What happens when repressed people living under socialist rule finally gain their independence? Do they pursue policies that lead to their own destruction? Do they have the skills to practice self-governance? Will their transition become a model for other developing countries to follow? Michael Van Beek speaks with economist and Fraser Institute Senior Fellow Matt Mitchell to help answer these questions for the Overton Window podcast. Mitchell is the co-author of two books on the transition from socialism to capitalism in Poland and Estonia, which we discuss in this week's episode. 

“These are both countries that were essentially dragooned into the Soviet sphere,” Mitchell says. In both cases, the socialist governments took over private industries and repressed the regime’s dissidents. These horrific episodes of socialism for the Estonian and Polish people ended when the Soviet Union collapsed and the countries were able to establish their own national economic policy.

“What both of them achieved is really quite remarkable,” Mitchell says. Both Poland and Estonia used their freedom to balance their budgets, privatize industries, flatten tax systems, reduce spending, and eliminate price controls.

“In the case of Estonia, they unilaterally eliminated all barriers to trade,” Mitchell says. “I have to underline that, because unilaterally eliminating barriers to trade is not something that happens in the modern world.” 

Mitchell says the key to a successful transition between socialism and capitalism is understanding “the failure of the socialist experiment.” The socialists claimed that their system could outcompete market-based systems. That didn’t happen.

“The average of all former Soviet states were making something like 30% of the income of Western capitalist societies,” Mitchell says. Shortages in consumer goods like food, clothing, and shelter were extremely common.

In Poland, a Warsaw Pact nation, the road to freedom began as a labor movement. Workers formed a union that was not sanctioned by the Soviets, Solidarity, which protested and organized strikes against communist rule. The visit to Poland of Pope John Paul II, a Pole himself, helped inspire citizens to stand up to their authoritarian government. “One out of every three Poles was a member of the Solidarity union,” Mitchell notes.

Solidarity’s work was popular and the declining influence of the Soviet Union allowed more dissidents to operate without persecution. In Poland, that meant that the Poles could assert their independence, whereas previous attempts to go against Soviet policy in Hungary and Czechoslovakia resulted in military takeovers in those countries.

“Within a few years the socialist regime completely lost its support. There was new leadership in the Soviet Union that was not going to countenance invading Poland if it adopted reforms.” Due to the work of Solidarity and other groups, Poland would eventually gain independence.  

The path to independence for Estonia, an actual Soviet republic, was different. It began with environmental protests. Part of the claim of socialism was that it would protect the environment, but socialist practice was different from theory.

“The Soviets had dug up all this phosphate, often tainted with highly radioactive material. And they just dumped it into the ground where it just seeped into waterways, catching fire and polluting the air,” says Mitchell.

People protested Soviet plans to mine more phosphate in Estonia. “They were protesting the broader regime, but they also knew if they started the protest on a technical issue, like the environment, this was a good way to test the state’s willingness to allow open dissent,” Mitchell says. “To their surprise, they won. The Soviets actually backed down and did not pursue any more phosphate mining.”

This led to further protests, and Estonia eventually gained independence. “Really, the protests began because socialism was not living up to its promises,” he states. 

Having successful capitalist neighbors also helped Estonians understand that the socialism was not working. “One of the things that was really powerful was to have an example and a proof of concept. And in the case of Estonia, they had Finland,” Mitchell says. “The Finns fought against the Soviets and had their own independent state. Comparing the capitalist Finnish economy to the socialist Estonian one, by the end of the socialist experiment, the average blue-collar Finn could afford much more goods than the Estonian.”

For the Estonians, this contrast proved the superiority of the Finnish system to their own socialist one. Here in the United States, Mitchell notes, states like Michigan would benefit from looking to freer states and implementing reforms that worked in other states.  

Poland and Estonia are special because they were successful transitions from socialism to democratic capitalism. Yet the move was not easy for the Estonians or the Poles. It led to a lot of unemployment in these countries. “So once the socialist system goes away, you have people who are 40 or 50 years old, and they are trained to do something that no one wants them to do,” Mitchell says. 

It was a shock, and policymakers in the country had a choice between slowing the change and accelerating the change. They could eliminate state protections, mandates and controls quickly or delay them to lessen the blow. “I think that the empirical evidence is pretty clear that those countries that moved quicker and more ambitiously actually fared better,” Mitchell says. 

Estonia made quick changes while Poland delayed. Estonia is better off for having gone quickly. “Estonia now has the lowest poverty rate of any former socialist country. It has the highest per capita GDP of any formerly socialist country. It has more startups than any other country in Europe and more unicorn startups than any other country in Europe,” says Mitchell. 

After independence, Mart Laar became the first democratically elected Prime Minister of Estonia. Mitchell says that Laar told a joke about his introduction to economics. “The first that I had heard of economics was about this terrible, awful Western economist that the Soviets hated named Milton Friedman. And I thought, gee, if the Soviets think this guy is so awful, he must be pretty good,” he says.

“It was not that all these people were steeped in free market economics. It was just Mart Laar and a few of his colleagues who thought that free market policies were normal,” Mitchell says. 

To see more of the conversation, visit the Overton Window Podcast. 

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