Economics After the Cold War : Global change: Public euphoria for East Bloc reform may be matched by enormous commercial progress. But the process won’t be painless.

Whether hailed as the end of the Cold War or the triumph of capitalism, the opening of the Berlin Wall and the transformation of the Soviet Bloc have set off waves of euphoria in the West.

Beyond the celebration, the impact on the world economy will be profound, breathtaking in speed and scope--historically comparable to European voyages of discovery and the opening of the New World in the 16th Century .

Entering the world economy will be the 400 million people of the Soviet Union and Eastern Europe--historically shut off by an economic wall nearly as formidable as the political one. The opening of the Soviet Union brings to the table an economy of $2.25 trillion--45% of the U.S. gross national product.

The socialist economies, failing at home and taking almost no part in the trade and economic development of the West, can now enroll as beginning developing states in the world economy. Like trainees, they can hope to produce goods on the same quality and price level as those of Malaysia, India or Mexico. Within 10 years, perhaps they can match the quality of South Korea, Taiwan or Hong Kong.

Western Europe faces an opportunity to build a greater economic force. Poland, East Germany, Hungary and neighboring nations represent a source of inexpensive but high-quality labor--and a huge new market.

The United States may be the biggest winner. The Soviet government’s decision to pursue economic development--and the prospects of reducing the size and threat of the Soviet military--has immense meaning for the United States, which for 45 years has made national security and defense of the Western democracies its No. 1 priority. Initially, the nation faces the daunting challenge of unwinding a massive defense industrial complex--with painful consequences for regions such as Southern California.

But reduced world tension gives the United States the political leeway to choose new priorities, to chart a course taking it into the 21st Century. Economists propose rebuilding the infrastructure, supporting education, or health care, or the environment; some suggest that the government simply eliminate its deficit and thus boost national savings.

Clearly, the world is at a turning point comparable to 1815 when the Congress of Vienna ended the Napoleonic Wars. Then, as now, the world looked confidently forward to peace --although the following century brought social turmoil and regional conflict (notably the American Civil War). Then, as now, world events were being driven by strong, underlying economic forces. In 1815, the railroad age and industrial revolution, spawned by the invention of steam engines and cotton spinning machinery in the 1700s, created national markets to supersede local ones.

Today, the new world economy, based on inventions and developments in computers and microchips since the 1950s, is sweeping over national borders and is an impetus for reform in the Soviet Union. “No country today can be outside the international economy,” Soviet President Mikhail S. Gorbachev declared last December in a speech to the United Nations.

Ironically, for all the self-satisfaction that Americans feel over Gorbachev’s market-oriented reforms, the Soviet leader’s main inspiration, say East bloc experts, came from Japan and the rapidly developing economies of Asia.

“Gorbachev looked at Asia and saw advanced economies, like South Korea’s, developing within a decade or two,” says Jerry F. Hough, director of the Center on East-West Trade and Investment at Duke University.

He saw handwriting on the wall. Japan’s economy passed the Soviet Union in GNP last year, and China will probably pass it in 2010--when India, from poverty today, will have a GNP half the size of the Soviet Union’s. Gorbachev faced the prospect of his country being left dangerously backward and isolated if it didn’t join the modern world economy.

And what is that modern economy in which a Korea can do in two decades what the Soviet Union failed to do in 70 years? It’s an economy based on computer-guided machines that turn out high-quality goods with labor that can be quickly trained. It’s an economy based on microchips and knowledge that moves like quicksilver compared to the 19th Century’s coal-and-iron-based industries.

It’s an economy exemplified by the chain store in the American shopping mall that turns out quality eyeglasses in an hour with the help of semi-skilled technicians and computerized machines.

Korea and Thailand have such computerized machines, the Soviet Union does not. To get access to that technology--and to lower Western high-tech embargoes--Gorbachev has announced troop withdrawals from Eastern Europe and reductions in the Soviet military budget. And he is opening up the Soviet economy.

What he intends, says Thomas Naylor, an economist at Duke University and author of “The Gorbachev Strategy--Opening the Closed Society,” is for the Soviets to produce components for finished goods made elsewhere--as parts from Singapore or Mexico now go into final products made in Japan or the United States. The Soviets at first would produce low-quality goods--as Taiwan, Hong Kong, and even Japan once did--and hope to move up the scale later.

Of course, much depends on whether Gorbachev succeeds. But Soviet assets for development are not meager, argues Hough. “Sixty percent of its people have a high school education that is strong in math and science; they have cheap labor to attract investment from Western Europe.”

And what the Soviet Union may lack in attractions for investment, the historic manufacturing centers of Eastern Europe--Czechoslovakia, Hungary, and East Germany--most certainly have.

For Western Europe, the opening of the East adds new markets next door to the benefits that the 12-nation European Community expects from economic unification in 1992.

“The European economy has just found a low-cost production base,” says Alan Stoga, chief economist of Kissinger Associates, the consulting firm of the former U.S. Secretary of State.

West German firms, from giants such as Siemens and Hoechst to the Hamburg-based maker of Nivea skin cream, have begun stepping up their investments in the East. The Deutsche Bank, descendant of the institution that financed Hitler, has just opened offices in Warsaw and Budapest.

More than Germans are interested. General Electric of the United States last week bought a Hungarian light bulb manufacturer, and Japanese banks are reported ready to acquire five Hungarian companies. Things are moving fastest in Hungary: More than 650 joint ventures have been formed with Western companies, and already there are complaints about “the selling of Hungary.”

Stoga sees a mixed blessing. Investments in Eastern Europe--that help Czechs and Poles, Ukrainians and Latvians--will be taken away from southern Europe and North Africa, and slow development in Turkey and Algeria.

And, he says, “Europe will be absorbed intellectually and financially, and will withdraw attention from other problems of the world”--Third World Debt, Latin American development, which will have to be taken care of by the United States and Japan.

But Eastern Europe is not about to become an exclusive hunting preserve for West European business. U.S. companies already in Europe will be involved.

“American firms overseas generated $720 billion in revenues last year,” says Edward Yardeni, chief economist of Prudential-Bache Securities--a good portion of it in Europe, where IBM is the largest computer maker in several countries, Ford one of the largest auto companies and Heinz a leading seller of beans and ketchup. More U.S. and Japanese companies will now invest--wooed by incentives.

Finally, the East presents a challenge to West European countries to take responsibility for their own foreign affairs and defense. The fact is, the Economist magazine noted recently, the Cold War that brought tension to the rest of the world had “brought the blessing of stability to Europe.”

The old continent’s “German problem” that had led to wars in 1870, 1914 and 1939 was solved by dividing Germany and giving ultimate responsibility for it to the allies and the Soviet Union. And, said the Economist, the Europeans were able to “count on America as the guarantor of their peace.” That’s why each American pays about $1,200 a year for defense--half of it at least devoted to Europe--but each French or West German citizen pays about $300.

The imbalance has grown unhealthy for the U.S. economy, argues David Calleo, author of “Beyond American Hegemony” and director of European studies at Johns Hopkins Advanced International School. It runs a budget deficit that is exacerbated by support for more than 300,000 troops in Europe. The time had come long before the changes in the East for Europe to shoulder more of its defense burdens, says Calleo. But now, with the Soviet Union withdrawing troops from the East, a readjustment of the U.S. position is unavoidable--which will yield a payoff for the U.S. economy.

In the United States the big question is how much will the defense budget be cut and who will get the money--how large will be the “peace dividend”? In the short run, economists say, there may not be a peace dividend because it costs more to bring troops home and demobilize them than to leave them where they are.

But indeed there will be reductions in defense spending, and they could go deep. Sen. Sam Nunn (D.-Ga.), head of the Armed Services Committee, predicts a four- to five-year retrenchment in the size of the U.S. military. Defense Secretary Dick Cheney has told the armed services to cut $180 billion from its budgets in three years.

James R. Jones, chairman of the American Stock Exchange and a sophisticated former congressman who knows Washington’s budget processes, foresees deeper cuts, possibly a “50% cut from present levels”--indicating a future defense budget of $140 billion from $286 billion in fiscal year 1990.

Such a cut would be brutal for Southern California, base for more than 40% of all aerospace-defense work. But even here, the transition to a “peace” economy will be eased by increased expenditure on space exploration and by record production in commercial aviation.

But more than substituting spacecraft for ballistic missiles and jetliners for warplanes, the new economy will offer fresh opportunity to take advantage of this region’s enormous concentration of skilled people and technical know-how for more commercial endeavors. It won’t be easy; the mentality of custom military work is different from mass-production civilian work. But a region already advanced in information technology can prosper in a new world economy based on developments in computers and microchips.

What is needed to successfully make the transition is new thinking, says Jones. “Do we have program for peace as we had for war?” he asks.

“For 45 years, we’ve had a single, overriding priority--national security,” observes Duke economist Naylor. “Now we can think of other priorities--health care, education, the infrastructure, the environment,” he says. Perhaps, he suggests, the new priority should be faster economic growth to bolster and maintain America’s competitive position in the world.

With decisions to make, a look back is instructive for Americans. For all the talk of a fading power, the economy has shown stability, says economist Charles Wolf of Rand Corp. “The U.S. share of global product is now what it was in the mid-1960s, and our projections are that it will be the same or slightly less in 2010,” says Wolf.

“Seen in the perspective of history,” wrote Paul Kennedy in his book “Rise and Fall of the Great Powers,” “post-1945 American policy achieved some very significant aims: domestic prosperity as opposed to a 1930s type slump, the containing of Soviet expansionism without war, the revival of the economies and the democratic traditions of Western Europe, later joined by Japan to create an integrated economic bloc.

“And the U.S.,” added Kennedy, “maintained a very considerable superiority over the Soviet Union in almost all respects of true national power and has remained open to the stimulus of technological change”--something its Soviet rival had difficulty dealing with.

But if the match with the single competitor is ended, the footrace with the many has only begun.

There will be other consequences of the end of the Cold War that may be only dimly understood in the general euphoria. With increased production everywhere, the world is already awash in merchandise--an estimated 13 million cars, foreign and domestic, available for an American market that buys 10 million to 11 million; more than 40 manufacturers of television sets in the world. And with East Bloc nations entering the world economy, the next decade will see even more members in the modern industrial club, promising an unprecedented era of global competition.

One secret of the new world economy is that industrialization--producing complex products for sale on world markets--can come quickly to societies that once had to struggle for decades to accumulate the capital and master the skills that went into a steel mill.

The reason is advances in semiconductors, the microchips that hold millions of instructions in densely packed circuitry, forming the heart of today’s small but powerful computers. Such chips allow machines to turn out great volumes of uniform products, and give telephone systems the power to handle unprecedented amounts of voice and data communication.

Yet for all their power, microchips use only a fraction of the raw materials and energy consumed by machines of old. More than 70% of the value of a microchip represents the knowledge that the programmer puts in its instruction sets, says management expert Peter F. Drucker of Claremont Graduate School.

The exciting point for the world economy is that such advanced technology is available to every country. In fact, it would be hard to keep out of their hands. Unlike the coal, iron and oil of former ages, today’s lightweight industrial power moves through the air with the speed and ease of communications. That is why South Korea has come so far so fast and why Thailand, India and Malaysia are advancing so rapidly.

Microchip circuitry and the speed of information is also why the repressive communist regime in Beijing couldn’t keep news of the massacre at Tian An Men Square from its own people or the world.

And it’s why no one should doubt that the Soviet Union and the countries of Eastern Europe will be able to make industrial advances in the next decade--provided they allow their economies to open to the changed patterns of the new world economy.

The new word for industry is transnational, not national. With information technology available virtually everywhere, production occurs in many places for many reasons--quality, price, timing, availability--rather than wholly in one country and exported.

Indeed, traditional trade statistics have little meaning in a time when IBM, a U.S.-based company, is the leading exporter of computers from both Japan and West Germany (and several other countries), and Sony, a Japan-based company, is the leading exporter of televisions from the United States.

When automobile producers turn out cars in several global locations with parts from half a dozen countries, it is no longer companies that depend on nation states but national governments that woo companies for job-providing investment. When worldwide trading in currencies and securities totals more than $500 billion a day--at least 20 times more than the trade in goods and services--it is clear that the world economy has progressed beyond the nation state.

Smart men saw the new world coming. “There is an increasing misfit between the fact of global economic life and the political organization of the world, in 140 local, so-called sovereign states,” said the British historian Arnold Toynbee 15 years ago, in an interview shortly before his death. The multinational corporation filled a vacuum, said Toynbee, while understanding dawned upon the nations of the world that interdependence had replaced independence. “Sovereignty on a local basis is an illusion,” said Toynbee, “because you can’t be economically independent locally.”

Now, to cheers and exultation among Americans, the Soviet Union seems ready to join the interdependent world economy and end the Cold War.

But even Americans may feel less smug if in the next decade, responding to opportunities in reforming Soviet agriculture, John Deere & Co. opens a tractor plant in the Ukraine, with parts production in Poland--and cuts output in Moline, Ill. It’s sure to be a better new world, but not an easier one.