Econophobia: Turns out Eastern Europe is still afraid of capitalism

  • Warsaw

At private dinners or public meetings throughout post-communist Europe, when talk turns to the crucial issue of economic policy, the debate is seldom about how much should be changed but about how much should be left the same.

In the name of capitalism, heavy regulation remains in place; in the name of sovereignty, foreign investors are kept away. Caution, suspicion and ignorance are the unspoken watchwords of economic reform.

In the dim light of his Warsaw apartment, for example, the host of a dinner party is pacing around the room, waving his cigarette in the air, shouting at one of his guests. The host is a member of the Polish parliament and a former vice minister in one of Poland’s already numerous post-communist governments. He is also what a historian given to cliches might call an “architect of Polish democracy,” someone who fought communism for the better part of 20 years, from his student days up until the final collapse in 1989.

But right now, this veteran underground leader is denouncing the idea, proposed by the unfortunate guest, that private entrepeneurs should be allowed to purchase their own shops. “If we let people buy shops, then they will decide what to sell. How do we know that there will be enough food shops? What if an entire village has nowhere to buy vegetables? There must be some control. Shops should be leased, and the local administration should give the leases only to people who promise to sell what must be sold.”

To clinch his argument, he points out that most Poles are on his side: “How can you disagree with this policy, when the vast majority of mayors and local officials agreed to abide by it?”

Indeed this is already Polish policy. Like many other Polish policies, it is a half-way measure, neither “capitalist” nor “socialist,” created by people who fear the consequences of unfettered private enterprise. Refusing to believe the free-market argument (someone is sure to leap at the obvious opportunity in a village without a grocery store) or the practical argument (bureaucrats are not necessarily the best judges of what is most profitably sold where) or even the argument of experience (four decades of central administration left whole neighborhoods of major Polish cities without any shops at all), these “mayors and local officials,” all elected recently, all born under communist rule, have preferred to keep one foot in the old system and one foot in the new.

Not one of these policy-makers would call himself “left-wing” or “socialist” and would be offended if so accused. Their counterparts in Hungary and Czechoslovakia would feel just as insulted, claiming that their intentions lie in exactly the opposite direction. Yet the problem is a common one in every Central European country and it promises to be much, much worse in the Soviet Union. No matter how ardent the champions of capitalism, they will inevitably prefer to leave decisions in bureaucratic rather than private hands, preserving the essence of the old socialist economy.

The result: Complicated regulations and taxes, byzantine licensing requirements and antiquated legal procedures still stand in the way of many private ventures in Central Europe. Anecdotal evidence abounds.

The founders of a private school in Warsaw opened their classrooms with much fanfare and hearty approval from the minister of education. Six months later, a local board of education official insisted upon regulating the number of minutes each pupil spends upon each subject, threatening to withdraw the school’s accreditation if it refuses to comply.

A self-made Hungarian millionaire returned to his home town of Ozd, purchased a part of a faltering steel mill and made it into a huge success. Then he tried to buy another part of the steel mill, hoping to do the same thing — and found that local officials, jealous of his success, blocked his progress at every turn.

A Pole heard that farmland, theoretically, could now be bought and sold, thought about leaving the rat race to become a farmer, and tried to buy a creaking water mill and 70 acres of unused property in the countryside. Local authorities, he discovered, preferred to leave the mill unrepaired, its dam on the verge of collapse and the land uncultivated, all safely in state hands.

In every case, restrictions were the result of decisions made by officials who see private entrepreneurs acting directly against their interests. Clearly, a bureaucrat in the education system who lets local educators run their own schools may be doing himself out of a job. An official who lets a private individual operate the local factory loses his right to control that factory’s decisions. And why should the county land management board bother itself with selling land, if the sale might help someone else get rich?

Even when Czechoslovak Finance Minister Vaclav Klaus declares himself a disciple of Milton Friedman, or Poland’s former finance minister Leszek Balcerowicz opts for ever more radical privatization programs, the Czechoslovak or Polish bureaucrats who make decisions (or more often, fail to make decisions) at other levels of government are perfectly capable of preventing investment. It is very simple: Don’t sell land, don’t give them licenses, do persuade the work force to vote against the investor.

While resistance to domestic private business is a common ailment in post-communist Europe, open opposition to foreign investors is a plague. Like the suspicion of domestic private enterprise, much of the xenophobia can be put down to ignorance. Foreign investment in a Polish factory does not, for example, mean that foreigners come, take the factory apart and move it lock, stock and barrel to Hamburg — which is, of course, exactly what the Red Army did with useful Polish factories it found still standing in the region in 1945.

Nor does investment necessarily imply that the foreigner somehow “steals” the skills of the local Czech engineers, twisting them to be used for his own interests. A modern investor, whose goal is perhaps to buy a percentage of a company’s stock, to invest some money, to contribute Western know-how and help get a company access to Western markets, and then finally to take a part — but not all — of the profits, is still a relative novelty in some parts of Central Europe.

But most of the fuss so far centers not on what the investor will do, but on how much money he is prepared to spend. Is he, in other words, “buying up the family silver” on the cheap? In Bratislava, the capital of Slovakia, visions of fabulously wealthy Austrian day-trippers dance in the head of a small company manager, who fears they will “get” his factory for a few mere schillings before he has the time to protect it. In Poland, the mere mention of German investors can set people howling about the traitors who are giving away Polish blood and soil to the Hun. Everywhere, former communist officials are throwing up bureaucratic and financial barriers to the West to protect their shoddy factories from rescue.

For the record: The correct price of a post-communist company is impossible to calculate. What a factory might be worth in Belgium bears no relationship to what it is worth in Lomza, where the telephones connect to something but not necessarily to one another, where the workers are accustomed to taking early retirement and where the access roads are full of potholes. Whatever profit the Lomza factory made last year has nothing to do with what profit it might make next year, given that tax and customs regulations, credit availability and inflation rates change from day to day. Western accountants who claim to have discovered accurate systems for valuing East European countries, and there are quite a number of them now, should be regarded as clever salesmen.

And if Hungarian or Polish or Czechoslovak companies weren’t relatively cheap, no one, given the complexity of their problems, would bother to invest in them at all.

These are countries where the rules are unpublished, or they are unknown, or they are about to change, tomorrow or the day after, when and if the parliament meets as it is supposed to. These are countries where complex systems of bookkeeping exist far apart from any concept of “profit.” These are countries where even corruption is a hit-or-miss proposition: This bureaucrat might be susceptible to bribery, while that one working in the office next door might find it an affront to his patriotism and the memory of his grandfather, a cavalry officer in Emperor Franz Josef’s army. There is no standard for commercial behavior because there wasn’t any commerce until very recently, so anyone expecting “business as usual” will end up throwing money into a bottomless, post-communist hole.

Rather than reflecting a legitimate concern, the anxiety about prices illustrates that, along with the nature of investment, the nature of wealth itself is widely misunderstood in post-communist countries. Taught for decades that wealth, Soviet-style, means coal mines and minerals, iron, steel and heavy industry, the Central Europeans are now emerging into a world where countries without any resources at all can be economic superpowers. Wealth now consists of resource management as much as resources, of properly organized intellectual labor, and can originate in service industries, banking, tourism and other non-industrial spheres. Foreigners who bring nothing but new management techniques or access to Western distribution networks may make great contributions to a Polish or Czechoslovak company’s wealth, even if their contribution in hard cash seems insufficient to a haughty Czech manager or a suspicious Polish shipyard engineer.

These problems have been around since 1989, but a year ago, or even six months ago they looked like the birth pangs of capitalism. Two years into the reforms, bureaucratic interference and the accompanying resistance to foreign investment are beginning to look more serious, because Central Europeans still do not believe that they exist. They believe that their heavily regulated, state-dominated economies are capitalist and that capitalism has, so far, been a disaster: The Poles already describe their economic reforms as a “failure.”

But if reforms have “failed” in any sense, it is not because they have been too harsh, it is because they have been far too diluted. Political leaders like the dinner party host have taken too many decisions that keep too many things exactly the way they were.