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Philipp Fink, Titelei/Inhaltsverzeichnis in:

Philipp Fink

Late Development in Hungary and Ireland, page 2 - 12

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8 https://doi.org/10.5771/9783845217208

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
Nomos Universitätsschriften Politik Band 168 Philipp Fink Late Development in Hungary and Ireland From Rags to Riches? Nomos 1. Auflage 2009 © Nomos Verlagsgesellschaft, Baden-Baden 2009. Printed in Germany. Alle Rechte, auch die des Nachdrucks von Auszügen, der photomechanischen Wiedergabe und der Übersetzung, vorbehalten. Gedruckt auf alterungsbeständigem Papier. This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically those of translation, reprinting, re-use of illustrations, broadcasting, reproduction by photocopying machine or similar means, and storage in data banks. Under § 54 of the German Copyright Law where copies are made for other than private use a fee is payable to »Verwertungsgesellschaft Wort«, Munich. Die Deutsche Nationalbibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über http://www.d-nb.de abrufbar. Die Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at http://www.d-nb.de . Zugl.: Leipzig, Univ., Diss., 2008 unter dem Titel: FDI and Development: The Cases of Hungary and Ireland ISBN 978-3-8329-4173-4 In memory of my grandparents Erika and Erwin Oelkrug Sibylle and Werner Fink 7 Preface Since the completion of my PhD in 2007 and during the finalisation of this book the financial and economic turmoil of the last months has wreaked havoc in Ireland and Hungary. The scale and speed of the economic downturn is without precedent and was not foreseeable despite the depicted scenario of a “hard landing” in the conclusion of this book. Both states are on the verge of state bankruptcy. The IMF has granted loans to Hungary. Ireland is in the midst of a grave recession reminiscent of the bleak periods of the 1980s and 1950s. A drastic change in the course of events is troublesome for any author of contemporary politics and economics. Instead of completely rewriting the book, the arguments remain as they were intended to be. The current global financial and economic crisis has revealed the structural deficits of both countries, which are at the centre of this book. Uneven and dependent development in Hungary and Ireland - defined by the high level of dependence from foreign growth inputs, the poor state of indigenous industries in terms of innovation and international competitiveness - was hidden throughout the boom years by the glitter of foreign-led growth and continuous inflows of foreign capital. However, the current dire economic situation in Ireland and Hungary is more than just the result of macro and microeconomic mismanagement creating economic imbalances. Rather, the reasons are to be found in the implemented growth strategy. In similarity to other emerging economies, both countries followed the prescriptions of international development agenda, by harnessing the forces of globalisation in form of global flows of capital and trade (“associative development”). The liberal industrial policies were directed at creating indigenous development via the unleashing of spillover effects generated by the presence of foreign firms, who located to Ireland and Hungary to produce for their export markets in the US and the EU. Their apparent success in attracting foreign capital, generating export and income as well as creating employment led both Hungary and Ireland to be repeatedly praised as role models for successful development in the context of globalisation. Hence, the chosen growth strategy was seen as a path from rags to riches for emerging economies. As a result of the current crisis, this jubilant assessment is now openly questioned by a wider public. Many formerly benign observers now criticise policies and decisions they once endorsed. The cases of Hungary and Ireland show that in difference to the perceived merits of associative development, peripheral modes of growth cannot be overcome by simply transferring productive capacity and know-how from the centre to the periphery. Instead, as history shows, economic development remains an organic process that is dependent on holistic and inclusive policymaking, which harnesses market forces to fulfil politically defined developmental goals. Hopefully, this book will prove to be of value in the upcoming and necessary debate on economic and social development in an interdependent world. 8 I would like to take the opportunity to thank the German National Academic Foundation (Studienstiftung des deutschen Volks) for their generous financial support. I am greatly indebted to Prof. Elsenhans, a wonderful mentor. Without his capability to arouse my curiosity this project would not have been possible. I would also like to thank Prof. Peadar Kirby for his support of my work, for the long and fascinating discussions and for making my visit to Dublin City University in 2005 possible. I would also like to thank Richard Crowe for his help in finding the right interview partners in Ireland. Furthermore, thanks to Aidan Moore and his wonderful family for making me feel at home and showing me important insights to the Irish way of life – more than you can ever learn from books! I am also grateful to Prof. András Inotai and Miklós Szanyi for organising my stay in Budapest at the Institute of World Economics of the Hungarian Academy of Sciences in 2004. Thanks also to Kálmán Deszeri for helping me organise my interviews in Hungary and to Miklós Somai for fruitful discussions. I would like to thank all my interview partners in Ireland and Hungary for giving me some of their time. Thanks also to Jutta Günther for her support as well as to Andreas Lange for his helpfully stern criticism, to Gerrit Stratmann and Elmar Janssen for their endurance in battling through the first versions of the chapters, to Harry Wolf, Ronny Kittler, Volker Born, Matthias Finger, Sascha Schildhauer and the rest of the gang for comic relief. I am in great debt to Maurice Frank and Lukas Zidella for their last minute corrections to the text and literature. Finally, I would like to thank my parents and family for their unrelenting support. Most importantly, thank you Anke. This is as much as your work as it is mine and without your support, I would not be where I am now. To all of you: Go raibh mile maith agat! Köszönöm szepen! Berlin, April 2009 Philipp Fink 9 Contents List of Tables 13 Abbreviations 15 Introduction 17 1. Defective Capitalism 28 1.1 Hungary: Re-feudalisation, Unequal Specialisation, Backwardness 29 1.1.1 Re-feudalisation 29 Divergent Development 30 Restitution of Noble Privileges 30 Constrained Development 32 1.1.2 Agricultural Specialisation 33 The Demise of Trade 34 Complementary Imperial Incorporation 35 External Imperial Modernisation 36 1.2 Factors of Irish Underdevelopment 37 1.2.1 De-industrialisation 38 Irish Proto-Industrialisation 38 External and Internal Factors of Deindustrialisation 39 The Act of the Union (1801) 42 1.2.2 Emigration 43 The Transformation of Agriculture 43 Detrimental Development Effects 45 1.3 Agricultural Export Dependency 46 1.4 Socioeconomic Effects 47 1.4.1 Hungary 47 Noble Ascendancy 48 The Ethnic Dimension 49 The Social Dimension 50 1.4.2 Ireland 51 Agrarian Interests 52 Labour Interests 53 Party Political Structure 53 1.1 Constrained Industrialisation 55 10 2. Failed Industrialisation Attempts 57 2.1 The Concept of the Development Regime 58 2.1.1 Capacity and Autonomy 58 2.1.2 Popular Consent and Dissent 59 2.2 Hungarian Development Regimes 60 2.2.1 The Dual Monarchy (1867-1919) 61 The First Phase: Export Orientation and Laissez-Faire 61 The Second Phase: Industrial Protectionism 64 Results of Dualism 65 2.2.2 Economic Nationalism (1921-1944) 68 Changed Environment for Development 68 Post-WWI Reconstruction Regime 70 The Rise of the Right and Revisionist Consent 72 2.2.3 Hungarian Socialism (1948-1990) 76 The State-Socialist Development Regime 77 The Results of Forced Capital Accumulation 80 The Revolution of 1956 and the Ascent of Kádárism 81 The Era of Continuous Reforms 83 The Demise of Socialism 88 2.2.4 Continued Hungarian Backwardness 90 2.3 Irish Development Regimes 91 2.3.1 The Free State (1922-1932) 92 The Free State Development Regime 92 Restrained Capacity and Strong Autonomy 93 The Results of Laissez-Faire 96 2.3.2 Protectionism (1932-1958) 98 Protectionist Autonomy and Restrained Capacity 98 The Results of Protectionism 101 2.4 Autonomy, Capacity and Consent 104 3. The Current FDI-Led Development Regime 106 3.1 Envisaged Effects of FDI-led Development 106 3.1.1 Macroeconomic Effects 107 3.1.2 Microeconomic Effects 108 3.2 Preconditions 109 3.2.1 Attraction Strategy 110 3.2.2 Macro and Micro-Coordination 112 3.2.3 Implications for State Autonomy, Capacity and Consent 114 3.3 The Hungarian FDI-led Development Regime 115 3.3.1 External and Internal Factors for Hungarian FDI-Attraction 116 11 3.3.2 Hungarian Regime Readjustments 119 Crisis Management (1990-1994) 119 Strategic Reorientation and Stabilisation (1994-1998) 126 Creation of a Counter-Movement (1998-2002) 130 3.4 The Irish FDI-led Development Regime 134 3.4.1 The 1958 Revolution? 135 3.4.2 Regime Readjustments in Ireland 138 The Golden Age of Irish Economic Growth (1955-1973) 139 Decades of Crisis (1973-1987) 143 The Rise of the “Network State” 148 3.5 Complementarity and Divergence 154 4. Uneven FDI-led Development 156 4.1 Dualism 157 4.1.1 Industrial Dualism 157 4.1.2 Social Dichotomy 159 4.2 FDI-led Transition in Hungary 160 4.2.1 Economic Impact of FDI in Hungary 161 Extent of TNC Penetration 162 Impact on Trade 164 The Issue of Transfer Pricing 165 4.2.2 Linkages 166 Direct and Indirect Linkages 167 4.2.3 Indigenous Firms 169 4.2.4 Characteristics of Indigenous Firms 171 Socialist Legacies and Transition 172 Product Market Competition 173 Factor Market Competition 173 Political Neglect 175 4.2.5 Dichotomy of Industry in Hungary 177 4.3 Hidden Inequality in Hungary 177 4.3.1 General Trends in Hungarian Income Inequality 178 Income Dispersion 178 4.3.2 Transitional Winners and Losers 180 Earnings Mobility 181 Skill-Biased Labour Demand 181 Collective Bargaining and Inequality 183 4.3.3 Social Implications 185 Household Income Inequality 186 Income Poverty and Deprivation 186 12 4.3.4 Inequality, Poverty and the Hungarian State 189 Transformation of the Hungarian Welfare State 189 Inequality Reduction 191 Poverty Alleviation 192 4.3.5 Hungarian Social Dichotomy 194 4.4 The Irish Stepping Stone 195 4.4.1 Foreign-Owned Growth in Ireland 195 TNC Penetration 196 Impact on Irish Trade 198 Transfer Pricing Distortions 199 4.4.2 Linkages 201 Pecuniary and Productive Linkages 202 Spillover Effects 205 4.4.3 Irish Indigenous Industry 207 The Nature of Irish-owned Industry 208 Displacement Effects 212 Factor Market Competition Effects 213 The Internal Demand Factor 215 Political Neglect 216 4.4.4 Dichotomous Irish Industrial Structure 218 4.5 Irish Open Inequality 218 4.5.1 Irish Income Inequality 219 Labour Market Supply and Demand Factors 220 Social Partnership 223 4.5.2 Social Implications 225 Household Income Distribution 225 Poverty and Exclusion 228 4.5.3 Poverty, Inequality and the Irish State 233 The Irish Welfare State 234 Redistribution, Poverty Alleviation and Inclusion 235 Social Partnership Revisited 237 4.5.4 Irish Social Dichotomy 238 4.6 Results of FDI-led Development in Hungary and Ireland 239 Conclusion: Myth or Mirage? 242 Bibliography 253

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Zusammenfassung

Irland und Ungarn verfolgen eine Entwicklungsstrategie, die in bewusster Abhängigkeit von Globalisierungsprozessen in Form von ausländischen Direktinvestitionen steht und sich als Paradigma in der Peripherie durchgesetzt hat. Doch dieser Entwicklungspfad hat zu einer ungleichen und abhängigen Entwicklung geführt. Dies ist laut dem Autor das Resultat des mangelnden Gestaltungswillens beider Staaten, für einen gleichgewichtigen Wachstumsprozess zu sorgen. Die historische Analyse zeigt, dass eine auf ausländische Firmen fußende Entwicklungsstrategie nicht ausreicht, um traditionelle Peripheralität zu überwinden. Der Autor fordert eine Reform des Entwicklungsparadigmas, um eine gleichgewichtige Entwicklung zu ermöglichen.