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EU: Glum Prospects For Economic Globalization

  • Breffni O'Rourke

Prague, 25 March 1998 (RFE/RL) -- The concept of economic globalization is simple. It rests on the presumption that since nations live by trading, the broader their opportunities for trade, the more they stand to gain.

The reality, however, has been more complicated. The era of globalization, although still young, has seen the collapse of a group of the fastest-growing economies of the world, the East Asian "miracle" states.

Now it looks like Western Europe may be the next casualty.

The sudden and dramatic decline of the East Asian states came about in large part because foreign investors perceived that their economies were becoming less competitive and moved to withdraw their money. The move swiftly became an avalanche, leaving financial institutions and companies deeply exposed to debt.

In Western Europe the process has been more gradual. The problem there is that most of the countries have priced themselves out of the global market. In Germany, for instance, the average total hourly compensation for a worker in the production sector is almost 32 dollars -- almost twice the level of the U.S., which is flourishing in the new era. And each German worker costs an employer the equivalent of his wage over again in taxes and contributions to various social insurances.

The result is that for years now Germany and other core European Union countries have been unattractive not only to global investors but also to their own companies, which have been moving factories to lower-cost areas like the U.S., Central and Eastern Europe, or elsewhere. Jurgan Konrad, a senior analyst with Deutsche Morgan Grenfell bank in Frankfurt, says that a piecemeal move is already underway in Western Europe. The Netherlands and Sweden, for example, have acted to dismantle expensive welfare-state systems and increase labor flexibility. This move has not yet reached the core EU countries, like Germany, but it will come, Konrad says.

The term "flexibility" in this context means the dismemberment of many social protection measures which have been taken for granted in postwar Western Europe, and therefore the transition over the next 10 years will not be easy politically.

Conrad says that in Germany, for instance, wages may not actually decrease, but that many social costs -- pensions and health insurances -- may be shifted away from the employers and paid for by the employees themselves.

In a global era, the only way to avoid this social restructuring would be for high-cost countries to produce goods which could be sold successfully for prices covering all cost components. At a time when skill levels are increasing in many other regions of the world, this does not seem a practical option.

But what of the transition economies of Central and East Europe? They have a huge cost advantage and their people are willing to display the necessary flexibility to join in the global race. Are they poised to do well in the new era?

Conrad's advice, in simple terms, is that each country should seek to focus on what it does best. He notes that Slovenia could find a niche market in the manufacture of optics and associated equipment. He says the Baltic republics can make their mark in textiles, paper products and wood, while the Czech Republic and perhaps also Poland and Hungary should concentrate on quality manufactured goods.

In a global market, like any other market, those who meet the right conditions can prosper. Investment is to be found only where the outlook for profit exists, and Central and Eastern Europe remain a mixed bag. Corruption, mafia infiltration, government inefficiency, inadequate legislation, disoriented workforces are all common factors across the region.

Each Eastern country presents a different picture. Romania, a late reformer where impetus has been lost amid political squabbling, is not a strong prospect. Neighbor Bulgaria, also a late starter, appears to be progressing.

Now in the doldrums after years as Central Europe's star performer, the Czech Republic continues to be stalled by political deadlock. Paradoxically, neighbor Slovakia, despite its perceived flaws in democratization, features strong growth, steady investment inflows and falling unemployment.
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