Sunday, 14 March 2010

Eastern Europe still lags in attracting foreign investors

Anton Khmelnitski writes: Orange Revolution spurred investment in Ukraine, but nation still needs to change its ways. While painful for many, the current economic crisis provides an opportunity to assess Eastern European economies more than two decade after the fall of the Berlin Wall. It is also a chance to look at challenges and opportunities ahead.

The 2008 global economic crisis has without any doubt been the biggest economic shock since the Soviet Union’s disintegration. In general, Eastern Europe has done relatively well as a group.

Currency devaluations were relatively mild, with the exception of Ukraine, whose currency devalued by nearly 50 percent. There was no widespread run on deposits, although many Ukrainian banks froze withdrawals – and some depositors are still waiting for their savings. Overall, output losses were not worse than the Asian crisis in 1997 and foreign corporations did not leave the region en masse.

Banking bailouts were also lower than during the emerging markets crisis of a decade ago, contrary to the developed world. Many countries needed financial help. But sovereign solvency remains relatively good, compared to developed markets, helped by lower debt-to-gross domestic product ratios.

The reasons behind both crises – the 1997 Asian and the 2008 global – were similar: cheap money and a credit-fueled asset bubble. But policy responses vastly differ today. Countries have managed to combine loose monetary policies with a large fiscal stimulus, contrary to what the International Monetary Fund has been preaching for decades.

On the investment side, over a 20-year period, Eastern Europe received $700 billion in net investment. Poland took a large share of this inflow, close to $110 billion, while the biggest country, Russia, attracted only $43 billion and Ukraine received $41 billion. Out of 30 countries, 15 entered the European Union, which played a large role in bringing foreign direct investment to them, sometimes regardless of reforms achieved. But outside the EU, there is still an Eastern European market of over 300 million people.

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