Stumbling Blocks
Stumbling Blocks
Many factors could impede the orderly progress to becoming a successful market economy. The following discussion highlights the major hurdles.
Economic Shocks In bringing about a market transformation, there are some negative economic consequences, at least in the short term. The basic problem is that the costs are up front, and the benefits are much later. For example, a move to increase efficiency by allowing foreign competition brings unemployment. HPEs are neither accustomed to unemployment, nor do they have the safety nets of fall-back compensation, retraining, and job-relocation assistance that were developed over a long time period in industrial countries. A deregulation of prices brings rapid inflation because the old prices were below the true market values for many of the goods being sold. When Poland deregulated most of its prices, the standard joke was, "We used to have long lines and empty shelves. Now we have no lines, full shelves, but no money to buy what's on the shelves."
Statistics may overstate the degree of hardship arising from economic shocks. The prior full-employment rates mask the fact that many employees were simply performing "make work" assignments. Although prices look lower before deregulation, before and after comparisons do not take into account prior shortages and quality differences. For example, some goods in short supply showed official prices, even though the goods may have been resold in the black market at a higher price. Furthermore, many goods with lower before than after prices could not be sold at any price. The quality or safety characteristics were so poor that no one would use them. Where central planning overstates employment and understates prices, there is a familiar joke: "We pretend to work, and they pretend to pay us."12 A reality of the economic shocks is that they are politically dangerous.
Workers and consumers have had high expectations of the results of transformation—perhaps too high. To the extent that they are adversely affected by unemployment and higher prices (a lowering of real income), even in the short term, they may lose confidence in the elected political leadership and in the transformation process itself—thus slowing or preventing changes.
The most difficult prices to deregulate are those for rationed products deemed to be necessities, even though the system leads to further shortages and black-market sales. For example, the former USSR drew up a new basket of necessities in 1990 and allocated these on a subsidized basis. Each adult male's coupons could buy, among other things, 146 eggs, six and a half pounds of soap, one toothbrush, two ties, five rolls of toilet paper, twelve condoms, two pounds of chicken, and a pound of strawberry jam per year.13
Privatization More than 90 percent of the economy within European HPEs and China is in the state-enterprise sector. The privatization of these enter-prises is extremely difficult and not likely to occur in the near future. We need only look at me privatization process within Western economies to see how slow and cumbersome the changes are. For example, Prime Minister Thatcher of the United Kingdom was hailed as the world's leading and swiftest privat-izer, yet her government transferred only a few dozen state enterprises over a decade. In contrast, Poland has over 7500 state enterprises, and more than 1000 of them have more than 1000 employees.14
A major hurdle for privatization is that there are few people within the HPEs who have the necessary funds for investments. In this absence, foreign investors have sometimes purchased a share of a state enterprise, such as GE's investment of $150 million for a majority ownership of Tungsram in Hungary. But foreign investment is only a partial solution. First, it is doubtful that HPEs will allow too great a share of their economies to come under foreign control. Second, it is also doubtful that there would be sufficient foreign investment anyway, particularly given the poor condition or outdated products of many government enterprises. For instance, on a list of state companies for an investment is a maker of vacuum tubes, an item replaced by transistors in most of the world. Evidence of the difficulty comes from auctions in Poland and the Czech and Slovak Federal Republic for the sale of some enterprises to their citizens. These sales have involved only small operations, such as retail butcher shops that do not include the land on which the stores sit. It will be far more troublesome to sell the large state enterprises.
One suggestion for privatization is to give workers ownership of the enterprises where they are employed (these are sometimes referred to as employee stock ownership plans, or ESOPs), and Yugoslavia has experimented with this process. However, there are at least two problems with this approach. First, there is a question of equity, since some state enterprises are much more efficient than others, making them more likely to survive and be profitable. Second, workers would then be the directors to whom top management would be responsible. Because the workers lack any experience at making or implementing viable competitive practices, they might take steps to increase their own wages or job security at the expense of cost efficiency. Or they might feel so ill-equipped that existing state managers would perpetuate their power and autonomy without any real accountability for their actions—until it is too late. A second suggestion for privatization has been to transfer ownership of all enterprises to all citizens, who would then have a diversified portfolio of company shares that they could later sell. This approach would not yield sale revenues to the government to help pay off debts. A third suggestion is to break up giant state companies, which would then have cross-ownership in each other. As smaller entities, they may be easier to sell; however, if unsold, inefficient suppliers are perpetuated. A fourth suggestion is to encourage the development of small private enterprises, but there are short-term problems in their successful development.15
Soft Budgets A soft budget refers to a situation in which an enterprise's excess of expenditures over earnings is compensated for by some other institution, typically the state or a state-controlled financial institution. The HPEs all have soft-budget legacies from the period when it was unthinkable that an enterprise would not survive. Even within an environment of transformation, there are pressures to continue soft-budget practices. To begin with, new managers may claim that their operating inefficiencies are due to excesses created before they took their posts. Therefore, they argue their need to continue receiving subsidies until they can make operating reversals. (Even within market economies, companies have successfully used this argument to receive indirect subsidies by limitation of import competition. A good example is the U.S. steel industry.) Second, some economists argue that soft budgets encourage enterprises to limit profits, thereby decreasing funds going as wages and dividend payments to workers and shareholders. This process reduces consumption and frees funds for growth-generating investment. Third, HPEs are burdened with many large and inefficient enterprises that they can ill-afford to let die in the "short term" for both economic and political reasons. HPEs have gone so far as to require investments by foreign automobile firms to be made in existing (inefficient) facilities for fear of economic disruptions if new facilities displace the old ones. (Again, we find examples in market economies of government support for economically significant companies when politicians fear the impact of failures and worker dislocations. Examples include U.S. past support for Chrysler, Lockheed, and Pan Am.)
The soft budget creates a management incentive to divert efforts to make deals with authorities rather than effect efficiencies to survive. For example, during the 1980s Chinese enterprises switched to a substantial degree from measuring performance on the basis of gross output to measuring on the basis of profit. But this change took place without elimination of the soft budget within the banking system and some productive sectors. Because the banking system faced no real budget constraint, it could continue lending to enterprises regardless of their efficiencies. The continuance of the soft budget in some sectors enabled even some of those enterprises that were evaluated on profits to raise profits largely by gaining access to subsidized credit and subsidized inputs, rather than by raising sales or cutting real production costs.16
Human Resources One problem plaguing many state enterprises is that they have mammoth bureaucracies that are difficult to replace. As central planning is eliminated without substituting knowledgeable owners to whom enterprise managers can report, there is little control over these managers' actions. There have already been examples in Hungary and Poland of managers who have sold output at low prices to enterprises in which they own stakes. The buying-enterprise has then sold at high prices, thus shifting profits.
A second problem, more acute in countries where people have no memory of market operations, is that managers have no knowledge or experience of operating without a central plan that tells them what to produce and to whom to sell. They may also lack experience in controlling their subordinates by hiring and firing them or by finding means of compensation to motivate them. Very few managers know how to understand financial statements, how to respond to market signals (such as demand changes), or how to market products where there is competition and no pent-up demand, especially in export markets to the West. Furthermore, these same managers may have a low work ethic because of their experiences with low pay and high job security. Although management training programs are being developed within HPEs, they will accommodate a very small portion of the population for the foreseeable future. Furthermore, egalitarian attitudes, especially in the CIS and China, cause successful entrepreneurs sometimes to be viewed as speculators—a contemptuous label.17
Production Concentration In the Commonwealth of Independent States (CIS) especially, there are not only state enterprises, there are also state monopoly enterprises that produce in only one facility. For example, the Kama River Truck factory covers nine square miles and is larger than the combined capacity of all U.S. heavy truck manufacturing. Instead of using an automobile supply system as in Western industrial countries, every part is forged, machined, and assembled in the same location. Table 10.3 illustrates some of the monopolies and near-monopolies within the CIS. Like the Kama River Truck factory, these enterprises tend to be highly vertically integrated as well; that is, they produce most of the components they need in the one location because they cannot assure supplies from other enterprises. In turn, these vertically integrated facilities tend to be inefficient. (Recall that McDonald's had to develop many of its own captive supplies because there were vertically integrated production arrangements already in place.) Such a situation makes it difficult to privatize and to break up existing facilities. It is also difficult for L- new producers to enter the market. The sheer size of operations makes their saie problematic. And how do you break up ownership of a single steel works to promote competition? Potential new competitive entrants face existing state monopolies of mammoth size, problems of gaining supplies that might necessitate large vertically integrated operations, and difficulty in selling to industrial customers who have long associations with existing state enterprises. To help eliminate monopolies, the CIS is planning to fine monopoly producers. However, if prices also become deregulated as planned, the monopolies may simply pass on the cost of the fines to their customers. Overall,
it is estimated that between 30 and 40 percent of the value of goods in the former Soviet Union are produced on single sites.18
National Heterogeneity A nation-state is held together either through dictatorial powers or by common interests. Dictators have been replaced by democratically elected leadership in many of the HPEs. Furthermore, the common bond of fear of a Western invasion has subsided. These factors have caused ethnic and regional differences to surface as important destabilizing national elements in several countries, most notably Yugoslavia and the former USSR. in contrast, China's provinces near Hong Kong, Guangdong and Fujian, as Well as some of the western provinces with large Muslim populations, are
dissident, but a potent military threat keeps them under control. At one extreme, countries may split further apart, particularly where there are ethnic regions that see themselves as economically viable and where there is a different attitude about the direction or speed of economic transformation. For example, the Baltic republics in the former USSR and Slovenia and Croatia in what was Yugoslavia see themselves as able to survive without the rest of the former country. Splits could occur peacefully, such as occurred for Estonia, or by force, such as occurred for Croatia. If by force, such as through a civil war, foreign-investment properties could be at high risk and foreign trade could be disrupted. Even in a less extreme scenario, regional dissension might channel resources from investments and actions that would otherwise enhance a transformation to a market system. Furthermore, resultant splintered markets are much less desirable for Western firms to pursue.
Funds Availability There is a consensus that the transformation to a successful market economy will be very expensive. Huge capital investments will be needed for developing infrastructure, for improving the environment, and for modernizing factories. Funds will be needed for educating managers on operating within a market system. At the same time, there will be substantial consumer pressure to buy goods and services that have historically been in short supply. These pressures will limit governmental efforts to divert funds from consumer spending to capital spending as they have been diverted in the past. For example, pressure for consumer products was so great in the former Soviet Union that the government had to concede to huge importations of soap, grain, and tobacco in the early 1990s. Although some spending relief may be obtained through reductions in the military budget, the ability to reduce this budget quickly may be hampered by internal regional dissent, which may necessitate a military presence, by the need to negotiate with Western governments on bilateral or multilateral arms reductions, and by entrenched military bureaucracies that will likely resist their own loss of power. Furthermore, past development has been so distorted toward military production that resources cannot easily be used effectively for other purposes.
The ability to receive large infusions of capital from abroad is hampered in some countries by their already existing high external debts. Poland, the
CIS, Yugoslavia, and Hungary are already among the countries with the highest gross external debts. Two other HPEs would have been on this list a few years earlier: The German Democratic Republic, whose external debt has been taken over by the Federal Republic of Germany after their merger, and Romania, whose debt was slashed in the 1980s through extreme austerity measures taken while Nicolai Ceausescu was president. To build the trade surpluses necessary to reduce Romania's hard-currency debt, imports were restricted and exports were pushed to such an extent that people did without sufficient heat and food for almost seven years while industry was unable to improve its technology or to update machinery necessary to keep the economy growing. Although these measures have perhaps increased the foreign borrowing power of Romania as compared to other HPEs, the austerity measures have nevertheless made Romania even more dependent on additional capital than other HPEs if it is to make the transition to a successful market economy. Meanwhile, countries such as Poland and Hungary are burdened by interest payments on external debts of 5 and 7 percent of their gross national product per year. The former Soviet Union had impeccable credit ratings between the end of World War II and the late 1980s. Since then, however, its increased external debt and decreased hard-currency deposits in Western banks have raised its private borrowing costs and lowered its commercial debt ratings.
Many suggest that Western banks and governments simply write off the debts so that HPEs could start with a clean slate. The arguments are based on humanitarian concerns (i.e., that populations have suffered so long under repressive regimes) and on precedence (i.e., that German debts were forgiven a few years after the end of World War II). But questions of equity will probably prevent any massive write-off. First, benefits would primarily accrue to those countries that have either incurred large debts or have not paid debts back, whereas a country such as Romania would receive no benefits for having endured a harsh austerity program. Second, singling out HPEs would seem unfair to the large, debt-ridden LDCs in Latin America, Asia, and Africa. Third, any type of write-off could more easily be accomplished on debt to governments than on debt to private banks. Poland owed most of its external debt to other governments; thus a partial write-off for Poland in 1990 was easier than a write-off would be for Hungary, which owes most of its external debt to foreign private banks.
Others propose a massive Marshall Plan-type program for Eastern Europe. Realistically, such a program seems unlikely. The largest Western economy, the United States, has substantial balance-of-payments problems of its own and is unlikely to have the wherewithal to finance massive assistance. There are also equity problems, particularly with LDCs. In addition, it is doubtful how successful the effort might be. The great success of the Marshall Plan in Western Europe after World War II was due not only to the huge infusions of capital, but also to the fact that the efforts were established merely to bring the war-devastated economies back to where they had been five or six years earlier. Some HPEs have never been at a high developmental stage. Furthermore, in some countries central-planning regimes have been in power for so long that few people recollect successful earlier situations that should be emulated if rapid development is to take place.
Many factors could impede the orderly progress to becoming a successful market economy. The following discussion highlights the major hurdles.
Economic Shocks In bringing about a market transformation, there are some negative economic consequences, at least in the short term. The basic problem is that the costs are up front, and the benefits are much later. For example, a move to increase efficiency by allowing foreign competition brings unemployment. HPEs are neither accustomed to unemployment, nor do they have the safety nets of fall-back compensation, retraining, and job-relocation assistance that were developed over a long time period in industrial countries. A deregulation of prices brings rapid inflation because the old prices were below the true market values for many of the goods being sold. When Poland deregulated most of its prices, the standard joke was, "We used to have long lines and empty shelves. Now we have no lines, full shelves, but no money to buy what's on the shelves."
Statistics may overstate the degree of hardship arising from economic shocks. The prior full-employment rates mask the fact that many employees were simply performing "make work" assignments. Although prices look lower before deregulation, before and after comparisons do not take into account prior shortages and quality differences. For example, some goods in short supply showed official prices, even though the goods may have been resold in the black market at a higher price. Furthermore, many goods with lower before than after prices could not be sold at any price. The quality or safety characteristics were so poor that no one would use them. Where central planning overstates employment and understates prices, there is a familiar joke: "We pretend to work, and they pretend to pay us."12 A reality of the economic shocks is that they are politically dangerous.
Workers and consumers have had high expectations of the results of transformation—perhaps too high. To the extent that they are adversely affected by unemployment and higher prices (a lowering of real income), even in the short term, they may lose confidence in the elected political leadership and in the transformation process itself—thus slowing or preventing changes.
The most difficult prices to deregulate are those for rationed products deemed to be necessities, even though the system leads to further shortages and black-market sales. For example, the former USSR drew up a new basket of necessities in 1990 and allocated these on a subsidized basis. Each adult male's coupons could buy, among other things, 146 eggs, six and a half pounds of soap, one toothbrush, two ties, five rolls of toilet paper, twelve condoms, two pounds of chicken, and a pound of strawberry jam per year.13
Privatization More than 90 percent of the economy within European HPEs and China is in the state-enterprise sector. The privatization of these enter-prises is extremely difficult and not likely to occur in the near future. We need only look at me privatization process within Western economies to see how slow and cumbersome the changes are. For example, Prime Minister Thatcher of the United Kingdom was hailed as the world's leading and swiftest privat-izer, yet her government transferred only a few dozen state enterprises over a decade. In contrast, Poland has over 7500 state enterprises, and more than 1000 of them have more than 1000 employees.14
A major hurdle for privatization is that there are few people within the HPEs who have the necessary funds for investments. In this absence, foreign investors have sometimes purchased a share of a state enterprise, such as GE's investment of $150 million for a majority ownership of Tungsram in Hungary. But foreign investment is only a partial solution. First, it is doubtful that HPEs will allow too great a share of their economies to come under foreign control. Second, it is also doubtful that there would be sufficient foreign investment anyway, particularly given the poor condition or outdated products of many government enterprises. For instance, on a list of state companies for an investment is a maker of vacuum tubes, an item replaced by transistors in most of the world. Evidence of the difficulty comes from auctions in Poland and the Czech and Slovak Federal Republic for the sale of some enterprises to their citizens. These sales have involved only small operations, such as retail butcher shops that do not include the land on which the stores sit. It will be far more troublesome to sell the large state enterprises.
One suggestion for privatization is to give workers ownership of the enterprises where they are employed (these are sometimes referred to as employee stock ownership plans, or ESOPs), and Yugoslavia has experimented with this process. However, there are at least two problems with this approach. First, there is a question of equity, since some state enterprises are much more efficient than others, making them more likely to survive and be profitable. Second, workers would then be the directors to whom top management would be responsible. Because the workers lack any experience at making or implementing viable competitive practices, they might take steps to increase their own wages or job security at the expense of cost efficiency. Or they might feel so ill-equipped that existing state managers would perpetuate their power and autonomy without any real accountability for their actions—until it is too late. A second suggestion for privatization has been to transfer ownership of all enterprises to all citizens, who would then have a diversified portfolio of company shares that they could later sell. This approach would not yield sale revenues to the government to help pay off debts. A third suggestion is to break up giant state companies, which would then have cross-ownership in each other. As smaller entities, they may be easier to sell; however, if unsold, inefficient suppliers are perpetuated. A fourth suggestion is to encourage the development of small private enterprises, but there are short-term problems in their successful development.15
Soft Budgets A soft budget refers to a situation in which an enterprise's excess of expenditures over earnings is compensated for by some other institution, typically the state or a state-controlled financial institution. The HPEs all have soft-budget legacies from the period when it was unthinkable that an enterprise would not survive. Even within an environment of transformation, there are pressures to continue soft-budget practices. To begin with, new managers may claim that their operating inefficiencies are due to excesses created before they took their posts. Therefore, they argue their need to continue receiving subsidies until they can make operating reversals. (Even within market economies, companies have successfully used this argument to receive indirect subsidies by limitation of import competition. A good example is the U.S. steel industry.) Second, some economists argue that soft budgets encourage enterprises to limit profits, thereby decreasing funds going as wages and dividend payments to workers and shareholders. This process reduces consumption and frees funds for growth-generating investment. Third, HPEs are burdened with many large and inefficient enterprises that they can ill-afford to let die in the "short term" for both economic and political reasons. HPEs have gone so far as to require investments by foreign automobile firms to be made in existing (inefficient) facilities for fear of economic disruptions if new facilities displace the old ones. (Again, we find examples in market economies of government support for economically significant companies when politicians fear the impact of failures and worker dislocations. Examples include U.S. past support for Chrysler, Lockheed, and Pan Am.)
The soft budget creates a management incentive to divert efforts to make deals with authorities rather than effect efficiencies to survive. For example, during the 1980s Chinese enterprises switched to a substantial degree from measuring performance on the basis of gross output to measuring on the basis of profit. But this change took place without elimination of the soft budget within the banking system and some productive sectors. Because the banking system faced no real budget constraint, it could continue lending to enterprises regardless of their efficiencies. The continuance of the soft budget in some sectors enabled even some of those enterprises that were evaluated on profits to raise profits largely by gaining access to subsidized credit and subsidized inputs, rather than by raising sales or cutting real production costs.16
Human Resources One problem plaguing many state enterprises is that they have mammoth bureaucracies that are difficult to replace. As central planning is eliminated without substituting knowledgeable owners to whom enterprise managers can report, there is little control over these managers' actions. There have already been examples in Hungary and Poland of managers who have sold output at low prices to enterprises in which they own stakes. The buying-enterprise has then sold at high prices, thus shifting profits.
A second problem, more acute in countries where people have no memory of market operations, is that managers have no knowledge or experience of operating without a central plan that tells them what to produce and to whom to sell. They may also lack experience in controlling their subordinates by hiring and firing them or by finding means of compensation to motivate them. Very few managers know how to understand financial statements, how to respond to market signals (such as demand changes), or how to market products where there is competition and no pent-up demand, especially in export markets to the West. Furthermore, these same managers may have a low work ethic because of their experiences with low pay and high job security. Although management training programs are being developed within HPEs, they will accommodate a very small portion of the population for the foreseeable future. Furthermore, egalitarian attitudes, especially in the CIS and China, cause successful entrepreneurs sometimes to be viewed as speculators—a contemptuous label.17
Production Concentration In the Commonwealth of Independent States (CIS) especially, there are not only state enterprises, there are also state monopoly enterprises that produce in only one facility. For example, the Kama River Truck factory covers nine square miles and is larger than the combined capacity of all U.S. heavy truck manufacturing. Instead of using an automobile supply system as in Western industrial countries, every part is forged, machined, and assembled in the same location. Table 10.3 illustrates some of the monopolies and near-monopolies within the CIS. Like the Kama River Truck factory, these enterprises tend to be highly vertically integrated as well; that is, they produce most of the components they need in the one location because they cannot assure supplies from other enterprises. In turn, these vertically integrated facilities tend to be inefficient. (Recall that McDonald's had to develop many of its own captive supplies because there were vertically integrated production arrangements already in place.) Such a situation makes it difficult to privatize and to break up existing facilities. It is also difficult for L- new producers to enter the market. The sheer size of operations makes their saie problematic. And how do you break up ownership of a single steel works to promote competition? Potential new competitive entrants face existing state monopolies of mammoth size, problems of gaining supplies that might necessitate large vertically integrated operations, and difficulty in selling to industrial customers who have long associations with existing state enterprises. To help eliminate monopolies, the CIS is planning to fine monopoly producers. However, if prices also become deregulated as planned, the monopolies may simply pass on the cost of the fines to their customers. Overall,
it is estimated that between 30 and 40 percent of the value of goods in the former Soviet Union are produced on single sites.18
National Heterogeneity A nation-state is held together either through dictatorial powers or by common interests. Dictators have been replaced by democratically elected leadership in many of the HPEs. Furthermore, the common bond of fear of a Western invasion has subsided. These factors have caused ethnic and regional differences to surface as important destabilizing national elements in several countries, most notably Yugoslavia and the former USSR. in contrast, China's provinces near Hong Kong, Guangdong and Fujian, as Well as some of the western provinces with large Muslim populations, are
dissident, but a potent military threat keeps them under control. At one extreme, countries may split further apart, particularly where there are ethnic regions that see themselves as economically viable and where there is a different attitude about the direction or speed of economic transformation. For example, the Baltic republics in the former USSR and Slovenia and Croatia in what was Yugoslavia see themselves as able to survive without the rest of the former country. Splits could occur peacefully, such as occurred for Estonia, or by force, such as occurred for Croatia. If by force, such as through a civil war, foreign-investment properties could be at high risk and foreign trade could be disrupted. Even in a less extreme scenario, regional dissension might channel resources from investments and actions that would otherwise enhance a transformation to a market system. Furthermore, resultant splintered markets are much less desirable for Western firms to pursue.
Funds Availability There is a consensus that the transformation to a successful market economy will be very expensive. Huge capital investments will be needed for developing infrastructure, for improving the environment, and for modernizing factories. Funds will be needed for educating managers on operating within a market system. At the same time, there will be substantial consumer pressure to buy goods and services that have historically been in short supply. These pressures will limit governmental efforts to divert funds from consumer spending to capital spending as they have been diverted in the past. For example, pressure for consumer products was so great in the former Soviet Union that the government had to concede to huge importations of soap, grain, and tobacco in the early 1990s. Although some spending relief may be obtained through reductions in the military budget, the ability to reduce this budget quickly may be hampered by internal regional dissent, which may necessitate a military presence, by the need to negotiate with Western governments on bilateral or multilateral arms reductions, and by entrenched military bureaucracies that will likely resist their own loss of power. Furthermore, past development has been so distorted toward military production that resources cannot easily be used effectively for other purposes.
The ability to receive large infusions of capital from abroad is hampered in some countries by their already existing high external debts. Poland, the
CIS, Yugoslavia, and Hungary are already among the countries with the highest gross external debts. Two other HPEs would have been on this list a few years earlier: The German Democratic Republic, whose external debt has been taken over by the Federal Republic of Germany after their merger, and Romania, whose debt was slashed in the 1980s through extreme austerity measures taken while Nicolai Ceausescu was president. To build the trade surpluses necessary to reduce Romania's hard-currency debt, imports were restricted and exports were pushed to such an extent that people did without sufficient heat and food for almost seven years while industry was unable to improve its technology or to update machinery necessary to keep the economy growing. Although these measures have perhaps increased the foreign borrowing power of Romania as compared to other HPEs, the austerity measures have nevertheless made Romania even more dependent on additional capital than other HPEs if it is to make the transition to a successful market economy. Meanwhile, countries such as Poland and Hungary are burdened by interest payments on external debts of 5 and 7 percent of their gross national product per year. The former Soviet Union had impeccable credit ratings between the end of World War II and the late 1980s. Since then, however, its increased external debt and decreased hard-currency deposits in Western banks have raised its private borrowing costs and lowered its commercial debt ratings.
Many suggest that Western banks and governments simply write off the debts so that HPEs could start with a clean slate. The arguments are based on humanitarian concerns (i.e., that populations have suffered so long under repressive regimes) and on precedence (i.e., that German debts were forgiven a few years after the end of World War II). But questions of equity will probably prevent any massive write-off. First, benefits would primarily accrue to those countries that have either incurred large debts or have not paid debts back, whereas a country such as Romania would receive no benefits for having endured a harsh austerity program. Second, singling out HPEs would seem unfair to the large, debt-ridden LDCs in Latin America, Asia, and Africa. Third, any type of write-off could more easily be accomplished on debt to governments than on debt to private banks. Poland owed most of its external debt to other governments; thus a partial write-off for Poland in 1990 was easier than a write-off would be for Hungary, which owes most of its external debt to foreign private banks.
Others propose a massive Marshall Plan-type program for Eastern Europe. Realistically, such a program seems unlikely. The largest Western economy, the United States, has substantial balance-of-payments problems of its own and is unlikely to have the wherewithal to finance massive assistance. There are also equity problems, particularly with LDCs. In addition, it is doubtful how successful the effort might be. The great success of the Marshall Plan in Western Europe after World War II was due not only to the huge infusions of capital, but also to the fact that the efforts were established merely to bring the war-devastated economies back to where they had been five or six years earlier. Some HPEs have never been at a high developmental stage. Furthermore, in some countries central-planning regimes have been in power for so long that few people recollect successful earlier situations that should be emulated if rapid development is to take place.
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