László Csaba
The Second Round
Transformation and the Eastern Enlargement of the EU
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It is clear that the indicators of the privatization race the media and international bodies constantly use tell little more about the real state of affairs than the earlier plan fulfilment indicators or production figures used to. The fact that the ratio of private ownership in Russia has reached an overwhelming two thirds has not led to any halting of the fall in production or to a start growth even by 1996 and 1997. In the Czech Republic, official accounts report that privatization has been completed, while the problems of corporate governance and control remain chronically unsolved. Further empirical studies (Pinto van Wijnbergen 1995) suggest that in Poland, the pressure of a competitive environment and private companies has led to a major increase in efficiency in state-owned companies even without any change in ownership. That, by the way, conforms to experience in the West (Dallago, 1993).
It follows from the above that ownership change and the speed of it are no longer in the forefront of attention. The Chief Economist of the European Bank for Reconstruction and Development (EBRD), Nicholas Stern (1996), for instance, emphasizes three issues as genuinely relevant: company management, infrastructure and regulation. As to the first, much more important than the nature of ownership (whether state or private) is that foreign owners should exercise control rather than company management, thus supervising the latter. The distortion of the infrastructure is manifest not only in its quantity but also in its composition, inasmuch as too much weight is given to energy, meant to accommodate heavy industry, whereas telecommunications and the financial and service infrastructure are backward. In developing this area, regulation is especially important since with the passing of natural monopolies into private hands, without creating competition, the privatization of public utilities - while distorting income distribution - may also contribute to an ongoing inflation, especially if the investors may base their prices on backward looking indexation formulae.
It must be clear from the above that it is far from indifferent what kind of private property, what market structure, regulation, and consequently, what propensity to invest, are produced by capitalism. These conditions determine how dynamic the emerging system will be, and to what extent the elements of development and modernity will be present as a result of the changes.
A balanced, sustainable development is, in all likelihood, impossible if the populist slogan that "cheapest government is also the best government" is obeyed. The quality of governance is seen as the cornerstone of a civilized market economy by some very detailed and thorough investigations (Blommstein - Staunenberg, eds. 1994). Thus one of the main tasks involved in the transformation of the system is to develop independent and competent government agencies (rather than simply destroying the bureaucracy in a kind of revolutionary fervour) and then to make these agencies function smoothly and ensure their credibility. That is a condition for avoiding the overweight of rent-seeking, which distorts the market economy, as well as the nightmare of the arbitrary/Mafia economy.
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The other area where self-imposed limitations are suggested and required by the philosophy of the European Monetary Union is exchange rate policy. According to empirical surveys, ensuring autonomy of the monetary authority is not enough; a stable price level requires a consistence in economic policy, within which the discretional use of exchange rate policy should be avoided (Hamacher, 1995, pp. 58-73). From this point of view, the pre-announced crawling peg regime introduced in Hungary in 1995 may be regarded as the first step toward calculability. However, on the road toward EU membership, the coefficient of the crawl must become smaller and smaller, and overall economic policy must ensure the country is not forced to rely on competitive devaluations. Among other things, that requires self-restraint on all subsidies.
It is especially important that according to empirical investigations, the traditional economic assumption the Phillips Curve describes - that by allowing for higher inflation, higher economic growth may be achieved - is not valid for these countries. Quite to the contrary, in a survey World Bank officers conducted in 28 post-socialist countries (Gelb et al., 1996) a statistical correlation was established between both the progress of liberalization and disinflation and also between it and the resumption of growth. That study also demonstrated that, beside the intensity of reforms, their duration was another important achievement which also played a major role in the unfolding of favourable economic influences. This may now seem self-evident. However, a few years ago it was still widely held that a long history of reforms was disadvantageous compared to rapid transformation. The above achievement, however, corroborates our experience regarding the advantages of experience and practice in any field.
The rearrangement of price relations - not independently of the country's accession to the European Union and of a market-type transformation of previously free services - has not yet been completed. This means, however, that the volume of the GDP, the most frequently employed yardstick in international statistics, is evidently becoming problematic as a measure for success. This point holds especially true for effective demand; consequently it becomes highly doubtful whether any Keynesian interpretation of transformational recession is adequately grounded. The question may even be raised whether "regaining pre-crisis levels" makes any sense at all here, if the new structure and quality are completely different. It is also highly questionable whether the achievement of those levels can be regarded as a yardstick in any sense. In the case of steel production or life expectancy, as partial indicators, of course, meaningful answers may be given to these questions. However, all this is hardly relevant as regards the whole of the system, of the macro-achievements, since an indicator there is but an element in what is a new quality and a different structure.
One of the few elements of the transformation that is well-definable in terms of both quantity and quality is the flow of foreign direct investment and the spread of foreign acquisition. A major characteristic of the transformation in Central and Eastern Europe is that investment is concentrated in the region's more advanced countries. It suggests that the qualitative elements of the economic environment, difficult to express in figures, weigh much more heavily than the availability of facilities or production costs expressed in hourly wages in dollars. It follows that in certain countries the ratio of foreign capital in domestic accumulation is now far from negligible: for example, in the Czech Republic it reached 6 per cent in 1994 and 5.3 in 1995, in Hungary in the same years, 13 and 12.6 per cent, and in Poland, 6.7 and 5.3 per cent: the Czech Republic overtook Chile and Malaysia with regard to per capita foreign capital investment, and Hungary reached the European record level established by Spain and Portugal (Hunya, 1996). As this Viennese economist observes, the macroeconomic impact of investments is greater than their value in figures, since it involves joining interfirm networks, the adoption of labour and management cultures and a number of other positive factors.
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The eastern enlargement shows favourable differences from the southern. The Mediterranean states began to open up their economies only after accession; in Central Europe, on the contrary, the process of opening up in the field of foreign trade was already completed between 1989 and 1992. Moreover, by going through their transformational recession, the countries of the region already paid the price of transition. Thus there is no reason to be afraid that, compared to the liberalization of the external economy, which now extends to the financial sector too, full membership would mean intensified competition - something like the oft-mentioned "integrational shock" - to the Hungarian, Czech, Estonian or Polish markets. On the contrary: membership would make the present openness more symmetrical, since it would make a full joining of the unified market possible.
That is, in fact, what appreciates Central Europe as an investment spot. In this sense it is not the official transfers but the foreign capital flowing into the region that must meet the need of the transition countries for resources. In that context, the question as to (who and when) will reach 75 per cent of the EU average, and how much net transfer they will receive through official channels, becomes clearly secondary. It is enough to compare the score or so of million dollars in aid coming to Hungary to the 14 billion dollars of investment and the country's 12 billion dollar foreign currency reserves to see clearly that those identifying the advantages of EU membership with the magnitude of official transfers are labouring under a misconception concerning both the order of magnitude and the structural aspect of these advantages.
EU membership would therefore involve advantages for the economy on three planes: those of the market, the currency and uniform security and regulation. The market is attractive, and a condition of any kind of economic dynamism. The acceptance of the obligation to establish a stable currency is also important; it is basically this common interest that is manifest in the Maastricht requirement. Finally, uniform regulation, on the one hand, increases the country's ability to enforce its interests vis á vis the non-EU world, including some of Hungary's neighbours. On the other hand, it becomes a factor that directly raises the ability of the country to attract capital. It also means that Hungary's modernization will not depend on the order of magnitude of domestic savings directly and at any time. Thus the limitation of savings will be overcome, and poverty will not be a direct obstacle to the process of catching up.
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László Csaba
is Senior Economist at Kopint-Datorg Ltd., Professor of International Economics at the College of Foreign Trade, both in Budapest, and Vice President of the European Association of Comparative Economics. His books include Eastern Europe in the World Economy (Cambridge U. P., 1990) and The Capitalist Revolution in Eastern Europe (E. Elgar, Ashgate Academic Publishers, Aldershot, U.K. & Brookfield, USA, 1995).
