Philipp Fink, Social Dichotomy in:

Philipp Fink

Late Development in Hungary and Ireland, page 159 - 160

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
159 firms must posses the necessary knowledge to produce the required products with the required quality. The plight of indigenous enterprise is additionally exacerbated by industrial policy. Policies are biased towards the attraction of TNCs, whilst the needs of indigenous firms are insufficiently met. Instead of engaging directly in the augmentation of indigenous capabilities in order to overcome the developmental constraints imposed by the barriers-to-entry, state capacity in Hungary and Ireland is selfrestrained. In accordance with the development strategy’s spending constraints; the state singularly focuses on supply-side issues. It, therefore, refrains from direct intervention to remedy market failures stemming from imperfect competition (Paus 2005: 30). The state picks and nurtures established firms, but does not create “winners” (O’Hearn’s 2000: 82). Investment in infrastructure, education, the provision of market information as well as favourable tax regimes are aimed at improving the economic environment to nurture established indigenous enterprise (O’Hearn 2000: ibid.). Hence, the state in both cases “leaves capability development to free market forces […]. It can result in slow and truncated technological development” (Lall/Narula 2004: 457). The enacted industrial policies are insufficient to tackle either the quasi-oligopolistic competitive positions of TNCs and to increase the strategic value of their operations or to induce indigenous competitiveness. Consequently, the continued underperformance of indigenous enterprise creates an overreliance on FDI inflows and TNC exports to induce economic growth. Instead of being complementary sources of investment, output and labour demand, TNCs supplement the role of indigenous firms. Hence, the vast differences in productivity and technological specialisation continue, whereby foreign-owned firms clearly dominate indigenous enterprise, resembling an uneven growth process. Echoing Wade’s (2005: 653) notion of “disarticulation” and Elsenhans’ (2007: 306) state of economic peripherality, economic growth in economies with dualistic industrial structures results in the dependence on exports and therefore on foreign market developments. As a result, production is disconnected from internal demand and consumption patterns. Hence, despite economic growth leading to higher incomes, the developmental contribution of TNCs is questioned, as economic peripherality persists. 4.1.2 Social Dichotomy The dual industrial structure is complemented by a pronounced social dichotomy, leading to a situation of social dislocation (Kirby 2004: 219). The over-reliance on FDI and export-generated growth feeds through into social inequality (Wade 2003: 635). Due to the export-oriented nature of FDI inflows, profits and productivity of the foreign-dominated export sectors are defined by the performance in the respec- 160 tive export markets. Incomes for those members of workforce employed by foreign firms are therefore higher than the national average. Moreover, endowed with superior technology TNCs employ large levels of highly qualified staff. FDI inflows can, therefore, constitute labour market demand shifts in favour of qualified labour and contribute to already present wage differentials for skilled labour. Rising educational premiums lead to larger direct market incomes for skilled personnel in the foreign-owned sector of the economy in comparison to those employed in the indigenous sectors and the low qualified (Nunnenkamp 2004b: 104- 105). The evolution of social inequalities casts doubt on the capacity of the state to cater for an equal spread of national income. Direct market inequalities question the ability of the institutionalised bargaining system to reduce wage dispersion. In part, this is related to institutional deficiencies. Income inequality is further enlarged by regressive redistribution, which translates direct market income inequality into household income disparities through a skewed tax system (Molnár 2004; Kirby 2006). This context reveals the middleclass bias of the respective FDI-led development regimes. Low-income groups penalised on the labour market due to their inadequate levels of education are further disadvantaged by the state following the premises of political efficacy (Greskovits 1998). The middle class and the affluent are further buttressed by the tax system and by access to superior private pension, health and education services, as the state follows the “politics of the median voter” (Hardiman 2000b: 835). Inequalities also question the level of solidarity of the FDI-level development regime. Biased compensatory policies and low corporate taxation of highly profitable firms contribute to constraints in the financing of public services and high indirect taxes (O’Hearn 2001: 190; Rodrik 1997: 64). In contrast, lower income groups are faced with comparatively poor state services. They are additionally penalised by high consumption taxes and an inefficient social welfare system. Their prospects of improving their situation are reduced by the fact that social mobility in both countries remain the outcome of market generated incomes and access to education based on class positions. 4.2 FDI-led Transition in Hungary The results of the Hungarian FDI-led development regime are ambiguous at best. Growth is driven by TNCs and displays a distinct dichotomy. Two enterprise sectors co-exist characterised by large performance differences and low interdependence. The first is defined by export-oriented foreign-owned firms, with a low level of embeddedness in the host economy. The second sector comprises indigenous firms, who are small in size, specialised in low technology goods production and are mainly oriented towards the internal market. Consequently, high productivity, high technology, high profit and TNC-dominated export enclaves have developed. Com-

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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.