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The Curtain Rises: Eastern Europe, 1989 : ECONOMY : The Promises of a Free Market Beckon--but Change Won't Be Easy : Atrophy has set in after four decades of communism. And it may take 40 more years to correct the problems.

December 17, 1989|ART PINE | TIMES STAFF WRITER

OZD, Hungary — From a small house on a hillside in this remote northern mountain town, Janos Petrenko is quietly fomenting a revolution.

Petrenko is in an animated conversation with officials of the local power station. "I can get you this steel casting made faster and more cheaply than anywhere else in Hungary," he says, "and I guarantee you it will be far better quality. Why buy from anyone else when I can give you a better deal?"

That may not sound revolutionary to Western ears, but here in Hungary--and in other East Bloc countries that are emerging from Communist rule--it is nothing short of sensational.

Petrenko, a former locksmith and sometime inventor, has just bought a 600-worker metal-fabricating plant that until now has been part of a large and financially ailing state-owned steel mill. It is one of the first such transfers to private ownership that Hungary has seen in four decades.

"Fantastic!" exults an enthusiastic Hungarian who sat in on the session and had never seen a real business deal transacted here before.

This is just the kind of revolution that officials here hope will break out not only in Hungary but throughout the Eastern Bloc. After 40 years of Communist rule, Hungary, Poland, Czechoslovakia and even the Soviet Union have decided that the socialist economic model has failed them and that they must move rapidly to a more market-oriented system. If developments continue as they have, East Germany won't be far behind.

"We have no choice--it's the only way," says Ivan Szegvari, deputy director of Hungary's Institute of Economic Planning, which has helped map out the economic reforms that are accompanying political liberalization in this country.

Four decades of socialism have left the East Bloc economies atrophied--hobbled by hopelessly outmoded technology, bloated administrative staffs and shortages of raw materials and supplies.

Experienced managers who can operate a firm Western style are in short supply. The work force is lethargic and uncaring. Worst of all, policy-makers must depend upon the men who ran industries and agencies during the Communist era to carry out the transformation.

Housing is so hard to find that young people routinely live with their parents until they can inherit their apartments. Getting a telephone can take up to 30 years. Corruption is a way of life.

"Our biggest problem is that there is no capital," says Janos Palotas, president of Hungary's fledgling National Union of Entrepreneurs, which serves as a trade association for the country's emerging small- and medium-size businesses.

The East Bloc countries also have no real financial system--Western-style banks, stock markets and the like. Profits and private ownership are new concepts, not even legal under the old regimes. Prices charged under the Communist system have had nothing to do with production costs or supply and demand. Tax systems discourage profits. Currencies are useless for buying needed imports. And accounting systems are totally incompatible with Western business practices; it is impossible even to set a value on property in East Bloc countries.

Eugenio Lari, the World Bank's top Poland expert, prescribes nothing less than building new economic systems from scratch--a banking system, a stock market and the kind of marketing and distribution systems that business as we know it needs to survive.

Most analysts believe it is likely to take years--possibly decades--before the East Bloc economies get fully on their feet. Western capital can do only so much in such an environment, and even joint ventures with large Western companies, which can help provide management expertise, won't solve the problem overnight.

What is more, the transition almost certainly will involve substantial pain--soaring inflation as governments struggle to bring domestic prices into line with costs and with prices charged on world markets; a visible reduction in already low living standards as inflation outstrips wage increases. And, for the first time, it will bring about widespread unemployment, as governments withdraw the subsidies that have kept state-run monopolies from going bankrupt and they are sold or forced to operate at a profit.

Governments here are bracing for the possibility of widespread social disruption if even the slightest thing goes awry. Modern economic annals are filled with examples of governments that have been forced to retreat from programs far less painful than the one Poland is embarking on now.

"I think the job they're undertaking is almost impossible," says Alan J. Stoga, chief international economic analyst for Kissinger Associates, a New York consulting firm.

The new East Bloc regimes are taking varying approaches to transforming their economies.

Czechoslovakia and Hungary, which began a few years ago, are going more slowly than they initially planned, partly to avoid any unnecessary social disruption. "If we try to move too rapidly, it means a huge social injustice," Hungary's Szegvari warns.

But Poland, on the advice of some Western economists, has decided to try the so-called Big Bang approach--to make the transition as quickly as possible in hopes of producing dividends within six months to a year. "We cannot move more gradually," Deputy Finance Minister Marek Dabrowski says, "because the current situation is out of control."

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