Industrial restructuring causes short-term pain for long-term gain

Date: 11/11/1999

By Simon Taylor

IN THE ten years since the countries of central and eastern Europe cast off the shackles of Communism, much has changed in the industries of the region. But there is still a long way to go.

Despite major attempts to privatise bloated state-owned enterprises and attract much-needed foreign investment, most of the countries applying to join the EU in the early part of the next decade still have painful restructuring programmes ahead of them.

Progress in this area is made more difficult by the enormous social costs of shedding jobs at large manufacturing sites where there are little or no sources of alternative employment.

In cases such as Poland, the economic imperative to streamline the coal and steel sectors has led the government into clashes with the very sections of the population who led the opposition to the Communist regime.

A united front of Polish farmers and industrial workers recently spearheaded demonstrations against the policies of Polish Prime Minister Jerzy Buzek, and similar expressions of protest over austerity measures have been witnessed in Slovakia.

But despite the pain already suffered by workers in heavy industry in countries such as Poland where workforces have been cut to around half previous levels, a bigger push is needed if the economies of the candidate countries are to be able to compete in the EU market against some of the fittest performers in the world.

The Union has urged the applicant countries to make greater progress in privatisation as one of the key requirements for membership of the Union.

Slovakia, where the pace at which shares in state-owned firms are sold off was slowed by the autocratic rule of former President Meciar, recently scrapped its list of 'strategic industries' which were to be shielded from privatisation.

The decision has opened the door to important restructuring of the banking sector and a partial sell-off in the telecoms sector. Phone companies have been popular targets for foreign investors in the candidate countries thanks to the monopoly-like conditions under which the biggest operators conduct business, allowing them to exploit pent-up demand for new lines and a massive market for mobile telecommunications.

Poland has set itself a target of privatising 70&percent; of state assets by 2001, but government officials admit that it will be difficult to find foreign investors prepared to put their cash into sclerotic firms.

There is, however, little alternative to paying the high political price of restructuring unwieldy industries in the candidate countries. New jobs can only be created to replace the ones lost in the streamlining process by dynamic and competitive firms in other sectors.

But to achieve this growth, firms need to attract more capital investment for expansion. That means pulling in money from international investors who will only be prepared to take a financial stake in lean, forward-looking companies.

Another key factor is that, like other economies around in the world, the applicant countries are experiencing a shift from the old labour-intensive manufacturing industries characteristic of the early part of this century to the more innovative, knowledge-based companies of the future.

Figures on changes in industrial production in the candidate countries reflect this trend.

In the first six months of this year, production of steel in Poland fell by more than a quarter while coal extraction was down by a fifth on the previous year. The output of high-technology products such as pharmaceuticals, on the other hand, was up.

The figures also reveal another trend. Economic success is being strongly influenced by trade with EU countries, with companies which sell their products into the Union such as clothing and footwear manufacturers doing well.

This geographical bias to economic development creates its own problems, as the eastern regions of the applicant countries lag behind even the modest improvements in incomes seen in areas nearer the border with the Union.