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Transcript of 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
Centralized national
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.
Centralized national
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
Centralized national
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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