Foreign Direct Investment in Transition Economies and European Union Membership : the Case of Hungary and Poland

Content Provider	Semantic Scholar
Author	Howell, Kristin K.
Copyright Year	2003
Abstract	FOREIGN DIRECT INVESTMENT IN TRANSITION ECONOMIES AND EUROPEAN UNION MEMBERSHIP: THE CASE OF HUNGARY AND POLAND Inflows of foreign direct investment (FDI) to the Transition Economies in Central and Eastern Europe and the Baltics have been relatively low since the fall of the iron curtain. This variable is considered one of the most important to international technology transfers and, thus, economic growth. Along with other crucial characteristics of a country, such as monetary stability and open trade policies, a Ahealthy@ growth rate of real GDP per capita is a prerequisite to membership in the European Union. There is now somewhat of an uneasy relationship and even resistence to expansion between the European Union and the Transition Economies. They have been unofficially categorized into several tiers according to their readiness for membership, with the Czech Republic, Estonia, Hungary, Poland, and Slovenia leading the pack. Some already have special agreements in place. Most of these countries have borrowed heavily in the past from the Bank for International Settlements, the World Bank, the IMF, and bilateral and private sources. In theory, these loans were meant to promote monetary and economic stability and eventually, access to private international capital markets and growth. There is some disagreement in the literature as to the effects of bilateral and multilateral aid on foreign direct investment. The goal of this study is to compare the effectiveness of the use these countries, specifically Hungary and Poland, made of their short and long-term loans from a variety of sources. Impacts on FDI will be examined in order to judge the progress that has been made towards free markets, economic recovery, and European Union membership. The conclusions are of interest to lenders and policy makers. FOREIGN DIRECT INVESTMENT IN TRANSITION ECONOMIES AND EUROPEAN UNION MEMBERSHIP: THE CASE OF HUNGARY AND POLAND INTRODUCTION There have been unprecedented developments in Eastern Europe and the Baltics since the late 1980's and there are now several tiers of transition economies, defined according to their potential as future European Union (EU) members. To qualify, they must, as candidates have in the past, meet certain criteria concerning appropriate and stable inflation rates, budget deficits, government debt, interest rates, and exchange rates. The five countries that seem the most likely to have their EU membership applications accepted within two years are the Czech Republic, Estonia, Hungary, Poland, and Slovenia (see Table 1). Although they are the most economically advanced, many problems remain, such as the slow pace of privatization, inflation, currency devaluations, and low per capita income levels. These countries have also borrowed to varying degrees from multilateral (International Monetary Fund (IMF) and World Bank (WB)), bilateral, and private sources, especially after 1989. Flows of aid, among other variables, have been found to positively affect inflows of foreign direct investment (FDI) to some degree, which is one of the stimuli of economic growth and, thus, future EU membership.
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