When the Berlin Wall fell, 20 years back, Eastern Europe began a project of economic development akin to what we in India have been engaged in. There were a few important differences when compared with what we have done.
The first was the attitude towards capitalism and freedom. Eastern Europe had chafed in misery for decades under a totalitarian regime, based on central planning and a welfare state. They knew how bad that was, and were single-mindedly focused on the task of achieving freedom and capitalism. As an example, in Warsaw, the posh building that housed the communist party was given over to the new stock exchange. In India, we have never had this level of clarity on the goal.
The second big difference was the tangible dimensions of this goal. Capitalism and freedom are big words—how are they to be achieved at an operational level? In Eastern Europe, there are two tangible goals: to join the European Union, and to join NATO. All economic policy decisions are viewed from the perspective of getting into the EU, and all international relations questions are viewed from the perspective of getting into NATO.
This matters a lot. In India, it is not hard for an expert to look at the international experience, identify best practices, and offer blueprints. For example, nothing prevents India from learning how the VAT works in the EU, and rapidly implementing the GST. But political support for change is generally hard to find. In Eastern Europe, specific questions about law, regulation and the role and function of government agencies were and are answered through reference to the EU. Politicians are willing to undertake difficult reform because EU admission is the tangible proof of having graduated to capitalism and freedom.
The project of achieving freedom and capitalism on the Western model saved a lot of time in domestic debates. As an example, in Eastern Europe, there is no policy discussion about capital account convertibility. All the countries adopted capital account convertibility because this was a basic element of the package deal of being European.
Similarly, all countries in Eastern Europe wisely understood that setting up a banking system is hard, and the market share of foreign banks ranges from 40 to 100%. This has worked pretty well, including in the crisis of 2008-09. Having such a big role for foreign banks, with full convertibility, has led to problems. But there are few alternatives for a developing country, given the difficulties of setting up a strong banking system from a scratch. As an example, India is a failure story where foreign banks were shunned, and the resulting banking system has largely avoided getting involved with the project of India’s economic growth. East Europeans picked a better path compared to us: they have a genuine banking system while we do not.
Upon looking back, two statements are simultaneously true. First, a lot of progress was made, and lives of people in Eastern Europe are undoubtedly better. Second, setting up institutions that make possible the synchronised dance of capitalism and freedom has proved to be much harder than expected, even given the existence of the EU as a clear recipe to emulate.
On the positive side, the change is hard to exaggerate. A visitor to Warsaw or Prague today sees a modern and sophisticated city. Of the countries of Eastern Europe, 10 have joined EU and 12 have joined NATO. These are massive changes.
But there are many problems. Eastern Europe has had and will continue to have good growth. But rising up to Western European levels will take a while. By and large, the politics has proved to be more difficult than expected. In many countries, multi-party democracy with freedom of speech and fair elections have not yet fallen into place. The lack of these has hindered the emergence of a competitive market economy: too often, politicians have hijacked parts of the economy for private benefit.
One dimension of this problem is just the generational change, which is inevitably hard. For people who grew up with communism, it is inherently hard to cope with political and economic freedom. Angela Merkel was 35 when the Berlin Wall came down, and she has clearly reinvented herself. But she is a PhD in physics, and is the exception that proves the rule. Most people found it very hard to shift their ways of thinking even though they were keen to reinvent themselves.
The children born free in 1989 are now 20 years old . The coming 25 years will see this generation dominate society, and this will be a much better period for East Europe. A similar demographic transition will take place in India in the coming 20 years: the generation that rises to prominence will be free from the blinkers of autarky and socialism.