At a discussion meeting on 2 July, Richard Portes called for changes in both Eastern and Western policies to combat the economic collapse of Central and Eastern Europe (CEE) and the former Soviet Union (FSU). Portes is Director of the Centre for Economic Policy Research and Professor of Economics at Birkbeck College, London. His talk was based in part on his CEPR Discussion Paper No. 695, `Enterprise Debt and Economic Transformation: Financial Restructuring of the State Sector in Central and Eastern Europe' (with David Begg) and his chapter, `The European Community's Response to Eastern Europe', in The Economic Consequences of the East (CEPR, 1992). The underlying research was supported by grants from the Ford Foundation and the Commission of the European Communities under its SPES and ACE programmes to CEPR's research programme on Economic Transformation in Eastern Europe. The views expressed by Professor Portes were his own, however, and not those of the above organizations nor of CEPR, which takes no institutional policy positions.

Portes maintained that the costs of current policies in CEE are both excessive and excessively protracted, in economic and political terms. There are no obvious, major successes to justify these sacrifices: industrial output has fallen by 25-30% over two years, and GDP by 15-20%, and further decline is expected in 1992. This depression is not a natural consequence of macroeconomic stabilization, which in chronic, high-inflation economies is usually associated with a short-run rise in output. Nor can the statistics be explained away by measurement error. Part of the fall in output results from the `trade shock' induced by the CMEA's break-up, but this was self-inflicted and could have been mitigated rather than exaggerated by policy. Many of those who attribute the contraction to the trade shock also argue that this trade should disappear, and that the firms dependent on those markets are the dinosaurs that should have been closed immediately.

Portes maintained that an excessively abrupt breakdown of established trade patterns and an equally abrupt opening to trade with the West had entailed unnecessarily high transition costs, and restructuring is not going in the right directions. There were also mistakes in the macroeconomic stabilization programmes in particular, excessive devaluation and poorly specified exchange rate policies but the main problems are in the microeconomic foundations: property rights, credit markets, financial discipline, managerial motivation and delayed privatization.

There is little dispute about basic elements of the standard reform programme: macroeconomic stabilization, price liberalization and the elimination of controls, restructuring of production, and the establishment of new laws and institutions, including privatization; but its results so far are unacceptable. Several pragmatic, mainly microeconomic, measures could substantially improve the performance of the standard stabilization programme.

Portes argued for a consistent exchange rate policy, with an initial peg during stabilization, and a crawling peg thereafter. Tariff protection should be maintained at uniform but non-negligible rates, to ease the transition and permit adjustment. Such protection is needed by both senile and infant industries, but it should not perpetuate activities with negative value-added. State firms should be commercialized immediately, to give them strong management before privatization; and governments should actively pursue industrial restructuring, by breaking up monopolies (to remove the bargaining power of those that are `too big to fail') and using Western assistance where the market cannot yet be expected to work properly. Banks should be recapitalized, followed by cancelling the debts of privatized firms and giving open, cash-limited fiscal subsidies (rather than hidden credits) to the others. Some intra-regional trade could be re- established by creating a free trade area and settlements mechanisms (short of a payments union) to deal with intra- regional payments.

Portes stressed that these policy recommendations apply mainly to CEE, since the cases of the FSU, and of Russia in particular, are much more difficult. The former Soviet republics may best focus for some time not on macroeconomic stabilization (nor on financial assistance to stabilization efforts that are unlikely to succeed), but rather on specific measures in the agricultural, energy and financial sectors. For each country in the region, the West should properly coordinate the efforts of the multilateral organizations and individual country aid programmes. Portes concluded that the West could best assist the CEE/FSU by achieving a breakthrough in the Uruguay Round to promote the opening and expansion of world trade and thereby offer the countries of CEE/FSU the markets they need to expand.