Introduction
Why do states adopt liberalizing reforms when doing so contradicts their domestic preferences and threatens to undermine their policy autonomy and national tradition? Even with the end of the Cold War and the collapse of communism, the appeal of political pluralism and free market enterprise was far from universal. For although countries in central and eastern Europe (CEE) converged on liberal political and economic models, most other states from across the former Soviet space maintained degrees of authoritarianism or central planning or both.
Exceptionalism in CEE with regard to liberalization might seem easy to explain, given the active role of international institutions in that region. After all, the European Union and the North Atlantic Treaty Organization (NATO), both guardians of the liberal order, were poised at the outset of the transition to provide advice, assistance, and, ultimately, membership. Thus the CEE countries—the only credible future members of NATO at that point—were particularly susceptible to liberalization. Moreover, to win admission, they had to implement core parts of a liberalizing agenda, including the convincing consolidation of democracy and capitalism.
Accordingly, there often was a correlation between external incentives and eventual liberalization in CEE. But this book’s major finding is that despite the enormous material leverage of international institutions vis-à-vis target countries, financial or membership incentives on their own explain very little about the extent to which states embrace liberalizing policies and why. This may seem paradoxical, given that NATO, the European Union, the International Monetary Fund (IMF), and the World Bank generally predicate financial assistance or membership on the fulfillment of specific criteria—conditionality—in which compliance is supposedly won by the promise of particular rewards. In truth, however, although some studies do show that credible conditionality sometimes elicits its intended effect if the domestic opposition is low (Stone 2002; Kelley 2004a, 2004b; Schimmelfennig and Sedelmeier 2005; Vachudova 2005), other research highlights the puzzling extent to which conditionality has perverse, limited, or no effects on domestic outcomes (Killick 1996; Collier 1997; Hunter and Brown 2000; Grabbe 2002; Barnett and Finnemore 2004; Hughes, Sasse, and Gordon 2004; Epstein 2005a, 2006a; Sasse 2005; Weyland 2005; Sissenich 2007).
If in some cases conditionality yields no results, in others it may not even be required to encourage compliance. To explain this puzzle I make the following argument: that pushing transition states toward a liberalizing agenda—for both state institutions and markets—depends on a social context in which compliance becomes desirable by virtue of the status it secures and the relationships it cements. Indeed, as this book shows, the power of international institutions is largely misunderstood. What drives compliance is not how much money or military power is on offer, but rather the extent to which such money or military power reinforces a state’s perceived international orientation. And that orientation depends, in turn, on where a society and its leaders believe authority appropriately lies.
The central dilemma for postcommunist states in determining the appropriate location of authority lay in balancing the demands of globalization and interdependence—two features of a liberal world order—against the protection of national autonomy and tradition. Thus, when it came to reorganizing defense or restructuring banks, the central question reformers faced was whether to locate authority in international institutions, which were pushing internationalization and liberalization, or to use national tradition and autonomy as guides instead. The dilemma proved particularly vexing for states that had only recently won their independence. Maximizing power was certainly their aim. But the question remained, How was power best maximized? In finance, would more power accrue to states that kept control of their banking sectors through domestic ownership, as many industrialized democracies had done in the past? Or would they gain more power by yielding to international financial institutions (IFIs) and allowing foreign domination of the sector? In defense, was security best achieved by preparing for enduring regional threats through robust territorial defense plans? Or would countries become more secure by currying favor with a powerful military alliance and agreeing to dedicate the bulk of their defense resources to far-flung multilateral missions?
How postcommunist countries weighed the options and reached their conclusions is the central subject of this book. Whereas the CEE instinct was usually to protect autonomy, international institutions were more likely to demand conformity with a liberalizing agenda. I argue that given competing claims between autonomy and conformity, international institutional definitions of power maximization were more likely to prevail when countries and sectors experienced exceptional uncertainty in the transition and when the international institutions were consistent in their reform advice. National definitions of power maximization were likely to prevail, by contrast, when countries and sectors had strong institutional legacies and their own views of what an optimal policy course entailed, and when the prescriptions of international institutions were inconsistent. The critical starting point for predicting the potential power of international institutions’ incentives to win compliance is in knowing whether it is their expectations or national experience that informs states’ beliefs about what constitutes power.
If there are competing notions of what constitutes power, then it follows that incentives, including money and membership, have a subjective quality. In arguing for the subjective quality of incentives, I am making an additional claim, rooted in a social constructivist tradition, about the nature of the social world. Many studies conceptualize actors as autonomous maximizers responding to incentives (e.g., Friedman 1953; Becker 1976; Olson 1982; Frieden 1991), but I take a different view. If incentives are subject to interpretation, then it necessarily follows that actors are not autonomous—otherwise, similarly positioned actors would respond uniformly to the same incentives, which, as this study highlights, is not the case. Furthermore, actors’ behavior is not triggered exclusively by external stimuli but is continuously informed by history, institutions, and social interaction—the very forces that make actors who they are. I do not take issue with the idea that actors engage in “maximizing,” but I do question what they are maximizing and why. And, most important for this study, I investigate who decided that the specified goals were the correct ones. As the many case studies in this book show, where domestic politics were highly fluid and international institutions were consistent, external actors, as opposed to national tradition, were more likely to shape states’ goals.
The conditions for liberalization in CEE were generally propitious from international institutions’ point of view. And the consequences of international institutional engagement with postcommunist Europe—through assistance, advising, and in some instances accession processes—have been path-breaking for a number of countries. Nevertheless, when it came to institutionalizing the Western conception of a liberal order—including, for example, central bank independence and democratic civil-military relations—there was heated political controversy and plenty of variation in compliance, over time and across countries. It is by studying that variation that this book assesses the power of social context in facilitating states’ acceptance of international institutions’ demands.
Throughout the theoretical and empirical chapters, I return repeatedly to the themes discussed above. The role of international institutions in central and eastern Europe has been fundamental for those states and for the organizations they have joined. However, what constitutes international institutional power is often misunderstood. And while states’ international orientations and underlying goals are malleable, such is the case only under narrow conditions.
Chapter 1 outlines a theory of institutional influence, specifying the conditions under which international institutions are able to manipulate the perceived costs and benefits of complying with their incentives. I argue that the presence or absence of those conditions, which include the uncertainty of domestic actors, their perceived status vis-à-vis international institutions, and the credibility of the latter’s policies, creates a social context that will help or impede international institutions in endowing incentives with particular meanings. For domestic actors, the meanings attached to incentives make them worthy of compliance or not. I map these conditions onto the postcommunist world in measurable ways to test the validity of the theory throughout the study. The first chapter also explains why I have chosen the following four areas of postcommunist reform: the institutionalization of central bank independence, the internationalization of bank ownership, the democratization of civil-military relations, and the denationalization of foreign policy and defense planning. Outcomes in these areas vary across the four countries under consideration: Poland, Hungary, Romania, and Ukraine.
In chapter 2, I investigate a key area of domestic economic reform—the institutionalization of central bank independence (CBI). At stake here was whether governments would exercise control over monetary policy and macroeconomic conditions, or would delegate that authority to central bankers charged with guarding price stability at the expense of other policy goals. For many (though not all) CEE politicians and banking bureaucrats, the idea of CBI was alien. International institutions provided incentives in order to win compliance. But variation in the timing and degree of CBI adoption corresponded more consistently with the social context than with strict conditionality. Thus, although IMF–World Bank conditionality was applied in all four countries, Poland and Hungary had already institutionalized high levels of CBI in the early 1990s, while Romania waited until a decade later. Ukraine was an outlier, diverging from some key indicators of CBI as late as 2006. Moreover, contestation over central bank authority despite EU strictures—concerning monetary policy and regulatory capacity—continued everywhere into the mid-2000s.
Chapter 3 explains why levels of foreign ownership in CEE banking sectors are far higher than those that industrialized countries generally accept for themselves. Without exception, postcommunist states set out to protect this strategic sector from foreign control, but over time that goal shifted—from seeking to preserve domestic ownership to securing rapid modernization through the participation of foreign capital. International institutions promoted foreign ownership, but with a varying impact across countries and over time, depending on the evolving social context as specified by the theory. Hungary had the highest levels of foreign ownership by the early 2000s, at close to 80 percent. Foreign investment in Poland’s banking sector was near 70 percent by the same date, but the Polish state also maintained an ownership position in the country’s largest bank as of late 2005. In 2002 Romania and Ukraine had much lower levels of foreign ownership (near 40% and 10%, respectively), but by 2004 foreign investment in finance was rising sharply. In 2005, Romania’s commercial banking sector was set to become one of the most internationalized in the region, with just over 80 percent of its banking assets owned by foreign interests. These discrepancies reveal the varying access of international institutions to domestic reform debates, and correspond not to conditionality but to the desire among domestic actors to preserve or rupture high-profile relationships with their external advisors.
Chapter 4 focuses on the democratization of civil-military relations. Although three of the four states under consideration had similar strategic concerns stemming from historical experience, their response to the incentive of NATO membership and the requirement of democratic civil-military relations varied considerably. In addition, in every state, regardless of either public opinion on NATO membership or historical vulnerability, the perceived “natural” balance of authority between civilians and military leaders was uniformly different from what the alliance found acceptable. Whereas every CEE state, left to its own devices, was likely to invest its General Staff with considerable autonomy and authority, membership in NATO demanded an entirely different set of power relations among groups in society. Rather than allowing military personnel to run military affairs, NATO officials were promoting a particular kind of oversight—diffused among multiple branches of government, the media, and society—that was anathema to military tradition in the region. Although all four countries made at least some concessions to the alliance’s democratic principles, NATO’s democratizing impact varied considerably, once again in line with the uneven influence it could exert in the different social contexts between the alliance and national actors.
Whereas chapter 4 concerns a fundamental area of internal security reform, chapter 5 covers NATO attempts to denationalize CEE states’ foreign policies and defense planning. Here again, NATO encountered resistance to what its founding members, especially the United States and United Kingdom, considered the alliance’s evolving strategic mission. Threat perceptions in CEE were about Russian power, regional rivalries, protection for diasporas, and irredentist claims—all of which had made NATO membership seem desirable. But not only did NATO not show great concern for CEE threat perceptions, it actively discouraged CEE states from engaging in forms of military planning that would have addressed such concerns. In response to the alliance’s effort to convince CEE states of how best to maximize their power and influence, some of its newest members proved to be among the biggest contributors to multilateral operations in both Afghanistan and Iraq. Although CEE political and material support for these far-flung missions was particularly notable in the light of the dramatic fissure between the United States, the United Kingdom, and many of their long-time allies in NATO, what also stood out was the great degree of variation in CEE states’ willingness to go global. Poland was a staunch contributor to out-of-area missions, Hungary was mostly a security consumer, while Romania and Ukraine were somewhere in between. Underlying the differences were contrasting national perceptions of the utility of military power and of NATO’s shifting credibility—conditions that informed the social context between NATO and aspiring members.
In the book’s conclusion I assess the strengths and weaknesses of the explanatory variables considered throughout the study—uncertainty, status, and credibility. I then compare my theory of institutional influence with other approaches that examine international institutions and domestic compliance, and gauge the explanatory power of uncertainty, status, and credibility against rival hypotheses. Finally, I consider the implications of the findings of this study for the ongoing pursuit of liberalism by international institutions, both within the postcommunist region and globally.
Previous Chapter
Buy This Book in Print