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Economists Benefit From Cold War's End

THE emergence from communism of eastern Europe and the nations that made up the former Soviet Union has created a challenging growth business for economists.

Hundreds - if not a thousand or more - economists in the United States have taken up the study of the economies of these countries from their positions at universities, research institutes, think tanks, or multilateral institutions such as the World Bank and the International Monetary Fund.

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The World Bank alone has some 50 economists on staff working on transition issues and has contracted many research projects to outsiders. The Association for Comparative Economic Studies had three days of meetings on economic changes in these nations at a gathering in Boston in early January. A paper entitled, ``On the speed of transition in Central Europe'' was the topic of a session at a National Bureau of Economic Research conference in Cambridge, Mass., last week.

Some US economists have become consultants to the leaders of these nations that are attempting to switch over to free enterprise. ``Many of us are involved, spending time over there to help,'' says Olivier Blanchard, an economist at the Massachusetts Institute of Technology in Cambridge and coauthor of the NBER ``transition'' paper. ``They have a lot of decisions to make. But there is not a whole lot of money to be made giving advice. It is largely pro bono.''

For an American academic, however, there is great excitement and satisfaction in being influential in a nation engaged in what one economist called ``this great experiment.'' Jeffrey Sachs of Harvard University, an adviser to Poland and to Russia, has become a frequent figure on television news shows and in the opinion pages of newspapers.

The arcane techniques needed by ``Sovietologists'' to study the economies of these secretive ex-communist nations prior to 1990 are no longer very relevant. ``They were made obsolete almost overnight,'' notes Mr. Blanchard, whose coauthor is Philippe Aghion of Oxford University. Poland's economic statistics ``are not so bad,'' he says. The country is developing ``national income accounts'' comparable to those used in Western industrial nations. These provide measures of national income and of gross domestic product (GDP), a country's total output of goods and services.

With the better numbers and the increased importance of market forces in these countries, economists can apply their more usual research methods. ``We can be a bit more analytical ... a bit more ambitious,'' Blanchard says.

His transition paper deals with an issue troubling Russia, Poland, and the other ex-communist countries: How fast should the switchover to free enterprise be? It is a question debated not only by economists, but by policymakers in these countries and in nations and institutions giving aid.

The 44-page paper argues that at this stage, four years after the start of the transition, the speed of privatization and restructuring of state-owned companies will slow down. High levels of unemployment have built up resistance to change both in these companies and at the political level. In Poland, for instance, employees control (though they don't own) state companies. They direct a large portion of any profits toward their own wages, leaving little for investment. And with 16 percent of the labor force unemployed, workers will not accept layoffs for the sake of greater company efficiency. Neither are elected politicians keen to add to unemployment by forcing privatization.

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High unemployment also hinders job creation in private companies as taxes go up to pay for unemployment benefits.

Poland, unlike Russia, has firmly constrained government subsidies to state firms, the Aghion/Blanchard paper notes. The subsidies amounted to 4.5 percent of GDP in 1989; 1.1 percent in 1993. Their gross profits have shrunk from 28 percent of sales in 1989 to 4 percent in the first 11 months of 1993. Some firms have shed workers to avoid losses but not to maximize profits as often occurs in private companies. Employment in Poland's non-farm private sector has swelled from 13 percent of total employment prior to reform to 36 percent at the end of 1992.

But, Blanchard says, restructuring of state companies may take ``quite a few years'' while the existing private sector grows sufficiently to reduce unemployment to an ``equilibrium rate.''

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