World Bank Sees More Tough Times for Eastern Europe

The euphoria surrounding the newborn free-market economies of Eastern Europe is yielding to the grim pessimism of statistical reality.

“The only thing that has collapsed faster than industrial productivity is the consensus over quality of living standards,” said Lawrence H. Summers, vice president and chief economist of the World Bank. “It will be closer to a lifetime than a generation before Eastern Europe’s economies will be comparable to Western Europe’s.”

Speaking late Sunday to a group of leading U.S. economists and Eastern Europe financial ministers at a conference sponsored by the U.S. Agency for International Development, Summers offered preliminary World Bank figures indicating that Eastern European economies will get worse before they get better.

Average output for the region is expected to drop roughly 15% this year. For example, East German output dropped 20% last year and is expected to fall another 20% in 1991. In fact, says Summers, World Bank estimates are that per-capita income in North Central Europe won’t be return to its 1989 level until 1996. It will take until the year 2000 for South Central Europe.

For now, said Summers, “It’s hard to see that even the richest part of Central Europe enjoys a standard of living greater than the U.S. did in the 1920s.”

Dismissing the specter of a “capital crunch” slowing Eastern Europe’s recovery, Summers argued that “the problem isn’t a lack of capital. It’s that even with the given capital, growth is slow. . . . It’s not a capital gap. It’s an institutional gap.”

In other words, the Eastern European economies don’t yet have in place the legal and market mechanisms that will enable them to effectively generate economic growth.

While Eastern European governments are trying to re-engineer their economies, they face a daunting array of obstacles ranging from political resistance to cultural confusion. Privatizing state-owned enterprises and eliminating centralized economic planning has proved more wrenching than anticipated.

Hungarian economist Andras Nagy noted that, although the Eastern European public is delighted with political democracy, “we find enormous resistance to the democratization of the economy.”

In an effort to build popular support for their free-market initiatives, Eastern European finance ministries are exploring a variety of innovative proposals for bringing capitalism to the people.

At the conference, Dusan Triska, Czechoslovakia’s deputy minister of finance, announced details of a plan to give vouchers to the entire adult population of the country. The coupons would be redeemable for shares in 2,000 of the country’s newly privatized companies.

Triska, who hopes to launch the voucher program in the fall, anticipates that as many as 4 million Czechs will sign on and sees “hundreds of mutual fund companies” springing up to handle investments.

“We’d offer ‘cocktail companies’-- mixtures of companies like South Bohemian Textiles and East Moravian Chemicals,” he said. “We are not giving away the family silver--we’re giving away a bankrupt economy.’

American economists greeted the Czech proposal with skeptical curiosity. ‘We have proven capital-market systems that work,” said Summers. “This seems more suitable to the design of a board game than the design of a new economy.”