Foreign Policy Research Institute A Nation Must Think Before it Acts COVID and Economic Well-Being in Eastern Europe and Eurasia
COVID and Economic Well-Being in Eastern Europe and Eurasia

COVID and Economic Well-Being in Eastern Europe and Eurasia

The COVID crisis shifted perceptions of what society is and how interdependent people are in times of crisis. It convinced people around the world that societies need to create economies and healthcare systems that work for everyone. This perspective was already prevalent in the formerly communist countries of Eastern Europe and Eurasia. While neoliberal political and economic theory posits societies made up of atomized individuals, free to do what they want and connected mainly by market transactions, COVID showed that people’s welfare is deeply intertwined. The welfare of others determines our own welfare and should not necessarily be abandoned to the outcome of market transactions.

COVID, therefore, furthered a loss of faith in neoliberal economic policies that had begun in Eastern Europe and Eurasia after the 2008 global financial crisis. There is now a widespread perception that while neoliberal market capitalism helped some individuals, cities, regions, and countries, it proved disastrous for others. While downtown Warsaw filled up with impressive skyscrapers, rural towns in Bulgaria and Ukraine emptied out. Some post-communist countries lost 20 percent of their population since 1989. Millions of people found their livelihoods destroyed. Excess deaths soared in the transition years and remain elevated in many countries. Fertility rates, meanwhile, collapsed. Some places have never substantially recovered. Eastern Europe suffers from the biggest population declines in the world.

Despite this, until 2008, most East European and Eurasian governments believed if they held the line and kept promoting neoliberal economic policies, growth would return and accelerate. In fact, in the mid-2000s, Eastern Europe saw an enormous inflow of foreign capital, foreign direct investment, and household credit. Yet, through no fault of their own—the 2008 crisis did not originate in Eastern Europe, but in the United States—the inflow of capital suddenly stopped. Economies plummeted. The lesson: Excessive reliance on Western capital and ideas about economic development was not necessarily a reliable strategy for growth.

COVID exacerbated the sense that the Western-advised growth model had failed and that post-communist countries needed to provide better opportunities to a larger share of the population, not just the lucky fifth or third who benefited from new market opportunities. Hungary and Poland both declined precipitously in Transparency International’s Corruption Perception Index in 2020, as the crisis exacerbated an ongoing lack of trust in the underlying social contract.

In a recent major study of the social consequences of the 1989 revolutions, Taking Stock of Shock, Kristen Ghodsee and I show that while many people prospered as a result of Western-advised liberal economic reform programs imposed in the region, others suffered the worst economic depression in modern history, generating a yawning gap between individual well-being and trust in public institutions. Privatization left people with the impression that all important assets had been stolen and a dramatic spike in poverty during transition convinced people that governments had lost interest in their well-being.

In contrast to the Great Depression of the 1930s, in which rich and poor suffered alike, in the post-communist countries, a very significant share of the population experienced dramatic growth in economic opportunities and life satisfaction, while millions of other people—often in the same cities, nearby regions, or neighboring countries—suffered the worst economic depression in recorded history. The average post-communist country lost 40 percent of its economy after 1989. The worst affected lost 60 percent or more and had not fully recovered by 2008. Official data show Russia and Latvia lost 45 percent of their economies between 1989-1999. Tajikistan lost 70 percent. Data from the Maddison Project, which has spent decades trying to estimate economic growth rates for all countries, going back hundreds of years, shows the post-communist economic crisis to be the deepest and longest affecting any group of countries in modern history.

Even in some of the best performing East European and Eurasian economies, economic inequalities grew as a result of destroying old systems of distribution and replacing them with unfettered markets. The result was that some high-performing metropolises and industrial regions, such as the capital cities of Prague, Warsaw, and Budapest and the manufacturing heartlands of Western Hungary, Western Slovakia, and Western Poland, have equaled or, in some cases, exceeded standards of living in the West, while other regions of the same countries have been left behind. In Poland, they speak of a Poland A, highly integrated into the world economy, and a Poland B, lagging behind.

No wonder, then, that right-wing populists touting left-wing economic programs started winning elections after 2008. Poland’s Law and Justice Party showed that not all Poles are impressed with that country’s economic miracle. A sizable percentage of voters remain afraid of “liberal” or “civic” parties that support procedural democracy but have consistently offered harsh economic medicine for the many people left behind by capitalist development. These voters, instead, chose anti-democratic populists whose economic policies did a lot for average people. Law and Justice created the Family 500+ Program, which gave generous child benefits to all families, enabling working-class Poles to gain a foothold in the middle class. This is just one example of many that tends to benefit people in Poland B, where Law and Justice gains its support.

Other East European countries began to adopt similar populist economic policies after 2008, beginning a wave of statist and more redistributive amendments to the harsh neoliberalism of previous policies, which sought to reduce the size of the state and allow markets to work. Serbia, for instance, created a version of Poland’s Family 500+ and created a new Ministry for Family Care and Demography in 2020 to run it.

COVID accelerated this trend. By requiring a broad, societal response, COVID impressed on people a new vision of society. Not the vision espoused by neoliberals, where self-interested individualists gain as much as they can, creating employment and economic efficiency in their wake, but where many by necessity are left behind. Instead, they have fostered a vision of society as an organic whole, where each person’s life—and death—depends on the decisions of others. After COVID, people are more likely to perceive that their welfare is intertwined.

Going forward, the U.S. foreign policy establishment and international organizations need to develop a model of economic policy that helps not just those who have prospered under “free markets” or neoliberalism, but a majority, even a vast majority, of the population. This should not be hard to imagine and could take a number of forms, but it no longer makes sense for U.S. foreign policy to double down on economic policies that succeeded in part, but also failed to deliver a better life for so many citizens after communism fell.

The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.