Politics Thwarts Reform

THE governments of Eastern Europe are attempting to bring about economic reform. But even the most courageous efforts are being blocked by political considerations. Until the political obstacles are surmounted, economic progress will be very slow. Most Western economists who have been involved in advising the Central and Eastern European governments on their transitions agree on the major points. The most important aspects of reform require that a number of steps be taken.

First, prices must be liberalized. Perhaps most important is that prices reflect the true values of goods by world standards.

Second, production must be de-monopolized. In most of the countries in transition, many industries are organized so that only one or two enterprises account for production of a particular commodity. Permitting foreign competition would help correct this problem.

Third, currency must be made convertible into "hard" currency. This means abandoning the fiction that, for example, the Russian ruble is worth about 60 American cents. In reality, it is worth about three cents.

Fourth, state capital must be turned over to private hands as soon as possible. The experience of state firms that try to behave like private enterprises is fraught with failure.

Fifth, well-defined property rights must be established, which protect foreign investment from confiscation and allow investors to take profits out of the country.

Sixth, an efficient and fair tax structure must be established to replace the current implicit tax. Currently the government receives all revenue from sales of goods, and what is left after payment to labor and foreign suppliers belongs to the government.

Seventh, free mobility of labor and capital must be permitted. This means that as some enterprises close and others expand, individuals can move quickly to avoid unemployment.

Finally, a well-functioning capital market must be established. An important aspect is the creation of a commercial banking system that can lend money to newly formed private enterprises.

Progress on these points has been slow. The reasons are primarily political. Sometimes, as in the Soviet Union, there are power battles between planners. Often the issue is the speed of transition to a market economy. Those who push for rapid change meet resistance from entrenched individuals who will lose ground as reform proceeds. Tadeusz Mazowiecki lost the leadership of Poland primarily because his reforms frightened many people.

Reforms have been slowed by debates that pit one interest group against another. In Czechoslovakia, privatization was held up for a few months while legislators argued about the form that restitution of property to its historical owners would take. Eventually, a compromise was struck, but the details of capital distribution are still not decided.

PRIVATIZATION has been hindered by another factor.

Virtually all of the East European countries have struggled with the problem of "tainted money." Under the communist system, individuals were unable to amass much in savings unless they did so illegally. Most of the people who currently have significant holdings of money were former nomenclatura, party officials who are disliked intensely by the general public. There is great concern that a sale of state capital will result in its acquisition by corrupt former communist officials who are the only ones w ith the money to purchase the shares. Unfortunately, there is little that can be done to prevent this. As long as shares are resalable, those with money will acquire the capital anyway. If shares are sold directly, then the government collects the revenue. If is given to the people who can resell it, then the public collects the revenue. Eventually, both Czechoslovakia and Romania gave up on trying to prevent those with money from buying the share of state enterprises.

The Soviet Union tried a different approach. Thinking that the tainted money was held in mostly larger denominations, they printed new 100 ruble notes and exchanged them for old ones. But citizens were only allowed to exchange a limited number of them. The idea was to render worthless the savings accumulated by corrupt officials. But those with hundred ruble notes simply sold them at a slight discount to law-abiding citizens who were below their quotas. The scheme only meant inconvenience and slight los ses to those with large numbers of 100s.

There has been public resistance to price liberalization. Currently price liberalization simply means higher prices, but no more goods since producers have little ability to increase output. Price increases have ended lines at stores, but the political opposition has been intense.

MEANWHILE no country, not even Poland with its sweeping reforms, has been willing to free up wages. Government officials fear that spineless managers will accede to worker demands for higher and higher wages, leading to inflation. And the governments are most concerned about expenses that they must cover themselves, wages being the largest one. Rather than give in to political concerns, it would be better to adopt a solution to the general problem: The managers need to be told that their compensation an d even their jobs depend on turning a profit. Then market forces will induce them to set wages at their appropriate levels.

The slow pace of economic reform can be attributed in part to lack of consensus on the best policy. But more important, politics rather than reason often guides economic policy.