The Heritage Foundation

Backgrounder #759 on Europe

March 13, 1990

March 13, 1990 | Backgrounder on Europe

"For Eastern Europe, An Agenda for Economic Growth"

(Archived document, may contain errors)

759 March 13,1990 FOR EAsIlERN EXJROPQ AN AGENDA FOR ECONOMIC GROWTH INTRODUCIION The revolutions sweeping Eastern Europe and the Soviet Union are a result of the broad popular demand for democratic government, personal freedom, and better living conditions. So far, enormous victories have been won for democracy and freedom, at least in most parts of Eastern Europe On the economic front, by contrast, the situation conti nues to deteriorate and could collapse completely.

Policy makers in the United States and Western Europe understandably want to help these East European Countries make the transition toward democracy and free markets. So do the reformers in Eastern Europe. The trouble is that they have no blueprint for dismantling their Stalinist economic system. Further, they are uncertain about exactly what sort of systems they should build. Reformed socialist systems? Swedish-style welfare states?

American-style free market economies with modest state regulation? Or the completely free and open market of Hong kng?

Complex System. The free market economic system offers the only means by which citizens of failed socialist systems can climb out of poverty to rising levels o f material prosperity.To recognize this, however, is not the same as knowing how to achieve it. Eastern Europes reformers must understand that the market consists of a complex and highly integrated system of mutually supporting economic, legal, and social norms, rules, and arrangements.The system only works if all of its components work Privatization of government owned industry, for example, will not work if the government still dictates wages and prices n Reforming Rapidly. This means that rather than re f orming piecemeal over a long period of time, reformers should introduce major initiatives quickly and as a package.This will create incentives and opportunities for productive entrepreneurial actjvity. Immediate economic benefits, such as a greater availa b ility of many goods and services currently in short supply, plus employ ment opportunities for entrepreneurs, will offset some of the costs of adjust ing to a new system such as job losses in the government and higher initial costs for some products inclu d e The right of individuals to own property, including businesses, fac tories, farms and other means of production 4 +The end to government monopolies on all forms of economic activity and ensuring the right of individuals to establish private firms or to s hut them down if they prove unprofitable The creation of a legal system, commercial code, and independent judiciary to protect property rights and contracts The setting of prices and wages through voluntary agreements be tween buyers and sellers, employee s and employers, instead of by state order or regulation The limiting to a minimum of government regulations, business licens ing requirements, and taxes The abolition of state central economic planning agencies The introduction of a stable, convertible cu rrency The sale of state-owned enterprises to the people, with stock shares 4 +The removal of trade and investment barriers.

East European reformers are lucky in an important respect. They can learn from the experience of American and international efforts to help less developed countries grow economically. When financial aid was provided without the donors insisting on sweepin g , market-oriented economic reforms dollars in assistance given to Argentina and Brazil over the past decade have allowed these countries to waste huge sums on state-owned money-losing enterprises. Example: Billions of dollars in U.S. food assistance to le s s developed countries has depressed prices for local farmers, removing incen tives for production Key and simultaneous components in the transition to a free market system sold to workers in newly privatized companies little was achieved; often matters we r e-made worse. Example: The billions of 2 To avoid repeating such mistakes, American and Western assistance to Eastern Europe and the Soviet Union should be guided by sound free market principles. Westerners should 1) Avoid measuring Western assistance to b y how much money is given. It is instructive that Czechoslovak President Vaclav Have1 told George Bush that he wants no aid from the U.S and that Polish Solidarity leader Lech Walesa has asked primarily for Western capital investment, not government to-go v ernment foreign aid 2) Offer technical advice on how to establish a market economy. The West should be teaching these countries how to privatize state-owned enterprises how to write a commercial code, how to create a stable currency, and how to craft a ta x system, among other things 3) Offer financial aid primarily to mer the transition costs to a free market Such costs could include temporary higher unemployment, inflation and shortages of foreign currency to cover outstanding debts. The West should not a d dict: Eastern Europe, as it has much of Africa, to international welfare programs by holding out the prospect that difficult reforms can be avoided by relying on foreign aid 4) Establish foreign aid goals in an Index of Economic Freedom and use it to gaug e the success of such assistance: This Index, which is part of the Sup port for East European Democracy (SEED) Act of 1990, would create a set of benchmarks by which to measure the progress of these countries toward creating free market economies. Examples : secure private property rights and the right to establish wages and prices by mutual consent rather than government dictate 5) Encourage exchange programs between such non-governmental ,U.S and Eastern Europe institutions as universities and trade unions , and internships in private businesses, for business and managerial training CENTRAL PLANNINGS FAILURE The economic system that throttles economic growth in Eastern Europe originated with the 1917 Bolshevik coup in Russia and the imposition a decade later of Stalins totalitarian dictatorship that sought to control every aspect of life and society. Under Soviet-style communism, private enterprise and ownership are severely restricted. Natural resources, factories, transpor tation, utilities, retail outlets, and farms -all productive assets and many per sonal goods are owned by the state. Usurping the market in allocating resources, goods, and services is the Central Plan and Central Planners.

There is little connection between an individuals work and his rewards be cause jobs are allocated by state-controlled quotas and salaries set by the government, not the market.

Parallel to the state ministries that execute policy is a Communist Party with agencies covering every aspect of economic, political, and socia l activity 3 Party officials are stationed in every enterprise to assure that Communist Party policy is carried out The result of this system is now as well knownlinside communist countries as outside: low productivity, shortages of such basic goods as fo o d and soap enormous waste, low quality goods, obsolescent industries, inflexible and sti fling bureaucracies, and huge budget deficits SHOULD SOCIALISM BE REFORMED OR ABANDONED Some policy makers in East and West still debate whether Eastern Europe should reject socialism altogether or reform it. Among the questions asked are: Should the state remain in control of the broad economy but allow mar ginal freedoms for small enterprises? Should the government levy high taxes on profits to provide welfare assist a nce to the poor? Should the Swedish wel fare state be the economic model for Eastern Europe tempts to save socialism will fail. Example: For nearly twenty years both Hun gary and Yugoslavia have attempted to reform socialism. Yet their economies continue t o worsen Pemtmih (the Russian word that has, under Soviet leader Mikhail Gorbachev, come to mean economic restructuring in the Soviet Union so far has consisted of minor attempts at liberalization in some sectors of the economy, leaving most economic acti vity controlled by central planners As a result, the Soviet economy continues to deteriorate.

It is questionable, moreover, whether Western European socialist-welfare state systems are a valid option for Eastern Europe.The fact is, most West European count ries are attempting to privatize their state-owned enterprises and to loosen needlessly restrictive economic regulations. Sweden, the ar chetypal welfare state, has seen its glitter dim by a relatively poor economic performance record in the past decade. S wedens gross domestic product grew at an annual rate of only 1.8 percent from 1980 to 1987, well below the 2.6 percent average of major industrialized countries. Consequently, the Swedish government recently cut the top marginal rates on income taxes as a means to stimulate economic growth Creating Wealth. Even if a redistributionist welfare state like Swedens was chosen-as a model, East European countries have little-wealth-to-redistribute Indeed, the first task of these countries must be to encourage the ir own people to create wealth, not redistribute what little wealth they have.This means they must give their people greater incentives to increase productivity.

The lesson from the evidence seems clear: the essence of the socialist sys tem must be abandon ed.The nations of Eastern Europe must give up state ownership of the means of production, central economic planning, prohibi tions on private property and enterprise, and government-dictated wages and prices The historical evidence indicates that half-way reform measures or at 4 TOWARD A PEOPLE'S FREE MARKET SYSTEM To achieve their economic goals, the East European countries must in- crease their productivity and economic output. Under socialism, manpower and productive assets are underutilized or used in a n inefficient manner. The erratic supply network forces many state-owned enterprises to amass large in ventories of raw materials and spare parts to forestall interruptions in produc actor and agent is the individual. The best way to increase economic out p ut is to empower individuals with freedom and with incentives to engage in economic activities. The "Informal Sector The people of Eastern Europe and the Soviet Union actually have considerable experience with the free market. Their countries have extensi v e "informal sectors" or "black markets" for goods and services that the people want but that the system does not provide. Repair men and cab drivers employed by the state often work on their own time or even company time to earn extra cash from consumers w illing to pay higher prices and wanting to avoid long waits for official services. Scarce goods are often stolen by employees of state stores and sold at prices reflecting their real market value. Much of the housing in the Soviet Union, for example, is b u ilt with materials stolen from state construction industry, because supplies are virtually unavailable from other sources. Goods unobtainable through the state are often smuggled into the country and sold by entrepreneuq. VCRs are produced in only very li mited quantities in the Soviet Union, for example which has created a lucrative market for foreign VCRS brought into the country.

Black markets emerge when a system does not meet consumer demands and where legal avenues for enterprising individuals are clo sed. In all of these cases, individuals respond to market incentives, acting for their own profit to provide goods and services in response to people's demands.The existence of the informal sector proves that most East Europeans are hard-working and enter p rising, and will take advantage of opportunities or incentives to better their own condition. What East European reformers need to do is change the economic system to liberate the entrepreneurial activity currently criminal ized in the black market. tion. T o correct this, reformers must understand that the primary economic THE GERMAN MIRACLE vs.THE MARSHALL PLAN Reformers in Eastern Europe and the Soviet Union would do well to study the example of West Germany after World War II. Under the Allies' military g overnment, goods were rationed, prices controlled, and nearly all forms of economic activity were regulated.The Allies planned to rebuild West Germany's shattered economy along the lines of the emerging American wel fare state or British socialism.The res u lt in Germany was shortages of essen tial goods, high unemployment, and economic stagnation 5' German Miracle. All of that changed on June 20,1948, when Ludwig Er hard, a member of the German provisional governing council, established a new currency. Igno r ing objections from the Allies, including the U.S he removed price controls and rationing and lifted most restrictions on busi nesses. The results were dramatic. Within one week goods appeared on empty shelves. Business activity increased. Workers found j o b opportunities. Under the free market policies of Erhard, as Finance Minister from 1949 to 1963 and Chancellor from 1963 to 1965, West Germany began what has come to be known as the German Economic Miracle. It has made West Germany the strongest economy i n Europe economic recovery, it was not sufficient to produce the dramatic results of Erhards reforms. Britain and France also received large amounts of reconstruction aid but did not achieve such a rapid economic recovery. Be cause Britain rapidly convert e d its system to a highly regulated and state-con trolled economy, outside funds could not stave off economic decline. The French economy, which suffered less war damage than its neighbors, stag nated because of continued attempts to manage the economy thr o ugh mas sive state intervention. France adopted trade protectionism, in contrast to Germanys free trade policies. One country, Belgium, did not require Mar shall Plan assistance: Immediately after the war it adopted free market policies Although U.S. assi s tance under the Marshall Plan assisted West Germanys THE ELEMENTS OF A FREE MARKET ECONOMY Reformers in Eastern Europe, confronted by economic crisis, are faced with the need for quick action. The success of democracy depends lafgely on economic growth. Y e t the need for speedy results could lead to even worse economic consequences when hasty and ill-conceived reforms make their economic situation worse. Reformers must learn the elements of a market economy and the functions they perform. These include Priv a te Propetty Rights The core of the free market system, from which absolutely all other prin ciples derive is the right of individuals to own private property. This means that the owner can use and-dispose of hk possekions exclusively, aS heSeeLS fit, with o ut thepermission or interference of other individuals or the govern ment. All exchanges of property between individuals are based on mutual consent.This creates a realm of personal freedom in which individuals can control their own lives. Simple ownership is not sufficient, however; there must be freedom from excessive government regulation. In Poland, for ex ample, most farmers held their land as personal property throughout most of the communist period, but they did not enjoy full economic freedom since the state controlled the prices and distribution of their produce.

Private property serves a number of important economic functions 6 First, profits or losses from the efficient or inefficient use of property ac crue solely to the owners of a business or e nterprise.This gives the owner a direct and strong incentive to put assets to the most effective use. In the Soviet Bloc, theft of materials and goods by employees from state-owned enterprises is rampant, in large part because no specific individual owner suf fers directly from such loses.

Second, because all economic activity involves risk, the results of economic misjudgments by businessmen will be limited to the owners of an enterprise.

In a centrally planned economy, the mistake of one bureaucrat can bring misery on .the entire country.The Soviet press reports that the countrys severe soap shortage has been exacerbated by the economic planners decision to stop importing soap long before a new soap factory was com pleted.

Third, determinations of what goods or services will best meet public demands and make profits are usually best made by individual local entrepreneurs who .are free to risk their own property, to act quickly, hd to apply their knowledge tive externalities the direct material effects o n one persons property by anothers action. Example: Environmental pollution, an extremely serious problem in Eastern Europe, often goes unchecked because all property is owned by the state. By contrast, when property is owned by individuals, pollu tion oft e n is a case of one individual or business harming the property of another. If an individual dumps waste into a stream or lake or water table and if the pollutants flow into another individuals property, that property owner can sue the polluter in a court o f law for damages to his property. Pol luting industries in socialist countries are owned by the state, which means that a citizen damaged by pollution would have to sue the state and its vast bureaucracy Private property rights help a society deal with w h at economists call nega Market Prices In a market system prices are determined by the countless voluntary ex changes between buyers and seller. There is no correct or just price for any good,senrice or 1abor.The price is simply what a buyer and seller agr e e to when-goods, labor, or services are exchanged for money A market price conveys information to the entrepreneur concerning the ac tual supply and demand for. any given good or senrice and its relation to other commodities in the market.The price reflec t s both the cost of the materials labor, tools, and other factors necessary to produce the good, and the relative public demand for the good. The price also creates an incentive for entrepreneurs to supply what the public demands. If the cost to produce a g ood is one dollar, for example, but the public is willing to pay two dollars for the good because it is in short supply, entrepreneurs eagerly will seek the profit to be made from producing the good. No government planning is neces sary 7 AN AGENDA FOR EC O NOMIC GROWTH Each East European country suffers from different degrees of economic decay. Each therefore needs an economic reconstruction program tailored to its particular requirements. Nevertheless, there are universal principles for transforming stagna n t socialist economies into growing free markets. Govern ments that want to promote free market reforms should 1) Establish the right of individuals to own property, including busi nesses, factories, farms, and other means of production The right of indivi duals to own property is the foundation of a market economy, providing individuals with a realm of freedom and control over their own lives and incentives to put their productive assets to efficient use.

This right initially could be established by an arti cle in a countrys constitu tion stating that the government may not infringe upon the right of in dividuals to own, use, and dispose of their property as they see fit.This would provide the legal protection of private property necessary for the emergence o f free markets Consumers in a market economy determine, through their purchases, what is produced, in what quantities, and at what prices. Prices transmit informa tion about the relative social value of a good, service, or labor from con sumers to produce r s Freedom to Compete The essence of a market economy is the freedom of individuals to enter or leave the market as they wish. Entrepreneurs risk their wealth to make a profit by providing goods and services to the consumers.The existence of numerous entre p reneurs gives strong incentive for each to work as efficiently as possible and provide the best goods and services. Those who are relatively inefficient will lose customers and be forced out of business. An increase in the efficiency with which goods and s ervices are produced translates into a rise in societys standard of living. Further, the services of those entrepreneurs who do not succeed in a given business are not wasted.The market allows such persons, as well as resources such as capital and land, t o be utilized elsewhere in an economy. In the U.S for example, approximately 8 percent of all jobs and businesses are eliminated each year. Yet Americas unemployment rate of 5.2 percent is lower than any major European country.

This is because the elimination of unneeded businesses frees up resources of capital and labor that are used more productively in other sectors of the economy.

The market is like a great economic laboratory. Businesses experiment by offering goods and services to the public, hoping to discover a way to make a profit. Consumers experiment by purchasing different goods and senrices hoping to discover new and better ways to satisfl their needs 8 2) Create a legal system, commercial code, and independent judiciary to protect private pro p erty rights and contracts Proclaiming the rights of individuals to private property and freedom of contract is relatively easy. The real test is guaranteeing these rights, especially against government abuse.To do so, a country needs a commercial code def i ning among many other things, what constitutes a contract, what are the obligations and 1iabilities.of each party involved, and when a breach of con tract has occurred In most East European countries, foreign businesses and their own citizens are at the m e rcy of the whims of bureaucrats concerning contractual obligations. If a country expects to attract foreign investment, it must establish simple, basic definitions of contracts and stick to them. It is not necessary to create a commercial code from scratc h ; several successful codes can secve as models. Hungary, for example, is using the West German commercial code. A country must have an independent and reliable legal sys tem to adjudicate contract disputes and to give individuals and businesses recourse i n case of breech of contract or government abuses of power. This re quires a judicial system with powers independent of the countrys executive branch 3) End government monopolies on all economic activity, allowing private firms to enter and leave the markt ikely.

This principle is the right to employ ones property as one sees fit. This right could be established initially by a constitutional article prohibiting the state from restricting production, voluntary economic transactions and trade.

Most enterprises, such as factories and large wholesale distribution networks at first would remain in government hands until they could be privatized. But allowing competition from the private sector would help ensure that the delivery of essential goods and services is not disrupted during the economic transition period because the private sector would produce goods and ser vices the state sector no longer did and sellers, employers and employees 1 4) Allow prices and wages to be set by voluntary agreeme n t between buyers To enable the market to set wages and prices, the government must allow free transactions between individuals based on the mutual consent of all par ties involved. A price is the terms by which the owner voluntarily parts with services ar e sold. Communist countries prohibit individuals from freely enter ing into contracts with others to perform services. In the Soviet Union, for ex ample, until very recently it was illegal for any individual to hire another rhis denies the worker the oppor t unity and incentive to benefit from his own efforts and lowers the productive output of the country by blocking economic activities and taxes his property and the buyer acquires it. A-wage is the price at-which skills or 5) Minimize government regulations , business licensing requirements 9 To encourage maximum economic activity, only the barest skeleton of regulations should be imposed on businesses; these include basic health and safety standards. Beyond this, governments should not use licensing and othe r regulatory powers to dictate how an enterprise is run or to certi

the qualifications of a businessman. Consumers and entrepreneurs in the market should make these decisions. Entrenched government bureaucrats often frustrate economic reforms. For example , bureaucrats in Hungary have delayed issuing business licenses to new enterprises because they wish to retain control Over the economy. Licenses should be granted automatically by the government within a specified, short period, such as two weeks. The go vernment should be able to reject a license application only for a specific and limited number of reasons, such as criminal activity. To deny such an ap plication, the burden of proof should be on the government 6) Establish a low, flat tax rate.

To encour age bushes activity, corporate or business taxes should be kept as low as possible. Best for economic productivity would be no corporate or business taxes. Since all taxes ultimately are paid by individuals, taxes on busi nesses will be passed on to consu mers in the form of higher prices. If a government should find that a personal tax is necessary, it should be kept low.

It is especially important that the government establish a low marginal tax rate. For income taxes, the ideal policy would be a flat tax rate for all incom es. Higher tax brackets for higher wage earners penalizes workers for work ing longer hours and making higher pay. Weakening the productive efforts of workers in this manner will lower economic output of the country 7) Abolish governme nt control and planning agencies.

The easiest way to assure that entrenched bureaucrats do not block reform is to take away their power and shut down their agencies. If these officials retain their power, they are likely to frustrate economic reforms to ke ep their privileges and positions. Shutting these agencies also saves government funds for more urgent needs, such as repairing roads, bridges, and other elements of the countrys infrastructure 8) Introduce a stable, convertible currency.

The countries of Eastern Europe produce too few goods and too much cur rency.The result: Great supplies of money chase low supplies of goods. Most are unconvertible: The government that issued them will not redeem them they purchase little within their country of origin, and they can buy nothing at all on the world market.To facilitate economic transactions and investments these countries should establish stable, non-inflated currencies, convertible internationally at world market rates. This could be done by tying the va l ue of currencies to a commodity such as gold or a basket of commodities such as wheat, petroleum, and silver, which would insure that the currency is not in Elated. Inflation would be checked because the government could not print money at will of thee m- e ii~es are practically worthless on world markets because they 10 9) Sell state-owned enterprises to the people, with stock shares for workers in newly privatized companies Privatization of state-owned enterprises can turn money-losing, wasteful white elep h ants into productive, profit-malting enterprises. Government enterprises have been privatized successfully in industrialized countries like Britain and in developing countries like Chile and Jamaica. Selling stock in such companies to the public helps to e xpand the countrys base of property ownership and helps soak up excess currency and reduce inflation. Privatizing an enterprise by setting aside shares for purchase by employees not only al leviates workers fears of losing their jobs, but gives them a str ong incentive to make the company efficient. In Britain, for example, the money-losing Na tional Bus Company was privatized by selling shares to workers and manage ment; within one year, the firm had boosted productivity and was making a profit.

Shares of a privatized company can be sold to foreign investors through a technique known as a debt-for-equity swap or exchange. For example, a government with a large foreign debt pays off part of what it owes by turn ing over shares a state-owned enterprise to it s foreign creditor, who for gives debt in exchange for this equity.This not only reduces a countrys debt but usually leads to greater idlows of new foreign investment. Chile, for ex ample, has retired approximately $7.6 billion of its debt through debt-equ ity swaps since 1985 10) Remove barriers to international trade and foreign investment. supply capital and consumer goods for their economies, East European countries must open their systems to foreign investment and im ports. Foreign investors not only must be allowed to bring their money into the country, they must be allowed to take out their profits and eventually their principal investment.This gives them greater assurance that their invest ments are safe against government abuse.This can be d o ne by removing con trols on the import and export of capital, removing tariffs and other protec tionist measures, and providing legal guarantees against expropriation HOW THE WEST CAN HELP The record of the U.S other Western countries, the International M o netary Fund (IMF and the World Bank in solving debt and economic development problems in lessdeveloped countries (LDCs) has been ex tremely poor. Policies imposed on LDC governments in exchange for IMF loans often have paid little attention to the need fo r substantial free market oriented reforms. World Bank funds often bail out wasteful Third World governments and allow them to postpone needed reforms, such as the privatization of state-owned factories, railroads, and public transportation sys tems.

This has fostered and prolonged stagnant (even deteriorating) economies I in theThird World, debt piled on top of debt, and calls by the World Bank 11 and IMF for more money to deal with problems that were in part a result of their own policies. Indeed, Poland s debt of nearly $40 billion is due largely part to the willingness of West European nations, especially West Germany to provide loan guarantees to private banks.

The West must not do to Eastern Europe what it has done to Argentina Brazil, and Mexico, whic h is to bail out their failed economies and reduce pressures for refomThe strategic stakes are too high peoples of Eastern Europe, Western aid providers can spur the necessary reforms by 1) Not measuring the efktiveness of Western aid by how much money is provided in foreign aid.

History has shown that free market economic reforms, not foreign aid, are critical to economic recovery.There is little correlation between amounts of aid received by lessdeveloped countries and economic success. Tanzania has been receiving one of the highest amounts of aid per person in the world and after two decades remains desperately poor. The U.S. halted economic development assistance to South Korea in the early 196Os, believing its economy to be hopeless.Today, South Korea has a strong, growing economy.

U.S. food assistance to many countries has depressed prices for local farmers and led to reduced food production.The West has promised some $10 billion in aid to the Philippines. Most of the $4 billion appropriated sits unsp ent be cause of the inefficiencies of the economy and the government. By contrast with free market policies and no foreign aid, Chile has built South Americas healthiest economy and reduced its debt burden. Money is no substitute for sound economic policy c While economic reform ultimately is in the hands of the governments and 2) Offering technical rdvice on how to establish a market economy.

Since most East European countries and the Baltic Republics (Estonia, Lat via, and Lithuania) already have announced their intention of moving toward a market economy, it no longer is necessary to convince them of the economic evils of communism and virtu e s of capitalism. What is necessary is nuts-and-bolts advice on particular aspects of the transition. They should be told, for example, about programs in Britain, Chile, and elsewhere that have privatized state-owned enterprises, using employee stock owner s hip plans or debtiforequity exchanges to bring in foreign capital;They should-be told how to reform their currency. This requires not so much foreign funds as sound policies. Western governments need not provide advisors for such reforms themselves.There are many private experts who can go to Eastern Europe to offer technical assistance 3) Offering financial aid primarily to cover the transition costs to a free market, rather than addicting Eastem Europe to international welfare.

If money is sent to Easter n Europe, strings must be attached to help the citizens of those countries gain their individual economic freedom. Aid should be conditioned on progress toward guaranteeing individual property 12 rights, legal commercial codes and an independent judicial s ystem, wages and prices set by individuals in the market; privatization of state-owned enterprises with shares for individual workers; deregulation of the economy a stable currenv; private banking; and free trade 4) Using an Index of Economic keedom to es t ablish goals to be advanced by foreign assistance and to gauge the success of such assistance A number of members of Congress waat to reform the Foreign Assistance Act of 1961, which governs U.S. foreign assistance, by adding an Index of Economic FreedomT h is Index wdd establish as goals for U.S. foreign aid the preservation of private property rights and open markets.The degree to which foreign aid programs meet these goals would be the standard by which to measure the efficiency of such programs While thi shdex has yet to be come law, Congress could apply it specifically to Eastern Europe to assure that U.S. assistance is put to the best possible use 5) Helping train East Europeans in business and market economics.

The U.S. can provide the educational help and managerial expertise for the transition to market economies in Eastern Europe.There are already efforts to establish business schools and centers for training mid-level managers in Eastern Europe at universities in Budapest and Warsaw, but these are h a mpered by a severe lack of qualified instructors.There exists an enormous pool of managerial expertise in the U.S. and Western Europe in the many universities, business schools, and private businesses that specialize in management training. A comprehensiv e program that combines some govern ment support with participation by universities and private businesses could bring East European students and faculty to the U.S. for instruction in busi ness and market economics, send American business school faculty m e mbers to teach in Eastern Europe, and recruit promising individuals in Eastern Europe to work in American businesses as trainees and interns. The U.S government could play the catalytic role in these exchanges, especially by bringing together applicants f r om Eastern Europe and interested institutions in the U.S CONCLUSION The year- 1989-was a time of political liberation for Eastern Europe, when the old political order was largely swept away and the beginnings of democracy established.This year should be a time in which the economic liberation of Eastern Europe begins and the foundation is laid for a new free market system. Although the various countries differ widely in the severity of the problem they face, they share the common task of dismantling social i sm and reviving a free market system after decades of oppression Much has been written about the difficulties and pain that will accompany this necessary transformation, and it is understandable that the emerging economic reforms are surrounded by doubts a nd anxiety. Yet, much of the economic difficulty and poor results of those countries that have attempted 13 some reform is the result of half-measures and flawed policies.The best chance for effective reform lies in a comprehensive program enacted as a wh o le, one which makes intelligent use of basic principles of the free market accumulated from the experience of two centuries Toward Sustained Growth. This program, an Agenda for Economic Growth, rests upon the establishment of secure property rights, the c r eation of an independent judiciary, the abolition of government monopolies, the removal of wage and price controls, the reduction of government regulation of the economy, the introduction of a convertiile currency, the privatization of statelowned enterpr ises, and the removal of barriers to international trade and foreign investment.

Given their resource base, location, and skilled populations, there is no reason that the countries of Eastern Europe need to continue to subsist with the antiquated and wealt hdestroying economies forced upon them by the Soviet Union.The way is open to them to undertake those reforms to launch them into an era of sustained growth and increasing wealth and full participa tion in the world economy. Having bravely recovered their freedom, they will quickly discover that the responsibility for their future lies entirely in their own hands.

Edward L Hudgins, PhD Director, Center for International Economic Growth Douglas Seay Policy Analyst 14