Hungarians, Czechs, Poles Race to Join EU
The political attention recently given to the entry of Poland, the Czech Republic and Hungary into NATO has obscured the important - but directly related - phenomenon of Central Europe's growing integration into the Western economy. Membership in major Western organizations such as the OECD, European Union (EU), or NATO is based not only on political criteria such as democracy or military compatibility, but also on economic compatibility based on market standards. In this respect, Central Europe's progress in the short span of seven years stands as a remarkable achievement.Skip to next paragraph
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Though its transition is far from complete and more adjustments are required, Central Europe's adaptation to the Western economic model is already far advanced, opening the door to trade and investment opportunities of a vastly different order from the heady but uncertain days of the early 1990s.
To see the real dynamic of Central Europe you have to look beneath the surface. Prague, the capital of the Czech Republic, presents a glittering face of European culture and a strikingly Western image. Renovation of the city's historic core occurred rapidly, and now draws nearly 100 million tourists to the country each year. Tourism has become a mainstay of the Czech economy. With growth last year of 4.4 percent, a private sector accounting for 70 percent of gross domestic product (GDP), a retail/consumer boom, and the only reform government in the region still in place after the transition from Communism in 1989, the Czech Republic is understandably a favorite of Western journalists, businesspeople, and visitors.
Czech banks' blank check
Underlying the sophisticated veneer, however, deep structural problems remain to be tackled. When Czech industry was privatized, ownership vouchers were aggregated in a number of large investment funds, many of which were dominated by banks. The banks, which have large loans outstanding to these former state enterprises, have been slow to force corporate restructuring. So, many industries continue to maintain bloated payrolls and fall short of international standards of efficiency and productivity. As a result, many Czech products are uncompetitive, which largely explains the country's sizable balance of trade/current account deficit (7 percent of GDP).
This lack of strong corporate governance also explains both the Czech Republic's remarkably low unemployment rate of 3.3 percent (almost 0 percent in Prague), and the economic retrenchment the country now faces. It is increasingly clear that the pain of economic transition, which at one time the Czech Republic appeared to have avoided, was only deferred.
Last spring Prime Minister Vaclav Klaus enacted economic measures designed to address these issues, including budget cuts, accelerated privatization, restraints on public sector pay increases, import curbs, and creation of a securities commission to regulate capital markets. As a result, Czech growth will likely slow to 2 to 3 percent, with uncertain social implications and reduced import levels.
Hungary takes the lead
Hungary represents the opposite end of the spectrum. Open to market forces and Western influence for decades, Hungary offers perhaps the most comfortable setting for Western business. Its banking, regulatory, and management infrastructure is the most sophisticated in the region. Hungary is Central and Eastern Europe's leader in attracting foreign capital, with almost double the level invested in any other Central Europe economy and over half of all foreign direct investment in the region.
More than 75 percent of Hungary's GDP is now generated by the private sector. Privatization occurred through market-based evaluation and direct sale of state enterprises to investors, many of them foreign (in contrast to Poland and the Czech Republic, where ownership coupons were distributed to citizens).
This strategy forced Hungarian industry, under pressure by new corporate managers, into extensive restructuring. That process, now largely complete, was followed by austerity measures in 1994 that produced flat economic growth. As a result, Hungary hasn't attracted media attention recently like the Czechs and Poles. Having paid the price of austerity and restructuring, though, Hungary is poised for resumed economic growth.