East Bloc Needs Western Support

The historic changes in the Soviet Union and Eastern Europe cry out for support from the West. We welcome the political and economic revolution sweeping the region and should be willing to help it succeed. The chances of success are greater if living standards improve; if they do not, hard-liners could once again come to power in the region. Thus, there may be a big payoff to economic assistance at this crucial juncture.

All of the centrally directed economies face certain common problems as they try to become market economies. To varying degrees they lack some parts of the framework of a market economy--entrepreneurial skills, institutions for creating and responding to market signals and other incentives, and financial instruments for channeling investment and risk taking.

In addition, years of central planning in each country have left relative prices distorted and resources misallocated. Because of these shortcomings, total production is inefficiently low and what gets produced is not what consumers want. In some cases, these problems have worsened recently.

In a market economy, these shortcomings would be corrected eventually. But getting from the present state to the market system may not be an easy transition. There is little precedent and no good theory to guide the process. And for a time the countries may face both more unemployment and higher inflation, as well as sharp increases in income inequality among workers.

Unemployment will rise as inefficient firms and industries are forced to lay off employees. Eventually these workers should find jobs where they can produce more and earn more. But all the needed jobs will not be immediately available; so, there will be transitional unemployment and the need to provide unemployment compensation.

The inflation risk comes in part because the price of goods that have been heavily subsidized in the past will rise, while pent-up demand for goods that have been rationed or unavailable will push up their prices. Only gradually will expanded production lead to lower prices for these goods in a market economy. In addition, any transitional decline in total output may push up the average price level.

With such problems looming, how can the Western industrial democracies aid in the transition from socialism? Western firms are already entering some Eastern European markets. Such direct investment and joint ventures between foreign and domestic firms can provide technical and entrepreneurial expertise, capital and immediate entree to the market economies of the world. For the long run, these are what the economies need the most. But in some countries, the transitional problems may require more immediate, macroeconomic assistance.

Prof. Jeffrey Sachs of Harvard University, who has studied Poland’s economic situation carefully and is an adviser to the Solidarity labor union, believes that Poland has much of the foundation needed for a market economy: entrepreneurial talent and a relatively skilled and educated work force. He is optimistic that foreign investors would be attracted to the new Polish economy.

Nonetheless, Sachs sees a critical need for special financial support from the West to help maintain living standards and provide foreign exchange to permit imports and support Poland’s currency during the transition to a market economy. Congress has recently provided for aid to Poland and Hungary, and other financial help will come from international agencies and other industrial democracies. Whether enough is forthcoming remains to be seen. With the Bush Administration pleading poverty in response to acknowledged domestic problems, it will be unlikely now to provide generous leadership on this international front.

The problems, the stakes and the difficulties in providing assistance to Eastern Europe are all magnified when it comes to the Soviet Union. There the distortions of central control and bureaucratic oppression have existed for as long as any citizen can remember. Initiative and entrepreneurship are not only in short supply, they are feared and disliked by the average citizen. The handful of Soviet cooperatives that have sprung up and have prospered modestly by operating outside the centrally controlled economy are not admired for their accomplishments so much as they are mistrusted for fostering income inequality.

If the economic situation in the Soviet Union has the furthest to go, it is also the most crucial. Soviet living standards have worsened during Mikhail S. Gorbachev’s reform period, and his leadership is at risk because of it. The incredible transformation that has taken place in the Soviet Bloc has happened because Gorbachev allowed it and encouraged it. If economic disaster were to lead to his overthrow by hard-liners, it would threaten progress in Eastern Europe as well.

At the same time that the stakes are especially high and problems with the Soviet economy are particularly grave, some kinds of assistance contemplated for Poland or Hungary will be less available to the Soviet Union. Its economy starts with less of the foundation needed for a market economy, and it is likely to be less attractive to foreign investors. And clearly, neither the public nor politicians are ready to send direct monetary aid to the Soviet Union the way they are to Poland.

How then can we help? Certainly by finding ways to reduce defense spending in both the Soviet budget and our own. Probably by allowing technical transfers that have previously been discouraged or forbidden, by removing trade barriers and by encouraging direct involvement of U.S. firms in the Soviet economy.

But we may also need to contemplate more direct aid, such as through loans or subsidized grain sales, that would provide temporary economic assistance. Which, if any, of these initiatives would be appropriate, let alone politically saleable, is yet unclear. The important thing is that President Bush leave all such possibilities open. The sterile “read my lips” approach that he has brought to domestic budget problems with such sad results should not be carried over to this new arena.