IHT Special Report: Central Europe: Staying Power in Central Europe

The rate of recovery is patchy though, with signs of growing divergences in Central Europe, the Baltic states and southeastern Europe, according to recent reports from the European Bank for Reconstruction and Development and the World Bank.

Estonia, Poland and Slovakia are forging ahead, with estimated growth rates of nearly 4 percent this year. The Polish economy has been sustained by resilient domestic demand and credit markets. Still, the E.B.R.D. warns that household consumption could be hit in Poland by a persistently high unemployment rate of nearly 10 percent. Meanwhile, Latvia and Lithuania are still struggling after the excessive credit boom before the global financial crisis, when getting mortgages was easy, followed by fiscal retrenchment, when banks tightened credit rules.

In Hungary, the E.B.R.D. expects growth to strengthen modestly this year to 1.7 percent from 0.8 percent last year. It has criticized Prime Minister Viktor Orban’s conservative government for failing to implement a wide-ranging consolidation program aimed primarily at bring the deficit under control and for lacking a credible medium-term strategy. The government’s “crises taxes” for the energy and telecommunications sectors are also regarded by foreign investors as discriminatory and could “unsettle investors,” the E.B.R.D. said.

For all these misgivings, Central Europe as a region is forecast to achieve average growth of 3 percent this year, according to the World Bank.

The World Bank singles out Poland as one of the best performers in the region. “The main reasons for that are solid consumption, deep integration with E.U. markets and the good absorption of E.U. funds,” said Peter Harrold, the World Bank’s country director for Central Europe and the Baltic countries.

Polish economists say there is another reason why Poland may be faring relatively well: the role of the private sector.

“The private sector plays a crucial role,” said Ewa Balcerowicz, director of CASE, the Center for Social and Economic Research, in Warsaw. “We reckon that it now contributes to 76 percent of gross domestic product and employs 74 percent of the labor force. That makes it one of the biggest in the region.”

“Shock therapy” economic reforms pushed through by Poland’s first post-communist government in the early 1990s cleared the way for private enterprise to take root, but the past helped, too. Poland was one of a few formerly communist countries in which peasants could own their land and small, independent trades were allowed. The tradition of private property was never destroyed.

Still, it was the speed of the introduction of a market economy that gave the private sector a real push.

The flip side of that, critics say, was that privatized industries and banks often ended up in foreign hands because Polish investors and entrepreneurs lacked the means to buy control.

“That was one of the downsides of the reforms,” said Leon Podkaminer, an economist at the Vienna Institute for International Economic Studies. “Ownership was not domestic. Forced privatization was aimed at helping to create domestic capitalism. But it had the effect of pushing ownership into foreign hands because there was not enough local capital.”

Yet over the past 20 years, an indigenous private sector has taken root in Poland and in other countries in the region as more people have acquired capital.

There are now 3.7 million registered private companies in Poland. Economists say this figure probably overstates reality because some failed companies suspend operations without deregistering. But even allowing for that, “in reality, there are about 2.1 million companies,” Ms. Balcerowicz said. Of these, “about 1.3 million are really small, employing sometimes just one or two people or family members. The remaining 800,000 employ more.”

This is where the private sector in Poland and elsewhere in the region has to make the leap from being locked in small niches to joining the league of small and medium-size companies that are the backbone of the western European, and notably German, economies.

Some analysts say private-sector companies in Poland are too cautious and risk averse, reluctant to take out loans and often lacking a long-term development and expansion plan. Managers are hobbled by too much bureaucracy, high labor costs and regulation. All these factors hinder growth and innovation, they say.

This is slowly changing as Polish companies develop links with German, Dutch, French, U.S. and British partners. These relationships give west European companies access to a pool of comparatively cheap and educated labor, while allowing Polish companies access to new technology, expertise and markets.

The relatively unimpaired state of the banking system in the region’s main economies is another plus. Because Polish banks in particular hewed to prudent credit policies before the global financial crisis, they suffered “no bubble in the mortgage market and the private sector was pretty much unscathed,” Ms. Balcerowicz said.

Although the economic crisis in their west European markets hurt the region’s exporters, trade has bounced back. Imports of goods to Eastern and Central Europe rose 22.7 percent last year, largely reflecting higher international prices of oil and other primary commodities, while exports rose by 23.1 percent, returning to pre-crisis levels by the end of 2010, according to the World Bank.

Indeed, exports are now running above their pre-crisis levels, except in the Czech Republic, Slovakia, Slovenia, Estonia and Latvia.

Article source: http://www.nytimes.com/2011/05/23/business/global/23iht-rbus-overview.html?partner=rss&emc=rss