It’s Already Time to Take Stock in Eastern Europe
Most of the focus of President Clinton’s trip to Europe last week was on unfinished business from the Cold War--the NATO alliance, nuclear armaments in Ukraine.
But more revealing for the future, and perhaps surprising, is the fact that two heads of state who met with Clinton--Presidents Lech Walesa of Poland and Vaclav Havel of the Czech Republic--preside over the fastest-growing economies in Europe.
The Polish and Czech economies are small but their moderate success in adapting to a new world after half a century of war and Cold War offers insights on how totalitarian states can become market economies and how their future development will broaden or undermine the European Union in this decade.
Implications for U.S. policy and U.S. business are considerable. Economic success in Eastern Europe would deter the region from descending into Yugoslavia-style chaos and it would help Russia and the lands of the former Soviet Union.
Stability and security now “depend as much on economic conditions as on assurances against military threats” write former Defense Secretary Harold Brown and Charles Wolf Jr., director of RAND Corp., in a paper on the post-Cold War period.
The world is turned upside down in Europe today. Germany is in a deep recession that economists say will last through 1995. Volkswagen has gone to a four-day week to share out work; some of Germany’s major companies are in financial trouble.
The country’s high wages, social benefits and taxes are blamed for sapping economic vitality. “Our social market system is bankrupt,” declares Norbert Walter, chief economist of the Deutsche Bank.
Meanwhile, East Europeans who work for less are getting the jobs. The Czech Republic’s famed Skoda Works, now partly owned by Volkswagen, is working overtime to turn out a car that sells briskly for less than $5,000 in Germany and other countries. Its workers make roughly one-tenth the pay and benefits of Volkswagen’s German employees.
The Czech Republic is doing quite well, even though most of its products are formally shut out of the huge EU market. Following the split with Slovakia last year, it is now a country of 10.3 million people with a gross national product of $38.4 billion that is poised to grow 4% in 1994.
Foreign investors have poured $2.3 billion so far into ventures in Poland, according to J.P. Morgan & Co. Pepsico acquired a chocolate and cookie company and turned it into a local base for Frito-Lay. And Time Warner, Bertelsmann of Germany and a Luxembourg company are bidding for a commercial television channel. The Polish economy--largest in Eastern Europe with 38 million people and a GNP of $70.6 billion--may grow 5% this year.
Hungary, the other leading East European state, may have slower growth because EU restrictions hurt its agricultural exports.
How did these countries adapt to a competitive world in just a few years? They encouraged foreign investment but did so in an unusual way. They used stock markets.
The Czech government handed its citizens vouchers of ownership in the state enterprises that were being privatized. Initially that seemed less than a brilliant idea, explains Charles Harman of Credit Suisse First Boston, who heads investment banking for Eastern Europe from offices in Prague and London. “Trading was nonexistent because while everyone had shares no one had money to buy other shares. But foreign investors came in, and it has developed into an active market with roughly $50 million a week in transactions.”
And more to come. The Czech stock exchange has just qualified for investments by the emerging markets mutual funds that are sending so much U.S. investment around the world. “We anticipate an inflow,” says Harman.
In Poland there is a very active stock market because the Poles have extra money thanks to remittances from Polish-Americans in the United States. That’s also why a sizable consumer economy has developed in Poland.
But make no mistake. Eastern Europe’s fledgling economies are fragile and troubled. Inflation is a constant threat. In the Czech Republic it is now 12% a year, but in Poland it runs at 30% and more, says Susanne Gahler, the Morgan bank’s chief economist for Eastern Europe. “Stock markets have helped with privatization,” she says, “but much of the real work of restructuring industries for productivity remains to be done.”
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The Eastern economies need markets, need access to the 12-nation European Union market specifically. But the EU has been unyielding in negotiations so far, maintaining restrictions against heavy machinery, textiles, agricultural produce.
Sooner or later those restrictions will be relaxed. The East European states are like Mexico in one sense, developing economies on the border of a highly developed market. But East European education and skill levels allow them to turn out higher quality goods than most developing countries.
Also, history is on their side. For centuries before World War II, the lands that are now the Czech Republic, Hungary and Poland were principal suppliers of agriculture and industrial goods to Germany and central Europe. Now they’re trying to re-establish historic patterns. And as their costs are compared to the swollen costs of EU Europe, the Easterners will get business. As German industry restructures, it will certainly use Eastern suppliers more and more.
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So the EU will either admit the East European states or dissolve itself in fractious internal disputes.
The prospect is for a vibrant, enlarged market emerging in central Europe in this decade, with big opportunities for U.S. companies. And that future business could do for the next half century what NATO did for the postwar era now ended.
