Fly East For The Winter

A major occupational hazard for emerging-market investors traversing through Central and Eastern Europe is letting the heart rule the head. After all, it's easy to believe that if Prague and Dubrovnik are such great places to visit, they must be great places to invest as well.

Then there is Warsaw. With much of the city's pristine architecture decimated in World War II and replaced by Soviet-style building blocks, it's easier to objectively assess the region's economic prospects. But the takeaway, even from Warsaw, is that the region is in the midst of a growth miracle that parallels East Asia in the 1970s and '80s.

There are some striking similarities. For a long period of time in East Asia, the continent's small- to midsize economies fed off each other's success, growing quickly. It was described as the "wild geese flying" model of development—a reference to the V-shaped pattern those birds fly in, providing a thrust to one another with the flapping of their wings.

That's true of Central Europe today. Many of its economies are racing against each other toward

the common goal of rapidly integrating with the European Union. Over the past few years, the CE4 countries of Poland, the Czech Republic, Hungary and Slovakia have averaged growth rates of 5 percent, the Balkan nations of Romania and Bulgaria have grown at nearly 7 percent, and the Baltic nations of Estonia, Latvia and Lithuania have expanded at 10 percent.

The process of economic catch-up is playing itself out in the classic way: the poorer the country, the faster the growth rate. As a result, the region's living standards are fast converging with those of the European Union. Per capita income in each of the CE4 nations is now above $10,000. The pace of expansion is particularly impressive as it is not fueled by any commodity boom, and unlike other emerging markets, a negative population growth is helping per capita income increase faster than economic growth.