Post-Communist Economies

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When do neoliberal economic reforms cause

democratic decline? Evidence from the post-
communist Southeast Europe

Dušan Pavlović

To cite this article: Dušan Pavlović (2019) When do neoliberal economic reforms cause
democratic decline? Evidence from the post-communist Southeast Europe, Post-Communist
Economies, 31:5, 671-697, DOI: 10.1080/14631377.2019.1607436

To link to this article: https://doi.org/10.1080/14631377.2019.1607436

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POST-COMMUNIST ECONOMIES
2019, VOL. 31, NO. 5, 671–697
https://doi.org/10.1080/14631377.2019.1607436

When do neoliberal economic reforms cause democratic

decline? Evidence from the post-communist Southeast
Europe
Dušan Pavlović
Faculty of Political Science, University of Belgrade, Belgrade, Serbia

ABSTRACT ARTICLE HISTORY

Do neoliberal reforms (notably, austerity policy) facilitate demo- Received 30 September 2018
cratic decline and the gradual deconstruction of democratic insti- Accepted 10 April 2019
tutions? I examine the democratic development of the Western KEYWORDS
Balkan countries since 2008 by focusing on the two most recent Neoliberalism; hybrid
cases of democratic rollback in Macedonia and Serbia. Neoliberal regimes; public spending;
reforms may create a preference to shut down democratic institu- austerity policy; democratic
tions, because such reforms are socially costly and politically risky. decline
However, democratic backsliding is not possible without opportu-
nity. I illustrate this with reference to the examples of Hungary and
Croatia. Croatia implemented some neoliberal policies after 2015,
but did not see a drop in its democracy score. By contrast,
Hungary moved towards centrally planned capitalism, nationalisa-
tion and state interventionism (all opposed to the neoliberal con-
cept of reform), and yet saw a significant democratic decline after
2010. The opportunity to dismantle democratic institutions was a
consequence of an electoral gap (a difference in vote share
between former and new incumbents), which enabled the rise of
authoritarian leaders in Macedonia, Hungary and Serbia.

1. Introduction
The theoretical interest in democratic rollback has been revived recently. The Journal of
Democracy rekindled the debate in 2015 when it published a separate volume titled
Democracy in Decline? followed by a book under the same title (Diamond et al., 2015).
We can think of many reasons why democracies break down (Levitsky & Ziblatt, 2018;
Linz, 1978; Przeworski, 2005), or fail to consolidate (Linz & Stepan, 1996; Mainwaring &
O’Donnell, 1992; Ulfelder, 2010), but I want to look into how and why democratically
elected officials begin to subvert democracy. More precisely, I focus on one specific
claim, namely, that neoliberal economic reforms cause a shift to non-democratic forms
of government from within a democratic context. The democratic context is analytically
critical because some earlier versions of neoliberal economic reforms were coupled with
brutal but external attacks on democratic institutions. For instance, Augusto Pinochet
carried out a coup d’état before getting into office. He suspended the constitution, put
political opponents in jail and then launched neoliberal reforms. In contrast, the modern

CONTACT Dušan Pavlović dusan.pavlovic@mac.com

© 2019 Informa UK Limited, trading as Taylor & Francis Group
672 D. PAVLOVIĆ

Balkan authoritarian leaders launched neoliberal reforms and started to subvert democ-
racy from within after they won elections. They have not suspended constitutions, and
the subversion has been gradual and subtle.
Some general but explicit statements about neoliberalism and democracy have been
expressed in the form of a paradox. Although neoliberalism ‘justifies radical market
deregulation, in practice, it becomes clear that the opposite is true: that neoliberalism
tends to undermine democracy and political freedom’ by bringing in new and undemo-
cratic political forums, ‘such as the World Bank, the IMF, and the WTO, that preclude
democratic representation from the outset’ (Hickel, 2016, p. 142). The argument had
already been hotly debated in the context of Latin America (Oxhorn & Ducatenzeiler,
1998), but became rather popular in Europe after the 2008 financial crisis that resulted in
the 2009 public debt crisis (Bartlett & Prica, 2017b; Günay & Džihić, 2016). The whole of
Europe (not only the Eurozone and the EU member states) started to implement
neoliberal austerity policies that called for public spending cuts, the reduction of public
debt and the deregulation of the labour market with the aim of reducing workforce
costs. (Austerity is here taken as a variant of neoliberal economic policy on which I
enlarge in Section 2.)
I examine the application of this general claim to the new Western Balkans democ-
racies after 2008. Since Freedom House’s Nations in Transit 2013 opened with a piece
entitled ‘Authoritarian Aggression and the Pressures of Austerity’ (Habdank-
Kołaczkowska, 2013), the number of authors who see democratic decline in post-com-
munist Europe as a consequence of austerity policies has grown. One such claim is that
neoliberal reforms and austerity policy were deployed as a major mechanism to justify a
delegitmatisation of the past political elites, redistribution of public resources, ‘the
perturbation of established arrangements and political routines and the creation of
new power circles’, which eventually ‘have opened new spaces for the generation of
power resulting in a fundamental change of patterns of governance and the rise of a
neoliberal authoritarian governmentality’ (Günay & Džihić, 2016, pp. 16, 18).
Other authors have been more explicit in bringing the EU and IMF into the argument.
In their latest piece, Bartlett and Prica (2017b) argue that the reversion to authoritarian-
ism in the six Western Balkan countries (WB6 for short1) was a consequence of their
austerity policies that were assisted by the EU and the IMF. The Eurozone countries,
which after 2008 faced under-consumption and secular stagnation, stimulated their own
economies by export promotion. The EU core economies encouraged the inner, outer
and super-periphery countries to take out new loans to absorb the EU core economies’
exports (Bartlett & Prica, 2013, 2017a).
The WB economies had good internal reasons to take on more foreign debt. Since
they ran procyclical fiscal policies in the boom years (2002–2007), the wage bill and
pensions rose dramatically. When the crisis hit, revenues declined and it became
increasingly difficult to finance current spending. This strategy left the WB economies
without buffers and rather vulnerable to external shocks. A countercyclical policy was
difficult to pursue and more debt appeared as an attractive solution at first. As a result,
fiscal deficit in the WB remained high and foreign debt exploded in 2008–2015
(Murgasova, Ilahi, Miniane, Scott, & Vladkova-Hollar, 2015).
What happened to the money that came into the region in the form of loans? In
economic jargon, foreign loans were directed to domestic consumption rather than to
 POST-COMMUNIST ECONOMIES 673

production (Murgasova et al., 2015, p. 54). In political economy jargon, the essential part
of these loans was used up for the maintenance of the patronage system rather than for
structural reforms (Bartlett & Prica, 2017b).
Bartlett and Prica’s claim is as follows. When the debt and deficit became a burden,
the WB6 economies accepted austerity policy as a solution, but at the cost of a
democratic decline. Fearing public protest over austerity measures – cutting the wage
bill and pensions, which form the bulk of current public expenditures in these countries
and may result in the fall of consumption – the WB6 governments started or continued
to pursue a gradual deconstruction of nascent democratic institutions. ‘Mechanisms of
illiberal democracy have begun to reappear in the super-periphery to ensure compliance
with the new austerity agenda’ (Bartlett & Prica, 2017b, p. 838). The EU and the IMF
tolerated this shift provided it got them austerity results – namely, reduced public debt
and smaller public spending. Indeed, all WB authoritarian incumbents have been receiv-
ing substantial help from EU officials in keeping the stability of their governments. It is
with this tacit support that the WB governments have undermined the media, judiciary,
prosecution and other supervising institutions that typically belong to the so-called
fourth branch of government (Bieber, 2018a, 2018b; Bieber, Solska, & Taleski, 2018;
BIEPAG, 2017a; Kmezić & Bieber, 2017).
I extend this argument by emphasising the role of opportunity. An agent typically
needs both a preference and an opportunity to accomplish its goal (Elster, 2015).
Consider an example from research on social movements. Social leaders’ preferences
to launch social action through social movements is not enough. Movements need an
opportunity to emerge (Kreisi, 2004; Tarrow, 2011). Similarly, politicians might have a
preference to undo democracy, but if they do not have an opportunity to do so, they
will not be able to produce their preferred outcome. Likewise, an opportunity might
create preference (Elster, 2015), meaning that new incumbents, even if they did not
originally prefer a semi-authoritarian regime, might go for it if an opportunity opens up
at some later point.
To show how the preference to undermine democracy depends on the opportunity, I
focus on the two WB countries that recently implemented neoliberal reforms and
underwent the most radical shifts to authoritarianism over the past 10 years:
Macedonia (2008–2017) and Serbia (2014–now). To shore up my argument, I look into
economic policy and subsequent democratic development in Hungary and Croatia in
2010 and 2015, respectively. These serve to show that neoliberal reforms are not
decisive for democratic decline, but an opportunity is. Croatia did implement some
neoliberal reforms but retained its quality of democracy. Hungary, in contrast, imple-
mented anti-neoliberal policies but nevertheless experienced a significant decline in
quality of democratic institutional design.
The article proceeds in the following manner. Section 2 gives definitions of the
central concepts necessary for the analysis in Sections 4–5 – electoral gap, democratic
institutions and neoliberal economic policy. Section 3 gives some policy details about
neoliberal reforms in Macedonia, Serbia and the WB6 in general. The central argument is
advanced in Section 4, where I show that neoliberal reforms are not the main driver of
democratic rollback and that such an explanation fails to take into account the existence
of an opportunity for it. Section 5 discusses the examples of Hungary and Croatia.
Section 6 concludes by offering some ideas for future research.
674 D. PAVLOVIĆ

2. Electoral gap and other definitions

Before I start, I want to define the three key concepts that are critical for the discussion
in Sections 3–6 – namely, electoral gap, democratic institutions and the concept of
neoliberal economic reforms.

2.1. Electoral gap

My central claim is that in the context of the Western Balkans, the opportunity for
democratic deconstruction is created by an electoral gap – roughly, a difference in vote
share between the incumbent and the opposition that occurs after the former incum-
bent loses elections due to unfulfilled promises or flawed policies in the past. The larger
the gap, the larger the opportunity for the new incumbents to start deconstructing
democracy (if that is their preference). The preference may be triggered when a former
incumbent suffers a (perhaps unexpected) electoral defeat, becomes weak and disor-
iented, and is, therefore, unable to block the new incumbents’ moves and policies.
Gruevski’s and Vučić’s behaviour from 2006–2008 and 2012–2014, respectively, could be
the instances of such preference formation (Section 4).
Consider Figure 1, which depicts two hypothetical but opposite examples. Panel A
displays a sizeable electoral gap between the new and former incumbent, measured by
the percentage of votes. At t1, the former incumbent suffered an electoral defeat, and
then continued to lose elections at t2–t4 with an increasingly larger vote difference. It is
this gap that created an opportunity for the new incumbents to subvert democratic
institutional design. Panel B, in contrast, shows a similar starting position between the
incumbent and the opposition at t0–t1, but exemplifies a much smaller vote difference
between new and former incumbents at t2–t4. In such a situation, new incumbents
would have a difficult task in dismantling democratic institutions (even in a nascent
democratic context), which is why they may not go for it.
Panel A presents what happened in Macedonia and Serbia after the elections of 2006
and 2012, respectively. (As we will see later, Panel A is also indicative of Hungary, but
Panel B is indicative of Croatia.) In both cases the opposition was crushed and remained
impotent for some time (in Serbia it still is). Encouraged by these electoral victories and
the disarray of the opposition, Nikola Gruevski and Aleksandar Vučić began to pursue an

Figure 1. Electoral gap – a hypothetical example.

 POST-COMMUNIST ECONOMIES 675

authoritarian path. The opportunity for democratic deconstruction was created by the
massive corruption of the previous (then still democratic) cabinets and the fact that
subsequent authoritarian leaders came into office and strengthened their grip on power
by a series of landslide electoral victories. The democratic decline is, therefore, mainly a
consequence of the weakness of the opposition that created room for non-democratic
practice and the subsequent re-emergence of a hybrid regime.

2.2. Democratic backsliding in the region

The Western Balkan countries (WB6) have been laggards in building and consolidating
democracy since the beginning of the 1990s. When Latvia, Lithuania, Estonia, the Czech
Republic, Poland or Hungary built democratic and market institutions, the whole Balkan
area lagged behind not only in governance, competition policy, labour-market reforms
and enterprise restructuring, but also in trade and price liberalisation, which was
typically implemented rather quickly after the fall of the Berlin Wall in the rest of the
post-communist world. (Recall that all these countries had rather similar initial condi-
tions around the time of the fall of the Berlin Wall in 1989.)
When the armed conflict in former Yugoslavia was over in 2001, and the economic
boom began in 2002, it appeared to be a perfect time to start an economic and political
transformation in the Balkans. Yet, most WB countries failed to complete the transfor-
mation. The economic reforms were partial, and democracy building stalled. Measured
by the FH democracy score, all Balkan countries did rather poorly compared to the
Central European post-communist countries (especially compared to the Baltic
countries).2 What is particularly worrisome is not only that the WB6’s average score
has consistently been in the area of the hybrid regime, but that it also got worse after
2008 (Figure 2).
I interchangeably use the terms democratic decline and democratic rollback to
indicate both the worsening of the democratic process and the deterioration of

Figure 2. The average FH democracy score for WB6, CEE and Baltics (2008–2018).
Source: Nations in Transit, Freedom House.
676 D. PAVLOVIĆ

democratic institutions. I do not think that the WB countries are democracies, but a
number of democratic institutions and practices have been established in these coun-
tries after 2000. It is this nascent institutional design that I refer to here. Such a weak
design with a short history is much easier to dismantle than a similar design with a
longer tradition, as in a Western democracy, because the cost to the incumbent who
would do so in a weak democracy is lower.

2.3. Neoliberal economic reforms and austerity policy

In the previous section I mentioned that I understand austerity policy as a variant of a
contemporary neoliberal economic policy agenda (Whiteside, 2016). Austerity ‘incorpo-
rates the neoliberal desire to shrink the (social welfare) state, deregulate labour markets
and emphasize private markets as the drivers of growth, enabling a reconfiguration of
the interests of capital, the needs of people and the role of the state’ (Farnsworth & Zoë,
2018). Under this definition, which I embrace in this paper, austerity policy is some sort
of mutation of the old liberal idea of minimal state (Crouch, 2011).
I also want to distinguish neoliberal economic policy from liberalism and liberal free-
market reforms proposed by the likes of Smith and Locke and advocated by the likes of
Friedman and Hayek. While neoliberalism is mainly directed at shrinking the welfare
state by reducing budget deficit and public debt, and launching privatisation pro-
grammes, early liberalism is a philosophy whose main concern was the fight against
mercantilist trade restrictions by way of privileging individual rights and liberties (nota-
bly property rights), and market freedoms (Freeden & Stears, 2013). After-war studies in
liberalism, such as those by Hayek and Friedman, were mainly about market allocative
efficiency. The post-communist version of neoliberal reforms partly relied on this idea,
but was mainly about privatisation and reducing the public spending to the right and
sustainable measure (Aligica & Anthony, 2009). In any case, both liberal and neoliberal
approaches are grounded in the belief that any social, political or economic problem has
its own market solution.
Here I want to address political repercussions of the two previous waves of neoliberal
reforms – in Latin America in the 1970s and the 1980s, and in the post-communist
Europe in the 1990s. Were such reforms harmful for democratic development in these
two continents? Latin American governments’ experience in pursuing neoliberal reforms
during the 1970s and 1980s suggests that neoliberal reforms negatively affect democ-
racy. The heyday of Latin America’s neoliberalism involved inflation-abatement (by way
of a fixed exchange rate), trade liberalisation and privatisation (Corrales, 2012). In some
countries this was accompanied by labour-market reform, cuts in public spending and a
reduction in foreign debt.
We may call this the first wave of neoliberal reform. Such reforms are politically risky and
socially harmful, and may require a concentration of political power. To implement the
package, Chile literally had to shut down democracy under the Pinochet cabinet (Ffrench-
Davis, 2010), while countries like Mexico in 1983–2012 (Laurell, 2015) or Peru under Fujimori
(Carrión, 2006), while implementing neoliberal economic policy, maintained some sort of
hybrid regime in which elections took place, but the opposition could never win in a regular
way. Conclusions are somewhat different when one takes a comparative prospective. Kurt
Weyland claims that, on the whole, ‘neoliberalism strengthened the sustainability of
 POST-COMMUNIST ECONOMIES 677

democracy in Latin America but limited its quality’, meaning that ‘neoliberalism has been a
mixed blessing for Latin American democracies’ (Weyland, 2004).
That neoliberal economic reforms are more easily carried out under non-democratic
conditions was one of the major inspirations for Adam Przeworski to write his Democracy
and the Markets in 1991, shortly after the market reforms started in post-communist
Europe. Economic transformation aimed at an efficient market is costly and politically
risky because it involves a temporary fall in consumption. The fall will hurt ‘large social
groups and evoke opposition from important political forces. And if that happens,
democracy may be undermined or reforms abandoned, or both’ (Przeworski, 1991, p.
136). Przeworski thought that democracy might undermine reforms because at the first
elections the losers would support the former communist parties which would undo the
reforms, thus going back to some sort of authoritarianism.
Neoliberal economic ideas had a great influence on some of the first post-communist
cabinets’ economic policies (Aligica & Anthony, 2009; Appel & Orenstein, 2018). Lots of
neoliberal and market reforms were implemented in various post-communist countries
after 1990 (though never in their entirety). Most Central European post-communist
countries excelled in trade liberalisation, privatisation of socially-owned enterprises,
currency convertibility and price deregulation at the outset of the transition. One
could say that the first coherent austerity policy programme was implemented by the
Hungarian government in 1995 known as the Bokros package (Köves, 1995). But post-
communist governments were avant-garde in pursuing neoliberal reforms, going
beyond the Washington consensus and the demands of the World Bank, the IMF or
the EU (Appel & Orenstein, 2018). Eighteen post-communist countries initiated flat tax
reform (1994–2011), and 12 initiated the privatisation of pension funds (1998–2011).
Such institutional redesign was rare in the Western markets from which East Europeans
wanted to learn. Nor was this all. Voucher privatisation, the reduction of the corporate
profit tax rate and rather rigid independence of the central bank were also among the
neoliberal elements that nobody demanded from the post-communist cabinets but they
implemented nonetheless (Appel & Orenstein, 2018).3
Did these reforms hurt the post-communist democracies and economies? Actually,
quite to the contrary. A 2002 World Bank study emphasised the congruence between
market reforms and democratic performance after the first decade of the post-commu-
nist world’s reforms. Countries like the Czech Republic, Poland, Hungary and the Baltic
countries, which in 1990–1999 implemented the most radical neoliberal reforms, had
frequent government turnover and were transformed into competitive democracies. In
contrast, the countries that kept their political institutions closed after 1990 – Belarus,
Kazakhstan, Uzbekistan, Turkmenistan – were classified as non-competitive political
regimes that did not permit government turnover (Åslund, 2007, pp. 206–240; World
Bank, 2002, p. 98). The relation between the reforms and economic outcomes was
almost identical. The countries which implemented market-oriented (neoliberal) reforms
more radically and swiftly managed to converge to Western European markets after
some 15 years. In contrast, countries that adopted a gradual or stop–go strategy
performed less well. Countries that implemented no reforms remained in some sort of
non-market regime all along (Åslund, 2007; Havrylyshyn, 2006; Havrylyshyn, Meng, &
Tupy, 2016).4
678 D. PAVLOVIĆ

It turned out that Przeworski did not need to worry. The social groups that did try to
block the reforms were the winners, not the losers of the transition (Hellman, 1998;
World Bank, 2002). This is precisely what, in my mind, happened in the WB countries. A
partial, stop–go reform process in the Balkans created winners who did not have a
motive to complete them. The neoliberal reforms that were undertaken in the Western
Balkans after 2008 actually did not serve to reform the system to make it more efficient
(in terms of allocative efficiency and hard budget constraints), but rather to enable
further extraction for those social and political groups who had been the winners in the
first phase of the reforms (2000–2008). Newly emerging tycoons in the WB made a pact
with the Balkan politicians to temporarily abstain from a total depletion of public
resources in order to be able to continue to waste resources rather than to use them
in the public interest.

3. Neoliberal reforms in the Western Balkans after 2008 and their

democratic repercussions
The third wave of neoliberal reforms started in Europe after the explosion of public debt
in 2008 as a consequence of the 2007 financial crisis. The wave particularly affected the
WB6 countries, because these countries had difficulties servicing their public debt. (In
the meantime, some post-communist countries such as Hungary and Poland backed
out.) The last package was mainly reduced to sorting out public finance (cut spending,
reduce debt), reforming the labour market (relax hiring and firing of workers) and
keeping the exchange rate fixed (which applied only to countries that were Eurozone
members).
In Europe, the policy response to the 2009 debt crisis was under the influence of
Germany as the largest European creditor. Most German politicians saw the public debt
crisis as a consequence of irresponsible fiscal policy rather than as current account
imbalances among surplus and deficit countries (Wolff, 2014). Therefore, they insisted
that the solution was to be found in austerity and structural reforms under a strong
currency rather than in expansionary monetary and fiscal policy. The prevalent solution
(pushed for mainly by the Germans) was that responsible countries should tighten their
belts by reducing their fiscal deficit and public debt (Varoufakis, 2017, 2018).
During the boom years (2002–2007), most WB6 economies did not build foundations
and buffers that would help them respond to the crisis more easily. Instead, they
pursued procyclical policies prior to the crisis. As a consequence, mandatory expendi-
tures (notably, the public sector wage bill and pensions) rose immensely prior to 2008.
When the crisis hit, these had to be decreased in order to harmonise with declining fiscal
revenues (Murgasova et al., 2015, pp. 14, 58). But this was easier said than done.
Eventually, most WB countries could not avoid pursuing fiscal tightening in order to
avoid future fiscal collapse. The WB governments embarked on tightening fiscal spend-
ing and reducing public debt.
On the whole, the WB countries carried out the most radical reforms in the area of
labour-market reforms and public finance. The unemployment rate in the region started
to drop after 2014. A 2018 World Bank study reports that the whole region created
231,000 new jobs in 2017, and unemployment fell by 169,000 (from 18.6% to 16.2%). For
some WB countries, this is a historical low (World Bank & WIIW, 2018).5
 POST-COMMUNIST ECONOMIES 679

Some WB countries demonstrated the most success in implementing fiscal consolida-

tion (a euphemism for austerity measures), which was targeted to reduce public debt,
the budget deficit and public spending. Serbia, Albania and Bosnia were the champions
in bringing public debt down (World Bank, 2017, p. 2), while other WB countries
managed to arrest its growth or slow it down after 2015. Public finance in the WB6
also became much more sustainable compared to 2008. On average, after 2014 the WB6
countries managed to reduce both public expenditure and their budget deficits as a
percentage of GDP. Figure 3 shows the two interrelated trends: as budget public
expenditures went down (grey line), the deficit shrank (black dashed line).
Even in monetary policy, most WB6 countries were forced to pursue restrictive
measures. The whole Balkan area has been highly euroised. Montenegro and Kosovo
use the euro, Bosnia and Macedonia have currency boards with fixed exchange rates,
which is why they were unable to depreciate after 2008 to accomplish fiscal adjustment.
These countries had to go for so-called internal devaluation, which is harmful for public
sector workers and is typically seen as another aspect of austerity policy. In contrast,
Serbia devalued the dinar (so-called external devaluation) in 2009–2010, which enabled
a less painful adjustment to the supply shock, which is probably why it had to go for the
most radical austerity reform in the region in 2014–2018.
In sum, the reforms in the WB were successful in an economic sense. Most WB
economies either closed the gap, or reached a small negative output gap by 2016
with the unemployment level falling back to pre-crisis levels (IMF, 2017a). I will now
take a closer look at Macedonia and Serbia, which closely followed the IMF and EU (i.e.
German) austerity guidelines, but experienced the most radical democratic rollback after
2008 and 2014, respectively.

3.1. Neoliberal reforms in Macedonia

Macedonia was the first Western Balkan country that embarked on neoliberal reforms
after 2008 under the leadership of Nikola Gruevski (in office 2006–2016). Prior to 2008,

Figure 3. Public expenditure and budget deficit in WB6 as a percentage of GDP (2013–2018).
Source: World Bank’s Western Balkans Regular Economic Reports (Spring 2018).
680 D. PAVLOVIĆ

the Macedonian economy suffered from two typical problems that troubled many
economies in the region: a high unemployment rate and messy public finances (high
public debt, sizeable budget deficit and high budget expenditures). In 2006, the unem-
ployment rate stood at 43.29%, which was the highest in Europe at the time. The budget
deficit was not particularly high, but appeared to be misdirected (World Bank, 2015). As
a result, Macedonian real GDP slumped after the 2008 external shock and has practically
not recovered since (Figure 4).
In sorting out public finances, the Gruevski cabinet was ready to implement some
economic reforms that the previous cabinets were reluctant to do. After 2008, it
implemented both austerity measures aimed at fiscal consolidation and labour-market
reforms. Although in 2006, Macedonia’s public spending was below the WB average, it
was lowered even more under Gruevski. Figure 5 displays a decrease in public expen-
diture and the wage bill in 2012–2018.
The same thing happened with the unemployment rate, which fell from 43% to
26.1% in 2016 (Figure 6). The Gruevski cabinet labour-market reform was the most
successful in Europe at the time. It was also praised for many structural reforms.
Macedonia under Gruevski was actually one of the top performers according to the
Word Bank’s Doing Business survey in 2014. In 2018, it was still the highest-ranked
Balkan economy on the world list, occupying 11th position.

3.2. Neoliberal reforms in Serbia

In Serbia, the implementation of austerity policy was somewhat delayed because, in
2009, Serbia could use external devaluation of the local currency to adjust to the
external shock. Serbia’s neoliberal reforms were the most radical in the Western
Balkans under the leadership of Aleksandar Vučić. However, during the first two years
in office (2012–2014), he did not push for an austerity package and labour-market

Figure 4. Macedonia and Serbia real GDP change 2000–2018 as a percentage of GDP.
Source: The IMF World Economic Outlook Database (July 2018).
 POST-COMMUNIST ECONOMIES 681

Figure 5. Macedonia, public expenditure and wage bill reduction as a percentage of GDP in 2012–
2018.
Source: World Bank’s Western Balkans Regular Economic Reports (Spring 2018).

Figure 6. Unemployment rate in Macedonia and Serbia (2007–2018).

Source: The IMF World Economic Outlook Database (July 2018).

reforms. This started only in 2014, after a landslide electoral victory by his Serbian
Progressive Party (SNS).
The first austerity measure of the Vučić cabinet was to cut public sector wages and
pensions. In October 2014, the Serbian Assembly adopted legislation that reduced both
the pension and wage bills. Pensions in the range of €180–230 were reduced by 22%,
while pensions over €230 were reduced by 25%, thus producing a saving of €297
million. At the same time, the Vučić cabinet decided to cut all public sector wages by
10%. The total saving from this measure was €212 million. The combined effect of these
two cuts was €509 million, or 5.7% of the 2015 budget, or 1.5% of the GDP for 2015. The
measure lasted for four years, thus producing a total saving in the amount of €2 billion
in 2015–2018. As a result, public expenditure and the wage bill dropped in 2012–2018
682 D. PAVLOVIĆ

Figure 7. Serbia, public expenditures and wage bill reduction as percentage of GDP (2012–2018).
Source: World Bank’s Western Balkans Regular Economic Reports (Spring 2018).

(Figure 7). This had a significant impact on public finance and public debt, which started
to decline after 2015. In 2018 the Serbian budget recorded a surplus, and the public
debt fell below 60% of GDP (a legislative threshold). EBRD praised this overperformance
by saying the fiscal adjustment was better than envisaged (EBRD, 2017).
The amendments to the labour law were adopted in July 2014. These radically
lowered the financial burden on labour by lowering severance packages and relaxing
the procedure for firing workers. This also had a positive impact on the labour-market
trend, which lowered the unemployment rate to 14.7% in mid-2018 (Figure 5).6
Granted, austerity policy measures are never popular because they may adversely
affect both vested interests and vulnerable populations. Why were Gruevski and Vučić
able to implement these measures while their opponents did not prior to 2006 and
2012, respectively? The IMF called for such measures before Gruevski and Vučić came to
power, but previous cabinets avoided them. We can offer two answers to this: first, they
pulled it off because they undermined democratic institutions and repressed opposition
to the reforms, which is basically what happened in some Latin American countries in
the 1970s and 1980s. This is what Bartlett and Prica claim (2017b). However, I announced
a slightly different answer in Section 1. Both the democratic decline and neoliberal
economic policies were possible because of the opportunity that was created by the
previous cabinets’ corrupt policies that were associated with rotten privatisation sales,
massive party patronage and unrestrained money-wasting in Macedonia (1990–1998
and 2002–2006) and Serbia (2000–2012). I expand on this argument in the next section.

4. The opportunity for democratic backsliding in the WB

The major thesis of this paper is that democratic rollback is not possible without
opportunity. In Macedonia and Serbia, the opportunity was created by the corrupt
policies of the previous government and the inability of the opposition (former
 POST-COMMUNIST ECONOMIES 683

incumbents) to transform. But the opportunity for both Gruevski and Vučić was not
created immediately after the 2006 and 2012 parliamentary elections, respectively. The
decline started two years later in 2008 and 2014, respectively, after both Gruevski and
Vučić held snap elections, which they won by a landslide. With a delegitimised opposi-
tion and a strong majority in parliament, they started neutering free media, the judiciary
and increased persecution, thus heavily rigging the electoral process.

4.1. Opportunity in Macedonia

Although post-communist democracies are young (the first multiparty parliamentary
elections took place only in 1990), in almost every Balkan country we can observe two
camps that emerged as major rivals taking turns in office. In Macedonia, these were the
Internal Macedonian Revolutionary Organisation – Democratic Party for Macedonian
National Unity, or VMRO-DPMNE for short7 (in office 1998–2002 and 2006–2016), and
the Social Democratic Union of Macedonia (SDSM) (in office 1990–1998, 2002–2006 and
2017–present) (Woynicki, 2016). Both camps could rarely win a majority on their own, so
they always needed help from one of the ethnic Albanian parties8 to put together a
winning majority in the Sobranie (the Macedonian parliament).
The 1990s in Macedonia were dominated by the SDSM and its leader Branko
Crvenkovski.9 Crvenkovski’s name was usually associated with abandoned factories,
lost jobs and shrinking income, which were consequences of privatisation, and the
emergence of the ‘new class’ of tycoons who took advantage by extraction activities.10
Nikola Gruevski, from VMRO-DPMNE, was the SDSM’s rival. He won the 2006 parliamen-
tary elections with the promise to stamp out corruption and rectify injustices created by
the privatisations of the 1990s. De-legitimising opponents and emphasising their already
existing bad image became, therefore, the main activity of the Gruevski cabinet in 2006–
2008 (Günay & Džihić, 2016).
The process began by way of constructing an image of a modern leader. Nikola
Gruevski did retain the old nationalistic narrative (notably concerning the name dispute
with Greece), but essentially brought a new outlook for VMRO-DPMNE, which had often
appeared nationalistic and backward-looking in the past. Gruevski presented himself as
a modern, technocratic politician who believed in the free market and the ethic of hard
work (Günay & Džihić, 2016).
Gruevski scorned the SDSM political elite and its tax-dodging tycoons who, in his
account, abused socially-owned enterprises and public resources, which lowered welfare
standards for common people. He often promised he would sacrifice his life, if necessary,
for the well-being of all Macedonians. In the controlled media he was portrayed as an
ordinary man, a person everyone could relate to, who lived in a small flat with a wife and
two small kids (The profile, 2011).
This struck a chord with a significant part of the Macedonian electorate precisely
because part of this was true – the Macedonian transition from the 1990s and 2000s
was marred with corruption and embezzlement that enabled a class of privileged
people to get richer at the expense of the common man. It is now easier to under-
stand why the implementation of unpopular austerity measures after 2008 was not
met with much resistance. The people were ready to sacrifice because they believed
in a better future.
684 D. PAVLOVIĆ

It was on this platform that Gruevski and the VMRO took the 2006 parliamentary
elections with 32%, thus forming a winning coalition with the Albanian minority parties.
At the same time, the SDSM-led coalition secured 23.31%, which brought it 30 seats fewer
than it had had in the previous Sobranie. During the 2006–2008 term, the democratic
institutions in Macedonia were not neutered. However, the electorate learned about various
corruption cases that had taken place under the Socialist-led cabinets.
The most infamous was a military scandal involving Vlado Bučkovski (also a SDSM
leader in 2004–2006). Bučkovski served as Prime Minister in 2004–2006, but also as
Defence Minister in the Georgievski cabinet during the 2001 Albanian uprising and the
Ohrid Agreement. Bučkovski was charged with buying and selling spare parts from T-55
tanks (in the amount of €1.8 million) and was eventually found guilty by the court. The
scandal exploded in the summer of 2007. Bučkovski had to go, but rather then selecting
a new face, the SDSM membership decided to bring Branko Crvenkovski back to the
position of leader in 2009. This appeared to be even worse for the opposition. A large
part of the Macedonian population still remembered Crvenkovski and his cabinets’
involvement in rotten privatisation sales from the 1990s and the resulting growing
social inequalities. Indeed, Macedonian income inequality and the Gini coefficient
were among the highest in Europe, and some authors claimed that corruption and
party patronage were major causes for it (Tevdovski, 2015).
As a result of these scandals and the opposition’s inability to get rid of compromised
leaders, the Socialists’ political image worsened in 2006–2008. Gruevski took this oppor-
tunity and dissolved the Sobranie in April 2008. In the snap elections two months later,
the opposition was literally crushed. VMRO-DPMNE secured 49% (up from 32%), while
the SDSM (this time in the Coalition for Europe with seven additional smaller parties)
won 23.64% and another five seats fewer in the Sobranie.
As mentioned above, the deconstruction of democratic institutions began in the
second phase (after 2008). The media was the first to come under attack. After lots of
harassment, the independent TV A1 eventually had to file for bankruptcy in July 2011
over a debt of €30 million. In 2015, a massive wiretapping scandal (called ‘bombs’) broke
out. Gruevski and Sašo Mijalkov, his cousin and the head of the shady secret service,
were recorded admitting to have monitored around 20,000 citizens (app. 1% of the
Macedonian population) – opposition politicians, journalists, priests etc. Although every-
thing was on tape, the public prosecutor did not dare to press charges against any
incumbent. The controlled media shared in hiding the scandal from the public.
Captivated by Gruevski, they did not report anything about the wiretapping scandal
for months. After several months of silence, they used Gruevski’s version of the story,
according to which the whole thing was fabricated.
In such an atmosphere, the next three parliamentary elections were massively rigged.
Media were not free and the electoral roll contained people who voted but did not exist.
The 2011 elections enabled Nikola Gruevski to keep the position of Prime Minister with
39%, while the Socialists achieved 33%. In 2014, Gruevski won 44%, while the SDSM
(again in coalition with several smaller parties) garnered 26%. The opposition was
protesting against electoral fraud, but to no effect.
Things started to change for the better for the opposition only in 2013, after
Crvenkovski was replaced by Zoran Zaev, former mayor of the municipality of
Strumica, who had been arrested by Gruevski in 2008. Zaev was not a completely new
 POST-COMMUNIST ECONOMIES 685

face, but was not part of the bad image created by Crvenkovski. The change in leader-
ship, combined with the strategic move to leave the Sobranie in mid-2015 and threaten
to boycott the next elections, and the wiretapping scandal from 2015, led to early
parliamentary elections in December 2016 (two whole years ahead of schedule), which
VMRO-DPMNE lost.11 By mid-2017, VMRO was out of office and the democratic erosion
in Macedonia was halted after 11 years. (Gruevski, who left the country in early
November 2018, asked for political asylum from no-one else but the Orbán
Government.)

4.2. Opportunity in Serbia

After 2000, Serbian party politics was dominated by two camps which were led by the
Democratic Party (DS) and the Serbian Radical Party (SRS) (Bochsler, 2009). However, a
larger group led by Tomislav Nikolić and Aleksandar Vučić splintered off from the SRS in
September 2008, thus forming the Serbian Progressive Party (SNS) (Konitzer, 2011).
When Nikolić won the presidential elections in 2012, the SNS grew more dominant,
formed a cabinet with the Socialist Party of Serbia (SPS) and pushed the SRS out of the
picture. Since 2014, the Serbian party scene has been dominated by the SNS, regularly
winning over 45% in all elections, while everyone else has basically struggled to clear
the 5% threshold.12 (As will be seen, the defeat of the Serbian political parties that were
in office in 2000–2012 was much harder than the equivalent defeat of the Macedonian
opposition.)
As mentioned above, the neutering of democratic institutions in Serbia did not begin
in 2012, when Vučić came into office. He did not even demand the position of Prime
Minister, although his SNS was by far the strongest in the 2012 parliamentary winning
coalition. Instead, the position was ceded to Ivica Dačić (SPS). The first two years were
used to de-legitimise the opposition and construct Vučić’s image as a reformer and
fighter against corruption. The public learned about many rotten deals from the period
2000–2012, when the Democratic Party and other members of the coalition that over-
threw Milošević in October 2000 came to power. Like in Macedonia, the ugliest process
was privatisation, that had produced abandoned factories, left many workers without
jobs and given rise to the emergence of post-Milošević era tycoons (Pavlović, 2016).
Vučić most likely learned a great deal from Gruevski in embracing the fight against
corruption as a major policy platform and in constructing the image of himself as an
honest and hard-working man. In 2012–2014, he basically repeated what Gruevski had
done in 2006–2008. He explicitly referred to Max Weber’s protestant work ethic, pointing
out that ‘Serbs must work harder and always rely on themselves’. He bragged about his
working late at night and getting up early in the morning, sometimes reading 500–600
pages a day. He even produced an uncorroborated story that he had to work for £2 per
hour in a hardware store in Gloucester Road in London, and that due to his hard work
his salary was raised to £2.50.
Vučić won the 2012 election by promising to examine the 24 most rotten privatisa-
tion sales and rectify injustices from 2000–2012. His bravest move was to arrest the
tycoon Miroslav Mišković in December 2012. Mišković had become extremely rich after
2000 and was a kind of symbol of the corrupt privatisation and post-communist transi-
tion in Serbia. (In 2007, Mišković ranked 891 on the Forbes list of the world’s richest
686 D. PAVLOVIĆ

people. His wealth was estimated at $1 billion and was categorised as ‘self-made’.)
Everybody knew that, prior to 2012, Boris Tadić (president in 2004–2012) had not
dared to launch investigations into the origins of Mišković’s wealth. Moreover, most
believed that Mišković and most other tycoons had got rich by using political ties with
the Democratic Party. With Mišković in jail, Vučić tirelessly emphasised the involvement
of the DS in corrupt privatisations and other sorts of money-wasting.13
With Mišković behind bars, Vučić’s popularity skyrocketed in early 2013. He called snap
elections in March 2014 to validate this fact. In these elections, Vučić’s SNS-led coalition
won 48.35%, while the DS-led coalition and Boris Tadić’s SDP-led coalition slumped to a
mere 6% and 5.7%, respectively.14 With a two-thirds majority of parliamentary seats (SNS
formed a winning coalition with the SPS), the Vučić cabinet could not only implement any
sort of austerity policy but could also neuter democratic and judicial institutions, which
brought about a drop in Serbia’s democracy rating (Section 2).
The democratic condition in Serbia radically deteriorated only after 2014. In October
2014, Vučić shut down the most popular TV show, ‘Impression of the Week’. By
manipulating the system of broadcast licensing and media subsidies, he soon controlled
almost all electronic and most print media. In April 2016, a group of masked persons
used bulldozers to tear down several buildings and storages in downtown Belgrade to
make room for the expansion of the Belgrade Waterfront project,15 and the public
prosecutor did not dare to launch an investigation into what happened. The 2016
parliamentary and 2017 presidential elections were held in such an atmosphere: manip-
ulations at electoral booths were massive (Damnjanović, 2017, 2018), but the Republic
Electoral Commission and administrative court did not act. The SNS won 48.5% in the
2016 parliamentary elections, and Vučić handily won the 2017 presidential elections
with 55% in the first round (the second-ranked Saša Janković won a mere 16%). The
opposition protested against electoral fraud, but still agreed to participate in elections as
well as to take up seats in the assembly and participate in parliamentary life.
At the start of 2019, Vučić is still in office with public opinion polls giving him over
50% approval ratings. In contrast, despite the emergence of several new leaders
(unconnected to the 2000–2012 period), the Serbian opposition still does not appear
to be able to carry out the required change in leadership and refurbish its image. In the
2018 elections for the Belgrade city hall, the bulk of the opposition threw its weight
around Dragan Đilas, former mayor of Belgrade (2008–2013) and also a former member
of the DS. The DS itself has changed leaders many times since Boris Tadić stepped down
in 2012 (Dragan Đilas, Bojan Pajtić, Dragan Šutanovac, who were all active and had kept
important offices in the government prior to 2012), but only in mid-2018 did the party
elect Zoran Lutovac, former ambassador to Podgorica and a person who had held no
significant post prior to 2012.
Like Gruevski before him, Vučić did not miss a chance to express his contempt for the
former DS leaders and the past regime’s politicians in order to de-legitimise them
(Günay & Džihić, 2016). This was not particularly difficult to do since a great number
of politicians from the post-Milošević era (2000–2012) remained politically active in the
opposition after 2012. Vučić’s oft-repeated argument was: ‘I’m no angel. But do you
want these criminals to come back?’. It worked every time. Of course, shortly after the
2014 parliamentary elections, one could see that Vučić’s government retained all the
corrupt practices from the 2000–2012 period: massive party patronage, abuse of the
 POST-COMMUNIST ECONOMIES 687

state budget and shady privatisations. However, there was no free media any more to
report it to the electorate.
We are now ready to draw early propositions about what brings about democratic
decline in weakly consolidated democracies. Instead of explaining it with reference to
neoliberal economic policy, I should like to offer an explanation which is grounded in
something one could call electoral gap (defined in Section 2).
Figure 8 displays electoral gaps for the two major camps in Macedonia and Serbia in
2002–2016 and 2008–2016, respectively. I begin with Serbia (Panel B) because it exem-
plifies the idea more clearly. Since the gap opened and grew larger after 2012, the
democratic decline became more pronounced. In the pre-2012 period, during the DS-led
cabinet (2008–2012), the gap was not only smaller (which indicates that the deconstruc-
tion was harder to accomplish), but the incumbent did not hold a preference to under-
mine democratic institutions in a radical way.
Something similar can be observed in the Macedonian case (Panel A). The gap was
rather wide in 2002, but the SDSM did not hold a preference of radically undermining
democratic institutions. In contrast, when the gap switched in 2006, and then enlarged
in 2008, the VMRO-led cabinets developed a preference to undermine the existing
democratic design. In the Macedonian case, moreover, we can see that the gap basically
closed in 2016 when the incumbent and the opposition won an almost identical
percentage of the votes. As a consequence, the democratic decline was halted in
Macedonia in 2017 (BIEPAG, 2017b).

5. The opportunity for Hungary and Croatia

To shore up the argument that democratic decline depends on both preferences and
opportunities, I argue that something similar to what happened in Macedonia and
Serbia happened in Hungary after 2010, but not in Croatia after 2015. Hungary saw a
massive democratic decline but did not implement neoliberal policies. Croatia did not
see democratic rollback but did implement some neoliberal policies just like Macedonia
and Serbia. The major difference between these two countries (Hungary and Croatia)

Figure 8. Electoral gap in Macedonia (2002–2016) and Serbia (2008–2016).

688 D. PAVLOVIĆ

was the extent of the former incumbent’s corruption and whether this translated into an
electoral gap. In Croatia, it did not; in Hungary, it did.

5.1. Hungary 2010–2018

Over the past eight years, Hungary has also been a country that has undergone a
significant democratic rollback. In 10 years (2008–2018), its Freedom House score
worsened from 2.14 in 2008 to 3.71 in 2018, thus catching up with the Balkan semi-
consolidated democracies and hybrid regimes. As an immediate response to the finan-
cial crisis, the Bajnai cabinet implemented harsh austerity measures (Győrffy, 2015), but
after the 2010 parliamentary elections, the policy course reversed. Therefore, one could
say that, in contrast to Macedonia and Serbia, Hungary did not adopt a neoliberal reform
package, on account of which it had to initiate democratic deconstruction. To the
contrary, after 2010, Fidesz’s leader and Premier Viktor Orbán16 harshly criticised market
reforms proposed by the EU, and even broke the arrangement with the IMF by shutting
down the IMF office in Budapest in 2013.
Orbán likes to think of his cabinet’s economic policies as unorthodox. Are they, at the
same time, anti-neoliberal? Did they differ from what was done in Macedonia and Serbia
after 2008? The Orbán cabinet’s economic policies expanded nationalisation, selective
taxes and price control, monopolies, subsidies, retaliatory bank regulations, and other
characteristics of a centrally planned capitalist economy (Danjkov, 2015). Csillag and Iván
(2015) used the Weberian term neo-patrimonial capitalism to signify that allocation of
resources in Hungary after 2010 is done by post-communist political bosses rather than
by the market. They most likely have a point in claiming that Orbán’s intention was to
create a new class of entrepreneurs (according to the pattern established in Russia under
Putin). Although nationalisation was not complete (foreign firms still dominate the
Hungarian economy), it was done to assist the new and loyal national bourgeoisie in
order to prevent the electoral loss of 2002 (Csillag & Iván, 2015). This ran contrary to the
very idea of neoliberalism: free market and private property.
In 2010–2018, the two Orbán cabinets managed to accomplish similar goals that were
set by the EU and the IMF for the whole Western Balkan region (including Croatia). The
unemployment rate dropped, as did the budget deficit and public debt. Who paid for it?
The Orbán cabinet adopted different policy principles to go about answering this
question. The mainstay of its ‘unorthodox’ policy was that the bill for the crisis should
be footed by foreign banks and foreign corporations that do business in Hungary
(Kowalczyk, 2015). This was radically different from the usual neoliberal economic policy
assumption that the bill is dominantly paid by domestic taxpayers – namely, public
sector workers and pensioners.
The Hungarian labour-market reforms were successful but the lower unemployment
rate was more a consequence of exogenous factors such as massive EU transfers that
well exceeded transfers to other new EU members. Lots of these transfers were used up
to finance public work projects in Hungary after 2010 (Oblath, 2016, p. 12). The transfers
almost doubled in 2010–2015, thus leading some authors to suggest that, without these
transfers, ceteris paribus, real GDP growth in Hungary in 2010–2015 would be four
percentage points lower (Oblath, 2016, p. 26).
 POST-COMMUNIST ECONOMIES 689

Labour-market reforms worked partially against the low-income workers, but tax and
price policy worked for them. Orbán introduced selective taxation in order to obtain
revenues to compensate the worse off. The cabinet imposed higher taxes on selected
services, especially those in the financial sector (banks) and retail chains, telecommuni-
cations and energy, which are usually amongst the largest players in the market. Some
of these businesses used to pay less taxes than local small businesses. For example,
when Orbán returned to office in 2010, the Hungarian pharmaceutical sector paid an
effective tax rate of 18%. In contrast, domestic small and mid-sized business were taxed
at 52% (Bershidky, 2018). Likewise, prior to 2010, Hungarian citizens paid among the
highest utility prices in Europe due to the monopoly held by foreign companies in the
utility sector. Due to the Orbán cabinet’s policy measures, utility bills went down by 25%
by 2014. The benefits of these price policies went mostly to the poorest social strata. The
tax revenues from the selected sectors were used for tax breaks for families with
children.
Other public policy measures emphasised Orbán’s anti-neoliberal stance even more.
Although foreign firms still dominate the Hungarian economy, Orbán pushed several
large foreign firms to find new owners among the Hungarians, some of whom were his
personal friends and political allies (Magyar, 2016). The cabinet’s policy to undermine
property rights and introduce retroactive legislation was truly anti-market and non-neolib-
eral, as was the 2010 nationalisation of the private pension fund, whose reserves to the
amount of $14.6 billion Orbán used to reduce the budget deficit and pay off the IMF debt.
Finally, the most anti-neoliberal measure took place in 2014 and 2015, when the
government literally ordered the foreign banks that loaned Hungarian citizens Swiss
franc denominated mortgages at a fixed rate to convert them into the Hungarian forints.
As an even more unorthodox measure, the cabinet, assisted by the Hungarian constitu-
tional court, mandated that the banks compensate the borrowers who lost out in what
the government deemed to be unfair contracts. Banks had to give back around $3.5
billion, which was about 32% of the capital buffer of the whole system. Foreign banks
recorded huge losses on account of this move and heavily disinvested as a result of it
(Appel & Orenstein, 2016, p. 326). Orbán and his cabinet shrugged it off when banks said
such a policy would make them leave Hungary. The tacit message was ‘We have too many
foreign banks in Hungary anyway’. It was obviously cheaper for Orbán to make the foreign
banks angry than for the Serbian or Croat governments who did not dare to do so.
Those were economic differences. What Orbán did in Hungary against foreign capital
and banks, Gruevski, Vučić and Plenković would never have dared in Macedonia, Serbia
and Croatia. Yet, we can observe striking political similarities among Hungary, Serbia and
Macedonia. Just like in Macedonia and Serbia, Hungarian public opinion shifted radically
in 2006 after the Őszöd speech given by Ferenc Gyurcsány at a closed-door party
meeting. Gyurcsány, then Premier (2004–2009) and the head of the Hungarian
Socialists (MSzP), admitted that his cabinet had heavily lied to the Hungarian people
about how deep the economic crisis was and how much his party had contributed to its
depth. The electorate was enraged, which was already apparent in the 2006 local
elections and the 2008 referendum (initiated by the opposition) on abolishing some
medical tuition fees. The 2006 local elections defeat and the 2008 referendum, which the
incumbent lost, were clear indicators that the MSzP would lose the next parliamentary
elections, set for 2010.
690 D. PAVLOVIĆ

The popularity slump of MSzP continued after the 2008 financial crisis broke out.
After 2000, foreign banks offered cheap mortgages expressed in Swiss francs, which
many Hungarians were happy to take out to buy homes. In 2008, the Hungarian Central
Bank devalued the forint, which made the franc-nominated loans extremely costly.
When many borrowers lost their homes on account of this, Orbán blamed the
Socialist-led cabinets for this in the 2010 electoral campaign. It worked.
In the 2010 parliamentary elections, Viktor Orbán’s Fidesz won by 52.73% against the
MSzP, which won a mere 19.3%. The victory created a yawning electoral gap (Figure 9,
Panel A), which explains an opportunity for democratic decline. In contrast to Gruevski
and Vučić, Orbán did not have to wait for another chance to nail it. With such a feeble
opposition in Parliament, he already started neutering democratic institutions in 2010.
Orbán began with the electoral system and constitutional court, and then, naturally
enough, moved on to the media. The people close to Orbán and Fidesz bought up a
number of regional newspapers and shut down a number of newspapers, among which
was one of the most influential dailies, Népszabadság, for uncovering a series of
corruption scandals involving people from the government. This helped Fidesz to
continue with democratic deconstruction through the next two elections. In the 2014
parliamentary elections, the gap narrowed, but then in 2018 it widened even more than
in 2010 (Figure 9; Panel A).

5.2. Croatia 2011–2018

Croatia, although it became a full EU member in 2013, also belongs to the EU’s outer
periphery (in Bartlet and Prica’s vocabulary), and was in an identical position vis-à-vis
foreign debt and budget deficit after 2008. The austerity policy was implemented in
Croatia in 2015–2018 by the HDZ-led coalition that replaced Premier Zoran Milanović
and his SDP-led coalition after four years in office (2011–2015). Interestingly enough,
although Croatia did implement some neoliberal economic policies guided by the EU
and IMF, Bartlett and Prica (2017b) do not associate Croatia with ‘a drift towards illiberal
democracy and more authoritarian forms of governance’. Why did Croatia not undergo
democratic backsliding after 2015? Let me first review what kind of austerity policies the
Croatian government implemented, and then answer this question directly.

Figure 9. Electoral gap in Hungary and Croatia.

 POST-COMMUNIST ECONOMIES 691

Like the rest of Europe, Croatia was hit hard by the 2008 financial and 2010 sovereign
debt crisis. In contrast to some other European economies, Croatia’s recession lasted
somewhat longer because the Croatian economy was not a part of the German supply
chain (IMF, 2018b, p. 6). After five years of grappling to get out of recession, the 2014
IMF report about Croatia began with a pretty dismal statement, pointing to a fifth
consecutive year of real GDP contraction and an unemployment rate of 17% (IMF, 2014).
Like many other Balkan economies, Croatia could not initiate effective fiscal stimulus
to boost economic growth because it already had a sizeable deficit and growing public
debt. Although the Croatian fiscal policy was mainly procyclical, it was, due to the
voracity effect, mainly misdirected – namely, unable to cut waste and restrain rent-
seeking (Drezgić, 2015). Indeed, when the debt crisis hit Europe in 2009, Croatia was a
rent-seeking and captured state stuck in the partial reform equilibrium (Kotarski & Petak,
2019).
When Croatia entered the EU in mid-2013, the Milanović cabinet’s fiscal policy was
considered to be so lame that Croatia was immediately put under the European Union’s
Excessive Deficit Procedure, a part of the stricter fiscal surveillance mandated by the
Stability and Growth Pact (Šimović & Milan, 2019).17 The IMF supported it by proposing
the restructuring and privatisation of the socially-owned enterprises that gobbled up a
large chunk of the state budget, the reform of health and welfare (for the same reason),
and labour-market reform (IMF, 2014). The idea was to re-establish confidence among
investors and reignite economic growth (IMF, 2014, pp. 9–12).
Until the end of its term (2011–2015), the Milanović cabinet was unable to effectively
implement any of these policy recommendations. After the SDP-led cabinet lost the
2015 parliamentary elections, the new cabinet was put together by the Croat
Democratic Union (HDZ) and Most (Bridge). They agreed to choose a technocrat for
the premier, Tihomir Orešković, a Canadian businessman of Croat ethnic origin, who had
no party affiliation. Orešković launched a typical austerity package that implied fiscal
squeeze, public sector reforms (notably the health sector) and labour-market reforms.
Yet, only half a year on, the HDZ–Most cabinet collapsed due to a corruption scandal
which involved the Deputy Prime Minister and the HDZ head Tomislav Karamarko’s wife,
who was allegedly paid a handsome consultancy fee of €60,000 for a government job
arranged by her husband. Both Karamarko and Orešković had to step down, and after
snap elections in September 2016, the Sabor (the Croatian parliament) elected a new
cabinet headed by Andrej Plenković from the HDZ. The cabinet continued with the same
policies expressed in a document entitled National Reform Programme 2017, which
mandated expenditure control in the areas of public administration, socially-owned
enterprises, social benefits, health insurance and the pension system as the major policy
goals.
After a sizeable fiscal consolidation, which implied a longer wage and pension freeze,
Croatia exited the Excessive Deficit Procedure in June 2017 (Šimović & Milan, 2019). That
year the Plenković cabinet recorded a budget surplus of 0.9% of GDP, while public debt
was reduced from 85.5% of GDP in 2014 down to 75.4% of GDP in 2018. In its 2017
report, the IMF concluded that Croatia had almost closed the output gap and had
overperformed fiscally, meaning that the better-than-expected fiscal positions were,
among other things, due to expenditure restraint and lower spending than planned
(IMF, 2018a, pp. 4–5).
692 D. PAVLOVIĆ

Fiscal policy was not the only one that was restrictive after 2015. Croatia was one of
the economies with the most restrictive monetary policies before and after the 2008
crisis. Although it could have devalued its currency in 2009, thus implementing external
devaluation, the Croat National Bank (CNB) stuck to a fixed exchange ratio with the Euro
and has not changed this policy as yet. Its regulatory role was also procyclical, thus
supporting less risky credit policy and discouraging commercial banks from giving out
credit for companies (Drezgić, 2015). Monetary policy had an austerity effect on the
economy, squeezing monetary growth and disabling countercyclical policies. Even the
IMF, which typically requires fiscal caution, suggested a relaxing of monetary policy (IMF,
2012), but the CNB roundly turned such suggestions down.
Interestingly enough, a significant number of Croatian citizens have also experienced the
same problem with Swiss franc-nominated mortgages since 2010. But the solution in
Croatia was somewhat different from that in Hungary. In 2015, the Swiss loans were
retroactively converted into Euro-nominated loans, which eased the debt burden for
about 60,000 borrowers to the amount of around 2% of GDP (IMF, 2018a, pp. 25–26). Of
course, foreign banks were hurt, but far less than in Hungary, where the government forced
foreign commercial banks to convert the loans into local currency. Even the way the
Plenković cabinet attempted to handle the Agrokor collapse (the largest Croatian private
corporation that employed 57,000 people and was owned by tycoon Ivica Todorić that went
bankrupt in the beginning of 2017 because of the bad debt which was as high as 15.7% of
the Croatian GDP in 2017) was closer to a market-based solution than to an attempt to save
it by using up the budget money. Namely, to save Agrokor the Plenković cabinet pushed for
legislation that enabled the creditors to accept a partial debt write-off and a debt-for-equity
swap in which exclusively private investors and funds took part (Dalić, 2018).
Why did the HDZ cabinet, during the implementation of austerity measures, not start
neutering democratic institutions, as happened in Macedonia, Serbia and Hungary? The
major reason is that the former incumbent, the Social-democratic Party (SDP), did not see a
crushing defeat in 2015 and 2016, respectively. In the 2015 elections, the ratio between the
HDZ and SDP was 33:32, while one year on, the former incumbent managed to keep a
similar ratio of 36:34 (Figure 9, Panel B). If one compares these results with what happened
in Macedonia (a ratio of 48:23 in 2008), Serbia (a ratio of 48:12 in 2014) and Hungary (a ratio
of 53:20 in 2010), it seems that what matters most for a regime to transform into
authoritarianism is the perceived level of corruption of the previous incumbent and if
this translated into an electoral outcome. The former Croatian incumbent left office in 2015
but was much stronger, so that the HDZ never had an opportunity to revert to the
Tuđman-type electoral authoritarianism of the 1990s. At the same time, shortly after
replacing the SDP-led coalition in office, within less than a year the HDZ itself was hit by
the Karamarko scandal which reduced the effect of the former incumbent’s bad policies
from 2011–2015 and kept the electoral gap between HDZ and SDP at a negligible level.

6. Conclusion
I have argued that a preference to change regime type can be achieved only if there is
an opportunity for it. The opportunity in Macedonia was created by the policies of the
preceding cabinets of Crvenkovski, Kostov and Bučkovski (2002–2006), and in Serbia by
Mirko Cvetković’s cabinet under President Boris Tadić’s sponsorship (2008–2012). These
 POST-COMMUNIST ECONOMIES 693

cabinets’ corrupt policies generated massive discontent among the electorate, which
was eventually (after one election round) transformed into massive electoral support for
the subsequent cabinets of Nikola Gruevski and Aleksandar Vučić, who defeated the
SDSM and the DS at the parliamentary elections of 2006 and 2012, respectively, and
then solidified this victory by a landslide in 2008 and 2014, respectively. This created a
wide electoral gap, which enabled gradual democratic erosion.
Can this theory be universally applied? Does a sizeable electoral gap always create an
opportunity that will be taken by the incumbents even in the consolidated democracies?
Is the theory of electoral gap country- or region-specific? Does it apply only in the
Western Balkans, but not in the rest of Europe? We saw that it could be applied in
Hungary, which was thought by many to belong to consolidated democracy, and then
deteriorated to semi-consolidated democracy. Further research would be required to
establish under what conditions such an opportunity matters.

Notes
1. The six Western Balkans economies are denoted by the term WB6. These are Albania,
Bosnia, Montenegro, Macedonia, Serbia and Kosovo (which is under international protecto-
rate). Montenegro and Serbia have been candidates in membership talks since 2010 and
2012, respectively. Macedonia and Albania have been candidates without membership talks
since 2005 and 2014, respectively. Kosovo and Bosnia are not candidates yet. While Croatia
is geographically part of the Balkans, it is not part of the Western Balkans that is made up of
six Balkan economies that are striving to became EU members. The term ‘Western Balkans’
is a political term coined by the EU administration to capture this fact.
2. Similar conclusions could be reached by using the EIU and BF data.
3. To the contrary, some European countries protested over the reduction of the corporate
profit tax rate (Appel & Orenstein, 2018). German Chancellor Gerhard Schröder, French
Finance Minister Nicolas Sarkozy and Swedish Prime Minister Hans Göran Persson called
such tax reform ‘unfair tax competition’ and ‘tax dumping’ (Mikloš, 2014).
4. Of course, there are alternative or supplementary explanations. One of them is that some
post-communist countries had a more developed rule of law, which made it easier for them
to implement economic reforms. Other research showed that some champions of economic
transformation like Slovenia, Estonia, Poland, Czech Republic, Hungary, Lithuania and
Slovakia had a moderate or strong rule of law, while others had weak or very weak rule
of law (Mendelski, 2018).
5. Western Balkans Labour Market Trends 2018. The 231,000 figure was taken from
Regular Report no. 12 (World Bank, 2017). But in Regular Report no. 13, the number
was reduced to 190,000, fearing that job creation was slowing down (World Bank, 2018,
p. 5).
6. There is, in fact, quite a hot debate among leading Serbian economists about whether the
unemployment rate really dropped that much in Serbia after 2014 (Arandarenko & Dragan,
2016; Petrović, Brčerević, & Minić, 2016).
7. Abbreviations of the political parties are given in the respective original languages.
8. Ethnic Albanians make up over 25% of the Macedonian population. Albanians are repre-
sented by several political parties, one of which almost always participates in the cabinet.
9. Branko Crvenkovski was Macedonian Prime Minister in 1992–1998 and 2002–2004,
President of Macedonia in 2004–2009, and the leader of SDSM in 1991–2004 and 2009–
2013.
10. Most of these new tycoons were actually old nomenclature managers from socially-owned
enterprises who were given a chance to take advantage of rigged privatisation.
694 D. PAVLOVIĆ

11. Actually, VRMO-DPMNE secured 39.39% (51 seats in the Sobranje), while the Socialist-led
coalition won 37.87% (49 seats), but an ethnic Albanian minority party decided this time to
make a winning coalition with the Socialists and the Sobranie elected Zoran Zaev as Prime
Minister on 31 May 2017.
12. In elections for local assemblies in some municipalities during 2016–2018, Vučić’s SNS
managed to win over 60%.
13. A similar conflict in Hungary happened between Viktor Orbán and Lajos Simicska in 2014.
Simiciska was one of the main Fidesz financial supporters whose companies (Közgép and
Mahír) have been privileged on public tenders. When he became too strong, Orbán
excluded Simiciska from the clientelistic network (Magyar, 2016, pp. 82–88).
14. Boris Tadić left the DS a month before the 2014 elections to form his new Socialist
Democratic Party. One could say that he thereby split the DS-electorate, and that the DS,
split into two factions, won nearly 12% in 2014.
15. A city project of posh apartments, luxurious office space and a massive shopping mall by
the Sava river in downtown Belgrade estimated at $3 billion.
16. Viktor Orbán was the Hungarian premier for the first time in 1998–2002, and then again
from 2010 to the present.
17. Details can be found at: https://ec.europa.eu/info/business-economy-euro/economic-and-
fiscal-policy-coordination/eu-economic-governance-monitoring-prevention-correction/stabi
lity-and-growth-pact/corrective-arm-excessive-deficit-procedure/closed-excessive-deficit-
procedures/croatia_en (accessed 22 April 2018).

Disclosure statement
No potential conflict of interest was reported by the author.

Funding
This work was supported by the Ministry of Education and Science, Republic of Serbia [179076].

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