Soviet Satellites Now Starring in Economic Growth

Views on BG | September 26, 2004, Sunday // 00:00

By Andres Oppenheimer
Miami Herald

If you think that China and India are the rising stars of the developing world, you may be missing a big part of the story. Increasingly, it's the countries of the former Eastern Europe.

The 10 former Soviet-bloc nations of Eastern Europe that joined the 25-member European Union (EU) on May 1 are not only the fastest growing economies of Europe, but are also displacing Mexico and Brazil as among the developing world's biggest magnets for foreign investments.

''This is a booming region,'' Witold Orlowski, chief economic advisor to the president of Poland,says proudly.

The emergence of the former Eastern Europe as a global economic player became evident when a recent poll by the United Nations Conference on Trade and Development (UNCTAD) asked 335 multinational companies which countries they consider the best ones to invest in over the next five years.

Predictably, China, India and the United States occupied the first three places. But Poland and the Czech Republic followed shortly afterward, ahead of Mexico, among the 10 countries most likely to receive foreign investments, according to UNCTAD's Global Investment Prospects Assessment ranking. Brazil, Argentina and other Latin American countries were not even on the list.
The flood of investments to the new EU members already is making their economies grow at a faster pace than their richer European neighbors. While Germany, France and other highly developed European economies are barely growing this year, Poland is expected to grow by nearly 6 percent, and the Slovak Republic, Lithuania, Romania and Bulgaria are projected to grow by 5 percent each.

During my visit to Krakow, once a Polish capital that has become a tourism and industrial center, I saw signs of progress nearly everywhere, and a general mood of optimism about the future. Two luxury hotels -- a Sheraton and a Radisson -- have just opened near the Central Square, where the 13th Century St. Mary's Basilica coexists with new cafes and fashion stores. The former Jewish ghetto of Kazimierz -- the setting of Steven Spielberg's Schindler's List -- has been turned into a tourism mecca.

New foreign investments have sprung up near Krakow, and unemployment -- still high at about 19 percent -- is beginning to drop. Multinationals such as Philip Morris, Motorola and the French car part manufacturer Valeo have set up plants in this area over the past few months.

They have come to take advantage of Central Europe's relatively low-cost and highly educated work force, as well as the possibility to export duty-free to Europe's market of 450 million people, thanks to the 4-month-old EU expansion.

In the nearby Czech Republic, DHL has just announced a $600 million relocation of its information technology offices from Britain and Switzerland to Prague, where it will soon open its European technology headquarters. This follows recent decisions by Honeywell, Accenture and Exxon to open their European business support or design centers in the Czech Republic.

Much like in the United States, where companies' outsourcing to China has become a major campaign issue, the outsourcing trend toward Central and Eastern Europe has become a thorny political issue in Germany. German Chancellor Helmut Schroeder recently said in a speech that it was ''unpatriotic'' for German companies to move to the former Eastern Europe, and he lambasted the new EU members for offering lower corporate taxes to attract investors.
But a recent study of global competitiveness by the Boston Consulting Group concluded that the outsourcing trend toward the former Eastern Europe will continue.

Consider: Production costs in Poland are 30 percent lower than in Germany, 27 percent lower than in Great Britain or France, 25 percent lower than in Ireland and 24 percent lower than in Spain. While moving to Poland increases transportation and other production costs, a factory worker in Germany typically costs $30 an hour, compared to $3 an hour for a comparable worker in Poland, the study said.

''In many industries, such as automobiles, wash machines and other goods, the best place in the world to produce for German and French firms will be Central Europe,'' says Robert Maciejko, a Warsaw-based BCG executive.

Part of the explanation is that the countries of the former Eastern Europe, like most converts, have embraced capitalism with amazing zeal, and are offering all kinds of incentives to foreign investors.

A comparative study by the U.S. Embassy in Prague shows that while corporate taxes are about 40 percent in Germany and in the United States, they are 28 percent in the Czech Republic, 19 percent in Poland and 16 percent in Hungary.

Richard Lucas, a British-born entrepreneur who publishes the Krakow-based Emerging Europe economic newsletter, says decades of communist rule have ironically helped encourage entrepreneurship in Poland.

''To survive in a communist regime, you require a lot of entrepreneurship,'' Lucas says. ``Once capitalism arrives, there is a lot of pent-up energy waiting to be released.''

Many business people here see themselves as Europe's new hope, and only half-jokingly refer to France and Germany as ''Old Europe.'' The term was coined by U.S. Defense Secretary Donald Rumsfeld to describe the two countries at the height of the U.S.-French dispute over the Iraq war.

''We can't understand how France has 25 percent of the people who vote communist,'' shrugged Thomasz Barbaszewski, a university physics professor and consultant to the Optimus computer manufacturing company in Krakow. ``For us, that's crazy.''

The former Soviet bloc countries are also exploiting their ideological conversion as a propaganda tool, both to cozy up to Washington and sell themselves to the world as their region's most One of the Czech Republic's most recent tourism attractions is the ''Museum of Communism'' in Prague. To my amazement, I found that it's located in a building above a McDonald's restaurant, and next to a casino.

But critics argue that, politics aside, the boom in foreign investments in the former Eastern Europe is a temporary thing, and that forecasts about a ''new China'' in this part of the world are greatly exaggerated.

''It's nonsense,'' says Thomas Klvana, an economic columnist with major Czech newspapers. ``The economies in this region are too rigid compared with Asia's.''

Unless something is done to make these countries more competitive, ''this tide of foreign investment, which started two years ago, will slow down, because labor costs are going up,'' Klvana says. 'In two years' time, this comparative advantage will disappear -- Some of these investments will flee as easily as they fled from Germany, and move further east in Europe, or to Asia.''
Indeed, Ukraine, Belarus and Turkey are waiting in the wings, as prospects for future membership in the European Union, which offer even lower labor costs than the 10 countries that recently joined the European club. But for the next few years, Poland and its Central European neighbors will have the upper hand.

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