DECEMBER 1991 - VOLUME 12 - NUMBER 12
E C O N O M I C S
Conquering the East
by Jim Ridgeway
BUDAPEST--For the businessmen in their Mercedes now hurtling down the autobahns of Central and Eastern Europe, the East is the last great market left in the world. And for the Germans, who already are the dominant force here, its conquest promises to give them the power they could not achieve in two world wars.
The true enormity of the economic difficulties facing Central and Eastern Europe are only now coming into focus. And while there can be little doubt that this region will soon become an economic province of Germany, its economic well-being will require what amounts to a reinvention of the cohesion that marked the old Austro-Hungarian empire. Corporations are looking first to the revival of the economy in the Czech and Slovak Federal Republic, with its highly skilled workforce and finishing industries that need far less retooling than those elsewhere. Their eyes will next turn to Hungary, with its robust, competitive agricultural economy and a stream of new bootstrap service-based industries. As for the Slovakia part of old Czechoslovakia, businessmen wish it and its Stalinist heavy industry would drop off the face of the earth. They have some hope for Poland, although that country seems forever trapped by determinist forces, whether it be Stalin or the Pope.
The infrastructure of much of Eastern Europe predates World War II, and imperils both human health and economic productivity. The sanitation systems are outmoded. Bratislava, for example, has a refinery virtually in the middle of the city, and the communists who built it there in order to make Slovakia the center of a plastics and chemical industry cheerfully paid the fines for violating the country's anti-pollution laws rather than cleaning up or halting the emissions. As a result, the children of Bratislava are literally all sick with bronchial infections, prompting the government to decree that each child may spend two to three weeks in the countryside. The phone systems are impossible. While there are some efforts to bypass existing antiquated machinery by skipping a technological generation and installing cellular phones, cities like Prague are not likely to have a decent functioning phone system for at least 10 to 15 years. Few people even have access to the poor system that is currently in place. In Budapest, 39 percent of the households have phones. Outside the capital, however, only 10 percent of the population is served by a phone system. The waiting period to get a phone is 12 years.
The most fundamental infrastructure problem is energy. While the countries of the Eastern bloc have no oil and little natural gas production, the Soviet Union is the largest producer of oil and gas in the world, and ought to have provided a modern energy base for the Eastern bloc. But instead of shipping natural gas to Central Europe, the Soviets sold the gas for hard currency to the West Germans, leaving East Germany, Czechoslovakia, Hungary, Poland and the rest of the East ever more dependent on burning dirty, energy-inefficient brown coal to produce electricity. This created a blanket of deadly chemical smog over the forests and cities of central Europe, which, when the wind blew, drifted back across the Ukraine, Byelorussia and Russia. Even worse, the Eastern bloc countries constructed rickety nuclear power plants which are just waiting to blow up like Chernobyl did.
Today, little has changed. Environmentalists and ecologically minded legislators in Eastern European countries are struggling to dismantle or make safe nuclear power plants, searching for ways of burning lignite more cleanly and efficiently, talking wildly of schemes for alternative energy and attempting to persuade their governments to adopt the kinds of energy conservation programs that U.S. environmentalists first urged on President Carter in the 1970s and now are demanding of President Bush.
Oil still comes from Russia, although at higher prices. High in sulphur content and vanadium, it poses serious toxic threats to the population, especially children. The former East bloc countries are reluctant to maintain any energy dependence on the Soviet Union, though there does not appear to be any long-term alternative. There seems to be little doubt that they will be buying oil and gas, and conceivably importing electricity, from Russia and the Ukraine.
Eastern Europe can no longer rely on oil supplies piped from the Middle East up through the Adriatic, since they have been cut off by the civil war in Yugoslavia. Even if these pipelines were reliable, they would have to be expanded greatly to be sufficient to serve the region.
Water engineers hold on to the great illusion of generating inexpensive, clean power from dams on the Danube. But the Stalinist dam projects on the Danube would produce barely enough electricity to run the water treatment and other facilities required to protect the nearby populace from the side effects of the dam, such as poisoned underground aquifers. Misty-eyed Czech planners talk enthusiastically about coal liquefaction and gasification, although similar projects in other parts of the world have always been expensive and technologically dubious. (One need only remember the hype surrounding coal gasification during the Carter years, when U.S. experts confidently predicted coal could be turned into gas to supplement the supposed dwindling supplies of natural gas if only the price were permitted to rise.) It appears unlikely that the cash-starved countries of Eastern Europe will find the money to pay for coal gasification.
One near-term prospect is to convert a pipeline that runs through the former territories of East Germany so that it can carry oil from the North Sea ports into Czechoslovakia.
Waiting for privatization
But all efforts to create new economic relations in the region hinge on privatization. Here there is remarkably little progress.
In the former territories of East Germany, the efforts to sell off the Kombinats and other businesses have been slow and clouded with charges of corruption. Over the past year, the Truehand, the agency charged with overseeing East German privatization, has privatized 4,000 of 10,500 East German businesses, generating some $9 billion in revenues. More than 130 foreign companies--only 17 of which are based in the United States--have acquired 200 formerly East German companies.
Unemployment in East Germany is running at 20 percent and is expected to rise to 40 percent by next year. East German labor is paid at 60 percent of the West German scale. There is a great sense of abandonment, betrayal and bitterness on the part of the East Germans towards the communists who promised everything and produced little, and now towards the West German political parties that held out high hopes at the time of unification.
In Czechoslovakia, U.S. law firms are pushing the nation towards a system in which former state businesses are turned over to the people, who would be provided stock certificates. But this is a paper exercise, and the exact terms of the transfer are vague. The Czech republic has now delayed the implementation of the voucher plan until February, and the federal government fears the vouchers will not actually be sold until after the parliamentary elections next June.
Meanwhile, Swiss and Austrian businessmen sweep across the landscape, taking advantage of small businesses wherever they can. To make it easier to rip off the East Europeans, the Swiss have rewritten their laws so that is possible to deduct bribes as business expenses.
In Hungary, capitalist accumulation seems to be moving more quickly since the government largely looks the other way when it comes to collecting taxes on new small business enterprises which operate in a fast and furious cash economy with no records. They, in turn, plow profits back into the new ventures.
"Thirty percent of the gross domestic product is in the private sector and most of that in newly formed enterprises, not the old socialist enterprises," according to Peter Rona, former president of the Schroder bank who now runs a closed-end investment company with investments in Hungary.
Concluding last year that the Soviet Union was going to collapse, Hungary stepped up exports and aggressively sought markets in the West. As a result, exports last year grew by 25 percent. This year, hard currency exports are expected to grow by 27 percent.
"For the Germans the East has to be the future," Rona says. "If there is instability and economic chaos in the East, Germany will bear the brunt of it. The French certainly won't feel it.... Already 80 percent of the foreign investment capital in Poland, Czechoslovakia, Hungary and the European parts of the Soviet Union is German. These investments now total in excess of 90 billion deutchmarks."
Jim Ridgeway is a columnist for the Village Voice.