COLUMN ONE : A Rocky Switch to Capitalism : A free market, seen as the antidote to communism in Eastern Europe, is proving to be a bitter pill.

Ryszard Puchala is camping out in a mile-long line at the government-owned cement factory, waiting three days to buy raw materials for his construction business.

It may not be worth the trouble. So sour is the economy of Poland’s countryside that most of the local farmers cannot afford Puchala’s services anyway.

Times are tougher still at the other end of Eastern Europe, where Romania is trying desperately to inject Western investment into its foundering economy. A sign of its difficulty: On a list of foreign countries whose businesses have invested in Romania, the United States ranks sixth, just below Libya.

Capitalism, the prescribed antidote to four decades of repressive communism in Eastern Europe, has paradoxically made the patient sicker, at least for the short term. The lifting of government controls has sent prices soaring far faster than wages. Antiquated factories, operating for the first time without government subsidies, are closing for lack of customers, leaving countless workers without jobs for the first time in their lives.

Even in Hungary and Czechoslovakia, the region’s two most vibrant nations, last year’s recession struck deeper than any in the United States since the Great Depression.

For most countries, conditions will get worse before they get better.

The free-market medicine, however, may be beginning to take effect. The most obvious evidence can be found in the big cities, where private shops are blossoming to meet long pent-up consumer demand.

Some of the signs point to more fundamental change. Jarek Astramowicz is one--a new breed of Eastern European businessmen who want to make capitalism work and themselves wealthy. The 33-year-old Astramowicz, who left for Merrill Lynch in Boston a decade ago, has returned, and, as a consultant for Elektrogaz Ventures, is working on a plan to extract methane from the Silesian coal fields.

“The amount of work there is to do here is overwhelming,” Astramowicz says. “I work 14 or 16 hours a day, six or seven days a week.”

And although much of Eastern Europe’s heavy industry may be beyond salvation, some of its light industry may prove globally competitive when set free of government ownership.

A happy combination of well-trained work forces and low wages puts Romania’s textile and furniture industries in this category. Bucharest’s gigantic Stil Conf textile plant has split into nine autonomous parts; Aurel Filfan, the general manager of the unit specializing in menswear, says decentralization has permitted him to tailor his production to the market, not to some bureaucrat’s orders. Although the government is still the owner, Filfan says: “We enjoy much more freedom to do things our own way.”

Uncertainty Grows

Hanging in the balance are the new democracies established by the revolutions of 1989. Capitalism may bring prosperity tomorrow. But today’s hard times have spawned political unrest everywhere, from protests by Poland’s Solidarity union to strikes by Romanian doctors, teachers, factory hands and railway workers.

Some officials are beginning to wonder if Eastern Europe will be able to get there from here.

“We can’t be sure that the next government will continue what we’re doing,” says Janusz Siwicki, Poland’s vice minister for privatizing government-owned industry. He warns of politicians “who promise everything tonight or tomorrow morning at the latest.”

Most Eastern Europeans, however, have greater faith. “There’s no turning back,” insists Romanian Finance Minister Eugen Dijmarescu. “This government might quit, but that will not change the transition under way.”

The United States and other industrial nations have much at stake: the development of not only a major market for their goods and a source of cheap labor but also a powerful force for world peace. Western Europe fears a tide of immigrants if Eastern Europe fails to satisfy its citizens’ pent-up demand for decent lives.

Yet support from the West--in the form of both foreign aid and private foreign investment--has left Eastern European officials shaking their heads in dismay. They find themselves competing for scarce resources not only with each other but also with the immensely larger, sicker Soviet Union.

“I’m afraid there’s more political commitment than financial commitment,” says Czechoslovak Finance Minister Vaclav Klaus, the dynamo behind his nation’s forced march toward free markets.

In Romania, where the politics remain unstable and the commitment to free markets is uncertain, Dijmarescu raises his eyebrows at Western governments’ declared determination to help his country. “From this declaration to the deed,” he says, “there is still a lot of room.”

If anything is certain in Eastern Europe’s caldron of capitalism, it is that each country is going its own way, propelled by its own particular history, leadership and circumstances.

A North-South Divide

Forget about the “East Bloc,” the undifferentiated column of countries with guns pointed West. David C. Roche, a London-based economist with the Morgan Stanley investment banking firm, says Poland and Romania are as different now as, say, the United States and France.

A north-south divide is shaping up with Poland, Czechoslovakia and Hungary better positioned to succeed than their neighbors to the south.

There are sharp contrasts even within the regions.

Poland leaped first to free markets. In its “big bang” of January, 1990, it simultaneously abandoned price controls, legalized private enterprise and devalued its zloty, which is still the only Eastern European currency that can be traded on international currency markets.

The immediate consequences were an explosion of inflation and a burst of unemployment. But Poland also turned a trade deficit in 1989 into a surplus in 1990, and Roche says “Poland has a very good chance of becoming the next Spain,” the most recent economic success story in Western Europe.

Czechoslovakia held back at first but took the free-market plunge at the beginning of 1991. With its industrial tradition and highly skilled work force, Joseph Tragert of PlanEcon, a Washington consulting firm, calls Czechoslovakia the most attractive for foreign investors.

Hungary, which had dabbled in free markets for two decades, is moving toward a gentler form of capitalism as it seeks to protect its citizens from the most brutal consequences of the transition. Although it has attracted the most foreign investment to date, Thaddeus Kopinski, of the U.S. Chamber of Commerce in Washington, says it is “resting on its laurels and not providing a sufficiently liberal trade and investment climate.”

To the south, the revolutions in both Romania and Bulgaria remain unfinished, with major reform laws still not in place and Communists by other names clinging to important posts.

The CIA calls Romania’s free-market reforms the slowest in Eastern Europe; Roche calls Romania the “least likely to succeed.” Brian V. Mullaney, his Morgan Stanley colleague, says that Bulgaria, which ceased making payments on its foreign debt more than a year ago, is “essentially insolvent.”

Yugoslavia, which had cast off Soviet domination years ago and developed a respectable economic system of its own, has disintegrated into warring republics, leaving the central government powerless to enforce its economic reforms.

Albania, so isolated that even its telephone system was not linked to the international network until last year, inaugurated its first non-Communist government since World War II only last month.

Each country’s predicament may differ in the details. But from north to south, Eastern Europe is wrestling with common problems. The economic collapse of the Soviet Union, a major market for all its former satellites, has hurt everywhere. But most of what ails Eastern Europe is home-grown.

Roads are terrible, telephone systems scarcely function. Largely still absent are the basic institutions of capitalism: stock markets where shares of companies can be bought and sold; legal systems that define private ownership rights; financial institutions where money can be borrowed. Poland turned the former Communist Party headquarters into a stock market for five of its most promising companies, but one promptly went belly up and another is gasping for breath.

Industries Needed

And these are the least of the difficulties. Even with all the free-market institutions in place, Eastern Europe will need productive industries and capable people to run them. For the most part, it now has neither.

Industry’s dreary state during four decades of government ownership is almost impossible to exaggerate. In a study for London’s Centre for Economic Policy Research, economists Gordon Hughes of Edinburgh University and Paul Hare of Heriot-Watt University sought to measure value added by various industries to the raw materials they took in.

To their astonishment, they found a host of industries actually subtracted value--that is, what left their doors was worth less than what entered. Such was the case for Hungary’s steel industry, Poland’s chemical industry and the food processing industry in Poland, Czechoslovakia and Hungary.

It’s not hard to see why. Much of the gigantic Huta Warszawa steel plant, covering 75 acres on Warsaw’s outskirts, now stands idle. (The work force, 11,000 before the 1989 revolution, is at 5,000 and falling.) Before the 1989 revolution, the government would have bought what the plant produced.

“If we had been idle this way under the old system, the secret police would have arrested us,” says Jan Olek, Huta Warszawa’s production coordinator.

The new system requires Huta Warszawa to go out and find its own buyers. But Henryk Staniszewski, a bear of a man who is Huta Warszawa’s production director, says he is not looking.

“Many other countries obviously manufacture steel cheaper than we do,” he says with an air of resignation.

Staniszewski’s comments suggest another of Eastern Europe’s great handicaps: a deficit of managers, not only in industry but also in government, who know how to make free markets work.

“Under the old way, nobody profited from being profitable,” says Stanislaw Wellisz, a top adviser in Poland’s finance ministry. “We have an enormous cadre of managers who have no experience with real markets.”

Thomas S. Scharf, president of Lloyd Equities in New York, found that out the hard way. The Polish-born Scharf, who fled the Nazi onslaught as a boy, is preparing to build and manage multifamily housing in Warsaw.

He has every advantage. He speaks Polish. And Poland desperately needs housing: Warsaw has a waiting list of 1.5 million households looking for a place to live.

Yet it has taken Scharf a year and a half to launch his project.

“Poland may have a new government,” he says, “but the Communists still are the bureaucrats. Under the old system, they had every incentive to say no, because once they said yes, there was nothing for them to do. And even if you can make a deal with one group of bureaucrats, they leave and you have to start all over again with another.”

Privatization Is Slow

In Romania, Finance Minister Dijmarescu estimates an immediate need for 20,000 managers savvy in the ways of free markets. Only a few hundred are now being trained.

Privatizing state-owned industry in Eastern Europe is proceeding more slowly than had been hoped. Hungary is probably making the best progress, although it sold less than 3% of its state-run businesses to private investors last year.

Czechoslovakia is preparing to auction shares of 1,000 to 2,000 enterprises to the highest bidders. Poland is going to try to give shares away.

Siwicki, Poland’s vice minister for privatization, acknowledges that much of his country’s heavy industry will quickly collapse when subjected to free-market competition. Poland’s best results so far have come from smaller firms.

Marek Ogrodzki, chairman of Omig, a Polish manufacturer of electronics components for telecommunications systems, took his company private two years ago. He promptly slashed his work force in half by firing “300 paper-pushing bureaucrats who produced nothing” and laying off 200 production workers.

The recession in Poland, where Omig makes 70% of its sales, has hurt. But Ogrodzki--unlike the management of state-owned Huta Warszawa--is looking for new products and new markets, including cable television.

Ogrodzki can hardly conceive of how the company had worked when the government owned it. “I have absolute independence,” he says. “I’m not a component in a giant planning system. Nobody orders me around.”

New private enterprises are being created much faster than state-run businesses are going private. Hungary is bursting with private shops, restaurants and services. In Warsaw, where food store shelves were often empty as recently as two years ago, yesterday’s street-corner fruit stand is growing into today’s new supermarket.

“After 40 years of having nothing to buy, the customers are coming,” says Tomasz Neumann, the 31-year-old president of Vicomus, a Warsaw shop that sells imported musical instruments ranging from children’s toys to electronic keyboards worth several thousand dollars. “People had savings--the Communists didn’t confiscate everything--and many people have relatives abroad,” Neumann says.

On Nowy Swiat, Warsaw’s answer to Rodeo Drive, Krystyna Pracz, a 35-year-old engineer at the state-owned pharmaceutical manufacturer, has just bought a bathing suit for 160,000 zlotys (about $15)--one-tenth of the average monthly Polish salary.

“It’s expensive,” she concedes, “but Polish women like to dress well, and sometimes we make sacrifices elsewhere.”

Shopping is still not so much fun in the southern tier of countries. At Unirea, a Bucharest department store, Valentina Nastase, 46, has just decided not to buy a pair of blue jeans for 2,500 lei ($42 at the official exchange rate).

A Change in Style

“It’s not easy to find what you want,” she says, “and when you do, it’s very expensive.”

Private enterprise is breeding a new generation of cold-blooded, Western-style business executives. One such is Tomasz Lukasiewicz, director of development for Universal, an export-import trading company that went private last year and is looking for new lines of business.

“Now is a splendid occasion to buy companies very cheaply” because many are bankrupt or cash-starved, says the 34-year-old Lukasiewicz. Universal has bought 30, including a printing company, a hotel and a condom manufacturer.

Like many an American workaholic, Lukasiewicz has little time to see his wife and two sons. “We’re working 18-hour days, and we’re very stressed,” he says. “But there’s a huge chance now--high risk and high gain.”

As usual, the southern countries are lagging. In Romania, the one private entrepreneur who has made a substantial mark is Ion Tiriac, the onetime guru to tennis pros Guillermo Vilas and Bjorn Borg. Tiriac’s enterprises include Romania’s first private bank.

“This country needs a hundred Tiriacs,” says a Western source in Bucharest.

To make up for its deficit, Eastern Europe is searching for capital from abroad. Except for Hungary, which has attracted more than half of the foreign investment in the entire region, each country has been disappointed so far.

“The figures aren’t very impressive,” admits Zbigniew Piotrowski, president of Poland’s Foreign Investment Agency, pointing to Poland’s end-of-year total of $350 million. He blames Poland’s laws, which still raise bureaucratic obstacles to ventures whose foreign ownership is more than 10%, and its customs, which have left many Polish businessmen “distrustful of foreigners.”

Western investors have found little of value in Czechoslovakia’s heavily polluting and energy-wasting factories. Much Czechoslovak production had been geared to the low demands of Soviet and East German markets, both of which have disappeared.

In Romania, Westerners are still waiting for political stability and a more attractive foreign investment law. They will not soon forget that Romanian President Ion Iliescu, who had served in the regime of Nicolae Ceausescu, summoned mine workers to Bucharest a year ago to bludgeon anti-government protesters into submission.

“We have to build our image,” says Misu Negritiou, president of the Romanian Development Agency, with considerable understatement. He hopes Colgate-Palmolive will soon approve a soap and toothpaste plant in Romania.

Bulgaria destroyed whatever chance it had of doing substantial business with Western firms when it ceased payments on its foreign debt more than a year ago.

Germany’s Volkswagen leads the list of Western corporate investors in Eastern Europe, with a deal to spend $6 billion during the next decade to rebuild Skoda, the Czechoslovak auto maker. Among major U.S. investors are General Electric and General Motors in Hungary and U.S. West in Czechoslovakia. GM is competing with Fiat for a joint venture with one of Poland’s two auto plants.

The northern countries are also more attractive as markets for Western products. In Romania and Bulgaria, says Dilip Chandra, general manager for IBM in Eastern and Central Europe, such necessary conditions as “the free flow of capital, access to foreign currency and repatriation of profits” are still not available.

Foreign aid has been easier to come by than private foreign investment--all told $56 billion has been pledged in grants, loans, loan guarantees and debt relief--although Eastern European officials remain unsatisfied.

On the ground in the East, Western Europe’s aid program generates more praise than America’s. Gregory Vaut, an American who directs the Foundation for the Development of Polish Agriculture, says bureaucrats from the 12-nation European Community “broke a lot of rules” to provide assistance when it was needed.

In contrast, Wellisz, in the Polish Finance Ministry, says: “The U.S. foreign aid program is tied in knots. Instead of support, we get a fact-finding mission once a month.”

The economic revolution in Eastern Europe may well fail without foreign assistance--lots of it.

“Traditional market capitalism is simply not able to cope with the problems that these countries face,” warns Roche, the Morgan Stanley economist. “A foreign investor is not going to be able to come in and earn a 15% return on his investment simply by putting padlocks on the doors of inefficient factories.”

Perhaps Eastern Europe’s greatest asset is the spirit of its people. Barbara Puchala, Ryszard’s wife, knew only deprivation under communism. Now she does not know what to expect.

“I am afraid of the future,” she says. “But I don’t want to go back to the past.”

Staff writers Carol J. Williams in Budapest, Charles Powers in Warsaw and Karen Tumulty in Washington contributed to this story.

Eastern Europe

Across Eastern Europe, it is clear that sweeping economic changes are under way. This is reflected in each country’s economic indicators--growth, industrial production, inflation, trade balance, per capita income and foreign debt, investment and pledges of aid. Because each of the former East Bloc nations is taking its own unique toward a Western-style economy, experts also offer specific evaluations of their pluses and minuses in the process.

POLAND Population: 38 million Per capita income: 30% of Western Europe* Foreign debt: $41 billion Foreign investment: $350 million Pledges of foreign aid: $8 billion

1989 1990 Economic growth 0% -12% Industrial production -3% -28% Inflation 251% 800% Trade balance (billions) -$1.8 +$3.0

Pluses: Radical reform in place; convertible currency; export sales boom. Minuses: Deep recession, mounting political unrest. CZECHOSLOVAKIA Population: 16 million Per capita income: 65% of Western Europe* Foreign debt: $6 billion Foreign investment: $100 million Pledges of foreign aid: $2 billion

1989 1990 Economic growth +1% -3% Industrial production +1% -2% Inflation 1% 14% Trade balance (billions) +$0.4 -$0.5

Pluses: Highest industrial output in region before the revolutions; relatively low foreign debt. Minuses: Nationalist tensions; inefficient heavy industry; uncertainty caused by effort to restore property to pre-communist owners. HUNGARY Population: 10 million Per capita income: 55% of Western Europe* Foreign debt: $20 billion Foreign investment: $1.2 billion Pledges of foreign aid: $6 billion

1989 1990 Economic growth -1% -4% Industrial production -3% -12% Inflation 17% 29% Trade balance (billions) +$0.5 +$0.9

Pluses: Head start from 20 years of “goulash capitalism”; favorite target of foreign investers; most stable government in region. Minuses: Extremely poor infrastructure, particularly telephone network; lagging privatization. ROMANIA Population: 23 million Per capita income: 20% of Western Europe* Foreign debt: $1 billion Foreign investment: $30 million Pledges of foreign aid: $6 billion

1989 1990 Economic growth -11% -12% Industrial production -2% -26% Inflation 2% 20% Trade balance (billions) +$2.5 -$2.0

Pluses: Oil and other natural resources; virtually no foreign debt. Minuses: Unstable political climate; deep recession; lack of foreign investment. BULGARIA Population: 9 million Per capita income: 30% of Western Europe* Foreign debt: $11 billion Pledges of foreign aid: $0

1989 1990 Economic growth 0% -11% Industrial production 0% -9% Inflation 9% 50% Trade balance (billions) -$1.2 -$0.4

Pluses: Some familiarity with high technology. Minuses: Parliament dominated by communists; debt repayments in default. YUGOSLAVIA Population: 24 million Per capita income: 45% of Western Europe* Foreign debt: $16 billion Foreign investment: NA Pledges of foreign aid: $4 billion

1989 1990 Economic growth -1% -10% Industrial production +2% -11% Inflation 1,256% 60% Trade balance (billions) -$1.5 -$4.2

Pluses: Decades outside Soviet orbit. Minuses: Disintegration into rebellious republics. Sources: Deutsche Bank, PlanEcon, International Monetary Fund, European Community and various countries * Per capita income in Western Europe is about 15,000.