How Foreign Direct Investment is Changing East European Economies
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How Foreign Direct Investment is Changing East European Economies Charles Kovacs Vice Chairman, Committee on Non-Member Economies, Business and Advisory Committee to the OECD, Paris RESEAU D’ECONOMIE INTERNATIONALE, Montreal, Quebec, Canada 30 March 2005. IN THE BEGINNING: 1990.

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How Foreign Direct Investment is Changing East European Economies Charles KovacsVice Chairman, Committee on Non-Member Economies, Business and Advisory Committee to the OECD, ParisRESEAU D’ECONOMIE INTERNATIONALE,Montreal, Quebec, Canada30 March 2005


In the beginning 1990

IN THE BEGINNING: 1990 Economies

Transformation and not revolution: radical political and structural change, but with pre-1990 power structure intact

Stagnant economies; no foreign investment

Low standard of living, but no formal unemployment

Poland, Yugoslavia among defaulted countries, Bulgaria on the brink, of the rest, only Hungary had a large foreign debt

Command economies closely linked to COMECON: dependent on USSR for exports and for oil and gas

Only minority of exports were to First World

Only Hungary had a legal structure that was close to Western law (e.g. Companies Act, Banking Law)

Very limited entrepreneurism except Hungary and Yugoslavia


Western reaction to the collapse of communist rule
WESTERN REACTION TO THE COLLAPSE OF COMMUNIST RULE Economies

  • Surprise, fear of rapid change, switch to historical autopilot

  • Divisions within EU about Yugoslavia

  • Attempted marginalization of US preoccupied with Gulf War and its aftermath

  • Establishment of EBRD

  • Great commercial interest till August 1991

    • Euphoric large banks and companies

    • Western SME’s with “ethnic” background

    • The beginning of tiering

    • The switch to Russia


The aftermath in eastern europe
THE AFTERMATH IN EASTERN EUROPE Economies

  • Chaos and war in Yugoslavia

  • Unrest in Romania and in the Baltic States

  • Hyperinflation in Poland

  • Initial joy at freedom and independence gradually undermined by economic problems and absence of fundamental change

  • Privatization slowed by local special interests and Western advice

  • Modernization of legal structures]

  • Initial exclusion of foreign banks in some countries

  • Most FDI limited to Hungary till 1993, then increasing amounts for Poland, Czech Republic


1995 start of the race to prosperity
1995: START OF THE RACE TO PROSPERITY Economies

  • Temporary peace in the Balkans

  • Stability achieved in the Baltic States

  • Break up of Czechoslovakia peacefully completed

  • Good record of scandal-free elections, democracy and free press solidly established

  • Legal reforms completed in Northern tier of E. Europe

  • Significant privatization, FDI inflows everywhere

  • Positive experience with green-field investments

  • Revolution in retailing and banking

  • Good progress in telecommunications



Where is eastern europe now share of global fdi flows
WHERE IS EASTERN EUROPE NOW? EconomiesShare of Global FDI Flows


Where is eastern europe now1
WHERE IS EASTERN EUROPE NOW? Economies

  • Still marginal in global terms, but

  • Massive qualitative and quantitative improvements in exports, largely to First World countries

  • Modern economies in Northern tier

  • Radical improvements in Baltic states

  • OECD and NATO membership by 1998 for North

  • EU membership for northern and Baltic states

  • Stability in the Balkans after Kosovo air campaign

  • Improvements in Romania, Bulgaria, Croatia

  • Eventual EU membership for the Balkan countries


Where is eastern europe now2

WHERE IS EASTERN EUROPE NOW? Economies

Market for Offices in 2004

Budapest Moscow Warsaw Prague

Office space (M of sq.m) 1771 2287 3329 1650

Highest rent (Eu/sq.m/p.m) 17.9 21.0 40.6 20.0

Source: Jones, Lang, LaSalle


Problems in the balkans fdi attracted through 2003
PROBLEMS IN THE BALKANS EconomiesFDI attracted through 2003


Problems in the balkans

PROBLEMS IN THE BALKANS Economies

Tiering within the region: Albania, Bosnia-Herzegovina, Macedonia, Moldova have almost no foreign investment

Improvements unlikely without resolution of Kosovo’s and Bosnia-Herzegovina’s problems

Very limited progress in improving infrastructure, except Croatia and telecommunications in most countries

US and EU attention shifting away from the region

Slow progress of structural reforms, except Romania and Bulgaria


Eastern europe in the future issues problems and questions
EASTERN EUROPE IN THE FUTURE: EconomiesIssues, Problems and Questions

Impact on the EU: The East European Perspective:

  • Distribution of subsidies

  • Constitutional issues: preference for a weak confederation

  • Preference for less regulation, freer economies, less socialism

  • Friendlier views towards the US

  • Preference for NATO

  • Potential disagreements about future expansion of EU


Eastern europe in the future issues problems and questions1
EASTERN EUROPE IN THE FUTURE: EconomiesIssues, Problems and Questions

Impact on the EU: The Western Perspective:

  • Loss of subsidies for “old” members

  • Immigration from new states (many pros and cons)

  • New power relationships within the EU: weakening of the Franco-German Entente

  • Disagreements on foreign and defense policies

  • BUT: Eastern Europe is secure, peaceful, and increasingly prosperous


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