"FDI is a religion"
Participants from Central and Eastern Europe discussed issues of EU-Enlargement, financial crisis, and the introduction of the Euro at the seminar EU-Enlargement: New Members – Old Periphery? Part II.
Katharina Fussi - Dec. 11, 2006
As foreign direct investments (FDI) had been a much discussed topic at the seminar, Jan Drahokoupil, from the Central European University, gave an overview of the history of FDI in CEE since their transformation to capitalism. 1995/96, he argues, FDI was still "pretty much a story of Hungary". They eventually became "norm" at the end of the 1990s. The discussion circles around the necessity of FDI in the first place, and whether it is possible to control the flow of FDI. One seminar participant points out that the discourse over FDI constitutes much of its power, another considers FDI "a religion". There is agreement that informal criteria for accession to the European Union (EU) persuaded CEE governments to adopt (neo)liberal policies, for example the degree of privatization.
Jan Drahokoupil, expert speaker at the IPE seminar in Bratislava, November 11/12, 2006. (Photos: Rasto Prochazka)
Petr Go�?ev debating at the IPE seminar in Bratislava, November 11/12, 2006. (Photos: Rasto Prochazka)
By 1998, Mencinger adds, the IMF admitted that Slovenia had been right in not following the IMF-plan to adopt a fixed exchange rate. The Slovenian government had decided to apply a floating exchange rate which bewared the national currency of an overvaluation. Moreover the country had adopted a cautious approach to privatizations as well as to foreign direct and portfolio investments. Therefore, Slovenia shows even more outward than inward flows of direct investments.
Jože Mencinger at the IPE seminar in Bratislava, November 11/12, 2006. (Photos: Rasto Prochazka)
Regarding the EU-enlargement in 2004, Mencinger reminds that the EU had created illusions of large net-inflows to the new member states but did not stand up to its promises. Instead of more economic aid for the catching-up process, the new members are expected to respect the Stability and Growth Pact in order to join the European Monetary Union. According to the Pact’s ideology, price stability and economic growth can be best assured by eliminating budget deficits and reducing public expenditures. Although this ideology already turned out to be questionable when, at the turn of the millennium, old member states like Germany and France couldn’t meet the demands of the pact anymore, the Central and Eastern European Countries are supposed to implement economically doubtful measures. Seemingly, Mencinger stated, Brussels was not willing to dissociate itself from the pact although it has been proven to work only in times of economic growth.
The author studies Political Science at the University of Vienna and belongs to the editorial team of the Paulo Freire-Center in Vienna.
Czech Republic: "Postponement" of Accession to the Euro-Zone?
Petr Gočev gave insights into the Czech experience. He stresses that up to now a postponement of the adoption of the Euro seems to be likely. Both the previous and the incumbent government have already at least once postponed the target date for the accession. Gočev argues that the price-level in the Czech Republic is only 60% of the average price-level of the European Union and that a jumping increase of prices would cause unbearable inflation rates, above all for lower income classes. Joining the Euro-Zone would therefore be perceived rather differently according to the social position. This is due to a higher inflation rate for goods and services more likely to be consumed by lower income classes. Since the latter show different consumption patterns than higher income households, Gočev suggests the introduction of different consumer prices indices for different income levels.
Jože Mencinger: the Exceptional Experience of Slovenia
Slovenia appears to be an exceptional case among Central and Eastern European new EU-members: a country with a stable national currency and a stable current account. Jože Mencinger, Professor of Economics at the University of Ljubljana and former deputy prime minister and minister for economic affairs of the Republic of Slovenia, explained the striking Slovene experience. Slovenia had opposed the International Monetary Fund (IMF) by ignoring its advises. "It is the problem with US-advisors", Mencinger says jokingly, "that they don't distinguish between Slovenia and Mongolia". On the other hand, Slovenia has been in a unique position. It has had a decentralized decision making process, a foreign debt that was not worth mentioning, and, last but not least, a robust economy thanks to its privileged position within Yugoslavia.By 1998, Mencinger adds, the IMF admitted that Slovenia had been right in not following the IMF-plan to adopt a fixed exchange rate. The Slovenian government had decided to apply a floating exchange rate which bewared the national currency of an overvaluation. Moreover the country had adopted a cautious approach to privatizations as well as to foreign direct and portfolio investments. Therefore, Slovenia shows even more outward than inward flows of direct investments.
FDI: Results against Mainstream
Mencinger presented some results of his own research that shows a negative correlation between FDI and economic growth. He points out that FDI does not necessarily have positive spill-over effects (e.g. transfers of technology, increased competition) as usually stated by mainstream economists but can also have negative consequences for the economy, primarily for the unemployment rate. Furthermore the tendency of investors to concentrate on certain sectors (i.e. banking or telecommunication sector) prevents a spill-over of technological know-how to other branches. Mencinger concedes, however, that a foreign ownership might make companies more efficient, but he stresses that only multinational concerns would benefit from this efficiency, not the domestic industry.Regarding the EU-enlargement in 2004, Mencinger reminds that the EU had created illusions of large net-inflows to the new member states but did not stand up to its promises. Instead of more economic aid for the catching-up process, the new members are expected to respect the Stability and Growth Pact in order to join the European Monetary Union. According to the Pact’s ideology, price stability and economic growth can be best assured by eliminating budget deficits and reducing public expenditures. Although this ideology already turned out to be questionable when, at the turn of the millennium, old member states like Germany and France couldn’t meet the demands of the pact anymore, the Central and Eastern European Countries are supposed to implement economically doubtful measures. Seemingly, Mencinger stated, Brussels was not willing to dissociate itself from the pact although it has been proven to work only in times of economic growth.
The author studies Political Science at the University of Vienna and belongs to the editorial team of the Paulo Freire-Center in Vienna.
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