So near and yet so trapped

Eastern Europe's nations crave successful market economies. But that go al is proving elusive

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Romania and Bulgaria are this week joining the other former Communist countries of central Europe - Poland, the Czech Republic, Slovakia and Hungary - in becoming associate members of the European Union. Officially at least, optimism prevails: aft er years of prevarication, most governments accept that the integration of eastern Europe is now inevitable; the only question is how quickly this can be achieved.

Yet behind the facade of bonhomie, eastern Europe is undergoing a profound crisis. Far from progressing steadily towards harmonisation with the rest of Europe, the east of the Continent appears to be stuck with governments that have all the trappings of Western-style democracy and the market economy, but little of the substance. Hungary, the pioneer of economic reforms since the Eighties, and the darling of Western investors, has three senior vacancies in its government that nobody wishes to fill - those of finance minister, central bank governor and head of the privatisation agency.

Poland, that redoubtable fighter against Soviet rule, has spent the past few weeks without either a foreign or defence minister. With the exception of the Czech Republic, Communists have returned to power in every east European state. To its Western neighbours, eastern Europe will remain an affliction for many years to come.

Only fools and economists ever believed the transition from Communism could be either smooth or painless. Yet to dismiss the current east European travails as just temporary setbacks on the irreversible path towards prosperity is equally wrong-headed.

The region is far from being a disaster area. From an almost total dependency on Soviet commerce, eastern Europe has redirected the bulk of its trade towards the West in just five years, an extraordinary accomplishment. During this period, the east Europeans have suffered drops of more than a third in their national wealth with remarkable stoicism: they have expressed their fury in the ballot boxes, rather than on the streets. In almost every country at least half of the national economy is now in private hands, and plans for further privatisation abound.

Nevertheless, the battle for the future of eastern Europe has just begun, and those who advocated a Western model of development appear to be on the losing side.

Every east European politician believes in the market economy, like every good Christian believes in the Ten Commandments, as a scheme that must be obeyed, but not just yet. Creating capitalism without the capital always involves a choice between the badand the even worse.

A serious privatisation effort requires a careful calculation of the worth of individual enterprise and painstaking negotiations with potential investors, none of which was available to the east Europeans. Distributing state assets to the entire population in the form of privatisation vouchers has been, therefore, a quick method of subjecting the economy to the pressures of the market and a useful instrument for breaking the power of the Communist-dominated bureaucracy.

Throughout eastern Europe, the printing presses have been churning out vouchers designed to transform citizens into share owners. Although varying in complexity, these voucher schemes have two things in common: they do not bring any new capital into the market, nor do they make their bearers feel that they are true owners of new wealth.

Even in the Czech Republic, the most advanced and ardent privatiser, the vouchers are still not tradeable. When they are finally allowed to change hands, many Czech citizens are likely to discover they are the proud possessors of colourful bits of paper better suited for framing than trading. And in Romania, the region's laggard, the privatisation scheme is nothing but a wheeze: at least 70 per cent of the equity will remain in state hands.

It is possible to argue that, given the Communist legacy, not much more could have been expected. But eastern Europe is suffering from more than just post-Communist hangover. Throughout its history, the region has relied on the actions of governments, rather than on the initiative of its citizens: barring a few exceptions, the entire process of industrialisation in eastern Europe this century has been dictated from above. East Europeans regard the market economy as a byword for greater personal prosperi ty, but in the vaguest sense only, because they neither understand nor share its fundamental concepts.

Vaclav Klaus, the Czech Republic's premier and the only non-Communist leader still around, has survived precisely because he has confined his belief in Thatcherism to speeches rather than actions. And the rapid process by which the Hungarian government discarded its promise to respect the independence of the country's central bank is a sign that free market concepts, Western-style, carry little attraction in the region.

Yet the reasons for the current disarray in economic policies go far deeper. The quick disposal of state assets is seen by most east Europeans as a fraud because they simply refuse to believe their labour over decades has been a total waste, and that thegigantic factories in which their fathers and mothers slaved away should now be sold for scrap metal. Yet this is precisely the message the markets convey, as the people of East Germany discovered.

The recent decision of the Hungarian government to cancel the sale of a chain of hotels to foreign investors may have made it unpopular with potential foreign entrepreneurs, but it illustrates the growing unease of many east Europeans with the idea theirnational wealth can conceivably be sold for a song.

Disappointed with the slow pace of change, many Western economists are now tempted to argue that if eastern Europe had implemented economic reform before political liberalisation, it would today be enjoying the prosperity of some Asian countries. This ishighly spurious. Unlike Asian nations which relied on rural societies for industrialisation, eastern Europe was already heavily industrialised, but producing the wrong goods at the wrong prices.

Isolated for decades from contact with the West, the bureaucracy-laden governments of eastern Europe are simply unable to provide the guidance necessary for a judicious allocation of investment resources. And, finally, the option of a trade-off between an open society and open markets never existed for eastern Europe: both were demanded by the population at the same time.

The message of eastern Europe is precisely that it does not conform to any of the existing economic models. It is not a disaster area, nor is it ripe for dictatorship. But it will not thrive either, at least not for a long time yet. Its existence will bepunctuated by periods of semi-chaos, like that which Poland experiences today, interspersed with authoritarian, if ephemeral, leaders.

For years to come it will remain a region in which the private sector produces most of the wealth, but is also expected to sustain large, loss-making state enterprises for political reasons. In short, eastern Europe is returning to its history: so similar to other Europeans, and yet so infuriatingly different.

The writer is director of studies at the Royal United Service Institute.

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