The twentieth century dramatically reshaped Central and Eastern Europe. The Second World War found the region war-torn and lagging behind Western Europe in economic de- velopment. Although some of these countries, especially Poland and Czechoslovakia, had started to modernize, most economies remained underdeveloped, predominantly rural, and dependent on foreign capital (Simons 1991). The heavy destruction suffered during the war brought about substantial economic crises and complicated economic recovery. In
the aftermath of the Communist revolution, Eastern Europe underwent rapid national- ization, violent collectivization, accelerated industrialization, and gradual incorporation into the Soviet Union-led Council for Mutual Economic Assistance (CoMeCon). The creation of new industries spurred urbanization and large-scale migration to large cities. Socialist governments invested heavily in public works, expanded access to education, and intensified trade with other socialist countries.
Despite these transformations, the primary sector remained a significant source of economic activity (Simons 1991). Indeed, although its importance had lessened over time, it still employed around 20% of the labor force and contributed approximately 15% to national income across Bulgaria, Czechoslovakia, Hungary, Poland, and Romania in 1980 (Turnock 1996). While the expansion of education and the growth of the public sector generated new employment opportunities, agriculture and mining absorbed a substantial proportion of the surplus unskilled labor (Turnock 1996). Remuneration levels in the sector varied across the region, but rapid increases in demand for food and ores and metals and exacerbating production deficits during the 1950s and the 1960s drove wages up in many countries. The primary sector, therefore, continued to provide employment and decent wages for relatively poorly qualified workers.
The fall of communism in the late 1980s completely overhauled the sector. National governments faced the imperative of deciding how to privatize the assets the communist authorities had collectivized decades ago. The collapse of public cooperatives induced a substantial fall in production. The restitution process, which returned publicly-owned land to its previous private owners, further disrupted productive processes. In some cases, city dwellers who had never lived in the countryside received extensive parcels in territories crucial for sustaining production (author interviews). In others, multiple heirs meant that previously consolidated properties were split into numerous smaller parcels. The resulting fragmentation and the new owners’ lack of experience created new challenges for the agricultural sector. As far as mining was concerned, privatization, exhaustion, and concessions drove some mines into closures.
The liberalization of trade with the rest of the world exposed Eastern European agri- culture and mining to competition from abroad. This competition was rather uneven: while the EU accession process required post-communist states to eliminate government interference in markets and open up to international trade, the Block sought to protect Western European agricultural producers and did not give candidate countries equal ac- cess to its markets (Vachudova 2005). Because accession countries were more reliant on their primary sectors, the European Union feared that they would pose a threat to its own member-states. Furthermore, because steel was such a sensitive sector, it enjoyed special protection in the Union. Simultaneously, Eastern European economies faced the collapse of the CoMeCon, which had provided a market for their goods. In this sense, in addition to witnessing the dramatic restructuring of the primary sector and the withdrawal of state support, post-communist producers also experienced intensified competitive pres- sures that they were in a weakened position to withstand.
The primary sector thus faced a decline during the early years of the transition. The restructuring of productive enterprises and the interruption of traditional commercial transactions resulted in the collapse of some producers and the emergence of many small- scale, subsistence farmers. As a result, the sector no longer employed as many workers as it had under communism. The adoption of modern technology and the introduction of new production methods further undermined agriculture’s capacity to absorb labor. Al- though production had changed under communism, becoming increasingly mechanized, the sector still employed relatively outdated machinery at the beginning of the transi- tion (Turnock 1996). The process of modernization that began in the 1990s, therefore, reshaped Eastern European agriculture and significantly decreased its demand for labor. The reorganization of production thus decreased the proportion of the region’s la- bor force engaged in the primary sector. This drop not only generated unemployment, but also had the potential to exacerbate economic inequality. A labor-intensive primary sector generally pays homogeneous wages, keeping income differentials low. It also pro- vides employment opportunities for low-skill workers. In contrast, a more technologically sophisticated sector can increase wage dispersion. Capital-intensive sectors not only do
not need as much labor, they also seek relatively better trained workers who can operate modern machinery. Thus, the transformation of the primary sector is likely to have had important implications for income inequality in Eastern Europe.
Because the transition coincided with this modernization process whereby agriculture shed labor and ceased to perform the equalizing role it had had in the past, I expect that
• Hypothesis 1: The decline of agricultural employment in Central and Eastern Eu-
rope is associated with higher market income inequality.
Nevertheless, my expectations for trade with primary goods in the region are different. By the end of the 1990s, the sector had started to recover. Indeed, primary goods exports increased during the late 1990s and the 2000s. Because this increase occurred when most of these industries had become more capital-intensive, had ceased to demand much labor, and had passed into private hands, I expect that
• Hypothesis 2: Larger primary goods exports in Central and Eastern Europe are
associated with higher market income inequality.
This is because the gains from trade with such goods probably go to capital owners, land owners, and relatively skilled workers. These groups were already better positioned to benefit from the transition away from communism than other segments of society which did not own assets and lacked better qualifications. I therefore hypothesize that higher exports from the post-communist world’s transformed primary sector would contribute to widening income differentials in the region.