globalization and the state in central and eastern europe shadab & zaid

8/13/2019 Globalization and the State in Central and Eastern Europe Shadab & Zaid

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Globalization and the State

Central and Eastern EuropePolitics of Foreign Direct

Investment by Jan Drahoko

Interpreted by Shadab Khan a

Kadiri


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The Aim

The aim of this presentation is to explain the transfo

the state in Central and Eastern Europe since the ecommunism and adoption of market oriented reform1990s, exploring the impact of globalization and ecoliberalization on the regions states, societies and peconomy and the emergence of the competition sta

It compares the different policies and national stratadopted by key Central and Eastern European statethe Visegrad Four (V4) countries-the Czech RepubHungary and Slovakia, showing how initial internallystrategies of market reform, privileging domestic soinvestment, had by the late 1990s given way to exte

oriented strategies emphasizing the promotion of


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It explores the reasons behind this convergence, cothe influence of internal and external forces, and theinterests, institutions and ideas. It argues thatinternationalization of the state is forged in the procthrough which domestic groups linked to transnatioattain domestic influence necessary to shape state

strategy. These groups the comprador service separticular constitute and organize political, sociainstitutional support of the competition state in the r

The Aim


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V4 Countries


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in CEE


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Introducing capitalism into CEE: The

Neoliberal Transformational State

Neo liberalism is a political philosophy whose advocsupport for rapideconomic liberalizations, free trad

markets, privatization, deregulation and enhancing

private sector in modern society. It is characterized

inflationary measures of budgetary and monetary re

shock stabilization, shock price and trade liberalizat

privatization and some form of compensation and c

to preserve social justice.


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Washington Consens

This is the set of 10 policies that the US governmeninternational financial institutions based in the US c

WB) believed were necessary elements of first stag

reform that all countries should adopt to increase e

growth. At its heart is an emphasis on the importanc

macroeconomic stability and integration into the inte

economy - in other words a neo-liberal view of glob

W hi C F


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Washington Consensus Fram Fiscal discipline - strict criteria for limiting budget de

Public expenditure priorities - moving them away fro

and administration towards previously neglected fie

economic returns

Tax reform - broadening the tax base and cutting m

rates

Financial liberalization - interest rates should ideally

determined

Exchange rates - should be managed to induce rap

non-traditional exports


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Washington Consensus Fram Trade liberalization

Increasing foreign direct investment (FDI) - by redu

Privatization - state enterprises should be privatized

Deregulation - abolition of regulations that impede t

new firms or restrict competition (except in the area

environment and finance)

Secure intellectual property rights (IPR) - without ex

costs and available to the informal sector

Reduced role for the state.


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National pathways of the ear

A variety of state strategies with common features ethe CEE in the early 90s

In the realm of economic policy, an inward-oriented

aimed at stimulating domestic accumulation and na

capitalist class formation prevailed in the V4 and SlHungary embarked on the externally oriented frame

as social policy is concerned, all state startegies inv

relatively generous measures of social compensatio

national state was a dominant means of non-marke

governance.


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Czech RepublicEconomic Policies Social Policies Primary Scale Prim

com

failu

Klausian Policy-

Monetarism, Economic

Nationalism, Minimum

regulation of the

financial sector, Bank

Socialism, anti

inflationary and tradedeficit policies, creation

of local bourgeoisie, no

positive industrial

policy

Welfare-

Generous welfare

provision, illusory

collective bargaining,

low wage, low-

unemployment policy

by providing soft creditor subsidies to

enterprises, high social

spending, minimum

wage regulation

National-

Primacy of national

scale. Centralized

national administration.

Regional governance

bodies were either

non-existent or lackedsubstantial autonomy.

Stat

Stat

relia

hoc

help

ente

by bprot

curr


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Czech Republic-Vaclav Kla


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Czech Republic

Shock therapy Privatization of medium and large enterpris

voucher method to create local capital clas

prevent foreign investors from buying out

undervalued and disorganized Czech econ

Most vouchers were distributed among the

population for free.


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Voucher Privatization


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CZ- Irregularities in the financial s

A bulk of the vouchers ended up in the privatizationby the state owned banks.

The four largest state-owned banks owned six of th

investment funds, which in turn owned enterprises w

were indebted to the state owned banks. The state owned banks would support inefficient firm

portfolios.

The lack of control in the financial market enabled t

management of enterprises to tunnel out the assets


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CZ- Problems with Czech Capita Czech Capitalism could not reproduce. The functional

of KWNS had narrow limits and the factors that cause

downturn were largely produced by the very forces drCzech capitalism.

In 1996, CZ experienced an economic downturn whic

followed by a serious current account deficit.

The years 1996 and 1997 saw a series of bank failurefrauds.

In 1997 the government tried unsuccessfully to contai

economic situation by introducing two little packages o

restrictive economic measures.


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SlovakiaEconomic Policies Social Policies Primary Scale Prim

com

ma

Meciarist Policy-

Nationalism with

economic means,

debt-financed

demand stimulation,

tight monetarypolicy.

Welfare-

Employment

keeping subsidies to

private sector,

welfare state,

consumer pricesregulation.

National-

Project of national

resurrection.

Centralized national

administration.

Sta


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Slovakia- Vladimir Meciar

Sl ki


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Slovakia After the split of Czechoslovakia in 1993, the Slova

substantially slowed the implementation of market r

However, it maintained the orthodox macro economstance pursued under the Czechoslovak federation

Meciar government subordinated economic policy to

nationalistic project of Slovak resurrection. Need fo

nationally conscious capitalist class. Most state owned enterprises were privatized by dir

while keeping the sale terms, ownership structure a

identity of the new owners out of the public control.

Slovakia Capital Accumulatio


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Slovakia- Capital Accumulatio During the Meciar period, GDP growth in Slovakia osc

between 4.1 and 6.7 percent led by foreign and dome

demand in a stable macroeconomic framework of rest

fiscal and neutral monetary policies, by a demand orie

economic policy through increased public spending an

extensive public infrastructure investments.

Yet by 1996, partial privatization of banks,politicized le

expensive industrial policy for the politically connectedfiscal deficits that destabilized Slovakia and croweded

domestic investment.

The 1998 elections pushed Meciar and his policy of N

Capitalism out of power and radical reorientation of ec

P l d


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PolandEconomic Policies Social Policies Primary Scale Prim

com

ma

Shock Therapy,

considerably

forfeited. Gradual

privatization. Post

1993 attempt to

build nationalcapitalism.

Strategically

targeted pensions

and benefits.

Blurred collective

bargaining, wage

indexation, workerscouncil,

concentrated

system


administration.

Sta

rest

deli

gov

stru

helppriv

from

one

Poland


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Poland Least distorted reform policy from the washington

consensus.

Shock therapy based on monetarist reasoning of crsqueeze, fiscal consolidation, limiting wage growth

and prize liberalization.

However, after shock therapy in 1990 fiscal and mo

policies were considerably loosened. Moreover thereintroduced provision of credit to enterprises and e

selective protectionism.

In addition the government engaged in economic

intervention including a number of industrial policies

Poland


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Poland Shock therapy did not include privatization. Poland e

on an internally oriented gradualism with employee-

management buy-outs or leases being the main met

In 1994, almost four-fifths of the 500 largest industria

companies were still state owned, only 64 were priva

owned and 39 were foreign owned enterprises.

By 1995 most of the privatized enterpirses were sma

companies employing fewer than 200 employees.

Mass privatization through direct sales was impleme

1995-96

Only 6 to 10 percent of the total FDI coming to Polan

directed to rivatization rocess between 1994-98


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Poland Capital Accumulation In terms of growth record, Poland proved to be the big

success story of the region, it experienced unbroken g

record throughout the 90s.

Polish deliberative government structures performed h

state-owned enterprises to the new environment.

The Polish growth record can largely be attributed to

relatively superior performance in enterprise restructuin creation of new firms.

Poland integrated into the world economy using the lo

trade however throughout the 90s neither foreign-orie

privatization nor other types of FDI changed the struct

H


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HungaryEconomic Policies Social Policies Primary Scale Prim

com

failu

Externally oriented,

gradual reform, case-

by-case, cash based

privatization

Initially generous

welfare measures,

Strategically targeted

pensions and

benefits, tripartite

collective bargaining,

wage indexation,dispersed system.

Hungarys share of

social spending was

even higher than that

of EU.


administration.

Stat


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Hungary

Hungarys reform strategy was more gradualist, with s

reforms undertaken already under socialism. A case-by-case approach based on direct sales for ca

main method of privatization, which favored TNCs.

Privatization of formerly state-owned large companies

by the end of 1995

Privatization of banks was accomplished by the end o

In the early 90s no other CEE country was prepared to

stakes in sensitive or strategic sectors such as bankin

to foreign capital


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Hungary

Hungary offered generous incentives to foreign inveincluding tax and custom exemptions.

It also guaranteed free repatriation of after-tax profi

capital.

However between 1993 and 1994 there was a shorin which national accumulation was promoted by su

the sale of enterprises to domestic owners.


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Hungary

Hungary became fully integrated into global, especiall

European capitalism through debt, trade, FDI and ban Only 20-25% of the local firms survived the transition

room for foreign owned companies.

Privatization made Hungary the leading capital import

It established itself as an export leader in Europe in tramostly with Western Europe.

The Hungarian strategy proved to be functional in crea

foreign led capitalism and underpinning foreign led gro

development.


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Hungary Hungary became fully integrated into global, especi

European capitalism through debt, trade, FDI and b

Only 20-25% of the local firms survived the transitio

room for foreign owned companies.

Privatization made Hungary the leading capital imp

CEE. It established itself as an export leader in Europe in

mostly with Western Europe.

The Hungarian strategy proved to be functional in c

foreign led capitalism and underpinning foreign led

Slovenia


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SloveniaEconomic Policies Social Policies Primary Scale Prim

com

ma

Social-democratic,

export oriented

developmentalism.

Generous welfare

measures, strong

tripartite collective

bargaining


administration.

Sta

Slovenia


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Slovenia Slovenia underwent IMF led price and trade liberalizat

early as the 80s.

Transition policies in Slovenia were aimed at domestic

accumulation and were very cautious in relation to FD Privatization followed a decentralized model involving

Every FDI transaction required a registration at the dis

court. Most of the deals were subject to approval by th

Slovenian Privatization Agency. It was required that a majority of any board of director

be Slovenian citizens.

In some sectors like transport, communications, insur

mass media, wholly foreign owned companies were n

Convergence towards Competi


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Convergence towards CompetiStates in CEE in the late 90s

Competition state- The promotion of economic comand competition as a political priority in response to

globalizations lowering of economic borders betwe

Investment attraction is not an isolated sectoral poli

targeting FDI are considered as means of achieving

such as job creation, industrial development and theof R&D.

Convergence towards Competition


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Convergence towards Competition in CEE in the late 90s

The competition states in the V4 countries can be c

porterian since the industrial polices in the V4 are bthe notion of competitiveness as described by Mich

Porter.

In porterian logic competitiveness is archived from h

rising level of labor productivity associated with high

production processes and highly qualified labor-inte

activities.

The Porterian strategy in the V4 is driven primarily b

industrial upgrading with transnationaly oriented ind

late 90s


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late 90s

The Porterian states engage in supply side intervention to

the insertion of locality into the global economy by discrimin

among investors upon their potential contribution to the loc

economy. The main means of intervention in the V4 are difftargeted investment subsidies, including tax breaks, emplo

training grants and subsidies for infrastructure developmen

After bringing an investor into a locality, state policies attem

embed in in the local economy and thus create potential fo

effects and industrial upgrading ad reduce the risk of its de

making it more locality dependent and thus less mobile.

In the late 90s Greenfield investments in the automobile an

electronics sectors dominated the agenda, which is now be

replaced by the service sector.

late 90s


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late 90s

In contrast the Baltic competition states can be calle

Macroeconomic stability driven neoliberal states wit

monetary institutions at their core. These states aimattracting and keeping investment primarily by mark

and by the provision of low-cost and flexible environ

which can have adverse effects on social inclusion.

Slovenia has developed a distinct type of competitiowhich can be characterized as balanced neo-corpo

Negotiated industrial relations play a crucial role in

the potentially contradictory tasks and institutions o

Slovenian competition state.

Overview of Incentive Sche


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Overview of Incentive ScheCountries Tax Holidays/

Subsidies

Tax rate

%

Strategic

Incentives

Special

Economic

Zones

Bulgaria Yes 20 No 6 zones

Czech Rep Yes 28 Yes 13+ zones and

parks

Hungary Yes 16 Yes 75+zones and

parks

Poland Yes 19 Yes 14+ zones and

parks

Overview of Incentive Sche


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Overview of Incentive ScheCountries Tax Holidays/

Subsidies

Tax rate

%

Strategic

Incentives

Special

Economic

Zones

Slovakia Yes 19 Yes 9+ parks

Slovenia Yes 25 No 8+ free zones

Estonia No 26 No Ports only

Latvia No 15 Yes Ports only

Lithuania No 15 Yes 3 free zones

and 2 parks

Romania Yes 25 Yes 30 Zones

or er an or are os -na ona eg me V4


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gV4

Economic Policies Social Policies Primary Scale Prim

com

failu

Porterian-Manages insertion of

the locality into global

economy. Supply side

intervention, FDI

attraction through

targeted subsidies,

emphasis on skill

intensive, technology

rich activities.

Workfare-Subordinates social policy to

economic competitiveness,

emphasis on flexibility and

employability, attempts to

reduce unemployment

through investment

attraction. Retrenchment of

old welfare schemes and

discouragement of passive

welfare benefits.

Post-national-Shift of power

upwards,

downwards and

sideways. New

role of national

scale, equalizing

compensating

spatial project.

EU accession

norms and

decentralization

RegShif

Pub

Part

PWPR-Economic Policies- The Czech R


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The National Investment Incentive Scheme of 1998 esta

very generous system that included corporate tax holida

10 years, dutyfree importation of machinery and equip

newly established companies, low cost or virtually free tland and infrastructural facilities to investor, subsidies fo

the labor force and grants for newly created jobs.

The scheme also improved the institutional frame work f

investment promotion by giving the investment promotio

Czech Invest considerable independence and establishione-stop shop for investors.

Later amendments to the scheme gradually lowered the

amount of individual investment, reduced the duration of

to 5 years and retargeted the scheme to more technolog

PWPR-Economic Policies- Hungary


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With the aim of attracting export-oriented, high-technology

Hungary introduced Industrial Free Trade Zones, as early a

which were exempt from customs and indirect taxes.

Hungary offered a complex set of fiscal, financial and otherthroughout the 1990s and 2000s.

Aiming to attract blue chip companies, the government offe

monopoly positions to foreign investors.

In 1996, the investment incentive scheme changed and be

generous and more export oriented large investments inmanufacturing.

The new scheme also created policies aimed at creating lin

local companies.

In 2003 Hungary had to be less generous with tax allowan

PWPR-Economic Policies- Poland


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Till January 1999 Poland did not have a stable national pol

investment incentive

In 1998 all companies with foreign participation were grant

year tax holiday which was replaced by individual tax exem1991

Some of the large investors like Fiat, Alcatel, lucent and Sie

were granted monopoly positions

In 1996 the government introduce special economic zone fforeign and domestic companies and increased the speed

privatization of the already restructured SOEs to foreign ca

In 1999/2000 the country invented the massive programme

foreign sell off in the banking sector

In eneral it was onl in the late 90 s that externall oriente

PWPR Economic Policies Slov


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PWPR-Economic Policies- Slov

The new government of Mikulas Dzurinda in 1998 r

changed the countries policy orientation. FDI becam

hegemonic in thinking about economic developmen

country.

In 1998 Slovakia, emulated the Czech investment s

scheme

In 2002/2006 motivated by the encouraging FDI the

government introduce flat tax and employer friendly

In 2005 the government re targeted its investments


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Competition states- Capital Accumula

The economic recovery of the late 90s in the CEE r

been largely driven by an upsurge of FDI. Economies in the region went through a rapid

internationalization process.

Foreign-led economies crystallized in CEE with fore

control of leading export industries and most public and unprecedented level of foreign dominance in th

banking sector.

The competition states in CEE indeed did address t

element of reproduction of capital So far the foreig

Transnationality index- CEE


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Countries 1999 2002

Czech Republic 17.6 30.9

Hungary 27.6 30.1Slovakia 7.1 27.5

Poland 11.5 15.6

Slovenia 7.9 22.3

Estonia 23.2 39Lativa 18.3 18.8

Lithuania 13.2 23.3

Ukraine 4.8 10.3

Romania 9 4 12 1


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Transnationality index Review


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Transnationality index- Review Czech Republic, Hungary and Slovakia have becom

internationalized as small open European economie

Sweden, Netherlands and Denmark. Slovenias level of internationalization is higher than

UK or Germany.

Poland has taken over Germany and France by a n

margin in terms of internationalization. As far as Baltic states are concerned Estonia has b

the most internationalized economy in the region. L

Lithuania are comparable to Slovenia.

Penetration ratios of majority-owne


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bank affiliates in banking sector, 20

CEE % Developed

Countries

Estonia 98.9 New Zealand

Czech Republic 90 UK

Hungary 88.8 US

Slovakia 85.5 Norway

Lithuania 78.2 Portugal

Poland 68.7 Australia

Why did state strategies converge to a particu


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y g g p

the V4 countries?

V4 countries have been endowed by similar comparative

and structural advantages through out the 90s and earlythey are more similar in terms of their international expo

nature of integration into the transnational economic spa

Competition - the V4 countries had to replace the Counc

Economic Assistance trade with Europe and the West.V

could compete only in labor intensive and low tech prodlowering of trade barriers caused a huge influx of import

products from the West.

Coercion - Conditional re-financing of loans by IMF & W

of foreign advisers and conditions attached to EU memb

Why did state strategies converge to a p


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type in the V4 countries?

Learning- Policies maker in V4 countries changed t

goals and preferences as a consequence of past po

failure.

Emulation and the process of transnational class fo


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globalization and the state in central and eastern europe shadab & zaid

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