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Sunset of the 'nomenklatura'.

Capitalists take cheer: The command economies' and the communist bureaucrats' days are numbered.

As someone who has helped design tax systems for governments around the world, Patrick L. Clawson chuckles good-naturedly when he talks about the flourishing black markets in Eastern Europe. The black markets, admits this international economist, are beneficial in that they are helping to speed the conversion to a free market-oriented system. Clawson was a Senior Economist with the World Bank and the International Monetary Fund. He is now a Resident Scholar at the Foreign Policy Research Institute, an international affairs think tank based in Philadelphia. In a conversation with Directors & Boards, he comments on a variety of economic issues in the Eastern European market.

On the Prospects for Political Stability: "The concept of Eastern Europe that we have today is really a product of the Cold War. It doesn't correspond to the history and culture of the region, which is divided between Central Europe on one hand, and the Balkans on the other. The political future of Central Europe is going to be quite stable. We see East Germany, Czechoslovakia, and Hungary making a transition to new policies and new sets of governments much more smoothly than any of the Balkan states. The political future of the Balkans is going to be very messy. It's been an area of turmoil for hundreds of years. Ethnic groups are all mixed in. They don't like each other, there is no trust, there are no democratic traditions to build on. Romania, Bulgaria, Yugoslavia, and Albania are going to be torn by competing anti-democratic movements and ethnic tensions, which could disturb political stability and, quite possibly, lead to civil strife bordering on civil war. It's very different from Central Europe, and this difference looks like it's going to grow through time."

On Misleading Economic Indicators: "I'm very skeptical about how useful our Western economic concepts are in understanding what's happening in Eastern Europe. What does the GNP in those countries tell you when you simply can't find goods in the market? It's like saying that inflation in Poland has been 2,000%. Someone might well say, |That doesn't make a difference to me. Now I can at least get the goods instead of standing in line for 10 hours, getting to the head of the line, and discovering that what I want is not there.'

"Furthermore, I happen to think that the situation is much better today than what the official statistics are telling us. All the economic activity taking place in the private sector has not yet been caught in the official statistics -- which are still turning out these misleading numbers about the state-owned sector, which is rapidly in decline. I don't think the Polish economy, for example, has declined anywhere near what the figures are suggesting. You don't get a $3 billion trade surplus with the West in six months in a place like Poland unless there is an enormous amount of growth taking place."

On Soviet Economic and Political Influence in Eastern Europe: "Will it disappear? I think a good indicator is what has happened in Hungary. What you saw is ruble exports -- which are overwhelmingly to the Soviet Union -- drop by 30% in one year, with further drops of similar magnitude anticipated in the coming year. The Hungarians are scrambling madly to increase their exports to the West, and are doing quite well at it. Yet, in spite of that, they are finding that their overall trade is shrinking because of the tremendous problem they are having in ruble trade.

"Independent of the political issues, the Hungarian companies, whether state-owned or privately owned, are being forced to look to the West for markets, for capital, and for technical assistance, because the Soviet Union is turning in on itself so much. Its economic problems are so great, that the Soviets are ending any kind of preferential agreements that benefitted Eastern Europe. We see this in the shift to world market prices for Soviet oil.

"If the Soviets have hard currency, that is going to significantly diminish any reason that Soviet companies had to buy commodities from Eastern European countries. Eastern Europeans have been selling to the Soviets things like machine goods and consumer goods, which hadn't been the best of quality, and the Soviets haven't been in any position to argue about it because they only had transferable rubles instead of hard currency. Now the Soviets are going to buy the things they want. Soviet consumers are at least as picky as East German consumers have proved to be. They want Western goods. They would much rather have Marlboros than whatever it is that's produced in Romania. If the Soviets have hard currency, the prospects for East European manufacturers maintaining their share of the Soviet market are pretty bad."

On German Dominance of Europe: "The tacit assumption that we have to worry about German armies marching into Western Europe again is silly. It won't happen. But there is, indeed, a real issue as to what extent the population wave and the economic wave of Germany is going to dominate the EC and Central Europe as a whole. We're talking about the largest nationality in Europe, outside of the Soviet Union -- a very large group of German-speaking people who identify with Germany, are very industrious, and quite prosperous. It would be surprising if Germany didn't have an enormous weight in the EC.

"On the other hand, if I were a citizen in any of the surrounding countries, I would prefer to see a strengthening of EC institutions, knowing full well that Germany is going to have a dominant role in these institutions, because I would still have some say in them. Effectively, the Bundesbank already controls European money supply and monetary policy. If there were a EuroFed, then these smaller countries would have some voice in the matter. Their voice might be small compared with that of the Germans, but some say is better than none."

On Eastern Europe Infrastructure Problems: "We all know that the telecommunication system is terribly backward in Eastern Europe. But one can, after all, introduce things like cellular systems that could pay for themselves and can be very attractive for Western investors to put their money into. What I'm particularly worried about is the road system. So far, I don't know that any of these countries are talking about a toll road system, and they badly need to have some system. After all, the French and Italian road systems have all been financed as toll roads. Until we start hearing talk about toll roads in Eastern Europe, I don't think that these very strapped governments, which are under great pressure to contain their budget deficits, are going to put a lot of money into the road systems. Not only are the road systems bad but they are in the wrong place -- they're oriented toward the East. And the focus in the past has been on railways. It went so far in East Germany that the law prohibited shipments of any major quantity more than 100 kilometers unless it went by train. So, I think the road system is going to be a much harder problem to address than energy or telecommunications, for which you can charge consumers quite readily."

On the Embracing of Capitalism: "Most of the economists I deal with from the Central European countries and the Soviet Union range in political leaning from admirers of Milton Friedman to admirers of Ayn Rand -- i.e., right to extreme right. We're seeing this in the debate going on in the Soviet Parliament. Everyone is competing against each other to see how quickly they can introduce the most extensive features imaginable of a market economy.

"What's blocking that are the remaining bureaucrats who are so powerfully entrenched at the middle level. All of those second-level bureaucrats are still caught in the old way of thinking and are doing everything that they can to block the kind of initiatives that are being announced by the national governments and approved by the assemblies. They are just a tremendous barrier. They can be extraordinarily effective at stopping you from renting premises, or from getting permits, which, theoretically, are easily available. These people are determined to preserve their privileges, convinced that the old ways were right. That's why I think we are going to see a flourish for the black markets, because the only effective way around these people is by not going by the rules.

"But those bureaucrats' days are numbered. It's just a question of how long they can block things, and I would say probably more like three to five years rather than one to three years, unfortunately. But I'm reasonably confident that we're going to see a greater opening to market forces, both in the Soviet Union and Central Europe. The Balkan states are more of a mixed bag. There is still real sentiment in some of those places for state-directed economies."

On Privatization: "There is tremendous pressure to get the state out of some of the services it has been providing in the past. The quality has been so outrageous. The issue here tends to be more of |How can we make sure we get value for our money for our national assets when we sell to foreigners?' There is not much dispute that these industries need to be in private hands. But there is a lot of worry about how to make sure they don't get taken for a ride by either the foreigners or by the old |nomenklatura.' That's what's really slowing down the privatization process. It's not the desire to keep things in the states' hands. It's how to make sure the foreigners don't get something for free or that the old communist bureaucrats don't get their hands on these things cheaply." [Tabular Data Omitted]
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Title Annotation:Chairman's Agenda: Acquiring in Eastern Europe; communist bureaucracy and privatization
Author:Clawson, Patrick L.
Publication:Directors & Boards
Date:Jan 1, 1991
Words:1645
Previous Article:Reconstruction and the art of the possible.
Next Article:Assessing the market and the opportunities.
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