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The Bear's Lair: A poisonous interaction

By MARTIN HUTCHINSON, UPI Business and Economics Editor

WASHINGTON, Sept. 16 (UPI) -- I n the Macedonian elections held Sunday, about 60 percent of the ethnic Macedonians voted for the former Communist SDSM, while between 60 percent and 70 percent of the Albanian minority voted for the (questionably former) Albanian terrorist leader Ali Ahmeti.

This against a bi-ethnic Macedonian government that had made considerable progress on economic reform and had an economic track record better than any of its post-independence predecessors, in spite of the 2001 civil war.

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The Macedonian result forms yet another element in an East European pattern, common to almost all the post-Marxist economies. Reformist governments, however successful their economic track record, have enormous difficulty in getting re-elected.

This appears to be the result of a poisonous three-way interaction among the stresses of economic reform, the demands of an electoral timetable with frequent appeals to the people, and the meddling of Western public-sector agencies whose motivations may be more mixed than they appear.

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It must be said that Western management of the reform process in the former Communist bloc has, in general, been poor. In mitigation, mass privatization and transition from a Communist to a free market economy was not something people had experience with.

In the Czech Republic, for example, the hiring of the inexperienced Harvard Professor Jeffrey Sachs to put in place a mass privatization program through voucher "funds" was, in retrospect, a little like giving a first-year medical student a license to practice his surgical techniques on real patients. The result was appalling, because Sachs and his colleagues had not thought through the problem best expressed by the Latin tag: "Quis custodiet ipsos custodies (who will guard the guardians?)"

The voucher fund structure required the voucher funds to act as private equity funds of a Western level of integrity and competence; in the Czech Republic, of course, no such funds existed, nor were there staff available who could have formed them. Consequently, the Czech privatization scheme became a byword for corruption and wealth destruction, and Czech industry fell well behind its competitors in the race to become internationally competitive.

Vaclav Klaus, the admirably Thatcherite prime minister who instituted the mass privatization program, fell from power amid scandal and appears most unlikely to regain it. Whether or not he was corrupt, Klaus was largely a victim not of his own principles or policies but of the half-baked schemes of the Harvard economics faculty.

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In Slovenia, the opposite happened. Initially, in the two years after 1990, a reformist government instituted a privatization program and began the work of cleaning up the banking system, stabilizing the new country's currency and restoring the domestic savings that were expropriated by Yugoslavia on independence in 1991.

On the principle that seems to govern in Eastern Europe, that no good deed goes unpunished, that government was replaced in May 1992, with the replacement being confirmed in December 1992. Except for a five-month period in 2000, its supporters have never held office again.

The replacement government was led by Janez Drnovsek, the last Slovenian president of communist Yugoslavia, who had signed the first order for ethnic cleansing in Kosovo in 1989.

He slowed the pace of reform and privatization to a crawl, instead propping up the economy with international borrowing (easy to do when your population is only 2 million and you have good relations with the European Union, the European Bank for Reconstruction and Development and the World Bank.)

The Drnovsek government is only now, 10 years after its arrival, getting around to partial privatization of the country's dominant bank -- Ljubljanska Banka -- which has, in the meantime, served as a piggybank for the government's economic meddling.

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Slovenia is first in line to join the EU. With its high level of public ownership and unreformed banking system, it needs to get in fast and unload its liabilities on the German taxpayer. The net effect of Drnovsek's policies, however, has been political stability -- by avoiding reform, and cultivating the EU bureaucracy, he has been able to perpetuate himself in power.

Poland and Hungary have shown similar political patterns, in spite of having pursued quite different economic policies.

In Poland, Leszek Balcerowicz's 1990 "shock therapy" policy stabilized the economy quickly at the cost of a steep recession, after which companies were sold rapidly to foreigners. The result was a return to the "Social Democrats" -- former Communists -- in 1994-1997 and again in 2001.

The latter election result was startling. The Polish economy had performed well, the country was heading towards the EU, privatization was essentially complete and the banking system was in good shape. Yet the incumbent government was defeated so badly that it lost all its parliamentary representation, with the center-right being represented only by agrarians and populists.

The new government, more leftist than that of 1994-98, is conducting a vendetta against Balcerowicz, now governor of the National Bank of Poland, while attempting to quell the opposition media, and hoping to join the EU and thereby bail out Poland's gathering financial problems.

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In Hungary, the initial post-Communist government moved slowly on reform but was still thrown out in favor of the "Social Democrats" -- in Hungary, also ex-Communists, but a pretty moderate lot -- in 1994.

The new reformist government, led by Viktor Orban, which won in 1998, was more nationalist and was consequently treated with some hostility by the EU and international aid agencies. Much to their relief, Orban was again replaced by the ex-Communists in 2002.

The EU in particular, which of course quite reasonably has an institutional bias against nationalism, and the international aid agencies in general, which are mostly staffed by the ideologically anti-nationalist, clearly regard nationalism in Eastern Europe, however mild, as far more of a threat than Communism.

Thus, the Croatian HDZ conservative nationalist government of 1990-2000, which achieved great strides in economic reform, was heavily opposed by the EU and the agencies from 1997 on, with EU, aid agency and Soros Foundation money all contributing heavily to the victory of a "Social Democrat" (former Communist) dominated coalition in January 2000.

Likewise in Macedonia: the successful economic track record of the outgoing Ljubco Georgievski government has earned it no points with the West.

In both Croatia (in 1997) and Macedonia (in May 2002) the IMF went so far as to cut off funding to the incumbent government, in spite of its reformist, stability-generating economic policies, in order to encourage its defeat in the forthcoming elections.

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In Croatia since 2000, the budget has been much further out of balance than before and the balance of payments deficit has opened into a yawning chasm -- but IMF, EU and EBRD funding to the new leftist government has flowed without a hitch.

An interesting test case will be Slovakia. There, after the initial burst of reforms while it was still united with the Czech Republic, progress towards the market ceased altogether under the 1993-98 government of Vladimir Meciar, who was both "Social Democrat" (former Communist, and not very 'former') and heavily nationalist.

The Mikulas Dzurinda government, elected in 1998, made up for lost time, with a spectacularly successful reform program, so that Slovakia is now fully up with its neighbors in the race to join the EU. However, as in other countries, successful reform has proved very unpopular.

Elections are due Sept. 22; Dzurinda is forecast to lose and Meciar, probably, to win. Since Meciar is corrupt, strongly opposed to civil liberties and a nationalist, the EU and the aid agencies won't be so happy about this one. Thus a Meciar victory will presumably demote Slovakia sharply to the back of the line in the race for EU entry.

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The pattern is thus clear. Eastern European electorates have no historic attachment to the free markets, such as exists in the United States and to a lesser extent in Britain. Instead, they are pragmatic, willing to vote for whatever works and (being generally fairly old, since the region has had a low birthrate for several decades) both small-c conservative and cynical about the capabilities of government and its honesty.

In some cases, this cynicism may have served them well; the failed Czech voucher privatization was still being held up as a model in the West at the time the electorate threw out its authors.

Generally, however, the cynicism has translated into a resistance to change of any kind and an assumption that any economic change is likely to result in fortunes for the well-connected and lost jobs for everyone else. Add in the one benefit that those societies received under Communism; the ability to work intermittently and to retire at 55, and you have a recipe for a generally anti-reformist political system.

The problem is exacerbated by the rapid rotation of the electoral cycle, with elections succeeding each other generally every four years, compared with say the seven years of the French Fifth Republic (until 2000.)

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Even when economic reform "works" in terms of delivering better economic performance, adequately transmitted to the populace as a whole, it does not have long enough to do so before the electoral cycle comes round again. Add in EU and aid agency paranoia about nationalists and willingness to support even quite extreme leftists, and you have a recipe for economic and political decline, with living standards rising only achingly slowly above the Communist level that was supposed to have been left far behind.

The solutions are obvious but only partial. During the period of economic transition, which is likely to extend for another generation or more, the electoral cycle should be considerably lengthened, to at least six to seven years, so that the benefits of reform have time to be clearly felt before the next election is due.

It may be objected that anti-reformist governments will equally be perpetuated by this means, but this is the case only for moderate such regimes; governments that are extreme in their anti-reformism and corruption, such as the 1994-97 Bulgarian government of Zhan Videnov, tend to fall of their own weight amid public obloquy before completing even a four-year term in office.

Of course, it will also be necessary for the EU and the aid agencies to cease supporting anti-reformist forces. Fortunately, a number of factors should make their support much less important in future. As far as EU accession is concerned, it is likely that the Copenhagen meeting in December 2002 will admit only a small number of countries, possibly only Slovenia, which is small and relatively wealthy.

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In addition, one or more countries, such as Poland, may vote in referenda not to join the EU even if admitted to it. Thus within the next couple of years, the EU's views on Eastern European politics may become very much less salient than they are today.

As for the aid agencies, most of the countries of central Europe have now graduated from heavy dependence on the non-EU aid agencies and are closely linked to the Western private sector.

Further east, the volume of aid available for Eastern Europe is likely to shrink, as the perceived political importance of the region diminishes compared with the Islamic world, Africa and the impending huge economic crisis in Latin America.

Additionally, the failure of massive quantities of Western aid to produce a viable economy in Bosnia, where the aid agencies have neglected the importance of private savings, and the politicization and economic failure of aid policies further east, are likely to diminish further the credibility of aid donors' policy recommendations, compared with the almost complete acceptance with which they were received in the glory days of 1991-93. This, too is a healthy development.

In the end, Central and Eastern Europe will probably continue moving gradually towards the free market -- it will be a matter of two steps forward, one step back, with frequent and damaging interruptions by retrograde, mistakenly elected governments.

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Without a reform of the poisonous interaction described herein, however, joining the West in terms of living standards will be an appallingly lengthy process, maybe another 20 years for the central European countries and probably 40 for the southern Balkans. Countries such as Bosnia, Kosovo and Macedonia that have intractable ethnic problems may fail to join the West altogether, as their populations give up on economic advancement and concentrate on ancient ethnic rivalries.

One had hoped for so much more.


(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)


Martin Hutchinson spent four years in Croatia in 1996-2000 as a banker and U.S. Treasury adviser and carried out consulting assignments during the 1990s in Slovenia, Bulgaria, Macedonia, Slovakia and Poland.

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