Inside Eastern Europe.

Having come through wrenching economic and social change, the leading countries of Central Europe are poised to break into the club of Western market economies CE escorted a group of CEOs to Poland, the Czech Republic, and Hungary to meet senior ministers and local business leaders, and to visit joint ventures run by PepsiCo, GE, and Kmart.

Why do some countries grow rapidly when others, even ones nearby, do not? Under certain conditions, countries that have lower per capita gross domestic product or standards of living can be expected to grow faster. Economists call this convergence. A major reason is that less developed countries have little capita per worker, and, thus, productivity can be dramatically boosted through investment. But some do better than others. Charles I. Plosser, an economics an finance professor at the University of Rochester's Simon School of Business, cites six criteria for sustained long-term growth: a market economy, educated population, political stability, low government consumption relative to GDP, developed financial markets and capital intermediaries, and participation in world trade.

Poland, the Czech Republic, and Hungary have met the first four requirements an are moving rapidly on the last two. A crude but useful benchmark is per capita GDP. Germany around 85 percent of U.S. per capita GDP, with the Netherlands about 75 percent. Russia is generously estimated at 30 percent, and Romania at 19 percent. Poland, Hungary, and the Czech Republic are approximately 23 percent, 30 percent, and 35 percent, respectively. These levels are on a par with Portugal Greece, and Turkey, the first two of which are EC members. Future EC membership was one topic discussion among local leaders and participants during the roundtable events held in Warsaw, Prague, and Budapest. (The week-long series was held in partnership with Deloitte & Touche.) EC membership which the three Central European countries are expected to attain in five to si years, would greatly accelerate transformation. In fact, most U.S. companies investing in the region are betting on it. Despite the return of former Communists to power in the region, the three countries visited continue to be committed to privatization and market liberalization--although problems remain, such as closing the productivity gap and eliminating unnecessarily long border delays.

Following are thumbnail sketches stops on the CE itinerary.

* Poland: With 38.5 million people, Poland is the largest of the Visegrad Group (Slovakia, which the CE group did not visit, is the fourth.) Reform has a times been chaotic, but the gains are enormous. The government that came to power in September 1989 faced 550 percent inflation, external debt of 86 percen of GDP, and virtually exhausted foreign-exchange reserves. Today, inflation and real income are dramatically improved, with the private sector employing 60 percent of the work force and responsible for 90 percent of total trade.

Poland has 1.5 million private companies; many are controlled partly by foreigners. If it were not for Italy's Fiat--the automaker's Cinquecento plant accounts for the largest single foreign investment in Poland--U.S. companies would be the largest outside investors. PepsiCo, which is the 15th largest overall and seventh largest U.S. investor, controls 40 percent of E. Wedel, an 80-year-old chocolate maker that now distributes Frito-Lay and Pepsi products. It is the biggest cookie factory in the country, employing 3,000 people with sales of $123 million, according to Jozef Rutkowski, the company's managing director.

* Czech Republic: With 95 percent of prices liberalized and import restrictions relaxed, competition is the watchword. Stringent macroeconomic policies control inflation, with full convertibility of the currency expected soon. Voucher privatization set the stage for liquid capital markets. Nevertheless, Czech businesses face some fundamental problems. According to Gus Hraska, a partner with Deloitte Touche Tohmatsu International--Czech Republic, companies have experienced falling demand but haven't cut costs. To boot, the voucher-driven program, which seeks to privatize first and restructure later, poses a special problem for investors, and banks: Bad debt write-offs for tax purposes are subject to court approval.

Despite such risks, early-bird U.S. players such as Kmart have gained an advantage. The upscale merchandise mix of its Prague unit is closer to that of Macy's department store than a traditional American Kmart. It took in $19 million in sales last year, says Managing Director Don MacNeill. The only competition is three local department stores.

* Hungary: The decisive Socialist parliamentary victory may somewhat slow the pace of market liberalization in Hungary, along with curbing the country's aspiration to become a full EC member by the year 2000. Nonetheless, signs of progress are evident. Since 1989, U.S.-Hungarian trade has doubled. At the same time, trade between Russia and Hungary has dropped from 32 percent to less than 14 percent. In 1989, the country had 162,000 private businesses. Today, there are 710,000. Of the $5.5 billion U.S. companies have invested in Central Europe $3 billion has gone to Hungary.

Apart from GM's Opel plant, the most visible American presence is Tungsram, a light-bulb manufacturer acquired by GE in 1990. Roundtable participants toured Tungsram's principal plant in Budapest with Don McKenna, vice president of international unit GE Lighting Europe. Under an aggressive turnaround effort, McKenna projects a 1992 loss for the subsidiary of $32 million will become a $4 million profit by the end of 1994. The work force was cut to 9,950 from 17,600 four years ago. The number of plants dropped from 40 to 12. TQM, Work-Out sessions, zero defects, and other footprints of GE Chief Executive Jack Welch are in evidence on the factory floor. As a result of the changes, production costs have decreased significantly. Order-to-shipping time has gone from 90 day in 1992 to 10 in 1994. GE, which aims for 15 percent annual labor productivity per year, claims Tungsram is at 13.5 percent.

Despite the need for capital and the financial intermediaries to funnel it to the right places, Poland, the Czech Republic, and Hungary have planted the seed of political stability and market reform. Assuming the Eastern European region can contain its internecine squabbles--a subject not covered in the roundtable discussions--the three countries will become part of a mini-bloc, roughly equivalent to the economies of Southern Europe.

Eventually, they may be integrated into the EC orbit. In time, Europe may no longer be divided into East and West. In fact, the dissolution of trade boundaries already has begun.

POLE POSITION 

Jerzy Osiatynski (Polish Parliament): This is just the beginning of the new world order for Poland. We've had some successes, but we also face many problems, including a backsliding toward socialism by some of the voting public

When we started the transformation, about 93 percent of total output and 94 percent of total employment was generated by the government sector. Today, abou half of GDP and half of all employment is generated by the private sector. Excluding agriculture, the figure is about a third. Last year, we had a record rate of GDP growth of 4 percent. We cut the inflation rate to 35.5 percent last year from 43 percent in 1992. However, at 31 percent today, it is still high by European standards. The budget deficit, which was about 6 percent of GDP in 1992, was trimmed to 3.6 percent in 1993.

Despite our economic successes, we didn't fare very well in changing our mentality. Communism educated people to believe in the government's obligation to provide things from cradle to grave. Even the business community occasionall clings to the old mind-set. For example, we introduced better protection for ou agriculture products and made selective investments in factories and other enterprises, but the newly minted chief executives of man former government enterprises now say Warsaw also should provide markets and determine prices. If the government does this, we are back in the communist system.

In addition, the opponents of a market economy didn't help matters by publicizing the calamities of the transformation. Ironically, those problems originated in the communist system, not in our transformation strategy, but voters don't understand that. There was inflation before, but it was inflation that found expression in corruption and empty store shelves. There was a budget deficit, but it wasn't because the government needed to borrow money. It was because the government was financed by printing money and stifling the market.

We failed to communicate adequately these matters to our people, and to make them understand that the transformation might require a generation before it is complete. This lack of communication, coupled with the failure to meet some ver high economic expectations, has fostered a yearning to return to socialism in some quarters.

William E. Mayer (CE/University of Maryland's School of Business): Can anything stop the trend toward more government?

Osiatynski: I don't think anything can stop it altogether. In the present government, there are varying opinions. Probably some forms of privatization will be delayed. For instance, only one of two new banks that were supposed to be privatized in the course of 1994 will be privatized.

Kevork S. Hovnanian (K. Novnanian Enterprises): Are you happy with the speed of privatization and the growth of the economy in Poland?

Osiatynski: I am happy with the growth. But I think the idea that we can consistently post annual GDP growth of 4 percent or more is rather unrealistic, because the Polish economy is very import-intensive. Most of our gas, oil, and raw materials are imported. So when we constructed the budget for 1993, we said GDP would grow at about 2 percent. Earlier, we thought it would be higher. But immediately introduced an import surcharge when I became finance minister in September 1993 because of the unfavorable balance of payments. Even with the surcharge, however, we were in the red for nearly $2.3 billion, compared with a export surplus a year earlier. Superior growth is unattainable unless we make a extra push for developing exports.

Hovnanian: How would you boost exports if you don't have growth in your production?

Osiatynski: Production growth follows market growth, but a corollary issue is that the U.S. is responsible for the constraints on our markets.

We try to maintain a competitive advantage in textiles, agriculture, cement products, and metallurgy. Part of that advantage derives from cheap labor. But when we try to sell our products on the open market, America slaps us with anti-dumping penalties. We will continue to find it difficult to expand trader these conditions.

Cyril C. Baldwin (Cambrex): What is the government's attitude toward foreign participation in privatization?

Osiatynski: Some officials are for it, and others are not. Unfortunately, many Poles have a phobia about accepting foreign capital. They think of it as sellin out. Nevertheless, foreign participation must continue, because the demand for capital outstrips our ability to supply it.

INVESTOR EDUCATION

Andrzej Sadkowski (Polish Agency for Foreign Investment): That's partly why the number of foreign investors in Poland has increased tremendously. And in the last six months, foreign investors seem more willing to move into Greenfield investments.

Nonetheless, investing in Poland can be a complicated process, so we have created a support network for investors. The Polish Agency for Foreign Investment, which I represent, takes investors by the hand from first contact i Poland; provides basic information on foreign-investment, privatization, and banking laws; and walks them through the process.

In some cases, investors decide they would like the agency to sponsor their project. Then, we bring in a project manager. We have specialists in food processing, construction, engineering, heavy machinery, tourism, automotive, an electronics. Together, the manager and company executives formulate an appropriate strategy.

Some of the most successful foreign investments in Poland have been those that drew on local managers' skills. These people know the terrain and the markets. In some cases, these locals are sent to the home factory or headquarters for training.

Baldwin: What happens if a foreign company wants to buy a business in Poland that already has social contracts in place between the government and the workers?

Osiatynski: Bargaining is always involved. Perhaps you can spread the staff reductions across a certain span of time.

Sadkowski: The Ministry likes to get an 18-month moratorium, guaranteeing employment for that time. This is usually accepted by the labor unions.

George W. Ahl III (Crimson Capital): What impact do the unions have on foreign investment in terms of privatization?

Sadkowski: Labor unions in Poland play a significant role, because privatizatio must be approved by a company's workers' council. That right was secured by the Solidarity trade union strikes of 1980 and 1981.

Osiatynski: Some people believe the Solidarity trade union is the guarantee for our transformation's continuation, because it no longer supports the communists But at the same time, it makes ever-increasing demands on the new government. The situation is much worse here than in the Czech Republic or Hungary, because in those countries, trade unions have never been of political importance.

David Elias (Elias Asset Management): I almost feel like I'm in America when yo talk about labor problems.

Edward A. Kangas (Deloitte Touche Tohmatsu International): The big difference here is that the unions have a lot of political power. They control the electorate. Therefore, the government here is dominated by the unions.

Osiatynski: And it's important to note that at present, I believe, the ex-communist trade unions outnumber Solidarity by a 3-to-1 ratio. It used to be the reverse.

DOWN ON THE FARM

Mayer: Are you satisfied with the progress in the agricultural industry?

Osiatynski: That's our weakness: The government hasn't established a strong agricultural policy. We need to develop policies that take regional differences into account. Some regions, for example, have poor soil, and they should be reforested.

Leonard Tow (Citizens Utilities): My business is infrastructure--gas, water, electric, telephone, and television. My impression is that opportunities in thi sphere are limited, because all the Polish utilities are nationalized.

Sadkowski: You can privatize utilities here. We've privatized seven so far, including gas, except for methane. And the telephone system will be privatized. However, keep in mind that utilities could be perceived as a strategic or quasi-strategic sphere, meaning one over which the government prefers to retain control.

The problem is financing. Poland does not have an abundance of domestic capital for these projects.

Hovnanian: I'm a real-estate housing developer. Could I buy a piece of land, build houses on it, and sell them to local residents?

Sadkowski: Poland is the only post-communist country that allows foreign investors to purchase land. You simply have to demonstrate to the Ministry of Interior Affairs that you need the land for an infrastructure or investment project and then obtain a permit. But to make such a development project viable you would need a functioning mortgage market, which we don't yet have.

One other problem potential investors must be aware of: A state-owned enterpris may have environmental liabilities such as soil toxicity.

Ryszard Michalski (deputy minister of Finance): In addition, we still lack legislation on land ownership rights. The problem is that in many urban areas, no one knows who the land belongs to, because most of the books listing all the non-agricultural property vanished during World War II. Thus, investors are war about buying land that someone else could later claim they owned.

BANK SHOTS

J.P. Donlon (CE): Let's turn our attention to banking and finance. At last count, between one-fifth and one-third of bank assets were non-performing.

Osiatynski: That depends on how you measure them. Overall, the situation is improving.

In 1988, the central bank was split into nine commercial banks, wholly owned by the Treasury but targeted for privatization. By the end of this year, we will have completed three privatizations.

The portfolios of the first two banks were sound. The remaining seven banks hav been provided with long-term government bonds. Some of these banks may need to be consolidated or merged.

In addition to these newly created banks, however, in the period between 1988 and 1992, anyone could found a bank. Many were established that were not capitalized properly. Some of them are on shaky ground, and they need better capitalization and auditing, and the constant monitoring of their credit portfolios.

Robert W. Lear (CE/Columbia Graduate School of Business): Is there the equivalent of a Financial Accounting Standards Board in Poland?

Osiatynski: We are moving in this direction. Soon, our accounting regulations will conform to those set forth in the General Agreement on Tariffs and Trade.

Donlon: What are Poland's competitive advantages versus its Central European neighbors, and where does it have the most work to do?

Jan Maciejewicz (Deloitte Touche Tohmatsu International--Poland): Two of Poland's biggest assets are its large market of 38.5 million consumers and its well-educated work force.

Kangas: Nevertheless, Poland does have challenges to confront. The unions here led the revolution in the Eastern European states, but in recent times, they have become more of a problem than an advantage.

Osiatynski: Here's another comparison: The Czech Republic never had inflation--either before or after the transformation--because it carefully controlled wage increases. Of course, such control creates problems of its own. In addition, Hungary and Poland are heavily in debt, but the Czech Republic isn't. That's partly a tribute to the cleverness of Prime Minister Vaclav Klaus

CZECH POINTS

Vladimir Dlouhy (minister of Industry and Trade): Our transition involved a package of economic reforms, including the liberalization of prices, opening th economy to foreign competition, dismantling the old central-planning system, moving toward the convertibility of the currency, removing most subsidies, launching privatization, and changing the banking system. Growth was not our main aim; instead, we sought macroeconomic stability.

Let's check our progress. Inflation is under control. Unemployment is low, abou 3 percent in 1993 and 5 percent today. We devalued the currency three times in 1990 before we got it stabilized; in turn, stability stimulated exports.

GDP fell 14.1 percent in 1991, 7.1 percent in 1992, and .3 percent last year. This year, we hope to see between 2 percent and 3 percent growth. So far, the numbers for the first quarter are not encouraging, because we lost the Slovakia markets when our country separated. In addition, industrial production has been plagued by lingering inefficiency from the old command-and-control economy, and by soft markets in the former Soviet Union.

But all the cornerstones of the market economy are in place. Now government policy must focus on growth. Toward that end, there are two broad strategic categories: one internal, the other external.

Looking abroad, our biggest challenge is to continue to promote exports aggressively. On the domestic front, we must stimulate investment by lowering the tax burden on small and medium-sized businesses. We also must increase the mobility of the labor force, complete the re-structuring of the industrial complexes, and finish privatization. By the end of this year, approximately 85 percent of the economy will be privatized, though most businesses will continue to undergo some rationalization.

On the banking side, I wish our institutions were able to take greater risks, a Germany's banks--aided by the Marshall Plan--did in the post-war economy.

Jiri Kunert (Zivnostenska Banka): Yet if you look closely, the banks have drive transformation. According to the Central Bank, credit in the past year jumped 2 percent--though one might argue that banks could do more to weed out the inefficient companies.

Hovnanian: Are you suggesting that all capital-short companies should be cut of from credit? That would be dangerous for the Czech economy. Even in the U.S., particularly during periods of recession, we've seen the counterproductive effects of banks cutting back on credit.

Dlouhy: I'm just calling for banks to be more selective, to be able to pick those companies that should be winners.

Helge Midttun (Vitana): Though this might cut against the grain with this group I have a question: Aren't the balance-sheet problems of local businesses partly the result of a lack of protection for domestic industry? After operating here for two years, I've found that a lot of local industry has been thrown into tough competition overnight. In the food business, for instance, locally produced goods must comply with regulations that do not apply to imports. Perhaps liberalization has come too far, too fast.

Dlouhy: We must choose between two evils: either throw companies into the water and let them sink or swim, or ask for protection. Incidentally, when we ask for protection, we do so selectively to comply with GATT.

CAPITAL IDEAS

Arnold B. Pollard (CE): Let's get back to the problem of capital. In terms of sources, there's commercial banks and the government, of course, but there's also merchant banking and venture-capital financing. By tapping the latter two, you help to keep long-term risk outside the commercial banking system.

Marc L. Holtzman (MeesPierson EurAmerica): We raise equity capital. In the case of some Czech businesses, we've done that through passive U.S. and British investment funds. We usually deal with the larger emerging market funds, half o which are based in the U.S., and the other half mostly either in the U.K. or continental Europe. The problem in the Czech Republic and other Central Europea countries is that institutions frequently aren't willing to make smaller deals.

Our equity placements average between $10 million and $20 million. Often, that is just under the range where larger institutions see most of their profit potential.

Baldwin: Rather than an equity investment in the Czech Republic, we've started techno-liaison. We exchange technology with other chemical companies there, getting them to license their technology to us, and vice versa. This starts a relationship that could lead to future investment.

Dlouhy: Returning to Mr. Holtzman's point, foreign investment is crucial to our continued progress, because it brings in both capital and technology. During th past three-and-a-half years, more than $2 billion dollars was invested here. However, during the first quarter of this year, inflows have slowed substantially.

Why? The press quotes Vaclav Klaus as saying we feel we do not need--or cannot absorb--all of the available foreign investment. This is a misinterpretation. The point is that foreign investment must be mutually profitable, and unfortunately, that's not always the case. In two instances, foreigners closed shop here after a year, because their businesses simply were pre-emptive strike to head off potential competition, not longer-term commitments.

The only way to avoid such situations is for Czech partners to do their homewor on potential partners and to be well-prepared.

INSURANCE POLICIES

Vlastimil Uzel (Ceska Pojistovna): The insurance sector is a relatively new avenue open to outside investors. Some 22 companies in the Czech market have ties to such foreign companies as American International Group and Germany's Allianz Group.

From 1953 to 1990, we had only one insurance company. After that, we enacted legislation to facilitate market liberalization and diversification. At first, opportunities extended only to domestic investors. After a year, we opened the sector to foreigners.

Market expansion demanded effective supervision and regulation. So we created a professional association of insurance brokers to formulate standards.

Lear: What's the state of the Prague stock market? Holtzman: Total market capitalization is about $13 billion with 700 companies, though of late, there's been far more interest in unlisted equities because of the rich multiples of listed stocks--in some cases, prices are running 30 times earnings.

Usually, however, the bubble bursts on overvalued stocks. That's why there was tremendous correction on the Prague and Warsaw exchanges.

Lear: Why should I invest in the Czech Republic instead of in Poland, which has a market of 38.5 million people and more territory?

Dlouhy: This country has many comparative advantages. Consider this: The averag monthly wage last year in the Czech Republic was nearly 15 times less than that in Germany.

In addition, we recently concluded a free-trade agreement with Poland, Hungary, and Slovakia. Beginning in 1998, no tariffs will be charged on products moving between these countries. They will comprise an open zone with a population of 6 million.

Pollard: The Czech Republic has fared relatively well under the transformation to a free-market system. How much of that can be attributed to pre-existing infrastructure strengths, and how much is the result of transformation policy? Dlouhy: It's difficult to determine. If there's one thing you can say about our communist central planners, it's that their overriding concern was the maintenance of macroeconomic stability. That meant, at least in terms of other Eastern bloc countries, our infrastructure was relatively strong.

Our transformation policy, geared to enhance these natural strengths, has been sound. In the wake of privatization, however, we face the question of whether our economic policy is strong enough to force new business owners to restructure. And with unemployment in some regions running close to 9 percent, we need policies to promote job-creation.

Holtzman: Will you change the privatization laws regarding electric and gas utilities? Generally only 20 percent of such Czech companies are available to foreigners. That's too small a stake for most investors.

Dlouhy: In the near-term, the laws will remain the same. Utilities notwithstanding, we are moving toward economic equality with European and other market-based countries. This, however, results in a paradox: We are the first o the former communist countries to be successful, but we are vulnerable to the political election cycles and to the expectations of our people, who demand continuous improvement in their standard of living.

HUNGARY ENTREPRENEURS

Bela Kadar (minister of International Economic Relations): You've heard from th representatives of Poland and the Czech Republic; I will try to bring you up to speed on the progress Hungary has made in the past four years, and to what it aspires.

Let me begin with some simple facts. Transition or systemic change implies big social and economic learning curves, because if you liberalize, decentralize, and demonopolize an economy, the consequence is that the inefficient enterprise fade away. So in all the Central and Eastern European countries, GDP dropped in the past four years on average by 30 percent. Naturally, this results in a higher unemployment rate. Ours is 12.8 percent right now.

Thus, everybody loses income, and we end up with a deficit. When this happens, the mood in a society is one of dissatisfaction, and people look for new hopes and new changes. Nevertheless, our performance is improving: At the end of 1989 we had 162,000 small private entrepreneurs. Four years later, the number jumped to 710,000.

Meanwhile, Hungary's trade policy has changed drastically. Four years ago, the economy depended heavily on the Eastern European markets, mostly those of the former Soviet Union. In the 40 years following the end of World War II, Hungary was a completely protectionist country. But now we have opened up the economy: We recently concluded free-trade agreements with EC countries and Central European countries such as Poland and the Czech Republic.

Baldwin: How long will it take for you to become as open as you would like?

Kadar: The big dream will turn into reality two-and-a-half years from now, because of the free-trade agreements we have signed with the Visegrad countries which include Poland, Hungary, the Czech Republic, and Slovakia. That's a big encouragement to foreign investors, because they will be able to supply from a plant in Hungary or Poland the whole Visegrad region.

Lear: When we drove down from Warsaw to Krakow to Prague to here, each of the borders was clogged with lines of trucks waiting for hours to go through. That' not free and open trade.

Kadar: The delays do not reflect any Machiavellian manipulation to stop regiona free trade. We simply don't have the funding to improve and develop our border-crossing infrastructure. We need international assistance--perhaps investments from the World Bank.

To date, investment has been pouring in, though not for this type of development. So far, $14 billion has been invested in the form of direct capital, equity capital investment in the former COMECON countries. Of this amount, $7.5 billion, more than 50 percent, has been invested in Hungary, which represents only 2.5 percent of the total region's population.

GUT CHECK

Donlon: Returning to the broader question: What does systemic change require of a people?

Kadar: Systemic change means the legal and institutional reshaping of the economy. This always requires heavy social, political, and economic sacrifices. But in Hungary, the institutional changes have been completed. Now we have to decide what to prioritize: trimming the budget deficit, fostering economic growth, or building distribution and the infrastructure.

We've built a house based on market principles. Now we have to put in the prope furniture and find a caretaker for it. If the foreign investments continue to transfer not only financial resources but technological resources and human skills to Hungary, then we can look to the future with optimism.

Of course, despite all the optimism in and about Hungary, as U.S. General Douglas MacArthur once said, "In life, there are no guarantees, only opportunities."

Hovnanian: You mentioned Hungary's deficit. Why would European or American companies choose to invest in Hungary instead of in the Czech Republic, which doesn't have a deficit?

Kadar: Does a deficit stop investment in the U.S.? If you concentrate exclusively on decreasing the deficit, you mortgage your economic future.

It's all a matter of consequences. I am well acquainted with Vaclav Klaus. But let me tell you a secret about the Czech economy. If the state owns the bank an the banking system in a country, and if the banks keep financing enterprises, then the companies can keep employing until there is no unemployment. If there is no unemployment, there's less strain on the budget, and, thus, there's less of a need for deficit financing. But what are the consequences? The amount of bad credits and unsettled debts keeps growing. So before studying the size of our deficit, please also study the bad debts in countries that do not have one.

Pollard: In the Czech Republic, the government enhanced liquidity in the capita markets through a voucher system, in which employees and managers of an enterprise--along with the general public--were given the option to buy a piece of formerly publicly held businesses. What has Hungary done--or what could it have done better--to help finance investment?

Gyorgy Ivanyi (Inter-Europa Bank Rt.): One problem is that our oversized Social Security system can't function as an investor.

On the positive side, however, public equities offerings benefit from some tax incentives. And we have taken legislative steps to create investment banks and brokers and other capital-market intermediaries.

But perhaps most important, savings is the name of the game for investment. I want to get my grandmother's savings into the investment scene. That money is more important than General Electric's, because there are more grandmothers around than GEs. The popular savings investments are in real estate and jewelry we need to put that capital into privatization. The population's savings are estimated to be about $5 billion, and that amount can be grown effectively through a different type of investment.

HOT POTATO 

Mayer: There's another issue in terms of raising capital: The government says i is the banking system's role to lend money to support small business, but the commercial banks say otherwise and throw it back on the government.

Elias: The commercial banking system exists explicitly for non-investment-grade borrowing that implies the assumption of a different kind of risk. But you can' assume that risk without managerial know-how.

Peter Lorincze (Deloitte Touche Tohmatsu International--Hungary): The attitudes of local investors must change toward the Hungarian capital markets. Most think of an investment as a means only of making money. But when you invest, you are sometimes bound to lose. This concept is alien to the Hungarian mind-set. In addition, Hungary needs to expand its stock exchange and get more institutional investors such as insurance companies.

Donlon: According to a recent poll by Median, a Hungarian firm, only 7 percent of the local population feels direct foreign investment has been an unqualified benefit for the country. Some 40 percent questioned whether such investment benefitted them at all. Does this attitude increase the risk for foreign investors?

Lorincze: The short answer is no. Of the tens of thousands of foreign investors in Hungary, some are crooks. Thus, some people are wisely wary but not categorically opposed to foreign investment.

Lear: GE's Tungsram facility--one of the first major investments by an American company and one of the largest--has faced environmental, labor, and cultural problems. Are they GE's fault or Hungary's?

Kadar: Jack Welch has complained frequently about his unhappiness with Tungsram but he's still here, isn't he? If the prospects weren't good, would he have invested $500 million since the inception of the project?

Meanwhile, he has been somewhat justified in complaining about the policies of the national bank. The Hungarian currency has been appreciated in real terms by 25 percent over the past four years. That certainly has helped to check inflation, but it also has worked against exporting enterprises.

Hovnanian: Why does Hungary lag Poland in developing legislation to support the private ownership of land, particularly by foreigners?

Kadar: Real-estate prices in Hungary have been much higher in the past 25 years than in any other former COMECON country, so the real-estate business has not been as lucrative for foreign investors as it was in countries where the prices were low. In addition, we have not encouraged foreign investments in the real-estate business, because we wanted to channel them into the technological modernization of the country and its production.

DON'T LOOK BACK

Mayer: If you could have the past four years back, would you have done anything differently?

Kadar: Not a thing. The successes and failures are all a part of the process. W knew going in that no strategy could immediately bring paradise on Earth. Yet people had market euphoria, meaning they held high expectations that a market economy and a pluralistic society quickly would raise our living standard to that of the West.

Most people--including politicians--did not understand that systemic change often means closing inefficient factories and firing excess employees. The period of grace in a transition economy is maybe one year, two at the most. If you fail to show tangible gains by then, you will lose politically. That's why the governments that tried to introduce shock therapy lost political power in Bulgaria in six months; in Romania, 15 months; in Slovakia, 18 months; in Poland, two-and-a-half years; in Hungary, four years.

Donlon: Let's engage in a retrospective of our trip. What do you think of the investment possibilities in Poland, the Czech Republic, and Hungary?

James Eiting (Midmark): All three countries offer investors low-cost engineerin and manufacturing capabilities. That's quite an opportunity.

Baldwin: The Czech Republic and Hungary have more sophisticated economies and more diverse opportunities. All the countries have well-educated work forces. They share some common labor problems.

Overall, my impression is that Poland has had more problems but is in better shape than its Central European neighbors. Despite their more sophisticated systems, Hungary and the Czech Republic haven't yet faced the music.

Tow: I'm in the public utility business. Though I don't like it, utilities are linked with the political process, so I understand well some of the difficultie we've been discussing.

I came with the idea that there might be opportunities. But the only major openings I see across the board are in the telecom business, with the Czech Republic offering some limited involvement in gas and electricity.

In short, I don't see how these counties can prosper without a substantial infusion of capital into the infrastructure.

Pal Horvath (Hungarian Telecommunications Co.): In terms of the telecom industry, Hungary is unique, because we installed a digital, fiber-based countrywide infrastructure before we began privatizing.

Lorincze: No matter whether transformation follows the Hungarian, Czech, or Polish model, the reality is that the fates of these three countries are intertwined.

Together, perhaps along with Slovenia, we will have to group together and strengthen our cooperation. That is the only way to prosperity for all of our people. That is the only way we can create a stable Central Europe.

A WHO'S WHO'S OF INTERNATIONAL PARTICIPANTS AT CE'S ROUNDTABLE EVENTS

POLAND

George W. Ahl III, Crimson Capital, a financial company.

Jun Maciejewicz, managing partner, Deloitte Touche Tohmatsu International--Poland, a consulting unit of DTT.

Ryszard Michalski, deputy minister of Finance.

Jerzy Osiatynski, member of Parliament and former minister of Finance.

Jozef Rutkowski, managing director, E. Wedel, a food and snacks company 40

percent owned by PepsiCo Foods International.

Andrzej Sadkowski, vice president, Polish Agency for Foreign Investment in Warsaw.

CZECH REPUBLIC

Vladimir Dlouhy, minister of Industry and Trade.

Gustav Hraska, partner, Deloitte Touche Tohmatsu International--Czech Republic.

Jiri Kunert, president and chief executive, Zivnostenska Banka.

Jiri Makovec, director general, SPT Telecom, the State telecommunications company.

Donald MacNeill, managing director, joint venture Kmart CR/SR, Kmart Europe, a division of Troy, MI-based Kmart Corp.

Helge Midttun, managing director, Vitana, a Czech-Norwegian food-products joint venture.

Miroslav Tvrdy, economic director, IPS, a construction company.

Vlastimil Uzel, chairman, Ceska Pojistovna, a leading insurance company.

HUNGARY

Ferenc Darvas, president, CompuDrug, a biotech software company.

Marc L. Holtzman, president and managing director, MeesPierson EurAmerica, a Dutch investment-banking firm.

Pal Horvath, executive strategic director, Hungarian Telecommunications Co.

Gyorgy Ivanyi, chairman, Inter-Europa Bank Rt.

Bela Kadar, minister of International Economic Relations.

Peter Lorincze, partner, Deloitte Touche Tohmatsu International--Hungary.

Don McKenna, vice president and director, manufacturing, GE Lighting Europe (Tungsram facility).