COVER

COMMUNISM'S CAPITALISTS

THE REFORMERS BEGGING TO FIGHT

HOLGER JENSEN November 13 1989
COVER

COMMUNISM'S CAPITALISTS

THE REFORMERS BEGGING TO FIGHT

HOLGER JENSEN November 13 1989

COMMUNISM'S CAPITALISTS

THE REFORMERS BEGGING TO FIGHT

Earlier this year, East German government officials ordered the state-run Waggonbau Dessau, which manufactures refrigerated railway cars in Dessau, 100 km southwest of Berlin, to take over a city factory that assembled children’s bicycles. The aim was to improve the quality of bikes and to increase production. But the two state-run cartels responsible for supplying the parts could not deliver efficiently. Dessau had to find its own widely separated sources for components. One truck drove daily to Sangerhausen, 80 km west, for pedals. Another truck picked up drive chains in Barchfeld, 180 km south.

And the only available supplier of wheel rims, a kitchen furniture factory in Weissenfels, could not meet Dessau’s demand. Such nightmares of inefficiency are so common across Communist Eastern Europe that they are a source of derision, but governments are trying desperately to correct the problem. In some cases they are seeking financial help from the West, but as winter sets in, there is little sign of change: food shortages are critical, energy supplies are short, and party officials still insist on controlling the rusting levers of economic power.

Bankrupt: East Germany has the healthiest economy in the Soviet Bloc, but even it is showing signs of strain. With the exception of Romania, all the members of the Warsaw Pact have conceded, to a greater or lesser degree, that the Communist economic system is bankrupt and needs a drastic overhaul. However, even the most ardent reformers in Hungary and Poland insist that they do not want to offend conservative hard-liners, who are still capable of derailing the dramatic political changes that have occurred in their countries. Rather than embrace all-out capitalism, they say that they are trying to promote a freemarket approach: one in which production and prices are dictated by the market—not an arm

of government—while the factories continue to remain under some form of central control. But Western investors appear to be leery of the idea and, to date, Canada’s trade with the U.S.S.R. and other Eastern European countries is very low. And Eastern Europeans, whose aspirations have been raised by promises of economic renewal, have made it clear

that they will not make further sacrifices while they wait to see if reform works.

Indeed, in East Germany, thousands of the country’s skilled young workers have decided not to wait any longer and are fleeing to the West. East German economists say that the nation is losing 0.12 per cent of its gross national product for every 10,000 people who leave. So far, they estimate that the exodus has robbed the economy of $210 million this year, with another $30 billion lost to future growth over the next 30 years. Last month, the exodus led to the ouster of 77-year-old Communist party leader Erich Honecker, whose health is poor, and Finance Minister Günter Mittag, the 63-year-old Politburo member who had most stubbornly resisted introducing any of the free-

market-style reforms being tried in Hungary, Poland and the Soviet Union.

East Germany does not have to endure the food shortages seen elsewhere in Eastern Europe, but the housing shortage is acute, the waiting time for a new car is 10 years and East Germany’s goods are no longer competitive abroad. Exports are falling, as is production. And the enormous state subsidies that are needed to maintain 1950s prices on basic foods, housing and transportation eat up a quarter of the budget. Meanwhile, East Germany’s foreign debt has climbed to more than $9 billion, after being reduced to $7 billion in 1985, as it resumes borrowing to modernize its antiquated industry.

Egon Krenz, East Germany’s new leader, has promised some kind of change. But even Communist reformers increasingly say that the only plausible direction would be towards a market system.

Poland, with its non-Communist, Solidarityled government that is barely two months old, also faces a bleak winter. Polish housewives

are complaining that they now have to spend $5 a day on food. This is a huge amount in a country where the monthly wage averages just $140. Some food prices have risen by 1,500 per cent since price controls were removed in August, while the cost of heating and electricity doubled last week alone.

Hardship: In the midst of the hardship, the reform-minded government is counting on Western assistance to show the people that it has managed to make things better since it came to power. To that end, Prime Minister Brian Mulroney announced that Canada will give the Polish government $42 million in aid in the form of food, economic development aid and export credits to buy Canadian products. The United States has already sent 135,000

tons of wheat, part of $118 million in food aid pledged by President George Bush. But Malgorzata Niezabitowska said, “The golden shower of aid pouring on Poland consists mainly of declarations and promises.”

Privatization: Western nations have also promised to set up a $1-billion stabilization fund for Poland, which is also seeking $700 million in loans from the International Monetary Fund. And in a fresh attempt to solve its deep economic problems, Warsaw unveiled a new economic plan last month, calling for the devaluation of its currency—the zloty—reducing subsidies, the closing of factories that use too much energy and the sale of state enterprises that continue to lose money. The document, published in the government newspaper Rzeczpospolita (The Republic), admit ted that this will cause “a temporary sharp increase” in inflation and unemployment lasting about a year. But by the end of 1990, it said, privatization should be in full swing.

Despite the promises of help, the amount of participation by Western companies in Poland still remains small. Only 52 were in operation at the end of last year but, so far in 1989, another 607 joint ventures have won preliminary approval.

Hungary, which has been experimenting with market systems far longer than Poland, has had greater success in wooing Western businessmen. The number of operating joint ventures in that country doubled this year to more than

600. Although many of the deals are financially small, the investors have provided not only an infusion of working capital but also know-how, technology and management skills. Sales per employee for joint-venture firms are three times higher than the average for solely Hungarian-owned firms. Still, Budapest’s continuing habit of interfering in industrial management, and Hungary’s poor infrastructure— including a trouble-plagued telephone system—continue to scare away major investors. There is also opposition to privatization from the Workers’ Councils, which run 75 per cent of the state enterprises.

The Czechoslovakian government is more resistant to change. It allows only family businesses, with no outside employees, and has announced that it will keep

any expansion of that private sector “under the supervision of the party.” The Czechs are more ambitious when it comes to letting the market set prices, promising to complete the process next year by moving from the current 10 per cent of free prices to 80 per cent or more. But that is expected to bring steep inflation to a country that has always kept it under control. Now, shops are generally well supplied, and the goods reasonably cheap, although people complain about lack of choice and declining quality.

Inflation: In Yugoslavia, where a liberal Communist party is trying to run a confederation deeply divided on ethnic lines, inflation ranges anywhere from 1,000 to 2,000 per cent annually. The various nationalities huddled together in she republics and two independent provinces find it so hard to get along with each other that there is no national economy to speak of. The central bank in Belgrade cannot control the money supply, the central government accounts for less than a third of public spending, and there is less trade among Yugoslavia’s republics than there was 20 years ago. When most Yugoslavs receive their wages, they rush to turn the money into commodities that they can use for barter. And whenever the government tries to correct the situation, the republics threaten to secede.

Bulgaria, which does whatever Moscow asks it to do, has instituted many of Soviet leader Mikhail Gorbachev’s economic reforms but not his political liberalization. Many Soviet citizens go to the Bulgarian capital of Sofia to shop and consider its well-stocked stores a paradise. But Bulgarians complain that imports are cut to a minimum in order to avoid raising the nation’s foreign debt. Still, their country’s temperate climate and fertility spares them from food shortages.

Romania, the only maverick, has almost completely eliminated its foreign debt. But President Nicolae Ceauçescu’s obsession with repaying $12 billion over the past seven years has bankrupted his country. Having diverted many Romanian goods from domestic use to foreign export, while reducing imports to a bare minimum, he now finds himself with a third of his industrial capacity broken down for lack of imported machinery and spare parts. And Romanians have the tightest food rationing in Eastern Europe, only a few hours of electricity a day and the highest infant mortality rate on the continent.

But even Romania, with an unyielding leader at its helm, may find itself buffeted by the winds of change. As Eastern Europe opens up, even the most devout Communist will find it more difficult to resist the blandishments of economic revival.

HOLGER JENSEN with correspondents ’ reports