A Stabilized Central Europe Beckons FDI

By Roett, Riodan | Chief Executive (U.S.), July/August 1996 | Go to article overview

A Stabilized Central Europe Beckons FDI


Roett, Riodan, Chief Executive (U.S.)


Recent developments in Central Europe indicate that a critical component for the investor-political confidencehas increased. Contrary to a rather gloomy outlook in 1995, Hungary, Poland, and the Czech Republic are poised for continued reform and further consolidation of the post-Communist political system. Certainly some investors are skeptical about former Communist officials redesigning themselves as social democrats, but that process appears to be under way, and will no doubt lower the political risk for foreign direct investment in Central and Eastern Europe.

The resignation of Hungary's finance minister, Lajos Bokros, in late February raised questions about the future of the government's commitment to continued economic reform. Prime Minister Gyula Horn, a former Communist official, quickly moved to reassure the markets and named Peter Medgyessy, a former Communist-era deputy prime minister, as the new finance minister. Medgyessy, who has a track record as a reformer but maintains ties with leading members of the governing Socialist party, has promised to continue the Bokros reforms. While less radical than Bokros, the new minister's background in public administration and finance and his negotiating skills may facilitate the next stage of reform and make structural reforms more palatable to the Socialist cabinet. Medgyessy served as finance minister between 1987 and 1988, and turned down the post in 1995 after the resignation of Bokros' predecessor, Laszlo Bekesi. That Horn has named three consecutive finance ministers with strong reformist credentials-with the backing of the prime minister and his Socialist-led coalition-is significant for foreign investors. What's more, a $387 million standby loan from the International Monetary Fund was granted last March as a result of Medgyessy's appointment. The approval by the IMF of the government's successful implementation of its strict austerity program is also an explicit acknowledgment of the strength of the current economic team. The IMF loan and recognition of the government's economic management capability are important since they are prerequisites for the country's OECD membership.

Poland's political stability, meanwhile, appeared volatile in late January when Prime Minister Jozef Oleksy resigned suddenly to contest allegations of spying for the KGB. His resignation was preceded by the defeat of President Lech Walesa in late 1995 by Aleksander Kwasniewski, the candidate of the Democratic Left Alliance (SLD), the former Communist party. But the governing coalition, the SLD, and the Polish Peasants Party (PSL) quickly agreed on an SLD candidate to replace Oleksy, Wlodzimierz Cimoszewicz. …

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A Stabilized Central Europe Beckons FDI
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