CAMBRIDGE: In elections last March, Estonia’s reform government was rudely toppled from power by a left-leaning coalition. In light of its accomplishments, dismissal of the reform government seems an ungrateful act by Estonian voters. For by 1994 Estonian inflation was down to an annual 20% (lowest in the FSU), and the economy was growing at a rate of 5% (highest in the FSU), with forecasts predicting even stronger growth.

Why were Estonia's reformers toppled? Why, indeed, have left-wing parties, the political heirs of the communists, succeeded in winning elections in Bulgaria, Estonia, Hungary, Lithuania, Poland, Slovakia and Slovenia? The simple answer, for many, is that market reforms have been too quick and too cruel. People yearn for the simplicity of the past.

Such glib explanations miss the point:

1. Surveys show that the public does not want to go back to the old regime, and that left-wing parties are not deemed instruments to undo market reforms.

2. Falling standards of living cannot cause disenchantment, particularly if no fall really took place. If you examine actual household consumption rather than changes in crude indexes of real wages, which do not give a picture of shortages in the old regimes, living standards have held their own. Many countries, indeed, show a buildup of pricey goods--cars, refrigerators, videocassette recorders--unavailable under communism.

Throughout Eastern Europe social spending has not only remained a high proportion of GDP, it has soared. Post communist states have among the most generous social budgets in the world, when measured as a percent of GDP. Social budgets tend to claim 15 - 30% of GDP, in comparison with outlays in East Asia of between 5-10% of GDP for social programs. Ironically, it is high and escalating social spending, not alleged cuts, that gives insight into regional politics. Rather than view recent polling as referenda on market reforms, or on capitalism versus communism, these votes show how much East European politics now resemble politics in the West: interest groups rule.

Left-wing parties win, in part, because they cater to organized interests that receive ample state benefits, and are seen as wedded to retaining such largesse. Estonia’s former government may have been too severe with pensioners, but at the same time parties advocating moderate benefit levels have been defeated by parties willing to raise the stakes in populist bids for pensioner votes. Generally speaking, most people in the region want to have their cake and eat it too--market reform and an expensive social safety net.

Social spending has increased significantly as a percent of GDP everywhere. Poland, which supposedly went "cold turkey"-- embracing market reforms that are alternately admired and reviled, but always seen as harsh -- saw social spending claim 11% more of GDP between 1989 and 1993. Like increases also took place in Bulgaria Hungary, Slovakia, (insert name of local country). In most countries, the cuts in subsidies that accompanied price liberalization were offset in part, or even in full, by increased social spending, rather than deficit reduction. With heavy social spending go heavy taxes, particularly on labor, which distorts economies, reduces capital inflows, and raises unemployment rates, partly because work shifts to the untaxed grey economy.

Left-wing parties also reap the organizational advantages of their past. They inherited the skills of fund-raising and recruitment of activists, a presence in factories, trade unions, and bureaucracies, as well as other nuts and bolts of party organization. In most countries communist parties bequeathed their assets to their successors with little hindrance. One exception is the Czech Republic, where the process of lustration (disqualification for state posts as a consequence of previous senior membership in the communist party or secret police) dramatically weakened the communist party organization.

Pensioners’ power - Pensioners are the electoral base of today’s left-wing parties. Three factors account for the power of pensioners, and for why the left and the old are linked:

1. All communist regimes made lavish commitments -- universal pensions, disability pensions, health care, housing -- that bankrupted the economic system. Nonetheless, as Western governments also realize, it is almost impossible to reverse these commitments even during an extreme budget crisis. Left-leaning parties pay lip-service to keeping these promises.

2. Because of low population growth rates, the old make up a very high proportion of the population. This adds an extra burden to social costs, but gives them extra voting power when they act as a bloc.

3. Adults over the age of 45 have had the hardest time adjusting to new market conditions. Mobility costs for older workers tend to be high; retraining difficult and the time horizon for retraining to pay off too short. Politicians, even those of the reform ilk, have thus tended to "buy out" this age cohort through generous early retirement schemes and lax disability standards.

The result of all three factors is a vast army of pensioners who see themselves having a stake in the past, not the future. Roughly 32% of the entire Polish adult population is now made up of pensioners (with an astounding 9% of the adult population on disability pensions). Compare this to the United States, where only 21% of adults are pensioners. The number of Polish pensioners increased by 28% in just four years, from l989 to 1993, though the population increased only 1.5%. And Poland's numbers are not unusual. The army of the old and pensioned is growing everywhere in the region.

Farmers are the Second most cossetted voting bloc. No surprise then that they are also big supporters of the left. Agrarian parties have formed coalitions with former communists in many countries. At the onset of market reforms farm interests suffered relative income declines as agricultural subsidies were slashed. Later on, some or all of these losses were recouped through successful lobbying for renewed subsidies and import controls. West Europe’s farmers provided ideal role models for this sort of rent-seeking.

What results from the growing power of these groups? High payroll taxes and import tariffs have been imposed. Payroll tax rates, indeed, are so onerous that they threaten the dynamics of a market economy. There are hardly any countries in the world with incomes of less than $50,000 per capita in which government revenues exceed 40% of GDP. In the Czech Republic, Hungary, Poland, Slovakia, Slovenia -- indeed, almost everywhere in the region -- government revenues exceed that boundary.

Such transfers of wealth might be justified as a one-time historic bargain, in which young and old share the burden of transition. That bargain, however, looks permanent as these promises have become open-ended. Generous pensions and protectionist laws are becoming permanent features of the landscape. Of course, these promises could be reversed. But no country in the world has yet been able to roll back long established entitlement benefits.

In coming years the most important fiscal task facing East European and NIS government will be to reduce the size of social spending to a more reasonable portion of GDP. Political elites -- at home and from abroad -- will have to focus public attention on the looming fiscal crisis. The public should understand the crucial difference between a one-time transfer to old workers at the start of market reform, and a long run pension policy. In any viable long term arrangement, the level of benefits relative to wages should be reduced, retirement ages should be raised to international norms, and eligibility for special pensions (disability ones in particular) should be tightened to cover only the truly in need.

In institutional terms, long-term reform should aim for a shift to a pension system based on individual savings accounts, as in Chile, as opposed to the current state run, pay-as-you-go pension systems. Individual savings let each household choose its own level of savings to accord with its preferences and needs. Such a system also eliminates the debilitating irresponsibility in entitlements that bankrupted the old regimes, and that is damaging the new ones. The privatization process can be linked to pension reform by earmarking privatization revenues or enterprise shares now held by the state to help finance the change over to a private, individualized pension system.

Of course, the election results through the region demonstrate just how hard a task these needed reforms will prove to be. Various governments have flirted with pension reforms, but none has progressed far and still survived the electoral test. Reformers, politicians, and international advisors should focus on improved public understanding and on innovative transitional strategies for pension fund reform in order to undo the continuing fiscal legacy of the ancient regime.

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