Eastern Europe's Economic Boom The Tiny Tigers

Accepted into the European Union last year, the former eastern bloc countries are the latest to capitalize on globalization. Followed by Slovenia and Slovakia, the Baltic States have set a cracking pace with their radical economic reforms. Their fervor is alarming its old-school neighbors in the West.
Von Marion Kraske und Jan Puhl

The day master joiner Rudi Finzgar returned to work, the future of the world was at stake. War was raging and the Nazis had seized nearly all of southeastern Europe. Finzgar, a ski jumper who hated the fascists, wasn’t going to stand idly by.

So he did what he did best: Tirelessly, he set about sawing and sanding in his small carpenter’s shop in Begunje – a village some 30 miles north of the Slovenian city of Ljubljana. But rather than tables or coffins, he made the skis he hoped would give the last remaining partisans under Marshal Tito a decisive edge in their battle against the despised Germans.

Today, more than 60 years after the end of the war, Begunje is still home to sawing and sanding. Its new spacious factories were erected back when Yugoslavia still existed, and the Elan company was still government-run. Times have changed. Now the company is packed with the latest production technology. It turns out 2,500 pairs of skis a day. The carpenter’s shop has metamorphosed into a major corporation, even if the Slovenian government still has a finger in the pie. Germany has long ceased to be the enemy; it has become a customer. One of many. Today, Elan has a bigger prize in mind.

The Slovenian ski-manufacturing industry has already worked its way up to eighth place in the sector’s global rankings. But few people in Begunje will be leaning back: “In the next five years, we want to make the top 5,” says Martin Lehner, a native of Germany’s Allgäu region and the company’s sales and marketing director. Annual sales have been rising by a steady 10 percent – despite a declining, highly competitive market, the German says proudly.

Other companies from the small Alpine republic are making a name for themselves in international markets as well. Revoz, a Renault spin-off, produces the Clio. Lek, a Sandoz subsidiary, sells pharmaceutical products. The exhaust-system manufacturer Akrapovic supplies components for high-end racing motorcycles. And Gorenje, which was making electrical goods for western markets as far back as Tito’s days, has shaken up the kitchenequipment industry and now even ships to China.

Reform obsession

The Slovenian economy is booming “thanks to our successful export industry,” says Irena Rostan from the Chamber of Commerce in Ljubljana. This year the EU newcomer is targeting 3.7 percent growth – a rate exceeding that of many long-time members, although most of these still play in a different economic league. But for how much longer?

Like Slovenia, other fresh arrivals in the European Union are producing stellar figures – thanks to their burning ambition, demand born of dispossession, a near-obsession with reforms, and a fearless approach to competition. Eighteen months after the eight countries were officially accepted into the European family, a region is clearly emerging between Tallinn in the north and Ljubljana in the south that is focusing its sights on the global market. The prospect has sent a shudder through the powerful yet lethargic industrial nations of Old Europe.

In Brussels, leaders are therefore eying the lengthening shadows cast by the brilliant newcomers: Service regulations? Need reworking fast. Social dumping? More controls required. Turkey, Bulgaria and Romania as the next new members? Agreed, only to be hotly contested again. And how long will net contributors like the German government continue to subsidize the new EU competitors from the East? While Franz Müntefering, until recently SPD chairman, garners public approval for condemning the evil power of international capital, the EU newcomers are putting it to profitable use.

German politicians know they are caught in a pincer movement: between new regulations coming from Brussels and low-wage workers coming from the East. A sense of unease has gripped Germany, producing more questions than answers – even among experts. True, the waves of cleaners and seasonal workers were welcomed with open arms. But will they soon be followed by a tide of migrants prepared to work more for less? Will the bloodletting continue, driving more German companies to the supposedly cheap-production countries?

Growth industry: corruption

Skyrocketing growth rates have set the tone of public debate in the new EU member states. They reflect a success painfully wrought from reforms engulfing everything from the job market to the healthcare system.

The winners are young, well-educated people. The losers are middle-aged employees, retirees, the rural population, fringe ethnic groups – and even ethics. One of the top growth areas in the new EU countries is corruption.

While a big, old, industrial nation like Germany is bogged down by what leading economic institutes call “fundamentally weak growth” – and is predicted to grind out a best-case gain of under 1 percent this year – the countries to the east have been posting growth ranging from 4 to 7 percent for years. Shades of West Germany’s economic miracle in the 1950s and 1960s.

While nearly 5 million Germans are out of work and not a day passes without some company, politician or union griping about the corporate exodus to Eastern Europe, new jobs are being created daily in what were only recently decrepit planned economies.

And while German President Horst Köhler appeals to his people to finally “put their noses to the grindstone” and introduce much-needed reforms, countries like Estonia, Latvia and Lithuania have not only revamped their governments, but also transformed their ailing economies into ultra-flexible powerhouses.

Closing the wage gap with the West

In no other place in Europe are entrepreneurs and consumers as optimistic as in Poland. Last year the country boosted its export volume by nearly 12 percent. The World Bank recently upgraded the “emerging” Czech Republic into a “developed” nation. Former Deputy Prime Minister Martin Jahn forecasts: “There will be fewer and fewer investments where low-cost labor plays a central role.” The subtext: We can be both low-wage and high-tech.

Even remote Lithuania, the poorest country in the EU along with Latvia, is planning its offensive: “The initial upswing was driven by booming exports; most recently, domestic demand is booming,” the World Bank said of the Baltic republic.

Hungary and Slovenia have been ranked the top economies of all the countries in transition by the rating agency Dun & Bradstreet. Germany is Hungary’s biggest foreign investor with about €10 billion. In addition to Audi and Deutsche Telekom, the country has attracted scores of automotive suppliers. Slovenia has sewn up the Balkans as an investment destination: Slovenian companies are thriving in the countries that emerged when multi- ethnic Yugoslavia fell apart. They speak the language; they understand the mentality.

Part II:From black hole to auto-making paradise 

Today, low wages are but one of many selling points in these countries. They have shed layers of bureaucracy, simplified their tax systems, invested in education, and overhauled their infrastructure. A bottomless resolve to make up for all the deprivations of the socialist regime is fueling these changes. The economic creed of eastern Europe is defined by a mood of new departure. “In the next 10 years, the gap between per capita incomes in the old and new EU member states will progressively close,” forecasts Andreas Polkowski of the Hamburg Institute of International Economics (HWWA). “Some regions may even overtake us.”

In Eastern Europe, the transition from planned economy to open market ran much more smoothly than in former East Germany. Thanks to the support of their big brother in the West, the new federal Germans had many things fall into their laps – things that their neighbors had to work hard to achieve. Ultimately, this did them a disservice.

The speedy introduction of the deutschmark in the former G.D.R. enabled its citizens to taste the good life of the West, but brought ruin to East Germany’s barely competitive companies. Their products were too expensive in a currency with real buying power. Wages rose with similarly destructive consequences, for they quickly outpaced productivity and made eastern German labor too costly. The billions that flowed eastward over the old border perversely made matters worse. Too much was consumed and too little invested.

As a result, eastern Germany and Eastern Europe have moved in opposite directions. After the giddy intoxication of reunification in the early 1990s, the East Germans woke up with a prolonged hangover. In contrast, the former eastern bloc countries faced the hardships right at the start – but are now reaping the rewards.

The pace is breathtaking. Until the end of the 1990s, Slovakia was considered the “black hole” of Eastern Europe, the problem child holding up negotiations for EU membership. Today foreign financiers value the little country as an investment jewel. Last year alone, Sario – the government agency for foreign investment – recorded 47 projects worth €1.7 billion, and 35,000 new jobs are being created. With plenty more on the way.

In the first half of 2005, some 40 further projects worth €2 billion were under negotiation, the agency reported. “The talks have now entered their final phase,” says a gleeful Roman Kuruc, general director of Sario.

Ján Slota, the mayor of Zilina (population: 87,000) in northern Slovakia, is another happy soul. The South Korean automaker Kia is investing €700 million in its first European production site there. Slota’s party headquarters in Bratislava (he doubles as chairman of the ultra-rightwing Slovakian National Party) also serves as the control center for the economic boom. A wooden eagle – the emblem of his party – hangs on the wall, its martial pose recalling Germany’s imperial eagle. Alongside it is a black-and-white portrait of Andrej Hlinka, a Catholic priest and fanatical Slovakian nationalist in the years between the wars.

Slovakia on the march

Slota is taking a double-pronged approach. Politically, the dapper Slovak vies for votes on a platform of retro-nationalism. At the same time, the powerful mover and shaker is carving out the future of his region. He declared the Kia investment a matter of overriding national priority. When several landowners were reluctant to part with their holdings, Slota put his foot down. Anyone who stood in the way of the project or made exorbitant demands for money would be “simply and swiftly” dispossessed.

With last year’s Kia coup, Slovakia snapped up one of the choice investments in Europe, leaving Hungary and Poland, among others, out in the cold. The plant is projected to bring 10,000 new jobs to Zilina.

Kia is not the first automaker to discover the remote eastern European country. VW builds its luxury SUV, the Touareg, in Bratislava. Peugeot Citroën plans to set up shop in nearby Trnava. When the first Kia rolls off the assembly line at the end of 2006, Slovakia will be one of the world’s key automaking centers.

Slovakia’s meteoric rise began as late as 1998 with the fall of autocratic leader Vladimír Meciar. Since then, launching a company just takes a matter of days, the national pension system is being supplemented by capital funding, and unemployment benefits are accorded only to those who actively look for work and are willing to do part-time community service – until a real job materializes. But the heart of Slovakia’s reforms is a flat tax rate.

Since January 1, 2004, a uniform rate of 19 percent has applied to income, corporate and value-added taxes. The driving force behind the reforms is Deputy Prime Minister and Treasury Secretary Ivan Miklos, who considers himself a trailblazer on the European reform stage.

When he talks about the major economies in the western half of the continent, sympathy and arrogance mingle. Of course, the 45-year-old says, large countries can institute reforms, too. But they only opt to do so “when they’re at the point of no return.”

The Latvians are equally self-confident. Their capital of Riga has seen a major makeover in the past few years. The once cold and remote Soviet satellite has become a modern city with Scandinavian chic. The buildings in its old quarters have been renovated; luxury limousines squeeze through their narrow lanes. Porsche can’t even keep up with orders for Cayennes and 911s. At least that’s the word at trendy cafes such as “Sarkans.”

"We want to return to Europe"

The clientele here appreciate quality, and they can afford it. Private consumption has been the fuel in the tank of the Latvian economy for years. Last year’s statistics cited growth of 8.5 percent. In the old trading center of Riga, it is not the jobs that are in short supply. It is the workers.

After languishing for years on the outskirts of the stagnating Soviet empire, Latvia fulfilled a long-cherished dream when it joined the European Union in 2004. For half a century, the Latvians had felt like aliens in the Soviet system. No wonder: Stalin did not capture the small country on the Baltic until the end of World War II, and then used brutal force to suppress resistance. Finally freed of the communist yoke, the country yearns all the more for independence, prosperity and a future.

“We want to return to Europe,” say well-dressed young men in a sushi bar near the cathedral. “But more than anything else, we want to live like you.”

Baiba Rubess came to Riga 12 years ago: “I was motivated by pure idealism. My dream was to help build something new here. And it has come true.” During the war her parents moved to North America, like many other Latvians. She was born in Toronto, graduated from high school in the German town of Bad Vilbel, and now heads the Latvian branch of Statoil, a Norwegian oil company.

“Latvia has become a real tiger,” she says. As a top executive and board member at the Foreign Investors Council, she praises the strengths of her new home: a skilled workforce, the Baltic coast location with its strategic transport links, low tax rates for employees and companies alike, and minimal social security contributions.

The state and its bureaucrats have beaten a hasty retreat. The Baltic countries, Estonia first and foremost, are viewed around the world as extremely liberal, open-market economies. Baiba Rubess can only shake her head at the chronic economic debates being waged in Germany: “Prosperity puts people to sleep.”

"Not much happens without kickbacks"

For HWWA analyst Andreas Polkowski, the eastern European countries are “miniature economic laboratories.” The popular theories of the neo-liberal economist Milton Friedman and others have been implemented “verbatim,” he says. But is the courage to tackle radical reforms merely a matter of a country’s size? Eastern Europe’s governments, right and left, basically had no choice but to take drastic measures. Deficits in the millions had been ignored for decades, and the socialist legacy left entire companies steeped in debilitating debt.

State-run companies maintained cost intensive operations and produced merchandise that had little to do with real needs. These products hardly stood a chance on the world market, because the quality was so poor. After the fall of the Iron Curtain, the eastern European states were bankrupt. There was nothing left to pass around.

“Nobody owned anything worth preserving; we had nothing to lose,” says Baiba Rubess. There were virtually no expectations placed on the state. In the Baltic mindset, government is less a sheltering source of support than an ineffectual instrument of suppression. The powers of the open market, in contrast, beckoned back then with sunny, Western-style prosperity and progress – notwithstanding their various drawbacks.

Roberts Putnis, head of the Latvian branch of Transparency International, an NGO committed to fighting corruption, has no time for the country’s economic celebrations. The boom, in his opinion, has nurtured a seed planted back in the socialist era: the creeping vine of corruption, now in full bloom and penetrating every part of life.

Part III: Eastern Europe goes high-tech 

“Not much happens in business without kickbacks,” Putnis says. Of course there are laws, but no one seriously monitors compliance. “Brussels has set standards; without those, things would have been even worse.” Resigned, the 28-year-old says, “I’ve no idea how we can break the back of the corruption here.” Another set of losers in this real-life game of Monopoly are retirees, the poorest segment of Latvian society. Even before the Iron Curtain fell, they lived in abject poverty; hunger was a fact of life. Free health care existed on paper, but in reality people had to bribe doctors to receive treatment – or pay exorbitant prices for medication on the black market.
This explains why no public outcry accompanied Latvia’s 100 percent increase in the charge for house calls – from two to four lats (about €6). The largely uncompromising open-market economic course steered by eastern European countries is not in question for most of the population. Unions that might buffer some of the harsher winds of capitalism are practically non-existent. “They reek of socialism,” many Latvians think. Under the former system, almost all labor organizations were synchronized weapons of propaganda to be wielded at will by their governments.

Poland is the exception to this rule. There it was “Solidarity” that helped overthrow the workers’ and peasants’ state. But now, 15 years later, its influence has virtually evaporated.

The lesson learned in recent years? Initiative is the key to progress. Inventiveness and courage have enabled many entrepreneurs to make their fortunes in the new EU countries. People like Tiina Mois, who is considered Estonia’s wealthiest woman.

“None of us really knew what we were doing. We simply started up,” she remembers. She and a few friends rented a couple of rooms in downtown Tallinn in 1991. She gave up her secure job as head bookkeeper at the Chamber of Industry and Commerce. “We dreamed of a customer- friendly bank, without brusque, Soviet-style manners and with longer opening hours than 11 a.m. to 1 p.m.” Thousands of Estonians deposited their savings in the newly established Hansabank back then: in rubles, the currency of the much despised big brother in Moscow. Estonia finally gained its independence in 1992. “We profited considerably from the fact that we were perceived as Estonians rather than Russians.” From the onset, the infant Hansabank harnessed the latest technology. “We didn’t want paper; we started with computers right off the bat.” Today the Hansabank Group employs 6,000 people in the Baltic region. After much wavering, Mois recently gave in and sold her stake to Swedish investors.

The bank’s success reflects the Estonian economic miracle en miniature. With irrepressible creativity, the nation simply hurdled the phase of industrial capitalism, catapulting itself straight into the IT era.

Paying taxes by laptop

The state embraced the new age as well; the ministers hold paperless meetings on laptops. Citizens can follow the workings of parliament and government agencies live over the Internet. To bring the citizenry up to speed, PC training was provided to hundreds of thousands of Estonians.

Today more than 60 percent of the population files their tax returns by e-mail. Even the most remote places have public Internet access. And the leaders in Tallinn are already debating whether to allow citizens to vote by computer.

Here as well, the young are writing the success stories. The political and economic upheavals have opened up tremendous career opportunities.

Take the headquarters of the J&T financial group located just outside Bratislava. Only the heavy metal revolving doors – equipped with the latest security technology – hint at the fact that power and money reside here. Martin Fedor is one of the group’s nine partners. Eleven years ago, Fedor and several friends, all more or less of the starving-student variety, began buying stocks on the new exchange in Bratislava – with the aim of selling them off at a profit.

After the group chalked up its initial successes in this uncharted territory, the project gradually expanded. Fedor and his friends were eventually dealing with sizable stock volumes. “With the sale of our stakes in the Slovakian energy group Nafta to Germany’s RWE, we realized profits of 500 million korunas [about €13 million] in the space of five months. That was a landmark in our careers,” Fedor recalls. The erstwhile students evolved into one of the most potent financial groups in the country.

“We’re fast, innovative and flexible,” Fedor says, enumerating his firm’s strengths. Today J&T employs 300 people. The group even owns its own “J&T Bank” headquartered in Prague. The clique of students, most of whom are now in their mid-30s, has become a powerful club of euro millionaires.

Migration from the East never materialized

But by no means are they ready to retire. Plans are already under way for a new money-making scheme: the construction of a winter sports facility in the High Tatra Mountains, including a five-star hotel and golf course. It is an ambitious project worth about €100 million. “We’re always on the lookout for opportunities,” says Fedor laconically of his firm’s secret to success. These careers are beyond the wildest dreams of Fedor’s contemporaries in the existing EU states. And they are one reason why the mass migration to Old Europe – a source of alarm in the West – has largely failed to materialize.

In the horror scenarios painted prior to accession, invading hordes of Poles, Czechs and Hungarians – hundreds of thousands who had been waiting with their bags packed – would descend on the West on May 1, 2004. Happy to work for a pittance, they would pose a mortal threat to the livelihoods of complacent West Europeans. With a few exceptions, such as the meat industry, the menace from the East never arrived.

Even Poland has bounced back from its bout of anemia. Experts expect its economy to grow by 4.2 percent this year. Warsaw’s “Palace of Culture,” a relic of the bygone communist era, is slowly being eclipsed by modern skyscrapers. Business centers, banks and corporate headquarters block the view of Stalin’s tower. Poland may be politically chaotic, but it is stable. With a population of more than 38 million, the largest new EU member is both an affordable production site and a market full of hungry consumers from the standpoint of global predators.

Even the country’s hundreds of thousands of farmers are better off since the subsidies began flowing in from Brussels. The West has begun to develop an appetite for Polish butter, beets, pork and poultry. But this economic earthquake is inevitably causing some social aftershocks.

“Poland A” is a new colloquial expression describing the people who patronize the downtown cafés and restaurants. They speak German and English and have computers at home. At the Frédéric Chopin Airport, they line up at the business-class counter, shoulder to shoulder with executives from the West.

Poland’s industrial production grew more than 11 percent in 2004. Listed corporations such as PKO Bank or PKN Orlen – an oil company active in Germany – are making record profits.

Mid-sized German companies recognized the country’s huge potential long before it entered the EU, and have set up more than 6,000 joint ventures with Polish partners. The self-confidence of the up-and-coming Eastern European generation has grown along with their countries’ economies.

Ponderous dinasaur Germany

In this generation’s minds, just a few years ago Germany stood for quality, thoroughness and entrepreneurial success. Today many regard the country as a ponderous dinosaur that is toiling to keep pace with the times.

“We did away with communism, privatized the economy, and now have 6 percent growth. What are we supposed learn from you?” asks Andrzej Kaniewski, a man who is well acquainted with Germany. His skepticism is shared by the Slovakian financial juggler Martin Fedor. Today, “we’re world class,” he says, even if not everyone in the East is profiting from the boom.

“Poland B” begins just a few kilometers beyond the sparkling new skyscrapers: decaying villages with gray and peeling facades, many without paved streets. At noon men with beer bottles in their hands are already standing around in the sun. The Poles have an expression for alcoholism: “Standing outside the store,” they call it.

The Lublin region is among the hardest hit. The official unemployment rate borders on 15 percent. But in villages like Rudnik near Zamosc, the birthplace of Rosa Luxemburg, nearly half the population is out of work. Rudnik is considered the poorest community in the entire country. But there are hundreds of Rudniks all across Poland.

The other members of the former eastern bloc also have their poorhouses, where time seems to have stood still. While cities like Tallinn, Riga and Vilnius are assuming a chic, Scandinavian flair, many rural areas are sinking into destitution. Old women often linger outside the bright boutiques, shyly offering bunches of parsley or small icons to tourists in hopes of supplementing their meager pensions.

While western Slovakia revels in capitalism, hundreds of thousands can scarcely eke out a living in the country’s eastern regions. They live far from the prestigious, high-priced industrial developments, under wretched conditions. Their homes are little more than sheds; electricity and running water are rare luxuries.

Some are left far, far behind

The Slovaks contemptuously dismiss them as “tin villages.” It is primarily the Roma who are missing out – the economic boom is passing them by like a distant thunderstorm. Officially, some 100,000 are affected. But experts estimate the real figure at closer to 500,000.

Ninety percent of the Roma are unemployed and live off welfare: social dynamite which the government of Prime Minister Mikulás Dzurinda has primed with his neo-liberal reforms. The cabinet’s decision last year to halve the welfare payment (at 2,900 korunas – some €70 – hardly lavish) sparked an angry explosion. In Kosice, Presov and Spisská Nova Ves, Roma looted shopping centers and small businesses. The government responded with police and troops, the first time the army has intervened domestically since 1993.

Local officials have begun giving public service jobs to the Roma to keep them off the streets. But the danger still remains. The gulf between rich and poor has widened dramatically in the past few years.

Luxury cars in the cities and tin huts in the country: In Poland, the glaring social inequality is above all under assault from Catholic, anti-EU nationalists who canvas for votes with inflammatory speeches.

The huge population living in rural areas and decaying towns forms the potential pool of those willing to go west and work for what, in Germany, are condemned as dumping wages. Experts estimate that several hundred thousand migrant workers are now seeking their fortunes abroad.

Most do seasonal work, harvesting asparagus and grapes. In the 1980s and early 1990s, Polish professors and doctors got down on their knees to harvest Germany’s strawberry crop. Today this work is done mainly by unskilled laborers with no hope of finding employment back home. At the same time, flourishing Poland is attracting more and more migrant workers from the Ukraine and Belarus.

The illegal workforce is estimated to be 300,000 strong. It does the jobs Germans also happily delegate to immigrants working for cash in the shadow economy – cleaning, gardening, and babysitting.

The Belarusians are to the Poles what the Poles are to the Germans: cheap labor. The caravan of globalization is winding its way farther and farther east.

A new whirl on the global carousel

The Hungarian city of Székesfehérvár has had a bitter encounter with this eastward crusade. After the Iron Curtain fell, the storied imperial city experienced a fairy-tale revival. Hundreds of major western companies relocated there within a short space of time. The Financial Times even ranked the city and its environs – with a combined population of only 108,000 – among the world’s 10 most dynamic economic regions.

As salaries in Székesfehérvár continued to climb, its competitive edge dulled. The mass exodus was sparked in 2002 when IBM, Hungary’s second largest employer at the time, laid off 3,700 employees and moved to China. Other high-tech companies followed. A wave of plant closings washed over the country. Soon people were talking about the “pullout of the big players” – but the small players were not immune. Textile mills and leatherworking companies are following the trend and relocating as well.

“We have watched low-wage production migrate – primarily to Romania, but to the Ukraine too,” complained Economics Minister János Kóka recently. In Székesfehérvár, the unemployment rate rose dramatically. The fat years seemed over.

But now the pace is gradually picking up again, and a new whirl on the global carousel is about to begin. “Hungary is in the midst of a structural transition,” says Wolfram Klein of the German-Hungarian Chamber of Commerce in Budapest. New investors are knocking on the door, offering “higher-quality employment.”

Hungary is gearing up and hoping to snare new jobs in such growth sectors as IT, logistics, environmental technology and bioengineering. The merry-go-round is turning once again.

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