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The 'Miracles' of Hungary and Poland: European Tigers

A driver crosses the Soviet-Polish border, December 1990.
Georges DeKeerle | Getty Images
A driver crosses the Soviet-Polish border, December 1990.

"We may read in ten or twenty years of the "Hungarian Miracle" or the "Polish Miracle," or how these countries have become a European equivalent of the famed late 20th century "Asian Tigers" (Hong Kong, Singapore, Taiwan, South Korea)." So I concluded a 1991 lecture to a special symposium hosted at Vanderbilt University School of Law.

Having traveled in the region extensively since the collapse of the Iron Curtain, my lecture was excited and optimistic about extraordinary reforms and freedoms being experienced anew in Central and Eastern Europe. The radical rejection of Soviet style communist politics and socialist economics and the quick embrace of western political and liberal market economics were heartening.

In the spring of 1990, U.S. Treasury Secretary Nick Brady asked me to lead an effort to design and structure U.S. assistance, particularly delivering training to financial sector managers in Eastern Europe's banks, security exchanges, central banks and the ministries of finance.

Now twenty-two years later, I reflect on two decades of this successful transition.

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The Asian Tigers offered a template of success far superior to so-called market policies in Western Europe or even in the United States.

This was such a rare opportunity in politics and economics - to get a "do over," a "mulligan." But in fact, due to the exceptional vision of President George H. W. Bush, German Chancellor Helmut Kohl and Soviet leader Mikhail Gorbachev, such a mulligan was indeed granted.

President Bush's careful diplomacy facilitated the Eastern Block, particularly a unified Germany to have the freedom to stay in the defunct Warsaw Pact, join NATO, or actually remain non-aligned. Gorbachev's tacit agreement (this rejection of the Brezhnev Doctrine) was one of the most visionary and peaceful decisions in modern history and led to his being the recipient of the 1990 Nobel Prize for Peace.

The Asian Tiger model of low taxes, free trade, currency convertibility, protection of private property and price liberalization was the talk of newly elected Eastern European parliaments. However, in Europe, a particular challenge resided in the local, government controlled banks where no one had made any "independent" credit decisions in four of five decades utilizing independently produced financial statements. Instead, the banks were purely arms of the communist government budget controllers who directed the spoils of the economy to favored companies.

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The U. S. Treasury engaged former U.S. accountants and commercial bankers and made them available to the central banks and financial ministries to help create basic regulatory schemes; structure training institutes in Poland, Hungary and Yugoslavia to help train bankers in credit analysis and financial accounting. Teams of western lawyers and accountants helped draft the basic tenants of private property rights, corporate securities and corporate governance practices. Using Poland as an example, by the summer of 1991, a small stock exchange was functioning and a private banking industry was started with 22 new licenses and training was wide spread.

While the immediate "shock therapy" of these market forces were not embraced by all, parliaments and leaders headed in that direction, nonetheless. Poland, perhaps, was the most dramatic. With a population of 38 million, Pope John Paul II's visit to the Gdansk shipyard in 1979 followed by Solidarity's formation in 1980 started the then tiny snowball of freedom and democracy rolling downhill. On June 4, 1989, the snowball avalanched with the election of Solidarity majorities in both houses of the Polish legislature body. Ironically, on the same day this extraordinary achievement happened halfway around the world, the opposite was happening as tanks rolled into Tiananmen Square in Beijing.

During 1991, the Poles devalued the Zloty, from 700 to 9,500 to the dollar. Poland initiated a largely convertible currency and created over 1.2 million new businesses. By the end of 1991 the private sector represented 45 percent of all employment; a mass privatization scheme was put in place; old government debts were re-structured; and, Central Bank Independence was initiated. Thus, this rebirth of a nation was a transformation of hope, but it was not pain-free as state-owned enterprise job guarantees were abandoned and the trade with the West replaced that of the Eastern Block.

But in the end, Solidarity members and the remaining Communists (Polish leader and 1983 Nobel Peace Prize winner, Lech Walesa called his "Communist" colleagues "radishes" for their lack of Communist zeal, that is, they were "red only on the outside"!) worked for the betterment of Poland.

Twenty-two years later, one finds my words at Vanderbilt fulfilled. In the last two decades, Poland became the fifth fastest growing country among the 210 countries followed by the U.N. between 1990 and 2007 (prior to start of the global downturn). Per capita, gross domestic product was up 11.6 percent over the period. Poland is in good company with six other former communist states joining the top 20 fastest growing economies of the period.

Economists consider Poland's two decades of freedom a success.

Inflation is under control; the economy continues to grow in spite of European economic headwinds. The Poles continue to lead in fiscal reforms with government debt limited to 60 percent of GDP ("Washington, are you listening?"); a proposal is pending to limit the growth in government spending to consumer price index plus one percent; and, the Poles are considering reforms to retirement benefits by extending the retirement age from 65 and 60 to 67 for men and women, respectively. Polish banks are liquid, profitable, with adequate capital; corporate tax rates remain low, less than 20 percent, preferable to the Organization for Economic Cooperation and Development average of 24.5 percent and far superior to the penurious 38 percent rate experienced in the United States. In short, we are indeed reading of the Eastern European Tigers.

The two decades were not without strife.

The ethnic chaos of the brutal breakup of Yugoslavia and the Kosovo crisis were painful and remain so. But across the region there's new hope and new opportunity. Governments are responsive to the people and follow many of the best practices long lost in Paris, London and Washington, D.C.

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J. French Hill is founder and chief executive officer of private banking company, Delta Trust & Banking Corp. (www.delta-trust.com) and a member of YPO's graduate organization, WPO. He served as Deputy Assistant Secretary of the U.S. Treasury from 1989 to 1991; subsequently, he served on President Bush's White House staff as Special Assistant to the President for Economic Policy. This is the first of two columns about Eastern Europe's successes that will be on CNBC.com. His next column will discuss investment opportunities in the region. To read the referenced 1991 lecture to the Vanderbilt School of Law, please go to: http://www.delta-trust.com/exchange/rebirth-of-a-nation-french-hill/

Disclosures: This is not a recommendation to purchase securities. Investments listed herein may not be suitable for all investors. Please consult your investment professional before investing.

CNBC and YPO (Young Presidents' Organization) have an exclusive editorial partnership. A key component of this partnership is regional Chief Executive Networks in the Americas, EMEA and Asia-Pacific. These Networks are made up of cross-sections of YPO's unrivaled global membership of 20,000 top executives on the frontlines of the economy, running companies that collectively generate $6 trillion in annual revenues and employ 15 million people in more than 120 countries.