Eastern Europe: The Shock of Reform

By GEORGE J. CHURCH

"I think we'll be perched on the edge of catastrophe for a long time to come. This makes me an optimist."

-- Krzysztof Bien, economics editor of the Warsaw daily Rzeczpospolita

What, then, would a Polish pessimist predict? About what is expected by gloomy counterparts in Hungary, Czechoslovakia and the other Soviet satellites that broke free of communism in 1989. Standards of living will drop so low and for so long that the populace may rebel, not just against capitalism and free- market economics but against democracy as well. Possible result: the accession to power of "the man on the horse" -- a dictator.

It does not have to come to that. Here and there, small signs of economic revival are appearing. Horrendous inflation rates are slowing down; private businesses are opening and doing vigorous trade. More and better-quality goods are appearing. In Poland particularly, the days of bare shops are over as stores fill with everything from pickles to Mercedes cars -- though many items are well beyond the reach of potential customers.

Still, there is no question that the slump in production and the rise in prices and joblessness are breeding dangerous discontent. In Czechoslovakia "almost half the population is dissatisfied and nonsupportive of economic reform," says Marek Boguszak, president of a Prague opinion-research firm. "The hardship is almost at the crucial point where it could turn to aggressive opposition to reform."

But this is where "shock treatment," the crash course in economic reform advocated by many Western economists, was supposed to work. These advisers said if price controls were lifted, if subsidies to state enterprises were stopped, if curbs on imports were ended and if currencies were allowed to trade freely, Eastern Europe could move swiftly from communist stagnation to free-market prosperity. On the way, the unavoidable pain would be initially sharper but also, it was hoped, shorter.

So far, it hasn't quite worked out that way. The East European nations have received more pain than gain. Critics say they lacked essential preconditions to make such an overnight change successful. There was, and is, no well- developed banking system capable of siphoning capital and credit to entrepreneurs opening private businesses or to state combines suddenly shorn of their subsidies. No country has been able to figure out a rapid way to convert state businesses to private ownership. "It is absolutely wrong to come in here with textbook notions of economics," says Werner Varga, an economist with Creditanstalt, a large Austrian bank that keeps a close watch on the region.

Western advisers and East European free-marketeers often reply with metaphors: You can't cross a chasm in two jumps; you don't slow down when driving through deep mud. But now slowing down is exactly what some populist politicians in the East want to do. To ease the frightening burden on their citizens, some politicians and economists advocate government action that will keep afloat giant state enterprises, such as steel and textile mills, which have suffered especially deep drops in production and endured the heaviest layoffs. But renewed subsidies would only prolong the economic agony by keeping inefficient dinosaurs alive.

All this constitutes a very bad omen for Russia, which on Jan. 2 began a partial course of shock treatment, mainly by freeing prices. Analysts agree that converting to a free market will be much more difficult for Russia, partly because of its sheer size, but even more because it was wrapped in the communist straitjacket much longer. President Boris Yeltsin probably compounded the trouble by promising Russians that the worst hardships would be over in a mere six to eight months. The results so far are distressing: prices for goods have more than tripled without any significant increase in store supplies. People are already growing restive. Yeltsin has been telling Western governments that if there is no quick improvement, a new dictatorship might emerge.

Though outsiders are prone to consider Eastern Europe a single entity, the countries differ considerably. Prospects for the northern tier of Poland, Czechoslovakia and Hungary, however clouded, are brighter by far than those for the southern tier of Romania, Bulgaria and Albania, where political as well as economic reforms have barely begun.

POLAND. "If anybody can make it, the Poles can," goes one widely believed refrain. Even under communism the country preserved some corners of a private economy, and the Poles rebelled against their red masters earlier than their neighbors, developing broad popular support for reform. Poland also began shock treatment first, in January 1990 -- and may become the first to step back.

The drastic program has had some successes. Poland may soon find that it has more people working for private bosses than for the state; according to at least one estimate, 45% of all employment was private by late last year. Virtually all retail business is in private hands.

Quality and quantity are up -- but so are prices. Poles, says a Western diplomat wryly, "are eating less but as well." Some citizens are even getting rich. A visitor to Warsaw found Avenue of Pope John Paul II thronged with well-dressed young people hurrying to the opening of a new clothing shop, where they sipped champagne and eyed the latest designer fashions.

By official count, however, total national output fell 12% in 1990 and an additional 7% last year. Some analysts think that is far too gloomy; if black and gray markets are counted in, production has held level. Maybe, but unemployment has jumped to 2 million, or 11.4% of the labor force, and is expected to hit 3 million this year. The annual rate of inflation, a stunning 600% to 700% in early 1990, has come down to 60%, but prices are still rising faster than wages. "My salary is good enough for only two weeks out of the month," complains Slawomir Nawrocki, a coal miner demonstrating outside the parliament in Warsaw.

Popular discontent is running deep, as evidenced by a wave of strikes. When respondents were asked in a recent survey which of six leaders governed Poland best, "none of the above" came in first with 28%, followed by "no answer" with 18%. Tadeusz Mazowiecki, Poland's first noncommunist Prime Minister, was the leading human at 14%; Lech Walesa, the current President and long considered the dominant figure in Polish politics, drew only 8%, coming in sixth behind Wojciech Jaruzelski, the last communist leader. Many fear that a succession of weak, short-lived governments pursuing inconsistent economic policies could open the way for a populist demagogue and even an authoritarian revival.

CZECHOSLOVAKIA. Prague began shock treatment a year later than Poland, prodded by zealous free marketeers, especially Finance Minister Vaclav Klaus. Inflation, which totaled 60% for all 1991, now runs 1% to 1.5% a month, which in Eastern Europe passes for price stability, and the country has the lowest foreign debt of all the former satellites.

End of good news. Like Poland, Czechoslovakia has been hit hard by the collapse of Comecon, the economic organization of the former Soviet bloc. Exports to Russia and other once communist countries have shriveled faster than new markets can be developed in the West, and imports of Russian oil now have to be paid for in scarce hard currency. Czechoslovak production fell 16% last year; unemployment, officially zero under communism, has risen to 8% and is certain to go higher, bringing some of the same calls heard in Poland for pumping more money into sick state enterprises.

Klaus has so far rejected them. His current goal is faster privatization. A novel feature of the program is the public sale of $37 voucher booklets containing l,000 investment points redeemable for the stock of state-owned companies. Seven million citizens have invested in the booklets, the bulk of them since late December, when a company called Harvard Capital & Consulting promised a 10-fold increase within a year to citizens who would deposit the booklets with HC&C and let it choose which firms to buy into. The promotion spawned hundreds of imitators and boosted sales, but the privatization program in general has been dogged by chronic delays and reports of corruption.

Klaus' Civic Democratic Party is favored to win parliamentary elections this June, enabling him to continue the free-market drive. But the pain of transition has been felt most deeply in Slovakia, which is highly dependent on state-owned heavy industry. That has intensified Slovak demands for more autonomy or even independence. The government might be able to continue shock treatment only at the price of splitting the country in two.

HUNGARY. Former boss Janos Kadar's "goulash communism" allowed some privatization of industry (15% by 1989) and considerable self-management by state-owned enterprises. So when communism was overthrown, the new government saw no need for shock treatment; officials could institute a more gradual process of lifting price controls and reducing or eliminating subsidies. As a result, Hungary has experienced the smallest drop in production in Eastern Europe (6.5% last year) and the lowest inflation (34% for all 1991, about a third of that at year's end). Hungary has been especially successful in attracting foreign investment; it has formed no fewer than 10,000 joint ventures with Western firms. The country has also developed new markets to replace those lost when Comecon collapsed; more than three-quarters of its exports go to the West.

But if Hungary is closer to prosperity than any of its neighbors, it is hardly there yet. Unemployment, now 7.3%, is expected to rise to 11% by the end of this year. By some estimates, Hungarian standards of living are lower now than in 1979. A huge budget deficit is also spurring concern. One odd result is that the government is under fire for not being tough enough. "Programs that shock the populace are unavoidable, but the government has sought to avoid them," laments Marton Tardos, parliamentary leader of the opposition Alliance of Free Democrats. Still, the government's measured if plodding approach is expected to make Hungary the first post-communist country to see its economy actually grow.

THE SOUTHERN TIER. The government of Romania looks to many critics like a continuation of communism without Nicolae Ceausescu, the dictator executed in 1989. Not much has changed for the better in this benighted land. The government has passed some privatization laws, but quasi-communists within the ruling National Salvation Front have blocked any deeper reform. The moves so far have served mainly to spur inflation and unemployment without easing the severe shortages of all consumer goods, including food. Bulgaria at least has enough to eat, thanks largely to the fertility of its soil and the skill of its farmers. It has also made some progress toward political freedom: incumbent President Zhelyu Zhelev, chosen in 1990 by the parliament, won the nation's first direct presidential election last month against an opponent who accused him of trying to impose an "alien" system -- a market-oriented democracy. But economic reforms have been introduced only halfheartedly, just enough to cause inflation and rising joblessness. Albania, long isolated even from the rest of the communist world, held democratic elections last year, but its government has been unable to forge any economic system to replace the shattered communist structure. The country is the only one in Eastern Europe threatened not just by food shortages but by outright starvation.

In the countries of the northern tier, the biggest problem is time. Many analysts point out that the capitalist economies of the West grew organically over centuries. It was totally unrealistic for anyone to expect that Eastern Europe could demolish the communist system and build free-market democracies in two -- or even 10 -- years. Yet many people in Eastern Europe thought that by getting rid of the stagnant and oppressive communist system, they could enjoy Western prosperity overnight, and their governments failed to disabuse them of that idea.

Two troubling questions loom as the East Europeans slowly turn capitalist. Will they have the patience to endure still more dislocation? And will the pattern of optimism, pain and disillusion be repeated in Russia, on a vastly greater scale and with far more dire consequences?

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CAPTION: Foreign Investment

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With reporting by Daniel Benjamin/Warsaw, James L. Graff/Budapest and William Mader/London