A New Curtain Rises Behind Ex-Iron Curtain

Where communism once separated East Europe from the West, an uneven pace of reforms now threatens to divide the region

FIVE years after the fall of the Iron Curtain, a new ''cultural curtain'' is descending on East Europe. Instability and underdevelopment, some financial analysts warn, will now divide tens of millions where ideology divided them in the past.

On one side, Poland, Hungary, and the Czech Republic could successfully complete the transition to free-market economies and gain entrance to the European Union and NATO.

But Romania, Bulgaria, Albania, Russia, and most former Soviet republics may continue to suffer through years of political instability and economic underdevelopment reminiscent of the third world.

''You can see the [cultural] curtain along the old lines of the Austro-Hungarian empire,'' says Werner Varga, head of East European Research at Creditanstalt Bank in Vienna. ''Those inside it had Western laws and a civil society in place [before World War II] and are reinstating it. It will be much, much slower and much more chaotic for the others.''

Curtain calls

But Western observers caution that it is too early to start dividing East Europe between haves and have-nots. Reforms are being carried out by the region's economic tortoises and their cheap wages and abundant resources may allow them to catch up. ''The next five years are absolutely crucial,'' says one Western diplomat based in Romania. ''But I think things are generally optimistic.''

Analyst Varga sees the Baltic states, Poland, the Czech Republic, Slovakia, and Hungary on the developing side of this ''cultural curtain'' and Russia, Belarus, and Ukraine on the struggling side. The former Yugoslavia is split with Slovenia, Croatia, and government-controlled parts of Bosnia integrating with Europe, with Serbia, Montenegro, Macedonia, and the Serb-controlled parts of Bosnia remaining isolated. Romania, Bulgaria, Albania, Moldova, Ukraine, and most other former Soviet republics are also seen as unstable and underdeveloped and will be dominated by former communist leaders and entrenched bureaucracies.

James Lister-Cheese, a financial analyst with London-based Independent Strategy, says that if governments fail to enact reforms soon, such divisions could solidify in investors' minds.

''It's a perception thing. Investor confidence has dissipated very quickly in a post-Mexico world,'' he says, referring to Mexico's recent financial crisis. ''I think investors will be more and more conservative, more prudent, and more risk-avoiding now.''

Both Varga and Mr. Lister-Cheese cite clear foreign investment patterns as proof that a gap already exists between ''rich'' and ''poor'' East Europe. A potential ghetto -- with millions of poor eager to illegally emigrate West -- is forming in Europe's back yard.

According to Varga, of the $6 billion invested in the region last year, 70 to 80 percent of the investment has flown to Poland, the Czech Republic, or Hungary. The remaining $1 to $2 billion is spread among the region's approximately 20 other countries.

Even the total amount of investment in East Europe has been disappointing, according to analysts. Despite the hype that surrounded the fall of the Berlin Wall, East Europe with a population four times that of Mexico -- has received roughly the same amount of foreign investment as that Latin American country. By comparison, China received over $27 billion in investment in 1993.

Foreign investment is the only source of capital for nascent private companies. The danger is not of a Yugoslavia-style war in the region, analysts say, but of falling off investors' maps.

The Romanian model

Romania, with the region's second-largest population after Poland and rich national resources, is in many ways a case study of what has gone wrong and gone right on the wrong side of the ''civil curtain.''

Varga's definition of a ''civil society'' -- a functioning democracy, a middle class, and a legal system supporting property and human rights -- has been slow to evolve here, and foreign investment has been far lower than expected. A total of only $1.2 billion has been invested in Romania since 1989.

''There's been so little investment because of fears of political instability, the bureaucracy, and some obstructionism on the part of the government,'' the Bucharest-based diplomat says. ''Trying to get a telephone installed here without greasing the necessary palms is impossible.''

Western observers say a corrupt, bureaucratic culture that thrived under Romanian dictator Nicolae Ceausescu is undercutting economic reforms carried out by President Ion Iliescu's coalition government in 1994.

By maintaining a tight monetary policy that raised interest rates, the average household savings rate tripled and the inflation rate was reduced from 300 percent a year in 1993 to 61.5 percent in 1994. The government also kept its own budget deficit low and stabilized a foreign exchange system that was vexing on foreign companies.

But observers say that Mr. Iliescu's government has still not carried out the most difficult reforms. A long-delayed privatization program, a cut in agricultural subsidies, the opening of a securities exchange, and the enacting of new bankruptcy and antimonopoly laws must all take place in 1995.

Dumitru Pislaru, spokesman for Iliescu's Party of Social Democracy, insists that the government has already carried out the ''toughest and most important'' reforms. As far as bureaucracy and corruption goes, Mr. Pislaru says there is only so much a government can or should do. ''Only the real extremist and authoritarian systems want to liquidate certain behaviors forever,'' he explains. ''The mentality can't be changed through punitive measures -- especially in a short time.''

Western officials say it's the government officials' attitude that worries them most.

''In Poland, [governments] took office and said we have two years, now let's do it,'' says the banking official. ''You have never heard that kind of statement from Romanian officials.''

Diplomats also cite continuing infighting with Romania's Hungarian minority and the inclusion of three nationalist parties in Iliescu's government as signs of continued political immaturity.

''Politics is still very parochial here. That's going to take a generation to change,'' warns one diplomat. ''There are very few politicians who understand what they're talking about when they're talking about EU membership. It's not just economic but also human rights [reform].''

Western investors say that despite the government pitfalls, Romania is a potential goldmine for long-term investment. Nick Constantinescu, a Romanian-American who is manager for Coca-Cola of Romania, blamed the Western media for focusing on Romanian orphanages, corruption in Bucharest, and other negative stories.

''Bucharest is not Romania like New York is not the US,'' says Mr. Constantinescu, seated in an office blanketed with red Coca-Cola paraphernalia. ''We found the best quality labor we can dream of here. We believe in the economic future of Romania more than the Romanians themselves.''

Coca Cola has invested $130 million, employs 3,000 people, and is building one of its largest plants in Europe in the country, according to Constantinescu. Since Congress granted Romania most-favored-nation trading status in October 1993, US investment here has increased sharply. Such major American companies as Colgate Palmolive and Amoco have invested here, and McDonald's will enter the country this spring -- long after it entered Poland, the Czech Republic, and Hungary.

''What's happening here is a miracle because it's happening in spite of, not because of, legislation that's being passed,'' Constantinescu says. ''If the privatization goes as the government says in 1995, it will be a turning point in Romania.''

Romanians unimpressed

On the streets of Bucharest where a handful of BMWs mix with hundreds of dilapidated communist-era cars, residents were far less optimistic than Constantinescu. They expressed little support for the government and little hope for change.

''The biggest [foreign] companies aren't here,'' says Valentine Baiscu, a recent high-school graduate looking for a job. ''[The future] depends on the elections in 1996. We need more parties than are in the government now.''

Galina Ors, a clerk in a Bucharest factory, complains that the West has not produced the foreign investment it promised. She says the reason former communists have fared well in elections here and in other countries on the losing side of Varga's ''cultural curtain'' is simple.

''It's going very badly. I think it's getting worse,'' she says. ''So far, there's nothing good to show since the revolution.''