Low Cost Aid to Eastern Europe

WILLIAM PFAFF

April 27, 1992|By WILLIAM PFAFF

PARIS. — If optimism is possible about the economic outlook in what used to be the socialist bloc, Yugoslavia must be excluded from that optimism, as must several former Soviet republics where ethnic struggle has installed itself.

However, some remarkably positive views of Eastern Europe and Russia were expressed last week at a major conference on the region held at the Sorbonne in Paris (sponsored by the French newspaper Liberation). Participants included government ministers and leading public figures from the East.

This optimism was despite the uncertain prospect for further major Western aid commitments. The leading Western governments recently committed themselves to a $24 billion package of balance of payments support and currency stabilization for Russia alone. Congress has yet to approve the American contribution, and the prospect of anything remotely comparable for other countries is slight.

In this election year, Congress and the President resist any new aid commitment. Although the Bush administration has attempted to assume political credit for the generality of Western aid-giving, leadership has gone to Germany and the European Community. The Germans have given more than anyone else to help the East, and the German public is not inclined to do more.

There are things to be done, however, which do not cost PTC enormous sums. The major obstacles to development are the following:

The ex-Communist countries' loss of markets for what they now produce. They lost their Communist-bloc markets when

Comecon, the old Soviet-bloc trading group, collapsed as a result of the need to settle in hard currencies.

They need new markets in the West. There is general agreement that the best form of immediate help the West could give is to buy what the East makes. The main things the Eastern countries can export are farm produce and relatively low-value-added manufactures of little interest to Western markets. Protectionist pressures in the West are highest on exactly these products, where the Eastern countries might acquire a comparative advantage.

If the West is serious about helping the East, it should not refuse the food products, steel, textiles, apparel and other labor-intensive goods in which the Eastern countries can be competitive, while subsidizing its own producers to compete in third markets. It is destructive hypocrisy for the West to give lectures to the East about free market economics while refusing to open its own markets to competition.

There is a problem of what to do about the state sector, which produces shoddy goods and lacks the equipment, knowledge and skills to do otherwise. This is why state enterprises are mostly unsalable to private investors. Who would want them? They provide jobs, however, which is politically important, and they meet certain current domestic market needs.

There are two choices. Either the state sector, or a part of it, should be given the investment and attention to make it more efficient and more attractive to private investors, saving jobs, or it should be closed down. In the latter case the very considerable political, social and economic costs must be understood.

There is no third way. Western aid-givers are inclined to be evasive about the consequences of their doctrinal opposition to support for the reform of state industry.

Another problem is lack of capital. Little is available internally. Yet capital must be generated to support a self-reinforcing process of reconstruction. It is relatively easy to privatize commerce -- shops, traders, restaurants. But industries cannot be restructured without capital.

Foreign capital is short because of the disastrous macro-economic situation of the Soviet successor-states and East European countries: negative interest rates, negative growth, high inflation, currency instability and exchange-rate risk.

In most of these countries, reliable legal and banking structures, clear property titles, guarantees for the repatriation of profits, etc., do not exist.

The greatest part of the foreign investment thus far in the East has gone to Hungary and Czechoslovakia, which have created stable macro-economic conditions, relatively sophisticated structures for investment, and which bring strong industrial and commercial traditions.

Alienation of the work force is another serious problem, widely ignored in the West. Under communism, workers were paid badly and worked badly, but had security and bleakly reliable futures for themselves and their children.

Now they do not know for whom they work or why, or what the future will bring. They have always been told that capitalism is exploitative. Few have seen convincing evidence that this is not so.

Foreign investment is seen as threatening not only their own jobs and status but the national industrial patrimony. They fear that foreign interests will exploit them and keep their industries backward.

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