Eastern Barriers Collapse: Revolutions Signal Opportunity for American Business

By Peak, Martha H. | Management Review, March 1990 | Go to article overview
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Eastern Barriers Collapse: Revolutions Signal Opportunity for American Business


Peak, Martha H., Management Review


Eastern Barriers Collapse: Revolutions Signal Opportunity for American Businesses

On the heels of the popular revolutions sweeping Eastern Europe come the wheels of the United Parcel Service - now making "regular" deliveries in East Berlin, Budapest, Warsaw and Cracow, as well as in Moscow.

UPS was not the first foreign investor to cross the Berlin Wall. General Electric, Citibank and the Hyatt Corp. are all in the vanguard of an ever-growing invasion of American companies that are taking advantage of business opportunities throughout Eastern Europe. But how wise is Eastern European investment? Enthusiasts point to a populace 140 million strong (compared with Western Europe's 322 million), all hungry for the consumer goods denied them during 45 years of Communist rule. The realists number the obstacles: Shatered economies and galloping inflation rates combined with a dearth of hard currency, faltering infrastructures and bureaucracies mired in centrally planned economies.

As political barriers come tumbling down, leaders in Eastern Europe are increasingly looking West. "Culturally and economically, they think of themselves more as West European than as Soviets," claims Donald Hasfurther, director of the East-West Trade Section of the U.S. Chamber of Commerce. By late last year, Soviet-dominated regimes had been rejected in each of the Warsaw Pact nations (Bulgaria, Czechoslovakia, East Germany, Hungary, Poland and Romania). In the Baltic region, Lithuania has directly challenged the Kremlin's legal and political authority. Ethnic turmoil is increasing in Yugoslavia; cracks are even appearing in Stalinist Albania.

The political crises are directly tied to economic woes. Eastern Europe has accrued huge debts - Poland alone owes $39 billion in foreign debt, an IOU compounded by an inflation rate spiraling near 1,000 percent per annum. Since 1949, Eastern Europe has been bound by exploitative trade agreements with the Soviet Union: The Comecon countries (the Council for Mutual Economic Assistance, a Soviet-style common market) receive "transfer rubles" from the USSR in exchange for their trade surpluses. These paper rubles are strictly an accounting device and cannot be used to purchase goods from any other Comecon nation, leaving the satellite nations with worthless paper in exchange for their exports to the Soviet Union. "The transfer ruble is everything but transferable," claims one Hungarian economist.

In January, the Soviet Union proposed phasing out the transfer ruble in favor of real market prices, but the proposal has been viewed with skepticism by many Eastern Europeans who believe that the methodology proposed will benefit the USSR rather than her East European Comecon partners.

Throughout the turmoil, Hungary and Poland have been the trend-setters of European-style perestroika. Privatization is a stated goal of Hungary's new Socialist government; the country legally opened its doors to international joint ventures in January 1989. Poland had already liberalized its rules governing private enterprise effective the preceding month. Then in the final days of 1989, Poland's legislature passed sweeping reforms introducing market forces into the economy. Effective January 1, many state-owned companies were privatized and price controls lifted; additionally, bankruptcy and layoffs are now technically possible.

Similar legislative reform is expected throughout the Eastern bloc region and soon: At press time, changes in currency regulations and investments laws are anticipated, particularly in Hungary and Czechoslovakia.

A NEW ECONOMIC PLAN

What Eastern Europe needs to cure its economic woes is hard currency - dollars and Deutsche marks. In response, both Washington and Bonn are promoting - and backing - Soviet-bloc investment. Hungary and Poland already have been granted Most-Favored-Nation tariff treatment by the United States. And as more and more Communist governments toppled during late 1989, support for normalization of trade to other Eastern bloc countries - including the Soviet Union - became increasingly audible in Washington.

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