worth.com
The Eastern Block
by Jim Rogers
Regular readers of this column should know by now that I like to
invest in countries almost as if they were stocks. This can be
done in a number of ways, of course, such as purchasing a
currency, investing in a mutual fund that targets a specific nation,
or acquiring bonds issued by a foreign government. Those are
just a few examples. The larger point I've tried to make is that it
actually can be easier (and more interesting) to forecast the
direction of a nation than that of a corporation. If a country has
the proper resources and is doing the right things economically
and politically, investors can be reasonably sure that its fortunes
will improve over time. It also helps that the quality of public
discourse about nations (in the press and elsewhere) is generally
superior to what's out there about individual companies.
It's not always superior, though. Recently, for instance, I've been
hearing a lot of talk about Eastern Europe as a potential hot spot
for American investors. Many people now appear convinced
that the old Warsaw Pact countries, steeped as they are in the
grand tradition of European civilization, will show rapid progress
because they've repudiated Communism and embraced
capitalism. On the surface at least--and from our vantage point
across the Atlantic Ocean--this is a pretty compelling story, not
to mention one that many Americans, given their ancestral
heritage, would certainly love to believe. I don't believe it. For all
of my enthusiasm about the spread of free markets around the
globe, I'm pessimistic about Eastern Europe. As a potential
spawning ground for emerging markets, I don't think it's in the
class of Africa, South America, or even Asia. Investors will do
far better putting their money to work in places like Uganda,
Peru, or China. (Or, for that matter, Ireland. See "Greener
Pastures," in Worth's September 1998 issue).
Let's look at the largest of the Eastern European countries, a
nation of about 40 million people in an area the size of New
Mexico. It's Poland. Poland also happens to be one of the
healthiest countries in the region from an economic and political
standpoint. On the plus side, its government has been a
parliamentary democracy since 1989. The nation's literacy rate,
at 99 percent, is one of the highest in the world. Following the
collapse of the Berlin Wall, the Polish economy underwent a
profound transformation as the government introduced a
free-market system to replace a 40-year-old centrally planned
Communist economy. This shock therapy unshackled prices and
privatized most small enterprises, bringing an end to the chronic
shortages of consumer goods. In 1996, Poland was admitted to
the Organization for Economic Cooperation and Development. It
now hopes to join the European Union within the next two to
four years.
On the minus side, the legacy of almost half of a century of
indifferent Communist oversight has left Poland with a seriously
decayed infrastructure (this nation, with the same population as
California, has only one major highway). The industrial base is so
outmoded that Polish businesses must import (at huge expense)
almost everything they need, from chemicals to computers.
Poland's biggest industries--mining, machine building, and
steel--continue to create serious pollution problems that will cost
a fortune to clean up (so much for Marx's assertion that
capitalism would be the scourge of the environment).
On the political front, the Solidarity Election Action Party, a
collection of small centrist/right-wing parties, received 34 percent
of the vote in the national election last year. Many factions within
this coalition want to stop, or even reverse, many of the market
reforms that have taken place since 1990. While both major
political parties are anti-Communist, the new ruling party wants
to increase social spending and support for many of its
working-class constituents, not a prelude to a robust future for
capitalism in Poland. I also have to wonder if a government
made up of at least 40 political parties will ever be able to
govern effectively.
Others closer to the scene are asking similar questions. Of all the
Europeans, the Germans should know Eastern Europe the best.
After all, they paid a pretty pfennig for East Germany, where
they've received a firsthand lesson in the difficulties that arise
from investing in a former Communist state. I find it especially
revealing, therefore, that German industry acquired a total of 13
businesses in Poland during the first half of 1997 but only one so
far this year.
What this suggests is that there really isn't much of a viable
business base on which the Eastern European nations can build.
It's true that Hungary was once the breadbasket of Europe and
that Czechoslovakia has long possessed tremendous skills in
engineering and manufacturing. Yet for all their fabled history,
culture, and bred-in-the-bone business sense, Eastern Europeans
today simply have little to sell. For decades after World War II,
their only market was the USSR, to which they sold goods under
a sort of casual barter system, one with little accountability. As
they pretended to manufacture goods for the USSR, which in
turn pretended to pay for them, any competitive discipline they
once had was lost.
While Western European, Japanese, and American businesses
were slugging it out in a way never before seen in global
competition, Eastern Europeans were shipping whatever they
liked to the USSR. The sad consequence is that today Eastern
Europe simply doesn't have much to offer that could pass muster
on the world market. Even East Germany, with the massive help
it has received from West Germany, is finding it hard to produce.
Russia--now in a horrendous financial crisis of its own--has also
become a terrible drag on Eastern Europe. Interest rates on
short-term Treasury bills in Russia have risen dramatically,
sometimes more than 200 percent a year, and the stock market
has plunged more than 90 percent from its peak last October.
The ruble was recently devalued a de facto 34 percent, and a
90-day moratorium was declared on payment of debts owed to
foreigners. If the ruble continues to slide, Ukraine, with its close
economic ties to Russia, will have to follow, and these events will
have a devastating effect on their Eastern European neighbors --
much like we saw earlier this year in Asia. I don't expect the
Russian government to solve these overwhelming problems
anytime soon--and I've recently shorted the ruble in my own
portfolio.
Perhaps an even more intractable problem for Eastern Europe is
its crazy quilt of wrongheaded national boundaries, which remain
much as they were drawn under the Treaty of Versailles almost
80 years ago. From an ethnic point of view, the region today is
about as disordered as human affairs can become. Some
examples: Hungary's population is two-thirds Roman Catholic
and a quarter Protestant. Bulgaria's population is nearly 10
percent Turkish and 13 percent Muslim. The Croatians are but
78 percent of Croatia, alongside a Serb population of 12
percent. Nearly 10 percent of the population of Slovakia is
Hungarian. The Federal Republic of Yugoslavia contains Serbia
and Montenegro, and has a population that is 63 percent Serb,
14 percent Albanian, and 6 percent Montenegrin. While 65
percent of its population is Eastern Orthodox, Muslims constitute
19 percent, creating the conflict that hits our front pages.
After the Berlin Wall fell in 1989, the Eastern Europeans were
eager for democracy. As a result of the spread of television, the
Eastern Europeans saw American programs and assumed (I
suppose somewhat reasonably) that democracy meant automatic
prosperity. TV dramas, of course, don't picture the toil that lies
behind the prosperity they depict.
Disappointed expectations are at the root of the strife exploding
in this part of the world. Throughout history, the breakup of
empires has reverberated for decades. Even today we see the
ongoing repercussions from the dismantling of the British
Empire--just look at the fight between India and Pakistan and
the disputes over various African borders. It will be the same in
Eastern Europe for many years to come. Expect these countries
to remain treacherous and unsure.
Contributing editor Jim Rogers is an international investor
and the author of Investment Biker (Adams). |
