How to gain competitiveness in accession countries?

The recession in the early transition phase, caused – among other factors – by the trade shock of economic disintegration and the credit shock of high real interest rates, is overcome by now. Catching up with western income and productivity levels is sometimes seen as the most important aim in the transition period. However, this is a difficult, if not an impossible, task, as the least developed EU countries grow quite fast as well. In order to decrease the gap in national income, accession countries would have to grow even faster. Obviously, it makes sense to envisage equality in terms of macroeconomic stability, but much less so in terms of structural features (such as export price structures).

The accession countries are enormously diverse in their process of catching up, with Hungary , Poland, the Czech Republic and Slovenia taking the lead. This process not only differs between countries, but also between industries. Moreover, productivity catching-up is very different across branches of industry, while wage catching-up is distributed more evenly across sectors and branches. Productivity catches up at greater speed in electrical equipment and transport and much lower in textiles, leather and machinery. In general, the productivity advances are fastest in high-tech and medium-tech sectors. Combined with a strong wage drift, this leads to a shift in comparative advantage towards the medium-tech sector and away from low-medium-tech, labour intensive sectors (Landesmann). Nowotny stated that, in the discussion on competitiveness of the accession countries, too much emphasis is usually put on wage developments. According to his opinion, the institutional and material infrastructure plays a more important role than wages. If these factors are neglected, regional problems are likely to evolve.

Traditionally, the secondary sector played an important role in socialist countries. According to Landesmann, deindustrialisation characterised the first years of the transition process, but is of rather minor importance now. In fact, some accession countries seem to move towards re-industrialisation. Since reconstruction is an important task in most of the CEECs, the construction industry is largely responsible for the high share of industry in total production, this share still exceeding the average level in the EU. Landesmann supposes that the development from deindustrialisation to re-industrialisation shows specialisation of the CEECs in manufactured goods. As a consequence, the service sector has remained underrepre-sented.

Foreign direct investment still plays an important role in the CEECs, although FDI inflows differ from country to country and are allocated predominantly near the western borders (Landesmann). It has been subject to discussion whether or not the efficiency of a firm depends, among other factors, also on the nationality of the owner. The causality may run either way, and it is by no means clear that foreign ownership has a favourable impact on the efficiency of production. In fact, foreign-controlled companies do exhibit the best production results, but this is because, early on in the transformation process, foreign capital was able to select and enter the most dynamic branches of industry.

FDIs still finance considerable parts of investment in the CEECs who would otherwise depend on the more volatile financial capital inflows.

Another aspect is the transfer of management techniques and technological skills linked to FDIs (Brenton et al., 1999) and the contribution to reach conformity with EU law (Inotai, 1999). Therefore, CEECs generally continue to encourage FDIs, which requires that financial systems be liberalised further (strict rules for banking, effective banking supervision) and financial markets transmit reliable information. It is likely that FDIs will increase further after accession to the EU because of the expected fall in risk premia. This fall will be a consequence of an increase in legal security, the reduction of still existing transaction obstacles, lower administrational burden and the reduction of political risks.

When looking at Austrian projects in CEECs, market-driven motives clearly dominate: More than 80% of firms in a survey mentioned this motive as main reason for their engagement. In contrast, efficiency-oriented motives (in particular low wage costs) seem to be of rather minor importance. At the beginning of the opening-up of the east, FDIs were directed towards the existing, already privatised, enterprises.

Today greenfield investments play an increasing role (Pfaffermayer /Stankovsky, 1999, Burger).

As to the motives for investing in plants in eastern Europe, outsourcing of production by western companies is of particular interest in terms of value-added and employment for both the outsourcing and the receiving country: Outsourcing means that the value-added chain of production is fragmented and part of it is moved to an eastern country. The advantage for the western company may lie in lower production costs which may help maintain international competitiveness. For CEECs it has the advantage of generating additional value added combined with a transfer of technological skills and management know-how. According to Kohler, real income per capita is likely to rise in CEECs by receiving western outsourcing. The accession to the EU will significantly broaden the outsourcing potential, because the traditional rules of origin will disappear for goods produced (partly) in eastern European countries.

Like international trade in general, outsourcing is welfare-enhancing as it facilitates the specialisation and thereby the optimal allocation and use of resources. This is true for EU countries as well as the accession countries, but, given the relative size of the EU and the CEECs, the

latter should benefit more than current EU members. Therefore, CEECs may be better off by becoming a part of the global production network than by attempting to start entire new industries from scratch.

Production and trade structures are rather diverse across the CEEC region, even after the enormous adjustments during the transformation process. Sectoral trade structures and the factor intensity of exports have long been regarded as indicators of the level of development of an economy and of its value-added generating capacity. Exports from CEECs are on average much more labour intensive than exports from the EU. But in both regions the importance of labour intensive goods is on a strong decline. In the CEECs' exports, the R&D-intensive branches were underrepresented at the beginning of the transition period, but gained importance during that period. Hungary in particular seems to evolve as a “Pannonian tiger” (Landesmann).

In contrast to the factor-intensity of trade, according to Salvatore, the question whether transition economies should trade with industralized western countries or within their own group is virtually meaningless.

What is important is that they trade – no matter with whom. The benefits of trade can be reaped off only if there are no trade distortions.

However, as Fink found out, some 122 trade-distorting measures have been introduced by the five most developed CEECs (i.e. Hungary, Poland, the Czech Republic, Slovenia and Slovakia). This new wave of protectionism is strongly motivated by real currency appreciations which make it more difficult for eastern firms to successfully compete on world markets. Nevertheless, if these distortions are abolished the liberalisation of foreign trade may save the country from employing strict competition rules (Welfens, 1998). The Schengen border regulations are seen by eastern countries as an important distortion of trade because the new procedures increase the waiting time at the border and thereby discriminate against competitors within the Schengen area.