Victims of success

Nestled in the industrial heartland of the Czech Republic, Otrokovice has become a symbol of the rebirth of post-Communist Europe - a thriving factory-town transformed by foreign investment. But if not careful Otrokovice, and many similar towns across developing Europe, may become victims of their own success. Since the fall of the Iron Curtain, investors have poured billions of dollars into east Europe to take advantage of the highly-skilled, cheap labour force that emerged on its doorstep. Last year the Czech Republic took in some $ 4 billion in estimated foreign direct investment.

The much bigger Poland received around $ 10 billion in the same period. Hungary, the regional leader in terms of foreign firms per capita, has nearly 15,000 foreign-owned companies operating on its soil. In Otrokovice, 350 km east of Prague, a bleak landscape of unemployment, pollution and decay has been swept clean since the German tyre maker Continental AG arrived in 1993. The Germans bought a 45 percent stake in the antiquated Barum factory and have invested some $ 375 million in breathing new life into an outdated plant and a region suffering from chronic high unemployment. But investment has a down side. It has fuelled economic growth and a dramatic rise in living standards but also pushed up salaries - still only a fraction of those in the West - and the cost of living to a degree that threatens to push investment out of the region. It will be a growing danger as more advanced countries in the region, such as Hungary, Poland and the Czech Republic, hone in on the European Union's 2004 membership target and costs rise further. ''People are very well educated in tyre production and they are very close to Germany and Europe, geographically and in mentality,'' points out Bernard Bamberger, Continental's marketing director for Germany, Austria and Switzerland. But he adds ominously: ''The wages are lower than in Germany, but higher than in Asia.'' Though quick to say quality at Barum is among the best, his underlying sentiment is beginning to trouble officials who fear the regional economy can be torn down just as quickly as it was built. Continental may be happy with its plant, but others firms do not have the same sense of loyalty. Hungary was among the first post-communist countries to create a favourable legal environment in the late 1980s and early 1990s for both portfolio and foreign direct investment. It appears to be losing its attraction as salaries rise.

The volume of investments in Hungary fell 1.2 percent year on year in the third quarter of 2000, according to seasonally adjusted data, after a rise of 5.1 percent in the second quarter. Despite having one of the strongest economies of emerging Europe and being a leading EU candidate, Germany's Mannesmann announced recently that it was closing a car radio and compact disc plant in Hungary just three years after opening it. Some 1,100 workers will see their jobs move east to neighbouring Ukraine where pay is even less than the $ 300 per month that many production-line workers make in Hungary. Several others, including a Japanese cassette maker and a German-Swiss cement maker have moved to cheaper places. ''Recently a number of labour-intensive investors have withdrawn their operations from Hungary as they can find even cheaper labour in Romania or Ukraine,'' said Istvan Zsoldos, analyst at Budapest-based Concorde Securities. Another legacy of five decades of Communist rule that is plaguing investors in the region is labour market rigidity. A lack of housing plays a part in the equation, but the problem runs deeper.

People are not willing to move for jobs and investors cannot entice them. A shipyard in the Polish city of Szczecin wanted to hire workers from Gdansk, about 300 km away, but the Poles were not willing to move and the shipyard recruited from poorer, eastern countries whose workers would travel. Jeremi Mordasiewicz, deputy head of the Business Center Club in Warsaw, says Poland's labour market is marred by a lack of work discipline, short hours and inefficiency which have a negative effect on investment. ''I would not exaggerate the problem of competition from the east. The inflow of eastern labourers is still small scale but to prevent it getting bigger Polish workers have to become more mobile,'' adds Mordasiewicz. Foreign investment has been motivated by the prospect of cheaper labour and encouraged by investment incentives that will largely disappear once countries join the EU. But officials hope investors can be persuaded to stay if the region can sell itself as a home to highly-skilled technicians, good research and development facilities and high-tech plants. ''We may lose our labour cost advantage in, say, 10 years or so,'' says Martin Jahn, head of CzechInvest, a state agency in the Czech Republic that facilitates foreign investment: ''But at that time we will have more high value-added projects and low labour cost projects will move elsewhere. But that's the global economy.''