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A Tattered Welcome Mat For Investors

BUDAPEST— Like many financial planners, I have long advised clients to put part of their portfolios in foreign stocks. That, however, was before I was forced to pay a ransom for toilet paper at the Budapest Zoo.

Before you plunk down your money for shares in somebody’s Hungary Fund or, for that matter, in any investment that promises to put you on the frontier of free enterprise, I would like to offer a few observations gleaned during a two-week stay in this country. My travels included all four of Hungary’s largest cities, several small towns, and visits with typical citizens ranging from impoverished pensioners to university professors and nouveau riche entrepreneurs.

Hungary is supposed to be one of the bright stars of the expanding investment universe. Even in the communist years, a fairly tolerant attitude toward enterprise gave this country a higher living standard than most of its Warsaw Pact partners. Today, with a functioning democracy, a policy of privatization, and a society relatively free of ethnic strife, Hungary is widely viewed as one of the safest bets among the former Soviet republics and satellites.

The reality, however, is that Hungary and its peers will soak up investment like a sponge for decades just to reach a level of development that can support modern Western-style commerce. The problem is a lot bigger than the antiquated telephone system that receives so much attention in the West. Decent office space is hard to find in the capital and nonexistent everywhere else. The expressways running out of Budapest in all directions quickly turn into slow and dangerous two-lane roads, clogged periodically by horse-drawn carts and bicycles. Key rail links have just a single track. When you finally get where you are going you find that hotels are scarce and decrepit, except in Budapest where the numerous Western establishments are merely overpriced. Homes and apartment buildings nationwide are literally crumbling after a half-century of neglect. And people reared under communism need to unlearn a lifetime of bad habits before they can prosper, evidenced by the fact that though this country is struggling to lift itself out of poverty, it virtually shuts down through the month of August for a vacation it cannot afford.

Bashful Need Not Apply

Which brings us to the ransom at the zoo. In Hungary, public rest rooms are seldom free except in Budapest’s Western hotels. Elsewhere an attendant is stationed inside to collect about 20 forints (16 cents) from each patron, and to hand out a small-to-middling piece of toilet tissue in return when requested. Most of these attendants are female. If they are at all bashful about being positioned in the middle of the men’s room, they do not show it. It would obviously be cheaper to raise the zoo’s admission charge by a forint or two and simply put the toilet paper on Western-style rollers, but the toilet lady exemplifies another major problem in the former communist lands, underemployment. Across Hungary, there are many workers who do virtually nothing because they have nothing better to do.

Does all of this mean that Hungary is bound for economic failure? No. While it will be a very long time before this country reaches the level of rich neighbors like Germany, Italy and Austria, all but the oldest Hungarians can hope to see their country achieve parity with less-prosperous European Union countries such as Portugal and Greece. Does Hungary lack good business opportunities? Again, no. Plainly, economic progress for the country will translate into financial success for at least some of its people.

The question for Western private investors is whether this is a good place to tie up some of your money, in the form of shares of local companies. Before I arrived here I probably would have followed the conventional wisdom and said “yes.” I now believe the better approach is to invest in shares of multinational companies, regardless of whether they are based in the U.S. or abroad, that can sell or produce products here, but which may be better off owned and managed someplace else.

The most visible American brands here seem to be Coca-Cola, Pepsi and McDonalds. All of them, not coincidentally, sell or license their products here through local franchisees. This approach allows the U.S. firm to tap Hungary’s growing market with only a small capital investment. (See: "A Path of Faulty Logic Leading to Foreign Stocks".)

The Hungarians have not yet decided what kind of society and how much free enterprise they really want to have. The Dutch entertainment company Polygram recently discovered this when it bid $5 million, by far the largest offer, for the Hungarian state record company, Hungaroton. Government authorities decided instead to sell to local investor group with political connections. I met some Hungarians who agreed with the government line that the music of Bartok and other great Hungarian composers should be kept in native hands. I met others who were outraged that taxpayers and their cash-strapped government were unable to profit from the lucrative Western bid.

Shepherds With Cellular Phones?

The scene: a living room in the university city of Szeged, near the border with Serbia. I am chatting with the wife of a college professor who herself holds several graduate degrees. We discuss the growing number of entrepreneurs who bustle around Budapest with cellular phones and foreign cars. “Most of them don’t have enough education to herd sheep,” she says disdainfully of the entrepreneurs. But, I ask, haven’t the nation’s intelligentsia found comfortable government or university jobs? Are the educated elite willing to take risks to build successful businesses? No, she admitted; the adults who received status and education during the communist years did so by going with the system, which methodically weeded out the nonconformists. Today’s entrepreneurs therefore tend to be either very young or relatively uneducated. They will get their MBAs at the school of hard knocks.

A couple of days later I visit a Hungarian entrepreneur who lives in a small village. The streets are mud and the neighboring houses are dilapidated, but this man’s home is neat and modern, with a satellite dish on the roof and a new German car in the garage. A carpenter, he hired help as soon as it became legal under communism and set up a small factory to make wooden doors. He soon prospered and needed more land for his home and shop. Rather than expand along the street, where jealous neighbors would see his success, he bought a parcel behind his home that is invisible from outside. I surmise some of his doors are going into the lovely homes that are being built these days on the Buda hills by those uneducated businesspeople with cellular phones.

Service With A Shrug

As we traveled the country we gradually realized that there are two types of establishments in Hungary: The kind where the owner serves you, and all the rest. One afternoon we stopped at a small restaurant on the banks of the Danube north of Budapest. As we sat outside beneath the trees, the owner served us large kettles of tasty goulash, along with fresh fish, salad and fruit, followed by coffee, tea and dessert. We had a lovely meal.

Elsewhere we discovered the basic rule of Hungarian labor law, which is that nobody is ever fired no matter how poorly they perform. We checked into our hotel in Szeged on a sultry evening to learn that our rooms had no air conditioning. (We never saw air conditioning outside Budapest, though Hungarian summers are comparable to New York’s or Chicago’s.) The food in the hotel dining room was barely edible. Seeking to escape, we asked the bell captain where we could take our daughters for ice cream. He shrugged and said he had no idea.

At that point I was approached by a hotel guest from England who told me of a very large, fancy ice cream parlor at the city’s central square, just a few minutes away. “Of course, the bell captain knows about that place. Everyone in town knows about it,” my new friend told me later. “He just couldn’t be bothered. It’s a Hungarian disease.”

I encountered the same symptoms a few days later in the eastern city of Debrecen, where Raoul Wallenberg disappeared into the Soviet gulag a half-century ago. The girls wanted to buy some Hungarian dolls at our hotel gift shop, so I went to the front desk to exchange $100 in American Express travelers checks for forints. Sorry, the clerk told me, we don’t exchange travelers checks. She advised me to inquire at another hotel in the center of town, several miles away. I asked to speak to the manager. He’s in a meeting, I was told. All right, I replied, he undoubtedly has an assistant, so I will speak with that person.

The desk clerk gave that now-familiar shrug and led me down a corridor to an unmarked door. Inside I found a dimly lit office populated by the hotel manager and three aides. After I explained, clearly and firmly, that I intended to exchange my travelers checks for forints at the hotel where I was staying, one of the assistants escorted me back to the front desk. He then conducted a 10-minute ceremony involving three separate ledger books.

I finally got my forints. Our daughters got their dolls. Local businesses, the kind we financial advisers often suggest you invest in, get the dubious pleasure of trying to operate with this kind of labor force.