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Text File | 1994-05-02 | 53KB | 952 lines

<text> <title> Eastern Europe Goes To Market </title> <article> <hdr> Foreign Policy, Spring 1992 Eastern Europe Goes to Market </hdr> <body> By Mark Kramer, a research fellow at Brown University's Center for Foreign Policy Development and a fellow of Harvard University's Russian Research Center. The collapse of communist rule in Eastern Europe in the autumn of 1989 brought with it widespread euphoria about the prospects for democratic change and economic prosperity. By the start of 1992, however, the optimism of 1989 had been supplanted by a sense of gloom. This deepening pessimism stemmed in part from the resurgence of old political rivalries and national conflicts, including the bloody civil war in Yugoslavia and the turbulent dissolution of the Soviet Union. As Western Europe moved toward greater political and economic integration, Eastern Europe faced disintegration and internecine warfare. Even if these ethnic and political fissures had remained submerged, the growing public awareness in Eastern Europe of the region's economic plight would have been enough to sustain a mood of pessimism. The task of replacing dysfunctional state-controlled economies with viable free-market systems would have been formidable under the best of circumstances. In Eastern Europe, the task has been further complicated by a series of external economic shocks and by the lack of clear guidance from past experience. Although previous transitions from authoritarianism to democracy in Latin America, the Iberian countries, and Greece are instructive, the economic and political challenges facing Eastern Europe have no ready parallel in modern history. The East European countries find themselves embarking on a painful and prolonged economic transformation without any guarantee that their sacrifices will pay off in the end--but with the risk of growing social and political unrest. Official statistics in all the East European countries paint a grim picture of the first two years of postcommunist transitions, revealing substantial declines in both production and living standards. Advocates of a cautious approach to reform widely cite these statistics, claiming that the cure of "shock therapy" is killing the patient. In reality, the gloomy statistics tell only part of the story and, in some respects, are highly misleading. The decline in production in each country came exclusively in the inefficient state sector, where most of what was lost would have had no place in a viable free-market economy. Moreover, the production statistics often understate the growth and vibrancy of the private sector, especially the rise of small-scale entrepreneurs. In Poland, for example, some 1.4 million private businesses opened between December 1989 and December 1991, and their impact on the economy is not always given due weight by statisticians. Official data showing a precipitous drop in living standards and a sharp rise in unemployment are misleading as well. These figures do not adequately reflect qualitative improvements in peoples lives, such as the disappearance of lines and the improved quality of consumer goods and services. Nor do the figures take into account money people earn in the private sector but fail to report in order to avoid paying taxes. The statistics also exaggerate unemployment, counting as unemployed those who actually work in the "second," or unofficial, economy. The unemployment figures also include people who in previous years had been paid wages for work they never performed. The disguised unemployment of the communist era has now simply been acknowledged. In short, from an economic standpoint, the initial results of the postcommunist transitions are less discouraging than the official statistics indicate. From a political standpoint, however, the situation is altogether different. In the political arena, the actual (or projected) achievements of the economic reforms matter less than the public perception of those achievements. On this score, there seems little basis for optimism. The electoral results in Poland in October 1991, the sporadic demonstrations against price increases in Hungary, the labor unrest and widening ethnic division in Czechoslovakia, and the violent rampages by miners in Romania all bear witness to growing popular discontent with the hardships and austerity that economic reform requires. The basic question for the East European countries over the next few years is whether the proponents of economic shock therapy will survive the political fallout of their reforms and, if not, what the consequences of a gradual approach or even outright failure might be. Why have the post communist economic transitions in Eastern Europe encountered such difficulty, and what might be done to improve the situation? Four basic problems have complicated the economic transformation of these countries: disruption of foreign trade, the ambiguity of property rights, worker resistance, and uncertainty about the appropriate sequencing of reforms. The first category refers to the external climate for reform, whereas the second, third, and fourth categories concern internal matters. These four problems are not the only ones that the postcommunist states have confronted, but they are the most important and they bear, at least indirectly, on all other obstacles to the creation of free-market systems. Trade Shocks From the late 1940s until 1989, the Soviet Union was by far the largest trading partner of all the countries in the region. The East European states depended heavily on Soviet supplies of energy and raw materials, and many East European firms relied on the USSR as their main customer for finished goods. By contrast, the USSR, as a largely autarkic state, depended relatively little on its imports from Eastern Europe and could easily shift its exports of energy and raw materials to the West. Soon after the upheavals of 1989, Soviet-East European trade began to crumble. In 1990 the Soviet Union reduced its deliveries of oil and natural gas to Eastern Europe and sought to export more to the West for hard currency. Starting in January 1991, the USSR and East European countries replaced the transferable ruble with the U.S. dollar as the basis for all transactions. This change, carried out at Soviet insistence, forced the East European and Soviet governments to use world- market prices for the goods they traded (including Soviet oil), thus ending the artificial pricing system that have long existed within the council for Mutual Economic Assistance (COMECON). Fittingly enough, COMECON, which had been moribund since late 1989, was formally disbanded in June 1991. This shift to hard-currency financing not only forced the East Europeans states to pay more for Soviet energy supplies and raw materials; it also deprived them of vital markets. Because Soviet officials and enterprise managers for the most part had to use scarce hard currency reserves to pay for East European goods, they chose instead to buy what they needed from Western suppliers, whose products were of much better quality and only slightly more expensive. The resulting decline in orders for the USSR for East European products dealt a sharp blow to East European firms as yet unable to compete in Western markets. In the first quarter of 1991, Czechoslovak and Hungarian exports to the Soviet Union fell by 80 percent, and for the year as a whole they declined by nearly the same amount, despite a partial return to barter trade in the second half of 1991. The drop in Polish exports to the USSR was almost as steep, around 60 percent. The reductions particularly hurt pharmaceutical, transportation, cosmetics, and food processing industries, leaving them with warehouses of unsold goods that were unmarketable in the West. The growing chaos in the Soviet economy further disrupted Soviet-East European trade. By mid-1991, most of the USSR's foreign tr