Many pitfalls for East bloc economic reforms

Press, 1 December 1987, Page 12

Many pitfalls for East bloc economic reforms

PATRICK WORSNIP

of Reuters NZPA-Reuter London The capitals of Eastern Europe are buzzing with talk of economic reforms, but economists are asking whether the rigid Communist structure will allow the shift to a more market-oriented system to succeed. Spurred by Mikhail Gorbachev’s efforts to ring the changes in the Soviet Union, leaders of Moscow’s Warsaw Pact allies are reviving plans to modernise their own economies or are becoming apostles of reform in their old age. “The change of Soviet leadership has had a propitious effect,” a Western diplomat said. “There’s very definitely now a feeling that there’s no longer a brake there.” Hungary, which pioneered the reform of

the centrally planned economy almost 20 years ago, has pledged to go further down the road next year, introducing value added tax and personal income tax and enforcing a bankruptcy law for loss-making enterprises. Poland has just announced plans to slash its Government bureaucracy,' firing an estimated 3000 officials, in a bid to transfer power to factory managers. Poles will vote on the proposals in a referendum on November 29. In Bulgaria, too, the party leader, Todor Zhivkov, aged 76, has ordered radical changes in the Government structure and decreed a system of workers’ self-man-agement in industry. Czechoslovakia has also decided to give more autonomy to firms from 1989. Of the Eastern bloc nations, only Rumania

and East Germany have said they see no need for reforms. All in all, says a diplomat specialising in East European economies, “Things have been happening quite fast and quite radically in a way that was unthinkable five or 10 years ago.” But some experts are more sceptical and compare East European economic reform to an aircraft that trundles along the runway but is never allowed to reach critical take-off speed. The reason for the reform drive, economists say, is a growing realisation that traditional Communist economies, with their massive investments in heavy industry and rigidly planned production targets, cannot cope in today’s sophisticated world. According to figures published by a Polish economist, Jan Winiecki, the Warsaw Pact countries use more than twice as much energy and steel as Western European countries to produce every dollar’s worth of gross domestic product. Eastern bloc living standards have failed to match the West’s, and industries are outstripped on world markets even by those of some developing countries like Taiwan and South Korea. The answer, Communist leaders have concluded, is to replace fixed plan targets, which emphasise quantity at the expense of quality, with vaguer guidelines, and to let factory managers take more of the decisions. This has already happened, in theory, in Hungary and similar moves are under way elsewhere. In the Soviet Union, Mr

Gorbachev has said enterprises must pay their own way. from next year and inefficient ones will not be subsidised by profitmaking ones. But economists say the experience in Hungary has already demonstrated the pitfalls of this approach. There, agriculture and service industries have flourished but much heavy industry remains inefficient, with party officials continuing to interfere in managerial appointments, and disguised subsidies instead of strict budget controls. Another problem is that for profit and loss to mean anything, real prices — both retail and wholesale — must replace the arbitrary ones decreed by the Communist authorities. At present, most East European countries spend huge sums subsidising basic foods, housing and transport. Governments in Hungary, Poland and even the Soviet Union have realised that this has got to stop, or at least be scaled down. But past experience shows that price increases will be deeply resented by the public, especially in Poland, where they are likely to rise by almost one half next year. The Warsaw Government has promised to compensate wage earners, but like some of its allies has warned people that things will get worse before they get better. Another move is to allow small private firms to be set up to meet market needs that the lumbering State enterprises cannot respond to. Poland and Hungary have had them for years and the Soviet Union, Bulgaria and

Czechoslovakia are following suit. Again, the experience is mixed. Private businesses have eased i the lot of some consumers, but their owners complain that they are often hobbled by Government regulations and taxes. Perhaps the greatest threat to all such reforms, economists say, is the entrenched class of party officials and . middle managers, reluctant to see their privileges withdrawn or face the cold blast of competition and budgetary constraints. And no East bloc Government has so far been willing to contemplate large-scale unemployment, long portrayed as an ill peculiar to the capitalist world. • Winiecki, an associate professor at Warsaw’s Institute . of Labour Research, sees political change as essential. “It is not surprising that the only scenarios that offer a reasonable chance of success are those envisaging the transformation of the whole Communist system, not only of its economic component,” he wrote in a book published in the West. Another problem, Western observers say, is that if firms start chasing markets rather than plans, this could cause chaos within Cbmecon, the Soviet-dominated Communist trading bloc. With all member currencies non-convertible, trade within Comecon is glorified barter. Country A is obliged to import from country B as much as it exports to it, and cannot build up a surplus that could be spent in country C.