Heft36 1 - SFB 580 - Friedrich-Schiller-Universität Jena

WHAT CAPITALISM? 

SOCIO-ECONOMIC CHANGE IN 

CENTRAL EASTERN EUROPE. 

PROCEEDINGS OF THE WORKSHOP THE 29/30 OCTOBER 2009 

COLLABORATIVE RESEARCH CENTRE 580 IN COOPERATION WITH 

THE UNIVERSITY OF OSNABRÜCK, LONDON SCHOOL OF ECONOMICS AND 

THE OTTO-BRENNER FOUNDATION 

Agnieszka Cianciara, Péter Csizmadia, Alexandra Janovskaia, 

Alexandra Krause (Ed.), Kathrin Loer, Martin Mendelski, Abel Polese, 

Catherine Spieser, Ivett Szalma, Bernadett Szél, Vera Trappmann (Ed.), 

Lyudmyla Volynets 

SFB 580 MITTEILUNGEN 2010 36

36 SFB 580 MITTEILUNG 

Heft 36, August 2010 

Sonderforschungsbereich 580 

What Capitalism? Socio-Economic Change in Central Eastern Europe. 

Proceedings of the Workshop the 29/30 October 2009 

Collaborative Research Centre 580 in Cooperation with the University of Osnabrück, 

London School of Economics and the Otto-Brenner Foundation 

Sprecher: 

Prof. Dr. Everhard Holtmann 

Martin-Luther-Universität Halle-Wittenberg 

Institut für Politikwissenschaft und Japanologie 

06099 Halle (Saale) 

Verantwortlich für dieses Heft: 

Dr. Alexandra Krause 

Friedrich-Schiller-Universität Jena 

Institut für Soziologie 

Carl-Zeiß-Straße 2 

07743 Jena 

Tel.: +49 (0) 3641/ 945564 

Email: alexandra.krause@uni-jena.de 

Logo: 

Elisabeth Blum; Peter Neitzke (Zürich) 

Cover & Satz: Romana Lutzack 

Druck: 

Universität Jena 

ISSN: 1619-6171 

Diese Arbeit ist im Sonderforschungsbereich 580 „Gesellschaftliche 

Entwicklungen nach dem Systemumbruch. Diskontinuität, Tradition und Strukturbildung“ 

entstanden und wurde auf seine Veranlassung unter Verwendung 

der ihm von der Deutschen Forschungsgemeinschaft zur Verfügung gestellten 

Mittel gedruckt. 

Alle Rechte vorbehalten.

WHAT CAPITALISM? 

SOCIO-ECONOMIC CHANGE IN 

CENTRAL EASTERN EUROPE. 

PROCEEDINGS OF THE WORKSHOP 

THE 29/30 OCTOBER 2009 

COLLABORATIVE RESEARCH CENTRE 580 IN COOPERATION 

WITH THE UNIVERSITY OF OSNABRÜCK, 

LONDON SCHOOL OF ECONOMICS AND THE 

OTTO-BRENNER FOUNDATION

REFERENCES LITERATUR CONTENTS 

Chapters 

1 

Editorial 

Alexandra Krause, Vera Trappmann ...........6 

Varieties of Capitalism 

2 

3 

The Varieties of Capitalism Approach Goes East: 

Institutional Complementarities and Law Enforcement during 

Post-Communist Transition 

Martin Mendelski ...........8 

Polish business – politics relations and their impact on national 

lobbying at the EU level 

Agnieszka K. Cianciara ..........45 

Companies in transition 

4 

5 

Germans on their way East – Austrians staying at home 

Kathrin Loer ..........62 

Automotive MNCs in Central Europe: The enterprise as a 

source of competitive industrial capabilities 

Aleksandra Janovskaia ..........80 

Seite page 4

REFERENCES LITERATUR CONTENTS 

Chapters 

6 

Organisational Innovations in the Hungarian Knowledge-intensive 

Business Service Sector: Lessons from a Company Survey 

Péter Csizmadia .........103 

Welfare state and labour markets 

7 

8 

The politics of labour market adjustment in post-1989 Poland. 

Trajectory of policy reform, politics of social change and emerging 

welfare regime 

Catherine Spieser .........121 

Analysis of the Hungarian labour market by deliberative methods 

Szalma Ivett/Szel Bernadett .........155 

Welfare Insights from the Ukraine 

9 

At the origins of informal economies: some evidence from Ukraine 

(1991-2009) 

Abel Polese .........200 

10 

Industrial Relations and post-socialist transformation: the case 

of the Ukraine. 

Lyudmyla Volynets .........217 

Seite page 5 

Authors .........242

REFERENCES LITERATUR EDITORIAL 

EDITORIAL 

1 

Alexandra Krause and Vera Trappmann 

Seite page 6 

Twenty years after the fall of the 

Berlin wall, it is due time for a balance 

sheet of whether the transition from 

a planned economy to a market economy 

in Central and Eastern Europe has been 

accomplished or is still under way - in both 

cases, we would like to know what economic 

system has emerged. The workshop held at the 

Friedrich-Schiller University in Jena in October 

2009 brought together researchers offering 

answers to this question. The approach was 

two-fold. First, we had empirical contributions 

of young scholars, two of which focused on 

Poland, Hungary and the Ukraine, respectively, 

whereas two additional contributions analysed 

offshoring and management strategies in 

the automobile industry from a comparative 

perspective. Altogether, these papers provide 

evidence of the variety of capitalism in the 

region. Diversity, in terms of the level of 

modernization and market regulation achieved, 

is still large. Moreover, the Ukraine is not at 

the same level as the Visegrad four, even 

considering the level of corruption or informal 

economy alone. This finding, however, provokes 

the question of how to deal with this variety? Is 

it mirrored at other world regions? Do some 

countries resemble those in Western Europe? 

How do we explain variety among the extransition 

countries, in terms of different elite 

constellations, as Eyal, Szeleny and King have 

suggested, or path dependencies or the varying 

influence of foreign direct investments? 

Therefore, in a second step, we had conceptual 

contributions that attempted to assess whether 

the emergent capitalisms and the ongoing 

social changes in the region can still be best 

analyzed by transformation theory or whether 

the region has become affluent of a particular

ALEXANDRA KRAUSE, REFERENCES LITERATUR VERA TRAPPMANN 

theory. Assuming the latter, we invited experts 

in the field to elaborate on existing analytical 

paradigms for socio-economic change and 

examine their adaptability to Central Eastern 

Europe. 

Professor Elena Iankova fom Cornell University 

dealt with the VoC paradigm and industrial 

relations; Professor Lawrence King from 

Cambridge University presented neoclassical 

sociology arguing for a re-evaluation of the 

role of the state in economic change in CEE; 

and Professor Christoph Köhler from Jena 

discussed the challenge-and-response approach 

developed by the Collaborative Research 

Centre 580. 

The event was part of a series of workshops 

for post-graduates and early career researchers 

studying Central and Eastern Europe. 

The network of these young scholars is 

supported by the Otto Brenner Foundation 

and benefits from the generosity of the 

various host institutions. While in the past 

the London School of Econmics, under the 

head of Aleksandra Janovskaia, organized the 

meetings, we are very grateful of the support 

of the SFB 580 for the meeting in 2009, which 

was organized by two SFB projects dealing, in 

particular, with Central and Eastern Europe. 

The A2 project compares economic elites in 

Poland and Hungary with those in Germany, 

while B2 compares employment relationships 

in Russia with Germany. The workshop in 2010 

will take place at Osnabrück University. The 

following workshop is planned in Bratislava. If 

any of the readers feels inspired by this project, 

please do not hesitate to host one of the future 

workshops! 

Finally, we must say that it has been extremely 

fruitful to engage the young researchers in a 

dialogue with the senior researchers of the 

field, who participated in the workshop. We, 

therefore, would particularly like to thank 

Katharina Bluhm, Elena Iankova, Lawrence 

King and Christoph Köhler for their helpful 

comments and a lively debate. 

We are even more fortunate to be able to 

present the empirical workshop contributions 

here to a broader audience and would like to 

thank all authors for revising their papers for 

this publication. 

Seite page 7

THE VOC EINLEITUNG APPROACH GOES EAST 

ABSTRACT 

THE VARIETIES OF CAPITALISM APPROACH 

GOES EAST: 

INSTITUTIONAL COMPLEMENTARITIES AND 

LAW ENFORCEMENT DURING POST-COMMU- 

NIST TRANSITION 

Martin Mendelski 

2 

The Varieties of Capitalism (VoC) approach 

is a popular paradigm used to 

explain the institutional diversity and 

economic performance in developed market 

economies. Does the VoC approach also have 

explanatory power for post-communist economies 

from Central and Eastern Europe and the 

former Soviet Union? This guiding question 

will be answered by analyzing the role of institutional 

complementarities and coordination 

for institutional diversity and development. It 

is argued that, while the VoC approach can 

serve as an analytical framework of analysis 

and in parts as a tool for classifying transition 

economies regarding their modes of coordination, 

it is less suited to explain the process of 

path-dependent and volatile institutional development 

in most transition countries because 

of its static perspective and the negligence of 

enforcement. Therefore, the VoC approach can 

be applied only restrictively to post-communist 

economies. 

1. INTRODUCTION 

Seite Page page 8 

With the accession into the EU, transition 

seems to be over for most post-communist 

countries. Remaining work is to be done in 

Central Asia and South-Eastern Europe (SEE), 

where transition has not yet come to an end. A 

comparison of countries from SEE, Central 

Eastern Europe (CEE) and Central Asia on 

the basis of selected institutional indicators (e.g. 

EBRD transition indicators 1989-2007; World 

Bank governance indicators, 1996-2007) reveals 

dissimilar institutional trajectories during the 

last two decades. According to the average

MARTIN SEMENOVA MENDELSKI 

transition score in the EBRD 2006 report, 

countries from SEE (except Bulgaria, Croatia 

and Romania) and the former Soviet Union 

still lag behind the development of the CEECs 

and the Baltic States (see EBRD 2006). So why 

do institutional quality and reform progress 

differ between post-communist countries? 

What accounts for persisting differences of 

institutional systems? 

Research on institutional diversity is addressed 

by scholars of the VoC literature (Albert 1993; 

Whitley 1999; Hall/Soskice 2001; Amable 2003; 

Crouch 2005). The VoC approach, elaborated 

most prominently by Hall and Soskice 2001, 

sees institutional complementarities behind 

the persisting institutional and organizational 

diversity of developed Western countries. 

Hall and Soskice emphasize limited diversity 

of capitalism (institutional diversity) and 

limited ways to economic success (comparative 

advantage/economic growth). The reason for 

limited diversity can be found in complementary 

institutions, i.e. mutual enhancing institutions, 

which leave basically two possibilities for the 

coordination of economic activities, via market 

and non-market relationships (Hall and 

Soskice 2001, p.8). 

The VoC approach has mainly been applied 

to developed Western countries and has 

only recently been extended to countries 

from CEE, SEE and Central Asia (Hancke/ 

Rhodes/Thatcher 2007; Lane/Myant 2007). 

Scholars who apply the VoC approach to 

post-communist countries attempt to explain 

institutional diversity (type of emerging 

capitalism) and institutional development 

during transition. They do so by grouping 

post-communist countries into successful 

and less successful clusters, by comparing 

selected countries in qualitative case studies 

or by analyzing single countries. Dynamic 

comparative studies including all transition 

countries are rare (Knell/Srholec 2007) and 

the recent application of the VoC approach to 

post-communist countries seems to have only 

explanatory power for the most successful 

transition countries such as Slovenia and 

Estonia (Feldmann 2007; Buchen 2007). 

What makes it so difficult to extend the 

approach to other post-communist countries 

from the region? Unfinished transition in 

several states and methodological difficulties 

(missing data, comparability of data) could 

be part of the answer, but there are additional 

reasons, as well. 

This paper’s aim is to explore these reasons why 

the VoC approach has only limited explanatory 

power in post-communist countries. 

Particularly, the question should be answered 

whether certain VoC concepts (institutional 

complementarity, coordination concept) can 

be helpful in explaining institutional diversity 

and institutional development during postcommunist 

transition. The basic argument of 

the paper is that the creation of institutional 

complementarities is more difficult to achieve 

under conditions of transition (i.e. uncertain 

environmental conditions, changing power 

relations of diverse actors, capacity restrictions) 

than under conditions of stability, 

prevailing in developed countries. 

Such difficult transition conditions Seite Page page 9 

as well as persisting institutions from 

the past make the enforcement of 

new formal institutions difficult and require a 

cautious application of the VoC to transition 

economies.


The outline of this paper is as follows. The 

next section gives an overview of the literature 

attempting to apply the VoC to post-communist 

economies. The third section elaborates the 

limits and possibilities of the VoC approach 

to explain divergent transition outcomes. In 

this section, I will attempt to reveal whether 

the concept of institutional complementarity 

and that of pure types of coordination are 

helpful in the transition context. I argue 

that, in general, the VoC approach can be 

useful as a framework of analysis, but that its 

application in the transition context also has 

certain limits. In particular, I identify three 

limitations (uncertainty resulting from a 

changing environment, diversity of actors, lack 

of capacity) that restrict the ex ante design of a 

complementary institutional system. In the last 

section, I will conclude that the VoC approach 

is less suitable to explain institutional quality 

and diversity during transition and, therefore, 

is restrictively applicable to the still evolving 

capitalist systems in most post-communist 

countries. 

2. VARIETIES OF CAPITALISM AND POST-COM- 

MUNIST TRANSITION (LITERATURE OVERVIEW) 

Before giving an overview of the VoC literature 

focusing on post-communist countries, 

some basic differences must be kept in mind 

when comparing capitalist systems. 

By considering four types of capitalist 

classification (coordination, re- 


gionalism/nationalism, development 

stage, origin), the deeper underlying 

assumptions and sources of capitalist diversity 

should become clearer. 

A first possibility to distinguish among 

capitalist systems is to classify them according 

to regional and national characteristics. This 

popular typology is based on similar national 

or regional logics of organization, which are 

related to socio-cultural and geographic factors. 

Forms of regional developed capitalist systems 

were labeled Scandinavian, East Asian, Latin 

American or Mediterranean capitalism. National 

typologies of capitalism are, for instance, British, 

Dutch, Prussian, American and Japanese. Most 

of these national and regional categories refer 

to developed economies; and only recently have 

scholars begun to label the evolving forms of 

capitalism among post-communist countries 

as East European Capitalism (Stark 1996; 

Iankova 2002), Central European Capitalism 

(Lawrence/King 2007), Russian capitalism 

(Woodruff 1999) or post-soviet capitalism 

(Tholen 2005, p. 228). 1 

A second method to classify capitalism is 

according to the dominant logic of coordination 

(e.g. Hall/Soskice 2001). Scholars focusing on 

different modes of coordination between subsystems 

of the political economy identified 

liberal market economies (LMEs), where 

firms coordinate via competitive market 

arrangements, coordinated market economies 

(CMEs), where firms interact strategically 

with other actors via non-market relationships, 

and mixed market economies (MMEs), which 

face high state intervention on the supply side 

(Hall/Gingerich 2004, p. 17). 

A third criterion of classification is the degree 

of “capitalism ripeness”, i.e. the stage in capitalist 

development. This criterion makes more sense 

to distinguish between evolving capitalism in 

post-communist and developed capitalism


in the West. Developed economies, which 

have already reached a certain level of stable 

and settled market economy, possess a more 

developed and settled form of capitalism 

than post-communist economies, which are 

still building their economic and institutional 

systems. Given the different stages of 

development between the developed West 

and the lagging East, it is not surprising that 

there is a different organizational logic in postcommunist 

countries. This special logic in postcommunist 

countries is driven by institutional 

and economic catch-up strategies in still young 

and evolving capitalist systems. Nevertheless, 

the degree of capitalism ripeness differs even 

among post-communist countries. On the one 

hand, very advanced frontrunners (Estonia, 

Slovenia) have already established clear and 

settled institutional structures and are classified 

in the Hall/Soskice framework as either LME’s 

or CME’s. On the other hand, laggards from 

South-Eastern Europe, Central Asia and the 

Caucasus are still constructing and improving 

their institutional system. Under such transitory 

conditions, their still unsettled institutional 

system does not allow for a classification in 

Hall/Soskice’s framework. However, even the 

situation of stable but mixed type of capitalism 

in the Visegrad States makes categorization 

difficult and would imply a need for additional 

criteria describing capitalist variety. 

A fourth method to classify capitalist systems 

is according to their origin. Basically, two 

forms are possible, internally or externally 

driven capitalism. Internally driven capitalism 

indicates a domestic and gradual development 

of capitalist institutions over time. Successful 

Western capitalist systems were developed 

internally (e.g. in USA, Great Britain, Prussia) 

and formal institutions could be adjusted to 

local conditions. In contrast, externally induced 

capitalism stands for imported capitalist 

institutions from abroad. Such institutional 

transfers based on Western models occurred in 

CEE after the end of Habsburg domination at 

the turn of the 19 th century and again after the 

end of communism in the 1990s. Institutional 

development in the CEECs has been based on 

the imitation of technological or organizational 

leaders from the West, characterized by 

institutional or economic catch-up strategies 

and institutional recombination (Stark 1996) 

leading to an institutional patch-work system. 

According to the VoC literature, such mixed 

systems should not be very successful (Hall/ 

Soskice 2001; Cernat 2006). 

Which criterion matters most to explain postcommunist 

capitalist diversity? Is it possible to 

apply Hall/Soskice’s VoC framework to postcommunist 

economies? Before trying to answer 

these questions myself, I would like to give an 

overview of what other scholars have written 

so far. Literature related to the application 

of VoC in post-communist countries can be 

divided into four kinds of analyses: single 

country case studies, comparative case studies, 

static comparative analysis and dynamic 

comparative analysis. 

Single country case studies focus on institutional 

development in a single country 

(see Charman 2007; Christophe 

2007; Myant 2007; Hanson/Teague; Seite Page page 11 

Korosteleva 2007). While this 

frequent approach, conducted as a 

qualitative case study, is able to reveal complex 

agency-structure relationships over time, it 

does not allow one to identify the sources


of capitalist divergence at a general level of 

analysis. 

Another popular method to study VoC is the 

comparative case study of few selected countries 

(Mykhnenko 2007; Feldmann 2007; Buchen 

2007; King 2007). Although this approach 

allows for institutional change over time, 

generalized findings are not possible, as only few 

CEECs are compared. However, this approach 

requires detailed information and sufficient 

data for a thorough qualitative analysis. For 

lagging post-communist countries data is 

still not available. Another problem is that 

most data is not standardized and, therefore, 

difficult to compare. Thus, researchers prefer 

to focus on countries where distinct structures 

of capitalism are clearly discernible such as 

Estonia and Slovenia. Other country studies 

(on SEE and Central Asia) are rare, mainly 

because their institutional systems are still 

evolving and data is difficult to obtain. 

In static comparative analysis of a larger group of 

countries, different indicators (e.g. state control, 

proportion of FDI, stock market capitalization) 

are compared at a certain point in time (Lane 

2007). The authors of such studies are able 

to identify diversity among post-communist 

countries in terms of institutional and socioeconomic 

indicators. Although these broad 

studies provide an overview of the current 

situation and enable the grouping 

of countries into clusters, their 


snapshot approach does not capture 

the dynamics of institutional change. 

Therefore, important dynamics, such 

as the transfer from one type of capitalism 

to another, are overlooked. Such changes in 

institutional and organizational structures are 

especially likely in transition countries where 

structures are still developing, enforcement is 

weak and complementarities seem to be not yet 

developed. A static comparison brings about 

the danger of overlooking important changes 

and, therefore, incorrectly classifying postcommunist 

transition countries. 

A sophisticated approach to consider 

institutional change and capitalist transfer is 

dynamic comparative analysis (Knell/Srholec 

2007; Paunescu/Schneider 2004). These studies 

compare several countries over time and are able 

to capture dynamics and change to a certain 

extent, but unfortunately are quite rare. Because 

of data and comparability constraints, dynamic 

comparative studies of CEE often consider 

few countries (e.g. Paunescu/Schneider 2004 

consider just three CEECs) and only a short 

period of time (Knell/Srholec 2007 analyze the 

period 2001-2004). If the problem of obtaining 

and comparing data could be overcome, dynamic 

comparative studies are most promising for the 

analysis of capitalist diversity.


Table 1. Summary of VoC literature on post-communist countries 

Publication 

Lane/ 

Myant 2007 

(edited 

volume) 

Conclusion 

Lane: Most post-communist economies have a high state control, a high proportion of 

foreign direct investment and a low market capitalization. Three types of capitalism are 

identified: Continental type, hybrid state/market uncoordinated type, non-capitalist type. 

Knell/Srholec: The diversity of production regimes is measured. Most post-socialist economies 

have liberal welfare systems (except SLO, BLR, BIH, CZ), coordinate business 

regulation (except RUS, LIT, HU, EST) and mixed forms of labor market regulation 

(period: 2001-2004). The difference of post-communist capitalist models is attributed to 

historical legacy. 

Buchen: The VoC approach is used to identify what kind of capitalism has been emerging 

in Estonia (LME) and Slovenia (CME), two post-communist countries with high degrees 

of complementary institutions. 

Myant: The Czech capitalist system shows institutional features of LMEs (wage bargaining) 

and CMEs (social policy). The hybrid Czech system is not a consequence of 

institutional complementarities, but the result of diverse interests and political compromises 

(government, management and foreign firms’ interests), the need to comply with EU 

membership conditions, the legal heritage and state budget constraints. The VoC approach 

needs modification in order to be applied in the case of the Czech Republic. 

Hanson/Teague: The VoC approach is not useful to explain Russia’s capitalist development 

as still many features of developed capitalism (financial system, independent judiciary, 

government efficiency) are lacking and other explaining factors must be considered 

(important role of the state, natural resources, international market integration, informal 

institutions). The VoC criteria which are applied to assess Russia produce a misleading 

picture and mask the economic role of the state. 

Charman: Kazakhstan has a still an unsettled dual-type economic structure (“state led 

liberal economy”) resulting from two parallel developments (LME focus and hegemonic 

role of the state). 

Christophe: The VoC paradigm is difficult to apply in Georgia because the transfer of contradicting 

institutions from abroad (Germany, USA) has resulted in a non-complementary 

institutional system, because institutional subsystems (e.g. capital market, welfare system) 

are still underdeveloped and formal institutions are rarely enforced. 

Bartlett: The application of the VoC approach is difficult. War-torn Western Balkans 

relied on policy and institutional transfer from different international organizations, which 

created non-complementary institutions. Additionally, the strong reliance on informal 

institutions makes capitalism classification difficult. An attempt of classification is made: 

Continental European model (Croatia, Macedonia), LME with strong influence of informal 

institutions/organized crime (Albania, Kosovo), Mediterranean model with informal 

economy/black market activities (Serbia, Montenegro, Bosnia and Herzegovina). 


Korosteleva: Belarus does not fit in conventional VoC type classifications and is considered 

to be a “state capitalist economy” (state ownership, state control over the economy, price 

controls and elements of market economy).


Hancke/ 

Rhodes/ 

Thatcher 

2007 

(edited 

volume) 

King: The VoC can be applied to CEE as a framework of analysis, but it has to consider 

post-communist similarities (importance of backwardness, lack of working-class pressure) 

which are more important than the respective differences in terms of VoC typology. Two 

expanded typologies, “liberal dependent capitalism” in Hungary and Poland and “patrimonial 

capitalism” in Russia, are identified as a consequence of dependency conditions 

in the former (dependency on FDI and technology transfer, lack of domestic banks and 

stock markets, denationalized vocational training) and patrimonial network structures in 

the latter, resulting from financial crisis. 

Feldmann: The VoC approach is applied successfully to explain institutional diversity in 

Slovenia and Estonia. Diversity is explained by a different degree of old networks between 

economic actors, which were built under socialism and influenced by policy choices during 

transition (e.g. mode of privatization). 

Mykhnenko: Poland and Ukraine are institutional hybrids (mixed market economies) 

which can function successfully and escape predetermined trajectories. No complementarity 

effects between science/technology education system and revealed comparative trade 

advantage are detected. As institutional and organizational factors explain only a part of 

macroeconomic performance of post-communist countries, there is a need to integrate 

exogenous factors (internationalization, globalization, Europeanization) into the national 

state-oriented VoC approach. 

Cernat 

2006 

In the Romanian case, the inconsistent mixture of domestic and external institutions 

(“cocktail capitalism”) explains poor economic performance during post-communist transition. 

Bohle/ 

Greskovits 

2007 

The VoC approach is difficult to apply to Eastern Europe as institutions are still not 

consolidated. Four types of capitalist systems, based on institutional configurations and 

performances are identified: state crafted neoliberalism of the Baltic States, world-market 

driven neoliberalism of the CIS countries, embedded neoliberalism of the Visegrád countries, 

and neo-corporatism in Slovenia. Capitalist diversity is explained by differences in 

external factors and state capacity. 

Paunescu/ 

Schneider 

2004 

Crowley 

2008 

Several OECD countries moved towards the liberal market model in a relatively short period 

of time (1990-1999). Poland, Hungary and the Czech Republic have mixed systems. 

The VoC framework is successfully applied to assess the type of capitalism which has 

developed in CEE, particularly in the sphere of industrial relations (labor). However, the 

VoC logic fails to explain the outcome in this sphere because it neglects the role of labor (its 

absence and presence), the state and international actors as the main drivers of change. 

Source: Own elaboration. 


Table 1 gives an overview of conclusions 

on the VoC studies in postcommunist 

countries. On the basis 

of these conclusions, four summarizing statements 

are made: 

a. Variety defined in most studies based on postsocialist 

economies. However, this variety often 

refers to the stage of institutional and economic 

development (e.g. FDI proportion, stock 

market capitalization, privatization proportion), 

which is explained as an outcome of historical


(socialist legacy) and current factors (EU 

membership, policy choices, wars). Because 

many different variables are chosen to explain 

variety, sometimes one and the same country is 

put in different clusters of countries. Therefore, 

classification of countries depends strongly on 

the level of analysis (micro/macro level), the 

research design, the length of the study period 

and the sectors chosen (Deeg 2007; Deeg/ 

Jackson 2007). 

b. No consistent relationship between economic 

performance and complementary institutions. The 

institutional trajectories of post-communist 

countries do not confirm a correlation of 

economic success and institutional system 

purity. On the one hand, countries with 

complementary institutions are economic 

frontrunners (Slovenia and Estonia) while 

countries with non-complementary institutions 

(most countries from SEE and the former 

Soviet Union) are economically less successful. 

On the other hand, there are mixed political 

economies with non-coherent institutions that 

are also economically successful (e.g. Poland, 

Czech Republic, Hungary). 

c. Unfinished transition process to capitalism. In 

most post-socialist countries, the transition 

towards a certain type of market economy is still 

unfinished and unsettled. Especially in South- 

Eastern Europe and former Soviet Republics, 

capitalist structures are underdeveloped and 

institutional enforcement is low. Therefore, it is 

difficult to classify these economies and predict 

which type of capitalism will emerge. 

does not capture the development of postcommunist 

transition countries because of the 

peculiarities of the former socialist societies 

(path dependent informal institutions, diverse 

communist legacies). As a result, scholars 

propose an extention of the CME and 

LME typologies and, with that, introduce 

additionally some “mixed type” or “hybrids 

of capitalism” (e.g. Bartlett 2007; Charman 

2007; Cernat 2006; Lane 2007a; King 2007). 

Moreover, Hall/Soskice’s VoC approach 

is extended by bringing in other actors 

(state, international organizations, political 

entrepreneurs, networks between economic 

actors) that bargain over institutional reforms 

under different political systems (authoritarian 

or repressive state) and are constrained by 

informal institutions and history. In summary, 

VoC literature on post-communist Europe 

claims that capitalist diversity cannot be 

explained solely by internal complementarities 

between institutional sub-systems and firms as 

the main actors. Instead, explaining capitalist 

diversity and institutional change must 

include diverse historical and future variables, 

which can be internal (national state, national 

interest groups, structural legacy) or external 

(EU, international organizations). 


d. Extension of VoC proposed. Most authors, 

especially those in the volume edited by Lane/ 

Myant 2007, conclude that the VoC approach


3. THE POSSIBILITIES AND LIMITS OF THE VOC 

APPROACH TO EXPLAIN INSTITUTIONAL DIVER- 

SITY AND INSTITUTIONAL DEVELOPMENT DURI- 

NG TRANSITION 

3.1 The possibilities of the VoC approach in 

the analysis of transition economies 

Despite the critiques and the need of the 

extension mentioned in the previous section, 

the analyzed literature gives several ideas of 

how the VoC approach can be applied to postcommunist 

economies. 

First, the VoC approach can serve as an 

analytical framework to classify economic 

institutions in post-communist countries. It 

can serve as a point of departure for ex post 

analysis. Therefore, it can help to conduct 

descriptive and explanatory research. Indeed, 

several researchers have employed the VoC 

approach as an analytical framework in their 

comparative case studies of post-communist 

countries (e.g. Crowley 2008; Buchen 2007; 

Mykhnenko 2007; Feldmann 2007; Knell/ 

Srholec 2007). 

Second, by shifting the focus of attention to 

coordination and complementarity between 

institutional sub-systems, the VoC approach 

opens up a fruitful perspective from which the 

transition process can be analyzed. The study 

of institutional complementarities 

and their relationship with economic 


performance has been widely 

neglected in the transition literature. 

Given its relational perspective on the 

outcomes of complementary institutions, the 

VoC approach could help to refocus transition 

research on complementarity aspects. Studies 

which analyze complementarity in transition 

economies (e.g. Knell/Srholec 2007; Buchen 

2007) are rare and there is still much potential 

for future research. 

Third, to put the firm’s behavior into the focus 

of attention can be a refreshing counterbalance 

to the strong emphasis of the state (and its role 

in reform strategies) by transition researchers. 

Considering the firm as an important 

actor during transition shifts attention to 

important long-term drivers of economic 

growth such as innovation, technology, 

research & development, cooperation and 

skills. Although Hall/Soskice’s approach sees 

firm behavior as an outcome of institutional 

structure, an extended version of the VoC to 

post-communist economies should consider 

–besides the supply side of institutional change 

(state, international actors)– the demand side as 

well, i.e. firms’ pressure for institutional reforms 

and particularly, the influence of foreign firms 

on institutional and organizational change (see 

King 2007; UNECE 2001, p. 186). 

To sum up, the VoC approach can function as a 

reference model of an ideal type of coordination 

between different institutional sub-systems and 

the firm. Such a model shows the researcher 

how a capitalist system should look, i.e. which 

institutions it should contain and how the 

relationships between those institutions should 

be. Applying the VoC approach to understand 

the relationships between institutional subsystems 

can be useful in explaining what 

kind of market economy has evolved in postcommunist 

countries. Given its theoretical 

and conceptual strength, Drahokoupil argues 

that the VoC approach “seems to fill the 

theoretical vacuum left by the death of the


‘transition’ debate in the political economic 

research on Central and Eastern Europe” and 

provides a “major post-transition research 

agenda” (Drahokoupil 2008, forthcoming). At 

the same time, the uncritical and mechanical 

application of the concepts and preconditions 

of the VoC to post-communist countries can 

also be misleading (Bohle/Greskovits 2007; 

Drahokoupil 2008, forthcoming). In the next 

two sections I will share this critical view and 

describe some limitations of the VoC approach 

when applied to post-communist transition 

countries. 

3.2 The limits of institutional 

complementarities in the transition context 

How useful is the VoC approach to explain 

divergent institutional development trajectories 

during transition? I will try to answer this 

question by focusing first on institutional 

complementarity, the central concept of Hall/ 

Soskice’s approach. According to Hall and 

Soskice, institutions are complementary “if 

the presence (or efficiency) of one increases 

the returns from (or efficiency) of the other” 

(Hall/Soskice 2001, p. 17). 2 Institutional 

complementarities are basically positive synergy 

effects, i.e. they create additional efficiency 3 for 

institutional performance. In a short formula 

we can portray institutional complementarity 

as follows: 

efficiency (institution A + institution B) > 

efficiency (institution A) + efficiency (institution 

B) 

As this formula shows, institutions are 

complementary if the combined efficiency of 

two institutions is larger than the efficiency 

of the single efficiencies, i.e. if the left side 

of the equation has a higher value than the 

right side. The main message of institutional 

complementary is that institutions are 

not only important alone, but also in their 

composition. 

Hall/Soskice are mainly interested in 

complementarities between institutional subsystems 

of the political economy (education 

and vocational training, corporate governance, 

inter-company-relations, industrial relations). 4 

Complementarity between these spheres will 

lead to limited clusters of capitalist systems. 

Political economies can be classified according 

the modes in which firms resolve coordination 

problems, namely via corporate hierarchies 

and market relationships (LMEs) or via 

non-market modes of coordination (CMEs), 

such as relational contracting, networks, 

associations and collaborative relationships 

and strategic interaction with other actors 

(Hall/ Soskice 2001, p. 8-10). Typically, LMEs 

are exemplified by the organizational system 

of the United States and CMEs by that of 

Germany. Developed economies, which lie 

between these two ideal poles of coordination, 

are identified as non-complementary, mixed 

systems (France and other Mediterranean 

economies). Hall/Soskice assume that in the 

long-run complementary institutions are more 

efficient than non-complementary ones and, 

therefore, advise that “nations with 

a particular type of coordination in 

one sphere of the economy should Seite Page page 17 

tend to develop complementary 

practices in other spheres as well” 

(Hall/Sockice 2001, p. 18). In an empirical 

study, Hall/Gingerich confirm the theoretical 

assumptions of limited diversity as well as the


correlation of complementarity with economic 

performance in developed economies (Hall/ 

Gingerich 2004). Kenworthy, however, does 

not find such a correlation and questions the 

importance of institutional complementarity 

for economic success (Kenworthy 2006). 

Despite such diverse empirical results, why 

should institutional complementarities be so 

important for the functioning of institutional 

systems? According to Roland, institutional 

systems are not interchangable “modular 

constructions”. Rather, they complement each 

other, meaning that “replacing one institution by 

another can in some cases dangerously disrupt 

this systemic consistency” (Roland 2004, p. 

113). Such disruptions of the institutional 

coherence are not desirable if the system is 

performing well economically. However, if 

a country loses its institutional comparative 

advantage -for instance, due to changing 

environmental circumstances- institutional 

reforms are greatly required. In this case, 

complementary institutions become a burden 

because they are more resistant to change than 

non-complementary ones (Greif 1998, p. 82; 

Jackson/Deeg 2006, p. 37). Disrupting coherent 

but socially inefficient institutions is especially 

required when system complementarity is 

sustained by “brute force” (Mayntz 2007, p. 20) 

and provides sole benefits to a small predatory 

group (e.g. for the nomenklatura during the 

communism). 


The 1990s fundamental institutional 

reforms, known as post-communist 

transition, were a rapid disruption of 

an inefficient but coherent communist system. 5 

But did institutional complementarities 

play a role during this period of system 

transformation? I will try to answer this 

question by analyzing the extent of conscious 

ex ante design versus spontaneous, ex-post 

emergence of complementary institutions 

during transition. These two possibilities of 

conducting institutional reforms are grounded 

in two views about institutional change: 

institutions by design vs. institutions by 

bricolage. 

Institutions by design: This view of conscious 

design of institutions is reflected in rationalist 

theories, such as property rights theory or 

rational choice theory (see Williamson 1985; 

Demsetz 1967; Shepsle 1989; Calvert 1995). 

According to this actor-centered approach, 

rational individuals construct and change 

institutions on the basis of cost-benefit 

calculations. This approach presupposes the 

existence of non-selfish designers 6 who are 

powerful enough to create efficient institutions. 

Transition scholars who follow the design 

approach believe that institutions and legacies 

from the past can be overcome by adequate 

institutional and policy choices ( Johnson 2003, 

p. 290). They assume that after getting rid of 

formal communist institutions (tabula rasa 

approach) and designing the new system on 

Western models a successful transition could be 

achieved. Therefore, they favor radical reforms, 

in the form of “big bang” institutional change 

(Sachs 1993; Aslund 1991; Boycko 1992; 

Przeworski 1991; Lipton and Sachs 1990). 

These authors believe that “big bang reforms” 

(i. e. simultaneous liberalization, privatization 

and restructuring) are more effective than 

piecemeal gradual reforms, as they benefit 

from complementarities between different 

policies and institutions. Partial reforms, 

instead, would eliminate the positive effects


of complementarities (Murphy et al. 1992; 

Gates et al. 1993) and lead to rent-seeking 

and corruption (Havrylyshyn 2007, p. 3). The 

prevailing credo of the design view in the 

transition context is the introduction of market 

economy in one stroke. 

Institutions by bricolage (trial-error): This 

evolutionary and structure-based view 

reflects the ideas of Austrian scholars such as 

Menger or Hayek, who see social order not 

as the outcome of conscious design but of 

spontaneous and unintended human action 

(see Ahrens 2002, p.60; Poznanski 1996). 

According to this view, historical legacies can 

constrain rational institutional design and 

produce unintended outcomes (Goodin 1996, 

p. 28). Institutional change and institutional 

complementarity are endogenous, i.e. driven 

by internal dynamics. They are the results of 

experimentation, bricolage and learning under 

a constantly changing environment (Stark/ 

Bruszt 1998; Mukand/Rodrik 2005, p. 375). 

Referring to the design of complementary 

institutions, Amable summarizes as follows: 

“There is no social engineer in charge of 

the efficiency of institutional design, and 

there is no pre-established fit of institutions 

either. Economic models, i.e. specific sets 

of institutional forms and the associated 

complementarities, are not designed from 

scratch with all the different pieces intended to 

nicely complement each other. The coherence 

of a model is usually defined ex post and the 

complementarities may sometimes come as a 

surprise...“ (Amable 2003, p. 12). Transition 

scholars, who adhere to the “bricolage view”, 

stress the evolutionary and path-dependent 

nature of institutional change and support 

gradualist reforms (Portes 1990; McKinnon 

1990; Murrell 1995; Poznanski 1996; Roland 

2000). Gradualist reformers argue that, in the 

presence of aggregate uncertainty, gradual 

reforms are politically more acceptable, because 

they have lower reversal costs, i.e. lower costs 

of trial and error (Dewatripoint/Roland 1995, 

p. 1209; Roland 2000). Therefore, this view 

stresses a sequenced design of reforms, i.e. to 

start with reforms that are socially less costly 

and provide constituencies for more difficult 

reforms. An example for sequenced reforms is 

to do privatization before painful restructuring 

(Zecchini 1997, p. 174-175). 

Which view has more explanatory power for 

post-communist transition? Initially, without 

a doubt, transition period was one of conscious 

institutional design. In all former communist 

states, basic institutions of a capitalist system 

were missing and had to be constructed in a 

short period of time. Post-communist states 

designed their formal institutional framework 

on the basis of Western models. Because 

capitalist knowledge was limited, reformers 

had to rely on advisors from the West, who 

were mostly advocates of the big bang 

approach (e.g. Jeffrey Sachs, David Lipton, 

Anders Aslund). Market-oriented institutions 

(e.g. fiscal and financial institutions, property 

rights) and government agencies (e.g. Central 

Bank, Finance Ministry, anti-monopoly 

agency) had to be created from scratch. 

However, supporters of radical reforms 

forgot that the degree of communist Seite Page page 19 

implementation differed among 

communist countries. Some states 

(Hungary, Poland, Yugoslavia) had already 

undertaken market-oriented reforms during 

the last decades of communism and, therefore,


had superior economic and institutional 

starting conditions (EBRD Transition Report 

1999, p. 29) than states with more rigorously 

implemented communism (e.g. the Soviet 

Union, Romania, Bulgaria, Albania). The 

more beneficial communist legacy of Hungary, 

Poland and Yugoslavia was reflected in a less 

centralized economy, enterprise autonomy, 

small private sector, entrepreneurial skills, or 

even tax and banking regulations that were 

similar to Western ones (Szalai 2005, p. 9; 

Rona-Tas 1997, p. 130; Fischer/Gelb 1991, 

p. 92f ). Because of this advanced starting 

position, in some economic or political areas 

institutional design from scratch was more 

pronounced in former Soviet republics than in 

CEECs. While the Baltic and Central Asian 

states had to design commercial laws anew, 

Poland, for instance, could rely on its precommunist 

commercial code (Havrylyshyn 

2006, p. 35). Rather than designing institutions 

from scratch, CEECs had to redesign them, 

i.e. to recombine old institutions with new 

ones (Stark/Bruszt 1998). In some cases, new 

institutions substituted for old ones, in other 

cases, new institutions only supplemented old 

ones (Grzymala-Busse/Jones Luong 2002, 

p. 542). What is important to see is that 

institutional reforms were not done on a tabula 

rasa, and no matter which transition strategy 

was used (big-bang or gradualism), historical 

formal and informal legacies influenced the 

functioning of new institutions. 7 


One has to bear in mind that the good 

intention to design a complementary 

institutional system is always subject 

to hindering factors. Unintended events (wars, 

external financial crisis) and historical structural 

restrictions can hinder the implementation of 

formal reforms and policies. Although in all 

post-communist countries institutional subsystems 

were (re)designed, the relevant question 

is how strongly radical or gradual designers 

insisted on institutional complementarities 

(efficiency aspects) during post-communist 

transition and whether complementarities can 

explain post-communist institutional variety 

and performance. I will argue that the design of 

ex ante complementary institutions is difficult 

due to three limitations: changing environment, 

lack of resources/capacity for law enforcement 

and changing power relations of diverse actors. 

Changing environment (uncertainty): All 

institutional designers face a changing external 

environment and an uncertain future (Streeck 

2004, p. 102 and p. 112). These changing 

conditions guarantee neither that the goal 

to build complementary institutions can be 

maintained, nor that initially complementary 

institutions will remain complementary in the 

future. Future environmental changes are not 

always easy to predict by institutional designers. 

Thus it is not straightforward to evaluate 

which institutions will be complementary 

in the next years. According to Streeck “… 

institutional complementarity is hard to predict 

and provide for ex ante. Where it exists, it is 

mostly generated ex post, through corrective 

intervention and piecemeal mutual adjustment. 

Rather than being planned and designed in 

one step, complementarity seems the product 

of continuous, more or less improvised debugging 

of perceived frictions...“ (Streeck 

2004, p. 107). A good example for changing 

effects of the same institutional configuration 

comes from Japan and Germany. The Japanese 

and German institutional systems, which were 

praised as highly complementary and efficient


in the second half of the 20 th century, are 

regarded some decades later as hard to reform 

and inefficient. The explanation according 

to Streeck is that, with the technological 

change in form of micro-electronic revolution, 

the formerly complementary institutional 

systems, although still coherent, became less 

complementary (Streeck 2004, p. 112). 

As post-communist countries experienced 

a great deal of geopolitical and economic 

uncertainty, institutional adjustments and 

experimentation were strongly required during 

the transition period (McFaul 1999, p. 28). 

Initial variation in uncertainty among transition 

countries can be explained by different exit 

modes from communism. Whereas CEECs 

(e.g. in Hungary, Czech Republic, Poland) 

created competitive democracies in roundtable 

negotiations “in Bulgaria and Romania, for 

example, the collapse of incumbent regimes 

caused greater uncertainty than in the 

negotiated transitions of Central Europe…” 

(World Bank 2002, p. 108). Similarly, the 

initial degree of uncertainty was relatively high 

in concentrated political regimes emerging 

from former regional blocks (Soviet Union, 

Yugoslavia). 

Even if institutions were designed ex ante 

as coherent, they could not be sustained in a 

rapidly changing environment. For instance, 

in SEE (Croatia, Serbia, Bosnia-Herzogovina, 

Macedonia, Albania, Moldova), the Caucasus 

(Armenia, Azerbaijan, Georgia) and Central 

Asia (Tajikistan), economic and geopolitical 

uncertainty increased because of wars, ethnic 

conflicts or spillovers from the Russian financial 

crisis. It is not surprising that under such 

quickly changing and uncertain conditions the 

design and implementation of complementary 

institutions was difficult. Wars and conflicts 

sharply reduced living standards and the 

capacity of the state (World Bank 2002, p. 

110). In the presence of negative feedbacks 

and aggregate uncertainty about reform 

outcomes, the leaders of unstable economies 

relied on former practices. According to 

Grzymala-Busse and Jones Luong, elites 

in Central Asia and the Caucasus relied on 

old formal and informal institutions (e.g. 

patronage) because of the rapidity of statebuilding 

and a weak central state apparatus 

(see Grzymala-Busse/Jones Luong 2002, 

p. 535 and p. 541). In contrast, geopolitical 

and economic uncertainty disappeared in the 

Baltic States, CEECs, Bulgaria and Romania 

with NATO and EU membership. The EU 

has served as an “outside anchor” (Berglöf/ 

Roland 1997) and, through its membership 

criteria, conditioned the applicants to reform 

their political and economic institutions. An 

unstable environment (high uncertainty in 

the short-run) explains why complementary 

institutional design was not possible for a 

certain time during transition. It also explains 

why economic cooperation based on trust 

and repeated interaction was difficult in wartorn 

countries. But why was complementary 

institutional design also complicated in 

peaceful transition countries? The answer is 

closely related to lack of resources (low state 

capacity) and a weak enforcement of 

rules. 


Lack of resources (time, capital, state 

capacity) can prevent the implementation 

of coherent institution building, despite the 

focus of institutional designers on institutional 

complementarity. During rapid institutional


building, reformers do not have the time 

to collect and evaluate “facts” about the 

environment (Grzymala-Busse/Jones Luong 

2002, p. 541). Furthermore, institutional 

reformers can be constrained by financial 

resources and weak state capacity. Lacking the 

financial means, third parties (state agencies, 

courts) are not able to enforce new institutions, 

especially when other informal mechanisms 

of enforcement (shaming, gossip, ostracism, 

shunning) are absent (Ostrom 2005). The 

available state capacity to enforce institutions 

can result from historical structural deficits or 

from current environmental context (external 

shocks). 

Post-communist transition involved both 

socio-economic and political reforms, which 

left relatively little time to conduct an 

analysis of the most efficient combination of 

institutions. As transition countries had to 

simultaneously conduct reforms in different 

areas (Elster/ Offe/Preuss 1998), they often 

did not have the time for long-term master 

plans of complementary institutional systems. 8 

The simultaneity of reforms compelled actors 

to prioritize and neglect some areas of reforms 

(McFaul 1999, p. 31). Whereas developed 

countries had built up democracy and market 

economy over a period of several decades, 

post-communist countries had to do so in only 

a few years (Grzymala-Busse/Jones Luong 

2002, p. 535). Similarly, EU candidate 

countries were under time pressure and 


the adoption of EU legislation (acquis 

communautaire) was often carried out 

as a rapid legislation passing in the 

parliament without a correct implementation. 9 

According to Sadurski “…the sheer volume of 

the acquis meant that parliaments had to adopt 

fast-track procedures for passing the related 

laws…“ (Sadurski 2006, p. 34). Such hastened 

institutional reforms could not have produced 

complementary institutions. 

Similarly, resource constraints (resulting from 

the past, from financial crises or wars) hindered 

the enforcement of institutions and did not give 

way for a complementary design of institutions. 

The leaders of economically instable countries 

had to postpone reforms, relied either on 

transitional institutions or even alternative 

solutions by half-legal private actors. Initially, 

informal and unofficial practices (black market) 

were a popular means to resolve coordination 

problems in almost all transition states. 

However, there were strong regional differences 

in terms of informal practices. According to 

the estimations of Johnson et al., the average 

share of unofficial economy in CEE was at its 

peak with 21,3% in the year 1992 much lower 

than in former Soviet countries, which had its 

highest value with 36,2% in the year 1996 (See 

Johnson et al. p. 182-183). 10 

With progressive institutional reforms, some 

transition countries (e.g. Poland, Hungary, 

Slovenia, the Baltic States) overcame these 

initial problems of the shadow economy 

and were able to provide a stable business 

environment and attract FDI. Why? Higher 

state capacity seems to be an important key to 

success. Better state capacity in CEE can be 

attributed to structural differences of the past 11 

as well as the absence of wars and financial 

crisis (World Bank 2002, p. 13 and p. 110). In 

contrast, reform laggard countries from SEE 

or CIS neither had the “beneficial legacies” 

nor the resources to train lawyers, bureaucrats 

and teachers to change quickly to capitalist


mentality and guarantee the enforcement of 

capitalist institutions. While transplanted 

formal institutions were often the same, 

enforcement and implementation were not. 

Otherwise, best practices (first-best institutions) 

would have had the same effect everywhere. 

The Worldwide Governance indicators from 

the World Bank provide some evidence that 

enforcement and legal quality differed. Rule 

of law 12 has on average been lower in CIS 

(Commonwealth of Independent States) and 

SEE than in CEB (Central Eastern Europe 

and the Baltic States) between 1996 and 2006. 

Whereas average scores on legal quality have 

been constantly high in CEC (around 70%), 

SEE had a considerably lower and fluctuating 

development (score between 33% and 43%) 

and the CIS even a deterioration from about 

24% to 19% (see table 2). 

Table 2. Regional average scores on the rule of law in transition countries 

CIS SEE CEB 

1996 24.3 33.3 69.4 

1998 20.8 44.2 68.8 

2000 18.6 33.9 68.2 

2002 18.3 36.7 69.2 

2004 19.8 40.8 70.2 

2006 19.1 42.7 68.0 

Source: Worldwide governance indicators 1996-2006, World Bank. 

Note: The Scores are calculated on a scale of 0 to 100, with 100 being the highest possible score. 

This general evidence on different quality 

of the institutional environment is reflected 

in more specific economic institutions. The 

EBRD’s legal indicator survey 13 from the year 

2005 provides some evidence that enforcement 

(legal effectiveness) of corporate governance 

laws differed among transition countries and 

that “even excellent laws can suffer from poor 

implementation” (see EBRD Report 2005, 

Annex 1.2.: Corporate governance, p. 30). 

EBRD survey data reveals on average a weaker 

legal effectiveness of corporate governance 14 

in CIS and SEE than in Central Europe 

and the Baltic States (see table 3). Although 

some countries in SEE (e.g. Macedonia) 

and in the CIS (e.g. Armenia, Kazakhstan, 

Moldova) have high compliance with 

international standards and score high on legal 

extensiveness (quality of “laws on the 

books”), they score only poorly on 

legal effectiveness, i.e. the laws do not Seite Page page 23 

work well in practice. In contrast, the 

corporate governance legislation in 

most Central European and Baltic States is in 

most cases reasonably well implemented.


Table 3. Regional average of corporate governance effectiveness in 2005 

CIS SEE CEB 

Effectiveness of disclosure 4.74 5.32 5.73 

Effectiveness of redress 4.74 4.98 5.35 

Source: Source: EBRD Legal Indicator Survey 2005 and author’s own 

calculation. 

Note: The scores are calculated on 0 to 10, with 10 being the highest possible 

score. Data on SEE does not include Kosovo. 

This implementation gap in SEE and former 

Soviet countries in contrast to CEECs 

recurs in other areas of legislation. The 

difference for these three groups of countries 

among extensiveness and effectiveness 

(implementation gap) is especially obvious 

in the area of commercial laws (see figures 

2 and 3 in appendix), insolvency regulation 

(see figure 4 in appendix), concession laws 15 , 

securities markets legislation (see EBRD’s 

legal indicator survey 2007) and labor market 

institutions. 16 Using survey data from three 

different sources, 17 Pistor et al. 2000 confirm 

a weak institutional environment and weak 

implementation of economic institutions in 

most countries from SEE and the CIS (see 

Pistor et al. 2000). 

Legal and economic research on 

institutional enforcement has shown 


that there are important constraints 

to implementation of economic 

institutions (most notably in the CIS 

and also in SEE) and, consequently, limits to 

a coherent or complementary system in this 

region. Thus, lower institutional quality and 

absent institutional complementarity in these 

regions can be explained. But what accounts for 

different institutional configurations among the 

most advanced transition countries? Why did 

only Slovenia and Estonia develop coherent 

institutional systems and the other CEECs 

(Poland, Hungary or the Czech Republic, 

Lithuania, Latvia) did not? The rule of law 

indicator for the CEE group may indeed explain 

coherence in Slovenia and Estonia, as these 

countries have the highest scores on effective 

legal environment (see figure 5 in appendix). 

However, as Hungary and the Czech Republic 

have similarly high levels, but less coherent 

institutions (see Knell/Srholec 2007, p. 60), 

even an overall good institutional environment 

(high enforcement) does not guarantee a 

coherent system. Another explanation why 

coherent and complementary institutions 

were difficult to create during transition could 

have been the degree of diverse interests and 

ideologies of domestic and external actors 

during transition. 

Power relations (diversity of actors): Scholars 

stress the increasing importance of actors over


institutions during transition and emphasize 

the role of the state for institutional reforms 

(Hanson/Teague 2007; Charman 2007; 

Schmidt 2008; Higley/Pakulski/Wesołowski 

1998). 18 However, it must be considered that 

institutions and institutional complementarities 

are not only created at the regime level alone, 

but are the outcome of many actors with 

diverse interests and power positions (Streeck 

2004, p. 111). Institutions are often the result 

of a political compromise and not an optimal 

solution to a given problem or, as Amable 

puts it: “…institutions do not emerge as the 

result of a welfare-maximizing process. They 

are the outcomes of a political process. The 

whole set of institutions is not chosen all at 

once, by agents possessing a clear view of all 

the interdependencies between institutions 

concerning all areas of the economy” (Amable 

2003, p. 63). Both Streeck and Amable remind us 

that the pursuit of political and economic power 

can limit rational design of complementary 

institutions. This is particularly true if there is no 

benevolent “dominant social block” (Callaghan 

2008, p. 9) and when institutional reformers 

have opposing ideological backgrounds. But 

even when ideologically diverse reformers 

find a compromise, this compromise will 

not necessarily lead to the first best solution 

(complementary institutions). 

The emerging post-communist state was not 

a unitary actor with uniform authority, but 

underwent a formation process characterized 

by “multiple actors, domestic as well as 

international” (Grzymala-Busse/Jones Luong 

2002, p. 533). Let me first focus on domestic 

actors 19 and explain why so few complementary 

systems emerged during transition. A main 

reason can be found in opposing ideologies and 

changing power relations of these actors. After 

the demise of communism, old power structures 

changed and a battle for political and economic 

power began among different domestic actors. 

Communist rulers lost their legitimacy and 

previously constructed institutions were 

contested. The early transition years became a 

period of bargaining about political power and 

the future institutions to stabilize this power. 

Institutional change was not an outcome of 

designed complementarities, but of conflicts 

and compromises between different domestic 

actors. It is difficult to imagine that the 

competing interests between internal actors 

were reconciled in all post-communist countries 

and led to ex ante creation of complementary 

institutions. Although in some countries a 

political compromise by consensually united 

elites was reached, such as Poland, Hungary 

and Slovenia (Higley/Burton 2006, p. 83), in 

other countries (e.g. Bulgaria, Russia, Croatia, 

Serbia, Belarus and Romania) disunited 

political elites hindered the implementation 

of coherent transition strategies (see Higley/ 

Burton 2006, p. 90 and p. 171). In these 

countries, quite often reform strategies 

changed with a change in the government 

(see Havrylyshyn 2007). Although electoral 

backlash and some modification of initial 

policies occurred even in advanced transition 

countries such as Poland, Hungary and the 

Czech Republic (King 2002, p. 8), the general 

reform paths were not altered. 

Changing power relations and the Seite Page page 25 

redesign of institutional reforms were 

often the result of changing economic 

conditions, which differed among transition 

countries. In former Soviet Republics 

and SEE, prolonged economic decline


and deteriorating living conditions made 

cooperation between domestic actors more 

difficult. Intense struggle among different 

domestic actors or ethnic groups, which also 

produced violence (e.g. in Yugoslavia), did not 

leave room for stability and a complementary 

institutional system. In war-torn countries 

(e.g. Azerbaijan, Georgia) and countries with 

high concentrations of political power (e.g. 

Moldova, Russia, Ukraine, Kyrgyz Republic), 

powerful domestic groups actively influenced 

institutional reforms (see World Bank 2002, p. 

106). Influence of such actors is nothing bad, 

as long as the state remains powerful enough 

and will not be captured by powerful internal 

business groups or oligarchs, who seek to extract 

rents from the state. The composite index 

of state capture 20 provides snapshot evidence 

that in the year 1999 the influence of firms on 

institutional and policy reforms was on average 

more pronounced in SEE and the CIS as 

compared to CEB (see table 4). 

Table 4. Regional average of state capture among transition economies in 1999 

CIS AM AZ BY GG KZ KG MD RU UA UZ 

regional 

average 

state capture index 7 41 8 24 12 29 37 32 32 6 22.8 

SEE ALB BG HR RO 

state capture index 16 28 27 21 23 

CEB CZ EE HU LV LT SK SI PL 

state capture index 11 10 7 30 11 24 7 12 14 

Source: Calculations based on Hellman./Jones/Kaufmann, 2000, p. 9. 

Note: The index is constructed as the average proportion of firms responding that their businesses are directly affected by private payments 

made to public officials to influence decision making in one or more of the following six institutions: parliament, the executive 

apparatus, the criminal courts, the civil courts, the central bank, and political parties (Hellman/Kaumann 2001). 

While dealing with institutional 

change and institutional complementarity 

during transition, ex- 


ternal actors should be taken into 

account. Post-communist institution 

building has been subject to pressure 

from Western consultants, international organizations 

(IMF, World Bank, USAID), 

multinational corporations and foreign banks. 

The EU was particularly important for 

institutional reforms. 21 Although international 

actors initially produced institutional and 

policy similarities (best practices), at the same 

time multiple conditionalities and interests 

hindered coherent institutional strategies, as 

well. Bartlett shows, for instance, that former


Yugoslavian states became dependent on 

financial aid from external actors (IMF, EU, 

World Bank) who were able to impose their 

own diverse interests and thus hindered the 

creation of a complementary institutional 

system (Bartlett 2007). However, because of 

different geopolitical locations and economic 

resource bases, external pressure to adopt the 

same institutions was far from universal among 

post-communist states (Grzymala-Busse/Jones 

Luong 2002, p. 547). 

Even in states with a similar geopolitical 

location and resource endowments (EU 

candidate states from CEE) diversity persisted. 

Similar EU impact on economic institutions 

of candidate countries (see for instance Myant 

2007; Cernat 2006) does not automatically 

mean a convergence towards a complementary 

“EU logic of coordination”. According to 

Philip Hanson, who analyzed the impact of 

EU membership on economic institutions 

(labor market regulation and business 

regulation), considerable institutional diversity 

among the new EU members has persisted. 

His explanation of diversity is that economic 

accession requirements left a “wide scope for 

institutional variation” and that institutional 

convergence towards either state or market 

coordination was not enforced by the EU 

(Hanson 2007, p. 97 and p. 100). By setting the 

goal (minimum standards) of the institutional 

reform, yet leaving enough room for the method 

to implement the economic regulations, the EU 

did not necessarily induce a full convergence, 

but rather a divergent convergence. However, 

despite persisting differences, the EU’s indirect 

influence on post-communist diversity as a 

whole must be acknowledged. By accelerating 

institutional reforms in reform laggard 

countries (Romanian, Bulgaria), the EU 

accession process widened the gap with 

post-communist countries without an EU 

membership perspective. 

Let me briefly assess the EU’s role regarding 

complementary institutions. I would not 

consider external conditionality as the optimal 

solution to create complementary institutions, 

as it brings in additional external interests and 

is not based on a strategy of coherent design. 

However, I would consider EU conditionality 

as a second-best solution to accelerate 

institutional reforms in the short-run. This 

would imply that institutional reformers have 

to make a trade-off between institutional 

effectiveness (enforcement), which can be 

improved in the short-term and institutional 

efficiency (complementarity), which is a rather 

long-term goal. The best example for the EU 

impact on improved institutional quality in 

a short period of time comes from Romania, 

Bulgaria and Slovakia (see Schimmelfennig/ 

Sedelmeier 2005; Vachudova 2005). However, 

whether the improvement in institutional 

effectiveness will translate into long term 

complementarity is an open question that can 

only be answered in the future. 

The last puzzle which remains to be solved 

is why Slovenia and Estonia have created a 

coherent institutional system, while Hungary, 

Poland and the Czech Republic, 

which had similar state capacities, 

beneficial historical legacies and the Seite Page page 27 

EU membership perspective, did 

not. According to Feldmann, the mechanism 

behind coherent institutions in Slovenia and 

Estonia are economic networks between key 

economic actors (Feldmann 2007, p. 337).


He argues that the combined effect of 

communist legacy (degree of centralization 

under communism) and policy choices during 

transition (privatization strategy, monetary 

policy, centralization of wage bargaining) 

encouraged network-promotion in Slovenia 

and network-disruption in Estonia and 

created two diverse but coherent systems. 

Although this may be an explanation for 

these two countries, Feldmann cautions: “The 

conditions necessary to promote or disrupt 

networks may in fact be quite stringent, and 

Estonia and Slovenia may be quite exceptional 

in terms of their combination of legacies and 

political preconditions for their reform paths” 

(Feldmann 2007, p. 348). Broader comparative 

analysis is required to clarify this remaining 

puzzle. 

If we recapitulate the arguments on the design 

vs. spontaneous emergence of institutions 

(agency-structure importance), it is most 

reasonable to seek a reconciliation of both 

approaches. Particularly, if we conceive 

institutional change occurring simultaneously 

as a short-term change (e.g. agency design, 

external shocks) and long-term change (e.g. 

structural change, enforcement, informal 

institutions) it makes sense to see both views 

as complementary rather than contradictory. 

Institutional change is an interplay between 

agency and structure. It is an interaction between 

the old structure (historical legacy), 

the current agency actions (policy 


and institutional choices) and future 

possibilities (e.g. EU membership or 

new opportunities due to scarcity of 

resources). In such an interdependent process, 

where in the short-run the causal direction 

can run from economic performance to 

institutions, institutional complementarities 

can be no more than one consideration among 

others to explain institutional divergence. 

I have mentioned some limitations of the 

complementarity concept to explain shortterm 

institutional diversity in post-communist 

countries: a changing external environment 

and uncertainty, diversity of actors and power 

relations, weak enforcement of institutions 

due to lacking capacity. If such limitations 

are absent thanks to beneficial legacies, or 

become absent, for instance after economic 

and geopolitical stabilization, the design of 

complementary institutions could be easier. 

Generally, the argument of complementarity 

is more convincing in the evolutionary, long 

run emergence of institutions. Nevertheless, 

particular institutional or policy reform areas 

(e.g. policy complementarities 22 between 

macroeconomic stabilization and price 

liberalization), where fewer actors or resources 

(lower state capacity) for enforcement are 

required, may make complementarity relevant 

in the short-run. The transformation of an 

entire economic system, however, requires time 

and experimentation. 

3.3 The limits of pure types of coordination in 

the transition context 

The VoC approach insinuates that, because of 

efficiency considerations, developed economies 

tend to converge towards two ideal types 

of coordination (LMEs and CMEs) and 

institutional complementarities constrain 

switching between CMEs and LMEs. After 

being criticized for not considering change in 

coordination logics (Goodin 2003; Blyth 2003; 

Watson 2003; Jackson/Deeg 2006), Peter Hall, 

together with his co author(s), responded to


the criticism and underlined the importance 

of politics for institutional change (Hall/ 

Soskice 2003, p. 245; Hall/Thelen 2005; Hall 

2006). A recent empirical study by Paunescu/ 

Schneider has confirmed switching from state 

to market coordination for several developed 

economies (Paunescu/Schneider 2004). The 

relevant question for transition countries is 

whether mixed logics of coordination can 

become complementary and converge towards 

pure LMEs and CMEs or rather remain noncomplementary 

hybrids. Put differently, will 

there be dual convergence towards pure forms 

of organization or rather a lock-in of mixed 

organizational logics? 

In my opinion, sustained mixed logics of 

coordination (second-best solution) are 

possible due to positive feedbacks resulting 

from increased enforcement, i.e. more 

effectiveness. Let me illustrate a more dynamic 

model of capitalist diversity (see figure 1) to 

explain the fundamental differences between 

developed economies (CMEs, LMEs) and 

transitional market economies (TMEs). In 

contrast to transition economies, developed 

economies have strongly enforced and 

effective institutions. While in developed 

economies the possibility to increase economic 

performance by increasing the quality of 

institutions (effectiveness) is nearly exhausted, 

performance can still be improved by making 

institutions complementary (efficiency). 

Given that complementarity depends on 

external environment changes, developed 

countries can improve efficiency by adapting 

to external pressures by switching their logic of 

coordination (horizontal shifts between CMEs 

and LMEs). 23 These horizontal shifts tend to 

be slow due to institutional complementarities, 

path dependence and certain reforms (e.g. 

better protection of minority shareholders, 

adopting international accounting standards) 

and often do not have a major impact on other 

sub-systems or corporate strategies. Therefore, 

despite “liberalizing” reforms, switching of 

coordination modes should remain difficult in 

developed economies (Hall/Thelen 2005, p. 26 

and p. 31). 

While gradual institutional and economic 

development may be true for developed market 

economies, transition economies experience 

rapid formal institutional change. Due to the 

unfinished stage of capitalism (lower economic 

development) and high uncertainty (transition 

as an open-ended process), institutions in 

post-communist economies have initially a 

transitory character, i.e. they are only weakly 

enforced. Because of weak enforcement, 

institutional change is easier and, at least 

in the short or middle-run, there are more 

alternatives for capitalist trajectories than in 

developed economies. 24 

Seite Page page 29


Figure 1. Modes of coordination under consideration of different levels of development 

high 

LMEs 

CMEs 

level of development 

TMEs 

low 

low 

high 

Source: Own elaboration 

At a lower level of (capitalism) development, 

TMEs can move vertically and diagonally. 

The paths of institutional and economic 

development are not yet fixed and can develop 

towards LME, CME or a mixed form of 

both. In the absence of positive feedback, 

development towards a stronger role of the 

state and even less capitalism is possible (e.g. 

downward diagonal shift in Venezuela and 

Belarus). Such upward and downward diagonal 

and vertical shifts are reflected in capitalist 

reforms or reform reversals and are possible 

because political and economic institutions are 

enforced only weakly. 25 


How does the model reflect the 

transition period? At the beginning of 

transition, the initial strong decline of 

GDP and a lengthy and burdensome recovery 

hindered positive feedbacks to stabilize 

the institutional system. Weakly enforced 

institutions (“frames without content”) could 

be changed more easily and reform reversals 

were the case in states with a low capacity 

(e.g. in Russia, Romania and Bulgaria). 

Transition countries, which succeeded in 

increasing state capacity and enforcing formal 

institutions, created a stable institutional 

environment for economic cooperation and 

entrepreneurship. The Visegrad states, for 

instance, although having missed the chance to 

build complementary institutions, nevertheless 

established a stable and relatively effective 

institutional system. Institutional quality in 

Poland, Hungary and the Czech Republic 

was increased through better enforcement, 

not through better complementarity. If we 

consider positive feedback and lock-in effects, 

these non-coherent systems should be difficult 

to reverse for a while. As long as efficiency 

or effectiveness gains are possible through 

improved enforcement or other means (for


instance, by increasing the compatibility 

between formal and informal institutions), 

mixed market economies should persist. 

The success story of transition frontrunners 

with non-complementary institutions shows 

that the primary step to an efficient institutional 

system and system stability is enforcement of 

rules. While enforcement does not exclude 

a focus on institutional complementarity, 

it should be a secondary step to increase 

efficiency. The main reason for precedence 

of enforcement over complementarity are 

capacity restrictions (time constraints, financial 

and human resource constraints), which make 

it difficult to create complementary (efficient) 

and well-enforced (effective) institutions at 

the same time. A look at the ranking of three 

post-communist countries in the coordination 

index constructed by Knell/Srholec 2007 will 

make my argument more clear. According 

to this index, Estonia, Armenia and Russia 

have all a strongly liberalized system with 

coherent formal institutions. However, because 

of weak enforcement capacity in Russia and 

Armenia (low effectiveness), coherence did not 

translate into complementarity and good de 

jure institutions are being undermined by the 

interests of powerful companies. In contrast, 

Estonia’s coherent and well enforced institutions 

have facilitated competition and cooperation 

and translated in complementary institutions. 

Enforcement does not mean enforcing 

every detail of the political economy and 

restricting critical institutional entrepreneurs 

and arbitrageurs who are discovering the 

weaknesses of the system and create a demand 

for improvement. What it does mean is that 

the state has to establish and enforce a set 

of core institutions, which guarantee the 

rule of law and stability for a stable business 

environment, while experimentation and 

change are still possible at the periphery. Such 

an approach, which distinguishes between 

core and peripheral institutions, allows for the 

exploitation of possibilities of both enforcement 

and complementarity. When enforcement 

is guaranteed for a set of central institutions 

across different sub-systems, complementarities 

between these core institutions can be 

established with less effort and resources than 

in the case of complementarities between all 

institutions (including peripheral, less enforced 

institutions). In other words, the basic skeleton 

of the political economy could be initially 

designed, but the flesh should be developed in 

a trial and error process. 

Although I am suggesting that institutional 

complementarity should not be that important 

for transition and developing countries lacking 

enforcement capacities, it could become more 

important with increasing enforcement. 

Consolidated transition countries (e.g. Slovenia 

and Estonia), where efficiency gains resulting 

from good enforcement of institutions were 

already exploited, can increase their institutional 

and economic performance by focusing on 

complementarity aspects. In contrast, nonconsolidated 

transition economies (e.g. most 

economies in the CIS and SEE) should 

focus on the enforcement of core 

institutions or, if possible, pair-wise 

complementarities (e.g. between Seite Page page 31 

financial institutions and institutions 

regarding inter-firm relations). 

Only when a certain level of enforcement is 

achieved, should institutional complementarities 

bring about additional efficiency.


What we have to keep in mind is that the 

ability of enforcement and complementarity 

depend on the context (external environment, 

historical legacy, state capacity). As this context 

varies among transition countries, every country 

should conduct reforms that take into account 

different environmental pre-conditions in 

terms of economic development, geographic 

situation, resource endowment, human 

resources, networks and informal institutions. 

In my opinion, institutional complementarity 

in the transition context should be understood 

more broadly, namely as compatibility in time, 

space and existing structures. A good model 

of institutional change in post-communist 

economies should, therefore, incorporate 

resources, geography, history and the dynamic 

interplay between the economic and political 

arenas during transition. 

The complementarity of institutions depends 

on changing environmental circumstances. 

This means that coherent institutions will 

be beneficial in the “good times” (i.e. when 

fundamental reforms are not required), but 

detrimental in the “bad times”, when change 

is most needed. Because of a changing 

environment, institutional complementarity 

and enforcement should be understood as 

dynamic concepts, i.e., there should always 

be room for experimentation and adaptation 

of the institutional structure (see North 

1990). To enable change and 

flexibility, adaptive institutional 


complementarity is required. If 

too much emphasis is put on static 

institutional complementarity, the 

political economy can become inflexible and 

lose its comparative advantage. The emphasis 

on enforcement, which I made before, does not 

necessarily produce inflexibility and institutional 

inertia as long as enough room is left for 

institutional experimentation and competition. 

The dynamic approach of adaptive institutional 

efficiency would enable institutional change 

within particular types of institutions without 

necessarily changing the entire institutional 

sub-system. Allowing Siemens, Infineon or 

IBM to increase engineers’ wages to cope with 

low supply of engineers, without changing the 

overall wage policy, is such an adaptive way of 

specific peripheral change. A second example for 

experimentation, under continuing dominant 

logics of coordination, is the introduction 

of temporary work agencies to reduce labor 

market rigidities in Germany (Höpner 2005, 

p. 333). Within such an adaptive process of 

change, learning and the adoption of new skills 

are important. However, learning does not 

mean transferring best practices from abroad, 

but rather searching for functional equivalents 

and local solutions. 

4. CONCLUSION 

The research question I started with was 

whether the VoC approach and, particularly, 

its concepts of institutional complementarity 

and limited coordination modes can be 

helpful in explaining institutional diversity 

and institutional development during postcommunist 

transition. The answer is: “yes, but 

only in parts”. Let me summarize my results by 

evaluating the usefulness of the VoC approach 

for every research step in a comparative analysis 

(table 5).


Table 5. Concluding evaluation of VoC’s application to post-communist economies 

Research steps in a comparative analysis of post-communist economies 

VoC’s 

usefulness 

1. Classification of institutions Yes 

2. Explaining origin institutions No 

3. Explaining institutional development (enforcement of institutions) No 

4. Classifying type of market economy based on coordination Yes/No 

5. Explaining link between complementary institutions and economic success Yes 

Source: Own elaboration 

As I argued before, the VoC approach can 

be used as analytical framework and point 

of departure to classify formal economic 

institutions (step 1). The VoC approach is also 

partly useful to identify which market economy 

has emerged in post-communist countries 

(step 4). Thus, it can help shed some light on 

the formal institutional diversity of capitalist 

systems. Furthermore, its theoretical insights 

can be used to test the relationship between 

institutional complementarity and economic 

performance (step 5). However, the VoC 

approach in its current form has difficulties 

explaining institutional origin and institutional 

development of institutions (step 2, 3) and 

needs to be extended by theories of institutional 

change (e.g. New Institutional Economics, 

Historical institutionalism) in order to account 

for institutional enforcement and other actors 

(e.g. the state) than firms. 

On the whole, Hall/Soskice’s VoC approach 

can only be restrictively applied to postcommunist 

economies. Post-communist 

transition demonstrates that institutional 

complementarity is not a short-term project. 

Complementarity is more difficult to create 

in times of turmoil, rapid socio-economic 

change, low state capacity and diverse interests 

of actors. Although there are also diverse 

actors in stable and developed economies, 

well-enforced institutions control both state 

actors and other groups from predation 

(rent seeking, state capture). The dynamism 

of transition implies that mechanisms other 

than complementarities explain institutional 

diversity and performance. It has been argued 

that enforcement rather than complementarity 

is such a mechanism. If enforcement of rules 

is guaranteed, institutional stability will 

produce a good business climate for economic 

cooperation, innovation and FDI. 

What are the implications of institutional 

complementarity for future Seite Page page 33 

reforms? As certain institutions (e.g. 

financial institutions and institutions 

regarding inter-firm relations) are established 

with less financial resources and 

time than others (e.g. educational or labor


market institutions), there is room for the 

design of pair-wise institutional complementarities. 

However, an entire complementary 

institutional system (including core and peripheral 

institutions) is a long-term project 

that cannot be designed and implemented in 

several years. Therefore, the concept of institutional 

complementarity can be applied mainly 

in countries where the capacity for enforcement 

of institutions works (the developed 

West, advanced transition countries). Where 

the capacity for enforcement is low (the CIS, 

SEE), a first step should be the strengthening 

of enforcement and only then the fine 

tuning of efficiency through complementarity. 

In other words: Prefer second-best institutions 

that are implemented over first-best 

institutions that are not enforced (need for 

“small and pragmatic solutions that work” in 

the short-run). 

NOTES 

1 

The notion of „Central Asian capitalism“ still does not appear in 

the literature. However, a recently initiated research project aims 

to discover whether a distinct form of capitalism is emerging in 

Central Asia. For details see www.centralasiaproject.de. 

2 

The concept of institutional complementarity was debated in 

detail elsewhere (Boyer 2005; Deeg 2005; Amable 2003; Crouch 

et al. 2005; Streeck 2004; Höpner 2005). 

3 

Hall/Soskice define efficiency as the “net returns to the use of an 

institution given its costs” (Hall/Soskice 2001, p. 17). 

4 

Note that Hall/Soskice’s notion of institutions also includes 

organizations (Hall/Soskice, p. 9-10). Therefore, institutional 

complementarity should not be understood as a complementarity 

among rules only, but also among policies, relationships, strategies 

and skills. 

5 

On the coherence of the classical communist system (Stalinist 

system), see Kornai 1992. 

6 

In reality, this is seldom the case, especially in countries that lack 

the political institutions to control the grand designer (state). 

7 

For the impact of communist legacies (initial conditions) on 

institutional and economic outcomes during transition, see Jowitt 

1992; Elster/Offe/Preuss 1998; Ekiert/Hanson 2003; Fischer/ 

Gelb 1991; De Melo et al. 1998; Falcetti et al. 2000. 


8 

According to Michel Camdessus, the former managing director of 

the International Monetary Fund, “…there was no master plan 

and scarce relevant experience to guide action. In the economic 

sphere, a host of proposals quickly filled the vacuum, jostling with 

the force of events and circumstance to determine what happened” 

(Camdessus 1999, p. 9). 

9 

In Hungary’s June parliamentary session in 1999, the majority 

of EU-required laws were passed in parliament without any 

debate (see Schimmelfennig/Sedelmeier 2005, p. 2).


10 

Despite these different average results, there are some exceptions 

in these two groups of countries. In the period 1990-1995, Hungary 

had a constantly high share of shadow economy (approx. 

30%). Uzbekistan (around 10%) and Belarus (around 15%) had 

instead relatively low ones. 

11 

The better structural and economic conditions in CEE in 

contrast to the CIS are reflected in better starting conditions. 

For evidence, see the initial conditions indicator in the EBRD 

Transition Report 1999, p. 29. 

12 

The rule of law indicator „measures the extent to which agents 

have confidence in and abide by the rules of society, in particular 

the quality of contract enforcement, police, and courts, as well as 

the likelihood of crime and violence (http://info.worldbank.org/ 

governance/wgi/pdf/rl.pdf ). 

13 

The quality of legislation (“laws on the books”) is based on 

the EBRD’s annually conducted survey of legal experts from 27 

transition countries. See legal annex of various EBRD Transition 

reports. 

14 

By analyzing the effectiveness of corporate governance laws, 

the 2005 EBRD survey tries to reveal how well minority shareholders 

are protected in each transition country. Legal effectiveness 

is assessed in terms of information disclosure for minority 

shareholders and effective mechanisms to obtain redress (legal 

actions). 

15 

See EBRD Concession assessment project report on the quality 

of concession legislation in early transition countries. http:// 

www.ebrd.org/country/sector/law/etc/etccon.pdf. 

16 

On the different degrees of enforcement regarding employment 

protection legislation in the CIS, SEE, and CEE, see Rutkowski/ 

Scarpetta 2005, p. 37. 

17 

Sources: Experts’ assessment from the Central European Economic 

Review; EBRD legal indicator surveys; World Business 

Environment and Enterprise Performance (BEEPS) survey (see 

Pistor et al. 2000, p.341-342). 

18 

This is particularly true in a rapidly changing environment, 

when newly introduced rules are only forms without meaning. 

Then it is more plausible that the direction of influence goes 

mainly from actors to institutions. 

19 

Internal actors are political parties with opposing ideologies 

(e.g. former communists, non-communists), oligarchs, business 

groups, trade unions and cultural or military elites. 

20 

Hellman and Kaufmann define state capture as „ the efforts 

of firms to shape the laws, policies, and regulations of the state to 

their own advantage by providing illicit private gains to public 

officials“ (Hellmann/ Kaufmann 2001). 

21 

The EU’s influence on institutional development has been 

acknowledged by the Europeanization literature (Grabbe 2001; 

Schimmelfennig/Sedelmeier 2005; Vachudova 2005) and the 

most recent VoC literature (Menz 2005; Schmidt 2002; Callaghan 

2008). 

22 

On policy complementarities during transition, see Braga De 

Macedo/Martins 2008; Staehr 2005. 

23 

Although most economies tend to shift towards the liberal model 

of coordination, Paunescu/Schneider’s study shows that France 

and Belgium moved between 1990 and 1999 in the opposite 

direction, i.e. towards more state coordination. On the switching 

of coordination regimes, see Paunescu/Schneider 2004. 

24 

There are more options to achieve institutional efficiency than 

in developed states. This was, for instance, the case when Taiwan, 

South Korea and Singapore were transition/developing 

countries and achieved economic success by developing a different 

type of capitalism than in the West. 

25 

The assumption of a beneficial effect of enforcement 

is only true when there is no predatory authoritarian 

regime, who has designed institutions 

to their benefit and who maintains the status quo 

by force. 

Seite Page page 35


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APPENDIX 

Figure 2. Perception of commercial law extensiveness over time 

Source: Ramastry 2002 and EBRD Legal Indicator Survey 1997-2001. 

Figure 3. Perception of commercial law effectiveness over time 


Source: Ramastry 2002 and EBRD Legal Indicator Survey 1997-2001.


Figure 4. Extensiveness and effectiveness of insolvency legal regimes 

Source: EBRD Legal Indicator Survey, 2004. 

Seite Page page 43


Figure 5. Rule of law in Central and Eastern Europe 


Source: Kaufmann/Kraay/Mastruzzi 2008: Governance Matters VII: Governance Indicators for 1996-2007.

AGNIESZKA REFERENCES LITERATUR K. CIANCIARA 

SUMMARY 

3 

POLISH BUSINESS – POLITICS RELATIONS 

AND THEIR IMPACT ON NATIONAL LOBBYING 

AT THE EU LEVEL 

Agnieszka K. Cianciara 

There are differences in businesspolitics 

relations between CEEC and 

Western Europe that stem from the 

specificities of the post-communist capitalist 

model. The communist heritage, as well 

the three simultaneous processes of change 

(transformation to capitalism and democracy, 

Europeanization, globalization) have created 

hybrid institutions at the CEE national level. 

Polish capitalism is characterized by significant 

public sector, weak corporate governance 

mechanisms, relatively poor business climate, 

inefficient governance structures and weak 

institutionalization of civil and social dialogue, 

as well as extremely weak legitimization of 

lobbying. This is translated into specific types 

of relations between business and political 

elites: clientelistic relations of state-owned 

companies, oligarchic relations of biggest 

national private companies and weak organization 

of SMEs, while professional lobbying 

strategies are used mostly by multinational 

companies. How do these domestic patterns 

of relations between business and politics 

affect mobilization, resources and strategies 

of Polish business interest representation at 

the EU level? It appears that post-communist 

formal and informal heritage still plays an 

important role in politics-business relations. 

In the Polish case, this is manifested in the 

degree of embeddedness in domestic 

clientelistic and oligarchic networks, 

the level of internationalization and Seite Page page 45 

resulting autonomy vis-a-vis national 

political elites, as well as a lack of tradition, 

institutionalization and legitimization 

of pluralist interest representation.

POLISH BUSINESS REFERENCES LITERATUR – POLITICS RELATIONS 

INTRODUCTION 

Twenty years after the fall of communism, 

Central-European member states of the 

EU are still struggling with the transition to 

democratic market capitalism (Hancke, et al., 

2007). It is argued that the Polish economy 

has not yet reached the level of institutional 

development comparable to developed economies 

of Western Europe. According to the 

World Bank, in 2009 Poland was still classified 

as an ‘emerging market’, although it shifted, 

together with Hungary, to the sub-group of 

‘advanced emerging markets’ 1 . Economically, 

Poland should be perceived, in the light 

of the theory of world system, in terms of 

‘semi-periphery’ or ‘internal periphery’ of 

the European Union ( Jasiecki, 2004). Other 

authors differentiate between Visegrad and 

Baltic countries, while treating the latter as 

‘semi-periphery’ and characterizing the former 

by ‘semi-core’ features (Greskovits, 2008). 

In this article, I argue that differences in the 

development of capitalism and market economy 

between the Western and Eastern members of 

the European Union (EU) are translated into 

divergent patterns of relations between politics 

and business at the national level. In turn, these 

patterns affect mobilization, resources and 

strategies of business representatives at the EU 

level. The EU business lobbying environment 

is determined by Western models 

of consolidated democracy and 


developed market economy. Thus, 

the observed institutional differences 

between national CEE and European 

levels explain, to a significant extent, the 

perceived ineffectiveness of Polish national 

lobbying in EU institutions. Both scholars 

and public affairs practitioners would argue 

that the effectiveness of lobbyists in the EU 

depends on the position and function lobbying 

occupies in their country of origin (Van 

Schendelen, 1994, p. 15; Greenwood, 2007, 

p. 14; Chorus, 05.03.2007). Consequently, 

in order to analyze strengths and weaknesses 

of national interest representation, one must 

look at the institutional environment at the 

national level, which provides opportunities 

but also constraints and barriers to active 

and effective lobbying strategies. Among the 

intervening variables, one does not only find 

the critical resource dependencies (Beyres 

& Kerremans, 2007), but also institutional, 

structural and normative specificities of the 

Central-European context of post-communist 

(advanced) emerging economy. 

The particularities of Central-European, or 

in this case Polish, capitalism stem from the 

incomplete consolidation of the formal market 

institutions, as well as from the informal socialist 

heritage, which is present in the spheres of both 

economic and political governance. Within the 

transformation process, the emerging marketoriented 

network of institutions is constrained 

by path dependency. Thus transformation is of 

incremental and continuous nature, as various 

actors attempt to improve their situation by 

forcing subsequent institutional changes (North, 

1999). Consequently, the socialist burden and 

the three simultaneous processes of change 

(transformation to capitalism and democracy, 

Europeanization 2 and globalization) have 

created a hybrid environment of formal and 

informal institutions. This hybrid institutional 

context plays a crucial role regarding relations 

between the state and economic, political and 

business elites.


The institutionalist-evolutionary approach 

provides the most adequate perspective for 

socio-economic analysis of business-politics 

relations in the CEE hybrid environment. 

This is in line with the so-called 4 th wave of 

transition studies, which are rather suspicious 

of modernist logics of linear transformation 

and the centrality of markets, liberalization 

and liberal politics for the social re-engineering 

of post-socialist economy (Pickles, 2008). 

Instead, emphasis is put on cultural studies, 

social theory, historical legacies and new forms 

of regional economic analysis that account for 

specificities of state rule and economic practice. 

Varieties of post-communist capitalist models 

derive from cultural and historical contexts and 

greatly depend on the state of institutions in 

the initial phase of transformation (Lissowska, 

2008). 

The purpose of this article is thus to analyse 

how business-politics relations at the 

national level, structured by the processes of 

transformation and consolidation, affect the 

effectiveness of Polish lobbying 3 at the EU 

level. To this end, I draw on recent literature 

on post-socialist politics and economic change, 

varieties of capitalism, Europeanization and 

business interests at the national and EU levels. 

The empirical analysis is carried out on the 

basis of interviews (March 2007-March 2009) 

with Polish representatives of state-owned 

companies, national federations and european 

federations based in Brussels. 

POLISH CAPITALISM: MAIN FEATURES SHAPING 

BUSINESS-POLITICS RELATIONS 

The crucial factor shaping capitalism in Poland, 

including relations between political and 

business elites, is the socialist or post-socialist 

heritage transferred directly or indirectly in 

the transformation process. Namely, Poland 

inherited a system of ‘destroyed capitalism’ 

(Balcerowicz, 1997). The socialist economy was 

based on fundamentally different incentives 

and organizational forms than the ones proper 

to the market economy. Therefore, remnants 

of this system constitute barriers to effective 

functioning of mechanisms of the developed 

capitalist economy. Under socialism, private 

economic activity was subject to strict state 

control, notably through the granting of 

licenses, or permissions and enforcement of 

changeable maximum levels of production, 

as well as employment limits. Officially, 

social ownership was supported by the state, 

regardless of its economic efficiency, while 

private initiative was regarded as the necessary 

evil. Due to unstable conditions of economic 

activities and fully discretionary character of 

administrative decisions, the entrepreneurs 

were restraining their activities, cutting on 

investments, employing temporary, instead 

of long distance, business perspectives and 

counting for immediate gains without paying 

attention to economic or social consequences 

of their activities ( Jasiecki, 2002). 

Such thinking survived the transition 

in the form of lack of strategic 

planning, lack of social responsibility 

and limited trust towards law or 

decision-makers. 

Seite Page page 47


In terms of social status, a paradoxical 

situation emerged, where private owners 

constituted a privileged group in terms of 

income, but operated at the margins of the 

official socio-economic life and enjoyed little 

social prestige. Growing consent of authorities 

to private economic activities resulted only 

from the basic needs of the society that 

could not be satisfied in the framework of 

the normative socialist order. In terms of 

assumptions underlying the communist 

system, private ownership was perceived as a 

systemic deviation. But it led to the emergence 

of new pathological phenomena, taking the 

form of informal adaptation mechanisms. 

The latter involved practices of ‘arranging 

things’, abuse of public resources for private 

gain, creation of interdependent networks of 

the management of state-owned companies, 

administration and party officials based on 

bribery, as well as trading of permissions and 

licenses (Balcerowicz, 1997). These networks 

have survived the transformation process, 

particularly in the heavy industry sector, 

blocking restructuring efforts and privatization 

as well as petrifying clientelistic ties between 

political and economic elites. 

The socialist system led to an emergence of 

specific forms of interest representation, fully 

dysfunctional from the point of view of market 

economy and democratic governance. As the 

expression of particularistic interests 

was excluded for ideological reasons 


and administration enjoyed utterly 

arbitrary power over the economy, 

influence could only be exerted 

through secret and corruptive means. In the 

absence of channels of dialogue between the 

state and society, corruption became the sole 

facilitator of communication with authorities 

(Lissowska, 2008). 

Economically speaking, transformation from 

socialist to market economy consisted of 

macroeconomic stabilization, microeconomic 

liberalization and institutional change. Due to 

serious economic crisis in Poland, emphasis was 

placed on the former two while institutional 

change was neglected. As a consequence, 

market mechanisms were introduced, while 

no efficient governance institutions (economic, 

judicial, and political) were in place to support, 

control and correct those mechanisms in the 

first period. This is one of the main elements of 

the specificity of hybrid Polish economy, which 

is well reflected in the field of privatization and 

corporate governance in the privatized and 

state-owned companies (Kozarzewski, 2006, 

pp. 73-74). 

As a consequence, the ‘semi-periphery’ or ‘semicore’ 

capitalist systems of CEEC have a number 

of features that distinguish them from the 

developed market economies of Western EU 

member states. These features are embedded 

in the initial transition paths from socialism 

to capitalism 4 . The relative domination of one 

of the paths in each particular state determines 

the degree of success in transformation to 

market economy. Capitalism from above leads 

to patron-client relationships, notably typical 

for Ukraine and Russia. On the other hand, 

capitalism from without, with its substantial 

reliance on foreign investors, leads to a more 

liberal, but also more externally dependent 

market economy (King, Szelenyi, 2005; King, 

2007). Foreign direct investments also play an 

important role in technology transfer, gradually 

modernizing outdated technological structures,


resulting from the late and largely obsolete 

industrialization under state socialism. 

In the Polish case, a crucial role was played 

in the privatization process by multinational 

corporations, which ensured capital, technology, 

know-how and access to foreign markets for 

the restructured companies. However, the first 

transformation phase was to a large extent 

dominated by capitalism from above created 

by the economic and technocratic elites of 

the ancien regime. Finally, success of private 

companies that did not have access to resources 

of the socialist economy, only became visible 

after the year 2000. The economic crisis in the 

late ‘90s eliminated actors that relied mostly on 

political resources and were not able to cope 

with requirements of the competitive market 

economy. The expansion of Polish private 

capital was also accelerated by EU membership 

and prospects for greater internationalization 

of Polish firms. However, it appears that 

Europeanization of economic activities has 

been progressing faster than Europeanization 

of interest representation. 

Polish capitalism is thus characterized by a 

relatively large public sector (slow pace of 

privatization), weak corporate governance 

mechanisms (especially in public sector), a 

relatively poor business climate, inefficient 

governance structures of the state, weak 

economic and political culturea, as well as weak 

institutionalization of interest representation. 

The public sector accounts for approximately 3% 

of firms operating in Poland. However, 7 out 

of the 10 largest companies in the year 2008 

were at least partially state-owned (‘500 biggest 

firms in Poland’ by daily Rzeczpospolita, 2009). 

In 2005, 162 (12.5%) of 1300 biggest firms 

in Poland were at least partially state-owned, 

but they generated 22.5% of net income and 

employed more than 40% of the workforce 

(CASE, 2007). Though in the years 2002- 

2007 the number of public firms among the 

500 biggest companies decreased from 128 

to 81, this was linked to the rapid expansion 

of Polish private capital after joining the 

EU in 2004, rather than to the process of 

privatization. The level of internationalization 

of Polish firms is still low and 96.3% of them 

are micro-firms, employing up to 9 people 

(Ministry of Economy, 2009). 

Weaknesses of the corporate governance system 

are particularly visible in the biggest stateowned 

companies 5 . In post-communist state, 

due to private capital shortages, the German 

(internal control through supervisory board), 

rather than Anglo-Saxon system (external 

control mechanisms by dispersed shareholders) 

was introduced. However, Central-European 

experience shows that control is much 

more effective when a company is being 

restructured by a foreign strategic investor. 

In case of continuous state ownership, 

the commercialization of the enterprise 

constitutes only a minor adjustment to formal 

market requirements, while petrifying existing 

economic, political and social networks of 

informal nature. Consequently, supervisory 

and executive boards of state-owned 

companies often demonstrate classic 

traits of political corruption ( Jarosz, Seite Page page 49 

2006). These executives are strongly 

embedded in political elites, thus the 

rotation in these posts depends on the current 

constellation of the unstable political scene. 

Posts are perceived as rewards for party loyalty,


or a comfortable ‘waiting room’ before entering 

into high politics ( Jasiecki, 2004). Research 

clearly demonstrated clientelistic dependence 

of Polish economic elites on political elites 

and the role of the state as both the greatest 

investor and client in the economy throughout 

the 1990s ( Jasiecki, 2002). 

According to World Bank 2009 Doing Business 

ranking, Poland occupies position 72 (out of 

183 countries examined) when it comes to the 

ease of engaging in and conducting economic 

activities. There were only 3 EU member 

states with even poorer business climate: Czech 

Republic (74), Italy (78) and Greece (109). 

Moreover, Poland’s position has not changed 

over the last 3 years, which suggests a limited 

reform effort 6 . The Polish score is also quite 

ambivalent: the country enjoys a relatively 

high level of investor protection (41), while 

rules for granting permits in the construction 

sector are among the least business friendly in 

the world (164). The generalized problem with 

granting permits and licenses in many business 

sectors (lengthy and difficult administrative 

procedures, high levels of officials’ discretion, 

and politicization of decision-making) is highly 

conducive to corruptive practices, which is also 

confirmed by Poland’s unsatisfactory score in 

Transparency International rankings. Finally, 

in the 2009 Index of Economic Freedom (Wall 

Street Journal and Heritage Foundation), 

Poland was classified as the last of all 

the EU member states (position 82 out 


of 179 countries). Main factors constraining 

economic freedom involved: 

high level of corruption (as measured 

by CPI - corruption perception index), 

excessive state intervention in the economy, 

as well as inefficiency of the judicial system. 

In terms of efficiency of governance structures of 

the state, research indicates a prevalent practice 

of subordinating long-term goals to short-term 

political gains, an underestimation of continuity 

and the role of experts, as well as consultative 

bodies and procedures in the policy-making 

(Raciborski, 2006). Decision-makers perceive 

experts’ opinions more in terms of support for 

decisions that were already taken, rather than 

a factor determining the content of decisions. 

Similarly, little understanding for social and 

civil dialogue, as well as for socio-economic 

programming is observed (Hausner, 2007). 

Consequently, decisions in the sphere of socioeconomic 

policy produce ineffective, façade 

and poorly legitimized solutions. At the same 

time, Europeanization of the administration 

was visible mostly among young officials of 

departments dealing with European affairs 

in each ministry. Research conducted in 

2005 among Polish officials pointed out their 

perceptions of Western administrations as 

more professional, less hierarchical, more open 

and transparent (Kochanowicz, et al., 2007). 

Meanwhile, Polish administration continues 

to function within a culture of secrecy, where 

power is understood more in terms of privileges 

than responsibility, and where technological 

and organizational distance from Western 

counterparts still poses serious governance 

problems. 

Empirical material gathered by R. Inglehart 

indicates that beliefs and values typical for 

the socialist economic system have, to a large 

extent, survived the transformation process and 

co-exist with the new capitalist institutions. 

Polish economic culture is characterized by 

egalitarian attitudes, a lack of trust towards 

private business and more importance


attached to state control, than freedom of 

economic activity. Polish society represents 

more materialist attitudes (preponderance of 

survival values), which results from permanent 

deprivation typical for socialist economy. Thus, 

despite the remarkable economic development 

and growth in welfare over the last 20 years, 

Central-European societies are still classified 

as materialist. Relative scarcity of postmaterialist 

values is also visible among Polish 

entrepreneurs, in particular in their attitudes 

towards CSR - corporate social responsibility 

(Lewicka-Strzałecka, 2006). 

Contrary to what is often upheld by Western 

scholars, basing their arguments on the 

experience of Solidarity movement, Poland is 

characterized by weak civil society organization, 

together with weak institutionalization of interest 

representation. In fact, Polish society has hardly 

any traditions of constructive civil involvement, 

as it was historically focused on protest and 

opposition. Social dialogue in the form of 

tripartite councils is formally well established, 

but produces questionable results and lacks 

autonomy, as it is dominated by the government 

(Gardawski et al., 2008). Other forms of 

involvement of business interest representation 

practiced in the modern governance systems, be 

it in the form of consultations in the framework 

of impact assessment procedures, or in the form 

of public hearings, are frequently of facade 

nature. They do not contribute to mobilization 

and consolidation of interest groups. Finally, 

and contrary to developments at the EU 

level, lobbying activities are not legitimized 

in Poland and are not considered part and 

parcel of the democratic decision-making by 

both the public opinion and political elite 

(Burson-Marsteller, 2009). 

BUSINESS-POLITICS RELATIONS IN POLAND: 

FROM TRANSFORMATION TO CONSOLIDATION 

PHASE? 

The above mentioned characteristics of the 

institutional environment of Polish capitalism 

structure business-politics relations to a 

significant extent. Inefficient governance 

structures in the largest (usually state-owned) 

companies, a low level of political culture of 

decision-makers conducive to high levels of 

corruption, a relatively unfavourable business 

environment due to substantial administrative 

burden and very weak legitimization of 

lobbying as an element of democratic 

decision-making – all these factors hamper 

the development of interest representation 

procedures compatible with those developed 

at the EU level. 

At the same time, patterns of Polish capitalism 

are obviously subejct to processes of change 

over time. Notably, the pattern of change 

from transformation phase to consolidation of 

market economy and democratic governance is 

assumed, in particular due to Europeanization 

process ( Jasiecki, 2008). It is worth underlining 

the fact that different companies and sectors 

belong to different phases of development 

(for instance, compare energy and ICT 

sectors). The passage from transformation 

to consolidation phase is also linked to the 

growing level of autonomy of business 

elites from political elites, which 

heavily affects their mutual relations. Seite Page page 51 

It is expected that with the progress 

of consolidation phase, professional 

lobbying would gradually weaken and replace 

clientelistic and oligarchic ties. Nevertheless, 

as experience of Western democracies and


developed market economies shows, the latter 

are never completely eliminated, no matter 

how advanced transparency and consultation 

procedures are. 

It is stressed that the low level of autonomy of 

economic elites, typical for the transformation 

phase, is reflected in clientelistic relations 

of state-owned companies and oligarchic 

relations of biggest national private companies 

with decision makers ( Jasiecki, 2004, 

2008). Another important element is poor 

organization and interest representation of 

SMEs - small and medium-sized enterprises 

(they account for 99.8% of all companies in 

Poland). Under such conditions professional 

lobbying strategies are used almost exclusively 

by foreign and multinational companies, as 

they dispose of much higher levels of autonomy 

vis-a-vis national political elites. 

Thus, if ownership structure and size of firms 

are taken as key variables, four strategies of 

business-politics relations can be enumerated. 

These strategies are typical for economic elites 

of the transformation phase, undergoing 

a process of professionalization. Whereas 

clientelism is the characteristic of relations 

maintained by state-owned companies 

(especially heavy industry and energy sectors), 

the largest Polish private firms tend to exploit 

oligarchic links 7 . In terms of professional 

interest representation, such strategies 

constitute pathological behaviour, 


generating corruption and suboptimal 

distribution of resources. In Poland, 

the most emblematic example of 

political-economic clientelism is delivered by 

sectoral networks forming a closed system 

of interdependence between politicians, 

management of state-owned companies (usually 

party-affiliated) and economic environment of 

these companies (Gadowska, 2002; Jasiecki, 

2004). In fact, decisions-making processes in 

these companies depend on current, shortterm 

party interest and particularistic personal 

gains, and not on economic calculation. In 

case of highly symbiotic, oligarchic relations, 

a company monopolizes delivery of certain 

services to the state and relies on a single 

client – the state, while avoiding competition 

on the market. Cost on the state budget is very 

high, while size and certainty of state contracts 

guaranteed by public funding enable the 

emergence of huge fortunes at low risk, thus 

creating conditions for the so-called ‘political 

capitalism’ (Staniszkis, 2001). 

However, a question emerges, whether patterns 

described above persist, petrifying businesspolitics 

relations typical for the period of 

economic and political transformation to 

capitalism? Or, whether they are becoming 

marginalized with the progression of the 

consolidation phase of market economy and new 

economic elites? On the one hand, the post- 

2004 expansion of Polish private capital (slightly 

mitigated by the 2008 crisis) both domestically 

and abroad, together with the incremental 

Europeanization of public administration, 

seems to confirm the consolidation hypothesis. 

On the other hand, despite recent political 

declarations, the privatization process is not 

accelerating and governance standards in public 

sector are not improving. 

Equally, the public affairs market in Poland is 

not yet developed. Few domestic companies 

are operating, with their services focused 

mostly on foreign players. Subsidiaries of


international consultancies are concentrated 

on public relations, media relations, or crisis 

management communication, only occasionally 

dealing with actual lobbying (Matraszek, 

24.08.2009). The relatively new phenomenon 

concerns the quasi-lobbying activities of law 

firms that provide clients with legal arguments 

and expertise necessary to influence the 

decision-making process. We thus observe a 

certain degree of professionalization in terms 

of argumentation, but not of the core formal 

and informal institutions that define businesspolitics 

relations and access to decisionmakers. 

Large parts of the business elite are 

still interdependent and closely linked with 

personal ties to the world of politics, thus 

lacking autonomous status. 

At the same time, new members of the 

business elite emerged in the aftermath of the 

post-accession economic boom. The 1998- 

2002 economic crisis, together with new 

opportunities offered by the single market, 

have enabled growth of private companies that 

disposed of real competitive advantage. In the 

rankings of fastest growing firms, a substantial 

change is also evident, as the new generation 

of successful businessmen is too young to have 

been socialized in the former system, as well as 

benefit from the early transformation period, 

its unclear rules and ambiguous opportunities. 

This part of the elite demonstrates a high 

degree of autonomy from the political elite, but 

also avoids active participation in any forms of 

collective action and interest representation. 

To sum up, various forms of business-politics 

relations co-exist in Poland, depending on sector, 

ownership structure, size and resources of the 

company, as well as socialization background 

of management. Consequently, heterogeneity 

reigns among the business elite, where some 

groups demonstrate characteristics typical for 

the (early) transformation period, whereas 

others belong to the modern, internationalized 

elite of consolidated capitalist system. 

However, this partial consolidation seems not 

yet to be translated into mobilization and 

effective lobbying of Polish business interests 

at the EU level. Consequently, I argue 

that the short period of participation and 

learning process within the EU governance 

structures (after accession in 2004) cannot be 

seen as the main explanatory factor. Nor do 

the critical resources (Beyers & Kerremans, 

2007) such as membership density, funding 

and sector consolidation provide sufficient 

explanation in the case of mobilization and 

impact exerted at the EU level by economic 

interest groups coming from post-communist 

CEE member states. It appears that postcommunist 

formal and informal heritage 

still plays an important role in businesspolitics 

relations. In the Polish case, this is 

manifested in the degree of embeddedness in 

domestic clientelistic and oligarchic networks, 

level of internationalization and resulting 

autonomy vis-a-vis national political elites, as 

well as lack of tradition, institutionalization 

and legitimization of pluralist interest 

representation. 

EXPLAINING THE EFFECTIVENESS OF 

POLISH BUSINESS LOBBYING AT THE 

EU LEVEL 

Studies on Europeanization of interest groups 

suggest that membership density, funding and 

sector consolidation constitute critical factors 

Seite Page page 53


of mobilization and exerting influence at the 

EU level. Reflection on Polish interest groups 

in a comparative perspective leads us to the 

conclusion that their resources are rather 

scarce, which results in weaker mobilization 

and influence compared to groups from 

Western Europe. 

In terms of membership and funding, a 

comparison of Spanish and Polish member 

organizations of Business Europe (largest EUlevel 

business umbrella organization) shows 

that while Polish PKPP has 3000 members, 

Spanish CEOE accounts for 1 million of 

them (in both cases these are mostly SMEs). 

This is translated into 1.5 million euro in 

membership fees for Polish organization and 

more than 20 million euro for the Spanish one; 

however, their membership fees in Buiness 

Europe are roughly the same (Karaszewska, 

04.08.2009). The Brussels office of PKPP 

employs 2 lobbyists, whereas CEOE employs 

6. Not only does this juxtaposition indicate 

important disparities in terms of capacities 

of exerting potential influence, it also points 

to the fact that activities at the European 

level constitute a huge financial effort for the 

Polish organization, incomparable with the 

one the Spanish association is experiencing. 

The importance of sector consolidation is 

best depicted by the example of the chemical 

industry. A relatively small number of large 

companies allows for more efficient 

mobilization, both at the domestic 


and European level. In fact, the 

sectoral EU umbrella association, 

CEFIC, with its huge funding and 

relatively smooth and timely decision-making 

process, is typically mentioned as one of the 

most efficient corporate groups in Brussels. 

However, the critical resources approach does 

not offer plausible explanations to a number 

of questions, which are particularly evident in 

the CEE context. Why do large and wealthy 

Polish companies not engage in EU level 

lobbying or only at a very late stage? Why 

do groups and companies with substantial 

resources tend to choose the national route of 

influencing EU affairs, even if they are aware 

of the fact that the number of national officials 

occupying key Brussels posts is extremely 

limited? Why do Polish representatives of the 

chemical sector not see themselves influential 

despite relatively high sectoral consolidation 

and active participation in CEFIC works? In 

order to solve these dilemmas, I offer three 

additional explanations based on the argument 

of direct impact of domestic business-politics 

relations on mobilization patterns and lobbying 

strategies at the EU level. 

It is widely acknowledged that EU impact is 

largely mediated through, and conditioned 

by, existing domestic institutions, policies, 

cultures and identities. There is no automatic 

shift of loyalties and activities to the European 

level (Ladrech, 1994). Much of the literature 

emphasizes that the Europeanization process of 

interest groups is constrained at both European 

and national levels (Woll, 2007). Notably, a 

negative correlation is found between the extent 

to which a group is embedded in domestic 

policy networks and the extent of its integration 

in European networks (Beyers & Kerremans, 

2007). Thus, mobilization and lobbying 

strategies of interest groups are conditioned by 

the immediate institutional and organizational 

environment of the domestic groups and the 

level of dependence or autonomy of groups visà-vis 

this environment.


Accordingly, privileged access to domestic 

decision-makers, especially in the form of 

clientelistic or oligarchic relations, is to decrease 

motivation for interests’ mobilization at the 

EU level. Actors that are heavily embedded 

in domestic networks have a tendency to 

rely on routine contacts with national-level 

decision-makers and are unwilling to develop 

new networks in Brussels. In fact, existing 

literature suggests that the national route 

is typical for Southern (Italy, Greece) and 

Eastern member states (Greenwood, 2007). 

Such a path-dependent strategy allows 

for avoiding additional costs, but prevents 

influencing actors other than the national 

government representatives in the Council of 

the EU. In particular, with the growing impact 

of bargaining in the European Parliament on 

the entire decision-making process, illustrated 

notably by the cases of services directive (2006) 

or regulation on spirit drinks (2008), such an 

approach is ineffective 8 . 

The largest Polish companies, which are 

usually state-owned, are constantly entangled 

in politics. Frequently changing and partyaffiliated 

executives, who often dispose of 

doubtful management competences, do not 

usually promote long-term strategic planning. 

Interest representation instruments, such as 

public hearings, which are common at the EU 

level, are often underestimated. Regular data 

gathering, reporting and impact assessments, 

aiming at supporting arguments, are neglected 

(Lubiewa-Wieleżyński, 24.08.2009). Consequently, 

benefits of the high consolidation 

of the sector cannot be realized, as companies 

are subjecting their decisions to demands of 

current party politics and are often unfamiliar 

with procedures of professional and expertisebased 

lobbying. Awareness of the necessity 

to defend the industry’s interests in Brussels 

is still not well developed among the largest 

Polish companies; and EU-oriented attempts 

of influence are often limited to isolated 

consultations with a national vice-minister 

responsible for the dossier. Such a method 

fits very well into a tradition of ‘arranging 

things’ with an acquainted politician, often 

in exchange for concrete benefits. This shows 

a huge difference in the rules of the game 

operational in EU and Polish politics. 

It is thus argued that the preference for the 

national route is reinforced by uncertainties 

stemming from the distinctively different 

institutional context of the European level, 

in comparison to the hybrid, post-communist 

environment. In fact, formal and informal 

institutions that exist at the European level 

are more conducive to open and participatory 

interest representation than those present in 

post-communist countries, including Poland. 

Clientelistic and oligarchic strategies, practiced 

by the largest Polish companies at the national 

level, cannot be applied in the EU due to 

multiple points of access and a high level of 

bureaucratization of the decision-making 

process. This is further reinforced by the 

scarcity of Polish politicians and high officials 

occupying key posts in Brussels. Sticking 

exclusively to the national route is particularly 

inefficient for a new member state, as 

the number of its officials is limited 

due to a short period of presence in Seite Page page 55 

Brussels institutions. At the stage 

of agenda-setting and preparing 

proposals in the European Commission, it is 

necessary to go beyond national ties and gain 

access to decision-makers working directly on


the dossier in question notwithstanding their 

nationality. 

Moreover, the repartition of Polish deputies 

among the European Parliament committees 

is not at all functional from the point of view 

of business interest representation. Poland is 

overrepresented in the foreign affairs committee, 

whereas membership in committees 

dealing with single market or environmental 

issues is more than scarce (the tendency has 

been similar after the 2009 EP elections). Thus 

the potential for opinion shaping in economic 

matters is considerably limited. 

At the same time, the specificities of Polish 

capitalism discussed above result in a relatively 

weak level of internationalization of Polish 

business and an absence of large national corporations 

capable of attracting and mobilizing 

smaller players into national and European 

business associations. Just as in the third sector, 

business organizations are seriously underdeveloped 

in terms of membership and financing 

in comparison with the situation in Western 

member states. Meanwhile, company size, together 

with the level of internationalization, 

constitutes a crucial resource for mobilization 

and influence in the EU arena. 

In fact, the more transnational ties and activities 

the company has, the more it is interested 

in influencing the regulation of the 

single market. Such a company is 


naturally much more affected by 

acquis communautaire than a company 

operating locally within one member 

state. The expansion of economic activities can 

also be accompanied by socialization to the 

international management standards. Finally, 

an important position on the European market 

should make the firm more autonomous 

towards domestic political elites. Meanwhile, 

a low level of internationalization impedes 

mobilization and implementation of effective 

lobbying strategies, while the company is 

focused on domestic market and traditional 

linkages between the world of business and the 

world of politics. In particular, this occurs with 

a high level of dependence on politicians and 

administration due to the overwhelming and 

burdensome intervention of the latter in the 

economic activities of private entrepreneurs. 

Finally, policy-making in the EU is technical in 

nature; and the EU governance system relies to 

a significant extent on knowledge and expertise, 

which is reflected in the great number of advisory 

and expert committees in the Commission and 

public hearings in the Parliament. At the same 

time, the nature of Polish business-politics 

relations has been traditionally based not so 

much on information exchange but more on 

‘making deals’, nepotism, and corruption. Both 

the government and interest organizations are 

not yet prepared to play the game by European 

rules, too often relying on populist arguments 

of national interest or veto (Rey, 09.03.2009; 

Karaszewska, 04.08.2009). 

Lobbying is far from being the dominant 

form of relations between business and politics 

in Poland. Socialist tradition of interest 

representation as systemic deviation contributed 

to the delegitimization of the pluralist game 

of interests. Lobbying is not recognized as a 

legitimate element of the democratic decisionmaking 

process. As interest representation 

strategies of argumentation, persuasion and 

opinion formation are not well developed


nationally, actors are poorly socialized to 

develop the necessary strategies at the EU 

level. For instance, consultations and public 

hearings are poorly institutionalized in Poland, 

which is impeding active engagement in similar 

practices in the Brussels arena. 

Polish lobbying at the European level is also 

characterized by an ad hoc approach. On one 

hand, this is due to high costs of permanent 

presence in Brussels. On the other hand, 

companies still do not possess the awareness 

as to the importance of the continuous opinion-shaping 

at the EU level. They often limit 

themselves to the participation in works of an 

EU-level trade association but use it more for 

an informative purpose than active interest 

representation. The lack of long-term planning 

and continuity in business strategies might be 

considered a result of a specific economic culture 

derived from the post-communist heritage, 

in particular business-politics relations 

in state-owned companies. Meanwhile, the ad 

hoc practice of ‘arranging things’ is fully dysfunctional 

in the formalized and highly institutionalized 

lobbying environment of the EU. 

CONCLUSIONS 

Specificities of Polish capitalism are particularly 

well reflected in existing patterns of businesspolitics 

relations and lobbying. In this 

article, I looked at how the post-communist 

heritage, transferred into the institutions of 

Polish ‘advanced emerging market’, affects 

representation of economic interests at both 

national and European levels. I made an attempt 

to explain the relative ineffectiveness of Polish 

lobbying in Brussels, while going beyond the 

critical resources approach and pointing to 

the characteristics of the CEE institutional 

and organizational environment. It seems that 

the perceived ineffectiveness results from the 

incompatibility of the hybrid, post-communist 

socialization context with the institutions of 

consolidated democracy and developed market 

economy at the EU level. 

As stated above, various forms of businesspolitics 

relations co-exist in Poland, depending 

on the sector, ownership structure, size 

and resources of the company, as well as socialization 

background of the management. 

The partial consolidation of economic elites, 

also resulting from the opportunities offered 

by EU membership and internationalization 

of economic activities, is not yet translated 

into effective mobilization of Polish business 

interests at the European level. The critical 

resources approach neither fully explains the 

low level of mobilization in the EU arena, nor 

the use of strategies that are not adequate to 

the European rules of the game. Among other 

explanatory factors proposed, one can find the 

argument about the embeddedness in domestic 

networks where specific, post-communist 

types of business-politics relations dominate. 

Clientelistic and oligarchic strategies practiced 

in Poland cannot be successfully used in 

the European environment, in particular due 

to the high level of autonomy of economic 

and political elites, as well as scarcity 

of Polish politicians and officials occupying 

key posts. A lack of tradition Seite Page page 57 

and institutionalization of pluralistic 

interest representation and civil society, 

together with weak financial and human 

resources of business organizations, further 

obstruct the capacity to exert influence.


NOTES 

1 

According to the FTSE group ranking (Sept. 2008), all EU15 

countries were classified within the group of 25 developed market 

economies in the world. Apart from Poland and Hungary, 

all the other new member states from Central Europe that joined 

the EU in 2004-2007 were still labelled as emerging markets; 

www.ftse.com. 

2 

In his classic essay, Radaelli (2000) defines Europeanization 

as ‘processes of construction, diffusion and institutionalization of 

formal and informal rules, procedures, policy paradigms, styles, 

‘ways of doing things’ and shared beliefs and norms which are 

first defined and consolidated in the making of EU decisions 

and then incorporated in the logic of domestic discourse, identities, 

political structures and public policies’. Understood as process 

of adaptation, Europeanization does not lead to homogenization. 

As abundant literature demonstrates, due to interaction, 

institutional systems undergo adaptation processes according to 

their own specific paths (Heritier 2005, Radaelli 2000, Ladrech 

1994). 

5 

Corporate governance is understood here as ‘legal and economic 

institutions constituting a system of formal and informal rules, 

determining the behaviour of entrepreneurs’ (Kozarzewski, 

2007). 

6 

For instance, Hungary has moved up 19 positions and Romania 

16 positions during the same period. 

7 

The phenomenon of clientelism constitutes a continuation of the 

nomenclature system of state socialism in many respects. It defines 

the asymmetric governance system, where decisions are taken in a 

fully discretionary way, and personal loyalty together with commitment 

to exchange goods of unequal value form the backbone of 

the relationship. In such a system, the patron uses public resources 

in pursuit of private benefits, as the division between public and 

private is blurred ( Jarosz, 2004). As for oligarchic patterns, they 

are based on social networks, direct contacts with politicians and 

administration, abuse of personal ties and reciprocity of favours 

( Jasiecki 2002). The classic example is the financing of political 

party activities by businessmen in exchange for privileged positions 

in public tenders. 

3 

The scope of this article does not allow for detailed explanation 

of the different understanding of lobbying, in particular, in 

contrast to notions of interest representation, or social and civil 

dialogue. For instance, the understanding of who a lobbyist is 

under Polish law is quite different from the definition used by 

the European Commission. I assume that lobbying constitutes 

one of the forms of interest representation, next to territorial 

parliamentary representation and corporatist representation 

(Łabno 2009). For different aspects with regard to the conceptualization 

of lobbying phenomenon in Polish literature, see: 

Wołpiuk 2004, Jasiecki 2006, Wiszowaty 2006, 2008. 

8 

In these cases, the focus on building a blocking minority in the 

Council of the EU was not sufficient, as the main political battle 

took place in the European Parliament. With the expanding competences 

of the European Parliament (also with the intialization 

of the Lisbon Treaty on 1 December 2009), the Council appears to 

be losing its crucial bargaining position within the EU decisionmaking 

process. This puts the efficiency of the national route of 

lobbying into question even further. For details on the lobbying 

campaigns with regard to the above mentioned legislative acts, 

see: Petsch (2006), Gazeta Wyborcza (2007a, 2007b). 


4 

There are three transformation models identified, namely capitalism 

from below, capitalism from above and capitalism from 

without. The first model stipulated that a new private market 

sector emerged in the shadow of old socialist redistributive 

economy. The second one pointed to the attempts of the socialist 

nomenclature to transform the system, while converting 

themselves into the grand bourgeoisie and using 

the resources (political and social capital) acquired 

under the previous institutional setting. Finally, the 

third model accounts for dominant impact of foreign 

capital and ownership in the transformation process 

(King, Szelenyi in Smelser, Swedberg, 2005).


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of Economic Sociology, 2nd edition, Princeton University Press. 

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świecie, Wydawnictwo Sejmowe, Warszawa. 

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procesie stanowienia prawa’. In: Przegląd Sejmowy, 5 (76). 

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no 9(13). 

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13.06.2007. In: Gazeta Wyborcza. 

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funkcji prawnopublicznych’. In: Przegląd Sejmowy, 4(63). 

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of SEAP (Society of European Affairs Practitioners) in 1998- 

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Seite Page page 61

AUTOMOTIVE REFERENCES LITERATUR COMPANIES GO EAST - 

GERMANY AND AUSTRIA 

1. INTRODUCTION 

4 

Ultimately, all automotive companies are 

international companies with a global 

focus, acting at several locations and 

on different markets. While some are actively 

engaged in establishing new sites, finding new 

cooperation partners and exploring foreign 

markets, others seems to act conservatively, 

appearing reluctant while focussing on and 

strengthening their position in their traditional 

markets. 

GERMANS ON THEIR WAY EAST – AUSTRIANS 

STAYING AT HOME 

Kathrin Loer 

In this regard the title of this paper must be 

explained, as it does not seem to say anything 

about the topic. Who is meant by “Germans” 

and “Austrians” and what is meant by “way 

east” in contrast to “staying at home”? 

The following text addresses problems of 

the European automobile industry, more 

precisely problems and challenges of a certain 

segment of the automotive sector: the contract 

manufacturers. On the basis of two case 

studies, I will explain under what conditions a 

German company begins to build production 

units in Poland, while its major Austrian 

competitor does not follow the trend to use 

attractive Central and Eastern European 

production sites and still remains competitive. 

Seite page 62 

From an institutional point of view, 

interdependencies between the institutional 

surrounding 1 and a company’s economic 

performance and (international) competitiveness 

can be assumed, whereas the cases show 

dissolution of these interrelations and some 

weakness of the argumentation. Hence, the 

aim of this paper, from a theoretical point of 

view, is to show the limits of institutionalist 

approaches and the need to broaden or

KATHRIN REFERENCES LITERATUR LOER 

modify these approaches in the face of serious 

transformations of economic surroundings 

and market transformations. Perhaps this 

diagnosis could be transferred to other sectors 

or market structures. The empirical contents 

of this paper will support the assumption of 

serious market transformations and their 

complexity. To a certain degree, behaviour 

and decisions of economic actors are expected 

to be rational or the result of figure-based 

analyses summing up the situation. The paper 

will show that – at the latest – the complexity 

of the business environment does not make 

it possible to act and decide (completely) 

rationally; economic rationality could instead 

be used as an auxiliary tool to legitimate the 

decisions of an economic actor. 

Given a framework of transformation 

processes, changes and characteristics of the 

automotive sector, this paper will explain how 

and why automotive companies invest abroad, 

more precisely in Central and Eastern Europe. As 

mentioned above, not the whole automotive 

industry will be covered but rather a small 

sample that might be a representative example 

of the complex framework of mechanisms that 

restricts, promotes or undermines the actor’s 

behaviour. On the basis of the two case studies 

of European “contract manufacturers”, this 

paper shows under what prerequisites foreign 

direct investments in Central Eastern Europe 

can overstrain (medium-sized) companies as 

well as when disregarding the trend to move 

east leads to greater competitiveness. With 

a focus on different types of foreign direct 

investments of these automotive companies 

in CEE transformation processes of the 

market, manufacturer-supplier-relations as 

well as consequences for industrial relations 

will be explored. Before the two case studies 

are presented, the theoretical and empirical 

framework will be explained in more detail. 

2. THE EUROPEAN AUTOMOBILE INDUSTRY – 

A STARTING POINT. 

In order to first reduce complexity, a simple 

picture is drawn: The automobile industry 

evolved during the last century from small 

factories producing the first, mainly handcrafted, 

cars into huge corporate groups with 

a very high employment volume (compared to 

other parts of the industrial sector) (Altshuler 

et al. 1986). Although each region of the 

triad has its own specialities regarding the 

production models, generally speaking similar 

developments can be identified in Europe, 

North America (mainly the United States) 

and Japan (later: Southeast Asia) after the 

Second World War. Common is especially 

one characteristic feature: The automobile 

is a very complex as well as labour and 

knowledge intensive good. The Original 

Equipment Manufacturers 2 (OEM) represent 

the key players in the sector but do not build 

automobiles on their own, which is why a 

more or less differentiated supplier industry is 

needed for automobile production (Hoetker, 

Swaminathan & Mitchell 2007, Helper, Kiehl 

2004, Kaufman, Wood & Theyel 2000). In the 

Japanese automobile industry, supplier 

companies are mostly affiliates of the 

OEM (e.g. Toyota), which is a small Seite page 63 

deviance to the organization of the 

automotive value chain in Europe or 

North America. Traditionally, the European 

automotive suppliers are independent 

companies varying from small and medium



to large companies. The automotive supply 

chain and its hierarchy can be illustrated with 

a pyramid. 

Figure 1. Automotive Supplier Hierarchy 

(by author) 

If it was a simple and successful story, it could 

be followed by reports of continuous growth, 

expansions, and developments of new markets. 

Automobiles would be the main transportation 

means, the OEM portfolio would become 

increasingly diversified, and automobiles in 

nearly all price classes would be offered. There 

would be mainly growth prospects for 

companies in the automotive sector 

Seite page 64 

for OEM and the supply industry. As 

one can imagine, considering the many 

countries and regions in the world 

that are still not saturated as far as individual 

transport (by car) is concerned, OEMs and 

supplier companies would be “lucky devils” in 

the era of globalization. Indeed, all that is partly 

true, yet accompanied by other developments 

and mechanisms: 

International production- and distribution 

strategies of the large multinational OEMs 

are constitutive for all other entrepreneurial 

decisions in this sector. Internationalization 

and an extensive process of consolidation have 

taken place simultaneously since the 1990s – 

for the Original Equipment Manufacturers 

(OEM) as well as for supplier companies. This 

process produces “mega suppliers” as a result 

of fusions and takeovers and the reduction 

of the in-house production depth on the


OEM-side. Different reports and consultancy 

studies forecast a promising economic future 

for the mega suppliers because of vertical 

disintegration of tasks, growing specialization 

and the need for flexibility (Mercer 

Management Consulting 2004, Verband der 

deutschen Automobilindustrie (VDA) 2003, 

Kinkel, Zanker 2007, Kinkel, Lay 2005). In 

an extreme scenario, one could think about 

task sharing to such an extent that the OEM 

is “merely” responsible for marketing and 

distribution as well as for the management of 

the automotive brand(s), whereas the supplier 

industry performs all steps of the production. 

Research and development in the development 

of a new automobile model is also vertically 

disintegrated. Considering such a high impact 

for supplier companies regarding production 

activities, one could raise the question 

whether relocation of production sites may 

be economically advisable to escape high-cost 

countries (e.g. Germany or Austria). From the 

perspective of (Western) European automobile 

producers, this question is asked again given 

very attractive conditions for production 

activities in Central and Eastern Europe as 

well as their proximity to the automobile 

producer’s headquarters in France, Germany, 

Italy etc. Indeed, the automotive industry 

can be identified as a pioneer regarding the 

constitution of new sites in Central and Eastern 

Europe, not only since the “iron curtain” fell in 

1989 (Bandelj 2008) but also with investments 

of GM and Suzuki, for example, in Hungary 

already in the early 1980s (Sadler, Swain 1994). 

As this was the case for the OEM, the supplier 

industry also realized the new opportunities or 

was forced to follow the OEMs to gain new 

contracts. 

The automobile industry retains a large volume 

of employment as (despite a high degree of 

automation) the assembly of automobiles still 

requires manpower on a large scale, especially 

for the production of certain supply parts as 

well as during the last steps of the assembly line. 

Workers in the automotive sector unionized 

and founded workers’ councils in the early years, 

which continuously grew and developed in the 

second half of the last century. Particularly in 

Europe the development of the automobile 

industry was accompanied by the growth of 

trade unions (metal unions). Hence, in this 

paper the perspective on enterprise’s strategies 

and interdependencies between the OEM and 

the supplier industry is complemented by the 

perspective on power and powerlessness of the 

workers’ councils. Negotiation and bargaining 

processes between the workers’ councils of the 

traditional and established production sites 

“at home” influence business and investment 

strategies – not only of the respective company 

but also of the dependent companies in 

the supply-chain (Cooke 2006, Marginson, 

Meardi 2006, Doellgast, Greer 2007). The 

same is true by looking the other way around: 

business and investment strategies as well as 

high cost pressure can force the organized 

labour of one company to concede or give 

up standards or previous conditions or – to 

mention an extreme case – to capitulate. 

This very brief sketch of major developments 

may lead to the assumption 

that the supplier companies that survived 

the consolidation process and 

Seite page 65 

grew in the course of joint ventures 

and takeovers turn out to be the part of the automotive 

sector that continues to achieve high 

employment rates and are important, or even



Seite page 66 

the most important players in the automotive 

sector as counterpart of the OEM. Of course, 

one can also identify a strong dependency of 

supplier companies on the OEMs, insofar a 

picture of great interdependence between international 

companies arises. The same is true 

for the European “contract manufacturers” (or 

“0.5-tier suppliers”, see Figure 1) as a special 

segment of the automotive industry yet still 

very much subject to the OEM. Contract 

manufacturers are developing and producing 

automobiles on behalf of large automotive 

producers, the OEMs. They are capable of fulfilling 

all tasks required to produce a vehicle. 

In this regard, these companies can be viewed 

as “miniature” automobile manufacturers or 

“small” OEMs. In addition, most of these 

companies are market-leaders for the production 

of specific supply modules. The segment 

of “contract manufacturers” is chosen to present 

two cases from Germany and Austria 3 . 

Similar to a magnifying glass, this approach 

should help to point out and analyse important 

structural changes and actor’s behaviour 

within this changing environment. Summing 

up, the following aspects are important for this 

paper: 

 

 

 

High degree of internationalization. 

High relevance of Central and Eastern 

Europe regarding production sites in 

this region for all automobile 

companies (European, North 

American and Asian) and the 

supplier industry. 

Interdependence between OEM and 

suppliers as well as OEM and contract 

manufacturers. 

 

 

 

 

Importance of workers’ councils and 

(metal) trade unions. 

Importance of sector with regard to the 

whole producing sector of a national 

economy. 

Large assembly lines and a multiplicity of 

automated production steps, but the need 

for (highly) skilled workers, manpower 

and engineering capabilities to compete 

in the sector. 

Necessary development of new technologies, 

innovations and inventions forces the 

companies (OEM and suppliers) to invest 

in research and development divisions. 

The recent crisis of the automobile industry 

just shows the tip of the iceberg. Even if the 

bankruptcy of famous automobile companies 

is on everyone’s lips in the light of the current 

economic crisis, the crisis in the automotive 

sector is not a new phenomenon. Automobile 

companies have faced several severe problems 

during the last two decades. Their economic 

drawbacks are mainly caused by changing 

circumstances on buyers’ and sellers’ markets 

and resulting large overcapacities. Even if 

this paper does not discuss these long-term, 

structural problems, it is necessary to keep 

their influence in the back of our minds when 

regarding the following investigations. 

2.1 General changes in the automotive sector 

If one were to describe the market strategies of 

automobile producers not in an analytical and 

academic, but rather a heretical and exaggerated 

way, a general diagnose could be: The European


automotive companies, particularly the OEMs, 

have dug their own (economic) grave step by 

step because of immense overcapacities over 

the last decade. Of course, this picture is onedimensional, 

as the problem of overcapacities is 

not only caused by (independent) management 

or executive decisions but is the result of 

parallels in the development of the market 

that complicate these decisions. To describe it 

concisely: The opening of Central and Eastern 

European countries opens new markets with 

a huge demand and backlog in people having 

their own automobiles. This is an example 

of a (quite) unexpected potential to expand 

for market changes during a short period of 

time (van Tulder, Ruigrok 1998, Keune, Tóth 

2005). As demand for expensive investment 

goods such as automobiles cannot be exactly 

predicted, the forecast of trends is sophisticated 

and partly coincidently. As new competitors 

enter the market and the automotive 

industry is profoundly dependent on general 

developments of national and international 

economies and their rapid shocks and changes, 

unilateral criticism against the OEM does 

not cope with the complexity of the situation. 

However, the impact of market instabilities, 

the need for flexibility and fast adaptation 

to new circumstances pressures workers and 

employees in the sector as their employment 

conditions are often seen as an “adjustable 

screw” in the eyes of company management 

( Jürgens 2005a, Jürgens 2005b, Jürgens 2004, 

Kahancová, van der Meer 2006, Charron, 

Stewart 2004). Another remarkable change is 

related to cooperation between competitors in 

the market that reach from buying syndicates 

to joint production sites. On the other hand, 

new competitors enter the international market 

and discover Europe as an interesting economic 

region (mostly cheap automotive producers 

from emerging markets, India or China…). 

In summary the transformation of the automotive 

sector proceeds in different respects: 

 

 

 

 

Growing cost pressure. 

Changes regarding the terms and 

conditions for workers in the sector. 

Growth of new flexible employment 

strategies, namely temporary employment, 

which produces a segmentation of 

employees with permanent staff, on 

the one hand, and workers that accept 

precarious employment conditions 

(continuity, wage levels), on the other. 

Organized labour is hardly achievable 

and the counterpart of the management 

weakened. 

After years of implementation, the 

concept of “lean production” and the 

idea of a “breathing plant” are enforced 

to cope with changing circumstances 

(Schumann et al. 2006) 4 . The concept 

aims at introducing terms of employment 

that allow hiring and firing at short 

notice, without difficult legal bindings. 

Of course, this concept is judged very 

differently depending on the perspective. 

Employers recognize the need 

to be flexible if they want to 

stay competitive and search Seite page 67 

for solutions in the range of 

employment conditions as they 

turn out to be the most extensive cost 

factor. The employees’ perspective claims 

the trend to capitalize the current market



 

situation (particularly on the labour 

market) to force the workers to accept 

bad conditions. However, the employees’ 

behaviour in reaction to these changes 

also shows their powerlessness, as they 

actually widely accept and adapt to these 

new situations. 

The relation between OEM and 

supplier companies alters exceptionally 

regarding bargaining position and power: 

Cooperation structures of OEMs (from 

buying syndicates up to productioncooperation) 

form a powerful counterpart 

to the supplier companies. 

What are the consequences for contract 

manufacturers referring to this? These general 

changes hit the contract manufacturers hard 

due to the fact that they occupy a “niche” of car 

production, being experts for special features, 

design, and exceptional functionalities and 

notably low volume production. Their special 

niche productions could be classified in the 

“premium segment”, which is difficult to 

combine with growing cost pressure. If we think 

of economies of scale, this target is also hardly 

to be achieved with low volume production. As 

far as the flexibility of employment strategies 

is concerned, it might be a competitive 

disadvantage to rely on skilled workers, highly 

skilled engineers and other technical staff to 

realize high quality production and 

complex products. The dependency 

Seite page 68 

of OEM was and is extensive with 

regard to niche production, which 

also changes and creates a very 

unstable economic situation. The contract 

manufacturers appear to be powerlessness and 

– in a way – “abandoned to their fate” as far 

as the production of full vehicles is concerned. 

Remembering the OEM-supplier hierarchy, 

the changes let the 0.5-tier suppliers descent 

to 1 st -tier suppliers specialized on modules and 

systems. In such times it is doubtful whether 

outsourcing to foreign countries like those in 

Central and Eastern Europe helps to master 

the crisis. If an OEM starts to invest in CEE, 

contract manufacturers may get an opportunity 

by following them, or are forced to follow? 

3. ANALYTICAL FRAMEWORK 

In order to compare and analyse the two case 

studies, a starting point is defined that regards 

similarities and differences, whereas the 

similarities are seen as formative for the specific 

character and function of these companies. 

Therefore, firstly attention is turned to 

institutionalist theory that might be helpful to 

understand the environmental conditions of the 

two companies. In a second step, characteristic 

features of the company’s constitution will be 

divided into similarities and distinctions. 

Considering the classification of the “Varieties 

of Capitalism” (VOC), the home countries 

of both enterprises fall into the category of 

“coordinated market economies” (CME) (Hall, 

Soskice 2001) p.19f ). Although the VOC 

approach is broadly assailed and enhanced 

(Crouch 2005, Jackson, Deeg 2006, Deeg, 

Jackson 2007, Hirt 2004, Campbell, Pedersen 

2007, Allen 2006), this substantial debate 

will not be addressed in this paper. Rather, 

the approach is used to emphasize some 

characteristics of the coordinated market 

economies in Germany and Austria, which are 

not challenged by the criticisms of the VOC


approach. Asked how wages and working 

conditions are established in these coordinated 

economies, the bargaining structures between 

the employers and the organized labour and a 

long tradition of unionism are the answer. This 

characteristic is important for the case studies, 

because wage structure and working conditions 

are presumably the most important aspects 

when it comes to decisions on new production 

sites abroad, vertical disintegration and foreign 

direct investments. From this theoretical 

classification, one could expect similar 

confrontations inside the enterprises in times 

of growing cost pressure, increasing difficulties 

to gain new contracts and orders. A second 

characteristic regards vocational training and 

education. The coordinated market economies, 

especially Germany and Austria, are famous for 

their publicly organized and subsidized training 

system (Culpepper 2001). Companies in the 

automotive sector take part in the vocational 

training system and can, therefore, secure a 

skilled labour force. Looking at inter-company 

relations, coordinated market economies dispose 

of appropriate and manifold institutions. By 

using institutionalist approaches, one attempts 

to respect the political embeddedness of actors. 

Path dependency provides an explanation 

for this as well as for why institutions do not 

change in a way that completely shifts the 

national economy. However, with regard to this 

theory, two important remarks must be taken 

into account. The VOC-paradigm is an ideal 

typology – even though Hall and Soskice bring 

forward their argument by using OECD-data, 

national figures and statistics and link their 

two capitalist models (coordinated and liberal) 

to “real” countries. At the latest in the course 

of the European Integration process, growing 

reform pressure with regard to welfare state 

institutions, and considering the Globalization 

processes, these countries “move” away from 

their ideal type. With the two case studies 

in mind, the significance of industrial 

relations, vocational training and inter-firm 

relation might be doubtful on two counts: 

the automotive industry was (and partly still 

is) very much affected by a strong influence 

of workers’ councils and trade unions. They 

might have changed their role and function 

but are still an important counterpart of the 

company’s management – in Germany as 

well as in Austria. Referring to this, but also 

with regard to the other two categories (VC and 

interfirm-relations), particularly traditional and 

regional (rooted) companies adhere to well known 

and long established routines and institutions. 

Also the cooperation-partners of those companies 

(employees, prospective apprentices, chambers 

and other organizations dealing with inter-firm 

relations) stick to familiar routines. The case 

studies can show whether these statements can 

be confirmed and, if so, provide an explanation 

– particularly as far as the decision about foreign 

investments (in CEE) is concerned. 

In addition to thoughts about national 

economies, some theoretical remarks about 

the constitution of the market should be 

introduced and linked with the case studies. It 

seems helpful to use Beckert’s categories for the 

constitution of markets: the “value problem”, 

the “problem of competition”, and the 

“cooperation problem” (Beckert 2009). 

The following paragraph includes all 

important aspects that can be used for 

the case studies: 

„I argue that three coordination problems 

in the sense of “mutual coordination” can be 

Seite page 69



analytically distinguished: I call them the value 

problem, the problem of competition, and the 

cooperation problem. These coordination 

problems can only be resolved if market actors 

are able to form stable expectations with regard to 

the actions of other market actors and future 

events relevant for their decisions as well 

as whether they consider the expected outcomes 

to be sufficient in their material interest and 

normatively acceptable. In this sense, markets 

are understood as “fully social institutions, 

reflecting a complex alchemy of politics, 

culture, and ideology” (Krippner 2001: 782). 

While the notion of the “order of markets” 

refers to the macrolevel result of the solution 

of the three identified coordination problems, 

the expectations formed by actors constitute 

the building blocks of this order on the actor 

level.” 

(emphasis added) 

With this understanding of the constitution 

of markets, the severe problems and also 

contradictions in actor’s (here: company’s) 

behaviour and decisions can be explained. 

The following case studies will show where 

and under which conditions it is remarkably 

difficult or almost impossible to achieve the 

necessary level of coordination. 

4. CASE STUDIES: WHAT IS SO SPECIAL ABOUT 

THE CONTRACT MANUFACTURERS – ARE THEY 

SPECIAL? 

4.1 …some remarks on the empirical studies: 

The case studies are based on media reports, 

business reports and interviews with decision 

makers 5 of these companies and actors in the 

company’s environment as the major source. 

The aim is to explain corporate decisions 

and strategies as well as the dramatic changes 

affecting the market segment. The case studies 

focus on the following figures: changes of 

business sections, company size, company 

locations, foreign investments, co-operations 

among suppliers and contractors. The two 

companies from Austria and Germany were 

chosen as the main focus, because they are 

(were) by far the leading and largest companies 

for contract manufacturing worldwide. 

Summarizing the main characteristics for 

the segment of niche producers and contract 

manufacturers, they mainly produce for the 

premium sector, while the production is labour 

intensive, requires specialized and expert 

knowledge to create unique selling points. All 

contract manufacturers have a long tradition in 

their home countries and no or few production 

sites abroad. 

4.2 Transformation of manufacturer – 

supplier – relations 

Seite page 70 

Referring to the main aspects mentioned 

above, which show what happens in the sector, 

these characteristics can be applied to the 

relation between contract manufacturer and 

suppliers as well. Due to the interdependencies 

between OEM and contract manufacturers,


these countries are also to a certain degree 

internationalized. As the case studies will 

explain, there are very different concepts 

followed by the contract manufacturers 

grounded in different ratings of opportunities 

and economic risks but also dependent on their 

relation to the OEM. Central and Eastern 

Europe attracts investments from all kinds of 

automobile industries, contract manufacturers 

are not excluded. As far as the interdependencies 

between OEM and contract manufacturers are 

concerned, there is strong evidence suggesting 

less balance and more power of the OEM with 

the result that the dependency gains weight in 

one direction. It shall not be forgotten that the 

automobile industry started with a high degree 

of manufacturing in its early years (at the end of 

the 19 th century / beginning of the 20 th century); 

in the market for “premium cars”, individualized 

products, skilled workers, manpower and 

engineering capabilities are still important. If 

OEMs decide to outsource production, it is 

presumably this part of the product portfolio. 

The role of Central and Eastern European 

countries for this production will be explained 

with regard to the case studies. 

4.3 Case Study 1. 

This case study takes a closer look at the 

Wilhelm Karmann GmbH, which was 

founded in 1901 (Knust 1996). Until recently, 

Karmann employed around 8.000 persons 

spread at six locations worldwide (Karmann 

2006, Handelsblatt.com 2009a). The company 

specialized historically in manufacturing 

cabriolets as well as modules necessary to build 

cabriolets such as retractable tops. During the 

last years, several rounds of layoffs needed 

to be executed (still some layoffs could be 

prevented). Overall, the situation for the 

company staff has worsened since 2006. At 

the moment, the insolvency proceedings 

are short of being concluded (Handelsblatt. 

com 2009b, neue-oz.de 2009). Excluding the 

current and ongoing events, the Karmann case 

shows interesting aspects for the purpose of 

this paper. With regard to different categories, 

serious changes can be observed. As a family 

business, the company grew steadily and 

employed around almost 10.000 people at 

the company’s climax. Over time, Karmann 

emerged to an established regional company that 

was well known nationally and internationally 

for its niche production of cabriolets. Long time 

tradition and strong regional roots are main 

characteristics that can also be identified by the 

embeddedness of the principal of the company in 

social and political networks. This might be seen 

as typical for German family owned business, 

but also for the industrial sector and specificly 

the metal sector. Especially the grandson of the 

founder and also the first successor beyond the 

family were very much involved in “old-boysnetworks”, 

the traditional, informal German 

management-networks used to negotiate and 

complete deals, for example at the automotive 

fair. As such, Karmann mostly cooperated 

with German OEMs for the manufacturing of 

automobiles in the 1970s and 1980s. Rooted 

in trust, long-time relationships and business à 

la “you scratch my back and I’ll scratch yours” 

characterized most of the deals. 

Trusting in the apparent assurance 

to be and stay market leader in the Seite page 71 

special niche segment of cabriolet 

production, the company was not 

bothered with fear for its existence during a 

long period, although the production of cabriolets 

always had to deal with fluctuations. In former



times it was not easy to embed the niche 

production, especially of cabriolets in larger 

production sites or assembly lines of OEMs 

with higher volumes. One interview partner 

expressed: “Cabrio production will provoke 

serious headaches, if it has to be implemented 

in OEM’s production sites. That’s why the 

OEM give it to contract manufacturers.” 

As far as foreign investments are concerned, 

Karmann used to be connected to investments of 

OEMs (for example: Volkswagen in Mexico 

and Brasil, Nissan-cooperation in England) 

but did not invest abroad on their own. They 

always produced abroad to realize a specific 

car production – as a kind of piggyback 

international production. 

Compared to the recent situation, several 

serious changes took place during the last 

five to ten years. The company’s heir left the 

company in 1990. A manager followed him, 

who again remained a comparatively long 

time and continued the business practices. 

But then more frequent personal changes in 

the management could be recorded. As the 

“business landscape” internationalized, the 

new executives have been less embedded 

in social and political networks or these 

networks have been very much expanded and 

internationalized. If there are new contracts, 

they are concluded in the context of complex 

treaties that require legal expertise. Technological 

change enables OEMs to produce 

niche cars and small production series 

Seite page 72 

within their own assembly lines. 

Simultaneously, the importance of 

system and module suppliers with 

high technological competitiveness grows. 

For contract manufacturing, Karmann could 

no longer rely on stability and certainty of 

following orders – new mechanisms of shorttime 

business relations, high flexibility, and high 

internationalization replace the old system 

of trust and long-term partnerships. The 

company tried to explore new ground after the 

year 2004/2005 and was “on its way east” with 

foreign investments on its own authority: two 

investments in Poland that are not piggyback 

with an OEM. One of the new Polish sites is 

connected with a contract for BMW in Leipzig 

but is not a contract manufacturier of a full 

vehicles but rather systems and modules. This 

might be interpreted as a prognosticator for the 

company’s following development. The Polish 

site is economicly and legaly independent from 

the other parts of the company and was erected 

to support an OEM under high cost pressure. 

The second site in Poland was founded as a 

tooling shop where Karmann wanted to realize 

low cost structures. However, problems already 

appeared in the early years of those sites: 

(Skilled) labour is rare, wages are higher than 

expected (and especially the growth rate of wage 

levels), institutional conditions in that country 

prove to be more difficult than assumed, the 

company laments organizational problems. The 

increase of transaction costs is enormous. During 

the last years, the company was unable to obtain 

new orders for the manufacturing of complete 

vehicles – regardless of the production site. The 

combination of OEMs being able to integrate 

small volume and niche production in their sites, 

“Standortsicherungsvereinbarungen” binding 

employment in the OEMs factories, and the 

opportunities for the OEM to build sites in 

Central and Eastern Europe to produce special 

products (for example Porsche together with 

Volkswagen: Cayenne in Bratislava, Slovenia) 

seems to be the “knock out” for the German 

contract manufacturer Karmann. Negotiations


with OEMs during the last years showed that 

the sites in Osnabrück and Rheine tried to 

compete with factories in Central and Eastern 

Europe (e.g. with Györ in Hungary / Audi). 

From an external perspective it is not possible 

to judge whether the wage conditions and 

production costs have been the most important 

and decisive criteria. 

The changes and problems described have 

serious impacts on the industrial relations: 

Workers’ councils are increasingly forced to 

accept conditions that they would not have 

accepted in former times. The threat to start new 

production sites at cheaper locations, especially 

in CEE, with cheaper labour determines the 

strategy of the workers’ council. Staggered, 

but similar to the changes in the company’s 

management, the leaders in the workers’ 

council have been replaced and bargaining 

routines have differed. Now, technical, skilled 

staff represents the workforce and has been 

transformed to a “co-management” without 

strong negotiation power. The downward 

tendency of the company has intensified the 

feeling of being powerless in terms of ensuring 

employment. 

4.4 Case Study 2. 

Magna Steyr in Graz is an affiliate of the 

Austro-Canadian mega-supplier “Magna 

International”. The company has a long history 

but changed its name: it was well known as 

“Steyr Puch” in former times. Originally 

founded as an arms manufacturer in 1864, 

it transitioned to a bicycle producer. Later, 

Puch was specialised in the production of 

motorcycles in 1901 shortly before it entered 

the automobile-manufacturing sector in 1904. 

After a merger with the German automobile 

company “Daimler” in 1928, the company 

was named “Steyr-Daimler-Puch AG” (since 

1935) and started to assemble vehicles ordered 

by different European automobile companies 

after the Second World War. In 1999, the 

Canadian Corporation “Magna International” 

took the majority of shares – meanwhile, 

Magna Steyr reached comparatively high 

volumes and was very successful with new 

contracts from a wide spectrum of OEMs. 

The Austrian contract manufacturer looks 

back on a long time tradition. Similar to its 

German competitor, it has strong regional 

roots but, likewise, records quite a few 

changes regarding the ownership structure. The 

interviews showed that, particularly during 

the last decades, the continuity of the Austrian 

management (as well the Canadian corporate 

management in persona Frank Stronach) 

and a quite flexible way of bargaining and 

finding specific solutions with the workers’ 

council and trade union form the framework 

for (new) strategies. This might be part of a 

“secret recipe”. Stemming from a “coordinated 

market economy”, strong industrial relations 

can be expected – but the way of negotiation, 

the bargaining method and interrelationship of 

politics, associations, corporate organizations and 

management executives might be characterized 

with “high flexibility”, pragmatism, and the 

ability to agree upon package deals. 

Magna Steyr thoroughly continued 

to maintain long time partnerships 

and cooperation with international 

OEMs but was never very much 

interwoven with one or more OEMs 6 . 

Seite page 73



Regarding its niche competence, the Austrian 

company has never had the assurance to be 

and stay market leader, although the company 

offers a special segment: the 4-wheel-drive. 

However, different from cabriolet production, 

this special engine technology could be 

integrated in the production lines of the OEM. 

They have nearly always been competitors 

for this production, so that Magna Steyr was 

in danger that OEM would undertake this 

production on their own. Taking a look at 

foreign investments, the Austrians “stayed at 

home” as far as production is concerned. The 

case study shows a surprising strategy: High 

quality services are transferred or established 

abroad while all production tasks remain in 

Austria. At first glance, this strategy may seem 

unrealistic and implausible. But reality shows 

that thoughts about relocating high quality 

services accompany foreign investments 

considerations – regardless of whether 

production will remain at the home-site 

(Rudas, Witzani & Fritzer-Posch 2003). 

Asked if they invest in Central and Eastern 

Europe, the interview partners express two 

statements. First, they affirm that the niche 

and low volume production of premium cars 

can only be done adequately with a skilled 

labour force and trusted workmen by using 

engineer support and experiences located 

close to the production sites. In the eyes of 

the interview partners, this is only the case 

in Austria. Second, an investment 

in Central and Eastern Europe for 

Seite page 74 

financial reasons is not needed, as 

supplier parts can easily be purchased 

from neighbouring countries (just 

a few kilometres from the headquarter in 

Graz). Beyond that, the company’s executives 

refer to the next migration trend far more east 

(because of rising labour cost, difficulties to 

recruit skilled employees…). 

Although it might be judged as “accompanying 

measures” that could be neglected, the institution 

of the “Automotive Cluster Steiermark” should be 

named. The Bundesland Steiermark initiated 

a relatively large-scale and financially wellsupported 

institution that provides collective 

goods specifically to the automotive industry. 

Leading companies are AVL List (an engine 

company) and Magna Steyr. Besides offers to 

meet staff from other companies in order to 

build business-networks, the effort to develop 

cluster-specific infrastructure, the cluster acts 

as a lobby for the Austrian automobile industry. 

The initiative finds acceptance, which is not 

self-evident, because the companies have to 

pay to be members of the cluster. Therefore, 

they staff the decision-making body and are 

involved in decisions about new initiatives such 

as the constitution of the automotive-specific 

cooperation of all Steyrian universities and 

research institutes to support the companies. 

Regarding all these aspects, one must 

emphasize that – compared to other European 

contract manufacturers - Magna Steyr proceeds 

and decides in a different role. As an affiliate 

there are opportunities to compensate. As an 

affiliate of a mega-supplier being part of a 

large corporation, the company can benefit 

from supplier-relations, utilize the corporate 

structure and take advantage of corporate 

decisions. Furthermore, interviews, reports and 

other sources basically rely on information from 

the “Magna era”. On closer examination of the 

company’s history, it becomes apparent that this 

contract manufacturer rather seriously starts to 

play in the concert of the European contract 

manufacturer since it became part of the Magna


Group. Decades ago, when the company traded 

under the name “Steyr-Daimler-Puch”, the 

interconnection with Daimler-Benz was highly 

visible and formative. 

5. CONCLUSION 

Not only are the national boundaries literally 

crossed in the course of companies’ investments 

in Central and Eastern Europe, the case studies 

show that Central and Eastern European 

countries are highly competitive regarding 

the quality and highly skilled production 

and have crossed the boarder that divides 

production regions in “low cost” in terms of a 

cheap subcontractor (“verlängerte Werkbank” 

in German) and “high cost” countries. This 

region is no longer (if it even ever was) solely a 

low cost production region for the automobile 

industry. Of course, parts of the 2 nd -tier or 3 rd - 

tier supplier industries can be found in CEE 

and might still realize cost advantages, but 

with regard to more complex manufacturing 

processes, a different picture must be drawn. 

The case studies show that, as the companies are 

part of the premium segment of the automobile 

industry, low-cost production might not be an 

adequate option. As OEMs invest in Central 

and Eastern Europe – also in the premium 

segment, as the examples of Porsche, BMW and 

Daimler show – these countries have become 

serious alternatives to Western European 

production sites. Karmann exported production 

to be able to leave high skilled engineering 

services at their home site. However, for this 

German contract manufacturer it is obvious 

that last year’s investments abroad caused 

(transaction) costs that must be compensated 

by appropriate savings on labour costs, both 

in the past and present. This target seems 

to be hardly achievable when a company 

has started to invest in Central and Eastern 

Europe during the last five years with the 

objective to start low cost production. On the 

contrary, especially the acceding countries to 

the European Union became attractive sites as 

far as quality production and the involvement 

of skilled labour is concerned. As an affiliate of 

Magna International (Canada), Magna Steyr 

relocated high skilled engineering services 

to different countries to keep production 

in Austria. The company did not decide to 

outsource production to Central and Eastern 

Europe. Of course, the proximity to this region 

from the Austrian site in the “Steiermark” 

might be an argument, as supply parts are quite 

easy to purchase from supplier companies in 

the Eastern European neighbourhood. I argue 

that relocation of production is controversial 

and has to be judged critically. As far as 

automobile manufacturing is concerned, CEE 

is no “cheap region” or low cost region in a 

broader sense. It is not the institutional setting 

that determines the competitive strength of 

the contract manufacturers or hinders their 

success (for example regulations in coordinated 

market economies). Rather the company’s 

configurations, its financial background, the 

continuity of cooperation with OEM and – 

although from an academic perspective this 

might not be satisfying – serendipity 

are decisive. 

Seite page 75 

Returning to the conceptualizing 

approach of Beckert regarding the 

constitution of the market, the case studies 

exemplify how and why the balance of actors 

and their competence to solve the “value



problem”, “problem of competition”, and 

“cooperation problem” is disrupted. Insofar 

the developments in the automotive sector can 

be operated as counterevidence, the market 

for independent contract manufacturing – as 

it existed during the last century - nearly 

collapses. A specific segment of the automotive 

industry may survive by changing its role and 

becoming a 1 st tier supplier, giving up the 

contract manufacturing by being taken over by 

or purchasing an OEM. With regard to the 

new capitalist states in Central and Eastern 

Europe, it can be identified that they have 

the capability to meet all requirements of 

the automotive industry. Yet concurrently 

they might loose their status as “verlängerte 

Werkbank” or as a cheap manufacturing base 

and may subsequently have to develop an 

equal production and development place of 

location. 

A second concluding remark refers to the 

VOC-debate. Even if the two cases are small 

aspects, a narrow picture and just a small 

part of the automotive industry, they may 

be appropriate to question the similarities of 

coordinated market economies. The German 

case illustrates how a traditional and regional 

(rooted) company can tend and adhere to 

well known and long established routines 

and institutions. As assumed before, the 

cooperation-partners of that company stick 

to these familiar routines as well. 

In the light of these diagnoses, the 

Seite page 76 

company’s investment in Poland 

produces the impression of a flight 

forward. The traditional routines and 

reliabilities of the management seem to be 

broken, even if the institutional surrounding 

did not change markedly. At first sight, the 

second case might not be a typical Austrian case 

– primarily because it should be titled Austro- 

Canadian correctly – but the specificities that 

can be identified with regard to industrial 

relations and inter-firm relations are nearly in 

line with the idea of the “coordinated market 

economy”. Heretically, their “interpretation” 

and performance of industrial relations might 

be seen as betrayal of labour. From a pragmatic 

perspective, the case shows an example of how 

to save employment and continue to keep 

industrial production in a so called high-cost 

country. 

The link between the case studies and the 

chosen theoretical background shows a 

balancing act with some weakness, but may 

frame the question and presentation of the case 

studies in an appropriate way. 

The differences regarding investments in 

Central and Eastern Europe are hard to judge. 

In addition to a certain degree of coincidence, 

the proximity of the Austrian company to 

Central and Eastern Europe might be an 

easy explanation. To benefit from attractive 

cost structures as far as supplier-goods are 

concerned, the company does not have to 

invest abroad but rather can purchase in 

the neighbourhood. Moreover, it might be 

in a closer relation to get information what 

earnings and benefits are realisable effectively. 

The mixture of competitive labour force, skilled 

workers and engineers, public collective goods 

and less unionized labour force is still very 

attractive for industrial production.


NOTES 

1 

E.g. industrial relations, institutions of vocational training, 

corporate governance structures, institutions to support intercompany 

relations. 

2 

I.e. leading companies such as Volkswagen, Renault, Fiat, 

Toyota, General Motors and Ford. 

3 

If the current developments (of the last weeks) are excluded, 

the segment of European Contract Manufacturers consists of 

six companies: two from Italy, and one from Finland, France, 

Germany, and Austria, respectively. They are all automobile 

producers “without an own brand” – they produce automobiles in 

order of the European or US-American (rarely and under special 

conditions Asian) OEMs. 

4 

The author is aware of the background of this book. It is published 

as “Begleitforschung” (translation: accompanying research) 

and is taken into account with care because of its proximity to the 

sponsor (Volkswagen). 

5 

These sources are not specifically noted in this paper. 

6 

This is the case when we are strictly referring to Magna Steyr. 

The merger with Daimler (Steyr-Daimler-Puch) must be evaluated 

differently. 

Seite page 77



Seite page 78 

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AUTOMOTIVE MNCS IN CENTRAL EUROPE 

5 

AUTOMOTIVE MNCS IN CENTRAL EUROPE: 

THE ENTERPRISE AS A SOURCE OF COMPETI- 

TIVE INDUSTRIAL CAPABILITIES 

Employment stability based on the administratively 

set output targets was a 

key feature of state socialist production 

regime. A shift from state socialism to market 

economy in this context meant an adaptation 

of employment and production numbers to 

‘market demands’ and market prices. In market 

economies, the volatility in product demand 

can imply an increased ‘flexibility’ of production 

and, thus, employment levels that could 

endanger employment stability. Thus, with the 

introduction of a market economic rationale, 

state socialist non-economic enterprise institutions 

have been challenged by the new logic of 

market-driven efficiency and competitiveness. 

The combination of private ownership, pressures 

of international competition and the increased 

role of cost efficiency were expected to 

contribute to making enterprises focus more on 

their economic competitiveness as the first and 

dominant measure of enterprise performance. 

page 80 

Alexandra Janovskaia 

State withdrawal from the production 

process and the arrival of foreign owners were 

associated with a larger focus on profitability, 

the new desired field of managerial action. In 

other words, these reforms characterised by a 

strong purposeful rationality considered social 

relations in the enterprise as means, not ends 

of social action. However, this paper argues 

that despite important institutional changes in 

the structure of markets and firm ownership, 

preserving industrial capabilities has remained 

an enterprise norm for local actors, an end in 

itself. Thus, an understanding of the enterprise 

as a social organism and a source of industrial 

capabilities remains alive. Despite the new 

institutions of increased competition, the 

expectation of an enterprise commitment to its 

employees survived from state socialist era to

ALEKSANDRA JANOVSKAIA 

the present day. This commitment is associated 

with what I call a ‘productionist stance’ of 

local actors. It is embedded in their desire to 

preserve employment numbers and develop 

local industrial capabilities, even if it sometimes 

goes contrary to the pure logic of cost efficiency 

and financial competitiveness. 

In the four VW subsidiaries that served as a 

case study for this paper – the Czech Skoda, 

Slovak VW Bratislava or VW Slovakia, Polish 

VW Poznan and Hungarian Audi Györ - an 

important industrial upgrading took place 

during the late 1990s and early 2000s in 

production volumes but, most importantly, in 

production depth, product range and strategic 

positioning within the VW Group. It also 

related this industrial upgrading to a dramatic 

increase in employment volumes in all four 

subsidiaries. To a certain extent, this industrial 

upgrading and employment increase have been 

part of the overall group’s strategy, which largely 

depended on decisions about transnational 

distribution of production volumes and 

technology investments mainly made in the 

VW Group headquarters. Yet I was able to 

identify an important role of local stakeholders 

in this process. The valuation of the industrial 

capabilities has been an important factor for 

industrial upgrading and employment growth. 

Despite the new ‘market’ organising logic 

of greater efficiency and increased market 

competition, local management has preserved 

a clear ‘productionist’ attitude in its desire to 

attract more investment to the production 

location, ensure production over time and 

upgrade. This ‘productionist’ norm is rooted in 

the experience of state socialism. Its overarching 

goal has been to develop local capabilities and 

make companies a full-fledged partner within 

the VW group. Both local unions and local 

management have shared this productionist 

attitude. Local managers were looking for 

German know-how to modernise their plant, 

but they still perceived it as their main task 

to ‘develop’ the company. Thus, whenever the 

opportunity emerged, local managers, together 

with unions, showed through their actions that 

high employment and industrial upgrading 

remained their highest priority, while market 

efficiency rationale remained a secondary 

factor. 

The rest of this paper develops this 

argument further. Several dimensions of 

this productionist attitude are brought out. 

First, stakeholder attitudes and strategies of 

preserving the industrial capabilities at the 

time of privatisation are discussed. The role 

of local coalitions between government and 

unions as guarantors for brand survival for the 

case of Škoda is discussed. Second, Section 

II disentangles the productionist logic that 

underpinned the actions of the stakeholders, 

while Section III elaborates the formal 

agreements between management and union 

representatives that followed this implicit 

coalition. The last section underlines the role 

of the external dimension – the role of public 

opinion – in strengthening and reinforcing 

the local ‘productionist’ commitment to firm 

industrial capabilities. 

This paper argues that the organis- 

page 81 

ing logic of economic liberalism of 

increased cost-efficiency and financial 

performance standards affected the firms 

when the institutions of ownership and control 

changed. Yet the local norms that set up the


firm as a source of valuable industrial capabilities 

remained alive. These norms imply a local 

commitment to the preservation of industrial 

capabilities independent from pure market efficiency 

and competitiveness logic. Thus, the 

norms related to economic liberalism have 

been challenged by the other, non-economic 

enterprise norm that partially goes back to a 

state socialist enterprise function. The result 

of this constant tension between the organising 

logic of efficiency and competition, on the 

one hand, and the value of industrial capabilities, 

on the other, is that the firm continues to 

function as a source of competitive industrial 

capabilities. 

I. STAKEHOLDER COALITION FOR BRAND 

SURVIVAL 

The system of state socialist central planning 

was characterised by the fact that resource 

allocation took place through political decisions 

rather than being driven by the economic 

rationale of the price mechanism, resource 

scarcity and cost efficiency. With the regime 

change, direct political allocation of productive 

resources disappeared and the ‘market rationale’ 

officially entered the scene either anew or less 

disturbed by ‘social intervention’ in countries 

such as Hungary where certain market 

reforms were already implemented earlier. In 

the company context, the new market 

rationale meant three things. First, 

page 82 the links to the Communist Party 

were dismantled. Second, politicallyoriented 

setting of production 

volumes and prices stopped as production 

orders were left to ‘markets’, which meant that 

only orders from customers who were ready 

to pay in the hard currency at ‘market’ rather 

than at the subsidised rates would be taken. 

Finally, the state withdrew from the ownership 

structures by privatising the previously stateowned 

enterprises. 

However, despite the new dominant logic 

of market efficiency that was established 

in the early years of post-communism, the 

company level reality was more complex. The 

new organising logic of economic liberalism 

formulated and defended by the new political 

elites did not penetrate the companies overnight 

and did not make the previously existing norms 

and commitments towards the enterprise 

disappear completely. In an environment of 

high uncertainty, a medium- and long-term 

‘market value’ of enterprises and their viability 

in the future was unclear, yet decisions still 

had to be made. The governments and other 

stakeholders such as managers and trade 

union leaders needed to decide which existing 

industrial projects were viable for the market 

economy environment. It is in these decisions 

that the desire of stakeholders to preserve the 

existing industrial capabilities despite financial 

difficulties can be identified. 

At first glance, market-oriented rationale 

entered the scene in a very prominent way: 

financial viability of entrepreneurship became 

a crucial factor considered by stakeholders. 

In 1990, it was acknowledged by many that, 

economically, Škoda was not a viable company 

as it had large debts, declining sales and 

falling orders. Due to high debts, the company 

was unable to take out new loans that were 

urgently needed to pay day-to-day operations 

and the suppliers of components. There were 

voices among the Czechoslovak public that


suggested abandoning car production in 

favour of automotive components for foreign 

car producers (Pavlínek 2008: 80). Also, the 

government, as company owner, did not want 

to take a high financial risk and the option of 

government-led restructuring of the company 

and its subsequent privatisation were ruled out 

due to the fact that neither the government nor 

the banks were ready to guarantee the capital 

needed, despite the fact that the domestic and 

foreign demand were estimated to be far above 

production capacity (Pavlínek 2008: 80). Thus, 

Škoda was a troubled company with its East 

European markets collapsing; its financial 

position was close to bankruptcy. 

Yet market-oriented rationale has been 

restrained by non-economic organising logic. 

Thus, already during the privatisation process, 

next to the market-oriented logic of cost 

efficiency and market pricing, a ‘productionist’ 

attitude of local stakeholders has become visible. 

Industrial traditions and industrial capabilities, 

rather than pure financial returns-oriented 

thinking, were important to local stakeholders. 

Due to its over 100-year-old history, Škoda’s 

reputation as a ‘family jewel’ was strong. It 

gave stakeholders the legitimacy to demand 

a continuation of firm activities. A foreign 

partner that would enter the joint venture was 

expected to invest in the company in order 

to improve quality and expand production 

volume (Pavlínek 2008). Thus, the solution 

of joint venture can, in this light, be seen as 

a compromise of the two logics – letting the 

‘market forces’ in the form of a foreign investor 

enter the scene, while at the same time ensuring 

the survival and preservation of already existing 

local industrial capabilities. Thus, Škoda’s 

example demonstrates that local stakeholders 

valued the company as a source of industrial 

capabilities and wanted to preserve these. 

The dramatic financial situation of Škoda might 

even explain the eagerness of the Czechoslovak 

government to privatise such an important 

industrial project at such a fast pace. In other 

Visegrad countries, if important industrial 

projects existed, they were either privatised 

but remained in domestic ownership, as in 

the case of Hungarian industrial giant Raba, 

or they were privatised much later following 

prolonged negotiations and a search for the 

‘right’ partner, as in the case of Polish FSO. 

Thus, a comparison across national borders 

allows us to conclude that Škoda’s foreign 

privatisation in itself can be interpreted in 

this context as evidence of the ‘productionist’ 

logic, as marketisation through privatisation 

had as its final goal the strengthening of the 

company’s industrial capabilities. 

Large-scale government-led restructuring 

plans and with them more advantageous 

valuations of companies were ruled out 

quite early in the three cases of brownfield 

investments analysed in more depth in this 

study: Czech Škoda, Polish Tarpan and Slovak 

BAZ. In the case of Škoda, the government 

demands went furthest. This is what makes us 

focus on Škoda’s privatisation in the rest of this 

section. These demands went beyond general 

investment demands and covered, 

among other things, preservation of 

the Škoda brand. Yet why were these 

page 83 

advanced ‘productionist’ demands 

for preserving industrial capabilities 

formulated and followed in Škoda, but not in 

its former supplier Slovak BAZ or in Polish 

Tarpan? The explanation has to do with the


power balance and a perceived more prominent 

role of the government in the negotiations for 

Škoda: the local stakeholders were perceived 

to be in a stronger bargaining position 

when selling their ‘family jewel’. Focussing 

on the company’s medium-term industrial 

capabilities, the stakeholders were confident 

that Škoda’s reputation and its position in 

international markets were good: a large share 

of Škoda cars were sold abroad and thus Škoda 

was considered by stakeholders to be able to 

pass ‘the test of markets’. 

Yet, also non-economic rationales have been 

important for Škoda’s stronger negotiating 

position. Its reputation was strengthened by 

the fact that Škoda was among the few East 

European car brands that had home-grown 

technological developments – many other state 

socialist car brands had to buy the technology 

in the West. The introduction of its last 

model in the late 1980s strongly contributed 

to a significant improvement of its previous 

international image of a low cost, low quality 

car: introduction of Favorit ‘narrowed the gap 

between Škoda and its Western competitors in 

the class of small passenger cars so that Škoda 

could offer a (potentially highly) competitive 

product’ (Pavlínek 2008: 75). Thus, privatising 

the ‘family jewel’ with long industrial traditions 

guaranteed a strategically strong position for 

the government to formulate high demands 

on the foreign investor. In other 

plants, the local stakeholders in and 

page 84 outside of the plant were perceived 

to be in a weak bargaining position 

in relation to the foreign investor: in 

Slovakian BAZ and Polish Tarpan the strategic 

importance of the plants was considered 

low. VW group is argued to have found out 

about the BAZ supplier plant only during 

government negotiations concerning Škoda. As 

a manager in VW Slovakia explained: ‘we did 

not have Škoda’s hundred years of industrial 

history, this plant was relatively new’ (Interview 

March 2007). Thus, it is only in Czech Škoda 

where local stakeholders such as management, 

but even more importantly trade unions and 

government, could have a strong influence 

on the privatisation process; in the two other 

brownfield locations and, of course, in the new 

greenfield Audi Györ plant the new foreign 

owner was dominant. 

Two rationales dominated Škoda’s early partial 

privatisation. First, it was driven by the desire 

of local stakeholders - within the company as 

well as in the government – to preserve local 

industrial capabilities with the help of foreign 

investors in the short-term. Apart from having 

high debt, practically no long-term investment 

capital and thus no chances of being able 

to compete in international markets, Škoda 

even lacked financing to keep up day-today 

production (Pavlinek and Smith 1998). 

Sperling believes that: 

[T]he government of Czechoslovakia […] was 

of course interested in continuing the production 

activities of Škoda as a foundation for future 

economic development under the conditions, 

although the Czechs involved knew too well that 

Škoda would not survive in the changing and 

more competitive markets without some form of cooperation 

with Western manufacturers (Sperling 

2004: 184). 

The situation of Škoda’s suppliers was also 

critical given the following considerations: if 

Škoda went bankrupt, the suppliers would have


to share its fate. At that time, Škoda had 237 

domestic suppliers. Its bankruptcy, therefore, 

would have had a high impact on the regional 

economy (Pavlínek 2008: 80). 

However, the time dimension is very important 

for the understanding of this privatisation 

strategy. Foreign investors were perceived by 

the public and the government as a solution 

for the company’s short-term survival, but also 

as a guarantor of the long-term prosperity of 

the company as well as the regional economy 

as a whole. Thus, these so-called ‘strategic 

privatisations’ were not only motivated by the 

short-term financial returns. Preserving the 

existing industrial capabilities – even if they were 

weak and not up to international competition at 

that moment – was considered crucial because 

preserving industrial traditions was a symbol of 

continuous economic development. It is in this 

context that foreign investors were considered 

as ‘saviours’ of local companies and guarantors 

of long-term enterprise success. 

The role of government was important, as it 

could dictate the conditions of the joint venture. 

The preservation of the Škoda brand was a 

precondition for privatisation. It was explicitly 

expressed in the privatisation negotiations, 

together with other demands such as 

maintenance of the labour force, continuation 

of relations with local suppliers, continuation 

of R&D activities and Czech participation 

in company’s management ( Jung, Klemm et 

al. 2004). The choice of the foreign partner - 

the VW group - was thus made dependent 

on the condition of preserving the industrial 

capabilities of the enterprise. The other foreign 

bidder for Škoda was Renault, yet this major 

French car manufacturer was not interested in 

preserving and developing Škoda’s industrial 

capabilities: ‘to opt for a co-operation with 

Volkswagen was the credible commitment 

of Volkswagen to keep Škoda as a brand 

manufacturer coupled with the promises of 

major modernisation’(Sperling 2004: 184). 

The joint venture agreement signed between 

the VW group and the Czech government 

in April 1991 explicitly stated the level 

of expected investment on the part of the 

German investor and the future production 

capacities. It also included clauses concerning 

Czech components producers and Škoda’s 

employees (Pavlínek 2008). These numerous 

special clauses were developed by government 

officials and were one of the first expressions 

of government stakeholders before a more 

formalised process of privatisation was 

established. As Pavlinek (2008: 86) points out, 

it was only several months after drafting the 

Škoda joint venture agreement that the Czech 

Ministry for National Property Management 

formulated a directive that set out how 

privatisation projects should look. 

Yet the joint venture plants were made by 

government officials in cooperation with 

the management and trade unions, and not 

against their will. The role of Škoda’s direct 

stakeholders - i.e. management and trade 

unions - in the privatisation decision was 

crucial. Local management supported 

the idea of a joint venture with 

a foreign company: ‘as a leading 

page 85 

industry in Czechoslovakia and based 

on past trade experience with Western 

partners, the Škoda management quickly 

realized that drastic measures needed to be 

taken if the company was to survive under the


pressure of competition with Western auto 

producers’ ( Jung, Klemm et al. 2004: 206). 

The role of local unions was also crucial for 

the choice of the foreign partner. Despite the 

original preference of government officials and 

the broad public for Renault, Škoda unions 

persuaded the government to select VW 

as the preferred candidate (Pavlínek 2008). 

They voted against cooperation with Renault 

fearing downgrading and loosing the status of 

an independent brand. Volkswagen’s previous 

fair treatment of the SEAT – keeping it as 

independent brand – gave Czech stakeholders 

more confidence that VW promises would be 

kept. Union representatives also supported 

the German bidder due to strong industrial 

relations in Germany (Sperling 2004: 185). 

Renault, on the other hand, ‘was seen as a 

state company and, hence, not the appropriate 

partner for the privatisation process, in which 

the main challenge Škoda faced was overcoming 

the deficits created by the period as a state 

company’ ( Jung, Klemm et al. 2004: 207). 

Thus, unions were an important stakeholder in 

this choice of the foreign investor. It was with 

the agreement of Škoda’s management and 

unions that the foreign investor was chosen. 

Preserving the labour force was part of the joint 

venture agreement between the government 

and the VW group. Despite a very large 

headcount, the majority of employees were 

taken over. The fact that high levels 

of employment - around 15,000 

page 86 employees in the early 1990s – were 

preserved was a direct consequence of 

stakeholder demands. In the Slovak 

BAZ that then became VW Bratislava, on the 

other hand, the influence of local management 

and government backing were much weaker. 

As a consequence, a very different employment 

strategy was chosen: all ‘old’ employees were 

laid off and had to go through re-hiring process. 

The company restarted with 400 employees in 

1992 (Interview March 2007). Also, far fewer 

privatisation conditions from the government 

side were formulated. 

As the VW group experienced a crisis in 1993- 

1994 and announced a reduction in production 

numbers, lower level of investments and overall 

much more modest investment approach – so, 

for example, no new engine factory was going 

to be built in Škoda despite the original promise 

– the Czech government took an active stance 

to protect regional industrial capabilities. It 

requested an addendum to the existing joint 

venture agreement that would clearly stipulate 

the group’s continuous commitments towards 

Škoda. Although the investment levels stated in 

the document signed in November 1994 were 

more modest than in the original agreement 

of 1991, it was the government’s goal to 

have a formal commitment of the German 

investor to its Czech investment project. The 

state also gained the right to participate in 

‘all fundamental decisions regarding the joint 

venture and a veto power over any decision 

that would dramatically affect Škoda’s activities 

until December 1999, when the VW group was 

planning to buy the remaining shares of the 

company’ (Pavlínek 2008: 90). The government 

also added an additional protection for the 

Czech suppliers in the agreement: once able to 

compete with other suppliers, local component 

suppliers had the right to supply the whole 

group. 

What could be demonstrated by the example 

of Škoda is a general pattern of several


organising enterprise logics being at work; 

sometimes in conflict with each other but 

sometimes supporting each other. The main 

demands to the foreign investor were related 

to the non-economic enterprise logics of 

brand preservation, employment guarantees 

and modernisation of the company, yet market 

organising logic has also been visible. It has 

been the means to reach the non-economic 

ends. Applying this economic logic and 

‘second guessing the markets’ allowed Škoda 

stakeholders to take a much stronger stance 

vis-à-vis the foreign buyers during the joint 

venture negotiations. 

The valuation of the enterprise as a social and 

industrial organism went against other sets 

of non-economic norms. For Czechs, such 

other non-economic logic was the strong anti- 

German sentiment related to World War II. 

Thus, the transfer of Škoda’s ownership to the 

VW group caused some controversies in the 

Czech public during the time of privatisation 

talks (Sperling 2004). But also on the German 

side, different organising logics co-existed. 

Even if the warnings about a potential 

cannibalisation of the main Volkswagen brand 

that focuses on good quality but more expensive 

family sedans by the re-emerging Škoda brand 

were expressed, non-economic organising 

logics have prevailed. The respect for industrial 

capabilities of Skoda engineering tradition has 

been stronger than the fear of cannibalisation 

of the main VW brand. Even today, when 

the evidence of certain cannibalisation of the 

German production is large, this issue is hardly 

discussed and, as Sperling argues, ‘denied by 

the group itself or made to appear harmless’ 

(Sperling 2004: 187). 

This section attempted to demonstrate how 

during the privatisation process, despite several 

economic and non-economic logics playing 

a role, the non-economic organising logic 

that conceptuliased enterprise as a source of 

industrial capabilities has been crucial. Škoda’s 

privatisation has been an example of local 

stakeholders - managers, trade unions and 

government officials - becoming a coalition 

for protection of local industrial capabilities. 

II. THE NEW COST EFFICIENCY GOALS RECON- 

SIDERED 

During state socialism, company goals were 

expressed in units of production output. With 

the joint venture, these non-economic goals 

were supposed to be replaced by other, more 

market efficiency-oriented targets. But how 

has this change towards new company goals 

taken place and what exactly are the new 

company performance goals? 

Formal administratively set production output 

goals were replaced by cost efficiency and 

productivity goals. Financial targets and cost 

monitoring became a higher priority for local 

management that received responsibilities 

of ‘profit centres’ within the VW group. 

The cost goals are set in cooperation with 

the headquarters and play a decisive role in 

companies’ affairs. A finance director 

at VW Slovakia explained that 

the company is ‘managed through 

page 87 

these cost goals’: the company 

has performance and profit goals 

(Interview March 2007). Also, the internal 

cost benchmarking has become a norm. 

There exists comparative data on production


costs per hour across the group and this data 

is communicated to all subsidiaries. Thus, 

even among ‘low cost’ production sites of 

Central Europe, the headquarters try to build 

up competition. As a consequence, greater 

attention is devoted to monitoring production 

costs. At Audi Györ, the works council leader 

stated that ‘We cannot go above 10 euro 

[per hour] if we want to remain competitive’ 

(Interview August 2007). In addition to 

the continuous benchmarking, the tender 

system of the VW Group that is comparable 

with that in most other large automotive 

MNCs requires subsidiaries to apply for new 

models and, thus, represents an additional 

pressure of cost-efficiency for companies. ‘The 

competition for new models within the group 

is very, very strong. For each new model we 

need to apply, there are three criteria: quality, 

costs and flexibility’, stated the HR director in 

VW Slovakia (Interview March 2007). 

Credit institutions impose further ‘hard budget 

constraints’. They lend money to the VW 

subsidiaries for investment projects. These loans 

can be taken without headquarters’ permission. 

Thus, normally, no inter-company credits take 

place, but loans are taken from private or semipublic 

banks. Thus, in case of VW Slovakia, 

these banks have been the European Bank of 

Reconstruction and Development (EBRD) 

and a number of private banks (Interview 

March 2007). The manager was 

happy to announce that all debts of an 

page 88 enormous investment – 1.53 billion 

euro over 15 years - have been paid 

back by 2006 (Interview March 2007). 

Furthermore, the modern auditing concepts 

common in market economies such as balance 

sheets and own capital ratios have become 

widely used (Interview March 2007). Thus, 

the level of financial accountability, but also 

of financial pressures, increased substantially 

to make the previously existing soft budget 

constraints disappear. 

Productivity pressures that also come from 

headquarters’ benchmarking are a further 

dimension of the new organising logic of 

cost efficiency. Productivity increases are fixed 

every year, often they are set quite high. Fixing 

expected productivity increases at the level of 

inflation is justified by arguing that the wage 

increases are covered by inflation increases 

without jeopardising the financial stability of 

the company (Interview March 2007). The 

consequences of these pressures are a greater 

emphasis on optimisation and efficiency at 

work. A line manager from production unit 

explained: 

Of course, productivity does not only depend on 

production process, but also on design and the 

nature of parts and construction. However, the 

part of production process and the assembly line is 

important. Less mistakes are made, less cars need 

to go into repair. […] The group’s goal is a ‘first 

in’ quote of 95%, at VW Slovakia this quote has 

been 90-95%, sometimes 80% (Interview March 

2007). 

Also in Škoda, there has been a clear change in 

the narratives of management; it underlines a 

new orientation ‘towards achievement, quality 

and efficiency’ ( Jung, Klemm et al. 2004: 208). 

The narratives of constant improvement of 

work organisation have become widely spread. 

Thus, in Škoda, management introduced the 

‘Škoda production model’. The predecessor of it 

was ‘fractal production organisation’, a German


inspired version of the lean production system 

introduced in Škoda in 1994 with a new model 

Felicia. Apart from following the philosophy of 

continuous improvement, the idea behind the 

fractal – modular – organisation of production 

was to make the production process more 

transparent by improving information flows 

and more flexible by dividing production in 

modular groups (Pavlínek 2008: 95). In other 

VW subsidiaries, no ‘extra’ names were given, 

but new practices of work organisation have 

been introduced in all plants since the mid- 

1990s. The idea of continuous improvement 

is known and referred to. KVP Kaskaden 

– ‘continued improvement workshops’ in 

product and process exist where team leaders 

from assembly lines come together with 

engineers and specialists from industrial 

engineering to propose things ‘to make their 

work better’. Similarly, a production manager 

in VW Slovakia argued that ‘there are always 

still reserves that can be optimised: material, 

reduction of work errors, maintenance, non 

ergonomic movements’ (Interview March 

2007). Just-in-time working practices are 

omnipresent: in many cases ‘system suppliers’ 

deliver their products directly to the assembly 

line. The manager at VW Slovakia referred to 

them as ’Just-in-sequence’, an expression that 

implies an even faster turn-around, as delivery 

times are very low, usually two hours (Interview 

March 2007). Similarly, in Škoda, delivery times 

are two to three hours. The visible consequences 

of this clear shift to a lean production-oriented 

work organisation have been an increased level 

of work effort required and an increased work 

pace. The director of the sport utility vehicle 

(SUV) production at VW Slovakia confirmed 

that ‘turnover is high, qualified people are going 

away: work at the assembly line is hard, people 

prefer to work in the repair shop rather than 

on the assembly line’ (Interview March 2007). 

Yet the development of tougher productivity 

and cost efficiency benchmarks is subject to 

certain limits set by the productionist focus 

and by the commitment to local industrial 

capabilities that has been preserved in the 

Central European VW subsidiaries. Next to 

embracing the logic of ever higher productivity 

and cost efficiency, from the beginning of this 

joint venture, the non-economic organising 

logic has also been an important rationale for 

local management. At the core of managerial 

thinking are ‘productionist’ variables related to 

employment, industrial upgrading, and product 

quality as well as engineering and technical 

proficiency. They matter to stakeholders 

regardless of their cost-efficiency. Two phases 

can be distinguished in the evolution of the 

VW subsidiaries: the early 1990s to mid-1990s 

and the late 1990s to mid-2000s. During the 

second phase - from the late 1990s to early 

2000s - the technological and organisational 

upgrading took place. The following paragraphs 

elaborate how during both phases the role of 

‘productionist’ variables remained important 

for local stakeholders. 

During the first phase in the early 1990s, the 

process of adaptation was most intense. It is 

especially during the early period of special 

‘hardship’ and restructuring where 

the objectives related to employment 

levels can be identified easily. During 

page 89 

this early phase, the policies of 

employment pursued directly during 

and after the privatisation are telling. During 

the early 1990s when production numbers 

were low, employees were to a large extent


kept on board at Škoda, at least the ‘core 

workers’. In 1994, restructuring of production 

organisation meant that 800 Czech workers 

and a much larger number of foreign workers 

lost their jobs. Among these foreign workers 

were 800 Cubans, 700 Poles and more then 

1,500 Vietnamese (Pavlínek 2008: 97). Yet 

these large lay-offs have still been relatively 

small in relation to the overall headcount of 

15,000 and 17,000 in the early 1990s. Thus, 

labour hoarding, even if at a much smaller 

scale in comparison to state socialist times, 

was still partially preserved. Also, during the 

second phase, examples of temporary ‘labour 

hoarding’ still exist. Thus, at Audi Györ, during 

the periods of model change when production 

volumes are low due to technical restructuring 

of the assembly line, the company could afford 

to keep employees on board. 

The second phase of company developments is 

associated with industrial upgrading and, thus, 

with another type of ‘productionist’ enterprise 

norm. VW group’s internationalisation 

strategies in all four production locations 

intensified in terms of investment volumes, 

production and employment numbers that 

went together with industrial upgrading. For 

Central European managers, the importance 

of engineering and technical proficiency has 

been at the heart of this modernisation process. 

In Škoda, introduction of the Octavia model 

in 1996 was described as a crucial 

moment despite the fact that the 

page 90 joint venture has been in place since 

1991 and two early models - Felicia 

and Favorit - were already produced 

in cooperation with German headquarters. 

These two commonly developed models still 

had some elements of the original Škoda 

design and technology, but local managers 

did not express any regret about them being 

replaced by Volkswagen technology (Interview 

December 2006). The technical and engineering 

supremacy of German know-how definitely 

seems to have priority for local managers. 

International comparative benchmarking 

techniques such as Harbour Report, which 

compares data of productivity and efficiency, 

are familiar to the production management; but 

when confronted with relatively ‘bad’ results for 

VW group on financial and productivity figures 

from the Harbour Report, Škoda management 

did not see a big problem (Interview December 

2006). The director for industrial engineering 

explained that the low productivity figures of 

Central European VW subsidiaries can be 

explained by low levels of automation. Thus, 

the role of comparative benchmarks in labour 

costs does not seem to be high. When costs are 

evoked, they are used to justify ‘productionist’ 

decisions such as keeping a high headcount: it 

is acknowledged that the share of labour costs 

in Central European automotive production is 

relatively low. In Škoda’s case it is 20-30% of 

total production costs, which is significantly 

lower than the share for the VW group as a 

whole (around 50%). It is argued that employing 

people is cheaper and more flexible than using 

machines. These would need to be replaced, 

while people can adapt. This fact allowed for 

the retention of a high headcount (Interview 

December 2006). A similar argument has been 

developed by the HR director of VW Slovakia, 

who argued that ‘The sophisticated cars that 

we produce here demand a lot of manual work 

and manual work is cheap in Slovakia’. He also 

explained that: ‘One reason for low automation 

is that we wanted employment. [..] Ten years


ago employment of people was priority number 

one. At that time, unemployment was very high 

in Slovakia - 20-30%’ (Interview March 2007). 

A clear indicator of managerial ‘productionist’ 

attitude has been its desire of medium-term 

modernisation of the plants: the goal has been 

to attract more investment to the production 

location, ensure production over time and 

upgrade the facilities from low value added 

to high value added. The overarching goal has 

been to develop local capabilities and move the 

company’s position within the group from the 

periphery to the centre. In Škoda, improvement 

in the quality of production has been described 

by insiders as one of the crucial reasons for 

success. The second reason stated has been the 

recognition of the plant as a mature partner 

within the VW group (Interview December 

2006). Thus, despite the growing importance of 

short-term cost efficiency pressures, the focus 

on technology and production quality remains. 

Responding to the question whether the 

financial side has become more important than 

the production side, the top finance manager at 

VW Slovakia, responded: ‘No, I cannot say that 

this is the case. The production and quality still 

matter. The allocation of production resources 

could have been different’ (Interview March 

2007). Thus, despite a shift towards the logic 

of cost efficiency, the financial parameters 

still have not completely replaced mediumterm 

goals of production and employment 

parameters in managerial thinking. 

A clear desire to build up local research 

capabilities has also been emphasised. Even if a 

large part of innovation know-how is imported 

from the headquarters, especially in the field of 

process innovation, the role of local managers 

is not negligible. Even if local decision makers 

are not fully autonomous, process innovation 

still takes place (Interview December 2006). 

Thus, the director for industrial engineering 

at VW Slovakia was proud to report examples 

of process innovation that were introduced in 

his company. Thus, for example, the concept of 

‘supplier basket’ was introduced in his plant to 

deal with variety and complexity of the vehicles 

constructed at the same assembly line. 

Union representatives – together with 

management – also continue to share a strong 

‘productionist’ identity. Like management, 

company unions see their goal in company 

advancement and prosperity. An example of 

union adherence to the ‘productionist mode’ 

is their emphasis on the union function of 

assuring production quality and discipline. 

Especially since the early 2000s, a high turnover 

has been an increasingly important issue in all 

plants. For example, in Audi Hungaria, labour 

force fluctuation has been 1% per month in 

2000, while the goal has been 0.4%. In VW 

Slovakia, where turnover rates increased in 

mid-2000s from 7-9% to higher levels of 

9-10% annually, they are still reported to be 

only half of turnover rates of other Slovak firms 

(Interview March 2007). Unions have started 

to capitalise on their function of assuring 

discipline during the production process. 

The HR director of VW Slovakia stated that 

‘unions are our eyes and ears: what we 

don’t see, they see’ (Interview March 

2007). Furthermore, a productionist 

page 91 

part of union identity is also visible 

in the fact that unions also started 

to develop a discourse based on the valuation 

of skills and knowledge. Finally, unions are 

directly involved in the issue of industrial


upgrading. A Hungarian union leader at Audi 

Györ stated referring to German management 

that: ‘if they do not take our problems seriously 

then maybe the best solution for them is to 

go home, because we cannot be efficient’ 

(Interview August 2007). Furthermore, unions 

sometimes intervene directly and express their 

opinions concerning upgrading. Thus, in 2002 

in Škoda, as employees perceived the danger 

of degradation of the product profile, a short 

protest action organised by trade unions was 

staged (Sperling 2004: 191). 

The underlying reasons for the productionist 

approach among company stakeholders are 

complex. First, the highly ‘productionist’ 

approach of VW group in Germany has 

further reinforced the productionist attitude 

of Central European stakeholders. A 

productionist approach on the German side 

meant that core-periphery division between 

the headquarters and subsidiaries was not 

permanent. The original investment decisions 

were driven by the desire to build up low-cost 

production locations and access new markets; 

the upgrading of the new subsidiaries to the 

state-of-the-art production locations was 

not the original intention of the VW Group 

headquarters. ‘At the beginning, three halls 

were constructed here. Now, the whole area is 

full of buildings. At that time, no one could 

imagine that VW Slovakia would become such 

a huge factory’, emphasised the HR 

manager (Interview March 2007). 

page 92 It was subsidiaries’ initiatives to use 

the window of opportunity whenever 

it emerged to upgrade their plants. 

A productionist norm of technical and craft 

proficiency that was also a feature of the VW 

group headquarters was the underlying factor 

in industrial upgrading of subsidiaries: when 

Central European subsidiaries proved that they 

were capable to produce highly sophisticated 

products, their upgrading was launched. The 

HR director of VW Slovakia makes this 

argument clear with the example of his plant: 

Originally, the plan for this plant was to produce 

Passat. Yet in 1994, we were offered an opportunity 

to produce a four-wheel ‘Golf for motion’. And it is 

in this project that we showed that we were capable 

of producing these most sophisticated cars. And this 

was the starting point. But this was a coincidence, 

not a strategic decision. The headquarters were 

looking for a cheap production location, they realised 

that in Bratislava there was an empty capacity, so 

they decided to give it a try.[..] It was in 2000 that 

the strategic decision to produce the SUVs in VW 

Slovakia was made. [..] And one of the reasons for 

this was that earlier we showed ourselves capable 

of producing these sophisticated cars [...], in the 

excellent quality (Interview March 2007). 

Thus, a high level of openness about the future 

upgrading in the VW Group headquarters 

has been an important factor supporting the 

productionist attitude and the preservation 

of the local non-economic enterprise norm. 

The local stakeholders were the driving forces 

behind the upgrading, yet this crucial role of 

local management has been possible due to the 

specific control mode and commitment mode 

of the German MNC. More generally, Bluhm 

(2007) argues that the arm’s length control 

mode of the German MNC headquarters 

allows certain opportunity structures to 

emerge. When these opportunities emerge, 

they are capitalised upon by local management 

to strategically enlarge the mandate of its 

subsidiary within the group.


Furthermore, VW group has not used any ‘back 

door’ strategy to achieve compliance with new 

managerial goals but followed a route that took 

into consideration the previous experience 

of old managerial staff. Replacement of 

managerial staff by new people with experience 

of working in market economies could have 

been a strategy of the headquarters. However, 

this happened only to a limited extent. Only 

top management was replaced by the German 

expatriates, while the large share of local middle 

and line management was kept. Even in 2006, 

30% of old local managers were still employed 

by Škoda. The role of expatriates has been 

relatively limited in the medium term. Apart 

from Škoda’s experimental three year tandem 

program that has attracted a large number of 

German managers to the subsidiary, the usual 

trend in all subsidiaries is that only the top 

management team is dominated by expatriates, 

while the human resource manager is usually 

a local person. VW Bratislava and Škoda have 

several top local managers; Audi Györ has 

had the smallest number so far with only one 

local top manager - responsible for human 

resources. 

Another reason for the ‘productionist attitude’ 

is the technical-engineering background 

dominant among local managers, rather 

than an orientation towards pure financial 

accountability and profit maximization. The 

training background of managers in engineering 

facilitates their technical-engineering orientation. 

This is how Škoda senior manager for 

industrial engineering describes his reasons to 

come to Škoda: 

I’ve studied mechanical engineering. [...] During 

my studies, in 1994, I was a trainee in the Audi 

plant. This is where I saw the first models of the 

new Octavia. And this is the point when I became 

fascinated by it. I told myself: ‘If we had this car in 

production at Škoda, this would be unbelievable’. 

Then, some time later, I saw this car on the street 

for the first time and this is when my decision was 

made – I wanted to go work for Škoda, because 

the cars that they produce there are amazing 

(Interview December 2006). 

The manager further reports that what was 

crucial in the new model was the new level 

of quality compared to previous models. Thus, 

engineering and technical excellence rather 

than pure financial parameters are the defining 

features of managerial thinking. 

Internal career progression is another factor 

that facilitates the preservation of productionist 

focus. Internal labour advancement has 

remained important and many of senior 

managers started as simple blue-collar 

workers. The director of motor production at 

Škoda was one of them. He has been working 

in the factory for 20 years. Originally, he was 

a welder, and then moved to the planning and 

preparing new models as a technical specialist 

before becoming the director of the engine 

plant (Interview December 2006). Similarly, 

the director of the SUV production at VW 

Slovakia was previously a blue-collar worker 

(Interview March 2007). Interestingly, the 

internal career ladder has also worked 

for trade union leader: the head of 

VW Slovakia’s human resources was 

a trade union leader during state 

socialist times (Interview March 2007). 

To sum up, the introduction of certain 

benchmarking and financial accountability 

page 93


tools in the Central European VW subsidiaries 

allowed a new, more market-oriented efficiency 

logic of firm valuation to emerge. At the same 

time, the headquarters’ lenient approach to 

managerial staff as well as training background 

and internal career ladder allowed a part of 

the old productionist attitudes to persist. The 

next section shows the role of local production 

coalitions between management and unions in 

translating this productionist enterprise norm 

into industrial upgrading. 

III. COLLECTIVE AGREEMENTS AS PRODUC- 

TION COALITIONS 

As the previous section demonstrated, local 

management in VW subsidiaries has had a clear 

‘productionist’ attitude in its desire to attract 

investment, ensure production over time and 

upgrade. The industrial upgrading has been a 

unique phenomenon due to its speed and scale. 

To convince the headquarters, management 

had to rely on the support of key stakeholders 

such as local trade unions. As a consequence, 

to achieve the goal of plant modernisation 

and upgrading, local management in VW 

subsidiaries chose to treat trade unions as 

partners1 in issues where unions have legal 

co-decision rights. Unions have thus become 

important in the industrial upgrading process 

of VW subsidiaries. This section brings out 

the dominant part of union identity: 

between union functions – production 

page 94 and protection – union identity 

remains strongly ‘productionist’. In 

this argument, the last section tried 

to disentangle the rationale behind union 

productionist attitudes. I argued that also on 

the union side, preserving and developing 

industrial capabilities was a core goal. This 

section, in turn, discusses formal collective 

agreements as examples of management-union 

coalitions for upgrading. 

In the German VW plants, as in most other 

German automotive producers, company level 

management-labour production coalitions 

have become quite wide-spread in the 1990s. 

In Germany, the goal of these coalitions was to 

‘minimise the costs’ of the economic downturn 

or of the increased international competition. 

Also in Central European VW production sites, 

collective agreements have been used in some 

cases for similar purposes. Thus, in 2005 in VW 

Slovakia, due to reduced demand, management 

sought an arrangement with unions which 

was found by reducing the number of hours 

worked. The trade-off agreement was reached 

between management and unions mainly by 

increasing the pay. Thus, management used 

cooperation with unions in cases of strong 

demand decreases although these cases were 

rather exceptional. Yet the main purpose of local 

production coalitions in Central Europe has 

been different in comparison to Germany. In 

Central European VW subsidiaries, company 

collective agreements have been the major 

examples of enterprise ‘production coalitions’ 

for upgrading and industrial modernisation. In 

this way, the common goal of building up of 

industrial capabilities was achieved: collectively 

agreed additional, although limited, bonuses 

and pay benefits for the core labour force are 

traded-off against more working time flexibility 

at continuously overall relatively low wages. 

Working time flexibility includes the variety 

of shift systems and overtime arrangements. 

A more flexible use of these arrangements 

allowed a more intensive use of machines and


other productive investment, making Central 

European subsidiaries highly competitive 

production locations within the VW group. 

Local management was the main driver in 

the industrial modernisation process, while 

unions were the facilitators. Collective 

agreements cover the issues of overtime, shift 

organisation and time accounts. Working 

time and work organisation are two crucial 

fields, in addition to wages, where unions 

have had legal rights to be consulted and be 

taken into account. The case of Audi Györ is 

the clearest example of union-management 

cooperation for upgrading. The cooperation 

only materialised once management saw an 

advantage in concluding the agreement. It has 

been looking for a ‘win-win situation’ before 

engaging in serious collective bargaining. Thus, 

collective negotiations took place for six years 

without an agreement and only in 2001, when 

the Hungarian employment law was amended 

introducing more possibilities for negotiating 

working time flexibility, did management 

became serious about collective bargaining and 

the first deal was struck. The manager explained 

how introduction of this time flexibility was 

fostered by changes in labour law that made 

such an agreement with unions possible and 

how this allowed the company to save costs: 

‘Before we had to pay overtime, once we had 

the collective agreement longer working time 

periods could be used. […] This was the most 

important reason for us [management] to have 

this collective agreement’ (Interview August 

2007). What these collective agreements 

allow is a very high level of working time 

flexibility and thus better use of machines 

and productive investment. The Audi HR 

manager stated that ‘there are 70 working time 

models here. It has been very important for 

our company to be able to be flexible, ‘to play’ 

with working time’ (Interview August 2007). 

Yet also in other subsidiaries, the collective 

agreements have been used by management 

more intensively since the late 1990s-early 

2000s to achieve the necessary flexibility in 

working time, shift structure, etc. Thus, also 

in Škoda and in VW Slovakia, management 

used collective agreements as a flexibility tool. 

HR director at VW Slovakia put ‘enormous 

flexibility’ as one of the key reasons for the 

success of VW Slovakia: ‘I don’t know if there 

is another firm in the group that has such a 

high level of flexibility. […] The workers work 

normal number of hours, but they also work 

Saturdays, Sundays’ (Interview March 2007). 

The shift system has been changed from a 

three-shift to a four-shift to a continuous shift 

system. The latter allows a more intensive use 

of machines and people. This ‘flexibility’ that 

is praised by management has been possible 

due to company level collective agreements 

between management and trade unions. 

According to labour law and collective 

agreements in Škoda, most working time 

flexibility measures need to be agreed with 

unions. Thus, to introduce new working time 

systems for the period of one year, agreement 

with trade unions is required. Also working 

time systems that extend the work week to the 

weekend are agreed with trade unions 

two months in advance (Škoda 2005: 

18-20). Similarly, in VW Slovakia, all 

page 95 

important changes in shift systems 

are agreed with unions. The collective 

agreements create a limit of weekly and annual 

over-time thus effectively allowing for working 

time accounts. In terms of work organisation,


a three-shift system operates (with time 

accounts2). 

Also in VW Slovakia, the ‘extreme flexibility’ 

of the labour force is presented as a crucial 

ingredient for the upgrading success. The 

management used agreements with unions to 

achieve a level of very high shift flexibility. A 

three-shift system was first tested since 1996 

and was fully introduced in 1998. In this 

system, the weekends were free but employees 

could be asked to come to work if necessary. 

In March 2007, the system was ‘flexibilised’ 

further when the three-shift system was 

replaced by a ‘continuous shift3’ system with 

four shifts a day. In this system, people work 

for seven days and then have two to three days 

free. It allows the plant to utilise the equipment 

and the labour to its extreme: ‘flexibility is one 

of the main factors that explain the success 

of our plant. […] we are able to do with our 

employees everything we need’, explained the 

director for human resources in VW Slovakia 

(Interview March 2007). The cooperation 

with unions was assured after an early stage 

of conflict: ‘When we first introduced this 

working time flexibility, we met with resistance 

from the labour force i.e. the unions’, the 

manager reported (Interview March 2007). 

In addition to flexible shift systems, most 

collective agreements also cover additional 

agreements between management 

and unions concerning maximum 

page 96 allowed overtime. Thus, for example, 

while the labour code allows 200 

hours overtime per year, the company 

collective agreement in Audi Györ made it 

possible to increase this level up to 300 hours 

overtime per year (Interview August 2007). 

Also, in VW Slovakia, the collective agreement 

allows overtime to go above the national 

legislation maximum of annual overtime. 

Similarly in Škoda, the overtime work is 

regulated by collective agreements: it sets an 

average maximum number of overtime per 

week and establishes a yearly account for the 

calculation of overtime (Škoda 2005). 

The second pillar of these production 

coalitions in form of collective agreements 

has been important wage moderation. Unions 

share management’s new rationale of strong 

pressures of international competition. During 

most of the 1990s and early 2000s, limited 

wage increases have been a substantial part 

of these enterprise production pacts. Wage 

restraint and inflation indexation remain the 

norm, as it is seen by both local management 

and local unions as the safest option to secure 

additional foreign investment inflows – unions 

and management both admit that they do not 

want to lose out in international competition 

and would like to preserve their low-cost 

location advantage. Thus, the HR director at 

VW Slovakia states: ‘The main reference point 

for us in wage increases have been the inflation 

rates. This year, because of tight labour markets, 

we decided to implement the planned wage 

increase earlier then planned because for such 

sophisticated products we need the best people. 

But we do need to fit within the VW brand, we 

should not go far beyond, otherwise we won’t 

be competitive within the brand’ (Interview 

March 2007). 

The tension between wage increases and 

competitiveness is especially strong for 

the metalworking industry, as it is hugely 

internationalised. Trade unions have been


very sensitive as far as the competitive 

positions of their countries were concerned. 

Rather than following the advice of the 

European Metalworker Federation, which 

since 1998 has been formulating guidelines 

insisting that wage bargaining should cover 

at least a part of labour productivity increases, 

metalworker unions in Central Europe have 

not seriously made participation in labour 

productivity a part of their bargaining agenda. 

Their bargaining demands as well as achieved 

outcomes have been much closer focussing on 

covering inflation. Union officials confirmed 

that it was important to preserve the wage gap 

to Germany, as this has been their comparative 

advantage: thus, Czech and Slovak wages are 

still at about one third of German wages, while 

productivity differences are substantial but 

smaller (Interview August 2007). This explicit 

union goal of preserving wage gap to the 

German wages despite very high productivity 

increases is a clear sign of competitiveness logic 

that unions now share with local management. 

To sum up, during the late 1990s and early 

2000s, the local management-labour coalitions 

have become stronger in VW subsidiaries. 

High functional flexibility and low wage 

increases have been the two central pillars of 

these enterprise production coalitions. These 

were traded by unions for company expansion 

and product and production upgrading. These 

collective agreements represent ‘local pacts 

for production’: their intensification went 

together with industrial upgrading that took 

place since the late 1990s and early 2000s. 

Management-union cooperation has thus 

been crucial for upgrading: it is the intensified 

exchange between labour and management 

since the late 1990s that contributed to the 

success of industrial upgrading in Eastern VW 

subsidiaries. Collective agreements have been 

examples of ‘productionist’ attitudes shared 

by local management and trade unions. The 

productionist legacy of state socialist era has 

thus been preserved even if in a very different 

institutional form. 

IV. INDUSTRIAL CAPABILITIES AS AN ISSUE OF 

PUBLIC CONCERN 

During state socialism, public ownership of 

enterprises was not a monetary ownership 

– profits could not be re-invested. Rather, it 

was ownership that represented a control 

of allocation of productive resources. As 

abundance of productive resources was mostly 

linked to high employment figures and all 

related social provisions, large industrial 

projects were also high prestige projects. Thus, 

although in state socialism there was no free 

public media or free civil society and, thus, 

no means for the public to express its opinion 

about industrial policies or similar, large 

industrial projects still enjoyed high status and 

prestige. Furthermore, even if the decisions 

concerning industrial priorities might have 

served more the particularistic interests of the 

Communist Party officials than the broad goals 

of economic development, the official version 

of events presented company affairs as an issue 

of public concern. This section shows 

how, to a certain extent, this rationale 

of industrial capabilities being an 

page 97 

issue of public concern has been 

preserved from state socialist period 

to the current day. What has survived is the 

idea that enterprise is not just an issue between 

employees and management of a particular


enterprise, but an issue of public interest. In 

other words, public concern has been a further 

stakeholder in the industrial upgrading process 

that pushed the decision makers to preserve 

local industrial capabilities. Central European 

VW subsidiaries are a useful case for assessing 

the role of public opinion, as these companies 

have enjoyed high coverage in the national 

media and high public interest due to the size 

of these industrial projects, early arrival of the 

foreign investor to the region and the strategic 

role of the automotive industry in the region 

in general. 

The role of public opinion in the restructuring 

and privatisation of former state-owned 

automotive companies cannot be underestimated. 

Already during the privatisation 

process, public opinion de-radicalised the 

intentions of the Czech government to sell 

Škoda off completely. 

The fear of the public that the German investor 

would completely restructure the factory and 

implement purely German means of production 

and employment led the Czech government to 

agree with VW on a form of a Joint Venture, 

where government’s share gradually decreased 

[…] (Mikulikova 2002: 46). 

The role of public opinion also mattered for 

management training. Public opinion meant 

that the old management structures 

that were partially considered as 

page 98 obsolete could not be completely 

ignored. Thus, Mikulikova (2002) 

interprets introduction of management 

tandems at Škoda as a consequence of public 

pressures. Blazejewski, Claasen et al. (2003) 

report a case of a privatised - less known - 

large Polish company where the managerial 

structures were completely circumvented by 

the new German managers, as they felt it was 

too cumbersome for the new owner to retrain 

the Polish old-school managers. A high media 

exposure and media attention to the VW 

subsidiaries prevented this from happening in 

the VW subsidiaries. 

The idea of enterprise and industrial capabilities 

being an issue of public concern was explicitly 

expressed by company insiders as well as 

stakeholders in the automotive sector. Thus, in 

Audi Györ, the union leader underlined the role 

of ‘public ownership’: ‘On paper this company 

is the property of Audi but in our heads it is 

our property because this company is based in 

Hungary’ (Interview August 2007). The linkage 

between company affairs and regional/ national 

economic development has also been clearly 

identified. The HR director at VW Slovakia 

elaborated on his company’s involvement in 

improving the deteriorating national industrial 

capabilities of vocational training: 

Before we had a complete dual system of vocational 

training. [With the regime change] the first 

thing that enterprises did when they were about 

to privatise was to give these schools back to the 

state. [..] Today, these schools do not train properly 

for vocational training. [..] No one thought that 

vocational training would take such a turn, and 

you know, now it will take a long time – I would 

say 10 years – to make the system work again. You 

know, it is much easier to destroy something than 

to build it up. [..] The government needs to take 

the lead here to improve the system of vocational 

training. [..] We cooperate with Kia and PSA 

in these issues, even if we are competitors. On 

issues of labour markets we are partners [...]


and we agree on a common position about what 

government activities we need. We need to 

convince the government to cooperate on that. We 

are developing a pilot project that should advance 

Slovakia (Interview March 2007). 

Thus, company stakeholders see company 

affairs and general interest of national industrial 

capabilities as closely interlinked. 

Across the board, representatives of employer 

federations, trade unions and national 

chambers of commerce and industry referred to 

the importance of strong local manufacturing 

traditions as relevant for society as a whole 

rather than only as an enterprise relevant 

issue. The embeddedness of engineering 

and manufacturing capabilities in the local 

history and economy is explicitly stated by 

practitioners. Thus, in Hungary, the legacies 

of state socialist industrial development are 

evoked as crucial despite the fact that it did 

not have automotive final producers after the 

World War II. Yet it is argued that it had strong 

manufacturing capabilities in bus production, 

engines and other components (Interview July 

2008). Similarly in Slovakia, the representative 

of the chamber of commerce said: 

You cannot create industrial history on this 

table. You cannot do that. Either it exists or not. 

Czechoslovakia in the past had a tradition of 

machinery industry […]. It is not possible just 

to say: ‘it is good to make electronics, let’s start 

producing electronics now’ (Interview March 

2007). 

The importance of historical heritage of 

machine tools production in the emergence of 

a strong automotive industry today has been 

evoked by the stakeholders. It has been pointed 

out that Audi Györ is located in the area of the 

traditional Hungarian engine producer Raba. 

In Slovakia, the region of Martin has been 

a stronghold of arms production (Interview 

March 2008). 

The destiny of enterprises and industry is 

closely linked to broader societal changes. 

Industrial modernisation of enterprises and 

country modernisation are often seen as 

interdependent. Thus, the representative of the 

Slovak chamber of commerce stated: 

[After Slovakia’s independence], we did not have 

a big choice –we were happy if anyone came to us. 

There was not much choice – it was a new country, 

new Slovakia, new currency, new government, 

and new problems. You know how it is: political 

ups and downs. This is like when you go to eat: 

when you are hungry, you eat anything, but once 

you are half full, you will choose the better things 

– it is normal. And it is also like this in business 

(Interview March 2007). 

Making business is also associated with a longterm 

sustainability rather than with short-term 

windfall gains. Stakeholders differentiated 

between good and bad investment. ‘Bad’ 

investments are associated with speculation, 

while ‘good’ investments are associated with 

‘productive investment’ that would develop the 

company’s capabilities: 

The entrepreneurs of the first wave, they 

page 99 

are the so called ‘gold diggers’. Everybody 

wanted to own a company, but they were not 

ready to spend their own lives in it. Neither to 

wake up at 6 am, nor to take care of hundreds of 

employees, not to take care of the sub-suppliers,


nor pay attention if exports are working fine, if 

the [Slovak] crown is up or down. Buy cheap, sell 

expensive. Buy a Lamborghini; go on holidays in 

the Caribbean. This was the first privatisation. 

They did not know much about the industry. Their 

way of thinking was: ‘certainly one day someone 

will come who will want to buy it from me and 

it is my aim to sell it then. So, it was all around 

the speculation motive. […] After a few years, 

now it is clearer - the best way was when the 

management made a buy-out. It could be a factory 

producing colours, painting. They would say: we 

work here for 20 years, we know the company well 

- we shall decide about its future, we continue to 

develop it. This was a positive privatisation 

(Interview March 2007). 

Investors are thus clearly differentiated between 

those with productionst attitudes and the rest. 

There are those who are interested in investing 

in and developing the company and others 

who acquire companies for other reasons: 

speculation or reducing the competition. 

Thus, ‘real’ businesses are seen as long-term 

preservers of industrial capabilities. While 

VW subsidiaries are considered as successful 

cases of preserving and developing local 

industrial capabilities, the stakeholders quoted 

a large number of unsuccessful privatisations 

where industrial capabilities were destroyed. 

One such case is the foreign privatisation 

of a previously internationally renowned 

Hungarian bus producer Ikarus. 

Ikarus, one of the largest Hungarian 

page 100 bus producers in the state socialist 

era, was bought by an Italian bus 

producer Iveco in 1999. Its two plants 

were closed down in 2003 and 2007. A trade 

union leader wondered: ‘What was the point 

for Iveco to buy Ikarus, what was the interest 

[of the foreign investor]: to buy a competitor 

or to buy a plant with capacity?’ (Interview 

September 2008). The implicit argument 

behind this question is that the Italian bus 

producer bought its Hungarian competitor 

to reduce competition in the market and not 

to develop regional industrial capabilities – 

something the trade union leaders would have 

expected, as it would have been conform to the 

‘productionist logic’. 

CONCLUSION 

This paper demonstrated that some enterprises 

in post-communist Central Europe still 

function as sources of competitive industrial 

capabilities. Despite dramatic changes in the 

institutions of firm performance associated 

with cost efficiency and a stronger focus on the 

firm as an actor in product market competition, 

the local commitment to industrial capabilities 

that existed in state socialist times has at 

least partially been preserved. The increased 

financialisation of firm performance and the 

new cost-efficiency logic did not completely 

replace the non-economic old productionist 

enterprise norms of firm stakeholders. 

Company collective agreements have been good 

examples of coalitions of stakeholders with a 

productionist norm of upgrading company’s 

industrial capabilities and advancement within 

the group. In addition, this commitment to 

industrial capabilities has also been propagated 

outside the firm: enterprise development and 

industrial upgrading are considered an issue 

of public concern. Preserving and developing 

local and national industrial capabilities has 

been important for stakeholders inside and 

outside the company. Despite the emergence


of organising logics within the enterprise that 

are associated with economic liberalism, the 

productionist logic contributes to enterprises 

functioning as sources of competitive industrial 

capabilities. 

NOTES 

1 

Some other auomtoive MNCs in the region such as Suzuki 

Hungaria or Kia in Slovak Republic still do not recognise unions 

on their premises or build adversarial relationships with them. 

2 

The overtime is first put in the time accounts and paid three 

months later. 

3 

Not for workers on the assembly line. 

page 101


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PÉTER LITERATUR CSIZMADIA 

1. GLOBAL CHANGES IN THE WORLD ECONO- 

MY: EMERGING SERVICE ECONOMY 

6 

ORGANISATIONAL INNOVATIONS IN THE 

HUNGARIAN KNOWLEDGE-INTENSIVE 

BUSINESS SERVICE SECTOR: 

LESSONS FROM A COMPANY SURVEY 

In the last few decades, the world economy 

has undergone a structural transformation 

process that can be described by an 

increasing role of the service sector within the 

national economies at the expense of manufacturing. 

According to the OECD, in 2005 

the contribution of services to the GDP in the 

developed economies was around 70% with remarkable 

country differences (OECD 2007). 

The proportion of services in the economic 

output in the case of the USA is close to 80%, 

while it remains below 60% in South-Korea. 

In Hungary, services produce 65% of the 

GDP, which is around the European average. 

The position of the country is better than the 

Czech Republic or Slovakia but lags behind the 

Benelux-states and the Nordic countries. Table 

1 illustrates the growing economic role of the 

service sector in some OECD-countries. 

Péter Csizmadia 

When evaluating the growing international 

importance of services, it is important to call 

attention to the changing internal structure 

of the sector, e.g. the increasing share of 

business services representing higher valueadded 

activities. Another important factor 

shaping the global economy is the different 

development dynamics of the manufacturing 

and service sectors. Globally, the service sector 

achieved 23.6% productivity growth 

accompanied by a 20.2 % employment 

increase. On the other hand, 28.8 % 

productivity growth and a 22.8 % 

employment decline were registered 

in the manufacturing sector (Sako, 2006). 

Seite page 103 

Another important tendency is that the

ORGANISATIONAL LITERATUR INNOVATION IN HUNGARY 

development ICT facilitates changes in 

the inherent characteristics of services. 

The majority of the former theoretical 

contributions emphasized the following three 

basic features of services in distinguishing 

them from manufacturing activities: (1) 

service is intangible and, therefore, cannot be 

accumulated; (2) production and consumption 

are simultaneous activities; and (3) services 

are produced jointly with the customer (as the 

customer represents a basic input for services) 

(Kuusisto & Meyer 2003, Chesbrough & 

Spohrer 2006). The changing role of ICT 

has resulted in a standardisation of services. 

Some services are becoming more similar to 

manufacturing products: they are standardised, 

storable and deliverable (Sundbo 2002). These 

changes 1 , which are labelled “productising of 

services”, are visible in the increasing weight of 

services in the international trade (Sako 2005). 

A similar tendency has also taken place in the 

manufacturing sector. The basic idea here is to 

utilise economy of scale of mass production 

and, simultaneously, the greater value added 

by the costumer-specialisation of products. As 

a consequence, there is a growing interest in 

modularisation of products, on the one hand, 

and a development of services related to the 

products or a shift of activities in direction of 

services, on the other (e.g. IBM or Siemens). 

This process is often called “servicising 

products”. (Sundbo 1999, Kuusisto & Meyer 

2003, Sako 2005). 


The changes presented briefly 

above, e.g. the standardisation 

and “productising” of services, the 

modularisation and “servicising” of products 

and the blurring boundaries between service 

and manufacturing sector, caused radical 

changes in the economic weight of services. 

In this relation it is important to stress the 

increasing role of knowledge-intensive services 

in innovation, knowledge development and 

transfer that are of particular importance 

in opening a new development path for an 

economy. 

1.1 Distinguishing characteristic of the 

service sector: extreme heterogeneity 

The aggregated data presented in Table 1 

do not provide information on the internal 

composition of the service sector nor on its 

changes, although it is composed of very 

heterogeneous activities representing diverse 

productivity, employment, working conditions 

and patterns of knowledge use. There have been 

several attempts to classify the different service 

activities focused characteristics of the sector 

such as role of technology, the intangibility of 

outputs and modes of innovation (Pavitt 1984, 

Porter 1990, Evangelista 2000, Miozzo-Soete 

2001, Hollenstein 2003). Salter and Tether 

(2006) differentiate three basic types of services 

firms in their classification based on economic 

function: traditional services, system firms and 

knowledge-intensive business services. 

Traditional service firms are small and serve 

local needs. These firms suffer from poor 

technology base, weak managerial and labour 

force skills, and a lack of abilities to provide 

high value-added services. Traditional service 

firms often have no full-time employees and 

rely on self-employment or part-time staff. 

They are often associated with a “low-skill 

equilibrium” in their manpower use. 

System firms, on the other hand, are large and


complex organisations providing sophisticated 

services both on domestic and international 

markets. These firms typically operate in 

such industries as banking and insurance, 

airlines, infrastructural services (gas or water 

supply) and supermarket retailing and are 

characterised by a well-developed internal 

division of labour, sophisticated operational 

processes and intensive use of technology, 

especially Information and Communication 

Technologies (ICT). 

The third group of service providers is knowledgeintensive 

business service firms (KIBS). KIBS 

provide professional services, such as legal and 

accounting services, management consultancy, 

engineering and R&D activities, and play 

a crucial role in creating and transferring 

new knowledge and technologies. They rely 

intensively on the expertise of their highly 

skilled professional employees, often carry out 

their activities in projects and are dependent 

on close connections to their clients. The firms 

belonging to this particularly rapidly growing 

area of services are of crucial importance in 

economic growth, as they provide intermediary 

services to other actors of the economy and 

constitute important inputs to the modern 

production process (Salter-Tether 2006). 

The knowledge-intensive business service sector 

is, however, composed of firms that are very 

diverse regarding characteristics of the services 

they provide, their innovation capacities and 

modes of manpower use. Partly due to this 

heterogeneous composition, there is no widely 

accepted definition of KIBS. According to the 

very general definition by Tovoinen (2006:2), 

KIBS are “expert companies that provide services 

to other companies and organizations”. In contrast, 

den Hertog (2000:505) provides a wider 

definition that focuses on the characteristics 

of knowledge used and created in the service 

process and emphasises the importance of the 

cooperation between the clients and service 

providers: “Private companies or organizations 

who rely heavily on professional knowledge, 

i.e. knowledge or expertise related to a specific 

(technical) discipline or (technical) functionaldomain 

to supply intermediate products and 

services that are knowledge based”. Miles et al 

(1995) identified three basic characteristics of 

KIBS: (1) they rely heavily upon professional 

knowledge; (2) they either are themselves 

primary sources of information and knowledge 

or they use knowledge to produce intermediate 

services for their clients’ production processes; 

and (3) they are of competitive importance and 

supply primarily to businesses. Based on these 

characteristics, Miles et al (1995) defines KIBS 

as “services that involved economic activities which 

are intended to result in the creation, accumulation 

or dissemination of knowledge”. In addition, the 

authors differentiate between the so-called 

“traditional professional services” (P-KIBS) 

– intensive technology users (business and 

management services, legal and accounting 

activities, market research, etc.) – and “newtechnology-based 

services” (T-KIBS) relying 

on ICT and technical activities. The former 

group of KIBS is sometimes referred to as 

“operational business services” (Viitamo 

2007). In their contribution, Müller 

and Doloreux (2007) identified three 

common elements in the various 

classification attempts: 

 

The term „business services” refers to 

services that are provided in order to 

satisfy the demands of firms and public 

Seite page 105


 

 

companies and are not produced for 

private consumers. 

„Knowledge-intensive” is defined either 

in terms of the reliance on highly qualified 

labour or in terms of the complex 

transaction between client and service 

provider. 

„Knowledge-intensive firms” are companies 

carrying out intellectual activities 

where human capital plays a significant 

role. 

Although, as presented above, the widely 

accepted definition on KIBS is still missing, 

there is a consensus regarding the labelling 

of categories within the classification of 

economic activities as knowledge-intensive 

business activities. In general, mainly nonroutine 

services provided to firms and public 

organisations and based on intensive utilisation 

of knowledge, e.g. IT services (both hardware 

and software), administrative-legal services, 

R&D, etc. belong to this category. Concerning 

the NACE 2 -categories, the following activities 

usually count as KIBS: 

Table 1. NACE codes of knowledge-intensive business services 

NACE code 

Activity 

62 Computer programming, consultancy, and related activities 

63 Information service activities 

649 Other financial service activities, except insurance and pension funding 

661 Activities auxiliary to financial services, except insurance and pension funding 

662 Activities auxiliary to insurance and pension funding 

69 Legal and accounting activities 

70 Activities of head offices; management consultancy activities 

71 Architectural and engineering activities; technical testing and analysis 

72 Scientific research and development 

73 Advertising and market research 

743 Translation and interpretation activities 

773 Renting and leasing of other machinery, equipment, and tangible goods 


78 Employment activities 

8110 Combined facility support activities 

8122 Other building and industrial cleaning activities 

8220 Activities of call centres 

855 Other educational activity


1.2 Changing role of manufacturing and 

services in the Hungarian economy 

Similar to global trends, the economic 

performance of the service sector in Hungary 

increased significantly in the last decade. 

Since 1990, the gross output of agriculture 

and mining has massively decreased, while 

in manufacturing contradictory tendencies 

have taken place and the output of the service 

sectors has permanently increased. In 2007, 

almost two-thirds of the GDP was generated 

by the service sector (KSH 2007a). The 

economic performance of the manufacturing 

sector measured by the gross value added by 

industries was different in the various industries. 

The performance of the textile and clothing 

industry has been steadily decreasing since the 

end of the 1990s, while growing tendencies 

were registered in the machinery, electronics 

and pharmaceutical industries, however, at a 

different rate (KSH 2007a). 

Between 1990 and 1998, the general level of 

employment decreased. In 1998 this tendency 

reversed but not in all sectors of the economy. 

The agriculture and mining sectors experienced 

dramatic job loss. Until 1998 the number of 

employees decreased in manufacturing and 

construction as well; yet between 1998 and 

2002, permanent employment growth was 

registered. Since 2002 the number of employees 

in manufacturing has been decreasing, while the 

opposite tendency was observed in the service 

sector. The most dynamic employment growth 

has taken place in the categories of “real estate 

and other business services” and “retail trade 

and repair” (40% and 30%). In general between 

1995 and 2006, 90 % of new jobs were created 

in the service sector; and, interestingly enough, 

more than every second new job (57 %) was 

created in the knowledge intensive business 

services (KIBS) (ERM Report, 2008). 

Besides its role in employment generation and 

stabilization, another important indicator of 

the service sector’s economic performance is 

productivity as a source of competitiveness. 

Between 1992 and 2002, the productivity 

measured by gross value-added per capita in 

the service sector exceeded the one registered 

in manufacturing. In addition, when 

evaluating firm level performance indicators 

such as turnover, export and profitability 

during this period, business service and IT 

firms performed better that services as a whole 

(Hamar, 2005). 

We can summarise the tendencies presented 

briefly above as follows. The economic 

modernisation of the manufacturing sector was 

controversial. There are only a few subsectors, 

like machinery, electronics or pharmaceutical 

industry that were successful in increasing 

their economic performance as well as in 

integrating themselves in a global division 

of labour. The modernisation of these sectors 

was based on the leading role of the FDI, 

which had positive effects such as increasing 

productivity, export growth, diffusion of 

leading-edge management practices, etc. 

However, as a negative consequence, the 

asymmetric character of the economic 

modernisation can also be observed, 

which is partially reflected in the Seite page 107 

growing gap between the innovative 

performance of the foreign-owned 

and Hungarian companies and the weak 

integration of SMEs into the international 

division of labour (Makó & Illéssy 2007).


On the contrary, there is a steady tendency of 

growth in the service sector in terms of both 

its economic performance and employment 

capacity. In other words, services in general 

and especially business services represent a 

potential sustainable development path in the 

Hungarian economic modernisation. 

2. INNOVATION IN SERVICES 

There is a wide consensus in both the academic 

and professional communities that innovation 

is at the hearth of economic development and 

wealth. The literature dealing with the issues of 

innovation makes a distinction of two types of 

innovation. The first is often labelled the linear 

model of innovation. This model describes 

innovation as a linear chain of discrete R&D 

activities in which each development stage 

is separated from the others. Innovation 

is driven by scientific research or direct 

market demands. In this model, of particular 

importance is codified knowledge, which 

originates in scientific research and flows 

in one direction. Critiques of this approach 

often claim that a linear form of innovation 

represents the exception rather than the rule in 

practice (Schienstock & Hamalainen 2001). 

The second approach is the recursive model 

of innovation, which describes innovation 

as a novel combination of existing 

knowledge. In this model, innovation 


is driven by market needs and new 

knowledge is an unintended result 

of the complex interdependent 

relationship between the various actors. 

Multiple feedback mechanisms are important 

here, as is the intensive cooperation between 

different actors (firms, clients, suppliers, 

scientific institutions), as well (Schienstock & 

Hamalainen 2001). In this regard, innovation 

is open and happens dominantly in complex 

networks rather than in individual firms, while 

the institutional environment plays a crucial 

facilitating role. 

In the Hungarian discourse on innovation, the 

linear model plays a dominant role, although 

the recursive model better suits to the real 

characteristics of the innovation process, 

especially in the case of service innovation. The 

former model places emphasis on technology 

largely embodied in machinery, and equipment 

as well as the processes involved in the 

development and commercial introduction 

of new, technologically advanced goods. In 

addition, this model neglects such “soft” 

elements of innovation such as cooperation, 

collective knowledge development and sharing, 

trust relations, etc. 

According to Salter and Tether (2006:2), 

“services were long thought to be laggards with 

regard to innovation – they were assumed to be 

uninteresting adopters of existing technologies 

rather than producers of new technology.” 3 

Since the beginning of the 1980s, however, 

there has been a shift in this rather one-sided 

approach of service innovation. The authors 

identified the following four generations of 

innovation research in services. 

The period of neglecting service innovations 

can be characterised by narrow perception 

of innovation primarily focusing on the 

creation of new technologies, while diffusion 

and adaptation of new technologies was 

seen as either unproblematic or of secondary


importance. The main focus of innovation 

research here was the creation rather than use 

of new technologies. According to the authors, 

this perspective has remained dominant until 

today. 

The second generation is labelled as the period 

of assimilation. In this phase researchers tended 

to examine service innovation using the 

conceptual framework developed to understand 

innovation in manufacturing. They assumed 

that innovation shows universal patterns 

that should exist both in manufacturing and 

services. 

The distinction approach in service innovation 

appeared in the 1990s as a critique of the 

assimilation period. Authors representing 

this line of innovation research argued 

that innovation in services differs from the 

manufacturing sector. Researchers in this 

period focused on organisational innovations 

and the “soft” skills playing a dominant role 

in knowledge-intensive business services, such 

as management consultancy, and regarded the 

role of “hard” technologies to be less dominant 

in the innovation activities. 

role of organisational innovations in shaping 

the service innovation process. 

The latest results of service innovation research 

suggest that service innovations are highly 

dependent on organisational practices and 

represent and open and networked form of 

innovation (Salter – Tether 2006). In addition, 

in the case of service innovation the different 

forms of innovation – product, process and 

organisational – are more closely connected 

than in manufacturing, which implies that the 

economic value of service innovation heavily 

relies on the combination of the different 

forms of innovation (Hipp et al. 2000). 

Finally, Gann and Salter (2000) identified 

the following basic characteristics of service 

innovations: 

 

 

the role of highly skilled labour in 

the creation and exploitation of new 

solutions; 

the importance of new organisational 

practices in supporting the realisation of 

new innovative opportunities; 

The latest stream of service innovation research, 

however, intents to synthesise the experiences 

of the traditional innovation research as well 

as the experiences stemming from a deeper 

understanding of the special characteristics 

of services. These researchers highlight the 

complex and multidimensional character 

of modern services and manufacturing and 

focus on such issues as organisational change, 

social networks and other, mainly institutional 

mechanisms that support innovation in services. 

In this approach special attention is paid to the 

 

 

 

the cooperation between clients and 

producers; 

the key role of social networks in generating 

and supporting knowledge 

creation and exchange; and 


the ‘ad hoc’ or ‘informal’ organisational 

form of most knowledge-intensive 

service firms.



2.1 Organisational innovations 

Despite the growing interest in understanding 

the main characteristics of organisational 

innovations as well as its role in economic 

development, there is no single coherent 

conceptual framework for the term. The 

Oslo Manual distinguishes product, process 

organisational and marketing innovations 

and defines organisational innovation as 

follows: “Organisational innovations refer to 

the implementation of new organisational 

methods. These can be changes in business 

practices, in workplace organisation or in the 

firm’s external relations” (OECD 2005:49). 

Lam (2005) suggests a more general definition 

where organisational innovation is equal to the 

creation or adoption of an idea or behaviour 

new to the organisation. 

In their research, Armbruster et al (2008:646) 

define organisational innovation as “the use 

of new managerial and working concepts and 

practices”. They provide a further classification 

that distinguishes between structural and 

procedural organisational innovation and the 

intra-organisational and inter-organisational 

features. Their categories are as follows: 

1. Structural organisational innovation, which 

may modify the divisional structure of 

organisational functions, hierarchical 

levels, and information flow, or, 

in general, the organisational 

architecture of the firm. 

2. Procedural organisational 

innovation, which may change the 

process and operation routines within the 

firms, such as improving the flexibility 

of manpower and the use of knowledge 

through the implementation of team 

work, just-in-time (Kan-Ban in Japanese), 

or quality circles. 

3. Intra-organisational innovation that is 

taking place within an organisation, and 

4. Inter-organisational aspects of innovation, 

which refer to new organisational forms 

and processes that exist beyond the 

organisational boundaries of the firm. 

In the “learning economy”, where the pace 

of knowledge erosion is accelerated and the 

key source of the economic growth is the 

individuals’, firms’, regions’ and national 

economies’ capabilities to learn continuously, 

organisational innovations are becoming 

increasingly important in fostering the actors’ 

collective learning capabilities (Lundvall 

1996). 

3. ORGANISATION INNOVATIONS IN THE HUN- 

GARIAN KNOWLEDGE-INTENSIVE BUSINESS 

SECTOR: LESSONS FROM A COMPANY SURVEY 

In the following sections, the preliminary 

results of a company-level empirical survey 

will be presented with the aim to provide a 

general overview on the diffusion and drivers 

of organisational innovations and knowledge 

development practices in both the Hungarian 

manufacturing and knowledge-intensive 

business sectors. The survey was carried out 

in 2008 by the Institute of Sociology at the 

Hungarian Academy of Sciences.


3.1 Sample description 

In the first quarter of 2008, according to the 

National Register of Economic Organisations 

compiled by the Hungarian Central Statistical 

Office, 4 049 companies with 10 or more 

employees were registered in the field of 

business services. In order to statistically 

represent the organisational population, 200 

companies were selected based on the multistage 

stratified sampling method. Here, the 

basic economic activity of the firms captured by 

the NACE code was used as the stratification 

variable. This sampling method ensured equal 

selection chances to all companies belonging 

to the population surveyed and reflected the 

heterogeneity of the organisational population, 

as well. In other words, the sampling method 

takes into consideration the fact that the 

number of the companies operating in different 

economic activity categories varies within the 

population surveyed. For instance, there are 

more IT companies within the field of business 

services than facility management providers. 

The sampling frame was restricted to companies 

employing at least 10 persons. Firms with 0 to 

9 employees were excluded because, according 

to previous research experience, these firms 

are rarely available for surveys. In addition, 

since the division of labour within these 

firms is rather underdeveloped, organisational 

innovation characterizing larger firms is absent 

(Valeyre et al., 2009). 

established between 2000 and 2003 and only 

6.5% prior to 1990. The majority of companies 

investigated belongs to the so-called de novo 

segment of the Hungarian economy, e.g. they 

were established after the collapse of state 

socialism (Martin 2008). As for the ownership 

structure, the share of foreign ownership 

among business service firms is considerably 

low (20%). The KIBS sector is dominated by 

small firms - companies employing less than 

50 people have a share of 78.7%. 

The survey questionnaire contained questions 

regarding the market share and structure, 

e.g. the share and location of the primary 

and secondary markets within the total sales. 

Domestic markets play a crucial role in the 

KIBS sector. Hungarian business firms 

merchandise their services almost exclusively 

in the Hungarian market (95 %). 

3.2.1 Diffusion of organisational innovations 

According to the theoretical classification of 

organisational innovations presented earlier, the 

following types of organisational innovations 

were distinguished in the questionnaire: 

1) Structural organisational innovation: 

 

 

Project-based work; 

Lean or flat organisation; 

3.2 Basic characteristics of the Hungarian 

KIBS sector 

 

Inter-professional 

working groups. 

(functional) 


The Hungarian KIBS sector is relatively young. 

21.1% of firms have been established in the 

last four years, while a further 24.7% were 

2) Procedural organisational innovation: 

 

Quality assurance or continuous improve-


 

 

 

 

 

ment process (e.g., ISO, TQM); 

Collecting suggestions from workers; 

Teamwork; 

Benchmarking; 

Job rotation; and 

Delegation of quality assurance to workers 

(decentralization). 

In assessing the managerial practices in the firms 

investigated, it is visible that procedural forms of 

organisational innovation (OI), such as quality 

assurance systems, collecting suggestions from 

employees, team work, etc., are more widely 

used than the structural forms of OI. The 

project-based work organisation representing 

a structural/radical form of OI is, however, 

relatively widespread in the KIBS sector. In the 

case of procedural organisational innovation, 

the collecting of the employees’ proposals, 

team work and benchmarking are the most 

organisational practices among KIBS firms. 

Table 2. Diffusion of organisational innovations 

Types of Organisational Innovation 

Share within the KIBS sector 

(%) 

I. Structural organisational innovation: 

Project-based work 34.9 

Flat or lean organisation 10.3 

Inter-professional (inter-disciplinary) working groups 13.4 

II. Procedural organisational innovation: 

Quality Assurance and Auditing Systems (e.g., ISO and TQM) 21.9 

Collecting suggestions from employees 49.7 

Team work 41.7 

Benchmarking 37.3 

Quality control carried out by rank-and-file employees 23.7 

Job rotation 9.7 


Source: Makó et al (2009) 

3.2.3 Special focus on differences 

within the KIBS sector 

In Section 1.1, I have already referred to 

attempts that recognized the heterogeneity of 

different activities in the knowledge intensive 

business sector and attempted to classify the 

sector on that basis. Miles et al. (1995) made 

a distinction between “traditional professional 

services” (P-KIBS) that are intensive technology


users (business and management services, legal 

and accounting activities, market research, etc.) 

and “new-technology-based services” (T-KIBS) 

relying on ICT and technical activities. The 

former group of KIBS is sometimes referred to as 

“operational business services” (Viitamo 2007). 

There is a breadth of literature that calls attention 

to the importance of production strategies in 

the firms’ manpower and knowledge utilisation 

practices, innovative capacity and adaptation 

to the market requirements. Regini (1995), 

however, in analysing the flexible production, 

found that a set of different competitive and 

production strategies were being adopted by 

the European firms’ managements and that 

not all of these were consistent with the Post- 

Fordist production, which gains competitive 

advantage on the basis of quality, product 

differentiation and customisation and flexibility. 

In this relation, Lampel and Mintzberg (1996) 

emphasise the importance of standardisation 

and customisation of products and services as 

the two dominant strategies in the economic 

development of the past 100 years. The authors 

refer to these two logics not as “alternative 

models of strategic actions but, rather, as 

poles of a continuum of real world strategies. 

(Lampel & Mintzberg 1996:21) 

Mason (2005), in investigating the 

competitiveness and skill requirements of the 

British plastic processing, printing, logistics 

and insurance industries, analyses how product 

strategies are developed and implemented 

within UK companies as well as the nature of 

any barriers that may inhibit companies from 

moving to high value added products and 

services. He concludes that high value added 

production strategies, e.g. attempts to capture 

choices made by enterprises regarding product 

or service differentiation within particular 

markets, take on very different forms in each 

industry. In addition, high levels of skill and 

knowledge are prerequisites for success in 

high value added production along with the 

strategic capability of the management to 

combine different resources effectively in 

implementing new production strategies. 

In the following, I intend to examine which 

production strategies can be identified in the 

Hungarian KIBS sector and how these can 

be linked to organisational innovations and 

firms’ knowledge of development practices. 

In order to classify the production strategies, 

two dimensions were applied. The first 

one concerns the composition of the firms’ 

service portfolios, e.g. to what extent they 

provide a large or narrow scale of services. 

The other dimension intends to capture the 

degree of service standardisation. Following 

this categorisation, two types of practices 

were identified depending on the proportion 

of standardised and tailor-made services the 

firms dominantly provide. I hypothesize that 

diversification of the service portfolio and 

customisation of services are the dominant 

strategies in the Hungarian KIBS sector. On 

the other hand, I assume that firms following 

these strategies rely more intensively on the 

external knowledge sources and application of 

organisational practices that support 

the integration of these knowledge 

sources as well as the organisationallevel 

learning process. Figure 1 sum- 


marises the two dimensions. It must 

be stressed here that only the standardisation 

versus customisation of services and not that 

of the operating processes were examined.


Figure 1. Typology of the production strategies in the KIBS sector 

Based on the two distinctive dimensions 

presented above, four types of production 

strategies can be identified. The firms providing 

a narrow set of standardised services follow the 

strategy labelled “simple standardisation” (18% 

of firms). The second group was composed 

of firms providing different routine services 

(diversified service portfolio); their strategy 

is called “diversified standardisation” (15.3% 

of firms). The third strategic category, “simple 

customisation”, includes the firms providing 

a narrow set of tailor-made solutions (16.8% 

of firms). The last and largest group of firms, 

which follow the strategy labelled “diversified 

customisation”, provide tailor made services 

in different fields (49.5% of firms). The 

distribution of various types of activities 

moderately correlates with classification. 

IT service firms (“New technology 

providers”) are overrepresented in the 


group of diversified customisation 

strategy, while service diversification 

seems to be the dominant strategy 

in the case of legal and financial service firms 

(“Operational service providers”) independent 

from the degree of standardisation. 

Engineering and R&D firms (“Science-based 

service providers”) also have high prevalence 

in the category of “diversified customisation”, 

but their production strategies are more diverse 

and balanced than the ones of the IT service 

providers. Professional service providers (e.g. 

management consulting, HRM, call centres, 

etc.) represent a rather heterogeneous group: 

their dominant strategy is providing diverse 

and tailor-made solutions; however, the share 

of those who implement simple standardisation 

strategies is important, as well (see Table 3).


Table 3. The distribution of firms by type of activity and production strategy 

Type of activities 

Simple 

standardisation 

Diversified 


Simple 

customisation 

Diversified 

customisation 

IT services 0.0% 13.8% 20.6% 65.6% 

Legal and financial services 12.9% 35.5% 12.9% 38.7% 

Engineering, R&D 22.5% 10.0% 27.5% 40.0% 

Professional services 23.1% 7.7% 10.3% 58.9% 

In the following, the connections between 

the various production strategies and the 

implementation of some organisational 

innovations will be examined. Project-based 

work organisation represents a structural 

organisational innovation that allows firms 

to control their costs more efficiently, on one 

hand, and support knowledge creation, sharing, 

transfer and utilisation, on the other, therefore 

creating more space for organisational-level 

collective learning (Whitley 2004). There is no 

linear correlation between the implementation 

of project-based work and the production 

strategies. However, the rate of its use is 

significantly lower among companies applying 

simple standardisation strategies than those 

applying other strategies. A similar tendency 

could be identified in the case of implementation 

of formal knowledge management. Firms 

representing the less flexible production 

strategy seem to be less reliant on the use 

of radical organisational innovations and 

systematic knowledge management than firms 

following more flexible practices in choosing 

their production strategies. In addition, firms 

representing a more flexible production 

strategy, especially those who follow diversified 

customisation, invest more in renewal of 

their external relations, which increases their 

capability to use external sources of knowledge 

more intensively. 

Table 4. The distribution of some organisational innovations by type of production strategy 

Type of organisational 

innovation 

Simple 


Diversified 


Simple 

customisation 

Diversified 

customisation 

Project-based work 9.4% 30.8% 48.3% 38.7% 


Knowledge management 

system 

6.3% 36.0% 16.7% 16.3% 

Renewal of external relations 18.8% 28.0% 26.7% 38.0%


There are also differences between the 

knowledge development practices of the 

KIBS firms representing different production 

strategies. The share of the followers of simple 

standardisation strategies in the different 

training practices is significantly lower than 

for other categories, which implies that more 

flexible production strategies require more 

investment in knowledge development (see 

Table 5). 

Table 5. Knowledge development practice and production strategies 

Type of knowledge 

development 

Simple 


Diversified 


Simple 

customisation 

Diversified 

customisation 

Courses organized and 

financed by the firm 

Courses selected by an employee 

but financed by the firm 

Courses supported by 

working time reduction 

Relying on customer 

knowledge 

18.8% 36.0% 33.3% 37.0% 

6.3% 6.9% 13.3% 15.2% 

1.7% 4.9% 13.8% 3.3% 

50.0% 68.0% 65.5% 67.4% 

4. CONCLUDING REMARKS AND FUTURE 

RESEARCH CHALLENGES 

In this paper, I attempted to briefly present the 

paradigmatic changes in the world economy that 

can be labelled as the rise of the post-industrial 

service economy. These changes, which can 

be captured by the increasing importance of 

the service sector in the performance of the 

national economies, has also taken place in 

Hungary over the last two decades. According 

to global trends, the weight of services 

in the Hungarian economy has been 


growing steadily, especially in the case 

of the knowledge-intensive business 

services (KIBS). The modernisation 

of the manufacturing sector was controversial 

and affected only a few subsectors. In this 

situation, KIBS may represent a possible 

new development path for the continued 

modernisation of the Hungarian economy. In 

fulfilling this role, firm-level facilitators such 

as learning and networking capability and the 

implementation of organisational practices 

as well as the innovations supporting them 

play a crucial role in addition to an adequate 

institutional environment. 

In the second part of this paper, the results 

of a company-level questionnaire survey were 

presented that was carried out in 2008 among 

the Hungarian knowledge-intensive business 

firms. The KIBS sector is relatively young 

and dominated by Hungarian-owned small 

and medium sized firms that provide service 

mainly to the domestic market. Examining the 

service production strategies that Hungarian 

firms apply suggests that knowledge-intensive


business firms following flexible and customised 

production strategies and providing diversified 

service portfolios are overrepresented among 

KIBS firms, especially in the case of IT and 

professional services. Firms implementing such 

production strategies invest more in the various 

forms of knowledge development and rely to a 

greater extent on the use of such radical forms 

of organisational innovation like project-based 

work that supports them in integrating external 

knowledge sources. 

The results presented briefly above call attention 

to the necessity of further investigation of the 

role of both KIBS and more traditional services 

in the economic modernisation of Hungary. In 

doing so, researchers should focus on both firmand 

institutional level facilitators and inhibitors 

of the service sector development. This requires 

a combination of research methods: there is a 

need for company-level case studies in order to 

better understand the internal dynamics of the 

service sector as a whole. 

NOTES 

1 

These changes, however, are not observable in the case of several, 

mainly personal services, such as hotels and restaurants, 

health and social services, etc. 

2 

NACE: ‘Statistical Classification of Economic Activities’ – an 

international statistical system for classification and registration 

of economic activities. Source: http://ec.europa.eu/competition/ 

mergers/cases/index/nace_all.html 

3 

This view is still dominant in the Hungarian discourse on 

innovation. 

Seite page 117



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Seite page 120

CATHERINE SPIESER 

ABSTRACT 

THE POLITICS OF LABOUR MARKET ADJUST- 

MENT IN POST-1989 POLAND. 

TRAJECTORY OF POLICY REFORM, POLITICS 

OF SOCIAL CHANGE AND EMERGING WELFARE 

REGIME. 1 

Catherine Spieser 

7 

Labour market adjustment is constructed 

by the policies that set the rules for the 

governance of employment and unemployment. 

Therefore, labour market polices 

have redistributive implications. Their orientations 

are defined in a process involving various 

socio-political actors (unions, employers associations, 

government with a partisan orientation). 

This has been particularly salient in Central 

and Eastern Europe given the pressure for 

adaptation to new market conditions resulting 

from economic liberalisation. Starting with a 

critical review of Esping-Andersen’s concept 

of welfare regimes, which places emphasis on 

the politics of social risk redistribution, this 

paper explores the policies and politics of labour 

market adjustment in Poland since 1989. 

It builds on original and secondary material 

and has a strong empirical component. The 

aim is twofold: (i) to identify which welfare 

regime (if any) is gradually taking shape and 

(ii) to uncover the socio-political compromise 

on which it rests. While policies have generally 

tended to become minimalist over time, 

retracing the trajectory of policy reform in two 

domains - unemployment compensation, on 

the one hand, and the rules governing employment 

relationship, on the other - reveals 

that there are two contrasted worlds of ‘labour 

market politics’. 

INTRODUCTION 

page 121 

The breakdown of authoritarian communist 

regimes consecutive to the fall of the 

Berlin wall twenty years ago had one uncontested 

immediate effect: it gave rise to a wave


MENT IN POST-1989 POLAND 

page 122 

of hope and high expectations for material improvement 

as well as improved living conditions 

in many of the countries concerned. In 

Poland particularly, the free market was seen as 

the solution to bring to end the consumption 

restrictions that marked the years of shortage 

economy (Mazurek 2010). As Leszek Balcerowicz 

led the way to macroeconomic stabilisation 

while pursuing his ‘shock therapy’ plan 

of anti-inflationary policies and quick privatisation, 

however, it soon became obvious that 

the rise of a capitalist, free market economy 

would not take place without another type of 

pain: rapidly expanding unemployment. Some 

feared that this would trigger labour unrest, 

union opposition to the course of reform or a 

risk of electoral backlash resulting in former 

communist parties returning to power and attempting 

to restore the former political order. 

None of this happened in Poland, even when 

mass dismissals became common in sectors 

undergoing privatisation and unemployment 

peaked at 20% at the end of the 1990s. More 

strikingly, social pains rarely translated into 

political mobilisation against new policies, 

which suggests that other channels of interest 

representation and compensation came into 

play. Contrary to the argument of a quick retreat 

of the state, I argue that policies – both 

new and old undergoing reform as well as both 

discourses and effective instruments - played 

a major role in establishing the conditions for 

a peaceful transition from a centrally 

administered universal employment 

system to a capitalist labour market in 

which individual fates are widely differentiated. 

The transformations of the work – welfare 

nexus in post-communist Central and Eastern 

European countries can be analysed along the 

same dimensions as historical developments 

that, I argue, are comparable in scope: the 

emergence of welfare policies in rising capitalist 

states in Western Europe over the last century, 

which has been the subject of a wide array of 

research. Confronting welfare state theories 

within a new setting, the fast changing political 

system, economy and society in Poland (and 

other Central and Eastern European countries) 

allows for further testing of their explanatory 

power and validity. Conversely, comparing the 

profound, multidimensional transformations 

observed in fast-changing environments, such 

as Poland and the rest of Central and Eastern 

Europe in the aftermath of 1989, with more 

established theories of welfare policy-making 

offers analytical rigour to the study of this 

seemingly unique phenomenon and reintegrates 

it into the field of comparative politics. 2 The 

aim of this paper is thus to examine what the 

theories of the welfare state originally derived 

from the study of ‘mature’ welfare states in 

Western Europe tell us about labour market 

policy formation in emerging capitalism, and 

what the latter tell us about the former. 

In both cases, regardless of the gap in time, 

what is at stake is a radical redefinition of the 

respective responsibilities of the individual 

and the political community of citizens, while 

state administration consolidates itself as an 

interface between both in times of profound 

industrial and economic transformations. These 

are best captured through the process of labour 

market adjustment, which in turn is governed 

not only by firms but also by the institutional 

framework available to them, and in which 

they are embedded. Placing the emphasis 

on policies organising work, employment


and unemployment allows for observing the 

transformations of the work-welfare nexus 

and the way in which change is negotiated (or 

not). 

This paper focuses on the explicit part of the 

work-welfare nexus at the macro-level, i.e. 

the body of rules and institutions governing 

employment and unemployment, which are 

shaped by distinct policy-making processes in 

specific arenas. It also explores cross-sectional 

and cross-time variation in a single country, 

Poland, and builds on a comparison of policy 

dynamics in two domains, unemployment and 

employment policy. Unemployment policy 

is defined as the composite sphere of labour 

market policies addressing unemployment 

and the unemployed, whether they aim to 

alleviate or counter unemployment or facilitate 

employment (as return to employment or 

accession to a first job). Employment policy 

is the regulation of work and employment, 

applying to hiring and firing and designed 

to foster equitable employer-employee 

relationships while striking a balance between 

flexibility and security. 

Section one presents a conceptual framework 

for the study of a shift in welfare regime. Section 

two and three trace the trajectory of policy 

reform in the area of employment regulation 

and unemployment insurance, respectively. 

Section four concludes the paper by comparing 

findings and drawing conclusions for the study 

of welfare reform politics. 

1. A CONCEPTUAL FRAMEWORK BASED ON THE 

COMPARATIVE WELFARE STATE LITERATURE 

A large portion of studies on social policy 

development in the CEECs that attempt to 

establish a connection with works on other 

geographical areas and theories focus on the 

role of path dependency and legacies from 

pre-1989 regimes (e.g. Inglot 2003 & 2008). 

This tends to provide a misleading picture on 

two points: first, it emphasises stability while 

the distinctive feature of developments in the 

CEECs compared with Western Europe lies 

in the extensiveness of the transformations 

at stake; and second, it disregards the role of 

domestic politics and excessively de-politicises 

the process of reforming welfare entitlements, 

neglecting the salience of the politics of labour 

market adjustment in times of systemic change. 

In the search for an alternative framework, I 

argue that the comparative literature on welfare 

states provides some interesting insights and 

ways to overcome these pitfalls. On the one 

hand, the typology of welfare regimes allows 

for mapping change over time when the 

objectives, instruments and institutions of 

social policies are all simultaneously at stake 

in a process of policy formation and reform. 

On the other hand, the welfare state literature 

provides a conceptual framework for the study 

of political conflicts, bargaining processes and 

reform coalitions. 

1.1. Mapping a change of welfare 

regime in one country over time 

page 123 

The typologies of welfare systems 

(Esping-Andersen 1990 & 1999) help us 

understand the nature of the transformation of 

the work-welfare nexus in post-1989 Poland,



because they facilitate the identification of a 

shift of welfare regime. The idea of ‘welfare 

regime’ entails a societal and socio-political 

embeddedness resulting from the politics of 

social policy in modern democratic welfare 

states. The concept is heavily contextualised, 

however. The development of the welfare state 

is closely linked to the rise of the industrial 

society in Western Europe when ‘its promise 

was not merely social policy to alleviate social 

ills and redistribute basic risks, but an effort to 

rewrite the social contract between government 

and the citizenry’ (Esping-Andersen 1999: 33). 

With a view to represent the limited crosscountry 

diversity of welfare capitalism, and 

building on an earlier distinction between the 

residual and the institutional welfare state by 

Titmuss (1958), Esping-Andersen (1990) 

identified ‘three worlds of welfare capitalism’. 

In a residual welfare state, the state assumes 

responsibility only when the family or the 

market fails; it seeks to limit commitments 

to marginal and deserving social groups. 

On the contrary, the institutional welfare 

state addresses the entire population, is 

universalistic and embodies an institutionalised 

commitment to welfare; therefore, in principle, 

it extends welfare commitments to all 

areas of distribution necessary for societal 

welfare. The divide between Bismarckian and 

Beveridgean systems is often used to contrast 

two fundamentally opposed ways of 

organising social protection: work- 

page 124 related entitlements based on statute 

that reproduce income differentials 

in the former, and universal flat-rate 

benefits that equalise income, especially upon 

retirement, in the latter (Arza 2006: 2). While 

several waves of reforms in many European 

countries from the 1990s onward have blurred 

these institutional differences, the two types of 

welfare systems remain useful as a cognitive 

and historical reference, including in the minds 

of contemporary actors. Besides, these regimes 

provide a conceptual framework for the analysis 

of other empirical cases. 

Situating Central and Eastern European 

welfare regimes with respect to these seminal 

categories is often problematic. On the one 

hand, some historical features of their welfare 

arrangements dating back to the interwar 

period were inspired by Bismarckian welfare 

states: Polish territories belonging to the 

German Empire inherited Bismarckian-type 

social insurance. On the other hand, eligibility 

and benefits became universal with socialistera 

full employment after 1945. Nevertheless, 

in the 1990s, the dependence of welfare rights 

upon employment or occupation was still 

reflected in the relatively high share of social 

expenditure financed through contributions. 

The most recent reforms, however, tended 

to mirror post-industrial welfare reforms 

in Western Europe and a liberal-oriented 

perspective emphasizing benefits targeting and 

social safety nets (Barr 1994 & 2005). Given 

generally poor achievements of the welfare 

state in the CEECs, social outcomes may 

instead resemble some observations made on 

Southern Europe (Ferrera 1996). 

The macro-typology is most useful when 

understood as a frame of reference of idealtypical 

configurations or a repertory of 

possible ways in which social protection 

may be organized (Palier 2005a), rather 

than a classification in which all empirical 

cases should fit. 3 One key assumption in the


welfare regime literature is that policies and 

institutions develop in a relatively consistent 

manner across the different policy domains, 

so as to constitute, as an outcome, a coherent 

policy regime. ‘Short-term policies, reforms, 

debates and decision-making take place within 

frameworks of historical institutionalization 

that differ qualitatively between countries’ 

(Esping-Andersen 1990: 80, my emphasis). 

Nevertheless, we can extract the functional 

logic of ideal-typical welfare regimes in order 

to build a conceptual grid for the analysis of 

a shift of regime, and more generally, policy 

change over time in a given setting. 

A change of welfare regime may take place on 

the occasion of a radical reform involving an 

explicit shift of paradigm (as occured in the 

Polish pension reform in 1995-1996, with the 

introduction of funded pensions based on the 

actuarial principle). It may also happen in a 

more gradual way, through the cumulative effect 

of successive reforms that, taken in isolation, 

seem limited to a recalibration of existing 

instruments or minor institutional change, 

but considered together and combined lead to 

major transformations questioning the general 

objectives and principles of the welfare system 

(Palier 2005b & 2007). In order to identify such 

a shift of welfare regime, we need to trace the 

trajectory of successive policy reforms focusing 

on in-depth case studies and using a processtracing 

methodology (Hall 2003, George and 

Bennett 2005, Vennesson 2008). 

1.2. Regime politics, risk communities and 

reform outcomes 

It is in its conceptualisation of the relationship 

between welfare institutions and social 

outcomes that the theory of welfare regimes 

makes its most decisive contribution. Esping- 

Andersen (1999: 36) stressed that ‘social policy 

means public management of social risks’. Two 

kinds of risk – defined as a contingency or the 

higher-than-average likelihood of seeing one’s 

individual situation worsen through no fault 

of one’s own – connected to work or lack of 

work are particularly significant in the process 

of economic and social adjustment. The first 

risk that individuals in employment face is 

increasing uncertainty and a deterioration 

of their working conditions. The second risk 

is losing paid work in circumstances that are 

beyond one’s control: unemployment as the 

unexpected and involuntary loss of income 

from work due to external factors affecting the 

employer. 

The communist regime eradicated 

unemployment by achieving artificial full 

employment as it imposed central state control 

over the allocation of work and welfare while 

eliminating free markets. By contrast, welfare 

policies in the capitalist world try to reduce the 

exposure to and consequences of labour market 

risks in several ways: re-arranging who bears 

and manages socioeconomic risks, establishing 

collective risk-pooling arrangements and 

providing social protection mechanisms 

to alleviate the impact on individuals. This 

implies providing security over a wide range 

of possible aspects: participation in 

the labour market, employment, skill 

formation and recognition, income, page 125 

and representation (Standing 

1999: 52). Thus, the welfare state is 

‘reapportioning the costs of risk and mischance’ 

(Baldwin 1990: 1), i.e. redistributing the 

capacity to cope with labour market risks.



Table 1. Risk-pooling arrangements in selected policy areas 

Redistribution of risk / 

policy domain 

More risk-sharing 

Less risk-sharing 

Unemployment policy 

Passive Active ‘Activated’ 

Pension system 

Employment relationship 

Predominant level of risk 

management, insecurity 

and uncertainty 

Social security 

(defined benefit, state provision) 

Protected and regulated 

Collective 

Actuarial 

(defined contribution, 

state or private provision) 

Flexible and deregulated 

Individual 

In that perspective, the defining feature of a 

welfare regime is ‘how risks are pooled’, i.e. 

‘how social risks are managed and distributed 

between the state, market and families’ (Esping- 

Andersen 1999: 33-36) as well as how they 

are distributed among unequal individuals. 

The system of social protection defines the 

eligibility or non-eligibility of citizens for 

benefits and services (‘the boundaries of rights 

and claims’ and the ‘range of human needs that 

are given the status of a social right’ in Esping- 

Andersen 1990: 80), thereby delimiting 

various groups in society. The major dimension 

of variation across regimes is the nature of the 

(institutional) arrangement that enables social 

risks to be pooled - or not. 

Labour market adjustment in a 

context of systemic transformations 

page 126 is also a highly redistributive process, 

triggering increased inequality as a 

result of ‘the transition from a world 

of jobs that were equally good (or equally bad) 

to a world of jobs that differ considerably in 

terms of job security and reward’ (Rutkowski 

1998a: 17). It is a reshuffling process in the 

most basic sense: it involves the reorganisation 

of job allocation and the redefinition of both 

private and collective roles, as well as individual 

and state responsibilities. Many individuals are 

exposed to a high risk of a loss or a deterioration 

of their income and job, but they are affected to 

a varying extent. 

In a consolidating democratic political 

system, the politics of welfare reform can be 

interpreted as regime politics. The logic of 

conflict combines both politics of transition, i.e. 

extraordinary politics of large-scale adjustment 

in times of systemic change, and social politics 

that approach the ‘politics as usual’, i.e. ordinary 

political games that have been a characteristic 

of reform processes in Western European 

welfare states since the retreat of Keynesianism. 

Uncovering the underlying power game, 

or compromise, allows for explaining the 

orientation of the welfare regime that results 

from cumulative, successive reforms, which 

together define a policy trajectory in terms 

of whether it has become more, or less,


redistributive, and whether it is pooling risks 

(and to what extent). This assumes a certain 

consistency across branches or policy areas, or 

at least that the actors interpret it as such. 

Comparative welfare studies provide models for 

the explicit or implicit political compromises that 

are underlying solidaristic- or individualisticoriented 

welfare regimes and ensure their 

stability over time. Welfare state generosity 

is often thought to be rooted in a democratic 

class struggle in which the social democratic 

parties and unions prove particularly powerful 

(Korpi 1983). However, class is a problematic 

concept in Poland where there is little empirical 

evidence of class consciousness (Meardi 2000; 

Ost & Crowley 2001 and Ost 2005) and 

widespread aversion to class-based ideology. 

Baldwin’s (1990) idea of risk communities is 

more enlightening to explain the emergence 

of institutions providing risk-pooling, or their 

absence. Social insurance, he argues, introduced 

a distinctive political dimension in that ‘the 

terms of misfortune’s reapportionment were 

determined not privately, but by society as a 

whole in accordance with commonly accepted 

standards of equity’, a process through which 

‘concerns that had formerly been individual 

became political’ (ibid.: 2). 

Redistributive policies such as welfare 

programmes (or income tax) tend to create 

‘haves and have-nots’ (Lowi 1964: 691), 

redistributive winners and losers. Social 

insurance redistributes the cost of managing 

socioeconomic risks rather than resources 

(Baldwin 1990: 19). Policies respond and give 

rise to demands for protection and support, 

expressed by certain categories of individuals, 

while other groups are satisfied by the primary 

distribution of socioeconomic capacities and 

security. The ‘risk categories’ group ‘actors 

identified and given interests in common by 

their shared relations to the means of security, 

by their stake in or against the redistribution 

of risk promised by social insurance’, in 

accordance with ‘the interaction of (...) (1) 

the simple incidence of risk as it afflicts the 

group in question, and (2) the group’s ability 

to shoulder its burdens unaided, its capacity 

for self-reliance’ (Baldwin 1990: 11-12). The 

simple incidence of risk relates to the effect of 

market mechanisms in the allocation of work 

and income, especially in the extraordinary 

politics of adjustment. The capacity for selfreliance 

is evaluated prior to the intervention 

of social policies. Therefore, ‘social security 

demands are best understood in terms of how 

risk communities coalesce. Risk communities 

are defined in terms of their relations to the 

means of security, and they may or, more likely, 

may not coincide with class identity’ (Esping- 

Andersen 1991: 225). 

Support for social protection is rooted in the 

amalgamation of a relatively high exposure to 

economic uncertainty, a low capacity for selfreliance 

and a capacity for collective action 

or political representation. 4 Universal social 

democratic welfare states and policies, which 

exhibit the highest level of risk-pooling, 

arise in the presence of a strong risk-pooling 

coalition. Only when such a risksharing 

coalition exists can solidaristic 

policies be pursued. Conversely, page 127 

residual or minimal welfare policies, 

placing an emphasis on individual 

responsibility, are adopted when the capacity 

for self-reliance of risk communities prevails 

at the expense of solidarity among them.



Finally, Bismarckian policies, or conservativecorporatist 

policies, are based on an insider 

status enjoyed by a category of individuals 

who contribute to social insurance in exchange 

for future entitlements. Therefore, they tend to 

emphasise the link between contributions and 

social security, or individual fairness, rather 

than universal solidarity. 

The inherited ‘state of entitlements’ (Inglot 

2003) in Poland in the early 1990s combined 

universal and Bismarckian aspects. With 

respect to a shift of welfare regime, three 

hypotheses can be formulated. First, generous 

universalistic policies tend to become 

minimalist residual ones when there is a shift 

in, or a breakdown of the coalition among risk 

communities in favour of self-reliant ones. 

Second, redistributive politics characterised 

by a recurrent two-side conflict are likely 

to be observed primarily in areas in which 

entitlements pre-exist. Third, as a consequence, 

Bismarckian (conservative-corporatist) policies 

are unlikely to be easily replaced by minimalist 

residual ones because they are supported by 

identifiable categories of beneficiaries who 

gained rights and entitlements in return for 

resources invested in the system, and seek 

to maintain these benefits. The dynamics of 

adjustment in Poland and policies connected 

with labour market risks provide new grounds 

on which to examine the validity of these 

hypotheses. 

page 128 With a view to testing these propositions, 

sections 2 and 3 trace the trajectory 

of successive reforms of un/ 

employment policy with a focus on two institutions 

that can be considered cornerstones of 

the post-industrial capitalist welfare state: the 

employment relationship and unemployment 

insurance. 

2. UNEMPLOYMENT POLICY BY DEFAULT: THE 

WEAKNESS OF SOCIAL INSURANCE AND THE IM- 

PORTANCE OF PARTICULARISTIC REGIMES. 

This section reviews the policies that 

contributed to the institutionalization (and to a 

lesser extent the alleviation) of unemployment, 

the management of mass dismissals through 

exit to inactivity and the slow emergence of a 

broader government program of action against 

unemployment, including active labour market 

policies eventually seeking to add obligations 

to social rights. 

2.1. The recent institutionalisation of 

unemployment 

Unlike other social problems, unemployment 

really appeared on the political agenda in 1990 

as a result of the first transition measures and 

was to be addressed with little experience to 

build upon. Unemployment compensation and 

labour market policies more generally do not 

have a long history in Poland. 5 

Unemployment as a new social problem 

Prior to 1989, everyone had a constitutional 

right to work; and unemployment had been 

made illegal (Mlonek 1999). As a result, the 

concept of unemployment was rarely used as 

an analytical category and was inexistent as a 

category of public intervention. While at a 

marginal level a form of frictional unemployment 

(the gap between one’s job and the 

successive one, when one changes jobs) could


be found, the number of people explicitly 

unemployed was never significant, as few remained 

without a job for long. 6 In that context, 

the definition of unemployment was written 

in the law only in 1989. The fact that such a 

conception of unemployment was the only existing 

one in the analyses of labour allocation 

carried out before 1989 probably explains the 

somewhat prolonged belief of many Polish analysts 

and policy-makers that unemployment 

was a natural side effect of transition that would 

resolve itself through market mechanisms. 

In 1989, the initial government proposal for 

an unemployment benefit scheme forecasted a 

moderate increase in the number of unemployed 

(300 000). In reality, registered unemployment 

jumped from 55,000 people (0.2%) to 

1,125,000 (6.1%) within twelve months; more 

than one million people became unemployed 

in 1990 alone. The registered unemployment 

rate increased steadily during the 1990s and 

peaked at 20% in 2002-2003 (see table 2). By 

2003, more than one in two registered jobseekers 

had been without a paid job for more 

than a year. The trend only reversed with EU 

accession. In 2005, unemployment started to 

decrease, which is explained both by the large 

numbers of Poles who emigrated to other 

EU countries, which had opened their labour 

markets in 2004 (UK, Ireland and Sweden), 

and to an increase in job creation in Poland 

itself. 

The Employment Act of 1989, revised in 1991, set 

the basis for new labour market governance and 

institutions compatible with a capitalist market 

economy and the conditions of eligibility for 

unemployment compensation. It introduced 

an initially broad definition of unemployment, 

which was subsequently restricted on several 

occasions in later years. Unemployment grew 

as a result of the combination of uncertain 

economic conditions, wide-scale economic 

restructuring, adaptation to a changing market 

environment, hardening budget constraints on 

large state-owned enterprises, and dismissals 

becoming an option to adjust workforce thanks 

to the changing governance of work. 

page 129



Table 2. Employment and unemployment in Poland (% of active population) 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

2008 

Registered 

unemployment 

rate 

Employment 

rate 

(LFS) 

6.1 11.4 14.3 16.4 16 14.9 13.2 10.3 10.4 13.1 15.1 17.5 20 20 19.0 17.6 14.8 11.2 9.5 

n/a n/a 53.3 52.1 51 50.7 51.2 51.5 51 48 47.4 45.5 44.1 44 45.1 45.9 47.5 49.5 51 

Source: employment services (data end of year) and labour force survey (Q4) 

page 130 

The introduction and erosion of the 

unemployment benefit 

In the early 1990s, policy-makers were 

concerned that the surge of unemployment 

and a temporary deterioration of economic 

conditions could put regime change at 

risk. An unemployment benefit was swiftly 

introduced as the major instrument in view 

of alleviating the consequence of losing one’s 

job. While the government response included 

both passive and active labour market policies, 

the first largely prevailed. The Employment 

Act, which became the Act on Employment and 

Unemployment in 1991, established a network of 

public employment offices, an unemployment 

compensation scheme, a dedicated Labour 

Fund, and limited active labour programmes 7 . 

The Labour Fund, which served to 

finance them, was relying primarily on 

state subsidies (up to three-quarters 

of the total) and, to a lesser extent, on 

social contributions. 

The first measures could appear generous 

in the context. The level of benefit was 

initially calculated on the basis of the last 

remuneration and length of unemployment 

with a starting level of 70% (within the limit 

of the average wage) during the first three 

months, subsequently falling but unlimited in 

time. When a significant rise of unemployment 

was expected, this was a generous and 

costly scheme, which would quickly become 

unsustainable. It is highly likely that the initial 

generosity of the scheme aimed to achieve a 

peaceful institutionalization of unemployment 

in Poland: ‘the government, seeking to gain 

social acceptance for its far-reaching reforms, 

was more interested in a temporary solution’ 

(Gardawski 2002c: 2). This law contained some 

peculiarities: there was no condition related 

to previous employment and young graduates 

entering the labour market were granted a 

preferential unemployment benefit which could 

reach up to 200% of the minimum wage, even 

in the absence of employment history 8 (MPiPS 

1995: 9; Gardawski 2002c). 

Quite logically, from 1991 onwards, a number 

of successive measures aimed to impose an 

increasing number of restrictions on the


general conditions of eligibility and length 

of unemployment benefit. First, a 12-month 

limit was introduced, with the possibility of 

extending the benefit to 18 months in total 

for people with a long employment history. 

The level of the benefit was linked to the 

local unemployment situation. Both the lower 

and upper limit of the benefit amount were 

lowered drastically: it could be as low as 33% 

of the average wage but not higher than the 

average wage. Restrictions on the benefit for 

unemployed graduates were also introduced 

in parallel. The relationship between the 

level of the benefit and one’s wage in the last 

job was completely eliminated in 1992: the 

unemployment benefit became a flat 36% of 

the average wage in the national economy. As 

a result, it was perceived as a measure of social 

assistance, rather than an entitlement deriving 

from one’s contributions paid to a social 

insurance fund. In 1996, the mode of calculation 

of the benefit level was reformed so that it 

would allow for adjustment independently of 

a set level of the average wage, which made 

it possible for further lowering of the benefit 

to wage ratio (Gardawski 2002c). In 2004 the 

rules were amended again. Although the Polish 

system is formally an unemployment insurance 

with obligatory contributions calculated as 

a percentage of salary, the benefit has, over 

the years, become a flat amount that varies 

only slightly according to work experience. 9 

Generally speaking, the unemployment 

benefit is granted for six months, but this can 

be extended in districts (powiats) marked by 

a level of unemployment higher for people 

who have a long working career behind them. 

In 2004, the Act on employment promotion and 

labour market institutions also introduced tighter 

conditions of eligibility for the unemployment 

status. To qualify, one needed to be a Polish 

or EU citizen between 18 and 60 (women) 

or 65 (men) years of age, not employed, not 

involved in training nor in any kind of paid 

work, not entitled to an old-age or invalidity 

pension, not owning more than two hectares 

of land, but willing and available to start full 

time work immediately, and registered with 

the local employment office. 

page 131



Table 3. Unemployment benefit coverage and replacement rate 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

2000 

2001 

2002 

2003 

2004 

2005 

2006 

2007 

Entitled to benefit 

(% of the unemployed 

registered) 

79 79 52 48 50 59 52 30 23 24 20 20 17 15 14 14 14 14 

Unemployment 

benefit (% of Polish 

average wage) 

19.6 34.2 37.9 36 37 36.7 33.4 32 30.5 23.8 23.3 23.1 23.4 22.9 22 21.9 21.5 20 

Source: Ministry of Economy and Labour (data end of year) 

While 79% of the unemployed received 

income support from the unemployment 

insurance in 1990-1991, the proportion of 

the unemployed covered by the benefit started 

to decrease significantly from 1992 (table 3). 

In 1999 there were 2.3 million unemployed, 

out of which 554 000 (almost one in four) 

received an unemployment benefit. In 2002 by 

comparison, there were 3.2 million unemployed 

(almost one million more) while the number 

of recipients of the unemployment benefit 

had slightly decreased, with only 539 000 

being eligible. The proportion of unemployed 

people entitled to the benefit sunk to 14% 

in 2004 and has remained at that level since. 

Such a drastic reduction of the eligibility 

for unemployment benefits was triggered 

by the combination of the limited duration 

of the benefit and an increasing 

unemployment duration. With many 

page 132 unemployed remaining jobless for a 

long time (more than half for longer 

than a year from 2002), the number 

of beneficiaries declined mechanically over 

the years to become a marginal proportion of 

the unemployed, falling below one in five in 

2005. The people who stopped being eligible 

for benefits over time are unlikely to receive 

any other form of income replacement and 

may only qualify for basic social assistance like 

food aid. As Gardawski (2002c) noted, in 2000, 

the average annual subsistence allowance paid 

by the social services barely amounted to one 

month of the average wage. Survey data on the 

economic means of the unemployed confirms 

that social assistance is not a source of income 

for those left without benefit (ISSP 1997). 

Meanwhile, the level of the unemployment 

benefit, which is determined by the Ministry 

of Labour and Social Policy, decreased in a 

severe manner (table3). The replacement rate, 

an indicator showing the level of the benefit 

in relation to wages 10 , stood at 76% of the 

minimum wage and 30.5% of the average 

wage in 1998, whereas one decade later it 

accounted for only 49% of the minimum wage 

(2008) and 20% of the average wage (2007) 11 . 

Both developments had an important social 

impact: further impoverishment of those who 

remained in unemployment for a long time. 

In 1997, according to survey data, only 22% of


the unemployed mentioned the unemployment 

benefit as their main source of economic 

support. 50% relied primarily on partner or 

family support and only 5% on social assistance 

(ISSP 1997). 

2.2. Measures facilitating labour market exit 

while bypassing the unemployment status 

Neither the worsening economic situation of 

the unemployed nor the reforms restricting 

the unemployment benefit triggered specific 

collective mobilization in Poland. These issues 

were not among the priorities on the agenda of 

trade unions, except in a few specific instances. 

Things differed when a large number of workers 

with a strong tradition of mobilization faced a 

deterioration of their work situation. In effect, 

‘the political threat posed by unemployment’ 

(Baxandall 2003: 253) was primarily in the 

discontent of politically influential workers 

still in employment who risked losing their 

jobs. There were two major instances: the 

process of restructuring of strategic sectors in 

which workers had enjoyed a privileged status 

and workers with a long career behind them 

and no future in the new market society were 

concerned. In view of avoiding social conflict, 

these categories of people were often granted 

special compensation that not only bypassed but 

also undermined the standard unemployment 

benefit. 

This resulted in a segmentation of policies 

addressing unemployment: the jobless were not 

covered by one universal scheme, but split among 

a variety of compensation or social security 

mechanisms, which some saw as a deliberate 

government strategy to ‘divide and pacify’ 

groups opposing market reforms (Vanhuysse 

2006). Without going that far, these policy 

choices clearly gave more favourable conditions 

to the groups that had the greatest capacity to 

mobilize against economic transformations, 

workers with a long career under the previous 

regime who had no future in the capitalist 

economy, and workers in strongly unionized 

sectors such as heavy industry and mining. 

Aside these particularistic schemes, the 

universal unemployment benefit set up as early 

as 1990 quickly became marginal as a result 

of successive reforms. The unemployed, hardly 

identifiable as a social group, neither developed 

a collective consciousness nor uniform 

interests in the face of welfare reforms; the few 

instances of mobilisation concerned primarily 

the conditions of collective dismissals and early 

retirement for workers in specific industrial 

sectors. 

Collective dismissals and severance payments 

Trade unions, which gathered the workers 

facing the threat of becoming unemployed, 

were potentially the strongest organized 

opposition group and retained a significant 

mobilization capacity in sectors like steel or 

mining 12 . In a few cases of large company 

or sector restructuring, the conditions of 

unemployment, or more precisely, the conditions 

of dismissal led to intense negotiations. The 

Act on Dismissals of 1989 set the rules of large 

workforce reductions and measures 

to protect affected employees and 

imposed some obligations on the page 133 

employer (notification of the trade 

unions in advance; stating the reasons 

for redundancies and the number of people 

concerned; informing the local employment 

office; and developing a program for retraining



and re-employment). Dismissed employees 

would receive redundancy payments of up to 

three months wage. Under the influence of 

powerful unions, restructuring plans involved 

intense negotiations and complex agreements. 

As an example, in the years 1994-1997, 

under the threat that the miners’ unions 

would block the restructuring of the whole 

sector, particularly generous social packages 

were granted in the form of significant 

one-off severance payments 13 . The mining 

sector provides an interesting illustration of 

negotiated compensation. Concentrated in 

Upper Silesia, 14 the mines and steelworks 

had a tradition of strong local trade unions 

and better than average welfare entitlements; 

they enjoyed more state support than 

elsewhere. Restructuring was contentious, 

for employees were strongly attached to the 

mines, which gave access to various benefits 

and social institutions. As a result, dialogue 

and coordination among the social partners 

was high on the agenda. In spring of 1995, 

representatives of socio-political, professional, 

local government and economic circles agreed 

to cooperate in a program for restructuring 

and development in Upper Silesia. A fouryear 

reform plan prepared by the Ministry 

of Industry in 1996 granted special social 

transfers and other subsidies. The regional 

leader of Solidarność presented an alternative 

scenario calling for more involvement 

of the national government and a 

page 134 wider consultation of regional and 

local actors. The outcome reflected 

the traditional power structure of 

actors in the region, i.e. the prominence of 

industrial actors linked to the largest plants, 

which made it difficult to envisage innovative 

solutions. Half a dozen successive restructuring 

plans were drawn up, but most were never 

fully implemented due to industrial conflict. 

Nevertheless, the workforce was reduced from 

a million people in the 1980’s to a quarter of 

this by 2003. Conflicts over collective dismissals 

were eventually avoided by granting generous 

packages, reflecting the bargaining power of 

the miners unions: there were reports of sums 

exceeding 10,000 euros to secure a definitive 

exit of mining employment (Gardawski 2003). 

This contrasts with the steel industry, where 

employment was reduced in the same proportion, 

but under very different conditions. Until 1998, 

jobs were lost principally to retirement or 

disability benefits, or transfer to other entities. 

In 1999 a social package led to further jobs 

reductions, among which slightly less than half 

were transferred to other companies and the 

rest made redundant (Towalski 2003). In 2003, 

a second social package for steelworks, focusing 

on activation, was adopted by the government 

and endorsed by the sectoral tripartite team. 

Its major innovation was to facilitate reemployment 

in other industries, by linking 

severance payments to enrolment in training 

contracts. By Polish standards, restructuring in 

the steel sector is an unusually positive example 

of working social dialogue in a developmental 

perspective. In comparison to the mining sector, 

this process was also remarkably peaceful and 

conflicts were scarce 15 ; a contrast that can be 

traced back both to the different role played 

by the unions (obstructing restructuring of the 

mines while accepting restructuring in the steel 

sector), and to the ultimate objective (closing 

down the mines as opposed to reducing 

workforce to build smaller, competitive steelmelting 

plants).


Organizing exit from employment and 

the labour market at once: paths to early 

retirement 

As in Western Europe in the past (Kohli et 

al. 1991, Ebbinghaus 2006), early retirement 

provided a widely-used alternative to manage 

mass dismissals, reducing their visibility by 

the same token. While it existed as a privilege 

before 1989, its function changed as it became 

a mechanism for employment adjustment. 

In addition, after 1990, the pension system 

continued to allow a long list of professions 

to retire earlier with full pension rights 

(Czepulis-Rutkowska 1999: 152). Social 

plans accompanying firm restructuring made 

extensive use of measures allowing to peacefully 

get rid of redundant workers and put them on 

the two kinds of inactivity pensions available: 

old-age retirement and disability. In 1991, 

a regulation targeting people who would be 

unable to find new employment allowed those 

who had been working for 35 (women) or 40 

years (men) to retire with full rights regardless 

of age if they had been made redundant (ibid.). 

An additional pre-retirement benefit financed 

by the labour fund, was later created to bridge 

the period between becoming unemployed and 

reaching the legal retirement age, targeting 

especially the long-term unemployed. 

Evidence of the scope of early retirement 

in practice is provided by several indicators 

regarding people moving from work or 

unemployment to retirement before the legal 

retirement age. The number of people retiring 

significantly exceeded those reaching retirement 

age in several given years. In 1991 and 1992, 

around 40% of all pensioners had not yet 

reached the legal retirement age (Golinowska 

1994: 33-35; Orenstein 1995: 191). In 1996 

again, 39.5% of all men and 28% of women 

who retired had not yet reached retirement 

age (ZUS, in Müller 1999: 101). In 1999, one 

third of the male workers who retired were 

below 60, declining to one fourth in 2001 

(ZUS figures). In 1999, still, more than 10% 

of men receiving an old-age pension were 

below 60. While the number of employed 

people fell by 14% between 1989 and 1996, 

the number of pensioners (including those 

on disability benefits) rose simultaneously by 

34%. Pensions clearly played the role of an 

additional unemployment benefit scheme. In 

2003, according to the Ministry of Economy 

and Labour, out of around one million of 

unemployed who were receiving some kind 

of benefit (less than 30%), slightly more 

than half received a pre-retirement benefit, 

while only the remaining portion received a 

proper unemployment benefit. In 2003, over 

half a million people were receiving a preretirement 

benefit or allowance. Similarly, 

the high rate of certified disability suggests 

that disability benefits were in part used as 

a functional equivalent of pre-retirement 

despite the medical examination required 

to certify unfitness to work. In 2002, they 

were distributed to 13% of the working-age 

population (20-64), and up to 18% of those 

aged between 40-55 (Burns and Kowalski 

2004: 6-7). The government attempt to reform 

the scheme and strengthen controls 

in 2003 met with little success. 

page 135 

Therefore, the standard unemployment 

benefit was only one of 

several policy instruments used to address 

rising unemployment, and not necessarily 

the prevailing one. With the heavy reliance



page 136 

on severance payment to ease dismissals in 

strategic sectors, on the one hand, and on 

inactivity pensions (early retirement and 

disability) to ease the exit from the labour 

market of a generation of workers with 

outdated skills, on the other, governments 

privileged selective schemes at the expense of 

universal ones. This contributed to the lack of 

visibility of the unemployed. 

3. THE CHANGING GOVERNANCE OF WORK AND 

THE REVIVAL OF LABOUR LAWS 

The shift from universal, centrally managed, 

protected standard employment towards more 

flexible and decentralised labour relations 

involved the retreat of the state from certain 

aspects of labour regulation (as part of setting 

the institutional foundations for a capitalist 

economy), a change of regulatory regime, 

and a diversification of forms of work and 

employment. Pre-1989 institutions and 

employment relations played a significant 

role. Unlike the issue of unemployment, the 

sphere of employment regulation tended to 

be perceived as a redistributive policy arena 

(Lowi 1964) in which interests were organized 

and represented around the opposition of two 

sides. 

3.1. Institutionalizing a labour market 

The end of the employer-state and 

the revival of the Labour Code 

Polish labour legislation dated back 

to the interwar period and was remodelled 

into a Labour Code in 1974, but the text had 

lost its role in the ‘command economy’ where 

unemployment was banned. The 1974 Code 

included the right to work (a formal guarantee 

of full employment) and kept some elements 

of the early codification: an employment 

relationship supposedly based on the freedom 

to contract, a distinction between the contract 

of indefinite duration, the norm, that of predetermined, 

short duration, the exception, and 

finally rules for employee dismissal (Surdej 

2004b: 13). The small number of modifications 

of the Labour Code between 1945 and 1989, 

ten at most 16 , testifies that it was a rather 

inactive piece of legislation (Gardawski 2002a), 

which was revived only after 1989. 

At the end of 1989, re-institutionalising 

market mechanisms for the allocation of work 

and jobs became a necessity, especially with 

respect to hiring and firing. However, at the 

outset of economic transformations, changing 

labour law was a lesser priority as ‘there [was] 

a prevailing belief that the government should 

take care of the economy first and then try to 

develop the legal superstructure’ (Swiatkowski 

1990: 45). The major laws needed to prepare the 

ground for economic restructuring and labour 

market adjustment were passed within the last 

four days of 1989 with little involvement of 

the parliament: the Act on Collective Dismissals 

on 28 December 1989, the Act on Employment 

and Unemployment on 29 December 1989, 

immediately followed by the programme of 

macroeconomic stabilization, also referred to 

as ‘Balcerowicz plan’ on 31 December 1989/1 st 

January 1990. This first series of laws decidedly 

set in motion the process of labour adjustment, 

by allowing dismissals, re-establishing 

the market and defining employment and 

unemployment.


From centralised control on wages to plantlevel 

wage bargaining 

The second major aspect of the state 

disengagement from administrating the 

workforce was the liberation of salaries and the 

withering away of state control on the level of 

wages. While wages were centrally fixed prior 

to 1989, the liberalisation of the labour market 

and the launch of privatisation brought this to 

an end in the rapidly expanding private sector. 

Following price liberalisation, the necessity 

to fight inflation justified the persistence of 

state control on wages through tax-based 

policies (ILO 1995a). Excess wage increases 

were penalised by a progressive taxation 17 to 

avoid fuelling inflation, which led to a real 

wage decline. Regulation was mainly targeting 

the public sector, thus virtually all workers 

initially, and then a decreasing share of them. 

The potential for union pressure on wages 

was considerably restricted as a consequence. 

Tax-based income policies were abandoned in 

1995-1996, leaving wage determination to the 

social partners. 

The Tripartite Commission, in its first version, 

provided a forum for wage negotiations 

primarily in the state sector. It established 

common positions on the growth of average 

monthly wages in enterprises during the 

third and fourth quarters of 1994; the level of 

resources to be allocated to wages in budget 

sector institutions in 1995; the maximum 

annual growth rate of average monthly wages 

in enterprises for 1995, 1996 and 1997; the 

expected level of average pay in budget sector 

and pay differential in sub sectors (Casale 2001: 

10). Union leverage was strengthened by voting 

powers which equalled those of government 

and employers representatives taken together 

(Pankow 1996), but it was undermined by 

a lack of cooperation between OPZZ and 

Solidarity and the self-restraining behaviour 

of the latter. Negotiations were suspended 

at the end of 1996. The Commission had 

practically no influence on wages in the private 

sector, where the absence of both unions and 

minimum standards allowed for employer 

opportunism and unilaterally imposed wages 

and employment conditions. In the mid 1990’s, 

wage-bargaining was taking place at the local 

plant level in more than 80% of Polish firms 

(ILO 1997), often without the presence of a 

shopfloor union. 

The minimum wage was formally recognised 

by the Polish Constitution in 1997 and set at 

a uniform rate by the Ministry of Labour and 

Social Policy. The government had planned to 

differentiate it according to regions in order to 

match the variation of average wages, but this 

was not adopted (Surdej 2004b: 11). Solidarnosc 

stood for a higher level set at 40 % of the average 

wage (Solidarity 2001) while opposing the 

indexation of the minimum wage on inflation 

and the introduction of a lower separate 

minimum wage for labour markets entrants 

(Casale 2001). A reform of the minimum 

wage in October 2002 increased the amount, 

changed the way it is set, and established 

a lower rate for school leavers 18 (Czarstaty 

2002b). According to the new law, 

from 2003 onwards the minimum 

wage is subject to negotiation in the page 137 

Tripartite Commission on the basis 

of a government proposal. It is one 

of the few subjects on which the trade unions 

always managed to cooperate (Kruszczinski, 

interview), with little result however. Since



page 138 

2000, the minimum wage has been wavering 

between 35% and 37% of average wage, one 

of the lowest rates among EU countries, 

nearing the pre-poverty income level which is 

estimated at 30% of average wage 19 . 

3.2. Successive reforms of the Labour Code: 

flexibility po-polsku 

They took place in four stages. In 1995-1996, a 

first, limited attempt to modify the text aimed 

at adapting it further to the new economic 

context. Between 1997 and 2001, the second 

attempt to modify the labour code was subject 

to trade union pressure to protect standard 

employment against deregulation. From 2001, 

a clear move toward de-regulation and greater 

institutionalised flexibility signalled a revival 

of the Labour Code reform. Nevertheless, 

interestingly, the government stepped 

backwards on some issues in 2003-2004 when 

it had to align rules with European framework 

legislation and policy guidelines in accordance 

with the EU accession process. 

A limited move to further adapt the old 

Labour Code (1995-1996) 

The issue of a fundamental reform of the 

labour code came back on the political 

agenda in 1995 as it became clear that the 

existing labour code did not provide a suitable 

framework; for instance, it did not 

impose any limitation on the renewal 

of fixed-term contracts, which came 

to be widely used. 

In 1996, the initiative for changes in the labour 

law came from a government supported by a 

centre-left coalition (SLD-Labour Union 

[UP]-Polish People’s Party [PSL]). To prepare 

for this, an Extraordinary Parliamentary 

Commission for the Modification of Labour 

Law worked from July 1994 until February 

1996 under the guidance of Wit Majewski, an 

SLD representative. However, most proposed 

modifications were elaborated by an expert 

committee for the reform of the labour law 

composed mainly of labour law professors, 

operating as a standing advisory body to the 

Ministry of labour and social policy since 

1990, with the implicit mission to design a new 

labour law for a social market economy (Surdej 

2004a). The Parliamentary Commission, acting 

to draft an acceptable reform compromise, 

held meetings with the participation of 

representatives of the major trade unions 

(OPZZ and Solidarnosc), employers associations 

(the KPP confederation, Business Centre Club 

[BCC], Polish Business Roundtable [PRB]) 

and two public institutions closely involved 

in the matter: the Social Security Institution 

(ZUS) and the National Labour Inspectorate 

(PIP). A law was voted that eliminated 

outdated legal provisions and brought greater 

uniformity of regulation for employment in the 

public and private sectors (Kwiatkowski et al., 

2001: 25; Czarzasty 2002a). 

The most contentious issue was the definition 

of the employment contract. The spreading 

practice of bypassing the labour code by using 

task-based contracts for assignments that, given 

their regularity and a unique employer, would 

normally require more binding employment 

contracts, had revealed loopholes in the 

existing legislation. This happens at the expense 

of worker’s protection: the Labour Code by 

definition only governs employment contracts, 

while contracts covering the execution of a


precise task within a specific, limited time 

frame (the so-called Polish civil contracts) 

fall under the rules of the Civil Code, which 

means that the contractor is neither considered 

an employee nor protected against employers’ 

abuse (Streeck 2005). In an attempt to remedy 

the situation, the Extraordinary Parliamentary 

Commission put forward a proposal to modify 

the legal definition of employment (Surdej 

2004a, 30). 

The trade unions, the labour inspectorate 

(PIP) and the Social Insurance Institution 

(ZUS) called for the introduction of a legal 

provision stating that every job automatically 

implied an employment contract unless the 

employer proved that it qualified for an agency 

contract. The proposal was opposed by the 

Ministry of Labour and Social Policy and 

eventually rejected with the argument that 

it would have created legal uncertainty and 

high implementation costs. The compromise 

consisted in adopting a solution that defined 

the employment contract as ‘a work under 

principal’s supervision’ (Surdej 2004a: 30-31), 

as opposed to task-based contracts designed 

in principle for independent workers. This 

seems an insufficient measure given that some 

enterprises were already using civil contracts 

in abnormal situations. A few other changes 

were introduced in the Labour Code, without 

putting its continuity into question. The most 

important of these is a restriction on multiplying 

fixed-term contracts: only two such contracts 

between a given employee and a given employer 

can succeed to each other, with a renewal for a 

third contract automatically taking the shape 

of an undetermined, long-term one. 

While the two main trade union federations 

proved satisfied with the changes, the Labour 

Code in general continued to be criticised by 

employers for being too employee-friendly, too 

rigid for small businesses, and insufficiently 

amended (Czarzasty 2002a; Surdej 2004a). In 

effect, the lack of radical changes to the Code 

at this stage could be seen as a union-friendly 

compromise of the ruling coalition composed 

of the Democratic Left Alliance (SLD) and 

the Polish People’s Party (PSL) (Czarzasty 

2002a). 

Trade unions, the protection of standard 

employment and the defeat of reform attempts 

(1997-2001) 

By 1997, the SLD and PSL coalition had 

thus introduced some non-radical revisions 

to the labour code while keeping the bulk of 

it unchanged, which was seen as damaging 

for business and interpreted as an indication 

of both union power and employers’ failure 

to organize and lobby efficiently for their 

interests. With rising unemployment, labour 

law reform was taken more seriously; it was 

on the agenda of the AWS coalition (Electoral 

Action Solidarity), which returned to power 

in 1997. Employers also became more active, 

putting forward a large number of proposals 

to amend the labour code. Two reform projects 

were especially significant: the union proposal 

for shortening the work week and a series 

of liberalising measures proposed 

by businesses; they triggered an 

ongoing battle over labour law reform page 139 

opposing the two sides for several 

years (McMenamin 2005: 224) 20 . 

The Labour Code reform was also put 

on the political agenda by a coalition of



business associations that brought together 

the Confederation of Polish Employers 

(Konfederacja Polskich Pracodawcow – KPP) 21 , 

the Business Centre Club, the Polish Chamber 

of Commerce, and the Association of Polish 

Artisans, which represented small-sized craft 

businesses. This was a well-coordinated effort 

benefiting from the administrative support and 

technical analysis of the Business Centre Club. 

The coalition worked to prepare a detailed 

and radical draft bill, aiming to significantly 

increase flexibility and reduce labour costs. 

Their first proposal was a draft bill focusing on 

improving conditions for small and medium 

enterprises (SMEs) 22 , a theme to which both 

the Freedom Union, the party of Leszek 

Balcerowicz, and AWS were attached; but, in 

fact, a number of measures adopted within this 

frame concerned all enterprises and were aimed 

at reforming the labour market in general. The 

draft included measures concerning overtime 

and fixed-term contracts, which were of 

interest to all employers (ibid.: 229-230). 

The way in which the bill was presented 

largely explains its rejection. Unions saw it as a 

provocation. The text had been shown neither 

to the government nor to the trade union 

Solidarnosc before reaching parliament. It was 

discussed only in a specific SME committee, a 

favourable audience a priori, but a committee 

with no history of passing legislation and no 

political weight (ibid.: 232). AWS 

and SLD were committed to rejecting 

page 140 the proposal. After the SME bill was 

rejected in its first parliamentary 

reading, business associations and 

their political allies turned to a more efficient 

active lobbying strategy, i.e. talking to 

politicians of the opposite side to see which 

elements could become acceptable and trying 

to persuade them, lobbying the government 

directly and using personal channels rather 

than institutional ones (ibid.: 232-234). 

In the meantime, a distinct project explicitly 

aiming to reform the Labour Code was taking 

shape. During the debate on the SME bill, 

both left- and right-wing political forces were 

publicising proposals concerned with the 

duration of the working week and working 

time, primarily aiming to satisfy union demands 

for a shorter working week. This led to two 

draft bills: one from the governing coalition 

and one from the opposition, both appearing 

sympathetic to unions’ concerns. 

The first draft bill was proposed in the Senate 

by Solidarnosc and only supported by a faction 

of the related political party. It focused on two 

measures: reducing the 42-hour working week 

to forty hours with no reduction in pay and free 

Saturdays in place of old designated free days. 

The proposal also included practical provisions 

for the implementation of these changes in a 

worker-friendly way, and other pro-union or 

pro-worker adjustments to regulations (ibid.: 

235-236). 

The second draft bill was proposed by SLD in 

the Sejm. It was supported by the leadership 

of the party and was more likely to represent 

a compromise between the pro-union and 

pro-business factions. The bill ‘was designed 

to ensure that AWS could not take the 

credit amongst workers, as the party that had 

shortened the working week. However, it also 

had something to offer employers and was, to 

some extent, inspired by the small enterprise 

bill. The bill simply declared a 40-hour week


and increased the overtime limit from 150 to 

200 hours per year’ (ibid.: 236). In comparison 

with the former, the proposal of the left would 

have raised the cost of labour significantly, but 

it was less of a threat to employers since it did 

not provide for free Saturdays and raised the 

overtime limit. Both proposals, however, were 

leading to more uniform working conditions 

across industries (in many state sectors, such as 

steel, energy and mining, the shorter 40-hour 

week already existed). 

Taking its time, the government published a 

unique draft in September 1999 attempting 

to bring together the three previous proposals, 

a ‘compromise between the pro-union bills of 

AWS and SLD and the pro-business bill of the 

SME committee’ (ibid.: 240). Workers had free 

Saturdays, a gradual implementation of the 40- 

hour work week, plus two extra days off on the 

annual minimum leave. Employers obtained 

an extension of maximum overtime allowed, a 

cut by half of overtime pay, and the abolition 

of restrictions on sequential temporary 

contracts. The unions were strongly opposed to 

most measures, arguing that not all measures 

involved had been discussed in the Tripartite 

Commission; and the proposal was buried in 

October 1999 as the unions announced that 

the MPs connected with them would vote 

against the bill (ibid.: 241). 

After this failure, the government decided to 

limit itself to implementing what the unions 

called for: the 40 hour and five-day week, with 

a two-year phase-in for the former. This was 

passed without the support of the Freedom 

Union, while two renewed attempts to pass 

bills that would liberalise the labour code were 

defeated: a resurrection of the failed SME bill 

by the Freedom Union, and a bill introducing 

a specific, more liberal labour code for SMEs 

aside the regular one (ibid.: 243). Finally, a bill 

banning work on Sunday in firms employing 

more than 5 people, proposed by a faction 

of AWS, was passed with the support of the 

Peasant party, small parties and independents. 

In the face of many opposing voices, the 

law, probably aimed at the foreign-owned 

hypermarket chains, was eventually vetoed by 

the president. 

In conclusion, the period of the third Sejm 

was marked by repeated attempts to liberalise 

or bypass the labour code, but the continued 

pressure of trade unions (in particular 

Solidarity, given its strong link to the AWS 

coalition) and business lobbying inefficiency, 

led to a consolidation of the standard 

employment contract. Conditions even 

improved with a shortened work week, while 

new legal or administrative burdens fell on 

employers, such as the requirement to establish 

internal company bylaws and social funds 

(Gardawski 2002a). SMEs remained subject 

to the same requirements as large companies. 

Nevertheless, the debate had clearly moved: 

the “left” had made some significant steps 

towards a more business-friendly position, at 

times departing even from the pro-workers 

movements of some parts of AWS. Thus, two 

increasingly separate types of cleavage were 

emerging on the issue of labour law 

reform: the usual left-right divide and 

a workers-business opposition, while page 141 

the Left and workers’ side, on the one 

hand, and the Right and employers’ 

side, on the other hand, were not necessarily 

overlapping.



The Labour Code and the institutionalisation 

of flexibility (2001-2003) 

Following general elections in 2001, in the face 

of rapidly rising unemployment, the new left 

coalition government taking office in autumn 

made boosting economic development the 

highest priority on the agenda. 23 To achieve 

its agenda, the government planned reforms 

aiming at a combination of improving 

flexibility of the labour market and supporting 

SMEs. When Jerzy Hausner (SLD) took up 

his post of Minister of Labour and Social 

Policy, he declared his intention of introducing 

profound changes to the Labour Code in view 

of reducing financial costs and administrative 

burden for enterprises 24 . 

Although the right-wing incumbent 

government had been defeated, altogether, 

business forces appeared to be better represented 

in both the government and parliament. 

While a number of trade unionists lost their 

seat, a group of deputies representing private 

businesses appeared in the Sejm. Jacek 

Piechota’s (SLD) nomination as Minister for 

Economy – he had previously chaired the 

parliamentary committee on SMEs – was a clear 

signal: his first intervention was to draw up 

and circulate a list of demands from SME 

owners (Gardawski 2002a). 

A renewal of the government’s 

approach to law-making also contri- 

page 142 buted to changing the political 

climate. In contrast to earlier government 

practices, Hausner signalled 

his commitment to pursuing such a serious 

reform in consultation with all the significant 

institutional partners. His first task was, 

therefore, to revive the Tripartite Commission, 

the institution for social dialogue paralysed 

since OPZZ’s withdrawal. The innovative 

method was initially welcomed by the trade 

unions, since it appeared to be radically 

different from the way in which the previous 

government had prepared a law – behind closed 

doors, without consulting all sides involved. 

Measures geared towards enterprises were 

grouped in the programme ‘Enterprise above 

all’, which was approved in the beginning of 

2002. The title of the document clearly reflects 

the strong belief of government elites that easing 

the burden for entrepreneurs would speed 

up economic growth and ultimately increase 

the number of jobs available. A proposal for 

changes to the labour code was prepared by the 

Ministry of Labour and Social Policy. 

The package of labour law changes was 

presented and discussed with the social 

partners in a Tripartite Commission meeting 

on 28 January 2002. 25 The initial negotiations 

appeared to be promising, with media reports 

in early 2002 stating that agreement seemed 

imminent between the leadership of OPZZ 

and Solidarnosc. The two main trade unions 

seemed to agree on measures aiming to reduce 

administrative costs falling on enterprises, 

although they rejected the measures aiming to 

reduce the role and function of trade unions in 

collective agreements (a right for employers to 

dissolve collective agreements against unions) 

(Gardawski 2002b). The course of events took 

another direction, however, with Solidarnosc 

eventually rejecting the proposal. 

Nevertheless, the trade union OPZZ, the 

employers associations PKPP and the Polish


Craft Association (ZRP) worked out a 

common position, stating their reservations on 

several aspects, ranging from the dissolution of 

collective agreements and conditions of leave, 

to severance and overtime pay (Gardawski 

2002b). Two agreements were signed on 19 

April and 8 May 2002, without Solidarnosc. 

The union demonstrated in Warsaw against 

the government proposal 26 . However, the 

consequences of this opposition were limited as 

the union had lost parliamentary representation 

and protest remained circumscribed 27 . The 

government made some changes to the 

proposal consistent with trade unions’ demands 

and decided to move forward and submit 

the project to Parliament, despite the lack of 

unified support of the social partners. 

The Sejm adopted the law modifying the 

Labour Code on 26 July 2002 with the votes 

of the governing social-democratic coalition 

supported by the Civic Platform (PO), 

following which it was passed at the Senate 

on 7 August 2002 (Surdej 2004a: 34). For this 

success, and his reactivation of social dialogue 

at the national level, Hausner was deeply lauded 

by Gazeta Wyborcza, one of Poland’s most 

influential (liberal) daily newspaper, which 

praised him in the following terms: ‘rather 

than endlessly reminding all and sundry about 

social justice, Minister Hausner has created 

a language in which he combines economic 

slogans with ones about the building of civil 

society, with academic knowledge thrown in 

for good measure. (…) he has gained standing 

(if not necessarily affinity) among trade union 

people’ (18 October 2002, cited by Gardawski 

2002a). Unions, on the other hand, seemed 

to have fully internalised the constraints of a 

market economy and given the unemployment 

climate, started to buy the argument that a 

limited degree of de-regulation was beneficial 

to counter unemployment, and in the final 

analysis, employment-friendly (Kruszczinski 

interview, OPZZ interview). 

Meanwhile, before the government proposal 

was to be examined by parliament, PO 

had presented its own, more radical project 

which was subsequently abandoned. It 

contained many business-friendly measures: 

the elimination of rule limiting the number 

of successive fixed-term contracts, the right 

to terminate the employment contract of an 

employee absent for longer than a month, 

a reduction of sick pay entitlements and a 

lowering of the employer burden in sick pay 

to the first week, a significant increase of 

overtime allowance (from 150 to 240 hours 

per worker per year), and finally the right 

for an enterprise in danger of bankruptcy to 

suspend some provisions of the Labour Code 

(Czarzasty, 2002a). 

The actual changes introduced by the law of 

2002 are well captured by the redefinition of 

the employment relationship, aiming to limit 

the substitution of the employment contract 

by task-based contracts not subject to the 

Labour Code. The employment relationship 

exists ‘irrespective of the name of contract 

made by the parties’ (article 22.1.1) and 

establishes that ‘the employee agrees 

to perform a specified type of work 

for and under the directions of the page 143 

employer, in a place and at times 

designated by the employer, and the 

employer agrees to employ the employee in 

return for remuneration’ (Labour Code, article 

22.1). Furthermore, a ban on abusive civil



contracts is spelt out as follows: ‘a contract of 

employment shall not be replaced by a civil 

law contract on the same terms of performing 

work as those specified’ (article 22.1.1). While 

the aim was to render illegal the practice 

of dependent self-employment based on 

unprotected civil contracts, these rules remain 

insufficient to grant an effective protection 

given weak enforcement. 

Aside this, a considerable amount of measures 

introduced by these new laws had the effect 

of increasing the flexibility of labour. First, the 

law of 2002 suspended, until the day of EU 

accession, the rule imposing that after two 

fixed-term contract an employee should be 

offered a undetermined one 28 . This can be seen 

as a way to increase numerical flexibility, but it 

is detrimental to employment stability since it 

allows for an indefinite number of short-term 

contracts in a row. Secondly, by modifying 

the law on collective dismissals of 1989, it 

diminished both their cost, as it introduced 

more restrictive conditions for being granted 

severance payment, and their visibility by 

limiting the consultation requirement to 

the enterprise union instead of, previously, 

the regional office. Procedures for collective 

dismissals were also shortened and simplified. 

However, as the next session will show, new 

legislation in 2003 had to step back on some 

of these measures. Thirdly, the law expanded 

working time flexibility as it modified 

the way in which working hours are 

page 144 calculated, allowing for more flexible 

arrangements in the organisation of 

work and making maximum working 

time less of a constraint. Furthermore, it 

cut significantly the level of overtime pay, 

for which the employer can from then on 

also grant free time. In accordance with the 

government objective of facilitating economic 

activity, SMEs were granted an exemption 

from a number of internal company regulations 

considered bureaucratic and cumbersome 

procedures of little use in these small units 

(working and remuneration codes), while 

health and safety regulations and procedures 

were simplified for all employers. 

The synergy between the government objective 

of stimulating economic development and 

labour and social reforms was reinforced when 

the Ministry of Economy and the Ministry 

of Labour and Social Policy were merged as 

one single portfolio placed in the hands of 

Jerzy Hausner in July 2003.29 In the summer 

2002, a special legal commission for the 

revision of the Labour Code (Commission 

for the Codification of Labour Law - Komisja 

Kodyfikacyjna Prawa Pracy) was instituted for a 

duration of four years 30 . An independent body 

gathering experts in the matter of labour law, it 

was headed by Michal Sewerynski, a recognized 

Law professor (who later became Minister of 

education in 2005). While such commissions 

are regularly instituted in Poland to reform a 

wide body of laws constituting a Code, this 

intensified the technical character of both 

labour law reform and the transposition of the 

EU acquis into national law. In sum, it resulted 

in further de-politicizing the process. In reality, 

the commission had an implicit objective to 

rewrite the Labour Code entirely: its primary 

mission was to elaborate the foundations for a 

‘re-codification of individual labour law’ and a 

‘codification of collective labour law’, as well as 

drafting legal projects to meet EU standards 

with a view to accelerate the integration of EU 

provisions into Polish law.


Legislative changes induced by EU accession: 

limits on flexibility? (2003-2004) 

Although this was at the margin of legislative 

alignment with the EU acquis, labour market 

regulation was affected by the preparation for 

EU membership 31 . The requirement to integrate 

the EU acquis into national law applied in two 

areas that relate to employment regulation: a 

large body of detailed and binding rules needed 

to implement the free movement of persons 

and, more of interest, selected provisions 

concerning employment and social policy 

(negotiation chapter 13), which contained little 

binding regulations at the time, but a number 

of directives requiring transposition into Polish 

law. 

Therefore, the terms of the debate on lawmaking 

slightly changed, taking a more 

technical character with the urgent necessity to 

bring Polish legislation in line with European 

norms as accession became a tangible and 

proximate deadline set on the 1 st of May 2004. 

The accession negotiations were closed at the 

Copenhagen Council on 13 th December 2002. 

In 2003, legislative work focused on completing 

the integration of the acquis in the area of free 

movement and social policy and employment, 

leading to the adoption of three texts: the 

Act of 13 March 2003 on special rules for 

terminating labour relations for reasons not 

tied to the employees, 32 the Act of 9 July 2003 

on the hiring of temporary workers 33 and the 

Act of 14 November 2003 on amendments to 

the Labour Code and related laws, 34 aiming to 

refine certain aspects of labour legislation and 

finalise the adaptation of individual labour law 

to EU requirements. 

The impact of this legislation in terms of 

flexibility and security is a mixed picture. On the 

one hand, it is a step backwards in comparison 

with previously adopted measures aiming 

at greater flexibility. The ban on more than 

two consecutive fixed-term contracts was reintroduced, 

albeit with a list of exclusions. The 

Act of 13 March 2003 on collective dismissals 

considerably expanded the requirement for 

information and consultation of employees 

in the case of mass layoffs: the right could be 

exercised even in the absence of a union within 

the enterprise concerned; a 30-day notice 

should be respected; all employees dismissed 

for reasons beyond their control were eligible 

for severance payment without exceptions; and 

the labour office should also be notified. On 

the other hand, the rules concerning working 

time were in some respect changed again, 

introducing a more flexible calculation and an 

increase in the daily working hours, along with 

new rules facilitating work during the weekend 

(Saturday and Sunday). The latter, however, 

was better specified, allowing for separate 

contracts to be created for weekend work. 

More decisively, the Act on temporary work 

formally institutionalised this type of flexible 

work, thereby, giving temporary workers a real 

status by providing them with protection under 

the labour law. It also defined their rights and 

obligations, introduced a desperately needed 

regulation for temporary work agencies and 

regulated the relationship between 

the last employer, the temporary 

worker and the agency. 

page 145 

Altogether, elements from thirty 

different directives were integrated into 

the Polish Labour Code in preparation for 

membership of the European Union 35 . In the



page 146 

majority of cases, the coordination, monitoring 

of, and information on these legal changes were 

carried out by a small legal office responsible 

for labour law within the Ministry of Labour 

and Social Policy. On the eve of accession, 

the last ‘Comprehensive Monitoring Report 

on Poland’s preparations for membership’ 

published by the European Commission in 

October 2003, reported two areas where further 

attention and action was deemed necessary. 

First, it stressed that the combination of high 

unemployment and low employment rates 

constituted a key economic issue that the 

government needed to address. Secondly, the 

Commission assessment reported as follows 

on the state of legal readiness: ‘Poland’s 

Labour Code is only partially aligned with 

the acquis on labour law and completion of 

transposition must be prioritized. Legislative 

alignment still needs to be completed in the 

fields of working time (including sectoral 

working time), part-time work, transfer of 

undertakings and posting of workers’ (EC 

2003: 39). Some of these issues were simply 

remedied in the law passed in November 2003. 

However, since Poland joined the EU in May 

2004, the pressure of conditionality and the 

objective of accession have disappeared and the 

transposition of European norms has become 

a more politicized process. This was illustrated, 

for instance, by the negotiations surrounding 

the drafting of the law on information and 

consultation of employees, which 

required the design of institutions 

for employee representation at the 

enterprise level (a particularly salient 

issue for unions). 

4. POLICY OUTCOMES, EMERGING WELFARE RE- 

GIME AND THE POLITICS OF REFORM 

For the past twenty years, Polish labour 

market policies were being put on the agenda 

with varying degrees of priority, introduced, 

reformed and fine-tuned. In the early 1990s, 

a mix of universal and corporatist features 

could be identified: an insurance-based income 

replacement scheme with universal eligibility, 

but decreasing levels of benefits. In later years, 

policies concerning unemployment resemble 

those in a minimalist welfare state: more 

restrictive eligibility criteria, unemployment 

benefits of shorter duration and lower coverage 

rate. The social insurance logic is fading and 

income support to the unemployed failed to 

become a legitimate part of the welfare state. 

Unemployment was institutionalized as a 

social status giving limited rights while policies 

heavily relied on inactivity benefits to ease exits 

of the labour market, addressing primarily the 

political threat posed by unemployment rather 

than seeking to provide a universal support 

to alleviate social deprivation associated 

with joblessness. In 2002-2004, formal 

and discursive compliance with European 

guidelines and instruments served to reestablish 

labour market policies as a central area 

of public policy and triggered a re-orientation 

in favour of activation measures. Despite this, 

policies addressing labour market risks remain 

essentially minimalist and residual; priority was 

given to the fight against unemployment, as the 

debate on reforming labour law exemplify. 

Employment regulation, primarily based on 

labour law, was gradually aligned with the 

functioning of a capitalist labour market before 

encountering the challenge of organising flex-


ibility that other European countries have 

faced. The early reforms of labour law consisted 

in re-establishing market mechanisms for the 

allocation of work, adjustment of the workforce 

and wage setting. The re-commodification of 

labour triggered a decentralisation of decisions 

on hiring and firing, but also of the governance 

of work more generally, starting with the 

negotiation of pay and working conditions. 

The issue of ‘deregulation’ then dominated the 

debate and the search for the most adequate 

legal framework, and flexibility became a major 

policy objective toward the end of the 1990s. 

The successive attempts to reform the Labour 

Code sought to achieve, even if some targeted 

the objective more explicitly than others. The 

employment contract was redefined. From 

2002, various provisions increased working 

time flexibility and simplified conditions and 

procedures to the advantage of employers. 

Overall, however, the rules governing standard, 

full-time employment changed less than the 

conditions applicable to atypical forms of 

work: flexibility was achieved primarily by a 

rapidly growing share of workers not covered 

by standard employment contracts, but rather, 

for instance, work-based contracts ruled by civil 

law. While these practices initially developed in 

a relatively spontaneous manner, in more recent 

years a number of acts were adopted with a 

view to providing minimal regulation of the 

flexible forms of work (for instance, temporary 

workers in 2003), largely with the impulse 

of European directives. We are left with a 

‘permissive regulation of working conditions’ 

and ‘permissive labour relations through 

deviation’ (Bluhm 2008: 67). 

With respect to Esping-Andersen’s welfare 

regimes, referred to as ideal-typical 

configurations, Poland followed a trajectory 

marked by several shifts of regime: a shortlived 

universalistic welfare state (initially, 

extensive eligibility and unconditional generous 

benefits) quickly became unsustainable and 

turned into a corporatist system privileging 

certain branches (eligibility restricted mainly 

to certain well-organised and well-represented 

categories), and eventually into a minimalistresidual 

welfare state (stricter eligibility and less 

generous benefit, accompanied with a discourse 

emphasizing greater control and obligations). 

The inherited contributory regime in the area 

of pensions was consistent with universal 

benefits so long as universal employment 

with little income differentiation was the 

rule; however, it appeared as a contradiction 

when this was no longer the case, fostering 

the agenda for reform. Some features recall 

Southern European welfare systems, which are 

based on social contributions but marked by a 

high level of segmentation, missing a universal 

anti-poverty safety net and concentrating a 

high share of expenditures on pensions (Ferrera 

1996). They are also known to be impaired by 

clientelism and fiscal or contribution evasion 

and low administrative capacities, all of which 

are well illustrated in Poland, too. Finally, a 

fragmentation of social protection replicates 

the differentiation of labour market situations 

- another distortion typically observed in 

Bismarckian and Southern European welfare 

states. The whole population is no 

longer covered by the same principles 

and institutions. Instead, insiders with page 147 

full-time, permanent jobs continue 

to enjoy relatively good protection 

and significant benefits, while ‘outsiders’ with 

atypical jobs become increasingly marginalised 

by the welfare system.



In the original analysis, a welfare regime is 

also understood as a stable socio-political 

configuration revealing a particular kind 

of social contract and consistent policy 

orientations across all branches of the 

welfare state. In this perspective, the striking 

contrast between, on the one hand, the active 

involvement of the trade unions in the debate 

over labour law reform and, on the other, 

their complete absence in the face of the 

retrenchment of unemployment compensation 

is puzzling. The idea of a consistent ‘welfare 

regime’ is undermined by the co-existence of 

two worlds of ‘labour market politics’ involving 

distinct configurations of actors, which tend to 

constitute two separate ‘public policy arenas’. 36 

entitlements, is hardly politicised at all. Political 

conflict tends to be restricted to particular 

regional or sectoral arenas, and what is at stake 

is a particularistic compensation rather than 

a universal solution. In theory, the actors who 

are explicitly involved in the decision-making 

process are very similar to those found in the 

employment policy arena, but the salience of 

policy reform is not, since the unemployed are 

not well represented by the union side. The 

political salience of unemployment was high 

only when it appeared as a threat to workers 

in highly unionised sectors, while the general 

debate focused on the issue of employment 

creation, and thus the flexibility of employment 

conditions. 

page 148 

In what could be termed the ‘arena of employment 

regulation’, we can observe something 

that resembles ‘a stable and continual conflict 

that can only be understood in class terms’ 

(Lowi 1964: 715), in other words, a typical 

configuration of redistributive politics. Two 

sides can be identified, as employers and trade 

unions were actively negotiating the orientation 

and reform of rules governing labour relations, 

in terms of a trade-off between flexibility 

and employee protection (security). However, 

rising unemployment resulted in a convergence 

of the seemingly antagonistic policy preferences 

of the two sides in a compromise in favour 

of more flexibility. The Tripartite Commission 

was an important deliberative forum 

in which to discuss such compromises, 

although in effect agreements were 

rarely reached there. 

By contrast, in the ‘unemployment policy arena’, 

defining the conditions of income support to 

the unemployed, even in the face of reducing


NOTES 

1 

Revised version of the paper presented at the workshop “What 

capitalism? Socio-economic change in Central Eastern Europe”, 

Jena, 29-30 October 2009. I wish to thank the participants for 

comments and suggestions. 

2 

Kornai (2006) gives a good account of the unprecedented and 

multidimensional nature of post-communist transformations 

3 

The issue arises out of ‘a confusion between ideal-types and cases, 

with the latter being seen as exemplifiers of the former, rather 

than the former being seen as constituents of the latter’ (Crouch 

2005: 23). 

4 

The capacity for self-reliance is seen as a stronger determinant 

of a group’s stance on social policy reform than ideological motives 

(Baldwin 1990). 

5 

The experience of unemployment in Polish history in the 1930’s 

is only referred to by academic observers, it is not part of the 

cognitive frame in which policy-makers and other actors reason 

two or more generations later. 

9 

In practice, the Ministry fixes the amount of the standard 

unemployment benefit for people who have worked between 5 

and 20 years; those who have worked less than 5 years receive 

80% of the standard benefit and those with more than 20 years 

work experience are entitled to 120%. 

10 

Because the unemployment benefit is calculated as a flat 

amount unrelated to one’s previous wage, the reference indicators 

are the minimum wage and the average wage in the Polish 

economy. This should not be confused with the replacement rate 

used in contexts where the benefit is calculated on the basis of 

one’s previous individual wage, which takes into account individual 

wages. 

11 

These figures are useful indicator for the purpose of crosscountry 

comparisons. They should be interpreted in relation to 

the growth of real wages before drawing conclusions on their 

evolution over time. 

12 

The illegitimate character of mass dismissals is reflected in 

public opinion surveys which reveal a broad consensus on the 

idea that ‘the government should provide jobs for everyone’, 

as compared to an important divide on the provision of an 

unemployment benefits, which is supported by only half of the 

respondents (ISSP 1997 and 2006). 

6 

Frictional unemployment was estimated as not exceeding half 

a percentage point in the people’s Republic of Poland (Mlonek 

1999). However, universal employment was achieved at the 

price of a higher number of workers than needed in many productive 

units. 

13 

In counterpart, they lost their rights to unemployment benefits 

(Gardawski 2002c). 

14 

At the outset of transition, 64 out of Poland’s 66 deep coalmines 

and one of the two major steelworks were located in Upper 

Silesia (Blazyca 2002: 26). 

7 

Small business loans, loans to employers for creating jobs, training, 

public service employment, and wage subsidy programs. 

15 

Most strikes in this sector date back to the first 

half of the 1990s. 

page 149 

8 

The special benefit was lowered (though not cancelled) in 1991; 

yet it remained higher than the standard unemployment benefit 

(MPiPS 1995: 9). 

16 

To be compared with 20 amendments between 1989 and 

2002.



17 

The tax on wage increase (popiwek), was initially targeting 

the total wage bill of enterprises, which came at the expense of 

employment. It was revised in 1991 to target average individual 

wages. 

24 

Changes in labour law in 2002 ‘were meant to reduce bureaucracy 

in labour relations, reduce the costs associated with hiring of 

workers, and to increase the flexibility of working time.’ (MEL 

2004: 20) 

18 

Such a measure aimed to foster youth employment, at a time 

when unemployment was exceeding 40% for people in the 15-24 

age range. 

19 

To be compared with 34% in Spain (lowest in the EU) and 

37% in the UK, where the minimum wage is a relatively recent 

introduction. In Poland, the 1997-1998 pension reform 

established an anti-poverty social safety net by introducing a 

minimum pension fixed at a level of 35% of the average wage. 

20 

This sub-section draws on McMenamin (2005) who specifically 

studied business lobbying in relation to the reform of 

the labour code in this period. Given the difficulty to reconstruct 

a policy process ex post as time passes, since it implies tracing 

the individuals who were involved and relying on their possibly 

distorted memories, his work based on a series of interviews 

carried out closer to the events provides extremely valuable 

information. 

25 

Prime Minister Marek Belka presented a document on the 

government projected economic strategy, Marek Kossowski, 

undersecretary of State of the Ministry of Economy presented 

the ‘Entreprise above all’ programme and Minister of Economy 

Jerzy Hausner presented the ‘First job’ programme (Communiqué 

of the Tripartite Commission 28.01.02) 

26 

On this occasion, it seems that the representative of NSZZ 

Solidarność, J. Sniadek, who was sitting at the Tripartite Commission 

on behalf of his organization took a stance that was 

invalidated by the rest of the union leadership. His position was 

rejected by the Presidium. 

27 

Between several thousands and several tens of thousands 

people demonstrated on 26 April 2002, depending on sources 

(Gardawski 2002b). 

21 

The Confederation of Private Employers (Polska Konfederacja 

Pracodawcow Prywatnych – PKPP Leviatan), which later 

became the leading employers organization, was founded only 

in 1999. 

28 

This could only be done until the date of accession since it 

breaches European rules defining minimum employment 

standards, including a restriction on the number of consecutive 

fixed-term contracts. 

22 

SMEs are an important segment of the Polish economy: they 

constituted 95% of all enterprises and employed 50% of the 

working population in 2002 

29 

Later, however, Hausner expressed his difficulty to work 

with the new Prime Minister Marek Belka, who, an economist 

himself, kept challenging the decisions and views of the super- 

Ministry of Economy. 

page 150 

23 

The economic programme of the new government 

consisted of three packages: ‘Enterprise above all’ 

(Przede wszystkim przedsiebiorczosc), ‘First Job’ 

(Pierwsza Praca) and ‘Infrastructure – the key to 

development’ (Infrastruktura- klucz do rozwoju). 

The latter is not directly of interest. ‘First Job’ is a 

programme to support jobs for young labour market 

entrants. 

30 Regulation of the Council of Ministers on the creation of the 

Commission for the Codification of Labour Law, 20 August 

2002 (Dz U 2002/139 item 1167).


31 

The number of transposition acts needed in the area of labour 

and social security was lower than in many other domains 

covered more extensively by the acquis: according to transposition 

commitments as expressed in the National Pre-Accession 

Programmes, four acts related to labour regulation were scheduled 

for adoption in 2000, another four in 2001 and only three in 

2002 (Zubek 2005). 

32 

Dz U 90 item 844. 

33 

DZ U 166, item 1608. 

34 

Dz U 213, item 2081. 

35 

To name a few: the Directive on employment contract information 

(91/533/EEC), working time (93/104/EC), parental leave 

(96/34/EC), part-time work (97/81/EC), etc. The complete list 

can be found in any recent edition of the Code (Kodeks 2004: 

257). 

36 

I developped this argument further in my PhD thesis (Spieser 

2009). 

page 151



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SZALMA IVETT / SZEL BERNADETT 

INTRODUCTION 

8 

ANALYSIS OF THE HUNGARIAN LABOR 

MARKET BY DELIBERATIVE METHODS 

Szalma Ivett and Szél Bernadett 

European welfare states are under 

increasing pressure from a number 

of directions. Population ageing 

and shifts in family patterns increase needs, 

while the pressures of globalization on national 

competitiveness restrict the capacity to 

finance expansive welfare policies. In comparison 

to other EU member states, Hungary is 

characterized by a low employment rate, high 

inactivity and moderate unemployment. Hungary 

is a post-socialist country in which the 

capitalist regime has been around for almost 

20 years. As Dahrendorf (1994) elaborated 

upon this, different spheres pass through the 

transition phase with different speeds: while 

the fundamentals and institutions of political 

democracy can, in principle, be enforced 

in six months, and transition to the market 

economy can be carried out in six years, the 

(re)emergence of the values and norms takes 

a whole generation (60 years). It is a question 

whether the heritage of the socialist regime is 

still vivid in Hungary, in addition to whether 

people expect the government to take care of 

them in several aspects or whether they are 

ready to take care of themselves and have 

lower expectations of the state. It is another 

question what other European, non-postsocialist 

countries think about the role of the 

state and what connections can be detected 

between current expectations and a 

nation’s past. 

page 155 

In Hungary several national studies 

show that people hold a paternalistic 

state ideal (Ferge, 1996; Utasi, 2008). This 

phenomenon is said to have its roots in the 

socialist regime, because the state ensured

ATTITUDES TOWARDS LABOUR MARKET 

REGULATION IN HUNGARY 

workplace for all its citizens; thus, the 

responsibility of the individual was much lower 

than it is now. In 1989-91 the change of the 

political era brought many new development in 

this area: the dissolution of heavy industry, the 

closing of factories and privatizations. These 

kinds of changes triggered unemployment ; 

and employees began to worry about losing 

their jobs. At the same time, there is a vivid 

discussion about how to make the economy 

competitive. Nevertheless, as competitiveness 

improved, it resulted in many cases in cutting 

back the paternalistic state. The peak time of 

changes was in 1993 when the unemployment 

rate reached 17% among the active population. 

After this period, the unemployment rate 

decreased. Unemployment means financial and 

psychological difficulties for the individuals. 

Moreover, in Hungary there is a large chance 

of remaining unemployed for a long time (Sági, 

1997). Those people who cannot find a job for 

a long time are usually have little education, 

live in unfavorable regions and come from 

larger families (Spéder, 2002). Some authors 

call them underclass, which refers to their 

social status: they are poor, uneducated and do 

not have the chance to find a job, also, their 

norms and values differ from those of the 

main society. Their only chance to survive is 

by registering at the Regional Employment 

Office, which provides for some social benefits 

(Laky, 2001). 

The current paper examines what 

page 156 expectations EU-nations have towards 

their governments regarding 

employment and social services and 

seeks answers concerning whether a coherent 

European answer can be given to the problem 

of state involvement in job market 

disequilibrium. Related to this problem area, 

the second chapter explores the job market 

related expectations Hungarians have towards 

the government to date. An explanation is 

given to the observed attitudes. Finally, a 

deliberative analysis is presented showing 

how the participants’ opinion about the labor 

market related role of the state changes upon 

dissemination of relevant information. 

1. EXPECTATIONS TOWARDS GOVERNMENTS AT 

THE EUROPEAN LEVEL 

The goal of this chapter is to explore the kind 

of expectations the European population 

has towards governments as well as how 

the accomplishment of welfare measures is 

evaluated. Europe has been facing the problem 

of the contradiction between economic 

efficiency and social supportiveness for decades. 

The main four types of critiques opponents of 

the social state usually emphasize are as follows 

(Tomka, 2009). The neoliberal conservatives’ 

criticism focuses on restrictions of individual 

liberty that are imposed for the sake of societal 

equity. The second perspective points out that 

state-owned institutions are not efficient – 

they do not allocate resources in the optimum 

way, while wasting resources and providing 

opportunities for misuse. Moreover, as another 

typical criticism echoes, the social state 

influences economic performance in a negative 

way: the labor force will not be motivated to 

work because of the unemployment benefits; 

in addition, taxes imposed to finance social 

expenditures reduce savings and investments 

and, with that, the activity of enterprises and 

employment, as well. Finally, factors beyond 

financing social politics threaten the operation


of the system - mainly demographic changes 

and the effects of globalization. 

Based on the economic rationale, both in 

the OECD-countries as well as in the EU- 

15, welfare expenditures – in proportion of 

GDP – were increasing until 1995. Since 

then, they have been decreasing (Table 1). It is 

an important point how people relate to this 

process: how they interpret social welfare, what 

they expect form the government, and how they 

perceive the contradiction between economic 

and social aspects. In the following chapter, 

these questions will be addressed empirically. 

Table 1. In proportion of GDP welfare expenditures in the OECD-countries and the EU, 1980-2001 

1980 1985 1990 1995 2001 

OECD-21 17,7 19,6 20,5 22,5 21,9 

EU-15 20,6 22,9 23,4 25,6 24,0 

Source: OECD Social Expenditure Database [www.oecd.org] 

The fourth wave of the European Social 

Survey was conducted in 2008. For the 

current analyses, the following 20 countries 

are included in the comparison: Belgium, 

Bulgaria, Cyprus, Denmark, Estonia, Finland, 

France, Germany, Hungary, Norway, Poland, 

Portugal, Romania, Russia, Slovakia, Slovenia, 

Spain, Sweden, Switzerland, and the UK; 

34949 respondents were surveyed. The fourth 

block of questionnaires is a rotating module 

addressing questions regarding welfare and, 

more specifically, attitudes towards welfare 

provision, size of claimant groups, views on 

taxation, attitudes towards service delivery and 

likely future dependence on welfare. 

In our empirical analysis four questions are 

addressed. 

1. 

Expectations European citizens have from 

their governments; 

2. Perception of social measure efficiency; 

3. Regional differences; 

4. Beyond the regional aspect what else may 

influence the attitude towards social 

measures and institutions; here particularly 

information-awareness is measured via 

education and Internet use. 

1.1. Expectations towards the governments 

When measuring attitudes on the European 

level, it is visible that the majority of respondents 

expect the state to be present and 

take care of employees on the job 

market. Table 2, 3 and 4 reinforce 

page 157 

this conclusion; they show that, in 

terms of avoiding unemployment, 

taking care of the unemployed and ensuring 

adequate child care services, the majority of 

respondents are rather explicit in this respect.



Table 2. It is the responsibility of the state to ensure a job for everyone who wants one 

Frequency 

Valid Percent 

It is not the responsibility of the state. 5890 18.3 

It is party the responsibility of the state. 12583 39.1 

It is the responsibility of the state. 13741 42.7 

Total 32214 100.0 

Missing 1191 

Total 33405 

Table 3. It is the responsibility of the state to ensure a reasonable standard of living for the unemployed 

Frequency 

Valid Percent 




Total 32696 100.0 

Missing 709 

Total 33405 

Table 4. It is the responsibility of the state to ensure sufficient child care services for working parents 

Frequency 

Valid Percent 



page 158 


Total 32582 100.0 

Missing 823 

Total 33405


However, when examining how people would 

choose between tax decreases and a drop in 

social services and benefits or a tax increase and 

spending more on social measures, we see that 

the majority (63.5%) would prefer the former 

(Table 5). This result shows that expectations 

for social services exist, but when it comes 

to the individual budget, citizens are careful 

about how resources should be allocated. 

Table 5. Government should decrease taxes and spend less on social services and benefits 

Frequency 

Valid Percent 

Disagree 10768 36.5 

Agree 18726 63.5 

Total 29494 100.0 

Missing 3911 

Total 33405 

1.2. The efficiency of social measures 

Respondents were asked to judge to what 

extent they agree with the following statements. 

Social services and benefits in the respondent’s 

county: 

1. 

2. 

3. 

4. 

5. 

place too great a strain on the economy. 

prevent widespread poverty. 

lead to a more equal society. 

encourage people from other countries to 

come and live here. 

cost businesses too much in taxes and 

charges. 

Agreement with the first, fourth and fifth 

statements reflects a conservative attitude, 

while agreement with the second, third and 

sixth statements indicates that the respondent 

is closer to a social approach. 

Based on Table 6, we can see that the majority 

of respondents – 39.5 percent – disagree 

with the statement that social services and 

benefits in the respondent’s county place too 

great a strain on the economy. One third of 

respondents agree with this statement and 

more than one quarter of the sample would 

not give an exact answer. 

page 159 

6. 

make it easier for people to combine work 

and family life.



Table 6. Social services and benefits in the respondent’s county place too great a strain on the economy 

Frequency 

Valid Percent 

Agree 10542 33.6 

Neither agree nor 

disagree 

8436 26.9 


Total 31380 100.0 

Missing 2025 

Total 33405 

Table 7 shows that the majority of respondents 

(58%) consider social services and benefits as 

an efficient tool in preventing the spread of 

poverty. On the other hand, 21% believes that 

poverty cannot be stopped by social measures, 

while a further 21% is undecided. 

Table 7. Social services and benefits in the respondent’s county prevent widespread poverty 

Frequency 

Valid Percent 

Agree 18705 58.0 


disagree 

6765 21.0 


Total 32267 100.0 

Missing 1138 

Total 33405 

page 160 

The majority of respondents (50.9%) 

believe that social services and 

benefits will lead to a more equal 

society. Around one quarter do not 

trust in developing social equity via social 

expenditures, while almost a quarter does not 

have an explicit opinion (Table 8)


Table 8. Social services and benefits in the respondent’s county lead to a more equal society 

Frequency 

Valid Percent 

Agree 16359 50.9 


disagree 

7711 24.0 


Total 32157 100.0 

Missing 1248 

Total 33405 

The relative majority of respondents - 39.6% 

- believe that businesses are overburdened by 

social measures. On the other hand, almost 

one third disagrees with this statement, while 

28.2% is undecided regarding the relation 

between businesses and social welfare 

expenditures (Table 9). 

Table 9. Social services and benefits in the respondent’s county cost businesses 

too much in taxes and charges 

Frequency 

Valid Percent 

Agree 12014 39.6 


disagree 

8567 28.2 


Total 30342 100.0 

Missing 3063 

Total 33405 

According to the majority of respondents 

(56.7%), social measures help to establish 

work-life balance; only 16.8% believe that 

social services and benefits do not have 

such a positive effect in this sense. 

Again, more than one quarter of the 

respondents do not have an explicit 

answer (Table 10). 

page 161



Table 10. Social services and benefits in the respondent’s county make it easier 

for people to combine work and family life 

Frequency 

Valid Percent 

Agree 17828 56.7 


disagree 

8331 26.5 


Total 31443 100.0 

Missing 1962 

Total 33405 

The majority of the respondents (55%) believe 

that immigrants are attracted by the social 

expenditures; one quarter oppose this statement, 

while almost 19% are undecided (Table 11). 

Table 11. Social services and benefits in the respondent’s county encourage people 

from other countries to come and live here 

Frequency 

Valid Percent 

Agree 17278 55.0 

Neither agree or 

disagree 

5945 18.9 


Total 31443 100.0 

Missing 1962 

Total 33405 

Based on analyses of European 

countries as a whole, we may conclude 

page 162 that Europeans usually believe that 

social measures are efficient in terms 

of creating social balance in the 

population. In addition, they believe that these 

services and benefits would also attract people 

from other countries. 

1.3. Regional differences in terms of 

perceiving social services and benefits 

It should not be assumed that Europe as a 

whole considers the relationship between social 

expenditures and economic rationale univocally. 

In order to examine differences in how the 

diverse regions of the continent think about


these questions, a hierarchical cluster analysis 

was performed. The averages of respondent’s 

opinions were adjusted to each question in 

case of each country before the algorithm was 

applied. 

Based on this analysis, the following three 

clusters were identified (Figure 1). 

1. 

The Northern dimension and Switzerland, 

Cyprus: Finland, Norway, Sweden, 

Denmark, Switzerland and Cyprus. 

2. 

3. 

The Western dimension: Germany, the 

UK, Spain, Belgium and France. 

The Eastern dimension and Portugal: 

Bulgaria, the Russian Federation, 

Slovenia, Estonia, Poland, Slovakia, and 

Portugal. 

The only country that could not be assigned to 

the above clusters was Hungary. 

Figure 1. Dendrogram using Average Linkage 

The opinion of 19 European countries’ citizens on the efficiency of social welfare expenditures 

1= Belgium; 2=Bulgaria; 3= Cyprus; 4= Denmark; 5=Estonia; 6=Finland; 7=France; 8=Germany; 9=Hungary; 

10=Norway; 11=Poland; 12=Portugal; 13=Russia; 14=Slovakia; 15=Slovenia; 16=Spain; 17=Sweden; 

18= Switzerland; 19=UK 

page 163



1.4. The effect of information-awareness on 

expecting and perceiving social services and 

benefits 

The empirical analysis between the level 

of education and expectations from the 

government shows that, in case of higher 

education, expectations from the state 

decrease. Both in the cases of job market 

regulation [“It is the responsibility of the 

state to ensure a job for everyone who wants 

one”] and unemployment services [“It is the 

responsibility of the state to ensure a 

reasonable standard of living for the 

unemployed”], respondents with advanced level 

tertiary education expect less from the state: 

significantly fewer highly educated respondents 

say that social services and benefits are the duty 

of the state than less educated respondents 

(Table 12 and 13). The opposite is also true: 

among highly educated respondents, more 

explicitly say that the state is not responsible 

for the given social measure than respondents 

with only a basic level of education. 

Table 12. Crosstabulation between the level of education and 

“It is the responsibility of the state to ensure a job for everyone who wants one” 

It is the responsibility of the state to ensure a job for 

everyone who wants one 

It is not the 

responsibility of 

the state 

It is partly the 

responsibility 

of the state 

It is the 


of the state 

Total 

Basic level education 12.2% 36.1% 51.7% 100.0% 

Intermediate level 

education 

Advanced level 

tertiary education 

19.2% 39.3% 41.5% 100.0% 

25.0% 42.6% 32.4% 100.0% 

p


In the case of childcare services, the same 

tendency as above exists but is much milder 

in the sense that even respondents with higher 

education expect more from the state (Table 

14). A possible explanation is that childcare 

services enhance being present on the job 

market. Respondents with higher education 

invested a lot for a successful job carrier and 

can feel that they deserve some governmental 

assistance when it comes to their children. 

Table 14. Crosstabulation between the level of education and “It is the 

responsibility of the state to ensure sufficient child care services for working parents” 

It is the responsibility of the state to ensure sufficient 

child care services for working parents 

It is not the 


of the state 



of the state 

It is the 


of the state 

Total 



education 

Advanced level tertiary 

education 

5.8% 29.3% 64.9% 100.0% 

5.8% 31.8% 62.3% 100.0% 

p



Table 16. Crosstabulation between the level of education and “Social services 

and benefits in the respondent’s county cost businesses too much in taxes and charges” 

Disagree 

Neither agree, 

nor disagree 

Agree 

Total 



education 


education 

33.0% 28.7% 38.3% 100.0% 

38.5% 27.2% 34.3% 100.0% 

p


Table 19. Crosstabulation between the level of education and “Social services and benefits 

in the respondent’s county make it easier for people to combine work and family life” 

Disagree 


nor disagree 

Agree 

Total 



education 


education 

17.6% 28.1% 54.4% 100.0% 

17.2% 24.4% 58.5% 100.0% 

p



Table 21. Crosstabulation between the level of education and 

“Government should decrease taxes and spend less on social services and benefits” 

Agree Disagree Total 

Basic level education 63.9% 36.1% 100.0% 


education 


education 

64.8% 35.2% 100.0% 

61.0% 39.0% 100.0% 

p


Table 23. Crosstabulation between Internet penetration and “It is the 

responsibility of the state to ensure a reasonable standard of living for the unemployed” 

It is the responsibility of the state to ensure 

a reasonable standard of living for the unemployed 

Has Internet access 

at home 

Does not have 

Internet access at home 

It is not the 

responsibility of 

the state 



of the state 

It is the 


of the state 

Total 

12.4% 46.8% 40.9% 100.0% 

10.0% 39.7% 50.3% 100.0% 

p



Table 25. Crosstabulation between Internet penetration and “Social services 

and benefits in the respondent’s county place too great a strain on the economy” 

Social services and benefits in the respondent’s county 

place too great a strain on the economy 


at home 

Does not have 


Disagree 


nor disagree 

Agree 

Total 

38.9% 27.2% 34.0% 100.0% 

42.8% 25.4% 31.8% 100.0% 

p


Table 27. Crosstabulation between Internet penetration and “Social services 

and benefits in the respondent’s county lead to a more equal society” 

“Social services and benefits in the respondent’s 

county lead to a more equal society” 


at home 

Does not have 


Disagree 


nor disagree 

Agree 

Total 

23.8% 24.0% 52.2% 100.0% 

31.2% 24.0% 44.8% 100.0% 

p



The majority of respondents cannot say 

explicitly whether social measures should be 

diminished and, with that, the taxation level. 

This is valid both among those with private 

Internet access as well as those who do not 

have Internet at home (Table 30). There are 

slightly fewer respondents in the former group 

saying that taxes should be decreased. On 

the other hand, there are more respondents 

who disagree with decreasing the level of 

social services and benefits among those with 

private Internet access, even though they know 

that the level of taxation would also decrease. 

Both a higher level of education and Internet 

access available in private homes are related to 

a positive attitude towards the effects of social 

services and benefits. 

Table 30. Crosstabulation between Internet penetration and 

“Government should decrease taxes and spend less on social services and benefits” 

Government should decrease taxes and spend 

less on social services and benefits 


at home 

Does not have 


Disagree 


nor disagree 

Agree 

Total 

25.9% 37.6% 36.5% 100.0% 

23.7% 39.5% 36.8% 100.0% 

p


In this research, the state role is measured by the 

following questions: What do people think about 

the deregulation of the labor market? What do 

people think about the following statements?: 

Finding a job is one’s own responsibility or the 

government should provide jobs for all citizens; 

Unemployment cannot be totally avoided vs. 

unemployment should be avoided at all cost; 

The government should prevent all illegal work 

vs. the government should not do anything 

against illegal work; The government should 

cut taxes vs. the government should not spend 

more on education, health care and pensions. 

Not only descriptive statistics (answers given in 

percentages) will be discussed. We also attempt 

to uncover differences among the social groups 

(based on demographic character, cultural 

capital and employment status) regarding these 

items through logistic regression modelling 1 . 

The qualitative method is carried out by 

analyzing two group conservations. The focus 

is on what people think about the role of the 

state , and how their opinions have changed 

during deliberation. Finally, we compare the 

results of the two methods. 

rate among the 15-64 year old population, 

Hungary came before Poland and Malta in the 

EU. In the same year, the mean activity rate 

was 64.5% in the EU. The activity rate exceeds 

the target set in the Lisbon Agreement - 

70% - in the following countries: Denmark, 

the Netherlands, Sweden, Great-Britain and 

Austria. In international comparison, the low 

activity rate in Hungary is explained by the 

fact that less educated people have a smaller 

chance of obtaining employment and the rate 

of less educated people is higher than the EU 

mean (Girasek-Sík, 2006). 

In Hungary, there are great differences in 

unemployment rates between the different 

regions. The first chapter of this paper contains 

a deliberative analysis of the expected role 

of the government regarding the job market. 

Somogy County, where the deliberationprocess 

took place, is part of Southern Transdanubia 

where unemployment rates are the highest in 

the more developed Transdanubian part of 

Hungary (Table 31). 

2.1. Unemployment and activity in Hungary. 

Distinguishing factors about County 

Somogy 

It is important to note that the activity rate in 

Hungary is low. Therefore, the real problem is 

not so much the high unemployment rate but 

rather the low activity rate. This characterizes 

the Hungarian labor market in comparison to 

other member states of the EU. In 2006 the 

unemployment rate was 7.5% in Hungary, 

while the mean unemployment rate of the EU 

members was 8.2%. With its 53.7% activity 

page 173



Table 31. Number of employed persons of the population aged 15-74 (in thousands of persons) 

NUTS1, NUTS2 2000 2006 2007 2008 

Central Hungary 64.4 66.7 62.1 60.2 

Central Transdanubia 22.7 30.1 24.6 28.4 

Western Transdanubia 19.0 26.1 22.8 22.1 

Southern Transdanubia 30.4 34.7 37.2 38.6 

Transdanubia 72.1 90.9 84.6 89.1 

Northern Hungary 48.0 52.3 59.4 63.3 

Northern Great Plain 51.5 65.1 63.2 69.7 

Southern Great Plain 27.7 41.8 42.6 46.9 

Great Plain and North 127.2 159.2 165.2 179.9 

Country total 263.7 316.8 311.9 329.2 

Without Central Hungary 199.3 250.1 249.8 269.0 

Source: Labour Force Survey, HCSO 

The rate of unemployment was 17% in 

Somogy County at the end of the 2007, while 

the national average was 10%. In Figure 2, the 

South Transdanubian region where Somogy 

County is situated is marked in red. The 

figure shows that – in terms of unemployment 

– the NUTS3 region is one of the most 

problematic in Hungary and is in the least 

favorable situation in the relatively more 

developed West. The position of Somogy is 

the 4th worst in the country in this respect. 

Furthermore, one third of unemployment 

cases lasts more than one year, which again is 

a very unfavorable condition (Summary of the 

Results, 2008). 

Figure 2. Unemployment rate of population aged 15-74, 2008 

page 174


2.2. Who attended the deliberation 

weekend? 

First, 1514 people were polled on the targeted 

issue in May of 2008 (T1). This sample 

represented the population of the Kaposvár 

Region. In this paper, this survey will be 

referred to as the representative survey research. 

At the end of the questionnaire, the respondents 

indicated whether they wished to participate in 

a deliberation event. 350 people indicated their 

intention to participate. All were invited to the 

DP weekend on 21st – 22nd June, 2008. Finally, 

108 people attended the event. During the 

deliberation weekend, participants completed 

the questionnaire of May twice. First, they filled 

in the questionnaire when they arrived (T2). 

We told them that they did not have to recall 

their answers of the representative survey of 

May. We will call this survey research the predeliberation 

poll. Then they filled in the same 

questionnaires for the third time following 

deliberation (T3). This makes it possible to 

measure the effects of the deliberation. We will 

call this survey the post-deliberation poll. 

The sample who filled in the pre- and postdeliberative 

polls will be called deliberation 

weekend participants / small groups (as the 108 

participants were assigned to one of 15 groups 

during the weekend). There was no significant 

difference in the gender and age structure or 

educational background between the two 

samples (representative survey research; small 

groups). However, the deliberation weekend 

participants have more unfavorable positions: 

60% are economically inactive. Those living in 

Kaposvár are also overrepresented. 

According to the theory of deliberative opinion 

polling, the resulting changes inopinion represent 

the conclusions the public would reach 

if people had the opportunity to become more 

informed and more engaged in the issues. 

2.3. Hypothesis 

H1 People in unfavorable positions (women, 

less educated people, those who are out of the 

labor market, the old and those who do not use 

the internet or speak any foreign language) 2 

will object to the deregulation of the labor 

market. They are more likely to believe that 

the state should provide job opportunities for 

every citizen. 

H2 Risk groups will support the passive policies 

(social benefits) to tackle unemployment. 

Those of higher social status will prefer active 

policies (encouraging job creation) to tackle 

unemployment. 

H3 As for illegal work, we believe that those 

in favorable positions (men, those who are in 

the labor market, the young and those who are 

supplied with cultural capital) will more likely 

believe that illegal work should be eliminated. 

H4 Related to tax reduction, we assume that 

those in favorable positions will be supportive, 

while those in unfavorable positions will prefer 

tax increases in order to keep social 

benefits. 

page 175 

H5 The fifth hypothesis is related 

to the change of opinion caused by 

the deliberation. We generally expect that, 

following deliberation, people will have more 

information about deregulation and the state



role. The information gained during the 

deliberation will decrease the effects of socialdemographic 

position on the opinion about 

liberalization of the labor market, employment 

policies, illegal work, and tax cuts. The various 

points of views will get closer to each other. 

H1, H2, H3 and H4 refer to all of the survey 

polls, while H5 refers only to the pre-and 

post- deliberation polls. 

2.4. Regulation versus liberalization of the 

labor market 

First, we will discuss the issue of labor market 

deregulation. This question was measured on a 

seven degree scale. The first degree means the 

respondent strongly agrees with the following 

statement: Governments should let employers 

hire and fire as they see fit. The seventh degree 

means that the respondent strongly agrees with 

the following statement: Governments should 

make it very difficult for employers to fire. The 

results of each questioning session are shown 

in Table 32. 

Table 32. What do people think about the deregulation of the labor market? 

Measured on a 7 degree scale 

1-7 degree scale% 

Governments should let 

employers hire and fire 

as they see fit. (1-3) 

The middle of 

the scale (4) 

Governments should 

make it very difficult 

for employers to fire 

(5-7) 

Mean 

In the survey research 

(T1) 

Pre-deliberation in 

the small (T2) groups 

Post-deliberation in 

the small groups (T3) 

8.4% 17.6% 74% 5.7150 

12.8% 18.3% 68.8% 5.6422 

5.5% 16.5% 78% 5.9907 

T1 – T2: Statistically non-significant change (t=1.161, p>0.05) 3 

T2 – T3: Statistically significant change (t=-2.87 p


no significant changes occurred. However, 

the deliberation caused significant changes in 

the way the weekend participants think about 

the deregulation of labor market. Before the 

deliberation, twice as many people said that 

the government should have let employers hire 

and fire as they see fit than afterwards. After 

the deliberation, the percentage of those 

who thought that government should make it 

very difficult for employers to fire increased by 

10 percent. The author believes this change 

occured because people often talked about the 

importance of keeping their jobs during the 

deliberation. 

Table 33 shows which social-demographic 

variables have significant effects on choosing 

one of the statements in the logistic regression 

model. 

page 177



Table 33. Determinants of the probability of supporting regulation versus deregulation 

of labor market in logistic regression model (Q5) 

All 

N=1462 (1514) 

Pre- Deliberative Poll 

N=108 

Post- Deliberative Poll 

N=107 

Independent Variables B Sig. Exp(B) B Sig. Exp(B) B Sig. Exp(B) 

Gender (Women) .164 .143 1.178 1.333 .017 3.791 .316 .547 1.371 

Level of education* .036 .017 .028 

Vocational school .081 .590 1.084 .828 .247 2.289 -.302 .676 .739 

Completed Secondary 

General School 

Tertiary Degree 

(BA or MA) 

.121 .443 1.129 -.982 .153 .375 -1.209 .085 .298 

-.406 .055 .666 -1.770 .062 .170 -2.656 .006 .070 

Employment status** .002 .375 .862 

Working full-time -.294 .117 .746 .064 .924 1.066 .532 .430 1.703 

Not working: 

Unemploymen 

.264 .275 1.302 .177 .807 1.194 .492 .511 1.636 

Not working: any 

other reason 5 -.676 .008 .509 -1.726 .129 .178 .667 .607 1.948 

Using Internet (Yes=1) -.392 .007 .676 -.845 .158 .430 -.689 .232 .502 

Speaking foreign 

language (Yes=1) 

-.180 .209 .835 .231 .730 1.260 .066 .919 1.068 

Age Group *** .025 .261 .730 

30-55 -.392 .034 .676 -.962 .378 .382 -.413 .694 .662 

Over 55 -.643 .007 .526 1.813 .177 6.126 .023 .985 1.023 

Constant .766 .004 2.151 .397 .788 1.487 1.436 .270 4.203 

-2Log Likelihood. initial 2025.052 144.342 140.375 

-2Log Likelihood. model 1969.174 111.641 115.320 

Model Chi-square 55.878 32.701 25.054 

Degree of freedom 11 11 11 

Significance 0.00 0.01 0.021 

Nagelkerke R Square 0.050 0.337 0.259 

page 178 

*Reference Category=Maximum Completed Primary School; **Reference category= Not working: Retired permanent 

job; ***Reference Category=under 30 

Recoding of variables: Values between 1 and 6 were recoded into 0. Value 7 was recoded into 1 in order to apply the 

recoded variable as a dependent variable in the logistic regression model. 6


The first observation to be made from the table 

above is that much more dependent variables 

have significant effects in the representative 

survey than in the small groups. Those holding 

a tertiary degree prefer the liberalization 

of the labor market in comparison to the 

reference groups in each of the sessions. In 

the representative sample, using internet has 

the same effect as holding a tertiary degree. It 

seems that those who have more cultural capital 

are more likely to support the de-regularization 

of the labor market. This finding corresponds 

to our expectations. Surprisingly, most of 

the oldest age group (over 55) supports the 

liberalization of the labor market. The author 

supposes the explanation may be that the 

labor market status of the youngest age group 

(under 30) is the most uncertain. They might 

not have obtained enough experience due to 

their age. The members of the oldest age group 

must be retired, so they do not take any risk 

if they support the liberalization of the labor 

market. The same mechanism can be found 

behind the fact that those who are not working 

for some other reason (mostly students or 

people on maternity leave) mostly support the 

liberalization of the labor market. 

In the pre-deliberation groups, there are two 

significant variables: gender and educational 

level. Women seem to object to liberalization 

as compared to men. As for educational level: 

highly-educated people prefer liberalization 

compared to the reference group. 

In the post-deliberation groups, the only 

variable found to be significant was educational 

level: those who completed higher education 

support liberalization of the labor market most. 

2.5. One’s own responsibility to get a job 

versus the state should provide jobs for every 

citizen 

This question refers to the role of the state 

similar to the previous one. Respondents had 

to express to what extent they agree with the 

given statement on a seven degree scale. The 

first degree signifies that the respondent totally 

agrees with the following statement: ‘Finding 

a job is one’s own responsibility’. The seventh 

degree indicates that a person completely agrees 

with the following statement: ‘Providing jobs 

for all citizens is the government’s responsibility’. 

The results of each survey session are shown 

in Table 34. 

page 179



Table 34. What do people think: finding a job is one’s own responsibility or 

the government should provide jobs for all citizens? Measured on a 7 degree scale 

1-7 degree 

scale % 

In the survey 

research 

Pre-deliberation 

in the small groups 

Post-deliberation 


Finding a job is one’s 

own responsibility. (1-3) 

The middle of the 

scale (4) 

Providing jobs for all 

citizens is the government’s 

responsibility. (5-7) 

Mean 

32.9% 31.5% 35.6% 4.0596 

33.9% 26.6% 39.4% 4.0917 

46.2% 33.6% 20.2% 3.2920 

T1 – T2 Statistically not significant change (t=0.656, p>0.05) T2 –T3 Statistically significant change (t=3.689, p


Table 35. Determinants of the probability of considering it one’s own responsibility to 

find a job versus the sate has to ensure jobs (responsibility for finding a job Q9) 

All 

N=1485 (1520) 


N=108 


N=112 


Gender (Men=1) .357 .002 1.429 .940 .055 2.560 -.203 .722 .816 


Vocational school -.005 .975 .995 -.251 .672 .778 -.852 .197 .427 



Tertiary degree 

(BA or MA) 

-.144 .366 .866 -1.271 .048 .280 -1.568 .041 .209 

-.562 .015 .570 -.165 .841 .848 -2.939 .020 .053 


Working full-time .017 .931 1.017 -.456 .468 .634 -.328 .674 .721 

Not working: 

Unemployment 

.325 .176 1.384 .841 .201 2.318 .043 .956 1.044 


other reason 7 .176 .497 1.192 -1.344 .218 .261 .530 .677 1.699 

Using Internet (No=1) -.421 .006 .657 .483 .386 1.620 1.198 .077 3.312 


language (No=1) 

.000 1.000 1.000 -.083 .895 .921 -.750 .375 .472 

Age Group **** .653 .680 .226 

30-55 -.167 .375 .846 .567 .575 1.763 1.732 .154 5.652 

Over 55 -.190 .437 .827 .167 .883 1.182 1.028 .459 2.796 

Constant -.449 .101 .638 -.886 .455 .412 -1.812 .209 .163 





Significance 0.00 .269 .175 

Nagelkerke R Square .043 .158 .199 

*Reference Category=Maximum Completed Primary School; **Reference category= Not working: Retired permanent job; 

***Reference Category=under 30 

Recoding of variables: Values between 1 and 4 were recoded into 0. Values between 5 and 7 were recoded into 1 in order 

to apply the recoded variable as a dependent variable in the logistic regression model. 8 

page 181



Women are more likely to think that providing 

jobs for all citizens is the government’s 

responsibility in both the representative sample 

and the pre-deliberation group. However, 

in the post-deliberation session, the effect of 

gender disappeared: agreeing with the statement 

that it is the individuals’ responsibility 

to find a job is independent of gender in the 

post-deliberation group. 

The effect of educational background was 

almost constant, which means that those who 

have a higher level of education emphasize 

more the responsibility of the individual in 

finding jobs than the reference group in each of 

the sections. Those who use the internet tend 

to agree with the statement that ‘Finding a 

job is one’s own responsibility’ than those who 

do not use the internet in the representative 

sample and the post deliberation group. These 

results confirmed our first hypotheses: those 

who are in a favorable position are more 

likely to support the liberalization of the labor 

market. 

2.6. Unemployment cannot be avoided versus 

it should be avoided at any cost 

We will now discuss what people think about 

unemployment; respondents were asked to 

tell how much they agree with the given 

statements on a 7 degree scale. One indicates 

that the respondent totally agrees with the 

following statement: Unemployment cannot 

be avoided totally. Seven means that the 

respondent totally agrees with the following 

statement: Unemployment should be avoided at 

any cost. The other degrees show the relation 

to the statements. The results of each round are 

shown in Table 36. 

Table 36. What do people think: unemployment cannot be totally avoided 

vs. unemployment should be avoided at any cost? Measured on a 7 degree scale 

1-7 degree 

scale % 

Unemployment cannot 

be avoided totally. (1-3) 


scale (4) 

Unemployment should be 

avoided at any cost. (5-7) 

Mean 

In the survey 

research 

Pre-deliberation in 

the small groups 



37% 18.7% 44.3% 4.17 

37% 15.7% 47.2% 4.15 

49.6% 13.7% 36.8% 3.52 

T1 – T2: Statistically not significant change (t=1.004, p>0.05) T2 – T3: Statistically significant change (t=2.021, p


This is an important question, because 

people’s lives have been organized by work in 

industrialized societies. However, substantial 

changes have taken place in many ways. 

According to Claus Offe (1991), the developed 

countries have entered a new stage of the 

economy, where the growth of the economy 

does not mean that everybody has work. The 

forms of flexible work are spreading (parttime, 

temporary contracts, self-employment), 

which predicts that the essence of life should 

not be work. It seems that deliberation helped 

participants to understand that we have 

to live together with the phenomenon of 

unemployment. 

Table 37 presents which social-demographic 

variables have significant effects on choosing 

one of the statements using the logistic 

regression model. 

page 183



Table 37. Determinants of the probability of thinking whether the 

unemployment can be dissolved or not (Q17) 

All 

N=1484 (1520) 


N=107 


N=111 


Gender (Men=1) .248 .026 1.281 .867 .070 2.380 .363 .441 1.438 


Vocational school .250 .090 1.285 -.554 .368 .575 -.227 .706 .797 




(BA or MA) 

.106 .492 1.112 -1.111 .083 .329 -.540 .394 .582 

.032 .878 1.033 -1.085 .206 .338 -1.004 .236 .366 


Working full-time -.197 .291 .822 .263 .662 1.301 1.221 .048 3.390 

Not working: 

Unemployment 

-.156 .505 .856 .267 .690 1.306 .212 .760 1.236 


other reason 9 -.017 .948 .984 -.331 .760 .718 1.667 .165 5.298 

Using Internet (No=1) -.153 .287 .858 .187 .738 1.206 .603 .300 1.827 



-.443 .002 .642 -1.251 .069 .286 -1.043 .130 .353 

Age Group **** .197 .112 .220 

30-55 -.289 .110 .749 -1.997 .066 .136 1.687 .157 5.405 

Over 55 -.396 .092 .673 -1.417 .242 .242 2.244 .086 9.430 

Constant .078 .767 1.081 1.784 .170 5.956 -2.688 .045 .068 





Significance .001 .148 .162 


page 184 

*Reference Category=Maximum Completed Primary School; **Reference category= Not working: Retired 

permanent job; ***Reference Category=under 30 


to apply the recoded variable as a dependent variable in the logistic regression model. 10


Gender has a significant effect on both the 

representative sample and the pre-deliberation 

group. After deliberation the gender-effect 

disappeared. The educational background 

influenced the answers of respondents in T1 

and T2. Those who completed vocational school 

are the most likely to agree with the statement 

‘Unemployment should be avoided at any cost’ 

than the reference group in the representative 

sample. While those who completed secondary 

school are less likely to agree with the statement 

‘Unemployment cannot be totally avoided’ than 

the reference group in the pre-deliberation 

group. Nevertheless, the educational effect 

also vanishes in the post-deliberation group. 

At the same time, employment status has a 

significant effect only on the post-deliberation 

group: those who are working full-time are 

more than three times as likely to think that 

‘Unemployment cannot be avoided totally’ 

than the reference group. 

Those who speak a foreign language are more 

likely to believe that unemployment cannot be 

totally avoided than those who do not speak 

a foreign language in T1 and T2. However, 

this difference also disappears in T3. The age 

variable has a significant effect on the small 

groups: those between 30-55 years are most 

likely to think that unemployment cannot be 

avoided in T2, while those over 55 are most 

likely to believe that unemployment should be 

avoided in T3. These results also verify our first 

hypotheses. 

2.7. Employment policies 

Employment policies are regulatory activities 

of the state to tackle unemployment. 

Theoretically, employment policies are usually 

divided into two groups: active employment 

policies and passive employment policies. The 

aim of passive employment policies is to take 

care of people who lost their jobs. On the 

contrary, the intention of active employment 

policies is to help the unemployed find a job. 

First, we examined whether the theoretical 

structure of employment policies (active 

and passive) exists in the minds of people in 

the representative survey. In the T1 and T2 

interview sessions, factor analyses did not 

suggest that the theoretical structure could be 

found in the minds of participants. However, 

we found a factor structure (active and passive 

employment policies) in the post-deliberative 

session. We think that the existence of 

theoretical structure in the post-deliberation 

session is due to the fact that the moderators 

aggregated the employment policies several 

times during the deliberation, so people 

learn of the employment policies during the 

deliberation. The results of T3 interview are 

shown in Table 38. 

page 185



Table 38. The grouping of the employment policies in the post-deliberation group 

How strongly would you favor or 

oppose each of the following as ways 

of dealing with unemployment? 

Active Policies 

Factors 

Passive Policies 

Labor market services 

.681 

.055 

Training support 

.834 

.002 

Wage-and contribution-type subsidies 11 

.555 

.317 

Support for self-employment 

.282 

.162 

Job search allowance and benefit 

.111 

.777 

Regular social aid 

.149 

.879 

Maximum Likelihood factor analyses, with Varimax rotation 

KMO indicator value:0.650, 

Bartlett test value: 144.975; Sig.:0.00 

This question was measured by on a 5 degree scale where the first degree means oppose it strongly and fifth degree 

means favor it strongly. 

We can see that there are two factors in table 

38. The first includes the following items: 

labor market services, training support, and 

support for self-employment. The mentioned 

policies belong to the active employment 

policies, so we call this factor Active Policies. 

The second factor includes the following 

items: job search allowance, benefit and regular 

social aid. The two mentioned items belong to 

the passive employment policies, so we called 

this factor Passive Policies. Table 39 presents 

which social-demographic groups prefer the 

applying of the active and the passive policies. 

page 186


Table 39. Effects of dependent variables on choosing between active and passive employment policies 

Independent variables 

Gender 

Mean of the Active employment 

policies in the postdeliberation 

session 

Mean of the Passive employment 

policies in the postdeliberation 

session 

Men .0160243* -.0745066* 

Women -.0121785* .0566250* 

Age group 

Under 30 .0458470 .6137456 

30-55 .1489792 .1232090 

Over 55 -.1593003 -.2025254 

Educational level 

Max. completed primary schools -.1194293 .1172068 

Vocational school .1568382 .0234950 

Grammar school .0346563 .0869121 

Tertiary school -.3193728 -.4701077 

Employment status 

Having a job -.0882782 .0252327* 

Unemployed .2053722 .5046878* 

Retired -.0731706 -.2320810* 

Not working for any other reason .2923586 .1865640* 

Using internet 

Yes .1209967 -.0440701 

No -.0772680 .0055342 

Speaking a foreign language 

Yes .1914047 .0547550 

No -.0415927 -.0183208 

*Statistically significant change ( p



active policies than women, while women 

are more likely to support the passive policies 

than men. The results supported the second 

hypotheses. 

2.8. Liquidation vs. toleration of illegal 

work 12 

If the labor market is regulated too rigidly 

and the cost of hiring or laying off is too 

high while the supervision of the labor market 

is weak, some people will be employed 

without paying taxes. The issue of illegal 

work is extremely relevant in Hungary, as the 

main problem is not the high unemployment 

rate, but the low activity rate (the number of 

legally employed people). With its 53.7% 

activity rate among 15-64 year olds, Hungary 

is lagging behind the EU members, where the 

mean activity rate is 64.5%. 

The following question concerns what 

people think of illegal work. This question 

was measured on a seven degree scale. One 

indicates that the respondent strongly agrees 

with the following statement: ‘Government 

should prevent all illegal work’. Seven means the 

respondent strongly agrees with the following 

statement: ‘Government should not do anything 

against illegal work’. The results of each 

questioning session are shown in Table 40. 

Table 40. What do people think: government should prevent all illegal 

work vs. government should not do anything against illegal work? Measured on a 7 degree scale 

1-7 degree 

scale % 

Government should 

prevent all illegal work 

(1-3) 


scale (4) 

Government should not do 

anything against 

illegal work (5-7) 

Mean 

In the survey 

research 





61.8% 18.3% 19.8% 2.78 

65.4% 20.2% 14.4% 2.61 

64.6% 20.4% 15% 2.57 

T1 – T2: Statistically not significant change (t=-0.932, p>0.05) 

T2 – T3: Statistically not significant change (t=0.292, p>0.05) 

The deliberation did not bring any 

page 188 significant change in this issue, as 

we can see in table 40. In all three 

sessions, more than 60% of the people 

said that the government should prevent all 

illegal work, while less than 20% declared that 

the government should not do anything against 

illegal work. Table 41 shows which socialdemographic 

variables have significant effects 

on choosing one of the statements.


Table 41. Determinants of the probability of agreeing with ‘Government 

should prevent all illegal work’ vs. ‘Government should no do anything against illegal work’. 

All 

N=1455 (1520) 

Pre -Deliberative Poll 

N=103 

Post -Deliberative Poll 

N=107 


Gender (Men=1) .132 .241 1.141 -.401 .411 .670 .093 .845 1.098 


Vocational school .368 .014 1.445 -.457 .453 .633 -.286 .646 .751 




(BA or MA) 

-.026 .871 .975 -.179 .779 .836 .502 .430 1.652 

-.108 .612 .898 -.391 .646 .677 -.854 .329 .426 


Working in full time .206 .273 1.229 -1.184 .079 .306 -.599 .358 .549 

Not working: 

Unemployment 

.415 .077 1.515 -.287 .675 .751 .787 .246 2.196 


other reason 13 .188 .462 1.207 .352 .741 1.422 1.160 .326 3.190 

Using Internet (No=1) -.091 .533 .913 .836 .144 2.306 .332 .563 1.393 



.059 .681 1.061 -1.358 .044 .257 -.582 .363 .559 

Age Group **** .013 .515 .106 

30-55 -.462 .011 .630 -.311 .734 .733 -2.286 .061 .102 

Over 55 -.656 .005 .519 -.966 .367 .381 -1.596 .221 .203 

Constant -.050 .851 .951 .980 .378 2.664 1.397 .284 4.044 










to apply the recoded variable as a dependent variable in the logistic regression model. 14 

page 189



The first observation to be made from the 

table above is that gender does not influence 

the answers of the participants in any interview 

period. Educational background, however, had 

a significant effect in T1 period: those who 

completed vocational school are more likely 

to agree with the statement ‘Government 

should no do anything against illegal work’ 

than the reference group. Employment status 

influenced answers in the T1 and T2 periods: 

the unemployed are more likely to agree 

with the statement ‘Government should not 

do anything against illegal work’ than the 

reference group. While those who are working 

full- time are more likely to agree with the 

statement ‘Government should prevent all 

illegal work’ than the reference group. The 

effect of the employment status disappears in 

the T3 session. 

Regarding age, those over 55 are more likely to 

agree with the statement ‘Government should 

prevent all illegal work’ than young people in 

the representative sample. 

We can notice that fewer variables have a 

significant effect in the small groups than in the 

representative sample. In the pre-deliberation 

session, only full-time work and the knowledge 

of a foreign language have significant effects 

on the dependent variables. Those who speak a 

foreign language are more likely to agree with 

the statement ‘Government should 

prevent all illegal work’ than those 

page 190 who do not speak a foreign language. 

In the post- deliberation group, only 

the 30-55 age group has a significant 

effect: they are more likely to agree with the 

statement ‘Government should prevent all 

illegal work’ than the reference group. The third 

hypothesis has been confirmed by these results. 

We can draw the conclusion that working 

illegally is a defensive strategy of people whose 

status is unfavorable in the Hungarian society. 

2.9. Government should cut taxes versus 

spend more on education, health care and 

pensions 

Hungary is among the countries where the tax 

rates are high. Tax awareness is very low and 

people do not know much about the tax system. 

In addition, voters in Hungary falsely perceive 

the state role in the social sector and the cost 

of state programs (Csontos, Kornai, & Tóth, 

1996). For example, the majority of people 

underestimate the cost of pensions and medical 

services, while they overestimate the cost of 

social benefits. Sometimes they do perceive the 

relationship between social benefits and the 

tax rate. This question examined what people 

think the government should do: decrease taxes 

or spend more on education, health care and 

pensions. The respondents were asked to what 

extent they agree with the given statement on 

a seven degree scale. One indicates that the 

respondent totally agrees with the following 

statement: Government should decrease taxes even 

if this means less funding for education, health care 

and pension. Seven means that one totally agrees 

with the following statement: Government 

should spend more on education, health care and 

pension. The results of each questioning session 

are shown in Table 42.


Table 42. What do people think: Government should cut taxes vs. Government 

should no spend more on education, health care and pension? Measured on a 7 degree scale. 

1-7 degree 

scale % 


decrease taxes even if this 

means less funding for education, 

health care and pension. (1-3) 

The middle of 

the scale (4) 

Government should spend 

more on education, health 

care and pension. (5-7) 

Mean 

In the survey 

research 



Post-deliberation 


39.2% 34.9% 25.9% 

3.61 

30.5% 34.3% 35.2% 

4.14 

29.8% 35.6% 34.6% 4.14 

T1 – T2: Statistically significant change (t=-2.717, p0.05) 

Table 42 proves that there are significant 

differences between the T1 and T2 sessions. 

Deliberation did not bring significant changes 

in this issue, as we can see in table 42. Both in 

the pre- and post- deliberation small groups, 

around 30% of respondents prefered decreased 

taxes, even if this means less funding for 

education, health care and pensions. On the 

other hand, 35% declared that the government 

should spend more on education, health care 

and pension. It is surprising that the deliberation 

did not bring any significant changes, because 

the most important result of earlier research 

on the tax awareness (Csontos, Kornai, & 

Tóth, 1996) was that if the citizens know 

more about the cost of the state programs they 

will change their opinion about the role of 

the state, subsequently prefering to decrease 

the role of the state and emphasizing more the 

role of the market. 

The differences between T1 and T2 might 

be due to the composition effect and/or the 

briefing materials. The composition effect can 

be excluded by focusing the analyses on those 

people who took part in the small group conversation 

(Table 43). In Table 43 the component 

effect has been excluded because answers 

of the same people can be found there. Still, 

the significant differences between T1 and T2 

remain. Consequently, it is assumed that the 

variance is caused by the briefing materials. 

page 191



Table 43. What do people think: government should cut taxes vs. government should no spend more 

on education, health care and pension? Measured on a 7 degree scale. 

(Focusing only those who participated in small groups as well) 

1-7 degree 

scale % 


decrease taxes even if this means 

less funding for education, health 


The middle of 

the scale (4) 

Government should spend 

more on education, health 


Mean 

In the survey 

research 



46.2% 27.4% 26.4% 3.36 

29.4% 35.3% 36.4% 4.16 

T1 – T2: Statistically significant change (t=-2.826, p


All 

N=1416 (1520) 


N=104 


N=102 


Gender (Men=1) .205 .112 1.228 .852 .146 2.344 1.079 .058 2.943 


Vocational school -.283 .101 .753 -.554 .436 .575 .494 .455 1.640 




(BA or MA) 

-.087 .622 .917 -2.498 .003 .082 -1.702 .026 .182 

.049 .834 1.050 -1.801 .066 .165 -.552 .544 .576 


Working full-time -.289 .178 .749 .171 .795 1.186 .549 .394 1.731 

Not working: 

Unemployment 

-.280 .307 .756 -2.614 .023 .073 -1.591 .080 .204 


other reason 15 -.357 .221 .700 .517 .679 1.677 -.295 .798 .744 

Using Internet (No=1) .018 .915 1.018 -.040 .953 .960 -.380 .548 .684 



Table 44. Determinants of the probability of agreeing with 

‘Government should decrease the taxes versus should increase the tax’ (Q19) 

-.003 .985 .997 -.474 .569 .623 .580 .421 1.786 

Age Group **** .340 .423 .262 

30-55 -.295 .157 .745 .613 .649 1.845 -1.002 .352 .367 

Over 55 -.170 .525 .844 1.386 .336 3.999 -.084 .944 .920 

Constant -.709 .018 .492 -.638 .648 .529 -.280 .816 .756 



Model Chi-square 18,163 33.628 22.404 






Recoding of variables: Values between 1 and 3 were recoded into 0. Values between 4 and 7 were recoded into 1 in order to 

apply the recoded variable as a dependent variable in the logistic regression model. 16 

page 193



Astonishingly, none of the independent 

variables have a significant effect on the 

representative sample. In the small group, 

almost the same variable has a significant 

effect: those who completed secondary general 

school tend to think that the government 

should decrease taxes in comparison with 

reference group. The unemployed are more 

likely to agree that the government should 

decrease taxes than the reference group. In 

the post-deliberation session, gender also has 

a significant effect: women are more likely to 

agree with the statement ‘Government should 

spend more on education, health care and 

pension’ than men. 

2.10. A Qualitative Analysis 

We conducted a qualitative analysis based on 

conversations in two groups 17 (groups 10 and 

14). There were 4 pensioners, 1 employee and 

1 student in group 10. As for the gender ratio, 

there were 2 men and 4 women. In group 

14, there were 1 unemployed, 1 mother on 

maternity leave, 1 employee, 2 pensioners and 

1 disabled pensioners. Of these participants, 1 

was male and 5 female. 

In group 14, the moderator asked participants 

directly how the state regulated the labor 

market and whether they preferred a strong 

or weak state influence on the labor market. 

It seems that participants are aware of 

the fact that a strong state influence 

page 194 restricts the labor market, while a 

weak state influence makes employees 

defenseless. The participants believe 

that role of the state should be somewhere in 

between. They also understand the operation 

of the tax system. In both groups there are 

some people who are against the high tax rate, 

which makes the situation of the entrepreneurs 

difficult: ‘There are a lot of forced entrepreneurs 

who are almost up to their neck in taxes. Less 

tax should be imposed’ (group 10). At the same 

time, they realize that the missing amount 

should be supplied from other sources: ‘The 

state has to take money from somewhere in 

order to decrease the tax rate; money must be 

taken from where it is wasted’ (Group 14). 

Participants emphasized job security, which 

they miss on many levels. First of all in the 

training: People should be trained (given such a 

profession) so that they can also find a job in 5 to 

10 years (Group 10). At the same time, they 

speak a lot about life-long learning, meaning 

that people must continually invest in their 

human capital in order to stay competitive on 

the labor market. 

The expectation that people gain knowledge 

in public schools, which will guarantee them 

fa job decades after they left school without 

a need to obtain new skills or qualifications 

continually required by the labor market is not 

realistic. This is shown by the fact that, among 

less educated people, the activity rate is very 

low, since the skills required by the labor market 

(for example, readiness to study) are missing. 

The following example is the reaction of an 

unemployed woman in group 14 who was asked 

if she attended a retraining program supported 

by the job center. Her answer was: „I have not 

learned for 30 years; I am afraid I might not be able 

to”. The negative opinion about training and 

education makes the situation even worse. They 

believe it is not worth learning and obtaining 

a higher education level, since the situation of 

highly educated people is even more difficult:


„Even those who have qualifications cannot get a 

job. Even more people with more than one degree 

are not wanted by the labor market” (group 10). 

We are past the society of work (Offe, 1991; 

Beck, 1999), which means that it is not 

guaranteed that everybody can find a job. 

Therefore, we do not let individuals to judged 

by their work. We should not let the society 

be split in two parts: the majority, who has a 

job according to the traditional norms, and the 

remarkable minority, which is out of the labor 

market. Although, the participants value work, 

as they regard it as the essence of life: ‘It is not 

good if people live without work and they do not 

have job opportunities” (group 14). 

They miss the security of workplaces: ‘The 

employers get support if they employ unemployed 

people, but they will just employ them until they 

get the support, then they are going to fire them. 

It is not worth doing this procedure. The employers 

will not invest anything in their skills. Why do 

employees train themselves? This is not a longterm,calculable 

job opportunity. The employers 

should employ the employees for at least 5 years, so 

the employees would be secure for at least 5 years, 

in this case they would be able to plan” (group 

10). The only solution for people to find or 

keep their jobs is to be ready to adapt to the 

new situations (job, position and environment 

changing). Project work is spreading, which 

means that employees get temporary job 

contracts. Yet, it seems that most of the people 

are not yet ready for flexible employment. 

The participants are not against illegal work. 

Even more, they commiserate with illegal 

workers: ‘People accept illegal jobs, because they 

have to live on something” (group 10). At the 

same time, they do not feel the same solidarity 

with the employers. They believe employers 

are the beneficiaries of illegal work by tax 

evasion: ‘Employers are always searching for 

loopholes. You (employee) are defenseless, but 

you have to undertake this game” (group 14). 

They emphasize that the defenseless position 

forces employees to accept illegal work: ‘You 

know this is not correct but you do not have any 

other choice” (group 14). In accordance with 

quantitative analysis, we can find that people 

who are in unfavorable position in society use 

the illegal sector. 

3. SUMMARY 

In the deliberative analysis, the first hypothesis 

was partly supported. Those who posses more 

cultural capital (higher education, access 

to internet) are more likely to support the 

deregulation of the labor market. Concerning 

educational level, those who completed 

tertiary school are more likely to agree 

with the deregulation of the labor market 

than the less educated people. Educational 

background had a significant effect in each of 

the sections. Those who use internet prefer the 

liberalization of the labor market in T1. The 

fact that older people are more likely to agree 

with the liberalization of the labor market 

than the young is exactly the opposite of what 

we had expected. We believe that this 

is due to the fact that those who are 

over 55 are mostly out of the labor 

page 195 

market. Thus, if the labor market was 

more deregulated than it is today, it 

would not mean any uncertainty for them, but 

would mean uncertainty for people in their 

active age. As for the employment status, I



page 196 

could show that the unemployed demanded 

the regulation of the labor market. The effect 

of gender and the ability to speak a foreign 

language were not significant. 

Our hypothesis concerning employment 

policies was also partly supported. We could 

find the theoretical structure in the postdeliberation 

group. We also showed that 

women and unemployed people are more likely 

to support passive employment policies than 

men and those who are on the labor market. We 

assumed that people over 55 support passive 

employment policies. It has been revealed 

that people over 55 oppose both employment 

policies. Pensioners are the ones who oppose 

passive employment policies the most. One 

explanation can be that they might be afraid 

that greater support for the unemployed may 

decrease their benefits. The effects of other 

independent variables (using the internet, 

speaking a foreign language, education level 

and age group) were not significant. 

Our hypothesis regarding illegal work was also 

supported. Regarding the effect of educational 

level, we found that those who completed 

vocational school are more tolerant regarding 

illegal work than other educational groups. 

The effect of other independent variables 

(using internet, speaking a foreign language, 

employment status) was not significant. 

However, we found that unemployed 

people are very tolerant towards 

illegal work, as we expected it in our 

hypotheses in the post-deliberation 

poll. 

Our fourth hypotheses was not entirely 

supported either. We found that pensioners do 

not want to cut taxes. Concerning educational 

level, we supposed that highly-educated people 

are most likely to want tax decreases. On the 

contrary, in the representative survey session 

we found that those who completed vocational 

school were most likely to be in favor of 

decreasing taxes. However, this tendency 

became non-significant in the post-deliberation 

session, while the effect of completed tertiary 

school became significant. They are more likely 

to be in favor of decreasing taxes. Surprisingly, 

those who do not use the internet are more 

likely to agree with the decrease of taxes 

than those who use the internet. The effects 

of other independent variables (speaking a 

foreign language, gender, age groups) were not 

significant. 

We can accept our last overall hypotheses, as 

we found that in the post-deliberation the 

opinions of the participants converged. For 

example, the effect of gender disappeared in 

the liberalization of the labor market issue and 

the effect of employment status disappeared in 

the tax rate issue. We obtained the same results 

from the qualitative analyses. We did not find 

any contradictions between the results of the 

qualitative and quantitative research. 

As a conclusion, based on the deliberative 

analysis perfomed in Hungary, we can see that 

– in a post-socialist country – the population 

would expect a patronizing state, but has little 

consideration about how the necessary funding 

can be secured for the preferred social measures. 

We have also learned that education or any 

kind of authentic and efficient information 

dissemination can help people understand 

interrelations between welfare measures and 

taxation, but can also generate a more plausible


picture of how governmental institutions work. 

A remarkable sociological research showed 

that people in Hungary considered the role 

of the state to be very important in the 1990s 

(Ferge, 1996). 

Based on our research, it is visible that this 

expectation still exists, not only in postsocialist 

Hungary, but also in the majority of 

the EU. It has also been shown that not every 

citizen expects the same level of state care and 

influence on markets. The current sociological 

research in Hungary shows that risk groups 

and individuals with less education require 

more state support: they would prefer greater 

state influence while putting less emphasis 

on the responsibility of the individuals. They 

expect the state to provide job opportunities 

and financial security (Utasi, 2008). On the 

European level, it has been shown that the 

majority of citizens prefer a strong social 

perspective in their country as well as tax 

decreases. Citizens with a higher education 

level believe in the efficiency of social measures 

to a greater extent as well as that businesses 

suffer on expenditures related to social services 

and benefits to a certain extent. 

page 197



NOTES 

1 

I decided to use logistic regression instead of ordinal regression, 

because, while results do not differ substantially between the two 

methods, those of logistic regression are easier to interpret. 

12 

Illegal work means that taxes and social insurance are not 

paid. 

13 People in this category are mostly students or mothers on maternity 

leave. 

2 

Women’s position on the labour market is more uncertain than 

men because, when they have small children, they must be out 

of the labour market due to a lack of child care services and 

part-time jobs. Those who are over 50 belong to the risk group 

because employers prefer to employ younger people. Those who 

do not have enough cultural capital (do not use internet, do not 

speak any foreign language and are less educated) are also in 

unfavourable position on the labour market. 

3 

Measured by Paired Samples T-test. 

14 

The method of recoding was chosen according to the mean and 

distribution of the variable. 

15 

People in this category are mostly students or women on maternity 

leave. 

16 


the distribution of the variable. 

4 

Measured by Paired Samples T-test. 

17 

The author choose 10 th and 14 th groups for analysing. 

5 


leave. 

6 



7 


leave. 

8 



9 

People in this category are mostly students or mothers on maternity 

leave. 

page 198 

10 

The method of recoding was chosen according to 

the mean and distribution of the variable. 

11 

The only items that were part of both dimensions 

are wage and contribution subsidiaries. It can be assumed that 

participants were confused by the phrase.


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page 199

AT THE ORIGINS OF INFORMAL ECONOMIES: 

THE UKRAINIAN CASE 

ABSTRACT 


SOME EVIDENCE FROM UKRAINE 

(1991-2009) 

Abel Polese 

9 

Drawing evidence from participant 

observations and informal interviews 

between 2003 and 2009, when the 

author spent around four years working in 

Ukraine as a lecturer and consultant in the non 

governmental sector, this article explores the 

conditions that make the informal sector blossom 

in transitional countries. In this respect, it 

will be suggested, informal economies originate 

from tensions between citizens and the state, 

in which the former feels compelled to respect 

decisions and policies imposed from the latter 

with no possibility to express their opinions or 

react politically. 

In such a context, the only way to react is to 

use informal economies as weapons of the weak 

(Scott 1984). Through informal payments, 

(petty) fiscal fraud or suitcase smuggling, 

people may reverse the effects of state decisions 

that are not tailored to a local context. This, in 

turn, may allow people to participate politically 

even when a participatory democracy is not 

immediately available (Gupta 1995). 

INTRODUCTION 

page 200 

Ukraine gained independence in 1991. Coming 

out of a period of nationalist movements, worker 

and student strikes as well as an attempted 

golpe, the future president Leonid Kravchuk 

played the card of a radical rupture with the 

past in the hope to rapidly gain stability and 

sustainability. 

Although a full republic within the USSR, 

Ukraine still lacked some of the international

ABEL POLESE 

institutions that a sovereign country needs. The 

Ministry of Foreign Affairs had been based in 

Moscow as well as the national bank, both of 

which would have to be created ex novo and 

based in Kiev. 

In an effort to gain credibility and international 

recognition, the country initiated a number of 

political and economic reforms at domestic and 

international levels. As a first step, the country 

became a presidential republic in 1991and 

Leonid Kravchuk was elected as the first president. 

In addition, the communist party was 

formally banned (though re-admitted into 

politics in 1993) and its property nationalized. 

In spite of this, a consistent number of communists 

remained in politics by adopting a new 

political identity (most went into the Socialist 

Party, while others have run as independent 

candidates or found themselves distributed in a 

number of other parties, Polese 2008). 

Because of Russian proximity and claims (on 

gas and foreign debts, the Ukrainian territory 

and domestic politics due to consistent Russian 

minorities in the country), international recognition, 

assistance and support were also sought 

to counterbalance these pressures. The country 

applied and was accepted into the Council of 

Europe in 1995 ; and a partnership and cooperation 

agreement with the EU entered into 

force in 1998, one year before the Common 

Strategy on Ukraine (and Russia) was put 

forward by the EU Commission. Programmes 

of assistance like TACIS or IREX were set up 

and Ukraine was allowed to become a main 

recipient. The IMF and World Bank were also 

welcome to give advice and collaborate with 

the local government in an attempt to protect 

the country from harsh crises. 

However, this international attention had a 

double effect. On the one hand, the transfer 

of knowledge enabled domestic companies 

and public industries to potentially catch up 

with the rest of the world. On the other, it 

exposed the very essence of a society based on 

informal exchanges and social networks that, 

consolidating in Soviet times, had become a 

main feature of the country’s economy after 

the end of socialism. If, on the one hand, 

macroeconomic reforms and performance of 

the Ukrainian economy was a main concern 

(Kravchuk 2002, Van Zon 2000), an increasing 

number of firms mentioned informal practices 

and suggested that their liquidation would 

have a positive effect on the country’s transition 

(Aslund 2009, Aslund and Mesnil 1999, De 

Cornelius and Lenain 1997, Kuzio 1998). 

Researchers focusing on economic development 

in Ukraine could be divided into two 

mainstreams. Some assess informal transactions 

as harmful for the country (Freedom 

House, Transparency International, World 

Bank) and hold the opinion that the economic 

transition should pass through a cultural transition 

from Soviet deltsi (equivalent of businessman 

in Russian but with a different moral 

attitude) to businessmen (Papava 2001, Papava 

and Khaduri 1997). Others, however, argue for 

a dinstinction between pure corruption and 

the informal sector, suggesting that the most 

effective way to deal with extralegal 

activities was to integrate them into 

the official economy (Kaliberda and page 201 

Kaufmann 1996, Kaufmann 1994). 

The account on corruption given by most 

international organizations, and sometimes 

diligently adopted by local actors (Zerkalo



page 202 

nedeli), might have several weakenesses. One 

is that ‘international standards’ do not always 

take into account the local cultural and social 

context, especially when dealing with corruption 

(Polese 2008, Werner 2003). Legal systems, 

if allowed to develop autonomously, may also 

generate definitions that differ radically. 1 

A further weakness arises in the case of small 

transactions, happening on a daily or regular 

basis, that allow common people to survive 

once the state is unable to secure their needs. 

In such contexts, the very word ‘bribe’ and its 

meaning may be questioned (Humphrey 2002, 

Patico 2002, Polese 2008). 

A commonly agreed upon definition of 

corruption is as follows: ‘corruption is the use 

of a public function for a private advantage’. 

However, if the public function (a doctor, a 

teacher, a civil servant), that is, the fact that an 

individual works for the state, is not supported 

by the state (de facto, either because the state 

is not paying salaries or is paying too little 

to survive) then the very meaning of public 

function should be re-discussed and, with it, the 

meaning of corruption (Polese 2008, 2006b). 

Drawing evidence from participant observation 

and informal interviews between 

2003 and 2009, when I spent around four 

years working in Ukraine as a lecturer and 

consultant in the non governmental 

sector, I explore in this article the 

relationship between the state and 

the citizen in order to understand the 

origin of such informal transactions. 

In particular, I address the questions what 

conditions encourage or discourage success of 

an informal economy. In this respect, I suggest 

that informal economies originate from tensions 

between citizens and the state, in which 

the former feels compelled to respect decisions 

and policies imposed from the latter with no 

possibility to express their opinions or react 

politically. 

In such a context, the only way to react is to 

use informal economies as weapons of the weak 

(Scott 1984). Through informal payments, 

(petty) fiscal fraud or suitcase smuggling people 

may reverse the effects of state decisions that 

are not tailored to a local context. This, in turn, 

may allow people to participate politically even 

when a participatory democracy is not immediately 

available (Gupta 1995). To support this 

argument, the next sections will narrow down 

the concept of informal economies, as defined 

in this article, and discuss how informal transactions 

are performed. 

DISCUSSING THE INFORMAL SECTOR AND THE 

ILLEGAL-LEGAL BOUNDARY 

Agreement to consider the informal sector 

within a national economy is relatively recent. 

The informal sector was first defined as ‘unregulated 

economic enterprises or activities’ 

(Hart 1973) until, in 1993, the International 

Conference of Labour Statisticians (ICLS 

1993) decided to include all unregistered 

enterprises below a certain size – for example, 

micro-enterprises owned by informal employers 

as well as entrepreneurial operations owned by 

individuals who may employ family members 

or employees on an occasional basis. 

This definition, however, may fail to include

ABEL POLESE 

persons engaged in very small-scale or casual 

self-employment activities. In addition, 

anthropologists objected this perception of 

labour. In her work on women labour in Turkey, 

for example, White (2004) pointed out that 

activities such as child caring or piecework 

production, generating revenue according to 

Western legal codes, is generally not perceived 

by women themselves as work but rather as 

their duties as mothers and wives to contribute 

to household survival. 

A main result of this international debate is 

that the informal sector is no longer considered 

separate from the formal economy (ILO, 1972; 

Sethuraman, 1976; Tokman, 1978), representing 

only small scale activities (Moser, 1978; 

Castells and Portes, 1989) or large enterprises 

attempting to fraud the government (de Soto, 

1989). Also, the idea of a transitional informal 

sector has been challenged. The sector might 

survive long enough so that it is no longer a 

subject for economic policy (Maloney 2004) 

but a persisting and lasting part of the national 

economy with an impact on the GDP. In this 

way, this definition would subsequently include 

non-standard wage workers as well as the self 

employed, which might prompt governments 

to reconsider it use when deciding on a political 

and economic development strategy (Chen, 

Martha, Joann Vanek and Marilyn Carr. 2004). 

Because the definition of informal economies, 

or the informal sector, might come to include 

virtually anything, a study on informal economy 

should, as the first task, explain what part of the 

informal sector will be the focus of analysis. 

A distinction that might be worthy of use is the 

one between illegal, unreported, unrecorded 

and informal economies (Feige 1990:7). Illegal 

economies refer to those perpetuated in 

violation of legal statutes defining the scope of 

legitimate forms of commerce (1990:8), which, 

at least in principle, should be of interest for 

criminologists or law students. Unreported 

economies consist of activities that circumvent 

or evade the institutionally established fiscal 

rules so that tax authorities are not informed 

of the activity. Finally, unrecorded economies 

are all activities producing income that 

the state does not consider to be revenue 

producing, such as household production. 

In developed countries, it is estimated that 

such activities account for between 25 and 

50 percent of the GDP (Feige 1990: 9) and 

can strongly bias data on unemployment 

and production. Finally, according to Feige 

informal economies include all activities that 

circumvent costs and are excluded from the 

benefits and rights incorporated in the laws 

and administrative rules governing property 

relationships, commercial licensing, labour 

contracts, torts, financial credit and social 

security systems (1990:10). This illegal-legal 

boundary is difficult to trace and might be 

mobile: for example, how should politically 

motivated embargoes or bans be handled that 

directly affect traders who become smugglers 

overnight? 

Accepting that the boundary between legal 

and illegal is much more fluid in reality than 

in theory, I will use, as narrative of 

this paper, transactions that one could 

call ‘illegal-legal’ or ‘potentiallylegal-illegal’. 

Illegal-legal refers to 

page 203 

deeds that may be considered illegal 

in a given context, for they are not regulated, 

registered, or fully recorded, but could also be 

considered legal in a different context or when



performed by different people. As the desire to 

remain covert is often due to the incapacity of 

the state to invite people out of extralegality 

(Bovi 2001, de Cornelius and Lenain 1999, 

de Soto 2002), illegal-legal transactions may 

be illegal in a given moment (and context) but 

potentially legal if only the state would modify 

the legal framework – i.e. a businessman 

whose company is not registered because the 

registration procedure is too complex, or someone 

importing a product that is temporarily 

banned. Conversely, this classification excludes 

covert operations that would be very difficult 

to consider legal even by the most liberal government, 

such as selling narcotics. 

Another distinction between illegal-legal and 

fully illegal may be found when examining the 

beneficiaries of as well as those harmed by an 

action. Smuggling, selling with no licence, or 

failing to pay taxes may harm the state directly 

but might benefit the fellow citizen, who is 

able to buy things not available on the market 

otherwise or simply at a lower price (Polese 

2006). Citizens are, in this case, only indirectly 

harmed as they may not benefit from services 

the state might put at disposal with a higher 

budget. However, actions like selling or 

trafficking narcotics or burglary directly harm 

the fellow citizen and the state (directly or 

indirectly) and are harder to be considered 

legal or even potentially-legal. 

Potentially legal transactions are 

page 204 ambivalently considered in literature 

on post-Soviet transition. In Ukraine 

there have been some efforts to 

integrate informal economies in an economic 

framework to understand their impact on the 

economic transition (Kaufman 1994, Schneider 

and Enste 2000) as well as explore whether 

they can be integrated into the legal sphere of 

economic life (Hussmanns 2004, Kaliberda 

and Kaufmann 1997). However there is a 

portion of the literature, in Ukraine as in other 

former USSR republics, suggesting that we 

can understand the reasons behind those informal 

economies by understanding how they 

work, the way people survive in post-socialism 

(Humphrey 2002, Pavlovskaya 2004, Polese 

2006, 2006b, 2006c, 2008, Wanner 2005) and 

how, in particular, the relation state citizen may 

affect the relevent action (Patico 2002, Polese 

2008, 2010, Sebinova Peter 2005). This may 

be due to the fact that people participate in a 

whole range of economic practices on a daily 

basis, many of which can be defined in noncapitalism 

terms (Pavlovskaya 2004: 334). By 

exploring not only the way the state address 

citizen’s needs but also the perception of the 

state by the citizens (i.e. whether or not they 

feel their needs are met), we can understand the 

way and the extent to which informal economies 

are formed and the reason why they may 

persist over time. 

Informal economies, as explored in this paper, 

seem to show a partially transitory or nonpermanent 

nature. They exist because citizens 

need to survive in their daily life and not 

because of a desire for fullfillment through a 

maximization of profits. In this we can see the 

Weberian distinction between consumption and 

acquisition (Schluchter Weber [1908] 1998) 

that helps to narrow our sphere of investigation 

to the consumption-oriented actions. 

However, priority of consumer interests 

normally characterize traditional economic 

structures, which is in line with the fact that

ABEL POLESE 

informal economies tend to deny the role of the 

state as social or economic mediator among citizens. 

Informal transactions take place directly 

between two or more citizens and either leave 

no place for the role of the state or occur in a 

context in which the state is superfluous. 

Currently it might difficult to find a national 

territory in which the state is absent, although 

there may be cases in which it is partially absent 

in spatial or temporal terms. That is, the state 

might be absent ‘sometimes’ or ‘in some places’. 

I refer here to the possibility that the state, while 

attempting to regulate economic life, might fail 

to do so in some cases (e.g. for some sectors or 

industries or in some regions) or in some time 

periods (e.g. during an economic crisis). 

Alternatively, the state might be unable to 

boost even regional development by neglecting 

some regions, thus encouraging engagement 

in informal transitions. The more often this 

occurs, in temporary and spatial terms, the 

more the state might be considered a failure. 

This perception may occur despite the fact 

that the actual situation likely falls somewhere 

between a failed and a perfect state; and 

informal economies are present in virtually 

every country irrespective of development 

status (Williams 2005). 

In Ukraine there is a tendency to renegotiate 

state policies and informally tailor them to a 

local reality in terms of language and identity 

policies (Polese 2009). In this context, the 

very presence of a state, as well as its work, 

generates tensions between habits, structures 

and dynamics consolidated over time, which in 

a Weberian perspective are the very source of 

power. The state attempts to regulate economic 

life and the relations between citizens. 

However, citizens may feel they are already 

able to regulate themselves on their own and 

feel unable or unwilling to further participate 

in the life of a given state. Those willing to 

participate, but at the same time feel somehow 

excluded, may provide informal transactions 

another meaning, in that they become a way to 

participate in the country’s political life (Gupta 

1995). Every action aimed at contrasting 

what the state imposes on citizens becomes a 

weapon (Scott 1984), so that informality may 

be seen as a way to reshape political decisions 

that were not accurately tailored for a given 

context (Polese 2010). To find confirmation 

of this statement, we need to look at the way 

informal economies function, their genesis 

and their perceptions by actors other than the 

state. 

WHERE WILL ALL THE BABUSHKI BE GOING? 

Kiev, a Wednesday afternoon, one of the 

hundreds of podzemnyj perekhod (subterranean 

passages used to cross wide roads that offer 

protection from the weather, especially in 

winter) of the city. 

Ukrainians, as they often do, are shopping. 

Sellers (mainly elderly women, but also 

some younger sellers) have arrived from the 

countryside or the neighbourhoods 

to sell their goods. Some offer a pot 

of marinated cucumbers, others have page 205 

collected and dried wild mushrooms, 

and still others sell apples. The more 

organized have a whole stand and a wider 

range of products. Some sell clothes, others 

biscuits and sweets or several kind of nuts.



Perekhody are crossing places, used to go home 

or change connections, so that Kievlyans, while 

busy going home, may hurriedly stop at some 

stands to buy whatever they might need for 

dinner or the evening. This type of shopping 

is not time consuming and can be done in the 

time between transfering buses. 

Suddenly several police officers arrive and 

ask the sellers to leave. They are in the right: 

none of the sellers have a permit to be there. In 

addition, since Soviet times there is a strong 

inhibition (and diffidence) when dealing with 

the police, so resisting is not an option. 

However, conversely to what might happen 

elsewhere, the police officers are not keen 

to fine the sellers or confiscate their goods. 

They simply order them to leave. Some 

of the elderly women may ask for mercy, 

adding that this is the only way they can 

earn money. The officers will reply that 

they cannot do anything, that their job is 

to implement orders received from the state. 

To the accidental observer, this situation is 

perfectly logical. There is a group of people 

acting illegaly, while another group is paid to 

re-establish order and keep things under the 

control of the state, so that the state can get its 

revenue and take care of its citizens. However, 

following an approach suggested by Geertz 

(1973) it might be worthwhile to 

explore this situation and its context, 

page 206 in order to understand who the street 

sellers and police officers are as well 

as why people engage in such transactions 

and challenge the state to such degree. 

The reason why those babushki (grandmothers, 

elders) are there and the policemen chase 

them is a main issue in Ukrainian transition 

nowadays and a main conflict. The women 

are there because, in most cases, they have no 

better choice. The policemen go there because 

the government is pursuing a strategy to crack 

down on informal transactions and increase 

hygienic standards. 

There are several motivations for regulation. 

Informal shops in the street take revenue out 

of the taxable transactions and, thus, from the 

state budget. In a world in which the state must 

provide citizens with certain services, money 

must be obtained from several sources. With 

fewer taxes, there are less funds at disposal. 

Second, this is unfair competition for those 

who pay taxes; it damages their businesses by 

causing higher costs in turn for operating legally. 

This, in turn, encourages more individuals 

to leave the legal and enter the illegal sector. 

Finally, there is an issue of quality control. 

How can the state have control over quality of 

what is offered to the citizens if those sellers, 

who do not exist officially, buy from unknown 

producers or produce at home? As far as the 

state knows, the mushrooms and berries sold 

in such contexts might have been collected in 

radioactive areas; yet in the case of unregistered 

sellers who are at that particular location only 

temporarily, there is no accountability. Sellers 

would not have to respond to anybody should 

their products cause someone harm; and the 

state would bear the costs of hospitalization 

and loss of labour. 

Following this logic, Ukrainian politicians, and 

especially those in charge of Kiev, have started 

a crusade against ‘unhealthy food’, banning 

shaurma (kebab) and fried cakes on the ground 

that they are prepared in unhealthy conditions.

ABEL POLESE 

The same is happening to dairy sections of 

several bazaars in Kiev where, for fear of unhygienic 

conditions, the simplest solution seems 

to be a ban on selling of dairy products and a 

push for citizens to buy only in supermarkets. 

However, as street food is something available 

almost everywhere in the world, it is sufficient 

to regulate it. Why is it not possible to apply 

some form of control on street food so that 

people can know what they are eating, thus 

making it unnecessary to deny work to street 

vendors? And more, where do the babushki go 

after they are kicked out of a passage? 

Further questions would then be why such 

street vendors are there as well as why people 

tend to sell what they have at home and do 

so without a licence? A first point is that, to 

differing degrees, all those living on state 

pensions have seen both their savings and their 

income eroded by inflation. It is sufficient to 

think of all those already retired in 1991 to ask 

what has happened to their ruble-calculated 

pension after inflation skyrocketed and the 

national currency was changed. In addition, 

the inflation has been relatively high even after 

1996 and depends on the exchange rate, which 

has been highly unstable, even in recent years, so 

that even wages have proved unable to keep up 

with the price of living. This is why it is almost 

impossible to find someone who is comfortably 

living, after a life of hard work, on their statepaid 

pensions; and pensioners have to take up 

odd jobs to supplement their incomes. Some 

work in real estate, some as concierges, some do 

little reparations and some sell on the street. If 

elderly citizens live alone and have no relatives 

but needs money, the cost of their labour/time 

is extremely low. Thus, even selling a couple of 

kilos of self produced apples might be enough 

to finance their day to day lives. 

Registering a business requires an initial capital 

that most of these people do not have. Simply 

to obtain a permit or purchase a vendor outlet 

on the street to sell goods is not a possiblity, 

not to mention the bureaucratic complications 

of registering a business, which is often 

complicated further by those very same state 

officers with the goal of obtaining personal 

benefits. In addition, elderly citizens, who 

typically lived most of their life in the USSR, 

have less capacity to learn new regulations, 

especially in such a fast changing environment 

like Ukraine. Without support, they might get 

lost in all the necessary steps of registering a 

business, as we will see in the next case study. 

Alexei is a businessman. During the 1980s he 

completed his PhD in engineering and began 

working at a university but rapidly understood 

that this was not leading far. As soon as the 

country became Independent, he started his 

own business with a colleague from the university. 

His life in the business environment 

of the 1990s is reminiscent of the novel by 

Andrei Kurkov ‘The Penguin’. He had to hide 

several times outside the city, often with his 

own family. Although he was able to register 

his business, he was often operating between 

legality and illegality. One day he lost his 

company. His partner had falsified 

documents stating that Alexei had 

sold his share of the business to his page 207 

partner and then threatened to harm 

his family if he attempted any retaliation. 

Alexei began from zero again and, moving



from one business to the other, slipped so far 

into illegality that he got arrested and convicted 

for a petty crime (exchanging money 

on the black market). This was also due to 

the fact that somebody was after him and his 

apartment in the centre of the city, which he 

eventually sold to bear his legal costs. 

Released from prison, he was unable to get 

a job and started working as a taxi driver. 

Anybody can work as taxi driver in Ukraine, 

as long as they have a car. There are registered 

taxi companies with official fares as well as private 

citizens who supplement their salaries by 

accepting to give lifts to other fellow citizens. 

He finally got a job in a communication 

company and acted as managing director of a 

department but was fired after approximately 

two years. The story of his employment in 

the company is an interesting outlook on the 

business world in Ukraine. Alexei was paid a 

thousand dollars a month, a respectible salary 

for somebody over forty in Ukraine. However, 

his official stipend was only two hundred 

dollars, paid directly into his bank account. The 

bulk of this money was paid to him in a white 

envelop. This is also a method, imposed from 

companies, to avoid paying income taxes; and 

employees tend to agree with this practice, as 

the services offered by the state in exchange for 

the taxes are very poor. Either way, employees 

have little choice. 

page 208 One of the drawbacks was that, once 

he applied for a bank loan, he could 

not prove he was earning enough to 

pay the loan back so that his wife (working for 

the state and thus declaring the whole of her 

revenue) had to guarantee for him. 

The director of his department was a 

relative of the company’s president, and thus 

almost untouchable, despite the fact that 

his management was far from being honest. 

When purchasing electronic components from 

abroad, he would inflate the price and pocket 

the difference. When the company decided on 

a salary increase for the employees, he would 

also pocket the difference, as no control over 

the white envelop was exercisable. As a result, 

Alexei and his colleagues had the lowest salary 

at the company (with no promotion in 2 years) 

and no right to protest. 

During this period, Alexei rediscovered his 

entrepreneur skills and registered a company. 

This time he used his in-laws as owners and 

distributed the assets so that it was not possible 

to steal it as a whole. He started repairing electronic 

devices that his employer threw away and 

sold them using his contacts in the company 

network. Several of his colleagues in different 

Ukrainian cities, unhappy with their salary or 

working conditions, helped him to create a 

national network able to dispatch anywhere in 

Ukraine. Meanwhile, he tried to convince his 

colleagues to denounce the abuses of their boss 

to the president. The director, probably expecting 

this, decided to get rid of him and waited 

until Alexei went abroad for a holiday to fire 

him and forbid his colleagues to talk with him. 

Alexei could not take any immediate actions 

and, probably tired of the situation, let things 

go, also reassured by the fact that his small firm 

was doing well. 

Today, he is still struggling to consolidate his 

position on the market but is able to survive. 

He says that the business environment has 

improved since the 1990s and no one has ever

ABEL POLESE 

tried to step on his way, not least because his 

business is too small to bother (which would 

not have been a deterrent in the 1990s). 

Here is a difference to some years ago. Because 

the economic situation has improved, and there 

seem to be more controls, people are less willing 

to take risks for few dollars. If, on the one hand, 

this seems to be an improvement, on the other 

it is not. Ukraine is an extremely bureaucratic 

country and very often legal acts are impossible 

because of the cumbersome bureaucracy. 

Think of a truck transporting animals or fresh 

fish at the border. If they have to wait 4-5 days, 

the load is lost. Especially after the 2004 Orange 

Revolution, the pro-Western direction of 

Ukraine and the compliance with international 

standards and control has made people afraid 

of getting caught. This means truck drivers 

have to play fair and wait until the custom 

officers are able to process the documents, 

which means the food might spoil. Or, because 

there is more risk involved in accepting informal 

payments, now officers expect you also to 

pay for their risk (so there is an extra tax on 

bribes) – either because they have to bribe their 

superior so that they will not be reported, or 

because prices are also higher with greater risk. 

One illuminating example is what happened to 

Alexei once he tried to import electronic components 

from China. Because they are trying 

to expand and produce in Ukraine, and some 

electronic devices are very expensive to import, 

he has been looking for a factory that produces 

radio components that can be assembled in 

Ukraine, allowing him to be more competitive 

on the market. He ordered one component to 

try to mount it and check whether it would 

be worth buying a whole lot. When this was 

shipped through DHL to Kiev, he found 

himself in a paradoxical situation: to be able to 

pay the exact custom duty, the product had to 

be registered by customs. However, to register 

the product, one had to go to the Ministry of 

Trade and produce that very same good, so 

government experts could evaluate it. How 

was it possible to register a good before import 

if, to register a good, one had to have already 

imported it? 

The custom rejected his parcel and he found 

it more convenient to send it to Moldova, 

where the DHL office had no trouble with 

the regulations, then send it to Odessa by bus, 

where there is a price for everything, registered 

or not, and then handle it to a train inspector 

who, in exchange for a small tip, brought it to 

him in Kiev. 

We could discuss whether Alexei and his colleagues 

are victims or accomplices, as Miller 

(et al. 2000) debate. However, there are several 

things that would not happen in a more 

transparent environment. The problem is not 

only the pressure of regulations defending the 

worker. For one thing, eager to attract foreign 

investments, Ukraine has tried to make some 

concessions to investors and simplify their life, 

although this might mean a worsening of workers’ 

lives. Moreover, even if trade unions are a 

long time tradition in former Soviet countries, 

their role was quite ambiguous in the 

past and they might not be truly used 

to lobby for the good of the workers page 209 

as they claim. 

Dimitry is a university professor – that is, 

teaching at the university is one of his many 

jobs, as his university salary is not enough to



pay his bills. Normally, university professors 

are paid for their teaching hours, conducting 

research and writing in their leisure time. A 

salary package would start at 200 US dollars, 

increasing with the workload (for instance 

if some administrative or teaching tasks are 

undertaken). In his case, he is willing to do several 

other jobs at the same time and, when we 

meet, I usually have to accompany him around 

the city to meet the most diverse people before 

we can finally sit to drink a tea and chat. 

Dimitry is not against accepting ‘presents’ from 

students. He says: ‘if the student comes to me 

and wants to pass my exam, I know that, if I 

fail them, they will bounce around until they 

finally pass another exam. Why shall I complicate 

things if those people were not born to 

study? In exchange, if after the exam they want 

to give me a bottle of kon’yak (brandy) or wine, 

I shall not refuse’. 

Dimitry is not alone, most university professors 

have to face the problem of low salaries and 

motivation. Some can tap from international 

programmes like IREX, CEP (now AFP), 

USAID and, more recently, Marie Curie and 

receive money for traveling or their research. 

However, the majority of them, and especially 

those who do not know English and thus 

cannot connect with the Western world, are in 

a more critical situation. They might 

look for a number of remedies: they 

page 210 might get a second job at a private 

university, using the prestige of the 

public one they work for. They might 

give private lessons to their students. Or they 

might accept informal payments in different 

ways and modalities. 

Under pressures from the international community, 

Ukraine has come to outlaw flowers 

and chocolate, a traditional present from 

students to the teachers but defined as bribes 

in a desperate effort to limit corruption at universities. 

However, I have argued that the main 

problem is low salaries, rather than greedy 

teachers (Polese 2008). 

A further question, however, would be why a 

student who does not want to study is at the 

university. Why are hundreds of such cases 

found at the university? The answer is that, 

with no university degree, it would be extremely 

hard to find a job that is decently paid. With 

a high unemployment rate, competition for any 

kind of job is great. To succeed, it is necessary 

to have higher qualifications than the others, 

even to work in a shop or as a cleaner. 

Aware of such conditions, parents are willing 

to do anything to secure their children a future 

and invest their savings into an university 

education. With an increasing number of 

students willing to enter a university, the first 

consequence is that universities accept more 

students than they should and classes become 

overcrowded. Once a limit is reached, the old 

law of supply and demand applies and prices 

to enter a university rise. I am not talking of 

official prices but, rather, the extra costs parents 

will have to pay to secure a place for their 

children. 

The most prestigious universities become 

places where prices are exceedingly high; and 

even universities with no real perspective on 

the Ukrainian job market (like ethnography or 

history) are in demand. Some meritocracy still 

applies, but what university is not willing to

ABEL POLESE 

obtain extra money from students in times of 

economic crisis when university expenditures 

are low? This also means that students, 

becoming a source of revenue for the university, 

are untouchable. To fail a student means to get 

into trouble as a professor, who would even 

risk being fired. This is an extra motivation to 

allow cheating on exams. The result is a huge 

fraud to the state, with universities producing 

unprepared students, while professors and 

faculty receive extra money and many students 

enter the job market with a (fake) degree. All 

this occurs while the state is trying to persuade 

universities to implement the Bologna process 

and teachers to use ‘interactive teaching’ 

methods during their classes. The main looser is 

the job market. Students might learn a job even 

with little university education. The problem 

is that they learn that such behaviours like 

paying for an exam or cheating are tolerated in 

society and might continue this tradition when 

working. 

THE INFORMAL SECTOR: PROBLEM OR SOLUTION 

OF TRANSITION? 

What do the actors mentioned above have 

in common? The first element is a desire or 

necessity to engage in informal transactions 

with other fellow citizens. The nature of those 

relationships is always fluid, oscillating between 

the legal and the illegal, depending on the point 

of view (and on the moral code) adopted. 

However, they also have in common a conflictual 

relationship with the state or its subordinates. 

In the case of a public worker, this is all 

the more visible, as it is direct: the state either 

does not pay enough, pays late, or does not pay 

at all (Polese 2006b, 2008). The case of the 

pensioners is also similar, with the state not 

providing enough to live on. Where we have 

a doctor in a hospital or a teacher accepting 

informal payments, we have somebody else 

paying. The fates of the above mentioned 

people are, thus, entangled, each receives and 

gives money depending on the situation and 

the economy turns. Perhaps not the way the 

government would like, but we have circulation 

of liquidity and a quasi functioning economic 

system. 

The case of the private worker is less direct, but 

it is important to remember here that, where 

the state is in charge of the management of a 

country, it normally has two options – it either 

takes care of all the sectors (central planned 

economy) or creates the conditions for external 

institutions to regulate the economic life of 

the country. Neither of the mentioned options 

applies to Ukraine, where employees have little 

defence against their employers, who in turn 

have little defence against larger companies 

and so on. 

The case studies explored are situations generating 

tensions, directly or indirectly, between 

the citizen and the state. However, because of 

the political situation in Ukraine, it might not 

always be possible to directly oppose political 

decisions or confront the political elites, as it 

might happen in a country with more 

interaction between the political 

class and the people. The best way page 211 

people can cope is to officially accept 

the change but then de facto reject 

it. Informal economies, thus, may be seen as 

generated by tensions between the state and 

the citizen. But change, the shift of an equi-



librium, always generates tension, the level of 

which will depend on how hard it will be for 

citizens to adapt to the new rules. If people 

can live with this change, they will slowly pass 

from one stage to the other. If people cannot 

live with it, they will oppose it through civil 

society, political or other actions popular in 

a given context. Either a government will 

understand that it will loose popularity and 

revoke the measure or it will loose popularity 

and political power and most likely some other 

elites will use this to gain power. 

During the adjustment phase, tensions between 

what the state wants and the citizens 

are willing to give will generate tensions that 

may, in turn, develop into informal economies. 

We may see informal economies, thus, as 

something transitory that will disappear once 

the tension will be solved in one or another 

direction. 

However, there is another situation, in which 

people are captured between adaptation and 

political struggle, which does not move for the 

better or worst. Should this persist, informal 

economies would, as well. 

The question would then be ‘how long is transitory’. 

Is there a way to distinguish informal 

economies created to make up for a temporary 

state inefficiency from those that will stay? 

Informal economies can act as a buffer 

page 212 between the state and the citizen and 

shall be seen as something moving 

and fluctuating but existing in every 

single country in the world. When they are 

strong, it means there is much tension between 

the state and the citizen. When they are weak, 

it means the state is more able to meet the 

needs of its citizens. 

The informal sector may be seen, not as the 

problem or the solution, but as an indicator of 

the wealth of a society and the performance of a 

state. The more active it is, that is the more the 

society is based on social network rather than 

on state-led actions, the more room there is for 

a change of state attitudes that should be revisited, 

because it means the state does not address 

the needs to which citizens give priority. 

CONCLUDING REMARKS 

Informal economies may be generated either 

by a lack of a state or by its incompetence. I 

have suggested that in Ukraine the small 

amount of money allocated for hospitals has 

made informal payments the rule rather than 

the exception and this is the only way doctors 

and nurses can survive on the wages the state 

allocates (Polese 2006, 2006b, 2008). 

In this respect, informal transactions are not 

the disease but the solution, as de Soto (1989, 

2002) suggested. The main problem, according 

to the Peruvian economist, is that Western 

capitalist models of development, in particular 

property laws and practices, were drawn from 

practical experience rather than blindly imposed 

on the citizens (when trying to do so, the 

authorities faced open or hidden resistance). 

But those very models, practices and rules, 

elaborated through historical experience, are 

now imposed on transitional countries in the 

credo that, as long as they work in the West, 

they must work everywhere.

ABEL POLESE 

Recently, mainly anthropologists have started 

questioning the imposition from the top of 

such normative categories that limit domestic 

initiatives and are bound to shame politicians 

or people for failing to line up with capitalist 

standards. When talking of gift exchange 

practices in Kazakhstan, hurriedly classified as 

corruption by Western organizations (Transparency 

International or the World Bank), 

Werner (2003) suggested that it might be useful 

to compare the definition of international 

organizations with local and cultural standards, 

agreeing with other scholars that a contextual 

analysis is needed when theorising informal 

economies (Rasanayagam 2003). This might 

ultimately lead to an acceptance that standards 

depend on a particular economic situation 

(Wanner 2005) before trying to separate the 

formal from the informal, the legal from the 

illegal. 

In a context where decisions are imposed from 

above, informal economies become a way to 

react to economic measures with which citizens 

cannot comply. Once an unorganized struggle 

challenges an economic policy, by simply failing 

to comply with the economic instructions of 

the government, this failure may become a sign 

or way to respond to decisions and have a voice 

in the political arena (Gupta 2005, Thompson 

2003, Scott 1977, 1985, Tarrow 2005) to oppose 

too abstract rules that would make life 

impossible to anyone willing to survive. In a 

number of countries, registering a business 

following the official legal procedures could 

take several years and is much more expensive 

than remaining in the shadow. The drawback 

is that even accumulation of capital becomes 

informal and, thus, the country remains ‘poor’. 

In Ukraine, as in many other countries, laws 

often contradict themselves and come to reject 

social practices that people need to survive. 

Social and economic interactions, with the 

subsequent indebtedness, become a way to 

maintain relations and be able to ask for help 

when needed (Lolinka 2002, White 2004). 

On their side, international organizations, 

by proposing an international standard to all 

contexts, sometimes come to deny historical 

practices and the very social fact of the gift, 

as Werner (2003) has remarked for the World 

Bank. 

NOTE 

1 

Perhaps the most striking example is quoted by 

Robert Whiting in his book Tokyo Underworld. The 

authors describe tensions between American and Japanese 

anti-corruption authorities due to the fact that in Japan 

corruption involves a direct favour and a counterfavour by the 

other part, otherwise it is a simple gift that helps maintain social 

relationships. 

page 213



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LYUDMYLA REFERENCES LITERATUR VOLYNETS 

ABSTRACT 

10 

IINDUSTRIAL RELATIONS AND POST-SOCIALIST 

TRANSFORMATION: 

THE CASE OF UKRAINE 

Organized interest representation 

is central for transformation processes 

(incl. economic, political 

and social systems) to be completed. Unless 

workers’ interest is articulated in an organized 

manner, the prospects for democracy and a 

market economy in Ukraine, like elsewhere, 

are threatened. The complex structuring of 

industrial relations (IR) under the conditions 

of emerging capitalism in Ukraine embraces 

changes at all possible levels: arenas, legal and 

institutional settings, actors and their agency. 

Together with the enterprise-related restructuring, 

it leads to the segmentation of the IR 

systems. From the actor-centred perspective, 

this article demonstrates how unions-related 

changes (conceptualized as formative processes) 

have shaped the differences across 

enterprises and segments of IR in Ukraine. 

Lyudmyla Volynets 

INTRODUCTION: SEGMENTED INDUSTRIAL RE- 

LATIONS SYSTEMS 

The structuring of business systems in the 

countries of Central and Eastern Europe 

(CEE) led to the emergence of segmented 

capitalisms (Martin (2008)) 1 . Industrial Relations 

(hereafter IR) constitute one element 

of such business systems and are understood 

here in terms of the shifting frontier 

of control over working conditions 

between workers and their unions Seite page 217 

and employers. Accordingly, the 

low integrity and incoherency of 

the emergent IR systems within the present 

segmented business systems (Martin und 

Christescu-Martin 2006) resulted in the rise

INDUSTRIAL RELATIONS REFERENCES LITERATUR IN THE UKRAINE 

of certain segments operating according to 

different IR dynamics. Hence, each of the segments 

(state budget sector, privatized or about 

to be privatized enterprises, emergent private 

sector, and Transnational Corporations) were 

claimed to produce a different pattern of IR 

(Kabalina und Komarovsky 1997, Martin und 

Cristescu-Martin 2004, 2006, Sidenko und 

Kuziakiv 2003, Slomp, van Hoof und Moerel 

1996, Peng 2000) 2 . 

It should be recognized that while certain 

segments are conducive to certain types of IR, 

these arguments do not apply in full for the 

example of Ukraine. In education and medical 

services in Ukraine workers and independent 

unions were quite assertive in terms of their 

rights and demands. In contrast, unions remained 

salient in many privatized enterprises; 

and IR followed old-style paternalistic logic. 

Similarly, the continuity in the original IR 

practices in foreign companies was questioned 

elsewhere (e.g. Cooke 2006, Tholen 2007). 

Hence, the segmentation of the business systems 

alone is not sufficient in explaining IR 

outcomes. Rather, some insights are necessary 

into how the new IR system is structured and 

institutionalized. Whereas its institutional 

design is driven much by international practices 

and principles, the bottom-level change 

in enterprises, employers and unions proceeds 

more slowly. Here IR actors, in particular, still 

find themselves in the processes of 

formation, while their agency does 


not always conform to the patterns of 

action imposed institutionally. I argue 

that the dynamic perspective of actors’ 

formative processes and their interaction is 

superior in explaining the local segmentation 

of IR. 

IR INSTITUTIONAL DESIGN AND ACTORS’ 

FORMATION 

Such unique simultaneous re-building of postsocialist 

IR arenas and actors can be addressed 

as the evolution of IR arenas in the sense of 

Müller-Jentsch’s actor-centered institutionalism 

(Müller-Jentsch 1996). On the one hand, 

the new institutional design is developed 

across former Soviet countries (hereafter 

FSU) in convergence with the principles 

of the International Labour Organization 

(ILO) and the European Social Model 3 . Such 

institutionalization from above (and from 

outside) is difficult in its deterministic view of 

the local processes (Burawoy und Verdery 1999, 

Grabher und Stark 1997, Stark 1998, Wollmann 

1997). Not least because the newly imposed set 

of rules regulates the patterns of interest and 

prescribes patterns of action that are still to 

emerge. As the construction of autonomous 

interest organizations is not completed (Slomp, 

van Hoof und Moerel 1996, Schienstock 1992), 

actors find themselves in the processes of (re) 

defining their roles and functions (Rippe 1985, 

Schienstock, Thompson und Traxler 1997). 

Therefore, it is not surprising that the new 

rules of the game laid down with international 

assistance cannot be institutionalized. This is 

confirmed by deficits in the functionality of 

law, collective bargaining and social dialogue in 

the region 4 . 

In the process of the institutionalization, 

currently fluid and contested IR arenas will 

be re-shaped during the processes of actors’ 

formation and their capacity to mobilize the 

resources providing for their strength. From 

the perspective of the actor-centered institutionalism, 

institutions are treated in terms


of actors’ interest and cultural ideas being the 

building blocks of institutions. IR arenas are 

addressed as “a complex institutional system 

that determines which interests and actors are 

to be admitted … [and which] set boundaries 

for the courses of action open to the actors…” 

(Müller-Jentsch 1996: 31). Such an approach 

allows one to address the linkages between the 

progress of the institutionalization and actors’ 

formation, on the one hand, and the tensions 

between the macro-level (system) and microlevel 

(actors) institutionalization (Wollmann 

1997) on the other. It further advances the 

understanding of the IR segmentation. 

Advancing such a perspective pre-supposes the 

recognition of actors’ strategic choices as well 

as the scope of changes they go through. Firstly, 

those authors highlighting the role of union 

discretion over IR (Trif und Koch 2005a,b, 

Huzzard, Gregory und Scott 2005, Hanke und 

Mense-Petermann 2001) show that even under 

the present constraints, unions still have been 

able to impose strategic choices on employers. 

In spite of union weaknesses, they could be 

effective in some IR areas. For example, on 

the national level Avgadic (2003) develops an 

understanding of union effectiveness that has 

resulted from the pre-history of state-unions 

interactions and their learning processes. A 

similar, process oriented concept was developed 

by Frege (2002) pointing that a process of unionmanagement 

relationships is determinant 

for union effectiveness. It facilitates longterm 

union transformation and goes back to 

unions’, members’ and managers’ attitudes and 

perceptions. Thus, sorting out unions’ choices 

in the processes of their relationships with 

the management is helpful in tracing unions’ 

formative processes and the linkages between 

the institutional and behavioral aspects of IR 

institutionalization. 

Secondly, union formative processes go beyond 

a solely organizational formation of unions to 

their roles and functions. Structural reforms 

alone would not be enough to re-constitute 

unions’ roles as workers’ representatives 5 . In 

this dilemma, unions’ choices are more embracing. 

Unions can either resist or collaborate 

(subordinate) with employers and the state 

(Clarke 2005). Which way unions follow 

depends on how they address changes in the 

course of their formative processes, meaning 

in relation to union identity, agenda, structure, 

relationships with members, employers, and 

conflict articulation. Such a scope of necessary 

changes allows one to capture them as formative 

processes. Depending on the progress of 

union formative processes, the latter is a part 

of the explanation of a variety of enterprisebased 

IR ranging from subordination through 

union-management cooperation against state 

to cases of resistance and contestation. The 

formative processes of unions are directly 

affected by union embeddedness into interactions 

with employers and, in broader terms, by 

transformation. 

THE INTERACTIONS OF MANAGERS AND UNIONS 

ACROSS FSU 

Transformation exposes IR actors 

to significant challenges originating Seite page 219 

from the interplay of the socialist 

past and present choices, external 

and endogenous factors, as well as those that 

come from the interplay between the formal 

dimension of policy-making and its informal


dimension referring to actors’ behaviours. 

Both independent and ex-official unions find 

themselves at the intersection of these three 

dimensions of post-socialist transformation. 

Whereas actors have not grown up to the 

roles the new IR framework prescribes, they 

continue to structure their interactions outside 

the formal framework. In their formative 

processes, they combine the results of learning 

with experiences accumulated in the past. The 

learning of managers and unions is facilitated 

by the integration of the IR into the broader 

processes of globalization. Approaching actors 

from such a dynamic perspective (as formative 

processes offer) means to understand the 

scope and advance of choices they make. The 

complexity of changes on different dimensions 

of union formation (identity, agenda, structure, 

resources, relationships and conflicts management) 

defines union positioning in relation to 

IR. A trade union is likely to commit to the 

democratic model of unionism (on all dimensions) 

depending on its positioning within 

the current formal and informal settings and 

arenas, union origin and evolution, and the 

degree of insertion into the international trade 

union movement. 

Certainly, union positioning within the IR 

arenas is not a sole determinant of the final 

shape of IR, as unions are embedded in the 

interactions with employers meaning that 

local IR patterns reflect the process 

of interactions of both actors. For 


example, where employers remain authoritarian-paternalistic 

(as in many 

state and privatized enterprises), they 

will be likely to remain aggressive to independent 

unions, but will pursue cooperative 

relationships with the subordinate unions. 

As ownership and enterprise strategies diversify, 

so do managerial approaches to IR. 

The structuring of economic elites across 

FSU follows intra-entrepreneurial cleavages 

between old-style (administrators of former 

state enterprises) and new (newly emerging 

entrepreneurs) (Kabalina und Komarovsky 

1997). Respectively, traditional, Soviet-type IR 

patterns are most likely to be insulated within 

enterprises managed by old elites and leaving 

union structure intact. Change is rather unlikely 

here, as the inflows of new human capital 

remain low (Barberis, Boycko, Shleifer und 

Tsukanova 1996). This “conservatism” has been 

paralleled by informalization and individualization 

of work relations, often accompanied 

by the strengthening of the authoritarian style 

of management. Here management is increasingly 

hostile to trade unions “in anything 

other than their former role as accessories to 

management” (Pollert 1999: 214). In such a 

view, IR segmentation embraces the insulation 

of traditional IR in some segments and their 

individualization in the others. 

If managerial agency 6 is linked to the business 

system structuring, then the segmentsrelated 

IR dynamics can be better explained. 

It becomes clear that one or another business 

system segment is more conducive to certain 

managerial styles than the other and is able to 

explain outcomes in IR related to the assertiveness 

of trade unions. The differences within 

unions’ and managers’ approaches to IR impact 

the shape of IR and, for trade unions, the form 

of unionism they want to institutionalize.


VARIETIES OF UNIONISMS IN FSU 

Despite the introduction of pluralist principles 

across FSU countries, IR arenas do in fact 

continue to be dominated by previously existing 

(ex-official) trade unions. This situation hinges 

on differences in labour’s formative processes. 

Existing unions across FSU adapted their roles 

and conducted “cosmetic” reforms (Kabalina 

und Komarovsky 1997). Newly established 

unions, in order to develop their roles, initially 

embark on the contestation of arenas by means 

of collective action and strikes. As independent 

unions emerge, even if they fail to break the 

dominance of ex-official unions, they challenge 

their adaptive role which leads to rivalry and 

incoherence of labour movement across CIS 7 . 

The initial position from which ex-official 

unions in CIS countries entered the formation 

process was characterized by subordination, a 

“transmission-belts” identity, pro-management 

interest, and dependence on the resources 

provided by the state and management. New 

unions were established in protest to continuing 

subordination and a pro-management position 

of unions at the point when workers’ grievances 

multiplied (also Kubicek 2004). Both 

membership and resources were absorbed by 

former official unions and must be established 

from scratch by new unions. In fragile, semidemocratic 

regimes, democratic principles of 

unionism appear as embarrassing. Here, independent 

unions are viewed with suspicion by 

the presiding authorities and ex-official unions 8 

and are opposed by both. 

From these somewhat different starting conditions, 

there emerge different trajectories of 

union formation. For ex-official unions, striving 

to ensure their institutional survival and 

retaining their dominance becomes a priority. 

Ideally, in order to sustain long-term they 

need to break from subordination and acquire 

independence. For newly established unions, 

the formative processes are about the contestation 

of arenas dominated at present by the 

ex-official unions. They are about gaining recognition 

and extension of membership base. In 

the view of above mentioned differences, the 

kind and sources of union weaknesses cannot 

be generalized in the same manner for both 

former official and newly established unions. 

WEAKNESSES OF THE TRADE UNION MOVE- 

MENT IN THE CONDITIONS OF POST-SOCIALIST 

TRANSFORMATION 

Crowley (2001) and Crowley und Ost (2001) 

shaped the definition of union weaknesses 

while arguing that “… workers and unions 

were unable to shape conditions of work and 

public policy in accord with their interests… 

it has been the object and not the subject of 

the postcommunist reform” (Crowley und Ost 

2001: 219-220). In terms of aggregate macro 

indicators (e.g. membership decline, low wages 

and weak union input to policy-making), 

unions are correctly argued to remain weak. 

However, locally the issues of union weaknesses 

play out differently as the conditions of 

the same severities local IR outcomes vary 9 . 

For example, whereas union membership 

decline could be explained by Seite page 221 

structural factors 10 , notable is that former 

official and independent unions 

do not reveal similar membership dynamics. 

Here, the drastic fall in ex-official union density 

was contrasted by slow but steady growth


of independent unions. Similarly, in the CEE 

countries data on unions’ membership loss 

(Pollert 1999) demonstrate the variance in the 

degree of union revitalization. In particular, 

in Ukraine the former official unions loose 

around a million of members each year. Even 

if slow, newly established unions succeed in 

extending their membership rates in a sustainable 

manner. As regards weaknesses in union 

militancy, one can apply a similar logic of argumentation. 

In spite of a low record of strikes 

already in 1993, more strikes were recorded in 

Ukraine than in Russia, whereas the number 

of days lost during strikes also exceeded those 

in Russia 11 . The distribution of strikes demonstrates 

that independent unions more actively 

cultivate mobilization and striking activities 

within the settings of social partnership (e.g. 

Crowley 2000) than the ex-official unions do. 

The dimensions of transformation vary in 

their effects on the kinds of unionism. Informal 

politics used by ex-official unions for the 

purposes of exclusion and marginalization of 

independent unions pre-emptively preclude 

the contestation of arenas by new trade unions. 

The most recent examples of a bill “on social 

dialogue” in Ukraine submitted by the exofficial 

union federation clearly explicate it 

in that it strived to marginalize and exclude 

the majority of newly established independent 

trade union organizations out of official IR 

mechanisms. This is in spite of principles 

of pluralism enshrined in law. 


Legacies of the past, as the second 

impacting factor, find probably the 

strongest expression in the case of unions. 

Legacies might no longer be so evident on 

the level of identity and mission as all unions 

declared themselves independent. However, 

further levels of ex-official union choices and 

operations demonstrate the continuity with 

the past, and with it - how symbolic a change 

in the unions’ mission was. The scope of union 

activities and services (social and welfare 

benefits) still too greatly resembles socialist 

practices, even though meets workers’ demands 

on unions for the time being. 

Independent unions relying on mobilization 

and collective action have to struggle with 

such workers’ legacies. On the one hand, bizarre 

co-existence of socialist collectivity and 

individualism and passivity does not express 

itself into workers’ effective collective action 

and self-organization (Ashwin 1996). On the 

other hand, deep cultural limits to the role of 

interest representation in workers’ perceptions 

re-enforce a legalistic and individualized approach 

of workers to articulate their grievances, 

which is, indeed, spread across CEE (Pollert 

1999). Such legacies constrains new unions’ 

opportunities to extend their major resource 

– militant membership. So, where ex-official 

unions inherit resources (membership and 

property) facilitating their survival, newly established 

unions are attacked in the resources 

that would ensure their successes. 

External influences are catalysts in that they 

pressure unions for renewal (Ashwin 2007). 

The discourse of social partnership facilitated 

the establishment of union freedoms and 

pluralism, at least on the constitutional and 

legislative levels. In institutional terms, it basically 

opened arenas of IR for newly emergent 

unions and provided a necessary degree of relegitimizing 

unions (Pollert 2000) as interestrepresenting 

institutions. Emerging and still


fighting for recognition, unions could have 

extracted further benefits, as social partnership 

provided for room for control and pressure 

mechanisms (e.g. ILO) on the implementation 

of pluralist principles in the area of IR. 

Independent unions could also draw on bilateral 

cooperation with European and American 

unions. However, social partnership precluded 

the articulation of workers’ interest by means 

other than conciliation. Thus far, the rhetoric 

of social partnership “was no more consistent 

with independent forms of workers’ organization 

than had been the rhetoric of “socialism” 

before it” (Clarke und Fairbrother 1994: 379). 

It prescribed conciliatory and concessiondriven 

activities for all IR actors on the cost of 

increasing their strength by collective action. 

The prospects of the trade union movement 

in CIS might not look promising. The prevailing 

response of unions was “to exchange the 

subservience to management and the state 

in the name of “socialism” for subservience 

to management and the state in the name of 

“social partnership” (Mandel 2004: 59). Indeed, 

prospects are provided by the consequent development 

of the independent trade unions. 

THE STATE OF IR IN UKRAINE 

At the onset of transformation, Ukraine was assumed 

to quickly catch up with Western living 

standards (Mandel 2004). Later on, however, 

Ukraine was identified as the slow transformation 

country (Wittkowsky 1998) compared to 

the others. The lack of transformation progress 

was attributed to a lack of political will of 

then-Ukrainian governments, strong embeddedness 

of the rent-seeking interests (e.g. 

Aslund 2002, Wittkowsky 1998), and heavy 

economic dependence of Ukraine on Russia 

(Mandel 2004). The following section, firstly, 

suggests a brief overview of the economic and 

political developments since Ukraine gained 

its independence in 1991 as well as the social 

consequences. It is then followed by a review 

of the institutional re-arrangement of IR and 

the regulation of union activities. It is once this 

Ukrainian context of IR is set that differences 

in emerging unionisms are outlined. 

POLITICAL AND SOCIO-ECONOMIC SITUATION 

Ukraine declared its independence in 1991, 

but the advance of economic reforms hardly 

took place until the late 1990s. Notably, as no 

clear rules were laid down in the first years 

of the transformation, rent-seeking interests 

that have originated from nomenklatura 

(party top positions) acquired strong positions 

in both economics and politics. This tight 

overlapping of economic and political 

interests resulted in the promotion of reforms 

and corrupt privatization serving the profit 

and power-oriented needs of wealthy elites. 

Business elites that consolidated in 1990s were 

identified as oligarchs 12 , clans, and financialindustrial 

groups 13 (Kowall und Zimmer 

2002). The symbiotic relationships between 

the political and economic core actors (and 

businesses direct representation in 

the Parliament and ministries) led to 

the blockade of the economic reforms Seite page 223 

(e.g. Pleines 2006, 2008) and “region 

capture” (Zimmer 2002). Hence, 

prior to 2004 one speaks about Ukraine as 

the system in the form of oligarchy (Kowall 

und Zimmer 2002) and autocracy (Franzen,


Haarland und Niessen 2005). 

In 1994 the neo-liberal programme of 

reforms (embracing standardized IMF’s 

policy prescriptions) was adopted under then- 

President Leonid Kuchma with the assistance 

of the International Monetary Fund (IMF) 

and the World Bank. Neo-liberal reforms 

exacerbated the structural economic problems 

Ukraine inherited 14 and led to a steep economic 

decline. “Ukraine is the only transition country 

to have known nine consecutive years of 

economic decline” (1991-9) (van Zon 2002). 

The first signs of economic growth appeared 

only in 2000 (Merkel 2008). Then Ukraine 

showed the highest performance in Europe 

with the growth of 15.8% and 12.5% in the 

years 2003 and 2004, respectively (Chernyshev 

2006). Meanwhile, subsidies and social 

spending were reduced and wages and their 

increase freezed (Mandel 2004). Until growth 

resumed, official employment declined by 

one-third between 1990 and 1999, given the 

40% reductions in industry and agriculture 

employment (Chernyshev 2006). 

By 2001, three fourths of the economy (as 

of 2005, 78.3%) was claimed to be private. 

However, these estimations also included the 

enterprises in which the state retained its share 

(Franzen, Haarland und Niessen 2005). They 

employed 73.8% of the total workforce (Statistics 

Annual of Ukraine – 2005 cited 

in CASE 2007). However, by value of 


the assets, the state and communal 

authorities still retained over one half 

– 54.8% - of the assets (CASE 2007), 

mainly huge strategic enterprises that have been 

excluded from the privatization, but which play 

a significant role in the Ukrainian economy. 

The Ukrainian governments were anything 

but successful in developing socially oriented 

responses to the economic decline. In the 

period of hyper-inflation, the indexation of 

wages was ceased between 1992 and 1997 15 , 

leading to a significant fall in workers’ real 

wages. Even though the government regulated 

wages through legally-set minimum wage, it 

failed to increase it to the levels of the legally 

set subsistence minimum, thus violating its 

own laws. Workers’ earnings were far from 

adequate 16 . Even after the freeze of wages was 

abolished, both insolvent and economically active 

enterprises continued to accumulate wage 

debts. Wage increases driven by improved 

economic performance still left one fourth of 

the population below the poverty line in 2004 

(Chernyshev 2006). 

Corrupt and rent-driven policy making 

were interrupted by the mass protest of 2004 

identified under the term “Orange Revolution”. 

Caused by the vote frauds during the 

presidential elections, these protests resulted in 

the election of expectedly more democratically 

oriented President Yushchenko. Whereas his 

Presidency allowed for more freedoms (not 

least, media and independent union freedoms), 

he has been consistently criticized for his inability 

to overcome intra-governmental cleavages 

and a failure to advance the socio-economic 

development of Ukraine. The slight increase in 

living standards brought on by the economic 

growth of recent years (since around 2005) was, 

however, anything else than long-term and sustainable, 

as achievements were soon smashed 

away by the global financial crisis. Since 2008 

the Ukrainian economy, together with the 

living standards of the population, entered a 

downturn again.


There is no need to stress that living conditions 

of the Ukrainian population have deteriorated 

enormously since Ukraine gained 

independence. The transformation towards 

capitalism in its Ukrainian version has led to a 

deterioration in working conditions and workers’ 

earnings, facilitating an erosion of social 

security. According to the People’s Security 

Survey conducted by the International Labour 

Organization and the State Statistics Committee 

of Ukraine in 2003, a monthly income 

per capita amounted to less than $100, 40% of 

wage earners suffered from wage arrears, over 

two-thirds were dissatisfied with their wages, 

and about 85% of adults could not even cover 

their healthcare needs. 

INSTITUTIONAL FRAMEWORK OF IR IN 

UKRAINE 

In spite of pressures, the institutional framework 

in Ukraine is generously supportive of workers 

and unions. It allocates a broad scope of rights 

to trade unions to regulate employment, working 

conditions and workers’ pay. Surprisingly, 

unions have failed to derive maximum benefits 

from this. The inability to assert workers’ interest 

and interest antagonism and give effects to 

the collective bargaining represent their major 

failures. But the regulation of workers’ rights 

has been under attack and the processes of deregulation 

already begun. As the labour market 

is changing, so are the forms of employment. In 

contrast to full-time employment of indefinite 

duration, civil-law, self-employment, employment 

by small entrepreneurs and informal employment 

were introduced. All these emerging 

forms of work have hardly found any relevance 

with trade unions. 

LABOUR CODE 

The central piece of the codification of labour 

rights has been the Soviet Labour Code 

adopted in 1971. As in socialism, current 

labour legislation remains pre-conditioned on 

the employment contract and implicitly on 

trade union membership, thus leaving workers 

without the written labour contract and 

unions outside. Such conditionality goes back 

to the socialist regulatory traditions. The most 

detailed legal and administrative regulation of 

IR ever, the Soviet labour law, was designed 

in part to strengthen labour discipline and 

increase productivity (as opposed to defend 

workers). State paternalism implicitly excluded 

the voluntary regulation of work by workers 

and employers. Workers felt responsible for 

regulating everyday small issues but delegated 

all other responsibilities to the state. This is 

the case even today, as only less than ten per 

cent of workers would go to unions in cases 

of violations of their labour rights (Razumkov 

Centre 2001). 

With the background of influx economic 

developments and enterprise-specific changes, 

labour rights have remained heavily regulated 

through the Labour Code of 1971. The initial 

amendments of the Labour Code did not 

go beyond formal and superficial changes. 

A more intensive revision process that has 

been on-going since 2003 prompted 

a degree of the de-regulation. Summarized 

in the new draft and adopted Seite page 225 

in the first reading in 2008, the new 

Labour Code aimed to adjust labour 

legislation to market conditions, according to 

its initiators – surprisingly – from trade union 

leaders 17 . The adoption of this draft was post-


poned by union pressure until certain amendments 

by trade unions were incorporated 

(KVPU, new release of 27.05.2009). Unlike 

in Russia, where a strongly neo-liberal Labour 

Code has been in place since 2000, Ukrainian 

trade unions were more pro-active in delaying 

the de-regulation process 18 . 

The effects of the new labour legislation will 

be deteriorating for workers and weaken trade 

unions in their protective capacity. The work 

day will be prolonged to 10 hours (compared 

to 8 hour-days at present). Employers will dismiss 

workers within two weeks without union 

approval. They will regulate enterprise-based 

IR by means of their own internal provisions. 

The new code no longer obliges employers to 

sign collective agreements nor report on their 

implementation. For disputes related to agreements 

they can no longer be taken to labour 

courts. In a similar manner, employers will no 

longer be obliged to provide unions with office 

premises or check-off systems of dues 19 . 

COLLECTIVE BARGAINING 

Collective bargaining in the existing form has 

been present in Ukraine since 1993 20 . It was 

introduced as an institution aiming at the 

regulation of labour relations and socio-economic 

interest of both workers and employers 

and extended to all levels and forms 

of ownership. First in the history of 


its existence, bargaining was designed 

according to the principles (Conventions 

and Recommendations) of the 

ILO. As a result, in 1995 a mechanism was set 

to increase wages through the development of 

negotiatable coefficients. 

However, in spite of the growing number 

of collective agreements, its effectiveness 

remained low. Workers did not consider 

bargaining to be their responsibility; and collective 

bargaining remained an act to be done 

between the administration and trade union 

committee. Yet both parties revealed a low 

degree of responsibility for the promotion of 

workers’ interests by means of collective agreements. 

Firstly, whereas the Federation of Trade 

Unions of Ukraine (FPU) alone unites around 

120,000 primary organizations, the total number 

of signed collective agreements as of 2007 

constituted only 95,781, almost half of which 

are in state administering (the highest number 

of agreements by sector), education, and health 

and social assistance (State Statistics Committee 

of Ukraine 2008). Respectively, collective 

agreements cover slightly under 10 million 

workers, only 82.4% of pay-roll workers and 

hardly extends to those not on pay-rolls. 

Secondly, employers spent (as of 2007) only 283 

hryvnya (equivalent to ca. 30 Euro) per worker 

as a result of additional benefits set by bargaining. 

Upom closer examination, it appears that 

collective agreements mostly re-state legal 

provisions, as the minimum tariff scales are the 

same as that in law in 70.8%, and in only 26.6% 

are they higher (State Statistics Committee of 

Ukraine 2008). 2.6% of agreements even set the 

tariff coefficient lower than those in law, while 

5.6% of agreements set lower tariff coefficients 

than in the Sectoral Agreement (the same 

source). Thirdly, officially the compliance with 

the collective agreements amounts to 94-96% 

in average (the same source). However, according 

to the Chief State Labour Inspector, Ihor 

Sumovs’ky, violations are detected in 90-95% 

of audited enterprises 21 . As these data demon-


strate, collective bargaining is ineffective. 

Beyond the weaknesses in union ability to 

enforce the regulation of IR, collective agreements 

can be considered arena of contestation 

between different trade unions. In particular, 

in the case that more unions exist at the same 

enterprise, they must establish a joint representation 

body to negotiate and sign agreements. 

Respectively, if unions fail to establish such 

a body (a quite probable case in light of the 

intra-union rivalries), employers can choose 

the union to negotiate with. This allocates 

some advantages to the ex-official unions and 

basically marginalizes or excludes independent 

trade unions from the arena of such regulation 

of working conditions. 

COLLECTIVE LABOUR DISPUTES AND SETTLE- 

MENT PROCEDURES 

The institutions of dispute settlement were 

implemented in Ukraine only in 1998. They 

are based on the procedure of conciliation between 

the contractual parties, and envisage the 

disputes solution by labour arbitrary and National 

Service of Mediation and Conciliation. 

The latter is responsible for the registration of 

disputes and issues non-binding recommendation 

to solve the relevant issues. Interestingly, 

the facilitation of the collective disputes by the 

national conciliation service acquired the forms 

of the suppression of protest actions undertaken 

in cases of disputes. Only in the case that the 

parties to the dispute have completed all mediation 

and conciliation procedures can strikes 

be declared. Otherwise, strikes are illegal. Thus, 

the legislative regulation of labour disputes, in 

fact, prompts the individualization of labour 

conflicts and their resolution through long, 

drawn-out judicial procedures rather than on 

the basis of mobilization 22 . 

This kind of regulation originates from the 

promotion of social partnership in Ukraine 

by ILO. The benefits of the consensus-driven 

policy process are undeniable - the articulation 

of labour disputes is channelled into an 

arbitrary sphere by law in a way that creates 

obstacles for workers’ collective action at 

times where interests can be pursued solely 

in a militant manner. Many union leaders 

explain the lack of strikes by these legal preconditions 

23 . In particular, major obstacles 

arise out of this for independent trade unions. 

Whereas the emergence of many unions is 

conflict-driven, independent trade unions are 

established in cases where conflicts that arise 

are not absorbed by any mechanisms of their 

institutional articulation. Until the conciliation 

procedures are completed, unions are all 

too often pressured and destroyed. The spread 

of such experiences among new trade unions 

makes the further establishment of independent 

trade unions more difficult 24 . 

THE SCOPE OF UKRAINIAN TRADE UNIONISMS 

Notably, in early socialism trade unions were 

basically imposed on workers: membership 

was automatic, trade unionism was 

modelled on the monolithic principles, 

and workers’ relationships to Seite page 227 

the unions were structured along 

distributor-consumer principles. Instead 

of articulating workers’ concerns (other 

than the violation of the law) through trade 

unions, workers were disciplined by them.


And instead of receiving increases in wages, 

workers received discounted holiday vouchers 

and holiday presents. Here trade unions 

appeared as an entity external to workers and 

in which workers’ involvement and participation 

was restricted to the obedience to labour 

discipline and productivity targets. Workers 

find points of contact with the unions only in 

relation to their social and welfare interests. 

Hence, beyond atomizing workers (Ashwin 

1996, 1999), system legacies find its expression 

in structuring union-workers’ relationships not 

along representation but rather consumerism. 

This nature of the linkages between unions 

and workers also continues, to a large extent, 

to structure union-workers relationships post- 

1991 25 . 

Shortly before the collapse of the Soviet Union, 

there appeared the signs of the activization 

of the union movement outside the existing 

union structures. These predictions of union 

change were initially inspired miners’ strikes 

of late 80-s in Russia and Ukraine. Notably, 

workers’ militancy resulted in the emergence 

of alternative union-like structures, giving the 

first split to the monolithic unionism model 

existing so far. Initially identified as striking 

committees, workers’ self-organizations are 

developed later on into trade union organizations 

(interviews). 

As unions’ militancy over time has 

decline and current wage levels signalled 

unions’ inability in these areas, 


it became clear that neither ex-official 

nor alternative trade unions were 

ready to fully overtake the function of workers’ 

protection. In the literature, alternative unions 

were perceived as playing no significant role 

in IR, facing marginalization or slipping back 

into a traditional mould (Clarke und Fairbrother 

1994). Meanwhile, the Ukrainian cases 

deserves attention, as the share of trade unions 

affiliated with the ex-official Federation of 

Trade Unions of Ukraine (FPU) shrank from 

100 per cent in 1993 to claimed 55.8 per cent 

in 2004. In contrast, trade union organizations 

belonging to other trade union federations 

increased threefold during 2000-2004 (Chernyshev 

2006). 

Upon closer examination, it becomes clear 

that in case of Ukraine one speaks not about 

pure fragmentation of union movements along 

old-style ex-official and newly established 

alternative unions, but indeed, along different 

visions of unionisms. In particular, on the way 

towards finding their role and niche in the patterns 

of organized interest representation, one 

finds unionisms in Ukraine differentiating in 

terms of their ideologies and identities, organizational 

structures, prioritized resources, and 

a set of relationships with members, employers 

and the state. Sometimes (e.g. in case of conflict 

articulation as Kozina (2005) shows) they 

even oppose each other. As the processes of the 

searches on such dimensions are still on-going 

(and the framework of IR is still in making), 

such formative processes of different unionisms 

provide useful insights into the prospects of 

the transformation of IR in Ukraine. Notably, 

both unionisms are placed into a set of different 

immediate external conditions (defined by 

relationships with employers and authorities); 

and managers are more likely to deal with exofficial 

than independent unions. 

The current union density in Ukraine still constitutes 

approximately 50% of the workforce


according to unions themselves (down from 

almost 100 % in late 1990s) (interviews). Notably, 

behind it is formal membership. According 

to survey results (e.g. Razumkov Centre 2001) 

in 2001, 43.7% of members have remained in 

the union by tradition from the Soviet days, 

and 20.2% members joined because it was customary 

at their enterprise. In addition, 12.2% 

reported that trade unions were established at 

their enterprises in a centralized manner and 

no one had ever asked for their consent to be a 

trade union member (the same sources). 

Stronger than structural reasons of union 

decline, workers’ disillusionment with trade 

unions and their withdrawal (sometimes in 

whole organizations) are better placed to explain 

membership drops. Only 18.7% of union 

members believed in unions as an institution 

protecting their rights (Razumkov Centre 

2001). This trend was hardly countervailed 

by unions with a comprehensive organizing 

strategy, as organizing was unfamiliar to them. 

Surprisingly though, in the view that the institutional 

preconditions were conducive for 

expanding their activities, unions were guided 

by own self-interests. Not least, this also explains 

their reluctance to recognize and address 

the employment effects brought about by the 

economic structuring processes and the consequent 

loosening of work regulation. 

Remarkably, membership as a resource (as 

unions are normally dependent on membership 

for financial means in the form of dues) lost its 

relevance for ex-official trade unions. Whereas 

under socialism unions were imposed on workers 

as an external body (see this argument in 

the previous section), they were provided with 

resources and their recognition and power was 

granted by the Party. As all the financial and 

material resources could have been retained 

by the Federation of Trade Unions of Ukraine 

(FPU), organizing as such lost its importance. 

The assets inherited from the predecessor’ 

trade union amounted to approximately 3 

billion dollars (interviews); and commercial 

activities could be launched. In 1993 then- 

FPU President Olexandr Stoyan declared that 

it is necessary for the FPU to strengthen the 

financial base of the trade union federation by 

means of commercial activities (“Trade unions’ 

newspaper”, 6 February 1993) 26 . Consequently, 

the Federation came out of socialism as an 

organization that has been independent of its 

members. Its existence (at least in financial 

terms) is no longer contingent on members 

and dues. By means of such choices, however, 

the FPU put itself into the dependence 

relationship in relation to the government, 

as the legitimacy of the FPU’s ownership of 

these resources was questioned and attacked 

elsewhere. 

The structuring dynamic looks different in 

these regards in the case of the trade unions 

emerging bottom up from workers’ selforganization. 

Remarkably, an impetus for this 

organization became the invalidity of existing 

trade unions in the area of workers’ representation 

and protection (interviews). In arising 

conflicts the existing unions took the part 

of the management, including the 

public discussion of labour disputes 

in courts (interviews). The spread of Seite page 229 

this kind of unionism allowed for a 

structural consolidation of different 

alternative unions into the Association of 

Free Trade Unions of Ukraine (1997) and its 

reform in 1998 into the Confederation of Free


Trade Unions of Ukraine (hereafter KVPU). 

At this starting point, the KVPU united only 

two sectoral and one regional union and was 

basically founded on the initiative and base of 

the Independent Trade Union of Miners of 

Ukraine (NPGU). In total, the then 90 000 

members within the KVPU were certainly 

non-comparable to the declared 14-million 

in the FPU (that had already almost halved at 

that point in time). However, it placed in the 

centre of unions’ activities the need for expansive 

strategy and spured the solidarity over the 

frontiers of the enterprise and sectors. Now, 

ten years later, the KVPU has slowly, but in a 

sustainable manner, expanded to unite 275,000 

members through the establishment of the 

further all-Ukrainian unions. Even though 

this number still appears non-comparable to 

the now around 10 million members left in 

the FPU, the dynamic of extending unionisms 

across the branches, professions and enterprises 

speaks for a more sustainable formative strategy. 

Notably, the model of unionism to which 

the KVPU commits is closer to the class-based 

union ideology in the classical understanding 

of unions. 

As the legalization procedure for unions was 

simplified, the certificate from authorities was 

not enough to gain recognition from workers, 

employers, and authorities. Moreover, the very 

notion of unionism was already discredited. 

Neither was the social partnership 

able to ensure a degree of recognition 


of these organizations. In particular, 

newly emerging bottom up structures 

had to frequently turn to the collective 

action as a means of recognition and 

subsequent consolidation of the specific workers’ 

interest (also mentioned by Kabalina and 

Komarovsky 1997) and so recommended itself 

as more militant organizations. 

EX-OFFICIAL UNIONS 

The structuration process of ex-official trade 

unions includes the reforms of then-existing 

Council of Trade Unions of the Ukrainian 

Soviet Socialist Republic into the Federation 

of the Independent Trade Unions of Ukraine 

(in 1990). In the course of the further developments, 

the latter was renamed the Federation 

of Trade Unions of Ukraine (hereafter FPU), as 

it is still known today. In spite of reforms, the 

FPU was characterized as “a largely conservative 

organization that did little more than issue 

hollow proclamations while millions of workers 

were pushed into poverty” (Kubicek 2004: 

29). The reforms undertaken by the FPU were 

criticized in public as cosmetic, as they did not 

go beyond the organizational restructuring on 

the principles of confederation or federation 

(interviews). The decentralization of the organizational 

and membership-dues structures 

(as opposite to previously practiced democratic 

centralism) resulted in a disconnection between 

different levels of union activities. For example, 

enterprise-based unions find themselves in isolation 

in the face of employers (interviews) 27 ; 

and regional and national unions can no longer 

impose their decisions, also concerning the 

transfer of membership dues to the top. 

Structural reform did not go beyond the statements 

of the re-establishment of the FPU as 

workers’ organization. Whereas the principles 

of democratic centralism were abolished and 

the organizational structure decentralized, it 

still has not reflected the clear demarcation


of the FPU from employers. In particular, the 

FPU “preserved a Soviet trade union tradition 

of simultaneous membership of hired workers 

and employers” (National Security and Defence 

2001, 8: 28). Symbolically in relation to 

reforms is the fact that the FPU removed the 

symbols of socialism (hammer and sickle) from 

the front of its headquarters only in 2003 28 . 

Prior to 2001, the formative processes of the 

FPU embraced its attempts to preserve its 

withdrawing membership. However, the preservation 

strategy was hardly complemented by 

attempts at expansion in response to the restructuring 

of the labour market. Respectively, 

its membership density further declined with 

the growth of the private sector, newly established 

enterprises and mushrooming small 

firms. 

The activities of the Federation have been 

characterized by frequent changes in political 

position the 1990s. Declaratory criticism of the 

politics has never resulted in national strikes 

or protests. Meanwhile, the government policy 

was criticized and challenged by ad hoc actions 

of some enterprise-based union organizations 

in their effort to protect their enterprises, quite 

often jointly with employers. For example, in 

response to the President’s decree dated 16 

March 1995 on the strengthening of the financial 

discipline, workers of the ship construction 

plant in Mykolaiv went on strike against the 

decree even though it did not have any direct 

effects for workers’ interests. Workers striked 

after the ship plant director informed them 

that, due to the decree, they will no longer get 

their wages (interviews). 

The lack of cohesion between different levels 

of union activities is demonstrated by the positioning 

of the top-level FPU and its regional 

and branch structures. At the background of 

the deteriorating living standards throughout 

1990s, branch and regional unions associations 

demand concessions for their branches 

or regions, yet their demands lag behind 

class-driven. Some regional councils of unions 

(e.g. Donets’k, Kharkiv and Dnipropetrovs’k) 

even went on to declare pre-strike situations 

demanding that minimum wages increase 

up to the subsistence level. At this time, the 

President of the Federation publicly declared 

that “trade unions of Ukraine support the 

President’s request to retreat from strikes” 

(UTN, 4.04.1994). In December 1995, Olexandr 

Stoyan, then-President of the FPU, 

received together with then-Prime Minister of 

Ukraine, the award of the Foundation ”Social 

Partnership” for the ”particular contribution 

to the conclusion of the General Agreement, 

the social partnership development and peace” 

(Mist, 29.10-05.11, 1995). 

The FPU’s legitimacy was meanwhile questioned 

and challenged elsewhere. In 1996 

many miners’ strikes took place in Ukraine 

with demands for payment of wages arrears. 

The FPU was forced to act but was cautious 

about damaging its relationships with the 

government and authorities. It declared the 

country-wide strikes against the general 

fall in the living standards and 

stopped work at enterprises for one Seite page 231 

hour. As one could have imagined, 

it is much easier to sustain one hour 

stoppage than a normal strike. Such tactics 

were used by the FPU on a regular basis for 

some time throughout 1990s.


Shortly before the Presidential elections of 

2004, the FPU concluded the alliance with 

then-Prime Minister and candidate for 

presidency, Viktor Yanukovych, who was 

alleged of vote frauds once the elections took 

place. The FPU, nevertheless, remained loyal 

to its candidate. During the mass protests 

against the vote fraud and this candidate, 

identified later on as the Orange Revolution, 

PU Olexandr Stoyan publicly appealed to the 

President of Ukraine to use all possible means 

to insure peace and prevent people from 

protesting. In response, workers occupied the 

central FPU building and Stoyan flee. 

The new FPU President, Olexandr Yurkin, 

initiated some reforms within FPU. As he told 

in one of the interviews, the FPU embarked on 

the process of the “internal reforms” bringing 

the Federation out of the organizational forms 

of the old Soviet unions’ association VTsRPS, 

including the strengthening of the primary 

organizations, branch trade unions, oblast 

(provincial) union councils, and broadening of 

their authorities. “Either we all modernize, or 

die”, stated the FPU President 29 . The structural 

reforms have hardly ever beenrealized, partly 

because the activities of the trade unions were 

often concentrated on retaining its property 

and partly due to the resistance of the union 

leaders of the regional and branch trade 

unions. 

Meanwhile, great efforts were put 


into the enhancement of the public 

image and PR-policy. Under his 

presidency, a new concept of the FPU 

development 30 and a detailed plan of actions 31 

come out. Both set an extensive scope of quite 

ambitious goals for the FPU over the next 

five years, including the creation of 4 million 

workplaces, wage increases of four or five 

minimum wage levels 32 , and the increase of 

the living standards of workers up the Western 

European ones. Unions committed themselves 

to reform the medical and education spheres, 

and facilitate the growth of the housing 

markets. FPU also committed itself to finally 

establish cooperation with other trade unions 

and coordinate union activities across the 

country 33 . 

Following Yurkin’s resignation, the new congress 

of the FPU, in spite of its announcement, has 

never taken place. In November 2008, the FPU 

Council elected the Party of Regions MP and 

the President of the Donetsk regional council 

of trade unions, Vasyl’ Khara, as the FPU 

President. The FPU remained committed to 

its previously adopted concept of development 

and a plan of action under Khara’s Presidency. 

But Khara’s presidency has been constantly 

surrounded by numerous controversies. As he 

was elected by the FPU Council and not by its 

Congress (as the FPU Constitution stipulates), 

the court of the city of Kyiv cancelled the decree 

and legal findings issued earlier by the Ministry 

of Justice confirming the legitimacy of Khara’s 

election and presidency 34 . Meanwhile, the FPU 

refused to cooperate with other trade unions 

and concentrated on the preservation and 

further commercialization of its properties. 

In this light, the activities of the Federation 

cannot be identified as those representing and 

defending workers. Rather reforms of some 

enterprise-based unions and attempts within 

the branch unions remind us that the FPU 

structure is far from being homogeneous and 

coherent.


INDEPENDENT TRADE UNIONS 

Since 1989 in the Eastern region of Ukrainian 

Donbass there have emerged first striking 

committees among miners giving rise to 

independent bottom-up unions. These unions 

emerged in the opposition to the activities of 

the existing miners’ trade unions that proved 

indefinite to workers’ growing complaints. 

As no trade union law existed at that point 

of time in the Soviet Union, miners’ unions 

acquired legitimacy and recognition by the 

scale of their collective action. Miners’ strikes 

across the Donbass were partly responsible for 

the collapse of the socialist system (Crowley 

2000). Similar initiatives emerged among 

transportation workers. 

The years before 1998 became the years of 

establishment, structuring and consolidation 

of the oppositional trade union movement 

of Ukraine identified in the literature as new, 

independent, free, or alternative. The overall 

situation within trade unions made it clear 

that a solely sectoral unionism has hardly 

any prospects in the view of the continuing 

dominance of the ex-official trade unions. 

Hence, it was necessary to structure and improve 

the shape and expand this unionism into other 

sectors. Such understanding prompted leaders 

of independent unions to launch quite early the 

debate on spurring workers’ solidarity across 

the mining sector frontiers. Significant in this 

regard was the training on organizing provided 

by the Solidarity centre of the American unions 

AFL-CIO. 

In the course of the structural consolidation 

of the independent trade union movement, 

the lack of the united vision of how this 

unionism should look became evident. 

The crisis originated in the split among the 

leaders of different independent unions 35 in 

their negotiations of the all-Ukrainian strike 

planned on 18 January 1994 that aimed at 

the retreat of the then Prime-Minister. This 

resulted in the withdrawal of some unions from 

the first Free Trade Unions Association; and 

the Association dissolved. Upcoming actions 

and strikes were organized by separate branch 

trade unions in an uncoordinated manner, first 

of all by miners and railway drivers. 

Meanwhile, as the economic situation 

worsened and workers’ wages could not even 

ensure the necessary food for workers, miners 

again went on strike. In the course of the 

miners’ march to Kiev in 1996, organized 

by the Independent Miners’ Union, workers 

walked 600 km to the capital city of Ukraine 

and demanded the payment of wages arrears. 

Afterward, under the autocratic Presidency 

of Kuchma, the leaders of the march were 

threatened with imprisonment. Under threat 

of a new strike, the government had to stop 

the criminal allegations against union leaders. 

However, independent unions offices were 

illegally searched, their safes seized and their 

documentation stolen. In answer to this 

persecution, miners went on hunger strike. 

In October 1996, new attempts to consolidate 

independent unions were undertaken. 

Leaders of some independent unions 

established Consultative Council of Seite page 233 

trade unions (miners, railway workers, 

metro workers, textile workers) that 

grew in 1997 in the Association, and changed 

in 1998 into the Confederation of Free Trade 

Unions of Ukraine (KVPU). It spread its



presence to five branches (teachers, miners, 

transportations, medical workers and football 

players) but remained too small to break the 

dominance of ex-official unions. 

Remarkably, throughout 1994-1996 the leaders 

of independent trade unions could not work 

out an effective work strategy in conditions 

of economic crises (Razumkov Centre 1997). 

With the background of harsh economic 

conditions, these unions lacked organizational 

experience and technical capacities except 

organizing militant actions. While the FPU 

employed one of the best economists and 

lawyers, independent unions could employ 

experts only – mostly those who could not find 

another job. However, financial resources of 

these unions were limited (interviews). It also 

lacked experienced leaders in newly emerging 

enterprise-based unions, as the capacity of the 

KVPU to educate all new-comers was also 

restricted. It should be recognized that such 

a disadvantage originates from the initially 

unequal starting conditions of both – ex-official 

and independent unions. While the former 

retained and expanded their financial base (as 

described in the previous section), alternative 

trade unions could solely offer their members 

benefits of the solidarity-driven struggle for 

better life but none of immediate material 

benefits implicitly expected by workers. 

Meanwhile, the non-agreement of these unions 

with the prevailing consumerist-like 

union-worker relationships makes 

further attempts at expansion more 

resource-demanding. 

The expansion of independent trade unions 

within the traditional core branches of the 

economy (coal-mining and metallurgy) 

coincide with the consolidation of oligarchies 

and financial-industrial groups. The resulting 

harassment and persecution of the free 

trade unions intensified in the late 1990s 

under Kuchma’s Presidency. Between 2002 

and 2004, the KVPU President was beaten 

five times by the police in public places. His 

family members were persecuted and in 2004 

his son was kidnapped and heavily beaten. 

Leaders of regional and local trade union 

organizations were persecuted, as well. Many 

newly established local union organizations 

were literally immediately destroyed either by 

local authorities or employers and independent 

unions (interviews and the numerous KVPU’s 

complaints to the ILO). Because of the heavy 

persecution and harassment, the KVPU filed a 

complaint to the ILO Committee on Freedom 

of Association (Case 2388). While it took 

the ILO and the government several years to 

investigate the complaint, the government 

tried to deny any assaults and kept excluding 

the KVPU representatives from the delegations 

to the annual ILO conferences. It is only after 

2004 when Yushenko came to be elected 

President of Ukraine did the constraints on 

the Confederation’s activities on the part of the 

government became looser. 

As the example of independent miners’ unions 

demonstrates, the prospects of the collective 

action, more common in the independent than 

ex-official trade unions, have been constrained, 

as no law on industrial protests was adopted 

and no procedures for their solution put in 

place. At that point of time, making actions 

illegal appears an easy means to prevent them. 

It is worth noting that the adoption of the 

law on collective labour disputes (see above) 

correlated with the decline in union militancy.


One explanation could be the legal procedure 

that makes any protest prior to the longlasting 

solution procedure illegal. The second 

explanation originates from the persecution of 

independent trade unions. 

CONCLUSION 

This paper explained the segmentation of IR in 

Ukraine through analysis of the development 

and impact of unions into the IR outcome. It 

was argued that, with the background of the enterprise-specifics 

developments, IR are shaped 

by the interactions between management and 

unions. As Ukrainian unions find themselves 

in the formative processes, two kinds of unionism 

are emerging in Ukraine that contribute to 

different IR outcomes. 

Such ideological incoherency and a divide 

within labour movement are central to explain 

labour dynamics and its formative processes. 

Former official unions seem to have little 

prospects for reform, at least at the current 

stage of development. Locally, many former 

official unions on the enterprise-level succeed 

in breaking away from such subordination 

relationships. But this has not taken on a 

broader scale so far. Independent unions offer 

more prospects for workers’ interest articulation. 

But they also face serious barriers to their 

development, as they threaten established 

informal order both nationally and locally. 

The development from transmission belts to 

social partnership demonstrates very little 

progress of labour revitalization, because the 

contestation of IR arenas is still much more 

constrained for independent union development 

and, not least, the agency imposed by 

external settings is not enough to challenge 

the current state of things. On both trajectories 

of developments, one may speak of dependencies. 

In the case of ex-official unions, 

it is dependency on the management and the 

state. In the case of independent unions, it is 

dependency on members that are at this point 

passive, individualistic, and consumerist. 

The review of the developmental trajectories 

of the FPU and KVPU in Ukraine confirmed 

the arguments advanced earlier. Major 

centres of union activities are put in place 

and identifiable in terms of two different 

models of unionism. They embody the two 

differentiating logics of unionism they follow. 

Whereas the FPU pursues conciliatory politics 

and strives to preserve its membership on the 

basis of its commercial activities, the KVPU 

commits itself to the vision of unionism 

structured along the lines of class antagonism. 

Militancy and action are more likely in case of 

independent unions. Although the autonomy 

of the ex-official Federation is limited, 

it still finds itself in the more supportive 

settings, originating from its dominance and 

collaborative relationships with employers 

and government. In contrast, independent 

trade unions originate from worthier starting 

conditions (in terms of resources) and initially 

find themselves in more constraining settings 

determining their further development, than 

do ex-official unions. 

The consistent decline in the FPU Seite page 235 

membership still does not allow any 

conclusions on the prospects of the exofficial 

unions; and the bottom-level processes 

within the FPU are often contradictory. At this 

point, it is evident that national-level union


approaches to some extent constrains the 

bottom-up formation of its affiliated unions 

(as also claimed by Mandel 2004). Whereas 

from 1989 on independent trade unions 

have consistently increased their presence, 

they have still remained under-resourced in 

their capacities and too small to break the 

dominance of the FPU. They are recognized 

by the state and could have influenced certain 

policy areas (e.g. the new law on miners’ work 

allocating many additional privileges to miners 

was initiated by the independent miners’ 

union). However, much needs to be changed 

to ensure the implementation of their trade 

union vision. 

NOTES 

1 

Here, the four “critical axes of structural change” were argued 

to have shaped the simultaneous changes in IR and their institutions 

(Martin 2008: 141). 

2 

For example, in the public budget sector, IR are in crisis and 

workers’ interest is hardly articulated. In contrast, in the privatized 

sector IR are found turbulent as a result of the bargaining 

power of actors. Yet in the new private sector no unions exist; IR, 

thus, are informalized. Lastly, foreign companies were claimed to 

follow their international IR practices. 

3 

Once socialism collapses, the countries of the former Soviet 

block legally commit to the freedoms of association and collective 

bargaining, as well as establish procedure for strikes and wages 

determination in convergence or resemblance of those found in 

established capitalist economies and formalized in the form of 

the ILO International Labour Standards and European Social 

Model. 

4 

See, for example, Ashwin (2004), Borisov und Clarke (2006), 

Casale (1997), Cox und Mason (2000), Gerchikov (1995), Hethy 

(1994), Kabalina und Komarovsky (1997), Mason (1995), 

Meardi (2007), Ost (2000), Schroeder (2004). 

5 

As well known, unions in the socialist system had different functions 

(related to productivity and social and welfare benefits). 

The degree of differences between socialist and capitalist unions 

(even if they appear similar) was so high that Vyshnevs’ky, 

Mishenko, Pivnyevet al. (1997), for example, when comparing 

different dimensions of unionism, define socialist unions as “antiunions”. 

6 

Managerial agency can be directive (authoritarian), directive but 

welfare-oriented (paternalistic), negotiational (constitutional), 

or participative (Schienstock 1992 in reference to Poole 1988). 


7 

Certainly, such a strict distinction cannot be made in practice. 

Within the formerly socialist Federation of Trade Unions of Ukraine 

(FPU), for example, there are progressive leaders and local, 

or sectoral, unions that already succeeded, or that are on the way to 

reconstitution. Given the constraints imposed by non-progressive 

and traditionally-oriented leaders in such cases, it is still too 

early to speak about a broad-scaled, successful transformation of 

ex-official unions.


8 

Independent leaders were harassed and persecuted in socialist 

(Grancelli 1988) and post-independence regimes (examples are 

listed in Kubicek 2004). 

9 

In many enterprises, workers suffer from wages arrears and 

administrative leaves. In others, they succeeded in gaining wage 

increases and more social protection even in spite of the generally 

poor economic conditions. 

10 

Decline in production and outputs, employment shedding, the 

emergence of private sector, and the abolishment of “universal 

membership”. 

11 

Kubicek cites ILO data: 462 strikes and 260,400 strikers in 

1993 (in comparison to 264 strikes and 120,000 strikers in 

Russia) and 1,269 strikes and 171,400 strikers in 1996 (in comparison 

to 8,278 and 662,000 in Russia, respectively). Another 

interesting detail is the number of days lost due to strikes, whereas 

this number remains quite high in Ukraine (10.28, 12.45, and 

10.54 in 1993, 1996, and 1999, respectively) and significantly 

higher than those in Russia (1.97, 6.04, and 7.66, respectively) 

(ILO 2000 in Kubicek 2004). 

12 

The term „oligarchs“ appeared in the second half of the 1990s. It 

referred to different economic actors who obtained economic and 

political power and gained influence on the process of the political 

decision-making in Russia under El’tsyn (Kowall und Zimmer 

(2002) and in Ukraine under the Presidency of Kravchuk and 

Kuchma. In particular, in Ukraine, their consolidation proceeded 

in an unrestricted manner until 2004. 

13 

The financial capital that the groups initially accumulated 

from the gas trade is further channeled into the other branches, 

like metal processing, coal mining, energy, banks, food processing, 

and media. The financial industrial groups develop vertically 

integrated structures along the value chains (Zimmer 2002: 

45-46). 

14 

Its economy was concentrated around the heavy metallurgy and 

was dependent on the Russian economy for supplies. It possessed a 

huge agricultural sector that had not been modernized for years, 

even though Ukraine used to be the bread basket of the Soviet 

Union. And finally, the Ukrainian economy was heavily dependent 

on Russia for energy supply. 

15 

According to the law on the temporary seize of income indexation 

nr. 7-92 dated of 9 December 1992. 

16 

The depth of the problem is demonstrated by the fact that, 

until recently, the gap between the legally set minimum wages 

and the minimum subsistence level could not be overcome. It is 

only in October 2009 that the minimum wages were set higher 

then the subsistence minimum. However, it hardly changes the 

situation, as this time the subsistence level was decreased in real 

terms. The originally suggested minimum wage for 2010 (before 

the government increased it to 3 Euro under pressure of trade 

unions) was even below the official poverty line according to the 

Federation of Trade Unions of Ukraine (FPU, 22 September 

2009). 

17 

The draft was submitted by the current President of the largest 

trade union association FPU Vasyl’ Khara, the former President 

of the same Association Stoyan, and the MP Sukhyi, see „Кодекс 

рабовласника“ (The Code of the Owner of Slaves), Glavred, 

online-news, dated of 08.07.08, available at http://glavred. 

info/archive/2008/07/08/131548-5.html, last visited on 5 

October 2009. 

18 

The new discussion of the draft Labour Code is scheduled for 

the beginning of 2010. 

19 

All remarks taken from KVPU appeal to the ILO, dated of 

11.06.2008, KVPU news-release dated of 28.11.2009, Glavred, 

08.07.08, as well as “Новий Трудовий кодекс опинився 

«під слідством“ (The new Labour Code under investigation), 

KVPU news-release, dated of 28.11.2009, available at http:// 

www.kvpu.org.ua/ua/news/112, last visited on 5 October 

2009. 

20 

Notably, collective agreements also existed in the Soviet Union. 

Then, bargaining was addressed as “an economic-political 

measure to mobilize workers and servants around the successful 

fulfilment and over-fulfilment of the people’s 

economic plan” (Council of Ministers of the USSR, 

6.03.1966). In this form collective agreements did 

not serve as IR regulating mechanisms and were of 

symbolic nature. 

21 

Interview with Ihor Sumovs’ky, State Chief Labour Inspector 

of Ukraine, Kyiv, 27 August 2009. 

Seite page 237


22 

Ashwin und Clarke (2003) make similar conclusions for 

Russia. 

23 

E.g. Interview with S.Ponomarchuk, the Vice-President of 

the Donetsk Oblast Council of the Construction and Building 

Materials Industry Workers’ Union of Ukraine (CBMIWUU), 

Donetsk, 22 August 2009. 

24 

Interview with the KVPU President, Kyiv. 

31 

Програма Дій Федерації професійних спілок України 

(2006-2011 роки) (A plan of actions of the Federation of Trade 

Unions of Ukraine (2006-2012), № 5з-3, adopted by the Vth 

FPU Congress on 05.04.2006, available at http://www.fpsu. 

org.ua/images/stories/images/2009/August/programa.doc, last 

visited on 10 October 2009. 

32 

As compared to minimum wages amounting to 80-90% of the 

subsistence minimum at that point of time. 

25 

E.g. the interview with the President of the Mykolaiv Oblast 

Trade Union Committee of the Agro-Industrial Workers’ Unions, 

Mykolaiv, 2008. 

26 

Later investigations into unions’ properties uncovered the ownership 

by the Federation of joint American-Ukrainian firms 

and a lot of premises. The office premises of the FPU are even 

today rent to different firms. 

27 

E.g. Interview with the President of the DBK-4 trade union 

committee, Krychkevych, Kyiv, 27 August 2009. 

28 

“The big cover-up”, Kyiv Post, web-news, dated of 28 August 

2003, available at http://www.kyivpost.com/nation/17797/ 

print, last visited on 15 October 2009. 

33 

The same sources. 

34 

“Court cancels election of Khara as chairman of Trade Union 

Federation of Ukraine”, Kyivpost, issues dated of 03.10.2009, 

available at http://www.kyivpost.com/city/50022, last visited 

on 12 October 2009. 

35 

The negotiating unions included the Associations Free trade 

Unions, Free trade Unions of railway drivers, Trade Union 

Association of the pilots, Federation-Trade Union of the aviation 

dispatchers of Ukraine, Independent Trade Union of the textile 

workers of the Donetsk cotton factory, trade union of the aviation 

of engineers and technicians of Ukraine, Independent Trade 

Union of the Illichivsk see commercial port and Solidar Trade 

Unions of Ukraine. 

29 

„Олександр ЮРКІН: «Угода важливіша за вибори» 

(Olexandr Yurkin: the Agreement is more important than elections“, 

Дзеркало тижня», № 8 (587), dated 4 — 10 March 

2006, available at http://www.dt.ua/2000/2650/52762/, last 

visited on 10 October 2009. 


30 

Концепція розвитку Федерації професійних 

спілок України (The conception of the development of 

the FPU), NP-4-5 , adopted by the FPU 

Council on 09.12.2005, available at http:// 

www.fpsu.org.ua/index.php?option=com_ 

content&view=article&id=26%3A2009-07- 

14-17-36-08&catid=10%3A2009-07-06-16- 

44-54&Itemid=36&lang=uk, last visited on 10 

October 2009.


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AUTHORS 

Agnieszka Cianciara (1981) is a PhD candidate at the Institute of Political 

Studies, Polish Academy of Sciences and Academic Assistant in the 

College of Europe, Warsaw/ Natolin Campus. Main research areas: EU 

governance and institutional reforms, lobbying in EU and CEEC, European 

Neighbourhood Policy. 

Contact: a.cianciara@wp.eu 

Péter Csizmadia (1973) is a researcher at the Institute of Sociology of the 

Hungarian Academy of Sciences. Main areas of research: non-technical 

innovations, organisational learning, knowledge-intensive business services. 

Contact: pcsizmadia@socio.mta.hu 

Alexandra Janovskaia is a PhD student at the London School of Economics, 

UK. Main areas of research: political economy of transition, varieties of 

capitalism, MNCs. 

Contact: sasha.janovskaia@gmail.com 

Kathrin Loer (M.A. in European Studies) is a research associate for 

Comparative Social Sciences and lecturer in European Studies at the 

University of Osnabrück. Her research interests include economic sociology 

with a focus on the automotive sector as well as welfare state politics within 

the European Union. She previously worked for the German Bundestag, the 

Ministry of Economics, Technology and Transport and several consulting 

agencies. 

Contact: kathrin.loer@uni-osnabrueck.de 

page 242 

Martin Mendelski is a research fellow at the Private University of Applied 

Sciences in Göttingen and a Ph.D. candidate at Goethe University 

Frankfurt. He holds two Master‘s degrees, one in European Studies from 

the European University Viadrina Frankfurt (Oder) and one in Business 

Studies from Mannheim University. His current research addresses market 

economies in Eastern Europe and the role of institutional complementarities 

in economic performance. He was visiting researcher at several universities 

(Bilkent University, Harvard University, European University Institute) and 

research institutes (Max Planck Institute for the Study of Societies in Köln, 

CEPS/INSTEAD in Luxembourg). 

Contact : mmendelski@hotmail.com

AUTHORS 

Abel Polese is Marie Curie Fellow at the Institute of Geography of the 

University of Edinburgh and Research Fellow at the Institute of Sociology of the 

Ukrainian Academy of Sciences. Main areas of research: informal economies, 

nation building and identity policies, civil society and democratisation 

contact: apolese@ed.ac.uk 

Catherine Spieser is a post-doctoral researcher at the centre for the study 

of employment and labour market policy (Centre d‘études de l‘emploi) 

in Paris. She completed her PhD at the European University Institute in 

Florence in 2009. Main areas of research: comparative social and labour 

market policy, politics of socio-economic policies, political sociology of the 

welfare state. 

Contact: catherine.spieser@eui.eu 

Ivett Szalma (* 1980) is a researcher at the Hungarian Academy of Sciences 

(HAS), Institute of Sociology and Ph.D. candidate at the Corvinus 

University of Budapest. Main areas of research: labour market, deliberative 

polling, social policy, partnership formation, childbearing 

Contact : szalma@socio.mta.hu 

Bernadett Szél (* 1977) is a Doctoral Candidate in Sociology at the Institute 

of Sociology and Social Policy at the Corvinus University of Budapest 

and Leader Councilor of the Hungarian Central Statistical Office. Main 

areas of research: Identifying and measuring patterns and mechanisms 

supporting partnership cohesion, consequences of labor market uncertainties 

on partnership formation, corruption research 

Contact: bernadett.szel@uni-corvinus.hu 

Lyudmyla Volynets (1982) previously worked as International Secretary 

at the Confederation of Free Trade Unions of Ukraine and is currently 

working on her PhD in political sciences at the Free University of Berlin 

(Germany). Her research interests lie in different aspects of Industrial 

Relations, collective action, and trade unions. 

Contact: lyudmyla.volynets@gmx.de 

page 243

AUTHORS 

Alexandra Krause is assistant professor at the University Jena and associate 

at the Collaborative Research Centre 580 in Jena. Main areas of research: 

Employment systems, flexible labour markets, social inequality and social 

justice. 

Contact: alexandra.krause@uni-jena.de 

Vera Trappmann is assistant professor at the University Osnabrück and 

associate at the Colloborative Research Centre 580 in Jena. Main areas of 

research: Employment, labour politics and welfare states in Eastern and 

Western Europe. 

Contact: vera.trappmann@uos.de 

page 244

SFB 580 - GESCHÄFTSFÜHRUNG (2010) ISSN 1619-6171

Heft36 1 - SFB 580 - Friedrich-Schiller-Universität Jena

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