Is Liberalism dead in central Europe? The disturbing return of socialism and authoritarianism in the former Soviet bloc.

WHEN THE SOCIALIST party Smer ("Direction") won Slovakia's parliamentary elections last June, party leader Robert Fico cemented his controversial reputation by forming a coalition government with the Movement for Democratic Slovakia, led by the disgraced former Prime Minister Vladimir Meciar, and the Slovak Nationalists, led by the racist xenophobe Jan Slota. Meciar stands accused of ordering the murder of a journalist and the kidnapping of a former president's son; he cannot be prosecuted because of an amnesty he himself gave to the criminals who allegedly carried out his orders. Slota has raged against "mongoloid" Hungarians and "hideous" Gypsies, and has called on the Slovak army to "flatten Budapest." Small wonder that in an act of unprecedented decisiveness, the Socialist members of the European Parliament expelled Smer from their ranks a mere 24 hours after the new governing coalition was announced.

Of the Central European countries--Slovakia, Hungary, Poland, and the Czech Republic all but the Czech Republic are seeing the rise of politicians who combine "right-wing" attitudes toward public and private morality with "left-wing" ideas about economics. Demands for tax hikes, price controls, tighter labor regulations, and renationalization of privatized property mix freely with calls for a return to faith, traditional family values, and restrictions on sexual autonomy.

The media and other observers have had trouble classifying this combination of socialist and conservative impulses. The European press, for example, refers to the Slovak Nationalists as a "far right" party, even though their economic program resembles that of the Slovak Communists. A more helpful way to analyze the region's political scene is by contrasting liberal and illiberal political forces. I mean "liberal" not in the modern American sense but in the European sense of generally favoring an extension of individual autonomy in the economic and social spheres. Illiberal movements, meanwhile, resist both economic and social liberties.

Adding to the confusion, many politicians have publicly espoused the principles of market liberalism--free trade, low taxes, property rights, rule of law--but privately used the state to enrich themselves and their cronies. So while the Financial Times summed up the conventional wisdom by describing the Slovak election as a backlash against the nation's "sweeping free market reforms," opinion polls do not show significant opposition to the market. Rather, the people have turned against corrupt politicians.

It's telling that there hasn't been a big backlash against liberal reformers in Estonia, the country that has gone furthest in the transition from communism to free markets. In their Baltic outpost miles to the east of Central Europe, the Estonians have greatly reduced the size and scope of government and, as a result, limited corruption as well. If Central Europeans learn that lesson, genuine liberalism can make a comeback and with it reforms aimed at increasing economic and social freedom.

Authoritarianism Rising

Throughout Central Europe, illiberalism is on the march:

* In Hungary last April, the Socialists were re-elected with 43 percent of the vote, while the liberal Alliance of Free Democrats received only 6.5 percent. The main opposition party Fidesz, which received 42 percent--started off as a libertarian youth organization in the late 1980s, pushing for smaller government and more individual freedom. After losing the 1994 elections, however, the party split, with some leaving to form the Alliance of Free Democrats while the rest turned to social conservatism and economic interventionism. Fidesz's deputy leader recently has toyed with the idea of state-sponsored "light" corporal punishment for unruly children. During the 2006 election campaign, party boss Viktor Orban promised new trade barriers, free health care, price caps for energy, and renationalization of some privatized state property.

In September 2006, it became clear that Socialist Prime Minister Ferenc Gyurcsany had regularly lied about the state of the government's finances. Before the election, he claimed Hungary's fiscal footing was sound and even promised moderate tax cuts. After the election, he admitted that the budget deficit was approaching 10 percent of GDP and promised tax increases. His admissions led to violent street protests in Budapest.

* In late 2005 the economically interventionist and socially conservative Law and Justice Party won the Polish parliamentary elections and the presidency. President Lech Kaczynski named his identical twin, Jaroslaw, as prime minister, making Poland the world's only country where the top two spots in the government are occupied by genetically identical individuals. Less amusingly, his party has formed a coalition government with the Self-Defense Party and the League of Polish Families.

The Self-Defense Party's economic program is based on financial support for Polish farmers and opposition to the European Union (E.U.). The League of Polish Families emphasizes the Catholic doctrine of social justice and, consequently, greater redistribution of wealth. All three parties adhere to some degree of xenophobia and homophobia. Self-Defense Party leader Andrzej Lepper has praised Hitler's employment policies and accused gays of spreading disease. In a 2004 interview with the Israeli newspaper Ha'aretz, Lepper dismissed critics of his numerous anti-Semitic pronouncements by saying, "I'm already suspected of being a Jew myself. After all, anyone who has a head for numbers like me and a memory like mine can only be a Jew."

* While the situation in Slovalda, Hungary, and Poland is serious, conditions in the Czech Republic are almost comic. In June the Czechs voted to split the powerful Lower House of Parliament right down the middle. The pro-market Civic Democratic Party came out ahead in the elections, but even with the support of its coalition partners, the Christian Democrats and the Greens, it has only 100 out of 200 seats. The Socialists and the Communists have the other 100 seats. At press time, the Czechs are still without a new government.

Partly as a result of the economic reforms the Czech Republic underwent in the 1990s, the Socialists have presided over solid economic growth. But toward the end of their last term in office, from 2002 to 2006, they relied increasingly on the support of the Communist Party. That led to a partial renationalization of the health sector and a tightening of the labor code, which will make it harder to reduce the Czech unemployment rate, currently 8 percent. The strength of the Socialists and their Communist allies in the new Parliament probably will stifle economic reforms, including the flat tax proposal that formed the core of the Civic Democrats' election platform. On the upside, no major political party in the Czech Republic promotes the harsh social conservatism seen elsewhere in the region.

Conservatism and Corruption

One reason for this rise of illiberalism is the dramatic social change the region is undergoing. Despite their official commitment to "social progressivism," the Communists, who dominated Central Europe for four decades, were ultraconservative when it came to lifestyle issues. Pornography and homosexuality were either prohibited or discouraged; gender equality did not exist. The groundswell of personal freedoms that followed the collapse of the Berlin Wall in 1989 took stultified socialist societies by surprise. Permissive attitudes that took decades to evolve in the West--especially tolerance of sexual autonomy--were suddenly expected in the East as well, as socially liberal legislation became a prerequisite for joining the E.U.

As long as E.U. membership was being negotiated, the ruling elites made an effort to keep intolerant politicians out of the news media. The extremists, in turn, moderated their rhetoric, understanding that the electorate would punish politicians who jeopardized entry into the E.U. Now that the Central European countries are inside the tent, the foes of liberalism have reclaimed their natural political space. That partly explains the electoral success of socially conservative forces in Slovakia and Poland, as well as the strength of Fidesz in Hungary. So far only the Czechs, who have the region's oldest and most deeply rooted liberal tradition, have evaded the lure of illiberalism.

According to the conventional wisdom, the other important reason for the region's anti-liberal backlash is the alleged excesses of the free market. Consider the situation in Poland, where former Finance Minister Leszek Balcerowicz--now the head of the country's national bank--is a focal point of populist fury. Balcerowicz presided over the initial wave of economic liberalization in the early 1990s, when the economy was deregulated, prices were freed, many state enterprises were privatized, and the country battled inflation with a tight monetary policy. Those reforms made Poland a magnet for foreign investment. They also earned Balcerowicz many enemies. Asked why he named his party Self-Defense, Andrzej Lepper responded that Poland needed defending from people like Balcerowicz. "He represents all the evil," Lepper told Ha'aretz in 2004. "It is not true that Poland has no money. There is money in the banks, and the reserves are deposited in banks in the West.... It is untenable that Poland's central bank be a state within a state.... Both right and the left kept him on, because they're really one band."

Yet there is evidence that, whatever their misgivings about the transition process, Central Europeans continue to prefer the free market to socialism. At the end of 2003, the Gallup Organization polled more than 12,000 people in the E.U.'s new member countries about their "identities and values," including their beliefs about the roles of the state and competition in the economy. In the Czech Republic, (59) percent of the respondents either totally agreed or tended to agree that "the state intervenes too much in our lives"; 65 percent in Hungary, 59 percent in Poland, and 73 percent in Slovakia concurred.

Similarly, 63 percent of Czechs, 63 percent of Poles, and 65 percent of Slovaks either totally agreed or tended to agree that "free competition is the best guarantee for economic prosperity." In Hungary free competition was backed by a smaller 47 percent of the respondents but still more than the 39 percent who opposed it.

The people polled were also asked to evaluate the statement, "Economic growth must be a priority [for our country], even if it affects the environment." Considering the prejudicial phrasing, it is notable that in all four countries more people agreed than disagreed with the statement. In the Czech Republic, the ratio was 42 percent to 35 percent, in Poland it was 37 percent to 27 percent, in Hungary it was 44 percent to 32 percent, and in Slovakia it was 38 percent to 37 percent.

My own experience visiting Slovakia during June's parliamentary elections cast doubt on the notion that economic reforms were the chief reason for the illiberal backlash. Everyone I spoke to complained about one thing: widespread corruption among public officials. An election analysis by the Bratislava-based Institute for Public Questions has confirmed that corruption was among the Slovak electorate's top concerns and that the majority of the population had "no profound resentment or disagreement" with the outgoing government's economic reforms. Rather, voters were outraged by ongoing corruption.

Granted, it used to be worse. When Vladimir Meciar was prime minister, from 1994 to 1998, grand larceny was the order of the day. To give just one example, a steelmaking giant in Eastern Slovakia was "sold" to one of the prime minister's cronies, Alexander Rezes. Prior to the sale, Rezes received a heavily discounted loan from Meciar's government with which he bought the company. Rezes then dutifully channeled some of the profits back to Meciar, who used much of the money for political campaigning.

Today's acts of corruption are generally smaller, but they are also more sophisticated and more widespread. They tend to coalesce around government procurement. Officials go through the motions of subjecting contracts to competitive bidding but then choose the company that offers an attractive kickback. Subsidies, highway building, I.T. upgrades, and feasibility studies at government ministries are especially popular sources of riches for officials, their families, and their friends.

Many of them then use their ill-gotten wealth to build expensive houses and buy fancy cars. The combination of ostentatious spending that far exceeds officials' salaries with freedom of the press has been explosive. In 2005 Ludovit Kanik, a Slovak government minister responsible for streamlining the welfare state, was forced to resign after a newspaper reported that his brother and business partner stood to benefit from a large state subsidy. That same year, Czech Prime Minister Stanislav Gross resigned when he was unable to explain how he came to possess a luxury apartment, the price of which was clearly far beyond his official income.

The Corruption Perception Index, calculated by the German group Transparency International, provides good evidence that, some 16 years after the end of Communist rule, corruption is still a serious problem. By its measurements, the level of corruption hasn't changed in Hungary since 1998, when the group started collecting data, while in Poland and the Czech Republic it has gotten noticeably worse. Slovakia showed some improvement under the post-Meciar government, but not enough to keep it in power.

Bloat and Bribery

Corruption is widening as well. On the local level, enterprising mayors and city councilors throughout Central Europe have turned politics into a gold mine. Building permits are an especially attractive source of extra income. A local businessman who wants to build a factory or a warehouse, for example, has to petition city officials for a permit. Land designated for construction is much more valuable than land designated for farming. So a businessman will bribe the mayor or a majority of the city councilors. That way, he can buy a piece of "agricultural" land and have it redesignated for construction. Even after paying off the local politicians, the windfall profit is large enough to make the transaction worthwhile.

The root cause of the corruption isn't hard to find. In Central Europe, the state remains the most important consumer in the economy. According to Eurostat, the E.U.'s statistical arm, government spending as a percentage of gross domestic product (GDP) in the Czech Republic fell from 50 percent in 1994 to a still sizable 45 percent in 2005. In Poland it fell from 48 percent in 1995 to 43 percent in 2005. In Hungary it actually rose from 50 percent in 1999, the first year for which data are available, to 51 percent in 2005. The official numbers for Slovakia show a deceptively large reduction from 58 percent in 1994 to 37 percent in 2005. In fact, much of this drop can be attributed to a change in the methodology by which Slovakia measures government spending. The Bratislava-based Hayek Foundation estimates that the real reduction in state spending between the end of the Meciar era in 1998 and his return in 2006 was just 2 percent to 4 percent of GDP.

Considering the size of the public sector under communism, it isn't surprising that the state played a major role in Central Europe's economies at the start of the transition process. In 1989 the private sector generated 5 percent of GDP in the Czech Republic, Slovakia, and Hungary, and 30 percent in Poland. By 2005 the private sector generated 80 percent of GDP in the Czech Republic, Slovakia, and Hungary, and 75 percent in Poland. Yet government spending has not declined commensurately.

The private sector has reacted to the government's persistently large role in the economy in a predictable way. Despite generous public funding, most of the region's major parties receive large private donations. Major financial groups, such as ING in the Czech Republic and the Penta group in Slovakia, bankroll the political establishment, including rival parties with programs ostensibly opposed to one another. Private political contributions are common throughout the world, of course, and are not inherently corrupt. But they have a more corrupting influence on the democratic process in Central Europe, where government transparency, legislative oversight, and judicial independence are underdeveloped.

The campaign finance system does provide a degree of predictability and stability. Companies and politicians expect that donations will be rewarded by government contracts and vice versa. Stability goes overboard, though, when a particular group of corporations feels left out. Some of the region's past political crises erupted after disgruntled businessmen decided to throw their financial support behind political upstarts. The rise of Smer in Slovakia, for example, was partly due to the massive financial support the party received from wealthy businessmen, such as Juraj Siroky and Vladimir Poor, who felt they had been denied their "fair" share of public contracts.

Corruption produces more than public anger and cynicism. It undermines values--honesty, trust, thrift, self-reliance, hard work--that are important for the smooth functioning of the market. It is tragic that many ostensibly liberal politicians in the region have not lived up to the principles they espoused. Like Latin America's nominally pro-market politicians of the '90s, they have helped discredit liberalism through their actions.

The Estonian Model

Given these institutional weaknesses in the post-communist countries, some economists, including the Nobel laureate Joseph Stiglitz, have argued that liberalization should have been slowed down. But the cost of postponing reforms, whether in terms of subsidies to inefficient producers or of forgone economic growth, would have been immense.

Moreover, Oleh Havrylyshyn, the former deputy director in the Office of Internal Audit at the International Monetary Fund, shows in her new book, Divergent Paths in Post-Communist Transformation, that by virtually all the relevant criteria, from growth rates to corruption, Central European nations have performed significantly better than formerly communist countries that took a more gradualist or haphazard approach to reform, such as Russia and Ukraine. Central Europe, in turn, is outperformed by Estonia, the most fervent liberalizer in the post-communist world.

Estonia began to liberalize at the end of 1992. The government eliminated import tariffs and instituted a flat income tax. Corporate taxes on reinvested profits fell to zero. To arrest inflation, the government established a currency board, which tied the exchange rate of the Estonian kroon to the deutschmark and, later, the euro. State enterprises were sold off in a transparent fashion; unlike in Central Europe, Estonian privatization favored the highest bidders regardless of their political connections. Foreign investors were welcomed, though Russian firms were treated with suspicion due to national security concerns.

Like all the formerly communist countries, Estonia initially entered a recession as inefficient firms folded. By 1995, though, its economy was growing again. According to the World Bank, its per capita GDP grew at a compounded average annual rate of 6.9 percent between 1995 and 2004. Poland, the best-performing Central European country, grew by only 4.5 percent during that period. Adjusted for inflation and purchasing power parity (which accounts for variations in consumer prices across countries), Estonian per capita GDP rose by 96 percent--twice the rate in Hungary, the best-performing Central European country by this measure.

The real problem with Central Europe's economic transition was not that it went too fast but that it did not go fast enough. The amount of money available to Central European governments some 16 years after the fall of communism continues to astonish. On average, the region spent 44 percent of its GDP on a variety of welfare schemes, subsidies, and government purchases in 2005. By comparison, Estonian government spending was 36 percent of GDP. Slovakia spent as little as Estonia, but the overall level of economic freedom in Estonia was considerably higher, thanks to Slovakia's heavy regulatory burden. In 2005 Slovakia had the 37th most welcoming business environment in the world, as measured by the World Bank's Doing Business report, while Estonia came in 16th.

According to Transparency International, Estonia also has the lowest level of corruption in the post-communist world. That supports the argument that corruption in the former Soviet empire is related to the size and scope of government.

It is true that some countries have both high government spending and low levels of corruption. In 2005, for example, the Swedish government spent almost 54 percent of the country's GDP, but Sweden was rated the world's ninth least corrupt country. That lack of corruption is partly attributable to relatively light regulation of the economy; according to the World Bank, Sweden had the world's 14th best regulatory environment in 2006. The Swedes, like most other developed nations, also enjoy a well-entrenched rule of law. The government's activities are subjected to thorough judicial and parliamentary oversight, and if the usual checks and balances fail the government can be held to account by a vibrant civil society. The situation in Central Europe is quite different; decades of totalitarian rule left the region without a strong civil society or a robust rule of law.

The Return of Liberalism

The liberalization of Central Europe remains unfinished. Social attitudes tend to be very conservative, partly because the political scene is dominated by voters who grew up behind the Iron Curtain. The pensioners, who are very conscientious voters, are particularly conservative. The young, however, are increasingly cosmopolitan, better informed, and more socially liberal.

There are several reasons for that. E.U. membership makes it relatively easy for young Central Europeans to work and travel in Western Europe, where tolerance is stronger. As incomes in the region increase, a growing number of Central Europeans can afford to buy computers and go online. Cable and satellite television are also readily available. Moreover, a growing number of young people have access to higher education. Like elsewhere in the world, university-educated people in Central Europe tend to be significantly more socially liberal than people with less education.

Economic liberalization also has a way to go. Government spending is high and the regulatory burden remains excessive, thus prompting many businessmen to resort to bribes. They find willing collaborators among thousands of powerful bureaucrats, many of whom see careers in public administration as a way to get rich. The public, which bears the heaviest burden of a corrupt, inefficient, and overbearing state, has imposed the only available punishment on their rulers by kicking them out of office. Unfortunately, many of those disgraced politicians paid lip service to the virtues of liberalism and the free market.

But the recent electoral setbacks for liberal parties do not mean that liberalism is dead. In time, the public in Central Europe will find that their new rulers are at least as corrupt as those who preceded them. Since they are unlikely to reduce the size and scope of government, they will be unable to address the underlying causes of corruption. That will undermine their popularity and electoral support, as will policies that are apt to result in low growth and high unemployment.

When the liberals return to power, however, they will need to finish the job their predecessors started after the fall of the Berlin Wall. The discretion and regulatory power of national, regional, and local governments will have to be substantially reduced, as will the level of spending and the number of bureaucrats. Public administration will have to be simplified and made more transparent.

Above all, the politicians will have to be humbler and more honest. Before I left Slovakia, a friend told me a story about the wife of a liberal government minister who was very angry with her husband because, as she put it, "the man was as poor at the end of his term in office as he was at the beginning." We will know that liberals have succeeded in Central Europe when that kind of performance by a politician is standard rather than extraordinary.

Marian L. Tupy ([e-mail]), a policy analyst at the Cato Institute's Center for Global Liberty and Prosperity, is the author of the Cato study "The Rise of Populist Parties in Central Europe: Big Government, Corruption, and the Threat to Liberalism."