Market Scene : Eastern Europeans Get Sneak Preview of Change : They hope to learn about privatization and its pitfalls from Mexico’s experience.

Albania’s vice minister of industry was intrigued by Mexico’s audacity in selling off state banks and wanted to know more.

Romania’s head of privatization was curious about Solidarity, Mexico’s public works program funded by the sale of state companies.

The Russians were interested in the “culture” of private property--particularly, how to convince the public it is a good thing. But they had another goal too: to meet Mexican television star Veronica Castro, whose soap opera “The Rich Also Cry” is a hit back home.

“Most of these countries see Mexico as a new free market and a wealthy country--at least closer to it than they are,” said Paul Knight, head of merchant banking for the European Bank for Reconstruction and Development. “But the Russians all wanted their pictures taken with Veronica Castro.”

The European Bank brought about 30 officials and business leaders from Central and Eastern Europe and Russia to Mexico last week to see a developing country that has already gone through privatization and economic restructuring--a process many of them are just beginning.

They are going home with a clearer understanding of where privatization might take them--and with a sobering preview of its pitfalls.

President Carlos Salinas de Gortari, who once viewed Eastern Europe as a competitor for foreign investment, changed his mind after taking a close look at the region earlier this year and agreed to co-sponsor the event.

“Our privatization process is almost finished,” explained Jacques Rogozinski, Mexico’s director of privatization. “We are in two different stages in the process of privatization and attracting capital.”

The Mexican government abandoned its nationalistic, state-run economic model for open borders and a free-market economy seven years ago, long before the Berlin Wall came down. The government has privatized all but 221 of its 1,155 state-owned companies, including banks, airlines, the telephone company and the mining industry.

From Russia’s and Eastern Europe’s point of view, Mexico had a leg up before it even started restructuring. Mexico’s economy was heavily managed by the state, but Mexico was never a communist country. Mexico had a capitalist culture and business know-how. A wealthy, national private sector bought 94% of the state companies put on the block, leaving only 6% to foreigners.

In contrast, said Adrian Severin, president of the Romanian Agency for Privatization, “Romanians have no capital either in Romania or abroad.”

Mexico’s banks, for example, had been private before they were nationalized in 1982 and were already separate from the Central Bank. Thus, they were relatively easy to sell and brought good prices.

Many European companies, meanwhile, are deteriorating before they can be given away. The countries often seem not to understand even the most basic principles of free enterprise--or to have the resources to make the changes.

And yet, there are many lessons that the Europeans can learn from the Mexican experience.

Severin says he found support for the idea of a fast program of liberalizing trade, prices and interest rates. But he said these policies have been criticized at home by the political right and left, and Mexican officials reminded Severin of the need to build political consensus.

“We go straight to the economic goals, and sometimes we forget about the social safety net. Without this, we cannot expect the support of the people. Without support, I doubt we can be successful,” he said.

He admires Mexico’s multibillion-dollar Solidarity program but knows that Romania will not be able to copy it. Romanian companies will not bring the prices that Mexican ones did.

Severin is hoping that reaching a “critical mass” of private entrepreneurs--enough people with a stake in the new system--will build consensus.

Romania began privatization in 1990 after its longtime Communist dictator, Nicolae Ceausescu, was overthrown and executed during the revolutions in Eastern Europe. Severin said 85% of agriculture and 30% of industry is now in private hands.

Other countries were interested in more of the nuts and bolts of privatization: how many managers and workers it takes to run a company or how to figure out what a factory is worth.

Mensur Saraci, Albania’s vice minister of industry, mineral resources and energy, was intrigued by Mexico’s decision to pre-qualify bidders for the 18 banks sold last year, based on experience and reputation. “I admired the way they select the buyers of the enterprise,” he said. “The aim of the government was not only to get money but to develop the companies.”

Hungary, which has raised $1 billion over the last two years by privatizing 445 companies--nearly 11% of what the government once owned--will probably try to follow Mexico’s example for selling off its telephone company, said Tamas Szabo, the minister in charge of privatization.

The sale of Telefonos de Mexico, first to a small group that controls the company, then to investors on international markets, was a rousing financial success despite predictions from international investment bankers that the complex deal would fail.

Szabo, whose country has the region’s highest per capita foreign debt, also was impressed with Mexico’s debt restructuring program, which reduced payments sharply, leaving more money in the budget for building roads and schools. “They were able to get out of the debt trap,” he said.

Without actually admitting they had made mistakes, Mexican officials tried to warn the Europeans against some of the pitfalls of economic reform. They tried to get the Europeans to focus on their goals.

“They want to accomplish too many things with privatization,” said Rogozinski. “You can’t improve efficiency without some level of unemployment. They can’t attract foreign investment and redistribute wealth at the same time and have the companies work more efficiently. They have to decide what they want first.”

He urged his guests to look at companies on a case-by-case basis, rather than according to a prescribed plan.

Rogozinski’s strategy was to take the companies in hand and improve their finances before selling them. If that was not possible, he said, he closed them down.

“Don’t be afraid in some cases to bankrupt a company. If you transfer a company you know is going to fail without your protection, you are postponing problems that will be greater later on,” he said.

In addition to hearing such advice, the Europeans also toured privatized companies and spoke with Mexican union officials. Despite the encouragement they got, they went home worried.

“Before we began transforming the economy, we underestimated the difficulty of the change,” said Szabo. “The Mexicans taught us that you can’t avoid many of the problems.”