(FORTUNE Magazine) – AS THE TANNED, athletic-looking man with the thick mop of white hair stepped off a plane in Prague, the cheers of 10,000 Czechs rang in his ears. Was this ) a beloved former politico coming home from exile to resume power? Not exactly. Thomas Bata, 75, makes shoes. When the Communists nationalized his family business in 1945, he fled to the West. Today Toronto-based Bata Industries Ltd. is one of the world's largest shoe manufacturers, and he is talking to the Czech government about moving back into his old plants. Says Bata: ''I never gave up hope for this miracle.'' Bata's triumphal return epitomizes what is happening in Eastern Europe. Amid the peaceful revolution, Western entrepreneurs are scouting the landscape for new opportunities. How big they turn out to be will depend on how aggressively the Eastern countries press their promising reforms. But first comes the really hard part. Over at least the next 18 months or so, economic liberalization will inflict severe pain. Unemployment will rise and living standards will drop as decontrolled prices go up faster than wages. ''The changes could lead to revolt,'' says Norbert Walter, chief economist at West Germany's Deutsche Bank. ''People might say, this isn't what we expected from capitalism.'' To turn the corner, Eastern Europe needs a huge influx of foreign investment in plant and equipment that can narrow the gap in productivity -- and pay -- with Western Europe. East Germany and Czechoslovakia offer the best prospects. They have long been the industrial heart of the East bloc, and their investment-starved enterprises need everything from computers to pollution-control equipment. Together they make up a market of 32 million relatively well-to-do consumers. The biggest beneficiaries -- especially at first -- will be West German companies, which are poised to profit from Chancellor Helmut Kohl's quick move toward monetary and later political union with East Germany. Fairly typically, Volkswagen plans to counter West Germany's high labor costs by building a $3 billion car plant in the East. Says chief financial officer Dieter Ullsperger: ''Why go to South Korea when you can invest right next door?'' Others also stand to gain. General Electric of the U.S. has completed a $150 million deal for 50% of Tungsram, Hungary's state-owned maker of light bulbs, and has won a $300 million order to sell jet aircraft engines to Czechoslovakia. Japan's Mitsubishi is said to be considering East Germany for its first car plant in Europe. The regions that are now Czechoslovakia and East Germany have been industrialized for more than a century. Today per capita income in the two countries is the highest east of the Elbe: $9,360 in East Germany, $7,600 in Czechoslovakia. Neither nation is hampered by heavy foreign debt. Czechoslovakia owes just $3.4 billion to Western banks, vs. Poland's $40 billion. Only slightly less attractive is the smaller economy of Hungary. Despite piecemeal reforms dating from the late 1960s, lingering state control led to high inflation and huge foreign debt. The crisis is forcing the government to move to a far freer market than before: This year it will sell stakes in several hundred state-owned companies to private investors. Besides GE, General Motors and Japanese automaker Suzuki have announced major joint ventures there.

In Poland the new Solidarity-led government has promised a shift to Western- style capitalism. But first it must overcome its Communist legacy -- ruinous 40%-a-month inflation. Solidarity proposes a daring austerity program that includes slow money-supply growth, wage restraints, a balanced budget, and an end to all subsidies for housing, food, and energy. If those reforms succeed, Poland could become a magnet for foreign investment. Its 38 million consumers form the biggest market in Eastern Europe. U.S. and West European food manufacturers would love to turn Poland's potentially immense production of potatoes, wheat, and beef into processed foods. Combining efficient crop production with food processing -- a pairing that works well in Denmark -- could also be the best model for the impoverished agricultural economies of Rumania and Bulgaria. The East German government, which has dropped the Communist label but is still made up of old party members, has proposed legislation that would allow majority foreign ownership of companies with fewer than 500 employees, and a 49% stake in bigger enterprises, rising to 100% with special government approval. In Czechoslovakia, liberalization is gaining rapidly under the new coalition government of President Vaclav Havel, the playwright who was regularly jailed by the Communists. Some of the leaders are free-marketers -- including Finance Minister Vaclav Klaus, a disciple of Milton Friedman. Already, foreign companies can legally own up to 99% of ventures formed with Czech partners. IN EAST GERMANY the threat of economic collapse is driving the country headlong toward unification with the powerful West German economy. Elections will be held March 18; polls show only about 10% of the voters favor the Communists, while some 50% support the social democratic party that is the twin of West Germany's Social Democrats. Political unity could take several years, partly because it requires delicate negotiations on whether a combined Germany will be part of NATO. But some form of economic union is imminent. For East Germany economic unity will meet the key challenge facing all of Eastern Europe: how to get hard currency to buy industrial equipment and consumer goods from the West. The East needs everything. Visiting its decaying cities is like stepping back 50 years. In Dresden, tiny cars rumble over turn- of-the-century cobblestone streets lit by flickering electric lamps. Many factories resemble Blake's dark satanic mills, squalid brick edifices blackened by pollution and still scarred by wartime bombing. Authoritative estimates put the cost of modernizing industry and infrastructure in East Germany at $500 billion over the next ten years. Western governments and institutions -- including the European Community -- have pledged more than $20 billion in aid, grants, and low-interest loans for Eastern Europe. That's a start, but it will take a ton of private investment to finish the job. The main barrier: the lack of fully convertible currencies. Foreign companies can't change their Czech korunas or East German marks into dollars or deutsche marks in order to take profits home or buy more equipment in the West. Eastern governments are starting to face up to the problem. Czechoslovakia pledges to make its koruna fully convertible by the mid-1990s. Late last year the government devalued the koruna 17% against Western currencies to bring it more in line with the black-market rate. FOR THE EAST GERMANS, economic union will solve the problem far sooner. The West German government wants to move fast. Its revival plan for East Germany has two key parts: speeding up free-market reforms and quickly making the deutsche mark the official currency of East Germany. The reform menu is likely to include privatization of big state-owned companies and scrapping all restrictions on joint ventures. Bonn will also press for an end to heavy subsidies for housing, food, and fuel, and to create a Western-style banking system composed of private and state-owned banks that compete for corporate and retail customers. Propelled by the mass exodus of East Germans, monetary union seems certain to get under way right after the elections. Setting exchange rates won't be easy. In East Germany now, the official rate is one East mark to one deutsche mark; at banks in West Germany, one deutsche mark buys about seven East marks. At least two scenarios are possible. West Germany could immediately impose the deutsche mark as East Germany's sole currency by exchanging deutsche marks for all the East marks in circulation or make East marks convertible more gradually over six to 12 months. West Germany risks a tussle with inflation as well as severe strains on its social welfare system. East Germans' savings come to some 180 billion East marks. If East Germans get to exchange their East marks for deutsche marks at a single stroke, they might push up prices by storming into West German stores, car dealerships, and restaurants with the equivalent of billions of dollars. Pressured by the Bundesbank, its central bank, West Germany is likely to take precautions. One solution would be to translate at least some East German savings into deutsche marks at a lower rate than salaries. East Germany could also help channel savings into investment instead of consumption by quickly allowing all its citizens to buy their own houses. In the long run, by providing a pool of cheap labor, East Germany will help ease upward pressure on wages in West Germany. The two governments are betting that stiffer competition and inexpensive imports will restrain prices and that the swift shift to deutsche marks will generate a flood of job-creating investment. Even at an exchange rate of one deutsche mark to one East mark, wages in East Germany would be only half as high as in West Germany -- a powerful magnet for investment from the West. Deutsche Bank's Walter predicts a phenomenal 10%-a-year growth rate for the East German GNP in the 1990s. Says Paul Horne, an economist at Smith Barney Harris Upham in Paris: ''The shock treatment will be much more painful than gradual economic union. But it could also mean that instead of taking 15 years, an 'economic miracle' in East Germany could take much less than ten.'' For Western companies, East Germany and Czechoslovakia offer opportunities for sales and joint ventures in three main areas: factory equipment, consumer goods (especially cars), and infrastructure -- particularly in power generation, transportation, and telecommunications. The only energy-producing raw material in either country, lignite, better known as brown coal, now furnishes 85% of the electricity in East Germany and 54% in Czechoslovakia. Because it contains five times as much sulfur as hard coal, it has brought on an environmental apocalypse. Living in pea-soup smog, the people of many cities suffer a high rate of respiratory ailments. Reducing air and water pollution throughout Eastern Europe will be a major undertaking. East Germany pledges to reduce its sulfur dioxide emissions 30% by 1993. Jens- Peter Schaefer, president of Lurgi, a West German air pollution equipment producer, puts the cost over 20 years at more than $300 billion. Eastern Europe's telephone systems are decades out of date. It can take two hours of continual dialing to call from East Berlin to West Berlin -- if you have a phone. Some of the 1.2 million East Germans whose applications for phone lines remain unfilled have been waiting as long as 15 years. Czechoslovakia has one line for every seven people, East Germany one for nine -- and West Germany about one for two. East Germany and Czechoslovakia want to triple telephone capacity. Each country plans to buy $4 billion to $5 billion of digital switching equipment. East Germany, which aims to catch up with the West in phone lines per capita by the year 2000, just signed an agreement with the West German switching manufacturer SEL, a subsidiary of the French telecommunications giant Alcatel. Czechoslovakia is talking to Siemens, Alcatel, and Ericsson of Sweden about a joint venture with the Czech telecommunications equipment producer to make digital switches locally. AT&T so far has sold only one digital switch -- to Poland, for $9 million -- but hopes that is just the beginning. SALES OF WESTERN capital equipment are beginning to take off because of new government policies. In the past most hard-currency allocations went to basic industries such as steel and petrochemicals. Typically, the leading exporters to the West got little. VEB Lokomotivbau, East Germany's largest locomotive manufacturer, generated $214 million in hard-currency exports last year and received an allocation of $120,000. Both East Germany and Czechoslovakia have pledged to allow their companies total freedom to invest what they earn. That is giving them a powerful incentive to export, thus swelling the amount of hard currency available to buy Western machinery. Czechoslovakia's exports to the West jumped 13% last year. Auto producer Skoda plans to double exports to the West by the early 1990s; using that hard currency and its improved status as a borrower, Skoda and its suppliers aim to spend $1 billion by 1995 to modernize their plants. Foreign equipment suppliers are making lucrative deals. Example: Duslo, a Czech chemical company, last year bought several industrial control systems from Honeywell for about $6 million. Encouraged by the results, Duslo plans to spend $60 million on Western equipment through 1994. ''For the first time, companies care about exports and productivity,'' says Norbert Kiesling, a Honeywell managing director. By the late 1990s the company expects to lift sales of industrial control equipment at least tenfold, to $250 million. Another sleeping giant is automobiles. Eastern Europe has 115 cars per thousand people, vs. 600 in Western Europe. Volkswagen reckons that annual sales could expand from one million autos now to five million by the year 2000. Says VW President Carl Hahn: ''This is a megamarket without parallel.'' Three automakers plan major investments. In Hungary, General Motors is forming a $150 million joint venture with truck producer Raba to build car engines and assemble its compact Opel Kadett. Suzuki plans to manufacture 100,000 cars a year in Hungary by the late 1990s. But the most ambitious is Volkswagen. Five million East Germans are on waiting lists for new cars. Basic transportation is the Trabant, a smoky, two- cylinder midget that sputters like a lawn mower as it struggles to reach a top speed of 60 miles an hour. Though plans are still sketchy, Volkswagen, in partnership with IFA, the Trabant's maker, will probably produce an all-new replacement for it starting in 1995. The $3 billion venture will make some 250,000 cars per year, double the current total. The emerging consumer goods market is highly attractive to U.S. companies. East Germany is one of the few countries where shoppers can't find Coca-Cola, outside of hard-currency shops for tourists. Coke hopes to gain 16.6 million thirsty new customers by forming a bottling and marketing joint venture with Getranka Kombinat, the East German soft drink producer. Whirlpool International, a joint venture between the U.S. appliance company and Philips, the big Dutch electronics concern, is prospecting for partners in Czechoslovakia and East Germany to manufacture washing machines and microwave ovens.

Washers, microwaves -- and freedom: Such are the rallying cries in Eastern Europe. If the march toward democracy and free markets continues, Western companies could provide the cash, knowledge, and equipment to create an economic miracle to match the region's wondrous new freedom. That if remains a large one, at least for the short term. Businesses that jump in hastily, without careful homework, could find their ventures jeopardized by the inevitable turmoil as Eastern Europe moves from repression to political and economic liberty.

CHART: NOT AVAILABLE CREDIT: SOURCES: PLANECON, CIA ESTIMATES CAPTION: EASTERN EUROPE'S UNSTEADY MARCH TOWARD DEMOCRACY