Vladimir Kvetan Institute for Economic Research Slovak Academy of Sciences

1. Industrial transition models – review on Slovenia, Romania, Czech Republic, Hungary, Estonia and Poland Vladimir Kvetan Institute for Economic Research Slovak Academy of Sciences

2. Review from Ljubliana • Hearing 7th march 2008 - Ljubljana / Slovenia • Academic view on transition process • Jozef Mercinger – Economic transformation process in Slovenia • Gheorghe Zaman – Economic transformation process in Romania • Milan Žák – Economic tranformation process in Czech Republic • Practical point of view • Josef Zbořil – Restructuring in the chemical sector in the Czech Republic • Samo Hribar Milič – Restructuring in the Slovenian industrial sector • Vanda Pečjak – Restructuring in the Slovensian chemical sector • Angela Pop – Restructuring in the Romanian chemical sector

3. Review from Budapest • Hearing on 18th April 2008, Budapest / Hungary • Academic point of wiew: • Prof. Akos Bod – University of Economic Sciences In Budapest, former president of Hungarian Central Bank • Michal Gorzynski – Senior economist at CASE • Prof. Alari Purju – Professor at Estonian Business School, former advisor to Minister of Economic Policy Issues • Practical point of view: • Janos Nagy – Alba Geotrade Zrt. • Mr. Edward Swarc – Vice president of the Polish Association of Construction Industry Employers • Roode Liias – Proffessor at the Tallin University of Technology - Estonia

4. Population structure

5. Labour market structure

6. Employment structure in 1998 * BG and PL 2000

7. Structure of employment in 2007

8. Structure of GVA

9. General tasks of transition process • Privatization and private sector building • Price liberalization • Liberalization of foreign trade • Monetary convertibility • Slovenia and Czech Republic creation of national currency • Heading to EU (mid 90’s) • Restructuring the labour market • Restructuring of foreign trade orientation

10. Slovenia (1) • Overall background • Different position compared to others • No hard core communism and centralization • Part of Yugoslavia concentrated on industry for western territories • Tradition in self managing companies • Short war with Croatia • Transition background • Gradual approach • Ignoring Washington agreement with assumption S>D • Floating immediately

11. Slovenia (2) • Privatization process • Privatization equation (10+10+20+(1-x)*40)+(20+x*40)=100 10% Pensioners funds 10% Restitutions 20% Development funds 40% social property 20% employees 0<x<1 x=1 small successful companies, majority of workers and management x=0 large unsuccessful companies, state property, PF, RF 0<x<1large successful companies, auctions for vouchers

12. Slovenia (3) • Restructuring the industry • Retiring rather than firing • Strong social dialoque • Cautious approach to FDI • Experience in • Acquisitions rather than green field investments • Not much technology transfers • Increased imports more than exports • Specialization within a multinationals • Strong monopolies • Income account deficits GDP vs. GNP • FDI not positive or negative • The policy was NOT TO HAVE AN INDUSTRIAL POLICY (Milič)

13. Slovenia (4) • Slovenia’s success factors • Fast and rational reactions to changes • High investments to technology • Openness to foreign investments “take the best out of FDI” (Pečjak) • Professional leadership • Employment policy following business needs – good social mix

14. Romania (1) • Starting possition • Centralised economy • Relatively underdeveloped industry • Rural areas connected to agriculture • Transition background • Effective mix of gradual reforms and rare shock therapy

15. Romania (2) • Privatization • Slow process • 3 stages • 1990 – 1991 – setting up commercial societies with private or mixed capital • 1991 – 1998 – privatization law allows selling and buying the shares and state assest • 1998 – ongoing process - • Mostly foreign strategic partners • In 2006 only 71,6 % of GDP (by preliminary data) were made in private sector

16. Romania (3) • Restructuring the industry • Restructuring industry not a key role in transition process – deindustrialization • Wrong policy decisions (subsidies to wages rather than technology progress) • Positive effect of FDI due technology transfer • Key factor of success • Investment in modern equipment • Re training of employees • Environmental investments • Customer orientation

17. Czech Republic (1) • Starting point • Part of Czechoslovakia peacefully spitted • Highly centralized economy • More final goods oriented industry compared to Slovakia • Advantage (compared to SK) in Prague as a seat of foreign trade organizations • Transition background • Shock therapy

18. Czech republic (2) • Privatization process • Small scale privatization SMEs • Direct sales • Restitutions • Large scale privatization (vouchers) • Restructuring of industry • Restructuring done by the system “jump to water and swim” • Only key (network) industries were kept state owned as a social pillow • FDI as a strategic partnership, “neither saints or evil” (Zbořil) • “Tunneling”

19. Czech republic • Success stories • Operation facilities survived the shareholder’s shocks • Further foreign strategic investors arrived • There have been some “victims” but not too many causing not too much losses • Looking back the privatization was fairly smooth and fast and ultimately, succesfull

20. Hungary (1) • Starting points • Open (rather than suppressed) inflation • Import intensive economic structure • Exposure to international finance (high internationaldebts from capital markets, IMF, banks) • Active fiscal state (subsidies, sur-taxes, „financialbridges” • Privatization techniques • Sale to outside owners • MBO/ ESOP • Voucher • Restitution • Other • Still in state hands

21. Hungary (2) • Industrial policies • Antal’s years • cautious macroeconomic policies: gradual antiinflationary stance; maintaining access to capital markets, invitation of FDI • Radical reforms in micro-economy: banking law, • subsidy reduction, increase of energy prices, law on • bankruptcy, market-type privatization • The “second coalition” 1994 - 1998 • a macroeconomic shock in Spring 1995 to reduce deficit • U-turn in privatisation: sale of large scale (industrial natural monopolies, utilities) to foreign investors • Export-led industrial growth, industrial zones, statesupport to sub-contractors

22. Hungary (3) • Industrial policies • Correction again (1998 – 2002) • Slow down of privatisation • Mostly cautious macroeconomic policy • Increased support to SMEs • Demand-increasing policies in housing, construction • Support to Clusters • Energy pricing: a political football (A. Bod) • Accession to EU (2002 - 2006) • Increased public spending, wage growth, loss of • price competition • Boom and bust in infrastructure-related construction • Tax policies: U-turns • Further privatisation (banks, airport, oil and gas) –in order to generate revenues

23. Hungary (4) • Still room for industrial strategy • Hungary is not doing too well with Lisbon agenda • Economic slow down hits mostly SME in industryand construction • Duality of the economy: dynamic transnationals –stagnating domestic players • Debates on education system, labour marketregulation, tax system

24. Poland (1) • Starting position • deep economic crisis in Poland in the late 80-ies • Shock therapy approach – 1989/1990 • price liberalization • Polish currency depreciation • foreign exchange liberalization • foreign trade liberalization • limitation of subsidies (hard budget constrains) • salaries control and restrictive monetary policy

25. Poland (2) • Impact to Industry • New price structure (including the new price of the capital and energy) • Foreign competition • Decrease of the domestic demand (as a result of restrictive income policy) • In 1991 a deep crisis of the enterprise sector started in Poland. The need to change the structure of the industry – the goal to make it more competitive: • Privatization • FDI • Development of the Polish private sector

26. Poland (3) • Privatization • Main goals: systemic (ownership change of theeconomy) and economic (increase of theeffectiveness of the privatized companies) • Speed priority: not so important • Sectors excluded from privatization (part of theinfrastructure and mining industry) • Important role of insiders • Main methods of privatization: direct sales,MEBO, mass privatization • there are still more than 2000companies partially or fully owned by the State(Gorzinsky)

27. Poland (4) • Achievements • macroeconomic stabilization • progressing economic integration with theEU • rapid development of the private sector • flexible and competitive sector of Polishprivate enterprises • well functioning capital market • Failures • high unemployment rate • low innovativeness of the Polish economy • not enough level of internationalization ofPolish enterprise sector • “weak” SME sector • undeveloped infrastructure

28. Estonia (1) • Starting points • republics of the Soviet Union; • Creation of basic institutions like (e.g.Central Bank, Ministry of Foreign Affairs) and introduce completely newcurrencies etc • There was a strong political consensus on the need for fast and substantial economic reforms • The hyperinflation in the rouble zone in 1991 and 1992 destroyed the savings of households • Closed markets to Soviet Union • Key issues of reform • New currency • Monetary reform • Privatization • FDI and structural changes

29. Estonia (2) • Privatisation • The privatisation process of companies was organised bythe Estonian Privatisation Enterprise followed by the Estonian Privatisation Agency • Some elements of the Treuhand scheme, sales werewithout the restructuring of companies; • The companies were sold through open tenders, the firsttarget being to find core owners; • Minor part of shares were sold for vouchers; • No reservation of shares for employees and employers. • The FDI had a critical role in privatisation; • Privatisation of infrastructure enterprises (EstonianRailway, Estonian Air, Tallinn Port, Estonian Telecom) ofvarious success until 2000s; • In creation of the private sector, privatised enterprises didnot dominate, a larger number of companies had beencreated as new private companies • The FDI have been creating on average 15-20% of totalcapital accumulation in Estonia during 1994-2006.

30. Estonia (3) • FDI and structural changes • The total FDI stock created 10 bln EUR or 95% of theGDP at the end of 2006; • The gross fixed capital formation created around 30% ofthe GDP in the 2000s; • Changes in the structure of the FDI, less investments intothe share capital and more reinvested profits; • 40% of FDI from Sweden, 25-30% from Finland; • Around 30% of FDI stock in real estate, renting andbusiness services, 28% in financial intermediation, 17% inmanufacturing. • The main determinants of the FDI were related to financialstability, free movement of capital, rapidly improving legalframework and favourable tax regime; • Very liberal foreign trade regime, • The perspective EU membership played an important role

31. Estonia (4) • Industrial policies • The general aim of the Estonia’s economic policy has beenthe creation of an open competitive and stable frameworksupporting business activities; • Relatively low tax level; • proportional personal and corporate income taxwith 21% and with the tax exemption for reinvestedprofits • very limited resources available for industrial policy; • The availability of resources from the EU structural fundscreated additional resources to finance R&D activities; • The state programmes in ITCbiotechnology, materials science and powerengineering. • The central government’s role is increasing acording to local • Tallinn and surrounding county created60% of the total GDP and received 70-80% of the FDIuntil 2007; • The co-ordination between the different governmentagencies was too limited; • Ministry ofResearch and Education

32. Conclusions and findings • Privatisation and FDIs was an essential tool for industrial policy • Not a clear industial policy in all cases • Estonia, Slovenia • Mostly decentralised approach without state interventions • Institutional quality is basic element • FDIs are beneficial in greenfield investments • Gradualism vs. shock therapy??? • Labour market transition (hands drain)

33. For more insight to transition process • Kiglics Istvan, Rebuilding the Market Economy in Central – East Europe and the Baltic Countries, Akademiai Kiado, Budapest, 2007, ISBN 978-963-05-8557-6

34. Thank you for your attention Vladimir.kvetan@eesc.europa.eu Vladimir.kvetan@savba.sk