Smaller Capital Need Seen for E. Europe

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SOME Western political leaders have been putting pressure on the international financial community to boost investment capital flows to Eastern Europe. The money would be used to modernize the region and spur the economic liberalization underway there. Case in point: Last week West German Economics Minister Helmut Haussmann criticized his nation's industrial sector for its ``declining readiness'' to make ``courageous, job-creating investment decisions in East Germany.'' According to the Financial Times, Haussmann condemned ``the small-minded doubters, the subsidy seekers, and the bookkeepers'' who, as he sees it, have come to control the debate about investing in Eastern Europe.

Yet some analysts maintain that Eastern Europe may not need all that much new investment capital during the next decade - at least, not so much as to divert significant capital flows from elsewhere, including the United States and Western Europe.

George J. Iwanicki, an analyst for Kidder, Peabody & Company, calculates that Eastern Europe will need relatively modest external financing ``of less than $50 billion per year for each of the next six years.'' That amount, he says, is ``manageable'' for the West. In fact, when the yearly numbers are added, he concludes that total net external financing for the period 1990 through 1995, based upon a 10 percent growth rate, will come to $212 billion.

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That's not small change. But it is still hundreds of billions of dollars less than some other analysts have projected, and far less foreign capital than was used by the US during the late 1980s. During the past six years, according to Iwanicki, the US imported $706 billion in capital.

Even if the most ``outlandish'' scenario were adopted - such as assuming a 25 percent growth rate - then that would translate into a capital flow requirement for Eastern Europe of about $107 billion in 1994. But that $107 billion would still be below the $151 billion peak inflow for the US in 1987.

According to Iwanicki, even if East European economies post rapid growth and import capital, their external financing capacity will be constrained by the smallness of their economies.

Currently, the East bloc is in a recession, says Milan Brahmbhatt, an economist with DRI-McGraw Hill, an economic consulting firm based in Lexington, Mass. DRI expects the downturn to last through 1991.

Mr. Brahmbhatt assumes that there will be a decline in output in the region of about 5 percent this year and next. ``Out of that could come some strong growth,'' which could be 10 percent or more.

But just because Eastern European nations talk about the need for capital doesn't mean that they'll get it, Brahmbhatt says. ``Commercial banks are feeling very cautious these days,'' reflecting their having been burned in Latin America. Moreover, the total world economic environment will have to be in good condition for loans to be approved, Brahmbhatt believes.

East Germany would probably go to the head of the class for capital flows, Brahmbhatt reckons, followed by Czechoslovakia, Poland, and Hungary. Bulgaria and Romania would come in last, with the Soviet Union, which Brahmbhatt calls the ``most uncertain of all'' in economic and political terms, in a class by itself.

Does the possibly limited need for capital inflows to Eastern Europe mean less pressure on global interest rates? Not necessarily. Brahmbhatt notes that global rates have already gone up somewhat, in anticipation of expected flows to that area.

But no matter what happens in Eastern Europe, Brahmbhatt sees two other factors affecting capital flows:

Foremost is the new global consensus on protecting the environment. That, he says, will require outlays of billions of dollars. Second, the push for economic and political reform is occurring not just in Eastern Europe, but in Asia, Africa, and Latin America. Thus, many countries will require new capital inflows.

All of that, he says, will put upward pressure on global interest rates during the period ahead.

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