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                N`                            @=A=B=C=                        WORLD, Page 38

EASTERN EUROPE

The Shock of Reform


Creating a market economy was supposed to hurt -- for a while.
But why are places like Czechoslovakia, Poland and Hungary still
in such pain?

By GEORGE J. CHURCH -- Reported by Daniel Benjamin/Warsaw, James
L. Graff/Budapest and William Mader/London


    "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?