NID: EASTERN EUROPE: LONG ROAD AHEAD TO ECONOMIC WELL-BEING

• Document Type: SPECIALCOLLECTION
• Collection: The Collapse of Communism in Eastern Europe: A 30-Year Legacy
• Document Number (FOIA) /ESDN (CREST): 06826820
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 2
• Document Creation Date: November 26, 2019
• Document Release Date: December 10, 2019
• Publication Date: December 12, 1989

Approved for Release: 2019/10/29 C06826820
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Special Analysis
EASTERN
EUROPE:
Long Road Ahead to Economic Well-Being
Once the eupnoria of political change begins to wane, the daunting
task of recovering from four decades of economic mismanagement will
face the new reform governments in Eastern Europe. Not only are
expectations of rapid improvement unrealistic, but people generally do
not appreciate that a wrenching drop in living standards will accompany
economic restructuring. A timely, sustained program of Western
financial and technical aid will be a key factor in the ability of the
new leaderships to sell reform.
In recent months, Poland and Hungary have passed a series of
unprecedented constitutional amendments and other legislation in
support of economic reform. Many ideological barriers have been
overcome, and progress, probably irreversible, has been made toward
reducing administrative controls on the economy, opening it up to
market forces, and rewarding individual initiative.
Implementation, however, particularly of reforms dealing with
the politically sensitive issues of bankruptcy. unemployment, and
privatization, has not kept pace with legislation. The hybrid
governments in Warsaw and Budapest. inexperienced with market
mechanisms and increasingly answerable to the electorate, have been
slow to translate economic priorities into tough reform initiatives.
Popular Consensus for Reform Uncertain
The public's tolerance for austerity, which is key to further reforms, is
largely untested. Most of the legislation enacted thus far�broadening
foreign and private investment rights, liberalizing trade and foreign
exchange activity, creating stock and bond markets�does not add to
the burden on a population already struggling to makt ends meet.
Moreover, a steady stream of wage increases and an accompanying
upswing in real wages have helped cushion the potentially more
negative effects of recent price hikes
Despite the bandwagon for economic change, no electorate has yet
endorsed an austerity program. To many workers, economic reform
simply means greater access to material goods and a higher standard
of living without attendant hardships: unt�mployment, relocation, and
higher prices. In Poland, for example, only 15 to 20 percent of the
youngest voters�the most frustrated economically and the most
active in protesting against austerity measures�participated in the
election that eventually brought Solidarity to power.
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A crunch may come when reform leaders tackle the issue of consumer
subsidies and spiraling wages. In Poland. where food and fuel costs
have risen rapidly since August. it may happen as early as this month
when the wage indexation law protecting worker income expires.
Unfavorable Environment
A strong popular consensus behind reform would not by itself move
the regions' highly distorted economics closer to a market orientation.
In Poland, for example, much of the local Communist bureaucracy
opposed to rapid change rcmairs entrenched. The deteriorating
economic situation in most of the region�characterized by
inflationary pressure. declining industrial output, growing budget
deficits, and deteriorating balance-of-payments problems�will add
to the adjustments people must make.
Currency devaluations; more market-determined prices, wages.
and interest and exchange rates; and a reduction in government
expenditures�all prerequisites for IMF standby programs and
desperately needed Western aid�will mean higher unemployment,
a surge in inflation, falling output and consum lion and widening
income disparities, at least in the short run.
Expectations Dangerously High
With expectations so high, the risk of failure, perceived or real,
is great. Warsaw and Budapest have made Western economic support
the centerpiece of reform efforts and seem ready to accept large doses
of nasty medicine in exchange for sizable amounts of Western
financial and technical assistance. Failure to secure such help or to
meet ambitious targets could undercut reform efforts to win public
support and to hold the confidence of Western creditors.
Because the benefits of economic restructuring are long term and the
short-term costs are high, progress toward market reform will be
uneven for both the new coalition governments and the West. If
aggressive implementation coincides with consumer shortages and a
prolonged decline in real incomes, workers may take to the streets. In
these circumstances, the US and other Western donors would be
likely to encounter pressure for additional aid and a high degree of
ublic cn m if none were made available.
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