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The East: Economic Reforms Exhibit Successes And Failures

  • Michael Lelyveld



Boston, 1 July 1999 (RFE/RL) -- Nearly a decade since the fall of the Berlin Wall, economists are still struggling with the reasons for success or failure of reform in the former Soviet Union and Eastern Europe.

An economic analysis of the region by the Financial Times on Wednesday examines the issues following a conference sponsored by the Croatian National Bank in Dubrovnik last week. Clearly, Eastern Europe and the Baltics have outperformed the members of the Commonwealth of Independent States. The question is why.

A comparison of gross domestic products in 25 countries since 1989 offers a stark and provocative contrast. According to World Bank figures, only countries such as Poland, Slovakia, Hungary and the Czech Republic have recovered to the level of a decade ago.

While Poland's economy this year is expected to rise to 121 percent of its performance in 1989, Russia's economy is projected to sink to just 53 percent of its level in Soviet days. Nearly all of the former Soviet republics have suffered similar declines.

Johannes Linn, a World Bank vice president, sees a relatively simple explanation for the difference. A combination of market reforms, social reforms and institutional strengthening create the conditions for growth. In other words, those countries that have followed the advice of the International Monetary Fund and the World Bank have benefited, while others have not.

But such a conclusion may fall short of proof as to what steps actually work for former Marxist economies. Part of the reason is that multilateral lenders often delay aid to those countries that do not strictly follow their programs, affecting the outcome.

Beyond that, there lies a host of complexities. Martin Wolf of the Financial Times points out the influence of geography on political will. The farther a country is from Berlin, the less likely it is to take steps like privatization, price liberalization and banking reform, Wolf says.

In many cases, distance from the Bundesbank does seem to make a difference in the commitment of economic leadership. But there have been notable exceptions. Russian President Boris Yeltsin was among the first to free prices and privatize, for example. Over time, the results have ranged from mixed to disastrous. Although it has been largely forgotten since the ruble collapse of last August 17, Yeltsin also led the region's fight for monetary stabilization and inflation control.

The issue of failure to the east and success in the west is related to Moscow, just as much as Berlin. The CIS nations still depend on Russia for much of their trade, supplies and infrastructure access. By contrast, the leading nations of Eastern Europe had already largely reoriented their trade toward the West by 1994.

The debate about economic contrast is also very similar to the comparisons of Poland and Russia, which are now also a decade old. Some economists argued that reform prescriptions for Poland could not simply be applied to Russia. Poland's past experiences with capitalism and a mixed economy were simply not to be found in Russia. In light of the outcome, it is hard to prove any of the predictions wrong.

But the political variables complicate any conclusions. While Yeltsin has clung to power, nearly all the successful economies of Eastern Europe ousted their original reform governments to experiment with more leftist leaders, only to return to the reformers again. In some cases, the leftists also turned out to be surprisingly market-oriented. Yeltsin's grip on government has meant that the public's tendency to blame the party in power has been turned against the Russian reformers, frustrating implementation. By contrast, Poland's finance minister, Leszek Balcerowicz, has been able to benefit from his mistakes after his initial ouster in the early days of reform.

Poland's unique advantage is that it was the only country to rely on the creation of an IMF currency stabilization fund, a benefit that was long sought for Russia but always denied.

No single theory seems able to explain the pattern of successes and failures. Countries like Poland stalled on privatization for years, yet continued to progress toward economic growth. Slovakia, with 101 percent of its 1989 economic performance this year, was dominated by the autocratic Vladimir Meciar. Yet, it outperformed the reformist governments of the Czech Republic, which remains stuck in recession. The record is filled with contradictions.

But at least one major difference between east and west is natural resources. As in Soviet days, Russia has relied on oil and gas as its major products and exports. Plentiful energy has allowed Russia to resist rational pricing of inputs, leaving much of industry mired in the past of direct or hidden subsidies.

By contrast, an energy-dependent Eastern Europe was forced to face the problem when Soviet President Mikhail Gorbachev suddenly demanded payment for oil in dollars at world prices a decade ago. That shock was a wake-up call to the region which is still being heard. But farther east, supplies of petroleum still remain more available than the resolve to reform.

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