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Moscow Policies Burden East European Economies

Trade constraints hurt nations' entrance in world market

EASTERN Europe faces the prospect of worsening economies and ever-deepening debt unless nations in the region can cut free of Warsaw Pact trade arrangements. That is the assessment of several analysts inside and outside the United States government, who see the Soviet-driven Council for Mutual Economic Assistance (Comecon or CMEA) as a significant roadblock across the route to economic reform.

Reformers in Eastern Europe point to deep cuts in Warsaw Pact military spending as a signal of financial liberation. But such reductions, even if continued into the 1990s, will have only a marginal effect on the ability of the region's economies to enter the world market, analysts say.

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For integration to occur, productivity will have to supplant traditional party patronage. This can happen, says a senior economist with the US Treasury Department, only ``if the government unequivocally embraces a truly competitive, market-oriented economy.''

Comecon guidelines require member countries - Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania - to export manufactured goods to the Soviet Union in exchange for raw materials and energy supplies - coal, oil, and natural gas. The guidelines also require that each country's five-year plan leads to an overall balance of trade.

As a result, analysts say, Comecon countries have been sheltered from the very competition their reformers seek. This has led to lower-quality goods with little marketing value internationally.

In an October 1989 report issued to the Congressional Joint Economic Committee (JEC), Ed Hewett, a senior fellow at the Brookings Institution, cites aggressive competition from countries such as South Korea and Taiwan as primary contenders for any would-be increases in East Europe's share of the world market.

And even if quality did meet international standards, the Soviet Union could exercise the Comecon right to absorb such products regionally. This would leave other Comecon countries with fewer goods to export to the West for hard currency to pay debts or buy Western technology.

Poland illustrates the Catch-22 of a Comecon member trying to join the international economy. The country is grappling with comprehensive political and economic liberalization measures and currently is saddled with a $39 billion hard-currency debt.

In 1981, much of Poland's $24 billion principal borrowed from the West came due. The Soviets temporarily released the Poles from their Comecon export obligations in 1979 and '80 so that Warsaw could service its Western debts. Moscow did this by allowing Poland to run up a trade deficit with the Soviet Union.

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Moscow reduced some of Warsaw's deficit by cutting back on energy and grain exports to the Poles. But Poland did not manage to run the surplus necessary to completely correct the imbalance with Moscow. Today, Warsaw is more worried about its $3 billion debt to the Kremlin than its staggering $39 billion hard-currency debt to the West (which it has ceased servicing, both in principal and interest payments, risking future credits).

On the verge of economic collapse, Poland's export muscle is weak: Two-thirds of its exports go to the USSR, the bulk of which do not meet international quality standards; and it cannot buy energy and raw materials from the West without hard currency. It is thus inextricably tied to the Soviet Union and Comecon.

Ensuring Poland's ties with Comecon and the Warsaw Pact, says the Treasury Department economist, is the fact that the communists retain control over every ministry critical to the Polish economy - Foreign Economic Cooperation, Defense, and Interior.

In his JEC report, Mr. Hewett observes: ``It is simply wishful thinking to believe - as many CMEA economists and leaders seem to believe - that a reform of CMEA itself, and its procedures, could significantly contribute to genuine integration. ... The general timidity with which East European countries have approached [economic] reforms reflects the constellation of forces in those countries. ... East European parties having become entrenched, have their own good reasons to go slowly in reforms.''

Roger Robinson, a National Security Council adviser under President Reagan and former Chase Manhattan banker responsible for East European financing, explains just how ``entrenched'' the region is in the Comecon status quo. ``Gorbachev has reaffirmed that CMEA will remain in force as a prerequisite for any reform,'' he says. In Eastern Europe ``there is a tremendous residue of communism - a serious inhibitor to real change.''

``When the Polish delegation attended the IMF-World Bank meetings in Washington this fall,'' the Treasury Department economist recalls, ``one of the chief Polish economists, a minister without portfolio, was asked whether Poland can draw itself away from the CMEA. `We can't leave the Warsaw Pact,' he said, clearly equating the CMEA with the pact itself.''

Mr. Robinson, who returned last week from a visit to East Germany and Czechoslovakia, says that countries like these two will likely make the most successful integration into world markets, because their political reforms appear aimed at eliminating the dominance of the Communist Party.

Hungary and Poland, by contrast, started their reforms earlier, but won less-sweeping concessions from communist leaders. Debt-ridden Hungary, for example, is committed to democratic and free markets, Robinson says, but seems ``worried about Soviet economic penalties, particularly in the energy sector, if reform goes too far for Moscow's taste. If the Soviets put the squeeze on them, it could send Hungary into social panic.''

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