Central Europe economies thrive Growth: Reorienting their economies from the faltering Russia to the European Union, Hungary, Poland and the Czech Republic attract billions in foreign investment.

Sun Journal

December 12, 1998|By Tom Hundley | Tom Hundley,CHICAGO TRIBUNE

SZEKESFEHERVAR, Hungary -- Here, in what was once the bus-manufacturing capital for the old Communist bloc, lies the answer to why Hungary has thus far been mostly immune to the financial turmoil in Russia.

Drive past the pompously ornate Hapsburg facades of the old town, past the peeling paint and grimy smokestacks of the slowly dying Ikarus bus factory, down the highway a few miles through the gently rolling pastures.

Suddenly, you're in the presence of some of the best-known names in the global economy.

IBM, Philips and Shell have recently built facilities in a huge new industrial park that has transformed this fading manufacturing city into a thriving one. A range of goods from hard drives to fancy chocolates is being produced here, most of them destined for markets in the European Union.

In the nine years since the collapse of communism, Hungary, Poland and the Czech Republic -- the three big success stories of Central Europe -- have turned their economies from East to West. All three are well down the privatization path, and, as a result, billions of dollars in foreign investment have come pouring in.

"Russia is losing its relative weight in the world economy. Hungary and the other countries in the region are regaining theirs," says Istvan Szekely, head of economics and research for Hungary's central bank.

This year, Hungary's economy grew by 5 percent, Poland's by 5.8 percent. Growth was flat in the Czech Republic, mainly the fallout from last year's currency crisis, but the Czech Republic leads the other two in per-capita gross domestic product by a wide margin.

Optimistic forecasts for growth next year have been downgraded slightly, but this reflects the unexpectedly severe Asian crisis and its ripples across Europe and the United States more than it does the Russian collapse.

When the ruble started its free fall in August, short-term investors began pulling out of Central European markets in a hurry.

"Investors in New York and London tend to think in simplified terms," says Tamas Szalai, a senior analyst with Concorde Securities, a Budapest brokerage firm. "They think that if it's happening in Russia, it could happen in Hungary."

About $2 billion in foreign capital fled the Budapest stock exchange over September and October as stocks lost about half their value. Since then, however, the market has rebounded smartly. In Poland, Warsaw's stock exchange followed a similar pattern.

"Investors don't want to abandon Russia," says Dean Ruhle, who heads the tax and legal services department of Price Waterhouse Coopers in Poland.

"They want to be near this market, so they are just moving the front lines back to Central Europe. It could actually be a boost for this country."

The real key to the strength of Central Europe's emerging economies lies in their integration with the economies of Western Europe and North America. This can be measured in foreign direct investment and in westward trade.

Hungary, from the outset, was the most open to foreign investment and has managed to attract $18 billion thus far. The ** Czech Republic has received about $8 billion. Poland, with nearly four times the population of either country, has come on strong recently, accumulating about $27 billion in foreign direct investment, $5 billion of it from America.

By contrast, Russia, with a population of nearly 150 million, has drawn only about $10.3 billion in foreign investment.

The extent to which this investment has redefined the former Communist economies can be seen in Szekesfeherver, where Philips N. V., a Dutch electronics and home-appliance giant, has, in the space of a few years, become Hungary's largest manufacturer, with 9,000 employees.

Most of the CD players and dishwashers that Philips is making in Hungary will be exported to Germany, France, Italy, Britain or other members of the 15-nation European Union. Same for the computer hard drives that IBM Corp. produces here.

German carmaker Audi has shifted most of its European engine operations to Gyor, in western Hungary, to take advantage of Hungary's highly skilled but low-paid work force. Audi's needs have created a labor shortage around Gyor, with some workers commuting from more than 60 miles.

The net effect of all this has been to boost Hungary's monthly exports from about $500 million in 1994 to nearly $2 billion today, 70 percent of which goes to EU trading partners.

A decade ago the lion's share of Hungary's trade went to the Soviet Union. Today, only about 8 percent of its trade is with Russia.

The crisis in Russia may cost Hungary about $250 million in lost trade next year. It could spell the end of few industrial dinosaurs, such as Ikarus, which still depend on the Russian market. But the central bank's Szekely was quick to put the loss in perspective: "This is peanuts."

Similarly, Poland sends 70 percent of its exports to the EU and 8 percent to Russia. It, too, is upgrading its export base from smokestack products such as coal and steel to furniture and automobile assembly.

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