The many faces of capitalism in Europe

It has long been known that capitalism has many different variations. The French economics professor Bruno Amable, a lecturer at the University of Geneva, proved this in his book “The Diversity of Modern Capitalism”. In his opinion, there are at least five different models of capitalism:

• the Anglo-Saxon model (e.g. the United States, the United Kingdom);
• the social democratic / Scandinavian model (e.g. Sweden, Denmark);
• the continental European model (France, Germany);
• the Southern European model (e.g. Italy, Spain);
• the Asian model (e.g. Japan, South Korea).

The above list is missing a model that would include the countries of Central and Southeast Europe (CSE). Why? Because it is somewhat different. What is the face of CSE capitalism?

Who does CSE resemble

A few years ago, Professor Beata Farkas from the University of Szeged was the first researcher to take a closer look at CSE capitalism. She found that capitalism in all CSE countries is characterized first and foremost by a relative shortage of domestic capital in the economy, an underdeveloped civil society and a strong influence of the European Union on the institutional order.

Recently, a group of Polish researchers from the Warsaw School of Economics, which included Mariusz Próchniak, Ryszard Rapacki, Juliusz Gardawski, Adam Czerniak, Bożena Horbaczewska, Adam Karbowski, Piotr Maszczyk and Rafał Towalski, attempted to provide a more precise answer to this question. They analyzed 11 countries from the CSE region and applied the variables in their analysis: competition on the product market, labor market and industrial relations, financial intermediation system, social security system, knowledge creation system, and the housing market. The results were presented during an international conference “Diversity of Patchwork Capitalism in Central and Eastern Europe—Institutional Perspective” organized at the Warsaw School of Economics.

It turned out that in almost all countries of the region the existing model of capitalism is the most similar to the South European model (Spain, Italy), i.e. a model that is characterized by a high level of employment protection, a relatively low level of social protection, a high level of public expenditures, a moderately high level of taxation of labor, and a relatively low level of education (which is not conducive to innovation). The highest degree of similarity to this model is shown by the models of capitalism found in Poland, Slovenia, and Croatia.

According to Professor Krzysztof Jasiecki, from the Institute of Philosophy and Sociology of the Polish Academy of Sciences, who specializes in Central and Southeast European capitalism, the resemblance between the model of capitalism found in most CSE countries and the Southern European model is the result of similar indicators of institutional weaknesses which reduce long-term economic competitiveness.

“They mainly concern the role of the state in the economy, the quality of functioning of the public administration and its impact on the regulations. Studies also indicate a low level of innovation of the economies and a deficit of domestic capital which is conducive to dependence of growth on foreign capital,” says Prof. Krzysztof Jasiecki.

Professor Radosław Zenderowski from the Cardinal Stefan Wyszyński University in Warsaw believes that the low level of cultural homogeneity in most of the CSE countries also has an effect. “Countries such as Poland, Romania or even Hungary, which historically experienced long periods of division into various political entities remaining in the sphere of influence of various civilizations, had to develop their own, somewhat “syncretic” and less homogeneous economic models over time,” he indicates.

“The geographical proximity of the Southern European organizational culture undoubtedly had a big impact on the development of specific conditions for economic growth in the region. The Human Development Index indicates the existence of clear socio-economic correlations between the countries of the Mediterranean Basin and the countries of the CSE region,” points out Michał Cichoracki, PhD, from Kazimierz Wielki University in Bydgoszcz.

However, Krzysztof Głowacki, an economist from the think-tank Centre for Social and Economic Research (CASE), questions the unequivocal conclusion that capitalism in CSE is similar to the Italian or Spanish model of capitalism.

“In terms of the organization of the labor market, Southern European countries are distinguished by a strong position of the trade unions, rigid regulatory schemes, as well as familism and clientelism, i.e. features that cannot be compared with the situation in the countries of Central and Southeast Europe. When it comes to the capital market, Greek, Portuguese and Italian companies report more problems with obtaining financing than companies in the EU on average, while enterprises in the Visegrad Group countries or in Estonia report fewer problems. The level of fiscal discipline in both groups is different,” states Głowacki.

He emphasizes that the differences between CSE countries and Southern European countries in terms of the economic system have been clearly revealed during the recent economic crisis, when the first group emerged unscathed and the second group fell into serious macroeconomic problems.

The diverse nature of capitalism

Particularly striking exceptions to the general similarity between the CSE region and the Southern European model are found in the Czech Republic and in Estonia, which exhibit the greatest resemblance to the continental European model. It should be noted that the models of capitalism in CSE countries are not uniform, and this has been the case for many years. Already during the economic transformation in the 1990s there were significant differences within the region in terms of the approach towards capitalism and the solutions applied in the development of new institutions and principles.

Let’s take a look at some examples (quoted after: J. Kleer, “Central and Eastern Europe: Peripheral and Imitative Capitalism”, Przyszłość No. 3/2016):

• Bulgaria is the only CSE country in which the so-called shock therapy clearly failed;
• the Baltic states opted for a more liberal tax policy (lower taxation) than other CSE countries;
• Hungary had the lowest decrease in production and the lowest inflation during the transition period;
• various models of privatization have been adopted in the individual CSE countries (e.g. sales to external, foreign investors prevailed in Hungary and Estonia, so-called voucher privatization was carried out in the Czech Republic and in Lithuania, employee buy-out of assets was carried out in Poland, Slovakia and Romania);
• Bulgaria benefited the most and Hungary benefited the least from membership in the EU.

Meanwhile, Professor Anders Aslund points out in his publications that:

• in contrast to other CSE countries, in the Baltic states the state-owned banks played a marginal role during the transformation;
• Poland was the only country in the region to go through the financial crisis of 2007-2009 almost unscathed.

When we look at the various macroeconomic indicators of the countries from the CSE region, we see that the Baltic states (and especially Estonia) achieve the best results in terms of the market economy. Meanwhile, progress is the most difficult in the countries located in the southern part of the region (Croatia, Bulgaria).

Przemysław Wechta, PhD, from the Adam Mickiewicz University in Poznań points out that the Baltic states and Poland are less corrupt than the countries of Southern Europe and in the southern part of the CSE region. „In institutional terms, one could put forward a thesis on the evolution of spontaneous entrepreneurship, based on the accumulation of capital through fraud, corruption, exploitation and informal links with the authorities, towards systemic and normative entrepreneurship. In these countries trust is becoming an economic value, a factor of economic development,” emphasizes Wechta.

The Czech Republic and Estonia – different due to culture and religion

Why are there such differences within the region when it comes to the models of capitalism? Why are the countries from the north of the CSE region so successful in the implementation of capitalism and the market economy, while the opposite is true for countries from the southern part of the region? Why is the Estonian and the Czech model of capitalism similar to the German model?

“Countries from the north of the CSE region, and especially Estonia, are more successful in the development of capitalism due to the increasing quality of their institutions, including the consistent digitization of the country, and also due to the absorption of cultural patterns from Germany and the Nordic countries,” explains Prof. Krzysztof Jasiecki.

The cultural factor is also indicated by Prof. Zenderowski. He points out that at the beginning of the 20^th century Germans were the largest national minority in the Czech Republic—they made up about 30 per cent of the population. In Estonia, they accounted for about 3 per cent of the citizens, but constituted a very influential elite. “The Czech Republic and Estonia are countries where Germans dominated in the economy—in the industry, trade and services—until the Second World War. The Germans also had the best network of connections, partially based on the Hanseatic tradition, but primarily on the fact that German was the de facto leading language of international trade in the region of Central Europe,” he explains.

Marta Cobel-Tokarska, PhD at the Academy of Special Education in Warsaw and the author of the scientific work “Central Europe, old and new meanings”, puts emphasis on the religious aspect. “Both Estonia and the Czech Republic are countries where various Protestant denominations played a significant role. This distinguishes them from other countries in the region. Although today the Czech Republic is essentially a secular society, the memory of the Hussite movement is still an element shaping the Czech identity. Meanwhile, according to data from 1922, Lutherans accounted for as much as 78.2 per cent of the population in Estonia,” points out Cobel-Tokarska. She recalls, referencing to Max Weber, that the Protestant ethic was one of the main elements conducive to the formation of capitalism and emphasizes the great historical and cultural diversity of the CSE in the long term.

“In general, the idea of CSE is a certain intellectual construct. It consists of a large and relatively frequently changing number of state organisms with fluid borders. The basic feature of these countries is the high ethnic, cultural and religious diversity within a small territory. The CSE countries carry the legacy of the Ottoman Empire, Sweden, the Habsburg dynasty and the Austro-Hungarian Empire, the Polish-Lithuanian Commonwealth, the legacy of the partitioning powers and other states. These influences overlap and are frequently difficult to precisely identify. It is difficult to talk about Central Europe as a single entity, because its different parts had different historical experiences in the long term. And even if the experiences of the past several decades have been to some degree similar, in the long term perspective many things have been shaped differently in the individual CEE countries,” explains Cobel-Tokarska.

Recent history matters

According to some economists, the diversification of the economies in the CSE region is also the result of the different kinds of economic policies applied in recent decades.

“For example, due to the particularly repressive and irresponsible economic policies of their communist governments, at the beginning of transformation Bulgaria and Poland struggled with much more severe economic imbalances than Czechoslovakia or Hungary,” believes Krzysztof Głowacki from CASE. He points out that in the case of Croatia, one cannot forget about the war in the 1990s which resulted in an enormous waste of time and resources. “The war in the Balkans delayed Croatia’s economic development for many years,” he believes.

CSE model

One more important question arises in connection with the (heterogeneous) development of capitalism in the CSE region: is it possible for a model of CSE capitalism to emerge in the future, thereby forcing Amable to update his typology? Which of its features could become emphasized? Or perhaps the divergence of the Czech Republic and Estonia at the current stage of development of capitalism in CSE will make it impossible for such a uniform model to emerge?

Prof. Jasiecki emphasizes that Amable did not include CSE capitalism in his typology of models due to the early stage of development of market institutions, different directions of evolution and the diversity of the variants of capitalism in the region.

„It is true that the World Bank and the leading researchers, such as Anders Aslund, Dorothee Bohle and Béla Greskovits, point out the significant heterogeneity of the region of CSE. They distinguish several groups of countries representing different economic, political and social models: Central Europe, the Baltic states, Southeast Europe, etc. We are dealing with different variants of capitalism in CEE, rather than one model,” believes Prof. Jasiecki.

„This is accompanied by the volatility of political systems in the countries of the region, which makes it difficult to consider CSE capitalism as a separate type of capitalism. This thesis is confirmed in relation to Central Europe by the direction of systemic changes taking place in Hungary since 2010 and in Poland since 2015,” he adds.

Cobel-Tokarska believes that the internal diversification of CSE is so great that it is hard to expect that a model of Central and Southeast European capitalism could emerge. „It seems that the models are shaped on the basis of processes of long duration, and therefore the recent decades are unlikely to create a permanent model that would not be rooted in the past,” she says.

Scientists from the Warsaw School of Economics emphasize that at the current stage of development of capitalism in the region of CSE it is impossible to predict whether we are witnessing the emergence of a separate model of post-Communist capitalism or a convergence towards one of the four models of European capitalism.

Besides, some scientists are not in favor of establishing academic divisions within the concept of the global capitalist economy.

„Of course, these divisions play a very important role in the contemporary socio-economic discourse, but they do not reflect the essence of the issue when it comes to global capitalism. It will always be understood as a system of the most efficient allocation of resources, allowing for the accumulation of capital based on the institutionalization of the principle of profit maximization. Regional, cultural or even continental differences in the development of the capitalist economy in various countries of the world are less important than the very core of its functioning,” summarizes Cichoracki.

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