Transcript Lecture Sixteen

Central and Eastern Europe
(CEE)
A new business environment
2004 enlargement
• One of most significant events in EU
history
– 10 new member states
– Population up 20%
– Area increased by 26%
– GDP up only 5%
• What are implications for EU and for business?
Characteristics of CEE
– diverse population - culturally and ethnically
– low tech and productivity – changing
– poor quality infrastructure
– low costs and wages
– relatively low income/head but skilled labour
Employment costs – annual average full-time
male
Belgium
Sw eden
Germ any
UK
Denm ark
France
Japan
Ireland
Netherlands
US
Italy
Spain
Austria
Finland
Greece
Portugal
Slovenia
Hungary
Czech Republic
Poland
Estonia
Slovakia
Lithuania
Latvia
China
India
€0
€ 10,000
€ 20,000
€ 30,000
€ 40,000
€ 50,000
Source: Mercer Human Resource Consulting, Press release 4 April 2005
€ 60,000
GDP per capita – 2005 (PPS)
Latvia
Poland
Lithuania
Estonia
Slovakia
Hungary
Malta
Portugal
Czech Republic
Slovenia
Cyprus
Greece
Spain
EU (25)
Italy
Germany
EU (15)
France
Finland
Sweden
Belgium
Netherlands
UK
Austria
Denmark
Ireland
Luxembourg
0
Source: Eurostat
50
100
150
200
250
Rationale for EU
enlargement
• Cultural/geographical – part of Europe
• Mutual economic and political gains
• Internal gains:
– Economic: larger SEM, better policy co-ordination
– Security: alliance building with former Cold War
enemies - containing Russia?
– Political: extension of market orientated pluralist
democracy into former bastions of communism.
• External gains:
– Enhanced regional role for EU and greater weight in
international affairs (eg trade negotiations)
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Why join the EU?
• Alternatives?
• EU - dominant and successful regional
framework - market access and assistance
• Coincidence of requirements of transition and
enlargement - i.e. facilitate the process of
modernisation
• Membership - able to influence EU law and
policy
• Globalisation - membership of world’s largest
trading bloc
The legacy of communism
Micro-economic problems:
• Absence of market mechanisms
– inefficient resource allocations.
• Sectoral imbalances
– over-development of heavy industries
– under-development of consumer goods
industries.
• Environmental problems
• Bureaucratic legal/administrative structures
• Apathy- absence of competitive forces
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(continued)
Macro-economic problems:
• Repressed inflation via wage and price
controls
• Monetary policy - often a reliance on foreign
debt
• Inappropriate patterns of investment
• Hidden/disguised unemployment
MASSIVE PROGRESS TO DATE IN
OVERCOMING ABOVE PROBLEMS
9
Challenges of enlargement to European
business
• Enlarges SEM
– opportunities from supplying a larger market.
– CEE fast growing market for consumer and industrial
products
– CEE share of extra-EU exports in 1983= 7% , by 1997 =
15.3%
• Competition: Inter-industry or intra-industry trade?
– Eg Hungary -intra-industry trade ratio 61% 1994 but only
50% 1990. BUT
– Growth in inter-industry trade more evident (labour intensive
and lower value-added production).
• Relocation of industry to CEECs ?
10
What does EU enlargement mean for
•Growth
•Trade
•Investment
•Jobs
•For the EU?
Growth
• After traumatic falls of early 1990s, 2004
accession states growing faster than
EU(15) but:
– Real GDP in several still below that of 1989
• i.e. much catching up to do
Transition period GDP growth
(2004 average CEE and Baltics = 5%)
20
%GDP growth
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
-10
-20
-30
-40
Estonia
Hungary
Slovakia
Latvia
Slovenia
Czech Republic
Real GDP in 2003 (1989=100)
Romania
Bulgaria
Slovenia
Slovakia
Poland
Lithuania
Latvia
Hungary
Estonia
Czech R.
0
20
40
60
Source: EBRD, 2004 Transition Report
80
100
120
140
160
Trade
• Growth of intra-industry trade
• First half of 1990s – massive shift in CEE
trade towards the EU
– Trend continues albeit at lower rate
• Opportunities for both eastern and western
traders
– e.g. capital goods from the West
– Untapped markets in the east
– Low cost advantages for the east in the west
Evolution of EU-25 shares of trade of major
CEE countries
%
100
90
80
70
Im ports
Exports
60
50
40
30
20
10
0
1985
1990
1995
2003
Poland
Source : UNCTAD Handbook of Statis tics
1985
Hungary
1990
Czech Rep
1995
2003
%exports to EU
80
70
60
50
40
30
20
10
0
CZ
Est
Hu
Lat
Lit
Pol
1995
2002
Slk
Slvn
Blg
Rom
Investment
• Opportunities: low cost
production, privatisations,
skilled workforces and
emerging local markets.
– government incentives to
inward investing firms
– cumulative FDI inflows
1989-2003 - $147.5 bn
– Est. inflows of $14.8 bn in
2004
– Big difference between
countries – e.g. since 2003,
Slovenia is net exporter
Growth of FDI in CEE/Baltic
(US$mn)
25000
20000
15000
10000
5000
0
1990 1992 1994 1996 1998 2000 2002 2004
18
Cumulative FDI per capita, $US,
1989-2004
Romania
Bulgaria
Slovenia
Slovakia
Poland
Lithuania
Latvia
Hungary
Estonia
Czech R.
0
1000
2000
Source: EBRD, 2005 Transition Report
3000
4000
5000
Trade and investment example
The motor industry
Motor industry
• 1989–9 - CEE companies produced over 3 mn cars for
local market – not suitable for export
• EU motor industry – integrated, transnational industry
before SEM
• Transition and accession – extends transnational
European motor industry (econ. of scale and minimum
efficient size) eastwards
• CEE provides
– markets
– Platform for exports
• 1988-92 - 2% of EU car imports by volume
• 1992-5 rose to 7%
• Mid-2000s - about 15%
• Since 1990 – all major European automotive investment
in CEE - competition for investment
CAR PRODUCTION IN CEE
Slovakia
VW
300,000 units
PSA Peugeot-Citroen
300,000 units by 2006
Hyundai Kia
200,000 units by 2006 with possible expansion to
300,000
VW
450-500,000 units per annum
TPCA Toyota Peugeot Citroen
Automobile
Production began early 2005 and will rise to 300,000
vehicles per annum
Romania
Renault Dacia
95,000 units (2004)
200,000 by 2010
Hungary
Suzuki
200,000 by 2006 and later 270,000
Audi
Engine plant and 55,000 vehicles
Slovenia
Renault
132,000 units in 2004
Poland
Fiat
360,000 units in 2004
Opel
110,000 units (2004):→150,000
Czech
CEE motor industry benefited
from:
1. Qualified and low cost labour force –
problems with inflexibility
35
Labour costs in the motor industry – end 2004
Euros per hour worked
30
25
20
15
10
5
Fr
an
ce
er
m
an
y
G
Source: Derived from Revue Elargissement, Dossier 52 – March 2005
Sp
ai
n
Po
la
nd
Cz
ec
h
Re
p.
Hu
ng
ar
y
Sl
ov
en
ia
Po
rtu
ga
l
Ro
m
an
ia
Sl
ov
ak
ia
0
Car Ownership Levels in 2002
– Lower car ownership
rates
– Older stock – 12-13
years vs8 years
(EU15)
500
400
300
200
100
0
Bu
l ga
r ia
Cz
ec
hR
ep
.
Es
ton
ia
Hu
ng
ary
Lit
hu
an
ia
La
tvi
a
Po
l an
d
Ro
ma
ni a
Slo
ve
nia
EU
15
2. Strong regional
demand
Cars per 1000 inhabitants
600
Source: Derived from Revue Elargissement, Dossier 52 – March 2005
3. Proximity to West European markets
4. Links with related industries – e.g.
materials and components
5. Slovakia
•
•
•
•
2006 to become world’s largest car producer
in terms of cars per capita
At transition – produced no cars – 2006 will
produce 800,000 plus
Car production – 20% industrial production;
17% GDP and 25% exports
Location: market and at centre of emerging
auto cluster
VW Skoda - since 1991
• Greenfield investment - longer to take root
• Limited joint venture - brownfield opportunities:
VW quickly took advantage – Skoda in
Czechoslovakia
–
–
–
–
Initial reputation for poor quality and reliability
1991 VW took 30% stake in Skoda
2000 VW took last of government’s stake in VW
VW sees Skoda as platform for CEE and Russia and
Asia entry
– Largest auto producer in CEE - output tripled
– Consistent 50-55% of domestic market
– Skoda’s image transformed
– Spillovers - within 5 years, VW Skoda had
stimulated 52 joint ventures & 38 greenfield
suppliers
– Largest sales revenue of any Czech company,
– Czech number one exporter (10% of all
Czech exports - auto components a further
5%) - exports 52% of sales 1995 approaching 80%; 64 markets -
– Leading industrial employer - plants and
domestic supply chain employ 150,000 (4%
Czech workforce)
– Helped integrate Czech component
manufacturer into global automotive sourcing
– Some differentiation from VW cars - but many
VW qualities at lower price
Jobs
• Low wages in CEE leads to competitive
advantage over EU-15
– Investment effect
– Downward pressure on wages elsewhere in
EU
• Migration effects?
• Will CEE advantage disappear over time?
For the EU?
•
•
•
•
New balance of power?
Institutional pressure
Extension of SEM
Few policies unaffected
The Future
• Future members:
– Bulgaria and Romania - 2007
– Turkey - date unknown
– Croatia
– other former Yugoslav republics?
– Others?