Emerging Markets: Central and Eastern Europe

By Wieners, Klaus | Business Economics, July 1996 | Go to article overview

Emerging Markets: Central and Eastern Europe


Wieners, Klaus, Business Economics


Today, Central and Eastern Europe, i.e., the previous sphere of influence of the Soviet Union, is made up of a very heterogeneous group of countries politically and economically. While Russia is facing a presidential election (June 16) that is of crucial importance for the country's political and economic future, the four countries of the so-called Visegrad group, i.e., Poland, Hungary, the Czech Republic and Slovakia, now have a clear aim: They want to become members of the European Union (EU) as soon as possible and are even discussing joining NATO.

Table 1 provides a very good synopsis of the state of reform policy in the countries of Central and Eastern Europe (CEEC). The rankings range from 1 ("little progress") to 4* ("comparable with the standard of developed western industrial countries"). This table provides important information on the state of privatization, markets and trends and on the effectiveness of legal rules on investment for all those looking for business opportunities for their companies in the CEEC.

The four Visegrad-group states post the best figures in nearly all ten criteria. For this reason, it comes as no surprise that the overwhelming majority of foreign direct investment (FDI) is directed at these four countries (see Table 2). In 1995 these four countries attracted US$9 billion or nearly 70 percent of all FDI in Eastern Europe, including the former Soviet Union. The per-capita concentration of FDI is even greater: in 1995, FDI of US$7 per capita was directed at Russia, while it was as much as US$200 in Hungary.

FDI therefore plays a very different role in the development and growth process in Central and Eastern Europe. While FDI is a very essential factor in economic development in Hungary, the Czech Republic and Poland, it has been of only marginal significance for Russia so far. The financing aspect of FDI plays, in general, far less of a role than its positive side effects, especially as far as the transfer of know-how, marketing and technological progress is concerned.

CENTRAL AND EASTERN EUROPE SINCE 1989

The following synopsis is intended to illustrate how the countries in Central and Eastern Europe have developed since the upheavals of 1989. In 1995, only Poland regained its 1989 GNP level. In contrast, the Economics Intelligence Unit expects that by the year 2000 Russia will only have reached just under 80 percent of its 1989 GNP level. [ILLUSTRATION FOR FIGURE 1 OMITTED]

However, it is difficult to compare the "quality" of GNP in 1989 with, say, 1995 or 2000. Before the "Wende," much was produced that was superfluous, while consumer goods in particular were very scarce. When comparing per-capita GNP among the countries of Central and Eastern Europe, exchange rates in some cases greatly distort the real economic performance of individual economies. For example, in Estonia, per capita GNP at current exchange rates in 1993 was US$1,079, while at PPP (purchasing power parity) it [TABULAR DATA FOR TABLE 1 OMITTED] was US$6,860 (source: World Bank Atlas 1995). In Hungary, the corresponding figures were US$3,734 and US$6,260, and in Russia US$1,247 versus US$5,050.

Just how meaningful these figures are is hard to assess, but the PPP figure for Russia helps to understand why the political situation there still appears to be so stable and why the majority of the population continues to support economic reforms. With a per capita PPP-GNP of US$5,050 in 1993, the real standard of living in Russia is apparently far higher than the normal comparative data would lead one to expect, which are determined on the basis of current exchange rates. The comparison with China is also interesting. According to the figures of the World Bank, 1993 per capita PPP-GNP in China was only US$2,330, less than half of the level in Russia. By contrast, per capita PPP-GNP in 1993 in the group of high income countries was on average US$18,682.

EXTERNAL POSITION OF CENTRAL AND EASTERN EUROPE

Twice a year, the Institutional Investor magazine publishes a synopsis of the ratings of most countries by the leading international banks. …

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