EH 3: Eastern Europe in the debt crisis Flashcards
most important reasons and manifestations of world economic crisis of the 1970s
-decline of US economic power (loss of competitiveness -> investet transnationally -> new competitors)
-modification of the international fincancial system
-“oil shock”, umemployment and increasing inflation
-rise of “newly industrializing countries” (East Asia)
-“Exhaustion” of Fordism, ISI, and socialist industrialization
Latin America debt crisis in the 1980s
-trigger for neoliberal reforms
-> reimergence of markets, deregulation, etc
-from 1979 US Central Bank increased interest rates dramatically -> “Volcker Shock”
-> targeted domestic inflation, -> led to massive crisis in Latin America, where countries had borrowed massively in USD
-in order to service their debt, LA countries had to undergo “structural adjustment” programs -> consequence: LAs “lost decade”, turn toward exports
-IMF got new role in crisis: lend the heavily indebted countries to service their interest payment, in exchange for economic reforms
Détente
Period between late 60s 1969, ending with sowjet Invasion of Afghanistan 1979
each block tried to outcompete the other
effort to establish more cooperative relationship between east and west
(protests and economic problems in the east -> ease tensions through cooperation with west)
Willi Brand:
-sozialdemokratischer deutscher Kanzler 1970er
-Wandel durch Annäherung
-more cooperation -> east would eventually overcome socialist system
-realtions with eastern germany
major disarment treaties
Helsinki accords: incl. agreement on economic, technological cooperation, allow travel across east and west
debts
all major west european powers lend to eastern europe
main receivers of loans: Poland, Hungary, Rumania, sowjet union, bulgaria, (czechoslovakia never really got endebted)
context of endebtment
starting dialogue between east and west
-> trade relations
reasons for interest in engaging in trade:
-political goals (wandel durch annäherung) -> hope of united europe, stability of detente
-economic motivation (gaining new markets for europe in the beginning of economic crisis)
-competition between european countries around markets
-eastern countries wanted to get access to western technology
-economic modernisation -> build up consumer industries in the east -> debts
-> conditioned credits for eastern european countries, to allow them to open up
supply side of indebtment: Why was there such an abundance of money looking to be invested?
emergence of a borrowers’ financial market
-> financial markets with borrowers in drivers seat -> could get whatever money they wanted
“overproduction” of financial assets during the 1970s because of
- Eurodollar market
= dollars floating around globally, but not in the US -> US didn’t want short-term economic strategies to pay off due to past crisis experiences -> strong regulation within the States;
-GB didn’t regulate dollars very strictly -> build up of dollars in british financial system -> way for UK to still be important on financial markets, that didnt have repercussion on Sterling (own currency)
-» totally unregulated dollar market, really took of in 1960s and 70s
-> Eastern Europes entry point into Western capital - recycling of petrodollars (OPEC countries put gains from oil exports to Eurodollar markets)
- crisis of Fordism (recession in Western european countries -> no demand for credits)
borrower’s market
non-conditionality of lending (conditions in exchange for getting money, IMF conditionality: conditions for bail outs: austerity, liberalisation etc; usually kicks in during crisis)
long maturities (long term credits)
very low interest rates
large volumes of money involved
supply side: why was lending to east attractice for western bank?
- steady demand
2: strong government:
-authoritarian systems with strong grip on economy -> in case of bankruptcy governments can enforce conditions to pay back debt
- soviet fiscal and political umbrella: if even the indebted country goes bankrupt, it was expected that the soviet union would step in
-> idea, that there is little risk involved
additionally: western governments provided gurantees for some of the loans, because they wanted their own companies to be able to export
demand side: why did East european countries take up credits?
Limits to the autarchic model of socialist growth:
-hard to move away from heavy industry
-soviet union member states all built up similar industries
-> stuck
-> conviction, that they need to get access to western technology, trade etc in order to overcome this
- modernization thorugh import-led growth
-> industrial upgrading through imports of western technology
-> more efficiency in own industries -> more exports
-> some Eastern Euoprean satellite states sought more independence form the Soviet Union, and re-oriented their trade to the West (mainly Hungary, Romania) -> comicon trade - goal of increasing consumption
-little consumption possibilities for people (long waiting periods, no light industries)
-shortages even of basic goods - combined with reforms of the system
economic reforms under communism
- revising priorities within existing structures
-“new course” after Stalin’s death, sought to redirect funds towards consumption, agriculture and the service sector
-almost all countries after Stalin’s death - decentralization of decision making
-removal of the middle layer of the planning pyramid
-amalgamating production units into larger ‘associations’
-> decentralization through concentration
-e.g. Poland, Czechoslovakia in the late 1950s, in these countries cycles of de- and then recentralization of decision making can be observed - market socialism I:
-use of markets for allocation of current goods and services, planning for future oriented decisions
-Yugoslavia in the early 1950s; hungary’s new economic mechanisms from 1968 -> Hungary went furthest with reforms, closest to west - market socialism II:
-use of markets also for future oriented decisions
-Yugoslavia since 1965
Special case of Poland
-country that started east european and probably global debt crisis
-carried burden until late 80s
-> started transition to capitalism with high debt burden
financing new development strategy in poland
-Poland had very militant working class -> most workers unrest across socialist block
-> often linked to food shortages and austerity
-food shortages and price rises in 1970s triggered massive worker protests, that were brutally oppressed
-Party replaced Gomulka (leader of communist party) with Gierek
-> announced new development strategy:
-decentralization of economic control: enterprises becoming bigger and more autonomous in their decisions
-gaining access to Western technology & pursuing a strategy of import-led growth
-increasing wages and consumption
strategy worked well in beginning of 1970s
-> poland had among the hightest rate in Eastern Europe
but: non endebted countries were also growing fast
early 1980s: extremly low growth rate, basically no growth, then crisis with gdp decrease
failure of economic development plan
-debts in US-Dollar -> in order to pay back, countries had to get Dollars
-> to do that you either had to borrow more or export to the west (very difficult for socialist countries)
-> extremly high debt/export-rate of Poland
-> debt exceeds exports highly
-> really overendebted country
second half of 1970s:
-Gierek tried to trim borrowing exuberance -> to do that you had to either reduce imports, but that didnt make sense, because they wanted to import in order to improve exports
or implement austerity programs -> chose this option -> rise in consumer prices -> strikes and unrest -> rises were taken back
-poor harvest added additional strains
-from 1977 onwards: hints of a looming financial crisis, as Poland would soon have to repay its debt
Western banks increasingly realised their dangerous exposure to the East -> basically stopped lending to the region
third attempt at rising food prices in 1980s led to birth of Solidaridy (broad trade union movement) and the famous Gdansk Accords in 1980s
-> first and only time in socialist history were trade unions negotiated autonomy of trade unions -> they could act in the interest of workers and not controlled by the government
-> mobilization extremly closley tied to debts
-> replacement of Gierek by Kania
developments after 1981
-March 1981: Poland triggered the Central and Eastern European souvereign debt crisis (CEE) when it announced to Western creditors that it could not maintain its debt payments
-western governments feared their financial systems might break down in case of a Polish default -> Poland was able to negotiate a rescheduling of the debt in 1981
-in october 1981: military general Jaruzelski came to power (dislodged Kania as party chef) and declared martial law
-> aim of “disciplining workers”, restore order, stop strikes
-> imposement of austerity
-> still failed to pay its interests -> another reschedueling to 1982
-> during the whole 1980s Poland was struggling with huge debts
Hungary’s case
-Hungarys move to import-led growth and economic modernization started earlier and was better institutionalized than Polands
-one of its major aims was to replace COMECON supplies with Western ones; costly strategy and one of major reasons for growing indebtedness
-when foreign capital moved out of the region, Hungary also got in trouble and in 1982 got an emergency loan by the Central Banks of its most important creditors
but in contrast to Poland: Hungary had been keen on servicing its debt in a disciplined manner and was viewed as reliable debtor
joined IMF in 1982, which created strong linkages between its political elite and international financial system
-> at the end of 1980s Poland was mostly indebted to western governments and seen as unreliable debtor; hungary mostly indebted to commercial banks and considered reliable
Kádár:
-“father” of economic reforms
-reforms worked pretty well for country
-> legitimacy for regime
