Crossing the Valley of Tears in East European Reform
Author(s): JEFFREY D. SACHS
Reviewed work(s):
Source: Challenge, Vol. 34, No. 5 (SEPTEMBER/OCTOBER 1991), pp. 26-31, 34
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JEFFREY D. SACHS
theValley
ofTears
Crossing
inEastEuropean
Reform
tothemainstream
TheEast envisionsa return
of European
will
take
and capitalistlife.Butit
democratic
politicalleadership
Now the
and social consensustosurvivetheleanyearsoftransition.
'
WestmustshowitwantstheEast to 'return.'7
Theeconomicsituation
inEasternEuropeis mixedand and the societyto a panickedréponse.The riskof
ofthe panicbringsto mindRoosevelt'saphorismthat"the
On theonehand,mostofthecountries
troubling.
Czechoslovakia,
Poland)
onlythingwe have to fearis fearitself,"and underHungary,
region(Bulgaria,
of
marscoresthefactthatit is thepoliticalmanagement
a
toward
aremakingimportant
creating
progress
is
the
that
transformation
the
economic
of
the
two
The
results
keteconomy.
singlegreatest
yearsgive
past
strongevidencethattheseeconomiescan indeedbe challengefacingtheregion.Will the EasternEuroconverted
totheWestern
Europeanmodelina reason- pean countriesfindtheirRooseveltsto bringthem
thisdifficult
of through
ofthousands
ableperiodoftime.Therearehundreds
period?
in
and
newbusinesses,
trade,
steps,mostofthegovRegardingpracticalreform
particularlyconstruction,
havegraspedthecrucialneedforstabilization
services;shopsare fullof goods forthefirsttimein ernments
oftheeconomy.In mostofthecouninalmost andliberalization
iscomingundercontrol
decades;andinflation
triesas of mid-1991,pricecontrolshave beenelimiall countries.
forcurrent
low nated,currenciesare largelyconvertible
On theotherhand,as theresultofpersistently
tradeis quite
and international
andthemajordislocationscausedby accounttransactions,
livingstandards
of theold administrative free.As a resultofmarket-determined
thebreakdown
thereforms,
prices,shortages
have so
Butall ofthecountries
of havebeeneliminated.
system,and seriousexternalshocks,thecitizenry
on
a
to
make
decisive
far
failed
and
is
EasternEurope troubled,restive,
breakthroughprivatizaimpatient.
of thestate-enterprise
has risento around5-10 percentof tionand financialrestructuring
Unemployment
andfinanand itcontin- sector.Thisisnodoubtbecauseprivatization
thelaborforceineach ofthecountries,
andpointellectual
the
hardest
is risingeven cial restructuring
uestomount.Thefearofunemployment
pose
transformation.
whole
of
the
litical
fear
could
that
and
morerapidly,
puzzles
provokepoliticians
Economicsatthe
ofInternational
andVisitingProfessor
Tradeat HarvardUniversity
ofInternational
JEFFREYD. SACHS is theGalenL. StoneProfessor
to thedesignof
Sachs has also contributed
EconomicsResearch,UnitedNationsUniversity,
Helsinki,Finland.Professor
of Development
WorldInstitute
inEasternEuropeandLatinAmericain recentyears.
severaleconomicreform
programs
26
1991
Challenge/September-October
On the side of theWest,the supportforEastern
Europehasbeenmodestatbest.Therearesomebright
spotsto be sure:thereductionof Poland's debtsto
theEnterprise
Western
FundsforPoland
governments;
andHungaryestablished
the
U.S.
the
by
government;
BritishKnow-HowFund. Thereare also dozens of
by Westerngovernments.
specificprojectssupported
But at the same time,the levels of directfinancial
assistanceare small,andthefinancialaid is generally
andunusedinmanycases. Andon thegreat
inflexible
nonfinancial issues, such as the European
to accepttheEast Eu(EC) willingness
Community's
andthe
atsomedateinthefuture,
ropeansas members
to
East
Euroto
EC's immediate
willingness openup
and
the
of
textiles, steel, repeanexports agriculture,
sponseshavebeenfarfromadequate.
Thereare severalactionsthatshouldbe takenurandbythe
gentlybytheEast EuropeanGovernments
In
of
the
transformation.
success
Westto assurethe
EasternEurope,theneedforprogressonprivatization
In theWest,concessionsfromtheEC,
is paramount.
forvariousaspects
financialsupport
as wellas greater
are at thetopoftheagenda.
ofthetransformation
thecountries
wereable toeliminatechronicshortages
all have been
by allowingpricesto be decontrolled;
able to establisha relativelystablecurrencythatis
or at leastnearlyso, forcurrent
account
convertible,
in
and
all
have
a
commerbasic
transactions,
put place
cial code andcompanylaw to allow fortheestablishmentofnewprivateenterprises.
The qualitativeresultsare also similar,thoughthe
outcomesin thefourcountrieshave dequantitative
pended on manyfactors,including:how long the
marketreforms;how
countryhas been undertaking
has
been
hit
the
bythecollapseofSoviet
badly country
tradewithEasternEurope;and how unstabletheinitial conditionswere in the countryat the outsetof
reform.
As a roughoutline,we can notethatHungaryhas
the longest,and is in some sense
been reforming
"ahead" of the othercountries,in thatthe overall
ofa marketeconomyis bestdeveloped.
infrastructure
indebtOn theotherhand,Hungaryhas a highforeign
Poednessand moderatemacroeconomic
instability.
measures
landundertook
duringthe
manyliberalizing
the
under
the
Communist
of
1980s
lastyears
regime,
mannerthathelped to spur
but in an inconsistent
Thus, Poland
profoundmacroeconomicinstability.
todate
Overview
ofreforms
of
from
a
reform
has hadto
starting
point hyperinflaIt is generallyagreed thatthereare threedistinct tion and an extremedebt crisis. Withoutdoubt,
have beenthemostcomprehensive
aspectsofthefirstphaseofeconomictransformationPoland's reforms
the
in
decisive
macro- and
in EasternEurope: economicliberalization;
region,andPolandhas madeenorandinthedevelopment
oftheecon- mousprogressin stabilization
andprivatization
economicstabilization;
Czechoslovakia
startedtheresector.
the
of
structural
more
In
latter
a
private
policies
stage,
omy.
reCommunist
the
a
cold
in
from
1990
forms
start;
budgetand regional
involvingthepublicinvestment
policiescome to thefore.The contentof theinitial gime had been among the most repressive and
of theregion.WhileCzechoslovakiahas
unreformed
as follows:
stepsmaybe summarized
thanHungaryand
more
macroeconomic
had
most
Economic liberalization:freeingof
stability
prices;
ofquotas, Poland,andhas less foreign
elimination
debt,ithas also hadmuch
policy(low tariffs,
opentrading
sector.Bulgariaalso
of
the
less
for
basis
and
a
of
private
firms);
development
legal
endinglicensing trading
in
a situationof grave
and
reforms
the
started
late,
code,companylaw,judi(commercial
private
property
as
macroeconomic
ofcontracts).
destabilization, theresultofheavy
cial enforcement
and a particularly
Macroeconomicstabilization:sharpcutsin subsi- foreignindebtedness
heavydepenin
trade.
Soviet
Union
on
the
dence
and
rate
the
of
devaluation
Still,
Bulgariais
dies;
subsequent
exchange
progressas a
thoughlittle-noticed
positivereal interestrates; makingimportant
currencyconvertibility;
at
resultofa veryboldeconomicprogramintroduced
on domesticcreditexpansion.
andrestriction
into thestartof 1991.
Privatization:conversionof stateenterprises
of
In all cases, though,the broad outcomesare the
of ownership
form,followedbytransfer
corporate
to theprivatesector.Transfers
stateenterprises
may following:
1. An eliminationof chronicshortages,usually
means.
or
other
free
be through
distribution,
sales,
theriseinnominal
a riseofpricesthatoutstrips
and
PoIn Bulgaria,Czechoslovakia,Hungary,
through
land,rapidprogresshas been made in thefirsttwo wages;
2. Afteran initialjumpinpriceswhenpricecontrols
less progressinthethirdarea.All of
areas,andrather
1991¡Challenge
September-October
27
areeliminated
social welfaresystemis
and subsidiesarecutback,an ongoing theWestfora strengthened
inflation
on theorderof2-3 percent
needed.
month;
surely
per
3. A sharpcutinthebudgetdeficit;
4. A risein exportsto Westernmarkets
(at a fairly Stateindustrial
sector
dramatic
andPoland);
pace inthecases ofHungary
5. A dropoflivingstandards
forat leastpartofthe Withoutquestion,theAchillesHeel of theeconomic
inEasternEuropeis thestateindustrial
reforms
also
a
increasefora
sector,
population(though
significant
as a
smallpartabletotakefulladvantage
ofthenewtrading forseveralreasons.First,it is vastlyovergrown,
the
result
of
of
Stalinist
model.
forty
years
development
opportunities);
inscaleas
inneedofsubstantial
reduction
6. A rapiddevelopmentof privateenterprise
(in Itis therefore
A substantial
andmodernization.
wholesaleandretailtrade,international wellas restructuring
construction,
trade,andservices)inmanycases on a scale overtak- fractionof the East Europeanlabor force,typically
is intheindustrial
30-40 percent,
sector,andthe"iron
ingthestatesector;
andgovofindustrial
statemanagers,
inindus- triangle"
7. A modestincreaseinprivateenterprise
workers,
ernment
bureaucrats
a
formidable
constitutes
on
a
scale
is
which
still
small
pressure
try,though
compared
for
and
increases.
withthestatesector;
subsidies,
group protection,
wage
sectorinall ofthecoun8. A steadyrisein unemployment
andcutbacksin
Second,thestateindustrial
in trieswas builtup in substantial
partas a supplierto
jobs in large industrialenterprises,
particularly
Until1989,theSovietUnionprovided
thosethatweredependenton exportsto the Soviet Sovietmarket.
a totally
andstablemarket.
Union.
Indeed,theclassic
protected
inPolishindustry
ofmarketing
Thesefirst
haveprovoked definition
was: *'Load
stepsineconomicreforms
a complexpoliticalreaction.In Poland,forexample, the train,ship it East." In the past year-and-a-half,
has virtually
thereis clearlypublic reliefthatthe chaos of the however,theSovietmarket
disappeared.
hyperinflationary
periodof 1988-89 has been ended, A declinein exportswas expectedas a resultof the
oftheCouncilforMutualEconomicAssisandthatforty
havealsobeen dismantling
yearsofchronicshortages
eliminated.
The publiccan see a dramatic
transforma- tance(COMECON). Whatwas unexpected,
however,
tionofthecountry;
hundreds
ofthousands
ofnewshops wasthenearlytotalcollapseoftheSovieteconomyand
and newlyprivatized
shopsnow caterto thepublic's Soviettradethisyear.
demands.On theotherhand,thesqueezeintheliving
ThecollapseofSoviettradeis partly
theresultofthe
ofsomeportion
standards
ofthepublic,combinedwith SovietUnion'sdebtcrisisin 1991,forcing
theallocation
of
scarce
and
the
fears
of
to
debt
much
growingunemployment
higher
servicingand
foreignexchange
in
from
It
is
the
near
cast
a
also
the
ofthe
have
on
future,
result,
however,
unemployment
away
imports.
pall
Thefactthatsomeoftheadverseeffects unconscionable
ofSovietpolicymakers
developments.
incompetence
(or fearsof futureadverseeffects)have been rather inthesphereofthemonetary
system.
Simplyput,after
inheavyindustry,
concentrated
coal mining,
andsmall- theend of thebaitersystemwithinCOMECON, and
scalefarming,
andalso byregion(EasternPoland),has theputativeshiftto "dollar-basedtrade,"theSoviet
to a sharpening
of thepolitical authorities
contributed
failedto introduce
a payments
mechanism
probably
in
reactions
the
the
reform
Soviet
which
could
Union,by
against
program.
enterprises
reguforrubles.
One responseto thepoliticalchallengesto there- larlyobtaindollarsinreturn
formsis to strengthen
thesocial safetynetin Eastern
sectoris potentially
Third,theindustrial
explosive
both
and
so
that
"losers"
in
the
do
not
feel
becauseitnowopreform
the
politically economically,
Europe,
withoutlegal and institutional
senseofpanicthatcan accompanynecessarychange. eratesvirtually
norms.
Buthere,theopportunities
are limitedby themeager While the situationvariescountryby country,
it is
Allcountries
financial
have roughly
to saythatthroughout
meansofthegovernments.
correct
EasternEurope
arenotsubjecttoanyeffective
introducedunemployment
insurance,job retraining theenterprises
corporate
at governance,
otherthanan unhealthy
welfare
andpensionsprotected
kindthatsomepayments,
programs,
butthelevelofbenefits timesemanatesfromtheworkers'councilswithin
each
leastpartially
againstinflation,
IntheWest,enterprise
is undeniably
are
low, in line withtheveryfragilefiscal firm.
by
managers governed
and the generallylow a boardofdirectors
whoarelegallyobligedto govern
capacityof the governments
from thefirmintheinterests
In Eastern
oftheregion.Financialassistance
oftheshareholders.
livingstandards
28
1991
'September-October
Challenge/
ofmanagers,
governance
Europe,thereis no effective
tomanage
andas a resultthereareno clearincentives
manner.
inan efficient
theenterprises
Governanceused to be providedby a systemof
andtheComfromthestateadministration
commands
Withthe
oritsthreat.
backedupbyterror
munist
Party,
of
merciful
terror,
governance
collapseofCommunist
sectorhas also collapsed,withstriking
theindustrial
Thereareincessant
effects.
andpathological
wagepressuresthatarenotcheckedbymanagerswhorepresent
In theabsenceofcentralized
realownersofthefirms.
toward
thereis thetendency
therefore,
wagecontrols,
a wageexplosion,ofthesortthathas occurredinEast
werenotimposed).The
(wherewagecontrols
Germany
has had devastating
in
East
Germany
wageexplosion
of
forithasledtothevirtual
bankruptcy
consequences
sector.Wageshave
theentireEast Germanindustrial
ofWestGermanlevels.
risentoaround50 to60 percent
offactors:
froma variety
The wageexplosionresulted
thelack of wage controls;theEast Germanpublic's
'
'
beliefthatthey'deserved' WestGermanwagelevels;
of politiciansin WestGermanyto
theunwillingness
speakouton behalfofrationalwagepolicies;andthe
pressureof West Germanunionsto help raise East
Germanwages,lestthelowerwagesintheEastunderminethewagesintheWest.
In mostof therestof EasternEuropewages have
alremainedmorerealisticthanin EasternGermany,
thoughtheyhave been keptundercontrolpartlyby
incomespolicies,which
centralized
highlyunpopular
debilandpolitically
inefficient
arebotheconomically
forthegovernment.
itating
ofinterest
andconflict
by
Also,thereis self-dealing
not
controlled
is
and
is
that
that
statemanagers
rife,
by
Managersengage
legalnormsorbyboardsofdirectors.
bankkindsofactivities:
inthefollowing
intentionally
back
them
firms
to
cheaply;establishing
buy
rupting
deals,with
privatefirmsto do business,in sweetheart
thattheymanage;acceptingunfathestateenterprises
thatprovide
andtakeoveroffers
vorablejointventure
faforthemanager,whilerejecting
personalbenefits
thatputthemanager'spersonalposition
vorableoffers
at risk.("Favorable" or "unfavorable"refersto the
valueoftheoffercomparedto thevalueofthecapital
thatis beingsoldtotheforeign
bidder.)
of "zombie" enis
the
there
phenomenon
Finally,
in whichincompetent
managerssimplyrun
terprises,
downthebankbalancesandothercapitaloftheenterwaytothe
prise,whilefailingtoadjustina satisfactory
InthecaseofmanyPolishfirms
conditions.
newmarket
thatwere hit by the collapse of the Soviet market,
enterprises
simplycontinuedto producethe normal
waitingfora
outputlevels and buildupinventories,
miracleof some sort.Finally,in mid-1991,thebank
balanceshaverunout,and a politicallyand economihashitthecountry.
callytroubling
spateofinsolvencies
Once again,theabsenceof a capitalmarket(in which
a takeovermightoccur)andthelackofcorporate
govtotheseprofound
havecontributed
ernance,
managerial
failures.
ofprivatization
Difficulties
sector
solutionsto theindustrial
The properlong-term
should
be
are
The
clear.
privatenterprises
problems
underprivatecontrol.By
ized, and thenrestructured
for
quickly,the onus on the government
privatizing
the
and
reduced
will
be
pressures
restructuring
greatly
will be
fromthe firmsforsubsidiesand protection
willdo
owners
the
easiertoresist.Presumably, private
didonsavingtheviable
a better
job thanthegovernment
and
of
parts industry sloughingofftheunviableparts.
wouldbe
factoreasingprotectionist
Another
pressures
betweenEastern
successfulAssociationAgreements
These
EC.
the
and
countries
agreements
European
shouldpresumably
guaranteeopen marketson both
bindtheEast Europeancountries
sides,and therefore
tofree-trade
policies.
The crucial policy problemis the intervaluntil
occurs.To putthetimingissueintoperprivatization
thefactthatunderthe aggressive
consider
spective,
era,theUnited
campaignoftheThatcher
privatization
fifty
approximately
Kingdomsucceededinprivatizing
firms
five
the
1980s,
per
roughly
during
enterprises
a
followed
The
British
typically
privatizations
year.
' for
'
inwhichthefirmwas 'prepared' privatizapattern
the firmwas
tionthroughan internalrestructuring;
banksto get a
"valued" by one or moreinvestment
base priceforan initialpublicoffering
(IPO); theIPO
andthentheIPO
andpromoted;
was widelyadvertised
was finallycarriedoutseveralmonthsafterthestartof
theprocess.The wholeepisodecould takea yearor
threethousandstate
more.In Poland,thereareroughly
some
and
industrial
eightthousandstate
enterprises,
the
economy.At the
enterprisesin all sectorsof
froma sophisticated
rate(whichbenefited
Thatcherite
a
and
market
largeprivatesectorto absorbthe
capital
wouldtake
thePolishtaskofprivatization
statefirms),
severalhundredyears!"British-style
privatizations"
cannotbe themainanswerforEasternEurope.
1991¡Challenge
September-October
29
As a halfwayhousetoprivatization,
thereis a need
' the
atleastto *'commercialize'
thatis,to
enterprises,
convertthemfromtheircurrent
statusas enterprises
governedby workers'councils,to enterprises
governedby SupervisoryBoards (boards of directors)
operating
accordingto normalcorporatelaw. While
commercialized
arestill100percent
Treaenterprises
at
least
are
the
covered
normal
owned,
sury
they
by
commerciallaw, and have corporategovernanceacboardofdirectors
cordingtoa professional
appointed
bytheTreasury.ManyEast Europeanpolicymakers,
and certainly
muchof theEast Europeanpublic,unthe importanceof creatinga corporate
derestimate
fortheindustrial
sector.Afterdecades
legal structure
of neglectof legal normsunderCommunism,the
benefits
oflegalreform
seemtobe underespotential
timated.
eventhisimportant
Thus,unfortunately,
step
ofcreating
a corporate
environment
has
not
been
legal
viewedwithsufficient
urgencyin theEast European
withtheresultthatthepathologicalbehavcountries,
iordiscussedearliercontinues.
tocommercialization,
newmethClearly,inaddition
odsofprivatization
mustbe foundinEasternEuropeto
the
In
Polandthereare plansto freely
process.
speed
distribute
a portion
oftheindustrial
sharesintomutual
to the
funds,whosesharesin turnwill be distributed
adultPolishcitizens.Thereis also somediscussionof
sharesintonewprivatepensionfundsthat
distributing
wouldtakeoversomeof theobligationsof thestate
social securitysystem.In Czechoslovakiathereare
inreturn
for"vouchers,'' a kind
planstosellenterprises
of scripthatwillbe issuedby thegovernment
to the
sharesto thepublic.
publicforthesakeofdistributing
In all countries
thereis theintention
to auctionsmall
and medium-sizedenterprises,and to encourage
worker-management
leveragedbuyouts.
Thesenovelapproacheswillprovevitaltotheeconomichealthandrecovery
oftheEastEuropeaneconomies.They shouldbe championedby theWestern
international
financialinstitutions
(IMF, WorldBank)
andgovernments.
thereremaingreatpressureswithinthe
Ironically,
East European countriesslowing the process of
andtheWestern
advisershavedonerelaprivatization,
little
to
in
tively
weigh onthesideofrapidprivatization.
The delays in EasternEuropemay be attributed
to
severalfactors:
1. Thewidespread
attraction
ofthe"Britishmodel"
of privatization
(throughindividualsales of firms),
despite the fact that the resultingtimetablefor
30
1991
Challenge!
'September-October
slow. (In Poland,
could be disastrously
privatization
- ofcarrying
out
thereweregrandhopes- andillusions
ofIPOs ina yearortwo.So far,inthecourse
hundreds
Law waspassed,there
oftheyearsincethePrivatization
havebeenfewerthantenIPOs);
2. Thepoliticalopposition
ofmanystatemanagers,
to
someworkers
groups,andsomeofthebureaucracy,
rapidprivatization;
3. The generaldistrust
and confusionofthepublic
overvirtually
scheme.Everyscheme
anyprivatization
is viewedwithcynicismanddoubt,sincethepublicis
withcause) thattheenterprises
convinced(sometimes
arebeingrippedoffbymanagers
orsoldoutcheaplyto
foreigners;
4. Theprofound
ofconverting
logisticaldifficulties
intojointstockform,giving
thousandsof enterprises
boardsofdirecthemsomecrudevaluation,
organizing
inplacebasicinstitutions
ofthecapital
tors,andputting
market
securities
laws,enforcement
(stockexchanges,
institutions);
5. The lackofexperiencewithbasicfinancialmarandcorporate
law.
ketinstitutions
Westernadvisersare oftenof littlehelp,and are
bankerswant
occasionallyharmful.
Manyinvestment
thebusinessof "British-style
and so
privatizations,"
standard
methods
ofprivatization.
Some
theypromote
Westernadvisersalso stresstheneedto "restructure"
theenterprises
beforeprivatizing
them,a processthat
ifappliedwidelywouldbe fartooslow,andforwhich
are not only ill-equippedbut also
the governments
to
excessive
subject
politicalpressures.
PresenteconomicrisksinEast Europe
It is easyto becomeoverlypessimistic
abouttheecoinEasternEurope.Onthewhole,
nomictransformation
The
theprogressof reforms
to date is encouraging.
economiesalreadyoperatesubjecttomarket
forcesand
intradeandservices,
withsubstantial
ownership
private
sector
albeitwitha verylargestate-owned
industrial
Prices
are
thatcontinuesto be inefficiently
managed.
has
been
discentral
decontrolled,
completely
planning
and
andtheprivatesectoris highlyprofitable
mantled,
In
size.
all
from
a
small
very
though
growingrapidly,
newentrepreneurs
are comingto the
ofthecountries,
fore,witha flairthatdispelsold notionsthatsocialism
hadcreateda "homosovieticus"inwhichthemarketspirithadbeenvanquished.
And yet,the situationremainsdecidedlyfragile,
warm
even explosive.The positivebenefits
certainly
macroeconomic
willalmostsurelydeteriorate,
morethanthecitizens situation
theheartofa trained
economist
will
as
in
Latin
of
the
and
inthecountries
are
aware
themselves.
less
America,
rise,
democracy
instability
They
fact thatthe burgeoningof new firmspromises itselfwillbe putat risk.The riskis heightened
bythe
economicgrowthdowntheroadthantheyare of the factthateach of theEasternEuropeancountrieshas
as the basis for
are going adoptedproportional
factthatmanylargeindustrial
representation
enterprises
This
bust.Whiletheyappreciatetheend of shortagesand parliamentary
voting system
representation.
queuesthatplagueddailylifefordecades,theyarealso surelyincreasesthe likelihoodof weak, splintered
thatare dependent
cover politicalparties,and governments
worried
aboutmaking
theirlowmonthly
earnings
coalitions.
of
And
on
new
and
market
the
most all,
multiparty
fragile,
prices.
higher
- failing
tounderstand
whytheend
manyareconfused
did not bringimmediateprosperity; CrucialroleoftheWest
of communism
and low livingstandards
markets
have
both
whythey
The keyfactabouteconomicreform,
then,is thatsevatthesametime.
aren'tnecessarily
Reformers
popularinthisenviron- eral yearsmustpass beforethe fruitsof reformare
Thesociologist
RalfDahrendorf
thefather
ofthepostwarGerman widelyevident.
ment.LudwigErhard,
(inhis
in
on
Revolution
the
book
1990
economicmiracle,was not hailed as the creatorof
Europe-In
Reflections
untilseveralyearsafterthestartofhisfree- A LetterIntendedTo Have Been SentTo A Gentleman
prosperity
in 1950, in Warsaw)calledthisintervening
market
reforms.
Two yearsintothosereforms,
perioda "valleyof
' andit
in
be
observed
the
creator
as
in
attacked
Erhardwas widely
tears,'
nearlyeverycountry
may
Germany
a radicaleconomictransformation,
ratherthanhighlivingstan- thathas undergone
of highunemployment
andJapan,toChileandMexico
ofwhichErhardwas frompostwarGermany
dards.TheAdenauergovernment,
a part,just barelysurvivedpoliticallyin thedifficult in the 1980s. The timein thevalleydependson the
If thereis
and boldnessof the reforms.
firstyears,and itspoliticalsurvivaldependedheavily consistency
ineconomicmeasures,itis
onthegenerousMarshallPlanfundsthatwereflowing waveringor inconsistency
hasbeenlostfor
in
the
to
lost
intothecountry.
valley.Argentina
easy get
In EasternEurope,Leszek Balcerowiczin Poland forty-five
years.
and Vaclav Klaus in Czechoslovakiawill be rememPassingthroughthevalleyof tearsrequiresfirst,
and second,enough
economicmira- and foremost,
oftheircountries'
beredas thefathers
politicalleadership,
setofpolicies.But
a
stable
to
sustain
social
consensus
are giventhetimetowork.
cles,butonlyifthereforms
Andtimemaybe veryscarceindeed,giventhesullen evenMoses andtheIsraeliteswouldnothavemadeit
thefertile
ofthepopulation;
attitudes
groundforpopu- throughthe wildernesswithoutsome manna from
lism;thepowerful
protec- heaven.Externalassistancecanbe vitalintheperilous
politicalforcessupporting
and the firstyearsofchange.AndMoses didnotfacereelecof failingindustries;
tionand subsidization
faceda leadof tionforforty
in
several
or
worse
stalemate
for
years(thoughhe certainly
potential political
Mt.
of
at
base
the
Sinai). Poland's
thecountries.
ershipchallenge
elecfacesparliamentary
or subsi- radicalreform
The specificgroupscallingforprotection
government
InPoland,itincludesthefarmers tionsattheendofOctober,andCzechoslovakia'sdoes
diesdiffer
bycountry.
andtheindustrial in less thana year.
on minuscule
plots,thecoal miners,
fortheWesttothrowa lifelineto
The timeis urgent
fortheSoviet
thatformerly
insectors
workers
produced
the
The glue holdingtogether
it includestheworkersin theradicalreformers.
In Czechoslovakia,
market.
in
Eastern
consensus
social
is
basic
reforms
the
was
ofSlovakia,which particularly
theheavyindustry
Europe
'
*
to
will
achieved
be
success
that
need
These
trade.
on
Soviet
Europe,'
'returning
by
surely
groups
dependent
ofEuropean
partofthemainstream
helptoadjust,buttheriskis thatassistancecouldcome thatis,bybecoming
if
But
Western
life.
the
that
would
in a manner
Europeshows
capitalist
stymie necessaryadjust- democratic,
to
East
want
the
thatitdoesn'treally
"return,"thenthe
mentsintheeconomy.
riskin theregionis thatthepopulism, consensuswill breakapart,and theintensepressures
The greatest
oftheregionarelikely
of alreadyfacingthegovernments
and a splintering
theconfusionof property
rights,
Worse
the
to
undermine
reforms.
will lead to weak
yet,giventhestingy
politicalpowerin theparliaments,
casesof
oftheWesttodate,andtheundoubted
unableto take the remainingdecisive attitude
governments
from
intent
on
investors
Western
economic
the
In
that
to
profiteering
case,
rapacious
steps privateownership.
19911Challenge
September-October
31
inEasternEurope, a year.AndthenewEuropeanBankofReconsctruction
thegapsinadequatelegalstructure
thereis alreadyevidenta riskofxenophobicbacklash andDeelopment
(EBRD) hashardlystarted
operations,
will
over
its
role
time.
of
the
Eastern
grow
although
presumably
Europeanpopulation.
amongpart
in
Partof theproblemis thataid has been offered
Thekeystepwouldbe fortheEuropeanCommunity
touse.Almostnoneoftheaid is
thataredifficult
intheconcrete forms
tosignalthattheEastcanindeedreturn,
can expectto ingrantform.Andtheloansthataremadeavailableare
sensethattheEast Europeancountries
to use because of the conditions
after generallydifficult
becomemembersof theEuropeanCommunity
Nothing attached.Mostof theofficialexportcreditsthathave
theypassthekeyhurdlesofeconomicreform.
have
wouldso muchchanneltheenergiesandpoliticalpas- been grantedto theEasternEuropeancountries
of
untouched.
One
sionsoftheEastEuropeansas a cleartracktomember- remained
important
step the
largely
thecase,sucha track EC wouldbe toexaminehowtomobilizemorequickly
shipintheEC. If,as ispresumably
themoneythathas alreadybeencomweretorequirepoliciessuchas freetrade,an elimina- andeffectively
butthathas notbeendisbursed.
and privateowner- mitted,
tionof statesubsidiesto industry,
totheregionfrom
ofaidflowing
Theoverallamounts
steps would become
ship,thenthose controversial
shouldbe raisedbyatleast$3-5
imbuedwithgreatermeaning,indeedurgency.The theG-24governments
Part
of
thisshouldbe usedtostrengthen
the
billion
undermine
that
now
threaten
to
peryear.
greatpressures
of
social
Elections
the
reformscould be effectively
services;partformuchlargerprovision
dissipated.
would be foughton the questionof whichpolitical scaletechnical
assistance;
partshouldbe forstraightforthecountry ward,untied,balance-of-payments
wouldbe mostlikelytoreturn
movements
support;and part
intensive
investment
in
a
more
to
should
be
toEurope.
fastest
support
diThe regionhasnotoriously
infrastructure.
But,alas,thechanceforthispositivedynamicmay upgrading
andtransportation,
anda devcommunications
be fading,as a resultof thecomplacencyand short- lapidated
are
Theseinfrastructure
oftheEuropeanCom- astatedenvironment.
of manycountries
problems
sightedness
of
Thereseemsto notadequately
andtheEuropeanCommission.
bythesmallamounts
beingaddressed
munity
intheregionarecurrently
for moneythatthegovernments
be morefearthanwelcomeofeventualmembership
to
these
able
to
devote
Inthecritical
theEastEuropeancountries.
problems.
negotiations
assistanceis debt
Another
crucialformof financial
betweenthe EC and Czechoslovakia,Hungary,and
of theregion.
countries
theEC has so far relieffortheheavilyindebted
Polandon AssociateMembership,
themostimpressive
issueofagricultural Certainly
madenoconcessions
onthecritical
singlestepmadeby the
ofhalfof
trade,andonlylimitedconcessionson textiles.It has Westfortheregionhas beenthecancellation
debtsthispast
remainedvagueon thequestionof eventualmember- Poland's government-to-government
ledbytheUnitedStates,is offundaThiseffort,
is morerespon- Spring.
ship.So fartheEuropeanCommunity
ButdebtprobforPoland'sfuture.
and Portugal'stextile mentalimportance
sive to France'ssmallfarmers
bankcreditors
Poland'
s
serious.
lems
remain
commercial
than
it
is
the
to
opportunigreatgeopolitical
producers
andthey
debtreduction,
tiesfora unitedEuropeandthegreatrisksofpolitical havenotagreedtoa comparable
of
Poland's
officialbenefit
of
the
threaten
tocapture
intheEast.
destabilization
part
oftheG-7counassistanceto Eastern debtreliefunlesstheFinanceMinisters
financial
The needforgreater
bankstakea
insist
that
the
commercial
IMF
tries
is
the
record
mixed.
The
On
is
also
vital.
aid,
effectively
Europe
rehit.
Poland's
Paris
Club
for
tomobilizesupport
andtheWorldBankarestarting
Agreement
comparable (In
canbe consid- ducingofficialindebtedness
theregion,
butas usual,theIMF support
by half,thegovernment
insistedthatPolandshouldseek comparable
eredmodestat best.WhentheIMF loansitsmoney,it creditors
the commercial
forthe relieffromthe banks.Nonetheless,
on reserveaccumulation
oftensetsconditions
have
been
banks
maketheIMF loan
hopingthatPolandwill
that,in effect,
stonewalling,
borrowingcountry
a largepartof the
The simplycave in and startservicing
underthetermsoftheprogram.
nearlyuntouchable
bankdebt.Sucha stepwouldnotonlyjeopand is commercial
to theregionis growing,
WorldBank's support
butwouldundermine
ardizePoland'sfinancial
levels.Directgovernment-to-govstability,
meaningful
reaching
oftheParisClubrelief.)
advancedin- theobjectives
aid oftheG-24 (thetwenty-four
Also,Bulgariaand
ernment
and
so fartherehas
remain
a
on
the
has
been
coordinated
dustrial
indebted,
EC,
Hungary
heavily
countries),
by
totheir
the
Western
from
attention
no
been
to
the
aid
contributions
limitedscale. The U.S.
rather
governments
million
dollars veryseriousdebtproblems.
havebeenonlya fewhundred
entire
region
34
1991
Challenge!
September-October