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Chapter 5: The V4 Countries and the EU: A Comparative Perspective

  • Vladimir BalážEmail author
  • Katarina Karasová
  • Allan M. Williams
Chapter
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Abstract

Following the collapse of state socialism, the Visegrád 4 (V4) countries were rapidly integrated into the European networks of trade and investment. But the shock-therapy model caused significant imbalances in their economies, so their integration with Europe’s core economies was slow and partial. A comparison with the experiences of the southern EU entrants of two decades earlier (Greece, Spain and Portugal) highlights some distinctive characteristics of the transition. Although the southern members enjoyed stronger economic and institutional starting positions, the V4 Group enjoyed substantially higher growth rates, and by 2014 their GDP per capita levels approached those in Portugal and Greece. Within this broader structural picture, there have been significant differences in the trajectories of the individual countries in Central Eastern Europe, which is especially evident in migration and FDI flows.

Keywords

European Union Foreign Direct Investment Gross Domestic Product Total Factor Productivity Foreign Trade 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Introduction

The chapter examines both the similarities and the differences in the trajectories of the four V4 (The Visegrád Four) countries. The similarities reflect the enduring influence of structural factors and shared external institutional factors (notably European Union (EU) membership, and the acquis communautaire of more than 250,000 pages, Åslund 2013, p. 11) but this is not a simple story of path dependency and lock-in (see Martin and Sunley 2006 for a theoretical overview). Instead, institutions were able to drive new and, to some extent, different pathways, and there are important national differences in say inward investment, migration or engagement with the knowledge economy, which indicate the importance of agency. Transformation theory provides a relatively flexible theoretical framework (Breisinger et al. 2009), which can account for both path dependency and how institutions drive new pathways. Essentially this visualises there being a series of interlocking and repetitive s-curves of growth, but also the possibility of break points where change is driven both by external shocks and by institutional changes from within (Martin 2010). The external shocks are manifest in the V4 countries, but there are also institutional changes, as in national economic strategies, and the policies which accompany these. Additionally, this chapter provides a broadly based analysis of the economic journey of the V4 countries, and compares their economic trajectories with those of the three southern European states which became EU members some two decades earlier. Building on the authors’ earlier review of the 1990s (Williams et al. 1998), this chapter focuses more on the post-2000 period, when there were illuminating shifts in the experiences of the southern and V4 countries.

Over just 15 years, the central eastern European V4 countries (Czech Republic, Hungary, Poland and Slovakia) transitioned from state socialism to membership of the EU, via a set of often brutal market reforms that were initiated by external shock. They had low growth rates in the final decade of state socialism and the shares of gross fixed capital formation (GFCF) in gross domestic product (GDP) decreased significantly in Slovakia, Poland and Hungary in the late 1980s (Table 5.1).
Table 5.1

Economic development in the V4 countries and southern EU members in 1980–2014

 

CZ

HU

PL

SK

EL

ES

PT

V4 avg

South avg

Period

Average annual growth in GDP (%)

1980–1989

1.4

1.5

1.4

1.7

0.8

2.8

3.4

1.5

2.3

1990–2004

1.2

1.2

2.5

1.7

2.9

3.0

2.4

1.7

2.8

2005–2013

2.1

0.9

3.9

3.9

–1.9

0.7

–0.3

2.7

–0.5

 

Gross fixed capital formation as % of GDP

1980–1989

25.5

24.0

20.9

29.4

25.8

22.4

28.1

25.0

25.4

1990–2004

29.3

23.0

19.4

30.3

23.3

24.4

25.2

25.5

24.3

2005–2013

27.2

21.8

20.3

23.8

18.1

24.7

19.6

23.3

20.8

 

Average annual growth in total factor productivity (%)

1980–1989

X

x

x

X

–0.9

1.3

1.6

X

0.7

1990–2004a

1.4

1.8

3.1

2.0

1.3

0.2

0.8

2.1

0.8

2005–2013

0.7

–0.2

0.9

2.2

–1.4

0.1

0.1

0.9

–0.4

Notes: a1995–2004 for the CZ, HU, SK and PL. Simple averages for the V4 and Southern EU Members.Source: Eurostat (2015f): National accounts; World Bank (2015): World Development Database. National statistical offices of the V4 countries; Sixta et al. (2013) for the Czech and Slovak Republics in 1980–1990; European Commission, Economic and Financial Affairs (2015): AMECO database.

In contrast, the new southern members of the EU – Portugal and Spain in particular – benefited from inflows of FDI, and growth in GFCF and exports in the same period (Table 5.1, Fig. 5.1). After 1989, there were initially precipitous declines in the V4 economies, with cumulative decreases of 20–25% in their GDPs in 1990–1993 related to the sharp shock introduction of market reforms, the disintegration of traditional CMEA markets and difficulties in reorientating exports to EU151 markets, and changes in the product structure of exports.
Fig. 5.1

Exports of goods and services in the V4 countries and southern EU member Countries, as % GDP. Source: UNCTAD (2015b): Goods and services (BPM5): Trade openness indicators, annual, 1980–2014, International Trade in Goods and Services, online database

The economic growth was driven by the EU15-centered exports, strong increases in GFCF, foreign direct investment (FDI), and potential of the market economy in the early 1990s. There was also accelerating inward investment in anticipation of EU accession. Slovakia initially lagged behind, but the end of the Mečiar government in 1998, followed by institutional reforms (economic and political), led to Slovakia joining the accession negotiations, and to major FDI inflows in 2000–2002. Such was the pace of economic change and external reorientation in the V4 group that accession to the EU in 2004 appeared to represent a political formalisation of a process of economic integration that was already largely completed in terms of trade, FDI and migration flows. The transition was even more impressive when these trajectories were compared to those of the southern European member states. Although the journey was largely shared, it was also uneven with, for example, Slovakia lagging behind initially, the Czech Republic forging ahead in terms of GDP per capita, Hungary being quicker to open its doors to FDI, and Poland’s trajectory being influenced by its earlier partial economic reforms in the 1980s.

By the mid-2000s, there was relatively strong and sometimes spectacular, FDI- and export-led economic growth in the V4 economies. Subsequently, the economic downturn following the 2008 financial crisis exposed the darker economic side of transition and integration in the form of increased vulnerability to external shocks, and a potentially precarious position in the international division of labour. But there were persistent variations in their trajectories, reflecting structural and institutional differences: domestic consumption was a far more important factor of growth in Poland which meant that it was less affected by the 2009 economic recession than the Czech and Slovak Republics and Hungary. Economic growth rebounded in 2010 in all V4 countries, albeit at considerably lower rates than before the crisis, but markedly more strongly than in the southern member states, which experienced deep recessions in the following years.

Having briefly outlined the economic trajectories of the V4 countries, the remainder of the chapter focuses in more detail on foreign trade, FDI, research and development (R&D), and labour migration. The chapter is essentially empirical in content, although framed by an understanding of transformation theory which emphasises the persistence of growth curves in conjunction with the possibility for break points.

Foreign Trade

Under state socialism trade resembled a hub-and-spokes model of bilateral trade between the Soviet Union and the individual eastern bloc countries, with relatively weak trade ties amongst the latter (Dangerfield 1995). After 1989, trade with the Soviet Union collapsed, while trade reorientation to Western Europe was framed by the 1991–1992 Europe Agreements which mapped out a 10-year transition to free trade. Despite the asymmetrical nature of the agreements, which many commentators consider favoured the interests of the EU states (Gowan 1995), there was rapid territorial reorientation of foreign trade in goods after 1989. Whereas the EU15 markets accounted for 32.1% of Polish, 27.1% of Hungarian and 18.5% of Czechoslovak exports in 1989 (United Nations 1995), by 1995 these shares surpassed 60% in Hungary and the Czech Republic and 70% in Poland (Fig. 5.2). The share of direct exports from Slovakia to the EU15 (37.4%) in 1995 were far lower (UNCTAD 2015b), reflecting the importance of direct exports to the Czech Republic, although their ultimate destination was often the EU. By 2004, all the V4 countries exported 60–75% of their goods to the EU15 countries and over 80% to the EU28. The EU members remained the key export markets for the V4 countries also in late 2000s and early 2010s, although multinational branch plants and offices were developing new export markets, especially in Russia and China.
Fig. 5.2

The share of the EU15 in exports of goods and services from the V4 countries and southern EU Member Countries, in %. Source: UNCTAD (2015b): International Trade in Goods and Service in 1995–2014, online database

This reorientation occurred against the background of truly spectacular growth in foreign trade after 1989. The shares of exports/imports of goods and services in GDP roughly doubled in 1993–2014 in all the V4 countries (Fig. 5.1). In contrast, the national shares of world exports/imports declined in the GDPs of Portugal and Greece, while stagnating in Spain, in the same period. The most important increases in foreign trade happened in early 1990s, which are related to (i) the EU association agreements in the 1990s, and (ii) the introduction of macroeconomic and structural reforms. This was followed by further increases in export intensity, which are related to (iii) the arrival of multinational companies (MNCs) in the 2000s, and (iv) economic boom in 2001–2007. Within this overall picture, however, we can also see the importance of different national strategies. In 2014, Slovakia and Hungary had the highest degree of openness in foreign trade, equivalent to almost 100% of their GDPs, followed by the Czech Republic (78%), and Poland (48%). These differences only partly reflect country size (trade is usually a smaller share of GDP in larger economies), because Slovakia and Hungary, for example, were more open than the very small Baltic economies. They received more FDI and were more strongly integrated in global value chains. Significant increases in total exports reflected cross-border movements of parts and components (especially in the car industry and consumer electronics) in the V4 countries, and the creation of generally attractive conditions for inward investment in Hungary and Slovakia, in particular. The trade transformation was very much the outcome of the conjunction of external shocks after 1989 and 2008 with institutional changes.

The influx of FDI and the substantial presence of the MNCs influenced the export structures of the V4 countries. Because of their position in the global division of labour, the share of high-tech exports in total exports was low – 21.0% in the Czech Republic, 19.1% in Hungary, 9.7% in Slovakia, and 9.4% in Poland by 2014 – but it was even lower (2.0–6.6%) in the three southern European economies.

Main Trade Partners and Product Groups

Intra-EU trade generated some 79% of total exports of goods in the Czech and Slovak Republics and Hungary, and 72% in Poland, in 2014. The geographical patterns of trade were considerably different to those of the southern EU Members. Spain and Greece, for example, exported only about one half of their goods to the EU.

Germany has been by far the largest partner in intra-EU trade since the early 1990s, and it has also been the largest investor in the V4 economies: these features are interrelated. Germany’s FDI helped establish strong export-oriented automotive, electrical engineering and machinery industries in the V4. German- and French-owned subsidiaries of the MNCs ranked amongst the most important importers and exporters of intermediate goods, and final products to/from the V4 countries. In addition, some cross-border trade exchanges reflect continuities from pre-1989 trade patterns. The Czech Republic, for example, remained Slovakia’s second most important partner until the mid-2010s.

The concept of comparative advantages provide insights into trade composition. This implies that marginal factor productivities are significantly higher in the exporting than the non-exporting sectors; small open economies should specialise in limited portfolios of exported goods; and foreign investors should prefer export-oriented sectors with above-average marginal factors productivities. These principles seem to apply to the V4 countries. The most important merchandise exports of the V4 countries were concentrated in a relatively limited number of product groups (cars and car parts, consumer electronics and products of electrical engineering), which corresponded with the industries receiving the highest volumes of FDI. The V4 group’s competitive advantage in EU export markets is indicated by the Balassa index of revealed comparative advantage (RCA)2 which, for example, indicates that consumer electronics and electrical engineering accounted for disproportionally high shares of V4 countries exports in the 1990s, 2000s and 2010s.

Cars and car parts, consumer electronics, products of electrical engineering, and basic metals and metal products ranked amongst the most import exports of the Czech and Slovak Republics, and Hungary by 2014. Poland had a similar product structure, but also had strong furniture and shipping exports. Moreover, the concentration index3 (the degree to which exports and imports are focused in a few products) points to a very high increase in the concentration of exports in a small number of export items for Slovakia, and high increases for the Czech Republic and Hungary in 1995–2013. These small and open economies tended to overspecialise in a relatively small number of export items. Slovakia in particular became extremely dependent on exports of cars and consumer electronics. The concentration indices stagnated in Poland and decreased in Portugal and Spain in the same period. The changes in the concentration indices related to rapid and deep integration of the V4 countries into global value chains. The strategy of export concentration had its own risk, and the overspecialised V4 economies (SK, HU and CZ) experienced deeper slowdown in economic growth after 2008 than Poland, which had more diversified exports (Gurgul and Lach 2013).

Trade in Value Added: Domestic and Foreign Value-Added in Total Exports

Improving productivity and remaining competitive in a world dominated by global value chains requires efficient imports of goods as well as services. Several factors determine the share of domestic value in gross exports. First, large countries, such as the USA and Japan, have greater scope to source inputs from domestic providers and tend to import about one fifth of total production, compared to typically 50–60% in small and medium-sized countries. Second, exports of complex goods (cars and consumer electronics) are usually more demanding on foreign intermediate inputs than exports of simple goods (food products and raw materials) and/or services. Third, countries with extensive and well-embedded value chains tend to have higher shares of domestic content in total exports.

The total value added embodied in exports is broken down to the total domestic versus the foreign value-added contents of exports (see Table 5.2). Slovakia (46.8%), the Czech Republic (45.3%) and Hungary (48.7%), had higher share of foreign content in their total gross exports than Poland (32.4%), due to the three factors indicated above. High shares of foreign content in their total gross exports were clearly visible in key exporting industries—computer and electronics, electrical machinery and motor vehicles. The shares of domestic and foreign content in total gross exports indicate that the V4 countries were considerably more integrated into global value chains than the southern EU members (Table 5.2). Moreover, their integration deepened over time. Foreign content, for example, accounted for only 31.9% of the total gross exports in Slovakia, 30.5% in the Czech Republic, 30.1% in Hungary, compared to 16.1% in Poland in 1995 (source: OECD 2015, database on the Trade in Value Added). Inclusion in global value chains enabled fast growth in the exports and GDPs of the V4 economies. It is, of course, much easier to participate in incumbent global value chain than to build new ones but this does not automatically support development of domestic innovations and institutions (Éltető 2014, p. 53). Key industries were linked to the global value chains as suppliers and assemblers of the final products in the V4 countries.
Table 5.2

Domestic and foreign industry value added: share in gross exports in 2011 (%)

 

Total industry

C29: machinery

C30: computer, electronics

C31: electrical machinery

C34: motor vehicles

 

DVA

FVA

DVA

FVA

DVA

FVA

DVA

FVA

DVA

FVA

Czech Rep.

54.7

45.3

53.6

46.5

32.9

67.1

47.1

52.9

46.4

53.6

Hungary

51.3

48.7

53.8

46.2

25.9

74.1

38.3

61.7

38.6

61.4

Poland

67.6

32.4

63.1

36.9

46.3

53.7

58.0

42.0

50.7

49.3

Slovakia

53.2

46.8

54.2

45.8

39.1

60.9

52.2

47.8

39.2

60.8

V4 average

56.7

43.3

56.2

43.9

36.1

64.0

48.9

51.1

43.7

56.3

Greece

75.1

25.0

76.7

23.3

81.8

18.2

71.2

28.8

76.9

23.2

Spain

73.1

26.9

72.6

27.4

70.9

29.1

64.1

35.9

53.9

46.1

Portugal

67.2

32.8

62.8

37.2

47.6

52.5

50.9

49.1

41.7

58.3

South average

71.8

28.2

70.7

29.3

66.8

33.3

62.1

37.9

57.5

42.5

Notes: DVA = share of domestic value added in the total exports; FVA = share of foreign value added in the total exports. Simple averages for the V4 and southern EU members.

Source: OECD (2015): Trade in Value Added (TIVA).

The integration of the V4 countries into global value chains boosted the exports of goods much more than services. While the absolute volume of service exports grew, the relative shares of services in total exports decreased significantly in all V4 countries (1990–2014). This was the opposite of the general EU trends. The concentration on exports of goods is a potential weakness of the V4 economies in contrast to advanced EU and OECD economies which focus more on high value added services. International transport, travel and tourism were the most important items in the service trade of the V4 members rather than knowledge-intensive business services. This reflects the underdevelopment of the knowledge economy sectors of the V4 countries in the mid-2010s.

In the short term, the integration of the V4 countries into the EU boosted their economic growth via the low costs of production inputs and the influx of FDI. However, their integration into global value chains also means that, in the long term, the competitiveness of the V4 countries will depend on the continuing competitiveness of European exporters in the global economy. This will differ between the smaller and more open economies, and Poland. The high degree of openness of small and open economies may have reduced their exposure to domestic shocks (Iossifov 2014) while Poland, on the other hand, remains more exposed to shifts in domestic demand.

Foreign Direct Investment

Changes in foreign trade patterns were inextricably linked to new patterns of foreign investment. FDI was a key element of the neoliberal model of transition. It played an important role in privatisation, deregulation and liberalisation, and was considered essential for ensuring competition in national markets, as well as the transfer of technology, knowledge and capital at a time when national financial markets were weak and deformed (Sheehy 1994). The assumed benefits of FDI did not automatically follow the big bang economic reforms and the Europe Agreements. The V4 countries had to compete for the EU’s financial and knowledge resources with incumbent EU members (Spain, Portugal and Greece, in particular), and other Central Eastern European countries such as Slovenia, Romania, Bulgaria and the Baltic countries. However, they had several key advantages. First, they had favourable geographical locations, and either bordered or were close to Germany and France, two major EU economies. Portugal, Greece, Romania and/or Baltic countries had more peripheral locations. Strategic locations between Western and Eastern Europe, and geographical proximity to the EU and Russian markets, were valuable assets for their export-oriented industries. Geographical location was particularly important in determining FDI inflows in all the transition economies in Central Eastern Europe (Estrin and Uvalic 2014).

Second, they had favourable labour costs and educational strengths. Average nominal gross earnings were 4–5 times lower in the V4 countries than in Spain or Greece in the mid-1990s. The gap somewhat narrowed in the mid-2010s, but gross wages are still 2–3 times lower in the V4 countries than in Spain or Greece (Eurostat 2015a, Average annual gross earnings by economic activity). Educational attainment was also higher in the V4 countries than in the southern EU Members. The southern EU Members, for example, had slightly higher population shares with graduate qualifications, but also much higher shares with less than primary and/or lower secondary education in 2004 (Table 5.3). This reflected the existence of relatively well-developed systems of secondary education and vocational training in the V4 countries. This strong technically oriented secondary education was attractive to foreign investors in manufacturing, the automotive industry in particular. In contrast, the southern EU Members had high rates of early school leavers and lacked secondary school graduates in science and engineering in the mid-2010s.
Table 5.3

Population by educational attainment level, sex and age (%) for the age group 24–35, in 2004 and 2014

 

CZ

HU

PL

SK

EL

ES

PT

V4 avg

South avg

Period

Less than primary, primary and lower secondary education (ISCED 0 and 2)

2004

6.4

16.5

8.5

6.5

23.9

37.4

60.2

9.5

40.5

2014

5.4

13.0

5.8

7.4

17.7

34.4

35.3

7.9

29.1

 

Upper secondary and post-secondary non-tertiary education (ISCED 3 and 4)

2004

80.9

65.0

69.0

79.1

51.3

23.4

21.5

73.5

32.1

2014

64.7

54.9

51.6

62.8

41.6

24.1

33.2

58.5

33.0

 

Tertiary education (ISCED 5 and 8)

2004

12.8

18.6

22.6

14.4

24.8

39.8

18.3

17.1

27.6

2014

29.9

32.1

42.6

29.8

38.7

41.5

31.4

33.6

37.2

Source: Eurostat (2015g): Population by educational attainment level, sex and age (%25); Simple averages for the V4 and southern EU members.

Third, they had stable macroeconomic environments, and had experienced large-scale privatisations and rapid development of domestic financial markets. The ‘shock therapy’ reforms included policies aimed inter alia at price deregulation, and liberalisation of trade and capital flows. The liberalisation policies generated high increases in consumer prices but secured relatively stable price environment in the latter phases of the economic transition. Capital asset pricing models recognise two major determinants of the FDI inflows to emerging market economies, internal and external. The former refers to (country specific) ‘pull factors’, including economic, social and political developments: these can be further subdivided (Lensink and White 1998) into economic performance factors, such as GDP growth, inflation rates, trade and budget balances, saving rates, wage levels, and creditworthiness factors such as the debt to exports and GDP ratios, or international currency reserves to GDP. The latter refer to external (country non-specific) ‘push’ factors such as developments in international markets, and can be expressed in terms of differences between rates of return on alternative investment on international markets and those in the host country.

A comparative analysis of the V4 countries and newly industrialised Asian economies found GDP per capita, inflation and the ratio of M2 to GDP were the most significant determinants of FDI inflows in the 1990s (Williams and Baláž 2001). This broadly accords with Lensink and White’s (1998) findings that FDI tends to be directed to economies with relatively high development levels and relatively developed financial systems (indicated by ratios of broad money to GDP). FDI investors had longer term targets and were less influenced by fluctuations in interest rates and trade balances than speculative investors. Countries like Hungary, which privatised its financial sector early in the transition, enjoyed the advantage of a more sophisticated financial environment in the latter transition stages.

Fourth, there were well-established domestic industrial traditions in the V4 countries, which had strong manufacturing industries under state socialism. The former Czechoslovakia, for example, produced its own car brands (Skoda personal cars and Tatra trucks). Hungary exported Ikarus buses, and Poland produced Fiat cars under licence. The branches of MNCs mostly continued and extended manufacturing industries rather than building these from scratch in the V4 economies.

The average annual net FDI inflows generated 14.2% of the GFCF in the Czech Republic, 23.6% in Hungary, 15.0% in Poland, and 21.3% in Slovakia in 1993–2014. The high proportions in Hungary and Slovakia reflected particularly FDI-friendly national policies at different periods. These shares were substantially higher than those for the EU28 (11.6%), or for, say, India (4.4%), China (8.7%) or Latin America (13.9%). The contribution of FDI to the V4 economies, however, was higher than indicated by the shares of FDI in the GFCF. Financial and capital transfers were accompanied by knowledge transfers in terms of technologies and managerial practices.

The FDI inflows into the V4 economies were uneven, but they were generally positively related to their integration into the EU economy. The annual amounts of FDI reflected the privatisation and sales of domestic enterprises to foreign investors in the early 1990s, greenfield investments in new markets in the late 1990s and early 2000s, and different phases of V4 integration to EU structures (association agreements in 1991–1993 versus accession agreements in 2004). They were also related to business cycles, notably the 2001–2007 boom versus 2008–2009 boom. The first peak was in 1993–1995 while the second in 1998–2002 was related to the expected EU accession of the V4 region. FDI inflows peaked in 2007, when there were not only significantly lower inflows, but also substantial outflows of FDI from the V4 countries. During an economic crisis, ‘increased integration may result in more highly correlated business cycles because of common demand shocks or intra-industry trade’ (Frankel and Rose 1998). This accords with the notion of break points in transformation theory that are related to external shocks.

The EU15 economies were major investors in the V4 countries and were more severely affected during the economic recession than the USA and/or China. FDI flows from the EU15 to the V4 countries decreased more than the flows from the USA to Latin America and/or flows from China to developing Asia and Africa (UNCTAD 2015a). FDI inflows from the EU15 to the V4 economies resurged after 2010, albeit at a lower level than in 2004–2007. In the intervening period, the economies in Central Eastern Europe (CEE) had become less attractive than the Balkan economies.

Despite the relative slow down, the V4 economies had built substantial stocks of FDI by 2014. This accounted for 54.9% of GDP in the Czech Republic, 41.5% in Hungary, 36.6% in Poland and 55.0% in Slovakia. These were substantially higher than the proportions in the southern EU members in the same year: Greece –0.9%, Spain 4.0% and Portugal 23.9%. FDI in the V4 countries has usually been labour intensive and this provided a competitive advantage both for investors (MNCs) and the recipient countries. The V4 lost relative little foreign capital during the 2008+ economic crisis. European carmakers, for example, used lower cost V4 labour to cut production costs in the period of economic turmoil.

The success of industry-centred FDI in small and open economies (such as the Czech and Slovak Republics and Hungary) is understandable when these economies are well-integrated in global production chains. The Czech Republic and Slovakia had far stronger manufacturing sectors and received more FDI per capita than Hungary and Poland (Table 5.4). However, the low costs of production and proximity to EU markets constituted major competitive advantages for the V4 countries on international markets throughout the 1990s–2010s. The MNCs used the V4 countries as production bases for EU-oriented exports. Foreign capital targeted capital and labour-intensive and export-oriented, sectors such as the automotive and chemical industries. Foreign ownership was also significant in the financial and information and communication technologies (ICT) sectors. In contrast, there was relatively less FDI in those sectors serving domestic markets, such as food processing and transport. The FDI influx was reflected in changes in the ownership structure of the national economies. Eurostat data show that foreign controlled enterprises generated far higher proportions of total value added in the V4 (35.1–51.9%) than in Spain (18.7%) and Portugal (19.7%).
Table 5.4

Average annual net FDI flows in the V4 countries and southern EU members in 1993–2013

 

CZ

HU

PL

SK

EL

ES

PT

V4 avg

South avg

Period

Average annual net FDI, €m

19932004

3289

2176

6843

1251

502

–5741

–303

3390

–1847

20052013

4048

1718

7323

1814

–97

–13,772

2108

3726

–3920

 

Average annual net FDI, € per capita

19932004

322

215

179

233

46

–135

–29

237

–39

20052013

390

171

192

337

–9

–302

200

273

–37

Source: Eurostat (2015b): Balance of Payment Statistics; Eurostat (2015c): Financial account – Direct investment; and authors’ own computations. Simple averages for the V4 and Southern EU Members.

Most literature on FDI and economic growth identifies a causal relationship between the influx of foreign capital, and increases in exports and in GDP (for example, Makki and Agapi 2004; Alfaro et al. 2004). There is similar evidence for Central and Eastern Europe in the 1990s and 2000s. Kutan and Vukšić (2007) found that FDI contributed to higher exports by increasing supply capacity in the new EU member countries in 1996–2004. In a different study, Śmiech and Zysk (2014) found that the FDI strongly influenced Polish, Slovak and Czech exports and imports in 2001–2011.

FDI boosted the competitiveness of the V4 countries via growth in the stocks of fixed capital, and diffusion of knowledge and advanced technologies. The latter correlated with significant growth in total factor productivity (TFP). According to the EC’s Annual Macroeconomic Database (European Commission, Economic and Financial Affairs 2015, AMECO database), the V4 countries enjoyed significant growth in TFP in 1995–2014, increasing annually by 1.1% in the Czech Republic, 0.8% in Hungary, 2.0% in Poland and 2.1% in Slovakia. This was much higher than in Greece (0.4%), Spain (0.1%), Portugal (0.3%) and the EU15 (0.4%) in the same period (Table 5.1). High growth rates in TFP in the V4 countries reflected several factors: low TFP levels in the early 1990s; technology transfers via foreign trade; substantial stocks of human capital; diffusion of knowledge and technology via FDI; and national R&D and innovation efforts. However, the latter were severely affected by the economic and social transition in the early 1990s and contributed less than FDI to national competitiveness.

FDI in the V4 countries also helped to improve the competitiveness of the MNCs. The shares of the automotive industries in total manufacturing employment were significantly lower than the corresponding shares of these industries in gross value added in all the V4 countries (Túry 2014, p. 91). The German and French automotive companies exploited low production costs in the Czech and Slovak Republics and Hungary and reinvested their earnings in the V4 countries. This was different to Spain, where Volkswagen (SEAT) planned to relocate its activities to Slovakia in 2002 leading to a bitter dispute between the Spanish and Slovak governments, and the Spanish government threatening to veto Slovakia’s accession to the EU (Medve-Bálint 2014, p. 44).

The contribution of FDI to economic development was not always positive. The V4 countries also received substantial speculative investment in real estate. This was particularly pronounced in Hungary where a market bubble was fuelled by Hungarians taking out mortgages in euros and Swiss francs, leading to up to 40% of mortgages being denominated in foreign exchange in 2006 (Égert and Mihaljek 2007). The collapse of the Hungarian forint exchange rate impacted heavily on mortgage payments. The consumption booms and housing bubbles in the V4 countries, however, were smaller than those in the Baltic countries, Romania and Bulgaria (Bogumil 2014). And, as noted earlier, the openness of the three smaller V4 economies came at the price of considerable vulnerability to external shocks (Smith and Swain 2010).

Research and Development

Labour costs in the V4 countries have risen during the last two decades and have converged on EU15 levels. High labour cost countries can only compete in the increasingly globalised economy if they are specialised in industries that require high knowledge content, high qualification levels and expertise in the labour force. Investments in the knowledge economy increased in the V4 countries, but were far from matching those in the EU15 countries. This is critical because, in the long term, economic growth is primarily defined by technological progress and the accumulation of human capital, which determines the way and the speed at which technological progress penetrates the economy. The three most important issues are the availability of research funding and supply of highly skilled researchers; the creation of a functional national system of innovation; and high shares of innovative enterprises. The V4 countries have struggled with all three elements. R&D was weak under state socialism, due to the preponderance of basic versus applied research (Zon 1996). R&D continued to be relatively weak after 1989, and a Commission of the European Communities report (1995) attributed this to several factors: sharp reductions in public expenditure generally, including R&D; brain drain of highly skilled researchers; short termism in the private domestic sector, exacerbated by the struggle for survival following the sharp shock economic reforms; and the reliance of MNCs on external R&D.

Following EU accession, the V4 countries experienced four major trends. First, there has been an overall increase in gross expenditure on R&D (GERD) in both the EU and the V4 group, including the period of economic turmoil. Some governments have supported business expenditure on R&D (BERD) with tax breaks and grants. The V4 countries had higher growth in GERD compared to the EU28 average, while this stagnated in Greece, Portugal and Spain in the same period. The GERD levels in the V4 countries, however, increased from relatively low levels. The Czech Republic had the most impressive growth in GERD amongst the V4 group, while Slovakia resembled Malta, Cyprus, Romania and Greece in having low growth in GERD.

Second, business expenditure on R&D (BERD) also grew both in the EU28 and V4 in 2008–2013. The Czech Republic and Hungary, in particular, reported high growth in BERD, with the branches of MNCs and domestic firms having broadly similar importance in this. In Poland and Slovakia, expenditure by domestic companies contributed more than MNC expenditure to BERD. The southern EU members, on the other hand, had relatively low inward flows of foreign finance in the business sector.

Third, public expenditure on R&D (government + higher education institutions) decreased in 2008–2013 in the EU28. There were significant cuts in R&D in Spain and Italy in particular, associated with significant reductions in public spending. Public expenditure on R&D has stagnated in Hungary, Poland and Slovakia since 2009, and Slovakia ranked bottom amongst the EU28. The Czech Republic, on the other hand, had the fastest growth of public expenditure on R&D in the EU28 in 2009–2013. Public expenditure on R&D was also affected by cuts in government budgets in Spain, Portugal and Greece.

Fourth, the importance of external international sources of funding for R&D has increased in the V4 countries in the last 10 years. Foreign resources (foreign firms and international organisations) generated about 20% of total GERD in the V4 countries. The Czech Republic in particular had strong growth in such sources, of which two thirds was from the European Commission and one third from foreign companies. The European Commission provided for over 60% of foreign funding in Poland and Slovakia, but also in Greece, Portugal and Spain in early 2010s. The Hungary was rather exceptional, as two thirds of its foreign funding was provided by foreign enterprises in the same period.

Structural Challenges and Integration to the EU’s Knowledge Markets

The European Commission’s (2015b) annual country reports on research and innovation (R&I) identified a number of persistent challenges for the V4 countries. There is weak national funding and underdeveloped public–private collaboration, as well as the low embeddedness of MNCs in the national economy, and low co-operation between MNCs and national universities and research centres. This is compounded by underdeveloped and/or unstable systems of R&I governance. Other weaknesses include low levels of innovativeness amongst domestic small and medium-sized companies (SMEs), lack of a clear thematic focus in publicly funded research, and hesitant integration of national R&I systems into the European Research Area – for example, low participation in the framework programmes, and in European joint technology initiatives and partnerships.

Some of these structural challenges stem from the history of economic development in the 1990s and early 2000s. The MNCs entered the V4 markets principally because of the low effective costs of production inputs, labour costs in particular. They have tended to retain their research activities and other knowledge-intensive services in their headquarters. Eurostat data on sources of GERD finance do indicate a gradual shift towards more sophisticated activities in the V4 countries, in the Czech Republic and Hungary in particular. However, both the MNCs and domestic enterprises had to cope with a weak supply of high-quality research resources in the V4 countries. Business-oriented research largely disappeared during the turbulent 1990s. Universities and government research facilities tried to insulate themselves from market forces and refocused their attention on basic research and mass education. Research excellence was limited.

There were mixed trends in the internationalisation of R&D in the V4 countries. The Czech Republic and Hungary achieved average success rates in FP7 research projects in 2007–2014, but Poland and Slovakia had quite low success rates. All the V4 countries accounted for below-average patenting activity rates and high-quality scientific publications in the mid-2010s (Table 5.5). Researchers from the CEE countries were also more likely to publish in their national languages and received relatively less citations per paper than authors from the EU15. This may reflect ‘poorer knowledge of publication standards and publication strategies as well as inadequate levels of proficiency in English, but also perhaps poorer standards of research resulting, inter alia, from weaker international collaboration’ in the CEE countries (Płoszaj and Olechnicka 2015, p. 18). Amongst the CEE countries the Czech Republic and Hungary had the best publication results.
Table 5.5

Selected indicators of the V4 and southern EU member countries in research and innovation

 

Year*

GERD, % GDP

BERD, % GDP

Top publications

Patents

KIBS exports

Innovative SMEs

CZ

2005

1.17

0.73

4.9

0.72

31.6

35.5

2014

1.91

1.03

5.6

0.79

35.2

30.9

HU

2005

0.93

0.41

4.8

1.38

21.0

17.6

2014

1.41

0.98

5.3

1.49

28.8

12.8

PL

2005

0.57

0.18

3.5

0.28

22.6

22.2

2014

0.87

0.38

3.8

0.42

33.6

13.1

SK

2005

0.49

0.25

2.4

0.54

15.5

19.3

2014

0.83

0.38

4.2

0.50

31.3

17.7

ES

2005

1.10

x

9.2

1.30

24.0

32.1

2014

1.24

0.66

10.4

1.57

30.0

18.4

PT

2005

0.76

0.30

9.0

0.26

22.8

38.6

2014

1.36

0.65

9.9

0.67

35.5

38.3

EL

2005

0.58

x

8.9

0.28

x

34.5

2014

0.80

0.50

9.2

0.35

53.9

29.6

V4 avg

2005

0.79

0.39

3.9

0.73

22.7

23.7

2014

1.26

0.69

4.7

0.80

32.2

18.6

South avg

2005

0.81

x

9.0

0.61

x

35.1

2014

1.13

0.60

9.8

0.86

39.8

28.8

EU28

2014*

2.01

1.29

11.0

3.38

49.5

30.6

Notes: * = or the latest available year. GERD = gross expenditure on research and development; BERD = business expenditure on research and development; top publications = scientific publications within the 10% most cited scientific publications worldwide as percent of total scientific publications of the country; KIBS exports = knowledge-intensive services exports as percent of total service exports; patents = PCT patent applications per billion GDP in current PPS (EUR); innovative SMEs introducing product or process innovations as percent of SMEs. Simple averages for the V4 and southern EU members.

Sources: European Commission (2014): Research and Innovation performance in the EU in 2014; European Commission (2015a): Innovation Union Scoreboard 2015.

Some of the long-term structural challenges to national R&I systems were similar in the V4 and southern Members of the EU. The country reports on the Spanish, Portuguese and Greek national R&I systems, for example, refer to ‘fragile and unstable systems of the R&I governance’; ‘low business demand and private investment in R&I’, and ‘low innovativeness by the domestic SMEs’ (European Commission 2014).

The V4 countries have tried to overcome these weaknesses with support from the European Commission. A significant part of the structural fund resources, for example, was channelled to national R&I systems in the V4 countries. Their weak national R&I systems, however, had limited absorption capacity. In order to improve spending rates, some national governments allocated most structural funds for research-to-research infrastructure projects. Investments in research infrastructures, however, were not matched by national investments in human resources, or by necessary reforms of national R&I governance. Low levels of research excellence, and poor interconnections between the industry and academia sectors, were evident in the below-EU average values of indicators for commercial and non-commercial research outputs (Table 5.5).

Labour Migration

International labour migration was very limited under state socialism, but thereafter increased significantly. Initially, access to international labour markets was constrained, and there was considerable seasonal working and irregular employment, but there was also significant brain drain, contributing to reduced TFP (Baláž et al. 2004). However, returned migration also ensured that there were some benefits for the V4 countries in the form of knowledge transfers. These were particularly important in the early transition period, when there was a major technology gap between the V4 countries and the EU.

Accession to the EU in May 2004 was a turning point in the migration flows from the V4 countries. Ireland, Sweden and the UK opened their labour markets immediately after EU eastern enlargement in 2004. The UK and Ireland quickly proved to be popular destinations, and the numbers of V4 nationals in the EU15 doubled in 2004–2007. Some EU15 countries negotiated gradual adaptation of their labour markets: Greece, Spain, Italy, Portugal and Finland opened in 2006, Luxembourg in 2007, France in 2008, and Belgium and Denmark in 2009 but none were prime destinations for the V4 nationals. Finally, Germany and Austria enabled free access to their labour markets for the EU8 nationals in 2011, and their high wages, low unemployment rates and geographical proximity resulted in an increase of 340,000 V4 nationals working in Austria and Germany in 2011–2013.

Poland generated the highest numbers of émigrés in the EU (1.92 m), followed by Hungary (0.30 m), Slovakia and the Czech Republic (0.17 m each) in 2013. Poland, Slovakia, and Hungary, however, had the highest relative intensities of emigration (5.1%, 3.1% and 3.0% of population, respectively) in the same year. Relative emigration from the Czech Republic was significantly lower (1.6%), due in part to its lower unemployment rates and higher wages 1997–2013. Slovakia and Poland, on the other hand, had the lowest wages and the highest unemployment rates in the same period, and had the highest increases in the numbers of émigrés in 1997–2013. Holland et al. (2011, p. 14) assume that ‘approximately 75% of the increase can be attributed to the enlargement itself, while the remaining 25% is ‘likely to have occurred even in the absence of enlargement’. The 2008 economic crisis somewhat reduced the influx of V4 nationals to the EU15 countries, but the numbers of migrants increased again in 2011.

Migrants from the V4 countries concentrated in a relatively few EU15 destinations. The top six destinations (Germany, Ireland, Italy, Austria, Spain and UK) accounted for over 82% of the total Czech, Slovak, Hungarian and Polish nationals in 1997–2004 and 2005–2013 (Table 5.6). Germany and the UK were by far the most important destinations, accounting for some 55–65% of V4 nationals in these periods.
Table 5.6

Stock of foreign nationals in selected EU countries (period averages)

 

Czech Republic

Hungary

Poland

Slovakia

Period

97-04

05-13

97-04

05-13

97-04

05-13

97-04

05-13

Germany

25,293

36,686

53,247

74,899

300,873

432,845

15,124

28,081

Ireland

1080

12,450

590

6077

2091

111,814

4292

10,761

Italy

3498

5646

3514

6390

32,508

93,565

2481

7632

Austria

6771

9146

14,009

26,254

22,997

38,882

9208

19,665

Spain

2140

8202

1250

7652

17,722

75,087

1404

7330

UK

12,193

25,850

6355

29,240

33,600

485,778

5250

46,588

EU15 total

56,271

110,797

89,638

173,400

494,846

1,444,151

44,118

134,258

EU28 total

63,214

121,608

92,523

181,121

520,469

1,474,292

98,151

214,420

Sources: Eurostat (2015d): International Migration; Eurostat (2015e): Labour Force Survey; Holland et al. (2011); authors’ own computations.

The concentration was conditional upon wage and employment disparities, language and geographical proximity, and the evolution of labour market policies in the host countries. Jobs and educational opportunities were major motives for the intra-European migration of V4 nationals, and also the relative generosity of the welfare system (Kahanec 2012). Language proximity was of particular importance for the migration of Slovaks to the Czech Republic. The migration to Germany and Austria was informed by geographical proximity and wage differentials. Wage differentials, flexible labour markets and low unemployment rates were important for the migration of V4 nationals to the UK and Ireland. The UK and Ireland also attracted migrants wishing to learn English and/or purse tertiary education.

The network diagrams summarise major intra-European migration movements in 1997–2004 and 2005–2013 (stocks of 4000+ émigrés, Fig. 5.3). The size of the country is proportional to the total stocks of foreign nationals, while each line reflects the magnitude of the connection between the two countries of particular importance is that although the population of the V4 countries was some 6% lower than combined population of Spain, Portugal and Greece. The V4 countries had higher number of émigrés (2.8 million compared to 1.66 million) in 2013. The network diagrams indicate that the major labour migration flows from southern Europe to Western Europe in the 1980s were superseded by flows from the V4 countries in 2000s and later by flows from Bulgaria and Romania by the early 2010s.
Fig. 5.3

Outflows over 4000 nationals from each country in 1997–2004 (left) and 2005–2013 (right). Country size reflects stocks of the foreign born population from the top partner countries. Sources: Eurostat (2015d): International Migration and authors’ own computations

The V4 countries had an educated labour force so that deskilling levels were relatively low for the V4 nationals working in the EU15 countries by the end of the 2000s. Holland et al. (2011), for example, found that elementary or basic occupations were only taken by 30% of Poles, 23% of Slovaks, 19% of Hungarians, and 15% of Czechs working in the EU15 in 2010. Most V4 nationals worked in the middle-skilled occupations, such as clerks, service workers and shop and market sales workers, skilled agricultural and fishery workers, craft and related trades workers and plant and machine operators and assemblers. High-skill jobs were taken by about 38% of Czechs, 34% of Hungarians, 30% of Slovaks and 16% of Poles which, together with high numbers of the V4 tertiary students in the EU15 countries (65.7 thousands in 2012), indicate significant brain drain.

Conclusions

The V4 countries experienced a rapid transition from state-controlled to modern market economies. The fast pace of economic reforms in the 1990s, which were partly externally induced through the various agreements with the EU, and partly due to institutional reforms, enabled deep structural changes, such as the introduction of market mechanisms, price deregulation and liberalisation of trade and capital flows. The structural changes facilitated factor movements (capital, investment and knowledge) which contributed to rapid integration of the V4 countries into the EU. In terms of transformation theory, thereafter development did resemble a series of recurrent growth curves, but external shocks (EU accession, the 2009 crisis) and international institutional changes (such as Slovakia’s 1998 change of government, or Hungary’s creation of a dependence on foreign loans in the housing market) were important turning points.

While changing flows of production factors were the economic trademarks of the post-1989 period, particular factors had distinctive mobility features. Reorientation and integration of the foreign trade was remarkably rapid in the early 1990s, and was complemented by strong influxes of FDI in 1995–2008, conditional on macroeconomic stabilisation, and the prospects of EU eastern enlargement. Most of incumbent EU member countries did not immediately open their labour markets to Central Eastern Europe, but all were obliged to do so by the early 2000s. Knowledge is the most mobile production factor, and driver of productivity, but their integration to the European Research Area was relatively slow. National systems of R&D accounted for the considerable inertia and low speed of transformation in the V4 countries.

The integration of the V4 countries is generally considered a success story in the history of the EU. The comparisons with Greece, Spain and Portugal demonstrate that the V4 countries started their convergence with the incumbent EU members from considerably lower levels of GDP per capita, but achieved higher growth rates. This reflects differences in their starting points, the nature of the external shocks faced, and institutional changes. The future growth of the V4 countries, however, faces risks, some of which are similar to those currently faced by the southern member countries.

First, is likely to pose a major challenge for their future development. They have the highest rates of population ageing in the EU (European Commission 2015b), as well as high rates of emigration by young people, and – until very recently – low levels of immigration. Second, demographic trends indicate that labour productivity growth, in general, and TFP (especially technology), in particular, should be a major source of economic growth in the V4 countries in the coming decades. Since the 1990s, labour productivity growth has benefited from diffusion of technology and organisational innovations by the MNCs. However, this source of growth may diminish as the MNCs relocate some of their production to even lower cost countries. This problem is exacerbated, because the V4 countries have been unable to build strong national innovation systems to support labour productivity growth from domestic resources, yet this is essential for the long-term economic growth, sustainable public finances, and for providing public social services for ageing populations.

Third, the period of the 1990s–2010s was typified by capital-intensive growth and technology transfers assisted by FDI in the V4 countries. They benefited from having an educated but affordable labour force until the mid-2010s. Rising labour costs, however, represent a likely future challenge, especially given the slow transition to knowledge-intensive growth. In this respect, the experience of Portugal may be salutary. Portugal was a favoured FDI destination in the 1980s and 1990s but, having failed to transit to knowledge intensive growth, rising labour costs made Portugal less attractive in the last decade. The V4 countries will have to concentrate more resources in high-tech industries, including making more efficient use of EU structural funds, if they are to make the transition to high value added production. Specifically, they will need to focus more on ‘soft’ infrastructure projects, such as supporting start-ups, life-long learning and on-the-job training. With wage levels rising, the V4 may also be better able to facilitate the return of their émigrés. There is a considerable potential for turning brain drain to brain gain.

Fourth, overspecialisation is another problem for some V4 countries. Slovakia, for example, hosted four major car-markers and became the largest per capita car producer in the world in 2015. High specialisation in a few export products was also typical for the Czech Republic. While small open economies need to pursue their comparative advantage and specialise, overspecialisation can be problematic in economic downturns, such as that in 2009, or when a few major foreign investors relocate their investments.

Fifth, the V4 countries also are overspecialised in terms of their markets, with the EU taking the vast majority of their exports. Initially, the choice of exchange rate regime was critical for mitigating the impacts of foreign trade on macroeconomic stability. The Czech Republic, Hungary and Poland opted for an external anchor of the fixed exchange rate regime in early 1990s (Szijártó 2014), while Slovakia introduced a mixed exchange rate regime—the crawling peg. However, most CEE countries found the fixed exchange rate regimes were unsustainable during the 1998 crisis, and transited to a managed float or free-float regime. Subsequently, in what became an important turning point in the economic transition, Slovakia adopted the euro, while the three other V4 countries became less enthusiastic about the Eurozone after the outbreak of the 2008 financial crisis. Empirical evidence from the Eurozone indicates the positive effect of common currencies on the intensity of bilateral international trade (Rose and Stanley 2005; Baldwin 2006). The reduction of foreign exchange rate fluctuations and of transaction costs are particularly important for a small country trading intensively with a big Eurozone member. Germany alone accounted for about one third in all V4 countries. Indeed, some studies (Cieślik et al. 2014) found evidence that Eurozone membership was positively related to the probability of exporting.

Finally, institution building is far from complete in the V4 countries. By the mid-2010s, the V4 countries had relatively low rankings in the world leagues tables of the quality of public institutions. The World Bank’s Doing Business index and/or World Economic Forum data sets, for example, point to high levels of corruption, significant administrative burdens for businesses, inefficient and corrupt judicial systems, and high shares of the informal sector in the total economy. As these institutions continue to be reshaped in the coming years, transformation theory reminds us that they will constitute important internal sources of turning points in the experiences of the four countries.

Footnotes

  1. 1.

    EU-15 denotes the fifteen EU Member States that joined the Union before the eastern enlargement in 2004.

  2. 2.

    The Balassa index of revealed comparative advantage (RCA), or normalised market share is defined as (x ij /x aj ) / (X i /X a ) = where x ij is exports of product j from country i; x aj is exports of product j from the reference area (EU27); X i is total exports of country i; and X a is total exports from the reference area (EU27). Index RCA higher than 1 indicates a comparative advantage and specialisation of a country in exports of particular good or service. All V4 countries accounted for the Balassa index values higher than 1 in exports of cars and parts, and consumer electronics in mid-2010s.

  3. 3.

    The Herfindahl–Hirschmann index (HHIj) is a measure of the degree of market concentration. It has been normalised to obtain values ranging from 0 to 1 (maximum concentration), according to the following formula: HHIj = ∑ (x ij / i j )2; where x ij = value of export for country j and product i. An index value that is close to 1 indicates a very concentrated market. On the contrary, values closer to 0, would demonstrate a homogeneous market between the exporters or importers. Source: UNCTAD (2015b).

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Copyright information

© The Author(s) 2017

Authors and Affiliations

  • Vladimir Baláž
    • 1
    Email author
  • Katarina Karasová
  • Allan M. Williams
  1. 1.The Institute for Forecasting of the Slovak Academy of SciencesBratislavaSlovakia

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