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VIEWPOINTS : Eastern Europe's March to Prosperity Ends in Morass of Debt : Poor Quality of Exports Stalls Plan

September 21, 1986|LESTER C. THUROW | Lester C. Thurow is Gordon Y. Billard Professor of Management and Economics at the Sloan School of Management at Massachusetts Institute of Technology in Cambridge. and FO

In the 1970s, Eastern Europe thought that it discovered a way to develop its industries and let the West pay the bills.

Instead of forcing down the consumption of its own citizens to free resources for massive industrial investments, it would borrow funds from Western bankers.

These funds would be used to import Western technologies and Western capital equipment.

If these new plants were combined with lower-paid Eastern European workers, cheap products could be produced and then re-exported back to the West to pay off the original bank loans.

The plan did not work. The 1980s were a period of slow economic growth in the West and Western countries were not anxious to accept Eastern European goods.

Much more important, the Eastern European countries were never able to get those imported factories working at a quality level where they could compete with European, American or Japanese goods. Western consumers were simply unwilling to buy low-quality goods, even if those goods were much cheaper than the better-quality goods to which they had become accustomed.

Western quality levels were unattainable for a number of reasons.

To know what foreign consumers want, one has to spend a lot of time on foreign economic intelligence. If Eastern European factory managers and salesmen were not allowed to visit the West in large numbers, they could not hope to know what Westerners wanted.

Permanently in U.S.

To sell in the American market, for example, the Japanese have 100,000 Japanese businessmen permanently stationed in the United States.

Yet the governments of Eastern Europe were reluctant to let anyone out of their countries for fear they would not return.

With endemic consumer shortages, producers of consumer goods in Eastern Europe were also used to an environment where anything that could be made, no matter what the quality, could be sold. Once such a mind-set is in place, it is very difficult to dislodge.

High-quality products also are not just a function of having the right technology. No matter how good the equipment, a poorly organized, sullen, unmotivated work force cannot produce high-quality products.

Dissatisfaction with one's human condition ends up hurting economic performance even in a dictatorship. People can be forced to work but they cannot be forced to be good workers.

As a result of its inability to export, Eastern Europe could not earn the foreign exchange necessary to repay its debts and today it is in roughly the same position as Latin America.

Poland has defaulted on its loans in all but name, and no one knows how some of the other countries, such as Yugoslavia, are going to repay their debts.

Romania is repaying its debts by returning to Stalinesque techniques and forcing its citizens to endure large reductions in their already meager standards of living, but the rest of Eastern Europe is not anxious to follow the Romanian example.

Hungary has tried to escape from this dilemma by pioneering Communist Bloc efforts to reintroduce some market principles back into their centrally planned economies.

As the Chinese are now discovering as they follow the Hungarians, however, the problems are many.

When some sectors of the economy are "marketized" and others remain planned, the income distribution gets twisted in unfamiliar ways.

The Budapest taxi driver who has become an independent entrepreneur makes more than the corporate executives who remain state employees. Farm incomes rise above urban incomes when farmers are allowed to respond to market incentives and industrial workers are not.

Nothing is intrinsically wrong with such inversions of traditional salary arrangements, but that doesn't stop people from feeling that they are being unfairly treated.

This leads some of the gains in the liberated sectors to be offset by losses in the unliberated sectors where workers are even less motivated than before.

Industrial Cooperatives

Recently Hungarian industrial workers have been allowed to set up what are essentially "after hours" industrial cooperatives.

Work eight hours for the state enterprise and you can then use state equipment after normal working hours to work for yourself.

Not surprisingly, this encourages workers to save their best energy for those after-hours production efforts. Creative energy tends to get withdrawn from the state enterprises.

Such cooperatives also exclude some of their normal working colleagues--either because they are believed to be bad workers or are simply not liked by their fellow workmates.

Such excluded workers can take out their unhappiness during normal working hours and disrupt normal production even if their unhappiness springs from what is occurring after normal working hours.

Problems are further complicated by Stalin's belief that it was possible to create two world economies--one for the capitalistic economies and one for the socialistic economies.

A socialistic trading bloc exists, but it is not isolated from the West. How do enterprises (state or private) plan and produce if they must sell at two different prices and two different markets?

Politically there is no choice but to trade with the Soviet Union and other Eastern Bloc countries, but there is also no choice economically. The Soviets export energy that Hungary needs.

No Credit for Quality

Yet producing Western-quality products for the Eastern Bloc markets doesn't pay off, since Eastern prices are set at Eastern quality levels and no credit is given for higher-quality products.

In the East, one is paid for quantity and not quality. Few Western firms, however, find that they can simultaneously produce high- and low-quality products. A focus on high quality cannot be turned on and off.

As Hungary is discovering, integrating market principles with central planning is not easy.

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