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Lessons for Ex-Soviets From Ex-Satellites

19-Feb-1992
EWI Contact: Jean Dumont de Chassart
Publication Series: Opinion Editorials
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By Stephen B. Heintz and Krzysztof J. Ners

Published: Wednesday, February 19, 1992

PRAGUE: Experience with aid to post-Communist Poland, Czechoslovakia and Hungary provides guidance for the huge effort that will be required to aid the new Commonwealth of Independent States.

The painful process of transition in Eastern and Central Europe has taught us that economic development and pluralist democracy do not come quickly after the fall of a governing Communist Party. Even the "shock therapy" applied to the Polish economy has involved a far longer process of reform than revolutionary leaders and citizens had hoped. The challenges in the former Soviet Union are even more daunting.

Despite some impressive technologies and military production capabilities, the ex-Soviet economies remain backward, lacking adequate civilian technology and managerial capacity. Socialist industrialization left a legacy of inefficiency and bureaucratization. The farm sector is legendary for declining production and wasteful distribution. Energy, the major export sector, is in deep crisis due to the obsolescence of equipment and the poor technical infrastructure.

Unlike Eastern and Central Europe, the ex-Soviets have virtually no experience with the basic elements of capitalism: private ownership, individual entrepreneurship and market forces.

Despite sound programs and bold efforts, market reforms and privatization in Eastern and Central Europe have produced only modest results. Poland and Hungary, which started the reform process earlier than Czechoslovakia, have fully privatized fewer than 50 large enterprises between them during the past two years.

Price liberalization has introduced market forces and economic stabilization has brought inflation under control in Poland, Hungary and Czechoslovakia, but unemployment is up and consumer purchasing power has dropped by as much as one-third. While the West cannot help but admire the sincerity and boldness of President Boris Yeltsin's reform program, the mass of Russian citizens will surely suffer increased economic pain for the indefinite future.

The economic, social and territorial disintegration of the former Soviet Union could result in widespread unrest and the outbreak of violence or even civil war. The Russian price liberalization program may have been hastily conceived and applied, but the West must now support it or risk the failure of the first attempt at market reforms in 70 years of Russian history.

From experience with aid to Eastern and Central Europe, we can draw five basic lessons:

The need for humanitarian assistance (food, fuel, medical supplies) must be realistically assessed and expeditiously met. There should be few strings. Early efforts to improve transport and delivery should accompany direct aid.

In late 1989, excessive estimates were made of food relief requirements in Poland. Once the stabilization program was under way and prices had been freed, food shortages disappeared almost overnight. Still, food on the shelves should not be mistaken for full stomachs; consumers must be able to bear market prices. Special charitable assistance will be necessary.

Tough measures should be applied at the outset to assure adequate coordination among donor countries and multinational organizations and within the recipient states. This can reduce duplication and excessive bureaucracy. The development of in-country coordination mechanisms should be an early target of Western aid.

Wide-scale technical assistance is better than financial assistance that cannot be adequately absorbed until much later. Of $45 billion of Western aid committed to six Central and East European countries since 1989, only slightly more than 20 percent has been used. In the early months, absorption is almost nil. Technical aid - management skills, organizational expertise and fresh ideas - can enhance the capacity of recipient countries to make best use of grants and loans. The West should start by organizing teams of experts on an unprecedented scale for assignment throughout the former Soviet Union.

Assistance should be sustained over the long term - perhaps throughout the decade. The gestation period for projects is long and the in-country administrative structures are not well prepared for the transition. The transition itself is complex, involving questions of culture and habit as much as macro- and microeconomic policy. Development of a pervasive entrepreneurial culture will take years.

Aid should focus on helping recipient countries to become increasingly capable of recovery though their own efforts. Price liberalization is unsustainable without trade liberalization, flexible debt arrangements and convertible currencies. Here the role of multinational financial institutions like the IMF is critical.

Normally such help is made conditionally, tied to progress on key economic policies. The unprecedented risks associated with the collapse of the former Soviet Union challenge standard procedures. New terms of conditionality need to be defined; Western support should be based on assessments of political will and the sustainability of the reform process, not just on more narrow economic criteria. Conditionality should be used to prevent unilateral restrictions on intraregional trade and to protect human rights.

We do not know all we might about the best approaches to aid, but we have learned lessons that should help make the end of the Cold War the beginning of a new age.

Mr. Heintz is director of the Institute for East-West Security Studies' European Studies Center, near Prague. Mr. Ners is deputy director of the center and director-general of the institute's Task Force on Western Assistance to Poland, Hungary and Czechoslovakia. They contributed this comment to the International Herald Tribune.