Can Private Sector Meet the Challenge?

IN a wave of capitalist enthusiasm, the free market is seen in both the United States and Western Europe as an essential parallel to free democratic institutions in meeting global economic problems, whether in Central Europe, the Soviet Union, or Africa. Few would take issue with the premise that the failed centrally planned economies in Eastern Europe and the third world must turn to the free market if they are to resolve their enormous economic problems. The Bush administration, seeking to minimize the fiscal and administrative burdens on the American taxpayer, carries this premise a step further and looks to the private sector to carry a substantial part of the burden of responding to the expectations in both reforming communist countries and developing nations for assistance from Washington.

No doubt the enterprise, the capital, and the skills of US corporations and the vitality of American volunteer organizations will be important in this response. MacDonald's in Moscow has already demonstrated what the corporate sector can do and numerous private organizations are providing educational and advisory assistance.

In the enthusiasm for a primary private sector role, however, too little attention is paid to the obstacles and limitations of private enterprise in responding to the needs of societies in the midst of major reforms. Failure to acknowledge the limiting factors can lead to disappointment and disillusion, both in Western societies and in those countries in the midst of change.

First, the objectives of the private corporate sector and those of government are fundamentally different. Corporate responsibilities are to boards and shareholders; the objective is a fair return on investment. Companies cannot be expected to take the risks inherent in entering unstable societies to meet Washington's political objectives.

In the US, especially, other factors exist that limit the effectiveness of a business response. US executives are required by the emphasis on quarterly profits to take a short term view. And a combination of factors, including antitrust legislation, ideology, and a suspicion of government inhibit close cooperation between business and government of the kind that exists in most other major industrial nations.

The reality of the limitations for private enterprise in the Soviet Union is already apparent. In The Washington Post of May 27, Stuart Auerbach writes: ``But the lesson from the experience of Chevron and other foreign companies is that doing business in the Soviet Union is not easy. It takes big bucks, time and patience to deal with a recalcitrant bureaucracy unused to capitalist ways and a society so riddled with shortages that getting materials for a manufacturing plant is a daunting task. Adding to the downside, the chances are slim of getting profits out of the country in hard currency any time soon.''

Second, although many in the former Marxist-Leninist societies look eagerly to the free market, and indigenous entrepreneurs are emerging to show the way, a deep suspicion toward profit and capitalism remains. In the critical question of decontrolling the price of bread in the Soviet Union - the same since the 1920s - Mikhail Gorbachev has seen the resistance to change. Press reports emphasize the degree to which people are conditioned to expect jobs and housing and to fear the unemployment and inequality they associate with Western economies. In the developing countries that have been under socialist systems, similar doubts exist about outside investment and the workings of the capitalist system. In some, added resistance arises from the hold that certain ethnic minorities have had on the private sector.

Third, advocates of the free market system within the major industrial countries put little emphasis on the need for regulation. Like any human enterprise, the capitalist system is vulnerable to excesses, as the US savings and loan scandal has demonstrated. To press for the establishment of private enterprise where it has not previously existed without also emphasizing the need to enforce corporate responsibility to society is to risk serious distortions in the system.

New opportunities for enterprise and growth have been created through the establishment of the free market system in nations that have been hobbled by the structure and ideology of a centralized economy. If Western governments endorse that approach, however, without taking into account the limitations and the vulnerabilities of capitalism, they risk a backlash that could frustrate opportunities for fundamental change.