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The New Political Economy of Central Europe

The key to understanding the transformation in Eastern Europe lies in the new political economy, i.e., the way the societies produce, allocate resources, distribute income, and find political consensus and social stability. Considering the situation of Poland, Czechoslovakia and Hungary, the only political economic model realistically within reach is some kind of “social market economy.” Eastern Europe must be prepared to reconcile inherent statism and politicized trade unions with aggressive entrepreneurship. Not surprisingly, East European theorists are becoming increasingly interested in Ludwig Erhard, the forefather of German economic reform. In the 15 years following the 1948 reforms, Erhard proceeded to construct a system able to reconcile two seemingly incompatible ingredients: the market and “social justice.”