Kemp — A Decade Lost: 10 Years After the Fall of the Berlin Wall, What Went Wrong?

From the August/September 2000 issue of CEI UpDate

We recently commemorated the tenth anniversary of the fall of the Berlin Wall, and it was a well-deserved celebration. The Wall didn’t just fall, but was pushed by Ronald Reagan, Margaret Thatcher, Pope John Paul II, and the millions of freedom-loving men and women on both sides of it. It was indeed a triumphant moment for democracy and one of the greatest achievements of human freedom. Now that the anniversary has passed, it is time to reevaluate the impact of the fall of the Wall.

Every year the West celebrates this victory, we see the newspapers filled with stories of social and economic turmoil in the former Soviet Union. We hear people in the “east” saying they are sorry the Wall fell and that they miss the old regime. They believe democracy, capitalism, and freedom mean unemployment and poverty, not opportunity. What a tragedy. More importantly, what went wrong?

The Berlin Wall was a concrete manifestation of Winston Churchill’s Iron Curtain metaphor. It made palpable the reality that the Russian people and the people of Eastern and Central Europe were literally prisoners of Communism. When the Berlin Wall came down a decade ago, a nation of prisoners was suddenly released into a world of freedom and personal responsibility they had never experienced and found difficult to understand. Just as long-term prison inmates may find it impossible to cope on the outside and pine for a return to the safety and security of the prison cell, some began to yearn for the so-called security and certainty of the old regime.

But there is more going on than just the “old-prisoners” syndrome. George Gilder observed that “the crucial rules of economic innovation and progress are faith, altruism, investment, competition, and bankruptcy, which are also the rules of capitalism.” After 70 years of oppressive Communism, Russia was woefully short on faith and altruism. Moreover, Russia had gone directly from autocracy to Communist terrocracy and never developed the rule of law. Consequently, it lacks virtually all of the foundational institutions of capitalism—from banks to bankruptcy.

We in the West took the rule of law and the institutions of capitalism for granted and failed to appreciate how vital they were to Russia’s success. Instead of a Marshall Plan and Ludwig Erhardt-style reforms, we gave them the IMF and “shock therapy.” Hence, when we urged immediate and total privatization on the Russians, we unknowingly led them, not to free-market capitalism, but into a kind of economic jungle. Without the rule of law and the institutions of capitalism to protect property and create a new class of entrepreneurs and business owners, privatization was an invitation to thugs and gangsters to obtain and protect property by force.

We compounded this gross strategic miscalculation by subjecting Russia and her sister republics to the destructive ministrations of the IMF and the World Bank. The IMF behaved like a well-intentioned but incompetent doctor, addicting their economies to the opium of IMF loans and worse, IMF demands for fiscal austerity and floating currencies. The geniuses at the IMF actually tried to counteract the addiction with depressing high tax rates, and destabilizing weak monetary policies and currency devaluations. What a disgraceful chapter in the history of the West’s multilateral financial institutions. Worse still, we’ve missed a golden opportunity to integrate Russia and Eastern Europe into the global market revolution.

It is as if the IMF failed to learn the rules of capitalism of the past 250 years—beginning with the linkage of Jeffersonian democracy and Adam Smith’s economic system of natural liberty—and now insists on imposing its ignorance on the developing world at enormous cost in human suffering. Where was the IMF after World War II when the world relearned and refined the lessons of capitalism, from Ludwig Erhardt’s miracle in Germany, to Ronald Reagan’s victory over stagflation in the US, to Margaret Thatcher’s successful desocializaiton of Britain? How did the IMF fail to notice that lowering tax rates and instituting sound and stable money were the essential ingredients in all three cases? The world can only breathe a sigh of relief that the head of the IMF, Michel Camdesus, finally decided to step aside, and we can only hope that the member nations of the IMF have the good sense to appoint as new head of the organization someone like Domingo Cavallo, former Finance Minister of Argentina, or Mexico’s former Finance Minister Pedro Aspe—men with hands-on experience navigating developing nations successfully into the realm of non-inflationary economic growth.

History teaches us that the source of economic prosperity is economic growth flowing from the freedom of individuals to work, save, invest, and trade with each other and produce new wealth. History also teaches that in order for personal freedom to be transformed into growth and prosperity, it is essential for government to maintain the rule of law, protect individual rights and nurture and defend the institutions of capitalism that Gilder identified. And, if we learned anything during the course of this century, it is that low tax rates and stable money are indispensable for giving people the opportunity to escape poverty and successfully transform freedom into prosperity.

I am sad to say that beyond the bad advice we gave Russia, there was more than a mild dose of bad intent by some in our midst. If former Soviet citizens exhibited the “old-prisoner’s syndrome,” we in the West too often have exhibited the “old-warrior’s syndrome.” Frankly, we have been unable to accept our victory over Communism and seem intent on stalking the world in search of new enemies. When the Berlin Wall came down, the rationale for NATO ceased to exist. Yet, the first thing we did was to extend NATO up the very borders of Russia. One could hardly imagine anything more provocative and counterproductive at the dawning of a new world of freedom and opportunity—that is, until we decided to bomb Yugoslavia.

What kind of message did this send to the people of the former Soviet Empire? We piled fear of an external threat on top of the misery and anxiety of a failed economy at home, and everywhere the people looked, they saw either NATO or the IMF to blame. Little wonder many Russians came to believe that some people in the West desired to see not only the Berlin wall knocked down but also Russia itself pulverized.

The fall of the Berlin Wall announced a rebirth of freedom and prosperity for all people, everywhere. But I have come to the conclusion that we are squandering the opportunity by our failure to bring the people of the former Soviet Empire and East Berlin in from the cold. Until we totally integrate Russia and Eastern Europe into the world of democratic capitalism; until they have the same opportunities to live in peace, to succeed and become wealthy as those of us in the West; until then, there will be little cause for celebration.

Jack Kemp is a distinguished fellow at CEI and co-director of Empower America.