Many Socialist, Marxist Nations Try Capitalism : Commerce: From Mexico to the Soviet Bloc, free-market systems are cropping up where state-run economies have failed.

For generations, Mexican leaders nationalized industry after industry while dismissing free-market capitalism as little more than a thin disguise for Yankee imperialism. But today, those same industries are being returned to private investors. Among the latest--and largest: the country’s two biggest banks, just sold by President Carlos Salinas de Gortari.

Similarly, the long-embattled African nation of Angola, which once proclaimed itself a Marxist state and barred all foreign investment, is now openly seeking Western business help. “I do not hide the fact that I have been head of a socialist government,” says President Jose Eduardo dos Santos. “But we are Marxist no longer.”

Even Sweden, the most often-cited model for democratic socialism, is having second thoughts about its longstanding experiment. In September, for the first time since World War II, voters ousted a socialist government.

While most of the world’s attention has been focused on the breakup of the Soviet empire, a quieter, more far-flung revolution is under way: the decline and fall of the state-run economy. From Santiago to New Delhi, countries that once were Marxist or, like Sweden, were simply run as democratic welfare states, are jettisoning failed economic systems that relied heavily on central planning and government intervention and are turning toward some form of free-market capitalism.

“Taken together, these are probably the most important economic, political and social changes in the second half of the 20th Century,” says Michael J. Boskin, President Bush’s chief economic adviser.

Pedro Aspe, Mexico’s free-market-oriented finance minister, agrees. “Almost every nation on the planet is gearing its economy toward a market economy,” he says.

The reasons for the turnaround are clear. Analysts say that for all the hopes that state-run economic systems seemed to hold when they were adopted, they simply proved unworkable. In most cases, government bureaucracies and central planners ended up impeding healthy economic growth, promoting inefficiency and stifling efforts to build a private sector.

They shut out badly needed trade and private investment. And many spawned widespread corruption. Eventually, they proved too costly to sustain.

A fresh study by Johns Hopkins University underscores the magnitude of the failure: Between 1960 and 1980, Western-style capitalist economies grew three times more rapidly than those of socialist countries and were two times as efficient. In Asia, for example, where more countries have turned to free-market-based systems, output has more than doubled. But in largely socialist Africa, output is no greater today than in 1970.

At the same time, consumers in government-run economies have found that even though they earned less, they often paid more for life’s basics--because there was no competition to hold prices down. In Sweden, for example, 90% of the country’s food supply is controlled by only three retail chains. Partly as a result, a loaf of bread now costs about $3--compared to about 99 cents in the United States.

The death knell began in the early 1980s, after a series of global economic shocks inflicted particular damage on countries that had state-run economies--among them developing countries. First, the slowdown of inflation in the early 1980s held commodity prices in check, crimping the earnings of countries that had relied on them for income. Then the recession that hit developed nations in 1982 made them far less willing to provide aid. Finally, private banks, staggered by the Third World debt crisis, sharply cut lending to developing countries.

Also, the U.S. economic boom in the mid-1980s won more and more converts to U.S.-style capitalism. And the Reagan Administration pressed the International Monetary Fund and World Bank to prod countries with state-run economies to move toward market-oriented systems.

More recently, the end of the Cold War made it impossible for nonaligned countries to play the Soviets against the Americans in their search for foreign assistance.

Although the swing away from socialist economies is clear, it is uncertain which form of capitalism countries will take as a model in their push toward a free-market system--the United States, with its consumer-oriented, entrepreneurial free-market framework; Germany, which practices capitalism with a relatively strong social welfare safety net, or Japan, which has become an export powerhouse on the strength of a government industrial policy that has a strong influence in creating winners and losers.

Indeed, C. Fred Bergsten, director of the Washington-based Institute for International Economics, predicts that the contest among the models may replace the old, dying superpower rivalry between America and the Soviet Union.

“The two leading proponents are the world’s two largest economies--the U.S. and Japan--which have both been enormously successful in doing what they set out to do,” Bergsten asserts. “We set out to be the most affluent consumer society mankind’s ever known, and we did that. Japan set out to be a production juggernaut that would be the world leader in competitiveness, and they’ve done that.”

The battle Bergsten describes is just beginning. Mexico, for instance, is forging closer links with the United States through a regional free-trade pact but has also sent experts to study the economy of South Korea, which is loosely patterned on the Japanese experience.

The former Marxists of the Soviet Union are hedging their bets as well. While hundreds of American and European economic consultants have poured into Moscow, the Soviets have quietly dispatched economists to South Korea.

In fact, some analysts believe that South Korea and the other newly industrialized countries of Asia, which have moved from poverty to affluence more quickly than any other Third World nations, may offer the best road map for small countries struggling to phase out of socialism. Their success during the past decade may add to the allure of the Japanese model.

But Lawrence Summers, the World Bank’s chief economist, points out that the principles that have proved successful in one country may not translate well in another nation’s culture, politics and society. For example, Argentina has followed economic policies that look very much like South Korea’s, at least on the surface, including heavy government involvement in planning and financing certain industries. Yet South Korea is an economic success, Argentina a debt-ridden failure.

“The central intellectual question involved in economics right now is getting straight what exactly is different about Korea and Argentina,” Summers says.

Like zealous converts to a new religion, some countries are taking their new move to the free market to extremes. In New Zealand, where budget pressures from British-style social welfare programs helped send prices skyrocketing at double-digit rates throughout much of the post-World War II period, the prime minister and parliament have passed legislation that allows the government to fire the nation’s central bankers if they don’t keep inflation below 2%.

Other countries that once were regarded as economic “basket cases” are also transforming themselves--and attracting badly needed investment capital from around the world. Privatization of state-owned businesses has been so successful in countries such as Chile, for example, that Merrill Lynch, America’s largest investment house, has created a new Latin America Fund, a mutual fund designed to take advantage of “growth opportunities opening up in Latin America as economics and politics change.” St. Louis-based Southwestern Bell, meanwhile, just bought part ownership in Mexico’s national telephone company.

“I just can’t wait to start recommending Nicaraguan stocks,” laughs Lawrence A. Kudlow, an economist with the Wall Street firm Bear, Stearns & Co.

But the transition may not prove easy. Analysts warn that the rush to capitalism will almost certainly lead to hardships and abuses--especially in less developed countries that lack the social and regulatory safety nets that have taken centuries to develop in rich nations.

Some say the redistribution of wealth that comes with capitalist growth could also lead to a backlash. “The danger is that there will be abuses in it and the governments will make an attempt to regain a greater role,” says Robert D. Hormats, chairman of Goldman Sachs International in New York.

As a result, some economists fear that disillusionment with Western-style economics could grow if the promised prosperity fails to materialize rapidly enough for an impatient citizenry. That possibility is already visible in Eastern Europe, where the early euphoria over communism’s demise is giving way to haggard disillusionment. A new Times-Mirror poll has found that people throughout Eastern Europe rank their living standards low--with a belief that they are far lower than five years ago.

That feeling is spreading beyond the former Soviet empire. In Argentina, where the government of President Carlos Menem is seeking to emulate the free-market strategies of Mexico and Chile, thousands of workers poured into the streets in September in protest strikes against Menem’s plans to privatize state-owned companies. After similar demonstrations, Brazil recently postponed the auction of its state-owned steel producer for the second time.

Economic data support the suggestion that the transition from central planning to market economics is painful. The World Bank has found that 1990 was the first year since 1965 in which per-capita income in the less developed world declined. “It is a mistake to overestimate how easy it is going to be,” World Bank chief economist Summers says.

But even in countries where there has been some complaining, the realities of economics seem to be pushing governments toward the free-market approach. In Jamaica, for example, former Prime Minister Edward Seaga was voted out of office in 1989 after his free-market policies failed to spur more growth. He was succeeded by his predecessor, former socialist Prime Minister Michael Manley. But Manley has surprised some voters this time by pursuing a free-market course himself. “The old notions don’t apply,” he declares.