WORLD BANK TECHNICAL PAPER NO. 453 Europe and Central Asia Poverty Reduction and Economnc Management Series Work in progress for public discussion March 2000 Foreign Investment and Restructuring The Evidencefrom Hungary Bartlomiej Kaminski M,icelle Riboud Recent World Bank Tecmnical Papers No. 389 International Commission on Irrigation and Drainage (ICID), Planning the Management, Operation, and Maintenance of Irrigation and Drainage Systems: A Guide far the Preparation of Strategies and Manuals No. 390 Foster, Lawrence, and Morris, Groundwater in Urban Development: Assessing Management Needs and Formulating Policy Strategies No. 391 Lovei and Weiss, Jr., Environmental Management and Inslitutions in OECD Countries: Lessonsfrom Experience No. 392 Felker, Chaudhuri, Gyorgy, and Goldman, The Pharmaceutical Industry in India and Hungary: Policies, Institutions, and Technological Development No. 393 Mohan, ed., Bibliography of Publications: Africa Region, 1990-97 No. 394 Hill and Shields, Incentivesfor Joint Forest Management in India: Analytical Methods and Case Studies No. 395 Saleth and Dinar, Satisfying Urban Thirst: Water Supply Augmentation and Pricing Policy in Hyderabad City, India No. 396 Kikeri, Privatization and Labor: What Happens to Workers When Governments Divest? No. 397 Lovei, Phasing Out Lead from Gasoline: Worldwide Experi?nce and Policy Implications No. 398 Ayres, Anderson, and Hanrahan, Setting Prioritiesfor Environmental MAnagement: An Application to the Mining Sector in Bolivia No. 399 Kerf, Gray, Irwin, Levesque, Taylor, and Klein, Concessionsfor Infrastructure: A Guide to Their Design and Award No. 401 Benson and Clay, The Impact of Drought on Sub-Saharan African Economies: A Preliminary Examination No. 402 Dinar, Mendelsohn, Evenson, Parikh, Sanghi, Kumar, McKinsey, and Lonergan, Measuring the Impact of Climate Change on Indian Agriculture No. 403 WATelch and Fremond, The Case-by-Case Approach to Privaitization: Techniques and Examples No. 404 Stephenson, Donnay, Frolova, Melnick, and Worzala, ITmproving Women's Health Services in the Russian Federation: Results of a Pilot Project No. 405 Onorato, Fox, and Strongman, World Bank Group Assistancefor Minerals Sector Development and Reform in Member Countries No. 406 Milazzo, Subsidies in World Fisheries: A Reexamination No.. 407 Wiens and Guadagni, Designing Rulesfor Demand-Driven Rural Investment Funds: The Latin American Experience No. 408 Donovan and Frank, Soil Fertility Management in Sub-Saharan Africa No. 409 Heggie and Vickers, Commercial Management and Financing of Roads No. 410 Sayeg, Successful Conversion to Unleaded Gasoline in Thailand No. 411 Calvo, Optionsfor Managing and Financing Rural Transport Infrastructure No. 413 Langford, Forster, and Malcolm, Toward a Financially Sustainable Irrigation System: Lessonsfrom the State of Victoria, Australia, 1984-1994 No. 414 Salman and Boisson de Chazoumes, International Watercourses: Enhancing Cooperation and Managing Conflict, Proceedings of a World Bank Seminar No. 415 Feitelson and Haddad, Identification of Joint Management Structuresfor Shared Aquifers: A Cooperative Palestinian-Israeli Effort No. 416 Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority No. 417 Rutkowski, Welfare and the Labor Market in Poland: Social Policy during Economic Transition No. 418 Okidegbe and Associates, Agriculture Sector Programs: Sourcebook No. 420 Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Maija Tummers, Evaporative Air-Conditioning: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, Harrie Knoef, and Huber Stassen, Energilfrom Biomass: A Review of Combustion and Gasifica- tion Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector in Eastern Europe and the Former Soviet Union No. 424 Jaffee, ed., Southern African Agribusiness: Gaining through Regional Collaboration No. 425 Mohan, ed., Bibliography of Publications: Africa Region, 1993-98 (List continues on the inside back cover) WORLD BANK TECHNICAL PAPER NO. 453 Europe and Central Asia Poverty Reduction and Economic Management Series Foreign Investment and Restructuring The Evidencefrom Hungary Bartlomiej Kaminski Michelle Riboud The World Bank Washington, D.C. Copyright ©) 2000 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 2000 Technical Papers are published to communicate. the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions e xpressed in this paper are entirely those of the author(s) and should not be attributed in any marner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Biank does not guarantee the accuracy of the data included in. this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, dlenominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISBN: 0-8213-4594-X ISSN: 0253-7494 Cover map by Jeff Lecksell in the World Bank's Printing, Graphics, and Map Design Divisicin. Bartlomiej Kaminski is professor at the University of Maryland, College Park, and a consultant to the World Bank's Development Economics Research (Group, Trade. Michelle Riboud is manager at the World Bank Institute Human Development Grou p. Library of Congress Cataloging-in-Publication [ata Kaminski, Bartlomiej, 1944- Foreign investment and restructuring: the evidence from Hungary / Bartlomiej Kaminski, Michelle Riboud. p. cm. - (World Bank technical paper; 3lo. 453) ISBN 0-8213-4594-X 1. Investments, Foreign-Hungary. 2. Hungary-Economic policy-1989- . 3. Privatization-Hungary. I. Riboud, Michelle. II. Title. III. Series. HG5470.5.A3 K36 1999 332.67'3'0943909049-dc2l 99-047585 Table of Contents Foreword .................................................................... v Acknowledgments ............................................................. vi Executive Summary ........................................................... vu Chapter 1 Introduction ......................................................... 1 Chapter 2 Scope and Depth of Foreign Direct Investmnent: Sources of Success ............ 4 Why Hungary? ................................................................. 4 Penetration by Foreign Capital ................................................... 7 Chapter 3 Microeconomic Restructuring: The Role of Foreign Direct Investment ..........9 Privatization and Foreign Direct Investment ....................9.............9 Enterprise Performance ....................................................... 12 Impact on Performance: Employment, Productivity, and Wages ...................... 13 Chapter 4 Foreign Direct Investment and Foreign Trade ............................. 16 Export Dynamics ............................................................ 16 C:ompetitiveness in EU Markets ................................................. 18 Foreign Direct Investment and External Sector "Equilibrium:" The "Untold" Dimension of Success of the 1995 Stabilization Package ............... 19 lIntegration into Global Networks ................................................ 20 Chapter 5 Foreign Direct Investment-Led Restructuring and Change in Factor Intensities: T'he "EU Perspective" ............................................................ 23 Chapter 6 Has Hungary Becomne a Dual Economy? .................................. 26 Chapter 7 Conclusion ......................................................... 29 Notes .................................................................. 31 References ................................................................... 33 List of Figures Figure 1. Manufacturing Enterprises by Number of Employees Before and After the Collapse of Socialism (in Percent) ......................................................... 11 Figure 2. Exports of Firms with Foreign Participation, 1989-97 .......................... 17 iii List of 'Tables Table 1. FDI Inflows to Hungary in a Comparative Perspective, 1990-97 ................... 5 Table 2. Highlights of the "Weight" of Foreign Capital in the Hungarian Economy (in Percent), 1989-96 .......................................................... 8 Table 3. FDI by Sectors and the Share of Foreign Firms in Total Number of Firms by Sectors (1992 and 1996) ............................................................... 8 Table 4. Enterprise Losses (in Percent of GDP) ...................................... 10 Table 5. Forward-Looking Set 1992-97 (The Sarmie Firms are Followed Over Time; Ownership Category Corresponds to That in 1992) ................................ 12 Table 6. Backward-Looking Set 1992-97 (The Same Firms are Followed Over Time; Ownership Category Corresponds to That in 1997) ................................ 12 Table 7. Distribution of Value Added in Manufacturing by Types of Ownership, 1992 and 1997 (in Percent) ........................................................ 13 Table 8.Job Losses andJob Gains in the Manufacturing Sector 1992-97 (in Thousands) .... 14 Table 9. Real Value Added Per Employee in Manufacturing by Types of Firm Ownership, 1992-97 ..................................................................... 14 Table 10. Wage Advantages of Employees at Foreign Firms (Over Employees at Domestic Firms) in Major Occupational Groups, 1995 (in Percent) ................................. 15 Table 11. Export Growth of Firms with Foreign Participation, 1989-97 ................... 17 Table 12. Trade with the EU in Selected Networks Involving Production Sharing, 1989, 1993, and 1997 .................................................................... 21 Table 13. The Composition of Hungarian Exports to the EU According to Factor Intensities, 1989-97 (in Percent) ......................................................... 24 Table 14. Composition of Exports and Imports From the EU in Terms of Factor Intensities, 1989, 1993, and 1997 (in Percent) ....... ........................................ 25 Table 15. Firms Operating in FTZs in Hungarian Foreign Trade, 1995-97 (in Percent) ..... 27 iv Foreword The Poverty Reduction and Economic Management Unit in the World Bank's Europe and Central Asia Region has been undertaking a series of analytical work on issues pertinent to the economies in the region. These include: transition issues; issues of economic integration pertinent for the Central and Eastern Europe countries which are candidates for accession to the European Union; poverty issues; and other economic management issues. The analytical work was conducted by staff of the unit and other Bank staff, as well as specialists outside of the Bank. This technical paper series was launched to promote wider dissemination of this analytical work, with. the objective of generating further discussions of the issues. The studies published in the series should therefore be viewed as work in progress. The findings, interpretations, and conclusions are the authors' own and should not be attrib- uted to the World Bank, its Executive Board of Directors, or any of its member countries. PRADEEP MITRA DIRECTOR POVERTY RZEDUCTION AND ECONOMIC MANAGEMENT UNIT EUROPE AND CENTRAL ASIA REGION THE WORLD BANK v Acknowledgments The authors would like to express their gratitude to S. Ramachandran for his contribution to the design of the enterprise dataset and to Agata Pawlowska for her assistance in the data analysis. The authors are also grateful to the participants of the PREM Week seminar for their comments on foreign direct investment. Vice President: Johannes Linn Director: Pradeep Mitra Sector Leader: Hafez Ghanem The following study was prepared by Mr. Bartlomiej Kaminski, the University of Maryland and The World Bank, DECRG (Development Research Group), and Ms. Michelle Riboud, WBIHD (The World Bank Institute, Human Development Group). Executive Summary Hungary is a unique case for studying the impact of foreign direct investment (FDI). To begin with, the penetration of the Hungarian economy by foreign economies is enormous. Most firms accounting for the bulk of sales in their respective markets have some foreign participation. Second, except for a short period during the initial stages of EU accession (1990-94), the government has adlhered to the principle of nondiscrimination. Consequently, special treatment (such as subsi- dies and market barriers) has had no discernible impact on decisions of foreign investors. Third, the program of privatization-with its emphasis on improvement in corporate governance-active- ly sought to restructure state-owned enterprises (SOEs) before offering them to highest bidders. Hlaving assessed the reasons for Hungary's pull of FDI and the depth of foreign involvement in the Hungarian economy, thi.s paper addresses the following questions: What factors explain a drarnatic improvement in overall profitability of manufacturing activity beginning in 1992? Do firrns with foreign participation make an overall contribution to higher employment or do they have a suppressing effect? Do these firms pay lower wages? Do privatized firms with foreign participation become active participants in international markets? Do they push the Hungarian economy towards specialization at the bottom of the value-added spectrum-that is, in unskilled labor-intensive products? Has Hungary become a dual economy, one side increasingly modern and efficient, and the other increasingly backward? We proceed to answer these questions by (1) using a specially designed database allowing trac- ing trhe impact of privatization (including transfers of property rights to foreign investors) on pro- duc tivity and employment; (2) examining data on the structure of employment and wages in firms with andwithoutforeign participation; (3) examiningdevelopments (such as competitiveness and dynamics) in foreign trade with the EU, and assessing the contribution of foreign-owned firms; and (4) examining in factor intensities of Hungarian EU-destined exports. T'he analysis presents strong empirical support for the following conclusions. First, impressive performance of the Hungarian economy would have been impossible without FDI. Second, firms privatized to foreigners have increased employment after initial downsizing. Third, foreign-owned firnms pay more and employ a rnore highly skilled labor force. Fourth, the shift in the Hungarian export basket toward human capital-intensive products further confirms this finding. Fifth, for- eigTn firms have modernized Hungary's manufacturing sector, and Hungarian exporters have dra- matically improved their competitiveness in high-technology products. Last, fears about the emer- gence of a dual economy have turned out to be unfounded. vii Chapter 1 Introduction Although the official rhetoric in most transition economies has been in favor of foreign direct investment (FDI), few countries have succeeded in attracting sizable inflows. This is despite a dra- matic rise in capital flows to developing countries in the early 1990s. The former Soviet Union and Central and Eastern Europe, with an aggregate GDP equal to around 20 percent of all develop- ing country GDPs,-received around 12 percent of all capital flows to developing economies (Claessens, Oks, and Polastri 1998). Clearly, rhetoric alone is not sufficient. It has to be matched by dleeds such as privatization and a business-friendly institutional and policy environment. T'he averages conceal diversity among transition economies. Some have been quite successful in attracting foreign capital, and Hungary stands out among them. During the early stages of EU accession (1990-93), Hungary absorbed almost half (45 percent) of total FDI inflows to 25 coun- tries of the former Soviet Union and Central and Eastern Europe. Its share of FDI subsequently fell to around 25 percent once other Central European transition economies became attractive to foreign investment. Yet, Hungary's cumulative share of foreign investment outlays in the region frorn 1990 to 1997 remained very high at around 30 percent. Several factors helped Hungary to get ahead of other transition economies in terms of attract- ing FDI. These included earlier reforms under central planning, strong political commitment to attract foreign capital to finance current account deficits and external debt, and the credible com- mitrment of successive governrments to establishing competitive markets. By 1998, annual inflows of FDI to Hungary had been about 5 percent of GDP for eight years, and the cumulative impact on the Hungarian economy was huge. Foreign capital accounted for around 20 to 25 percent of domestic investment outlays. Consider also that foreign-owned firms have invested their retained earnings (or at least some portion of it), thus increasing the actual share of investment by foreigr,ers. It is estimated that foreign firms now account for almost two- thirds of total investment and employ around 40 percent of the Hungarian workforce. The scope of foreign investment embracing all sectors of the Hungarian economy (especially those of trad- ables) has no counterpart in other transition economies. For better or worse, behavior of foreign- owned firms controls the dynamics of the Hungarian economic performance. A large body of empirical research has accumulated on the impact of foreign investment on a host economy. The literature distinguishes between direct and indirect effects of industrial sub- sidiaries of foreign firms on a host country. The potential positive direct economic effect is an increase in the real income in a host country, thanks to the import of capital, technology, and skills that would otherwise be unavailable. However, if the profits accrued by a foreign firm are due to government subsidies (including, for instance, a level of effective protection so high that a prod- uct could be imported more cheaply), then the net benefit fails to materialize. Externalities or side effects include the diffusion of imported skills efficiency both horizontally and vertically and the creation of close links with "home" economies. It has been observed that domestic firms become more competitive as they become suppliers of foreign firms "upstream" and buyers of products "downstream" from a foreign firm. 1 While there seems to be consensus in the literatare that both direct and indirect benefits indee d occur in North-North investment flows, some of these benefits may fail to materialize in North- South flows-that is, in developing countries. Two sets of factors are usually responsible for the failure. First, ill-founded policies employed to ati:ract foreign investment may wipe out the posi- tive effect of foreign investment on real income. ]Excessive indirect subsidies (that is, protection) or direct subsidies (such as tax holidays or project-specific investment in infrastructure) to foreign firms may raise the price of certain goods well above that in intemational markets. A country would then be better off importing rather than producing the goods. Many countries offering high pro- tection to foreign investors belatedly discovered that the result was industries unable to compete in international markets. There is strong empirical evidence that subsidies offered to foreig,n investors have been usually self-defeating (World. Bank 1994). Second, indirect benefits may be weakened, if not entirely erased, by the inability of domes tic firms to take advantage of new opportunities. Since spillovers to other firms are crucial for eco- nomic growth, foreign investment does little to spur economic growth. The evidence on spillover effects remains ambiguous. On the one hand, a number of case studies pointed to significant pos- itive spillovers but only if local skills and the technological progress to adopt techniques used else- where are available (Lall 1992). On the other hand, microeconometric studies have found a sta- tistically significant negative spillover effect of for eign participation on firms wNithout foreign par- ticipation-see Djankov and Hoekman (1998) and Harrison (1996). Although negative spillover may simply suggest the lack of ability among dornestic firms to benefit from know-how diffusion, it remains unclear why the performance of domestic firms in an industry worsens with the increased number of foreign owned firms. One possible explanation is selectivity bias, that is, the best-performing domestic firms attract interest among outside investors. Furthermore, firrns acquired by foreign investors increase their edge over domestic firms. In their study of Czech firms, Djankov and Hoekman (1998) find that total productivity growth is positively correlated with the extent of foreign ownership; firms fully owned byforeigners perform better thanjointventures. A number of other studies on perfonnance of firns purchased by outside investors in transition economnies corroborate this result (see Rojec 1998). It seems that FDI offers the most efficient way to take advantage of growth opportunit:ies offered by the global economy. Firms receiving FI)I are not only efficient but also have direct access to the global networks of their parent companies. This is important, since the most rapidly grow- ing segment of global trade is in industrial components and parts, thanks to the possibility of "cdizvid- ing up the value chain" of production.' The result is-to borrow an apt phrase from Feenstra (1998)-integration of trade and disintegration of production in the global economy FDI off-ers the opportunity to become part of this process; an estimated one-third of world trade is among affiliates of a single company (Sachs 1998). Becoming part of the production and distribution net- work of a multinational corporation (MNC) offers an inexpensive way to market products.. Firms do not incur marketing costs, which are usuall.y quite significant for newcomers (Roberts and Tybout 1998). Hence, with the growth in foreign penetration, industries should become more competitive internationally. In Hungary the share of locally-owned firms has been precipitously falling since around 1991.The extent of foreign penetration of the Hungarian economy is substantial not only 2 by the standards of transition economies but also by those of most successful developing coun- tries. Foreign firms account for almost two-thirds of total investment expenditure, which suggests that their dominance will continue growing. Under these circumstances, the question whether spillovers are negative or positive seems to have little relevance, if any. However, there are other important questions to consider. What impact does FDI have on employment? Some suggest that FDI in Hungary has contributed to increases in productivity but not to matching increases in real earnings (Ellingstad 1997). Others complain about the emer- gence of a dual economy--one side increasingly modern and efficient, and the other increasingly bac:kward. Other interesting questions relate to what this omnipresence of foreign firms may mean to current and future economic performance. Considering that Hungarian firms will soon face competitive pressures of a single European Market, will abundant FDI put them in a better posi- tiorn to withstand these pressures? Most empirical studies we are aware of have focused on the impact of FDI on research and devel- opmnent (R&D) (for example, lElteto 1998), financial performance (for example, Hunya 1998 and World Bank 1999), export performance (Kaminski 1999), modes of integration into global mar- kets (Ellingstad 1997 and Marlin 1998), and industrial restructuring (for example, Hamar 1998). Drawing on this rich evidence, this paper seeks to assess the impact of FDI on various aspects of the Hungarian economic performance, including the Hungarian current and future capacity to withstand competitive pressures of a "Single Market" What matters for the capacity to compete is survival of economic activity at the higher end of a value-added spectrum. While ultimately the outcome depends on government policies, main FDI- related components pointing to the potential for sustainable performance may be traced. These include characteristics of industries attracting FDI in terms of factor and R&D intensities, and the financial performance (that is, profits), investment activity, and foreign trade orientation of foreign owned firms. These aspects of FDI shed light on long-term effects of foreign-owned firms on the Hungarian economy. With privatization nearing its completion, sudden surges in FDI inflows are rather unlikely, but reinvested earnings of foreign-owned firms seem to guarantee their grow- ing presence in the Hungarian economy. The remainder of this paper is organized as follows. Chapter 2 shows that Hungary's outstanding success in tapping FDI has bee n due to privatization and overall liberalization rather than to spe- cial incentives (such as subsid:ies) to foreign investors. Chapter 3 identifies distinctive character- istics of firms with foreign par ticipation in terms of employment, productivity, and profitability. Chapter 4 examines links between FDI-driven microeconomic restructuring and foreign trade effects including export growth, competitiveness in EU markets, and integration into global pro- duction and distribution networks. Chapter 5 examines "factor intensities" of Hungary's restruc- turing as revealed in exports to EU markets. Chapter 6 addresses the question of "duality" as a result of FDI-led restructuring. 3 Chapter 2 Scope and Depth of Foreign Direct Investment: Sources of Success Structural reforms and sound macroeconomic fundamentals are clearly necessary conditions to attract capital flows. Among various determinants of FDI examined in empirical studies, the strength of macroeconomic fundamentals as measured by GDP growth has been consistently vely important. Ireland's impressive growth performance, which raised its GDP per capita from 64 per- cent of the EU average in 1983 to 90 percent in -1996, can be attributed directly to two factors-- sound macroeconomic policies and its ability to act as a magnet for U.S. investment thanks to friend- ly business environment. Empirical studies of capital flows seem to agree on two observations: official flows lead or stirm- ulate countries' reform efforts, whereas private capital flows, with FDI as the most important corn- ponent, follow or respond to reform measures. A recent study has found that liberal reforms pro- vide a more powerful explanation of variation in FDI flows to former centrally planned economies (CPEs) than to other developing countries (Claessens, Oks, and Polastri 1998). Indeed, leaving aside investment in nonrenewable natural resources, which are partly immune to an economic regime, there has been a rather strong positive relationship between the size of FDI inflows and the progress in dismantling central planning and the shift to macroeconomic stability. Within the group of former CPEs, improved conditions in access to EU markets due to Europe Association Agreements, often referred to simply as the "EU factor," have clearly acted as a magnet for for- eign investors. Yet, the former, (that is, liberal) reforms seem to prevail over the "EU factor" alone, as the experience of Bulgaria and Romania shows. The developments in aggregate FDI inflows to transition economies seem to confirm these obser- vations. Garibaldi and others (1999) argue that the increase of FDI inflows per capita in 1994-95 coincided with the period when in transition economies reforms have begun to take hold, infla- tion rates fell and growth resumed. Indeed, there was a dramatic increase from $18 per capita in 1994 to $43 per capita in 1995. (All dollar amounts in this paper are U.S. dollars). However, despite rebounding economies and progress in macroeconomic stabilization, former Soviet republ:ics (excluding Baltic states) failed to increase their share in FDI. Two developments-Hungary's "big privatization" sale and Poland's improved creditworthiness thanks to the completion of Club of London negotiations-accounted largely for the increase in FDI. Why Hungary? The EU factor, combined with the rapid movement away from central planning and macroeCo- nomic stability, provides a good explanation why the bulk of flows to transition economies went to Central Europe. But these general characteristics fail to explain, for instance, why the Czech Republic, with lower inflation and debt, attracted less FDI than Hungary. It also fails to explain why Poland, despite its much stronger GDP growth performance, has attracted relatively less FDI than the Czech Republic. Hungary, together with Poland, has received the largest inflow of FDI from 1990 to 1997. But Poland's economy is almost four times larger, and so is its population. Hungary has a huge lead 4i over other popular transition economies among foreign investors, measured in terms of flows per capita or share of GDP. Cumulative inflows of FDI per capita from 1990 to 1997 to Hungary were 1.8 times larger than to the second largest recipient, the Czech Republic (table 1.A). Similarly large are the differences in cumulative inflows of foreign investment in terms of GDP per capita; Hungary absorbed 1.5 times mnore than the second largest recipient, Estonia (table 1.B). Inflows amounting on average to 5 percent of GDP (or one-fifth of total capital outlays) have produced a very significant penetration of the Hungarian economy by foreign capital-much more extensive than in any other transition economy. In addition, the share of foreign-owned manu- facturing enterprises in investment outlays in Hungary amounted to 83 percent in 1996 (Havlik 1999). This was 40 percent more than this share in Poland, which scored second among transi- tiori countries. The gap is much wider in financial and telecommunication services. Why has Hungary been so successful? After all, the Central European countries share similar characteristics.2 They are all in the EU accession pipeline, thus benefiting from the "EU factor" (Claessens, Oks, and Polastri 1998). They are all well endowed with relatively cheap skilled labor, which is usually associated wit'h a high volume of direct investment (Markusen 1998). In various surveys of transition economies the Central European countries are usually classified as the most advanced reformers (EBRD 1998, World Bank 1996, and World Bank 1997). Thus, one would expect a much lower variation in terms of the ratio of FDI to GDP. It seenis that Hungary has been better positioned to benefit from the sharp rise in FDI to devel- oping countries in the 1990s for four reasons. First, Hungary was saddled with a huge international debt at the outset of its full-fledged transition to competitive markets. Unlike Poland, however, it had never sought rescheduling; nor had it defaulted in its payments to private or public creditors. Therefore, Hungary's creditworthiness remained high. Moreover, earlier dealings with interna- tional financial community helped Hungarians develop considerable financial management and negotiating skills. Therefore, dtespite heavy indebtedness, Hungary was perceived as a reliable and creditworthy partner. Second, early liberalization, of foreign investment, including limited investment opportunity dating back to 1972, set the groundwork for the current high levels of FDI. Limitedjointventures Table I FDI Inflows to Hungary in a Comparative Perspective, 1990-97 A Cumulative inflows per capita, 1990-97 1990 1991 1992 1993 1994 1995 1996 1997 Estonia 0 0 55 163 305 440 513 620 Czech Republic 12 61 153 216 301 549 683 809 Huilgary 29 168 308 531 639 1,068 1,256 1,439 Poland 2 10 27 71 119 214 329 412 Slovenia 0 0 56 112 154 239 328 476 B. Cumulative inflows in terms of the share (cumulative) in GDP 1990 1991 1992 1993 1994 1995 1996 1997 Estonia 0.00 0.00 1.90 6.05 11.69 16.66 20.10 25.04 Czech Republic 0.66 2.30 4.44 6.26 8.38 13.83 16.48 19.10 Hungary 0.98 5.54 9.65 15.93 18.78 29.32 33.90 37.85 Poland 0.16 0.56 1.36 3.36 5.39 8.45 11.76 13.89 Slovenia 0.00 0.00 0.90 1.79 2.37 3.27 4.22 5.77 Source: Global Development Finance, The World Bank, Washington D.C., 1998, and Economic Survey of Furope 1998 No. 1, United Nations Economic Commission for Europe, NewYork and Geneva, 1998. 5 with foreign partners were already allowed under central planning: the 1972 Law permitted establishment of firms with foreign participation not exceeding 50 percent of equity. The domes- tic majority ownership requirement was abolished in 1988. While these legal provisions were of little practical consequence in 1972, they turned out to have positive impact once central plan- ning was abolished. Thanks to the 1972 Law some large MNCs (for instance, TDK in 1973) estab- lished their presence, but began investing only in the late 1980s. In other words, earlierjoint ven- tures have often led to follow-up investments. The earlyjoint ventures enabled foreigners to receive the help of local partners, usually state enterprises, in negotiating the legal and bureaucratic hurdles facing businesses. As the Hungarian private sector was allowed a larger role, foreigners increased their stake in theirjoint ventures and began to integrate their Hungarian units with their operations abroad. Although the overall num- ber ofjoint ventures has decreased recently (because the inactive ones were liquidated), new whol- ly owned subsidiaries have become the norm, not the exception. In 1992, the foreigners' stake was most often a blocking minority; but this slowly changed over the years, and majority and whvol- ly owned subsidiaries have become more common. Third, Hungarian firms were allowed to establish direct horizontal links with Western firms. They had been involved in subcontracting since 1968, which created a good base for foreign investors to respond to new opportunities created by the collapse of communism, and for Hungarian man- agers to seek foreign partnerships. Many firstjoin'L ventures were simply a more advanced stage in these long-lasting relations (Hamar 1998), but eventually they helped generate a virtuous circle of FDI. Investments by MNCs have paved the way for other investments. These include investments made by competing MNCs in similar lines of products, as well as subcontractors investing in major MNCs that purchase their products. Early entry of foreign capital has also facilitated participation of foreign investors in privatization (after this process was opened to foreign investment). Fourth, the Hungarian privatization program has specifically targeted outside investors. Hungary has pursued an active policy of selling firms to strategic investors on a case-by-case basis. During the initial stages of restructuring, the state played an active role by "packaging" state-owned firms for sale to outside bidders. Furthermore, H.1ungary moved much earlier than other transi- tion economies to open the so-called "strategic" sectors to foreign investors. This has set Hungary apart from other transition economies in terms of the scope and timing of the opening.3 With almost two thirds of privatized assets purchased by foreigners, the Hungarian central budget received around $6.4 billion in foreign exchange: between 1991 and 1997. This was equivalent of 43 percent of total FDI inflows during this periodl.4 The policy of privatization has generated a virtuous cycle of foreign investment. Measures aimed at deepening the financial sector and opening services to foreign capital have created a favorable environment for FDI in other areas. The inflows cf foreign capital have increased competition arad improved services. Hungary's banking sector, fo:r instance, is regarded as the best in the region. This can be attributed to a well-designed government program of restructuring and foreign banks. A whole array of high-quality services-financial intermediation, port services, telecom- munications, and so forth-has increased the attractiveness of Hungary to foreign investors, and has also facilitated exchange by reducing transaction costs. Hungary's success in attracting large inflows of FDI sheds light on factors explaining the vari- ation in FDI flows to Central European associates of the European Union. The choice of a method of privatization (that is, sale to outside investors), a business-friendly enrironment, and an earli- .6 er record of horizontal contacts with Western firms seem to be the relevant ones. While Poland also meets these criteria, a slower pace of privatization of strategic sectors and the unsolved issue of Poland's restructured private debt (until the 1994 London Club deal) negatively impacted FDI. Hunlgary's edge over other associates was due to an earlier start (compared to Estonia, the Czech Republic, and Slovenia) and fcreigner-friendly methods of privatization (as opposed to the Czech Republic and Slovenia). T o sum up, the answer to a cquestion why Hungary outperformed other countries rests on three interrelated premises: the record of high-and historically established-creditworthiness, a unique record of opening to thne external world foreign investment under central planning, and the Hungarian approach toward microeconomic restructuring and privatization. An inherited debt seemed initially a liability, but was turned into an asset with a courageous strategic decision not to default on the huge international debt. The authorities had to actively pursue other ways of financing servicing of the external debt. Non debt-creating foreign investment has been the obvi- ous choice. Debt management considerations seem to have provided a strong motive to choose piece-by-piece privatization to an outside bidder and open the strategic sectors to "external" pri- vauization earlier than in other transition economies. In addition, restructuring policies have been designed to establish a business environment friendly to foreign and domestic investors alike. Penetration by Foreign Capital Twco sets of preliminary observations can be derived from data presented in table 2. The first con- cerns the scope of FDI, and the second relates to its distinctive features. Clearly, the "weight" of foreign firms in the Hungarian economy is quite dramatic. Foreign firms employ around 40 per- cent of the Hungarian workfcorce. Around half of domestically produced products and services come from firms with foreign participation. On the basis of these observations alone, one could conclude that almost the entire economy of Hungary has been taken over by foreign capital. Furthermore, the significance of firms with foreign participation will grow even without new FDI inflows. Their share in total investment considerably exceeds their weight in terms of other indicators. The share of foreign firms in total investment tripled between 1989 and 1991, rising from 11 to 30 percent and more than doubled thereafter reaching 62 percent in 1996.5 With the share of foreign firms in the total of all newly incorporated firms in 1997 reaching two-thirds, their role will continue growing. In the manufacturing sector there has been a dramatic expansion of firms with "FDI ownership." Their niumber grew from 11,620 in 1992 to 18,070 in 1996 (Hamar 1998). An important feature of FDI in Hungary is its large scope in terms of sectors covered and actu- al numbers of foreign owned firms. FDI has been most widespread in manufacturing, where FDI firms are present in all major industries. Among fifteen major industries (denoted by double-digit NACE codes) FDI firms accounted in 1996 for more than 50 percent of total sales, with the fol- lowing exceptions: textiles (NACE code DB-44 percent), leather (NACE code DC-46 percent), wood (NACE code DD-43 pe rcent), basic metals (NACE code DJ-34 percent), and machinery (NACE code DK-45 percent,'. The share of FDI firms is not only higher than in other transition economies, but their presencc is also more evenly distributed across industries. For instance, the coefficient of variation (the raLio of standard deviation to the average FDI share) in 1996 was 0.79 for the Czech Republic with arn average of 22 percent and standard deviation of 17.1, compared to a coefficient of 1.18 for Slovenia (with an average FDI share of 18 percent and standard deviation 7 Table 2 Highlights of the 'Weight" of Foreign Capital in the Hungarian Economy (in Percent), 1989-96 1989 1990 1991 1992 1993 1994 1995 1996 Share of foreign firms in total investment 11 18 30 n.a 49 59 62 62 Share of foreign firms in total net sales 5 II 17 24 33 39 45 47 Share of foreign firms in total exports 10 1'7 28 37 50 61 66 71 Share of foreign firms in employment n.a 8 11 15 20 24 33 39 Share of foreign firms in total wage fund 4 9 14 19 28 31 37 41 Share of foreign owned assets in total assets of manufacturing sectors 2 5 9 10 16 19 28 32 n.a not applicable. Note: Data may differ from those reported in national statistics. These are based on companies reporting to the KOPINT Tax Office, which does not cover all econiomic agents. Source: Derived from calculations by Hamar (1998). of 2 1). The coefficient was only 0.35 for Hungary.6 Although the manufacturing sector has receivecd the largest FDI inflows of $4.2 billion from 198c9 to 1996, accounting for 40 percent of the total foreign investment stock in 1996 (table 3), its share declined between 1992 and 1996. This was mainly because of opening of other sectors of the econ- omy to privatization, particularly public utilities ancL energy (the 1995 "big" privatization). These sec- tors attracted $1.5 billion in 1995, only slightly less than FDI in manufacturing ($1.7 billion). The structure of capital outlays alone does not give a full indication of foreign presence, how- ever. The last two columns of table 3 give information on shares of foreign-owned fir-Ms in total number of firms by sector. Overall, one in five firms had some form of foreign involvement in 1996. Their presence was particularly large in financial services, with around 60 percent of all firms hav- ing foreign ownership and 50 percent of assets owned by foreigners. Table 3 FDI by Sectors and the Share of Foreign Firms in Total Number of Firms by Sectors (1992 and 1996) FIDI stock, Numberfirms to FDI stock distribution foreign allfirms 1992 1996 1992 1996 1992 1996 Sector (millions of U.S. dollars) (percent) (percent) Agriculture 33 122 0.7 1.2 5 12 Fishing 0 1 0.0 0.0 5 15 Mining 81 121 1.7 1.1 33 32 Manufacturing 2,500 4,244 52.8 40.3 22 21 Electricity, gas, steam, water supply 32 1,490 0.7 14.1 9 11 Construction 199 381 4.2 3.6 13 11 W'holesale and retail trade, repair workshops 686 1,248 14.5 11.8 28 25 Hotels & restaurants 159 26]. 3.4 2.5 24 21 Transport, storage & communication 85 926 1.8 8.8 23 17 Financial intermediaries 484 952 10.2 9.0 18 61 Real estate, renting and leasing, other business activity 432 731 9.1 6.9 20 15 Other 46 63 1.0 0.6 21 12 Total 4,735 10,538 100.0 100.0 22 19 Note: Data may differ from those reported in national statistics. These are based on the set of companies, the data of which are made available by the tax office to the research institute Kopint. Source: Derived from calculations by Hamar (1998). Conversion from forints (FT) using the average exchange rate of $1 = Ff79 for 1992 and $1=FT152.6 for 1996 (taken from Vz,n Elkan 1998). S Chapter 3 Microeconomic Restructuring: The Role of Foreign Direct Investment Hungary owes its impressive economic performance during 1996-98 to the progress achieved in microeconomic restructuring. While gradualism characterized Hungary's approach to policy areas, including foreign trade and exchange rate regimes, radicalism was its trademark in deal- ing with microeconomic adjustment to the double shocks of the collapse of import demand in Council of Mutual Economic Assistance (CMEA) economies and the shift to a demand-constrained economy, to borrow apt terms fromJanos Kornai. Gradualism inflicted additional adjustment cost, whereas radicalism fully paid off albeit with a delay. Halpern and Wyplosz (1998, p. 8) note that "deep restructuring has been partly obscured by the fact that misguided macroeconomic policies allowed some firms and banks to delay adjustment to the new environment." However, even if macroeconomic policies were indeed misguided, they appear to have done little to discourage for- eign investors. ]Long before enterprises were privatized, enterprise managers in Hungary were allowed to oper- ate with little government control. In addition, while most of the industry assets were controlled by large state-owned enterprises, numerous small private firms were operating even in the 1960s. This kept the entrepreneurial culture alive, helped Hungarian enterprises (even state-owned) estab- lish links with foreign enterprises, and facilitated the transition to a market economy. 7 As a result, fiinrns began restructuring even before they were privatized, which probably explains why research shows that performance of privatized and state-owned firms differed less in Hungary than in other transition economies.8 Privatization and Foreign Direct Investment E.arly intellectual exchanges, as well as considerable experience accumulated over decades of exper- imenting with various forms of ownership under central planning, appear to have contributed to the choice of a particular privatization policy. Many argued that dispersed, passive owners-even private-would not manage enterprises better than the state had. As a consequence Hungar,y did no t fall into the trap of mass privatization, with preference given to the speed of property trans- fers over gains in the quality of corporate governance. Neither did it rely on selling a controlling sta'ke to insiders; this practice remained very limited.9 Hungary adopted the practice of case by case sales to the highest bidders and encouraged foreigners to participate in the process. The objec- tive was not only to tap foreign savings, although this was an important consideration in a highly indebted country, but above all to encourage transfer of know-how and best international busi- ness practice. While the privatization process was slow and often frustrating, corporate governance has become stable, and its quality has become-according to Torok (1998)-comparable to that in 'highly industrialized countries. The restructuring was deep and comprehensive, as the subsequent discussion shows. Table 4 shows that gross losses in industry rose alarmingly following the collapse of central planning, from 0.6 percent of GDP in 1988 to 14 percent in 1992.1° However, from 1992 onward losses decreased precipitously.'1 Railways, the post office and a few firms in the communications sector accounted 9 Table 4 Enterprise Losses (in Percent of GDP) 1988 1989 1990 1991 1992 1993 1994 1995 1996 Industry' Gross losses 0.6 1.4 2.6 8.4 14.2 10.1 7.2 3.1 -- Net profits 16.9 16.2 13.3 4.1 -6.1 -3.4 0.1 2.2 - Limited industry2 Gross losses - - - - 6.7 4.0 3.3 3.6 2.7 Net profits - - - - -3.9 -0.7 0.4 1.2 2.8 Manufacturing Gross losses - - - - 5.6 3.3 2.3 1.8 1.6 Net profits - - - - -3.5 -0.7 0.7 2.6 3.3 -. Not available. 1. Includes mining (ISIC category "C"), manufacturing ("D"), electricity, gas and other utilities ("E"), construction (F"F), and transport and communication ("I"). 2. Excludes transport and communication (category "I", which has railways and the postal system) . Source: World Bank (1999) for a large proportion of losses after 1992; when linmiting the data to manufacturing, the gross loss- es decrease. Nevertheless, the same pattern prevails in all cases: the situation improved steadily from 1992 on. Beginning in 1995 net profits exceeded gross losses in manufacturing activity. Another sign of restructuring is given by the radlical changes in the size of enterprises that can be observed since the mid 1980s. Figure 1 depicts the rapid decrease in the number of large enter- prises and increase in the number of enterprises with less than 50 employees. While in 1938 around 76 percent of enterprises employed less than 50 wzorkers, this proportion fell to less than 5 per- cent in 1977, grew to 16 percent in 1987, and reached the 1938 level of 76 percent in 1991. This transformation reversed, almost with the stroke of a pen, a phenomenon that nearly 40 years of central planning had created. Although small has become beautiful again, the shift away from large socialist giants had actt- ally begun under socialism. The difference is evern more pronounced than data portrayed in fig- ure 1 suggest. Since there are no data available on the number of firms employing less than 20 people for 1967 and 1987 and above 100 or 500 people in the 1990s, we have drawn the line at the 50-employees level. However, enterprises employing less than 20 people accounted for 53 pe:r- cent of all enterprises in 1938, 58 percent in 19911, and 88 percent in 1997. In addition, the per- centage of large enterprises employing more than 500 people rose from 3 percent in 1938 to 11 percent in 1949 and 68 percent in 1967, and had fallen to 22 percent in 1987. Thus, some restruc- turing had already started under central planning, but it gained real momentum in the 1990s. To what extent was the pace and depth of restructuring influenced by the type of ownership? An analysis of data on manufacturing firms as reported to Hungary's tax office sheds some light on this question. The database-made available by Hungary's statistical office-covers the peri- od from 1992 to 1997 and contains information on firms divided into four groups according to ownership: wholly foreign owned, firms with foreign equity above 10 percent (but less than 100 percent, locally-owned private firms, and state-owned enterprises (SOEs). Two sets of grouped daLta have been constructed-a "forward-looking" set and a "backward-looking" set. Each helps to ana- lyze different phenomena. In the "forward-looking" set, firms are grouped according to their own- ership status in 1992 and remain in this ownership category over time even if ownership status sub- 10( Figume 1 Manufacturing Enterprises by Number of Employees Before and After the Collapse of Socialism (in Percent) (perent) 100- 80- 60- 93.8 r= 0-50 8/ 49.6 -W~~~~~~~~~~ above 20- 50 _ _ _ _ _ _ _ _ _5 8 _ _ _ _ _ _ _ _ Capitalism Early Mature Collapsing Early Back to (1938) socialism socialism socialism capitalism capitalism (1949) (1967) (1987) (1991) (1997) No16: The total number of enterprises was 3,911 in 1938, 1,632 in 1949, 807 in 1967, 1,043 in 1987, 12,128 in 1991, and 37,888 in 1997 (see Toth 1998). Source: Derived from data in Toth (1998). secluently changes. Thus, if the number of enterprises in each particular group declines over time, it hias to be the result of bankruptcy, liquidation, or merger. In the "backward-looking" set, firms are grouped according to their ownership status in the final year, 1997, and are placed in that categor-y for earlier years. In this case, variation in the number of firms over time is due to the creation of new firms. The database covers practically all firms in the manufacturing sector and indicates massive changes. In 1992 the databaseL included about 12 thousand firms; the number increased to near- ly 20 thousand in 1997. Chankges in the population of firms over time resulted from mergers or liquidation (approximately 4.7 thousand enterprises), as well as from creation of new enterpris- es (mnore than 12 thousand). The shift was unidirectional-from SOEs to the private sector. The number of SOEs fell from 1,3"60 in 1992 (table 5) to 146 in 1997 (table 6). The number of state-owned firms fell either as result of mergers or liquidati.ons (817 firms) or privatization (397). Since not a single firm was nationalized and 59 SOEs survived intact between 1992 and 1997, one may conclude that 87 emerged as a result of reorgan-ization. In the private domestic manufacturing sector, almost three thousand enterprises were liquidated or merged with others. At the same time, more than 10 thou- sanid firmns were newly created. Firms with foreign participation increased in number from 2.6 thou- san-d to almost 4 thousand 11 Table 5 Forward-Looking Set 1992-97 (The Same Firms are Followed Over lime; Ownership Category orresponds to That in 1992) 1 00 % Foreign Mininum 10% of controlled forig-n equity State owned Private domestic 1992 1997 1992 1997 1992 1997 1992 1997 Number of firms 781 542 1,789 1,340 1,360 543 7,721 4,866 Valueadded peremployee 1.9 2.97 1.27 2.6 1.8 2.1 2.3 4.37 Sales per firrm (HUF million; PPI adjusted) 179.0 571.8 220.3 441.3 744.5 1,242.6 37.3 46.6 Assets per firm (HUF million: nominal value) 209.5 831.2 288.1 792.0 877.7 2,389.7 30.0 60.0 Cash flow to assets (percent) 14.0 31.8 10.0 26.1 11.5 19.6 11.8 27.1 Cash flow to sales (percent) 16.4 19.8 13.0 20.1 13.6 16.1 9.5 15.0 Source: World Bank (1999). Table 6 Backward-Looking Set 1992-97 (The Same Firms are Followed Over Time; Ownership Category, Corresponds to That in 1997) 1 00 % Foreign Minimunm 10 % of controlled foreign equity State owned Pnivate domestic 1992 1997 1992 1997 1992 1997 1992 1997 Number of firms 662 1,735 1,018 2,182 59 146 5,606 15,751 Value added per employee 1.4 3.25 1.47 2.6 0.46 0.45 0.95 0.91 Sales per firm (HUF million; PPI adjusted) 297.7 470.3 612.E 490.4 336.3 378.4 61.4 53.2 Assets per firm (HUF million; nominal value) 378.2 736.9 835.6 957.0 493.5 661.0 52.1 74.0 Cash flow to assets (percent) 10.6 30.6 16.6 23.4 2.2 -0.4 12.8 17.9 Cash flow to sales (percent) 13.5 20.5 22.7 19.6 3.2 -0.3 10.9 10.7 Source: World Bank (1999). Enterprise Performance These changes had a direct impact on enterprise performance. Value added in the manufactur- ing sector increased in real terms by 40 percent between 1992 and 1997. Productivity measured in terms of value added per employee more than doubled and profitability almost tripled. The contribution of the private sector-and more importantly of enterprises with foreign ownI- ership-has been determinant. While in 1992, the public sector was the dominant source of value added in the manufacturing sector, its contribution fell to 1.4 percent in 1997 (table 7). In sharp contrast, the share of enterprises with foreign ownership (more than 10 percent of equity) rose to 67.5 percent in 1997. Foreign firms (both fully and partly owned) outperformed both locally-owned firms and remaining state-owned firms on all counts. In both fully and partly foreign-owned firms sales more than doubled, financial results improved, and firms invested heavily in new assets (table 5). For those which only became wholly or partially foreign-owned by the end of the period, improvement was equally noticeable, albeit more modest (table i5). This probably reflects an expected sequence of restructuring measures-first shedding excessive labor and cutting costs before investing in new 12 Table 7 Distribution of Value Added in Manufacturing by Types of Ownership, 1992 and 1997 (in Percent) rype of ownership 1992 1997 100 percent foreign 7.4 29.1 Minimum 10 percent foreign 20.3 38.4 State-owned 50.8 1.4 Private domestic 15.5 26.1 Other 6.0 5.1 Total 100 100 Source: See table 6. assets and expanding. At the end of the period, all indicators-cash flow to assets, cash flow to sales, assets and sales per finn, and value added per employee-are clearly superior in wholly or partially foreign owned firms (see table 6). Were there positive or negative spillovers from firms with foreign participation to private domestic firms? While this database does not allow full exploration of this question, it does not show any deterioration in the performance of private domestic firms. A large proportion of those firrms have been newly created (only one-third of the 1997 firms existed in 1992) and measures oi profitability improved. Thus, it seems that there were no negative spillovers-if anything these were positive. Impact on Performance: Employment, Productivity, and Wages The pivotal role of firms with foreign participation invites analysis of their impact on the labor m,arket. Do these firms createjobs? Do they have a positive impact on labor productivity? Do they create demand for highly skilled labor? The empirical evidence based on comparisons of employ- mLent patterns in domestic and foreign (both fully and partly foreign owned) firms suggest posi- tive answers to these questions. Restructuring in Hungary brought about substantial reallocation of labor. Between 1992 and 1997, total employment dec:lined by 37 percent in the manufacturing sector. This is the outcome of two factors working in opposite directions: a loss of 60 percent ofjobs due to downsizing, merg- er, or liquidation of enterprises existing in 1992, and a gain of 23 percent due to newly created jobs (table 8). This increase in employment was not merely the result of the expanding share of foreign-owned firms. A pattern is easily discernible from the aggregate behavior of firms that were foreign-owned in both 1992 and 1997; an initial shedding was followed by expansion in employ- ment once restructuring had been successfully completed. Within this overall picture, foreign-owned enterprises clearly had a positive impact, since they are responsible for 75 percent of newly createdjobs during this period. Those enterprises absorbed a significant proportion of the labor force released by state-owned enterprises. Employment in wholly or partially foreign-owned enterprises increased by 67 percent over the period. By 1997, it represented 55 percent of total employment in the manufacturing sector. Labor productivity also increased dramatically from 1992 to 1997 (table 9). As indicated earli- er, productivity measured in terms of real value added per employee more than doubled in the 13 Table 8 Job Losses and Job Gains in the Manufacturing Sector 1992-97 (in Thousands) Employment Change in Job losses due to Job gains due to in 1992 employment merger, liquidation establishment of Sector (in thousand) 1992-97 or downsizing new enterprises Total Manufacturing 577 -213 -344 +131 Foreign-owned enterprises (more than 10 percent equity) 119 +80 -18 +98 Source: See tables 5 and 6. manufacturing sector. The performance of firms with foreign participation combined with the increasing proportion of workers in those firms has been solely accountable for this increase. Labo:r productivity increased by 68 percent in firms with I 00 percent foreign ownership, and by 104 per- cent in those with at least 10 percent foreign ownership. For enterprises that had become 100 percent foreign-owned by 1997, productivity increased by 126 percent (see table 6). By contrast, labor productivity in enterprises remaining under pub- lic ownership as well as in domestic private firms, albeit in the latter to a much lesser extent, was lower in 1997 than in 1992. This does not reflect a deteriorating situation within privatized firms but rather shows that newly created domestic finms had relatively lower labor productivity than previously existing firms. Some of the discrepancies observed between domestic firms (private- or state-owned) and firms with foreign participation in terms of productivity can be attributed to the selection process dur- ing privatization. Investors, especially foreign, ten( to invest in firms that offer the highest poterL- tial. However, other factors play a determinant role. One of them is the quality of the labor force measured by its education and skills. Another is the high degree of complementarity that exists between skills and physical capital. Among skilled workers, younger employees are in particLu- larly high demand because of their greater capaci.ty to absorb new knowledge and adjust to new technologies. Available evidence does confirm that foreign firmns createjobs requiring higher skills than local- ly owned firms. Forinstance, research by Kertesi and K6116 (1999) reports thatforeign firms employ Table 9 Real Value Added Per Employee in Manufacturing by Types of Firm Ownership, 1992-97 Percent Distribution of employment change in labor Ownership type 1992 1997 productivity 1992-97 FDI 100 percent 4 21 +68.2 FDI 10percentormore 17 34 +104.3 State owned 66 7 -44.1 Domestic private 7 32 -19.9 Unknown 6 6 +104.4 Total 100 100 +121.3 Note: Value added deflated by industry price index. Source: Authors calculation using CSO data. 14 a higher proportion of workers with higher education (about 12 percent in 1996 compared to 7 percent in other types of firms). It also confirms that the share of young skilled workers in those enterprises has increased over time. Fazekas and K6ll6 (1998) also estimate that younger work- ers have a higher probability of being employed at a foreign firm within each occupational cate- gory listed in table 10. Education increases this probability in white-collar occupations and in some, but not all, manual categories. (Machine operators are a notable exception.) The workers heav- ily "overrepresented" in foreign firms are those with 3-10 years of work experience. As a result, it is no surprise to find that foreign enterprises pay higher wages than domestic firms. The differential is equal to one-third on average (table 10). It increases for higher-skilled posi- tions (that is, non-manual) and falls below 30 percent for low-skilled occupational groups. Overall, this analysis poin ts to a substantial transformation of the labor market and a rapid pace of restructuring in Hungary over the years of transition. Workers have left unprofitable sectors or firms and responded to new job and skill-enhancing opportunities. Foreign direct investment has undoubtedly played a major and positive role in this transformation. We find no evidence that MNCs have failed to offer wages matching gains in productivity or that they have increased dis- parities in income and wealth, as some observers have argued (Ellingstad 1997). The income inequality, as measured by the difference between the lowest and the highest decmile, increased in the 1990s, but it only moved to the levels of Western Europe.'2 Despite public fears to the con- trary, foreign-owned private firrms have significantly expanded employment opportunities (espe- cially for highly skilled laborj) once they initial restructuring was complete. This progress notwithstanding, Hungary still has a long way to go before bridging the gap with EU countries. Labor productivity in manufacturing was only about 30 percent of that in Italy or Spain in 1996. Since the employment decline has now slowed down, and with the changes in own- ership close to completion, maintaining the same pace of productivity gains may become increas- ingly difficult, albeit not unlikely. Table 10 Wage Advantages, of Employees at Foreign Firms (Over Employees at Domestic Firms) in Major Occupational Groups, 1995 (in Percent) Occupational group Wage differential, percent Non-manual Managers (without top managers) 166 Technicians 135 Executives 139 Office clerks 150 Manual Trade and catering occupatiorns 126 Textile, clothing workers 120 Engineering and metal workers 126 Machine operators 126 Other Porters, cleaners, guards 131 'Total 134 Source: Kertesi and K6116 (1999). 15 Chapiter 4 Foreign Direct Investment and Foreign Trade The unique feature of microeconomic restructuring of Hungarian industry is that it has been large- ly FDI-led. Hungary is the first among transition economies to experience FDI-driven industrial restructuring on such a scale. How has restructuring shaped Hungary's re-integration into inter- national markets, especially those of the EU? Because of the dominant role of FDI, answers to this question may provide some interesting insights into the role of foreign capital as a vehicle of integration. Export Dynamics The successful path of industrial restructuring in transition economies-as seen through the lens of export performance-has two stages. During the first stage, most exports come from firms with established links abroad and through redirection of exports from former CMEA markets (Kaminski 1993). In the second stage, sustainability of foreign trade and economic growth depends on facil- itating the entry of "second generation" firms-those that were newly established or successfully restructured. In the presence [of external disequilibria, weak export performance combined with little change in export baskets is a clear indication of the failure of industrial restructuring. Hungary's export performance in machinery and transport (Standard International Trade Classification SITC 7) during the second stage of restructuring offers evidence of impressive progress in industrial restructuring. During the first stage the increase in EU-directed exports caine from the redirection of these exports away from the former CMEA, especially the former Soviet Union (FSU). The FSU accounted in the late 1980s for around 40 percent of total Hungarian exports of machinery and transport equipment, whereas the EU accounted for 10 percent.13 The proportion was reversed by 1991 with the share of the EU in Hungarian exports of these prod- ucts increasing to 35 percent, and that of the FSU falling to 19 percent. The contraction of 20 per- cent in the value of machinery exports between 1988 and 1991 does not explain the change, as the value of EU-destined exports more than doubled over this period. In 1992 the share of the FSU fell further to 16 percent, while the value of total machinery exports was flat. Clearly not all exports were redirected, but some of them could be marketed in EU countries. Thus, Hungary seems to have successfully moved to the second stage of industrial restructur- ing. In fact, Hungary was quite successful in swiftly redirecting its exports from the CMEA during the first stage. Although between 1989 and 1992 the share of CMEA countries in total exports from Hungary fell from more than 50 percent to 20 percent, the value of total exports contracted only by around 10 percent. The 13 percent contraction in the volume of exports in 1993 was largely due to the combination of the fall of agricultural production and macroeconomic mismanage- ment. Reorientation (mostly redirection) of exports to Western markets (mainly the EU) allayed the shock of the CMEA collapse. In the process, however, the openness of the Hungarian econo- my has increased with the share of foreign trade in GDP-as measured by the ratio of the sum of exports and imports divided by two to the GDP--growing from 40 percent between 1990 and 1993 to 60 percent duringl996-97. ].6 Foreign-owned firrns have been the driving forces of Hungary's exports. Except in 1996, the value of their exports grew at double-digit rates (table 11). While in 1993 the value of total exports declined by 17 percent, exports of foreign-owned firms increased by 12 percent. The con- traction in total exports in 1993 was due to several factors, including bad weather, which was respon- sible for the fall in exports of agricultural products. The increase in exports in 1994 was exclu- sively due to growing exports of foreign-owned firms; their increase exceeded the increase in total exports by more than 15 percent. The shift to the seconcd stage, dominated by restructured "second generation" firms was in fact underway before 1993. Nlot surprisingly, it provides more evidence of the positive impact of FDI as well as of steady progress in restructuring through FDI. Exports from FDI firms were rapidly increasing, while these firom domestically owned sources were falling. They have accounted for all growth in Hungarian exports since 1989 (see figure 2). Table 11 Export Growth of Firms with Foreign Participation, 1989-97 1989 1990 1991 1992 1993 1994 1995 1996 1997 Total exports (billion of U.S. dollars) 9.6 9.6 10.2 10.7 8.9 10.7 12.9 13.1 15.9 Exports of firms with foreign participation (billions oflJ.S. dollars) 1.0 1.6 2.9 4.0 4.5 6.5 8.5 9.3 11.8 Annual percent change in lotal exports (in percent) 0 6 5 -17 20 21 2 21 Annual percent change in exports of foreign firms (in percent) 70 75 39 12 47 30 9 27 Source: Own calculations based on data from Hungarian Central Statistical Office and Hamar (1998). Figure 2 Exports of Firms with Foreign Participation, 1989-97 (billion of US dollars) 18 16 14 12 10 -w o 8 foreign| 6 _ . _ \ l _~~~~~~~~~~~~~~~~~~~~~-D Total| - _ _ - g ~~~~~~~~~~~~~~~~~~~exports l 4 1989 1990 1991 1992 1993 1994 1995 1996 1997 Soyuce: See table 11. 17 The focus on exports risks missing their major purpose, which is to generate the foreign cur- rency needed to service the international debt and assure imports. Hence, it is important to bear in mind that rapidly growing export earnings and inflows of foreign capital have allowed an increase in imports, providing higher quality products both for consumption and investment. The value o:EHungarian total imports increased from around $8 billion in 1989 to almost $10 billion in 1993 and to more than $18 billion in 1997. Without a dramatic expansion in exports driven by fir-Ms with foreign participation such an increase in imports would not be possible. Competitiveness in EU Markets The ultimate test of the quality of industrial restructuring is international competitiveness. This seems to have improved substantially, especially in tlhe case of firns with foreign participation. Except in 1996 when the rate of growth of exports in terms of value fell to 7 percent, the annual rates of growth from these firms were at high double-digit levels. Despite the appreciation of the forint, their value increased between 1993 and 1997 by 162 percent. (Total exports increased by 79 percent.) Hungary has become more specializecd in manufactures, with their share in total exports rising from 65 percent in 1989 to 80 percent in 1997. Although changes in shares in imports are only a crude measure of competitiveness, they nonetheless help assess whether Hungarian exporters outperformed those from other countries. ln EU markets Hungarian firms have overall done so. The share of products made in Hungary in EU outside imports (excluding trade among EU rnembers) increased each year-except in 1993-between 1989 and 1997. Hungary no longer seems to be the marginal supplier, highly vulnerable to vicissitudes in the business cycle, that it was in the 1980s. The number of markets in terms of four-digit SITC prod- uct categories where Hungarian exporters have had a share larger than 20 percent of external sUpplies of the EU fell from 12 in 1989 to 8 in 1993 and 1996, and increased to 13 in 1997. The number of product categories with a share between 10 and 20 percent increased from 15 to 17 and 23 over the same period. Between 1993 and 1997 the share of shipments in Hungarian exports to EU markets with a share below 5 percent in EU outside imports has fallen from 65 to 59 percent. The winners include mostly producers of machinery and transport equipment (SITC 7). For illustrative purpose, one may compare the four-digit SITC 7 items, which accounted for more than 10 percent of EU imports in 1989, with those in 1997. In 1989 there were only two SITC 7 items that met the 10-percent criterion: skin leather workirtg machinery (SITC 7172) and electric bulbs (SITC 7292). The share of leather machinery fell to 2 percent in 1996, and slightLy rebounded in 1997, while the share of electric bulbs in EU imports grew to 21 percent. The share of buses (SITC 7322) was 9.8 percent in 1989, and declined slightly to 7 percent in 1997. Three other four-digit items (SITC 7) with a share in EU- external imports exceeding 10 percent were also exported in 1989 but in tiny amounts. The share of piston engines (SITC 7115) in EU-external imports was 0.1 percent in 1989 and 27 percent in 1997; that of irtsulated wire cable was 1 percent and 15 per- cent respectively; and that of trailers (SITC 7333) increased from 3.5 percent to 18 percent. 18 Foreign Direct Investment and External Sector "Equilibrium:" The "Untold" Dimension of Success of the 1995 Stabilization Package An assessment of a firm's contribution to a trade deficit (or surplus), frequently used, derives from a protectionist credo thar exports are a virtue and imports are a sin."4 This is a wrong approach, albeit with a twist of irony as domestic market orientation has often been the result of protectionist import substitution policies. There is nothing inherently wrong about imports. On the contrary, they are crucial to the efficiency of import-competing sectors of the economy, raise standards of living, and increase a country's competitiveness in international markets. Macroeconomic and exchange rate policies shape the external equilibrium (or its absence) rather than amounts of for- eign currency used up by any particular firm. Even with the flawed criteria described above, Hungarian firms with foreign participation would probably satisfy economic nationalist thinking for the following reasons. First, foreign firms' share in exports has been. on the increase while their share of imports has grown at a slower pace. In 1993 foreign firms accounting for 38 percent of exports and 39 percent of imports were responsible for 40 percent of the trade balance deficit. Their respective shares increased in 1994 to 40 percent and 44 percent, and their contribution to the trade deficit rose to 56 percent (Hunya 1997). In 1996 the contribution of foreign-owned firms to the trade deficit dropped by 16 per- cent to around 40 percent, and in 1997 this share fell to less than 30 percent. Second, FDI-led microeconomic restructuring has contributed enormously to an impressive expansion in Hungarian. exports. This would hardly have been possible without expansion in imports. Imports of capital goods (excluding transportation equipment), whose share in imports increased from 29 percent in 1993 to 36 percent in 1997, have driven this expansion during the second phase. Export expansion driven by firms with foreign participation was crucial to successfully tackle what might have been a serious balance of payments crisis. In 1994 the symptoms of a serious macro- economic imbalance became apparent. The current account deficit was 10 percent of the GDP for the second year in a row, public debt exceeded 85 percent, and there was a rapid deteriora- tion in external borrowing conditions."5 Following the implementation of the stabilization pro- grain in March 1995, the macroeconomic adjustment was remarkable. By 1997 the net external debt in relation to GDP had dramatically declined and the current account deficit, financed almost entirely by foreign invest.ment, fell below three percent of GDP. Moreover, contrary to what one might expect, the economy-which began recovering only in 1994 after a four-year transforma- tional recession-continued growing. While the "1995 big pirivatization sale,""G which brought in $3.8 billion in foreign exchange rev- enue, facilitated external debt management, and cuts in government expenditure (as well as depre- ciation of forint) slashecl import growth, earlier microeconomic restructuring also explains this quick recovery. The contraction in domestic sales was more than offset by the expansion in man- ufactures exports, which was already underway in 1994. The GDP growth was lower during 1995- 96 than in 1994, but was not negative. In hindsight, it is now clear that export performance was bound to improve, barring major macroeconomic policy blunders. Hunya (1997) attributed it to several large manufacturing firms 19 t-hat finished their investment and turned to exports. Considering that by 1994 four years had elapsed with annual inflows of FDI in the range of i percent of GDP (accounting for around 20 to 25 percent of domestic investment outlays), one might expect that improvements in quality, efficiency, and productivity would take firm hold. This is exactly what has happened, once firms with foreign participation began to account for the bulk of exports-that is, around 1993 when their share exceeded 50 percent (figure 2). Furthermore, thanks in large part to foreign investments which appear to have compensated ;for the decline in domestic savings, there was no contraction in aggregate investment activity in Hungary. The share of gross investment in GDP, after taking a dive in 1992 to 16 percent, increased each year thereafter. Foreign investment amounted to 20 percent of GDP in 1993, 22 percent in 1994, 24 percent in 1995, 25 percent in 1995-96, and 27 percent of GDP in 1998. However, the ultimate test of whether this foreign investment will produce long-term growth is found in the kind of linkages established by local firms with MNCs. If the latter move only to exploit low cost labor, they are (a) unlikely to transfer important technological capabilities and (b) they may move out once labor cost goes up. A question to which we now turn is whether low unskilled labor cost has pulled FDI to Hungary. Integration into Global Networks While indirect effects related to restructuring and productivity spillovers are difficult to define, the contribution of foreign firms to integrating domestic production capacities into global net- works of production and distribution can easily be observed. First, taking into account that for- eign-owned firms account for almost three-fourths of Hungarian foreign trade turnover, and that this share has been rapidly increasing, these firms can be held largely accountable for a spectac- ular improvement in Hungarian export performance in EU markets (Kaminski 1999). Indeed, the performance of a number of product groups--top performers in 1996 but not in 1992 or 1989-can be easily traced to production activities of large MNCs. These groups include, above all, automotive parts and electronics. Second, while Hungarian statistics do not providle data on intra-firm trade, this trade must be quite significantjudging by the presence of large MNCs. There is abundant evidence suggesting a rapidly progressing incorporation of manufacturing capacities located in Hungary into global production networks, usually of large MNCs. The ].ist of top 100 Hungarian companies in 1997 includes many easily recognizable subsidiaries of MNCs.'7 Among the 20 largest firms in terms of sales there are at least six companies which are part of large MNCs. These include IBM Storage Products (second largest in sales); Volkswagen's Audi Hungaria Motor (sixth largest); General Motor's Opel Hungary (seventh largest); Philips (19th largest); General Electric Lightning (15th largest); andJapan's Magyar Suzuki (16th largest). Mvany companies are majority owned by MNCs (such as a white-goods producer Lehel Hutogepgyar, the 39th largest in sales, owned by Sweden's Electrolux). Data presented in table 12 shed additional lighlt on the emerging importance of links within global networks."8 It focuses on two networks-a motor vehicle network and an "information rev- olution" network. These accountedjointly in 1997 foir 35 percent of Hungarian EU-destined exports of manufactures and 23 percent of its manufactured. imports from the EU.'9 Note that these shares 20 Table 12 Trade with the EU in Selected Networks Involving Production Sharing, 1989, 1993, and 1997 Motor vehicle network' Information revolution networks2 1993 1997 1993 1997 Exports of final products (millions ofUS$) 105 1,813 62 1,271 Exports of parts 57 389 195 453 Imports of parts 178 1,372 348 947 Exports of final product minus imports of parts -72 441 -286 324 Memo: Imports of final products 636 672 21 73 Share of exports (final and parts) in EU-oriented exports of manufactures 3.90 22.70 9.22 12.11 Share of imports (final and parts) in imports of manufactures from the Et 12.10 17.90 4.11 5.32 Trade balance -652 158 -112 704 1. Final products are piston engines (SITC 7138), passenger motorvehicles (SITC 781), and road motorvehicles (SITC 784). Parts include piston enginre parts (SITC 7139) and motor vehicle parts (SITC 784). 2. Final products include TV receivers (SITC 761), radio receivers (SITC 762), sound recorders (SITC 763), and office machinery and data processing equipment (SITC 751). Parts are telecommunication parts (SITC 764) and office machinery parts (SITC 759). Source: Derived from EU foreign trade statistics as reported to the UN COMTRADE database. were 13 percent and 16 percent respectively in 1993, which testifies to a spectacular rise in impor- tance of this trade. The motor vehicle network includes motor vehicles, motor vehicle parts, piston engines, and piston engine parts. The establishment of a factory assembling piston engines by Volkswagen's Audi Hungaria Motor has shaped development of this network. The bulk of trade activity taking place around motor vehicle piston engines (that is, parts to these engines) relates to the Audi-VW net- work. Imports of parts expanded by a factor of 10 between 1993 and 1997, but exports of piston engines expanded in the same period by a factor of almost 20. The share of piston engines in EU-destined exports of manufactures increased to 13 percent, while the share of parts grew to 4 percent. Not all major investors are from the EU. Japan's Suzuki established an assembly plant in Hungary which started producing mid-size cars in 1992 (Tutak 1999). Hence, an interesting question is whether production links that emerged between Hungary and a non-EU country, (that is,Japan) are similar to those with EU firms. The analysis of trade in motor vehicle parts between Hungary andJapan (Suzuki has been in operation there since 1992) suggests that so far this has been a one-way operation; FDI has not triggered exports toJapan. Hungary's imports of parts (SITC 784) grew from $3 million in 1992 to $30 million in 1996 and $80 million in 1997. The value of Hungary's exports was below $1 mil- lion in 1997, and so was the value of Hungarian exports of motor vehicles ($0.6 million in 1997). On the other hand, probably because of restrictions in access to Hungarian markets, exports of 21 motor vehicles were relatively low;Japan exported only $85 million to Hungary in 1997. Thus, in contrast to the bulk of investment from the EU car manufacturers,Japanese involvement does not seem to be driven by the logic of production fragmentation. It has been so far a classic example of tariff-jumping type of investment. Another network that appears to have acquired importance is electronics, listed here under the heading of an "information revolution" network. This network consists of sound reproduc- ing and recording and telecommunications equipment, plus relevant office machinery equipment together with parts. It seems that subsidiaries of Ph-Lilips and IBM have mainly been responsible for the growth in trade of TV monitors and receivers, sound reproducing equipment, and radio broadcasting receivers. Note that the value of exports of these items increased almost 30-fold between 1993 and 1997 (their share in EU-destinecl exports of manufactures increased from 0.7 percent to 5 percent), while the value of imports of parts directly used in their production mere- ly doubled (their share in imports of manufactures grew from 4 percent to around 5 percent). These data certainly suggest the existence of very intensive exchanges within the networks, but they also appear to suggest that a growing share of parts may be supplied locally and that firms in Hungary have moved upward the production process. In addition, the growth in intra-industry trade provides another indication of Hungary's inte- gration into global networks. With MNCs acting as the main agent of globalization of the Hungarian economy, transition to competitive markets has been accompanied by expansion in intra-indus- try trade.20 Change in the level of intra-industry trade is a good indicator of the extent to which local firms are integrated into global networks of production and marketing. This trade-as mea- sured by the Grubbel-Lloyd index 2-seems to have expanded considerably. The value of this index, calculated for Hungary's trade with the EU, was already higher in 1994 than for some EU mem- bers (such as Finland, Greece, and Portugal).22 The consequences of active participation of Hungarian firms (whether foreign or locally owned) in global networks are both economic and political. Politically, these firms are economi- cally complementary rather than rivals. Zysman and Schwartz (1998) point out that this might sim- plify the task of establishing a stable and prosperous Europe. Aside from the standard economic effects of FDI, firms by becoming part of the "disintegrated" industry's value chain not only have access to technology but also enjoy more predictable demand for their products. Further, it is unlikely that they would have become competitive in world markets on such a large scale and in such a short time without foreign involvement. 22 Chapter 5 Foreign Direct Investment-Led Restructuring and Change in Factor Intensities: The "EU Perspective" An examination of Hungarian exports in terms of their factor intensities provides insights not only into foreign investors' perception of Hungary's relative factor endowments but also into factor characteristics of Hungary's microeconomic restructuring. Since the bulk of FDI went to priva- tized SOEs, factor intensities provide a good indication of what foreign investors perceived as strength in Hungary's endowment in factors of production. Has restructuring pushed the Hungarian economy towards specialization in unskilled labor intensive products, as many feared at the outset of transition, or has it actually resulted in the expansion of products at a higher end of the value-added spectrum? Furthermore, an examination of change in exports-driven almost entirely by firms with foreign participation (see chapter 4)-in terms of factor intensities can con- firm or reject our earlier finding about foreign firms employing highly skilled labor. The shift towards human-capital-intensive products would provide strong evidence that this has been indeed the case. The dominance of FDI firms in Hungarian exportsjustifies looking at factor characteristics of restructuring through the lens of the export basket instead of examining domestic supply of goods. After all, there is no serious doubt that exports are competitive internationally, and they offer the best way to assess Hungary's position in the evolving global division of labor. The analysis focuses on EU-oriented export baskets for three reasons. First, the share of firms with foreign participatiorL in EU-oriented exports (80 percent) is significantly higher than that in exports to other markets. Furthermore, exports to the EU soared between 1993 and 1997, and foreign firms drove this expansion.23 Thus, one obtains a closer approximation to actual exports of firms with foreign participation, especially relevant in absence of data. Second, the bulk of FDI came from firms operatintg in the EU. Considering the empirical finding that affiliates' exports back to the parent country depends on differences in factor endowments between the home and host country (Markusen 1998), it provides a firmer ground for the analysis of the role of factors endowments in foreign investors' decisions. To examine factor intensities we identify four commodity groups that reflect their relative fac- tor intensities.24 These groups are natural resource-intensive products; unskilled labor-intensive products; technology-intensive products; and human capital-intensive products. The first two groups represent lines of production characterized by low value added, high natural resource-intensity, and simple technologies. For less developed countries, such products account for a dominant share of exports. The change in the composition of Hungarian EU-directed exports corroborates our earlier hypothesis about the time profile of two stages of industrial restructuring, as depicted in export performance. As can be seen from data in table 13, the share of unskilled labor-intensive prod- ucts reached its peak level in 1993-the cutting year of the two stages. Note also that in 1993 the share of FDI firms in total exports reached 50 percent. Simultaneously, the share of human cap- ital-intensive products seems to have substantially increased during 1994-95 (the beginning of the second phase) and again in 1997. 23 'fable 13 The Composition of Hungarian Exports to the EU According to Factor intensities, 1989-97 (in Percent) Relativefactor intensity groups 1989 1990 1991 1992 1993 A 1994 1995 1996 1997 B Natural resource intensive 47 43 39 34 32 67 29 25 22 17 57 Unskilled labor intensive 19 21 23 25 27 141 23 19 19 16 74 Technology intensive 19 21 23 23 25 131 29 35 37 45 153 Human capital intensive 13 14 13 16 15 117 17 19 20 22 131 Notes:A-Index, 1993 (1989=100). B-Index, 1997 (1993=100). Source: Derived from the UN COMTRADE database as reported by the EU. The relative decline in unskilled labor-intensive exports from 1993 has more than a token mean- ing. Given the abundance of high-skilled labor relative to Hungary's GDP per capita, one would expect dominance of skilled labor-intensive products in Hungary's exports. But from 1989 to 1993 unskilled labor-intensive rather human capital-intensive products expanded faster. This situation changed only with a switch to a second stage of industrial restructuring, characterized by the dom- inance of "second generation" firms. It appears that second generation firms have selected products that are mostly human capital and technology intensive.25 Technology-intensive products registered the fastest export growth to EU markets among relative factor intensity groups. Their value increased from $1.5 billion in 1993 to $5.9 billion in 1997 and their share in total Hungaiian exports almost doubled. Affiliates of MNCs have been responsible for this expansion; the driving force in Hungarian exports has been machinery and transport equipment (SITC 71-73), completely dominated by MNCs. Their share in total EU-directed exports increased from 12 percent in 1989 to 18 percent in 1992 and to 48 percent in 1997. While between 1989 and 1992 the value of these exports increased by 174 per- cent, theirvalue grew by 444 percent during 1993-9,7. The expansion in technology-intensive prod- ucts demonstrates that Hungary benefited from transfer of knowledge capital usually associated with MNCs. The comparison of export structure in terms of factor intensities with that of imports from the EU points to the increasing convergence of the two baskets (table 14). While in 1989 Hungary exported mainly natural resource-intensive products and imported technology-intensive products, the share of technology-intensive products in its EU exports was higher than in EU imports in 1997. Note also the closing gap in trade balance in technology and human capital-intensive products. Calculations of Hungary's Export Specialization (ES) indices in EU markets confirm a signifi- cant shift in specialization.26 While technology-intensive products and human capital-intensive products were initially at a comparative trade disadvantage, their standing has been subsequent- ly reversed. The ES index of human capital-intensive products exceeded unity first in 1990, and between 1992 and 1997 increased from 1.06 to 1.46. Technology-intensive products have record- ed even more impressive gains, albeit from a lower base. The value of the ES index rose from 0.61 to 1.16 from 1989 to 1993 and their share of EU external imports also quadrupled. On the other hand, exporters of natural resource-intensive products have lost comparative advantage in these markets, while that of unskilled labor-intensive products has been on the decline. The ES indices of unskilled labor were increasing during 1989-93 but subsequently fell. Hungary's share, however, in EU imports of these products was growing until 1996. Unskilled labor 24 had the highest share in EU imports until 1996. In 1997, however, human capital-intensive prod- ucts topped the list of best performers in that sector. While further research is needed to assess the stability and technological potential of established external linkages, the discussed change in Hungary's EU-oriented export basket in terms of fac- tor intensities suggests that low skills and low wages do not epitomize FDI in Hungary. On the con- trary, the dramatic shift towards human capital- and technology-intensive products points to the movement up the value-added production chain. A recent study of price/quality gaps of Central European producers seems to confirm this observation. Burgstaller and Landesmann (1999) find that Hungary was one of the fastest in closing the quality gap (as measured in relation to prices per kilogram charged in EU imports) in engineering industries (which produce, for instance, cap- ital equipment, office machinery, and computers). Table 14 Composition of Exports and Imports from the EU in Terms of Factor Intensities, 1989, 1993, and 1997 (in Percent) Composition of Difference compared imports to exports Memo Trade balance as Commodity SITC 4 1989 1993 1997 1989 1993 1997 percent of exports Natural resource products 13.9 14.3 10.6 34.1 17.7 6.2 67.8 41.8 31.4 Unskilled labor products 12.9 18.0 13.6 6.3 8.9 2.3 25.2 13.1 7.0 Technology products 48.4 39.3 44.9 -28.8 -13.7 0.4 -174.8 -99.5 -7.5 Human capital products 24.8 28.3 30.9 -11.6 -12.9 -8.8 -109.0 -139.2 -51.9 All goods 100.0 100.0 100.0 0.0 0.0 0.0 -11.2 -29.9 -8.4 Source: See table 12. 25 Chapteir 6 Has Hungary Become a Dual Economy? Hlas Hungary become a dual economy-one domestic and inefficient and another one modern, largely foreign owned, and decoupled from the domrrestic economy-as a result of massive inflows of FDI? The preceding analysis finds no grounds for describing Hungary as a dual economy wi th an impoverished and neglected sector operating alcngside a modernizing sector.27 Advocates of this view may find some support for their thesis in the fact that foreign firms have been a mod- ernizing force of restructuring. But this does not necessarily imply that domestic firms are not inter- nationally competitive. Nor should it suggest that foreign firms are an enclave (or enclaves). Most sectors, including many producing nontraclables, have been open to external competi- tion from imports. The foreign trade regime compared to Hungary's major trading partners is very liberal. Industrial imports from preferential paxrtners-mainly but not only the EU-are not subject to tariff and nontariff barriers. Consequently, most markets for manufactures are almost as competitive as world markets. Domestic firms account for more than half of total net sales, and one-third of total exports. Better familiarity with lo zal conditions seems to provide an explana- tion (though not a complete one) why locally owned firms tend to be less export oriented than finns with foreign participation are. Thus, it appears that domestically owned firms producing trad- ables remain internationally competitive for the most part, although they are on average involved in lower value-added activity. Second, while firms with foreign participation ten d to perform better than those without it, this f act alone does not validate an observation that FD] has contributed to the emergence of a dual, deformed economy. There is not one branch or se.:tor of the economy that has not been perne- trated by foreign capital. Most, if not all, major firms operating in all sectors of the economy have had infusion of foreign capital. Aside from industry, their presence is particularly large in finan- cial services, with around 60 percent of all firms having foreign ownership and 50 percent of assets owned by foreigners. Under these circumstances, the distinction between domestically owned finns and foreign-owned firms seems to have lost much of its relevance. Overall, one in five firms had some form of foreign involvement in 1996. But have foreign-owned firms become an integral part of the Hungarian economy? Has there been any progress in terms of industrial-sector FDI firms expanding backward (supply) and for- ward (demand) linkages? Considering their huge presence these might seem the wrong questions to ask. It is certainly possible that most firms wvith foreign participation are simply affiliates of their respective MNCs, integrated into their global production and distribution networks with no links ,with each other. However, it is also possible that a network expands domestically through acqui- sition of property rights or thanks to shifts to local suppliers. Furthermore, many outside suppli- ers may have moved their operations to Hungary tc supply MNCs' affiliates starting their opera- -ions there. These scenarios remain hypothetical, since to our knowledge there have been no empir- ical studies of the integration of foreign-owned firras in the Hungarian economy. Dualism is often an unintended consequence of government's attempts to use foreign trade policy tools to attractFDI. The danger of creating a d istorted dual economy then emerges in rela- tion to sectors protected by tariffs or nontariff barriers. This may be the case of agriculture or food 26 processing industry in Hungary, but probably not of other sectors. Since the share of foreign firms in exports far exceeds their corresponding share in domestic sales, the barrier-jumping hypoth- esis would fall well short of explaining the bulk of FDI inflows. Other features of the Hungarian economic regime and policies appear to have attracted FDI. It is true that the Hungarian foreign trade policy may have weakened the development of back- ward linkages by providing an extra incentive to firms to move to a foreign trade zone (FTZ). Foreign investors often choose a FTZ in order to avoid dealing with customs administration and exposure to uncertainties in foreign trade policy. The potential negative impact of export zones on domestic integration of firms is considerable. Firms operating in a FTZ are outside the cus- toms territory. They operate in enclaves, and are devoid of any incentive to develop backward and forward linkages with the rest of the economy. The reliance on a FTZ usually exacerbates tendencies towards a deformed dual economy.28 Both output and expo rts of firms located in a FTZ grew faster than those of firms located inside the Hungarian customs territory. The value of output of FrZ firms increased 350 percent between 1994 and 1997, whereas that of non-FIZ firms increased by 61 percent. The difference in export expansion was much even larger-a 5.5 times increase against a 1.9 times increase. In 1997 the value of FIZ exports rose by 76.6 percent. Hence, the most dynamic sector of the Hungarian econ- omy may have potentially weak internal links. Firms in FI7Zs not only grow faster but also seem to make more intensive use of knowledge cap- ital. For example, electronic products accounted for about 77 percent of investments (Szanyi 1998). Exports from FTZs accounted for 54 percent of total engineering exports in 1997. Between 1995 and 1997 the share of FIZ-located firms in total exports increased from 11 percent in 1995 to and 26 percent in 1997 (table 15). In consequence, contribution of FIZs to the diffusion of import- ed efficiency may be lower than expected. Another danger inheirent in a FIZ is that firms investing there may move out once there is a change in circumstances that had initially attracted them. With the termination of various extra charges on imports (such as surcharge and customs fees) introduced in the 1995 stabilization pro- gram and liberalization o:f market access as stipulated in international agreements, FIZs may indeed loose their appeal. Another potential concern relates to the termination of the drawback system. InJuly 1997 Hungary became a member of the Pan-European Cumulation system, which is based on the principle of no drawback.29 The absence of a customs drawback may affect FDI, because exporters using inputs from outside the Pan-European Cumulation territory can no longer obtain refunds on duties paid on these inputs. In other words, they no longer have free-trade access to EU markets, which accoanted for 94 percent of their foreign sales in 1997 (Hamar 1998). Table 15 Firms Operating in FTZs in Hungarian Foreign Trade, 1995-97 (in Percent) 1995 1996 1997 Share in total exports (in percent) 11.0 19.1 26.4 Share in total imports (in percent) 8.0 13.8 19.1 Exports (billion of US dollars) 1.4 2.5 4.2 Imports (billion of US dollars) 1.2 2.2 3.6 Imports to exports (in percent) 87.39 89.35 85.71 Source: Own calculations from data in Hamar (1998) and Newsletter, Vol. 10. No. 1/1988, Ministry of Trade, Industry and Tourism, Budapest. 27 The experience with FTZs in other countries suggests that liberalization in the rest of the econ- omy help in developing strong domestic linkages. Compliance with the EU acquis communautaire implies the movement towards a transparent and liberal economic regime as well as improved administrative procedures. This in turn may help to weaken the incentive for foreign investors to move their production facilities elsewhere, and enhan ce their incorporation into a local economy. 28 Chapter 7 Conclusion Hungary in transition from central planning provides rich empirical evidence that FDI is the best ally for development and that liberalization of foreign trade and investment regimes, combined with privatization emphasizing improvement in corporate governance, is the best way to attract quality FDI. While there were some unique factors that cannot be easily reproduced elsewhere, Hungary's success in attracting FDI has broader policy lessons. Hungary has clearly benefited from the EU factor; the Association Agreements have not only opened EU markets to manufactures but have also compelled Hun,gary to liberalize its own foreign trade regime. Commitment to liberal reforms has also been a very important factor in attracting FDI. Since the collapse of central plan- ning in Central and Eastern Europe, Hungary has consistently been among the most advanced reformers in the region. Its privatization program has put emphasis on improvement in corpo- rate governance rather than provenance of investors. It was the first transition economy to open the so-called strategic sectors to foreigners. This approach has clearly paid off in terms of improved microeconomic efficiency and growth. The case of a successful Hungarian industrial readjustment demonstrates that FDI is the best vehicle for integration into the second global economy (in contrast to the first global economy at the end of the nineteenth century). FDI-led microeconomic restructuring has resulted in the emergence of a highly competitive industrial sector tightly integrated into the EU markets. FDI firms have been behind th e current expansion of exports, having a strong positive impact on growth and not the reverse. This strong positive impact seems to rest upon a solid foundation. The evidence of the positive impact of FDI firms is indeed overwhelming. It should put to rest fears that FDI only exacerbates inequality and does little to reduce poverty. First, the impressive economic growth performance Hungary has experienced since 1994 would have been impossi- ble without FDI-led microeconomic restructuring assisted by macroeconomic stabilization. Export expansion has driven Hungary's GDP growth since 1993, and the major engines of this growth have been firms with fore ign participation. This also explains the success of the Hungarian econ- omy relative to other Central European economies in generatingjobs. Overall, microeconomic restructuring has resulted in more economic dynamism and beneficial spillovers. Second, FDI firms have had a positive impact on the balance of payments. Thanks to their export earnings as well as inflows of foreign investment, Hungary was able to avoid a possibly very grave balance of payments crisis in 1995. Foreign-owned firms have been heavily export oriented. In addition, Hungary was saved immeasurable quantities of foreign exchange through the import- substitution effect of foreign investment in local industries. Third, contrary to earlier fears, FDI firms have created employment opportunities, especially for highly skilled labor. By 1997, wholly or partially owned firms represented more than half of total employment in the manufacturing sector. During the transition, they were responsible for 75 percent of newly createdjobs. Foreign firms have also set higher standards of pay and require- ments, which in turn has set a valuable example for labor and employers throughout the economy. Fourth, the FDI-driven process of industrial restructuring has produced internationally com- petitive industrial capacities and integrated the Hungarian economy into the largest and the 29 fastest-growing economy-the world market. Firms with foreign participation have contributed 0o a rapid closing of the initial gap (that is, at the outset of transition to market economy in 1989) between the potential of Hungary in terms of its factor endowments and its performance. The natural resource-intensive and unskilled labor-intensive products that dominated Hungary's 1989 ELf-destined export basket were a symptom of the inability of the Hungarian economic regime lander central planning to obtain full performance from a very important resource-human cap- .ital. While during the first phase unskilled labor-intensive products drove the growth in EU-des- tined exports, technology-intensive and human capital-intensive products recorded the fastest growth in the second phase of economic restructuring. Shift from natural resource and unskilled labor-intensive products to technology and human capital-intensive products in EU-oriented exports suggests the ongoing integration at a higher end of a value-added spectrum. It also sug- gests that firms seem to have developed the capacity to move up the value-added production chain. Furthermore, trade between Hungary and the EU trade has become increasingly like trade among highly industrialized economies. Intra-industry commerce has grown rapidly, and the gap between exports and imports from the EU in terms of factor intensities has dramatically narrowed. Both baskets have become more alike, with a shift towards technology and human capital-inten- sive products. Fifth, rapid and recently accelerating growth of exports of parts and components suggests advanced integration of Hungarian firms into EU-wide (if not worldwide) distribution and pro- duction networks. Sixth, there is no evidence that FDI has created enclaves with little or no connection to the domestic economy. This is hardly surprising considering that firms with foreign participation are present in all sectors of the economy. 30 Notes 1. According to a very conservative estimate, global production sharing (that is, trade in parts and com- ponents) amounting to around $800 billion annually accounts for around 30 percent of world trade in manufactures. It has been growing faster over the last decade than trade in finished manufactures (Yeats 1998). 2. The exceptions are Es,onia and Slovenia, which became sovereign states in late 1991 and mid-1992 respectively. But even this delay does not account for the variation in FDI inflows. 3. Both the Czech Republic and Poland have also benefited from privatization-related FDI. As in Hungary, privatization-related deals accounted for 43 percent of total FDI in Poland from 1991 to 1995 (Hunya 1997). But the share of FDI in GDP was much lower. Although the the Czech Republic sold SPT Telecom to a foreign investor for $1.32 billion, bureaucratic hurdles and the structure of mass privatiza- tion have prevented other large investments. Poland is yet to open fully its "strategic" sectors (energy, utili- ties, and telecommunication) to foreign investors. 4. The largest annual sale of $3.8 billion was in 1995. (For details, see Hunya 1997). Foreign exchange revenues accrued in 1995 account for more than 50 percent of all foreign investment in privatization over 1991-97, and they surpassed their value accumulated over 1991-94. The share of privatization varied over time but has not fallen below 20 percent. Based on data from the State Privatization and Asset Management in van Elkan (1998). 5 It compares very favorably with the share of FDI in capital formation in Singapore and Malaysia, which had experiences the largest FDI inflows among ASEAN countries. The average share over 1985-95 was 41 and 32 percent respectively (Zysman and Schewartz 1998). 6. Calculated from data in Havlik (1999). 7. As mentionedl earlier, joint ventures with foreign partners were already allowed under central plan- ning. This allowed Hungarian units to begin integrating with operations abroad. 8. See Pohl, Anderson, Claessens, and Djankov (1997). The study is based on survey data of about 1,000 Hungarian firms from 1992 to 1995. 9. Although managers and employees could buy shares at a 5 to 10 percent discount, it is reported that there were fewer than 100 instances where they bought a majority of a firm's shares. See World Bank (1999). 10. In this table, enterprises reporting profits are separated from the others and losses of the remain- ing enterprises are scaled by GDP. 1. In this measure, firms reporting profits are separated from each year's sample of firms and the total losses of the remaining firms are scaled by GDP. 12. The difference (1:8) is about the same as in France. It is well below levels in most developing coun- tries and below the Russian figure of 1:12 (Csaba 1998a: 1387). 13. Calculations based on data reported by Hungary to the UN COMTRADE database. 14. This has been often voiced criticism of foreign firms in many countries including transition economies. Due to pent-up demand for consumption goods, which were neglected under central plan- ning, much FDI during the initial stages of the transition focused on the domestic market. But these cri- tiques ignore the fact that with liberalization of foreign trade and domestic currency convertibility, domes- tically produced products would replace more expensive imports. This in turn would increase purchasing power of consumers, create employment, and generate extra tax revenue. 15. Policy factors that ccintributed to the turnaround in the current account position were the exchange rate policy (a strong appreciation of domestic currency) as well as an "unduly lax monetary poli- cy (in 1993)" (Oblath 1997, p. 11). 16. It is called "big" because the total hard currency revenues from this program account for more than 50 percent of all foreign investment in privatization from 1991 to 1997 and they surpassed their value aggregated from 1991 to 1994. 31 17. See the top 100 list in The Wall StreetJournal Europe's Central European Economic Review (July & August 1998, Vol. VI, Number 6). Compiled by Dun & Bradstreet Hungaria Inc. 18. For a detailed discussion of issues involved in estimates of production sharing, see Kaminski and Ng '1999) 19. For a detailed analysis of product categories involved, see Kaminski and Ng (1999). 20. Except for Bulgaria, all Central European economies experienced an outburst of intra-industry trade following the collapse of central planning (Landesman 1997). 21. The index is the difference between unity and the quotient of the absolute difference between exports and imports of a given sector and the total of imports and exports for this sector. When the index equals zero, there is no intra-industry trade. 22. This value was 0.51 for Hungary; 0.48 for Finland; 0.27 for Greece; and 0.42 for Portugal. As for Central European countries, the index was highest for the Czech Republic (0.54) and Slovenia (0.56). Considering Hungary's lower GDP per capita, this suggests a very high level of intra-industry trade relative to Hungary's level of economic development. The index was calculated for trade with EU using 129 three- digit NACE sectors (Kierzkowski 1998). 23. Hungary is the second largest exporter (after Poland) among economies of the first EU-candidate group. Leaving aside Estonia's initially volatile reintegration into the EU markets, Hungary registered the highest growth rates from 1995 to 1997. It caught up with the Czech Republic in terms of value of exports in 1997, and has been a top reformer among those coun[ries (see the ranking in EBRD 1998). 24. For a discussion of methodological issues, see Karminski (1999) 25. This share is larger than that of technology-intensive products because some products from the group (SITC 71-73) are classified as human capital intensive. 26. A country's "revealed" comparative advantage (or export specialization) in a product "j" is defined as the ratio of the share of"j" in the country's exports to the share of the product 'j" in world trade. A value for this index below unity indicates a comparative disadvantage. If the index takes a value greater than unity, the country is considered to have a "revealed" comparative advantage in the product. In this particular case, Hungary has a revealed comparative advantage in a product if its export of that item as a share of its total exports exceeds the EU imports of the icem as a share of EU total imports. 27. Dualism characterizes many developing countries. Sectors identified usually include a large stag- nant agricultural sector and the small modern industrial sector. The linkages between the two are weak; growth in the industrial sector does not generate growth in the agricultural sector (Singer and Ansari 1982). 28. A FTZ's integration into the domestic economy hi.nges critically on government policies in the rest of the economy. "If the rest of the economy does not liberalize, the zone will stay an oasis and be limited in its contributions" (Madani 1999, p. 13). 29. The Pan-European Cumulation system, established at the request of the Copenhagen European Council (June 22-23, 1993), includes EU, EFTA, and CEFTA members as well as the Baltic States and Bulgaria. Thirty-one states are members. The Czech Republic, the Slovak Republic, Slovenia, Bulgaria, and Romaniajoined the system in March 1997. Estonia, Latvia, Lithuania, Hungary, and Polandjoined on July 1, 1997 (Nell 1997). The rationale for removing the drawback is simple. Producers selling their prod- ucts in their domestic market would face "unfair" competition from imports. The former would have to include customs payments in their cost, whereas the latter would be reimbursed for them. The principle of non-drawback does not apply on "outside" exports. 32 References Borszeki, Zsuzsa. 1998. The Hungarian Industry and the Challenge of the European Union. Budapest. World Bank background paper. Processed. Brenton, Paul, and Daniel Gros. 1997. "Trade Reorientation and Recovery in Transition Econornies." Oxford Review of Economic Policy 13(2). Burgstaller,Johan, and Michael Landesman. 1999. Trade Performance ofEast European Producers on EUMarkets: An Assessment of Product Quality. Research Report 255, The Vienna Institute for Comparative Economic Studies, April, Vienna. Claessens, Stijn, Daniel Oks, and Rosana Polastri. 1998. CapitalFlows to Central and Eastern Europe and Former Soviet Union. Washington, D.C.: The World Bank. Processed. Csaba, Laszlo. 1998b. "A Decade of Transformation in Hungarian Economic Policy: Dynamics, Constraints and Prospects." Europe-Asia Studies 50(8): 1381-91. Csaba, Laszlo. 1998. "Privatization and Restructuring: the Hungarian Sector Reform in Comparative Perspective." World Bank background paper. Washington, D.C. Djankov, Simeon, and Bernard Hoekman. 1998. "Foreign Investment and Productivity Growth in Czech E_nterprises." The World Bank Economic Review. Washington, D.C.: The World Bank. Forthcoming. European Bank for Reconstruction and Development (EBRD). 1998. Transition Report 1998. London: European Bank for Reconstruction and Development. Ellingstad, M. 1997. "The Maquiladora Syndrome: Central European Prospects." Europe-Asia Studies 49(1): 7-21. Elteto, Andrea. 1998. "Economic Performance of Foreign Investment Enterprises: Effects of FDI in Hungarv." Institute for World Economics working paper. Forthcoming. Fazekas K., Kertesi G., andJ. Kollo. 1997. "Regional Labour Market Differentials dur- ing the Transition." Budapest. World Bank, Background Paper. May. Processed. Feenstra, Robert C. 1998. "Integration of Trade and Disintegration of Production in the Global Economy."Journal of Economic Perspectives 12(4): 31-50. Garibaldi, Pietro, Nada Mora, Ratna Sahay, andJeromin Zettelmeyer. 1999. "What Moves Capital to Transition Economies?." Paper presented at the conference "A Decade of Transition: Achievements and Challenges." International Monetary Fund, Washington, D.C. February 1. Halpern, Laszlo, and Charles Wyplosz. 1988. "The Hidden Hungarian Miracle." In L. Halpern and Ch. Wyplosz, eds.,.Hungary: Towards a Market Economy. Cambridge: Cambridge University Press. Hamar,Judit. 1998. "FDI and its Effects on Industrial Stricture and External Competitiveness." Budapest, June. World Bank background paper. Processed. Harrison, Ann. 1996. "Determinants and Consequences of Foreign Investment in Three Developing Countries." In Mark Roberts andJames Tybouts, eds., Industrial Evolution in Developing Countries: Micro Patterns of Turnover, Productivity and Market Structutre. Oxford: Oxford University Press. 33 Havlik, Peter. 1999. "Trade and Cost Competitiveness of the Czech Republic, Hungary, Poland and Slovenia." The Vienna Institute for International Economic Studies, Vienna, March. Hooley, G., T. Cox, D. Shipley,J. Fahy,J. Beracs, and K. Kolos. 1996. "Foreign Direct Investment in Hungary: Resource Acquisition and Domestic Competitive Advantage." Journal of International Business Studies 27 (4): 683-709. Hunya, Gabor. 1998. "Integration of CEEC Manufacturing into European Corporate Structures via Direct Investment." Research Report 245, The Vienna Institute for Comparative Economic Studies, Vienna, May. Hunya, Gabor. 1997. "Foreign Direct Investment and its Effects in the Czech Republic, Hungary and Poland." Reprint Series No. 168,June. The Vienna Institute for International Economic Studies, Vienna. Kaminski, Bartlomiej and Francis Ng. 1999. "Central European Economies and Production Fragmentation: Participation in EU Global Networks." The World Bank, Washington D.C. Processed. Kaminski, Bartlomiej. 1999. "Hungary's Integration into European Union Markets. Production and Trade Restructuring." Policy Research Working Paper 2135. Development Research Group, The World Bank, Washington, D.C. Kaminski, Bartlomiej. 1993. "How the Market Transition Affected Export Performance in the Central European Economies." Policy Research Working Paper 1179, International Economics Department, The World Bank, Washington DC. Kertesi, Gabor, andJanos K6116. 1999. "The Revaluation of Human Capital in Hungary in 1986-1996." Institute of Economics, Hungarian Academy of Sciences, Budapest, January. Kierzkowski, Henryk. 1998. "Challenges and Globalization: Foreign Trade Restructuring of Transition Economies." Trhe World Trade Organization, Geneva, March. Processed. Lall, Sanjaya. 1992. "Technological Capabilities and Industrialization." The World Economy 20(6): 165-186. Madani, Dorsati. 1999. "A Review of the Role and Impact of Export Processing Zones." Forthcoming in Policy Research Series, Development Research Group, The World Bank, Washington D.C. Markusen,James R. 1998. "Multinational Firms, Location and Trade." The World Economy 21(6): 733-756. Martin, Roderick. 1998. "Central and Eastern Europe and the International Economy: The Limits to Globalization." Europe-Asia Studies 50(1): 7-26. Nell, Phillipe. G. 1996. "Extension of the European Union/EFTA Regional Trading Bloc to Central and Eastern Europe." World Competition 4. Oblath, G. 1997. "Capital Inflows to Hungary in 1995-1996. Composition, Effects and Policy Responses." Kopint-Datorg Discussion Papers 49 (December). Budapest: Kopint-Datrog. Pohl, Gerhard, Robert E. Anderson, Stijn Claessens, and Simeon Djankov. 1997. 34 "Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options." World Bank Technical Paper 368. Washington D.C.: World Bank. Roberts, MarkJ. andJames R. Tybout. 1997. What Makes Exports Boom? Directions in Development Series. Washington D.C.: The World Bank. Rojec, M. 1998. "Impact of Foreign Investment on Efficiency and Restructuring of Slovenia's Manufacturing Sector." University of Ljubljana, Slovenia. Processed. Sachs, Jeffrey. 1998. "International Economics: Unlocking the Mysteries of Globalization." Foreign Policy 97-11. Singer, Hans, and Javedl Ansari. 1982. Rich and Poor Countries. London: Allen & Unwin. Szanyi, M. 1998. "The Role of Foreign Direct Investment in Restructuring and Modernizing Transition Economies: An Overview of Literature on Hungary." Institute for WorlcL Economy Paper, Budapest. Forthcoming. Torok, Adam. 1998. "Corporate Governance in the Transition-The Case of Hungary: Do New Structures Help Create Efficient Ownership Control." In L. Halpern and Ch. Wyplosz, eds., Hungary: Towards a Market Economy. Cambridge: Cambridge University Press. Toth,Janos I. 1998. "Ownership Structure, Business Links and Performance in a Transforming Economy. The Case of Hungary." Budapest: Institute of Economics, Hungarian Academy of Sciences. Van Elkan, Rachel. 1998. "Privatization." Occasional Paper 159. International Monetary Fund, Washington D.C. February. Wang, Z.Q. and N. Swain. 1997. "Determinants of Inflow of Foreign Direct Investment in Hungary and China: Time-Series Approach." Journal of International Development 9(July-August): 695-726. World Bank. 1994. East Asia's Trade and Investment. Regional and Global Gains from Liberalization. Washington D.C. World Bank. 1997. The World Bank 1997 Private Sector Survey. http://www.worldbank.org/html/prdmg/grthweb/wdr97.htm World Bank. 1999. Hungary Country Economic Memorandum. Washington D.C. Yeats, AlexanderJ. 1998. 'Just How Big is Global Production Sharing?" Policy Research Working Paper 1871, Development Research Group, The World Bank, Washington D.C. Zysman, John and Andrew Schwartz. 1998. "Reunifying Europe in an Emerging World Economy: Econornic Heterogeneity, New Industrial Options, and Political Choices." Journal of Common Market Studies 36(9): 405-430. 35 Distributors of World Bank Group Publications Prices and credit terms vary trom CZECH REPUBLIC INDIA Eulyoo Publishing Co., Ltd. PERU SWEDEN country to country. Conoutt your USIS, NIS Prodejna Allied Publishers Ltd. 46-1, Susong-Dong Editorial Desarrollo SA Wennergren-Wiltiars AB local distrbutor hetore plcing an Havelkova 22 751 Mount Road Jongro-Gu Apartado 3824, Ica 242 OF. 106 P 0. Box 1305 order. 130 00 Prague 3 Madras - 600 002 Seoul Lima I S-171 25 Solna Tel: (420 2 24231486 Tel: (91 44) 852-3938 Tel: (822) 734-3515 Tel: (51 14) 285360 Tel: (46 8 705-97-50 ARGENTINA Fax: (420 2)2423 1114 Fax: (91 44) 852-0649 Fax: (622) 732-9154 Fax: (S1 t4) 286628 Fax: (46 8) 27-00-71 World Publcationt SA URL: http:/iwww.nis.cz/ INDONESIA LEBANON PHILIPPINES E-mail: mail@wwi.se Av. Cordoba 1677 1120 Ciudad de Btsenos Aires DENMARK Pt. Indira Limited Librairie do Liban International Booksource Center Inc. SWITZERLAND Tel: (54 t1 4815-3156 SamfundsLitteratur Jalan Bombudur20 PO. Box 11-9232 1127-A Antipolo St, Barangay, Librairie Payot Service Institutiorinel Fax: (5411(4815-8156 Rosenoerns Alte 11 P.O. Box 181 Beirut Venezuela C(tm)tes-de-Montbenon 30 E-mail: wpbooks@inlovia.com.ar DK-1970 Frederiksberg C Jakarta 10320 Tel: (961 9) 217 944 Makati City 1002 Lausanne Tel: (45 35) 351942 Tel: (6221) 390-4290 Fax: (9619) 217 434 Tel: (63 2) 8966501; 6505; 6507 Tel: (41 21) 341-3229 AUSTRALIA, FIJI, PAPUA NEW Fax: (45 35 357822 Fax: (62 21) 390-4289 E-mail: hsayegh@librairie-du- Fax: (63 2) 896 1741 Fax: (41 21) 341-3235 GUINEA, SOLOMON ISLANDS, URL: http://www.sl.cbs.dk IRAN liban.com.lb VANUATU, AND SAMiOAs ECUADOR Ketab Sara Co. Publishers l: Lb International Publishing Service EditionsTechniques 648 Whitehorse Road Libri Mundi Khaled Eslamboli Ave., 6th Street liban.com.b UL Piekna 3137 Ch. de Lacuez 41 Mitcham 3132, Victoria Librerialnternacional Delafrooz Alley No.8 MALAYSIA 00-677 Warzawa CH1607 Blonay Tel: (61) 3 9210 7777 P.0. Box 17-01-3029 PDO. Box 15745-733 UnIversity of Malaya Cooperative Tel: (46 2) 628-6089 Tel: (41 21() 943 2673 FaxPs: ( 3 92107766 Juan Leon Mera 651 Tehran 15117 B6okshop, Limited Fax: (462(621-7255 Pay: (41 2f) 433605 E-mail: service@dadirect.com.au Quito Tel: (9821 8717819; 8716104 PO. Box 1127 E-mail: books%ips@ikpatm.com.pl URL: htp//www.dad' irect.comau Tel: 93 2) 521-606: (593 2) 544- Fax: (98 21) 8712479 Jalan Pantai Baru URL: THAILAND p,ww. re.cm.u 185 E-mail: ketab-sara@neda,net.ir 59700 KuaLaLumpor http:/Awww.ipscg.wawplfips/export 306 Silom Road AUSTRIA Fax: (593 2) 604-209 Kowkab Publisbers Tel: (603) 756-50s POT0A ago 00 Gerold and Co. E-mail:librumulft;brimuridiom.ec KokbulsesFax: (603)5-42 PORTUGAL Bangkok 10500 Retold and Co. E-mail: lihrimol@Iirimnicr.c PD Boo 19575-51 1 Ps(6.) 755-4424 Livraria Pormoal Tel: (66 2(2336930-9 Weihburvgasse 26 E-mail: librimu2@librimundi.com.ec Tehras E-mail: umkoop@tm.neLmy Apartado 2661, Rua Do Carm Pus: (66 2) 237-6321 Tel: (43 1) 512-47 31-0 CODEU Tel: (98 21) 258-3723 MEXICD o 70-74 Pus: 431f5112-4i-31-29 Ruiz de Castilla 763, Edif. Extiocolor Fax: (9 2) 258-3723 INFOTEC 1200 Liubon TRINIDAD C TOBAGO URL: (hfp:/AvwwgemId.co/at.onlne Primer pio, Gf. #2 IRELAND Av. San Fernando No. 37 Tel: (1 347-4962 Qsits Cot. Toriollo Guerra Pus: (i( 4-06 Syoternatics Studies Ltd. BANGLADESH Tel/Pay: (693 2) 507-363: 253-891 Govomment Supplies Agency 146584Mico64 SL. Augustine Shopping Center Micro Industries Development E-mail: codeu@impsat.net.ec ioig an tSolathair 14050 Mexico,2800 Eastern Main Road, St Augustine Assistance Socieb, (MIDAS) ~~~4-5 Harcoort Road Tel: (626) 624-2800 EaTerinia Mai Robado, Wst Auguestn Assistance Society (MIDAS) EGYPT, ARAB REPUBLIC GE Dublin 2 Pus: (62 5)624-2822 ROMANIA Tiia oao etldv House 6, Road 16 AAbaDitiuinAec Te:(3161311E-mail: infsotec@rn.net.rnur Compani Do Librarii BLucuresti S.A A. :(6 6586 Dhanmn R (MrDA Al Galaa Street FPs (36 1)475-2670 URL: hbp://rtn.net.mx Sr. Lips ani no. 26, sector3 E-mail: tob e@trinidad.net Teh:ko 1289242 Cairn ISRAEL Mundi-Prensa Mexico S.A. de GCV. Bucharest Fax: (880 2) 813118 Tel: (202 578-6083 Yozmot Literatuec/Rio Panuco, 141-Coonia Tel: (40 1? 313 9645 UGANDA Pus: (28 )) 676-6633 P0O. Boo 66055 Cuauhtemc us. 4 ~ 12, 00GutaLd BELGIUM The Middle Eas Observer 3 Yohunan Hiasandlar Street 06688 Mexico, DOP. RUSSIAN FEDERATION P0 Bus 9997, Madhoani Building Jean DOe Lnnoy 41, Shent Street Tel Aviv 61660 Tel: (52 61 533-668 Isdatelstvo Plot 16/4 Jinja Rd. An. do Roi 282Cio e:(72Pus:597Fa (52 614-67999a Kolpachni Pemoulok KampoI 1 068 Brussels Caio 7el(97 3Mosco97wa 40 31 Tel:2a(26641) 261 407 ToL: (322 638-5169 Tel: (20 2) 303-9732 Fax: (972) 5285-397 NEPAL oscow 1 Fax: (256 4 ) 251 468 PFa: (20 ) 393-9732 R.O.Y. Intemational Everest Media tntelnational Services Tel: (7 095 917 87 49 Pan, (32 5 38-8841 FILN ROY.o Intrntina JR Ltd. Faus.(7 09) 917 92659Emal uswfuad.o BRAZIL FINLUND P0 Boo 13856 GO Box 5443 ozimarin@glasnet.ru UNITED KINGDOM Publicacdes Tecnicas Internacionain Akoateeminen Kiriakuppa Tel Aviv 61130 Kathmandu SINGAPORE; TAIWAN, CHINA Microinto Ltd. Ltda. s P0. Sos 126 Tel: (672 3) 649 9469 Tel: (71)4606MAM ;BRNIP.O. BusS3, Omega Park, Altos, Rua 9PextGamide, 20 FIN-00101 Helsinki Fax 97 2 648 RUN9 S(7 d#O-0 41 2 Y A BUE R149oa Pio Gaulio, 209 PT-OOel sinki02 41 EPail: (972 ne3)i640 ne639 Pm: (977 I) 224 431 Hemisphere Publicahon Services Hampshire G23 2PG 81409 Sos Fouls, ~~~~ Tel: (3668(~121 4416 0-maL: hyiip neAviwiyn.nt.coi 41 Kallang Podding Road #04-03 England Tel: (66 111 259-6644u:(5011-45ULhl:/wwryn.oi NETHIERLANDS Golden WA heel Building Tel: (44 1420) 806840 Pus: (66 11(260-6898 E-mail: akahlaus@stockranvn.fi Paleshinian Authority/Middle East Do Lindeobosnfinternationaole Singapore 349316 Pus: (44 1420)689089 E-mail: postmaster@pti.usl.br URL: http:/Avww.akeateemineri.com ondes Information Services Publication byv.- Tel: (66) 741-5166 E-mail: wbank@microinfo.cosuk URL. http://www.ol.br FRANCE PO.B. 19502 Jerusalem PO. Box 202, 7480AE Haaksbergen Fax: (66) 742-9356 URL: http://wwwmicroinfo.co.uk CANADA Editions Eska; OBJ Tel: (972 2) 6271219 Tel: (31 531 574-0804 E-mail: ashgate@asianconnect.com The Stationery Office Renouf Publishing Co. Ltd. 48, rue Gay Lussac Pus (97 2)6271634 Pus: (31 63) 672-9296 SLVNA51 Nine Elms Lane 6369 Conotek Road 758065 Paris ITL,LIEIE-mail: lindeboo@worldonline.nl SLOVELononNWIho OMwa, Onta(o KIJ 9To3URL: hrtp.f/wwwe.wor1donline.nl/-fin- GosPodaruk Tsootni4 P1ob8i3b84g Ottawa, Dotado K 1d. 93 F(33 542-39067 Licosa Commissionaria Sansoni SPA deo Gispo Fisnkulhng1 73-8242 Tel: (613) 745-26065u -i- Vi'a Deca Di Calubria, 1/1 deboo)Gra csta87382S Fax: (613 745-7660 GERMANY Casella Postale 552 NEWDZEALAND 1008Ljuban URL: hllp:/iwwwthe-stationery- E-mail: UNO-Verlag 50125 Pirenze EWSCD ZE ALt. Tel: (36661(133 6347;n132a1230 office.co.ukf order.dept@reoautbooks.com Poppelsdorler Allee 56 Tel: (3955) 645415 PrSat Ma Ltd. B9 4: (38661)133 80 30 VENEZUELA URL: liffp://svww.reunsgbnoks.corn 531165Sons Pus: (3966)641-267 New Market E-mail: repsnsekjggvestnik.si Tecni-Ciencia Libros, SA. CHINA Tel: (49 226 949020 E-mail: licaOtcc.it . Centre Cidad Comercial Tamoncs China Financial & Economic Pus: (49 220)217492 URL: hffp:/Amwwftnbcc.itAicosa Tecl:d64164-11 PerT single ,BOTSWAN Nivel C2, Caracas Publishing House URL: hotp:/Awww.uno-oerlag.dIe JAMAICA Pus: (64 4) 624-68067 Oxford University Press Soulhern Te:(82959547: 5036:30016 8, Do Ps Si Doug Jie E-mail: snsverlag@aol.com Ion Randle Publishers Ltd. Africa Fa:(8~ 5 5636 Beijing GHANA 206 DId Hope Road, Kingston 6 Oasis Official Vasco Boulevard, Goodwood ZAMBIA Tel: (8610( 6401-7365 Epp Books Services Tel: 876-927-2085 PO. Box 3627 PO. Box 12119, Ni City 7463 University Rookshop, University of Fax: (8610)6401-7365 PO. Box 44 Fax: 876-977-0243 Wellington Cape Town Zambia China Busk Import Centre TUC E-mail: Irpl@colis.com Tel: (64 4) 4991551 Tel: (27 21) 595 4400 Great East Road Campus P.O. Bus 202 Accra JAPAN Fax: (64 4) 499 1972 Fax: (27 21) 595 4430 PO. Box 32379 Beijing UoxTel: 223 21 778643 Eastem Book Service E-mail: oasis@actrbx.gen.nz E-mail: oxford@oup.co.za Lusaka Chinese Corporation {oF 223 217709 3-13 Hongo 3-chome, Bunkyo-ku URL: htpJ/mwww.oasisbooks.co.nzl For subscription orderS: Tel: (260 1) 252 576 oties Hum poanties for Promotion GREECE Tokyo 113 NGRAInternational Suhscripfion Service Pus: (260 1) 253 952 52, YoumPangitieTo Papasohriou S.A. Tel: (81 3()3610-0001 UNIvERsItyPesA m PDO. Bus 41096 ZIMBABWE Xuan Nei Do Jie g,3,toraaSrPs(13)68-84 , Three Crowns Buildinlg Jedcho Craighall Academic and Busboy Books (Pot.) Beijing 10682 Athens E-mail: Drders@svt-ebs.co.jp Pra Ml nnesburg 2024 Ltd. Tel: (8610660 72 494 Toel: (30 1) 364-1626 URL: Pibade ailBg59 Tel: (27 11) 880-1446 4 Conald Road, Graniteside FaP: (8610)66072494 Fax: (30 1) 364-8254 http://www.bekkoameorjp/-svt- Tel:(234 22)F41-1366 Pa: (271 0-6246 P0. Box567 COLOMBIA HAITI hs Fax (234 22 (41-2056 E-m isicoza Harate notuenlace Ltda. Culture Diffusion KENYA SPAIN TFl: 263 4 755035 Cartera 6 No. 61-21 5, Rue Capois Atrca Book Service (E.A.) Ltd. PAKISTAN Mundi-Prensa Libros, S.A. Pus: 2634781913 Apartado Aereo 3'1270 C.P 257 Quaran House, M1angano Street Mirza Book Agency Castello 37 Santand de Bogota, D.C. Port-au-Pdnce PO. Box 45245 65, Shahrah-e-Quaid-e-Azam 28001 Madrid Tel: (571 285-2798 Tel: (509)239260 Nairobi Lahore 54000 Tel: (3491)4 363700 FaP: (57 ) 285-2798 Fax: (509) 23 4858 Tel: (254 2)(223 641 Tel: (92 42 735 3601 Fax: (34 9) 5 753998 COTE D'IVOIRE HONG KONG, CHINA; MACAI FaxP (254 2)330 272 Fax: (92 42) 576 3714 E-mail: libreriadmundiprensa.eo Center d'Edition et de Diffusion Asia 2000 Ltd. L gacy Books UF~~SIL: ht1p:/Awww.mundiprensa.com/ Center dEdiP i01 D n Sales & Circulation Department Loetac Book Oxord University Press Mundi-Prensa Barcelona Atricaines (CEDA) Salesn&adircuTotwnsCepartmenteLCita,H391 04 B.P. 641 302 Seabird House Mezzanine 1 6Shargale Tawnl080 C anseldonCan39 Abidoan 04 22-26 Wyndham Street, Central PO. Box 68077 PO Box13033 0800988rc 492 Tel: (225 24 6510; 24 6511 Hong Kong, China Nairobi Karachi-75350 0880 (arcelon Fax 25 056 Tel: 2 230-1409 Te (254 2-33053, 221426 Tel 92 2 446307 Fax: (34 487-7659 Fax:(85) 2526-1107 Fax: (254) 2-330854, 561654 (922)44E-maP : barcelona(mundiprensa.es CYPRUS E-mail: sales@asla2000.comn.hk E-mail: Legacy~for-neL.comn Pus. (92 2)) 4647640 Emi:breoamnirnan Center10or Applied Research URL: http://Wwww,asa2000.coCm.mhk E-mall Le9acy@fomm-n m E-mail: ouppak@TheOffice.net SRI LANKA, THE MALDIVES Centerus Appliede Rsac SR:hp:/ eoi20cmhk KOREA, REPUBLIC OP Lake House Bookshop 6, Digenes Street, Engomi HUNGARY Dayang Books Trading Co. Pak Book Corporation 100, Sir Chittampalam Gardiner P6 O Box 2006 Euro Into Service International Division Aziz Chambers 21, Queen's Road Mawatha Nicosia Margitszgeti Europa Haz 783-20, Pangba Bon-Dong, Lahore Colombo 2 Tel: (357 2 59-0730 H-1138 Budapest Socho-ku Tel: (92 42(636 3222 636 0885 Tel: (64 1 32105 Fax: (357 2) 66-2051 Tel: (36 1) 350 80 24, 350 80 25 Seoul Fax: (92 42) 636 2328 Fax: (94 1) 432104 Fax: (36 ) 350 90 32 Tel: (82 2 536-9555 E-mail: pbc@brain.net.pk E-mail: LHL@sri.lanka.net E-mail: eurointo@Omail.matav.hu Fax: (02 2) 536-0025 E-mail: seamap@chollian.net Recent World Bank Technvical Papers (continued) No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Marino and Kemper, Insti tutional Frameworks in Successful Water Markets: Brazil, Spain, and Colorado, USA No. 428 C. Mark Blackden and Chitra Bhanu, Gender, Growth, and Poverty Reduction: Special Program of Assistance for Africa, 1998 Status Report on Poverty in Sub-Saharan Africa No. 4293 Gary McMahon, Jos6 Luis Evia, Alberto Pasc6-Font, and Jose Miguel Sanchez, An Environmental Study of Artisanal, Small, and Medium Mining in Bolivia, Chile, and Peru No. 430 Maria Dakolias, Court Peiformance around the World: A Comparative Perspective No. 431 Severin Kodderitzsch, Reforms in Albanian Agriculture: Assessing a Sector in Transition No. 432 Luiz Gabriel Azevedo, Musa Asad, and Larry D. Simpson, Management of Water Resources: Bulk Water Pricing in Brazil No. 433 Malcolm Rowat and Jose Astigarraga, Latin American Insolvency Systems: A Comparative Assessment No. 434 Csaba Csaki and John Nash, eds., Regional and International Trade Policy: Lessons for the EU Accession in the Rural Sector-World Bank'FAO Workshop, June 20-23, 1998 No. 435 lain Begg, EU Investment Grants Review No. 436 Roy Prosterman and Tim Hanstad, ed., Legal Impediments to Effective Rural Land Relations in Eastern Europe and Central Asia: A Comparative Perspective No. 437 Csaba Csaki, Michel Dabatisse, and Oskar Honisch, Food and Agriculture in the Czech Republic: From a "Velvet" Transition to the C'hallenges of EU Accession No. 438 George J. Borjas, Economic Research on the Determinants of Immigration: Lessonsfor the European Union No. 439 Mustapha Nabli, Financial Integration, Vulnerabilities to Crisis, and EU Accession in Five Central European Countries No. 440 Robert Bruce, Ioannis Kessides, and Lothar Kneifel, Overcoming Obstacles to Liberalization of the Telecom Sector in Estonia, Poland, the Czech Republic, Slovenia, and Hungary: An Overview of Key Policy Concerns and Potential Initiatives to Facilitate the Transition Process No. 441 Bartlomiej Kaminski, Hungary: Foreign Trade Issues in the Context of Accession to the EU No. 442 Bartlomiej Kaminski, The Role of Foreign Direct Investment and Trade Policy in Poland's Accession to the European Union No. 443 Luc Lecuit, John Elder, Christian Hurtado, Francois Rantrua, Kamal Siblini, and Maurizia Tovo, DeMIStifying MIS: Guidelines for Management Information Systems in Social Funds No. 444 Robert F. Townsend, Agricultural Incentives in Sub-Saharan Africa: Policy Challenges No. 445 Ian Hill, Forest Managemenlt in Nepal: Economics of Ecology No. 446 Gordon Hughes and Magda Lovei, Economic Reform and Environmental Performance in Transition Economies No. 447 R. Maria Saleth and Ariel Dinar, Evaluating Water Institutions and Water Sector Performance No. 4493 Keith Oblitas and J. Raymond Peter in association with Gautam Pingle, Halla M. Qaddumi, and Jayantha Perera, Transferring Irrigation Management to Farmers in Andhra Pradesh, India No. 450 Andres Rigo Sureda and Waleed Haider Malik, eds., Judicial Challenges in the New Millennium: Proceedings of the Second Summit of the Ibero-American Supreme Courts No. 45l World Bank, Privatization of the Power and Natural Gas Industries in Hungary and Kazakhstan No. 452 Lev Freinkman, Daniel Treisman, and Stephen Titov, Subnational Budgeting in Russia: Preempting a Potential Crisis No. 454 Gordon Hughes and Julia Bucknall, Poland: Complying with EU Environmental Legislature No. 455 Dale F. Gray, Assessment of Corporate Sector Value and Vulnerability: Links to Exchange Rate and Financial Crises No. 456 Salman M.A. Salman, ed., Groundwater: Legal and Policy Perspectives: Proceedings of a World Bank Seminar No. 45,7 Mary Canning, Peter Moock, and Timothy Heleniak, Reforming Education in the Regions of Russia No. 45'3 Zvi Lerman and Csaba Csaki, Ukraine: Review of Farm Restructuring Experiences No. 460 Gloria La Cava and Rafaella Y. Nanetti, Albania: Filling the Vulnerability Gap No. 463 Stephen Foster, John ChiLon, Marcus Moench, Franklin Cardy, and Manuel Schiffler, Groundwater in Rural Development: Facing the Challenges of Supply and Resource Sustainability ,mt THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. Telephone: 202-477-1234 Facsimile: 202-477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK Internet: wwxv.worldbank.org E-mail: books@worldbank.org I.3 ISBN 0-821 3-4594-X