Journey to the East

This article is written at my own risk. My business friends always say: “Ed, we value your public-policy insights, but [...]

July 1 1994 by Edwin J. Feulner


This article is written at my own risk. My business friends always say: “Ed, we value your public-policy insights, but don’t tell us where to invest or how to make money. That’s our business, and we’re pretty good at it.”

That may be so, but nevertheless, I want to remind the business world of an investment opportunity that’s been discussed a lot without prompting much activity.

I’m talking about Eastern Europe. A quick repeat visit to the tiny European outpost of Albania earlier this year showed me the decisive role U.S. businesses can play in the transformation of this part of the world, and of the dire political and economic consequences if these efforts fail.

While things there are still tough-and may get even tougher-my travels in Central and Eastern Europe during the past several years have convinced me that the combination of institutional reforms, popular support for real democratic government, and the number of skilled and highly educated people in these countries eventually can bear tremendous fruit. However, one critical element needed to bolster the whole new nations rising from the rubble of communism is lacking: a pioneering spirit on the part of foreign investors. Especially American investors.

Perhaps this overcaution results from Albania‘s reputation as one of the Soviet empire’s economic basket cases. Let me assure you, those days are over. Unlike many Russians (and Americans, for that matter), the people of Albania are eager to roll up their sleeves and get on with the job of turning their economy into a bastion of free enterprise.

According to recent public opinion surveys, most people say Albania is the only country in Central and Eastern Europe where their household finances improved during the past year. Seventy percent believe the country is moving in the right direction toward free markets and private enterprise.

As Albania‘s president, Sali Berisha, pointed out to me, 150,000 private-sector jobs have been created there just in the past 18 months. More than 90 percent of the land      some 11,000 square miles, or roughly the size of Maryland-is now privately owned. Consequently, agricultural production jumped 15 percent last year, and it is expected to continue its steady rise. Stacks of hay now dot the countryside where before there were none. Milk is readily available, going a long way toward eliminating childhood malnutrition. In 1972, at the height of the Cold War, 450 children reportedly died from malnutrition in Albania. In 1993, that number dwindled to six.

The task now, Berisha says, is to attract investment. Prospective investors commonly balk at problems such as Albania‘s poor transportation system, which is in dire need of repair and expansion, and the fact that, like many other Eastern European nations, Albania is still building a legal and banking infrastructure that can support extensive foreign investment.

But Albania has qualified for and is now a member of the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development, making it eligible for the kind of multilateral financial assistance that can help jump-start its economy. The EBRD, in particular, is helping the country create its telecommunications infrastructure, develop its tourism industry, and institute sweeping banking reform and privatization.

Some corporations are getting the right idea. A Coca-Cola bottling plant, which will serve the entire Balkan area, was just about to be opened when I was there recently. A new international hotel is under construction in downtown Tirana, Albania‘s capital, whose population (238,000) makes it about the size of St. Petersburg, FL. Chevron and Occidental Petroleum, meanwhile, are drilling offshore.

These companies, at least, will be in the right place at the right time when Albania comes into its own economically.

Other opportunities abound. Albania‘s mineral and oil deposits are waiting to be further developed. New manufacturing facilities such as bottling and food-processing plants and mining/refining facilities need to be built-and existing ones updated.

And the country’s scenic mountain terrain and 217 miles of pristine coastline could transform Albania into a tourism mecca, as well as offer opportunities to lodging companies and manufacturers of hotel and restaurant equipment.

In short, tiny Albania with its educated, eager work force; low wage costs; entrepreneurial spirit; and stable, enlightened political leadership, has the potential to become Europe‘s Hong Kong.

While many U.S. companies remain gun-shy about taking the plunge in Eastern Europe, others are establishing beachheads that will reap huge long-term rewards.

General Electric, for example, was a pioneer in the uncharted waters of Eastern Europe when it purchased the Tungsram light works in Budapest, Hungary, in 1989. Now GE has decided to make Hungary the nerve center of its European operations, shutting down its lighting operations in Preston and Wimbledon in Great Britain, and transferring all of the equipment to Hungary.

Why the move? To improve GE’s competitiveness against European lighting giants Osram and Philips. A key factor: Wage costs in Hungary are significantly lower than in Great Britain. According to GE Chairman and CEO Jack Welch, the company’s involvement in Tungsram turned a profit for the first time last year and is expected to do even better this year. “We are changing our orientation from that of survival to that of winning,” Welch says.

Of course, it hasn’t been easy for GE in Hungary. But when is starting from scratch in a new place and a historically unprecedented situation ever easy? The point is: Because GE took the early plunge, the company will “be there” when nations such as Hungary have successfully made the transition to free markets.

Even Russia-despite its failure to service some $20 billion in bank debt last year-attracted around $700 million in direct investment from foreign companies in 1993. Though this is considerably less than the amounts invested in the Czech Republic and Hungary, it isn’t peanuts.

Remember debt-ridden Poland? According to The Economist, a deal Poland made in March to pay its more than $13 billion of unpaid debts-if it passes muster with commercial banks, as expected-”will spur an investment boom in Eastern Europe that is already in the making.” For example, the AngloDutch consumer-products group, Unilever, which is using Poland as a base for producing detergents and edible oils and fats, is starting to service the Czech and Slovak markets with Polish-made detergents and eventually could sell to Russia and Western Europe.

The Polish debt-restructuring deal will make the leader of the velvet revolution, once again, “a respectable candidate for new money,” The Economist says. That money will pour into a dynamic market: In 1993, Poland‘s stock market rose more than 1,000 percent in local currency terms and 700 percent in U.S. dollars.

Indeed, The Economist believes the Poland deal comes “just as Western interest in Eastern Europe is re-igniting.” Several portfolio-investment funds that have been limping along since the fall of communism are “making a comeback,” and new funds are being organized. Low labor costs and increasingly modern production facilities are making Western observers wonder whether Eastern Europe couldn’t become an important source for consumer products and manufacturing components in the next decade.

In fact, several Eastern European economies are showing signs of having weathered the depressions triggered by the communist collapse and the shift to free markets. Poland‘s economy grew by 4 percent in 1993, the fastest increase in Europe, despite investor wariness over the country’s debt situation. Poland, Albania, and the Czech Republic all registered real GDP growth in 1993, and their economies appear to be growing even faster this year-perhaps as high as 6 percent. Economic forecasters are even looking for the first signs of real GDP growth (0.5 percent to 2 percent) in Estonia, Slovenia, Hungary, Romania, and Bulgaria this year.

One emerging success story in the Czech Republic is the famed Skoda Works, now partly owned by Volkswagen. Skoda is beating much of the competition by producing an automobile with a sticker price of less than $5,000 in Germany. Its workers receive roughly one-tenth the high pay and benefits of Volkswagen’s German employees.

Ditto one of Skoda’s suppliers, just 80 kilometers to the northeast in Liberec. Its owner is Rockwell International, which aims to make “Rockwell BCSLiberec” a major part of its global vehicle-components business in the next few years. Liberec already provides Skoda with the mechanisms that operate power windows, seats, and sunroofs. It is slated to supply sunroofs for a high-volume, German-built small car to be launched in 1995, and soon will start making sun visors for another European automaker.

Of course, the situation is much grimmer in the Commonwealth of Independent States. Here, everything was negative in 1993, with real GDP growth down in several countries: Armenia (-29 percent), Ukraine (-20 percent), Russia (-12 percent), and Belarus (-11 percent). Further declines are expected in 1994.

Nevertheless, executives must not ignore the investment potential of these countries. The long-term advantages may well make a “wait-and-see” attitude seem overly cautious a few years down the road.

Even the U.S. government is getting into the act, for once making itself useful to entrepreneurs: The Department of Commerce has established a system to provide businesses with the market information they need to begin thinking about exporting to and investing in Eastern Europe. The department also is conducting a series of meetings between U.S. and European business and political leaders to help initiate the contacts American companies need to start up investments there. Just call (202) 482-5745 to obtain information about the effort.

Healthy Eastern European economies would prevent the area’s descent into Yugoslavia-style chaos and, by their proximity, would provide an economic boon to Russia and the other CIS states. As former Defense Secretary Harold Brown and RAND Corp. Director Charles Wolf Jr. wrote in a recent paper on the post-Cold War world, stability and security in Eastern Europe and the CIS now “depend as much on economic conditions as on assurances against military threats.”

Indeed, the world is turned upsidedown. It is now the very capitalists-much maligned in the Cold War literature of the countries in question-that have become the key to economic and political success for the former communist nations.

U.S. companies might as well turn a profit-and benefit the lives of millions to boot-while Karl Marx turns in his grave.


Edwin J. Feulner, Ph.D., is president of The Heritage Foundation, a Washington, DC-based public policy research institution. He also serves on the boards of several other foundations and research institutes. Dr. Feulner is the author of “Conservatives Stalk the House.”