Is the World Flat in Central Eastern Europe - Essay Example

Is the World Flat in Central Eastern Europe? Introduction It is certain that the world is rapidly becoming flat or moving toward a globalised economy, where local markets are developing into globally interdependent and unified economies. This so-called ‘flattening’ of the world, as Thomas Friedman introduced it, involves economic, political, cultural and social factors (Aronica & Ramdoo 2006). Economic globalisation is anchored in specialisation and global transaction, which result in growing interdependence among nations. These two trends enhance the global movement of capital and labour, flow of goods and services and cultivate the expansion of communications and transportation (Aronica & Ramdoo 2006). Advocates of globalisation assume that it enhances living standards and output all over the world (Fung 2007). In existing literature, scholars assess the effect of a few constituents of globalisation such as global financial flows, exports, inflows of foreign direct investment (FDI), and economic consolidation (Fung 2007). This essay will concentrate on FDI, as well as the role of the state, as major components promoting the ‘flattening of the world’ or economic globalisation, particularly of the region of Central Eastern Europe (CEE). Existing data on FDI stocks show that foreign investment fulfils a major function in the economies of CEE and plays as a sign of progressing globalisation of countries in CEE (Goldberg, Branstetter, Goddard & Kuriakose 2008). Foreign investment has played very vital roles in the restructuring and privatisation process of CEE economies (Michie 2003). FDI has developed nowadays into a major force fuelling stable economic expansion, enhancement in productivity, technology transfer and innovation, employment, and growth of capital stock. Is the ‘Flattening’ of States in CEE Successful? Friedman’s so-called ‘flattening of the world’ is a forceful mechanism of global integration, openness, and liberalisation across a broad array of economies, from labour to products and from services to technology and capital (Melik 2007). This process is rooted in the liberty to trade across the globe and to maximise the comparative advantage of each country, the liberty to put capital where returns are the best (Gillies 2005). The notion of globalisation involves the flow of products and services in the international economy, transfer of resources, multinational firms, worldwide movements of financial investment, and FDI (Gillies 2005). Friedman suggests a trend of growth in cultural, political, and economic interconnectedness among the different players in the international system (Aronica & Ramdoo 2006). In the economic stage it embodies a process of global economic integration. Fundamentally, globalisation is the historic course of cultural homogenisation and economic integration across national boundaries cultivated by major developments in travel and communication technologies during the post-war period (Dicken 2003). One of the key forces steering global processes is the highly developed Economic Integration of Europe (Fabian 2007). European countries have created a standard consolidated economy with a single currency: the EU (European Union) (Fabian 2007). The universal economy is shifting from a cluster of established national economies to a cluster of interconnected trading factions. This shift has sped up over the recent decades with communism’s collapse and the integration of the European trading countries into an exclusive market (Rossmeisl 2005). This is the very first time numerous economies have been opened to global movement of goods and services and capital, after the emancipation of the ex-communist economies (Sergi, Bagatelas & Kubicova 2007). However, the great societal transformations advancing in Central Eastern Europe necessitate a bigger role for states, not smaller; greater, and not lesser, investment in the public sector; establishing a set of policies and guidelines and an unbiased legal organisation, not quick liberalisation or deregulation; and enhancing social services provision, not their neglect. (Sergi et al. 2007). The sad irony is that numerous reform agendas carried out during the initial decade of transition included the fragmentation of exactly the components of the state governmental mechanism that are needed to examine and orient contemporary market economy (Goldberg et al. 2008). Several CEE countries permitted central government’s operating capacities to weaken until they could not impose conditions anymore for the process of a stable deregulated system. Instead of needed deregulated conditions, corruption and organised crime became widespread (Goldberg et al. 2008). The emphasis on economic globalisation and macro-economic transformation led to heightened instability, poverty, inequality, and susceptibility of individuals to social threats, such as substance abuse, deviancy, and crime, unemployment and the enlarged disenfranchisement of regions, communities, and individuals (Fabian 2007). It further diminished the ability of governments to operate in a collectively compensatory manner (Fabian 2007). Even detrimental to the potentials for economic progress, deregulated and weakened governments experienced difficulty in practising the form of efficient micro-economic strategies that are fundamental components of all thriving experiences of development (Goldberg et al. 2008). This cluster of traditional policies related to the Washington agreement has failed to generate the projected result in transition societies (Fabian 2007). This failure revives the major role of the state on the reform programme, clarifying that the state should fulfil a dynamic function in order to create a flourishing transition (Fabian 2007). A pursuit has now instigated for an adjusted free-market framework that not just acknowledges the significant function of the state but also focuses more on social equity (Goldberg 2008). Considering these variables, is Central Eastern Europe really becoming ‘flat’ as the rest of the world? During the initial decade of transition in CEE, majority of centralised government systems fell short in realising those essential functions that had been enhanced throughout the designed economy phase, and to satisfy the new conditions of a globalised economy (Sergi et al. 2007). Different publications of the United Nations have specified the level to which those state functions that promote human development have declined all over the CEE. These publications elaborate the weakening situations, and attendant strategies, of governments that have weakened in performing main duties to their citizens (Sergi et al. 2007). Due to the fact that designed economies were highly centralised, it was thought that the process of decentralisation would be a central aspect of the shift to a ‘flat’ society. It is usually stated that local governments are more capable of performing the responsibilities of the state that satisfy the urgent needs of the people (Goldberg et al. 2008). If these assertions were substantiated, then transfer of responsibilities and power from central government to regional and municipal governments would be a sensible move towards attaining a globalised development policy; because they are, generally, unsubstantiated, this is basically another skirting of duty by the national governments. Deregulation of economic development has actually taken place, transferring a great deal of activity outside immediate government power through a combination of privatisation; new venture creation; and commercialisation of public ventures (Goldberg et al. 2007). However, attaining vitalisation of regional and municipal governments has in fact been very difficult in the countries in CEE. Central mechanisms have been extremely diminished that they cannot muster the capability of local governments anymore (Sergi et al. 2007). Significant reductions in existing resources imply that the fiscal support needed to make ‘globalisation’ agendas actually work has been weakened or removed, leading to ‘empowered, but powerless’ (ibid, p. 91) regional and municipal governments. The expectation that regional and local governments could regain its strength by picking the crumbs left by the weakening central state government was normal, but impulsive fervour should now pave the way to thorough consideration of the components needed for globalisation to succeed in CEE. Capacities and resources should be transferred to, or developed at, or permitted to surface from within the lower-level government, so as to allow actual exercise of such official powers as are given by new globalisation policies (Fabian 2007). The capabilities of local governments should be understood comprehensively—reaching outside information technology and accounting facilities to mobilize civil society and political mechanisms in a process of mutual exchange with the local administrative and political powers. Is FDI Successful in Promoting the ‘Flattening’ of CEE? FDI denotes an investment launched to gain long-term interest in the ventures manoeuvring outside of investor’s economy. The purpose of the investor is to acquire a valuable position in the management of the venture (Goldberg et al. 2008). A certain level of equity rights is almost always thought to be related to an effective position in the supervision of a venture and a boundary of 10% equity rights makes an investor eligible as a foreign direct investor (Kornecki & Rhoades 2007, 113). After communism’s collapse, CEE countries initiated the conversion toward a market economy and recognised the favourable impact of FDI on the process of transition (Sergi et al. 2007). Inflow of FDI to countries in CEE has been building up in parallel with development in transformation and enhancements in political strength. Current inflows can be ascribed to the favourable effect of the recent EU expansion (Sergi et al. 2007). New members of the EU have enlarged the business sphere and brought in policy processes intended to liberalise, promote, and safeguard FDI (Goldberg et al. 2008). Liberalising economy and pulling foreign investment to make sure of free flow of capital have become major elements in the national policies of countries in CEE (Goldberg et al. 2008). The regimes of those nations have formally supported FDI and have offered considerable inducements for foreign firms, such as lengthened tax abatements, tariff exemptions, infrastructure improvements, total financing and other positive privileges (Fabian 2007). Previous EU constituents are anxious of a repositioning of production and service operations to the recent EU constituents, as they provide comparatively low business taxes, low wages, and the utilisation of financial backings (Fabian 2007). Czech Republic and Poland were named as the best FDI locations in CEE nations (Sergi et al. 2007). The United States and Germany are supposed to be the primary investors in Central Eastern Europe. The amount and escalating FDI inflows to shifting CEE nations were remarkable (Sergi et al. 2007). The Czech Republic, Hungary, and Poland have become the best location for FDI (Kornecki & Rhoades 2007): Between 1990 and 2000, and in 2004 Poland was the leader in FDI in comparison with other CEE countries. FDI in Poland increased from 3 million (USD) in 1990 to 10,000 million (USD) in the year 2000 (ibid, p. 114). Figure 1. Source: Wiener Institut fur Internationale Wirtschaftsvergleiche. WIIW Annual Database Eastern Europe www.wiiw.ac.at The drop in FDI inflows into the countries of CEE between 2002 and 2003 was attributed to the termination of privatisation, as Greenfield plans normally smaller in range and expand over a longer duration could not counteract the decline in privatization focused FDI (Kornecki & Rhoades 2007, 114): ‘All the accessing to the European Union CEE countries, between 2003 and 2004, increased FDI inflows dramatically; the Czech Republic by 186.3%, Hungary by 176.3%, Poland by 133.7%’ (Kornecki & Rhoades 2007, 114). As stated in the United Nations Conference on Trade and Development’s (UNCTAD) matrix all countries in CEE were categorised as having good FDI potential and excellent FDI performance (Rossmeisl 2005, 56). FDI inflows in CEE countries comprise a comparatively high fraction of the GDP. Inflows of FDI determine the sum of FDI penetrating a country annually (Fabian 2007). FDI shares embody the overall sum of productive potential held by foreigners abroad. It increases over time and comprises all foreign-owned companies’ retained earnings kept in investments and cash (Melik 2007). Statistical evaluations of FDI as GDP’s fraction between 1990 and 2001 in economies of CEE suggest an escalating growth rate in foreign investment (Sergi et al. 2007). The constantly increasing fraction of foreign shares in the GDP shows that foreign investment fulfils a vital function in the economies of CEE (Sergi et al. 2007): it is considered as one of the major components driving economic development and a fundamental marker of advancing process of globalisation in CEE countries (Goldberg et al. 2008): The share of foreign stock as a percentage of GDP has been very high in the Czech Republic, Hungary, Slovakia and Poland, and constitutes respectively: 48%, 56%, 33% and 31% of each countries’ GDP. In Slovenia, the share of foreign stocks as a percentage of GDP was much lower and amounted to 24% of the GDP (ibid, p. 88). Figure 2. Source: Wiener Institute fur Internationale Wirtschaftsvergleiche www.wiiw.ac.at Members of the EU hold the biggest percentage of the productive potential held by the foreigners in the countries of CEE, whilst the United States and its numerous global firms bring in a substantial foreign investment to CEE (Kornecki & Rhoades 2007, 115): FDI stock per capita in CEE economies shows increasing tendency between 2001 and 2004 increased in Hungary from USD 2 311 to USD 5 213, in the Czech Republic from USD 2600 to USD 4822, in Slovenia from USD 1 709 to USD 3218, in Slovakia from USD 1 115 to USD 2431 and in Poland from USD 1 010 to USD 1 559. The lowest FDI stock per capita in Poland relates to relatively high population numbers in Poland, as compared with other CEE countries (ibid, p. 115). Figure 3. Source: Wiener Institute fur Internationale Wirtschaftsvergleiche www.wiiw.ac.at CEE countries’ accession to the EU fuelled FDI inflow and led to marked boost in FDI stock per capita (Sergi et al. 2007). CEE’s FDI has boosted in the past two decades to become the most widespread form of capital movement (Goldberg et al. 2008). The most significant economic explanation for pulling FDI at the start of the transition course was to allow the restructuring and privatisation of the CEE economies (Rossmeisl 2005). Currently, as the process of reconstruction and privatisation approaches its final stage, the primary drive to continue FDI is to improve productivity, support employment, encourage technology transfer and innovation as well as boost economic progress (Goldberg et al. 2008). There are various patterns of economic development and disparities in productivity during the transformation of different CEE countries (Fabian 2007). Nevertheless, all of the transforming CEE economies have been developing the new macroeconomic system through capital market development (investment banks, stock market, banking system), external support (external assistance and external financial backing through FDI and foreign assistance), privatisation (substitution of state ownership with private ownership), trade liberalisation (removal of trade barriers to import products, services, technology and capital), and deregulation of prices (Sergi et al. 2007). There are various pointers evaluating the degree of economic growth and transformation results in the economies of CEE (Goldberg et al. 2008). One of the major pointers of macroeconomic efficiency is GDP and its growth rate. The economic growth rate is a primary pointer for evaluating transition (Goldberg et al. 2008). The distinguishing features of transition economies involve a preliminary disintegration of productivity followed by a gradual resurgence (Fung 2007). Throughout the initial years of transformation, particularly from 1991 to 1993, the decline of economic dealings was major (Kornecki & Rhoades 2007). The figures show positive correlation between the FDI stock and the actual GDP between 1990 and 2005. In all evaluated countries of the CEE the correlation coefficients are as follows (Kornecki & Rhoades 2007): ‘Hungary (0.940), then Czech Republic (0.936), Poland (0.931), Slovakia (0.909) and Slovenia (0.888)’ (Kornecki & Rhoades 2007, 114). These are all positive correlation coefficient. These figures show the strong correlation between economic progress and FDI stock, or more importantly, the strong link between FDI stocks and Friedman’s ‘flattening of the world.’ Conclusions The outcomes of this essay form a well-built foundation for additional studies on positive relationship between growth rate of CEE economies and increasing FDI stock. Numerous empirical analyses on the function of FDI in host economies indicate that foreign investment is a major source of wealth, balances local private enterprises, and is normally related to improvement of technology transfer and new employment opportunities, and enhances general economic progress in host societies (Dunaway 2003). Furthermore, even when central governments transfer duties, they usually keep hold of major supervisory and decision-making functions. They should build or sustain the ‘enabling conditions’ for the globalisation of non-governmental or government organisations—but also give them bigger spheres of actual control. Based on information from existing empirical studies, the agreement appears to be that there exists a positive correlation between economic globalisation and FDI stocks, as long as host countries have attained a minimum degree of infrastructure, technological, and educational growth. The correlation between economic globalisation and FDI has encouraged a large number of empirical studies in developing and developed societies. Research methodology linked to the correlation between economic globalisation and FDI in the literature has been grounded largely on regression models and production function (Rossmeisl 2005). The challenge now for future researchers is to show scientific and empirical substantiations that FDI has positively contributed to the CEE countries’ economic growth. This essay has demonstrated the positive relationship between CEE countries’ economic development and FDI. Future researchers should plan to carry out an analysis on the correlation between CEE countries’ economic development and FDI employing the model of growth theory, grounded on the production function. Gross domestic product is: ‘a function of labour (L) and capital (C). The increase in capital stock shifts the production function upwards producing a higher level of real GDP. The economy can produce more goods and services and the average capital to labour ratio rises’ (Rossmeisl 2005, 57). Higher technology and greater capital shares boost economic globalisation. FDI apparently aides developing countries in CEE boost capital shares—this capital flow has a tendency to boost economic growth rate in the evaluated CEE countries (Fabian 2007). The highly developed Economic Integration of Europe and communism’s collapse influenced globalisation or the ‘flattening of the world’ in the new millennium. Evaluated CEE countries have been assimilating into the international economy and this mechanism has sped up over the recent decades. Sizeable inflows of foreign capital and significantly high share percentage of foreign investment in the GDP suggest that FDI fulfils a major function in CEE countries and has become a major measure of the developing globalisation processes in the economies of CEE. This analysis shows the obvious correlation between the ‘flattening’ of world’s economies and foreign investment stock as the correlation coefficient is affirmative and comparatively high in all evaluated countries in the CEE. This analysis can be expanded to substantiate positive correlation between Friedmand’s ‘flat world’ and FDI stock in economies of CEE. References Aronica, R. & Ramdoo, M., 2006. World is Flat? A Critical Analysis of Thomas L. Friedman’s New York Times. Michigan: Meghan-Kiffer Press. Dicken, P., 2003. Global Shift: Reshaping the global economic map in the 21st century. London: Sage Publications. Dunaway, W.A., 2003. Emerging Issues in the 21st Century World-System: Crises and Resistance in the 21st Century World-System. New York: Praeger. Fabian, K.E., 2007. Globalisation: Perspectives from Central and Eastern Europe. San Diego, CA: JAI Press. Fung, V.K., 2007. Competing in a Flat World: Building Enterprises for a Borderless World. Upper Saddle River, New Jersey. Gillies, G., 2005. Transnational Corporations and International Production: Concepts, Theories and Effects. London: Edward Elgar. Goldberg, I., Branstetter, L., Goddard, J.G. & Kuriakose, S., 2008. Globalisation and Technology Absorption in Europe and Central Asia: The Role of Trade, FDI and Cross-Border Knowledge Flows. Washington, DC: World Bank Publications. Kornecki, L. & Rhoades, D., 2007. How FDI Facilitates the Globalisation Process and Stimulates Economic Growth in CEE. Journal of International Business Research, 6(1), 113+ Melik, R., 2007. The Rise of the Project Workforce: Managing People and Projects in a Flat World. New Jersey, Hoboken: Wiley. Michie, J., 2003. The Handbook of Globalisation. London: Edward Elgar Publishing. Rossmeissl, F., 2005. Consequences and Convergence—Western Firms’ FDI Activities in Central and Eastern Europe at the Dawning of EU-enlargement. Journal for East European Management Studies, 10(1), 55+ Sergi, B.S., Bagatelas, W.T. & Kubicova, J., 2007. Industries and Markets in Central and Eastern Europe. UK: Ashgate Publishing. Read More