Visitors from Prague report that cabbages and Marxist textbooks are on sale by the pound in shops near Charles University. A pound of cabbage costs more than a pound of Marx.
It would be nice to conclude that, from top to bottom, the market has as thoroughly, and as easily, replaced planning and liberty has replaced communism since Eastern Europe`s revolutions of 1989. But the real work, in Czechoslovakia and elsewhere, has just begun.
Across the river from Charles University, Czechoslovakia`s non-Communist government dithers over how, and how fast, to move to a market economy. Critics of President Vaclav Havel say he doesn`t understand economics and isn`t sure he really wants to move to the market. Meanwhile, eight months after its two weeks of revolution, Czechoslovakia seems stalled.
”If countries wait too long, they may be left out of the race,” said Tomasz Telma, an economist at PlanEcon, a Washington-based think tank that monitors Eastern European economies.
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”If a (Western) company wants to invest in Eastern Europe in the next 10 years, it`s not going to wait for Czechoslovakia to decide to finish its reform program.
”The danger of these countries staying permanently behind Western Europe is very real.”
The revolutions were the easy part. The former Soviet bloc, including the Soviet Union itself, is finding it is simpler to overthrow a Communist regime than to build democracy and a modern economy on its ruins. Earlier hopes that decades of communism could be overcome in two or three years seem wildly optimistic.
Politically, all these countries have held elections. But democracy is more than an electoral system. Except for Hungary, none has political parties with platforms that go beyond anti-communism. Press freedom is rudimentary, and new newspapers find their growth blocked by government controls on paper and distribution networks.
The bureaucrats who ran Communist regimes are still in place. The panoply of democracy-independent courts, access to information, a non-political civil service-is only now being set up.
Militarily, things are brighter. Most experts, including U.S. Defense Secretary Dick Cheney, say the pullback of Soviet troops from Hungary and Czechslovakia, due to be completed by mid-1991, is on schedule. Moscow has agreed to withdraw its massive army from a united Germany within four years;
its smaller contingent in Poland should be gone by then.
Economics is where the big problems lie. Moscow and its former allies are in a ”deep recession” that will last at least two years, according to Andreas Luecke, a specialist on Eastern Europe at the Association of German Industries in Cologne.
”Most commentators assume that prosperity follows hot on the heels of the political liberation of Eastern Europe,” said David C. Roche, a Morgan Stanley analyst in London. ”However, although I believe the road we are traveling on in Eastern Europe leads in only one direction and there is no going back, it twists and turns its way through the mountains of difficulties which these countries are likely to encounter long before they reach prosperity.”
Another Morgan Stanley analyst, Barton Biggs, is even gloomier.
”Everyone seemed to think that all Eastern Europe and the Soviet Union had to do was to declare capitalism and free markets, and their troubles were over,” Biggs wrote. Instead, he said, they are ”falling into an inflationary depression . . . People are losing their jobs and incomes at a time that prices of essentials are soaring.
”This is a recipe for riot and revolution.”
Biggs noted that ”impoverished, developing countries need strong governments with a clear vision capable of making bold and difficult economic decisions.”
Instead, the countries of the former East bloc have governments in which new parties and power blocs are being formed daily (Soviet Union), or are led by revolutionary umbrella organizations that have not yet dared to take tough economic decisions (Czechoslovakia and Romania) or that rest uneasily on coalitions (Hungary).
Poland`s dramatic, go-for-broke economic reform is endangered by the split between Lech Walesa and the Solidarity-run government.
Roche and other analysts say there are several reasons for this
”inflationary depression:”
– The countries are removing subsidies that kept prices artifically low-so low that, in Poland, bread was cheaper than the grain that went into it, leading farmers to feed loaves of bread to their livestock. Result: with subsidies going or gone, prices are soaring and families must scrimp.
– Factories and other businesses that never had to compete now must learn how to compete. Most are cutting employees. But many can`t do it and are folding. Result: unemployment-some 450,000 jobless in Poland alone. The CIA predicts this figure will more than triple by year`s end.
– The future lies in attracting foreign investment. But this takes time and foreign confidence. Economic turmoil discourages confidence. Result: the expected flood of Western money is, so far, just a trickle.
– Except in Poland, economic reforms are halfhearted. Even in Poland, they are incomplete. Result: the Eastern economies aren`t ready yet to absorb whatever Western aid and investment is available.
Subsidies amounted to 10 percent to 20 percent of the gross national product in most of the Soviet bloc. You can`t chop that much out of an economy without pain.
”The elimination of state subsidies reduces the income of a large part of the corporate sector, which was busy making nothing that anybody wanted anyway,” Roche said. ”Companies go bust, and a lot of people lose their jobs. At the same time, inflation is busy (eating up savings). Living standards, salaries and the value of savings fall. So demand shrinks.”
A recession means negative growth-that output actually falls. Output in the first five months of this year fell 1.5 percent in the Soviet Union, 7.1 percent in Yugoslavia and nearly as much in Hungary. In Poland, it`s off 24 percent from this time last year.
The Eastern leaders, led by Soviet President Mikhail Gorbachev, are begging for Western aid and credits. Aid has begun to flow from the United States, the European Community and other industrialized countries to Hungary and Poland, but more is needed.
West Germany, for political reasons, wants massive Western aid-$15 billion or more-to the Soviet Union. The Bush administration thinks that the current anarchic Soviet economy would waste such aid. Others think the West should put all its aid into Eastern Europe and let the Soviet Union break up, if it comes to that.
”We could lose three countries (Poland, Hungary and Czechoslovakia)
unless we help them,” says David Owen, former British foreign secretary.
”There`s no guarantee that they`ll become industrialized Western democracies.”
There have been calls for Marshall Plan-type aid. But the Marshall Plan pumped money into postwar Western Europe, which already had everything it needed-skills, industrial expertise, management, export markets-except cash.
Parts of Eastern Europe-Bohemia and Silesia, for instance-have an industrial heritage. But more than four decades of communism have robbed it of skills and expertise. There`s no market for its exports. And it doesn`t have cash, either.
Worse is to come.
Except for Hungary, these nations traded mostly with one another. This trade may have been in shoddy goods at phony prices but it was all there, and it kept them going. It will be years before they make things the West wants.
Now, as all these countries plunge into depression, they are buying less from one another. Czechoslovakia`s exports to the Soviet Union fell 17 percent in January, and its trade with East Germany is off 40 percent. Hungary`s exports to its former partners is off 31 percent this year.
Will reforms bring pain?
Consider the Soviet Union`s decision to price oil exported to its ex-satellites at world prices and make them pay in hard currency, instead of barter. Any economist would agree this is sensible and inevitable. But it will cost the ex-satellites $5 billion in Western currency this year-all the Western aid they expect to get.
Finally, there`s unemployment insurance. Under communism, the saying went, ”We pretend to work, and they pretend to pay us.” It was a bad system but, officially, unemployment didn`t exist.
Now easily 20 percent of Eastern Europe`s work force (21 million people)
could end up jobless. They earn an average of $3,000 per year. If they got unemployment pay equal to half their salaries, the annual bill would be $31.5 billion. Their countries just don`t have this money.
The Soviet Union`s economic woes are well-known. Shops are empty. Black marketeering is rampant. Inflation is in double digits. Workdays lost to strike are up 20 times over last year.
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Three proclaimed economic reforms have been botched in the past year when the government caved in to opposition. Western leaders, including President Bush, are known to doubt that Gorbachev and his aides want a market economy-or even understand what the phrase means.
The Soviet Union, like the rest of Eastern Europe, needs privatization of state companies, a pricing system, independent banks, commercial laws and a serious currency. At the current rate, it will not get any of these-or it may get lots of them.
The Baltic states, the Russian Republic and the Ukraine want to set up their own economic institutions, en route to declaring independence-moves that would shatter what`s left of the all-Soviet economy.
Eastern Europe`s economic gamut runs from East Germany to Romania. East Germany, about to be absorbed in a united Germany, is expected to grow the fastest, as West Germans pour in money and factories.
Romania, left destitute by the regime of Nicoleau Ceausescu, saw its chance for sizable foreign investment virtually destroyed this spring when its government, all former Communists, called in thousands of armed coal miners to drown dissent in blood. Morgan Stanley calls it ”the most unattractive
(country) in Eastern Europe as an investment opportunity.”
The other Balkan nations-Yugoslavia, Bulgaria and Albania-have always been relatively backward, and few analysts feel they have any chance to rise to Western European levels.
Because of that, most Western interest has focused on the three nations of north central Europe-Poland, Czechoslovakia and Hungary. All are Western in outlook and heritage. All are given the best chance to succeed and eventually join the European Community, possibly in this decade.
But all are just beginning to realize how much this success will cost, and to grasp that it might not happen after all.
POLAND:
When the Solidarity-led government introduced its radical economic reforms in January, every Pole knew they would hurt. But 70 percent of the people backed the reforms and said they were ready to take pain, if the inevitable downturn bottomed out soon. How soon? By April, said some. By June at the latest, said others.
April and June have come and gone, but the bottoming out is not in sight. Walesa already is calling for measures to ease the pain. So are unions. So are more and more Poles.
Yet Western companies, even German ones, are reluctant to pump investment money into Poland until they can see what kind of economy the nation will have and whether the reforms will work.
The reforms are crucial for the entire future of Eastern Europe. In one bitter pill, they freed 90 percent of prices, made the Polish zloty convertible, froze wages, wiped out most subsidies and stopped the printing of money to cover deficits.
Even the predictions of hardship were optimistic. The government expected inflation, already at 500 percent per year, to jump 46 percent in January. It rose 76 percent instead.
The government forecast 400,000 unemployed; it`s already 450,000, and rising. The government expected production to be off 5 percent; it`s five times that. The government expected a 13 percent drop in living standards;
it`s closer to 30 percent.
But inflation has since dropped back to 4 percent per month, and is falling. A law on privatization and foreign investment has just been introduced, on schedule. Laws to break up monopolies are to follow. Farmers, able to charge market prices, have turned the streets of Warsaw into peasants` markets. For those with money, there suddenly is plenty to buy.
But fewer Poles have money. Neither do their banks, meaning that few people can get the funds to set up private businesses. Infrastructure-roads, power, especiallytelecommunications-are terrible and need more money than Poland has.
Bribe-fueled bureaucrats set a tone of corruption for the entire society. How long will the pain and depression last?
”It took the shock reforms in Chile 10 years to work,” West Germany`s Luecke notes. ”In Poland, it will certainly take a long time. At the least, it will take years to make the administration more efficient.”
CZECHOSLOVAKIA:
Because they emerged from the Communist years with plenty of industry, low debt, full grocery stores and a high standard of living (compared to their Communist neighbors, if not the West), most Czechoslovaks expected the transition to capitalism to be less painful than in, say, Poland.
This raised expectations-and lowered support for radical, Polish-style reforms.
Comes the dawn. Cutbacks in subsidies have raised food prices 26 percent. The Soviet Union has cut back energy exports to Czechoslovakia by 30 percent, creating huge lines of Skodas at gas stations; next January, these exports must be paid for in hard currency.
Yet Czechoslovakia has fewer sources of Western currency than most of its neighbors. Fully 80 percent of its trade was with other Communist countries. This means it has few contacts and little knowledge of Western markets. It also means it will be hit harder than most by slumps in the Soviet Union and the other former bloc countries.
In the meantime, Havel has ended Czechoslovakia`s lucrative arms exports to the Third World, on moral grounds.
Morgan Stanley`s Roche predicts a 10 percent drop in living standards over the next two years, which will test Czechoslovaks` patience and may defeat moves toward radical reform.
So far, there has been little reform. First, the government waited for parliamentary elections in June. Now, infighting goes on between Havel`s circle and the ”Chicago boys”-the economists around Finance Minister Vaclav Klaus, a Hyde Park veteran and monetarist.
Klaus wants to break up Czechoslovakia`s bloated industrial conglomerates (the average Czechoslovak firm employs 3,500 people) and privatize the pieces that are left. He plans to hold the money supply down to starve out inefficient firms and open up the country to foreign investment. If he gets his way, laws on these reforms could be passed by autumn.
Amazingly, the Communists, before they were toppled, carried out other reforms still facing most Eastern European countries-a commercial banking system, for instance.
HUNGARY:
Hungary started on reforms earlier, back in 1968. Most were halfhearted, but it left a country more Western-oriented than the rest. Budapest is the only Eastern European capital that already feels like a Western city.
The country had no revolution. Instead, the Communists gave up power, more or less voluntarily, and allowed real Western-style parties, formed along ideological lines, to take shape. Today Hungary has a right-wing coalition government with a vibrant liberal opposition.
Poland and Czechoslovakia still are led by charismatic leaders beneath broad umbrella groups like Solidarity and Civic Forum. The new Hungarian prime minister, Jozsef Antall, is a dull librarian with none of the allure of Walesa or Havel, which may be to Hungary`s advantage.
More than any country, Hungary benefits from foreign investment by Western firms-1,800 so far. General Electric, General Motors and Ford are there. So are German and Japanese firms. The streets of Budapest bloom with McDonald`s, adidas and Benneton.
But Hungary is barely halfway there. Inflation is 30 percent. Hungary`s foreign debt per capita is the highest in Eastern Europe. In a work force of 5.5 million, 1 million are bureaucrats. Three 3 million more are in uncompetitive heavy industries.
Privatization and more foreign investment are vital. Yet both suffer from a political backlash. A number of state-owned companies, including a major hotel firm, have been sold to the West at cut-rate prices. The Communists who ran these firms seem to have taken part of the profits, and kept their jobs to boot.
Behind this lies a problem that bedevils privatization throughout Eastern Europe. After years of phony pricing and state ownership, no one knows just how much most firms are worth. The big Western accounting firms have set up in Budapest and other capitals, mostly to put a price on assets so they can be sold.