Jump-starting Ex-communist Economies

James M Silberman, Charles Jr Weiss, Mark Dutz. Foreign Affairs. Volume 73, Issue 1. January/February 1994.

Current US policy toward the countries of the former Soviet Union (FSU) and Eastern Europe (EE) is based on the premise that competitive free markets, combined with economic stabilization and privatization, will bring prosperity and economic growth. These changes are expected to encourage foreign investment and to press inefficient enterprises left over from the communist regime either to evolve or to die, letting new enterprises take their place. The productivity-drive approach, similar to the National Productivity Drives financed as part of the Independent Technical Assistance arm of the Marshall Plan in the 1950s, suitably modified to fit changed circumstances, can jump-start the transition to a market economy in the FSU/EE. It can increase efficiency, improve services, and expand the production of low-cost consumer goods, enabling workers and consumers to realize rapid benefits. For a productivity program to succeed, the leaders of the major industrial powers must convince thousands of enterprises in hundreds of industries to open their doors to study tours and to show visitors, not necessarily the latest technology, but information on management, products, and technology that can be used to build a modern economy.

The republics of the former Soviet Union (FSU) and Eastern Europe (EE), if they are to avoid political and social chaos, have only a few years to make visible progress toward providing their people with a supply of affordable consumer goods and a reasonable standard of living. The United States, Western Europe and the rest of the world have a huge stake in avoiding the geopolitical havoc and massive that might ensue if the formerly communist countries fail.

Current U.S. policy toward the countries of the FSU/EE is based on the premise that competitive free markets, combined with economic stabilization and privatization, will bring prosperity and economic growth. These changes are expected to encourage foreign investment and to press inefficient enterprises left over from the communist regime either to evolve or to die, letting new enterprises take their place.

This approach is not working fast enough. The average FSU/EE citizen has barely enough money to survive, a very limited choice of things to buy, and dim future prospects for more lucrative employment. However desirable rapid reform might be in the long run, its immediate social and political costs may prove too painful for fledgling democracies to accept.

To compete in the marketplace of the 1990s, FSU/EE enterprises require a wholesale change in their rigid mind-set, which they inherited from a centralized, militarized command economy cut off for more than 70 years from world markets and the worldwide flow of technological information. Instead of simply meeting production targets dictated from above, FSU/EE managers must now be familiar with cost accounting, marketing, quality and inventory control, labor relations, financial and organizational structure, product design, procurement and research. Workers, managers and consumers need to understand their stake in increasing productivity as a means to increase their quality of life. All participants must understand the implicit and explicit rules and procedures that enable a market economy to function smoothly.

Huge numbers of people from government, management and labor must therefore be exposed to new ideas on an unprecedented scale and within a very few years. An indispensable tool for this purpose is to send people from the FSU/EE to observe market economies and to see for themselves how enterprises are managed, how a competitive product is designed, manufactured and marketed, and how a modern economy operates, and then to have them share their observations with many countrymen upon returning home.

In the 1950s a similar effort, the National Productivity Drives, was financed as part of the Independent Technical Assistance arm of the Marshall Plan, reaching almost every plant in every industry, marketing agency, agricultural entity and research and development institution in Western Europe, Japan, South Korea and Taiwan. Now largely forgotten, these drives brought from Western Europe some 24,000 managers, engineers, supervisors, workers, and elected and appointed officials—and several thousand more from other countries—to the United States to acquire firsthand experience, to learn to make well-informed judgments, and to gain access to technology over a generation more advanced than what they were using. The drives accelerated the postwar economic recovery, in a few years raising the annual rate of increase in labor productivity of West European industry from its historical level of one percent a year to four percent or more.

Driving Up Productivity

The productivity-drive approach, suitably modified to fit changed circumstances, can jump-start the transition to a market economy in the FSU/EE. It can increase efficiency, improve services and expand the production of low-cost consumer goods, enabling workers and consumers to realize rapid benefits.

Energizing the productivity drive would be rigorous study tours of business enterprises in developed countries, focusing on subsectors and subjects requested by the participating countries. Covering just the Russian Republic may require 7,500 study tours totaling 100,000 participants at a relatively modest cost of $1 billion to $2 billion for a 10-year period. The month-long tours of 10 to 20 plants would consist of 15 Or SO managers, supervisors, union officers and government officials—whoever is essential to the introduction of new ideas. The participants would divide up the subjects for study, then collaborate on a report for widespread distribution within the FSU/EE and, upon their return, give lectures and seminars to extend farther the penetration of new ideas. Such tours would be the reverse of the now-conventional approach of sending consultants to the FSU/EE. Initially, the productivity drive should be protected from political turbulence and the misuse of study groups as political payoffs by working with local as well as nation governments, nongovernmental organizations and well-managed farm cooperatives. Eventually, productivity entities in each participating country would direct and monitor the study tours, which in turn would be coordinated by an international secretariat.

To help put new ideas into practice, the participating countries would have access for several years to a menu of follow-up services from the countries that the tour visited: training courses and audio-visual aids, technical publications, advice from experts, and samples of products suited to local manufacture. The entire operation would be accompanied by a major publicity campaign, patterned on those that took place in every West European nation after World War II and designed to acquaint the country with the basic principles of productivity and how they translate into a higher standard of living for workers and consumers.

Self-Help as the Key

Despite the continuing sell-off of state-owned enterprises and the start-up of small firms in some parts of the FSU/EE, large enterprises employing over 1,000 workers account for the bulk of employment in the region: over 32 million work in the Russian manufacturing sector alone. No government, however committed to reform, will allow these large enterprises to close until something emerges to replace them. This will not happen quickly. Republic after republic has refused to take the measures that would result in closing factories that provide most of the goods and most of the jobs. As a result, the rest of the reforms needed for a competitive market economy—stopping the flow of easy credit to money-losing enterprises, forcing bankruptcies and trimming excess staff; and setting up effective market-oriented institutions—have been and will continue to be slow in coming.

Even after they are privatized, large FSU/EE enterprises are likely to continue to make the same unsalable products using the same antiquated business strategies. These enterprises are typically led by engineers who focus mainly on production and new machines but who have little or no appreciation of Western management techniques for cutting costs and enhancing productivity. There is an urgent need to change these engineers’ mind-set and to improve their skills.

Existing efforts are not sufficient. Foreign investment is very low and is unlikely to rise until the environment is perceived as more stable, information flows improve and coherent laws covering land ownership and commercial practice replace the current confusion. Subcontracting, “out-sourcing,” and joint ventures are also very limited. Foreign aid, promised in large amounts, has for the most part been held up pending the adoption of further reforms, thereby further increasing public cynicism.

The productivity drive has important advantages compared to alternative methods of assisting the FSU/EE. It would produce prompt, visible improvements in productivity, so that the value of the program would immediately be perceived by a public weary of unfulfilled promises. It would meet the immediate needs of the FSU/EE countries for consumer goods that can be bought with local currency, for improvements in transportation and communications, and for the myriad of service industries neglected during the years of communist rule: distribution, insurance, banking, retailing, real estate, and so on. Other enterprise-to-enterprise private mechanisms, while important and valuable, are likely to overlook the subsectors that can give rise to the most rapid local increases in living standards.

The productivity drive would be relatively low in cost, and could not disappear in the form of capital flight or as deficit support to inefficient enterprises. Its ability to bring to virtually every large and medium-sized enterprise in the FSU/EE new methods of management and production, both through participation in the tours themselves and through the extension work that would follow them, is a critical advantage.

The productivity study tours would allow participants to identify for themselves those aspects of Western management and production techniques that can be directly integrated into existing practices and would make possible quick, widespread increases in productivity using existing equipment. The tours would in this way respond to the self-identified needs of FSU/EE managers and engineers, who are well educated and are heirs to a proud technological tradition.

National productivity drives would increase the effectiveness of the work of volunteers and paid experts for the FSU/EE countries by ensuring that such personnel bring expertise requested by those who need the advice. Postwar experience was that American experts were not requested by European factories—even though the Americans’ services were available without charge—until about two years after the study tours. By that time the lessons had been absorbed and the needs for specific expertise had been well defined.

In any case it is very unlikely that foreign experts can provide direct advice to each enterprise in the FSU/EE at an affordable cost or in a manner politically acceptable to the recipients, even if such a program could mobilize the necessary Western political and financial support. Despite the rather limited scope of Western technical assistance to date, FSU/EE countries are already voicing frustration and resentment at what they see as waves of highly paid consultants who monopolize the time of high-ranking local officials, often ask the same questions as their predecessors, and then too often provide advice unsuited to local conditions. Finally, government-owned and newly privatized enterprises, despite their importance as employers and producers and despite the political influence of their managers, have for the most part been ignored by existing programs of technical assistance on the grounds that they are uneconomic dinosaurs deserving of extinction. This policy in effect writes off the FSU/EE’s major industrial assets without allowing even the possibility that they can be made productive, and it earns the automatic animosity of the firms’ politically powerful managers. The fact that workers are often dependent on their employers and on job-based networks for food, housing, medical care, vacations, child care, and other services only makes it more urgent that the problems of productivity and inefficient managerial skills be addressed.

The productivity tours would be available not only to already privatized enterprises, but also to government-owned enterprises or their successors that have taken concrete actions to orient themselves toward market requirements and to improve their productivity and efficiency. The productivity drive thus constitutes a bottom-up, market-driven approach equally accessible to all enterprises, providing an equal place at the starting gate rather than picking winners.

Lessons from the Past

Although important differences distinguish the situation in Western Europe in 1950 from that of the FSU/EE countries today, striking parallels are at least as significant. European industry after World War II was in critical need of restructuring for productivity. Not only was industry partially destroyed, it was the ruins of an industrial plant that had been seriously out of date even before the war when it had been fully operational. Buffeted by economic instability and labor-management strife, protected from competition, lacking mass markets, and largely isolated from each other, from world markets and from outside developments in technology, much of prewar European industry never fully mastered the art of advanced product design or the techniques of low-cost mass production.

The productivity drives of the Marshall Plan achieved dramatic increases in productivity, helping to bridge the productivity gap that had grown up over several decades between Western Europe and the United States. In many industries, productivity within individual enterprises increased by 25 to 50 percent inside of a year with little or no additional investment. Laggard enterprises that would have been labeled loss-makers and closed in any free market reform often registered rapid productivity gains with little or no additional investment after they were exposed to more productive manufacturing methods, and they eventually achieved international standards of productivity. The productivity drives also created an awareness of modern technology that greatly improved the choice of equipment in the many major capital investments then under way.

The drive relied on national pride, national initiatives, and national identity, and was overseen by a locally chosen productivity commission composed of top-level representatives of government, business, and labor. Industry cartels agreed to lead the productivity drive, to accept and facilitate the difficult, multidimensional changes it was sure to entail, and to share the gains of productivity increases with workers and consumers. These industries did all this because of their fear of social unrest and because of patriotism engendered by the experience of defeat or near-defeat in war, despite the fact that they could perfectly well have profited from a restoration of mere prewar levels of industrial productivity. Indeed, prior to 1950 they had been investing in technology that would have led to no more than the latter.

The political leadership of the world’s leading industrial power, the United States, conceived the productivity program of the Marshall Plan and put it into place despite the reluctance of a war-weary public. U.S. business leaders opened their doors to tens of thousands of visitors from potential competitors in 35 countries, sharing management and production technology that would help them bring up productivity and restore competitiveness. U.S. business leaders did so because they understood the gravity of the emergency, and because they were confident that by the time their visitors could put what they had learned into practice, their own firms would be far ahead. The resulting program was a major contributor to postwar prosperity in Western Europe.

The urgency of the task confronting the West today is similar. For a productivity program to succeed, the leaders of the major industrial powers must convince thousands of enterprises in hundreds

of industries to open their doors to study tours and to show visitors, not necessarily the latest technology, but information on management, products and technology that can be used to build a modern economy. For their part, the leaders of several countries of the FSU/EE have expressed initial interest in a national productivity drive supported by technical assistance, and several West European powers have expressed interest in supporting such drives.

The size, scope and user-friendliness of the productivity drive give it a chance of launching the economies of the former Soviet Union and Eastern Europe in the direction of economic competitiveness and political stability. The time is ripe to put such a program into practice.