For East Europe, a New `Big Brother'?

By , Libby Rittenberg, an associate professor in the Department of Economics and Business at The Colorado College, specializes in comparative economic systems.

THE recent announcement by Prime Minister Nikolai Ryzhkov of a go-slow plan for economic reform in the Soviet Union was greeted almost by jeers from Western experts. Why doesn't the Soviet Union just take the plunge, as Poland did last January, as East Germany is scheduled to do in July, and as at least Hungary and Czechoslovakia are likely to do very soon? The difference is risk. As the Poles, East Germans, Hungarians, and Czechs dive into new economic waters, a belly-flop is possible, but if the Soviets dive in, they are likely to find that for them the water is only ankle-deep. The essence of the debate is the proper pace of economic transition. You know you want to move the economy from point A (a centrally planned system with primarily social ownership and a pricing structure willing to accept shortages of basic consumer goods over high market-clearing prices) to point B (a market-based system with more private property and greater consumer power).

The choice is between taking the plunge, or wading more slowly into the uncharted waters. The former generates higher costs to society in the short run in terms of inflation, unemployment, and bankruptcies, but presumably lower total costs over time, as the length of the transition period is likely to be shorter. Gradualism avoids the high initial costs, but the accumulated costs over the long transition period are likely to be higher.

So why are economic policymakers and politicians in Eastern Europe more likely to choose a faster pace of economic change than are Soviet Union planners?

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The desire for rapid change in Eastern Europe is at one level an emotional expression of independence from Moscow, a way of telling the Soviets that their tutelage was not appreciated. Along the same lines, with the changing of the political elite in Eastern Europe, there is the desire to build a new economic elite as well. Obviously, the present Soviet government can only distance itself so far from past Soviet governments.

The Soviet model never did fit the more industrialized countries of Eastern Europe very well. It appears that whatever advantages there are to a centrally planned system, they are most pronounced in the initial stages of a country's shift from agrarian to industrialized status. In such a period, planning may be easier because there are fewer items to plan and because consumers do not expect as much.

Since the better-off Eastern European countries were already at least partly industrialized, they embarked on central planning in its more costly phase. It is interesting to note that the countries of Eastern Europe that did best in terms of GNP growth from 1950-85 were Bulgaria and Romania - the two countries that were least developed when central planning was adopted. These two countries, like the Soviet Union, also appear to be opting for more gradual reform.

The overwhelming reason, however, is the special tie between Eastern Europe and Western Europe, and in particular the greater likelihood for these countries of admission to the European Economic Community (EEC). A World Bank vice president, Shahid Hussein, has said of Eastern Europe, ``The Western European countries are joining together to make sure the reform effort doesn't fail.''

Evidence suggests that admission to the EEC is highly beneficial, especially for poorer members. Spain and Portugal both joined the Community in 1986 and have done well ever since. Spain seems to be breaking all records, with recent employment growth the highest recorded in OECD Europe. While the success of the Spanish economy is attributed to a variety of factors, it has been claimed that most of Portugal's economic growth and dramatically improved prospects over the past five years are a result of entry into the EEC. If a Mexico or Brazil could expect economic aid of about 2 percent of GNP - about what Portugal received last year - more third-world countries might take the plunge.

Moreover, it is reasonable to expect that the EEC could absorb the countries of Eastern Europe over the period of a decade or so. The combined population of East Germany, Hungary, Poland, Czechoslovakia, Romania, and Bulgaria is only about 100 million people, about twice the combined population of Greece, Spain, and Portugal. And entry for Bulgaria and Romania is likely to be pushed off farther into the future.

Absorption of a country the size of the Soviet Union (approaching 300 million people) would surely be more difficult economically, to say nothing of political as well as social ramifications. For instance, the EEC has not shown a willingness to accept any country with a large Muslim population, as evidenced by the recent postponement until 1993 of talks on entry to Turkey, a long-standing associate member of the organization.

True, the Baltic states certainly have political and cultural reasons for wanting independence; but they also have an economic rationale - a quick plunge now could enhance their chances for EEC membership.

For prospective members, entrance to the EEC would lower the cost of transition to a market-based economy. For East Germany, a fairly smooth transition seems assured, as it joins with West Germany on favorable terms. In particular, the one-for-one exchange rate between East and West German deutsche marks on smaller savings accounts (up to 6,000 marks for persons over 60 and up to 4,000 marks for younger adults) is generous. The agreement maintains the savings of poorer East Germans and substantially reduces the risk and lowers the cost of the change.

The new ``Big Brother'' will not be so generous with the rest of Eastern Europe, but he will be more forthcoming than he has been with the third world or with the Soviet Union. Taking the market plunge may make sense only if a big brother is watching out for you.

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