The papers from the first stage of the INDEUNIS project analysing patterns of structural change, trade specialisation and the role played by foreign direct investment (FDI), have just been published.

INDEUNIS, an international research project coordinated by the Vienna Institute for International Economic Studies (wiiw) and financed by the European Commission from the 6th Framework Programme, brings together researchers from Austria, Poland, Hungary, Estonia, Finland, Russia, Belarus, Kazakhstan and Ukraine who jointly investigate the recent experience with economic transition, industrial restructuring and integration in both the New EU Member States from Central and Eastern Europe (NMS) and the selected Newly Independent States (NIS: Russia, Ukraine, Belarus, Kazakhstan and Moldova).

The available findings are summarised as follows:

The structural changes observed during the past decade brought especially the NMS nearer to the economic structure observed in the EU. Productivity catching up resulted mostly from productivity gains in individual sectors of the economy while employment shifts had only a marginal impact. The shadow side of the rapid productivity growth is a difficult situation on the labour market. Estimates show that economic growth below 4%-5% per year will not be sufficient to generate additional jobs. The required further productivity convergence may thus be in conflict with urgently needed employment growth.

The evolving patterns of trade specialization exhibited a declining trend and the indices of specialization have also tended to converge. For particular product groups, there have been large differences between the EU (including the NMS) and the NIS. The share of intra-industry trade in the NIS is also much lower; patterns of intra-industry trade are affected by levels of economic development and FDI inflows.

The strong FDI increases in the NMS have been the result of coinciding favourable investor- and location-specific conditions. The majority of NMS followed the mainstream approach with a rapid opening-up to international capital flows as they needed new capital and technology while providing market access, cheap assets and labour to potential investors. Recently, export demand has become the major driving force of manufacturing FDI while the access to local markets attracted FDI in the services sector. Foreign penetration has supported the upgrading of industrial structures and improved competitiveness. The example of Poland shows that revenues of foreign investment enterprises (FIEs) are generated mostly on the domestic market and FIEs are still responsible for a major part of the trade deficit. However, the export intensity of FIEs is gradually increasing and remains substantially higher than in domestic enterprises. FIEs were also decisive for the shift to technologically more advanced products in exports. Special economic zones also had a positive impact on industrial restructuring and exports. However, the realization of job creation targets has so far not been quite satisfactory. The reverse investment flows are the outward foreign direct investment (OFDI). By the end of 2004, Russia’s OFDI stock already exceeded USD 100 billion, carried out mainly by large industrial conglomerates. Most Russian outward investments are made in the NIS and in South-Eastern Europe, especially by resource-based companies in the oil, gas and metal industries with manufacturing and telecommunication enterprises following suit.

The three Baltic states (Estonia, Latvia and Lithuania) were the first to manage to stabilize their economies after the collapse of the USSR, yet at the cost of the loss of the previously dominant Eastern markets and a large part of their industrial assets. Compared to the Nordic states such as Finland and Sweden, the Baltic states, as well as Poland and Russia, focused predominantly on the stabilization of the macroeconomic frame¬work, paying little attention to the industrial competitiveness. As a result, there was a strengthening of industry in the Nordic states and a demolishment of a large part of inherited, although largely uncompeti¬tive, industries in the Baltics.

A critical evaluation of the Russian transformation strategy and its effects on the structure of industry and exports reveals a dramatic de-industrialization. Unfavourable structural shifts were accompanied by an overall economic degradation with industry in particular losing the ability to produce a wide range of technologically advanced products. The recent discussions indicate a tendency towards a possible revival of industrial policy in Russia and, as the authors hope, may bring about positive structural changes for the economy and for industry in particular.

The exchange rate policy scenarios and their impact on Russia’s economic growth and industrial structure under alternative oil price levels show that the industrial structure depends on the world oil price and the main beneficiary of a rouble appreciation would be machine-building. Even under the high oil price scenario the rouble appreciation has its limits and a more balanced exchange rate policy is recommended. One of the growth factors after the 1998 Russian crisis was a sharp decline in labour costs and the improvement in price competitiveness, especially in industries that are oriented towards local markets. The further development of the Russian economy depends on the ability of industry to gain control over costs and productivity improvement – both impossible without further restructuring.

Over the period 1996-2004, the NIS share in Ukrainian exports nearly halved and the share of the EU-15 and the NMS increased. However, Ukraine has not yet completed its foreign trade restructuring as it still exports mostly goods with a low degree of processing and the country has so far been unable to reduce its excessive energy consumption. Belarus represents a very specific example of restructuring: the economy is dominated by about 100 huge enterprises, most of them established already during the Soviet period. FDI inflows have been extremely low. Foreign trade specialization exhibits a distinct dual structure between the Russian (NIS) market and that of the EU. Obviously, such a development model is not sustainable.

The structural changes in Kazakhstan head towards strengthening the resource-based sectors. Moreover, the existing system of economic institutions hampers the development of the non-resources sectors even under a very positive situation on the international markets with significant oil price gains. The current efforts aim at a diversification of the economy, its structural rearrangement and a qualitative break-through in all development directions. Kazakhstan aims at the successful integration into the global community and even aspires to become the regional leader in the area of political and social-economic development.

For additional information please consult the INDEUNIS web site.