Regional Outlook / Eastern Europe : A Time to Build, a Time to Destroy : The economic gloom and doom of the post-Communist era is beginning to give way to a tentative optimism.

The young adviser to Poland’s finance minister leaned forward, carefully turning the $64,000 question put to him at the end of a lengthy interview:

Would his country successfully manage the arduous passage through the post-Communist age, or would the fragile, carefully constructed reforms put in place with such effort eventually collapse under the weight of social and political turmoil?

“We can’t go through this without scars,” he said. “But I’m convinced that the government can steer the country through its problems without an explosion.”

In an office 300 miles southwest in Prague, Czech Foreign Minister Jozef Zieleniec was more upbeat.

“I’m convinced we’ll be ready for integration (with the rich nations of the European Community) within a few years,” he said. “It’s impossible to keep these divisions in Europe.”

Although major challenges still loom for all the former Soviet satellite states of Eastern Europe, there is mounting evidence to support such positive official assessments.

Indeed, a mood of tentative optimism is beginning to dawn not only among policy-makers in the more advanced states of former Communist Eastern Europe, but also among Western experts as the region struggles through its fourth bleak winter of freedom.

After noting that the end of the Cold War plunged the economies of East Europe “into the second Great Depression this century,” PlanEcon Inc., a Washington-based think tank specializing in Soviet and East European research, added in a report that was released at mid-month: “After nearly three years of doom and gloom . . . there is overwhelming evidence that the second Great Depression is reaching its end. There is strong evidence that in four out of the seven East European countries surveyed--Poland, Hungary and the Czech and Slovak republics--economic recovery is now under way, and significant positive economic growth is likely to be achieved in 1993.”

Given the turmoil that grips Russia and the former Soviet states to the east and the waning interest in help among the rich industrialized nations in the West, progress of these fragile democracies in the painful task of rebuilding their shattered economies is remarkable.

Consider:

* In Poland, nearly half of the gross national product and the majority of all employment today comes from the private sector. Inflation last year dropped by roughly a quarter of its 1991 rate (to about 45%) and foreign trade is in the black.

The Stalinist, prefab gray concrete that dominated Warsaw’s main Marszalkowska Street during the Communist era has been transformed into a modern, multicolored commercial row--virtually all of it privately owned.

Of even greater significance, Poland seems likely to become the first post-Communist state to resume real economic growth. After four years of decline, GNP leveled out at zero in 1992, and economists presently forecast a rise of 2% or more for 1993.

* Hungary cut its inflation rate by about a third (to about 25%) last year, chalked up a $1-billion trade surplus and counted about $4 billion in currency reserves--a benefit of the government’s decision to privatize the cream of state-owned industry by selling it to foreign investors.

New investment has brought the country a long-absent auto industry, with General Motors, Ford, Audi and Suzuki selecting western Hungary as an important, low-wage production area from which to serve the European Community.

* The Czech Republic has privatized nearly all small businesses. Roughly 20% of the country’s gross national product stems from the private sector, and nearly 80% of the adult population took part in the first phase of Prime Minister Vaclav Klaus’ imaginative scheme to privatize the heavy industrial sector by selling discounted shares to individual citizens.

In the process, Klaus presides over a country with a balanced 1993 budget, a trade and current account surplus, the region’s lowest inflation rate (10-12%), a stable currency and an unemployment rate (2.5%) that is less than half that of the United States.

* The situation in Slovakia is less clear, given its leaders’ disagreements with their peers in Prague over the shape and pace of economic reform. But the PlanEcon report was nevertheless guardedly optimistic, saying that while a further slight decline in gross domestic production during 1993 is “more likely,” a slight rise in output this year is still possible.

In an interview, Slovakia’s Deputy Premier Augustin Marian Huska dismissed any chance of a U-turn back to central planning for Europe’s newest nation. “The state won’t set priorities for industrial production,” he said. “That was done for the last 40 years, and you can see the results.”

Huska talks instead of enticing Western capital to Slovakia with a new package of liberal tax incentives. “We have a new identity, we have a new chance,” he said.

In a little-noticed development last month in Krakow, representatives of Poland, Czechoslovakia and Hungary signed a treaty to establish a free-trade zone by the end of the decade that is expected to help arrest the precipitous fall in trade among them. The agreement is to end longstanding anomalies that, for example, allowed Spanish and Portuguese wine to enter Poland duty-free, but it slapped large tariffs on wine from Hungary.

The trade group--which now has four members with the Jan. 1 official split of Czechoslovakia--is considered important because it will help prepare their own entry into the European Community.

Summed up Jiri Pehe, who monitors events in the three countries from his post as assistant director of analytic research at Munich’s RFE/RL Research Institute: “I don’t view the future of these nations at all pessimistically. They are going through a troubled period, that’s true, but so far, they have been fairly successful.”

While the region’s other nations--Romania, Bulgaria and Albania--struggle to survive in conditions that in many instances can best be described as desperate, the commitment to reform remains, albeit at a far slower pace.

The PlanEcon report concluded that “the evidence for Bulgarian economic recovery is still weak” and added that “as of yet, it is hard to be an optimist about Romania.”

Still, there are hints of progress.

Romania has launched a scaled-down version of the Czech privatization scheme. Bulgaria managed to reduce inflation from 500% in 1991 to about 80% last year and began partial repayments on its $10-billion foreign debt.

Only in tiny Albania, a country of 3.3 million whose suffering and hopelessness defy description, does the future look truly desperate. There, much of the country’s 19th-Century industry has simply ground to a halt. Collective farms that employed two-thirds of the working population have been dismantled down to the last cowshed as confused peasants, striking out against the state that repressed them for years, stole every brick, board and tractor tire in a rush to get what they felt they owned. Aside from dismantling the tools of totalitarianism, the country’s new government has managed little.

(The PlanEcon survey did not cover Albania or any of the former republics of Yugoslavia except Slovenia, where the Washington researchers questioned whether there may be “some light at the end of the tunnel as well?”)

Despite the signs of progress in much of Eastern Europe, however, there is little euphoria among those who live here.

While the gains in the northern countries are certainly impressive--especially under such arduous conditions--they can be easily reversed. They also constitute only part of a far larger task.

Nowhere in the region, for example, has the job of privatizing heavy industry--seen by many as the key to achieving stable, free market democracies--progressed beyond the initial, easiest, stages.

Everywhere, obsolete coal, steel and other heavy manufacturing industries, employing hundreds of thousands, continue to live on huge subsidies and remain as politically sensitive as they are non-competitive.

The Czech voucher system, for example, affects barely one-third of industrial enterprises in both the Czech Republic and Slovakia, and the verdict on its success remains a question mark at least until trading begins later this spring. Many argue that the true test will only come when the managements of these privatized companies begin to implement the tough restructuring required for survival.

Foreigners have taken stakes in a handful of attractive Hungarian producers, such as the world-class electric light bulb producer Tungsram, but official statistics showed that at the end of 1991, there were still more state-owned enterprises than in 1985.

In Poland, bitter parliamentary squabbling has held up legislation needed even to tackle the issue, and through last October the basic structure of roughly three-quarters of the country’s industry remains untouched.

In both Hungary and Poland, the vast majority of private-sector jobs have come either through management buyouts or the establishment of new, mainly small, businesses.

Elsewhere in the region, privatization is effectively at a standstill. Despite its voucher system, last year only one Romanian state-owned enterprise passed into private hands.

Non-competitive state-owned industries are not just a drag on the public purse. Almost everywhere, they have become links in a depressing “chain of debt,” in which struggling producers, who operate on credit, cannot regain their financial footing because their customers can’t pay, because their customers, in turn, cannot pay, et cetera. . . .

Potentially viable companies often become saddled with debt after becoming entrapped in such a chain.

Privatization is also seen as a vital step toward generating much-needed tax income--itself a necessity for any stable democracy.

Lubos Dobrovsky, former Czechoslovak defense minister and presently administrative director of the Czech presidency, linked privatization with the struggle to counter the country’s present crime wave.

“To be able to deal with crime, you have to have good laws, money for the police, good equipment, good judges and modern prisons,” he said. “We also need educational reform. But all this requires higher state income, and there we come back to privatization.”

As a new business incentive, Klaus’ government is moving to reduce corporate earnings tax from 55% to 45%, but at the same time he will implement a 23% value-added tax that will hit the consumer, further squeezing shrinking personal income.

As governments this year begin to cut the financial lifelines to obsolete heavy state industries, social strains are expected to intensify throughout the region.

In Poland, where unemployment has more than doubled since 1990, to 2.5 million (13.5%) last year, experts predict as many as another half a million may be out of work by year’s end.

The picture is similar in Hungary, where one of the region’s highest unemployment rates, of around 12%, is expected to go still higher, while in Slovakia, the widely perceived loser in Czechoslovakia’s recent “velvet” divorce, a jobless figure of about 10% is also expected to rise sharply later this year.

Only in the Czech Republic do figures indicate a degree of latitude for the government. Job insecurity, rising prices, increased rents and an uncertain future all prevent any trickling down of official optimism to those struggling to make ends meet.

However, another important intangible is also at work in the region--a kind of psychological disorientation fueled by a nostalgia for an easier, less complicated life in which the struggle for survival in matters large and small forged a sense of solidarity as well as a quest for a higher moral plane.

Petr Pithart, a Czech writer who became a leader of the 1989 revolution and eventually Czech premier before his party was crushed in last spring’s elections, is one of the many affected.

In an interview, he lamented the emergence of an elbow society in which material wealth has overnight become the most important yardstick.

“The importance of material values has been too sudden,” he said. “People are losing their balance. You have to realize that only now does it make sense to have money. Previously you had to hide it, or didn’t need it. People are losing their scruples.”

Pithart said he sometimes feels “like a man in jail who for years dreamed of life in freedom until his release, but who then became homesick for the simplicity of jail and the clear vision of who was the enemy and who was a friend.”

In Warsaw, an office worker mourned the loss of what he called “a feeling of togetherness.”

“It used to be a common fight against the government, now it’s just everyone for himself,” he said. “Something important has happened to the way people react to each other.”

The combined social and economic pressures have already taken their toll on reformers.

In Romania and Bulgaria, elections last year brought new governments pledged to slowing the pace of change, while in Slovakia, the retooled Communists, now called the Party of the Social Democratic Left, represent the largest opposition political force.

Many look to the recent shock return of the Communists to power in Lithuania and question the staying power of reformist governments throughout the region.

“The biggest problem we face is that the economic difficulties tend to undermine people’s faith in democracy,” said Karoly-Attila Soos, chairman of the Hungarian Parliament’s budget committee. “It is terrible that we have succeeded in getting rid of communism, and people are now becoming nostalgic for that system because they lived better then.”

In Poland, the turmoil of three governments in the course of the year, a series of scandals, including one in which Parliament members were caught--on camera--voting twice, and persistent parliamentary squabbling in a chamber where no less than 29 separate political entities are represented, have combined to sharply devalue democracy’s image.

“To an increasingly greater extent, people are losing patience,” summed up Ernest Skalski, deputy editor of the leading Warsaw daily, Gazeta Wyborcza.

In an apparent attempt to deflect public pressure, search for scapegoats or simply exploit the situation, nationalist rhetoric has grown louder in some capitals.

In Hungary, the reactionary views of Istvan Csurka--a member of the ruling Hungarian Democratic Forum--have hit home with Hungary’s lower social rung, the farmers and unskilled laborers whose products and services have no market in the cutthroat environment of nascent capitalism.

“Anti-democratic stirrings, such as we see even from the inner circle of the government, can take advantage of people’s apathy and feelings of hopelessness,” said Soos, a member of the opposition Alliance of Free Democrats.

In Bratislava, Vladimir Meciar’s new government, which won independence by playing to Slovak nationalist emotions, has since begun quietly removing potential opponents from key media, education and even hospital positions. Moreover, a leading opposition political figure in Slovakia, Jan Carnogursky, described how he was shouted down by a crowd after pledging to expose weaknesses in government programs.

Such developments already dampened investment interest in both countries.

Whether the present governments, with their relatively shallow democratic roots, are strong enough to resist these pressures and push forward with their reforms remains unclear, despite the emergence of positive signs.

For some, like Bazyl Lipszyc, a personal adviser to Polish Finance Minister Jerzy Ostiatynski, it’s partly a matter of faith.

“No one knows for sure if it’s going to work,” he said, “but if I didn’t believe, I’d apply for a passport and go.”

Special correspondent Iva Drapalova in Prague and researcher Mark Zielinski in Warsaw contributed to this article.

Glow vs. Gloom

Although economic experts see a brighter future than expected for much of Eastern Europe, those who are living through it see things differently.

Question: Will, according to your opinion, the year 1993 be better than the year 1992?

YES:

Poland-14%

Hungary-11%

Czech Republic-16%

Slovakia-14%)

Germany-15% (West-12%; East-26%)

United States-61%

*

NO:

Poland-67%

Hungary-23%

Czech Republic-64%

Slovakia-64%)

Germany-24% (West-26%; East 16%)

United States-11%

*

NO CHANGE:

Poland-12%

Hungary-62%

Czech Republic 14%

Slovakia-14%)

Germany-49% (West-50%; East 47%)

United States-23%

(Where figures don’t add up to 100%, the remainder had no opinion)

*

Source: Pentor, a privately run Polish pollster cooperating with Gallup International.

East European Economic Turnaround: A 1992 Scorecard

Bulgaria Czech Republic Hungary Poland Rising Industrial Output 1 3 1 1 Retail Sales 3 1 4 2 Inflation Rate 4 6 6 6 Real Wages 1 1 1 5 Unemployment Rate 1 6 1 1 Significant Foreign Investment No Yes Yes Yes Evidence of Recovery Weak Strong Strong Strong

Romania Slovakia Slovenia Rising Industrial Output 6 3 6 Retail Sales 4 1 NA Inflation Rate 2 6 6 Real Wages 2 1 1 Unemployment Rate 1 6 1 Significant Foreign Investment No No Yes Evidence of Recovery None Strong Some

Legend: 1: Rising 2: Seems to be rising 3: Stable 4: Probably stable 5: Seems to be declining 6: Declining Source: Information based on survey by PlanEcon Inc.