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Reconstruction and the art of the possible.

Just as the U.S. committed itself to Western Europe at the end of the 1940s, so too must it now invest in the future potential of Eastern Europe.

The political changes in the Soviet Union, and in almost all the East Bloc countries, have opened up new prospects of cooperation for the 1990s. In particular, they have demonstrated the close correlation between political and economic development. Political liberalization will not be successful unless these national economies can increasingly integrate themselves in the world economy.

The radical changes initiated by Soviet President Mikhail Gorbachev have mercilessly exposed the weaknesses of the Eastern economic system. The system of a planned economy has resulted in structures that are not competitive on an international level. Consumer supply was considered a marginal parameter of planning. The production of capital goods was mainly devoted to the oversized military aspect of economic planning. International exchange relationships were bilateral and were based largely on barter trade.

Against this background it is not surprising that the share of goods exchange of European COMECON (Council for Mutual Economic Assistance) countries in the total foreign trade of OECD (Organization for Economic Cooperation and Development) countries, which was still 4.1% in 1975, had dropped to only 2.4% by 1988 and has been stagnating at this low level ever since. This means that East-West trade accounts for only about 40% of the goods exchanged between the OECD countries and the four advanced, newly developed countries of Southeast Asia (Singapore, Hong Kong, Taiwan, South Korea).

The low quality of economic relationships is not without political risks for Western countries. However, the transition of a planned economy that has existed for decades to a free market economy has not so far been analyzed either as a practical or theoretical problem. The West is now being confronted with a totally new situation, which is being aggravated by the fact that, in the individual countries of the Eastern Bloc, there are varying starting conditions and differing development processes.

There are frequent calls for transition to take place in one go, if possible, because mixed economic systems in general create additional problems. In the social reality of the European COMECON countries, however, transition can only be achieved in stages. The speed, extent, and order of stages will have to be found by a process of trial and error.

The transaction from a planned economy to a free market economy results in an invisible "economic destruction" of numerous companies. The companies were established on the basis of an autonomous planned economy, ignoring any cost and efficiency aspects. Today, they have no chance of surviving in the free market. The failures of the past are now hitting large sections of the public in the form of unemployment. The people do not understand the invisible economic destruction of their companies, and, therefore, there is a far-reaching lack of commitment to any particular reconstruction efforts. In Central and Eastern Europe, more than 40 years of planned economy have molded the people and have stunted any initiative of their own. Here, too, only gradual reform is feasible -- whereby people slowly get accustomed to the realities of a free market economy.

Controlling the destruction

The unavoidable economic destruction associated with economic reform must take place, however, in as controlled a manner as possible. Otherwise, it could produce a depressive spiral of declining employment and demand, which in turn could trigger a dramatic economic crisis and increasing pressure to emigrate.

The Commission on Security and Cooperation in Europe (CSCE) Conference held in Bonn in early 1990 acknowledged in this context the particular significance of stronger, direct company involvement from all sides. In the final communique, all member states agreed, depending on their capabilities and interests, to create favorable conditions for industrial cooperation up to implementation of the right of establishment and equal treatment of various forms of ownership.

Improved investment conditions

This agreement should be understood in the sense that, as economic reform in gradually put into effect, so too will the frame conditions for the involvement of foreign companies gradually improve. Thus, an economic policy is promised, which, like all politics, is the art of what's possible. At the same time, companies are now being called upon to achieve what is possible rather than wait for perfect conditions or divert to countries where conditions are ideal.

Although the currencies were not convertible and the exchange of goods had not been liberalized, and although there were still administered prices in large sections of the economy, the U.S. committed itself to Western Europe at the end of the 1940s because the future potential was recognized. Similarly, we must now invest in the future potential of Central and Eastern Europe. This potential can briefly be described as follows.

The transition to a free market economy system in this region will open up a market which, with 395 million people, is larger than the European Community (EC) market (320 million people). More than 280 million people of this market potential are living in the Soviet Union. A market of this size can, in the long term, only be opened up by a direct presence.

Above all, the Soviet Union has rich raw material resources which, so far, dominate export to the West. In the past, these raw material resources were used for barter trade -- e.g., the natural gas pipeline project. Similar transactions were made by all the other European COMECON countries. To this end, they relied on the Central Foreign Trade Organization, which has responsible for exports and imports. Greater decentralization of foreign trade should not be allowed to mean that the possibility of concluding such agreements is now lost. In view of the inadequate competitiveness of the COMECON countries, barter trade should remain a feasible alternative of industrial cooperation for Western countries.

The above-mentioned economic destruction of many production plants increases the demand for investment beyond a level that can be financed by the Eastern countries themselves. Without Western capital exports into the European COMECON countries, the reform process will, therefore, probably slow down to such an extent that the reform target itself will be in danger.

A negative image

The direct involvement of companies must, however, go beyond capital exports. In most European COMECON countries there is, so far, no positive consensus among the public for free economic enterprise. The negative image is understandable considering over 40 years of socialist uniformity and the negative experience gained with speculative and scrupulous traders. Without a gradual change in this perception of the entrepreneur, a free market economy cannot be achieved. Therefore, Western company involvement must, above all, demonstrate the social responsibility of any entrepreneurial activity. In South Africa, socially committed companies played a similar opinion-forming role in a totally different context.

The success of economic reform also depends on a number of company-related services being offered. These include, in particular, financial services provided by banks and insurance companies, and advisory services relating to internal accounting, corporate management, and marketing. The experts needed for these tasks are not available in the former planned economies because they were not governed by financial parameters but by direct planning requirements. These, therefore, will have to be obtained largely from the West, which, in general, is only possible via the direct establishment of company subsidiaries.

In terms of an approach geared to what is possible, the joint venture is in most cases the only form of direct involvement today. This means that, in fact, only a very difficult type of entrepreneurial cooperation is available. However, as the "germ cell" for entrepreneurial thinking and acting, it is of particular importance for the success of economic reform.

Just as we were not discouraged by the political confrontation over the past 40 years, so too should we not be discouraged by the difficulties either now or in the future. We should now much rather accept the current investment risks in view of the great opportunities for the future. Safeguarding the democratic reform process in Central and Eastern Europe necessitates the establishment of functioning market economies, because economic and political freedom are ultimately inseparable. Entrepreneurial commitment, therefore, has an obvious and high political value.

Walther Leisler Kiep is a General Managing Partner of Gradmann & Holler, the leading insurance brokerage firm in West Germany, a position he has held since 1968. He is a Director of Marsh & McLennan Cos. Inc., which acquired a majority interest in Gradmann & Holler in 1990. Mr. Kiep is also Chairman of the Supervisory Board of Deutsche ICI, Frankfurt, as well as of Glunz AG, Hamm. He is a member of the supervisory board of Volkswagen AG and of the board of Imperial Chemical Industries PLC, London. Among his other international activities, he is Chairman of the Atlantik-Brucke, a private, nonpartisan and independent organization for the improvement of the German-American relationship, and he has been active as a member of Parliament of the Federal Republic of Germany.
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Title Annotation:Chairman's Agenda: Acquiring in Eastern Europe; American participation in development and investments in Eastern Europe
Author:Kiep, Walther Leisler
Publication:Directors & Boards
Date:Jan 1, 1991
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