Philipp Fink, External and Internal Factors for Hungarian FDI-Attraction in:

Philipp Fink

Late Development in Hungary and Ireland, page 115 - 119

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
115 increasing labour force skills and improving infrastructure as well as establishing a non-discriminatory regulative environment (Klein et al. 2001: 16). Internal autonomy is guaranteed by attaining a broad base of social consent to the development strategy (Paus 2005: 22). For democracies the issue of consent towards the development strategies presents an operative dilemma, as the voicing of dissent can lead to the loss of power for the incumbent government (Greskovits 1998: 75- 76). However, consent to the development strategy also implies the acceptance of wage restraint in order to adhere to the strategy’s spending constraints (Islam 2005: 56). Hence, consensual industrial relations are pivotal to the success of the strategy (Paus 2005: 22). Katzenstein (1989: 198) as well as Mjøset (1992) both show how important corporatist institutions used to attain consent to the development strategies of small European countries. Indeed, these institutions were paramount in ensuring socioeconomic adjustment in times of economic crisis for these small and export-oriented economies. Social dialogue was an expression of the acknowledgement of the political elites of the importance of consensus across ideological divides (Katzenstein 1989: ibid). To remain within the parlance of institutionalists, corporatist institutions assured the embeddedness of internal state autonomy by firmly “linking the state with society” (Katzenstein 1989: ibid). Within the context of democratic societies, compensation strategies are essential in ensuring social consent to the development strategy (Greskovits 1998: 137). Compensatory elements are directed at thwarting the evolution of possible oppositional coalitions, which could pose a threat to the developmental strategy and question the development regime. Hence, they follow the rules of political efficacy, as the incumbent government aims to ensure the support of leading socioeconomic groups, such as urban middle classes, indigenous capital and labour (Greskovits 1998: 143-144). However, the compensation measures can conflict with the spending constraints of the development strategy and can contribute to macroeconomic instability by increasing consumption-driven imports. 3.3 The Hungarian FDI-led Development Regime Beginning with Hungary, the attraction of export-oriented FDI played a pivotal role in the country’s transition process. The Hungarian government initially attracted FDI to solve two major interrelated issues. The first of which was the privatisation process. The second issue was economic restructuring and the attainment of exportorientation. The process of economic restructuring was in dire need of three fundamental elements: sufficient amounts of capital, modern technology and experienced capitalist entrepreneurship. These three factors were seen to be indispensable for a swift and successful transition to a market economy. TNCs were accordingly chosen to be the prime developmental agents (Mihályi 2001: 62). 116 3.3.1 External and Internal Factors for Hungarian FDI-Attraction However, the choice of forming a development regime with foreign capital was not driven by straightforward economic reasoning. On the contrary, the decision to create an export-oriented development regime was influenced by internal and external factors, rather than by explicit choice. In fact, the room to manoeuvre by possibly choosing alternative policies was only slight. In the light of the country’s economic situation and the role of influential external and internal factors, Hungary’s economic policy options were more-or-less predetermined, regardless of incumbent party creed, ideological affiliations or populist aspirations (Greskovits 1998: 112). The external factors portray the low level of external autonomy of the Hungarian state. The chosen transition strategy was supported by international organisations such as the IMF, the World Bank, EBRD and the EU. They oversaw the transition process and ensured compliance to “the rules of the game” (Greskovits 1998: 107), which foresaw the eventual integration into the EU and the implementation of their prescriptions for transition. Likewise, foreign creditor banks and TNCs already present in Hungary were further influential actors. The West made it blatantly clear that the new democracies of Central and Eastern Europe would not benefit from a Marshall Plan, as was the case of Western Europe after the WWII (Andor 2000: 125). The IMF and the World Bank repeatedly used their disciplinary instruments of suspending stand-by loans in order to prod the Hungarian government into accepting their prescriptions for the transition process (Czabán 1998: 233). These can be summarised under the heading of the so-called four pillars of the “Washington Consensus”: Macroeconomic stabilisation, privatisation, deregulation and liberalisation of trade and capital (Williamson 2002). Essentially, the strategy propagated the export-orientation of economic growth by encouraging exports, FDI and trade liberalisation. The IMF together with western creditor banks supported the decision of the Hungarian government not to apply for debt rescheduling. It was feared that if Hungary were to default on its debt, the resulting short-term economic repercussions would cause a significant deterioration in Hungary’s appeal as an investment location. Moreover it would jeopardise the country’s positive credit rating. Instead, debt reduction was to be attained through the proceeds of cash-sale privatisation to foreign firms (Milhályi 2001: 63).104 The move to continue with its debt servicing obligations was also greeted by representatives of TNCs already present in the country prior to 1990. Their pretransitional presence was the result of the previous socialist regime’s attempts to access western markets and technology by permitting foreign companies to set up operations in Hungary (OECD 2000: 9, 32). Although their operations were origi- 104 The IMF calculated that Hungary would require FDI inflows of up to US$1 billion and $2 billion p.a. in order to finance its external debt and to sustain its international creditworthiness (Mihályi 2001: 63). 117 nally restricted to minority stakes in Joint Ventures (JV) with Hungarian firms and the total stock of FDI was low, they resembled influential voices in policy making due to the mere demonstration effect of their presence in the Hungarian economy (Milhályi 2001: 63). However, Greskovits (1998: 56) remarks that, although influential, the role of international actors in the Hungarian transformation process should not be overemphasised. The role of “home grown strategies” (Greskovits 1998: ibid.) devised by socialist reformers, administrative elites and the epistemic community with close professional ties to the international financial sector was of more importance (Greskovits 1998: 47). They supported the move towards export-orientation and FDI-led development in Hungry. Furthermore, the strategy was also the result of the predominance of economic orthodoxy within the epistemic community as well as amongst the bureaucratic and political elites (Henderson et al. 2001: 23-24). The advocates of FDI-based exportorientation argued that a long-term expansion and diversification of Hungarian exports and, therefore, increased economic growth and employment generation could not be attained without the integration of the Hungarian economy into the global production networks of TNCs (Czabán 1998: 233). The construction of the FDI-led development regime was also the result of the implicit constraints of the post-1990 political system, which was defined by intense distrust between the political elites (Körösényi/Fodor 2004: 368). Distrust was nurtured by the dominant political cleavages in the country. The conservative pre-1990 opposition movement followed ideological patterns akin to pre-communist lines of social and political conflict. Conservatism was based on nationalist, religious and rural (i.e. “rural populist”) values in contrast to liberal-metropolitan perceptions. Both factions could only rarely unite to express their opposition to the communist regime and preferred to follow their own anticommunist agenda defined by their specific values. Accordingly, the party political spectrum after 1990 was defined along these lines of conflict (Kiss 2002: 749-750). As a result, Hungarian politics are defined by extreme competitiveness and increasing polarisation between two camps leading to a de facto two-party system along a distinct left and right divide (Körösényi/Fodor 2004: 349). Additionally, the amended constitution further displays the distrust between former dissidents and former socialists. Although the executive is bolstered by the provision of a constructive vote of non-confidence, both the executive and the legislative are forced to cooperate. More than 30 legislative areas deemed to be of constitutional relevance require a 2/3 parliamentary majority of approval (Körösényi/Fodor 2004: 327-328). Consequently, developmental policy became intensely politicised. The privatisation process, the key to economic restructuring, was seen as a possibility to create a political clientele (Ágh 1993: 17). However, post-socialist indigenous economic elites had fallen into disrepute at the start of transition through the phenomena of the “spontaneous privatisation” of state-owned enterprises by their own managers. The 118 so-called Nomenclature privatisation process had begun under socialist rule as part of the market economic reforms introduced in 1988/1989 (Barnes 2003: 547). The socialist privatisation legislation105 essentially legalised a practice which had commenced in 1987, whereby enterprise managers used a legal loophole to establish subsidiaries via the transfer of SOE assets (Hanley 2000: 150). This uncoordinated form of privatisation was characterised by mainly short-term profit increases financed through bank loans and the stripping of firm assets. The success of these measures was doubtful, as in most cases the managers were not interested in the survival of the firms (Ágh 1993: 16-17). However, the actual figures for Nomenclature privatisation were low, affecting only 10% of SOE and amounting to six percent of total state assets (Kiss 1994: 124). Still, this type of privatisation was regarded by an avidly anti-communist government in 1990 as a potential threat to the new democracy and the transition of economy. It was feared that the economy and the political system would fall into the hands of the former socialist elite (Kiss 1994: ibid). Consequently, the state lacked indigenous entrepreneurial agents with whom it could forge a development regime. Hence, the inclusion of TNCs into the privatisation process was seen as a means to weaken the power position of former socialist elites (Ágh 1993: 17). Furthermore, similar to other former socialist countries, Hungarian civil society is characterised by the weakness of its institutions (Ehrke 2005: 155). It is of a highly fragmented and disorganised nature (Ágh 2002: 16). Hungary’s systemic change in 1989 was the result of elitist negotiations, whereby a coalition of experts and elites representing various political interests negotiated the change in systems without the support or pressure of a coherent social movement demanding change (Kiss 2002: 759). Consequently, the later evolving political parties were unable to represent a broad social stratum and thus only had “shallow roots in society” (Crawford/Lijphart 1995: 20). This caused a low level of embeddedness of state institutions and political parties within society. However, despite their lack of social embeddedness, political parties remain the only viable actors in the political system, as other forms of organised interest representation have only slowly evolved since systemic change (Greskovits 1998: 89). Although institutionalised, the social partnership process is weak due to the fragmented nature of the union movement and employer associations (Deppe/Tatur 2002: 266-268). These deficiencies are further upheld through the centralised nature of the state. The unicameral parliament neither caters to extra-parliamentary representation for sub-national entities nor to particular institutions nor organised interests (Ádám 2004: 7; Deppe/Tatur 2002: 186). This is also exemplified by the population’s continued pursuit of individualistic strategies in form of entering the informal economy (Deppe/Tatur 2002: 135). By pointing to the large size of the informal and black economy, Greskovits (1998: 87) classifies “going informal” as a dominant form of 105 The Company Law of 1988 and the Law on Enterprise Transformation of 1989 (Hanley 2000: 150). 119 social response to the economic hardships of transition and hence it resembles the Hungarian population’s exit strategy. Consequently, the lack of organised interest representation beyond the political system, the low level of party political affiliation and the continuation of individualistic survival strategies additionally supported the state’s internal autonomy. With the exception of sporadic and unorganised protests during the initial period of the development regime, dissent is silenced until the elections. As a result, with the exception of the 2006 elections, every previous government was voted out of office (Greskovits 1998: 87, 90). Hence, on the one hand, the strategy followed the prescriptions of the international financial community in arrangement with international lending constraints. The strategy also complemented indigenous elite views. On the other hand, in view of the political polarisation, TNC engagement in the privatisation process was seen as an instrument to curtail the opposing camp’s societal influences by filling the civil society void with affiliated clienteles. 3.3.2 Hungarian Regime Readjustments In total, Sass (2004: 76; Sass 2003: 50-51) identifies three periods associated with different approaches to Hungary’s attraction strategy. The analysed time frames convey the reaction of the state to the malfunctioning of the growth strategy. They coincide with the parliamentary terms. Despite the frequent change in government, the readjustments displayed considerable continuity, as the main pillar of the development regime, the predominance of FDI, was left untouched. Crisis Management (1990-1994) The first phase under review is concerned with the initial task of transition undertaken by the first democratically elected centre-right coalition government, led by József Antall. The Antall government’s term in office was defined by the daunting task of transition. The conservative coalition’s policies of transition attempted to square the circle of creating a market economy, building a conservative social base and ensuring popular consent to its transition course. 106 As a result, the Antall government embarked on a course known as “gradualist transition”. The government shunned from following the course of “shock therapy”, which propagated the introduction of harsh austerity measures and quick liberalisation of the economy. 106 The coalition comprised the conservative Hungarian Democratic Forum (MDF) and the Christian Democrats (KDNP) and the Independent Smallholders Party (FKGP) as junior partners (Andor 2000: 46).

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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.