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NATO: Investment Data Show Economic Benefits For New Members

  • Mark Baker

Economic statistics from NATO's first three Central European members appear to confirm what many have argued: NATO membership confers not only security benefits but economic ones as well. Statistics show that the level of new foreign investment going into Poland, Hungary, and the Czech Republic is rising or has remained stable, even as those countries finish off their large-scale privatization programs. Analysts say investors are responding to the reduced risk of investing in those countries and that NATO gets at least part of the credit. This comes as welcome news to NATO supporters in aspiring countries who must counter arguments that the costs of NATO membership outweigh the gains.

Prague, 10 May 2002 (RFE/RL) -- Economic figures from the first three Central European countries to join NATO appear to substantiate claims that membership in the alliance offers not only military benefits, but economic ones too.

Analysts say the amount of foreign investment going into Hungary and the Czech Republic, which along with Poland joined NATO in 1999, continues to rise. In Poland, overall foreign investment has declined in the past two years, but the proportion of money going to support new, or "green-field," projects has risen.

Officials in countries that aspire to NATO membership frequently use an economic argument to advance their cause. They point out that NATO membership not only reduces the chances of conflict but -- because NATO commits its members to a free-market economy -- it reduces risk factors like nationalization and expropriation. Risk-averse foreign investors, they say, will respond by pumping in more money.

Until recently, there was no hard data to substantiate this claim. But now, three years after NATO's first wave of eastward expansion, something that might be called a "NATO effect" is starting to be observed.

Vike Gronenberg is an economic analyst specializing in Central Europe at the investment bank Salomon Smith Barney in London.

She said that since 1999, the amount of foreign investment going to the Czech Republic and Hungary each year is roughly double what it was before NATO expansion. In Poland, direct foreign investment remains one of the few bright spots in an otherwise lackluster economy. Gronenberg said investors are responding to the reduced risk.

"Green-field and -- let's call it nonprivatization -- [foreign investment] has been increasing [in the three countries]. And this is very much for the reasons that you can argue: because of NATO; because of stability, democratically, in terms of policies. And that's all conducive to economic growth and investment," Gronenberg said.

She said this is especially noticeable in Hungary, where foreign investment had been expected to fall after the country completed most of its large-scale privatizations in 1997 and 1998.

Contrary to expectations, however, investment in Hungary has grown as investors increasingly choose to locate new factories and industries there.

"What was interesting was that [foreign investment in Hungary] did not drop off, but remained roughly stable. And in fact it increased slightly. The reason for that was that there was a lot of green-field investment and other investment to offset the loss in privatization-related revenues," Gronenberg said.

To be sure, measuring this NATO effect is not easy. Nor is it necessarily a major reason for foreigners to invest. Many other factors, including things like geographic location, labor skills, and currency stability, play a role in a firm's decision to put its capital in a foreign country.

And the NATO effect is probably small. A 1998 study in Hungary attempted to quantify the economic impact in Hungary of NATO entry. It concluded that entry into NATO would bring in around $50 million a year in foreign investment -- or well under 5 percent of the total.

Still, Robert Hejzak, director of marketing for the Czech investment-promotion agency Czechinvest, said NATO membership has made a strong contribution to his country's success at attracting foreign investment.

"Things like the accession to NATO or the future accession to the [European Union are] a major reason for investors when they think of political [and] economic stability. It's something that we are not able to measure directly, but we know from our research that investors put high emphasis -- [it's] actually 'priority number one' for them when they make a decision about where to place their investment -- [on the fact] that the final destination for their investment is a country with a high [degree of] economic and political stability," Hejzak said.

Hejzak said foreign direct investment since 1999 has grown to around $5 billion to $6 billion a year in the Czech Republic. This is approximately double the amount before that.

The Czechs have been aggressive in adopting a system of investment incentives, including tax breaks and rebates for companies relocating in economically depressed areas. This has paid off.

Hejzak also said investors favor the country's location and labor force. "If the [investor needs] geographical proximity to the Western market, then certainly the Czech Republic is very well placed on the map. [The project] can assure 'just-in-time' delivery from basically any place in the Czech Republic. If it's the quality of the labor force, then I think the Czech Republic still has a very good competitive position."

The relatively positive experiences of NATO's first three Central European members will bolster the arguments of NATO supporters in aspiring countries like the three Baltic states, Slovenia, and Slovakia. NATO, later this year, is expected to name which countries will be invited to join the alliance in the next wave of expansion. Bulgaria, Romania, Macedonia, Albania, and Croatia are also in line.

Ramunas Vilpisauskas is a researcher with the Institute of International Relations in the Lithuanian capital, Vilnius. He cautioned that measuring the NATO effect is difficult but confirmed that his research, too, shows a correlation between NATO entry, higher levels of foreign investment, and eventually economic growth.

Vilpisauskas saif the argument is useful to counter criticism that NATO entry will only burden government budgets and force huge investments in military hardware of dubious economic value.

He sees this as the major criticism of NATO. "I would probably see only one [disadvantage of NATO membership], but again, this cannot be stated as a straightforward case. I am talking about expenditures that are needed to meet NATO membership criteria."

Vilpisauskas said he believes the overall gain from investment and security that NATO membership will bring in is larger than the budget expenditures. In any event, he said, governments always have a budget for security, whether they are NATO members or not.