Eastern Europe: The Shock of Reform

"I think we'll be perched on the edge of catastrophe for a long time to come. This makes me an optimist."

-- Krzysztof Bien, economics editor of the Warsaw daily Rzeczpospolita

What, then, would a Polish pessimist predict? About what is expected by gloomy counterparts in Hungary, Czechoslovakia and the other Soviet satellites that broke free of communism in 1989. Standards of living will drop so low and for so long that the populace may rebel, not just against capitalism and free- market economics but against democracy as well. Possible result: the accession to power of "the man on the horse" -- a dictator.

It does not have to come to that. Here and there, small signs of economic revival are appearing. Horrendous inflation rates are slowing down; private businesses are opening and doing vigorous trade. More and better-quality goods are appearing. In Poland particularly, the days of bare shops are over as stores fill with everything from pickles to Mercedes cars -- though many items are well beyond the reach of potential customers.

Still, there is no question that the slump in production and the rise in prices and joblessness are breeding dangerous discontent. In Czechoslovakia "almost half the population is dissatisfied and nonsupportive of economic reform," says Marek Boguszak, president of a Prague opinion-research firm. "The hardship is almost at the crucial point where it could turn to aggressive opposition to reform."

But this is where "shock treatment," the crash course in economic reform advocated by many Western economists, was supposed to work. These advisers said if price controls were lifted, if subsidies to state enterprises were stopped, if curbs on imports were ended and if currencies were allowed to trade freely, Eastern Europe could move swiftly from communist stagnation to free-market prosperity. On the way, the unavoidable pain would be initially sharper but also, it was hoped, shorter.

So far, it hasn't quite worked out that way. The East European nations have received more pain than gain. Critics say they lacked essential preconditions to make such an overnight change successful. There was, and is, no well- developed banking system capable of siphoning capital and credit to entrepreneurs opening private businesses or to state combines suddenly shorn of their subsidies. No country has been able to figure out a rapid way to convert state businesses to private ownership. "It is absolutely wrong to come in here with textbook notions of economics," says Werner Varga, an economist with Creditanstalt, a large Austrian bank that keeps a close watch on the region.

Western advisers and East European free-marketeers often reply with metaphors: You can't cross a chasm in two jumps; you don't slow down when driving through deep mud. But now slowing down is exactly what some populist politicians in the East want to do. To ease the frightening burden on their citizens, some politicians and economists advocate government action that will keep afloat giant state enterprises, such as steel and textile mills, which have suffered especially deep drops in production and endured the heaviest layoffs. But renewed subsidies would only prolong the economic agony by keeping inefficient dinosaurs alive.