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Central and Eastern Europe’s Political Economy


The nation-state model of the international political economy refers to different sovereign states that have distinct institutional, economic, and political structures and systems (Hall & Soskice, 2001). Consequently, relying on this difference, the varieties of capitalist approaches evolved to contextualize and explain the economic paradigms within which different economies and systems operate and function in today’s fast-globalizing world (Menz, 2017). The conceptual framework is categorically unique as it has a character-centric perspective. While institutions are seen as critical actors, much focus is also placed on multiple actors in the political economy. This is because political economy plays a crucial role in shaping Varieties of Capitalism (VoC) and is likely to determine the extent to which institutions thrive based on the models opted for. This essay delves into critically analyzing the key features of Central and Eastern Europe’s (ECE) political economy according to the VoC approach to fully comprehend this concept. What are the key features of ECE’s political economy according to the Varieties of Capitalism approach? Firstly, the paper will discuss the derailed concept analysis of VoC. Secondly, the paper will discuss the key features of the ECE.

Part A: Theoretical Foundations of Varieties of Capitalization

Menz (2017) notes that the difference between non-market connections and competitive market relationships is a mandatory characteristic. The best illustration of market relationships and how they affect economies is notable in categorizing markets with similar economic approaches (Weiss, 2021). For instance, the Liberal Market Economy (LME) focuses on the joint efforts of the physical industry, financial community, and its members to build a solid and robust economy for efficient trade. Coordinated Market Economy (CME), however, focused on the trades of futures and options (Consterdine & Hampshire, 2020). To each are merits and demerits. Ideally, similar classifications have been extended among the Organization for Economic Co-operation and Development (OECD) countries. Any complexities or ambiguities notably arising from that are addressed through a Mixed Market Economy (MME) introduction (Menz, 2017; Consterdine & Hampshire, 2020). While some political economies thrive through LMEs, others can only grapple with them, and the same applies to the CME approach.

Historical legacies and economic shifts create a complicated environment that the VoC framework, defined by the distinctions between LMEs and CMEs, must traverse in the context of ECE. ECE market dynamics differ very slightly from the LME and CME ones. While some Central and Eastern European countries have pursued market-based reforms that resemble LME policies, others have opted for coordinated interventions aligned with CME practices. The state’s role in economic development, financial dependence on other capitalists outside ECE, and labor market circumstances underline the importance of MME perspectives on capitalism inside ECE. However, the move away from centrally planned economies in ECE leads to clearly diverging types of non-market networks and competitive market relationships that question the simplicity offered by the VoC framework. The dynamism of the privatization processes in ECE, constantly changing state control, and these factors promote informal networks’ power (Weiss, 2021). The MME approach is essential for analyzing capitalism in ECE due to the diversity of economic systems arising from historical events and changes, complexity emerging after government involvement, financial entanglements, and labor market intricacies.

Clift (2021) suggests that contemporary literature providing insights into the comparisons of capitalism borrows heavily from classical political economy analysis of capitalism. The truth in this statement is verifiable in how politics is seen to shape economies and markets (Clift, 2021). Moreover, it is easy to notice, in the present day, how states and markets are interconnected and how market relations are becoming relevant to how they are embedded in social contexts. The pre-disciplinary classic makes it easier to appreciate the historical significance of institutional and legal arrangements for capitalism (Clift, 2021). As such, a state’s relationship with the economy and its role in restructuring capitalism and development is crucial in how the country is perceived. For instance, increased financial dependence on foreign funding might be detrimental to the receiving nation.

On the contrary, the VoC’s approach’s most notable aspect is how it does not explicitly present the roles of the state. Clift (2021) further notes that the approach begins axiomatically, placing the firm as the central focus. While it plays down on state roles in capitalism, it is still imperative to remember that the state plays a crucial role in developing its economies and the growth of capitalism.

A better illustration of how influential states and politics are towards the development and stability of capitalistic societies is demonstrated in Kristal and Edler’s (2021) study, where the impacts of the political economy are felt in the wage determination process for technologically advanced individuals. The study’s outcomes indicate that wage determination and structure are hashers in countries with more flexible labor markets. For instance, the United States of America is an impeccable example of individuals who can operate computers more productively in the workplace, earning significantly more (Kristal & Edler, 2021). Quite notably, such crucial decisions are fostered through class politics, setting the norms and practices about wage limits. The institutional contexts are bound to these wage structures, the scopes for which workers legitimately claim salary increments, and the scarcity of computer-knowledgeable individuals in the market (Kristal & Edler, 2021). The widening wage gap is further attributable to increased technological advancements and innovations, with well-educated individuals at the top of the graph.

The institutional and legal structures established over the years of numerous economic reforms determine what capitalism looks like in ECE. The VoC framework also clarifies the levels of interdependence between states and markets, which shows how important institutions are in creating a capitalist system. However, the emphasis on firms in VoC does not capture all nuances of state involvement in ECE. This straightforwardness of the VoC framework is a challenge regarding distinct differences in non-market linkages and competitive market interactions due to the historical impact that state economies inflicted and their transformation into market systems. The connection with the VoC concept is a rather complex interaction that underlines financial dependence and reconstruction, among other forms of state intervention in ECE. The role of international financial aid contributes to questioning its compatibility or non-compatibility with the VoC structure in ECE. The VoC model allows for state involvement, but its firm-centric character may not fully express specifics to ECE relating to financial dependence and restructuring. The economic policies followed by most countries in ECE show different degrees of compliance with market-directed reforms and coordinated interventions, which underline the need for a more precise understanding of how the state affects the market.

The Attractions of the Varieties of Capitalism Approach

As noted earlier, the VoC approach is well-recognized for having a parsimonious framework. The attractiveness of this VoC framework in the particular context of ECE resides in its capacity to offer a systematic depiction of political economies, thereby enhancing a nuanced comprehension of the fundamental motivations driving distinct kinds of capitalism in the region. This elegant framework is more detailed as it emphasizes the primary constituent dimensions of every model. The way the VoC creates a categorical description of political economies in CMEs and LMEs allows an economist to quickly comprehend the primary drives behind specific models of capitalism (Consterdine & Hampshire, 2020). As noted above, the firm-centric attribute, for instance, places institutions at the center of political economy. It gives firms a crucial and indispensable function. Per the neo-Ricardian argument, firms will likely settle for the modest system-arming renovation against radical overhaul (Johnston et al., 2021). This is because it offers a change trajectory to the companies, which is easily predictable. In simple terms, the VoC approach stretches beyond the distinct model postulation and outlines why and how such models persist and operate.

The VoC approach allows a systematic classification of ECE countries into LMEs and CMEs, focusing on regional diversity. For example, some countries that introduced market-oriented reforms have characteristics consistent with LMEs, while others having coordinated interventions show traits similar to CME (Consterdine & Hampshire, 2020). This paradigm makes it easy to understand ECE’s economic routes and shows the institution’s influence in building a capitalist system. The VoC method increases understanding of the intricate relationships between states and markets in this region through an orderly categorization. This allows for a more objective analysis of political economy.

That component of the VoC framework with regard to enterprises links neatly to what institutions do in ECE countries and shows how firms impact the economic environment. The VoC approach focuses on a firm-centric perspective and, therefore, the factors that account for the continuity of particular types of capitalism in ECE. The privatization process occurring in ECE reflects the specific nature of capitalism, enumerating several levels within state control and impacting informal networks (Weiss, 2021). This shows that the firm-centric feature of the VoC framework can capture these intricacies. The VoC framework is also handy in identifying the adaptation mechanisms adopted by enterprises and factors that sustain various regional capitalism.

VoC Shortcomings

VoC is efficient because it provides a more detailed analysis of political economies. Nevertheless, several other weak points are related to it, particularly regarding change management. For example, there is a gap in understanding how different countries try to change CMEs and LMEs because it contradicts the idea that both forms of transformation are two-directional. Moreover, studies indicate that the approach poorly handles external shocks. In this case, its assumptions are typically structured towards heading back to the pre-equilibrium state with path-dependent criticism.

However, the two-way change process in ECE, based on economic transition and reforms that countries are implementing, is part of a VoC framework that presents challenges. This is evident when a country moves from market-based reforms to the nature of CME and LME. With respect to growth in ECE-associated GDP, the VoC method may fall short of addressing these minute shifts dynamically. Moreover, the VoC approach is influenced by external factors like political unrest or economic decline in ECE. Often, this approach tries to restore former conditions, but it is insufficient during unpredictable changes. It is the institutional and historical peculiarities of ex-communist ECE states that are important in defining their individuality under capitalism. Recognizing the histories of all Central and Eastern European States may also be difficult, especially in view of its tendency to return to more primitive equilibrium forms. This limitation undercuts the geospatial fluidity of the VoC framework. To analyze state intervention, market coordination, and institutional frameworks, the VoC provides a strong theoretical basis for ECE political economy. Among the essential characteristics of ECE’s political economy is that historical legacies have an important impact on a move toward capitalism. ECE markets are opened for reforms with a VoC approach, putting central planning realities as factors determining market-oriented reforming. The legacy causes before the transition persist, shaping approaches to developing market coordination in various ways from typical LME and CME divisions (Weiss, 2021). However, the VoC can show how external actors like multinational corporations and international institutions shape ECE’s political economy. The membership of these nations in the global economy and compliance with EU rules result in additional dynamics. Being a feature of Central and Eastern Europe’s capitalist systems hybrid structure implies an explicit awareness of transnational actors on corporate governance practices, labor market relations, and regulatory framework outcomes (Hall & Soskice, 2001; Weiss, 2021).

Another aspect is the adaptation of ECE nations to the global economy and technological advancements. The firm-centric nature of the VoC approach could also be furthered to analyze how firms in ECE react and adapt to globalization, digitization, and innovations. Evolutionary changes in the digital economy and technology integration into production processes affect firms’ competitive advantage, which may impact their political-economic structure. Also, the VoC framework facilitates a more detailed analysis of social factors in this ECE of political economy. The other social implications of economic transition are essential, such as the widening wage gap and disparity in skill-based income inequality (Kristal & Edler,2021). Thus, looking at the level of conditions in institutions based on VoC as a framework and methodology for wage distribution from ECE countries, one might get essential information regarding capitalist development consistent with social impact.

Part B: Capitalist Diversity in ECE

CPE Perspectives

One quickly gains valuable insights by exploring Central and Eastern Europe’s Comparative Political Economy (CPE). The region makes up about 0.91% of the global population, with a GDP of 1.82%. This region’s political economy (PE) is primarily shaped by key historical milestones, including the dynamics of the Cold War followed by democratization resulting in capitalism. One notable concern per Bohle (2018) and Bohle and Dan (2021) is CPE’s increased foreign dependency and control. It is concerning that while the regions anticipate growth and a resurgence of nationalism, they are highly dependent on foreign currency. Bohle and Ban (2021) highlight that the region’s increased economic dependence is attributable to the repercussions of the Great Financial Crisis. This would otherwise explain why the region, despite having progressed significantly, has its production and export sectors dominated by transnational corporations. Also, ECE has among the highest shares of foreign-owned banks. While this may appear relevant as it offers a form of international credibility to the ECE domestic sector, it is, on the other hand, a source of its economic vulnerability.

Building Capitalism in the Baltics

Regaining stability and growth in the ECE is further jeopardized by the increased pollicization of the region’s dependency on foreign investment. As investors withdrew from the region, highlighting it as a high-risk economy during the 2008/2009 financial crisis, the ECE governments were pushed into de-financialization and financial repression. While the credit growth was more promising initially, ECE radical deindustrialization was a misguided idea. Bohle (2018) notes that the primary priority of the Baltic reformists was to achieve national independence. Nonetheless, while radically departing from the past, it is only unfortunate that the independence needs were merely perceived. In so doing, the ECE despised the inherited industries of the Soviet Union and quickly deindustrialized toward investment real estate and banking. The economic backdrop experienced by these states post-crisis was intense. Attempts to recover have presented even more challenges.

Bohle (2018) further highlights that the process has been uneven and incomplete and needs more internal devaluation, as has often been stated in various statements. For instance, while the Baltic countries have significantly implemented wage cuts, more progress must be noted towards regaining competitive exchange rates. Furthermore, more investment has yet to be realized so far especially. Across all three countries, unit labor costs remain significantly higher than pre-crisis, which starkly contrasts with the situation in Southern Europe. There needs to be more evidence showing long-term FDI, as in all new EU members, and construction within the Baltics is stagnant. The Baltic states could outsource much of the internal validation than to outsource it.

Moving Away from the DME Program

Per Ban and Adascalitei (2022), the ECE countries and the Southern Erupt region have effectively utilized the FDI-led growth model. The efficiencies of the model were highly productive between the early 1990s and 2000s. However, following the 2008/2009 financial crisis, the sustainability of this model became increasingly questionable. Post the crisis, multiple challenges have been encountered within this region in an attempt to revamp the economy (Ban & Adascalitei, 2022). To fully recalibrate and reconstruct meaningful changes, it is apparent that ECE focuses on rebuilding the economy and further addresses pertinent socio-economic factors such as income policies and labor market shifts (Ban & Adascalitei, 2022). The crisis can also allow the ECE countries to halt the hybridization model and reinforce a more robust export-led growth component. This has to be implemented through short-term measures of austerity and stringent reforms in the labor market. This approach is crucial for addressing the FDI-led economic dependency on foreign funding. It ensures that the nations address debt consumerism and international integration, which could be more dependable.

The political economy of Central and Eastern Europe, examined using the VoC paradigm, reveals unique characteristics. The region’s historical background shows a move from state socialism to different forms of market-oriented systems. The central government’s dominant role in coordinating economic activity and the historical legacy of limited private ownership can be matched with such typical characteristics belonging to CMEs as articulated by the VoC framework. However, the post-1989 liberalization and privatization bear some features of LMEs. The VoC approach emphasizes the dominance of institutions in determining economic outcomes.

Additionally, the state authority legacy can persist, thus shaping the institutional framework in ECE. The large amount of state involvement in coordination and regulation in the post-Communist era is characteristic of CMEs. The obstacles faced by privatization initiatives in introducing private property ownership sometimes result in a peculiar combination that may deviate from what other free market economies expect. The post-communist development of ECE has been underlined by contradictions between the attempts at reforming institutions and historical legacies. The limitations to ultimately achieving the CME or LME-type model emphasize how complex capitalism is in that region. The ECE’s political economy is characterized by hybrid features that challenge the VoC approach’s deterministic nature because of the lack of clear-cut and distinct categories.


From the analysis, it is apparent that the creation of capitalism in ECE is centric in the FDI growth model. While this initially appeared to be a brilliant idea, its sustainability became questionable as key financiers withdrew investment amid the crisis. In this case, the ECE’s best approach is to find constructive ways of reverting to the export-led growth model in establishing a solid economy that is more sustainable and can endure economic hardships. This is imperative and possible since historical research shows the region has export-led roots. ECE shall gradually develop their economies by opting to fight the FDI dependency. The region must also refrain from debt-fueled consumption, which plummeted its economy into states lacking wage growth. ECE must also remember how ineffective domestic structures and international integration led to different forms of social disintegration.


Ban, C., & Adascalitei, D. (2022). The FDI-led growth models of the East-Central and South-Eastern European periphery. Diminishing returns: the new politics of growth and stagnation, 189-211.

Ban, C., & Bohle, D. (2021). Definancialization, financial repression, and policy continuity in East-Central Europe. Review of International Political Economy, 28(4), 874-897. DOI: 10.1080/09692290.2020.1799841

Bohle, D. (2021). European integration, capitalist diversity, and crisis trajectories on Europe’s Eastern periphery. Is the European Union Capable of Integrating Diverse Models of Capitalism? (pp. 95-110). Routledge. DOI:10.1080/13563467.2017.1370448

Clift, B. (2021). Comparative political economy: States, markets and global capitalism. London: Red Globe Press.

Consterdine, E., & Hampshire, J. (2020). Convergence, capitalist diversity, or political volatility? Immigration policy in Western Europe. Journal of European Public Policy, 27(10), 1487-1505. DOI: 10.1080/13501763.2019.1674364

Hall, P. A., & Soskice, D. (2001). An introduction to varieties of capitalism. Op. Cit, 21-27.

Johnston, A., Fuller, G. W., & Regan, A. (2021). It takes two to tango: mortgage markets, labor markets, and rising household debt in Europe. Review of international political economy, 28(4), 843-873. DOI: 10.1080/09692290.2020.1745868

Kristal, T., & Edler, S. (2021). Computers meet politics at wage structure: an analysis of the computer wage premium across rich countries. Socio-Economic Review, 19(3), 837-868.

Menz, G. (2017). Varieties of capitalism and Europeanization: National response strategies to the single European market. Oxford University Press on Demand.

Scheiring, G. (2021). Situations of dependency, mechanisms of dependency governance, and the rise of populism in Hungary and Poland. Dependent capitalisms in contemporary Latin America and Europe, 183-206.

Weiss, M. (2021). Varieties of privatization: informal networks, trust, and state control of the commanding heights. Review of International Political Economy, 28(3), 662-689. DOI: 10.1080/09692290.2020.1726791


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