IMF Warns Eastern Europe of Aid Limitations : Finance: The International Monetary Fund is urging the fledgling democracies to speed up the move to free-market economies.

Key International Monetary Fund officials warned the emerging industrial democracies of Eastern Europe on Monday that they must move more quickly toward free-market economies or risk seeing their Western aid dry up.

The IMF has been a crucial source of financial support for those fledgling democracies, this year alone offering them loans worth $5 billion under agreements in which they have promised to undertake steps that the fund believes are necessary to revive their economies.

Yet it is the East European countries themselves--and not their Western lenders--that are ultimately responsible for getting their own economies in order, Belgian Finance Minister Philippe Maystead said. Maystead is chairman of the Group of 10, which includes economic policy-makers from leading industrial powers.

In a written statement released at the IMF’s semiannual meeting here, the group said the transformation of those countries from state-run to market-led economies “should proceed as rapidly as possible and across a broad front.”

However, the Group of 10 ministers warned that loans from the fund “could only be limited and temporary,” given the scarcity of capital around the world and the growing need for it. Their ultimate goal should be to demonstrate the “stable self-sustained growth” that will attract private investors, the statement said.

Although creditor governments recently eased Poland’s economic load by agreeing to write off a large share of its debt, that country is “a special case. . . . It cannot be used as a precedent for the same kind of operation in other countries,” Maystead added.

Thus far, the overhaul of Eastern Europe’s economies has proven even more difficult than many had expected. Industrial production has plummeted, throwing tens of thousands of workers out of work, and inflation is raging out of control in some countries.

The World Bank--the IMF’s sister lending organization--issued a sobering warning Monday suggesting that the worst is not over. Reaching a standard of living akin to that of Western Europe “is a matter of decades, not a matter of years,” World Bank chief economist Larry Summers said.

Given the economic shocks being felt by the formerly socialist countries, the officials conceded, some might argue for slowing down the transition from the seeming security of an economy where the government made all the critical economic decisions to one in which market forces take control.

But “gradual is no good for things of this nature,” said Italian Finance Minister Lamberto Dini, chairman of the Group of 10’s Council of Deputies. “You will have to go with a massive kind of reform. Gradual aims are only likely to require too many resources, which . . . have proven, particularly at this point in time, to be very scarce internationally.”

IMF and World Bank officials have referred to their recommendations as the “big bang” approach.

Pointing to the political and economic turmoil in the Soviet Union, where hard-liners and reformers are engaged in an intense struggle over the direction of the country, Summers said: “Partial reform, as we’re seeing very clearly in the Soviet Union, doesn’t work.”

WHAT THEY’RE DOING: EASTERN EUROPE AT A GLANCE Poland:

Leads the entire region in overhauling and restructuring its economy. Tight spending and credit policies have cut inflation to below 30% this year, from 250% in 1990. Currency is now fully convertible. A stock market has been established. And Poland’s debt burden has been cut by Western governments.

But conversion of state-owned industries into private firms is proceeding more slowly than authorities had hoped--mainly because of difficulty in finding buyers and competent managers. Unemployment is rising, now topping 10%.

Hungary:

Started on restructuring, but the effort is going slowly, partly because Hungary has not carried out harsh fiscal reforms and because authorities want to let the privatization effort “trickle up” from the bottom rather than ordering state companies to sell off their assets.

Eastern Germany:

Hopes for economic success were high when East Germany was absorbed into West Germany, but progress has been slower than expected and Western business has been reluctant to invest much in the region.

Although the merger provided one-time East Germans with new opportunities, it also made East German industry obsolete virtually overnight. As a result, the region faces a serious depression, with massive unemployment now estimated at 40% of the work force.

Most analysts believe that it will take another five years for the East to get on its feet. Meanwhile, the region’s workers are racing to take advantage of job opportunities elsewhere.

Czechoslovakia:

Prague finally has introduced some radical reforms, slashing government subsidies and forcing companies to stand on their own, but Czechoslovakia still is six months to a year behind Poland in restructuring its economy.

Bulgaria:

The new democratic government has imposed a comprehensive economic program that includes massive reductions in government subsidies and an overhaul of national pricing practices to bring them in line with prices charged worldwide. But privatization efforts are lagging.

Romania:

The slowest and most backward of former Eastern Bloc countries. Political problems have slowed efforts at economic reform.

Source: International Monetary Fund, State Department