On the 2004 issues of the Külgazdaság journal

Külgazdaság 2004/7-8

Brief Summary of the Articles

Physical capital stock, technological upgrading and modernization in Hungary

Andrea Szalavetz

This paper discusses the relation between the quality and quantity indicators of physical capital and modernization. While international academic literature emphasizes the role of intangible factors enabling technology generation and absorption rather than that of physical capital accumulation, this paper argues that the quantity and quality of physical capital is an important modernization factor in particular in the case of small, undercapitalized countries that became recently integrated in the world economy. The paper shows that as opposed to developed countries, in Hungary the technological upgrading of capital assets is not necessarily accompanied by the upgrading of human capital. High-technology assets do not always mean that processing features high skill intensity. Even technological upgrading is not always accompanied by human capital upgrading. Finally the paper shows that there are large differences between individual industries' average technological level. The dualism of the Hungarian economy, which is also manifest in terms of differences in the size of individual industries' technological gaps, is a disadvantage from the point of view of competitiveness. The increasing differences in the size of the technological gaps can be explained not only with industry-specific factors, but also with the weakness of technology and regional development policies as well as with institutional deficiencies.

Intra-Industry Trade and a Shift in the Quality of Products in Trade between Hungary and the EU

ZOLTÁN KOVÁCS

Europe-wide trend of increasing importance of intra-industry trade characterised trade of the 1990s between Hungary and the EU, as well. By applying the method of Fontagné and Freudenberg the author pointed to two-way trade having become decisive since the mid 1990s. This trend was mainly due to dynamic growth of two-way trade in vertically differentiated products. Price-quality analysis identified an impressive improvement in the quality of the Hungarian exports to the EU that manifested itself in the shift from low towards medium and high quality products.

A survey of trade theoretical explanations of global production sharing and related empirical research

LÁSZLÓ ERDEY

Global production sharing is defined as the fragmentation of an earlier integrated production process, where stages are moved to lower cost locations abroad. This phenomenon is one of the most important aspects of modern globalization. The study outlines the dynamics and rapidly increasing importance of fragmentation in world economy, and also deals with some statistical and methodological problems of its measurement. The author systematizes the most important trade theoretical explanations and their sometimes very different predictions. Finally, he presents the multi-faceted results of empirical research, which draws attention beyond its beneficial effects - higher competitiveness, more sophisticated international division of labor, potential source of growth of output and world trade - to some potential disadvantageous impacts of fragmentation on certain resource owners. Global production sharing contributes to the widening relative wage-gap of skilled and unskilled workforce although most likely to a smaller extent than technological change.

Multifunctionality in agriculture

JÓZSEF POPP

The study analyses the importance of multifunctionality in agriculture. It considers non-trade concerns and provides an explanation of jointness between production and the provision of public goods. Multifunctionality is one of the key areas of non-trade concerns in the WTO negotiations. In rich countries the share of agricultural output in GDP is not substantial. However, the value of non-commodity outputs associated with land and other natural resources is likely to increase. Agriculture has several functions generating negative and/or positive outputs that have an impact upon the whole economy and policies. Producers do not always take into consideration externalities in production decisions. It is a concern to increase the amount of non-commodity outputs (landscape and environmental conservation) by internalising and shifting externalities into the direction of the interest of society. With the lack of internalising externalities (positive externalities) we may face under-provision of public goods while negative externalities result in over-provision of public goods compared with social demand.

Agriculture is perceived to be more prone to market failure than other sectors. Clearly, there are many unanswered questions about what the role of agricultural policy should be in correcting the market failure. The relationship between agricultural production and other functions is an important aspect. If there is no clearly established link other functions are not dependent of production, in which case the support is not justified. In the case of a high degree of jointness, however, government intervention seems reasonable. Other domestic and international opportunities and threats (positive and negative externalities) need also to be considered.

Market algorithms in the information economy

KATALIN SZABÓ

The author of the article analyses the changes occurring in the basic blocs and algorithms of market, the changes, which can be attributed to the development of the information technologies and the spread of Internet. Digitalising of the market algorithms logically suits the continuous increase of the share of the "weightless" products, existing only on the Internet and the knowledge incorporated in the physical products. New models are making their way in the transaction arrangements and we are witnessing major innovations in the pricing mechanisms as well. However, the so-called dynamic pricing is by no means a return to the model of pure competition, even if that seemed to be the case. Due to the electronic auctions and other digital pricing mechanisms the customers leave their previous price-taking role, becoming much more active by sharing information on the world wide web, yet the expectations of a "digital kingdom of customer to come" have been proven to be excessive by all means. Using the opportunities of information technologies the companies trading on the Internet are trying to restore the information asymmetries favouring them by price customization and limiting the transparency of the market, instead of starting price wars.

The reshaping of the Irish R&D system at the turn of the millennium

PÉTER VINCE

Ireland concluded a long and successful closing up phase. Summing up this process it can be stated that - as a result of the extremely fast economic growth and foreign direct investment inflow - the GDP per capita has reached and even surpassed slightly the average of the EU member countries. However, this closing up process has not equally affected all sectors of the Irish economy, as the report about the R&D activity clearly indicates. The Irish R&D performance - considering the country's development level - was moderate compared to the OECD and EU averages. The government has launched a series of initiatives throughout the 90s in order to diminish this gap. EU membership has contributed to establish the necessary conditions by taking over and elaborating institutions and regulations.

Külgazdaság 2004/6

Brief Summary of the Articles

Reasons behind the increase of Hungarian imports, its relation with exports

ERZSÉBET VISZT

After the EU accession no change in the high import content of the Hungarian economy characteristic since the early nineties can be expected. On the contrary, the fast import growth will proceed, although the accession itself has no direct impact on foreign trade, as market harmonization trends have taken place already.
On the demand side the increase of imports is influenced by fast growth in the manufacturing sector and in the investment activity - mostly in informatics, as well as by the rising consumer demand for cars and durable goods. On the supply side we have to take into consideration that - with the Union 's common custom regime - import competitiveness of countries outside the EU will improve contributing to the growing market penetration of low cost Asian exporters in the Hungarian market. The Experiences of the Use of EU Structural

Funds Transfers in the former GDR

TAMÁS SZEMLÉR

Between 1991 and 1993, the East German Länder (the former GDR) became part of the target zones of EU structural policy transfers as a result of an EU reaction on German unification. East German programmes between 1994 and 1999 run already according to the general EU rules (it meant considerably higher amounts of transfers, but also stricter administrative conditions of their use). The adequate institutional structure played a key role in the successful use of transfers. On the basis of the experiences between 1994 and 1999, priorities and the structure of the operational programmes have been modified for the period 2000-2006. Still, in comparison with federal transfers, EU structural policy tools have a relatively small weight in East Germany .

Kazakhstan's economy on the way of transition

GYÖRGY SIMON JR.

After joining the Commonwealth of Independent States in 1991, Kazakhstan realises the economic transition through gradual reforms, within which extensive price and trade liberalisation has been implemented, and privatisation and building of market institutions have been resolutely promoted. At the same time, structural and fiscal reform as well as the struggle against corruption are still seriously lagging behind, while the political system is characterised by a limited democracy.
The country's financial independence was established with the introduction of its national currency, the tenge in 1993. Transformational recession in Kazakhstan reached its nadir in 1995. The following economic growth was only temporarily interrupted in 1998 by the impact of Asian and Russian crises, since then it can be regarded as unbroken. However, the situation in the Kazakh economy depends to a large extent on the oscillations of energy carrier and raw material prices in the world market, as extractive branches, first of all the oil industry, attracting significant foreign direct investment, have an important role in its growth.

Külgazdaság 2004/5

Brief Summary of the Articles

Brief Summary of the Articles

Reforms of EU and the Enlargement

- Part II.

András Inotai

This study divided into two parts analyses the traditional and new areas of community policies of the European Union in the context of the coming enlargement. The first part deals with four policy areas, in which substantial progress towards strengthening the community level has been made in the last years or even decades. Despite the latest setback, this package includes the issues of institutional system and decision-making process, definitely the common agricultural policy and the common budget, as well as the new quality of integration achieved by the introduction of the common currency. The second part focuses on those areas of community policy that started to be developed in the recent past or are expected to take concrete forms. In this process, Hungary , as a new member of the EU, will be able to participate fully. In this basket can be mentioned the fulfilment of the Lisbon agenda which includes research and development and competitiveness issues, the future of the Western European model of social market economy, the pressing requirement of creating a common, European level migration policy, and, finally, the chance to establish a common foreign and partly also defence policy for the continent.

Factors determining the inflow of FDI and its promotion in the light of Hungary's accession to the EU

MIKLÓS LOSONCZ

This study analysis the major factors determining the inflow of foreign direct investments in Hungary in a microeconomic approach based on the adjusted net present value formula. This approach is in line with the investment decision making process of foreign companies. Its main conclusion is that in order to bolster the inflow of FDI, particularly into real assets of greenfield investments, the government should focus on incentives related to accelerated depreciation and measures with similar results as those of quick depreciation rather than reducing the corporate profit tax rate. The later may encourage companies to optimize theior tax obligations without investing in real assets. With Hungary 's accession to the EU, the room of maneuvering of the government has narrowed, the former incentives focusing on tax allowances had to be converted into the schemes applied in the EU based on investment intensity ratios defined differently for the individual regions with various GDP per head. In the future, the main factors attracting the inflow of FDI will most probably include a great number of small steps aimed at systematically and continuously improving the general business climate rather than specific investment incentives based on various allowances.

FDI-attractiveness and MNCs subsidiaries in the catch-up process of Hungary

Judit Hamar

International comparison and empirical analyses of the role of FDI-inflows and multinational subsidiaries (FIEs) in the catch up process of Hungary and some accession countries reveal some common trends and features, but also significant differences by countries and by time. FDI-inflow in each country speeded up restructuring, technological and productivity improvement, but the magnitude and significance of changes depended much on timing the legal, economic, and political conditions of FDI-attractiveness, influenced also by timing the privatisation process. Empirical analyses of the position of local subsidiaries in the network of the global firm stressed the positive effects of FDI in technology and productivity catch up but also the large heterogeneity of firms. Regression analyses proved the complexity of different determinants of competitiveness. The magnitude of productivity improvement (as sample average) was the highest in Hungary, and after Slovenia, the Hungarian managers of the FIEs were the most independent from the parent firm almost in all business functions, but future prospects of expansion (on scope) were expected much less than in the other countries where FDI-penetration is still much less.

Agri-food trade performance of Central-European countries in the EU in the ninties

Imre Fertő

The paper investigates the agri-food trade of Central-European countries in the EU after Association Agreements using Constant Market Share analysis between 1993 and 2000. The all of the Central European countries have increased their agri-food exports to the EU, except Slovenia . Our results suggest that main source of growth in Hungarian agri-food exports has been the rise of agri-food imports in th EU. Hungarian agri-food focused on those markets where demand of the EU has increased below average. But, in other Central European countries the increase of the EU markets has played less important role in the growth of agri-food exports. In these countries the main source of rise in agri-food exports has been the improvement of competitiveness. Detailed analysis shed light on the further insights. Hungary has been able to increase its exports in the case of dairy products, cereals, animal foods, beverages, oil seeds, cork and wood, textiles fibres. However, in these product groups other Central European countries also have increased their exports. The source of growth of exports in these product groups has been the improvements of competitiveness rather than the rise of EU demand for all Central European countries.

Külgazdaság 2004/4

Brief Summary of the Articles

Economic analyses in spring 2004

In springtime every year economic research institutes regularly publish their analysis about the performance of the previous year as well as their forecasts. The press informs usually only about the most important economic data and about the analysis in a few words, the detailed studies prepared by the institutions do not generally reach those who are interested. This is the reason why since 2001 we publish a short summary of the reports and prognosis of the research institutes. These analyses are especially interesting right now as they were prepared shortly before the EU accession. They analyse several aspects of this period as well as the possible short-term developments.

Reforms of EU and the Enlargement
Part I.

András Inotai

This study divided into two parts analyses the traditional and new areas of community policies of the European Union in the context of the coming enlargement. The first part deals with four policy areas, in which substantial progress towards strengthening the community level has been made in the last years or even decades. Despite the latest setback, this package includes the issues of institutional system and decision-making process, definitely the common agricultural policy and the common budget, as well as the new quality of integration achieved by the introduction of the common currency. The second part focuses on those areas of community policy that started to be developed in the recent past or are expected to take concrete forms in th future. In this process, Hungary , as a new member of the EU, will be able to participate fully. In this basket can be mentioned the fulfilment of the Lisbon agenda which includes research and development and competitiveness issues, the future of the Western European model of social market economy, the pressing requirement of creating a common, European level migration policy, and, finally, the chance to establish a common foreign and partly also defence policy for the continent.

What are the sources from where Hungarian enterprises may expect venture capital?

JUDIT KARSAI

The article introduces the main groups of venture capital companies and funds undertaking venture capital investments in Hungary , details the size of their operated capital, the typical investment size as well as the basic problems of the financing methods. The main conclusion of the article is that individuals who regularly invest their own private capital are almost completely missing from the Hungarian venture capital market. They are the so-called business angels who prepare the perspective project for the institutional venture capital financers. The lack of business angels sets back the improvement of the undertaking culture because enterprises need help in many aspects in the early stage of their lifecycle. Investment companies, which are raised from state funds cannot properly replace business angels because they cannot provide any forms of aid other than capital. Unlike business angels they are not in the position to help the financed companies to form their strategy, they cannot help in the operative control and they cannot take use of their own business partnerships for the sake of the company's prosperity. On the other hand, the state has an important role to make venture capital sources more accessible, therefore it should provide assistance to establish and strengthen mediator investments for the partners.

The export enclave character of foreign direct investments in Hungary

ÁDÁM MÉSZÁROS

In the article we search the answer to the questions: to what extent are the foreign direct investments integrated in the Hungarian economy and how closely they are related to the domestic economy's actors. The forward and backward linkage effects of the companies with enclave working character can be only marginal: these firms working isolate could reduce the FDI's positive impact on host economy. The article points out, that the theories, which explain FDI-flows, support only in parts and indirectly the foreign owned company's enclave working character. The foreign firms export-enclave character is observed through the main linking points and through the sometimes conflicting research outcomes. In the article it is analysed how the enclave character is affected by the sort of inflow, the settler firm's legal status or by it's departmental and sectoral classification, as well as by the motivation of the investment. The firm's export-orientation and import-intensity also may be an indicative of the investment's enclave character. The authors examine such significant linking points as the supplier-connections, the R&D cooperation and the strategic alliances.

Agricultural consequences of Cancún's failure

JENŐ SZABÓ

Cancún will take its place in the history of the negotiations as it has been a crucial venue. Some say that it was the unprecedented "alliance" of the developing world whereas others regard it as the fiasco the Mexican diplomacy being the main reason behind the stranded talks. Nevertheless, the developed world had been preparing seriously for the successful termination of the long lasting talks. Moreover, the U.S. and the EU had even started to reform their agricultural policies before the 5 th Ministerial Conference and leaving behind their often contradictory views, they managed to hammer out a joint proposal. No matter how laudable it was from the big players to seek consensus instead of further confrontations, some circles of developing nations thought it was a dangerous step. With the joint EU - U.S. proposal the critical mass was reached and a new interest group was born within the developing world. The G21 group with leading countries such as Argentina , Brazil , China , India seems to have had enough at the dawn of the 21 st century that the big countries decide on them without their involvement. The result is disappointing, the developing world claims victory but they hurt themselves the most.

Külgazdaság 2004/3

Brief Summary of the Articles

All-round inquiry: about joining the EU and the manoeuvring possibilities of the economy policy - part III

Hungary's accession to the EU - as we know it today - will take place under unfavourable international and domestic macroeconomic conditions. On one hand the slow expansion of EU member countries and the budget tensions in the largest countries, on the other hand the balance problems of the Hungarian economy will influence the manoeuvring possibilities of the domestic economy policy in the following years.

Our inquiry this year lists some opinions on the following questions: what are the tasks in this relatively short period of time for the Hungarian economy policy to restore the internal balance in the short term, to encourage the growth and the involvement of FDI and to fulfil the requirements of EMU membership in the medium term. How is it possible to rank the goals and how can a their harmony be achieved?

Thoughts about the development of the single European market at the beginning of the new millenium

MARGIT RÁCZ

The single market of the European Union exists since 1993. The article takes a look at the developments and unsolved questions of the past 10 years, deals with the mechanism of how to further shape the single European market as well as with the different characteristics of the member countries' behaviour. The creation and the functioning of the single European market is the biggest achievement of the integration from the economic aspect. The European Commission not only has functions in the traditional sense but also regulating functions in two different areas (competition policy and state subsidies), which results in conditions that are difficult to solve for some member states. Finally, the article reviews some typical features of the learning process in the individual member states.

Agricultural consequences of Cancún's failure

JENŐ SZABÓ

Cancún will take its place in the history of the negotiations as it has been a crucial venue. Some say that it was the unprecedented "alliance" of the developing world whereas others regard it as the fiasco the Mexican diplomacy being the main reason behind the stranded talks. Nevertheless, the developed world had been preparing seriously for the successful termination of the long lasting talks. Moreover, the U.S. and the EU had even started to reform their agricultural policies before the 5 th Ministerial Conference and leaving behind their often contradictory views, they managed to hammer out a joint proposal. No matter how laudable it was from the big players to seek consensus instead of further confrontations, some circles of developing nations thought it was a dangerous step. With the joint EU - U.S. proposal the critical mass was reached and a new interest group was born within the developing world. The G21 group with leading countries such as Argentina, Brazil, China, India seems to have had enough at the dawn of the 21 st century that the big countries decide on them without their involvement. The result is disappointing, the developing world claims victory but they hurt themselves the most.

International competitiveness as a capability to attract foreign direct investment

GYÖRGY CSÁKI - ANDREA SZALAVETZ

As an economic actor becomes integrated in a transnational corporation (TNC) its competitiveness will have to be redefined and measured with other than the traditional indicators of competitiveness. These actors will compete in a different market structure and under different market conditions. It will face new type of competitors and its competitiveness will be determined by new factors. Competition for a TNC-subsidiary is internal competition for allocation of resources. Similarly if the share of economic actors integrated in TNCs significantly increases in an economy, national competitiveness will have to be redefined and its analysis has to be complemented with new, non-traditional factors.

The authors analyze competitiveness defined as a capability to attract foreign direct investment (FDI). We discuss how this approach is related to some traditional indicators of competitiveness. We try to explain why the capability to attract FDI was seemingly unrelated to unit labour cost indicators in some Visegrád countries, or at least why the two indicators did not develop according to the predictions. We also review the reasons of an apparent lack of relation between economic growth and the capability to attract FDI. Finally we present some weaknesses of the Hungarian FDI-attraction performance and its future perspectives.

Külgazdaság 2004/2

Brief Summary of the Articles

All-round inquiry about joining the EU and the manoeuvring possibilities of the economy policy -

part II

International competitiveness: interpretations, indicators and some lessons for Hungary

dr. Gábor Oblath - Petra Pénzes

Although the concept of "international competitiveness" is in the focus of current policy discussions in Hungary, the concept does not have an unambiguous economic interpretation. The article first addresses the question whether or not the notion of competitiveness can be interpreted at the macroeconomic level, and it offers an affirmative answer. On reviewing different interpretations, we present empirical indicators of Hungary's competitiveness and offer some international comparisons. We find that the country's competitiveness deteriorated over the last years, but still there does not appear to be a fundamental misalignment in the level of the real exchange rate. Finally we formulate conclusions regarding the possible means for improving the country's competitiveness.

Trade-off between national and regional convergence in the EU countries and in Hungary

KRISZTIÁN KERTÉSZ

This study presents the latest achievement of the growth theories, the so-called trade-off theory, which establishes a synthesis between the formerly contrasting views, between the endogenous growth theories and agglomeration theory. The trade-off theory states that conditional ß convergence appears both between regions and nations, but this process does not take place at a constant speed. If the speed of national convergence accelerates the velocity of regional convergence slows down, in fact, in certain cases it can even turn into divergence. Certainly the opposite process can take place as well. This essay verifies the trade-off theory with empirical evidences of Ireland, Greece, Spain, Portugal and Hungary. The study also draws some lessons for the economic policy. It concludes that the policy can not change the trade-off phenomenon by any means, but can influence the success of the economy overall. The empirical evidences show also how the various political instruments influence the rate of development of regions and states (ex. redistribution policy, development of infrastructure, improvement of human capital and liberal external economic opening).

Külgazdaság 2004/1

Brief Summary of the Articles

All-round inquiry about joining the EU and the manoeuvring possibilities of the economy policy

part I.

Our inquiry this year lists some opinions on the following questions? What are the tasks in this relatively short period of time for the Hungarian economy policy to restore the internal balance in the short term, to encourage the growth and the involvement of FDI and to fulfil the requirements of EMU membership int he medium term. How is it possible to rank the goals and how can their harmony achieved?

Factors Behind Profitability in the Hungarian Manufacturing Sector

SÁNDOR BUZÁS - CSABA NOVÁK

Many conclude that more than 10 years after the start of transition market have managed to get close to perfect competition. However, there is indirect and casual evidence on the existing empirical patterns of industrial structure and the intensity of competition in Hungary. In this article we propose a simple statistical method to check on the patterns of competition across industries. The method is based on the close link between profitability and total factor productivity (TFP). After an expansive exercise we draw the conclusion that about 15 percent of the subindustries are such that show pattern that industries lack intensive competition.

Problems of the Ukrainian economy

GYÖRGY SIMON JR.

Transition to a market economy in Ukraine, similarly to other former Soviet republics, began in the second half of the eighties. Soon an acute transformational recession evolved, corruption and crime became wild-running. In 1991 Ukraine became a member of the Commonwealth of Independent States and in 1992 left the rouble zone. To arrest hyperinflation, the government initiated a comprehensive macroeconomic stabilisation programme in 1994, accompanied by a wide-range price and foreign trade liberalisation, and acceleration of privatisation. Ukraine confirmed its financial independence by the introduction of hryvnia in 1996. However, the transformational recession had not yet been surmounted then. Moreover, under the impact of the Russian financial crisis, this negative process even deepened in Ukraine in 1998-1999. Around the turn of the millennium, booming business gave a new stimulus to market reforms, and the Ukrainian economy trod on the path of sustainable growth. This growth, the perspectives of which, because of its strong dependence on energy carrier imports, are rather uncertain, has primarilly been fuelled by an improving performance of industry and agriculture, and exports to the countries of CIS and EU.

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