Eastern Europeans Focus on a Capital Idea

Eastern Europeans today talk about capitalism much the same way that American teen-agers talk about sex: with growing anticipation, excitement and a tone of bravado that’s not quite endearing.

What’s arousing the greatest passions, however, is how best to manage the painful transition from socialist control to market forces. What should happen to all those state-owned, state-run monopolies that produce the food, steel and automobiles? Who should own them? The people or foreign investors? How should they be privatized? Is it even a good idea to privatize a monopoly?

These were just a few of the easy questions that a distinguished group of Western economists and Eastern European finance ministers struggled with at the “Transition to a Market Economy--Institutional Aspects” conference here sponsored by the American Agency for International Development and the University of Maryland’s Institutional Reform and the Informal Sector project.

That Volkswagen had just spent billions to acquire the majority stake in Skoda, Czechoslovakia’s automobile monopoly, merely reinforced the existing sense of urgency.

The intricate legal and antitrust implications of privatization were rigorously examined. Various Eastern European ministers paraded their privatization proposals for academic scrutiny. Czechoslovakia’s assistant minister of finance offered a mass coupon and voucher distribution scheme that got economists’ eyes popping with disbelief. Hungarian and Polish officials explained the mix of economic theory and political pressure that made the privatization process so much more difficult than they had imagined.

In fact, in every Eastern European country represented, privatization of state enterprises was progressing far behind schedule. There was the fear that these delays would not only postpone the onset of a true market economy, but they would also further corrode Eastern Europe’s already ailing industrial productivity.

Something interesting happened. The Westerners told the Eastern Europeans that they were obsessing on the wrong issues.

“Privatization may burn up more of the society’s resources than simply shutting down state-run enterprises and starting new ones,” University of Maryland economist Peter Murrell asserted. “Privatization could be dangerous if it becomes a distraction. . . . You should put new firms at the center of the creation of a capitalist market.”

“It is as important to develop new firms as it is to privatize,” agreed MIT economics professor Stanley Fischer, who was recently chief economist and vice president of development economics at the World Bank.

“There is a misplaced fixation on privatization rather than the creation of an environment where new enterprises can flourish,” said Duke University professor Anne Krueger, formerly of the World Bank. “If you look at Korea, 80% of the national income streams came from new enterprises 10 years after reforms were enacted. . . . Last year in Turkey, 60% of income streams came from new enterprises compared to a decade earlier.”

In effect, these economists recalled Joseph Schumpeter’s notion of “creative destruction”--Eastern Europe’s state enterprises may well be incapable of being engines of economic growth. They need to be replaced by a new generation of entrepreneurs. It is better to create an economy that encourages innovation and entrepreneurship than put the nation’s best talent to try to attach wings to dinosaurs.

“You can’t instill the spirit of entrepreneurship from the top,” said Jerzy Dietl, a member of Poland’s Senate and vice chairman of the Commission of National Economy. No, but a nation moving to a market economy needs to carefully select just what incentives it wishes to offer its nascent private sector.

Westerners looking to see how well the post-communist Eastern European economies are doing should care less about the old monopolies and more about who becomes the H. Ross Perot of Hungary and the Steve Jobs of Czechoslovakia. They should see which Polish and Yugoslavian universities are emulating Stanford University and the Massachusetts Institute of Technology in their ability to generate new enterprises.

Silicon Valley journalist Michael Malone once commented that Eastern Europe doesn’t need a Marshall Plan, it needs a Terman Plan--named for Frederick Terman, the Stanford provost who persuaded Hewlett and Packard to launch a company from their garage and godfathered the Silicon Valley phenomenon.

This Terman Plan would help build Eastern Europe’s ability to grow new business much as the Marshall Plan helped post-war Western Europe rebuild its old ones.

So, who will be the Frederick Terman of Prague or Warsaw? Will there ever be one? The answer to that question is far more important to the economic destiny of Eastern Europe than the ability to “profitably” sell off a dairy processing plant.