New States Push to Privatize Industry as Old Economy Withers

THE well-lit floor of the Baltika apparel factory is humming with activity. Women hunch over sewing machines, forming cloth into sports coats and trousers. The finished goods hang on long metal racks, the jackets featuring labels of British clothing chains such as Westbury.

The Baltika clothing company is a bright spot in an otherwise dark picture for industry in this Baltic republic. Like all the other former Soviet republics, Estonia is suffering through a collapse of industrial output, a product of the transition to a market economy and the loss of old markets and suppliers in the former Union.

Baltika was the first large state-owned company to undergo privatization, as a test case in the experimental program that began in late 1989. Its success is considered a good guide to a far more extensive privatization program on which the Estonian government has embarked.

The conversion of the firm into a joint stock company was completed by 1991, when ownership of the company's shares passed into the hands of the managers and the work force, with the government retaining a stake of about 30 percent.

"Earlier if we had a problem, on top of us was our ministry and our Communist Party officials," says production director Jaan Hiio. "Then there was the Estonian Communist Party and government. And there was Moscow, of course. Now we have to resolve our problems here in our factory."

The Baltika management has shifted its business to new markets in the West. Exports now account for 60 percent of the company's sales, the rest sold in the Estonian market. And whereas orders from the Soviet Union used to account for the vast majority of the exports, now 90 percent of Baltika's goods go to the West. The firm produces ready-to-wear suits, jackets, and trousers for clothing companies in Britain, Sweden, Germany, Finland, Denmark, and elsewhere.

"We work as in the West," Edward Koster, a blond sales manager, says with unconcealed pride. "Our customers are moving [production] from Portugal, southern Italy, Greece, or Ireland to the Baltics."

The shift to the West has been greatly facilitated by the introduction last June of a convertible Estonian currency, the kroon. "After the currency reform, finally we can plan our business," Mr. Koster says. "We know there is stable money."

For Baltika, earning Russian rubles is not an attractive proposition. Ruble earnings, which are used to buy supplies such as fabrics, are increasingly unreliable. Yet the company is not ready to abandon the Russian market.

"I can't say `forget it,' " Koster says. "The Russian market is very big and it is going to change."

Despite the evidence of this success story, privatization has lagged relative to other market reforms in the three Baltic republics of Estonia, Latvia, and Lithuania. Everywhere the programs struggle with mixed approaches, uncertain legal issues, and controversy.

The Estonian program has been slowed until recently by a debate about two models of privatization - the so-called Czecho-slavakia model that distributes shares in firms to employees and to the populace through vouchers and the East German model, which sells state-owned firms through auction to one or several owners, including foreign bidders.

Privatization has mostly affected small-scale enterprises, mainly retail stores. According to Riivo Sinijaru, the deputy minister of Industry, half the retail sector has been privatized. The private sector has grown from 11 firms in 1986 to about 30,000 today, accounting for about 20 percent of the economy, he says.

But privatizing large-scale industry has been slow. Mr. Sinijaru, a member of parliament, represents the views of the previous government that lost power in September elections. He says vouchers would spread out ownership far too thinly.

Mart Laar, the new premier, defends the Czech approach, arguing that Estonians do not have enough capital to buy property by the German method. The aim is not to have "worker-owned factories," he says. This problem can be solved, as has been done in Eastern Europe, by forming investment funds that consolidate individual vouchers.

Still the government has gone ahead with the first public auction of 38 factories, mostly larger firms such as textile and furniture plants. They are largely money-losers, needing the large-scale investment that foreigners can bring. According to the Baltic Independent weekly, bids for all but three of the firms were received by late December and are now being considered by the privatization agency.

Latvian privatization also has been progressing slowly. Small enterprises are being sold into private hands, but large-scale industry has hardly been touched. A law passed in June 1992 provides for sale of state property through auctions for hard currencies or special vouchers. But the process has yet to be initiated.

Lithuania can claim the most rapid progress in privatizing its economy, a process that began in early 1991 with the distribution of vouchers to the public.

"We are many steps ahead, with Estonia and Latvia lagging even further behind," says Vytenis Aleskaitis, minister of external economic relations in the previous government. Housing has been completely taken out of state hands. About 20 percent of industry has been sold off, as well as 25 percent of agricultural land and more than 70 percent of other agricultural property. "In comparison to Czechoslavakia, Hungary, or Poland, the pace is much more rapid," he says.

The pace could slow, however, under the new government - the pro-independence wing of the former Communist Party.