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Eastern Europe: Investors Turn From Asia Toward Europe

Prague, 18 September 1997 (RFE/RL) -- The transition economies of Eastern Europe appear set to gain major new capital inflows as international investors turn away from the storm-tossed South East Asian region.

For years the high-growth Asian "Tiger" economies were the favoured targets for thousands of millions of dollars of investment from all over the world.

But with stockmarket crashes and severe currency declines of the last few months in South East Asia, increasingly nervous investors are looking elswhere to place some of their money.

The transition economies with their diverse mix of investment possibilities, general political stability and growing market expertise, are a natural target. But there's a catch: Latin America has emerged as a formidable competitor for the money now coming free from Asia.

South American countries have in recent years been able to shed their traditional image of coups, chaos and hyperinflation and are now considered serious investment options. Argentina for example, languished as a backwater during the years of military rule in the 1970s and 1980s, but is now considered one of the world's most vibrant economies. Likewise Chile, which also spent years under authoritarian rule, is recognised as a solid partner for international investors.

Brazil, the Latin American giant which has a reputation of never quite fulfilling its promise, is attracting a high level of foreign investment. But -- true to its reputation -- is causing concern because of its large fiscal and current account deficits, and its declining stockmarket. Mexico and Peru, once taboo areas, are now looking strong.

Even before the Asian crisis, Latin America had been attracting a higher level of investment than Eastern Europe. Last year the Latins drew $244 billion in international bank lending, compared to $103 billion for the transition economies. Both investment destinations however were dwarfed by South East Asia, which drew $370 billion in bank lending last year alone. All three regions, of course, attracted hundreds of millions of dollars more in direct investment from corporations and individuals.

East Europe and the Latin region have not in the past been competing for investment in the most direct sense, in that much of money going into Latin America originates in North America, and much of the money going into Eastern Europe stems from Western Europe. But the question now is who will gain most from the thousands of millions of dollars which would previously have gone automatically to Asia, but are now expected to be seeking a new destination.

Stuart Parkinson, a senior economic specialist with Deutsche Morgan Grenfell in London, told RFE/RL yesterday that both regions in question share similar advantages that they are strategically located on the periphery of big developed markets for their goods -- North America and West Europe in this case -- and both have big pools of cheap labour and cheap manufacturing conditions.

He says East Europe has the advantage of a better-educated population, but he says a lot depends on the flexibility of those people. He notes that most of the East European economies are traditionally linked to heavy industry and their people are accustomed to that sector, whereas the future lies more with light industry, high tech industries and the service sector.

Both regions suffer problems from corruption, which acts as a measurable deterrent to investment. A World Bank report estimates that in a sample of 39 developing and developed countries, high levels of corruption coupled with the unpredicatability of the bribery process, are an important factor in reducing investor activity. But at least East European countries fare somewhat better in this comparison than Latam countries. Bolivia, Colombia, Mexico, Venezuela and Argentina are all rated as worse in corruption issues than Romania, Poland, Hungary, the Czech Republic and other East European destinations. Russia, though, is high on the table, just behind Colombia.

Parkinson says that the basic decisions by investors about where to place their money will be made on the traditional grounds: namely in destinations where they can draw sound profit under stable conditions. He says it is up to the individual governments in both the transition region and Latin America to create the right conditions to secure the investment they need for continued devlopment.