Page 54 - BNE_magazine_11_2019

54 Opinion
bne November 2019
FDI inflow
The straitjacket: EU membership
The membership of both Hungary and Poland of the EU acts as a major safeguard. Even where institutional deterioration has occurred, the EU has an increasing number of instruments to prevent a full descent into authoritarianism.
The European Commission has flexed its muscles, albeit hesitantly and slowly, with proceedings to trigger Article 7, which could result in the suspension of certain membership rights. The EU budget for 2021-2027 is likely to couple development funding with respect for the rule of law. The newly established European Public Prosecutor’s Office (EPPO) will target nepotism and corruption.
There are other mitigating factors. Hungary and Poland are among the largest beneficiaries of EU structural and investment funding, having received €29bn (3% of GDP) and €105bn (2% of GDP), respectively, between 2014-2020. These funds – which benefit state-favoured companies – are not easily raised from elsewhere. Membership of the single market prevents by its very nature the kind of policies that would really cause investor flight, such as restrictions on the repatriation of profits by foreign companies, while being part of the EU “regulatory union” ensures commonality. Foreign exchange policy is coordinated with the Eurozone and European Central Bank, preventing politically catalysed currency valuations similar to those seen in Turkey.
Indeed, Hungary and Poland are so intertwined with the Central European supply chain and the FDI that brings, that it is only politically logical to push the limits of the rules, rather than to break them outright. Material realities win the day: the moody teenagers know on which side their bread is buttered – they may be rebellious but leaving home is not an option.
Fair winds: The economic cycle
Despite the institutional decline in Hungary and Poland,
the Fidesz and PiS governments have enjoyed an economic upswing. The global economic cycle has peaked and is slowing but has not crashed, cruising at a growth rate of 3.6% of GDP in 2018, while aggregate growth in the EU was 2%. Hungary and Poland perform above these averages, with both posting growth rates of 5%.
These rates are not synthetic, nor generated solely by EU funds and hot money: they are spread across all sectors of both economies, indicating that the macroeconomic fundamentals are robust.
Other key indicators bear this out: budget balance, current account balance and household debt levels, for example,
are all within sustainable limits. In such circumstances, foreign investors are prepared to tolerate higher levels of risk, including political. Yet the cycle is perpetuated by investor confidence, and should this disappear, it might not return
in the same volume.
reduced the social security burden on employers, and eased the process by which employers can dismiss workers.
Favoured companies, including foreign investors, can maintain a privileged relationship with the state through “strategic partnerships.” A system of tax-deductible donations to sports foundations – football is the burning passion of the Fidesz community – also allows for political protection to be bought.
PiS has also introduced generous incentives for FDI even while it has spoken of the “re-Polanisation” of certain sectors. The Special Economic Zone (SEZ), which offers corporate and personal income tax relief for new investments, was expanded from a regional to a nationwide basis. Companies may deduct up to 50% of investment costs from their corporate tax bill for projects that last at least five years.
The Innovation Box scheme conditionally lowers tax on intellectual property to 5%, the lowest level in the developed world. Investors in underdeveloped regions are exempted from property tax.
More generally, both countries occupy geographically strategic locations in the Central European supply chain. Poland, in particular, will deepen its infrastructural connectivity with several major projects, such as the Central Communication Port (CPK), which will serve the aviation and railway sectors. Hard indicators such as these, factor into the long-term planning of foreign investors more than populist rhetoric
and the creeping politicisation of independent institutions.
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