The Balkans: Foreign Direct Investment and EU Accession

Aristidis Bitzenis

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317040651
• Edition: 1
• Topic: Économie
• Subtopic: Théorie économique

The fall of communism and subsequent developments have put a renewed spotlight on the potential of the Balkan economies. Bulgaria, Albania, Serbia & Montenegro, Romania and the Former Yugoslav Republic of Macedonia are countries which have attracted low levels of investment and poor political leadership in most of the countries has delayed much needed reforms. However, there are now signs of improvement and this timely book fills a significant gap in the available literature. Demonstrating that these countries must engage as fully as possible with the world economy via EU accession, this book explores the implications of the specific characteristics of these countries which have made the transition process more difficult. This exciting new volume is valuable reading for students, academics and business professionals interested in international development in the Balkans.

Chapter 1
Transition Economies vs. Market Economies: Increased FDI Inflows in Transition Economies

1.1 Introduction: Planned vs. Market Economies; The Transition from a Planned to a Market Economy

The breakdown of centralized socialism in the Union of Soviet Socialist Republics (USSR), Central and Eastern Europe and Asia resulted in the adoption of the market process as a means of organizing the economy. The movement from a centralized socialist economy to an economy based on market relations has been termed transition, and thus the economies that have adopted this process are named transitional economies. In particular, the transition process was associated with an explicit end-state. The transition economies associated this end-state with the establishment of a capitalist economic system. Hence, the transition involved, in essence, the introduction of private ownership as a result of privatization and/or restructuring of state-owned enterprises, and the establishment of market equilibrium as a result of abolishing centrally administered commands. The transition went further to involve liberalization of economic activity, an institutional reform, a change in economic behaviour as a result of economic actors adjusting their behaviour in line with self-interest, and the rules of the exchange market. It also involved the reduction of the state’s role as a legislator and facilitator of economic activity.

The term transition has been criticized as being inadequate, as it does not capture all the complications involved during the process. The term implies a linear movement from A (centralized socialism and disequilibrium) to B (capitalism and equilibrium). Specifically, as the term transition implies an end-state, the achievement of the end-state completes the whole process. It can be argued that the process is already completed as transition economies have adopted a capitalist economic system and most countries of the Central and Eastern Europe have become members of the European Union (EU). Hence, the term transitional economy is obsolete.

On the other hand, it can be argued that the ‘transition’ process is ongoing and equilibrium can never be achieved by using terms such as transformational economies or simply developing economies. In addition, since capitalism comes in many forms, the question arises as to what type of capitalism should be the goal. This further complicates the process (Sergi, 2003; Marangos, 2004a). Even the goal of achieving a capitalist economic system was questioned by some commentators who offered alternatives such as market socialism as the most appropriate economic system, pointing out China and Vietnam as examples (Marangos, 2006a; 2006b).

The economic programme of transition involved the following four factors, but in no particular order. The first was macroeconomic stabilization, in order mainly to reduce inflation and to decrease the debt burden. The second was liberalization of economic activity such as prices, trade, currency convertibility, etc. The third was the reduction of the size of public sector by privatizing and restructuring state-owned enterprises. The last factor required introduction of new laws and regulations. For example, property rights, corporate law, accounting practices, tax regulation, etc. Hence, the decision to move to a market-based economy required a total transformation of the economy as a whole (see also Zloch-Christy, 1994). Meanwhile, as citizens had been protected for so long by the socialist state, they were ill prepared to face the economic adversity and uncertainty that came about as the result of the free market process.

Although all countries in transition had more or less the same final goal, the results of their efforts diverged. This was due to the diverse and/or adverse internal as well as external conditions each country initially faced and to the different strategies, policies, and paths they undertook to ensure smooth and successful transitions (Bitzenis, 2006b; 2007).

A market economy, or a free economy, or a free enterprise economy is an economic system which allocates scarce resources, based on the interaction of market forces of supply and demand. It is an economy that operates by voluntary exchange and it is not planned or controlled by a central authority. It is the conceptual opposite of a command, or central, or planned, or government controlled economy, where all goods and services are produced, priced and distributed under government control. Nowadays, a market economy is associated with a capitalistic economy (see Tables 1.1 and 1.2).

The market is a process in which individuals interact with one another in pursuit of their separate economic objectives. The basic principle under which the market functions is: if you own something which you are entitled to and you wish to exchange it for something else which belongs to someone else and you execute the exchange without violence, theft or deception then you become entitled to what the other person was previously entitled to, and vice-versa. Both parties in an economic transaction in the market benefit from it, provided the transaction is bilaterally voluntary and the parties well-informed. Otherwise, the transaction will not take place. In this way, through the market process, everyone is able to escape coercion at the hands of any buyer or seller by turning to another buyer or seller.

Table 1.1 Planned economies vs. market economies

There is currently no country where all markets within its borders are absolutely free. Rather, a free market economy is one with limited government intervention (otherwise known as laissez-faire). Market based economies require appropriate laws and institutions which include defined property rights that are respected and enforced, as well as procedures to guarantee the execution of contracts. Many states which are said to have a capitalist system do not have the level of market freedom that some would prefer. Even the United States of America (USA), a worldwide representative of capitalism, has placed restrictions upon the freedom of individuals in the economy.

Markets are also characterized by market failure, i.e. an allocation of resources which is not efficient. The market is able neither to produce public goods (defence, law and order, etc.) nor to ‘cover’ the social cost or benefits of externalities (environmental pollution, education, etc.). Thus, it creates monopolies and oligopolies. Then, the state takes on the responsibility of producing public goods and subsidising positive externalities funded through taxation, while it restricts negative externalities, monopolies and oligopolies.

Table 1.2 Market economy characteristics

Finally, Bitzenis and Marangos (2007) argued that the terms ‘integration and transition’ are more appropriate than just ‘transition’ of what essentially took place in the Central and east European region and generally in transition economies. They stated that in fact, it is an integration-assisted transition. These terms, integration, assistance and transition, are not substitutes but complements in demonstrating the transition process in the CEE economies. Integration means that a country becomes a part of the globalized world. Integration is the goal of globalization, and integration is achieved by inviting multinationals and entering the EU. Integration is further enhanced by membership of the EMU and the adoption of the single currency. Both the European Union (EU) and the Economic and Monetary Union (EMU) are the best examples of integration and globalization, as membership involves the abolishment of barriers to entry, liberalization policies, and the adoption of the 35 chapters of the acquis (6th EU enlargement policy). All of them determine the legal, political and economic convergence among member countries, and create the fundamentals for stability for the members and a sound business environment to attract FDI and trade flows (Sergi, 2004).

1.2 The Transition Reform Paths to Democracy and/or Market Economy

A successful transition process may be treated as a tool for the economic development of a country. However,

… (transition) is not only an intermediate goal contributing to economic development. It may also be regarded as an ultimate objective in itself. The market economy, in contrast to central planning, gives, in principle, the individual the right to basic choices over aspects of his or her life: occupation and place of work, where to live, what to consume, what risks to take or avoid, and so on. (EBRD, 1994, 3)

An important factor in studying the transition process is the way in which the initial dismissal of the communist regime occurred. Regimes ‘fall’ in many different ways. For example,

the transition of power was smooth and peaceful in Poland and Hungary, which had a tradition of dialogue and negotiations; it was peaceful but painful in East Germany, Czechoslovakia and Bulgaria; and it was painful and violent in Romania which was on the verge of civil war by Christmas 1989. (Berglund et al., 1994, 241)

There is a distinct difference between transition from a planned to a market economy and transition from a communist regime to democracy. In other words, after the Central and East European countries faced the collapse of the communist regime and moved towards democracy, they adopted monetary, income, fiscal stabilization policies and institutional reforms in order to establish all the elements of a functioning market economy in their economic environment. Thus, it is important to present and analyse the transition reform paths and the need to have a ‘strict government’, which would not sacrifice the successful implementation of its reform policy for the sake of popularity.

Meyer (1998, 209) characterizes the transition from communism to democracy as a: ‘… decisive precondition for the establishing of new democratic institutions and the restructuring of economic institutions moving away from the planned towards the market economy’. The political transition comprised political liberalization, free elections and general democratization and aimed at replacing the single-party political regime and establishing liberal democracy and a civil society (Sokol, 2001). The transition from communism to democracy in most of the countries was supported by the previous development of a civil society whose characteristics reflected the revolutions themselves: it was anticommunist, anti-ideological, and anti-political (Tismaneanu, 2001). However, certain barriers might arise in the development of the new political system such as the risk the old elite faced to transfer its political power into new forms in the new system, along with the lack of democratic traditions and experience (Mygind, 2000).

Despite the fact that transition countries adopted rapidly multiparty democracy regimes, some reversals of political reforms and many tensions, controlled by the previous regimes arose (EBRD, 1995). There is also a common consensus that the implication of a market-oriented transition might be deemed as a political development because of the robust relationship existing between the political and economic reforms (EBRD, 1995).

We agree with Kolman et al. (2003, 87) who found that in spite of the small geographical distance, there are cultural differences between countries from the Central and East European region and the Western European countries. It was also their belief that, from a managerial perspective, it would be dangerous to treat the Central East European countries as a homogeneous group or cluster.

In an earlier article, Ronen and Shenkar (1985) had attempted to create clusters among different countries and to group them together basically according to their geographical area, their language and religion, their beliefs that arose from certain norms and values and their technological development. Ronen and Shenkar had also argued that geography casually precedes the other variables such as language and religion and that the geographical grouping may contain countries from all five continents as the spread of culture may be attributed to colonization and immigration. They included in the proposed clusters only one country from the Central and East European region, ex-Yugoslavia.

By applying a political economy approach to the transition process, Marangos (2004a) develops alternative models of transition. The alternative models of transition can be distinguished on the basis of what the author defines as the primary elements of each transition model: (1) Economic Analysis; (2) What is a Good Society?; (3) Speed; (4) Political Structure; (5) Ideological Structure; and (6) Initial Conditions. On the basis of the primary elements, Marangos (2004a) distinguished five transition models: The Shock Therapy model of transition; the Neoclassical Gradualist model of transition; the Post-Keynesian model of transition; the Pluralistic Market Socialist model of transition; and the Non-Pluralistic Market Socialist transition model (Chinese model).

In Kolman et al. (2003), Ronen and Shenkar (1985) and Marangos (2004a), the grouping of the countries into clusters is profound and is based on cultural, geographical and transition elements in order to provide a framework for theoreticians and practitioners to study the interaction between companies and a host country (destination country of an FDI project) and to understand the values and attitudes of employees in such a country. To this end, the nine reform models presented in this paper will be our contribution to the categorization of transition countries into clusters, based on their political and transition reform features.

Table 1.3 Nine reform models

Studying the transition models to a market economy and the economic development of transition countries, one recognizes similar and different characteristics among transition procedures of the various countries especially at the beginning of the transition period (1990s), during the collapse of the communist regime. Thus, our introduction of nine general transition reform paths with regard to the way that the reform from communism to democracy and to a market economy was achieved: (1) the Diplomacy Reform; (2) the Quiet Reform; (3) the Disguised Reform; (4) the Compromised Reform; (5) the Violent Reform; (6) the Rebellion Reform; (7) the Belligerent Reform; (8) the Transparent Reform; and finally (9) the Mixed Reform (see Table 1.3).

The Diplomacy Reform model: In the Diplomacy Reform model transition is achieved through political intervention of an external power. This transition path is recognizable in the German Democratic Republic (GDR) where the collapse of the old regime and the subsequent reunion with West Germany was demanded by the East Germans. It is also recognizable in the countries that have been created from the dissolution of the Soviet Union and Yugoslavia (e.g. Russia, FYROM, Croatia, Bosnia & Herzegovina, Estonia, etc.). However, in most cases a Diplomacy Reform was an outcome of a Belligerent Reform (see below).

The Quiet or Peaceful Reform (colour or flower revolutions) model: In the Quiet or Peaceful Reform model the old regime is faced with a peaceful yet determined opposition and through a proclamation of national elections eventually hands over power to the democratic opposition without any resistance. The dissolution of Czechoslovakia (the Czech and the Slovak Republic) and its transition to democracy is such an example. This specific reform is also known as the velvet revolution. In November/December 1989, a peaceful student demonstration in Bratislava and in Prague along with other popular demonstrations and strikes led the communist party to announce at the end of that year the end of its monopoly on political power. This resulted in the first democratic elections since 1946 for Czechoslovakia.

The Quiet Reform with the simultaneous establishment of independence of the country in a peaceful way can also be called the Quiet/Diplomacy Reform. It took place in Slovenia, FYROM, Ukraine, Georgia, Kyrgyzstan, Serbia & Montenegro and Estonia. Both Slovenia and FYROM broke away from Yugoslavia (FRY) in a peaceful manner.

Under the same kind of reform we have the so-called colour revolutions, the rose, tulip and orange revolution. The first of such kind, the Rose Revolution started in Georgia in November 2003. In the parliamentary elections, Saakashvilli, the opposition leader who was supported by independent exit polls, claimed that he had won the elections. However, this result was unacceptable to the leading party and led to a non-violent and anti-governmental demonstration in Tbilisi and other cities of Georgia. The demonstrations of the supporters of Saakashvilli with roses in their hands along with the elite military units’ refusal to support the government, forced President Shevardnadze to resign.

In the same direction, in the Ukrainian presidential election at the end of 2004, Yanukovych (President from the end of 2002 until the end of 2004) was declared the winner. However, this outcome was not accepted by the majority since the exit polls proclaimed Yushchenko (Prime Minister from the end of 1999 until the end of April 2001) the winner. Thus, mass demonstrations in Kiev and many other Ukrainian cities took place at the end of 2004. Over half a million protesters, wearing orange ribbons demonstrated and supported Yushchenko (orange was the official colour of the movement and the predominant colour in Yushchenko’s election campaign). They peacefully asked for new elections in which Yushchenko finally won in the third round (Orange Revolution). This revolution has sometimes also been called the Chestnut Revolution due to the abundance of chestnut trees in Kiev, the capital city of Ukraine and the centre of this revolution.

In March 2005, there were demonstrations in Kyrgyzstan against President Akayev and his government who were increasingly corrupt and authoritarian. These demonstrations were known as the Tulip Revolution and ended with Akayev’s resignation. Another peaceful revolution of the same kind took place in Serbia, in October 2000 with mass demonstrations in Belgrade when Kostunica and his supporters doubted the results of the presidential elections and the demonstrations replaced Milošević’s autocratic regime.

Last but not least, another similar revolution took place in Estonia. It was in 1991 when mass demonstrations blocked the Soviet tanks and proclaimed the restoration of the independence of Estonia with the Singing Revolution which lasted four years (1988–1991). The Singing Revolution started in 1988 with various protests, acts of defiance, yet without violence. It ended with demonstrations with thousands of Estonians singing forbidden national songs and finally, winning Estonia’s independence.

The Disguised Reform model: In the Disguised Reform model the old regime anticipates the inevitable changes and in an attempt to stay in power, ‘disguises’ itself as a democratic socialist party. For example, Bulgaria’s regime was transformed by a ‘Disguised Reform’. The ruling elite in Bulgaria lacked pressure from a strong opposition and moved to the ‘political opening’ only when the Soviet Union politically intervened. Then the communist party renamed itself the Socialist party, ousted its president, scheduled and won the first elections.

The Compromised Reform model: In the Compromised Reform model under no significant pressures, the communist regime gives in to the demand for change and democratization by joining or co-operating with the democratic party. Together, they proceed to the first free elections (after 50 years of communism) and make the transition reforms. The Compromised Reform can also take place when the communist regime ‘allows’ the democratic opposition to hold and win the elections in order to proceed to the necessary transition reforms. The Compromised Reform can also be seen as the result of a conscious political decision for a gradual reform to a market economy. The starting point of such reforms goes back to the 1980s or even to the 1970s, during the communist era (e.g. Hungary, China, and Vietnam).

In 1989, the communist regime gave up power...