Economic Prospects for Paralysis

Nigel Harris

THE END OF history, the end of socialism; the source of a great new period of growth for Europe; the impoverishment of the Third World through a diversion of capital—the heroic inferences drawn from the collapse of the iceberg of Soviet power never cease to dazzle. But the economics look very different.

Politically, the events are momentous. A section of the world’s people has acquired the prospect of political choice. Whatever the right thinks about the left being defeated, in fact the removal of the albatross of Stalinist tyranny from the necks of the socialists is a tremendous act of liberation. No more equivocation—or straight lying—is required.

But what is the economic significance? The changes symbolize the collapse of reformism, the belief that the state can substitute itself for both market and the popular will. The last great citadel of state-forced capital accumulation has disintegrated before the world law of value. Almost all the component geographical parts of the system are now being disciplined from the same source. But that discipline can produce collapse as well as boom.

Sustained economic development does not take place because of an inflow of foreign capital. That may help, but only marginally, and not at all if the domestic transformation does not take place. The heart of that transformation is the submission of the labor force to the unrestricted rule of capital, supported by a willing state, within a framework of prices that accurately indicates the economic standing—and particularly the local productivity of labor—of the country in the world order.

Control and Chaos

In modern capitalism, the capacity to export goods of a rising value added is vastly more important than any inflow of capital. Yet this is precisely where Eastern Europe (including the Soviet Union) is at its weakest No one knows just how bad it 1 some estimates put the level of productivity at barely half that in Western Europe (and the per capita income at barely a quarter), but without market-determined prices it is all guesswork.

There are, as everyone knows, grotesque scarcities of basic consumer goods and a wild overproduction of poor-quality capital goods. The consumer starvation afflicts a population in open rebellion against both the past decades of austerity and the present increasing shortages (of soap, of toilet paper, of fruit and vegetables, etc.).

The estimated grain shortfall in the Soviet Union is put at 80 million tons (three times the Common Market’s giant grain mountain)–so there is a shortage of feed for animals and a lack of meat, eggs, milk; in Cuba they are slaughtering chickens (and have no eggs) because the Soviet Union is not sending grain.

In many countries of the East, enterprises have paid out much more in wages than the expansion in goods production. The prices of consumer goods have also been held very low in the pretense that there was no inflation.

The result is a vast overhang of savings, estimated to be 115 billion rubles in the Soviet Union. It is thought that if prices were decontrolled (if in fact it were possible to do so), the competition for goods would drive up prices by at least 50%, hammering the majority of the population with only small savings. At the moment, a major part of the savings goes to fuel a growing unofficial economy, which sucks goods out of the official one.

Nor can there be any consistency in setting prices Public authorities control twenty million prices in the Soviet Union. It is therefore impossible to get any consistency between goods in short supply and those that are abundant. Notorious waste is the result—with the low price of bread, it is cheaper to feed it to pigs, even if there is a bread famine.

The unadulterated irrationality of the system indicates that the road to even a semblance of common sense is hazardous. The mass of workers despair—the strike rate is now becoming spectacular, with 7 million working days lost in the Soviet Union last year (on average 30,000 workers were on strike every day). Absenteeism and rapid labor turnover make the problems even more severe.

Modest liberalization makes everything worse. Industry cannot use imported technology and equipment efficiently. The collapse of work disciplines makes waste even more gigantic and quality disastrous. Consumer goods grow increasingly scarce, even though subsidies are being removed and inflation is rising.

Exports to the West—the means to earn the revenue to import the means to expand—decline, while imports increase, paid for by increased borrowing. The vulnerability to increases in interest rates abroad grows.

There has been no revolution. The party remains entrenched as the sole means to administer; the opposition has no cadres to replace the Communists, even if it can sack a number of scapegoats. The old officials resist changes that affect their status. The leadership is caught in the same trap: When the Romanian minister of foreign trade tried to purge his ministry of ex-secret policemen; the officials revolted and drove him out on the charge that he had himself been a secret policeman.

Even where the officials are demoralized, they do not leave; those that can, become even more corrupt Note that extraordinary recent case in the Soviet Union when the ministers of defense, aviation and radio industries, with a senior general, were sacked and charged with trying to export twelve T-72 battle tanks to an unnamed Western power, for a profit of some $8 million.

Limits of Trade and Lending

Even if there were a greater measure of efficiency, the East European economies are not equipped for the scale of exports required to generate market-led growth How much Polish pork and soft fruit can Western Europe’s Common Market absorb without threatening its own Common Agricultural Policy? If foreign exchange cannot be earned, then foreign business cannot repatriate its profits and will not invest on any scale.

The problem is becoming even more exaggerated now as all the Comecon (Eastern Europe) countries compete to get as much foreign exchange as they can. Moscow has now set 1991 as the year in which all buyers of its oil and gas exports must pay world-market prices in hard currency (and the entire East except Romania is entirely dependent on Soviet energy supplies).

The East has managed so far only by borrowing abroad, but the supply is now (tying up—at just the time when it should increase. One estimate predicts the East will need an inflow of at least $80 billion-90 billion annually for four years ($16 billion alone to pay for Soviet energy imports), to service current debt, to purchase vital imports both to ease domestic consumer supplies so that prices can be decontrolled without hyperinflation and to upgrade exhausted capital stock.

Yet there has been increased tightness in the lending field. Since 1987, the rate at which European banks lend to each other has increased fmm9% to 15%.

The East has exhausted its credit as its cumulative debt rises. If we take 1980 as 100, in 1989 debts reached the following levels: Bulgaria 211; Czechoslovakia 113; East Germany 146; Hungary 190; Poland 161. For Poland, the ratio of gross debt to export earnings is now 279%; for Hun-guy, 173%.

Thus, despite all the hot talk, the banks are increasingly reluctant to lend, except for projects that can earn foreign exchange, to service the loan. Indeed, the Western industrial powers’ Organization for Economic Cooperation and Development (OECD) has been warning the banks not to lend to the Eastern countries since this will only increase the vulnerability of those countries to collapse as interest rates rise.

The reality is shown in what inflow of foreign capital there has been. Most of it has gone to Hungary, and some West German capital to East Germany. But what sort of capital is it?

Of the 1274 joint ventures (partnerships of Western capital with the USSR) registered in the Soviet Union by January of this year, only 184 were actually in operation. Of these, one third were in consultancy, research and development (that is, without any significant capital base); a third more in trade, tourism and some light manufacturing only 5% were in engineering, where Moscow desperately needs foreign technology and management.

The average size of each investment was falling—hardly surprising when the ruble remains non-convertible and profits can only be repatriated on the basis of exports (which thus diverts supplies away from the domestic market). Tax and company law is complex and ambiguous; ownership or operating rights are not protected; there is no procedure for getting assets out of the country in the event of bankruptcy (there is no stock exchange).

There would have to be astronomical profit rates to compensate for all that, on top of bureaucratic nightmare and political instability.

Thus, with bank lending and foreign private investment limited, the only source of external finance to soften the blow of reorganizing the labor force is f ram foreign governments. Is there much indication this will be coming on the scale required? There is not West Germany may swallow the tiny East but only with grave dangers of indigestion. Just to raise the East German pension and social-security to the West German level will require an annual inflow of 10 to 15 billion marks, raising West German per capita payments into the system by 25%.

The small Hungarian economy may succeed. But it is impossible to see how the rest can secure means to reform. The problems are at their worst in Poland, where the cumulative debt is approaching $40 billion, taking half the export earnings to service it To increase Poland’s export surplus, imports have been cut by 36% (1980-88), making it even more difficult to modernize the economy and increase exports. In 1989, inflation was put at 1000%.

In January 1990, the new government tried to do in weeks what Chile’s Pinochet did over several years. Subsidies were abolished and prices freed—the price index increased by 79%, industrial sales dropped 10%, real incomes declined by 36% (in one month) and exports fell 16%. The price of coal—in midwinter—increased by 00%; of gasoline, 100%; of rail and road transport, 250%; of postal services, 300%. The price of basic foodstuffs more than doubled in the first ten days of January.

But still the state officials remain part of the old party, and public monopolies are intact. Can the Polish state hold?

Toward Boom or Disaster?

Can the political changes in the East create the boom that will lift European—awl therefore world—capitalism? That would be heroically optimistic.

Will the demand for capital from the East divert supplies from the Third World? It is unlikely. West Germany will be most affected, but even then, it does not seem possible that the overall supply of capital would be affected.

The profitability of the Third World will not be reduced by whatever happens in the East The supply of sophisticated and skilled labor in the newly industrializing countries is now greater than in the East, and within a market context The Mexican border factories are driving toward high-tech manufacture with 0-error quality standards; Eastern Europe can only dream of such things.

Within Europe, the prospects of Portugal and Greece are much more promising than most of Eastern Europe. Outside Europe, the brutal difference in wages is so great, it is impossible to think that any feasible devaluation-of Eastern currencies could compete. For example, in spinning and weaving, as a percentage of U.S. hourly cost per operator (1989), Indonesia was 2%; Sri Lanka and Nigeria 3%; China and Pakistan 4%; Egypt 5%; India and South Africa 7%; Mexico 8%.

Of course wage levels are only half the story; we need wage cost per unit of output, the productivity level, to assess the competition. But everyone knows that productivity in Eastern Europe is so dreadful, it is at an even greater disadvantage.

Thus, in sum, the economic prospects of Eastern Europe and the Soviet Union are exceedingly grim. The economies are now hardly any longer under control, so reform becomes even more chaotic. And without reform, few profits can be made. The impasse blocks any smooth trajectory of evolution.

The governments of Western Europe, North America and Japan are not going to pay more than token sums. Their interest was in eliminating a political rival (for the moment, achieved) and if possible ransacking the assets. But they are now increasingly aware that to do the second requires an involvement that could suck them into the whirlpool. The claws of the tigers on both sides of the Oder-Neisse did not, after all, fall out.

The importance of events in the East is overwhelmingly political, a splendid chaotic confused contradictory inspiration to everyone, as pregnant with disaster as with opportunity. The East could yet provide the keys to unlock the West But economically, without revolution; the prospects are for almost complete paralysis.

May-June 1990, ATC 26