Download Varieties of Capitalism in Central and Eastern Europe

Nina Bandelj
Department of Sociology
Princeton University
Varieties of Capitalism in Central and Eastern Europe
For presentation at the Society of Comparative Research
Graduate Student Retreat, May 9-10, 2003*
*
This write-up is a part of the last chapter of my dissertation Embedded Economies: Foreign Direct
Investment in Central and Eastern Europe. For context, I included the abstract of the dissertation in the
Appendix.
Two major processes of social change have been consequential during
the past decade: globalization and transition from state-socialism. Much has
been written and speculated about the complexity and significance of each of
these two transformations. It is surprising, however, that we know little
about how they shape each other. How are places undergoing social, economic
and political transformation affected by global flows of commodities, capital
and culture?
The point of departure in my dissertation, Embedded Economies:
Foreign Direct Investment in Central and Eastern Europe, is precisely the
intersection of the global and local transformations. I examine the
establishment and operation of foreign investment markets in the transition
countries of Central and Eastern Europe in the first decade after 1989.
Specifically, I analyze the variation in foreign direct investment (FDI) flows
and transactions over time, across and within countries, and by
organizational cases. 1 I argue that studying FDI means analyzing embedded
economies – examining how economic institutions are socially constructed
and how economic action, as a relational social process, is shaped by
networks, institutions, politics and culture.
Studying foreign direct investment is also fundamentally linked to
examining property transformation in post-socialist Europe and thus to an
Foreign direct investment (FDI) is investment made by a company in the investor country
into a foreign, host country. It can take a form of acquisition of already existing host firms or
establishment of new companies in the host country, referred to as greenfield investment.
FDI is a crucial medium through which national economies become inter-connected on a
global basis.
1
2
investigation about a creation of capitalism. In this paper, I draw on my
findings about the processes of foreign direct investment in Central and
Eastern Europe after 1989 to begin charting a territory for an analysis of the
varieties of capitalism in post-socialist Europe. I suggest that the role of
states in and the interweaving of political power and economy, presence of
informality in economic sphere, and influence of foreign investors as property
owners, characterize the capitalist arrangements in Central and Eastern
Europe. However, these factors are differentially prominent in individual
countries (or clusters of countries), contributing to varieties of post-socialist
capitalism.
Varieties of Capitalism
Marx and Weber were concerned with the origins and character of
modern capitalism, assuming that the destination was given and singular.
Economists in the neo-classical tradition coming to Eastern Europe right
after 1989, proposing grand plans for re-design of institutions, likewise
assumed that there is one destination to capitalism, and one best way to get
there.
In contrast, contemporary sociological examinations of capitalist
institutions begin with the observation that there are different paths leading
towards capitalism. These do not only depend on the endowments of economic
actors but also on institutionalized patterns of authority and organizational
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logics, which are historically developed and resistant to change. “Institutional
blueprints guide which actors are constituted as legitimate economic
participants, and how they relate to each other as well as to the state. States
also are a product of history and may have different legitimate roles in
economic decision making across societies” (Biggart and Guillen 1999: 740).
Thus, networked small business firms might be the core pattern of economic
organization in Taiwan, chaebol based on patrimonial principle in South
Korea, and foreign multinationals linked to international technology and
marketing channels in Spain.
The debate over societal foundations of economic organization is also
present in political science. It probably has its foundations in Ronald Dore’s
(1989) analysis of the British and Japanese factories, but was revived by
Michel Albert (1993) who identified two variants of contemporary capitalism:
“Anglo-American" and "Nippo-Rhenish" models (Berger 2000). His research
was followed by several studies examining the specificities of the German,
Japanese, French, and other national models (Berger and Dore 1996; Couch
and Streeck 1997; Hall and Soskice 2001; Hollingsworth and Boyer 1997;
Soskice 1991, 1999; Streeck 1992). The underlying premise of these studies is
that firms (as well as other economic arrangements such as capital markets)
are "social institutions, not just networks of private contracts or the property
of their shareholders. Their internal order is a matter of public interest and is
subject to extensive social regulation, by law and industrial agreement"
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(Crouch and Streeck 1997:37). National markets then differ systematically
according to the kinds of resources and frameworks that the national models
provide.
For Soskice (1999), the basic differentiating factor is institutional
configuration of production regime, which is defined by four patterns: 1. the
sets of rules and institutions regulating the industrial-relations system, 2.
the educational and training system, 3. the relations among companies, and
4. the system of corporate governance and finance. In Soskice's categories,
there are two broad types of production regimes: business-coordinated
market economies (e.g. Germany, Japan, Korea, Sweden) and liberal market
economies (e.g. the United States and Britain). Overall, contributors to the
varieties of capitalism literature hold that the different institutional
configurations, or production regimes, generate systematically different
economic performances and allow countries to pursue multiple paths to
economic development.
Varieties of Capitalism in Post-Socialist Europe
Although not directly responding to the varieties of capitalism
literature, several scholars of post-socialist transformations have advocated
variability in the transformations, rather than a monolithic transition, to
capitalisms in Central and Eastern Europe. The researchers identified
several different types of capitalisms emerging in Central and Eastern
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Europe: a distinct form based on recombinant property (Stark 1996), political
capitalism (Staniskiz 1991), and “capitalism without capitalists” (Eyal et al.
1998).
One of the most prominent statements on the transformation of
economic arrangements in Eastern Europe is David Stark’s idea of
recombinant property. According to Stark, the transformation of property
rights in Hungary involved a formation of novel property forms based on
inter-enterprise ownership. These structures of institutional cross-ownership
originated in the informal reciprocity arrangements established during the
socialist period. Thus, Stark’s analysis is grounded in the idea of pathdependency of economic transformation in Eastern Europe. Moreover, Stark’s
analysis forwards a claim that “recombinant processes are resulting in a new
type of mixed economy as a distinctively East European capitalism” (1996:
995), akin to economic organization in Asia. In a later version of that
argument, in a book with Laszlo Bruszt, the authors explain: “Defying the
forced dichotomy of market versus hierarchy, [actors in post-socialism] create
new property forms that blur the boundaries of public and private, blur the
organizational boundaries of firms, and blur the boundaries of the
legitimating principles through which they claim stewardship of economic
resources” (Stark and Bruszt 1998: 7).
While widely accepted within the academic circles, Stark’s thesis also
generated criticism. Fligstein (1996) takes up Stark’s argument that the
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specific form of cross-institutional ownership is akin to the economic
organization in Asian societies and points out that Stark “only draws out one
line of that thought: the fact that Asian firms seem to have unique social
structures that he characterizes as networks. But he ignores the great
variation in those structures and how they work. He also ignores that states
have played interesting and complex roles in the generation of these social
structures” (Fligstein 1996: 1080).
In a more forceful critique, along the lines identified by Fligstein,
Hanley, King and Janos (2002), in an article published in the American
Journal of Sociology argue that the recombinant property thesis “is
empirically incorrect” (p.130). Using the case of Hungary, as did Stark, the
authors find that private property has emerged as the predominant category
of ownership in contrast to the pre-eminence of recombinant property
proposed by Stark. Hanley et al. trace the transformation of property to the
actions of the Hungarian state and the pressures from the international
agencies, such as the IMF and EU. According to the authors, “While there is
no doubt that the Hungarian state has experienced considerable erosion in its
ability to influence economic activities since becoming integrated into world
markets, the analysis presented here has demonstrated that government
officials in that country retained significant capacity to shape economic
developments through the allocation of ownership rights over state-
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enterprises” (2002: 162). The process of privatization enabled state actors to
exert significant role in the development of the post-socialist economy.
My dissertation findings corroborate Hanley et al.’s point about the
significant role of states, by tracing how they create markets in postsocialism. Across eleven countries 2 significant direct engagement of host
states as market agents was a key turning point in the growth of FDI activity
in Eastern Europe, significantly more influential than the economic
indicators and democratic order. However, my cross-country comparative
approach also highlighted the liability of generalizations about the role of
states in post-socialism, as the size of the state sector varies across the region
(see Table 1). By 2000, in some East European countries, Hungary included,
the private sector share in GDP is at 80 percent, which is comparable to that
in the United States (Tanzi 1999). In contrast, some other countries, while
decreasing state ownership substantially after 1989, have nevertheless
maintained relatively large state sectors. Therefore, continued state
ownership may be one source of variation in economic arrangements across
the region. This variation also has implications for the recombinant property
thesis. It is more likely that, ceteris paribus, the blurring of boundaries
between private and public will be present in a society with larger state
sector, such as Slovenia, Croatia, Latvia and Romania.
2
Bu lgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia,
Slovenia.
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Table 1. Economic Indicators in Eleven Central and East European Countries
Bulgaria Croatia Czech Estonia Hungary Latvia Lithuania Poland Romania Slovakia Slovenia
Gross National Income
5,950
8,440
14,550 10,020
12,570
7,870
7,610
9,280
6,980
11,610
18,160
per capita (%PPP)
Private sector share
70
60
80
75
80
65
70
70
60
80
65
in GDP (%)
Private sector share
65a
56
65
75
81b
70a
-72
62b
75
55a
in employment (%)
Asset share state
20
6
28
0
9
3
39
24
50
49
42
owned banks (%)
Foreign banks in
71
46
40
57
79
57
46
63
64
56
21
all banks (%)
FDI stock as
percent GDP 2000
28
18
44
76
44
30
22
18
19
19
17
Expenditure on health
7.4b
13.5
10.8b
12
11.4d
10.5b
11.1a
9.9b
5.9c
9.6
13.5
and education *% GDP)
Estimated Size of
20-40
11-25b
-30
20-25
40
21-27
16-19
35-50
15
17-30
Informal Economy**
30
45
30
15
20
30
15
15
50
40
41.3
Unionization Rate (%)
Estimated share of
18
4
1
19
15
35
22
18
44
9
1
population in poverty (%)
Prevalence of MEBOs
++
++++
+
+
++
++
+++
+++
+++
++
++++
in privatization
++
++
+
+
+
+
+
++
++
++
++
Political Capitalism
Note: Numbers are for 2000, unless otherwise noted. Source: EBRD 2001, * World Bank Indicators (2001), **Freedom House (2002)
a 1999
b 1998
c 1997
d 1996
^Data from: Lado, Maria (2002), “Industrial Relations in the Candidate Countries”, European Industrial Relations Observatory On-line,
www.eiro.eurofound.ie. All figures are estimates except trade union density in Slovenia; the figures refer to different years between 19992001; Also from Jasna Petrovic, editor in chief of the International Confederation of Free Trade Unions in Central and Eastern Europe
(ICFTU in CEE) Network Bulletin http://multinationalmonitor.org/mm2002/02may/may02interviewpetrovic.html
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Furthermore, my analyses also show that the role of states in the
economy in Eastern Europe is strongly mediated by pressures from
international organizations, in particular, the European Union, International
Monetary Fund, the World Bank and a range of credit rating agencies, which
evaluate the post-socialist states and the “effectiveness” of their reforms,
where “effective” means “in accordance with the neoliberal Washington
Consensus.” For example, World Bank Transition Newsletter, informing the
world about the status of transition economies, summarized the following
evaluation of Slovenia in 1996:
“Slovenia has received the highest initial credit rating of any country
in transition… Moody's has rated it at A3, while IBCA and Standard &
Poor's have given it A ratings… But while the rating agencies praised
Slovenia's macroeconomic management, they stressed the need to
restrain wage costs, accelerate privatization, and reform the pension
and health care systems.”
This evaluation clearly advocates the neoliberal way as the right way in
transition, whereby tight monetary policy, restricted fiscal policy and export
led growth necessitate low social security expenditures and privileging price
control beyond wage growth.
Tracing how post-socialist states yield to external pressures, my study
is in line with others proposing that integration into global and regional
markets has diminished the regulatory autonomy of post-socialist states
10
(Amsden, Kochanowicz, Taylor 1994). At the same time, these findings go
against the research in economic sociology doubting that globalization exerts
significant convergence pressures on domestic economies (Fligstein 2001,
Guillen 2001). To consolidate these findings, I suggest that we need to allow
for the possibility that some states may not preserve their unique
institutional arrangements, because they are in a structurally weak position,
or because they are in the period of institutional re-building and the global
world society is a source of legitimate models (Meyer et al. 1997), or both.
But while I find clear evidence for the convergence of institutions at
the level of states (Meyer et al. 1997), the empirical evidence is also strong for
the differentiation between the formal institutions and the actual economic
activity in practice. The presence of informality in transforming East
European economies looms large. I find that while we can trace a significant
change in formal institutions adopted by post-socialist states, the informal
logics of practice retain vestiges of the socialist past, where the formal
features of a command economy with a centralized allocation were in practice
complemented by a set of informal reciprocity arrangements that helped
firms maintain production despite shortages (Kornai 1992). Moreover,
because of general bureaucracy of the system, which could not satisfy all
social needs, informal mechanisms were used to compensate for it (Lomnitz
1988). The post-socialist societies thus face a challenge of reforming not only
formal but also informal institutions. And as Douglass North stated,
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“While the rules may be changed overnight, the informal norms
usually change only gradually. Since it is the norms that provide
"legitimacy" to a set of rules, revolutionary change is never as
revolutionary as its supporters desire and performance will be
different than anticipated. And economies that adopt the formal rules
of another economy will have very different performance
characteristics than the first economy because of different informal
norms and enforcement.” (North 1993)
What we see in Eastern Europe is the simultaneity of convergence and
divergence in globalization outcomes. Whether increasing international
movement of capital, people and culture makes the world more homogenous,
is one of the key issues in globalization studies, but much empirical work
conducted on the subject has found divergent results. My study contributes to
this literature by substantiating that global processes encourage both
convergence and divergence. This is in line with Zelizer’s (1999) proposition
that,
the economy operates at two levels: seen from the top, economic
transactions connect with broad national symbolic meanings and
institutions. Seen from the bottom, economic transactions are highly
differentiated, personalized and local, meaningful to particular
relations. No contradiction therefore exists between uniformity and
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diversity; they are simply two different aspects of the same
transaction. (Zelizer, 1999: 212)
Moreover, Guillen (2001a: 235) identifies that, in fact, the divergent
findings in globalization studies are "primarily due to the various levels of
analysis at which different researchers operate". To deal with this issue, my
study examined both the national level policies and organizational practices.
Therefore, it did not only illuminate how homogenization and diversification
happen concurrently but it also identified decoupling as the process that
sustains their simultaneity.
While investigating the role of states, international institutions and
informal practices in economic transformation, my study most directly
emphasized the role of foreign investors in shaping the Central and East
European economies, investigating the confluence of post-socialist
transformations and economic globalization and its consequences. What is
the role of foreign investors in shaping the variety of capitalism in Central
and Eastern Europe?
Some have argued that foreign investors have penetrated the postsocialist economies so deeply that they may be a large constituency of the
new post-socialist elite in Central Europe (Eyal et al. 1998). Counting foreign
investors among the domestic elite, this has serious implications for their role
in shaping the development of these economies. In fact, as Hanley et al.
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(2002: 159) report, in 1992 the Hungarian government placed firms in the
energy, telecommunications, finance, and basic industry into the category of
long-term state ownership, but “by 1999, foreign multinationals had assumed
control of two -thirds of these enterprises.” The authors conclude, “within 10
years of the collapse of state socialism, control of key sectors of the economy
had been ceded to foreign multinationals.”
Hungary is not an isolated case. As reported by the European Bank for
Restructuring and Development, the ownership structure of the financial
sectors in Eastern Europe in 2001 is as follows. In Bulgaria, 85 percent of the
banking sector is foreign owned. In Croatia, “foreign-controlled banks now
account for over 80 percent of banking assets.” In the Czech Republic, “the
banking sector is dominated by a small number of foreign-owned banks that
account for over 90 percent of banking assets.” In Poland, “the majority of
assets in the banking sector are controlled by foreign owned banks.” In the
Romanian banking sector, “about 55 percent is foreign owned.” In Slovak
Republic, “the largest bank in terms of assets was sold to Erste Bank of
Austria”, “the second-largest bank was sold to [an] Italian banking group”
(EBRD 2001: 126-197). These statistics point to the pervasiveness of
foreigners as owners of the strategic sectors in post-socialist economies,
which may have important consequences for national development.
While foreign ownership of strategic assets is a by-product of the
simultaneity of the regional transformation with the rise in neoliberal
14
pressures of international organization and globalization, still not all of East
European economies are equally penetrated by foreign investment. The
degree of such penetration may be a source of another variation in the types
of capitalisms consolidating in these countries. Which economies are more
highly subject to FDI? As empirical analyses point out it is not merely the
economic and political stability of those countries that matters. Overtime
flows are mostly subject to the choices made about property reform in the
first formative years of transformation. Indeed, privatization strategies
employed in Central and Eastern Europe showed tremendous diversity,
ranging from direct sales for cash by auctions or tenders; management and
employee buyouts (MEBOs); voucher schemes whereby citizens acquired
coupons for a small price, which they subsequently exchanged for shares in
companies; or programs of citizen grants, whereby a segment of the
population or sometimes every citizen was awarded some number of free
certificates, which they could exchange for property rights.
Overall, I have distinguished the privatization approaches by how open
they were to the participation of outsiders (Table 2). Outsiders include those
without former communist-party links, those who were not managers or
employees in targeted companies, or foreign investors. Evidence shows that
those countries that were more open to participation of outsiders in the
privatization process have, by 2000, accumulated higher FDI stocks than
others (Figure 1.).
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Table 2. Privatization Strategies
Country
Bulgaria
Methods of
Privatization
Openness to
Outsiders
MEBOs*
direct sale
vouchers
1
Croatia
MEBOs
vouchers
0
Czech R.
vouchers
direct sale
1
direct sale
vouchers
2
Hungary
direct sale
MEBOs
2
Latvia
direct sale
vouchers
2
vouchers
direct sales
1
Poland
MEBOs
direct sale
1
Romania
MEBOs
direct sale
1
Estonia
Lithuania
Slovakia
Slovenia
MEBOs
vouchers
direct sale
MEBOs
vouchers
1
0
Source: EBRD 2001
*Management employee buyouts
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Figure 1. Prevalence of MEBOs in Privatization and Foreign Investment
80
FDI stock as % GDP (2000)
70
60
50
40
30
20
10
0
0
1
2
3
4
5
Prevalence of MEBOs (0-low, 5-high)
The examination of property-rights transformations in a broadly
comparative perspective is highly consequential for claims about the variety
of capitalism emerging in Central and Eastern Europe, including the political
capitalism thesis (Staniszkis 1991, Hankiss 1990) and argument about
transition to capitalism without capitalists (Eyal, Szelenyi and Townsley
1998). According to Staniszkis, early privatization in Poland “was not a result
of the expansion of the traditional private sector, but was a peculiar linkage
of political power and capital” (1991: 128). Staniszkis reports that in 1987,
there were 80 firms owned by the communist party officials and by 1990, just
a month after the first post-socialist noncommunist Prime Minister
Mazowiecki initiated economic reforms, there were more than 40,000.
According to Staniszkis, this illustrates that the process of privatization
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benefited the former communist elite. The former nomenklatura used its
political power to enact privatization laws that enabled them to convert their
former positions into new forms of post-communist privilege, and thus private
wealth. The result was a creation of “political capitalism.”
In their examination of transition to capitalism in Central Europe,
Eyal, Szelenyi and Townsley (1998) find no evidence in favor of the political
capitalism thesis. Instead, they argue that no meaningful class of property
owners has been created in post-socialist Central Europe. According to the
authors, the institutions of market economy preceded the formation of
propertied class, resulting in a formation of “capitalism without capitalists.”
Instead of real capitalists, Central Europe has generated webs of crossownership, self-ownership and ineffective small shareholding via investment
funds connected with state-owned banks.
Because “property was fully socialized” (p.4.) and there was no
propertied capitalist class in East-Central Europe (unlike in historical
formations of capitalism that Marx and Weber write about), the key actor in
transformation, according to the authors, is “broadly defined intelligentsia
which is committed to the cause of bourgeois society and capitalist economic
institutions” (p.1). Are there any capitalists in the new Central European
capitalism? The only really distinct owners are, the authors conclude, firstly,
the state and, secondly, foreign capital. Furthermore, “managerial ownership,
or the management buy-out of state-owned firms, is not the major story in
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post-communism. Indeed, the majority of corporate and industrial manages
have acquired no business property at all (p.14).”
My study provides empirical evidence that uncovers the limits to these
claims. In fact, Eyal, Szelenyi and Townsley examine only Hungary and the
Czech Republic (with some reference to Poland), which, as it turns out in a
broader cross-country comparison, are substantially different from other
countries. In other countries foreign ownership is less, state sector is larger,
managerial and employee ownership is more substantial and acquisition of
property by (or related to) ex-communists (“political capitalism”) is greater.
The story of capitalism without capitalists is not a story of post-communism
in Central and Eastern Europe.
Admittedly, as all the authors rightfully acknowledge the post-socialist
transformations are not complete. The scholars are describing something that
has not yet taken its full shape and this has its liabilities. Beyond this caveat,
however, the limits to all of the propositions about the varieties of capitalism
in Eastern Europe lie in the lack of (or narrowness of) their comparative
approach. Quite paradoxically, while recognizing the variety of “post-socialist
pathways,” these studies still make claims about a unique variety (not
varieties) of post-socialist capitalism in Central and Eastern Europe.
In contrast to these studies, the embedded economies approach to the
varieties of capitalism implies that to determine a distinct quality of the
system of economic institutions in Eastern Europe (or lack thereof), we need
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to examine how states, pre-existing institutions, international organizations,
cultural understandings and actions of political and economic elites promote
a unique blend of property rights, governance structures and rules of
exchange. Moreover, examining substantive varieties of embeddedness, this
approach allows for the possibility that there is not only one variety of East
European capitalism, but that the variation across individual countries (or
clusters of countries) within the region is substantial. What may be some
points of similarity and sources of difference across the region?
All the post-socialist countries of Central and Eastern Europe shared a
particular state-socialist past of centralized economy with communist party
rule. After the fall of the Berlin Wall, these countries started reforming their
economic and political regimes, establishing institutions necessary for market
exchange and democratic governments. Although many Western analysts
have come to the region right after 1989 with advice on how to re-vamp the
economic arrangements so markets can emerge, in hindsight it was rather
unrealistic to expect that the transformations that took decades in other
parts of the world, would arise in a matter of a few years. Primarily, this was
because the mere presence of rational self-interested actors and the absence
of party-state interference were not sufficient for markets to emerge. In fact,
the notion of emerging markets carries the bias of neoclassical theory.
Markets needed to be created, because they can operate only when the
required political, legal, economic and social institutions of a market economy
20
exist. This market creation was carried out by political entities: new parties,
new governments, new nation-states with their privatization and economic
restructuring agencies. Because of these historical conditions, the role of
politics and political influences on economic activities (sometimes in terms of
converting ex-communists into the new bourgeoisie in a “political capitalism”
manner) may be generally more pronounced in the post-socialist countries
than in Western developed economies.
Beside the fact that the reforms were implemented very quickly, the
basic outlines of institutions in Central and Eastern Europe were also being
laid down in a specific context of increased economic integration on a global
scale and rising legitimacy of the neoliberal discourse carried by
international agencies, such as the IMF, World Bank, or UN Conference on
Trade and Development. These pressures created particular conditions in
which liberalization of economies needed to happen simultaneously with the
creation of market institutions. Thus, the foreign capital might be more
prevalent in all of the post-socialist countries than it would have been should
the transition occur in a different historical period.
In addition, almost all Central and East European states, upon the fall
of communism, set out to join the regional association of the European Union.
The application for membership involved re-forming their emerging
institutions along the lines of the aquis communitaire, the EU legislation.
The new institutional arrangements were thus implemented from outside
21
and sometimes did not reflect the political will of a country. This leaves a
possibility that formal rule in post-socialism will be substantially decoupled
from the actual practice and that the level of informality and thus the size of
the informal economy may have a substantial role in all of these countries.
Beside these similarities, which provided the broad context for
transition, the specific circumstances of each of the Central and East
European countries may create substantive varieties in their post-socialist
economic arrangements. The broad contextual forces will be mediated by
these countries’ histories before and during state-socialism, their pre-existing
institutions, their national cultures and current political structures and
domestic interests. All of these forces will contribute to a variety of outcomes
in economic organization.
For example, two smallest countries in Central and Eastern Europe,
Estonia and Slovenia may seem to have much in common. Both these
countries, after a long period of communist rule and redistributive economies,
emerged as independent states in 1991 after being member republics of large
federal and multiethnic states, the Soviet Union and Yugoslavia,
respectively. Both were highly developed compared to federal average and
also instrumental in starting the processes of disintegration of these
federations. Both of these states were among the first to successfully
complete the EU negotiations.
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However, despite these similarities the two countries took very
different approaches to market-transition. Estonia embarked on a radical
market based reform, whereas Slovenia has chosen more gradual and
selective reforms. Estonia was eager to liberalize the economy and open itself
freely to foreign investment. During privatization it relied on the direct sales
through auctions to outside bidders with a very liberal foreign direct
investment regime. Also, Estonia adopted a unilateral free trade regime with
zero tariffs across the board, making it one of the most open economies in the
world, together with Hong Kong and Singapore (Feldmann and Sally 2002).
Slovenia, on the other hand, was part of former Yugoslavia where the
command economy was more decentralized, more highly integrated with the
West, and was organized by, so called, workers self-management. This
organization left a mark on the preferred method of privatization in Slovenia,
which were management and employee buyouts, greatly limiting the
involvement of foreign investors. By 2000, Slovenia received only 17 percent
of GDP in its FDI stock while in Estonia this number wa s at 76. Generally,
Slovenia has chosen a more gradual privatization rate, so that by 2000, 45
percent of all employed were still in the public sector, while in Estonia this
number was one third lower. Inflation rate is higher in Slovenia, but
unemployment is higher in Estonia. Unionization rate in Slovenia is about 40
percent while less than 15 percent of Estonian workforce is unionized (Table
2). In spite of these differences, both countries offer a good standard of living
23
to its people, and both are among the most economically successful of the
transition countries invited to join the EU in May 2004. The fact that both
Estonia and Slovenia have restructured their economies successfully but in
very different ways, resulting in two substantially different social
organizations of economies, implies that there is no one way of market
organization that produces more efficient outcomes (Orru, Biggart and
Hamilton 1997, Biggart and Guillen 1999, Fligstein 2001, Guillen 2001b).
As for the role of FDI in an economy, Estonia and Slovenia, among the
eleven countries included in my dissertation, stand at two opposite ends on a
continuum, with the highest and the lowest levels of relative FDI stock,
respectively. While I have not dealt with the consequences of foreign
investment for economic development in post-socialism, the examination of
the substantive varieties of market organization found in Central and
Eastern Europe offers an important insight for future research on this topic.
It suggests that the role of FDI for economic restructuring may not be as
uniform and as equally consequential as the international organizations and
neoclassical approach promote it to be (Figure 2.).
After 1989, the International Monetary Fund, the World Bank, the
United Nations Conference on Trade and Development, and the European
Bank for Restructuring and Development, promoted FDI as the catalyst in
the economic restructuring in Central and Eastern Europe. In their view,
“without massive inflows of foreign capital, successful transition [from
24
planned to market economies] in Central and Eastern Europe is unlikely”
(Schmidt 1995: 268). As a catalyst in the transition from state socialism, FDI
was expected to affect key macroeconomic indicators, such as the balance of
payments and employment. Moreover, foreign investors would bring
financial, managerial, and technological resources that induce corporate
restructuring in formerly state-owned enterprises (Meyer 1998).
However, based on the findings of my study the relationship between
FDI and development may not be as linear as expected (Figure 2). Future
research of the effects of FDI for national development would benefit from
understanding this economic process as an integral part of substantively
different embedded economies, whereby divergent types and various
intensities of foreign capital involvement may yield sustainable outcomes.
Figure 2. Economic Prosperity and Foreign Investment
20,000
18,000
GNI per capita ($PPP)
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
0
10
20
30
40
50
60
70
80
FDI stock as percent GDP (2000)
25
The final question worth posing is whether we are really observing
established forms of market organization, i.e. varieties of capitalism, in
Central and Eastern Europe or whether these “transition” countries are still
“in transition.” Reforms are still ongoing in many areas, and EU accession
may affect these countries in yet another way, as might the developments at
the global level. Hence, there is no clear answer. If anything, the changes
that have happened in the past dozen years have made us aware of the
liabilities of grand predictions for the future. But while the substantive
variety of the economic organization is uncertain, what I hoped to have
shown in my dissertation is that our understanding of it will be seriously
impaired if it doesn’t pay attention to the specific configurations of social
structures, power distributions and cultural understandings that not merely
impinge on it, but make it possible.
26
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29
Appendix: Dissertation Abstract
Investigating market transition in a comparative perspective, the
dissertation examines sources of variation in foreign direct investment (FDI) in
post-socialist countries of Central and Eastern Europe. While previous research
on FDI emphasizes the importance of efficiency accounts based on individual
rationality, my approach conceptualizes FDI as a relational social process. I
argue that FDI flows and transactions are socially constituted and shaped by
institutions, power struggles, social networks and cultural understandings.
To situate the study in its regional context, Chapter 2 provides overviews
of post-socialist transformations and FDI in eleven Central and East European
countries included in this study. Chapter 3 traces over time variation in FDI
across these countries and finds that longitudinal country trends are little
affected by economic forces privileged in traditional studies. Rather FDI is
shaped by the actions of host states, which create markets by directly engaging
as sellers of state property. State actions are shaped by external isomorphic
pressures and path-dependency of domestic institutions. Chapter 4 examines
cross-sectional variability in FDI flows in investor-host country dyads. I find
that, net of economic potential and political risk of host countries, trade and
migration flows between investors and hosts, political alliances between
countries as well as shared cultural ties significantly structure FDI,
substantiating the embeddedness of macro-economic processes. Chapter 5 shifts
30
the analysis to the organizational level and asks what influences the realization
of FDI attempts. Using cases of FDI transactions, I argue for an understanding
of economic action as practical action. FDI efforts are not simply a matter of
rational efficiency maximization but are structured by business connections,
personal ties, pre-conceptions about transaction partners, political alliances and
struggles for power. The embeddedness and uncertainty contribute to
substantive and procedural variability in economic action, beyond profitmaximizing means-ends calculations.
This research advances the economic sociology by proposing a conceptual
framework that accounts for the multi-dimensionality of social forces that
structure economic action. It argues for an investigation of substantive varieties
of embeddedness at micro and macro-levels. Examining the creation and
operation of markets in post-socialist Central and Eastern Europe, the
dissertation also contributes to a comparative study of capitalisms.
31