Former East-Bloc Nations Look West for Money, Markets

TOPPING the recent Soviet request for $250 billion in international financing, economists say up to $1 trillion will be needed over the next five years to successfully revamp Eastern Europe's economies. While the reformers will supply most of the financing themselves, the West will be a key source of capital and play a dominant role by providing market access to East European exports, an important source of foreign exchange.

With bank deposits, household savings, and annual business earnings, Eastern Europe has enough domestic capital to finance reforms without placing huge demands on world capital, says Dani Rodrik, a professor at Harvard University's Kennedy School of Government and co-author of "Eastern Europe and the Soviet Union in the World Economy," newly published by the Institute for International Economics in Washington.

Dr. Rodrik says former communist-bloc countries annually invested a quarter of their gross national product in their respective economies. The past investments sustained industrial mediocrity and costly subsidies; today's leaders are challenged to make wise investments to revamp an entire system. Modern transportation, up-to-date communications, energy efficiency, and advanced-technology manufacturing plants are among the costly needs.

Domestic investments on the scale Rodrik expects are at least three to four years away, says Jay Mitchell, an economist with PlanEcon Inc., a Washington-based advisory firm specializing in Soviet and East European economies.

In the near term, "quality Western investments in the East are crucial. They can make up for the lack of quantity investments by planting the seed for private-sector development."

Western money will be well-directed, Mr. Mitchell says: "Westerners won't put up with a bad investment." For the next several years, he says, Eastern European countries will be "overwhelmed by their debt crisis and domestic recession."

Making huge productive investments will prove difficult, says Mitchell. Governments can reduce their burdensome costs by selling state housing and state-owned enterprises - ranging from big industrial plants to mom and pop stores - to private citizens.

The money generated from these sales, and the end to huge state subsidies, will provide governments with some capital to invest productively, he says.

It has been six months since the former Soviet-bloc Council for Mutual Economic Assistance (Comecon) commercial relationships were abrogated, signaling an Eastern European economic break with communism.

The short-term impact is negative for the East. It can no longer rely on regional markets to barter largely substandard products and must pay for Soviet energy in hard currency, at prices several times higher than the barter value under Comecon.

Output is declining throughout Eastern Europe, with the gross national product of some countries contracting by as much as 20 percent. Mitchell says the reasons for the decline vary.

The slide in Albania, Bulgaria, and Romania - countries that have failed to undertake reforms - is due to economic collapse. When these Balkan countries do embark on reforms, says Mitchell, "they'll suffer even further decline."

Short-term decline will mean long-term benefits for Poland, Hungary, and former East Germany, now undertaking ambitious reforms, including conversions to modern and efficient production that eliminate excess.

Czechoslovakia, Hungary, and Poland, often referred to as the "vanguard countries" because of early progress on economic reforms, are increasingly reliant on hard-currency earnings to pay for restructuring.

"These three countries have emancipated themselves," says Norbert Walter, chief economist of Deutsche Bank, Germany's largest commercial bank and a dominant Western banking presence in Eastern Europe. "Eastern trade has collapsed and Western trade has exploded."

Poland's exports to the West increased by 40 percent in 1990 and Hungary's by 25 percent, Rodrik estimates. "The emerging market economies could double their share of world trade over the next 10 to 20 years if the industrial countries provide market access for their products," he says.

Eastern exporters anxiously eye US and European markets, seeking opportunities to earn hard currency and "a chance to move faster with reforms," says Mitchell.

But even the "vanguard countries" suffer reform setbacks. Anxious to stop the decline, many countries are backpedaling on reforms.

Czechoslovakia has reversed its earlier promise to ban all arms exports and convert its military production into civilian manufacturing, says PlanEcon's Mitchell.

Prague recognizes that peddling tanks and other heavy armaments to Iran and Syria, for example, is a key source of foreign exchange.

Western bankers, backed by the World Bank and the International Monetary Fund, have cautioned Eastern European countries that they don't have the luxury of "gradualism" in pursuing reforms.

Western offers of help - in the form of aid, investment, and preferential trade treatment - are contingent upon marked progress toward market economies.