Institute of World Economics KRTK

Institute of World Economics, KRTK - Hungarian Academy of Sciences FDI-based development model revisited? Miklós Szanyi MTA KRTK Institute of World Economics and Budapest Business School Presentation for the 3 rd Polish-Hungarian Bilateral Conference Warsaw, 2016 September 29.

The Topic, Motivations • After 25 years of transition process Visegrad countries’ (V 4) economic structure was determined by strong presence of multinational business • Governments regarded FDI as an essential tool for economic development, attraction policies competed for international investments • During the 2000 s V 4 attitudes towards FDI became less enthusiastic • Attraction policies changed substantially after the 2004 joining of the EU • Around the year 2010 FDI-related policies became less favourable for multinational business, strong verbal campaigns were launched in Hungary • Also in Poland: „There will be Budapest in Warsaw soon!” (More complex political issue. )

Structure of the Presentation • The FDI-led model: characteristics, historic patterns and imperatives of the transition process • Main impacts of FDI and criticisms • Changes in FDI-related policies after 2010 • Interpretation of changes as shifts in business-polity relations

The Model of FDI-led development • Aims: quickest possible modernization of transition economies - Technological progress, structural changes, knowledge transfer (micro issues) - Institutional changes - Liberalization and more competition - Integration of national economies into global value chains (the new carriers of international labor division) • Role of privatization - General aims: quick reduction of the state owned sector (also to stop paternalistic expectations), balancing the state budget and current account • Major greenfield investments from the second half of the 1990 s in all V 4 countries • Strong dependence on multinational business in most economic branches (DME model)

Positive impacts of FDI in Hungary • Fundamental structural changes, largely to the benefit of the country • Huge increase in productivity, export performance, technological sophistication • Hungarian economy became integrated part of global value chains mainly through the single european market • Hungary has scored trade balance sufficit since 2009 • New job creation (job losses in less competitive domestic firms) • Net tax payers despite of tax holidays (especially after 2004) • Development of supplier networks (higher expectations though) - spillovers

Early privatization

Early greenfield investments

Flagship investments

Criticism of the FDI-based development • Dual structure - Spatial (large and increasing gap in business activity, income generation, employment…) - Ownership-related (suppliers mainly also foreign owned – reasons: suppliers were also privatized or traditional partners moved over to Hungary, very few capable local firms, most of them work on different markets – no interface…) • Spillovers not really convincing (little empirical evidence – reasons: methodological problems, parallel positive and negative impacts…) • Local supplies, perhaps also spillovers started to increase after 2000, after 2007 pressure on cost competitiveness of GVCs increased – growing V 4 activity and upgrading • DME model: more systemic criticism. - High level of specialization: retardation in activity structure, R&D, education - Tax incentives: deprive state from financial tools to correct for deficiencies

What happened…(? )-anomalies

Criticism of the FDI-based development • Political criticism - traditional: right-wing parties always favored more balanced aid policy (less preference on multinationals) – debates - Some negative experiences with FDI during the 1990 s (loose regulation!!) - 2007 (financial) crisis fuel for anti-globalist sentiments • Political message to the voter: lack of economic recovery, stagnating living standards are due to mistaken FDI policy until 2010 („luxury profits”, repatriation of „our” profits, overcharged prices in utility services, etc. ) • Resulting policy changes in FDI attraction: - Split of branches and companies: „good, productive” business and „bad, speculative” business - „Good” business is tolerated (supported on selective basis) - „Bad” business is curtailed

The revision and economic patriotism • Model changes interpreted as shifts in elites • The liberal, FDI-bound „comprador elite” (Drahokoupil) • National capital owners • New policies favour national capital and curtail multinational business (nationalizations, new taxes and market regulation versus directed public procurement, cash subsidies to national firms) • Strong political propaganda against multinational business • Questions: • Legal and/or illegal policies (EU competition office)? • Economic impacts (more growth? more efficiency? more equality? ) • Political impact (patronage, support of political clients)

Reactions

VIDEOTON-story

IKARUS-story

Economic patriotism before 2008 • „British jobs for British workers” • Return to „Buy American” • Dominique de Villepin: „defense of local interest on integrated markets” 2005 (Danon) • Lex MOL, 2007 • On supranational level: the Lisbon strategy of EU, Horizont 2020, TTIP (who will benefit? ) • Paradox of the neoliberal democracy: nationally embedded politicians and supranational action determinants • Creative usage of economic liberalism in defence of national economic interests

What is economic patriotism (EP)? • Preference of national interests against overall, global advantages – discrimination of agents, economic branches or social groups chosen by their territorial location. - Selection of winners is agnostic and normative - The principle can be applied on supranational and also local levels - It is not defined by tools (selective liberalization is also discriminative), the purpose is not banning competition but enhancing competitiveness

Economic nationalism and patriotism • Economic nationalism (F. List): usage of protectionist measures to achieve national development goals – conceptional debate with economic liberalism and free trade principle that aim maximization of personal utilities (Smith, Ricardo). • Economic patriotism: Usage of innovative support tools within the liberal institutional frames (creative not classic protectionism) - Shifts towards supranational (fortress Europe) and local levels - Variations: conservative EP (maintaining a status quo) liberal EP (increase dynamic efficiency – innovation, education, etc. ) - Selective liberalization (in the integration process, market regulations - Deregulation = reregulation - Political and economic sides of EP are separated: populist rhetorics but (more) rational economic policies – with potential dangers (!) - EP in employment relations, in consumption, on social levels

Types of EP toolkit with examples Ideological affinity Liberal Favouring of insiders Selective liberalization in strategic sectors Regulation to maintain traditional product and process standards, state subsidies Resistance to outsiders Policy target Protectionist Risk regulation or competition rules that prohibit standards common abroad Classic barriers to trade Forrás: Clift és Woll (2012): Economic patriotism: reinventing control over open markets. Journal of European Public Policy 19: 3 316. o.

EP summary: Preference of national interest in liberal institutional settings • Goal: to enjoy more from the benefits of free competition and free trade • Method: increase competitiveness of market agents (better power position) • Tools: selective liberalization, enabling policies (controlled subventions), development of production inputs, supportive business climate • Features: agnostic and normative, does not aim banning competition, selects on territorial basis, separates political promises and economic policy actions • Levels: national economy, local economy, supranational organizations • Dangers: if not controlled, shifts from economic interest to political and other partial (even personal) interest – need for control institutions (political competition, cilvil society)

Dangers: political dominance over the economy (business capture) • Starting point: Business-polity interaction is normal • Quality of interactions depends on institutional solutions (open or covert channels) and on the bargaining position of the parties • Interpretation in the dimensions of level of organization of business and polity’s need of support (Schoenman, 2012) • Cooperation if polity needs business support and business is well organized – mostly normative distributive tools • Patronage if polity’s need weaker and business agents are not organized – selective advantage tools, often partisan – support of political clients and business capture • Shift from cooperation to patronage – departure from „normal” economic patriotism

• Thank you for your attention !

Institute of World Economics KRTK — Hungarian Academy