02 November 1990 - 04 November 1990

Moving From a Centralised Command Economy to a Free Market: Problems and Solutions. How can the West Help?

Chair: The Rt Hon Edmund Dell

For this conference, the first regular Ditchley conference, I believe, attended by participants from Central and Eastern Europe and the Soviet Union, we were fortunate in having, in addition to representatives of government and other authorities in the West, the Minister of Finance of the Czech and Slovak Federal Republic and Mrs Klaus, the Deputy Governor of the Bank of Poland and the Deputy Prime Minister of Slovenia.

The principal objective of the conference was to establish how the industrialised West could best help the process under way of moving to a market economy in East and Central Europe. First it was agreed that each country was different, and that while common elements might be identified, each needed to be considered individually. Moreover, while the Soviet Union was confronting similar problems, the situation there was so different in so many ways, including the political, that it was difficult to consider it at the same time. Similarly, the conference did not consider the parallel problems in China, Cuba, North Korea or Vietnam.

The three groups into which the conference broke on the Saturday considered the issues under three broad heads: the re-introduction of economic criteria and the establishment of the necessary legal framework; the practicalities of the transition, including the establishment of new ventures, privatisation and the political and social problems that might arise; and foreign assistance in such areas as training, direct or portfolio investment, debt relief and access to markets.

Under the first head, it was accepted that the first step must be the establishment of a legal framework, both to facilitate the setting up of private businesses, with appropriate provision for commercial law and courts to administer it, and the internal convertibility of currencies, and, secondly, to regulate the activities of financial institutions. There was a need for training in free enterprise accountancy concepts, which were entirely lacking, for re-training management and perhaps also for advice on legal drafting, though much of the appropriate legal framework existed in the form of pre-1939 legislation which could be revived and modified. Consumer protection and monopoly legislation, except in rudimentary form, could wait, if needed at all: Western competition would automatically restrain monopolist tendencies.

In this context there was discussion of the plethora of advice on offer (and the competition between would-be investors and donors): some argued that control and co-ordination were needed, others that in a free market, control was inappropriate and impracticable, and that the governments of Eastern Europe, which were quickly learning to discriminate, would be wise to seek professional Western advice on competing investment proposals.

Given the legal framework, two issues arose: privatisation of existing enterprises and the establishment of new ones. With the proper framework, the latter should take care of itself, subject only to access to funds. The existing East European banks were not well-equipped by past experience to assess proposals for new ventures. There might be room for special arrangements for channelling venture capital, perhaps under the auspices of the EBRD. Some claimed that there was even now no shortage of capital for suitable projects, others that in practice, capital was lacking and that foreign investors were often deterred by the debt-overhang, especially in Poland, where the Foreign Investment Law with its 10% limit on foreign share-holdings (which however, we were assured, was more or less automatically waived) acted as an obstacle. However, it was agreed that the major source of new investment would have to be domestic saving.

Privatisation produced perhaps the sharpest debate. The problem breaks down into two: small to medium enterprises and large enterprises. Privatisation of small enterprises was proceeding fast in most countries, drawing on the so-called second market. To encourage the process, some incentives might be justified (e.g. tax holidays): tariff barriers were roundly rejected, but an appropriate exchange rate or even subsidies in the initial stages might be necessary. The major issue was the large enterprises. The scale of the problem was so great, the number of enterprises so large, and the urgency so pressing, it was argued, that the so-called British model appropriate to a developed economy, whereby each industry was groomed for privatisation and then sold, was not appropriate in East Europe, even though there might be lessons to be learnt from British experience. Moreover, given the absence of accounting procedures as understood in the West, it was difficult, if not impossible, to value an enterprise (there is controversy about this even in the West). Speed, a theme that ran throughout, was essential. Thus there seemed to be a consensus that governments should divest themselves of state-owned enterprises as quickly as possible, using such devices as vouchers, free issue of shares, the issue of shares to mutual share-holding bodies, which would themselves be sold off to the public, and so on, without worrying too much about the value (or even, perhaps, fairness) and leave rehabilitation to managements under the new ownership.

This led to a discussion of when and whether governments should support major enterprises which got into difficulties, some rejecting any such thought as redolent of old “perestroika” thinking, while others, from the West principally, argued that inevitably there would be some key businesses (electricity generation, for example) which could not be allowed to fail.

Sequencing or phasing was much debated. Speed was again emphasised by those on the ground, who argued that since each process had its own dynamic, sequencing would take care of itself, once the legal framework was in place.

In the general economic picture, the issue of debt loomed large, especially for Poland, which was not servicing its debt, but also for Hungary, which was, for Bulgaria, described by one as a case for massive international humanitarian aid, and to a lesser degree Czechoslovakia (with debts of “only” some US$8bn). The commercial banks had largely divested themselves of debts due to them: it was now up to Western governments to reduce the debt burden, finding realistic ways of avoiding if possible, or braving, the usual objections (the demonstration effect, the loosening of monetary and budgetary disciplines, the unfairness to those who had avoided or honoured debt obligations, etc). Failure to write-down would merely lead to repudiation. Conversion into counterpart funds, e.g. for pressing environmental or infrastructural investment, was mooted. Germany, it was suggested with some passion, should take the lead.

In the field of Western help, apart from debt, the countries of Central and Eastern Europe needed: (a) assurances of access to Western markets for their products (the EC’s restrictions on textiles, steel and particularly agriculture came in for specific criticism, though one questioned whether steel was a good sector to encourage given the inefficiency and dirtiness of the industry); (b) the prospect of ultimate membership of the European Community, for example, when certain objective criteria (economic, but embracing also human rights and probably a geographic definition) had been met. That would give East Europeans hope, a target to aim for and a defence against critics of reform.

These countries already faced the dismantlement of the CMEA system and from next January the payment for oil in hard currency: the rise in oil prices as a result of the Gulf crisis was a catastrophe. (It was suggested that the West could help by refraining from buying Soviet oil, though in a world market that would scarcely be relevant.) It was impossible to quantify the level of aid required for energy needs, or more generally (or at least no attempt had been made). The countries of East Europe could not or would not come together to present a co-ordinated plan to potential donors (as West Europe had to the single donor under the Marshall Plan). So far, despite talk, little or no actual money had been forthcoming from the West. Stabilisation funds were by definition not intended to be spent. West Germany was putting immense resources into the rehabilitation of East Germany, but there seemed no prospect of help on anything like that scale for East Europe. Money might not be the answer to all problems, but it would help. While re-structuring had not yet led to mass unemployment, it certainly would do so if it was to be effective; and the ability of the peoples of East Europe to support that and the other social stresses which the process engendered, given the popular illusion that prosperity could be achieved overnight, could snap and thereby put at risk the whole process. It was unrealistic to expect these economies to provide sophisticated unemployment and other social benefits, except in rudimentary form, to cushion the process. One result could be migration to the West on a scale which the latter would find unacceptable. How much, it was asked, would the West have been prepared to pay 5 years ago for the developments we were now seeing in East and Central Europe? Should we not be prepared, in our own interest, to pay as much now to see them succeed? After the joy which greeted the revolutions of 1989, could we afford to fail these countries now?

This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression. 

Chairman: The Rt Hon Edmund Dell
Chairman, Public Finance Foundation; Director, Shell Transport and Trading Co pic; Chairman, London Chamber of Commerce and Industry; Deputy Chairman, Governing Body, Imperial College of Science, Technology and Medicine; Honorary Fellow, Fitzwilliam College, Cambridge; author


Mr L V Appleyard CMG

HM Diplomatic Service; on secondment as Deputy Secretary, Cabinet Office
Mr Luqman Arnold
Partner responsible for the USSR and central Europe, Credit Suisse First Boston Ltd, London
Mr Samuel Brittan
Assistant Editor, Financial Times; Honorary Professor of Politics, Warwick University; Honorary Fellow, Jesus College, Cambridge;  a member of the Programme Committee, Ditchley Foundation
Mr K W N George
Head, Eastern Europe and Soviet Union, Overseas Trade Division, Department of Trade and Industry
Ms Isabel Hilton
European Affairs Editor, The Independent
Mr Neil Jaggers
Senior Adviser, European Division, Bank of England
Mr Michael Kaser KSG
Director, Institute of Russian, Soviet and Eastern European Studies and Reader in Economics, University of Oxford; Professorial Fellow of St Antony’s College, Oxford; President, British Association for Soviet, Slavonic and East European Studies
Mr Ralph R Land OBE
General Manager, Eastern Export Operations, Rank Xerox Ltd, London; Member, East European Trade Council
Mr Peter E Leslie
Deputy Chairman, Barclays Bank pic; Export Guarantees Advisory Council; Chairman, Overseas Development Institute; Chairman, Commonwealth Development Corporation
Mr Graham Mather
General Director, The Institute of Economic Affairs; Member, Monopolies and Mergers Commission
Miss Kate Mortimer
Member, Joint Assistance Unit, Eastern European Department, Foreign and Commonwealth Office (Financial Adviser to the Government’s Know How Fund); Member, Governing Body: Centre for Economic Policy Research; Imperial College  
Miss Hella Pick

Diplomatic Editor, The Guardian
Dr Ljubo Sire
Director, Centre of Research into Communist Economies, London and Co-Editor of its journal Communist Economies; author

Mr L George Bonar

Chairman and Chief Executive Officer, UNP Industries Ltd
Mr David C Elder
Deputy Permanent Representative and Minister-Counsellor of Canada, Canadian Delegation to the OECD, Paris

HE Mr Vaclav Klaus

Minister of Finance, Czech and Slovak Federal Republic
Mrs Livia Klaus

Mr Michael Emerson

Head, Directorate B (Economic evaluation of Community policies), Directorate General II, EC Commission

Mr William McCauley

Acting Director, Corporate Finance and Investments, European Bank for Reconstruction and Development, Paris

M. Pierre Jacquet

Associate Director and head of economic studies, Institut Français de Relations Internationales (IFRI); Assistant Professor of Economics, Ecole Polytechnique, Paris

Professor Wilhelm Hankel

Reader in Economics and Monetary Affairs, University of Frankfurt; Lecturer, University of Dresden
Herr Hans-Helmut Kotz
Chief Economist, Deutsche Girozentrale, Frankfurt, involved in reforming DDR banking system
Professor Dr Reiner Springer
University of Economic Sciences, Berlin: Dean, Faculty of International Economics and Foreign Trade, and Professor of International Marketing

Professor Francis Alexander Gabor

Professor of Law, Memphis State University (1976-); Faculty of Law and State Sciences, Eotvos Lorand Science University, Budapest; member, American Bar Association
Professor János Kovács
Economic Historian, working on the comparison of the transition scenarios in Eastern Europe, Institute for Human Sciences, Vienna

Mr Osamu Nariai

Senior Research Fellow, International Institute for Global Peace, Tokyo

Dr H O C R Ruding

Director or Advisor of several companies including Citicorp, Unilever, Nationale-Nederlanden, Robeco, Moret Ernst & Young

Dr Andrzej Olechowski

First Deputy Governor, Bank of Poland

The Hon Charles Dallara

Assistant Secretary for International Affairs, US Department of the Treasury, Washington DC
Mr Donald W Davis
Chairman, Executive Committee, Board of Directors, The Stanley Works; a Director, Allied-Signal Inc., the Dexter Corporation and Pitney Bowes, Inc; Chairman of the Finance Committee, National Association of Manufacturers; member, Industry Policy Advisory Group to the US Trade Representative
Ambassador John R Davis Jr
Diplomat-in-residence, Yale University
The Hon Philip M Kaiser
Senior Consultant SRI International; Member, Council on Foreign Relations, International Institute for Strategic Studies; Member, Board of Directors, American Ditchley Foundation, Soros Hungarian Foundation, International Research and Exchange Board, Council of American Ambassadors
Mr Bevis Longstreth
Lawyer, Debevoise & Plimpton, New York; author
Dr Deborah Duff Milenkovitch
Director, Institute on East Central Europe, Columbia University; Barnard College: Chair, Department of Economics, Barnard College, Professor of Economics; author
Mr Michael H Mobbs
Partner, (member, International Practice Group), Stroock & Stroock & Lavan, Lawyers, Washington DC; Consultant, Department of Energy and US Arms Control and Disarmament Agency  
Professor Leonard Rapping

Professor of Economics, University of Massachusetts; author
Professor Jeffrey D Sachs
Galen L Stone Professor of International Trade, Department of Economics, Harvard University, Cambridge MA; Economic Advisor to several governments in Latin America and Eastern Europe, contributing to design of economic reform programmes introduced in Poland and Yugoslavia at beginning of 1990; Research Associate, National Bureau of Economic Research, Cambridge MA; Consultant: to IMF, The World Bank, the OECD and UN Development Program; member, Brookings Panel of Economists, Brookings Institution, Washington DC; author
Mr George Soros
President, Soros Fund Management, New York and Chief Investment Adviser to Quantum Fund NV; established Open Society Fund; The Soros Foundation-Hungary and The Soros Foundation-Soviet Union; foundations operating in ten Central and Eastern European countries; author

Dr Igor Doronin

Senior Research Fellow, Institute of World Economy and International Relations, Moscow

Mr Jo
že Mencinger
Deputy Prime Minister of Slovenia, with special responsibility for the economy