elimination. It was not f­ oreseen that there would be a long time-lag before expected improvements arrived, while the destructive forces (particularly in the sphere of employment, as shown above) would start working with immediate effect. Nevertheless, in comparison with the post-ussr patrimonial regimes, the first decade of liberalism was an indisputable success story. The economy’s decline was less steep, and its recovery faster: within a decade they had reached pre-transitional levels. Poverty was not as widespread and deep as in some patrimonial regimes, and most countries under this regime remained reasonably egalitarian. On the other hand, liberalism did not fare that well when compared with ‘transformation from below’. The only advantage Eastern European liberalism had over China – and this advantage is not trivial – was political. By the end of their first decade, the Eastern European countries were all liberal democracies. 10

Poland was an outlier with Gini in the 0.30s.

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Their system may not have been as liberal, as democratic and as stable as one would have hoped for during the glorious months of 1989, but it was closer to democratic ideals than the political system in patrimonial regimes and in China. The cross-national variations within the liberal region were non-trivial, but mostly somewhat predictable and they had a lot to do with varying initial conditions in the countries. Bulgaria and Romania were significantly poorer than the other countries. Romania also had the most repressive political system. As a result, in social, economic and political terms, Bulgaria and Romania resembled Russia more than they did Slovenia, the Czech Republic or Poland during the early years. Slovenia and the Czech Republic were by far the most affluent nations. Slovenia had a triple advantage: it had been rather affluent during socialism; it had had much experience with reforms; and it followed a gradualist transitional strategy. The Czech Republic did not have the reform traditions of Slovenia, Hungary and Poland, but it had a better pre-communist record in democratic governance. The stronger performance of the Czech Republic was therefore no surprise. The differences between Hungary and Poland deserve more attention. Hungary might have been anticipated to lead the pack. It was the country that had been most consistently on a reform trajectory since the 1960s. It was the ‘merriest barrack in the socialist camp’, it implemented ‘goulash socialism’ and more importantly was ahead of the rest in joining gatt and the imf, introducing monetary reforms and creating the legal framework for a market economy. Jaruzelski tried to imitate the reforms of János Kádár11 during the 1980s with limited success in Poland. In some respects, Hungary remained on the cutting edge during the early years of post-communism. By ebrd measures, Hungary was among the most aggressively liberalising country when it came to privatising state-owned enterprises, having followed the Chicago School cookbook closely. It was rewarded for its exemplary behaviour being by far the most attractive country for foreign investors. As a result, in 1989–1999, the per capita cumulative fdi-inflow into Hungary was 45% higher than in the Czech Republic and 3.5 times higher than in Poland (ebrd 2000: 74).12 On the other hand, in Poland the recession lasted for only three years, while in Hungary it dragged on for four. Poland’s recovery was also much more robust than Hungary’s. From 1993, for four consecutive years, the growth of gdp in 11 12

János Kádár was the leader of Hungary for 22 years (1956–1988). He implemented the most radical and consistent economic reforms under socialism – with the exceptions of the post-1978 Chinese reforms. For more details on the Hungarian fdi policies, see Mihályi (2001a, b).

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Poland was above 5 per cent. Hungary never achieved above 5% growth during the whole period under consideration. According to the scarce data available to us from other reliable sources, inequality and poverty grew faster in Poland than in Hungary. The big puzzle is whether this happened despite the healthier condition of the economy, or whether it was the reason for the Polish economy performing better. Most likely there are numerous reasons – not only economic but also social, demographic and political – why, despite many similarities, the two countries began to diverge. Let us try to pick one ‘independent variable”’ almost at random to explain the differences between Poland and Hungary. In Poland in 1989–1991, Finance Minister Balcerowicz introduced a rather brutal financial liberalisation strategy. It freed the banking sector almost instantly and implemented a new tax system and a currency reform. As a result, the Polish economy was in free fall, unemployment exploded, but within a year the economy had bottomed out. Moves to privatise the Polish enterprise sector, on the other hand, were made much more cautiously. In Hungary, the sequencing of reform followed a different pattern. The government there moved more carefully with monetary reform, but pushed ahead with privatisation of soes, opening the country up to multinational capital. Since Hungary did not ask for a rescheduling of its foreign debt (unlike Poland), privatisation of the most valuable companies became the main avenue of keeping the country solvent. Thus, the ‘success’ of Hungary can also be attributed to the substantial inflow of fdi and early privatisation. However, these policies may also be the reason for its later ‘failure’, slow recovery and low rate of labour force participation. The second unanticipated cross-national difference in the liberal region is that Slovakia performed better than the Czech Republic. When Czechoslovakia was breaking up commentators anticipated that the Czech Republic would be the big winner and Slovakia would join the ‘East’. As early on as the first decade, this received wisdom proved to be correct. The economic recession was more severe in Slovakia than in the Czech Republic as the Slovaks did much worse in terms of unemployment than the Czechs. However, by the second half of the decade, when the Czech Republic slid into its second recession, the Slovak economy took off. Interestingly, this happened under the government led by Vladimir Meciar as Prime Minister in 1994–98, which in its ideology was rather patrimonial and resembled Russian patrimonialism. As of 1989, the per capita gdp level in Slovakia was 66 per cent of the comparable Czech figure; by 2016 it was already 88 per cent. The bottom line is that there are no easy answers to what the sources of success or failure are. The Slovak growth ‘miracle’ which started in 1994 and has continued until the present times is undoubtedly one of the most puzzling ones.

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2.2 The System of Legitimation in Post-communist Liberalism Between 1989 and 1999, in most of the formerly socialist countries of Central and Eastern Europe desperate efforts were made to turn these countries into liberal democracies (with the exception, arguably, of war-torn Yugoslavia, and of Albania, Bulgaria, Romania and Moldova where this happened partially if at all). The same was happening in some of the countries of the former ussr, in the Baltic States, even in Russia, and possibly in Ukraine. (It was not, however, happening at all in Belorussia, in the Central Asian former Soviet republics or in Asian former or still socialist countries, like China and Vietnam and was only partially happening in the Crimean republics.) The dominant form of legitimation was legal-rational authority (liberalism) along with a democratic polity to some degree. The rule of law was accepted, the legislative, executive and juridical powers (and the media) became reasonably separated from each other. The law acknowledged security of private ownership. Reasonably free multi-party elections were held to constitute the legislative branch. But already in the very early years, the most critical challenge all these societies faced was the conversion of public property into private wealth. According to the neo-liberal doctrine, all problems of transition from redistributive to market economics will be resolved as soon as identifiable private owners are found for public assets. The purpose was to ‘close the commons’ in 500 days (as the Russians tried to) or in a few years (5–10) as the Eastern European countries tried to. This was difficult, or impossible to achieve through legal-rational and democratic means. Democratically elected legislatures were elected freely, in multi-party competition, but with somewhat questionable democratic legitimacy due to underwhelming voter turnout in electoral campaigns in which ideological differences were more often discussed than the crucial question who will become the private proprietor of formerly public ownership.13 Hence even in the countries which were the closest to the ‘ideal type’ of liberal democracy (like the Czech Republic and Hungary during the early 1990s) there was inevitably a patrimonial component to the system of domination. Privatisation legislation – especially that relying heavily on vouchers – gave a great deal of discretion to the executive branch. In countries which were closest to the legal democracy model, those who tried to use citizenship vouchers (like in the Czech Republic or Russia), or compensation vouchers (like in Hungary) still needed massively subsidized government credits (and/or grossly undervalued property prices) to obtain ownership of large corporations without market- tested 13

See Ivan and Szonja Szelényi (1991), and Szelényi, Szelényi and Poster (1996).

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­creditworthiness.14 So it was some official in governmental and semi-governmental agencies who decided who was creditworthy (or a bank – in every case, though, this happened through ‘personal networks’). Even when an soe was put up for auction and the bidders were international (often multinational firms), the buyers needed inside information about the ‘real value’ of the firm up for sale. This again could be obtained by public privatisation agencies or the managers of those firms, but there was just no way it could be done through purely market means. And it is this deviation from legal-rational authority is what we propose to call a secondary ‘patrimonial principle’ of legitimation. In most post-communist liberal-democratic regimes this happened by offering special privileges to management or former knowledgeable and trusted government-party officials. When it came to foreign investors, they also had to rely on inside information either from management or government/privatisation agencies (we know that was indeed the case). To some extent, it was not just the market that clarified what the prices of privatised firms should be; this was decided or greatly influenced by individuals in various authorities, adding a patrimonial element to the assignment of public property to private hands. This kind of patrimonial element was the weakest in Eastern Europe – the emergent Eastern European post-communist capitalist systems basically could have been described as a legal-rational authorities operating within reasonably democratic institutions. In this way, they combined legal-rational authority with the ‘fourth type of authority’, and came as close to ‘liberal democracy’ as one could expect in societies undergoing a fast transition from communism to liberal capitalism. Nevertheless, many commentators have tended to overidealise the post-1990 years in Eastern Europe. In comparison with communism, of course, there was a great leap forward, with separation of powers, freedom of the media (which can also be interpreted as the ‘fourth branch of power’), recognition of the legitimacy of private ownership, and, in many countries, reasonably free, multi-party elections. The most vulnerable component of this kind of liberal-democracy was the legitimacy of private ownership (and voter turnout at the elections, which was usually miserable). For reasons elaborated above, people in a position of authority under communist rule had better access to privatisation than ordinary people (the neo-classical doctrine of course, is that it does not matter who becomes the private owner, the market will sort it out; if the new owners are not the right ones they will be wiped out by competition). The notions of ‘theft’ and ‘corruption’ were attached to the emergent new private property of the nomenklatura bourgeoisie from day one. Private ownership, therefore, was not as legitimate as one would have hoped 14

On the controversial aspects of voucher privatisation, see Mihályi (1997c).

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for. The Hungarian sociologist, Bálint Magyar (2013) coined the term ‘mafiastate’ much later, but many ordinary people in Eastern Europe had, in any case, thought of their new rich as Mafiosi since the very early days of the transition. The separation of powers, especially the independence of public media from the government was also challenged from day one. On this somewhat sceptical note, we do, however, accept the fundamentally legal-rational authority of most Central–European countries operating within a basically democratic framework – at least until 2010 or so. 3

The Patrimonial Model

Russia – after some hesitation – set off on a radically different trajectory. During the first year or two, Russia tried to follow the Eastern European example, adopting the Chicago cookbook and implementing shock therapy. Yegor Gaidar, in the capacity of main economic master and Acting Prime Minister in the second half of 1992, promised to build capitalism in 500 days. This turned out to be more shock than therapy (Gerber and Hout 1998) and the Russian economy went into freefall. President Boris Yeltsin (in office 1991–99) decided to abandon this strategy of imitation and, instead, drew on the historical reservoir: appealing to Orthodoxy, tradition, and respect for authority. Instead of building liberal democracy, he decided to co-opt local political and economic bosses; the result of which was to create a new class of nomenklatura bourgeoisie. If we may use such a historical analogy, he recreated a class of boyars15 called the oligarchs.16 This was a sort of patrimonial order: Yeltsin used voucher privatisation to enrich his followers. By the early 21st century, just one 15 The boyars were members of the highest rank of the feudal system in several East European countries and Russia from the 10th century to the 17th century. Peter the Great, who took power in 1697, took it upon himself to westernise Russia, and bring it up to date with the modern world. Among other measures, he created a Senate with members appointed by him, replacing the old council of boyars that initially advised the tsar. He also drove the conservative and religious faction of the boyars out of the courts, using both foreign and Russian officials to fill the administrative system instead. The social status of boyars in Russia was similar to that enjoyed by the top levels of the nobility in Western Europe. Their property rights were secure and their titles were inherited by their descendants. By turning boyars into ‘service nobility’, Ivan the Terrible and Peter the Great shifted Russia away from Western feudalism (or patrimonialism) and towards prebendalism (see Figure 2). 16 By oligarchs, we mean the new rich who eventually try to capture political power, like Berezovsky (Example 3). In illiberal, prebendal regimes, political bosses tend to deprive the new rich of political power and replace oligarchs with a ‘service nobility’.

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d­ ecade after the collapse of state socialism, more dollar billionaires lived in Moscow than in London. The nature of Russian capitalism during 1991–99 was a mixture of patrimonialism (offering fiefs to loyal followers) and political (and even merchant) capitalism. Office holders expropriated public property and this property was then often put not into production, but into circulation (importing luxury cars or computers from the West and selling them for extra profit) or this profit was simply transferred into Swiss bank accounts. The Political Economy of the Patrimonial Model: The Patrimonial Way to Capitalism in Yeltsin’s Russia The privatisation practices of Russia during the 1990s were overly determined by the desire to ‘create capitalism’ in 500 days.17 Advocates of voucher privatisation believed it was a democratic mechanism that would achieve fast and fair privatisation. The vouchers mailed out to every citizen of Russia were supposed to represent a certain share of the public wealth. When Yeltsin announced the program, he stated the following: “We need millions of owners rather than a handful of millionaires”.18 He might have believed that, but in reality that was not the case. Future vice premier, Anatoly Chubais was responsible for the very early part of privatisation. Yeltsin ‘managed’ the privatisation process from the Kremlin. It turned out most Russians did not know what to do with their vouchers (just as most Hungarians did not know what to do with the ‘compensation notes’ that they received, and the story was similar with the various types of vouchers issued in the Czech Republic and Poland). This being the case, the Russian voucher recipients sold their vouchers well under the nominal value to various investors/speculators. These investors subsequently turned up at privatisation auctions where the Kremlin had to decide who would win. When theory was put into practice, Yeltsin de facto ‘appointed’ a handful of billionaires. According to Klebnikov (2000), he relied mostly on advice from his beloved daughter, Tatyana. Public property was often grossly undervalued. There were also various other mechanisms by which the process of privatisation could be manipulated.19 Roman Abramovich, one of the very young beneficiaries of this process, (who eventually moved to live in the 3.1

17 18 19

The 500 Days Program was originally a document proposed by Grigory Yavlinsky in 1990, who later ran twice for Russia’s presidency: in 1996, against Yeltsin, and in 2000, against Putin. Cited by Åslund (1995) p. 235. Klebnikov gave a detailed description of how the Kremlin manipulated auctions. He also gave an interesting example of undervalued assets. According to Klebnikov, Gazprom was valued to be worth $250 million when it was privatised in 1994. It was estimated to be worth $40 billion in 1997 (Godfather of the Kremlin, p. 135).

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­ remlin, with the ‘family’ as the Yeltsin circle was referred to – see Example 8) K entertained Tatyana for weekends in his dacha. Oleg Deripaska’s trajectory was similar (Example 10). He literally did join the family, marrying Tatyana’s stepdaughter, the beautiful Polina Yumashev. (Tatyana’s second husband was Valentin Yumashev, a journalist who became an influential adviser of Yeltsin’s. Polina was his daughter from an earlier marriage.) Was the Russian state in the 1990s a ‘mafia state’? Not quite. Klebnikov used terminology not unlike Magyar’s (2015); he called Yeltsin the ‘Godfather’ and referred to his circle of protégés as the ‘family’. It was, in some ways, an organised ‘upper world’. Yeltsin appointed a new grand bourgeoisie – one might be tempted to call it a class of ‘boyars’ – which is now referred to as ‘oligarchs’. Rather than doing this in order to maximise his personal wealth, as Magyar’s mafia-state model would indicate, he did it to consolidate his political power. Under Yeltsin’s patrimonial system, the oligarchs did indeed behave like boyars. Not only did they feel that their property rights were secure, they also had political ambitions, acquiring control over the media and taking public office (Boris Berezovsky, for example, was Yeltsin’s national security adviser for a time). How much Yeltsin benefited financially from the system is hard to tell. After Yeltsin’s fall from power, Tatyana moved to London and it is clear that she lives comfortably. In all likelihood, however, these financial benefits were trivial in comparison with the enormous wealth of the oligarchs Yeltsin appointed. Under Yeltsin, Russia started to drift away from the liberal model very early on. Russia did retain a ‘democratic system’ (if by ‘democratic’ we mean merely that leaders are elected in reasonably free though not necessarily fair20 elections to office, as Yeltsin was in 1996 and as Putin was in the year 2000 and three more times after that). True, the system was ‘managed’ in 1996 by the oligarchs who controlled the media – standing behind Yeltsin. Some of them also supported Putin in 2000. The system was turning ‘illiberal’ under Yeltsin not only by virtue of its paternalistic or patrimonial approach to property allocation, which supplanted the procedural logic previously used, but also by the limitations placed on the powers of the legislature. In 1993, the Russian Duma intended to impeach Yeltsin.21 Yeltsin counterattacked, storming the Parliament 20

21

Elections are usually seen as fair when competition is free. Fairness is violated when, for instance, public media and public funds are used by the government to spread its propaganda. Hence theorists who doubt whether ‘illiberal democracy’ is possible at all, point out the ‘unfairness’ of such elections (government control of media, etc.). The State Duma, commonly abbreviated in Russian as Gosduma or Duma, is the lower house of the Federal Assembly of Russia. Prior to the communist system, the State Duma was founded in 1905 after the violence and upheaval in the Russian Revolution of 1905 and

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building by military force. He adopted a new constitution which gave him greater powers. He dismissed the Duma and called for a new election. This election (December 1993) did not go his way and resulted in a parliament which was opposed to many of his policies – an ironic reminder of the importance of ‘democracy’ even in Yeltsin’s Russia. Elections were still competitive. But then Yeltsin dissolved the Constitutional Court, and when he re-established it, he greatly diminished its powers (Hausmaninger 1995). The key point is this: Yeltsin not only exercised illiberal, non-market ways to allocate property, he also moved in an illiberal direction by reducing the separation of powers of the executive, the legislative and the judiciary – greatly increasing the powers of the executive. The Yeltsin (and later, Putin) regime was drifting away from liberalism but was retaining crucial elements of majoritarian rule (hence democracy in our terminology) such as the way office holders were selected. In this way it retained majoritarian rule as the (most important or at least one of the most important) legitimating principles of the system. Former communist political actors retained a great deal of power, mainly through the process of privatisation. This led to the emergence of oligarchs who were either former communist cadres, security personnel or clients of political leaders. The latter characteristic was especially true of Russia under Yeltsin, where privatisation was managed by the Kremlin and the oligarchs were, in effect, ‘appointed’ by the ‘tsar’. There were signs of transition to democracy, but it was often managed by former communists in top positions and the newly rich. As we have seen, the oligarchs had reasonably secure property rights, so much so, at least in Russia, according to some commentators, that they had, by the late ‘90s, attempted to ‘capture’ the state, and therefore to control the political system as well. What is more, they also often fought private wars among each other. In sum, the main features of this pathway were: a. The political system that was emerging was a ‘managed democracy’, ­typically referred to as a ‘presidential Republic’ (Blondel 2015: 212–220). Political power was usually held by people who were closely associated with the former communist rule. Though they were elected to office, their electoral success was ‘managed’. In order to reduce the dangers of instability, the ancient regime was organically transformed, rather than radically broken up.

was Russia’s first elected parliament. The State Duma replaced the Supreme Soviet as a result of the new constitution introduced by Boris Yeltsin in the aftermath of the Russian constitutional crisis of 1993, and approved by the Russian public in a referendum.

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The post-communist rulers and the rule itself were paternalistic. The privatisation process was as fast as under the liberal model (or even faster), but it was not subject to the ‘blind forces’ of the market. It was resistant to invasion by multinational capital and rewarded clients who promised to be competent and loyal with property. This paternalistic logic applied to the management-worker relationship as well. Rather than laying workers off, employers opted not to pay their wages, offering them instead provisions in kind (barter – at least initially – was often extensive). How well or poorly patrimonial regimes perform is still contested. It is possible that they absorbed the initial shock of transition better than the liberal regimes. The subsequent disintegration of the economy and social order was, however, even deeper and lasted even longer. Nevertheless, those who were ready, by 2000, to deliver a verdict on patrimonial regimes were doing so prematurely.

…

The ussr broke up in December 1991, but the writing was on the wall for it earlier than that. Some countries had declared independence and the economies were already rapidly declining by 1989–1990. The following decade was an unmitigated disaster, as gdp fell by some 50%, life expectancy declined substantially with mortality of middle-aged men in particular skyrocketing. We were not able to find systematic official data on poverty/living standards, but by all indications, they went through the roof. In Szelényi’s (2013) survey – referred already in the Eastern European story – we asked a large sample of randomly selected respondents in 2000 to report poverty and recall whether they had experienced the same level of poverty in 1988. In 2000, 17% of our Russian respondents were below a $2.15 ppp expenditure level, while the same figure in Hungary was 1.8%; and in Poland 1.7%. Russia was already a poorer country than its Eastern European satellites by the end of socialism, but it became much poorer after 10 years of transition. Since the trend of decline in gdp and life expectancy is similar in the other patrimonial post-Soviet states, there is good reason to believe that their speed (and level) of impoverishment is comparable to that of Russia.22 Furthermore, the recession in patrimonial regimes was not only deeper, qualifying them for the D word: ‘a depression’, but it also lasted longer. While liberal countries had generally recovered by the year 2000,

22

We have some doubts concerning the credibility of the data from the Central Asian Republics.

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and were at or near their 1988 levels of gdp and life expectancy, states on the patrimonial trajectory were still in free fall as late as 1998. In other indicators, the patrimonial regimes did not do that poorly. Despite sharp falls in gdp, these countries succeeded in having relatively small unemployment and quite substantial labour force participation. Take the case of Russia, which in 1992 was in decline for the third consecutive year and lost 15% of its gdp in that single year alone. Notwithstanding this, unemployment stood only at 5% and labour force participation was still at a respectable 66%. Another example is Ukraine, where gdp was down by some 50% by 1995, but unemployment had not yet reached 6%! There is some debate about what caused the disaster of the first decade of the transition, and much research remains to be done in order to provide a persuasive answer to this question. Some, while tending to emphasise the relative success of the transition (Sachs 2005; Åslund 1995, 2007; and Åslund et al. 2010), blamed initial conditions and lack of consistency in the reforms. Others blamed the reform strategy, the so-called ‘shock therapy’, and especially mass or voucher privatisation, the Russian transition to market capitalism being the most disastrous in that respect (Stiglitz 2003 and King 2003). The patrimonial orders in Russia and in Ukraine seem to be related both in terms of the dramatic decline in the economy and the relative moderation in unemployment and labour force participation. They had their ‘upside’ and their ‘downside’ even during the first decade. A unique feature of privatisation under patrimonial order was the speedy transfer of public property into the hands of a new small ‘domestic’ elite almost handpicked by the patrimonial rulers. Arguably, voucher privatisation was intended to achieve a sort of Proudhonian socialist aims (Proudhon 1840). Indeed, why not make everyone an owner by distributing the common wealth to all citizens or at least to all workers of a given firm? Due to the hyperinflation of the 1990s, citizens’ savings had disappeared overnight, so why not give them company shares free of charge? The oligarchs of patrimonial post-communism were, in many ways, similar to the robber barons of 19th century America. As Åslund, among others, pointed out at the beginning of the process, there is nothing a priori wrong about creating such a class if that solves the property problem (helps to create identifiable owners). But there were some essential differences between the oligarchs of post-communist patrimonial order and the robber barons of WildWest US capitalism. For better or worse, the robber barons were actually not clients of the American political class. On the contrary, it was already money that was calling the shots in the late 19th-century. Under patrimonial order, the new rich were, to some extent, ‘appointed’ by the political rulers. Even more 

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importantly, almost all American robber barons made their millions by making something (A. Carnegie produced steel, D. Rockefeller drilled and refined oil, and J. Gould built railways) – they created wealth. In sharp contrast, the oligarchs under patrimonial regimes made billions from speculation, at least in the first decade of market transition. Boris Berezovsky purchased cars from state-owned firms at subsidised prices, promising hard currency revenues after selling them in the West (Example 3). He never sold these ‘exported’ cars, but ‘re-exported’ them into Russia and sold them at excessive profits. In his shops, people could just drive away their cars when they had paid the purchase price, while in government shops they had to wait for years to get their new property. Arguably, the oligarchs performed a significant service by creating identifiable property rights. Nevertheless, society had to pay a heavy price for it. Russia lost half of its gdp. Millions, probably as many as three million in Russia alone – as some internationally-respected health economists argue – died years before they were due to meet their Maker (Stuckler et al. 2009). We have no wish to moralise about this and blame the oligarchs – nothing could be further from our minds. Many of them were bright, young, smart entrepreneurs. They used the opportunities inevitably created in a system which turned a substantial part of the publicly-owned economy into a system of private ownership in just 500 days. They managed to do this under the gaze of a benevolent patrimonial ruler. Yeltsin was looking for the ablest young people, almost exclusively men, to manage this newly-acquired property efficiently. The relationship between the new ‘robber barons’ and their subordinates was also patrimonial in the early years. The oligarchs were rich by the grace of the ruler, so the new barons also ‘took care’ of their subjects. As we already mentioned, workers may not have been paid at the end of the month,23 but they were less likely to be laid off than their comrades under a liberal regime. Instead of receiving a wage, they may have been given a plot of land on which they could grow their food. The industrial firms bartered food for their workers in exchange for products they produced for agribusinesses. Workers in agribusiness received bartered clothing instead of a wage. This system was workable, but less and less acceptable even in the patrimonial model.

23

There were such cases during the years of Soviet-type planning in the ussr (in fact not only wages but sometimes pensions were not paid on time). People were therefore ‘accustomed’ to these kind of developments. Since everybody was paid eventually, people were not particularly upset. To the best of our knowledge, such delays never happened in Central Europe during the 40 years of communism.

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The description of patrimonial order offered above fits Russia and Ukraine reasonably well, but it is at best a rough estimation of the actual s­ ocio-economic processes and structures in Belarus, Kazakhstan and Turkmenistan. Belarus came close to something one could call a neo-Stalinist state. It carried out some privatisation, but in 2019 the state sector was still the dominant one. Although the post-Soviet recession was somewhat milder than in Russia or Ukraine, the unemployment rate was substantially higher, and the decline in life expectancy was almost as severe as in Russia. Slow or little reform did not protect the country from the crisis, though its economic performance after 1997 was respectable. Its economy bottomed out earlier (1996), while countries like Russia, Kazakhstan and Turkmenistan – better endowed in natural resources – were still in free fall. Privatisation in Belarus followed a different trajectory than in Russia, but it had a similar socio-political system to the other patrimonial regimes. Each of these regimes was (and still is) ruled by older men who had been high or at least middle-ranking officials in the Soviet political, economic or military/intelligence establishments. Kazakhstan’s Nursultan Nazarbayev (born in 1940) had been the Chairman of the Council of Ministers during Soviet times. Belarus’s Alexander Lukashenko (b. 1954) had been an officer of the Soviet Army and a mid-level manager during the 1980s. Turkmenistan’s eccentric first post-Soviet president (‘president for life’), Saparmurat Niyazov (b. 1940) had been the First Secretary of the Communist Party of Turkmenistan. Soviet Ukraine’s last president, Leonid Kravchuk (b. 1934) was elected in 1991 as the first president of the newly independent country. Viktor Yanukovych (b. 1950) was promoted to managerial positions during the 1980s despite his earlier criminal (criminal-criminal, not political) convictions. Russia’s Vladimir Putin (b. 1952) had been an officer of the kgb.24 These rulers operate with a sophisticated network of clients, and while in Russia and Ukraine there is a somewhat competitive multi-party system, their democracy is highly ‘managed’. In Belarus and Kazakhstan, and especially in Turkmenistan, there is little semblance of any democracy. All five countries are ‘presidential republics’ with a strong institution of presidents who are not tested in particularly competitive elections. Some of the elections, especially those in Kazakhstan and Turkmenistan, are not competitive at all, giving 80–95% of  the votes to the ‘candidates’. In this respect, they resemble elections in ­Soviet times. Kazakhstan and Turkmenistan are Turkic states which had been ­rather  nomadic nations before they were incorporated into the ussr. The

24 The kgb (In English: Committee for State Security), was the central security agency for the Soviet Union from 1954 until the country’s break-up in 1991.

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­ ajority of their population is Muslim and both regimes increasingly – though m still ­cautiously – play the Islamic card. Despite these differences in economic policies and historical-cultural background, all these countries travelled on a similar trajectory; one which was distinctly different from Eastern European liberalism and East Asian ‘capitalism from below’. 3.2 The System of Legitimacy of Post-communist Patrimonialism In 1998 (Eyal, Szelényi and Townsley 1998), we were already calling Russia ‘capitalism from above’, i.e., a sort of patrimonial order. There may be many reasons for this: Russia’s long historical experience with autocratic governments and the recruitment of new post-communist elites from Soviet nomenklatura bourgeoisie. Yeltsin, however, clashed with the notions of the ‘legal-rational authority + democratic policy’ model early on. As we have shown in the previous section, voucher privatisation did not work in the way it had been planned to, and what happened next was a classic case of patrimonialism. Yeltsin, the new ‘tsar’, appointed the new grand bourgeoisie. We therefore call the first decade of Russian transition from communism patrimonial (with some legal-rational components). Since property was allocated by the ‘grace’ of the ruler, the executive branch had a great deal of autonomy in deciding who the new owners would be (this discretion was much, much more limited – though still existent – in Eastern Europe). On a few occasions, Yeltsin did try to challenge the powers of the new grand bourgeoisie – his conflict with V. Gusinsky was intense – but he eventually backed down (for the story, see again Klebnikov 2000.) Let us summarise: Russia under Yeltsin was a patrimonial order (the political ruler allocated property but with relatively secure property rights) with some legal-rational authority. It was not quite a liberal system. While private property was defended by law, Yeltsin, operating in a somewhat managed democratic system, sent tanks against the legislature when they went against his will. Competitive elections were held, but Yeltsin-friendly private owners controlled the media, so there was hardly a ‘free media’. In contrast, most Eastern European countries were liberal, legal-rational authorities with substantial separation of powers, property being allocated by market mechanisms (albeit with some patrimonial management). That said, the struggle for the media – namely to bring it under the control of the executive – started very early there as well. All in all, however, governance was quite democratic, elections were free, and to an extent quite fair, thanks to the messy campaign-financing law. However, democracy was not ‘consolidated’. It took a long time for parties  to be formed which could hold power in rotation. This process is still incomplete.

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Market Socialism or Capitalism from Below?

4.1 The Debate about the Capitalist Nature of China Between 1978 and middle of the 1980s, the Chinese leader Deng Xiao Peng (standardised spelling: DENG Xiaoping) followed a moderate Libermanist type of reform, limited almost exclusively to the agrarian sector. For a while, collective farms were retained but shifted towards a ‘family-responsibility system’ where peasants had increasing control over their labour and the product of their work. Much as happened with the agrarian reforms in Hungary from the mid-1960s onwards, agricultural prices were gradually deregulated and production quotas reduced and eliminated. The result was a decreasing gap between urban and rural incomes, and the big winners were the peasants. This reform was also complemented with substantial decentralisation of power from Beijing to the provinces and even to smaller administrative units (Yasheng HUANG 2008: 50–108). For the sake of comparison, it is worth noting that Deng, who was born in 1904, was 74 years old when he started to play a decisive role in the reform process. He was a trained intellectual, a professional revolutionary, with almost no personal experience in agriculture. Though he was the de facto ruler of the country between 1976 and 1989, he had never held office as head of state, head of government or General Secretary of the Communist Party. Deng died in 1997, having retired in 1989. As communist cadres and the urban population were becoming increasingly dissatisfied (Nee 1989) after 1989, the reform was an attempt to pacify the local cadres (by creating township and village industries) and the policy gradually shifted – more forcefully after Deng’s ‘Southern Tour’ in 1992 – to cities and industry. By the late 1990s, the Chinese government had begun the privatisation of the enterprise sector, but they also recentralized state power and the  taxation system. Given all these fairly radical changes, the question of whether China was still socialist, whether it had become a capitalist country or whether these terms should be used for it at all was posed within China and elsewhere. Many Chinese scholars and non-Chinese commentators emphasized the uniqueness of this gigantic land that had such a long history, and they resisted the tendency to force China into the straightjacket of Western conceptions. Perry Anderson (2005: 16) formulated this dilemma very astutely: [There are two distinct kinds of intellectual resource for imagining alternative modernities]. On the one hand, there will be the historical reservoir of thoughts, experiences and struggles connected to the past of the country concerned, its cultural heritage, if you like. On the other hand,

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there will be a range of foreign experiences that can be studied, imported or learned from, in any given period. […] Successful attempts at building an ‘alternative modernity’ have nearly always rested on a creative balance between these two sets of resources – that is a selective appropriation of the national past and selective learning from the external inter-state system. 4.2 Is China a Late Reformer? China is often seen as a socialist country that entered the market reform trajectory early. Whether this perception is correct depends on what we mean by reform and how we evaluate how far away China has moved from the classical system of socialism (see Kornai, 1992 as reviewed briefly in the Introduction). Some Eastern European countries were faced early on with the inefficiencies of the classical system of socialism and had, by the 1960s, implemented some rather bold reforms. Yugoslavia, with its workers’ self-management system25 and Hungary with its second economy26 were two of the early reformers. Even the ussr tried to revamp the classical interfirm relations during the Khrushchev era, and was accused by some Maoist theorists of ‘restoring capitalism’ (Bettelheim 1976). Given that 1978 was the starting date for its reform, China could be said to be quite a latecomer. This is not so surprising. The classical system had some initial success in China, in the ussr, and even in the less developed Eastern European countries. Martin Whyte (2007) pointed out that: “the prc experienced economic recovery after 1949 and considerable economic growth in most years after 1949” (averaging 4–5 per cent annual growth of the country’s gdp). He also pointed out that “China was already recognised in the Mao era as performing [even] better on ‘social development’ than on ‘economic development’” (Whyte 2007: 11–13). Y.Y. Kueh (2008) concurred. When he posed the question: “Was Mao really necessary?” the answer was a qualified affirmation: “Yes, from 25

26

When the Yugoslav communists turned their backs on Moscow in 1948, the declaration of the ‘workers’ self-management’ ideology become a unique feature of that country. In retrospect, the Yugoslav corporate governance system did not differ much from those of other reformed Central European systems: control was divided among three players: the charismatic dictator (J.B. Tito), the party-state bureaucracy and enterprise management (see Figure 3). Edvard Kardelj (1910–1979), a trained economist, is considered to be the primary creator of the Yugoslav system of workers’ self-management. After the cautious liberalisation of private agriculture outside of the cooperative sector and the state farms, from 1982 the Hungarian government opened up a new institutional space allowing the formation of small partnerships in industry and the service sector. This turned out to be the prelude to the radical economic reforms that began in 1989.

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an economic perspective” (Kueh 2008: 32). It was only from the mid-1960s onwards that the economically more advanced socialist countries began to stagnate and fall behind the advanced West and the late-industrialising countries of East Asia. Since China entered the socialist trajectory as an economically rather backward agrarian country, it did not face problems of economic stagnation as early as some of the European socialist countries did. But the reforms eventually had to come. In his formidable Economics of Shortage Kornai (1980) identified the internal contradictions in the classical system early on and, given those problems, he believed that the classical system was transitory. It proved to be relatively short-lived compared with the socio-economic formations that have managed to survive for centuries (Kornai 2008a: 22). The inherent inefficiencies of the classical system produced chronic shortages. Extensive growth limited the potential economic dynamism of the socialist economy. In this respect, China was not a late reformer. It started to make changes to the economic management system well before the potential of extensive growth was exhausted. When China began reforms in 1978, it was still primarily a rural, agrarian country and to some extent, its extraordinary explosion of economic growth can be attributed to its large labour supply (Sachs 2005: 158). Initially, 1978 may not have been much more than an attempt to correct the extremities of the Cultural Revolution and especially to solve the unnecessary food shortages. This was done by making relatively minor adjustments, namely, through a shift from agrarian communes to the household responsibility system. It was not that hard to ‘imagine’ these modestly novel alternatives – to invoke the words of P. Anderson already cited. As we have pointed out, there were quite a few experiments – and rather successful ones – under way in other countries. In Hungary, the so-called New Economic Mechanism,27 and in particular, its agrarian reforms were prime examples (Szelényi 1988). All the Hungarian communists did was to allow peasants to cultivate one acre of their land, and to do what they wanted with what they produced: consume it or sell it at markets at any price they could fetch. Food shortages soon disappeared at farmers’ markets. 27

In May 1966, the Central Committee of the Hungarian communist party announced Kádár’s plans for the reform of the economy, known as the New Economic Mechanism (nem). This modified system of corporate governance, which became official on January 1, 1968, was a major shift to decentralisation in an attempt to overcome the inefficiencies of central planning. The nem represented a move away from compulsory plan indicators in favour of a policy that stated profits as the state-owned enterprises’ main goal. nem created market relationships among firms, using prices as allocative functions. Firms responded to prices to maximise profits, and used profits to budget new investments.

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There was, however, an ample ‘historical reservoir’ of rural entrepreneurship in China as well. Indeed, as HUANG Yasheng has repeatedly pointed out, entrepreneurship in China has deep rural roots and not only in agriculture (Huang 2008: 57–62). Whyte (2009) also emphasised that China had had centuries of extensive commercial development and intensive agriculture; and that, among ordinary villagers, there was instant familiarity with markets (see also Rawski 2007: 103). One has, of course, to be careful in ascribing the success of entrepreneurship to such a historical reservoir, namely, to China’s cultural heritage. After all, since Max Weber, the received wisdom has been that Chinese culture, and Confucianism in particular, was an obstacle to modernisation and entrepreneurship (Weber 1951: 86, 100). But the rise of capitalism in East Asia and economic growth in China during the past three decades does not necessarily disqualify the Weberian argument. After all, Weber was interested in the origins of capitalism, and why capitalism emerged in the West and not the Orient. Now the question was: could elements of traditional culture be reassembled to fit the requirements of modernity (Peng 2005: 345)? The answer many scholars gave to this question was: yes (Vogel 1991: 92–101; Peng 2005; Whyte 2009). Socialist Market Economy or Capitalism with Chinese Characteristics? The official discourse in China remained focused on ‘reforming socialism’, but by the late 1980s, reform-economics in Eastern Europe and Russia was beginning to write about a transition to capitalism (Yu 2005: 28). And indeed, by 1989, European socialist countries were no longer reforming the socialist economy; they were in the process of transition to market capitalism. As early as the 1990s, Stark and Bruszt (1998) pointed out the teleological implications of the usage of the term ‘transition’ and recommended describing the changes as ‘transformation’: these countries are not building capitalism on the ruins of socialism, they create a new system with the ruins of socialism. Within China, the reconstruction of economic institutions was not labelled as either transition or transformation. Neither was the word ‘privatisation’ used in official documents. There was a slow and gradual change in what was meant by ‘reform’. In 1978, it referred merely to modernisation, more specifically the “four modernisations” program of Deng Xiaoping (Shi 1998: 5). YU Guangyuan believes that Deng might have used the term ‘market economy’ as early as 1979. However, this was only addressed to foreign audiences, Deng using the concept in an interview with the editor of Britannica (Yu 2005: 37). This expression had begun to appear in academic publications by the mid-1980s, though more careful authors preferred to write merely about a ‘commodity 4.3

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economy’. As late as 1984, the official party line was: “We do not practice market economy which is completely regulated by the market”, a discourse ambiguous enough to be used both by those who supported and those who opposed the market economy as proof that their position was backed by the party (Yu 2005: 37). It was only after 1992 Deng’s Southern Tour that reform began to be equated with the transformation of China into a ‘socialist market economy’ (Shi 1998: 6). This remains the official label for the Chinese economy and is the one used in academic circles almost without exception. In the words of DU Runsheng: “We want to build socialism with Chinese characteristics, not capitalism with Chinese characteristics. (…) The introduction of a market economy is one of the substantive details of ‘socialism with Chinese characteristics’. (…) [W]e have proved … that the market system can be compatible with socialism”. (Du 2005: 10–11) Or to cite Yu again: “the conclusion that planned economy has a socialist nature, and the market economy has a capitalist nature is incorrect” (Yu 2005: 37). As we explained earlier, market socialist reform proposals were put forward in the Soviet Union during Khrushchev’s time by E.G. Liberman in 1962. Liberman’s ideas influenced Chinese liberals like SUN Yefang but at that time were firmly rejected by MAO Zedong and the Communist Party (Kueh 2008: 10–22). In a pioneering article – and in many others later – János Kornai (1984) cast strong doubts on the feasibility of market socialism. He proved that there is an ‘elective affinity’ between forms of economic integration and forms of property: central planning tends to go together with public ownership, while markets tend to assume private property. By 1989, he took an even stronger position: reforming the economy is a ‘package deal’, in that if one goes for markets one has to accept private ownership (Kornai 1989: 44). Not surprisingly, ­Kornai’s idea of a ‘package deal’ implies that China should not be considered a socialist market economy (which, by 1989, had in his view become a contradiction in terms). In his words: “China (…) cannot be seen as [the historical realisation] of Oscar Lange’s theoretical construct of ‘market socialism’”. Kornai put great intellectual effort into proving the market can fulfil its coordinating role in the absence of private ownership: “In the real world of China (…) the market has become the chief coordinator. (…) [T]he ownership structure has undergone fundamental changes, in which the state-owned sector has given up its leading role. (…) The result is far from a classical socialist system, and fairly close to a typical capitalist system.” (Kornai 2008, 58). Not everyone agrees. As a Chinese colleague put it to Christopher A. McNally, “China is both far away from socialism and far away from capitalism”

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(McNally 2008: 231). Or to phrase it more positively: China is often seen as a hybrid system that combines elements of capitalism and socialism. There are at least three reasons why the arguments that China is a socialist formation should be considered seriously. a. China has been slow in recognising private property rights, and it is often doubtful whether what is being called private property is actually private. b. The state in China is so intimately involved in economic processes that it is arguably beyond the usual role of ‘developmental state’, even in its East Asian variant; and c. the most obvious reason: China is a one-party state where the communist ideology legitimates the party. Let us consider each of these arguments in turn. As Martin Whyte (2009) and Huang (2008: 31) point out, secure property rights are usually regarded as a major precondition of capitalism and dynamic economic development, yet China has proved to be an outlier in this respect.28 The national Property Law was passed only in 2007 (before 2007 there were various limitations on the number of employees domestic firms could hire), and even that law was rather restricted in scope. In this respect, China diverges radically from the European post-communist countries, which, as far as property rights are concerned, followed the Washington consensus cookbook rather closely: most of these countries privatized early and fast, and priority was given to creating identifiable owners even if that meant passing public property into the hands of former communist nomenklatura (which happened especially in Russia). China followed a dual-track approach: until the late 1990s, it rejected the privatisation of soes, while allowing foreign capital into the country and permitting domestic private firms with some limitations. Similarly, private ownership of agricultural land is still restricted. Even though family farming was restored during the early 1980s, peasants did not receive title to the land they tilled. They leased land from the villages, and the lease was gradually extended to up to 30 years in 1984. Although the lease had become practically indefinite by October 2008, still no title was granted to private individuals. Some commentators regard the October 2008 Resolution of the Central Committee of the communist party as a ‘landmark event’ (Li 2009) since it gave full rights to farmers to subcontract, lease, exchange, and swap their land-use rights.29 Optimists expected that this resolution would enable 28 29

See also Oi and Walder (1999) about property rights issues. A recent empirical study, however, showed that rural land rights confirmation had significant and positive effects on the likelihood and amount of transfer-out land at the 5% significance level, but the effect on transfer-in farmland was insignificant. Xu et al. (2017).

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retiring farmers to purchase homes in urban areas, that it would improve capital flow into rural areas, and – especially during the 2008 global financial crisis when China’s export dropped sharply – that it would increase domestic production and help China to change course from export-led industrialisation to an economic growth driven by domestic consumption. LI Cheng saw the new land reform as a step towards eliminating the hukou system, which had turned those who held rural hukou (especially migrant workers in cities with rural registration) into second- or third-class citizens. Land reform, it was hoped, might boost the income and consumption of former rural hukou registrants. According to Li’s 2007 data, “China’s total retail sale value of consumer goods was 8.9 trillion yuan while the retail sale value in the rural areas (…) accounted for only 1.4 trillion yuan.” Out of a population of 1.3 billion, only 200 million had the capacity to enjoy middle-class consumption; the land reform coupled with the abolishment of the hukou system may tap into this domestic market, which might easily counterbalance the loss of export markets. Furthermore, the issue of property rights is highly ambiguous, and that makes it more difficult to evaluate the actual property relations. In the early stages of the reform, when the private sector was still discriminated against, even private firms were classified as collectives. Most Western commentators – and a few Chinese academics, like the unnamed Chinese colleague of Christopher A. McNally – shared Kornai’s doubts about whether the current Chinese socioeconomic system can qualify in any meaningful sense as a ‘socialist market economy’. We tried to make the most persuasive possible case in the previous section of this chapter for why China might be called socialist, or at least why some socialist characteristics can still be located in the Chinese socio-economic structure. But even that strong case was not so strong. First of all, while property relations are indeed combined, or rather ambiguous, China does, without a doubt, have some ‘hybrid’ characteristics (Nee and Opper 2007: 93).30 Despite this, there can be little doubt about the directionality of the changes in property rights over the past three decades. China has not only gradually legalised private property, but it is certain that the private sector has been responsible all along for the dynamism of its economy and that, irrespective of measurement problems, its share of the economy has undoubtedly been on the increase. Until very recently at least, China has been moving away from the monopoly of public ownership of the means of production to the (eventual) hegemony of private property. 30

See Yeung (2004) on the more general issue of the nature of Chinese capitalisms outside the mainland; and Ho (2001) and Huang (1998, 128) about “fuzzy property rights”.

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There can also be little doubt that the Chinese government and the Communist Party do intervene in the functioning of markets more extensively than states do in so-called coordinated market economies (Hall and Soskice 2001), or even than East Asian states have done or are doing (Huang 2008: 276). The historical trend is nevertheless indisputable: “Market transition is a dynamic, transformative process characterised by a diminishing role of central planning and increasing significance of market institutions in economic life” (Nee and Opper 2007: 94; but see also Nee 1989). Finally, we come to the most complicated question. Can anyone doubt the socialist character of China when the Communist Party rules it? Chairman Mao’s photo is still displayed at Tiananmen Square (or the ‘Square of Eternal Peace’). But again, despite the name of the party and its insistence on standing for the cause of socialism, it is very clear that this is not the same party that existed at the time of MAO Zedong. Daniel A. Bell (2008) has half-jokingly suggested that the Communist Party of China (cpc) might be renamed the Confucian Party of China (cpc) and he certainly has a point. The historical trend in the cpc is away from an emphasis on Marxism-Leninism-Maoism, and away from an emphasis on class struggle especially. Deng Xiaoping placed a great deal of emphasis on one of the central values of Confucianism: meritocracy,31 And in the HU–WEN era another Confucian idea, that of ‘social harmony’, has been invoked rather often. To us, as distant observers, the cpc in 2019 more closely resembles the Kuomintang of the 1950s32 than the cpc of 1968. But does it matter whether China is socialist, capitalist or on its way to becoming capitalist? Well, it certainly does seem to matter to the cpc and its theorists. As far as we are concerned, though, this is of rather secondary importance, a kind of taxonomical question; and we would rather not attach a ­particular value judgment to the concepts of either capitalism or socialism. The question is interesting for us only to the extent that it helps to identify the 31

32

“As far as the leadership and cadre system of our party and state are concerned, the major problems are bureaucracy, over-concentration of power, patriarchal methods, life tenure in leading posts and privileges of various kinds” (DENG Xiaoping, August 18, 1980, cited by Huang 2008: 30). The Kuomintang (kmt) was a mass movement to overthrow the Qing Dynasty that resulted in the establishment of the Republic of China. Later, led by CHIANG Kai-shek (1887–1975), the kmt formed the National Revolutionary Army and succeeded with its Northern Expedition in unifying much of mainland China in 1928. The kmt – enjoying the military support of the Soviet Union – was the ruling party in mainland China until 1949, when it lost the Chinese Civil War to the rival Communist Party of China. The kmt retreated to Taiwan where it continued to govern the island as an authoritarian singleparty state for decades.

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kind of economic system that exists (or is unfolding) in China and how this compares with economic systems in other parts of the world or at other points in history. Christopher A. McNally offers a useful and comprehensive overview of various definitions of capitalism (McNally 2008: 17–32). Our aim here is simpler. We only intend to offer a brief and generic notion of capitalism that can accommodate the diverse institutional forms that can and did emerge as economic systems when former socialist regimes began to drift away from the ‘classical model of socialism’. The purpose of this exercise is to lay a conceptual foundation for the last section of this book, which deals with the varieties of post-communist capitalism as they drift from one form or type to another in various generations of reform or transition. Let us return here to the citation from Perry Anderson at the outset of this chapter. He poses the question: what sort of alternative modernities can we imagine? The four possible futures he sees are: a. market socialism, advocated by official Chinese theorists, which in Anderson’s view does not exist so far anywhere in the world (though this does not mean it could not emerge in China); b. actually-existing socialism, or what we knew from the Soviet experiment, which might not be that attractive any more after the fall of the ussr; c. “clean-path capitalism”, which is not unlike a) and is essentially an idealized version of what capitalism would be like if the ideals of civil society could be implemented; and d. actually-existing capitalism, which is not unlike b), a prix fixe, not à la carte. “You have to swallow it whole, or not at all” (Anderson 2005: 18). As far as we can tell, China comes closest to the prix fixe, though with some (not many) variations in the menu. There are three competing interpretations concerning the nature of Chinese capitalism. In the final section of this chapter, we will try to suggest that the real question is not which interpretation is the correct one. The nature of Chinese capitalism is changing over time and how it is changing is to a large extent determined by social struggles. Firstly, in our book, Making Capitalism without Capitalists (Eyal, Szelényi and Townsley 1998) we speculated that China might be on the road to building ‘capitalism from below’. This idea was consistent with Victor Nee’s ‘market transition theory’ and HUANG Yasheng’s concept of ‘entrepreneurial capitalism’. It also mirrored the analysis of Szelényi’s Socialist Entrepreneurs (1988). The key proposition was that China began to build capitalism from the ‘bottom up’, starting with small businesses in agriculture and gradually opening up to larger, initially domestically owned businesses before embracing m ­ ultinationals

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and­large private corporations. This analysis was rather similar to the CUI Zhiyuan’s (2005) ‘petty bourgeois manifesto’. A somewhat similar interpretation is the designation of Chinese or generally East Asian capitalism as ‘Sino-capitalism’ or ‘guang shi capitalism’ (Hamilton 1999; Redding 1990; Lever-Tracy 2002), a system based on small-scale, often family-based businesses (McNally 2005: 108). The second interpretation is found in Nee’s concept of politicised (or hybrid) capitalism, Huang’s ‘commanding heights’ economy, and the concept of state-led capitalism. Nee’s interpretation is ‘softer’: he has a conception of ‘transition’, and China in his view has performed a ‘partial reform’, but is on its way to market transition. He does not, therefore, go as far as Weber and call it political capitalism, which could be and likely would be a dead-end street. Nee’s view is that, while there might be more political interference with the economy than one would wish, this is temporary and likely to go away eventually. Huang is more critical; while Nee assumes a gradual progression toward a free market economy, Huang sees regression, and the 1990s for him was clearly a step backwards, though not necessarily a fatal one. After 2003, he sees signs of hope that the trajectory may change for the better. Thirdly and finally, there is a darker vision of China’s future: crony or political capitalism. Political capitalism usually refers to the capacity of political actors to use their office to accumulate private wealth. Weber used archaic examples to illustrate political capitalism, but with the transition from communism to capitalism, political capitalism hit a home run. As early as 1988, Polish and Hungarian commentators had alerted the public that through the so-called spontaneous privatisation that was happening at the time, the former nomenklatura would be able to turn itself into a new grand bourgeoisie (Hankiss 1990; Staniszkis 1991). This did not happen to any great extent in Eastern Europe (arguably critical intellectuals warned of this danger early enough and these were reasonably democratic societies with a robust civil society),33 but political capitalism did descend on Russia with a vengeance. We still do not know to what extent this has happened in China. ‘Princelings’ (children of high-ranking officials) certainly do well in politics (28% of the members of the Politburo are princelings, see Li 2009b), but no similar data are available concerning the composition of the new grand bourgeoisie. Such a scenario is not unimaginable in China. According to McNally, Chinese crony capitalism would mean that private entrepreneurs, especially those overseeing large firms, would continue to seek close personal ties with state and party officials. There would also be a tendency by the state to clamp down 33

For a detailed analysis of Hungarian spontaneous privatisation see Voszka (1993).

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on independent investor interests and to strengthen control over foreign capital. “This system would continue China’s present infusion of corrupt practices, and strengthen the monopoly positions of many firms locally and nationally. Chinese crony capitalism thus implies that the political imperatives of the cpc ‘freeze’ China’s capitalist transition (…) engendering an alliance of weak capital with a strong Chinese party-state (McNally 2008: 241). 4.4 Various Generations of Reform in China Turning to China’s experience, while Eastern Europe and Russia have so far gone through only two generations of reform, China seems to be in her third epoch. In each period, capitalism in China has been of a somewhat different brand, though each has borne some Chinese characteristics, and each has drawn on its historical reservoir and combined it with the imitation of other countries, be it Japan, Taiwan, Singapore or (rarely) the US. Huang astutely calls the first epoch of reforms ‘entrepreneurial capitalism’ (we call it ‘capitalism from below’). The 1980s, and especially the first five or six years of the decade, were a spectacular success. The reforms unleashed family farming, built on the tradition of family production and experience of Chinese families with the market exchange, boosted economic growth and reduced the urban-rural income gap without damaging health care and education in rural areas. These improvements were not limited to agriculture. By 1985, about 12 million tves were in operation (most of them genuinely private enterprises). These enterprises created a substantial number of industrial and service jobs in rural areas and improved the supply of consumer goods in cities. It is unclear whether this generation of reform was running out of steam by 1989, or to what extent the neglect of reform in urban areas was responsible for the unrest that same year and for the Tiananmen tragedy in particular. Y.Y. Kueh (2008: 47–60) puts forth a rather conservative but fascinating account, claiming that the peasants and even the urban working class were beneficiaries of Deng’s reforms, whereas Tiananmen Square was a movement of disappointed students and intellectuals. But after a short anti-reform interval, – in reaction to the May/June 1989 events – and following Deng’s Southern Tour, China turned away from rural reform under the leadership of the ‘elitist’ JIANG Zemin (General Secretary of the cpc from 1989 to 2002) focusing economic development on the south-eastern coast, and putting special emphasis on large cities such as Shanghai, which happened to be Jiang’s hometown. This epoch can be properly labelled using Victor Nee’s terminology of ‘politicised capitalism’, or using Huang’s phrase, ‘state-led’ capitalist development, where the emphasis was put on export-led industrialisation and massive investments. During the ‘entrepreneurial capitalist’ stage – just as Victor Nee described it in

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his 1989 article – state redistributions and redistributors lost some ground to ‘direct producers’, peasants, and tve workers. The state did, however, reassert its role during the ‘politicised capitalist’ stage of the Jiang years. Investment in China reached 50 per cent of gdp – a much higher proportion than it had reached in Japan and Korea when they were at a similar stage of development (Huang 2008: 279). At the same time, China was rather investment addicted during the second epoch, and total factor productivity (tfp) declined quite substantially between 1995 and 2000 (Hu 2007: 60–66). One important reason for the decline of tfp was conspicuous consumption; that is, expensive and not highly productive investments in coastal cities and a neglect of the domestic private sector. During the epoch of politicised capitalism, China still experienced an impressive gdp growth: just slightly lower than in the previous and in the following decade (Huang 2008: 254). However, Huang showed numerous downsides to this strategy: a. While gdp grew, the share of labour in gdp declined, and the growth of household incomes, especially rural household incomes, was much more modest; b. Urban-rural inequalities increased tremendously, which led to increasing protest movements in rural areas; c. Welfare provisions were also restructured and, both in health care and education, the role of the market increased substantially. Workplaces were no longer responsible for providing welfare services to their workers, and hundreds of millions of migrant workers (probably 200 million) were uninsured. So, for instance, while in 1991 about half of the health care expenditure was private and the other half was publicly provided, 60 per cent of health care expenses were paid privately by 2000, and only 25 per cent were compensated from public sources (Hu 2007: 149). In the 1990s, Jiang Zemin and his Shanghai gang pursued a rather one-sided policy – a policy that came close to the Washington consensus (Wang 2003). In that epoch, China was closest to imitating the US development experience and relied minimally on its cultural heritage. Substantial changes took place around 2002–3, both in the way China was governed and in its policy directions. The year 2002 saw a peaceful leadership succession for the first time in the history of communist China. This was particularly surprising since it was the elitist Jiang who passed the power to HU Jintao and WEN Jiabao. The emerging leaders did not only belong to a new generation but also offered a substantially different policy that was often referred to as ‘populism’ (see Li 2009b; Wong and Lai 2006). At that time, LI Cheng described China as headed by ‘one party, two fractions’. Indeed, the rise to power of Hu and Wen was not a

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replacement of elitists with populists, but a complicated power-sharing arrangement. All significant positions were shared equally by populists and elitists (many of the elitists were princelings or children of high cadres). But in 2013, Hu’s position (president) was taken over by an elitist (XI Jinping), whereas Wen (Prime Minister) was replaced by a populist (LI Keqiang). This complex set of checks and balances represented very different interests but worked smoothly. On one side, the elitists were pushing for fast growth, export-led industrialisation, and development along the south-eastern coast. On the other side, the populists were advocating social harmony, were sensitive to the question of social justice and inequalities, and were trying to improve conditions in rural areas and the situation of migrant workers in the cities, as well as endeavouring to implement government-run welfare systems. In this way, the current system has uniquely Chinese corporatist characteristics.34 It is not unlike Japanese corporatism or what T.J. Pempel (1999) has called ‘corporatism without labour’, but it is uniquely Chinese since it operates within a one-party state. How lasting and successful this Chinese corporatist (populist) patrimonialism35 will be remains to be seen. As pointed out above, the Hu–Wen landreform and mainly rural-oriented stimulus package may substantially increase domestic consumption and rural living standards. If they can keep high growth rates for another 10 years, China will have survived the 2008 international financial crisis better than any other country. What is more, given how important of economic dynamism and continued increases in living standards are for the legitimacy of the regime, the Chinese regime may remain legitimate despite its very limited reforms in the political system. From where we are in early 2019, this logic seems to be working in reality. Philip HUANG (2012), in contrast, objects to the binary opposition between public and private, capitalism and socialism, and he emphasises the central role of local (and central) government and the public sector in fermenting social and economic development. According to HUANG Yasheng (2008: 31) 10  out of the 12 million township and village enterprises (tves) during the ­mid-1980s were actually private businesses, yet they were legally classified as ­collective enterprises. Since the privatisation of soes became public policy, the data have been distorted in the opposite direction. According to Huang’s

34 See Figure 9.4 in Madden (1998: 188) for a discussion of the local network of corporatism. 35 See Redding (1990: 83) for a discussion of Chinese patrimonialism mainly among Chinese not residing in the mainland.

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c­ alculations, the share of genuine privately-owned enterprises is just about half of those that are registered ‘on the books’ as indigenous private businesses (Huang 2008: 13–19). The reason: there is substantial cross-ownership of soes one with the other. The majority of indigenous ‘private’ owners are ‘legal persons’, which usually means publicly owned corporations or banks. Huang believes the oecd estimation, according to which “the Chinese private sector – covering both the agriculture and industry – accounted for 70% of gdp as of 2003” is thus a substantial “overstatement” (Huang 2008: 277). Huang made an even stronger claim: in addition to his view that, since the 1990s, we have tended to underestimate the share of public ownership in the economy, he states that there was what he calls a ‘monumental reversal’ (Huang 2008) in property relations during the second decade of reforms (the 1990s). According to his data, while “[b]etween 1981 and 1989, the private sector’s share of fixed-asset investments was 21.4 per cent; it declined to 19.8 per cent during the 1990–1992 period and then to 13.3 per cent between 1993 and 2001” (Huang 2008). Huang also claims that despite the widely held belief that tves were privatised during the 1990s (Brandt, Li, and Roberts 2005; Oi 1999), there was a “resurgence of collective tves” (Huang 2008). Apart from the ambiguity of private property rights, the Chinese economy is also characterised by the huge role of the state and its ‘politicised’ nature, as HUANG Yasheng and Victor Nee have suggested, respectively. “[D]espite an economic transformation that is viewed by many as revolutionary, the size and the reach of the Chinese state have not diminished. In fact, by several measures, the Chinese state has grown massively since the early 1990s” (Huang 2008). Since 1989 Chinese economic development has been very much top-down and, unlike certain East Asian countries where even authoritarian states were ‘benevolent’ and offered a ‘helping hand’ to private business, the Chinese state had a ‘grabbing hand’ (Huang 2008). Victor Nee and Sonja Opper wrote of ‘politicised capitalism’ (Nee and Opper 2007). They claim that the Chinese state not only sets up the regulatory framework – something one would normally expect from a ‘capitalist state’ – but also “remains directly involved in guiding transactions at the firm level”. They also find evidence of “direct state involvement in the firm’s corporate governance” (Nee and Opper 2007: 106) and report evidence of the ‘grabbing hand’ by referring to “predatory behaviour on the part of government officials” (Nee and Opper 2007: 98). They also found that “in heavily state-regulated industrial sectors and regions entrepreneurs must cultivate personal connections with powerful government bureaucrats to gain reliable access to resources and protect their firms from predatory intervention” (Nee and Opper 2007: 107–108).

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This leads us to the sustained role of the Communist Party. The Company Law that finally allowed the privatisation of soes “still calls for a supervision of enterprises by government and social masses … [and] the continuing influence of the ‘three old political committees’– party committee, labour committee, and trade union … within the firm” (Nee and Opper 2007: 119). The then General Secretary Jiang Zemin gave guidelines sketching “the party’s activities at the enterprise level. According to his guidelines, the party should focus on four functions: (1) implementation of the party line, (2) fulfilment of partyrelated tasks with special attention to production and management, (3) participation in the most important business decisions, and (4) support for the board of directors, the supervisory committee, and management” (Nee and Opper 2007: 119–120). JIANG Zemin opened the door for party membership to private entrepreneurs, in an important speech in 2001, (Huang 2008: 164–165). According to the “Investment Climate Survey of 2,400 firms … more than 40 per cent of ceos concurrently hold party positions. … [P]olitically active ceos are … most common in state-owned enterprises … [but] political participation of management personnel is also widespread in non-state-owned firms … 17 per cent of ceos in officially registered private firms held party offices” (Nee and Opper 2007: 120–121). Hence the claims made by Chinese party and state officials – and shared by many academics – that China is a socialist market economy cannot be dismissed lightly. It is not obvious that private ownership, properly speaking, is as dominant as Western commentators often assume it to be. The government regulates the market processes and manages property rights quite extensively. Regardless of that, a great deal of redistribution may be practised in hidden (through cross-ownership in publicly owned forms) or decentralised ways (by provincial or local government in forms of ‘local state corporatism’) (Oi 1999). And while ‘politics is not in command’ the way it used to be under Mao, the Communist Party – often guided by ideological consideration – is still a major force in shaping national, local, and firm-level policies and, through the nomenklatura system, it controls appointments to crucial positions even in the business world. Philip HUANG (2012) is inspired by the work of Jean Oi and her theory of ‘local state corporatism’ (Oi 1992, 1999). She emphasised that the success of rural China cannot be merely attributed to the rise of the private sector; the local state manages to use revenues from tves to meet local social needs (fund education, healthcare etc.) when the central state cannot provide for such goals any longer. Is a “state centred” (change from above) (Oi) or a “society centred” (change from below) (Nee) explanation a better fit with the data?

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Greatly influenced by Nee’s early work (Nee 1989), we introduced the idea of ‘capitalism from below’ (Eyal et al. 1998 and King and Szelényi 2005) to characterise the Chinese way. Our proposal was not quite as radical as Nee’s new theory is, but we made the following assumptions: a. Unlike the liberal and patrimonial shock-therapeutic ways of making capitalism the drift away from redistribution to markets has been gradual in China (and after the mid-1980s in Vietnam). Exactly how gradual it has been is disputed. Sachs, for instance, argues that decollectivization in China was in itself enough of a ‘shock’ (Sachs, 2005). Nevertheless, ‘transformation from below’ never experienced fast mass privatisation; deregulation of state control over the economy was spread over years or decades, while in liberal and patrimonial regimes (with convertibility of currency, elimination of tariff barriers etc.) it occurred almost overnight. b. In China, the transformation started in the agrarian sector by shifting first production and next marketing/distribution of products from the agricultural collectives to individual peasant households. Another engine of early economic take-off for reform China was the success of tves. The property rights of tves during the 1980s were the subject of heated debates. tves were officially collectives and operated under local government control. Hence many commentators regarded the success of tves as proof of the central role of collective (rather than private) firms (see Philip HUANG 2012; Jean Oi 1999, among others). Others (HUANG Yasheng and others) claimed that the majority of tves were private businesses. According to HUANG Yasheng, only 1.5 million out of the 12 million tves during the mid-1980s were publicly owned (HUANG Yasheng 2008: 79). Incidentally, one outcome of this ‘market transition’ unanticipated by most Western observers on the political left and right (Nee pointed this out in 1989) was the improvement in the living conditions of rural masses, the shrinking of inequality between the rural and urban populations, and between cadres and the rest of the society, especially the peasantry. During the 1990s and the first decade of the 21st century, there was in China some convergence with the liberal/patrimonial model. Huang called this the ‘great reversal’ – a shift away from an entrepreneurial trajectory to a statedirected one (Huang Yasheng 2008: 109–174). Huang is far from an advocate of socialism – on the contrary, he has been critical of the drift in China during the 1990s away from entrepreneurial capitalism and towards a more statist mode (something Philip HUANG – much more sympathetic to the causes of socialism – is inclined to call ‘state capitalism’). Nevertheless, it is hard to dispute that there was substantial re-centralization during the 1990s. The most i­mportant

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such measure was arguably the change in the taxation system, with which Beijing regained a great deal of taxation authority and the balance of power shifted back from the province and localities which had been quite well off during local ‘state corporatism’ to the centre, which suddenly was flooded with resources. At that time the central state was weak and local states reasonably well-todo. By 2010, all that seemed to have changed. Beijing was flooded with resources. It can be debated how large the private sector was as compared to the public sector. It is also not clear whether it was the state or the private sector that led to Chinese economic growth. All sides in the debate tend to agree that during the 1990s social inequalities increased substantially in China. During 1978 and 1985 the Gini coefficient was moderate. (Much to the surprise of Western left-wingers, Gini was actually quite high at the end of the Mao area and it was during market reform that it was moderated.) After 1985, however, and especially during the 1990s, inequalities (and most disturbingly the urban-rural inequalities) skyrocketed. While the Gini index in China today is not all that different from that in the usa, most commentators agree (and in this respect HUANG Yasheng and Philip HUANG are on the same side) that it is untenably high and that, unlike the first decade of reform, the second two decades had some serious negative social consequences which will eventually need to be addressed. According to HUANG Yasheng, during the second half of the first decade of the 21st century, (the Hu–Wen regime) China began to address these issues, paying more attention to rural development and social inequality. The dominant ideology of the first decade of the 21st century was ‘social harmony’, an idea borrowed more from Confucianism than Marxism. While in MarxismMaoism the emphasis is on equality, the idea of social harmony can live with inequality as long as it accommodates the idea of harmony – some can be more privileged than others, but they also need to take responsibility for those beneath them. It involves the notion of solidarity and responsibility rather than equality. Thus China’s post-reform development (after 1978) can be classified into three different stages or epochs: a. During 1978–1985 or even until the late 1980s it was ‘capitalism from below’. The Chinese leadership after 1985 began to respond to the dissatisfaction of the urban population, but not sufficiently to prevent the 1989 revolutionary upheavals b. During 1992–2002 the ‘great reversal’ occurred, or the Chinese equivalent of ‘capitalism from above’. In 1990–92, there was a short anti-reform movement (for instance, between 1990 and 1992, the private sector share

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of fixed assets declined from 21.4% to 19.8%, see HUANG Yasheng 2008: 113). This was followed by a strong pro-urban policy with a top-down capitalist development under JIANG Zemin (1993–2003). Jiang coined the term ‘market socialism’, but he started the privatisation of large soes and opened up the market to fdi. Some commentators see in the Jiang epoch a sort of ‘political capitalism’. c. In the 2003–2012 epoch, the Hu-Wen era, the emphasis was on ‘social harmony’ and rural development, and there was a return, at least in principle, to a bottom-up-strategy HUANG Yasheng certainly sees the Hu-Wen epoch as a return to Deng’s policies; others (like Philip HUANG) are more sceptical. d. What about President Xi? Xi is undoubtedly the most illiberal politician of the post-Mao area. When it comes to both social and economic policy he is very much in favour of ‘top-level-designs’. He has elected himself life-long president (unheard of since Mao) and largely abandoned the real or quasi-collective leadership at the top of the Communist Party. It remains to be seen what that means for economic policy, but it will most likely entail more central and more party control. The most intriguing question (and we will discuss this in some detail in the closing chapter of this book) is whether the country has already entered a new epoch under President Xi, and if so, what kind of period this is. President Xi has more personal power than anybody since Mao (or DENG Xiaoping, possibly?). He runs the country a bit like Putin. Is China adopting the ‘Putinist’ model? What is constant in the Chinese case (and strikingly different from the former ussr and its European former satellites) is the fact that the cpc has retained its power monopoly. The ideology of Marxism-Leninism-Maoism is losing credibility and Confucianism is gaining ground, yet in the second decade of the 21st century it is still true that in China ‘politics is in command’. In political terms, China is still a ‘communist country’. The Chinese way of drifting away from a redistribution economy to a market one has had arguably fewer social costs and more social and economic returns than the liberal and patrimonial trajectory. During the first three decades of its transformation, China produced double-digit (or close to double-digit) annual economic growth, and while inequality increased substantially after the first decade of the reform, the number of Chinese people below the poverty line was reduced by hundreds of millions. China also emerged from the global financial crisis almost unscathed. The country entered the global financial crisis not only without sovereign debts but with enormous reserves, and then promptly administered a massive dose of Keynesian standard stimulation (Bradsher 2009). The way the 600 billion usd Chinese ‘stimulus’ package was

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spent is also indicative of the extent China is now driven ‘from above’. Almost all the stimulus went to the public sector and local governments (while the main beneficiaries of the Bush–Obama stimulus packages were private enterprises, especially banks and other financial institutions). When tested against empirical data, HUANG Yasheng’s theory fares well for the early 1980s but his hypotheses concerning the ‘social harmony’ epoch do not get much support. Indeed, the years 1978–1985 produced impressive growth combined with moderation of social inequality. We take this as strong support for Victor Nee’s 1989 ‘market transition theory’. However, given the shifts from ‘below’ to ‘above’, Nee’s theory does not appear to be that relevant any more. Neither do the data support HUANG Yasheng’s optimistic expectations about a new policy of social harmony, or a social democratic phase of Chinese capitalism or market socialism (call it what you will). Economic growth remains around the same level as it was in the 1990s, but there seems to be no evidence for any more ‘social harmony’, social inequality reaching its peak at the end of the epoch. 4.5 Is Vietnam Like China? Let us offer a few concluding remarks on the case of – the case we are the least familiar with and which is also the least covered in scholarly literature. Most commentators we read see Vietnam as following the Chinese strategy of transformation (GUO Sujian 2004: 393; YAMAOKA Kanako 2007: 13). The reform in Vietnam came through substantially later. After the long Vietnam War (1955–1974), the communist leadership of the North imposed the most doctrinaire policies on the South, creating a major economic crisis and food shortages during the second half of the 1970s (Yamaoka 2007: 12). The orthodox Vietnamese leadership resisted pressure to reform even when it came from their staunchest ally, the Soviet Union and from Gorbachev. The door to reform only opened up in 1986 when the arch-conservative LE Duan (born in 1907) passed away at the age of 79, and C. Truang, another conservative, though one with reformist inclinations, took over the leadership (Bunck 1996). The reforms introduced by Truang were called Doi Moi (renovation) and in some ways they resembled perestroika, though when the chips were down the reforms were closer to the Chinese rather than the late Soviet and especially early post-Soviet Russian model. Vietnam, much like China some seven years earlier, dismantled the agricultural cooperatives and gave agrarian production back to the peasants (something Russia never did and the Eastern European socialist countries did not do either). In one stroke, therefore, Vietnam eliminated food shortages and, as far as we can tell, dramatically reduced poverty during the transition (while as we saw poverty skyrocketed in the former ussr

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and its European satellites). Vietnam also followed China in not combining perestroika with glasnost, hence retaining the political monopoly of the Communist Party. This was arguably the precondition – a price many would judge to be unaffordable – of a gradualist transformation. (This again is something that distinguished Vietnam and China from the European post-communist regimes – see this point in Yamaoka 2007: 9.) Despite this, Vietnam’s reforms not only came later than those of the Chinese but they also had more of a shock element. While Vietnam did not rush towards mass privatisation, it moved more aggressively towards market liberalisation, shut down state enterprises early on, opened faster roads for the private sector and opened up its borders to fdi (Bunck 1996: 236). We may argue, therefore, that the Vietnamese version of ‘capitalism from below’ came with a ‘neo-liberal’ flavour. Vietnam never experienced the transitional recession/depression mainly because in the first stages of reform the rapidly expanding household sector absorbed most of the costs (and labour freed from soes – see Adam McCarty 2000). So far Vietnam has been a ‘success story’ – much like China is. They have managed to transition without the frightening economic costs other postcommunist transformation trajectories were unable to avoid.

…

However, the big question is, both for China and Vietnam – much like for the patrimonial states, but for a different reason – sustainability. There are two major reasons why the East Asian transformation from below is vulnerable: a. Will they be able to retain their export-led industrialisation once the price of their labour catches up with the rest of the world? b. Can the political monopoly of the communist party be maintained under market capitalist conditions and if it cannot, is a ‘gradualist’ transformation of the political system conceivable? If it is not, and political systems either stay or fall, what would be the economic consequences of such a political disintegration? In his Capitalism from Below, Victor Nee (2012) offers us the most optimistic scenario. The main meta-theoretical implication of this formidable book is that the natural or normal way capitalism evolves is ‘from below’. After all, capitalism also came ‘from below’ in England, the United States or the Netherlands. Gershenkron’s 19th-century cases of finance – capital-led capitalism in Germany or state-led capitalism in tsarist Russia were aberrations, just as capitalism by design either in liberal or in a patrimonial way may be. Let us add here that democracy did not come fast and free. Early capitalism operated

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sweat-shops, had no universal suffrage and workers’ resistance was broken by force. Democracy is a late-comer and came only after a strenuous fight for liberty and equality. Hence Jeffrey Sachs (2005) may be right: democracy will come to China but let us add, in due time. A final word of warning: comparing the various pathways out of state socialism is tricky. One may just as well compare apples and oranges. East Asian socialist formations faced very different challenges when reforms began. China during the late 1970s was still an overwhelmingly agrarian society, while before the fall of communism the ussr and its European satellites had completed industrialisation. China could – and still can – grow extensively and flood the world market with inexpensive industrial goods. The domestic market in China has extraordinary potential. Perhaps only about 400 million Chinese from a population of 1.3 billion lives in a mass-consumption society. China responded to the global financial crisis and the shrinking of world markets for its products by expanding domestic consumption. Russia and Eastern Europe, on the other hand, did not have much of a choice. Their political regime melted down in 1989–1991. No room was left for ‘gradualism’, for building capitalism ‘from below’ – like it or not, they found themselves being integrated into the world system without much or any qualification, and the crises which followed were logical consequences of this precipitate integration. 5

The Structure of Post-communist Societies during the First Phases of Transformation

5.1 Rank to Class Formation Continues The analysis above indicates a powerful class-formation in post-communist Eastern Europe (though this is constantly and probably increasingly challenged by a surviving – or even re-emerging pre-socialist – rank-order). In postSoviet societies, the new class stratification has never been able to never overcome the power of the rank-order, though the two have been in a constant and intense struggle with each other. So far the rank-order has, on the whole, had the upper hand (compare Table 9 and Table 10). In a gross over-simplification of the situation in Russia, we may see the epoch of Dmitry Medvedev, who was President between 2008 and 2012, as a time when class order advanced, while Vladimir Putin, who preceeded and succeeded Medvedev as President, worked on establishing the system of rankorder. Or to use the Hungarian case, the first post-communist regime’s Prime Minister, József Antall, did restore some of the pre-socialist rank-order while promoting class formation; the first socialist government of Prime Minister

128 Table 9 

Chapter 5 Distribution of various forms of capitals in different late capitalist and transitional/transformational formations

Social formations

Distribution of forms of capitals Economic Social/political

Late capitalism ( information society) Post-Soviet societies Eastern European post-communist societies Chinese transformational society

Human/cultural

+++

+

++ (human)

+++ +++

++(+) +(+)

+ (cultural) (+ human)+(cultural)

++

+++

+ (human)

Note: For the definition of various forms of capital see Chapter 3. Source: Authors’ compilation Table 10  Re-stratification after transition

Social formations

Late capitalism (highly developed market economies) Post-Soviet societies Eastern European post-communist Chinese society in transformation

Stratification regime Rank

Class

+

+++

++(+) ++ +++

++(+) +++ ++(+)

Note: For the distinction between rank and class see Chapter 3. Source: Authors’ compilation

Gyula Horn opened up the potential for communist rank order to transform into capitalist class stratification. As far as the nature of social formation is concerned in post-Soviet societies, there is an intense struggle between rank order and class stratification. Classes in post-communist Russia obviously matter more than ever, but stratification

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by rank remains strong. After some weakening of rank order while Yeltsin was in power, and vague attempts by Medvedev to promote class stratification during Putin’s third presidential term, rank is back in charge. In Eastern Europe, class stratification seemed to gain the upper hand, but rank remained strong (it meant in some cases an exceptionally strong role played by the humanistic intellectuals like Vaclav Havel in the Czech Republic or liberal intellectuals in Hungary or in other occasions – like in Bulgaria and Romania or under successor party rules in Hungary or Poland – the powerful influence of former communist cadres and their children). The main point is: social capital is of some importance in classical capitalism, but it was of more significance even in the liberal version of transitions from communism. The Chinese system remains dominated by the political estate, but the time of ‘capitalism from below’ has been over since the mid-1990s. As China moves towards the privatisation of the corporate sector, two processes may be underway: a. To the extent that this privatisation is ‘real’, and has indeed created genuine identifiable owners, it probably enriches former top managers, highlevel cadres and/or their family and children. The story of Prime Minister Wen’s family, which was reported to own billions of dollars,36 is a good illustration of this. b. However, some of this privatisation may, as HUANG Yasheng (2008) asserted, be quasi privatisation. Leaving property in the hands of publiclyowned banks, mere cross-ownership develops among publicly owned entities. In this case what emerges is just a new class of technocrats which does not exercise full ownership rights but does have the right to dispose of ‘privatized’ property. In reform China, cultural capital remains relatively unimportant, but human capital seems to be gaining ground. In illiberal post-communist regimes, in Putin’s Russia and Orbán’s Hungary there is even some ‘renationalisation’ of formerly privatised firms (though some suspect that this is no more than a sophisticated way to effect 36

For the Wen family’s wealth, see http://www.nytimes.com/2012/10/26/business/global/ family-of-wen-jiabao-holds-a-hidden-fortune-in-china.html. Here are a few quotes from the article. “Untangling their financial holdings provides an unusually detailed look at how politically connected people have profited from being at the intersection of government and business as state influence and private wealth converges in China’s fast-growing economy”. “The Times found that Wen’s relatives accumulated shares in banks, jewellers, tourist resorts, telecommunications companies and infrastructure projects, sometimes by using offshore entities. The Prime Minister’s younger brother, for example, has a company that was awarded more than $30 million in government contracts and subsidies. He controls $200 million in assets. Wen’s wife had a diamond and gemstone business. She once bought a pair of jade earrings worth about $275,000”.

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­ rebendal redistribution of wealth from disloyal new rich to new clients, p allowing rapid reprivatisation of renationalised forms). As the communist order was disintegrating, it looked like the former socialist societies were taking off in different directions. Eastern Europe was joining the EU, and, it seemed, global capitalism, where it would be under the firm control of economic capital gain. Its social structure, meanwhile, was on its way to becoming clearly class stratified. Russia (and most of the ex-ussr countries) retained a much stronger political hand. The transformation, though it was pointing in the capitalist direction, was led by a central hand, even if that hand was not legitimating itself any longer with the ideology of socialism. This central hand was more inclined to appeal to nationalistic feelings, as described later (see Chapter 6). After 1978, China was building ‘capitalism from below’. It started the reform by setting free market forces, first in an economy based on family farming, next in small-scale rural industrial enterprises, the tves. It also established rather isolated free-trade zones attracting mainly small scale Chinese capital from Hong Kong or Taiwan. China did not touch property rights in the public sector until the late 1990s. The second decade of the 21st century seems to be offering some surprising convergence in the three trajectories. Politics remains in command in China. It has reasserted itself in Russia, and it is reasserting itself in at least some of the Eastern European countries. It is hard to tell whether this is an indication of the resilience of socialist legacies. Is Putin after all a kgb officer, is Orbán a ‘Kádárist’, and is President Xi restoring some version of Maoism? Alternatively, can these post-communist regimes be seen as a resurfacing of pre-socialist conservative and authoritarian tendencies? Is Putin orthodox Christian, is Orbán restoring the Horthy regime, should the Chinese communist Party be renamed as the Confucian Party of China? What we are seeing may be a mix of both of these trends, but it is an important warning: transition to liberal democracy is not an easy, one-way street. Where the countries of these regions will end up in 20–30 years from now remains to be seen. There is nevertheless little doubt that China represents a radically different case from Russia and Eastern Europe in terms of elite recruitment. The political system did not collapse, therefore there was no circulation of the political elite at all. It also appears that recruitment into the economic elite followed a very different trajectory. So far, working from the Hurun ‘China Rich List’ of billionaires, it appears that by 2000, there was only one case of nomenklatura bourgeoisie. This is RONG Zhijian (Example 8), but even his case does not provide solid support for the theory of ‘conversion of political capital into economic capital’. His father, RONG Yiren, became Vice President of China ­because he came from the ‘red bourgeoisie’, a wealthy pre-communist family. The Chinese leadership needed him in a high-ranking position because of his

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entrepreneurial background. All the rest of the top 10 on the Hurun list seems to have come from humble backgrounds, at least until 2000 or even 2011. Typically starting their lives as farmers or workers, all of them were ‘self-made men’. It is, of course, unclear how reliable data from Hurun37 or Forbes38 are. The compiler of Hurun, Rupert Hoogewerf conceded that his list might fail to include 50 per cent of the wealthiest Chinese. In Russia and Eastern Europe, most of the new rich want to show off, and they are irked if they are not included in the ‘top lists’. (There may be exceptions, e.g., those who obtained their wealth illegally.) In China, however, being rich is still somewhat suspicious, so those with money may want to hide. For instance, when DU Shuanghua, the ceo of the steel giant Rizhao, learned that Hurun wanted to list him as the second wealthiest Chinese person of 2008, he tried – unsuccessfully – to persuade Hurun to keep his name off the list. He had good reason to be worried; in future years he disappeared from the list of wealthiest Chinese. There can be similar cause for concern especially if a conversion of political capital into economic capital has occurred. The personal wealth of BO Xilai (see his story later, in a slightly different context, Example 13) or the substantial assets of the Wen family mentioned above are mindboggling. It may be very difficult to measure personal wealth accurately in China. Some, like BO Xilai may hide it, others, like princelings (especially the family of President Xi) may be in charge of large companies which are formally state-owned enterprises, but they could be de facto private businesses of their princeling-managers. In 2018, the billionaires list was led by Jack MA or MA Yun (born in 1964) who was worth $34.6 billion. He also identified himself as a self-made billionaire who came from a family of traditional musicians, i.e., below the middle class. In 1998, we called China ‘capitalism from below’ in contrast with the former ussr and Eastern Europe which were cases of ‘capitalism from above’. Though we now qualify this label (although we are aware that Victor Nee published a book in 2012 under the title Capitalism from Below), we still insist that this is not a bad way to conceptualise the ussr/China difference. While some of the grand bourgeoisie in China may be hiding their mobility into substantial wealth from humble backgrounds, this is undoubtedly a unique feature of ­China, unparalleled in the former ussr or its European former satellites.

37 38

Established in 1999, today the Hurun Report – available both in print and in electronic format – is the foremost authority in tracking the rapid changes amongst China’s high net-worth individuals. The first list published in 1982 by the American business magazine Forbes referred to wealthiest 400 American residents. In 1987, the list became international, covering the 500 richest business people in the world.

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As we pointed out before, the way capitalism formed in China changed from the early years to the later years. According to our hypothesis, for a decade or so after 1978 China was indeed ‘building capitalism from below’. In sharp contrast to developments in Eastern Europe and Russia, the early beneficiaries of market transition – to use Victor Nee’s (1989) terminology – were often ordinary people, for instance collective farm peasants. In recently published articles LU Peng (2017) and FAN Xiaoguang and LU Peng (2019) examined the social origins of the Chinese super rich. They distinguished those who started their businesses between 1978–1989 – the ‘pioneers’ – from those who entered the world of private business after 1992 – the ‘newcomers’. They also collected data on some 200 ‘super-rich’. Their findings are consistent with our hypotheses. Whereas among the pioneers, 19.4 per cent came from collective farms, among the newcomers this proportion is only 6.6 per cent. While 31.3 per cent of pioneers were initially self-employed, this is true of only 8.2 per cent of the newcomers. Those who quit cushy state or party jobs for private business ‘jumped into the sea’. The proportion of people leaping into the unknown in this way rose sharply after 1992 (from 39.6 per cent to 57.4 per cent, LU Peng 2017: 13). A significantly high proportion of the ones who jumped into the sea were party members and were highly educated (FAN Xiaoguang and LU Peng 2019: 54). 5.2 The Making of Oligarchs: A New Grand Bourgeoisie in Russia After 1991, a critical step in making capitalism was the need to convert public ownership into individual private property. In 1990, Gaidar, the future Prime Minister of Russia, promised President Yeltsin that this would happen in 500 days. It took a little longer, but, unlike in classical capitalism, it did happen relatively fast. A unique feature of the new Russian capitalism was also the exceptional role social/political capital played in this process (Rose 2002; Kagalitsky 2002; Sharafutdinova 2011). We do not regard the Baltic countries as post-Soviet societies. Though they may share some of their characteristics, they were only part of the ussr for 50 years, and they have long-lasting ties with Eastern (and even Western, or Northern) Europe. For a long time, these countries were under Polish or German domination, they had a strong Scandinavian identity and were welcomed into the Scandinavian community right after the fall of the ussr.39 39

The Baltic States have long historical and linguistic links with other Baltic states, like Finland, and Sweden. The Estonian language is rather close to Finnish. After the fall of the ussr, the Scandinavian countries welcomed them to the North European community and they soon joined nato and the EU.

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The interaction between social and economic capital is complex and has happened in various ways. We distinguish two types of Russian post-communist capitalism. The first one can be called political capitalism: these are cases when people who hold high political office convert their political power into private wealth. In an adaptation of Weber’s terminology to post-communist conditions, and as discussed earlier in Section 3, we call the second system patrimonial.40 Under patrimonial conditions the political ruler (or establishment, when there was no identifiable individual ruler) decided who become wealthy. The ruler appointed the new rich, but also gave them relatively secure property rights. a. Political capitalism. Arguably the most obvious but also the most contested case is the one of Chernomyrdin and Luzhkov (Example 1 and 2). Example 1: Viktor Chernomyrdin The wealth of Viktor Chernomyrdin (1938–2010) is one of the great mysteries of post-communist Russia. At one point during the mid-1990s, he was believed to be worth $5 billion, but he disappeared from the billionaires list not very much later. Chernomyrdin’s father was a truck driver, and Viktor one of five children. He started to work in 1957 as a mechanic in the oil refinery at Orsk. In 1961, he joined the Communist Party, and later he was trained as an engineer-economist (1962–66) at the Kuybyshev Industrial Institute. After completing his training, he became a party activist in Orsk for a few years. Then he became a director of the natural gas refinery in Orenburg. As early as 1978, however, he was working at the Central Committee of the Communist Party and then moved back and forth between high-level government posts (deputy minister, minister of the gas industry) and significant managerial positions (director of Glavtyumengazprom, chairman of ­Gazprom). He was Prime Minister of Russia between 1991 and 1998. While Prime Minister, he was the subject of jokes by journalists – a whole collection of his misspoken Russian, improperly used words, grammatical errors and incomplete sentences – can be found on the internet. But his record as a politician is debatable. Yeltsin put him in charge when Gaidar was coming under intense attack. Chernomyrdin, as a grey, but ­experienced Soviet-style bureaucrat, presided over a relative stabilisation 40

László Csaba (2018) calls this clan-capitalism (p. 107).

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of the Russian economy. The economy collapsed shortly after his dismissal, however, and commentators hold him responsible for the 1998 financial crisis. He also negotiated with Chechens for the release of hostages; some see this as evidence of his diplomatic skills, while others blame him for the violence that followed. But ­everyone agrees that, as a businessman, he was shrewd and ruthless. He was ­chairman of Gazprom when the company issued stocks. In his tax return, he claimed he owned $50,000 worth of shares, but the cia estimated his wealth to be $5 billion. Izvestia reported the $5 billion figure, citing Le Monde, but Chernomyrdin denied it. Though Chernomyrdin was a Yeltsin loyalist, Putin appointed him as Ambassador to the Ukraine where he served with mixed success between 2001 and 2009, when President Medvedev relieved him from that position and appointed him as a ‘special advisor’ to the President.

Example 2: Yuri Luzhkov Luzhkov (b. 1936) was mayor of Moscow between 1992 and 2010. He was also vice-chairman and one of the founders of the ruling United Russia party. He had, at one time, been tipped to run for president, though he never did. By 1999, Luzhkov was believed to be among the wealthiest Russians; his fortune was estimated to be worth half a billion US dollars. His name, however, also disappeared from later lists – and not without reason. In 2010, he was dismissed by President Dmitry Medvedev amidst unproven  accusations of corruption and mismanagement voiced on state-run television. After the death of his first wife Marina Bashilova (b. 1963), in 1987 he met Yelena Baturina who was 27 years his junior, and they got married in 1991. Baturina was born in a working-class family, her parents were factory workers, and she also started her working life as a manual worker. She took evening classes at the Moscow Institute of Management and was already starting some cooperative ventures in the 1980s. She entered private business in a serious way only after she married Luzhkov. Her major company, Inteko was founded in 1991. At first, Inteko produced various plastic products, disposable tableware for instance, and early on the firm received orders for municipally-owned fast food chains. One of her early big business successes was a municipal contract to manufacture 85,000 plastic seats for Moscow’s main sports facility, the Luzhniki stadium. Inteko gradually became

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active in the construction industry. It was estimated that by the mid-1990s her company controlled some 20 per cent of all constructions in Moscow, just as the city’s big real estate boom was about to take off. Inteko also purchased cement factories and started to buy agricultural land in Belgorod, but there it ran into local opposition. Around 2005, Baturina reduced her presence in the construction industry, sold cement works for over a billion dollars, left the Moscow pre-fabricated housing market and invested funds into Gazprom and in the financial sector, in particular in Sperbank. Baturina was often seen as the richest Russian woman, the only female dollar billionaire. In 2007, Forbes estimated her fortune at $3.1 billion and ranked her as the 279th richest person in the world. It is likely that Luzhkin’s name appears on the early top lists since Baturina’s wealth was seen as his. It would also be hard to deny that her business success was at least initially driven by contracts from the city government, which was under her husband’s control. The Baturina–Luzhkin empire can therefore be seen as an instance of political capitalism. It is intriguing, however, that over time it became important to list the empire under her name, and equally intriguing that despite this mayor’s wife somewhat unusual business success, Luzhkov was not hunted by the press as he probably would have been in the West. He managed to get re-elected to office in apparently free and fair elections and substantial margins. In 2010, however, he fell out of political favour and soon his wealth also disappeared. He is not listed any more among the wealthiest Russians. There are other Russian oligarchs who made no attempt at all to hide the connection between their high government post and their extraordinary wealth: the most prominent example was Vladimir Potanin, who was Deputy Prime Minister and the inventor of a privatisation scheme which he skilfully used to achieve a place among the top 10 wealthiest people in Russia. He was still listed as No. 6 in 2018 with a wealth of $15.9 billion! He was No. 3 in 1999 with just $500 million. b. Patrimonialism. The second system is based on the conversion of social capital and human capital into economic wealth. With some luck, talent and connections, people benefited in this system from rapid privatisations even though they had not had either political positions or capital before the fall of communism. In this ‘class’ of grand bourgeoisie, some developed early political ambitions, clashing with Putin after the resignation of Yeltsin, and ending up either in exile or in jail.

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In 1996, a communist candidate, G. Zyuganov represented a real threat to Yeltsin’s re-election. In appreciation of Yeltsin’s contribution to his growth as a businessman, Berezovsky (Example 3) not only supported the Yeltsin campaign but managed to persuade six other ‘oligarchs’, the wealthiest of the wealthy at that time, the so-called ‘Big Seven’41 to push for the president’s re-election. Example 3: Boris Berezovsky Boris Berezovsky (1946–2013) was the first and the most prominent of the new boyars, or the founding member of the club of oligarchs. Berezovsky earned a PhD in mathematics in 1983 and became director of one of the laboratories of the Institute of Management at the Soviet Academy of Sciences. Soon, however, he became more interested in networking and doing business than in science. As a member of the scientific elite, he did not need to start with small shops – he could attach himself to existing large state-owned firms. This was exactly what he did. As early as 1989, he approached the management of Avtovaz, the Soviet car manufacturing company, and proposed setting up a private firm to provide computer programming for the company. The management was interested, and in May 1989 Berezovsky established Logovaz and he became its general director. Providing computing services was not sufficiently innovative a business for Berezovsky though, so Logovaz began almost immediately to sell Avtovaz’s automobiles. It is probably safe to assume that his first few thousand dollars was made by the resale of a Mercedes that he bought second hand in Germany and sold in Russia, but he also made money from the import of computers and computer software. His most profitable venture, however, was re-exporting cars. He managed to get an export license for cars, and since it was assumed that he was exporting the eminently non-marketable Russian Lada, he was able to buy such cars under production costs. He paid even those low prices in promissory notes in the long run, rather than cash. Berezovsky actually never exported the cars but sold them on the Russian market – for well over the official price. He was able to do this because those who wanted to purchase from Avtovaz had to wait sometimes for years for their cars, while at Berezovsky’s outlets they just could get into them and drive away.

41

The Big Seven – Russia’s Financial Empires, www.worldbank,org/html/prddr/trans/feb98/ bigseven.htm.

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As far as we can tell there is no indication that Berezovsky was close to high-ranking Soviet party officials. He had good relations with the young reformers, Yegor Gaidar and Anatoly Chubais in particular and Valentin Yumashev. Yumashev was a journalist – he eventually became Yeltsin’s chief of staff and the second husband of Tanya (or Tatyana) Yeltsin, as we already mentioned above – but during the early 1990s, he was just a ghostwriter for the President. He had helped Yeltsin write his 1989 book and was helping him with Notes of a President – a book eventually published in 1994. It was Yumashev who introduced Berezovsky to Tatyana, who at that time was the wife of Alexei Dyachenko, but already a good friend of Yumashev. (Dyachenko was a commodity trader, who became at one point Berezovsky’s business partner in Sibneft.) Valery Streletsky, who served as head of the anti-corruption department of the Presidential Security Services, told Klebnikov (2000) in an interview: “The key factor in the privatisation process was the attitude of Tatyana Dyachenko to this or that banker/oligarch…. She would go to the President and say: this man is good man and that man is bad man; this should be supported and that should not be supported… Tatyana Dyachenko is the only person the President listens to”. (pp. 202–203). Berezovsky’s entry into the family was via Notes of a President. Through Yumashev/Tatyana Dyachenko he offered to take care of the publication of the book, to get in printed in Finland and come up with the money to cover the publication costs. He came up with cash and offered to transfer royalties to Yeltsin’s account (it remains unclear whether he took a fee for himself, or t­ ransferred all royalties, or transferred funds even beyond the royalties earned by the President). Berezovsky probably met Yeltsin in person for the first time when the book was released, but Yeltsin offered him a toast and public thanks in any case. With his newly acquired contacts, Berezovsky managed to take significant managerial positions and eventually became an owner of the car manufacturing firm Avtovaz, of the Russian national airline, Aeroflot and of the major oil company Sibneft. His economic empire also included the aluminium industry and some important media outlets. In 1995, he also acquired the television channel Channel One, the most commonly watched TV station in Russia which had a tremendous impact on public opinion in the country. The ‘Seven’ controlled (owned?) about half of Russia’s economy at that time. The other six members of the ‘Big Seven’ – besides Berezovsky – were: – Mikhail Fridman (his real-time net worth according to the Forbes list of billionaires was $15 billion, putting him at No. 74, as of 1 January 2019);

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– Vladimir Vinogradov (he went bankrupt in 1998); – Mikhail Khodorkovsky (jailed for several years and allowed to emigrate in 2014); – Vladimir Gusinsky (as well as having a Russian passport, he also has a Spanish and an Israeli one – just in case); – Vladimir Potanin (his real-time net worth according to the Forbes list of billionaires was $16 billion, placing him at No. 65, as of 1 January 2019) and – Aleksander Smolensky (whose bank collapsed in the 1998 Russian financial crisis). In 2000, Berezovsky and some other (still surviving) members of the Big Seven (namely Khodorkovsky and Fridman) supported Putin’s election. They were, in a sense, bringing Putin ‘into the family’ – to use Mafia language. But Putin was no Yeltsin; he wanted to be Peter the Great, and did not want to be bossed around by the ‘boyars’, by the oligarchs. Even though Berezovsky had been elected to the Duma (the Russian legislature) in 1999 and had held various important political positions under Yeltsin, he soon clashed with Putin and fled Russia for England. He was later sentenced to a prison term in absentia and was accused of various murders. Though no murder charges were proven against him in any fair court of justice, he was suspected of being involved in the murder of Vlad Listyev, Russia’s most successful television producer. Listyev supported the privatisation of Channel One into Berezovsky’s hands, but he advocated fair competition for advertising time, something that clashed with Berezovsky’s interests. Listyev was murdered in 1995. Berezovsky vehemently denied any involvement. It is also thought-provoking that Paul Klebnikov, the US-born editor of the Russian edition of the Forbes magazine, who earned his name as an investigative journalist and whom we cite often in this book, was also murdered in 2004 by a young Chechen man after he called Berezovsky a mafia boss. The authorities have never come out with a credible explanation for either of these murders. Later, Berezovsky himself became ‘Public Enemy Number One’ for Putin’s Russia. It was rumoured that there were several attempts by Russian agents to murder him in London. In 2013, he passed away in his London residence under suspicious circumstances – he may have committed suicide (most likely) or may have been murdered by competitors or by one of the Russian intelligence services. Berezovsky and Khodorkovsky (Example 4) resembled the ‘boyars’– wealthy individuals with secure property rights who had claims for political influence or even power. Under Putin, this changed fundamentally, as he reasserted the primacy of political power. Those from the new grand bourgeoisie who had political aspirations were reminded that political power was still the monopoly of the president. Many were forced into emigration, some were put

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in jail and had their wealth confiscated or renationalized so that it could be reprivatized to new, loyal clients. The notion of ‘patrimony’ assumes substantial security of property rights. While under patrimonial rule property could not be alienated – meaning it was not fully developed private property – it was assumed to be the lifelong possession of the awardees, and it was usually even inherited. The oligarchs who survived in Putin’s presidency learned this lesson. In a recent interview with The Economist, Mikhail Fridman quoted a Russian Example 4: Mikhail Khodorkovsky Mikhail Khodorkovsky (b. 1963) started his career in Komsomol, the Soviet Communist Youth Organisation. He used his political connections effectively. Klebnikov (2000) offers a crisp description of his trajectory: “He had a classic career path of a Yeltsin-era business magnate. In 1987, as a top leader of Moscow’s Communist Youth League, Khodorkovsky established a trading cooperative financed with Communist Party money; the next year he established a bank. In 1990–93, Khodorkovsky entered the Russian government, serving first as economic adviser to the Russian Prime Minister and then as Deputy Minister of Fuel and Energy” (Klebnikov 2000: 203). His first business was, in fact, a coffee shop, before he opened his bank, Menatep. He also acquired ownership of Yukos in 1995, one of the major Russian oil companies in the loans-for-shares auction. M. Friedman’s Alfa Bank also made a bid for Yukos in consortium with other investors, offering $350 million for the company. The government, however, asked Menatep to register applications for the auction, and it disqualified Alfa Bank. A front company for Menatep went on to purchase Yukos for just $150 million. According to Klebnikov, this was a rather typical technique at auctions. In an interview given to him by Colonel Streletsky, the colonel said: “Why did the state sell its property so cheaply? Because this was a corrupt clan selling to itself… A certain p ­ roportion of the government apparatus had linked up with …. Berezovsky and other [businessmen]. These people knew the best way to steal, but to steal they needed the government apparatus. The government apparatus, meanwhile, needed money, so this alliance was concluded” (p. 129). By the end of the Yeltsin era, Khodorkovsky was regarded as the wealthiest person in Russia. However, much like Berezovsky, Khodorkovsky was far too ambitious politically for Putin. Probably sensing trouble with the new political boss, in early 2003 he proposed merging Yukos with the other major Russian oil company, Sibneft.

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­ roverb: “You can never be sure you won’t go to prison or be a beggar” and dep clared that he never saw Putin one on one. And speaking of him, Anders Åslund, the prominent Russia specialist whom we have quoted several times in this book, acknowledged that Fridman is now really “as far from Putin as you can be and still be a multi-billionaire in Russia” (The Economist, December 8th, 2018). The Rise of New Grand Bourgeoisie under Post-communist Liberalism In sharp contrast to the Chinese or Russian way, in Eastern Europe (Poland, the Czech Republic or Hungary), the dominant way to accumulate corporate wealth was the technocratic one (experiences in the corporate world, connections and knowledge of operating in the new market environment) and once capital was accumulated, capital was firmly in control. Property rights were secure, and business was calling the shots (see Example 5 – the life story of the wealthiest Hungarian, Sándor Csányi. The Csányi–Soros duel did not end in 1995. In October 2008, the Soros Management Fund attempted to short-sell otp. It borrowed some 390 thousand otp 5.3

Example 5: Sándor Csányi The Hungarian banker, Sándor Csányi (b. 1953) comes from a dirt-poor peasant family. His father was a sort of night watchman in an agricultural cooperative and raised his three sons with the food he produced on his family plot and sold at farmers’ markets. When he was admitted to a high school specializing in economics in the city of Budapest, Csányi told his mother, according to legend: “Do not worry Mum, I will eventually earn even 5,000 Hungarian forints a month”. (At the time, that was something like $200; his wealth is now estimated to be 300 billion huf, more than $1 billion – a large amount of money, but small in comparison with the wealth of Russian oligarchs). After graduating from high school, he attended the College for Finance and Accounting, graduating in 1974. (He received a degree from the more prestigious Karl Marx University of Economics later, by taking evening courses.) Between 1974 and 1983, he was employed by the Ministry of Finance. This ministry was an important training ground for future politicians and entrepreneurs. Péter Medgyessy, who was socialist Prime Minister between 2002–2005, was also his colleague and though Csányi is known for his sympathies for the political right, they got along well and were

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b­ elieved to be hunting partners. He also served as an undercover officer in the Hungarian intelligence service during his tenure at the ministry. According to his own account, he offered intelligence information on his Soviet colleagues to allow Hungary’s rapprochement with the West to go ahead without Soviet interference. In the Ministry of Finance, Csányi worked in the department of banking regulation. His close colleague there was Tamás Erdei. Csányi eventually became the manager of and finally major owner of otp, the number one bank in Hungary. Erdei was also a leading banker, but not an owner of the Hungarian Foreign Trade Bank (mkb). This was sold to Bayerische Landesbank, who retained Erdei as ceo. He left the Ministry of Finance for the Ministry of Agriculture (it is believed he did this for better compensation, the Ministry of Finance being a higher prestige job), but soon joined the first newly-funded commercial bank, the Hungarian Credit Bank (mhb). Before the founding of mhb the whole Hungarian financial system – much like the financial system of other socialist countries – was run by the Central Bank and the National Credit Union (otp), which was not properly speaking a bank, just a specialised division of the Central Bank. In 1989, another commercial bank was started (the National Commercial and Credit Bank, Országos Kereskedelmi és Hitelbank) and Csányi moved to the new venture. As early as 1991, he was approached to become the ceo of another bank the new post-communist government was creating, the Budapest Bank. Csányi was tempted, but while he was considering the position, he learned that somebody else, namely Lajos Bokros, was also a candidate, so he withdrew from the competition. This is a notable event since Bokros was (and in some ways ­remainsa) a leading personality of Hungarian politics, who started on the left but has positioned himself recently as a ‘conservative’. In 1992, Csányi was appointed President and ceo of the then stateowned otp, which was just being transformed into a bank proprement dit by the centre-right, conservative government. Soon after his appointment, he moved aggressively to restructure and modernise the bank. He fired 250 of the managerial staff and reappointed only 150 of them. Next came the crucial test: the privatisation of the bank. Which way would Csányi go? In 1994, the government decided to privatise otp, and George Soros offered to buy 25% of the bank. All other Hungarian banks were sold to foreign investors, as in the case of the Hungarian Foreign Trade Bank (mkb), where Csányi’s friend Erdei was eventually appointed as ceo. Going Erdei’s way would have held obvious attractions for Csányi as well. Foreign capital  would flow in and he would be able to earn a respectable, almost

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­ estern-level managerial salary ­without taking too high a risk. Csányi, W however, opted differently. He rejected the Soros option: this was the first of several rounds of conflict with Soros, and it says much for the talent of Csányi that he won all of them.42 Instead of selling otp to Soros, Csányi put the bank on the stock market and gave himself and some other members of the managerial team stock options. Unlike Erdei, who went for security, Csányi opted for risk and was richly rewarded. There was a second round of conflict between Csányi and Bokros. Lajos Bokros was Finance Minister in the socialist government in 1995–96. Neither the government nor Bokros liked the autonomy Csányi had carved out for himself (Csányi’s opposition to Soros did not fit Bokros’s more Westoriented economic philosophy) and decided to separate the positions of President and ceo of otp and appoint a ceo who would follow the policies of the Ministry of Finance more closely. Bokros decided, at otp’s 1995 Annual General Meeting, that the Ministry of Finance would propose separating the two posts. Given that, since privatisation, the ministry had retained 25% of the share + one vote, he was confident that he would be able to push the proposal through. Bokros knew that another 25% of the shares were owned by the Hungarian Trade Union Confederation, who at that time was under the leadership of Sándor Nagy – Bokros arch enemy in the Socialist Party – yet he was confident that with his 25% + one vote he could win at the Annual General Meeting. Curiously enough ,when the representative of the Ministry of Finance showed up at the meeting and was asked to present the stocks owned by the ministry – owners had to actually present their stocks if they wanted to vote – it turned out he hadn’t brought them with him and they could not be found in the safes of the bank either. The ministry, therefore, could not exercise its voting right, and the motion to separate the post of president and ceo was not passed. Csányi built up his empire, both otp Bank and his personal business empire aggressively after 2000. By the end of 2018, otp had become a successful multinational company operating in eight post-communist countries in Europe (including Russia). Using his managerial skills, networks and private capital, Csányi also entered mol (the major Hungarian oil company). It is not known for sure how much of the shares of otp and mol Csányi really owns, but it is suspected that his ownership is not trivial and he is serving on the Board of Directors of mol. Though formally there 42

But it is important to note that Mr. Soros’s offer was also loathed by the Socialist Prime Minister, Gyula Horn, who was afraid of potential criticism from Hungarian antisemites.

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is no otp-mol group, with Csányi’s involvement in the two corporations there is otp-mol cooperation. Since mol is also active well beyond the borders of Hungary, the otp-mol conglomerate has the best shot at becoming the first, or only, Hungarian multinational company. Csányi later diversified his personal portfolio. He invested heavily in agriculture and food processing. With István Kocsis – one of the former top privatisation officials – he is the owner of a major vineyard in Villány, one of the best wine producing areas in the country. By now he owns both of the major Hungarian salami factories (Herz and Pick) and he has interests in other food processing industries as well. In the 2019 list of Hungarian billionaires he was No.1 by a large margin with an estimated wealth of huf 360 bn (≈ 1.3 bn usd).a Bokros was known to be firmly committed to liberal reforms. He was Minister of Finance under the socialist government in 1995–96, later worked for the World Bank and was Vice-President of the Central European University, a university founded by George Soros. In 2008, after he joined the Hungarian Democratic Forum, he was elected as its representative to the European Parliament. He then became mdf’s prime ministerial candidate in the 2010 national election. The Democratic Forum, which was the governing party in 1990–1994, had started out as a centre-right, conservative party, so Bokros did not seem to belong to the party at all. But the program mdf adopted in 2010 was a radical liberal reform program, so it was mdf that changed its colours and not Bokros. Bokros, however, seems to be changing his colours too. In 2013, he initiated a new ‘conservative party’, quite a change for a former ‘socialist’. Until early 2019, he still had his own political party, though was not elected to parliament.

shares and before they were due, started to sell otp shares, bringing the price of stocks down by 14% in one day. otp survived, and while on paper Csányi looked like one of the biggest, if not the biggest loser of the global financial crisis (he was ranked No. 2 in the 2008 top list and fell back to the sixth spot in 2010), it is conceivable that he was buying otp shares when the prices were down, and since otp by and large recovered, by 2010 Csányi may be wealthier than ever. He might, therefore, have benefited from the Soros Management Fund’s short-sell. pszaf (The Hungarian Stock Exchange Supervisory Board) fined the Soros Management Fund 1.6 million Euros for unethical business conduct. Soros vehemently denied any personal responsibility, stating that he

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is not involved in the day-to-day management of the Soros Management Fund and he did not know about the short-sell of otp shares.42 It took time for Csányi to become the ‘number-one’ wealthiest Hungarian in 2005. But in many ways, he is still the most impressive and influential figure of the new Hungarian grand bourgeoisie. It is a saying among leading Hungarian businesspeople that when a new prime minister takes office, it is not Csányi who calls on the prime minister; it is the prime minister who visits Csányi. In 2008–2009, there was an interesting conflict between the top governing politicians of the fidesz43-government and Csányi, but Csányi came out again as a winner from this clash. During the autumn of 2008, a young man, Kornél Almássy challenged Ms. Ibolya Dávid for the position of president of the Hungarian Democratic Forum (mdf). Dávid had served as Minister of Justice in the 1998–2002 fidesz government, but had ended up clashing with its leader, Viktor Orbán, and was seen as a threat by fidesz. It was generally believed that Almássy would change the politics of mdf and adopt friendlier politics towards fidesz. Dávid believed – and stated in interviews – that certain circles of the big Hungarian capital – which was sympathetic to fidesz – were behind the candidacy of Almássy. Dávid received a CD from unknown sources on which a telephone conversation was recorded between Csányi and János Tóth, the director of a private investigating firm called UD. It is assumed that the telephone conversation was recorded by the Hungarian intelligence services. After all, it was under the control of a socialist government, which also had an interest in preventing cooperation between the major opposition party fidesz and mdf and in keeping Dávid in charge of mdf. During the recorded conversation, Tóth reported to Csányi that they were commissioned to gather information on David to discredit her and asked Csányi whether they should do it (UD was doing security work for otp so it was reasonable for Tóth, having been given a sensitive commision, to ask Csányi whether they should accept it or not). Csányi, in all likelihood, assumed that his phone conversations were monitored so he did not give a clear answer to the question, but it is clear from the conversation that he was aware of the Dávid-Almássy competition. Then Dávid made a ­terrible political blunder, showing how little she understood the power of 42 43

On the Forbes magazine’s real-time net worth list of billionaires, George Soros was listed with a wealth of $8.3 billion, putting him at No. 164, as of 1 January 2019. Fidesz – Hungarian Civic Alliance (this is the full official name today) was founded in 1988 as a liberal youth party opposing the ruling communist government. fidesz has come to dominate Hungarian politics on the national and local level since its landslide victory in the 2010 national elections. Viktor Orbán has been the leader of the party for most of its history.

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b­ usiness in Hungary. She visited Csányi in his office, told him she was in possession of this CD and asked Csányi to put pressure on Almássy to drop out of the race for the party leadership. Csányi refused, and Dávid threatened him with m ­ aking the CD public. Csányi protested, telling Dávid that this was a private conversation and he would not allow it to be made public. Dávid released the CD to the press nevertheless and initiated a criminal prosecution against the unknown persons who had collected illegal information on her. The intelligence services started an investigation, raided the offices of UD, confiscated computers and requested the office of the prosecutor to charge UD with various crimes. Then came an unexpected twist: the prosecutor found no evidence of wrong-doing by UD but charged Dávid for violating Csányi’s privacy. Dávid was safe from prosecution due to parliamentary immunity and, as the parliament dominated by the socialist party refused to waive her immunity, she did not have face trial for a while. Between 2010 and 2012, however, the fidesz government charged her with criminal offences on several accounts and she lost her trials at the first instance. The Supreme Court finally gave her justice in 2012. This story should be sufficient to show what the balance of power is between money and politics in Eastern Europe: it is changing all the time, and politics does not always prevail above the independent courts. This would be unimaginable in China or Russia.

…

We pointed out earlier that trends did not go in one direction. In the early stages of the transition Eastern Europe tended to be in the ‘liberal’ tradition, rather close to the classical type of capitalism where political capital ‘calls the shots’ in the least instance. Bulgaria, Romania, Croatia, Serbia, on the other hand had substantial components of patrimonialism or prebendalism, but none of the Eastern European countries were entirely free from the primacy of economic capital (money, rather than politics is in command). As we already mentioned, Bálint Magyar (2013) wrote about post-communist ‘mafia capitalism’, emphasising the role of the personal (occasionally even family) connections political elites use to acquire economic wealth. While his persuasive analysis mainly emphasised the characteristics of the post-2010 Hungarian formation, his claims can be applied to post-communist transformation in general. If and when the task is rapid privatisation of collective ownership (or to put it even more generally: in the case of ‘original accumulation of capital’), an ‘intimate’ or even ‘promiscuous’ relationship between those who supervise the transformation of property rights and the new owners is almost inevitable. This is why we are reluctant to use the heavily value-laden term

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‘mafia’. Rapid privatisation and the original accumulation of capital demand somewhat less well-defined property relations and a legal vacuum in which such an accumulation can take place. The enclosure movements in England in the 16th century had a great deal of similarity with the privatisation in postcommunist societies in the late 20th century. 5.4 The New Rich in China Though Chinese society continues to be dominated by political capital, economic capital, though never quite ‘autonomous’, is gradually gaining in importance. However, given the crucial role of privatisation of the enterprise sector in the post-Soviet and to some extent even in the post-communist Eastern ­European formations, one gains economic capital only at the grace, or with the good-will of political/social capital. At least during the first decade of the transformation in China, the original accumulation of capital followed the ‘classical way’. Huang Yasheng (2008) called this ‘entrepreneurial capitalism’ and indeed, during the 1980s, some people from a humble background, rice farmers, and construction workers did start private businesses and accumulated capital. Some of the early Chinese billionaires came from such backgrounds. We shall present two such cases here; the first being the story of the LIU brothers (Example 6) and the second of the YANG dynasty (Example 7). According to the information we were able to find, both families became fairly wealthy without any political protection. This is competitive capitalism, in which one needs political protection after one became reasonably wealthy. The Chinese wealthy are jailed after their political protection falls out of favour; the post-Soviet or (to some extent) post-communist Eastern European wealthy ends up in jail if they proved to be disloyal to the political boss who helped them on their way to wealth. There is also a great deal of emphasis on human capital and technical know-how in China. Example 6: Liu Yongxing LIU Yongxing (b. 1948) and his three brothers, Yonghang, Yuxin and Yonghao grew up in southwest China’s Sichuan province, in Chengdu. According to David Barboza (2009), the Liu family was regarded as ‘counter-­ revolutionary’ since they were seen as descendants of wealthy landlords. During the Cultural Revolution, the father of the family was condemned to a re-education camp and their mother was also officially denounced. During the 1950s, the family was so poor that one of the brothers had to be raised by another family (this was Yuxin, the second youngest one, who adopted his new family’s name, Chen). Until the late 1970s, all four brothers

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were toiling on farms or in state-owned factories. Their fortunes began to change in 1978, when three of the four brothers (except Yuxin who remained in farming in Gujia village in Sichuan province), were admitted to colleges, all of them studying science and technology. After graduation, they worked in various mid-level jobs, Yongxing in the Education Bureau in the county; the other brothers as a computer specialist and agricultural technician, and one as a secondary school teacher. In 1982, the Chinese government initiated and encouraged the development of new technologies in agriculture. The Liu brothers decided to quit their government jobs and take their chances. After three days of intense discussions, they started a private business. In 1982, they sold their valuables (watches and bicycles), raised 1000 rmb and began trading chicks and eggs. In fact, much of their first batch of chicks died during transportation and because of a fire. The brothers suffered a great loss, but they didn’t give up, eventually making 100,000 rmb in the first year. At that time, quail eggs were in demand, and they were worth twice what chicken eggs were. The LIU brothers had the brilliant idea of using new technology to lower the cost of the quail eggs. In this way, they earned considerable capital. Between 1982 and 1984, the LIU brothers started another big business with pork. They realised the traditional method of raising pigs was too old-fashioned. A new, foreign pig feed had arrived in Xichuan; long queues appeared, and they saw the new opportunity and started to produce pig-feed. In 1988, they bought 10 hectares of land, founded a laboratory and experimented with various ingredients for pig feed. The formula succeeded in 1989. It was much cheaper than the existing Thai feed. Their company, now called Hope, dominated the Chinese pig-feed market instantly. Hope Company’s net assets rose exponentially: 1000 (1982), to 10 Million (1988), to 100 Million (1993) to 1 Billion (1999) rmb.44 In 1991, they founded Hope Group in Chengdu. The group had a diverse portfolio, which includes feed production, but beyond that, high tech, finance real estate, biochemical industries, and even aluminium. Within a few years, it had grown into the largest privately-owned corporation in China. Various branches are owned and run by different brothers. LIU Yongxing is chairman of Hope Oriental Corporation. Hope Group consists of 4 corporations, owned and managed separately by the four brothers. The Liu family appeared in Forbes in 1995 just seven years after they started the business, the first time a Chinese entrepreneur had been listed 44 See Forbes on his net worth: 2010–2015.

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by Forbes. The family split up in the mid-1990s, but in 2000 they were still listed together by Forbes as the second wealthiest Chinese entrepreneur. LIU Yonghang and his family were still No. 20 in 2014, with $6.3 billion US dollars according to Hurun. The four families together may still very well be in the top ten. This is unmatched in the history of the new grand bourgeoisie in China starting from below. As of 1 January 2019, Liu’s net worth was estimated at $5 bn by Forbes, but the family did not make the top 10 Chinese again. Example 7: The Yang dynasty YANG Kwok Keung (b. 1955) was born in Shuntak, Guangdong Province and grew up very poor in the city of Foshan. He was the youngest child of six, h ­ aving two sisters and three brothers. He worked as a rice farmer and a construction worker and married a bricklayer who was in the same construction crew. It sounded like no more than a typical Chinese story under Chairman Mao and the early years of the reform. In 1978, he joined a tve, a town-owned construction company and worked his way up. By 1984, he was a foreman. By 1989, he was made General Manager. In the 1990s, Yang bought the construction company with a number of friends from Shuntak when the company underwent ‘corporate reform’. This reform included privatisation (from town-ownership) and some asset reallocation within the company. Yang became its largest shareholder. In early 1990s, Yang bought a large area of wasteland in Shuntak, named it Biguiyuan, and entered the real estate business. Unfortunately, the Chinese housing bubble burst around the same time. Only three of the 4000 apartments were sold. Yang was in financial trouble. A friend suggested to him that he should build an elite international school to attract wealthy parents to buy properties there. Yang took his advice, and it was a huge success. One of its ad campaigns was ‘Even DENG Xiaoping’s grandson goes here’. The exorbitant ‘educational contribution’ (300,000 rmb per student) that parents had to pay was returned to them once their child graduated, so that they could afford expensive housing and generate enormous profit for Biguiyuan. As, by the late 1990s, the government was allowing companies to acquire public land and sell plots of land to home buyers, Yang moved expeditiously and, in 1997, established a company under the English name ‘Country Garden’. This eventually became one of the largest real estate development firms in China mainly specialising in affordable housing. Yang

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finally also bought tvb, the mainstream television broadcasting company in Hong Kong. He is a very low-profile and inconspicuous man; he rarely attends public events and does not like to give interviews. Yang planned carefully to pass his business over to his children. He brought his second daughter Yang Huiyan, the heir-select, to board meetings when she was a middle school student (she attended her father’s Biguiyuan secondary school) and, in order to prepare her for the job of a ceo, he sent her to an American university (she earned a BSc in Marketing and Logistics at Ohio State University). She joined Biguiyuan in 2005 as sales manager. In the same year, he handed over 70% of the shares of Country Garden to Huiyan, and she became the ceo though her father still runs the company. Out of the nine voting board members, four belong to the YANG family: YANG Kwok Keung, YANG Huiyan, and two of Yang’s nephews (i.e., Huiyan’s cousins). In 2006, Huiyan married the 24-year-old son of a senior official of a north-eastern province and according to China Daily that “pleased Yang’s father”. She is very ­private person; her private and family life is kept from the public. She rarely attends public events, and has never agreed to be interviewed. Her wealth was assessed to be worth $19.9 bn, as of 1 January 2019, and was No. 6 on the Forbes list of Chinese billionaires. At that point in time, she was the richest woman in the world. She is a good example of accumulation starting from small businesses and growing large, and the importance of family ties in the process of ending up in the upper crust. The petty bourgeois way to wealth does not mean, though, that political capital is not appreciated. Among the early Chinese dollar billionaires (who had already become wealthy by the mid-late 1990s) one finds many more coming from humble backgrounds, starting as rice farmers, or bricklayers and making it to the top of the wealth ladder. A few such characters could also be found in Russia or in Eastern Europe. During the last 15 years, this seems to have changed. Now we find many more families of high ranking officials who own billions (e.g., Wen’s, Hu’s, Xi’s, Bo’s and Zhou’s families) who are extremely wealthy and can be seen to benefit from ‘political capitalism’. During the past decade, though, and especially in the information technology business there are still many young ‘bottom-up’ capitalists. These new IT billionaires, unlike the Liu brothers or Yang Kwok Keung, are however, usually highly educated, and their success stories are guided by their Western connections (they tended to be educated in the US, or to have had jobs in the US).

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5.4.1 Early Political Capitalism in China? When we looked at the list of the wealthiest Chinese in 2000, it appeared that nine of them looked very much like the Liu brothers or the Yang dynasty. There is one clear exception, which was at one point of time ranked by Forbes as No. 1: and that is RONG Zhijian (Example 8). Example 8: Rong Zhijian RONG Zhijian (b. 1942) came from a distinguished Chinese family. His father RONG Yiren (1916–2005) was the Vice President of the prc, so he was not merely a member of the nomenklatura, at the top of his career; he was a member of the system’s narrowest elite. But RONG Yiren was a most unusual Chinese communist cadre. He was born in Wuxi, Jiangsu (near Shanghai) into one of the wealthiest Chinese families. His father, RONG Zhijian’s grandfather, was among the 10 wealthiest businessmen by the end of the Qing dynasty, owning a flour and cotton milling business. RONG Yiren studied at St. John’s University in Shanghai, a prestigious Christianrun college at that time and took over the family business in 1948. RONG Yiren was allowed to keep the family business until 1956 when all private businesses were nationalised, but he received 6 million dollars in compensation and was appointed to the positions of Vice Mayor of Shanghai and also became an Economic Advisor for the Communist Party. He was actually known as a ‘red capitalist’ because his family were one of the few pre1949 industrialists who were well-treated by the Communist Party for their cooperation with the prc. He had even been a ‘secret’ cpc member since 1985, but that was only revealed after his death. He had difficult times during the Cultural Revolution (1966–1976), being exiled to Liangshan, Sichuan in 1966 due to his capitalist background. Nevertheless, after the Cultural Revolution, RONG Yiren became associated with DENG Xiaoping, and was appointed as an advisor for the economic opening up of China to western investments. He set up China International Trust and Investment Corporation (citic) in 1979. During his term as China’s Vice President (1993–1998), he was heavily involved with the opening of the Chinese economy to western investment. He stepped down in 1998, to be succeeded by HU Jintao. RONG Zhijian’s life got off to a rockier start. He went to Nanyang Model High School in 1959 and studied Electronic Engineering at Tianjin University. But during the Cultural Revolution, he was exiled to the hydraulic power plants in Jilin. He was allowed to return to Beijing as early as 1972

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and to move to Hong Kong in 1978. The family probably managed to salvage some of the compensation they got for their business and take it to Hong Kong. He made his first major business deal and earned 72,000,000 dollars when he sold his stocks in an electronics company started by his cousin. In 1986, he joined his father’s firm citic and acted as citic Hong Kong’s Vice President. In 1987, he borrowed 800 million Hong Kong dollars from the prc to buy Cathay Pacific. By 1990, he had acquired Cathay Pacific (12.5%), Dragonair (46.2%), the Hong Kong Eastern Harbor Crossing (23.5%), Hong Kong Electricity (20%) and real estate, and also telecommunications by 1990s. With the help of a Hong Kong tycoon, RONG bought Hengchang, a firm controlling 40% of the Hong Kong car retail market. In 2009, he had to resign from citic. Ha was accused of being involved in currency speculation which had gone wrong. He did indeed lose substantial funds during the global financial crisis. He was investigated by HK Police (Commercial Crimes) and the sfc (Securities and Futures Commission). He no longer appears in the lists of top Chinese billionaires, but he is supposed to be living the luxurious life of a billionaire in China. Though a most unusual one, Rong Zhijian’s rise and fall can be interpreted as a case of political capitalism. His father was not the average communist high cadre. Deng needed him to legitimate his reforms, Rong allowed him to show off with a ‘good capitalist’. But his father’s political connections benefited him in more ways than one. He was allowed to return to Beijing early and to move to Hong Kong just as Deng Xiaoping’s regime began. He had rich family connections and probably some funds saved from the compensation his father had received from the communist regime, so he had an easy start in business. He also joined the company his father was running, and money from cpr was also instrumental in making him wealthy. In 2009, he was only caught – if he had committed any crime – because, with the passing of his father, he had lost his political connections in Beijing. He had no more ‘protectors’, but still enjoyed personal wealth.

Chapter 6

Consolidation and Partial Re-convergence of Post-communist Pathways? 1

Eastern European Liberal Democracies: Successes and Crises, 2000–2010

The second decade of liberal transformation was, on the whole, a success story: the picture is of basically uninterrupted and rather impressive growth up until the international financial crisis (2008–9), which hit the region rather hard. The only exception is Poland, the sole country not only in the post-communist region but also in the whole of the EU to sustain positive growth in each of the first 10 years of the 21st century. This rather over-optimistic statement needs to be tempered by at least one qualification. During the first years of the second decade – well before the financial crisis hit – economic growth moderated. The reduction of sovereign debt that had been noticeable previously was, at least in some countries, reversed. The Czech Republic, Poland and Hungary began to struggle with their ‘welfare problem’. The regimes were under pressure to implement austerity measures and cut back welfare-related expenditures. This was met with political resistance, political mobilisation, such as strikes and increasing votes for radical right-wing populist parties. During the first half of the second decade of the 21st century, the Eastern European countries constituted two different ‘camps’. One of these comprised countries which had stronger civil societies and better social safety nets: the Czech Republic, Hungary and Poland. These countries began to struggle under pressures to implement austerity measures and cut-backs in welfare provisions. Their growth slowed and their sovereign debt started to climb again as a result. They were sliding into the ‘second transitional crisis’. While the first transitional crisis was the result of adjustment of the economy to market imperatives, the second emerged as a result of the need to invent a welfare regime consistent with the logic of a market economy. In the second camp were the other Eastern European countries, such as Bulgaria and Romania, where either civil society was too weak to come up with a serious challenge against austerity and/or the welfare provisions of the socialist epoch so poor that they were not worth defending.

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This ‘second transitional crisis’ was actually forceful enough only in Hungary, which had a rather strong civil society and arguably the most to lose as far as existing welfare provisions were concerned. As a result, there was an especially determined opposition to any cutbacks in entitlements. This led to a recession even before the financial crisis hit, and resulted in a steady growth of sovereign debt. The Poles – and to some extent the Czechs – managed to dig themselves out from the downward spiral that characterised the early years of this second transition. They achieved better growth rates and limited their budget deficits. The Bulgarians, Romanians and Slovaks were having a ball until the Global Crisis came. As capital was turning away from the Czech, Hungarian and Polish economies, which had become far too expensive, the countries from the second camp were gobbling it up. They managed to implement cutbacks and kept budget deficits and sovereign debt under control. The crisis hit almost all liberal regimes hard (as mentioned before, only Poland managed to remain in positive territories even in 2009). Though Romania and Hungary fared the worst, the other Eastern European countries experienced a drop in gdp output and an increase in unemployment similar to the rest of the EU or the advanced economies of the world. By 2010–11, recovery was generally underway, but it was not long before the region was hit again, this time by the euro-crisis, which slowed growth to below 3 per cent. As early as 2012, Hungary was in recession again and the Czech Republic was stagnating. The cross-national comparison has two important implications: a. Bulgaria and Romania were late bloomers. They experienced a sharper downturn than the rest of the region during the first decade and their recovery also started later. Nevertheless, during the second decade of the transition they did catch up at least until the 2008 US financial meltdown and the euro-crisis. b. Hungary was the worst performer in all indicators during the second decade. We could call the first 10 years of the 21st century a ‘lost decade’ for Hungary; it was not only lagging behind other liberal countries in economic dynamism, it also had the most severe fiscal problems, by far the largest sovereign debt and the highest unemployment (above 10 per cent between 2008–2013). Hungary and Slovenia looked like the only liberal countries suffering a double-dip recession in response to the euro crisis. Slovenia did exceptionally well during the first years of the second decade, but it too was struck by the international financial crisis. And while its sovereign debt was just half of Hungary’s, this debt level shot up as the euro-crisis unfolded. Slovenia in 2009–12 was the country that bore the closest resemblance to Hungary.

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The fact that Bulgaria and Romania were able to catch up may not be as puzzling as it first appears. When we were discussing the drawn-out Bulgarian recession with our distinguished Bulgarian colleague, Petar Mitev in 2000, he remarked insightfully: ‘Just wait a little longer. Once Germany has bought up the Czech Republic, Slovakia, Hungary and Poland they will buy up Romania and Bulgaria’. There was certainly a kernel of truth in this comment. The Bulgarians and Romanians joined the EU and that arguably boosted their economies during most of the second decade. Let us add here a word of caution: too-rapid integration with the EU and increasing dependence on foreign capital may be the very reasons why these countries proved to be, next to Hungary, the most vulnerable to the Global Fiscal Crisis and the euro-crisis. Furthermore, during the first decade of the transformation, both Bulgaria and Romania had been hesitating between the patrimonial and liberal trajectories, while during the first decade of the 21st century they were striving to join the EU and had to adjust their legal and political system to meet EU admission criteria. 1.1 Hungary’s Lost Decade What is a more complicated puzzle is why Hungary became the exception. How did Hungary turn into the laggard during the second decade when during the first one only Poland had performed better? By most indicators, Hungary was ahead, not only of Bulgaria and Romania, but also the Czech Republic and it was breaking even with Slovakia. What happened between 1999–2010? Why is Hungary shifting to the southern periphery of the EU and could it be next in line for sovereign bankruptcy after Greece (or Spain)? Political parties pointed the finger at each other, the right-wing government which came to power in 2010 blaming its socialist-liberal predecessor for eight years of mismanagement and excessive growth of sovereign debts,1 while the socialist-liberal opposition blamed the right-wingers for starting to ‘overspend’ before the 2002 electoral campaign and for not building on fiscal consolidation achieved during the last year of the socialist-liberal government in 2009. Government policies matter. The miserable performance of the Hungarian economy before the onset of the financial crisis in 2008, could be explained at least in part by policy mistakes made by the socialist-liberal government. During those years, gdp stagnated in Hungary (growing by only 1.3 and 0.6 per cent), while the growth rate in the rest of the region for both years was between 6 and 10 per cent. However, while the socialist government must take some responsibility for a slow decade and for those two miserable years, the centre-right 1 In 2002, the Socialist Party formed a coalition government with the Liberal Party (szdsz); in 2010, the centre-right fidesz won a two-thirds majority in Parliament.

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g­ overnment which took power in 2010 cannot be particularly proud of its record: the country’s weak recovery from the Global Fiscal Crisis and its response to the euro crisis, which was the worst in the whole post-communist world. The other post-communist liberal countries in the region merely slowed down – the Czech Republic teetering on the edge of recession – and, as we will see, patrimonial regimes were not affected at all. At least up until mid-2014, that is, when Russia again found itself in a recession as a result of drop in oil prices, its adventure in Eastern Ukraine and progressively restricting sanctions imposed by the US and the EU. It may be necessary, therefore, to look deeper than policy errors committed by governments. The only question is how ‘deep’ we want to look. János Ladányi (2012, 2015) offers an interesting longue durée explanation for the unexpected failure of Hungary. While it is usually assumed that the reforms under the Kádár regime were an advantage for the transition epoch, Ladányi takes the opposite view. The Kádár reforms were dead-end streets. They only created what one would call a ‘homo Kadariensis’, who was even less capable of adapting to the market conditions (having been socialist in the second economy in agriculture and other sectors of the economy). This is an intriguing idea. However: a. It does not fit the data from the first decade of the transition well. In this period Hungary benefitted from earlier reforms, Poland even more so, while an absence of reforms punished Bulgaria and Romania (and to some extent the Czech Republic); b. Even the Socialist Party (mszp) rejected the legacy of Kádár; the centreright party (fidesz), which formed the government for the second time in 2010, seemed to identify politically with the pre-communist Horthy regime and implemented social and economic policies, which are arguably reminiscent of the inter-war years. Can these political forces be ‘objectively’ Kádárist, even though ‘subjectively’ they reject the Kádár regime as ‘dictatorship’? We do not find this persuasive. We concede, nevertheless, that while Hungary might ironically have benefitted from the Kádárist reforms during the first decade of the transformation, these advantages – namely the open doors to fdi, relatively reasonably social ­benefits and living standards – backfired during the second decade of postcommunism. If we reject the Ladányi-hypothesis, what could be the possible reasons for Hungary’s abysmal performance after 2006? a. The meagre labour force participation rate (arguably, jobs were eliminated due to the Hungarian privatisation practice and heavy dependency on fdi – see eeag 2012: 120);

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Strong disappointment and even harsher political resistance against attacks on welfare provisions, which fuelled budget deficit and sovereign debt. Living standards were somewhat better in the ‘merriest barrack’; thus it was that, when, after liberalization and privatisation, the government turned its fire on the ‘welfare system’, people had more to lose. Their resistance to austerity would therefore be even greater than in the neighbouring countries; c. Greater dependence on foreign trade and high levels of foreign currency loans (Hungary was initially more attractive to fdi since it had a long history of reforms), which made Hungary more vulnerable to the financial crisis and the euro-crisis than most neo-liberal countries (see eeag 2012: 115 and 125). Let us conclude with a slight digression. Hungary found itself in a debt-trap by the end of the first decade of the 21st century. Its sovereign debt had reached 80% of gdp. While this was about the EU average and was better than the sovereign debt of Southern European countries, poor labour force participation, low productivity and poor prospects for economic growth meant that even this level of debt would be capable of bringing Hungary close to the danger of sovereign default. In 2002, the Socialist Party won the elections by campaigning for a ‘regime change for well-being’ (in Hungarian: jóléti rendszerváltás). Those who believed that socialism was a ‘prematurely-born welfare state’ (© J. Kornai) which needed to be reduced, and who advocated austerity blamed this program for the unfolding debt crisis. One of us (Iván Szelényi) disagrees. After 13 years of declining living standards, Hungarian society was ready for more attention to ‘well-being’ and aggressive state policies to generate jobs. And it was sensible to borrow during the early years of the 21st century when credit was readily available and interest rates were low. The socialist governments between 2002 and 2010 made serious errors, not because they wanted to improve well-being, but because they went about it the wrong way. The resources they borrowed were foolishly spent on increasing the real income of civil servants and pensioners (i.e., it was spent on buying votes) rather than on job creation. While the economy was still growing until 2006, it was not growing as fast as it could have done, and worst of all, this was growth without jobs. If Hungary’s rate of labour force participation and productivity had been comparable to the core EU countries, the 80% sovereign debt would not have been a major reason for Hungary being the worst performer during the early years of the third decade of post-communist transition. The cure for the Hungarian disease, therefore (and the key for sustained economic growth in neo-liberal postcommunist economies) is a simple one: not more austerity, not cuts in welfare benefits but jobs, jobs, jobs.

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Bálint Magyar, one of the leading Hungarian post-communist liberal politicians expressed his frustration with post-communist politics in the introduction to his 2014-edited book, The Hungarian Octopus, Volume 2. He stated: “After the fall of the Soviet Empire many of us shared the illusion that communist dictatorships – at least in Europe – could only be succeeded by Western-style liberal democracies” (p. 7). Many liberal democrats2 in the former socialist countries of Eastern Europe shared this sentiment. Indeed, in 1989–91, liberal democracy and market capitalism were the legitimating ideologies of the new political elites in most of the former socialist countries of Europe. During the first year of Boris Yeltsin’s presidency it appeared that even Russia might be heading toward liberalism.3 Yegor Gaidar, who was Acting Prime Minister of the Russian Federation for the second half of 1992, was widely recognised as a liberal and he was an advocate of shock therapy, a major liberal economic policy tool. Some basic institutions of liberal democracy and market capitalism were indeed in the making in Eastern Europe and even in Russia. A multi-party political system was established. Reasonably free and fair elections were held. The media was substantially free. The emergent new societies were governed by the rule of law. The executive branch (be it parliamentary or presidential) had to deal with freely elected legislatures. Constitutional courts checked whether the laws passed by the legislature were in accordance with the constitution (even in Russia a powerful constitutional court operated between 1991 and 1993). It looked like the three branches of government (the executive, the legislative and the judiciary) were rather autonomous, and some system of checks and balances were operating. At the same time, the institutions of market capitalism were also evolving. Private ownership was sacrosanct, and attempts were made to pass legislation regulating the orderly conversion of ­public property into private wealth. Basic institutions of the free market economy (bankruptcy laws, a central bank enjoying relative autonomy from the 2 In this chapter, we use the term ‘democracy’ in a narrower definition of the concept. Some authors use the term to write about liberal democracy (the rule of law, separation of powers, security of property and majoritarian rule), others merely define democracy as a system in which leaders are elected by majoritarian rule. We do not cast our vote one way or another in this complex theoretical debate, but we use the term here in the second, narrower sense of the term. 3 Some East European countries did not experiment with liberal democracy at all. Tudjman’s Croatia or Milošević’s Serbia, Bulgaria or Romania in the early 1990s were far from any conception of liberal democracy or even free market capitalism. As Ken Jowitt, a Romanian expert at UC Berkeley, pointed out (1996) it was not quite clear which direction post-­communist societies would take: would they become ‘civic’, or ‘ethnic’. (Jowitt predicted the ethnic turn would be more likely. Unfortunately, almost 20 years later we have to concede: he was making a good point, one valid not only for Romania.)

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l­egislature and the executive, the free flow of labour and capital) were also implemented. A quarter of a century after Die Wende (or regime change), as the above citation from Bálint Magyar indicates, the road to liberal democracy and market capitalism turned out to be rockier than expected. By the middle of the second decade of the 21st century, one began to wonder if the previously widely accepted doctrine of ‘democratic teleology’ (Carothers 2002; Trencsényi 2014) was valid at all. ‘Transitology’ and the ‘third wave of democratisation theory’ acknowledged that consolidation of democracy might take a long time, but it uusually assumed that deviations in the early stages of transition from models of liberal democracy were only temporary. At one point or another, all societies would eventually arrive at the final destination: liberal democracy. Francis Fukuyama, who once announced the ‘end of history’,4 shared Bálint Magyar’s anxieties. Fukuyama, in his recent book, Political Order and Political Decay (2014; see also Berman 2014) not only acknowledged that some countries in transit have not proceeded to democracy; he also showed that some even made U-turns and reverted to autocracy. Fukuyama successfully demonstrated that democratic institutions do not only evolve. They can also decay, even in consolidated democracies (hence the title of Berman’s review of this book in The New York Times: ‘Global Warning’). 1.2 Three Crises, But Not Every Country Was Hit In this chapter, our aim is not as grandiose as Fukuyama’s. We try to understand the nature of the political economies of post-communist countries, which, having embarked on the road to liberal capitalism, now appear to be diverging from liberalism. Though we pay particular attention to Russia and Hungary, the phenomenon may take place in several other countries as well. Indeed, in post-communist Eastern Europe, the drift away from the road leading to liberal democracy occurred at different points in time, and the degree of deviations varied. Furthermore, the institutions affected in the changes differ from country to country. We also need to note that moving from one system to another is indeed not a one-way street; countries often shift back and forth between trajectories. During the early 21st century, the liberal transitional countries faced the ­second crisis of transition (the first crisis having manifested itself in a sharp fall in output). Financial cutbacks to, and structural reforms of welfare provisions  were met with political resistance. Austerity measures slowed growth, 4 His book, The End of History was published only in 1992, but he had already presented the same ideas in an article in 1989.

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i­ncreasing the national debt and budget deficits. While these countries were still struggling with the second transitional crisis, they were hit by the international financial crisis. This crisis hit the region particularly hard since it had become particularly dependent on international capital. Finally, as the world was digging itself out of the global financial crisis, the former socialist countries of Europe became exposed to the plight of the European periphery; the euro-crisis. In contrast, Russia started the second decade of transition very successfully. Until the global crisis hit, Russia was not only recovering from the transitional depression but was achieving high rates of economic growth. Patrimonial capitalism, which had looked like a disaster during the 1990s, was successfully converted into a new system which we will call ‘prebendal post-communism’. China was continuing its fast progress, the brics (Brazil, Russia, India, China and South Africa) were beginning to play an impressive role in the world economy and world politics, two out of the five ‘success stories’ being former communist countries which did not follow the liberal trajectory. Was liberalism the wrong path to follow for countries coming out of communism? Did Putin offer a better alternative? Is Putinism a sustainable strategy of growth? Are China and at least some Eastern European countries following Putinism? These are the major questions we are posing in this chapter. 2

The New Legitimacy and a New Political Economy: Illiberal Managed Democracy and Prebendalism

2.1 The Political System under Post-communism Much like Montesquieu (1748: 157), John Stuart Mill (1859: 72–73) or recently Zakaria (1997: 24–25), we make a critical – and controversial – distinction between democracy and liberalism. We define liberalism as the political system in which various branches of power (the executive, legislative and judiciary and arguably in our time a fourth branch, the media) are separated from each other, and in which private/individual freedom and property are sacrosanct. On July 26 2014, in the Romanian resort Bâile Tuşnad (Tusnádfürdő), Orbán (2014) the Hungarian Prime Minister called the political system he is dedicated to the construction of – in our terminology quite accurately – an ‘illiberal democracy’. He used the term ‘illiberal’ in a somewhat different way from the way we use it. For Orbán, ‘liberalism’ means the excessive emphasis of individual interest over the ‘national; interest. One can interpret ‘national interest’ as ‘public interest’. (We will explain the potential difference between ‘national’ and ‘public’ interest later). George Schöpflin (2014) also criticises what he calls

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the ‘liberal consensus’ for ignoring ‘collective identities’ (of these ‘national’ identity appears to be the most critical for him) and advocates ‘illiberalism’. Viktor Orbán is quite right: how much emphasis we put on individual liberty and national (public) interest is a crucial question of good governance. Some liberals do indeed tend to believe that public interest is merely an aggregation of individual interests. Adam Smith was an advocate of this view. Indeed, in The Wealth of Nations, he wrote: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but their regard of their own interest”… (Smith 1776: 15). This seems to be what Orbán sees as ‘liberalism’. However, what is ‘self-interest’? In classical liberal theory (and in the practices of the most liberal political regimes of our times) it is in no way opposed to public interest, as Orbán’s speech seems to imply. In his Theory of Moral Sentiments, Smith was very clear that self-interest was not opposed to public interest: “No matter how selfish you think man is, it is obvious that there are some principles in his nature that give him an interest in the welfare of others, and make their happiness necessary to him” (Smith 1759: §1). According to Smith, it is in my own interest to keep my ‘moral alter ego’ at peace. If I am making others happy, my ‘moral alter ego’ will approve. My aim will be, therefore, to pursue self-interest in a way that does not make others unhappy, and, in so doing, does not offend my ‘moral alter ego’. Of course, Smith’s ‘sympathetic theory of human nature’ certainly includes the concept of the interest of all ‘others’ we interact with (‘citizens’ or even more broadly ‘human beings’, homo sapiens) irrespective of their ethno-racial and cultural identity. This is the way the term ‘liberalism’ is used in the United States or in Scandinavia. In this political culture, liberals serve the collective good, fight for universal healthcare and against ethno-racial discrimination, defend the human rights of refugees, and are open to migration transforming their countries into multicultural societies. Reference to the national interest is of a different order. National interest does not stem from interacting individuals, but from the ‘imagined community of the nation’, to take a term from Benedict Anderson’s (1983) theory of the ­nation. The ‘nation’ is conceived in ethno-racial and cultural terms: people with a different skin-colour and culture are ‘strangers’ and dangerous. As ­Donald Trump put it, they are ‘murderers and rapists’. The ‘alt-right’ wants to ‘make America great again’ by restoring its white ethnic and cultural homogeneity. It is possible to argue therefore, that for Trump, Putin, Kaczyński, Le Pen, Salvini or Orbán their emphasis on national interest when conceiving the ‘collective’ is similar to that of the ‘alt-right’, i.e., ethnically, religiously and culturally homogeneous ‘nations’. All of these politicians see that as requiring a very

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strong executive – and in the last instance very strong leaders – who will defend the ‘nations’ from the ‘strangers’. Let us return to Montesquieu and Mill. The problem of the post-2010 Hungarian regime (or Putin’s post-2000 politics) is not so much that it violates the rules of majoritarian (democratic) politics. United Russia and fidesz did manipulate electoral rules, and United Russia might have even cheated during the 2011 or 2014 elections, but the unique feature of these regimes is that they exercise power in an illiberal, non-moderate manner, giving as much uncontrolled power as possible to the executive in order to be able to defend the ‘national interest’.5 We believe democracies can, to some extent, be illiberal. There are also autocracies, constitutional monarchies that are liberal. Arguably even the Hobbesian ‘good monarch’, that is, an absolute monarch can act in liberal ways. For instance, the rule of Crown Prince Mohammed bin Zayed al Nahyan, the absolute ruler of Abu Dhabi is quite ‘moderate’. Zakaria (1997) offered the ­Austro-Hungarian Monarchy as an example (p. 29) of a liberal autocracy, a constitutional monarchy. We see democracy and liberalism therefore as two distinct dimensions of ‘good governance’. John Stuart Mill also believed that separation of powers, or liberalism, and the guarantee of individual liberties are more important for good governance than majoritarian approval of the person in authority. Mill was greatly concerned about the ‘tyranny by the majority’. ‘Popular governments’ can be elected by the majority and therefore claim to express the ‘will of the people’. But if the ‘most numerous, or the most active part of the people’ forces ‘its opinion’ on the rest of society, ‘society itself’ becomes the ‘tyrant’ over individuals, ‘enslaving the soul itself’. This leads to a situation in which liberal principles do not bind a democratically elected leader to the separation of powers (Mill 1859: 61–63, 72–73). By the late 20th and early 21st centuries, however, there was a consensus in the North-Atlantic region: the ‘best government’ is liberal and democratic, a combination of the two dimensions of ‘good governance’. Since the essence of liberalism is to defend all others we interact with, not only those who are ‘like us’, liberalism always implies a defence of ethnic minorities, or, for instance, people with a sexual orientation different from ours. We start this definition of democracy with one from Samuel Huntington,  whose ‘minimalist definition’ accommodates both liberal and illiberal 5 The critical question is whether an opposition party which at least in principle can rotate governmental power exists or not. In a parliamentary system where a ruling party has a twothirds majority, the crucial separation of the executive and legislative branches becomes a fiction. If such a supermajority manipulates electoral rules so that the ruling party keeps winning elections, the system is on the verge of becoming undemocratic, or autocratic.

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­ ractices: “Elections, open, free and fair, are the essence of democracy, the inp escapable sine qua non. Governments produced by elections may be inefficient, corrupt, short-sighted, irresponsible, dominated by special interests, and incapable of adopting policies demanded by the public good. These qualities make such governments undesirable, but they do make them undemocratic. Democracy is one public virtue, not the only one, and the relation of democracy to other public virtues and vices can only be understood if democracy is clearly distinguished from other characteristics of political system” (Huntington 1991: 9; cited by Zakaria 1997: 25). In agreement with Huntington and Zakaria, we use the term democracy to refer to ‘majoritarian’ legitimation of domination, to selection of leaders by the votes of the majority. It is a complex issue with many minuscule details. Whose majority? What are the rules which will guarantee “open, free and fair” elections? In the late 18th century, the United States was the ideal type of liberal democracy, even though women and blacks did not have the right to vote. There were severe restrictions even on white men’s electoral rights that made the power to vote conditional on property ownership or the ability to pay taxes.6 There are, there never have been and most likely, there never will be elections which are completely “open, free and fair”. Although democracies are generally becoming more inclusive, there are still major fluctuations in terms of fairness and openness of elections, both in positive and negative directions. At some point in the future, some electoral rules may become so restrictive that one will begin to wonder whether the system is still ‘democratic’. Besides, the notion of democracy is relative. In the world today, the liberal form of democracy is hegemonic. Thus it is that Putin’s and Orbán’s illiberal democracies are questioned – with good reason – as to whether they are democratic at all. At time of finalising the present book, it seems that Romania has been also shifting into this direction.7 We describe the features of the emergent illiberal post-communist systems in political terms. Other authors often refer to them as ‘autocracies’ (for a 6 Around 1790, when arguably the most liberal constitution in the history of humankind was introduced, 60–70 per cent of white men had voting rights in the newly formed usa. No women, no non-whites and no people without any property, or at least no people who did not pay taxes were permitted to vote. 7 After Poland and Hungary, in May 2019, the European Commission warned also Romania (currently governed by a social democratic prime minister!) that it will ‘trigger the rule of law framework without delay’ over ‘major concerns’ about the state of rule of law, according to a letter sent by Frans Timmermans, the Commission first vice president to the heads of state, government, and both chambers of the Romanian parliament. The Article 7 procedure ­provides for the most serious political sanction Brussels can impose on a member country – the suspension of the right to vote on EU decisions.

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r­ecent sophisticated formulation see Kornai 2014), ‘electoral autocracies’ (Shevtsova 2000), ‘managed democracies’ (Anderson 2007) and ‘illiberal democracies’ (Zakaria 1997; Gati 2013; Ladányi and Szelényi 20148). Some analysts are at pains to distinguish these systems economically from free-market ­capitalism. They use the terms ‘political capitalism’ (Staniszkis 1990), ‘state capitalism’ (Wooldridge 2012) and ‘crony capitalism’ (Sharafutdinova 2011). Yet others describe these systems as some sort of ‘neo-patrimonialism’ or ‘neo-­ prebendalism’ (King and Szelényi 2005).9 The most recent formulation of this concept – applied explicitly to Hungary – calls the second and third Orbán governments ‘mafia states’ (Magyar 2013, 2014).10 His widely popular theory of the mafia state sees the recent Hungarian post-communist state, not as an organised ‘underworld’, but rather as an organised ‘upper world’. In such a system, the prime minister acts as a Godfather, (capofamiglia, the Don) and uses public authority to pursue his own economic interests and the economic interests of his real and ‘adopted’ families (all composed of loyal followers) in an unpredictable (un-orthodox), illegitimate and un-ideological way (2014: 10 and 14). Since it first came out, Magyar’s heavily researched book on the mafia state has been translated from Hungarian into English, Russian, Polish and Bulgarian. This fact alone shows that the mafiastate concept has a uniquely broad appeal in the post-communist academic world – irrespective of our personal opinions about the inherent weaknesses of the entire idea. Less known is the literature about the ideology of the emerging post-­ communist systems. We call it post-communist neo-conservatism.11 We will ­elaborate what that ideology is and why it seems to have substantial popular support in the last section of this chapter. We aim to propose a genealogy of what we call post-communist managed illiberal democracy where property relations shift from private property and market capitalism to patrimonial and 8 9

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In that paper, we wrote about ‘managed illiberal democracy’, combining Gati and Anderson. In the present chapter, we do not aim at a comprehensive review of the relevant literature, which is far too extensive for a short summary. We only pick some examples from the literature to illustrate the diverse ways post-communist deviations from liberal democracy have been conceptualised. See also Moises Naim (2012) for an earlier and broader definition of mafia state. Naim refers to Russia and Bulgaria, but also countries in Latin America and elsewhere in the world. Nonetheless, the credit must go to Magyar, since we know that he had presented his mafia concept in interviews and shorter writings in the Hungarian – language press as early as 2001. The term neo-conservatism was coined in the US in the 1960. Its meaning has changed over the past half-century and is still contested; see for instance Hunter (2011). Zoltán Gábor Szűcs (2012) used the term for Hungary.

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eventually prebendal property relations.12 Rather than dismissing the emergent system as illegitimate13 we want to understand the mechanisms of how the system legitimates itself, and therefore what the ideology of the system is (what we call ‘post-communist neo-conservatism’). We have three sets of ‘variables’: economic institutions, political organisation and ideologies. These variables or dimensions interact with each other. As Weber put it: we want to explore the elective affinities14 between political systems, economic institutions and ideologies. Most attempts to explain the nature of post-communist systems focus on just one of these dimensions. We, on the other hand, will try to explore how they interact. 2.2 Putin’s Revolution: A Turn towards Prebendalism As Putin came to power in 1999 as Prime Minister and in 2000 as president, he was rather uncomfortable with the excessive power of the ‘boyars’ or ‘oligarchs’. While the oligarchs supported him, they did not know who it was they were supporting. They expected another Yeltsin, and they anticipated that money would stay in power. The dominant oligarch of the Yeltsin years, Boris Berezovsky, very soon learned otherwise, and learned it the hard way – as we have shown already in Chapter 5. Berezovsky owned one of the most popular television channels. According to one anecdote (who can tell whether it is true or not – it is a case of so-and-so told so-and-so) once Putin was elected president, he asked Berezovsky – one of his strong supporters – to visit him in his office. He told Berezovsky who the ceo of TV6 should be. “But Mr. President”, ­Berezovsky responded, “this is a capitalist society, the owner appoints the ceo…” “Well, you wanted me to be president; you got me”, responded Putin. Berezovsky got the message – unlike Khodorkovsky – so he boarded a plane and went to London. 12

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In this chapter, and indeed throughout the entire book, we use the terms ‘patrimonial’ and ‘prebendal’in the Weberian sense of the terms. Under ‘patrimonial’ authority, property holders receive their property at the grace of their master (fief), but their property rights are usually secure and their property can be inherited. Under prebendal authority, property (benefice) is given to the followers for their services, but rulers can revoke this property at any time (Weber 1978: 235). Following Max Weber, we regard all domination as legitimate as long as those subordinated to authority obey orders without being coerced to do so. Illegitimate power and involuntary compliance is only a ‘limiting case’ (Weber 1978: 212–215). Hence we are reluctant to call any political system from Putin’s Russia to Orbán’s Hungary (or for that matter Kádár’s Hungary or DENG Xiao Ping’s China) which attracts, or attracted a great deal of ‘voluntary compliance’ and even some degree of ‘belief’ in the system ‘illegitimate’. Weber did not believe in the possibility of causal explanation in the study of social life. The relationship between economic interests and ideologies can be best understood as ‘elective affinities’ (Wahlverwantdschaften, see Gerth and Mills 1946: 62 and 284).

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There are two points we would like to raise at this time: The oligarchs were becoming too powerful. Putin wanted to put them on a leash and persuade them to keep out of politics. b. All the commons were already ‘enclosed’. The only way one could recruit new followers was to redistribute the wealth that had been already allocated to the first round of oligarchs. Putin was ready to face both challenges. He was ready to submit the first round of oligarchs to a loyalty test and to dismiss them if they did not pass. He was also ready to redistribute the fortunes confiscated from the disloyal oligarchs to a new set of owners. The political genius of Putin was to convert patrimonial property relations to prebendal ones. Under Putinism, only those who served the political boss well could keep their property. He converted the ‘boyars’ into ‘Pomeshchiki’ or ‘serving nobility’. His mission was to complete the transformation started by Ivan the Terrible and Peter the Great: to create an obedient class of property holders, make property rights much less secure and much more dependent on political authority. This was the first, fatal step toward illiberalism. We may also call this the ‘original sin’. Putin did, however, face major constraints in accomplishing what he had set out to do. He was hobbled by ‘democracy’. He tried to combine the election of political leaders, a democratic procedure, with illiberal practices. Given the worldwide hegemony of liberal democracy in 1991, there were limits on how far Putin could backpedal. While he could place severe restrictions on liberalism (such as a stronger executive and weakened legislature and judiciary), he still needed the majority approval of his leadership. He needed regularly held, reasonably free and – apparently, at least – fair elections to legitimate his rule as prime minister or president. Putin did stay fairly close to ‘democracy’ or ‘republican rule’ as defined by Montesquieu or Huntington, though he tried to ‘manage’ the process as much as possible. We should acknowledge that democratic processes are ‘managed’ in all ‘­actually – existing democracies’. In the United States, for instance, if one of the parties gains a large enough electoral majority, it will often change the boundaries of electoral districts. The criteria governing when one is permitted to cast a vote, is repeatedly renegotiated. Can an ex-convict vote? If not, that is a restriction of the Democratic black vote (Manza and Unger 2006). Do people have to identify themselves when registering or actually voting with their driver’s license (clearly a disadvantage for black/Democratic voters)? Putin ‘­manage’ the system not only by such technical procedures. Since the political system is not consolidated, he ‘manufactured’ his own opposition by keeping ‘opposition’ parties like the communist party formally in existence (Anderson  2007). In Hungary, Zoltán Ripp made a similar argument about the ­incorporation of political opposition into the fidesz system (Ripp 2014: 97) a.

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the aim being to make sure the system looks like a genuine ‘multi-party system’. The main point is this: given the ‘democratic constraints’ on his rule and the iron laws of capitalism and market economy, Putin needed a bourgeoisie who would support him unconditionally. As long as the claim to or ‘pretence’ of democratic/majoritarian legitimacy is so important, ‘illiberal democracies’ need further elaboration. Due to constraints of space, it should be sufficient to note here that in the ‘third wave of democratisation’, it is hard or impossible to achieve an international reputation without holding regular and apparently free elections. There are various technologies at the disposal of political authority which could help it achieve the aim of redistributing the wealth acquired in the first stage of accumulation of capital: – the selective criminalisation of (real or potential) opponents, – the “transit nationalisation” of firms, and – exploiting the possibilities of the rentier state. There are some other technologies of power, such as giving profitable business concessions to a network of loyal followers (such as offering monopolistic rights to the sale of tobacco or alcohol to certain merchants); and imposing extraordinary taxes (such as taxes on banks or advertisements, or internet ­users) – often retroactively, hence contradicting the basic principles of liberal legislation, etc. However, focusing on these two should be sufficient for the time being. Early in his rule, Putin launched an anti-corruption campaign (a noble cause indeed). However, this anti-corruption campaign turned very soon into a campaign against political opponents. This happened in China too, with for instance the campaign against Bo Xilai. His imprisonment was politically motivated, but it was justified by ‘economic corruption’. Bo Xilai received a ‘present’ of $3.5 million from a businessperson and is now serving a long jail term for this, while the former Prime Minister Wen Jiabao,15 whose family supposedly accumulated $2.7 billion during his premiership (Barboza 2012), has never been investigated or prosecuted. This is what we mean by selective criminalisation. Authorities use criminalisation against oligarchs who have grown too big and are beginning to harbour their own political ambitions. Commentators on Russian politics saw this more as a change in the nature of corruption­­rather than a real attempt to eliminate corruption. According to Perry Anderson 15

The 6th Prime Minister of the People’s Republic of China, WEN Jiabao was in office b­ etween 2003 and 2013.

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(2007), corruption became the essence of the system. Those who renounced their own political ambitions and swore loyalty to the new ‘tsar’ could go on. (Even people like Abramovich (Example 9) and Deripaska (Example 10), who had been in Yeltsin’s ‘family’ for long, faced neither emigration nor jail.) Bálint Magyar’s mafia-state theory makes a similar point. He does not deny that corruption had existed in previous post-communist regimes, but he claims that under the Orbán regime after 2010 corruption became government policy, the essence of the system. Undoubtedly, all oligarchs have ‘skeletons’ in their closets. Many nouveau riche cheated on taxes. They paid high officials for their ‘help’, and even if they did not break laws, it is certain that they at least manipulated them. The authorities can criminalise anybody. However, criminalisation is a system or ‘technology of governance’ (as Foucault put it). It is a ­selective process in which some are prosecuted while others are not. Criminalisation as a technology of power creates a sense of fear. Unless you express your loyalty all the time, you never know when they will come after you. The technique of criminalisation is not restricted to the very rich. The authorities can criminalise even middle-bourgeoisie or small entrepreneurs. According to some estimates, the number of entrepreneurs in jail in Russia is possibly in the several hundreds of thousands (Lobello 2013). According to other estimates, up to three million entrepreneurs may have been given jail sentences (Kesby 2012) in the first decade of the 21st century. These are large numbers, but not comparable to the number of victims of purges in Stalin’s time. If a small entrepreneur takes a fancy to his neighbour’s property and has some connections in the police/prosecuting authorities, he may bribe those authorities to prosecute his competition/neighbour so he can lay his hands on their property. In Putin’s system, corruption – and criminalisation of neighbours or competition – became a government instrument (Anderson 2007). The same holds for China (and Vietnam). Perhaps the only important difference is that in Russia the selective criminalization is not accompanied by overt propaganda, while in the two aforementioned Asian countries the government controlled media is constantly doing this. Another technique for redistributing wealth from the ‘boyars’ to the ‘Pomeshchiki’ (from ‘bad’ oligarchs to the ‘good’ grand bourgeoisie) is ‘transitional nationalisation’ (see Békesi 2004: 248; Magyar 2014: 37). Although renationalisation of private property in Russia caught the attention of commentators, public ownership of productive assets grew only by some five per cent during the Putin regime at least according to data collected by Perry Anderson. While no reliable data are available, it is reasonable to assume that most of the renationalised property has been re-privatised. The government first works on

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bankrupting a firm. Once it is in serious trouble, they ‘help’ the firm out by ‘nationalising’ it. Once this is done, it is sold again – often underpriced, we ­assume – to the (by now) loyal new rich. Putin’s firm hand in fighting corruption turned out to be appealing to the public. His popularity soared into the stratosphere, hitting figures of 70-something per cent. This was driven in part by the rising oil prices of the early 2000s, which led to annual gdp growth of 6–7 per cent and some improvement in the living standards of most classes, and especially of the upper middle class (whose members are the most likely to vote during national elections). The great surprise of the post-communist transformation has been the aggressive rediscovery of patrimonial regimes. Social theory predicts that patrimonial regimes are not consistent with economic modernisations; for this reason the collapse of the 1990s did not come as a surprise to many social scientists. But starting in 1999 and going on for 10 uninterrupted years, all countries we identified as patrimonial were on a growth trajectory, some achieving doubledigit gdp growth; they outperformed the liberal regimes and produced growth rates comparable to China. The big puzzle of course is: are these countries so successful because they are patrimonial, or they are successful because they are resource-rich? It is hard to tell, since the crisis of the 1990s and the explosion of the first decade of the 21st century probably had as much to do with resource r­ ichness/­dependency and they did with the strategy of transition or the nature of the social-political regime. When it comes to explaining the different dynamics of the 1990s and early 2000s, there are two schools of thought,. Among other commentators, Åslund (2010) and Treisman (2010) claim that the collapse of the 1990s is overestimated and the resource curse is way too exaggerated (Ruthland and others tend to agree). Russia (and arguably the region) is on the right track; patrimonial or authoritarian order is transitory and eventually, with economic growth and modernisation, Russia will also enter on the path of democratic development (this is also consistent with Jeffrey Sachs 2005). Others attribute both the collapse and the recovery/and new downturn in the Russian economy to resource dependence. The Russian economy fell sharply during the 1990s. It recovered after energy and mineral prices skyrocketed between 1999 and 2009 and it fell sharply again after the 2008 crisis because of the shrinking demand for raw materials in general and oil/gas in particular. Sidosenko (2011) claims that, even in 2010, 98% of Russia’s exports came from natural resources and primary ­derivatives. Between 2009 and 2019 oil prices fluctuated, but there was no return to a boom in oil prices. This caused serious problems for the Russian economy. A country’s level of economic development and its growth perspectives are strongly related to the composition of its national wealth. According to the

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World Bank’s categorisation, natural capital is the most significant component of wealth in low-income countries (47% in 2014) and accounts for more than one-quarter of wealth in lower-middle-income countries. Non-renewable natural capital – such as fossil fuels and minerals – offers a one-time chance to finance development by investing resource rents. As a gift from nature, natural capital has historically been the most abundant asset available to all countries at one point in their development, although the endowment has varied enormously among countries. At low incomes, economies are largely built around this relatively abundant asset. They invest the proceeds in the relatively scarce assets of produced and human capital in order to foster development. For the present statistical exercise, we define a post-communist country as resourcerich if the share of total non-renewable natural resource-rent surpasses the – arbitrarily defined – level of 10 per cent of the country’s gdp in the year 2016.16 Since the majority of the former socialist countries were (and still are) relatively underdeveloped, this issue matters for many of them. The names of the 10 countries which qualify for the resource-rich label are capitalised in Table 11. Table 11  Political and economic scorecard of the best and worst performing postcommunist economies

Fast-growing economies

16

Post-communist democracies (26)

Post-communist Post-communist autocracies (8) dictatorships (11)

Cape Verde (1;1) Estonia (1;1) Slovakia (1;2) MONGOLIA (1;2) Poland (2;2) Albania (3;3) Seychelles (3;3) Bosnia-Herzegovina (4;4) MOZAMBIQUE (4;4) Armenia (4;4)

Myanmar (5;5) Cambodia (6;5) ANGOLA (6;5) Ethiopia (6;6)

CONGO (7;5) KAZAKHSTAN (7;5) Vietnam (7;5) Belarus (7;6) AZERBAIJAN (7;6) China (7;6) Laos (7;6) UZBEKISTAN (7;6) TURKMENISTAN (7;7)

We took these figures directly from the World Bank Development Indicator website (https://data.worldbank.org/indicator/NY.GDP.TOTL.RT.ZS?view=chart&year_high_ desc=true), downloaded on 30 December 2018.

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Post-communist democracies (26) Slow-growing Lithuania (1;1) or stagnating Slovenia (1;1) economies Croatia (1;2) Latvia (2;2) Benin (2;2) Sao Tome and Principe (2;2) Hungary (3;3) Montenegro (4;3) Burkina Faso (4;3) Macedonia (4;3) Tanzania (4;5) Contracting Georgia (3;3) economies Serbia (3;3) Moldova (3;3) Ukraine (3;4) MADAGASCAR (3;4)

Post-communist Post-communist autocracies (8) dictatorships (11) Armenia (4;4) Guinea-Bissau (5;4) Kyrgyzstan (5;4)

RUSSIA (7;6)

Zimbabwe (5;5) Tajikistan (7;6) Afghanistan (5;6)

Notes: Our three-level political categorisation reflects the state of affairs as of February 2019 from best to worst within every cell of the 3 x 3 tabulation. The numbers in bracket come from the Freedom House ranking of Political Rights and Civil Liberties (7 = the worst possible grade). Countries whose combined average ratings fall between 3.0 and 5.0 are ‘partly free’, and those between 5.5 and 7.0 are ‘not free’ according to the Freedom House. The names of resource-rich countries and rentier-state systems are capitalised. Source: AUTHORS’ compilation based on data in Table 2 of the present book, World Bank Development Indicators for identifying the resource-rich countries, and the 2018 edition of the Freedom in the World (fiw) survey.

If we try to combine political and economic evaluation in a simple three-­ dimensional story, the Eastern European countries bear witness that only early radical efforts were genuinely successful. The factors we took into account are: – long-term per capita income growth – level and quality of democracy – resource-endowment Except for two Asian cases – China and Vietnam – post-communist autocracies and dictatorships did not opt to introduce free-market reforms, although

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the leaders did have sufficient power to act. The growth performance of dictatorships was not outstanding either; except in five countries with extraordinary natural resource endowments (Azerbaijan, Congo,17 Kazakhstan, Turkmenistan and Uzbekistan). In 1989, it was widely held that democracy would hinder the reforms because painful measures are unpopular. However, during the past three decades in most countries the unchallenged and unchallengeable leaders have not even tried to strengthen private ownership, chiefly because the good private firms were too weak to exert pressure on them. So, was this impressive recovery simply the result of the increase in raw material and oil/gas prices or was there something else beyond it? Some argue that, after the 1998 financial crisis, Russia (at least partially) re-industrialised. Given the collapse of the rouble, import products became far too expensive; hence a policy of import substitution led to some degree of re-industrialisation (Kadochnikov 2006). A complementary explanation is a rebuilding of state capacities under President Putin; as Peter Rutland put it, a transition from Yeltsin’s oligarchic capitalism to ‘state-guided capitalism’ (for this distinction see also Baumol, Litan and Schram 2007), which some may attribute to Putin. It is hard to tell how much of the success of Putin’s first two presidencies has to do with ‘state-guided’ capitalist development (which, in the spirit if not in the words of Baumol and his co-authors, may not be the best, but it is certainly not the worst either). An alternative explanation is that it was not so much the reasonable or even smart industrial policies of the Russian state that led to the expansion in the early years of the 21st century, but more the growth of oil, gas and mineral resource prices. The big question can only be answered by further careful research: was Russia turning away from oligarchic capitalism to stateled capitalism, or – as Peter Rutland suggests – was it merely cash in the revenues of a rentier state which made all the difference. Following in the footsteps of some Marxists, social literature has begun to use the idea of ‘rentier capitalism’. Since the 1970s,18 Marxists have usually preferred to use the term ‘extra profit’ or ‘monopoly capitalism’ to describe economies which generate high revenues from exports of mineral resources, but do not develop harmoniously in spite of their natural richness. This is the socalled resource curse. The high revenues derived from a single natural resource (e.g., crude oil) create disincentives to develop other branches of the domestic

17 The former People’s Republic of Congo with its capital in Brazzaville, not to be confused with the present Democratic Republic of Congo (former Zaire). 18 The first usage of the term is attributed to Hussein Mahdavy (1970).

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economy.19 Hazem Behlam and Giacomo Luciani (1987) applied the rentier state metaphor to the Gulf Countries, and in general to Arab states. Douglas Yates (1996) applied it to Africa (Gabon, but others used it for Nigeria as well). Ahmet Kuru (2002) identified Turkmenistan as such a state. To the best of our knowledge, his writing was the first attempt to conceptualise post-­ communist patrimonial regimes as ‘rentier’ states. Turkmenistan, a highly authoritarian state with an estimated 40–60% unemployment rate and with the fourth-largest oil and gas deposits in the world, qualified perfectly for the label. Arguably, Russia and Kazakhstan also demonstrated rentier state characteristics in the first decade of the 21st century. Both of these states have vast mineral and oil resources and their dramatic growth has fluctuated in strong correlation with the oil prices. Being a resource-rich, rentier state tends to be a mixed blessing or indeed can simply be a curse. Economists usually emphasise the long-term negative impact on economic development, but resource-wealth and the rentier character of the state can also be a barrier to democratisation (Ross 1999: 312). Rentier states can buy peace and diffuse political mobilisation by generous welfare payments and, let us add, by maintaining strong oppressive apparatuses to keep those who do not benefit from those welfare provisions in line (like the guest workers in the Gulf States). It is difficult if not impossible to make a clear distinction between patrimonial regimes and the authoritarian/rentier state. We call regimes patrimonial if there is a patron-client relationship. The early post-Soviet Russian state was patrimonial, therefore, since the new rich received their wealth as ‘patrimony’ thanks to the good-will of the ruler. Employers were also expected to take care of their employees rather than laying them off and leaving them to the mercy of the welfare state. As a result, gdp fell, but unemployment remained low. The relationship between the ruled and ruler was one of loyalty and mutual obligations. The oligarchic stage of Russian development (from the mid-1990s until the end of Yeltsin’s rule) was rather different. The oligarchs threatened the power of the political rulers. The purest type of patrimonial order could be seen in the early days of Yeltsin and especially the first years of Putin, when, with his rather successful attempt to establish himself as the ‘good tsar’, poverty was reduced. The Gini coefficient measuring inequality was declining and the regime – though far from democratic – had substantial popular support. But the ‘good old days’ are clearly gone. Russia is more and more an authoritarian system. Some of the rentier states treat at least some of their subjects well

19

If natural resources are discovered in already developed countries, that can cause the­ s­ o-called Dutch Disease; the new resource may draw capital and labour from already-­ developed sectors, increase their expenses, and decrease their competitiveness.

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and combine strict authoritarian rule for the majority with generous provisions from rents to a privileged minority. The clearest examples are the Gulf monarchies, in particular Qatar and the United Arab Emirates where excessive exploitation of the ‘guest worker’ majority (some 90 per cent of the labour force in these countries are ‘guest ­workers’, who work there on three-year renewable visas) runs alongside Scandinavian-style welfare provisions for the 10 per cent who are ‘natives’ (Christopher Davidson, the best scholar of the uae, hesitates to call it ‘tribal c­ apitalism’ – 2009 – or a ‘rentier state’ – 2005: 298). Undoubtedly tribal capitalism or a patrimonial regime implies more the notions of loyalty, obedience and mutual obligations, while rentier state refers to oppressive and exploitative practices. The shift from patrimonial to authoritarian/rentier state is discernible in the successor countries of the former ussr, Belarus being at one end of the scale and Turkmenistan at the other. Belarus and Ukraine are outliers. The former is poor in mineral resources. The latter, though is not resource-rich, does have some minerals. It is more their political system that binds these countries together than their political economy. While the sharp drop in gdp during the first decade in Russia, Kazakhstan and Turkmenistan is clearly related to a moderation in oil prices, and their explosive growth in the first decade of the 21st century was for the most part caused by the new oil boom, Belarus and Ukraine’s economy cycle has more to do with their dependence on the Russian economy. During the international financial crisis the collapse of the Ukrainian economy also had to do with its increasing dependence on the world markets and the EU.

…

An essential element of liberalism is that individual/private property rights must be sacrosanct, and this can be guaranteed only if the requisite ‘checks and balances’ are in place, that is, the branches of government are separated. Liberalism turns into illiberalism when the security of individual property rights is questioned, along with those checks and balances. In post-communist capitalism, there are at least two challenges to the legitimacy of personal private property. First, the conversion of public property into private wealth happened over a short period, be it 500 days or five years. Doing this upholding the principles of legal-rational authority is extremely complex, especially when there is a legal vacuum. It is next to impossible to do this conversion in market-consistent and legally/morally legitimate ways. Most – if not all of those – who benefited from this conversion process have a ‘skeleton in their closet’, if not in legal, at least in ethical terms.

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In principle, the conversion of common property into individual wealth could have taken place by the new owners purchasing the collectively owned assets in competitive bidding at market prices. However, that was often impossible for two reasons: (1) The domestic bidders did not have the capital to pay for the value of the common property and (2) even if they did (like large foreign investors) they did not have sufficiently good information to be able to evaluate the real value of the property they purchased. So, even with the best intentions, when it came to deciding who the new owners would be, the emergent legal-rational authority (the liberal system) was forced to rely on some sort of patrimonial support. Domestic investors needed ‘connections’ to get loans; foreign investors needed ‘connections’ to obtain information about the real value of the firms they wanted to purchase. Keeping these points we mind, we will identify three subsequent systems of property-right allocation in the Putin era: a. A market-driven system, supported by a secondary patrimonial mechanism: public property was sold at a competitive marketplace, but access to credit for domestic investors (with little or no capital) and access to information for foreign investors depended on patrimonial connections to those who controlled credit/and information. b. Patrimonial allocation of public goods to private investors within a legalrational framework: political authorities operated in a democratic framework (even if it was already managed somewhat) and had to win elections. They therefore needed loyal supporters, especially among big businesses who controlled the media. Hence, in anticipation of their loyalty, they ‘appointed’ the new grand bourgeoisie. Property allocated this way was at the grace of political powers. Property rights were rather secure. In this respect it was like fief. It differed from classical fief, however, in that the property was alienable. It was closer, in that respect to private property. The new property owners felt empowered by the security of their newly acquired wealth, and even aspired to political power. The archetype of this system was Yeltsin’s Russia. Some commentators from that time suggested that, by the end of Yeltsin’s rule, some oligarchs de facto privatised the state. This was a case of state capture. c. Attempts by a new generation of political leaders to turn patrimonial property into prebendal property: once the ‘commons had been enclosed’, there was no more public property to be privatised, but the (quasi) democratic framework of politics still required the political rulers to create political support. Under such conditions, they had no option but to redistribute property that had already been allocated. They did so by withdrawing property from owners who were not seen as sufficiently loyal or suspected of having overly high political ambitions, and

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r­ eallocating this property (as ‘benefice’) to owners who were believed to serve loyally political powers. We called this system prebendalism, which operates with a much-reduced system of legal-rational authority. It appears to be functioning within the rule of law, but since the legislative branch is not sufficiently autonomous, laws change easily in response to the executive branch’s needs, occasionally even retrospectively. If the opposition is too weak and rotation of government becomes impossible despite regular elections, the system may cease to be democratic and can turn into an autocracy. Putin’s Russia comes close to this type.20 Arguably, the road from democracy to autocracy is paved with the ‘stones’ of illiberalism. While illiberalism does not necessarily eliminate democracy, it creates conditions (given the weakness of constitutional courts and the legislative branch) for particularly influential political leaders to flirt with abandoning democratic procedures if they sense that their electoral support is eroding and they may not win the next election. Putin’s rise to power represented, therefore, a significant shift in the system of legitimation in post-communist Russia. By the end of the Yeltsin years, the new Russian grand bourgeoisie began to ‘privatise’ the state itself. Big Money wanted political power. For a while, Berezovsky was Yeltsin’s national security adviser. This state of affairs was totally unacceptable to a young, ambitious, energetic (able) former kgb man; he wanted to bring Big Money under political control, to put a leash on the new grand bourgeoisie. The way to do this was to put the new rich under a loyalty test: those who passed the test could stay and get richer, those who failed had the option of exile in London or Tel Aviv, or ending up in jail in Siberia. The smart ones, like Berezovsky or Gusinsky went to Sheremetyevo airport, the over-ambitious ones, like Khodorkovsky, ended up serving long jail terms in Siberia. Those who gave up political ambitions and swore loyalty to the new ‘tsar’ and became ‘serving nobility’ (like Abramovich or Deripaska) were able to stay on and become even richer. (The fact that they had belonged to the Yeltsin ‘family’ was forgotten.) During the first decade of the 21st century, there were substantial changes. Putin took over first the prime minister’s position and then the presidency. Yeltsin was rather incompetent as an administrator (though he did show signs of genius as a politician – if we recall the role he played in the 1991 coup d’état) and he was captive to the oligarchs. Putin proved to be a skilful administrator and was unwilling to accept the dictates of the oligarchs, especially since some of them began to show political ambitions. Helped by fast-rising oil prices, Putin put the government’s house in order. On his watch, Russia’s per capita gdp, 20

The Orbán government in Hungary is next in line.

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measured in constant ppp dollars, jumped in 2000 from $7,627 to $17,407. This contrasts with Yeltsin, who oversaw the decline of per capita income such that the level in 2000 was lower than that of 1992 (cia Factbook 2009). Putin, much like his admired predecessors Ivan the Terrible and Peter the Great (or even Stalin, for whom Putin also has a few kind words), took on the boyars. Those who did not serve him well were sent into exile (for example, Boris Berezovsky), or locked up in jail for many years (Mikhail Khodorkovsky); the less lucky ones were murdered (as Sergei Yushenkov was in 2003). Putin has established, for the time being, a stable patrimonial rule. He is also reverential to the Orthodox Church, spending ample resources on renovating churches that had been greatly neglected and making a show of respecting traditions. He has been capable of presenting himself as the ‘good tsar’ and, during the first years of this century, was able – unlike the democratically elected Eastern European governments – to introduce rather brutal neo-liberal welfare reforms. What undoubtedly helped him were rapid growth, a small budget deficit, and small state debt. While Eastern Europe struggled between 2000 and 2009, Russia joined the world’s Wunderkinder. Russia’s growth rates were just barely behind China’s; but whether Russia will be able – as Putin keeps ­promising – to maintain dynamic growth in the face of declines in oil and gas prices is another question. Until the end of 2018, he failed. What looks certain is that the Russian system of legitimation shifted from patrimonialism to prebendalism. It is puzzling that prebendalism re-emerges after the original accumulation of capital took place in a liberal or patrimonial way. While the most obvious example of prebendalism is Putin’s Russia, some Eastern European countries have also seemed, at least since 2010, to be on the same trajectory. An essential feature of this system is the reallocation of property rights; through initially re-nationalising, then later re-privatising of property to the new loyal followers. The point is not that this emergent new system is more corrupt (the previous stage was corrupt enough) but that the security of property rights is both challenged and directly linked to the political loyalty of the client. While patrimonialism assumed a one-shot reallocation of property rights to those who were personally or politically connected to the political elite; prebendalism is a process of reallocation of property rights after repeated loyalty tests. Patrimonialism was a one-shot deal from public to private; prebendalism is a cyclical movement from privatisation-to re-nationalisation to re-privatisation. 2.3 Cases of Putin’s Prebendalism Once the common good had been initially distributed, the political authorities were tempted to “redistribute property rights”. Roman Abramovich and

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Oleg Deripaska (Example 9) are two of those who benefitted greatly from this strategy. Example 9: Roman Abramovich Roman Abramovich (b. 1966) was not one of the Big Seven, but he was still one of the early oligarchs. He was brought into the Kremlin circle by Berezovsky. He even moved to live inside the Kremlin and became a close friend of Yeltsin’s daughter Tatyana Yeltsin, who often spent time at Abramovich’s dacha. Abramovich started out in the shadow economy. It is rumoured that he began his business activities in the late 1980s by selling plastic ducks out of his Moscow apartment and working as a street trader. Later, he set up many small companies. In 1993 he met Berezovsky, who liked him and introduced him to the ‘family’ and in 1995, after Yeltsin had created Sibneft by presidential decree in a loans-for-shares programme, the two men acquired the company. They paid something like $80 million for the whole company, which must have been worth several billion already at that time. This was a classic – and much debated – example of the Russian way of privatisation. Abramovich eventually also moved into the aluminium business. The privatisation of the aluminium industry was also surrounded by a ‘war’; by rumours of corruption, blackmail and even the murder of plant managers and journalists. Abramovich is a survivor. He survived not only the aluminium war but also the change of regime from Yeltsin to Putin. In 1999 he was elected to the Duma; in 2000 he became governor of Chukotka. When in 2005 Putin eliminated elections for governorships, he re-appointed Abramovich to serve another term as governor (though in 2008 he resigned from this position). Abramovich’s survival may be due to his keeping a low profile until quite recently (unlike Berezovsky or Khodorkovsky). Few people even knew what he looked like – at one point a newspaper went so far as to offer a prize to whoever could first provide them with a photograph of him. After 1999 he became better known, but for the first few years, he kept a very low profile indeed. Abramovich is not hiding any longer. He is showing off his wealth (and his beautiful girlfriend, Dasha Zhukova, also from a prominent new-rich Russian family), investing heavily in British football and owns prestigious real estate all over the world. One of his recent purchases was a chateau in the French Riviera, which was the property of the Prince of Wales in the 1930s. He bought the villa for $27 million and spent a similar amount on its

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renovation. According to the Forbes list of billionaires, his real-time net worth on 1st January 2019 was $11.3 billion putting him at No. 120. Example 10: Oleg Deripaska Oleg Deripaska (b. 1968) also started at the bottom and rose to the top by the grace of higher political authorities. He became related to the Yeltsin family when he married Polina Yumashev. Her father, Valentin Yyumashev, was President Yeltsin’s chief of staff and eventual son-in-law. (We have ­already mentioned his name several times: Valentin Yumashev married Yeltsin’s daughter Tatyana. Polina, ­therefore, is Tatyana’s step-daughter). It is hard to tell which way the causal arrow should point: did Deripaska ­become so wealthy because he had married Yumashev’s daughter, or was he able to marry the beautiful Polina, who was from arguably the best-­ connected family in Russia, because he was wealthy. Whichever way causality goes it is obvious this is an excellent case study of the interwoven nature of politics and business in post-communist Russia. Deripaska also had close ties with Abramovich. They jointly created RusAl. Deripaska was only 23 years old when the Soviet Union collapsed, but in 1994 he was already chief financial officer of Aluminproduct and he used this position to acquire aluminium plants (using vouchers). Due to his close ties with Yeltsin and with the oligarchs who fell out of favour, it was expected, after Putin’s rise to power, that he would be the next to be accused of tax evasion, fraud or corruption, but he has not only survived, but even blossomed during the Putin years. His success is clearly due to talent. He saw the opportunities which opened up with voucher privatisation, and being in a bureaucratic position where he could take advantage of these opportunities and of course his membership of the ‘family’ and his personal ties to Yeltsin and members of the oligarchy was a great help. One of Putin’s first acts was to fire Tatyana Yeltsin from her position of Special Presidential Advisor. She had fallen out of favour just like many other Yeltsin protégés. Deripaska is an intriguing exception. After all, he made his fortune in aluminium, where the bloodiest wars were waged for privatisation. It is hard to believe that Putin was unable to find some dirt with which he could jail him or force him into exile. Deripaska, however, much like Abramovich, or if possible even more so, kept a low political profile during the Yeltsin era and showed loyalty emphatically to the new tsar. According to the Forbes list of billionaires, his real-time net worth on 1st January 2019 was $3.2 billion, putting him at No. 651.

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As we have asserted already numerous times, under Putin the democratic process has been substantially ‘managed’ for a long time. It needs to retain the appearance of multi-party democracy. As Perry Anderson (2007) noted such an illiberal democracy (this is our term, not Anderson’s) requires ‘opposition’ parties. For this reason, is conceivable that in Putin’s Russia the main force of opposition, the Communist Party is kept alive by Putin himself. There comes a point when such management goes ‘too’ far and turns managed democracy into autocracy. This can happen when there is a chance that the ruling party might lose power at elections. There is a historical example of this from a different part of the world. In Singapore Li Kuan Yew’s so-called People’s Action Party had been winning ‘elections’ since 1959 with only a puppet opposition. In 2011, however, for the first time in more than half a century, elections became competitive and the pap won only 60% of the votes. Even Singapore may be on its way to elections with real stakes. The story in Putin’s Russia is somewhat similar. He created his party, United Russia, in 2001, and it has dominated the legislature, the Duma, ever since. In 2007, it won a supermajority, enabling the Duma to change even the constitution, but fell somewhat behind in 2011, when it gained 49.3% of the votes. 3

The Ideology of Post-communist Traditionalism

As long as political rulers operate in a democratic framework, elites need more than just the support of Big Money (though this is important mainly due to its control over the media); they also need the popular vote. This means that they have to come up with an ideology which will appeal to ‘ordinary people’, and especially to people with a very strong national (and religious) collective identity. The extraordinary success Putin and Orbán have had at the polls has a lot to do with their ability to formulate an ideology that fits into the worldview of a substantial proportion of their electorate. Manipulating the rules of elections is only part of the story. The other part is finding an ideology that is appealing to the voters. We call this ideology post-communist traditionalism/neo-­ conservatism. What are the critical elements of it? They are rather trivial: nation (patria), the church and the traditional family. These were the major building blocks (and remain so) for all conservative movements. What, then, is ‘neo-’ or ‘post-communist’ about them? 3.1 Putin and the Tea Party Movement Mainstream conservatives (such as the cdu in Germany or the moderate Republicans in the US) are often critical of left-wing liberalism. Conservatives

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criticise liberals for being too soft on the poor, on drugs, crime, homosexuality, immigration, and building an excessive welfare system. Classical conservatives, however, tend to retain respect for individual liberty, and if there is a conflict between traditional values and individual liberties they may defer to individual liberties. Neo-conservatives, on the other hand, wage ‘culture wars’; traditional values, for them, may overrule the value of individual liberties. The example typically given for neo-conservatives in the US is the socially conservative/traditionalist fraction of the Tea Party.21 Culture wars aim to criminalise abortion and all uses of drugs. They fight for teaching ‘creationism’, advocate prayers in schools, and want to keep America ‘white’ and ‘Christian’. The value system of post-communist traditionalists and the values of the Palinites’ wing of the Tea Party are rather similar.22 There are some critical differences, however. The Tea Party traditionalist neo-cons are usually dedicated Jeffersonians; they fight the federal state and want to make the state as small as possible. Post-communist traditionalist/neo-cons, on the other hand, are statist, they want to use a strong state to reintroduce and reinforce the traditional social order. Trump has offered an interesting twist on neo-conservativism by ‘bringing the executive back in’ and creating an American version of illiberalism à la Putin or Orbán. Nevertheless, even before the global financial crisis, there were commentators, mainly on the political right, but not all of them right-wingers, who were reluctant to attribute the popularity of Putin only to high oil prices and increased living standards. Some observers argued that Putin had managed to restore the traditional system of domination in Russia: an ‘autocratic’ system in which citizens do not have to take responsibility for public affairs. Instead, they can rely on a caring government that will defend them against real economic perils and some imaginary foreign enemy. Since this new regime was pro-business, it was more reasonable to see it as retro-tsarist rather than neoStalinist (Anderson 2007; Pipes 2005; Cannady and Kubicek 2014). The manufacturing of a common enemy is a feature the Eastern European post-­ communist traditionalist/neo-conservative right-wing parties share. The fidesz regime in Hungary after 2010 is a rather extreme case of this. It has 21

22

The Tea Party is a multi-faceted movement within the Republican Party. It was initiated by Ron Paul, a libertarian who valued individual liberty and was an isolationist in foreign policy matters. By 2010, Sarah Palin had become one of the most influential figures of the Tea Party. She is a rather extreme social conservative/traditionalist and a foreign policy hawk. Rand Paul retained his father’s libertarianism and isolationism, with the result that the Tea Party movement had two wings: the Palinites and the Paulites (Hunter 2011). Clifford Gaddy wrote: “I am sure I could put together a long list of quotes that would make Putin seem like a card-carrying member of the Tea Party” (cited by Adam Taylor 2013).

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blamed the imf, Brussels and more recently the usa for many of the country’s self-­inflicted troubles. With this strategy, they have been able not only to pacify the public, but also to mobilise the masses, resulting in pro-government and anti-foreign-enemy demonstrations. The Russian economy was struck by the global financial crisis. It was not surprising, therefore, that, despite the weaknesses of its opposition and the lack of an alternative view of the future, Putin and his United Russia party lost a great deal of support. Under these circumstances, it became more and more evident that the regime needed ideological self-justification. In October 2013, Nikita Mikhalkov, a movie director with good ties to the Kremlin, demanded a re-invention of national ideology. In his view, this had become a ‘national security question’ (cited by Brian Whitmore 2013). Up to this point, Putinism had been sort of latently conservative. It now needed to adopt an aggressively traditionalist/neo-conservative ideological stance. Putin had begun to build his ideological image as soon as he became Prime Minister in 1999. He had published his Turn of the Millennium manifesto, which was the first step towards shedding his kgb past and creating a new political and ideological identity for himself (Cannady and Kubicek 2014). He was already laying out the principles of his future governance in the Turn of the Millennium. These were patriotism, order and effective governance. Those who suspect a ‘communist restoration’ behind this project may be wrong. The Putin regime is far from being anti-business. The assets of the wealthiest Russians grew fast during the early Putin years. Year after year, Forbes reported more dollar billionaires in Russia. In 2006, more billionaires lived in Moscow than in London (Perry Anderson 2007). It is crucial for the Putin regime to maintain at least semblance of democracy and constitutionalism. Communist regimes also had constitutions and held elections, but none of those was in any way consequential. Under communist regimes, no one can usually sue the executive, and the institution of a constitutional court typically did not exist.23 Elections were not competitive, and the executive appointed candidates for the legislative branch. This is not the case with Russia under Putin, in fact. Putin took the need for there to be an appearance of constitutionalism so seriously that he did not alter the constitution (though legally he could have done so) to enable him to run for a third consecutive term of presidency. Instead, he swapped places for one term with 23

According to Gábor Hamza (2017), Yugoslavia was the only country to have had a constitutional court since 1963. Hungary created an ‘embryonic’ constitutional court in 1984, followed by Poland in 1985. China also established a constitutional court with limited powers in 1982.

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Medvedev. The emphasis on Christianity or Orthodoxy is also essential in the constitution of several other Eastern European countries, such as Poland, Hungary, Serbia, Croatia, Bosnia and Bulgaria. Given the weaker performance of United Russia in 2011 and Putin in 2012 (and the subsequent anti-Putin demonstrations), the call for a stronger ideological appeal seemed more justified. On December 10, 2013, the major Kremlin think-tank the Centre for Strategic Communication issued a report entitled Putin: World Conservatism’s New Leader (Centre for Strategic Communication 2013; and Brian Whitmore 2013). Putin gave his annual presidential address just two days later (Putin 2013) and he aggressively followed the ideology proposed by the Centre for Strategic Communication. In our times – stated Putin (we are trying to capture the essence of his message rather than quoting him verbatim) – several nations (he does not name any of them, but he is thinking of the ‘West’ and especially the usa) are re-evaluating their moral values. In the name of globalisation, they tend to undermine the cultural differences among people and nations. The destruction of traditional values has significant negative consequences for societal order. Putin claimed that this process was not only destructive, but also anti-democratic since it attempts to impose the value system of a militantly secular, multicultural and transnational elite. On the other hand, Putin had some good news for his audience: The number of people who are ready to defend traditional values and the foundation of spiritual and moral values was increasing in every nation. Putin named the traditional family as being among those values. Though he did not elaborate on this in his address, given his well-known objection to homosexuality he obviously meant family among heterosexuals. He also emphasised the need the defend ‘life’ (most probably a somewhat coded objection to abortion), and he emphasised the need to recognise the primacy of religious life and spirituality over material existence. ‘This is, of course, a conservative position’ – here we cite Putin almost verbatim. Both the Centre for Strategic Communication and Putin’s 2013 presidential address were trying to find an ideology which would unite Putin’s supporters and divide his opponents, not only in Russia but globally. There are two camps in the world: the conservatives (and, in this address, Putin wanted to think that even Merkel belonged to this camp) and the left-liberal ‘populists’. What a fascinating twist in terminology! Neo-liberals usually use this term to discredit opponents on both ends of the political spectrum. However, Putin was explicit about who was on his mind: Obama and the French president François ­Hollande, the two politicians who were losing popular support despite their ­populist promises.

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Putin wanted to kill two birds with one stone: he was trying to gain the sympathy of Western, especially American neo-conservatives, and at the same time to offer an ideology to Russia which would restore its messianic vocation in the face of the declining West. In his vision, Russia would become the ‘third Rome’, would be again the most dedicated defender of traditional values: the values of religion, orthodoxy, family and patriotism. What, however, are the historical precedents, who are the models for such a leader and such an ideology? (Pipes posed this question as early as 2005, and see Whitmore 2013; Cannady and Kubicek 2014.) None of the Soviet leaders fits the bill, and especially not Stalin with whom Putin, given his kgb past, is so often compared. As Pipes has already noted (2005), the closest historical precedent is Tsar Nicolas i, the ruler with an iron fist who mercilessly cracked down on the Decembrists and re-established ‘law and order’. In his doctrine released in 1826, Nicholas i legitimated his rule by three principles: orthodoxy, autocracy and patriotism (as Cannady and Kubicek point out, Nicholas i was not ‘nationalist’ in the sense of the French revolution; for Nicholas i it was the “narod” which constituted “patria”, rather than the ‘citizens’ in the French tradition). As early as 1999, Putin recognised the importance of religion (he now claims his mother secretly baptised him when he was a young boy), and he managed to establish cordial relations with the Orthodox Church, which has a long history of accepting state authority. It is intriguing that, in November 2013, Yelena Mizulina, a representative of the United Russia party in the Duma proposed including that Russia is an Orthodox country in the preamble of the Russian Constitution. Mizulina also proposed the bill to ban gay ‘propaganda’. President Obama penalised her for her staunch support of Putin in March 2014 by freezing her assets in the usa. Some commentators (Whitman 2013) interpreted the report by the Centre for Strategic Communication and Putin’s December 2013 address as a call to create a new ‘International’. This time, however, an ‘International of Conservatives’ (we would do better now to call them ‘The Illiberal International’) seems to be emerging, led supposedly by Vladimir Putin. Can this become a reality, or is (was) Putin daydreaming? In 2013, before the Ukrainian crisis blew up, Forbes listed Putin as the most influential person in the world, ahead of President Obama, and Forbes retained his position as No. 1 even in 2014, after the crisis in Ukraine. He went on to keep it until, in the 2018 list, President Xi of China unseated him. In May 2019, on the list of the ‘10 most influential people in the world’ there is not a single politician who can be vaguely associated with the political left. The others (except the popular Pope, Francis) are representatives of the business world – people like Bill Gates or

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Larry Page, indicating the limited, and arguably weakening, importance of democratically legitimated power in the world. 3.2 Putin and Buchanan Even before the Ukrainian crisis exploded, Putin had had little chance of winning over traditional conservatives to his International. The right wing of the American spectrum had, however, heard his message. Pat Buchanan, one of the smartest and most articulate voices on the far right of the Republican Party, expressed sympathy or even admiration for Putin and his presidential address. This is not a trivial endorsement. Buchanan was an adviser to President Nixon and Reagan. He also ran in the Republican presidential primaries in 1992 and 1996 (running against G.W. Bush he got 23% of the votes at the Republican conventions in 1992, and in 1996 he got 21% against Dole). He is, therefore, a serious conservative American voice. On December 17, 2013, just five days after Putin’s presidential address he put a post up on his blog: “Is Putin one of us?” His answer at that time was, yes. In Putin, Buchanan saw a leader who was fighting against militant secularism, abortion, gay marriage, pornography and promiscuity and against the whole ‘Hollywood panoply’. Buchanan saw a new global ‘culture war’ emerging. (The term ‘culture war’ is usually attributed to Buchanan, who used it in 1992 at the Republican Convention.) It is intriguing that Viktor Orbán also used the term in 2008, when, after winning a two-thirds majority in the election for the third time, he promised a ‘culture war’ would follow his victory. In Buchanan’s own words: “President Reagan once called the old Soviet Empire ‘the focus of the evil in the modern world’. President Putin is implying that Barack Obama’s America may deserve that title in the 21st century”. He went on, saying that during the second half of the 20th century, the struggle had been vertical: The West fought against the East. In the 21st century, the struggle was becoming horizontal: today the conservatives, the traditionalists are fighting the militant secularists, the multicultural and transnational elite. The similarity of Buchanan’s and Putin’s terminology is striking. Buchanan posed the question, why do we not call Putin ‘paleo-conservative’ (a term he likes to use to designate himself)? In his blog, he was already acknowledging at the end of December 2013 that his position can be seen as ‘blasphemy’ by Western intellectuals, but if you read Putin’s 2013 presidential address, he has a point. In 1999, Buchanan quitted the Republican Party. One year later, he was trying to get a ‘third party’ nomination for the presidency. Eventually, however, he decided to endorse G.W. Bush in 2004 and Mitt Romney in 2012 as presidential candidates even though he was closer to the Tea Party than the Republican

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mainstream. He did not identify himself as a neo-con. He sees himself as a paleo-conservative, traditionalist independent. Unlike Buchanan, most American conservatives and British Tories were less than thrilled to be welcoming Putin to the family even before the Ukrainian crisis (Franklin 2013). It is, however, indisputable that the world is shifting to the right. The Palinites wing of the Tea Party shares almost the same values as Putin. At the last parliamentary elections in France, Marine Le Pen led one of the most su­ ccessful parties (and in Italy so did Salvini). Le Pen will be a serious contender at the next presidential elections and a major player especially – and more ­importantly – at the European elections in May 2019. There are many indications that Putin is somewhat close to the far right in Europe (and in the US) and as we write this chapter in April 2019, public opinion polls are indicating that radical nationalists may have made some substantial electoral gains. Nevertheless, it is not necessary for Republican Party conservatives to be Tea Party social conservatives to express admiration for Putin. After Putin invaded Ukraine, Rudy Giuliani, the popular former mayor of New York City, noted without debate or deliberation: “That is what you call a leader” (cited by Paul Krugman 2014). For the time being, let us focus on the social conservatives within the Tea Party. Though if one reads what Putin says, he does sound like a card-carrying member of the Tea Party. Putinism does, however, differ sharply in at least in two respects from what American social conservative neo-cons in the Tea Party believe. While Sarah Palin may agree with Putin on many issues (on the question of the traditional family model, on gay rights and on the role of religion, e.g., the need to teach creationism in schools), there are fundamental differences. The Tea Party – even in its most radical version – subscribes to a Jeffersonian view; its position is anti-federalist and anti-statist. (Though it does acknow­ ledge that governments have a critical role on ethical issues such as abortion, prostitution, pornography, drugs and gay rights – meaning that, at least as far  as social issues are concerned, social conservatives are ‘etatist’.) When it comes to economic matters, however, even Sarah Palin is opposed to government regulations. This is where the neo-conservative stance shades into neo-­ liberalism. The idea of state-led modernisation is what Alexander Gerschenkron (1962) described as a feature of backward economic regions of the world, those which would like to ‘catch up’. In the West, it was individual entrepreneurs and the propertied bourgeoisie who carried out the modernisation project. C ­ ountries east of Prussia had to rely on governmental tutelage. The second difference is this: even the most socially conservative Tea Party neo-cons ­accept the liberal principles of separation of powers; they are not, therefore,

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illiberals. The formula for Putinism, or, to put it more generally, post-­communist traditionalism/neo-conservatism is: Tea Party tradition, ‘statism’ plus insensitivity to minority rights. Eastern European illiberalism is close to the ‘alt-right’. 3.3 Putin and His European Allies No matter how much Putin would have loved to, it seems unlikely that characters like Thatcher, Reagan or Merkel would consider themselves part of his International. Putin has better chances of appealing to the ‘new right’ of Le Pen or Fidesz in Hungary. There is indeed some evidence that Putin is working hard to attract the anti-EU far right in Europe to his camp. Before the Ukrainian crisis, some American and British neo-conservatives distanced themselves from Buchanan’s endorsement of Putin (Franklin 2013). Some US neo-conservatives also distanced themselves from Putin’s ‘autocratic tendencies’. (As David Frum stated: Putin is a cold-blooded murderer but at least he hates gays; see Adam Taylor 2013) There is also some suspicion – though not proven in a court of law – that Russian intelligence services were involved in the 2016 election in the United States, that they played a role in the Brexit referendum and probably in some other European elections, always supporting radical nationalists, Eurosceptics, anti-multilateralists and anti-nato political parties. With the confrontation between the West and Russia, the positions of the US and Russia changed somewhat. In the eyes of the ‘interventionist’ subsection of the right wing in the US, Russia emerged as ‘public enemy number one’, and they attacked the Obama administration for not being forceful enough on the issue of Ukraine. But the Tea Party and the right wing of the Republican Party also have their ‘isolationist’ elements. Pat Buchanan (and Rand Paul, a presidential hopeful in 2016) is one of the leading forces in this respect, and Buchanan remains committed to Putin (see his blog post: “Is Putin worse than Stalin?” July 28, 2014. Buchanan’s answer is: “C’mon… he is no Stalin, he is just playing the geo-political game, only Obama does not understand this”. Nevertheless, there is no doubt that though the Ukrainian crisis yielded short-term benefits (allowing Putin to cash in the support he gained from Russian patriotism for regaining the Crimea for Russia and standing up for Russians in Eastern Ukraine), it has severely damaged Putin’s ambitions – if he ever really had any – to create a new ‘conservative international’. However, unlike the West, post-communist Eastern Europe may be much more receptive to that particular combination of conservatism, one which combines traditionalism, (the trinity of ‘family, patria and God’) with some version of statism. Such an ideology has appeal for the whole region. Many

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e­ lements of statist neo-conservatism could be spotted as early as 1990 (in Poland, Slovakia, and Hungary). Zoltán Gábor Szűcs was quite correct in locating a definite change in discourse – using Hungary as a case study – in the 2000s (Szűcs 2006: 99–128; Szűcs 2012: 133–141). However, this is far from just a Hungarian receptivity to Putinism. There is virtually no country in the region which was or which is not open to this idea. Think of Vladimir Mečiar, Roberto Fico (who is often seen just a more sophisticated version of Mečiar), Traian Basescu, Bojko Borisov, the Kacziǹsky brothers and most recently the Czech ‘Berlusconi’, Andrej Babiš. We can, of course, include Belarus under Lukashenko and Ukraine under Yanukovych (and arguably under Petro Poroshenko as well), Serbia under Slobodan Milošević and Croatia under Tuđman. They are Putin’s and Orbán’s ‘soul-brothers’. It is reasonable to assume that this may be part, at least, of some longue durée effect. In these countries, conservatism had a somewhat different meaning during the 19th century or the interwar years than it did in the West. What we consider to be East or West is another question. Was Bismarck East or West? Certainly, Hungarian conservatives by the end of the 19th and early 20th century (István Tisza or Miklós Horthy) were not particularly loved by the Tories or other Western conservatives (Tamás 2014). Even by conservative standards they were not sufficiently tolerant towards minorities. They also tended to be ‘statist’; this being especially true of the Horthy regime under the premiership of Gyula Gömbös. Interestingly, the fidesz ideologues are silent about Gömbös, but they are seeking out historical precedents in Horthy, Bethlen and Tisza. It is possible to give non-Hungarian examples too. Marshall Piłsudski was hardly more acceptable to the British Tories. The Kaczyňski brothers would be happy enough to think of Piłsudski as their historical predecessor. Stepan Bandera – a Horthy – or Piłsudski-style Ukrainian politician – is also the hero of the Ukrainian right wing. 3.4 Putin and Trump The question of how Trump relates to Putin, ‘Putinism’, and ‘illiberalism’ is a complex one. When he was still a presidential candidate, Trump expressed admiration for Putin as a leader who had firm control over his country, and he promised to be ‘friends’ with him. President Putin is on record as expressing his hopes for a Trump victory. One complicating factor for Trump when it comes to US-Russia relations is his uneasy relationship with the Republican Party, which traditionally has been strongly anti-Russian. This is the reason that despite his pro-Putin rhetoric, Trump’s administration has let the legislature pass new sanctions on Russia

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and, in 2018, even announced its withdrawal from the Intermediate-Range Nuclear Forces (inf) treaty. It is not unreasonable to assume that these were concessions made to ‘hawkish’ Republicans. The Trump-Putin relationship is very complex indeed. On July 16, 2018 they had a private, one-to-one meeting in Helsinki (without any American official present) and what exactly their conversation was about is still unknown. It is rather unusual for such high-level meetings to be just ‘personal’. What is more important, however, is not so much the ‘collusion’ during the electoral campaign, or Trump’s business dealings with Russia before and during the campaign (it is claimed one of his sons was negotiating a major real estate investment in Moscow even while the campaign was ongoing), but the ideological consensus between Putin in Trump around an ‘illiberal policy’ orientation. Trump is arguably the pre-eminent ‘illiberal’ politician in the North-Atlantic-European region. His ‘America First’ slogan is a clear illiberal policy recommendation, a rejection of multilateralism that puts the emphasis on national sovereignty. His key goal is the strengthening of the executive branch, and especially the power of the leader at the top of the executive branch. The judiciary is a major target. Trump has appointed politically committed judges into the Supreme Court, and into lower levels of the judiciary. He continues to attack the media for spreading ‘fake news’ if what they write does not support his policies. He attempts to bypass the legislative branch by issuing ‘executive orders’, the most recent example of this being his declaration of a ‘national emergency’ in order to overrule the House’s decision about budgetary allocation. This power to make decisions on budgetary allocation is, of course, a critical feature of the ‘checks and balances’ with which the legislature can restrain the executive. Despite this, the 250-year-old US liberal institution of the separation of powers is still working. Though the Supreme Court tends to support Trump, lower courts at least often rule against his illiberal policies. What is more, elections in the US are still not only (reasonably) free, but also (quite) fair, with the result that while the Senate is under Republican control, since 2018 Trump has had to deal with a Democratic House. Furthermore, while in Russia, Putin has United Russia under his firm control (the same goes for Orbán as far as fidesz is concerned), in the US there are still some Republican senators and congressmen who occasionally dissent. Even in the Supreme Court, some Republicanappointed judges may disappoint the ‘boss’ by voting liberal on some issues (like John Robert did on Obamacare). To sum up: Trump’s project is, to a great extent, a Putinist one; it is illiberal, aiming to maximise the power of the executive branch and the leader of that

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branch. However, the United States’ liberal institutions are putting the brakes on this illiberal project of his. Let us conclude and return to Bálint Magyar’s theory: the Trump administration has some ‘mafia’ tendencies. While Trump’s daughter, his sons and he himself do benefit from his presidency (for example from his hotel in Washington, DC), this is really beside the point. The essence of his rule – we are inclined to believe the essence of post-communist illiberalism – is the maximization of executive power and especially the power of the ‘leader’. While the growth of their personal wealth is important, it is secondary. What is crucial is the reduction of checks and balances. 4

Liberal-Democratic Ways to Capitalism in Eastern Europe: The Emergence of Prebendalism?

4.1 Post-communist Liberalism after the Fall of Communism As we pointed out earlier, in 1989–1991 the legitimating ideology of the new political elites in most European post-communist societies was liberal democracy and free-market capitalism. It is important to understand, however, that these societies were ‘transitional’, at least for the first decade. They were struggling with the rather extraordinary challenges that came with building ‘capitalism without capitalists’ within a limited period (Eyal, Szelényi and Townsley 1998) – not at all a trivial undertaking. While free-market capitalism was the hegemonic ideology, even the most liberal countries of the region faced some difficulties as they tried to live up to their ideals. The single most important challenge was the rapid conversion of property rights. Most neoclassical economists believed that the crucial step was to create identifiable private owners for the formerly public property. The Yeltsin-Gaidar team promised to ‘create’ capitalism in 500 days. Eastern Europe, while it may not have been in quite such a rush, was not far behind. While in England the ‘enclosure of the commons’ took hundreds of years, in postcommunist societies the original accumulation of capital took place within a few years. This inevitably brought patrimonial elements into even the liberal version of post-communist systems. While the legal rules which regulated the conversion from public goods to private property varied greatly from country to country, they were not sufficiently well defined and, when creating private ownership, they left a great deal to the discretion of political authorities and to personal networks.

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In countries where vouchers were a key element in the process (like in the Czech Republic, Poland and most of all in Russia) there was much more room for clientelistic manipulation of the process. The new private property was secure, but the new owners needed the goodwill of political powers and bureaucratic office holders to acquire their wealth. Privatisation agencies and banks had to decide who would qualify for loans and they could not use the traditional mechanisms of creditworthiness since virtually no one had a credit history. Even in the case of the most liberal country, Hungary, it was useful to have some ‘patrimonial’ connections during the 1990s. We give two examples here (see Kolosi and Szelényi 2010). If a person had sufficient inside knowledge about the real value of the public good that was being offered for privatisation, this could give him an enormous advantage. For the purposes of privatisation, it was possible to borrow up to 90 per cent of the purchase price in the form of a very low-interest government loan. It is obvious that people in authority would be able to ‘help’ the ‘right’ people to get privatised assets. Hungary was arguably one of the countries with the lowest level of patrimonialism. In Yeltsin’s Russia, we see an example of strong patrimonialism. In the next section, we will suggest that Putin played a leading role in changing its method of property allocation from one based primarily on the market and in making Russia’s democratic system increasingly illiberal. In retrospect, one can see some early signs that many Central/East European countries – even in the more liberal ones – were also moving in this direction. To what extent could/should governments/political powers leave privatisation to the ‘blind’ forces of the market? As there was inevitably an element of patrimony,24 some office holders (politicians and especially managers) and their ‘clients’ (children, kin, and acquaintances) enjoyed better than average access to privatised assets (through the mechanisms just described). There were also some early ‘illiberal’ attempts to limit the separation of powers. The media, especially, was an early target. Politicians elected to office (often conservatives) resented criticism by the media which was often controlled by people from the socialist times (usually liberals). Attempts were

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Unsurprisingly therefore only two major Central European countries, Hungary (No. 32) and the Czech Republic (No. 42) were ranked by Transparency International (TI) among the 50% least corrupt countries in the year 2000 (out of the 90 countries they investigated). Poland, Slovakia, Romania and Russia were in the bottom half. The ranking remained the same in 2008, while by 2013 out of 177 countries Poland (No. 38) overtook Hungary (No. 47).

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therefore made (and often nasty fights fought, like under the Antall government in Hungary) to bring the media under governmental control. However, with the exception of South East Europe (Serbia, Macedonia, Albania, Bulgaria and Romania), checks-and-balances and the rule of law were generally the names of the game in the region (even under the rule of Mečiar in Slovakia, Klaus in the Czech Republic or Antall in Hungary). Illiberal Tendencies during the Second and Third Decades of the Transition: The Putin Virus By the end of the first or the beginning of the second decade of the transition (see Szelényi and Wilk 2010), early successes in Eastern Europe had turned somewhat sour. The first generation of reforms were indeed partial. Although the economy was transformed into a market system quite successfully, health care, pensions and education (what the Eastern European economists call the ‘great distributive systems’) remained untouched and continued to function in very much the same way as they had under socialism. These systems had not worked well under socialism either: they were inefficient and underfunded. Since their funding had come mainly from the taxed-away profits of publicly owned enterprises, it disappeared with the onset of the transformation recession and/or the privatisation of these firms. This led to increasing budget deficits in all countries during the first decade of the 21st century, taking the Eastern European countries into a second transitional crisis well before the great global financial crisis erupted. These countries were under tremendous pressure to cut welfare expenditure, and at the same time, ironically, were feeling pressure from the European Union as new member countries not to follow the European social model, but to adopt the liberal, means-tested American welfare system. This was met with tremendous popular resistance and, up until May 2009 at least, these countries (with the exception of Slovakia) were unable to implement such reforms and reduce their deficit and national debts. Arguably, the Putin ‘virus’ is in most if not in all of the Eastern European systems. Structurally, this stems from a system which operates in a democratic framework. In this framework, elections must have at least the appearance of being competitive and the ‘commons’ will be already ‘enclosed’. The only mechanism, therefore, for ‘buying’ votes is redistribution of property which has already been allocated. The Hungarian ruling party and its Prime Minister, Viktor Orbán (1998– 2002, 2010–2022) deserve special attention. While in terms of its worldview and ideology fidesz is similar to the Slovakian Prime Minister Robert Fico and the Polish leader Jaroslaw Kaczyński, it differs from them in one respect. Orbán can win and recently has won elections with an overwhelming majority. (He 4.2

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has won about 50 per cent of the votes cast, giving him a two-thirds majority in parliamentary seats since 2010.) There is no doubt that the 2010 election at least, at which fidesz won a two-thirds majority in Parliament, was free and fair – only Putin’s popular appeal is comparable. (Though exactly to what extent the elections that Orbán has won have ever been ‘free and fair’ is disputed by the opposition and Hungarian and non-Hungarian political scientists.) In fact, fidesz only secured 53% of the votes in 2010, in an election where no more than 64% of the electorate voted. With this result, however, (given the curious nature of Hungarian election law which has never been challenged by any of the major political forces as long as it served their interests, and which is not unprecedented in other democracies) fidesz obtained 68% of the parliamentary seats. It possessed, therefore, a virtually unchecked and almost unlimited power to change laws. The party, now with a two-thirds majority, adopted a new constitution, which expressed the neo-conservative worldviews of the new government. Among other things, this new constitution insisted that Hungary had lost its sovereignty in March 19, 1944 when the Germans occupied Hungary militarily. This new interpretation absolved the country of responsibility for the deaths of the 600,000 Jews who perished mainly in Auschwitz following that invasion. The Hungarian parliament had the constitutional right to both adopt a new constitution and to change it at any time with a two-thirds majority. The political opposition countered this by pointing out that the government had passed the new constitution without sufficient consultation with opposition parties and the electorate. There had been only nine days allowed (!) for parliamentary discussion.25 Another thing that upset liberals was that the new constitution (officially called the Fundamental Law) limited the powers of the Hungarian Constitutional Court. There were also attempts to bring the judiciary and the media under executive control (for an outstanding, detailed summary see Vörös’s account of the limitations of the separation of powers, 2014).

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The US constitution was drafted and later approved in 1787 by the Constitutional Convention whose delegates were elected by ‘universal suffrage’ and it had to be ratified by all of the 13 member states. In the 18th century, suffrage was greatly restricted by race, gender and class. Incidentally, the US constitution has been amended 33 times in its over 200 years of history and the process is a very complicated one. In the 20 months following its adoption, the Hungarian constitution was amended five times (and since then has been another three times!). A simple two-thirds majority made this possible and there was no requirement of consultation. (We should note that the first 10 amendments of the US constitution also took place in its first year, but each time through a complex process of consultation.)

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In his excellent paper, János Kornai (2011) had already announced the end of democracy, arguing his case mainly by pointing out the limitations of the separation of powers. It may be useful here to cite Montesquieu, Huntington and Zakaria once again. If democracy (the republic) only means rule by the majority, it is hard to contest that fidesz acted according to democratic principles, at least between 2010 and 2014, and even after 2014 it has won more votes than the opposition. (This does not mean it ruled with ‘moderation’, to use Montesquieu’s expression.) During the times when fidesz had a two-thirds majority in parliament, it pass­ed legislation – in accordance with the regulations of existing constitution – that incidentally served its party interest. The change in electoral laws which had the most significant impact on election results was the introduction of single-round elections for individual candidates. Previously, if a candidate did not win 50% +1 vote in their first round, there was a second round of voting to decide between the top candidates. This change obviously benefited whichever party had a strong majority. The fidesz government also pushed through legislation giving voting rights for Hungarians living abroad. Since the liberal parties and the Left-wing party had opposed such a bill in an earlier referendum this also gave an advantage to fidesz. fidesz supported voting rights for all Hungarians irrespective of the length of their residence in Hungary. No one, therefore, can doubt that fidesz won the 2010 elections by rules accepted by all parties as ‘democratic’. While, it is true that, by 2014, they were managing those rules to their own benefit, these new electoral techniques did exist in other ‘democratic’ countries and all these changes had been passed according to the legislative and procedural rules. Hence the only basis for calling this regime a ‘dictatorship’ or ‘autocratic’ can be the limitations it placed on the liberal separation of powers. It is difficult to challenge the majoritarian legitimacy of the fidesz government (which was reconfirmed at the 2018 elections with a repeat of its two-thirds majority). However, calling the system of Putin or Orbán ‘democracy’, is a far cry from calling it ‘good’, or ‘moderate’ governance. Hungary is undoubtedly in the vanguard of the ‘Putinisation’ of post-communism. The Hungarian Prime Minister, Viktor Orbán has astutely called the system that he is trying to establish in Hungary ‘illiberal democracy’. To this, we only would add the term ‘managed’. In our view, then, the best description of the emergent system of legitimation in Hungary is ‘managed illiberal democracy’. The post-2010 Orbán regime is trying to establish a new rank order based purely on political loyalty to the new regime. This regime, in our view, is not more mafia-like than the other regimes (there has been no shortage of mafiosi anywhere in post-communist countries). What distinguishes it from the others

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is its extraordinarily aggressive push to build a network of clients. This clientelism is the main source of what is perceived by both inside and outside observers as its anti-democratic tendencies: Orbán’s regime places its clients in decision making positions in the media, in the judiciary, etc., where they will stay well beyond the current government’s term in office. Of course, politicians always try to put their clients into desirable/important positions. US presidents try to appoint judges to the Supreme Court who are sympathetic to their own legal/ideological positions. The chairmen of the fed tend to be of a similar political orientation to the president who appoints them. Networks, social capital and clientelism matters in all systems, but they have seemed to matter more than usual in Hungary since 2010. The most significant development as far as our argument is concerned is the ‘softening’ of property rights. Mr. Orbán’s party was briefly in government between 1998–2002. When they lost in a close electoral competition, Mr. Orbán acknowledged one mistake he made while Prime Minister: he did not create his own bourgeoisie. This is a mistake one does not make twice. He went on to win the elections in 2010, 2014 and 2018 comfortably, and made an effort to create and maintain a loyal base, realising that at its core must be a propertied bourgeoisie. During the fidesz government’s second and third terms (2010–) he is reallocating petty property rights from disloyal to loyal clients. After fidesz won the 2014 elections with a new qualified (two-thirds) majority, it went one step further, and is now trying to rein in Big Money. The weekly magazin hvg (September 2, 2017) quoted Orbán as saying after his reelection: “Trees do not, or if you like, cannot grow into the sky”. Since then he is attempting to limit the power of a few oligarchs and replace them with a whole set of smaller, supposedly more loyal oligarchs. This is a classic example of what we have called prebendalism, of making a class of ‘serving nobility’. What we see emerging in post-communism is legal-rational authority o­ perating within a (rather managed) democratic framework, combined in a novel way with some components of patrimonialism and more recently prebendalism. Let us be as clear as we can: we are not writing about policy error or a powergrab by one or several evil individuals. We do see a historically unusual (though not unprecedented) combination of legal-rational authority with some legitimacy claims typically existing under traditional authority. These managed, illiberal, democratic prebendal states are using substantial doses of ‘traditionalism’ or ‘conservatism’ – such as the centrality of religion patriotism, the traditional family, the sacredness of life etc. – in their ideology. This is illiberal, traditionalistic, conservative, or if you want to put it this way: neo-conservative. But these practices ‘inevitably’ stem (in so far as anything is ‘inevitable’ in

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­ uman history) from the accelerated transition from socialism to market capih talism within a democratic framework. While Putin and United Russia, Orbán and fidesz are reasonably close to being the ‘pure types’ we are trying to describe, as we have already mentioned, the ‘virus’ (no value judgment is implied by the term) has already infected all post-communist democratic societies. Or, maybe it has always been there. Russian and Hungarian liberal intellectuals tend to demonise Putin or Orbán, and they do not notice that these politicians have their ‘soul-brothers’ in virtually all post-communist societies. The twin brothers, Lech and Jarosław Kaczyński in Poland,26 Borisov in Bulgaria, Mečiar and Fico in Slovakia, Babiš in the Czech Republic, several top politicians in Romania, etc. What is unique about Putin and Orbán is not so much what they stand for, but who they are: they have a dose of charisma. Whether this is ‘genuine charisma’ or just ‘fake charisma’ is debatable, but easy to see that, unlike other traditionalist/neo-conservative leaders we have mentioned, they are capable of winning (and re-winning) elections and have – until their charisma is withdrawn from them – an enthusiastic and loyal following. 4.3 Cases of Turning to Prebendalism in Hungary? Arguably the most significant recent development – in Eastern Europe probably limited so far to Hungary – is the increasing insecurity of property rights, an indication of a move towards the Russian type of prebendalism. – Petty prebendalism. The Orbán regime, until the summer of 2013, was prebendalism of the petty bourgeoisie. This regime reallocated some property rights but tended to do so to the petty bourgeoisie. During 2013, for instance, the Hungarian government was involved in creating small-scale monopolies for tobacco shops; it issued licenses for the running of such shops. These became cushy – but tiny – businesses. The licenses were allocated systematically to clients of the governing party; buying in a way their loyalty and votes for the next elections. – Confrontations with the grand bourgeoisie. There was an exciting new development in the Orbán regime in 2013, when it began to challenge two of the wealthiest Hungarians. Case One: During the summer of 2013, Sándor Csányi (Example 5) was accused by the minister in charge of the Office of the Prime Minister, Mr. János Lázár,

26

Lech Kaczyński was the elected President of Poland between 2005 and 2010. On 10 April 2010, he died when a Polish Air Force jet crashed as it attempted to land at Smolensk North Airport in Russia.

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(then also a confidant of Prime Minister Orbán) of charging ‘usorious’ interest rates with his bank (otp). Usury is a crime so this potentially opened the way to a criminal investigation. Csányi fought back forcefully and threatened to sue the minister. He also kept emphasising how cordial his relations were with Mr. Orbán, and they often showed up together at football matches. Despite this, Csányi also promised to sue the Hungarian government in the European court in Strasbourg for imposing unfair costs on banks. Case Two: There was a significant confrontation with Sándor Demján (1943– 2018), who often competed with Csányi for the No. 1 position of the wealthiest Hungarian. The government nationalised the network of Saving Banks, an action which was met by strong – and futile resistance – on the part of the president of National Alliance of Saving Banks, Sándor Demján. He also clashed with the government when it significantly reduced trading hours on Sundays. So far neither Csányi, nor Demján had been ‘criminalised’, but the government had targeted some of the sources of their profits. This was all the more surprising since both of them supported the political right – but it may be an indication that a full swing turn to ‘Putinism’ is underway. Case Three: An even more colourful clash between the political elite and the grand bourgeoisie was the Orbán-Simicska war in 2015. This was an open and rather nasty confrontation between Orbán and Simicska (for a few known details about his life, see Example 11). Example 11: Lajos Simicska Mr. Lajos Simicska (b. 1960) was a close friend of Orbán (they shared even a room in college) and became a sort of party treasurer of the fidesz party. He not only raised funds for the party, but he himself became rather wealthy. Interestingly, there were no reliable estimates about his personal wealth, but some think it may not be all that far from that of the Csányi and Demján empires. Many commentators assume that he was also helpful in building family wealth for leading members of the party, probably even for Mr. Orbán. Interestingly, Simicska had been enjoying a successful business carrier between 2002–2010 (under the Socialist – Liberal government), as well. In 2004, the revenues of his companies were estimated to be 1.8 billion huf, by 2009 this had jumped to 40 billion (though it was never quite clear who really owned the firms under his control). After 2010, after fidesz formed a government, his wealth increased substantially; by 2015 it was estimated to be 73 billion huf.

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The origins of this conflict are unknown, but it is reasonable to assume that Simicska had become too powerful (politically) for Orbán. He had built up a large media empire consisting of daily newspapers, TV stations, radio stations, and he also owned most of the large-scale advertising hoardings. In 2014, he was already under pressure to sell some of these to new rising stars. He resisted this demand, and the conflict had become an open, heated war by February 2015. In various interviews Simicska wanted to explain the conflict in political terms. He claimed that he disagreed with Orbán’s opening towards Russia and his increasingly authoritarian style of government, but who knows. He might have been upset that other clients, in particular, Lőrinc Mészáros (Example 12) were starting to benefit from government-managed public procurement auctions. As a first move, the government cancelled a cushy highway construction contract with Simicska’s construction firm, and then it kept on punishing him in various ways. While his wealth is still considerable, it undoubtedly started to erode, going instead to the new loyal followers of the ruling party. Simicska’s net worth fell from 77 billion huf in 2015 to 77 billion huf in 2017, and to 27 bn by 2019, while, in the same period, Mészáros’s net worth leapt from 8.4 billion to 296 billion huf by 2019, making him the second wealthiest Hungarian. So far Simicska has not been ‘criminalised’ either and he may never be, since he knows far too much about the family wealth of high ranking fidesz party officials. Example 12: Lőrinc Mészáros Lőrincz Mészáros (b. 1966) started his entrepreneurial career as a gas fitter in the village of Felcsút (also the birthplace of Viktor Orbán) in the early 1990s, but he did not do too well, and by 2007 was close to bankruptcy. In 2006, his taxable income was 2.4 million huf. Mészáros started to build his business empire in 2013 with a net worth of 6.9 billion huf. His portfolio is vast. He owns banks, construction and manufacturing companies and a media empire of more than 200 national and local newspapers, TV and radio channels, etc. Although it was never proven, it is widely believed in Hungary that Mészáros is merely a Strohmann27 or frontman for Mr. Orbán, the real owner of all the wealth described above. As of early 2019, Forbes put him in first place among the Hungarian billionaires with an estimated wealth figure of 279 billion huf. This was enough to get him to No. 2057 in 27

This term was widely used in Nazi Germany and Hungary before 1945, when Gentiles were asked to take over the businesses of Jewish people on paper, although, in reality, they did not do anything with the business.

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the international ranking list. According to the latest Hungarian ranking, he is at the second place after Sándor Csányi with an estimated total wealth of huf 296 bn, but he is Number 1. on the basis of agricultural land cultivated by his family members and family-owned companies. Suspicious rises (and falls) in wealth (hinting at ‘corruption’) are not rare in post-communist Eastern Europe. One other example is Romania. After the presidential victory of Klaus Johannis in 2014, the government started a violent anti-corruption campaign. Over 1,000 people were charged with corruption and it is hard to tell how many of these were political opponents primarily and how many corrupt political partners were actually let off the hook. 5

Is China on the Road to Putinism?

China seems to be converging with Putinism as well. President Xi is making a bid to become a ‘charismatic leader’, allowing the official media to call him ‘father Xi’ and giving long addresses to scientists and writers about what they should do. His campaign against ‘corruption’ sounds very much like the selective criminalisation of the illiberal democracies of post-communist European countries like Hungary or Romania that we have discussed above. BO Xilai, as we will show later, was a Maoist challenger of the current leadership of the Communist Party. Was he sentenced to life imprisonment because he was corrupt, or was this a case of selective criminalisation? Bo was accused of acquiring a couple of million dollars through corruption, was given a life sentence and stripped of all his assets. The anti-corruption campaign is suspiciously similar to Putinism. Is China on its way to prebendalism? We do not have enough evidence to tell, but the attack on BO Xilai and his supporters looks rather like Putin’s attacks on the Russian oligarchs. From China to Russia to Eastern Europe, post-communism may be converging on an illiberal prebendal system. In the sub-sections which follow, we explore the changing relationship between political power and big business. In Chapter 4 we suggested that during the 1980s China was building ‘capitalism from below’ and that many of the wealthiest people in China even during the early 2000 lists of rich Chinese came from humble backgrounds (like the Liu brothers or the Yang dynasty). Even those who seem to have fit the image of political capitalists (like Rong) were not political capitalists in the sense we know from post-communist Russia or even from some Eastern European countries. The Hurun 2014 list was

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already painting a different picture. There were still some families which fit the ‘capitalism from below’ thesis, but five young entrepreneurs did not. They were young and had made their wealth in information technology or other hightech industries. But what appears to be really new in the last 15 to 25 years is the accumulation of substantial family wealth by high-level political cadres, a new Chinese form of ‘political capitalism’. Once they have entered the political fray, one set of cadres lose out as ‘collateral damage’. Their business partners – some of them political capitalists who became rich thanks to party connections, others just nouveau riche who needed party protection – will go down with them as well. 5.1 The Old Bottom-Up Grand Bourgeoisie While in the early years of the decade most of the top 10 wealthiest people tended to be ‘bottom up’ capitalists, in the 2014 list we found only two who fit this bill, ZONG Qinghou and YAN Jiehe. Zong’s story reads very much like that of the Liu brothers. He had little formal education, coming from a dirt-poor family. He was a manual worker who started a small business (Wahaha – a beverage company) in the 1980s, which eventually grew big. By 1 January 2019, his net worth had reached $8 billion, earning him 155th position on the Forbes list of billionaires. Yan is a little different, his parents being teachers, but according to his own account, they were discriminated against, especially during the Cultural Revolution. He worked in the construction industry in the 1980s and started his own company in 1995. He became rich when a tve in the construction industry was privatised. Let us also note that the ‘bottom up’ capitalists we spotted in earlier Hurun lists, the Liu brothers and the Yang dynasty, are still rather wealthy. They fell off the ranking not because they lost wealth, but because the other nouveau riche became so much wealthier. There is still a ‘bottom-up’ bourgeoisie in China; they are just less likely to end up at the very top of the list. 5.2 The New Bottom-Up Grand Bourgeoisie Jack MA and LI Yanhong ares good illustrations of a young entrepreneur who made a fortune in information technology (Examples 13 and 14). Example 13: Jack Ma The most extraordinary story is that of Jack MA (b. 1964), the ceo of Alibaba. His grandfather was a civilian leader, but he was blacklisted as Mao gained power because he was associated with the Kuomintang. At the age

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of 12, Ma bought a radio and listened to English broadcasts. This was when he first got interested in the language. He took the Gaokao (the Chinese national examination) three times until the English Department of Hangzhou University finally accepted him. At university, Ma excelled academically. He was elected as student president and chaired the inter-university league of students. In 1988, Ma graduated from Hangzhou Normal University in English. In the same year, he taught English and international trade in Hangzhou Electronic Engineering College. Between 1988 and 1992, he was a translator, and in 1992, he started a translation firm, hiring retired teachers to do the translations. The firm did not do all that well, and had to engage in all sort of other businesses like selling flowers. Nevertheless, it helped him to establish networks with important people. In 1994, after learning about the internet and visiting Seattle to learn more about it, Ma decided to invest in IT. In 1995, Ma founded the first internet firm in China with rmb 20,000. At this time, China was only three months away from launching the internet. In the same year, Ma launched a commercial website, also known as the ‘Chinese Yellow Pages’. He sold it in 1997, earning around rmb 100,000. In 1997, he joined the Chinese Ministry of Foreign Trade and Economic Cooperation to develop their official website and a network market for the ministry. In 1999, he founded Alibaba and started to develop this online shopping platform. Ma raised usd 25 million for Alibaba from international banks. As early as 2000, Ma was featured in Forbes’ cover story. In 2003, Ma founded Taobao (a Chinese eBay). Around the same time, he founded Alipay (a Chinese PayPal). In 2005, Yahoo China swapped shares with Alibaba. Ma became Yahoo China’s chairman. Alibaba issued its ipo in Hong Kong in 2007 and in 2014 on the New York Stock Exchange. Ma’s real-time net worth was estimated at $33.4 billion by the Forbes list of billionaires as of 1 January 2019, securing for him the position of No. 22 on the ranking list and making him No. 2 among Chinese billionaires. According to his company, Jack Ma will withdraw from the company on 10 September 2019. Example 14: Li Yanhong LI Yanhong (b. 1968) (English version: Robin Li) was born in Shanxi to factory worker parents. In primary school, Li was appointed as the class prefect. He was a disciplined student, and usually ranked among the top three in his school. In secondary school, he became interested in computer

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­ rogramming. He came second in a local program-writing competition. In p 1987, he the highest-performing student in his city’s Gaokao, and entered Beijing University. After graduation, he was admitted to the State University of New York at Buffalo, where he got an MSc in Computer Science. He turned down an offer of a place on the PhD programme, deciding instead to look for jobs where he could use his computing skills. He spent three months at Panasonic as an intern, then, in the summer of 1994, he began an internship at Dow Jones. Between 1994 and 1997, he worked at Wall Street. He became a Dow Jones senior advisor and a financial information system designer for the Wall Street Journal. After his spell working at Wall Street, he spent some time in Silicon Valley, working for Infoseek, at that time a popular search engine. He invented esp technology and applied it to Infoseek. He also designed the image search function on Go.com. In 1999, Li decided to return to China. He set up Baidu with seven other people in Beijing. Baidu received $120 million venture capital within nine months of establishing the business, and another $100 million afterwards. In 2001, Li transformed Baidu from a portal website into a pure search engine despite tremendous resistance from its shareholders. Nevertheless, Li turned out to be right: this was a turning point for the company. As of 1 January 2019, his real-time net worth was estimated at $11.4 billion, which put him at No. 118 in the Forbes list of billionaires. Both Ma and Li are ‘bottom-up’ rich, but they are bottom-up much like many of the IT wealthy in the US and elsewhere in the world. While they did not need a party or army connection to become rich, given the Chinese government’s strict internet controls, they probably have to cooperate with the ­security forces to run their businesses. So this is the classical Chinese story of ‘bottom-up’ capitalists, yes, you can become rich as a ‘self-made man’, but once you are wealthy, you may need contacts or even protectors in the state and party bureaucracy. 5.3 Selective Criminalisation of Political Opponents The evidence at our disposal suggests that in the past 15 to 25 years some of the high-level political cadres and their families have been becoming rather wealthy. We hypothesise that, during the 1980s, the road to wealth was ‘bottom up’, but after 1992, or the year 2000, communist cadres did not want to be left out and used their office to accumulate wealth for themselves or families. Whether this all was done according to the laws or whether it can be seen as corruption is hard to tell. After 2012, President Xi started an anti-corruption campaign, and major party and state leaders were accused of corruption and

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sentenced to long prison terms. We review the two most eminent cases, Bo Xilai’s family (Examples 15 and 16) and ZHOU Yongkang (Example 17). Example 15: Bo Xilai BO Xilai (b. 1949) was born in Shanxi, the son of Bo Yibo (1908–2007) a ‘wartime hero’ and one of the ‘8 elders’ of the Communist Party under Deng Xiaoping. Bo’s father had held high positions such as Finance Minister and Advisor to the State Economic Committee. Under Deng, he played a leading role in the ousting of two successive Communist Party general secretaries, Hu Yaobang and Zhao Ziyang, during China’s tumultuous and failed liberalisation in the 1980s. Bo Xilai received a BA in World History from Peking University (1979) and joined the Communist Party in 1980. He gained a Master’s degree in International Journalism from the Chinese Academy of Social Sciences (1982). During 1993–2000 he was Mayor of Dalian city and played a key role in transforming Dalian from a dull port city into a modern metropolis. Later he served as Governor of Liaonin, as prc Minister of Commerce and finally, from 2007 until 2012, as a Member of the Central Politburo and ­Secretary of the Com­munist Party’s Chongqing branch. In Chongqing, he experimented with in­novative – Mao-inspired – populist reforms (the ‘Chongqing model’ and was regarded by most top leaders in Beijing as a dangerous competitor. Some ­leaders did not share this view, the main exception being Zhou Yongkang, who was Chief of Domestic Security of the prc and a fellow Maoist. He was campaigning to be elected to the Standing Committee of the Politburo of cpc in 2012. On February 6, 2012 Wang Lijun, Bo’s top lieutenant and police chief, sought asylum at the Chengdu American consulate. After one day at the consulate, he gave himself up to the Chinese police. In custody, he claimed he was escaping from Bo. He claimed that he had evidence against Bo’s wife, Gu Kailai in the murder case of a British businessman, named Neil Heywood on Nov. 14, 2011. According to his testimony, he had initially cooperated with Bo to cover up the crime. This absurd episode was the beginning of the fall of Bo Xilai. As a first step, Beijing authorities went after Gu Kailai. WANG Lijun was a key witness against her, but he also ended up in jail. In Sept. 2012, Wang was charged with defection, abuse of power and bribe-taking. After a two-day trial in Chengdu, he was convicted and jailed for 15 years – a relatively lenient sentence thanks to his cooperation with the police.

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Example 16: Gu Kailai GU Kailai (b. 1958) came from a high-level cadre family. Her father was an important general in the army and Vice Secretary of Xinjiang province. She studied law at Peking University from 1978 and gained a master’s degree in International Politics. She met Bo in 1984. She was called to the bar in 1987 and started a law firm in Dalian, but moved it eventually to Beijing. The son of Bo and Gu, Bo Guagua, studied ppe at Oxford, then on to study at Harvard. When Gu was charged with the murder of Neil Heywood, the prosecution claimed that she had had a long-standing business relationship with him. Heywood served as an intermediary, linking western companies to influential figures in the Chinese political structure. Foreign companies wishing to work in Chongqing had to appoint Gu Kailai’s law firm to act on its behalf. The law firm, Kailai Law (now Beijing Ang-dao Law), is said to have charged exorbitant fees. The prosecution claimed Gu wanted to transfer substantial funds illegally from China to the West. She asked Heywood to do this on her behalf, but Heywood wanted to charge a fee that Gu considered too high. On Nov. 14, 2011, Heywood was found dead in a Chongqing hotel. At that time, it was claimed that he died of alcohol poisoning and his body was cremated. After Wang Lijun broke the story Gu was investigated, and in July 2012 she was charged with murder. She was accused of meeting Heywood in the hotel and of poisoning him with the assistance of Zhang Xiaojun. Her trial on August 9, 2012, lasted for seven hours. GU was sentenced to death, but was not executed (capital punishment is the usual sentence for murder in China). She will, however, have to spend her life in jail. Zhang was given a nine-year prison sentence. Example 17: Zhou Yongkang ZHOU Yongkang (b. 1942) was sacked from the Standing Committee in 2012 and by the end of 2013 he was being investigated for alleged abuse of power and corruption. First, he was expelled from the Communist Party, then he was found guilty of accepting about US $118,000 in bribes, including money and property from Jiang Jiemin, an oil and gas executive, the former head of the state-owned China National Petroleum Corporation. Zhou’s wife Jia Xiaoye, and his son from a previous marriage, Zhou Bin, had taken more than US $20 million in bribes from others including Sichuan

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businessman Wu Bing, former Luliang mayor Ding Xuefeng, and cnpc chief accountant Wen Qingshan. A Xinhua report claimed that Zhou worked for Jiang and that Liu (of the Liu brothers – see above) had provided $345 million to Zhou’s relatives. According to Xinhua, Zhou’s wife and three of Mr. Zhou’s relatives – a s­ isterin-law, a son and Ms. Zhan, the son’s mother-in-law – hold or have controlled stakes in at least 37 companies scattered across a dozen provinces, from Audi dealerships to property firms. He was convicted in 2015 for the bribes he and his family accepted. His sentence was life imprisonment. Next, we compare their wealth to current and past party/government leaders (former president Hu, former Prime Minister Wen, current president Xi), and we pose two questions: (1) is it possible that Bo and Zhang were ‘selectively criminalised’? If obtaining the kind of wealth they accumulated while in office suggests ‘corruption’, and (2) why is there no investigation of the wealth of some past and current leaders? Finally, we end this section with the case of a real ‘political capitalist’, WANG Jianlin, who is the source of a great deal of the current Chinese leaders’ wealth and who is happy to confess that his political connections were instrumental in creating his business empire. Bo’s fall from grace started right after Wang Lijun was captured as he left the US consulate. Within a month, he was dismissed from his job as First Secretary of the Communist Party of Chongqing (a city of 30 million inhabitants!) and was criticised by Prime Minister WEN Jiabao in a press conference. By April he had already been expelled from the Central Committee, and soon after from the cpc, too. It was one more year before he was criminally prosecuted. On 25 July 2013, Bo was accused of corruption and abuse of power. His trial began on 22 Aug. 2013 and concluded on 26 Aug. 2013, i.e., it lasted four days. According to the indictment posted by the court, Bo received bribes of 21.8m yuan ($3.56 million) from two Dalian-based businessmen – Tang Xiaolin and Xu Ming. Bo denied both accusations in court. Xu Ming was in custody; Tang Xiaolin’s whereabouts were unclear. Bo appealed the verdict, but his appeal was rejected. The dollar amounts mentioned in the verdict were tiny compared with the Zhou family’s wealth. A New York Times investigation found that the family had documented assets of more than $160 million, a conservative figure that did not include bank accounts, real estate, assets held by proxies or other wealth not reflected in publicly available records. A New York Times journalist posed the intriguing question: “Is President Xi really trying to crack down on ­corruption, or he is consolidating his hold on power?” (Forsythe 2015b). The journalist also

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mentioned the even larger family wealth of Wen, Xi and Jia. Rather than accumulating excessive wealth during their time in power, it seems to be safer for high-level officials to catch out their political enemies (Bo and Zhou were political allies and enemies of Hu, Wen and Xi) and accuse them, not of ideological deviation, but of corruption. This is what we called ‘selective criminalisation’ in the context of Putinism. But there are also signs of prebendalism – with Chinese characteristics. Once political enemies were ­sentenced on the grounds of corruption, their wealth was confiscated and, even more intriguingly, the wealth of their business associates was also confiscated. The authorities seized at least US $14.5 billion assets from Zhou’s family and associates (including bank deposits, bonds and stocks, apartments, villas, antiques, paintings, cars, gold, etc.). Ten family members and 20 personal employees (drivers, bodyguards and secretaries) were detained. About 10 officials were also under investigation. Among them were YIANG Jiemin, former chairman of both state energy giant PetroChina and its parent China National Petroleum Corporation (cnpc), former Vice Minister of Public Security LI Dongsheng and JI Wenlin, ex-vice governor of the southernmost island province of Hainan. New Wealth Acquired by High-Level Officials through Political Connections While in Office As we have already pointed out, the case of Wen was a prime example of the tremendous wealth accumulated by family members of high officials while they were in office. It is hard to assume that such wealth could have been obtained without using the networks (to express the notion of ‘corruption’ in the mildest terms), which the high-ranking family member would have had. As we said earlier, all new rich and probably many or most high ranking officials are likely to have ‘skeletons in their closets’. The question is: whose closets those in power decide to open, and indeed, the Bo and Zhang case seem to suggest that they tend to be the closets of political competitors or enemies. The uniquely Chinese characteristics of this selective criminalisation is that the primary ­targets seem to be first and foremost political competitors, not business partners. When the political patron falls, however, their business partners are likely to be in great trouble as well, and massive wealth is appropriated (and supposedly redistributed) to those who presumably are loyal clients of the people in power. In comparison to dollar billionaires, Bo appears to be a relatively ‘poor’ man; Zhou belongs to the same club as the ones still in office. This, together with the very short trials leading to long sentences seems to support the ‘selective 5.4

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c­ riminalisation’ thesis. But who is Wang Jianlin (Example 18), the man who seems to be the treasurer of China’s political elite? Example 18: Wang Jianlin WANG Jianlin’s (b. 1954) father was in the Red Army and was a Communist government official. Wang Jianlin joined the People’s Liberation Army at the age of 15. After eight years he was promoted to team leader and entered military school. He then studied party politics in Liaoning and obtained a bachelor’s degree in Economic Management in 1986. For a while, he worked in the government as a vice supervisor. Then, he began doing business in one of the government-owned corporations, solved its debts and earned his first million dollars in 1988. He is a member of cpc. In 1992, Wang set up Wanda, which was a real estate company. The New York Times conducted an exciting and exceptional interview with him. When explaining his b­ usiness success he told a reporter: “Stay close to the government and distant from politics”, and he continued: “It’s a fact that China’ economy is g­ overnment-led, and the real estate industry depends on approvals, so if you say you can ignore the government in this business, I’d say that’s impossible….[to say so would be] hypocritical and fake… But we do not pay bribes”. Forsythe (2015a). As of 1 January 2019, his real-time net worth was estimated at $22.5 billion, which secured him position No. 34 in the worldwide list of billionaires.

…

We are now ready to conclude our review of the legitimation system under post-communism. The transition from communism has been guided by the principles of legal-rational authority (what we call liberalism) and democracy (what we identify as a majoritarian selection of the leaders, Wille der Beherrschten). Given the challenges of the fast pace of transition, especially the conversion of public ownership to private wealth, liberal democracy was not consolidated in most (or any?) of these countries. They all (or most of them) are pregnant with patrimonialism. Prebendalism, illiberalism and such potentialities come to fruition (or to use other terminology: such viruses mature) if leaders with charisma appear on the scene. As long as these leaders deliver miracles, tradition-bound societies appreciate that they provide both security and welfare at the same time. This is probably what the majority of these societies aspire to.

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However, China has arguably entered a new epoch of its development, which shows signs not only of convergence with Putinism, but also more and more of prebendalism. Whether this began with the President Xi’s rise to power or whether its roots are in the 1990s, in the Jiang Zemin epoch, needs careful investigation. Huang Yasheng may have been right when he claimed that, during the 1990s, China changed direction from the entrepreneurial ­capitalism of its early years, more toward state capitalism. But he probably offered too optimistic an evaluation of the Hu–Wen decade. It is now often seen as a ‘lost decade’. If the Hu–Wen leadership’s primary aim was to deal with the excessive inequalities of the Jiang Zemin years, they failed. On December 18, 2012, the South China Morning Post carried a story in which Survey and Research Centre for China Household Finance, a research arm of the Southwest University of Finance reported that the Gini coefficient (which measured inequality) in China had jumped to 0.61, placing China as the second least egalitarian society after South Africa. A year later, on January 18, 2013, the South China Morning Post reported that the Chinese Bureau of Statistics claimed that the Gini index had declined from 0.491 in 2008 to 0.474 in 2012. It is hard to tell which calculation is accurate, but both figures confirm that it would be hard to say that Hu and Wen’s policies have succeeded in turning China into a harmonious society. The data presented above make the Hu–Wen decade look even worse especially compared with the excessive enrichment of the political elite, including former Prime Minister Wen, but also former President Hu. Xi Jinping was rather critical of Hu–Wen rule, but he was wise enough not to make public how extensively they had used their power to enrich themselves and their families – after all, Xi and his family were also becoming wealthy. Instead, President Xi promised a return to the more market-friendly and more liberal policies of the 1990s. As he consolidated his power, he appeared to be moving in the opposite direction, and, much like Putin, strengthening the statist path of the economy towards state industrial policies (and control of society). Seven years into his presidency we do not see much liberalism, but we do see signs of Xi accumulating power in his own hands, of a developing personality cult and of ‘selective criminalisation’ of his political opponents, clothed in the ideologically more acceptable garb of an anti-corruption campaign. But since in China ‘politics is in command’ the targets of such ‘selective criminalisation’ are other politicians. Bo Xilai and Zhou Yongkang and their clients among the grand bourgeoisie are only ‘collateral damage’. As Yan Jiehe put it so astutely: “A patron can turn into a volcano. Volcanic eruptions of Zhou, Bo, and

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Ling brought disaster to many bosses”.28 This is indeed at least a half-turn towards prebendalism. Unlike Xi, Putin and most recently Orbán select not only political enemies for criminalisation but often disloyal members of the grand bourgeoisie. 6

Social Structure in Post-communist Societies in or on the Way to Prebendalism

The most intriguing development in a country like Hungary, however, is the use of economic capital through re-nationalisation and re-privatisation to create a large mass of clients (Mihályi 2014b). In most post-Soviet states there was a strong tendency towards the formation of a new class of grand bourgeoisie during the 1990s. A unique feature of this class formation was its ‘patrimonial character’ – the new rich were mainly selected by the ruling estate. Until the rise of Putin, their property rights had appeared to be rather secure. It was Putin who put the new class to the political loyalty test and if they did not pass it through some legal mechanism, they were deprived of their property. This was then re-nationalised and/or re-privatised to the new loyal followers. In post-communist Russia, having cultural capital was never enough for a person to make it to the upper class. Cultural capital is seen more as a danger; journalists, for example, might get killed. In May 2013, after a frightening and humiliating interrogation a leading theoretical economist, Sergei Guriev fled to Paris to avoid prosecution.29 There was, of course, corruption in Putin’s Russia. As we argued in Mihályi and Szelényi (2019) there is corruption in every capitalist society (and especially at the stage of original accumulation of capital). Corruption is all but codified in the election finance law. Given the inadequate public funding of electoral campaigns, politicians at both ends of the political spectrum depended on ‘donations’ from big business. The businesses are compensated for these by lucrative public procurement orders. (This occurred especially in highway construction, such a mechanism being used both by the social-liberal and the right-wing governments.) Political capital remained important in post-Soviet 28 29

Tom Mitchell. (2015, February 1). “YAN Jiehe, cpcg; the Chinese billionaire turned debt collector”, Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/1cddb8cca7ac-11e4-8e78-00144feab7de.html. Very soon, in 2015 Guriev became the Chief Economist at the European Bank for Reconstruction and Development.

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states, and some of the new rich also moved into politics. But there is now some convergence with the Russian prebendal formation taking place. The political leadership is using re-nationalisation to build a new system of clients. This resembles more what we called the Thief of Bagdad (namely petty thieves) in our Making Capitalism without Capitalists, i.e., the ‘small privatisation’ of the early 1990s rather than the ‘big bank robbery’ of the privatisation of soes during the second half of the 1990s. What is in the making is more a middle entrepreneurial class, than a grand bourgeoisie. This process does, however, certainly weaken property rights and reinforce the rank-like character of the stratification system. Since 2010, it has been the Orbán regime in Hungary which has led the region back most forcefully to the East; from the Central European group of countries to the Eastern European group. Many aspects of the regime reveal this Hungarian shift to the East, a shift that has a broad appeal in Eastern Europe. The Orbán regime – much like the right-wing in Poland and even some in the centre in the Czech Republic – is Euro-sceptic (or ‘Euro-realist’ as they like to call themselves); it is conducting a ‘fight for freedom’ from the EU and other international economic institutions like the imf. For our analysis, however, the most important aspect is Hungary’s leading role among Eastern European countries in making property rights insecure once more – in so doing it is coming close to the Russian type of prebendalism. On the first day Putin gained office in the year 2000, he confronted the ‘oligarchs’ and began to reallocate the wealth of the richest members of society. This was prebendalism of the grand bourgeoisie. The Orbán regime, in contrast, until the summer of 2013, used prebendalism of the petty bourgeoisie. This regime reallocated some property rights but tended to do it in favour of the petty bourgeoisie. There was an interesting period in the Orbán regime in 2013 when it began to challenge two of the wealthiest Hungarians. Csányi, however, was not personally insulted by the Prime Minister in any way. At least he has not been up till now – the early months of 2019. All this is not just a local Hungarian story. Orbán has appeal in some of the Eastern European countries, especially in Poland with his Euro-scepticism. Many Czechs are also euro-sceptics while Serbia, Bulgaria, Romania have a long history of being pro-Russian. For these reasons the orthodox call for law and order, strong leadership, resistance against German ‘colonization’, resistance to ‘migrants’ and multi-culturalism may hold a wider attraction. Since post-communist privatisation has been a matter of redistribution of property rights – a process many may see as ‘corrupt’ – this can also be added to the political agenda in most of the Eastern European region.

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Reform China is a different story. The Communist Party has retained its political hegemony. While arguably under Putin political capital may have regained its predominance in Russia; economic capital has challenged political authority in significant ways, albeit so far unsuccessfully. In Eastern Europe, even the Orbán regime, which is the most extreme case of restoration of political power over the economic one in the region, has not yet succeeded in bringing politics back into command. In China, however, politics is indisputably in command. The Chinese system remains dominated by the political estate, but the times of ‘capitalism from below’ have been over since the mid-1990s. As China moves towards the privatisation of the corporate sector, two questions remain unanswered: 1. To what extent is this privatisation ‘real’? Does it really create genuine, identifiable owners? Or does it enrich former top managers, high-level cadres and/or their families and children? (The story of the Wen family is good illustration of this.) 2. Is this privatisation really quasi-privatisation as Huang Yasheng has asserted, leaving assets in the hands of publicly-owned banks, and merely developing cross-ownership among publicly-owned entities? If this is the case, all that is emerging is a new class of technocrats which does not exercise full ownership rights but does have the right to dispose of ‘privatised’ property. As the communist order disintegrated, it looked like the former socialist societies were taking off in different directions. Eastern Europe was joining the EU and global capitalism and it appeared that economic capital was gaining firm control and that social structure was on its way to becoming clearly class stratified. Russia (and most of the ex-ussr countries), however, retained a much stronger political hand. The transformation, though it was pointing in the capitalist direction was led by a central hand even if that hand did not legitimate itself any longer with the ideology of socialism, being more inclined to issue a nationalistic appeal. China after 1978 was building ‘capitalism from below’. It started the reform by first allowing free market forces to operate. It unleashed an economy based on family farming, and then opened it up to small-scale rural industrial enterprises – the tves. The next stage was creating isolated free trade zones attracting mainly small-scale Chinese capital from Hong Kong or Taiwan. The awarding of property rights in the public sector happened much later, but even when the corporate sector was privatized, the power of the Party was retained.

Chapter 7

Conclusions: Is Putinism a Model for Post-communism? The principal hypothesis of this book is that in some (or most) post-­communist societies one can detect elements of prebendalism and/or patrimonialism (see Figure 2 for a visual presentation). Given the speed with which the ‘commons had to be enclosed’ (rapid privatisation of state property), and since information about the value of the property put up for privatisation was unreliable and buyers had no credit history, some elements of patrimonialism (which can also be termed ‘corruption’ or ‘paternalism’) were present in all post-communist orders. Patrimonialism was dominant in Russia during Yeltsin’s time. Yeltsin all but appointed the new property owners. The Russian ‘new rich’, however, enjoyed security of ownership and over time even developed political ambitions. They began to act as oligarchs (or boyars – to use the historical analogy). Under ­Putin, Russia shifted ‘back’ from patrimonialism to prebendalism. Putin broke the political power of the oligarchs, and he is systematically reallocating property from oligarchs regarded as disloyal to a new set of followers. ‘Putinism’ seems to have its appeal in other post-communist societies; most importantly in China, in Kaczińsky’s Poland and Orbán’s Hungary. A combination of legalrational authority with patrimonialism/prebendalism is an inherent characteristic of post-communism. Mao famously defined communism as a system in which ‘politics is in command’ (Kraus 2012: 24). Ironically, Putin and co’s illiberal post-communist capitalism is shifting in this direction. Under Yeltsin, the oligarchs began to ‘privatize the state itself’ and caused state failure. Illiberal post-communism – unlike communism – does not eliminate private property, but it does bring it under political control. Big Money must either accept this, or move abroad (potentially putting economic stability at risk in the longer run). Both Yeltsin’s patrimonialism and Putin’s prebendalism differ sharply from liberal market economy, where ‘economics is in command’. As Marx and Engels (1848) so famously formulated it: “The executive of the modern state is nothing but a committee for managing the common affairs of the whole bourgeoisie” (p. 486). This is, of course, a gross simplification of an insightful idea about liberal democracy. In a competitive democracy, the state actors have to win elections and persuade a voting majority that their interests will be served. Nevertheless – especially © koninklijke brill nv, leiden, ���� | doi:10.1163/9789004413191_008

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due to campaign financing and funding of media – Big Money does play a huge role in shaping politics. It would be an exaggeration to suggest that the ‘one man, one vote’ principle has been replaced by the practice of $1, one vote. But who can doubt that a corporation or an individual with assets worth $1 billion does not have a greater impact on the outcome of an election than an individual with a $35,000 annual income? In the first years of the second decade of transformation, Russia produced spectacular growth. It is unclear though, whether this was the result of the newly implemented prebendalism. The Russian miracle had a lot to do with higher oil prices. Russia turned into a rentier state (arguably even more than the Soviet Union ever was) and suffered severe damages after 2008, when energy and raw material prices fell. On balance, neo-liberalism performed slightly better. Countries like Poland, Slovakia and the Baltic states were the most successful examples of this. Poland was the only one which remained on a growth trajectory during the international financial crisis and the Great Recession. Hungary did poorly and went into a prolonged recession. There is little doubt, however, that all post-­ communist regimes, irrespective of their system of domination, whether neo-liberal or patrimonial, did better than they would have done had they stayed on the state socialist trajectory. The nostalgia for its communist past which still haunts the region is silly, on the whole. People are now freer, and most of them live better than they or their parents used to live 30 years earlier. This nostalgia is either people romanticising their own youth, or it is a rational expression of anxiety in a new world where there is less security and more risk-taking. Nevertheless, the hopes of the late 80s or early 90s were not quite fulfilled. People may be living better than they used to, but they are not living quite as well as they had hoped they would. This explains their shift to the far right. Eastern Europe did not become the West, and it remained on the periphery. As Iván T. Berend (1998) formulated, the problem both for socialism and post-­communism was that this was a ‘detour from the periphery to the periphery’. During the early 1990s, we met David Stark, Professor of Sociology at Columbia University several times at various conferences. He often recited an old Irish joke. A tourist in Ireland asks one of the locals for directions to Belfast. The local man replies: “Well sir, if I were you, I wouldn’t start from here”. This is a good joke, but it overstates the importance of the initial conditions and understates the policy errors made in selecting the pathway. So can we learn from each other or can we only learn from our own mistakes? We do not want to end this book on a totally agnostic note. If there is a lesson to be learned it is certainly a complex one. The road from socialism to capitalism has proved to be rockier, costlier (and slower) than anticipated. Some of those costs should be

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discounted given the ‘initial conditions’. Other costs, however, were incurred because of poor policy choices made by the governments. Some of the benefits of transition to market economy and democracy might have been overestimated. Fewer benefits actually materialised than had been hoped for and costs turned out to be higher than society was prepared to pay for. The result was popular disillusionment. Let us return to the Irish joke. What could our response be when the stranger who has lost his way somewhere in Ireland asks us, “Which is the best road to Belfast?” First, we would ask: “Are you sure you want to go to Belfast? There are many other possible destinations, why don’t you compare at least some of them with Belfast? Would you consider London or Stockholm instead of Belfast? How much do you know about Belfast anyway? It’s possible that Belfast is not actually quite as lovely as you think, so if you get there you may regret it”. The second point we would make would be, “Well, there are many roads which will get you to Belfast, as you probably know. Some roads may not be for you. Some require a lot of climbing, and given the conditions of your knees, we would not recommend you take those. Don’t let anybody fool you with a claim that there is only one (or that there is a ‘best’) way you can get to your destination (whatever that may be). The first thing we need to do is eliminate some of the roads which are obviously not suitable for you and once we’ve done that you can make a careful evaluation of the costs and benefits of each of the roads open to you”. Finally, we would say that each destination offers various kinds of benefits, and each road has various and multiple kinds of costs. Deciding which benefits you want and what prices you are willing to pay cannot be established in a scientific manner. These are political choices that must be made by a well-­ informed public in a democratic process. Belfast exists, and the beer is good, but the place is boring. London is exciting, but you might find it too big, and you would feel lost in it. Stockholm may be the right size with just enough excitement, but will you be able to stand the long, cold winter nights? It depends, therefore on what your preferences are. The same goes with costs: if you take road A rather than road B it may take you longer, but it may be shadier, meaning you will suffer less from exposure to intense sunshine. So how much are you willing to pay, and what are you willing to pay for? After all, the transition is over, having incurred fewer or more costs, and caused more or less disillusionment. The process might have been less frustrating, however, if it had begun with fewer illusions and had there been more cool-headed, rational calculation by an informed public in a democratic discourse.

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Last, but not least, let us not forget that there are no final destinations in history. The market transition is over, but there are other transitions (making a welfare state for some, transiting to democratic policy for others or all of the above…) ahead of us. You are again – always – at a crossroads. Think about the advice we just gave to the lost stranger in Ireland. And do not forget: once you got to Belfast, you may continue your journey to London, New York, or who knows, perhaps to Singapore. This leads us to the concluding point of this book regarding the special trajectory China has followed. We were often warned (Sachs 2005) to be very careful in comparing the Chinese transformation with the post-Soviet and postcommunist European transition. Ironically, the argument is just the opposite of the Irish joke. The Irish joke implies that the problem is with the initial conditions that you could easily get to Belfast if you started from a better position. Now the initial conditions in China were, without doubt, the worst. If China – unlike the former ussr or its former Eastern European satellites – is a success story, this should not be attributed to the initial conditions. It could be the outcome of the ‘advantages’ of backwardness (to invoke Gerschenkron 1962). So, either the inverse of the Irish joke is correct, or the Irish joke is posing the wrong puzzle: what matters are not the initial conditions, but the selection of appropriate policies. When it comes to evaluating what matters more, initial conditions or policy choices, we are firmly sitting on the fence – both matters. The Czechs may have made some policy errors, but they are still doing all right, their point of departure having been so much better. The initial Hungarian conditions were pretty good, but they are doing poorly now and policy errors may be behind this. The Poles were not in great shape during the 1980s, but now they are doing better, probably because they made some good policy choices. We can think about China in the same way. Can one claim that the Chinese did something right or that they have only done well because they started from the very bottom (benefiting from the advantages of backwardness)? The bottom line of this book is: Putin’s United Russia and Orbán’s fidesz party are somewhat close to each other, and it is reasonable to describe them as post-communist illiberalism (or neo-conservatism) or managed illiberal ‘democracies’. However, there is also one unique feature of Eastern European and Russian neo-conservatism. Putin and his East European allies are strongly probusiness and pro-oligarchs. One cannot accuse them of being ‘populist’. Some of their economic policies can appear to be ‘left-wing’ (being anti-EU, antiglobalisation, and nationalist in economic policies) This is especially true for Orbán, but also relevant for Mečiar/Fico, Kaczyński, Borisov or even Klaus. A Hungarian sociologist, Zsuzsa Hegedűs (2013), went so far as to call Mr. O ­ rbán

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‘the true social democrat’. Alas, in the political mess post-communist Eastern Europe finds itself today, it is hard to tell who is ‘left’ and who is ‘right’… Left-wing Hungarian analysts, like Gáspár M. Tamás (2014) offered an explanation, and Ágnes Gagyi (2014) echoed his thoughts. The right-wing or centreright parties of Eastern Europe often express more understanding of popular needs and demands than the somewhat missionary liberals (Eyal 2000). As Gagyi put it, the Catch-22 of post-communist politics is the competition between democratic anti-populism and anti-democratic populism. The framing of this question as democracy vs. anti-democracy may not be the most accurate, but the dilemma is well formulated. There is certainly strong competition between the anti-populist commitment of liberals (and the ‘left’, if it can be called by this name) and the populism of the patriotic right-wing movements. Who will win elections? Of course, the populist, nationalist right (or centre right). Why should one vote for a party which promises only sweat and blood when the other party promises to be responsive to popular needs (they promise to tax banks, rather than the borrowers, will reduce the cost of gas, electricity and heating at the expenses of the profit of monopoly companies, etc.). Whether the centre-right is populist or just using populist rhetoric is another question. The fidesz government in Hungary, for instance, proved to be responding to problems people had on their minds. Eyal (2000) was undoubtedly right: the former dissidents-turned-liberals, having insisted on ‘living in truth’ seem to be doing a self-defeating job in democratic politics. They lose elections, and after not knowing how to play the democratic game better, they tend to label their opposition as anti-democratic or even dictatorial. Let us admit it: the game of democratic politics is about winning votes. Are the right-wing parties genuinely ‘for the people’ and ‘against business’? Hard to tell. The fidesz government in Hungary after 2010 certainly impressed the observer as an exemplary student of austerity. It reduced the budget deficit to below the 3% required by the EU, reduced inflation, cut welfare spending (in the Clintonian sense of making workfare from welfare policies) and did not increase government debt in times of recession when governments are ­supposed – at least according to Keynes or more recently Krugman – to increase public debts and budget deficit. So populist rhetoric was delivered while anti-populist policies of ‘actually-existing’ neo-conservatives or illiberals were being implemented. Let us conclude with the question of ideology and search for historical precedents. Image-creation is a crucial component of politics. This is one of the fatal weaknesses of theories, which try to label the centre-right post-communist neo-conservative, illiberal regimes as ‘fascist’, ‘dictatorial’ or ‘neo-communist’, comparing them to Hitler, Mussolini, Stalin or Kádár or just designating them

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‘mafia’. These regimes make a desperate effort to find reasonably respectable historical precedents and an acceptable ideology. Nothing can be further from the truth than the claim that they are unideological. This is not trivial. Nicholas I for Putin, Piłsudski for Kaczyński, Admiral Horthy (emphatically before the German occupation of Hungary on March 19, 1944), István Bethlen and István Tisza (two Hungarian prime ministers during the first third of the 20th century) are extremely important ideological models. The post-communist neocons want to legitimate themselves with the (rather right-wing) conservatives of the pre-communist times, just as US neo-cons want to reach back to Jefferson, or for that matter to classical liberals such as J.S. Mill or Adam Smith. These claims require careful analysis and balanced evaluation. Both for analytical purposes and political aims it is crucially important to make a distinction between the post-communist neo-cons and the radical far right, which does not have – at least so far – a chance of winning elections. Post-communist Eastern Europe is not (yet) the Weimar Republic, ready for a revolutionary political radical right (or left). The post-communist neo-cons are capable of winning elections with their populist rhetoric as long as they only have to compete with an anti-populist left/liberal opposition, which can only promise a painful treatment by the good doctor (Bokros 2014). Post-­communist neo-conservatism, a prebendal system of property reallocation and a managed illiberal democracy are the building blocks of the new model formulated by Putin, and quite a few post-communist countries are next in line. Since we still believe in the existence of a specifically Chinese way of transformation, the next intriguing question is, whether the Chinese model is sustainable. It certainly has at least two vulnerable points. One is, of course, political. Can the political monopoly of the Communist Party be maintained in the long run? Jeffrey Sachs and probably most Western commentators believe not. China is capitalist or on its way to capitalism and capitalism presumes multiparty democracy. We are very sceptical. We tend to think that liberal democracy may be the exception rather than the rule. One of the authors of this book (Szelényi) lived for four years in the United Arab Emirates, which is a perfectly well-functioning capitalist economy (in the post-industrial stage), and is not only not a liberal democracy but an absolute monarchy. It is Leviathan, in the way Hobbes would have loved to have it. Moreover, what about Singapore? Singapore is a quasi multi-party system with basically a single party in charge. When Zhou Enlai, the Prime Minister of China during Mao’s rule, was asked what he thought about the French revolution, he famously responded: “It’s too early to tell”.1 China followed her own paths 1 As we learned recently from the person who translated the conversation Zhou might have been referring to the Paris events of 1968, rather than 1789 – but this is still a smart ­observation

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for thousands of years. She never experienced universalised slavery, did not have a classical form of capitalism, and her communism was distinctly different from the Soviet model. Are the forces of globalisation now so powerful that this long history will change? It may or may not. As far as we can tell, Xi Jinping is not moving towards Western liberal democracy. He seems to have implemented a one-man rule, unknown since Mao. Finally, some argue China’s success has everything to do with being in the extensive stage of growth and following an export-led industrialisation strategy. As China is about to enter the intensive phase of growth, the domestic market is gaining in importance compared to the export markets. China’s growth will have to be substantially reduced to levels observed now in the advanced West. This is a powerful argument and may or may not be true. It is an important argument though, since the Chinese model worked because rapid economic growth was able to accommodate gigantic increases of inequality with improving living standards, and a reduction of absolute poverty for most, if not all. “All boats were rising”, and that was the foundation of socio-political stability. When the chips are down, we would put our bets on the longevity of the Chinese model. There was an interview with Henry Kissinger in Der Spiegel (July 6, 2011). He cautioned: “It is… psychologically not wise to tell a country that has 4000 years of uninterrupted history that we understand its history ­better than they do”. Well put. and cautions us to be careful in evaluating or predicting historical trends. https://media mythalert.com/2011/06/14/too-early-to-say-zhou-was-speaking-about-1968-not-1789/.

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Name Index Abramovich, Roman x, 99, 167, 175–178 Acemoglu, Daron 71, 219 Alba, Richard xiv, 219 Anderson, Benedict 160, 219 Anderson, Perry 163, 165–167, 179–181, 219 Antall József 62, 127, 191 Augusztinovics Mária 92, 219 Åslund, Anders 88–89, 99, 103, 140, 168, 219 Babiš, Andrej 187, 195 Bahro, Rudolf 60, 219 Balcerowicz, Leszek 88, 95 Bandera, Stepan 187 Békesi, László 167, 220 Bell, Daniel 40, 114, 220 Bensman, Joseph 22, 42, 220 Berend T. Iván 212, 220 Berezovsky, Boris x, 98, 100, 104, 136–139, 164, 175–177 Bethlen István 187, 216 Bettelheim, Charles 108, 220 Bhagwati, Jagdish 71, 220 Bierut, Bolesław 46–47 Bohle, Dorothee viii, 220 Bo Xilai x, 131, 166, 198, 202, 207 Bokros Lajos 141–143, 216, 220 Borisov, Bojko 187, 195, 214 Bourdieu, Pierre 52, 54, 58, 77, 220 Brezhnev, Leonid 48, 60 Bruszt László vii, 110, 232 Buchanan, J. M. 221 Buchanan, Pat 184–186, 221, 233 Bukharin, Nikolay 44–45 Burawoy, Michael 67 Carothers, Thomas 158, 221 Castro, Fidel 42, 49, 59, 222 Ceausescu, Nicolae 1 Chernomyrdin, Viktor 133–134 Chiang Kai-shek 46, 114 Clark, John B. 69, 221 Corbyn, Jeremy xiii Csaba László 133, 221 Csányi Sándor 140–145, 195–196, 198, 209

Davidson, Christopher 173, 221, 222 Demján Sándor 196 Deng Xiaoping 48, 63, 107, 110, 111, 114, 117, 124, 148, 150, 151, 164, 202 Deripaska, Oleg 100, 167, 175, 177, 178 Deutscher, Isaac 222 Dimitrov, Georgi 46, 47, 49 Djilas, Milovan 47, 59, 222 Dubček, Alexander 48 Dyachenko, Tatyana 137 Elster, Jon 92, 222 Engels, Frederich xi, 37, 68, 80, 83, 211, 227 Eyal, Gil vii, 62, 106, 115, 122, 189, 215, 222 Fehér Ferenc 42, 43, 222, 231 Fukuyama, Francis xvi, 1, 158, 220, 222 Gagyi Ágnes 215, 223 Gaidar, Yegor 98, 132, 133, 137, 157 Gati, Charles 163, 223 Gerschenkron, Alexader 185, 214 Giuliani, Rudy 185 Gomułka, Władisław 48, 60 Gorbachev, Mikhail 48, 60, 88, 125 Gömbös Gyula 187 Granovetter, Marc 55, 223 Greenwood, Jeremy 77, 220, 223 Greskovits Béla viii, 220 Gu Kailai 202–203 Guriev, Sergei 208, 219 Hall, Peter 1, 114, 223 Hegel, George 64, 224 Heller Ágnes 42, 222 Hobbes, Thomas 24, 161, 216 Holland, François 182 Horthy Miklós 130, 155, 187, 216 Hu Jintao 118, 150, 226 Huang Philip 40–41, 119, 121–124, 224 Huang Yasheng 110, 115, 119–120, 122–125, 129, 146, 207, 210, 224 Huntington, Samuel 161–162, 165, 193, 224

name Index Jiang Zemin 117–118, 121, 124, 150, 203–204, 207 Jowitt, Ken 157, 224 Kaczyński, Jaroslaw 79, 82, 160, 187, 191, 195, 214, 216 Kaczyński, Lech 195 Kádár János 48, 60, 94, 109, 130, 155, 164, 215 Kagalitsky, Boris 132, 224 Kalecki, Michał 40, 224 Kautsky, Karl 40, 224 Keynes, John Maynard 67, 124, 215, 225 Khodorkovsky, Mikhail 138–139, 164, 175–177 Khrushchev, Nikita 40, 47, 57, 60, 108, 111, 222 Kim Il Sung 42, 59, 227 King, Peter Lawrence 223, 225, 232 Kissinger, Henry 217 Klaus, Vaclav 191, 214 Klebnikov, Paul viii, 99–100, 106, 137–139, 225 Kocka, Jürgen 63, 221 Koestler, Arthur 45, 225 Kolosi Tamás 92, 190, 225 Konrád György 43, 47, 54, 57, 60, 63, 225 Kornai János 54, 73, 91–92, 108–109, 111, 113, 156, 163, 193, 225–226, 228 Körösényi András 220, 233 Krugman, Paul 185, 215, 226 Kurz, Sebastian xv Ladányi János 155, 163, 226 Lange, Oscar 40, 111, 226 Lenin, Vladimir Iljich xi, 2–3, 8, 11, 24, 37, 39–40, 42, 44–45, 49, 55–57, 59, 114, 124, 219, 226 Le Pen, Marine xv, 160, 185–186 Li Yanhong x, 199–201 Liberman, Evsei G. 40, 48–49, 107, 111, 226 Liu Yongxing 146–150, 198–199, 204 Locke, John 9, 24, 37 Lukács, George 44, 227 Lukashenko, Alexander 105, 187 Lu Peng xvii, 132, 222, 227 Luzhkov, Yuri 133–135 Ma Jack 131, 199–200 Machiavelli, Niccolò xv, 227

237 Magyar Bálint 145, 157–158, 163, 167, 189, 220, 227, 231–232, 234 Malinoswki, Brosnislaw 36, 227 Manza, Jeff 165, 227 Mao Zedong xi, xvi, xviii, 2, 25, 37, 41–42, 44, 46–49, 55–60, 63–64, 108, 111, 114, 121, 123, 124, 130, 148, 190, 199, 202, 211, 216–217, 223, 226, 229, 233 Markus, George 42, 222 Marshall, Alfred 73, 227 Marx, Karl vii, xi, xvi, 2–3, 8–11, 27, 37, 39–40, 43, 49, 58, 65, 66–69, 80, 83, 114, 123–124, 140, 171, 211, 219, 221, 227, 230 Meciar, Vladimir 95, 187, 191, 195, 214 Mészáros Lőrinc x, 197 Mihályi Péter viii, xv, 1, 3, 49, 51, 53–54, 65–66, 79, 88–89, 94, 97, 208, 227–229, 233 Mill, John Stuart 159, 161, 216, 229 Mills, C. Wright 14, 164, 223 Milošević, Slobodan 157, 187 Mitev, Petar 154 Montesquieu 9, 45, 159, 161, 165, 193, 229 Moynihan, David xiv, 223 Murray, Charles 229 Nagy Imre 47–48 Nee, Victor 63–64, 113–117, 120–122, 125–125, 131–132, 219, 229, 232 Nohlen, Dietrich 46, 229 North, Douglass C. 229 Nove, Alec 45, 226, 229 Obama, Barack 125, 182–184, 186, 188 Oi, Jean 121–122, 229–230 Opper, Sonja viii, 113–114, 120–121, 229 Orbán Viktor viii, x–xi, xv, 10, 22, 79–80, 82, 129–130, 144, 159–160, 162–164, 167, 175, 179–180, 184, 187–188, 191–197, 208–211, 214, 224, 230 Pareto, Vilfredo 70 Piketty, Thomas ix, xi, 65–67, 69, 72, 76–77, 229–230 Piłsudski, Jozef 187, 216 Pinochet, Augusto 24 Pipes, Richard 180, 183, 230 Polanyi, Karl 30, 38–39, 55, 80, 230 Poroshenko, Petro 187

238 Proudhon, Pierre Joseph 67, 103, 230 Putin, Vladimir (Putinism) xv–xvi, 9–10, 22, 80, 99–101, 105, 124, 127, 129–130, 134–136, 138–140, 159–162, 164–168, 171–172, 174–188, 190–193, 195–196, 198, 205, 207–211, 213–217, 221–222, 230–234 Rákosi Mátyás 47 Ricardo, David 9, 65, 68–70, 78, 231 Rigby T. Harry 42–43, 231 Rizzi, Bruno 40, 231 Robespierre, Maximilian 45 Róbert Péter 92, 225 Rong Zhijian 130, 150–151, 198 Roth, Günter 17, 231 Sachs, Jeffrey 88, 103, 109, 122, 127, 168, 214, 216, 231 Salvini, Matteo xv, 160, 185 Sanders, Bernie xii–xiii Schluchter, Wolfgang 17, 231 Schumpeter, Joseph ix, 74 Shills, Edward 22, 231 Simicska Lajos x, 196–197 Smith, Adam 9, 65, 160, 216, 227, 231 Solow, Robert 71, 232 Soskice, David 1, 114, 223 Sørensen, Aage 72–73, 78, 232 Stalin, Joseph xviii, 22, 38, 41–42, 44–47, 49–51, 55–61, 105, 167, 176, 180, 183, 186, 215, 219, 230, 233 Stark, David vii, 86, 110, 212, 232 Stiglitz, Joseph 70, 103, 222, 232 Stöver, Philip 46, 229 Staniszkis, Jadwiga vii–viii, 116, 163, 232 Swedberg, Richard 66, 225, 229, 232 Szelenyi, Sonja 120, 229 Szelényi Iván vii–viii, xii, xv, xvii, 39, 43, 47, 57, 60–62, 65–66, 79, 93, 96, 106, 109, 115, 122, 156, 163, 189–191, 208, 216, 222, 225–226, 229, 232–233 Szűcs Jenő 11, 233 Szűcs Zoltán Gábor 163, 187, 233

name Index Tamás Gáspár Miklós 187, 215, 233 Tardos Márton 41, 233 Thompson, Edward Palmer 233 Tisza István 187, 216 Tito, Josip Broz 45–46, 108 Tóth István György xii, 233 Treisman, Daniel 77, 168, 233 Trotsky, Leon 40, 45, 59–60, 63, 234 Trump, Donald xii–xv, 79–80, 82, 160, 180, 187–189 Vogel, Ezra 110, 234 Voszka Éva 116, 234 Walder, Andrew 42, 64, 112, 230, 234 Wallerstein, Immanuel 38, 234 Wang Jianlin 204, 206, 222 Wang Lijun 202–204 Wang Hui 118, 234 Weber, Max ix, 7, 9, 13–26, 28–29, 41, 43, 45, 58, 60, 62, 66, 71, 75–76, 78, 110, 116, 133, 164, 223, 230–231, 234 Wen Jiabao 114, 118–119, 123–124, 129, 131, 149, 166, 204–205, 207, 210, 234 Whyte, Martin K 108, 110, 112, 234 Xi Jinping xv–xvi, 41, 80, 119, 124, 130–131, 183, 198, 201, 204, 207, 217 Yang Kwok Keung 148–149 Yanukovych, Viktor 105 Yeltsin, Boris viii, 10, 86, 98–101, 104, 106, 129, 132–139, 157, 164, 167, 171–172, 174–178, 189–190, 211 Zakaria, Fareed 159, 161–163, 193, 235 Zhivkov, Todor 47 Zhou Enlai 216 Zhou Yongkang 149, 202–205, 207, 222

Subject Index Afghanistan 3, 6, 7, 170 Albania 6–7, 39, 47, 50, 90, 96, 169, 191 Alt-Right xiii, 160, 186 Angola 3, 8, 169 Armenia 1, 7, 169–170 Autocracy communist autocracy 8 enlightened autocracy 25 feudal autocracy 33 illiberal autocracy 25 liberal autocracy 24–25, 161 monarchical autocracy 26 Azerbaijan 1, 7, 169, 171 Balkans 12, 46, 90, 232 Baltic nations (including Estonia, Latvia, Lithuania) viii, 2–6, 11, 86, 90, 96, 132, 169, 170, 212 Belarus 5, 7, 86, 105, 169, 173, 187 Benefice 10, 23, 28, 164, 175 Benin 3, 8, 170 Big Money xii, 175, 179, 194, 211, 212 Bosnia-Herzegovina 6, 90, 169, 182 Bourgeoisie Bildungsbürgertum (cultural bourgeoisie) 63, 221 Besitzbürgertum (propertied bourgeoisie) vii, 63, 185, 194 Nomenklatura bourgeoisie 64, 97–98, 106, 130 Boyars 98, 100, 136, 138, 164–165, 167, 176, 211 Brexit xiii, xiv, 79, 82, 186 Budget constraint 4, 91, 225–226 Bulgaria xvi, 4, 6, 9, 37, 46, 49, 83, 86, 92–94, 96, 129, 145, 152–155, 157, 163, 182, 191, 195, 209, 232 Burkina Faso 8, 170 Cambodia 6–7, 41–42, 169 Cape Verde 2, 8, 169 Capital cultural capital 52, 54, 57, 60–63, 76–77, 129, 208 human capital 54–55, 57, 62, 77–78, 85, 129, 135, 146, 169

political capital 130–132, 146, 149, 208, 210 social capital 54, 78, 129, 135, 146, 194 Capitalism capitalism from above viii, 106, 121, 123, 131 capitalism from below 115, 117, 121–123, 126–127, 129–132, 148, 198, 199, 210, 229 capitalism from the outside viii classical capitalism 55–56, 58–59, 129, 132 crony capitalism 116–117, 163, 231 hybrid capitalism 116 mafia capitalism 145 market capitalism 23–24, 35, 43, 47, 75, 103, 110, 156–158, 163, 189, 195 patrimonial capitalism 159 political capitalism viii, 116, 124, 133, 135, 149–151, 163, 199, 224, 232 Caste 59–61, 83 Central Europe 9, 11, 45, 47, 61, 81–82, 98, 104, 108, 143, 190, 209, 229 Charisma 9, 13, 16, 19–24, 26, 41, 44–47, 49–51, 53, 55–57, 59–61, 63, 108, 195, 198, 206, 220–222, 231, 233 Chile 5–6, 8, 24 China Communist Party of China (cpc) xvi, 40, 114, 117, 124, 150, 202, 204, 206, 208 Cultural Revolution 42, 44, 56, 59, 109, 146, 150, 199, 226 Socialism with Chinese characteristics 10, 110–111, 117, 205, 224 Citizenship 18, 96 Clients, clientelism (see also patron) viii, 32, 43, 71, 101–103, 105, 130, 139, 172, 176, 190, 194–195, 197, 205, 207–209 Communism (socialism) actually existing socialism (“real socialism”) 40, 115 classical communism, Stalinism, Maoism 39, 48, 50, 55–59, 61, 108–109, 111, 115 “goulash” socialism 94 liberal socialism 221

240 Communism (socialism) (cont.) Maoist socialism 59 reform communism 9, 43, 47, 57, 58–61, 110 market socialism 40–41, 47, 107, 111, 115, 124–125 scientific socialism 57 socialism with a human face 47 state socialism 34, 48, 99, 127 Confucianism 10, 110, 114, 123–124, 220 Congo 3, 8, 169, 171 Conservativism (see neo-conservatives) Convergence xvi, 4, 9–10, 37–38, 85, 122, 130, 152, 209, 232 Corruption 10, 55, 97, 134, 137, 166–168, 177–178, 198, 201, 203–205, 207–208, 211, 224 Credentialing 78 Criminalization 167 selective criminalization 166–167, 198, 201, 205, 207 Croatia 1, 4–6, 90, 145, 157, 170, 182, 187 Cuba 2, 7–8, 12, 39, 49, 221, 235 Czech Republic viii, 4, 6, 11, 79, 81–82, 86, 89–90, 92, 94–96, 99, 129, 140, 152–155, 187, 190–191, 195, 209, 214, 222 Czechoslovakia 9, 37, 46, 48, 50–51, 95 Democracy illiberal democracy x, 100, 159, 162–163, 165, 179, 193–194, 198, 216, 235 liberal democracy x, xi, xiii, 5, 25, 26, 41, 85, 93, 96, 97–98, 130, 152, 157–158, 162–163, 165, 189, 193, 206, 211, 216, 217, 223 managed democracy 9–10, 101, 159, 179, 219 Despotism (see illegitimate rule) Dictatorship 2, 5, 8, 44, 155, 157, 169–171, 193, 222, 226 Discrimination 79, 83, 160 Domination 7, 9, 11, 13–16, 18–22, 24–29, 41, 96, 132, 162, 164, 180, 212 Education xii, 33, 35, 76–78, 117–118, 121, 147–148, 191, 199, 220 Elite communist 106 economic xii, 130

Subject Index intellectual 61 political xii, 57, 145, 157, 176, 189, 196, 206–207 scientific 136 technocratic 89 transnational 182, 184 England (UK, Britain) viii, xiii, 77, 82, 84, 126, 138, 145, 189 Entrepreneur 61, 73, 75, 104, 110, 115–117, 120–122, 131, 140, 146–148, 167, 185, 197, 199, 207, 209, 222, 225, 227, 230, 232 Ethiopia 3, 8, 41, 169 Ethno-racial identity ix, xi, xiii, 82, 160 European Union (EU) xiii–xvi, 3–4, 11, 79, 81–82, 84, 88, 130, 132, 152–153–156, 162, 173, 186, 191, 209–210, 214–215, 232 Exploitation 67, 69, 75, 173 Fascist 215 Feudal, feudalism, vii, ix 29, 31–32, 37, 55, 65, 70, 73, 83, 98 Fief 10, 23, 28–29, 99, 164, 174 Forbes list 41, 131, 135, 137–138, 144, 147–150, 178, 181, 183, 197, 199–201 Foreign direct investment (fdi) viii, xv, 3, 89, 94–95, 124, 126, 155–156, 228 France, vii 8, 81, 185 Freedom House 86–87, 170 Georgia 1–3, 6–7, 170 Germany (East Germany, gdr) 3, 37, 48, 60 Gini-coefficient (Gini index) ix, 93, 107, 123, 172, 207, 219 Globalisation xi–xvi, 35, 73, 79–81, 83–84, 182, 214, 217, 232 Great Leap Forward 37, 46 Grenada 2, 8 Guinea-Bissau 2, 8, 170 Gulf states (monarchies, countries) 24, 33, 172–173 Habsburg Empire 11 Helicopter parenting 77 Housing 33–35, 70, 135, 148 Hukou system 83, 113 Hungary viii, x, xii, 4–6, 10–11, 37, 41, 47–48, 50–51, 60–61, 73, 79–80, 82–84, 86–90, 92–96, 98–99, 102, 107–109, 116, 127, 129, 140–145, 152–159, 161–165, 170, 175,

Subject Index 180–182, 186–187, 190–198, 208–209, 211–212, 214–216, 223–225, 227–228, 233–234 Hurun list 130–131, 148, 198–199 Illegitimate rule (despotism) 7, 9, 13, 16–19, 38, 41–42, 44–47, 49, 163–164 Illiberal, illiberalism viii, xvi, 5, 9–10, 26, 36, 44, 80, 85, 98, 100–101, 124, 129, 159–162, 165–166, 173, 175, 180, 186–191, 194, 198, 206, 211, 214–216 Illiberal International 183 Image creation 215 Inequality ix, xii, 58, 63, 65, 67–68, 72, 81, 95, 122–125, 172, 207, 217, 219, 222–223, 232, 234–235 Innovation 9–10, 70, 74–75, 78, 83, 219, 222, 233 Intellectuals 47, 56–57, 60–63, 75, 107, 116–117, 129, 184, 195, 225 Ivy League universities 76–78 Kazakhstan 7, 83, 105, 169, 171–173 Kosovo 1–2, 4, 6 Kuomintang (kmt) 114, 199 Kyrgyzstan 7, 170 Labour market xiv, 52, 74, 84, 90, 92 Laos 6–7, 169 Legitimacy charismatic authority 9, 13, 20–24, 49, 55–56, 59, 222 legal-rational authority 9, 17, 19–20, 22, 24–27, 43–44, 55, 59, 96–98, 106, 173–175, 194, 206 traditional authority 18–23, 26–28, 42, 44, 56, 194 neo-patrimonialism 163 neo-prebendalism 163 patriarchy 23, 27–28 patrimonialism (feudalism) vii, 9, 17, 27–29, 31, 55, 70, 83, 95, 98–99, 106, 119, 135, 145, 176, 190, 194, 206, 211 prebendalism 10, 17, 23, 27–29, 98, 145, 159, 164, 175–176, 189, 194–195, 198, 205–209, 211–212 sultanism 27–29 Wille der Beherrschten 9, 20, 25–26, 206

241 Liberalism xvi, 9–10, 24–26, 44, 88–90, 93, 96, 101, 106, 140, 157–161, 165, 173, 179, 207 Macedonia 2, 5–6, 83, 90, 170, 191 Madagascar 2, 6, 8, 170 Managers, management vii, 35, 48–54, 69, 71, 74, 89–90, 97, 102, 106, 108, 121, 129, 131, 134, 136, 177, 190, 206, 210, 228, 223 Master 15–18, 20–23, 27–29, 58, 62, 83, 98, 164 Meritocracy 75, 114 Migration (immigration) xiii, xv, 11, 79, 81–82, 138, 160, 167, 180 Mobility (fluidity) x, 58, 131, 225 Mode of production (social formations) vii, 55, 59, 68, 128 Moldova 6–7, 96, 170 Mongolia 4, 7, 39, 169 Monopoly 2, 17, 31–32, 35, 39, 58, 73, 78, 113, 117, 124, 126, 138, 171, 215–216 Montenegro 4, 6, 90, 170 Mozambique 3, 6, 8, 169 Multi-culturalism 11, 209 Multilateralism xiii, 188 Multinational companies (firms, corporations, capital) xi, 41, 95, 97, 102, 115, 142, 143 Myanmar (former name: Burma) 2, 6, 7, 169 nato xiv, 3, 88, 132, 186 Neo-conservatism (neo-cons) 163–164, 179–181, 183–187, 192, 194–195, 214–216, 226, 233 Neo-liberalism 185, 212 Nepal 2 New Economic Mechanism (nem) 109 Nicaragua 8 Nomenklatura 34, 43–44, 64, 97, 98, 106, 112, 116, 121, 130, 150 North Korea 2, 7, 42, 83, 227 Oligarchs (oligarchy) 10, 98, 100–101, 103–104, 132, 135–140, 164–167, 171–172, 174–175, 177–178, 194, 198, 209, 211 Ownership cross-ownership 121, 129, 210 state (public, collective) ownership 3, 39–40, 145, 167, 206, 227

242 Path dependency 3, 85–86 Patriarchy (see legitimacy) Patron – client relation 43, 172 Patrimony (patrimonial model, patrimonialism see legitimacy) Poland 4–6, 27, 11, 37, 46, 48, 50–51, 60–61, 79, 81–82, 84, 86–90, 92–95, 99, 102, 116, 129, 132, 140, 152–155, 162–163, 169, 181–182, 187, 190–191, 195, 209, 211, 212, 232 Populism (populists) x–xiii, xv–xvi, 79, 81, 118–119, 152, 182, 202, 214–216, 223 Poverty xii, 82–83, 93, 95, 102, 124–125, 172, 217, 219, 231–232, 234 Powers (separation of powers) 97–98, 101, 106, 157, 161, 185, 188, 190, 192, 193 Prebendalism (see legitimacy) Privatisation quasi-privatisation 129, 174, 210 re-privatisation 167, 176, 208 small privatisation 209 spontaneous privatisation viii, 116, 234 voucher (mass) privatisation 89–90, 96, 97–99, 103, 106, 122, 126, 178, 190, 223, 228, 232 Property (see ownership) Rank (status groups, estate) ix, 37, 47, 55–62, 64, 98, 127–129, 193, 209 Rationality formal rationality 43 goal rationality 43 instrumental rationality 43, 55 substantive rationality 43, 49 value rationality 24 Real estate xiii, 35, 70, 77, 135, 147–148, 151, 177, 188, 204, 206 Reciprocity 30–36 Redistribution 47–48, 57, 90, 118, 121–122, 124, 130, 191, 209 Rent rent-seeking ix, 11, 65, 68, 70, 89, 226 scarcity rent 9, 68–71, 74, 78 solidarity rent 9, 71–72, 79 Republican Party 179–180, 184–188 Revolution (counter-revolution) xv–xvi, 26, 37, 45, 59, 68, 79–80, 100, 164, 183, 233 Roma (Gypsy) 61, 83

Subject Index Romania 1, 4–6, 37, 83, 86, 93–94, 96, 129, 145, 152–155, 157, 159, 162, 190–191, 195, 198, 209 Rule of law 16, 24–25, 44, 87, 96, 157, 162, 175, 191 Sao Tome and Principe 2, 8, 170 Second (shadow) economy 59, 61, 108, 155, 177 Self-management 48, 60, 108 Serbia 1, 6, 83, 86–87, 90, 145, 157, 170, 182, 187, 191, 209 Seychelles Islands 2, 8, 169 Shock therapy 5, 88, 90, 98, 103, 122, 126, 157, 223, 225 Shortages (shortage economy) 4, 50, 91, 109, 125, 225 Slovakia 4, 6–7, 11, 83, 90, 92–93, 95, 154, 169, 187, 190–191, 195, 212 Slovenia 4, 6, 81, 90, 92, 94, 153, 170, 230, 232, 234 Social democracy 125, 162, 215, 224 Socialism (see communism) Somalia 3, 8 South Korea 6, 83 South Yemen 2–3 Soviet Union (ussr) xvi, 1–3, 11–12, 37–40, 42–50, 56, 60–61, 83, 88, 104–105, 111, 108, 114, 125, 127, 132, 178, 229, 231–232 Staff 16–18, 23, 27–29, 45, 47–48, 56–57, 59 Stand 58, 60 State mafia state viii, 98, 100, 146, 163, 167, 189, 193, 216, 220, 227, 229, 231 nation state ix, xv, 79–80, 82, 233 state capture 174 state-owned enterprises (soes) 49, 52–53, 64, 89–90, 94–95, 97, 109, 112, 119–121, 124, 126, 131, 209 Stratification 52, 55–62, 127–129, 209, 225, 232 Sultanism (see legitimacy) Suriname 8 Sweden 132 Tajikistan 6–7, 170 Tanzania 2, 8, 170 Tea Party movement 179–180, 184–186

243

Subject Index Technocrats (technocracy) 56–61, 89, 129, 140, 210 Three-agent model 51, 228 Township village enterprise (tve) viii, 64, 107, 119 Trade unions xiv, 71–72, 79, 121, 142 Traditionalism 23, 28, 179, 186, 194, 234 Turkmenistan 7, 105, 169, 171–173 United States (usa, US) xi, xiii–xiv, 7–8, 70, 72, 75–77, 81–82, 91, 117, 126, 149, 155, 160, 162–163, 165, 179–183, 185–189, 201, 223 Ukraine xvi, 2–3, 6–7, 48, 85–86, 96, 103, 105, 134, 155, 170, 173, 183–187 Uzbekistan 4, 7, 169, 171

Varieties of capitalism (VoC) vii, 1, 66, 85, 223–224 Venezuela 2, 7–8 Vietnam 2, 6–7, 12, 39, 83, 85–86, 96, 122, 125–126, 167, 169–170, 221, 223, 227, 235 Wage 31, 67, 69, 71, 74, 81, 104 Wall Street xi, xii, 201 Wille der Beherrschten (see legitimacy) Women 27, 77, 91, 162 Yugoslavia 46, 50, 60, 96, 108, 181, 232 Zimbabwe 3, 6, 8, 170