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SUMMARY (Order Form)
The analysis presented in this report is based on unique WIIW databases which allow detailed disaggregated analysis of CEECs’ industrial, trade, and FDI developments. As the CEECs are moving towards the adoption on international statistical classification schemes, it has become possible to undertake a more wide-ranging comparative analysis between Eastern and Western European countries than was hitherto possible. It allows one to move towards a Europe-wide assessment of industrial structural developments. The convergence towards internationally compatible disaggregated statistics is, in quite a few of the CEECs, still in its infancy and therefore the interpretation of some of the data requires a lot of caution; nonetheless, we believe that the time has come to embark upon a detailed cross-country analysis of industrial structural change, including also East-West European comparisons.
The processes of transition in the various CEECs have now moved into a phase in which longer-term trends in the directions of industrial structural change, the evolution of employment patterns, of trade and FDI specialization, etc. can be discerned on the basis of the time series available to us since the beginning of the transition processes in 1989. The first few years of the transition, roughly 1989 to 1993, were characterized by the effects of the dramatic adjustment to the collapse of the CMEA, the shift towards a completely new mechanism of coordination of economic activity, and the only gradual responses of behaviour and of institutions to fit that new mechanism. From 1993 onwards (in Poland, 1992), a number of countries moved out of this deep slump of economic activity, while others (mostly those further to the East) lingered on in conditions of economic (and, often also political) disarray without being able to master the momentum of political will, institutional and behavioural change required to pull through a successful transition.
By 1997, the picture which Central and Eastern Europe presents is that of growing diversity. The period following the initial slump in economic activity has for some of the countries become sufficiently long, to be able to discern longer-term characteristics of these countries’ pattern of industrial growth, of their positions in the international division of labour, of labour market patterns, and so on. It has also become possible to shift our attention to studying the conditions for and likelihood of sustainability of the types of growth rates that would allow a closure of the developmental gap which still divides Eastern and Western Europe.
The growth rates of output, employment, productivity, investment and exports in the industrial sectors of the set of more advanced CEECs clearly show the features of the two distinct developmental phases since the beginning of the transformation: deep recessions followed by economic recoveries. In the features of the growth profiles of the two periods, covering only the more successful CEECs, we can see many of the particularities of the transition processes. There is, especially in the first period, still evidence of non-market conform behaviour (such as investment declining less than output, substantial labour hoarding), with some countries achieving less productivity decline in the wake of output decline than other countries and a diversity of export performance based on a more or less successful process of trade reorientation (Hungary, Poland and Slovenia having already had more open trade relations to the West than the Czech or Slovak Republics). In the second period, with strong growth of industrial production and continuing declines in employment levels (the latter except for Poland) and, in many countries, rather fast export growth especially to EU markets, there is much more evidence of 'active restructuring', i.e. change in behavioural responses from enterprises to actively move into new markets, upgrade the quality and composition of their products and restructure their production processes.
The first chapter in the volume, written by Waltraut Urban, analyses structural change within the manufacturing sector by setting up groups of ‘winners’ and ‘losers’ among the industries in terms of their growth rates relative to the industry average. In the first period, 1990-92, the losers were particularly investment goods sectors which suffered, firstly, from the deep recessions in the domestic market and, secondly, from the collapse of other CMEA markets; also consumer goods industries which, for the first time, were heavily exposed to Western competition. Among the relative ‘winners’ were industries relying heavily on the use of raw materials and producing semi-finished products as well as some industries which, given past suppression of domestic demand, would immediately gain from political and market liberalization (such as the printing and publishing industry).
In the second period of economic recovery, 1993-95, one could already observe an above-average performance of the more sophisticated engineering industries, particularly electrical engineering and transport equipment (but in Hungary and Poland, mechanical engineering as well). This is to some extent a function of the rebound of investment activity in the respective countries, but is also due to the emergence of these sectors as attractors of international investments, which itself might serve as evidence that some of the CEECs do have longer-term comparative advantages in producing lower-quality products in these more sophisticated industrial branches. It emerges (and is confirmed in a number of other studies in the volume) that these patterns of specialization reveal a distinct spectrum across the different CEECs in terms of levels of economic development and their place in the international division of labour. The careful comparative analysis of industrial structures in CEECs as compared to the groups of ‘Northern’ and ‘Southern’ EU economies shows that, on the whole, the composition of manufacturing industry in CEECs lies in between the two reference groups, with the most advanced of the CEECs (Hungary, Slovenia and the Czech Republic) coming close to a pattern of industry composition observed in Northern EU countries.
The second chapter by Hermine Vidovic analyses labour market developments in CEECs since the beginning of the transition: the dramatic reduction of the rates of labour force participation, the broad picture of sectoral reallocation of labour which amounted to a loss in the overall number of jobs available (about 1.5 million jobs were lost in agriculture and 5.7 million in industry over the period 1990 to 1995). We can speak of a dramatic process of ‘deagrarization’ and ‘deindustrialization’ taking place in Central and Eastern Europe which is only marginally (in employment terms) compensated so far by a process of ‘tertiarization’ (over the same period the net increase in service jobs was about 400 thousand). Most jobs here have been created in trade, while the fastest growth rates were recorded in financial services; interestingly, jobs in public administration have expanded as well, while there is evidence that cuts in public spending affect employment levels in health and social services in some of the CEECs.
Chapter 3 by Peter Havlik provides an analysis of emerging patterns of export specialization in relation to EU trading partners which account now for an overwhelming proportion of trade of CEECs. The changes over the period 1989 to 1995 were far greater than those observed for Western EU economies (such as Austria). There is now a clear pattern across the CEECs in terms of the degree to which they conform to the general import pattern observed on EU markets or show distinct profiles of inter-industry specialization: on one end of this spectrum there is the Czech Republic, Hungary and Slovenia, on the other end, Romania, Bulgaria and then Poland and Slovakia. Overall, exports still show a bias towards energy-intensive and labour-intensive goods, but there are important changes which can be interpreted as revealing the emergence of a ‘dual’ structure of the export sectors of at least some of the CEECs which present evidence of a process of relatively rapid technological catching up.
The following Chapter 4, also written by Peter Havlik, provides productivity level and compensation rate estimates by detailed manufacturing branches (at the 2-digit NACE level) which has not been done before for the whole range of CEECs. Such calculations are fraught with numerous methodological difficulties; the study is very explicit about these problems and every step in the calculations can be followed by the reader. Over time, labour unit costs are increasing (as a function of the relative speed of wage vs. productivity movements measured in an international currency) but they remain low. In a concluding section (contributed by Michael Landesmann based on joint work with Peter Egger) it is shown that the spread of cost conditions in the European economy as a whole (including Western and Eastern Europe) has increased very significantly as a result of East-West European integration. This is true both for the range of productivity levels and of labour costs observed. The conclusion is that the integrated European economy now offers the degree of diversity traditionally observed in Asia and, hence, similar characteristics of cross-border corporate linkages will increasingly be observed, thus intensifying intra-firm trade flows as well as labour and capital market integration effects.
The next chapter by Michael Landesmann and Johann Burgstaller presents the first results of a very detailed study examining ‘quality gaps’ between the baskets of goods sold by Eastern European producers on EU markets and their more advanced competitors. The analysis indicates that the East European producers do indeed sell their products at the very lowest end of the quality spectrum (particularly in the engineering industries) but that, over the period 1989-94, there were, particularly for the 'Western' group of CEECs (Hungary in particular, but also the Czech Republic, Poland and Slovenia; less in the case of Poland and even less in the case of Slovakia) significant closures in the price gaps. For some of the ‘Eastern’ CEECs (Romania, Bulgaria, Russia) one could observe quite a few instances of further falling behind, i.e. of the quality gap indicators showing an increase rather than a decline. The study thus presents another instance of increasing diversity across Central and Eastern Europe.
Chapter 6 by Gábor Hunya examines the role of FIEs (enterprises with any degree of foreign ownership involvement) in the process of structural change taking place in CEECs. By 1994, FIEs accounted for 37% of manufacturing employment in Hungary (12% in Poland and 7.5% in the Czech Republic), for 79% of investment outlays (Poland 31%, Czech Republic 25%), and 66% of sales for exports (29% in Poland and 16% in the Czech Republic). Foreign trade orientation is thus high amongst FIEs and either their general propensity to invest is high and/or they are disproportionately located in capital-intensive branches such as chemicals, machinery, transport equipment, non-metallic minerals. Substantial foreign interest exists both in domestic-market-oriented as well as export-oriented industries. In labour intensive sectors, such as apparel and footwear production, foreign involvement takes more the form of subcontracting and outward processing. The involvement in ‘problem’ branches with inherited oversized capacities and lost markets such as metals production, heavy chemicals, shipbuilding, coal is very limited.
In the final chapter Josef Pöschl and Michael Landesmann
explore the structures of the balance of payments of the CEEC economies.
The authors start their analysis with the observation that recurrent balance-of-payments
problems (which can build up to become a ‘growth constraint’) are a systematic
feature of two types of economies: those with structural weaknesses as
well as those economies which embark upon a catching-up process in relation
to more advanced economies; in many cases, the CEECs fall into both these
two categories. A detailed analysis of the various items on the current
accounts reveals, typically, comparative advantage structures which differentiate
the CEECs from each other. Next the structure of the capital accounts and
their evolution over the period 1989-96 is analysed, showing the relative
shares and developments of FDI, portfolio investment, as well as short-
and long-term debt items. This allows an assessment of the relative fragility
of the balance-of-payments situation of the different CEECs at various
points of their transition and growth experience. The analysis of balance-of-payments
structures both in relation to other structural features of the different
economies (such as patterns of trade specialization, the functioning of
the domestic financial system, labour market characteristics, etc.) as
well as in relation to the movements in nominal and real exchange rates
will continue to constitute an important component in the overall assessment
of the feasibility and sustainability of longer-term growth and catching
up in Central and Eastern Europe.
WIIW Structural Report, M. Landesmann et al.: Structural Developments
in Central and Eastern Europe. WIIW Report 1997, December 1997,
xix + 239 pp. including
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