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East: Economies Walk Narrow Path Towards Globalization

  • Breffni O'Rourke

Prague, 10 April 1998 (RFE/RL) -- Economic experts are warning that the transition economies of Europe and Central Asia must be managed very carefully if they are to benefit rather than lose from the process of economic reforms.

Those countries now building free markets economies are -- with the exception of Russia -- fairly small and are vulnerable to the demands of openness being created by globalization. In particular their institutional infrastructure is mostly inadequate to cope with big flows of capital characterizing the new world order.

German-based analyst Dirk Woelfer of Standard and Poor's credit rating looks at the dilemma facing the emerging economies: "An example is the Czech Republic, where we had a financial crisis last year. We had a fully convertible currency, and of course with a country of only 10 million inhabitants, it is not a problem for big investors from the west to force down the currency, there is no way to resist such external pressures.

"Of course it's another case if we look at Russia, there the market has another dimension of flows. But in any case, in all countries the need to adjust the internal economy to external demands exists, and in some cases these needs contradict the domestic needs.

"To stay with the Czech example, you have to maintain certain interest rates to hold up the national currency, and of course on the other hand the same levels of interest put pressure on the domestic growth potential. That means in general that the leeway for the government, and the decision-makers is smaller than without these globalization tendencies".

Woelfer goes on to say that Russia also illustrates other aspects of problems facing the transition economies, in that it does not have an adequate financial infrastructure. He notes that in any case most of the foreign money coming into Russia is in the form of portfolio investment, meaning investment in stocks and shares, rather than direct investment in factories, plants and the like. Portfolio investment, being speculative and often short term, is much less beneficial to a country than direct inflows into the real economy.

In Russia's case, the absence of a sophisticated financial infrastructure renders it incapable of channeling incoming capital to productive targets. Yet possession of such an infrastructure is an essential element in coping with globalization, says Hong-Kong based specialist Callum Henderson. Henderson, who has written a book about the Asian crisis, says that without such guidance incoming money will go on unproductive adventures. He notes this is exactly what brought the crash in Asia. Amid a careless climate of euphoria, vast sums of money arrived in Asian banks and were unwisely forwarded for instance into unproductive Thai property investments. This means a "bubble" was created which eventually burst, bringing the Asian crash.

Russia, therefore, is potentially in danger of suffering a "bubble." However analyst Woelfer says that the presence of international institutions like the International Monetary Fund and the World Bank are probably sufficient to ensure that this will not happen.

As to which transition countries are doing best to meet the challenge of globalization, Woelfer says: "I guess the Central European economies which are negotiating to enter the European Union -- Hungary, Poland and the Czechs. The Czechs still have some problems, but the underlying structure of their economy is still better off than Romania, Bulgaria and other countries. There, a lot of regulations and infrastructures are missing still, and of course their real economic sectors are still underdeveloped compared with the three first mentioned.

"For instance Hungary began reforms in the late 1960s, and they have the legal framework, and a microsphere with highly competitive enterprises, so I think there will be much fewer problems than in other countries".