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Globalization and the State in

Central and Eastern Europe: The

Politics of Foreign Direct

Investment by Jan Drahokoupil

Interpreted by Shadab Khan and Zaid

Kadiri

The Aim

  • The aim of this presentation is to explain the transformation of the state in Central and Eastern Europe since the end of communism and adoption of market oriented reform in the early

1990s, exploring the impact of globalization and economic

liberalization on the region‘s states, societies and political

economy and the emergence of the competition state.

  • It compares the different policies and national strategies

adopted by key Central and Eastern European states, including the Visegrad Four (V4) countries-the Czech Republic, Poland, Hungary and Slovakia, showing how initial internally oriented

strategies of market reform, privileging domestic sources of

investment, had by the late 1990s given way to externally

oriented strategies emphasizing the promotion of competitiveness by attracting foreign investment

The Aim

  • It explores the reasons behind this convergence, considering

the influence of internal and external forces, and the roles of

interests, institutions and ideas. It argues that

internationalization of the state is forged in the processes through which domestic groups linked to transnational capital attain domestic influence necessary to shape state policy and strategy. These groups the comprador service sector in particular constitute and organize political, social and institutional support of the competition state in the region.

V4 Countries

V4 Countries

Transition from Communism to Capitalism in CEE

Transition from Communism to Capitalism in CEE

Introducing capitalism into CEE: The Neoliberal Transformational State

  • Neo liberalism is a political philosophy whose advocates support for rapid economic liberalizations, free trade and open markets, privatization, deregulation and enhancing the role of private sector in modern society. It is characterized by anti- inflationary measures of budgetary and monetary restraint,

shock stabilization, shock price and trade liberalization,

privatization and some form of compensation and compromise to preserve social justice.

Washington Consensus

  • This is the set of 10 policies that the US government and the international financial institutions based in the US capital (IMF & WB) believed were necessary elements of ―first stage policy

reform‖ that all countries should adopt to increase economic

growth. At its heart is an emphasis on the importance of

macroeconomic stability and integration into the international

economy - in other words a neo-liberal view of globalization.

Washington Consensus Framework

  • Fiscal discipline - strict criteria for limiting budget deficits

  • Public expenditure priorities - moving them away from subsidies

and administration towards previously neglected fields with high

economic returns

  • Tax reform - broadening the tax base and cutting marginal tax

rates

  • Financial liberalization - interest rates should ideally be market- determined

  • Exchange rates - should be managed to induce rapid growth in non-traditional exports

Washington Consensus Framework

  • Trade liberalization

  • Increasing foreign direct investment (FDI) - by reducing barriers

  • Privatization - state enterprises should be privatized

  • Deregulation - abolition of regulations that impede the entry of new firms or restrict competition (except in the areas of safety, environment and finance)

  • Secure intellectual property rights (IPR) - without excessive costs and available to the informal sector

  • Reduced role for the state.

National pathways of the early 90s

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

  • In the realm of economic policy, an inward-oriented framework

aimed at stimulating domestic accumulation and national capitalist class formation prevailed in the V4 and Slovenia. Only

Hungary embarked on the externally oriented framework. As far as social policy is concerned, all state startegies involved relatively generous measures of social compensation. The national state was a dominant means of non-market governance.

Czech Republic

Economic Policies

Klausian Policy- Monetarism, Economic Nationalism, Minimum

regulation of the

financial sector, Bank Socialism, anti inflationary and trade deficit policies, creation of local bourgeoisie, no positive industrial policy

Social Policies

Primary Scale

Primary means to compensate market failure

Welfare-

Generous welfare provision, illusory

collective bargaining,

low wage, low- unemployment policy by providing soft credit or subsidies to

enterprises, high social spending, minimum wage regulation

  • National- State - State favoring market- reliant restructuring. Ad

Primacy of national scale. Centralized

national administration.

hoc interventions to

Regional governance bodies were either

non-existent or lacked substantial autonomy.

help strategic enterprises threatened by bankruptcy and protectionism through

currency devaluation.

Czech Republic-Vaclav Klaus

Czech Republic-Vaclav Klaus

Czech Republic

  • Shock therapy

  • Privatization of medium and large enterprises by

voucher method to create local capital class and to prevent foreign investors from buying out

undervalued and disorganized Czech economy.

  • Most vouchers were distributed among the Czech population for free.

Voucher Privatization

Voucher Privatization

CZ- Irregularities in the financial sector

  • A bulk of the vouchers ended up in the privatization funds led by the state owned banks.

  • The four largest state-owned banks owned six of the largest investment funds, which in turn owned enterprises which were indebted to the state owned banks.

  • The state owned banks would support inefficient firms in their portfolios.

  • The lack of control in the financial market enabled the

management of enterprises to tunnel out the assets for their

CZ- Capital Accumulation

  • The Klausian Welfare National state (KWNS) co-constituted a specific growth dynamic called ‗Czech Capitalism‘.

  • After 1993, KWNS experienced accelerating, low-wage, low- currency value, low-inflation growth and an economic boom.

  • Investment projects (infrastructure) and social spending stimulated demand.

  • Exports were dominated by products associated with lower level of development.

CZ- Problems with Czech Capitalism

  • Czech Capitalism could not reproduce. The functional adequacy of KWNS had narrow limits and the factors that caused the downturn were largely produced by the very forces driving Czech capitalism.

  • In 1996, CZ experienced an economic downturn which was

followed by a serious current account deficit.

  • The years 1996 and 1997 saw a series of bank failures and frauds.

  • In 1997 the government tried unsuccessfully to contain the

economic situation by introducing two little packages of restrictive economic measures.

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Economic Policies

Meciarist Policy- Nationalism with

economic means,

debt-financed demand stimulation, tight monetary

policy.

Slovakia

Social Policies

Primary Scale

Primary means to compensate market failure

Welfare-

  • National- State -

Employment

keeping subsidies to

private sector, welfare state, consumer prices

regulation.

Project of national

resurrection.

Centralized national administration.

Slovakia- Vladimir Meciar

Slovakia- Vladimir Meciar

Slovakia

  • After the split of Czechoslovakia in 1993, the Slovak part substantially slowed the implementation of market reform.

  • However, it maintained the orthodox macro economic policy stance pursued under the Czechoslovak federation.

  • Meciar government subordinated economic policy to it‘s nationalistic project of Slovak resurrection. Need for a nationally conscious capitalist class.

  • Most state owned enterprises were privatized by direct sales

while keeping the sale terms, ownership structure and identity of the new owners out of the public control.

Slovakia- Capital Accumulation

  • During the Meciar period, GDP growth in Slovakia oscillated between 4.1 and 6.7 percent led by foreign and domestic

demand in a stable macroeconomic framework of restrictive

fiscal and neutral monetary policies, by a demand oriented

economic policy through increased public spending and extensive public infrastructure investments.

  • Yet by 1996, partial privatization of banks,politicized lending and expensive industrial policy for the politically connected created fiscal deficits that destabilized Slovakia and croweded out domestic investment.

  • The 1998 elections pushed Meciar and his policy of National Capitalism out of power and radical reorientation of economic

Economic Policies

Shock Therapy, considerably

Poland

Social Policies

Primary Scale

Strategically targeted pensions

Centralized national administration.

Primary means to compensate market failure

State led restructuring and

forfeited. Gradual

and benefits.

deliberative

privatization. Post 1993 attempt to

Blurred collective bargaining, wage

governance structures that

build national

indexation, workers‘

helped public and

capitalism.

council,

private actors learn

concentrated

from and monitor

system

one another

Poland

  • Least distorted reform policy from the washington consensus.

  • Shock therapy based on monetarist reasoning of credit squeeze, fiscal consolidation, limiting wage growth and trade and prize liberalization.

  • However, after shock therapy in 1990 fiscal and monetary policies were considerably loosened. Moreover the state reintroduced provision of credit to enterprises and endorsed

selective protectionism.

  • In addition the government engaged in economic intervention including a number of industrial policies.

Poland

  • Shock therapy did not include privatization. Poland embarked on an internally oriented gradualism with employee- management buy-outs or leases being the main method.

  • In 1994, almost four-fifths of the 500 largest industrial

companies were still state owned, only 64 were private Polish

owned and 39 were foreign owned enterprises.

  • By 1995 most of the privatized enterpirses were small companies employing fewer than 200 employees.

  • Mass privatization through direct sales was implemented in 1995-96

  • Only 6 to 10 percent of the total FDI coming to Poland was directed to privatization process between 1994-98

Poland Capital Accumulation

  • In terms of growth record, Poland proved to be the biggest

success story of the region, it experienced unbroken growth record throughout the 90s.

  • Polish deliberative government structures performed helped

state-owned enterprises to the new environment.

  • The Polish growth record can largely be attributed to its relatively superior performance in enterprise restructuring and in creation of new firms.

  • Poland integrated into the world economy using the ‗logic of

trade‘ however throughout the 90s neither foreign-oriented privatization nor other types of FDI changed the structure of the

Hungary

Economic Policies

Social Policies

Primary Scale

Primary means to compensate market

 

failure

Externally oriented, gradual reform, case- by-case, cash based

Initially generous welfare measures, Strategically targeted

Centralized national administration.

State

privatization

pensions and

benefits, tripartite collective bargaining,

wage indexation,

dispersed system.

Hungary‘s share of

social spending was even higher than that

of EU.

Hungary

  • Hungary‘s reform strategy was more gradualist, with substantial reforms undertaken already under socialism.

  • A case-by-case approach based on direct sales for cash was the main method of privatization, which favored TNCs.

  • Privatization of formerly state-owned large companies was done by the end of 1995

  • Privatization of banks was accomplished by the end of 1996.

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

stakes in sensitive or strategic sectors such as banking or energy

to foreign capital

Hungary

  • Hungary offered generous incentives to foreign investors including tax and custom exemptions.

  • It also guaranteed free repatriation of after-tax profit and

capital.

  • However between 1993 and 1994 there was a short interval in which national accumulation was promoted by subsidizing the sale of enterprises to domestic owners.

Hungary

  • Hungary became fully integrated into global, especially West European capitalism through debt, trade, FDI and banking.

  • Only 20-25% of the local firms survived the transition making room for foreign owned companies.

  • Privatization made Hungary the leading capital importer in CEE.

  • It established itself as an export leader in Europe in trade mostly with Western Europe.

  • The Hungarian strategy proved to be functional in creating foreign led capitalism and underpinning foreign led growth and development.

Hungary

  • Hungary became fully integrated into global, especially West European capitalism through debt, trade, FDI and banking.

  • Only 20-25% of the local firms survived the transition making room for foreign owned companies.

  • Privatization made Hungary the leading capital importer in CEE.

  • It established itself as an export leader in Europe in trade mostly with Western Europe.

  • The Hungarian strategy proved to be functional in creating foreign led capitalism and underpinning foreign led growth

Economic Policies

Social-democratic, export oriented

developmentalism.

Slovenia

Social Policies

Primary Scale

Generous welfare measures, strong

tripartite collective

bargaining

Centralized national administration.

Primary means to compensate market failure

State

Slovenia

  • Slovenia underwent IMF led price and trade liberalization as early as the 80s.

  • Transition policies in Slovenia were aimed at domestic accumulation and were very cautious in relation to FDI.

  • Privatization followed a decentralized model involving vouchers.

  • Every FDI transaction required a registration at the district court. Most of the deals were subject to approval by the Slovenian Privatization Agency.

  • It was required that a majority of any board of directores must be Slovenian citizens.

  • In some sectors like transport, communications, insurance and mass media, wholly foreign owned companies were not

Convergence towards Competition

States in CEE in the late 90s

  • Competition state- The promotion of economic competitiveness and competition as a political priority in response to globalization‘s lowering of economic borders between countries. Investment attraction is not an isolated sectoral policy. Policies targeting FDI are considered as means of achieving other goals such as job creation, industrial development and the promotion of R&D.

Convergence towards Competition States in CEE in the late 90s

  • The competition states in the V4 countries can be called porterian since the industrial polices in the V4 are based on the notion of competitiveness as described by Michael Porter.

  • In porterian logic competitiveness is archived from high and rising level of labor productivity associated with high tech

production processes and highly qualified labor-intensive activities.

  • The Porterian strategy in the V4 is driven primarily by

industrial upgrading with transnationaly oriented industrial policy and related institutions playing a crucial role

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  • The Porterian states engage in supply side intervention to manage the insertion of locality into the global economy by discriminating among investors upon their potential contribution to the local economy. The main means of intervention in the V4 are different targeted investment subsidies, including tax breaks, employee- training grants and subsidies for infrastructure development.

  • After bringing an investor into a locality, state policies attempt to embed in in the local economy and thus create potential for spill over effects and industrial upgrading ad reduce the risk of its departure by

making it more locality dependent and thus less mobile.

  • In the late 90s Greenfield investments in the automobile and

electronics sectors dominated the agenda, which is now being

replaced by the service sector.

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  • In contrast the Baltic competition states can be called Macroeconomic stability driven neoliberal states with monetary institutions at their core. These states aim at

attracting and keeping investment primarily by market forces

and by the provision of low-cost and flexible environment

which can have adverse effects on social inclusion.

  • Slovenia has developed a distinct type of competition state, which can be characterized as balanced neo-corporatist. Negotiated industrial relations play a crucial role in balancing the potentially contradictory tasks and institutions of Slovenian competition state.

Overview of Incentive Schemes

Countries

Tax Holidays/

Tax rate

Strategic

Special

Performance

Subsidies

%

Incentives

Economic

requirements/

 

Zones

Special

 

Objectives

Bulgaria

Yes

20

No

6 zones

Tied to Zones, job creation

Czech Rep

Yes

28

Yes

13+ zones and

Size, job

 

parks

creation,

 

services and

R&D, partly

decentralized

Hungary

Yes

16

Yes

75+zones and parks

Size, structurally weak areas, environment

Poland

Yes

19

Yes

14+ zones and parks

Tied to zones, fully decentralized

Overview of Incentive Schemes

Countries

Tax Holidays/

Tax rate

Strategic

Special

Performance

Subsidies

%

Incentives

Economic

requirements/

Zones

Special

Objectives

Slovakia

Yes

  • 19 Yes

9+ parks

Job creation

Slovenia

Yes

  • 25 No

8+ free zones

Job creation partly decentralized

Estonia

No

  • 26 No

Ports only

No

Latvia

No

  • 15 Yes

Ports only

Case by case, Hi tech

Lithuania

No

  • 15 Yes

3 free zones and 2 parks

Case by case, very large size

Romania

Yes

  • 25 Yes

30 Zones

Size, tied to

zones

Porterian Workfare Post-national Regime (PWPR) in the

V4

Economic Policies

Social Policies

Primary Scale

Primary means to compensate market failure

  • Porterian- Workfare-

Manages insertion of the locality into global

economy. Supply side

intervention, FDI attraction through targeted subsidies, emphasis on skill intensive, technology rich activities.

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- Regime-

Shift of power upwards,

downwards and

sideways. New role of national

scale, equalizing compensating spatial project. EU accession norms and decentralization

Shift to governance. Public Private

Partnership.

PWPR-Economic Policies- The Czech Republic

  • The National Investment Incentive Scheme of 1998 established a very generous system that included corporate tax holiday of up to

10 years, duty free importation of machinery and equipment for

newly established companies, low cost or virtually free transfers of

land and infrastructural facilities to investor, subsidies for training the labor force and grants for newly created jobs.

  • The scheme also improved the institutional frame work for investment promotion by giving the investment promotion agency- Czech Invest considerable independence and establishing it as a one-stop shop for investors.

  • Later amendments to the scheme gradually lowered the minimum amount of individual investment, reduced the duration of tax relief

to 5 years and retargeted the scheme to more technologically

PWPR-Economic Policies- Hungary

  • With the aim of attracting export-oriented, high-technology FDI, Hungary introduced Industrial Free Trade Zones, as early as 1982, which were exempt from customs and indirect taxes.

  • Hungary offered a complex set of fiscal, financial and other incentives throughout the 1990s and 2000s.

  • Aiming to attract blue chip companies, the government offered

monopoly positions to foreign investors.

  • In 1996, the investment incentive scheme changed and became less generous and more export oriented large investments in manufacturing.

  • The new scheme also created policies aimed at creating linkages with local companies.

  • In 2003, Hungary had to be less generous with tax allowances and

PWPR-Economic Policies- Poland

  • Till January 1999 Poland did not have a stable national policy of

investment incentive

  • In 1998 all companies with foreign participation were granted a 3 or 6

year tax holiday which was replaced by individual tax exemptions in

1991

  • Some of the large investors like Fiat, Alcatel, lucent and Siemens were granted monopoly positions

  • In 1996 the government introduce special economic zone for both foreign and domestic companies and increased the speed of privatization of the already restructured SOEs to foreign capital

  • In 1999/2000 the country invented the massive programmed of foreign sell off in the banking sector

  • In general it was only in the late 90 s that externally oriented policies

PWPR-Economic Policies- Slovakia

  • The new government of Mikulas Dzurinda in 1998 radically changed the countries policy orientation. FDI became

hegemonic in thinking about economic development in the

country.

  • In 1998 Slovakia, emulated the Czech investment subsidy scheme

  • In 2002/2006 motivated by the encouraging FDI the

government introduce flat tax and employer friendly labor code

  • In 2005 the government re targeted its investments scheme to

Competition states- Capital Accumulation

  • The economic recovery of the late 90s in the CEE region has 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 foreign

control of leading export industries and most public utilities

and unprecedented level of foreign dominance in the banking sector.

  • The competition states in CEE indeed did address the key element of reproduction of capital. So far, the foreign led

Transnationality index- CEE

Countries

1999

2002

Czech Republic

17.6

30.9

Hungary

27.6

30.1

Slovakia

7.1

27.5

Poland

11.5

15.6

Slovenia

7.9

22.3

Estonia

23.2

39

Lativa

18.3

18.8

Lithuania

13.2

23.3

Ukraine

4.8

10.3

Romania

9.4

12.1

Transnationality index- Open economies

Countries

1999

2002

Germany

10.6

14.3

France

9.4

13.5

Spain

14.7

20.5

Sweden

33

28.5

Netherlands

25.2

38.4

Ireland

35.7

69.3

Belgium and Luxembourg

66

77.1

Denmark

17.9

35.3

UK

14.5

16.8

US

8.2

7.7

Transnationality index- Review

  • Czech Republic, Hungary and Slovakia have become as internationalized as small open European economies like Sweden, Netherlands and Denmark.

  • Slovenia‘s level of internationalization is higher than that of UK or Germany.

  • Poland has taken over Germany and France by a narrow margin in terms of internationalization.

  • As far as Baltic states are concerned Estonia has become the most internationalized economy in the region. Latvia and

Lithuania are comparable to Slovenia.

Penetration ratios of majority-owned foreign bank affiliates in banking sector, 2001

CEE

%

Developed

%

Countries

Estonia

98.9

New Zealand

99.1

Czech Republic

90

UK

46

Hungary

88.8

US

20.2

Slovakia

85.5

Norway

19.2

Lithuania

78.2

Portugal

17.7

Poland

68.7

Australia

17

Why did state strategies converge to a particular type in the V4 countries?

  • V4 countries have been endowed by similar comparative institutional and structural advantages through out the 90s and early 2000s. Thus they are more similar in terms of their international exposure and the nature of integration into the transnational economic space

  • Competition - the V4 countries had to replace the Council for Mutual Economic Assistance trade with Europe and the West.V4 countries could compete only in labor intensive and low tech products. The lowering of trade barriers caused a huge influx of imported finished products from the West.

  • Coercion - Conditional re-financing of loans by IMF & WB. The influx of foreign advisers and conditions attached to EU membership played

Why did state strategies converge to a particular type in the V4 countries?

  • Learning- Policies maker in V4 countries changed their ideas, goals and preferences as a consequence of past policies

failure.

  • Emulation and the process of transnational class formation.

Comprador Service Sector

  • Externally oriented strategy was implemented only when both the structural opportunities and political possibilities of

the moment allowed domestic groups to come to the fore.

  • These social forces ,the comprador service sector, became

the nodal point and organizer of a wide coalition of forces

centered on foreign investors- a power bloc promoting the competition state.

  • This power bloc also integrated significant fractions of

domestic capital, which were becoming increasingly integrated into the supply chains of international investors. Moreover, some large domestic companies joined the comprador block after it started to deliver direct benefits in

Who is the Comprador Service Sector?

  • The bureaucratic bourgeoisie-the managerial and administrative elites. This elite group translates structural dependence on foreign capital into concrete political processes within the CEE states.

Who is the Comprador Service Sector?  The bureaucratic bourgeoisie-the managerial and administrative elites. This elite

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