Stability Should Be West’s Chief Concern
Ever since the East European satellites broke away from the Soviet Union, politicians have struggled with whether and how to move from the command economy of communism to a market economy driven by price signals and profit incentives. Now that communist rule has ended in the Soviet Union itself, the stakes and the problems are magnified.
There has been no shortage of advice from the West about how to reform former communist economies. The advice generally stresses freeing prices, creating enterprises that respond to them, encouraging private ownership and the profit motive, opening the country to foreign trade and investment, stabilizing the currency and getting budget deficits under control.
Among advisers, a main source of disagreement is timing--whether changes should be made all at once or phased in. Among politicians, free-market principles count less than avoiding near-term problems.
Not surprisingly, the pace and scope of reform have varied widely across the countries of Eastern Europe. Yet there are no clear successes, let alone economic miracles, that might serve as guides for change.
In part because old trade relations with the Soviet Union have been severed, output and employment are falling throughout Eastern Europe. Even the old East Germany, which is assured of political stability, financial support and investment, is mired in a deep recession that is expected to last a long time.
Of the others, Poland has attempted the most rapid and thoroughgoing reform, and has achieved improvement on several fronts. It has stabilized the currency and expanded exports to the West.
But although it has privatized an estimated 40% of the economy, most of industry is still state-owned because buyers cannot be found for inefficient firms. Unemployment is high and rising, and hard times threaten to bring political change that will lead away from the market economy.
Hungary and Czechoslovakia, which were relatively prosperous among the old Soviet satellites, have attracted the most foreign investment. But they too have been unable or unwilling to privatize much of their industry. Bulgaria and Romania were worse off to begin with and are further from making a new start.
In the Soviet Union, central communist command of the economy is ending, but nothing has replaced it. The republics mistrust not only the old Kremlin but also each other. In the old system the economies of the individual republics depended heavily on one another for trade and on the central government for economic management. Their new-found nationalism may now pose special problems for economic reform.
Trade restrictions may arise among the republics even before they have established market economies and commercial relations with the outside world. Budget policy will be chaotic and probably inflationary unless the republics tax themselves enough to finance not only their own activities but also the remaining functions of the central government. And it is anybody’s guess where the urge for autonomy will lead the republics in the arcane area of central banking and currency reform.
Whatever reforms are attempted, the republics are heading for economic hardship in the near term. The blame lies mainly with the failures of the old communist system. But reforms themselves will reduce output and employment during the transition before they begin to improve the welfare of people. Unfortunately, reforms whose payoff is only a distant promise are unlikely to receive continued political support if economic conditions worsen too badly.
The nations of the West ought to care more about nurturing democracy in the region than about pushing a particular free-market economic ideology. Communism has failed and will be replaced by markets and private property. But the pace and scope of that change should be of less concern than the need for political stability. To the extent that the West chooses how and where to provide support, it should do so in support of good government, not of economic ideology.
The United States stands ready to provide food and technical assistance. Before long, however, more costly help may be needed. For example, it may be critically important to provide financial backing to support modern currency and banking systems. And loan guarantees and subsidies may be needed to attract foreign investment and to purchase needed investment goods.
The Germans, in particular, have urged us to provide greater assistance and are doing so themselves. But because U.S. domestic problems are routinely ignored on grounds that the budget cannot afford new initiatives, more costly aid is not being considered here.
None of these demands, either domestic or foreign, are beyond our capacity. Whether we have the political leadership and foresight to meet them is unclear.