Aug 28, 2008

Back to the Balkans. Volkswagen’s Relocation Plans and State-led Investment Promotion in Visegrad Countries.

By Michal Trnik, PERG guest author and MA IRES 2006 graduate

A recent news post concerning the alleged move of Volkswagen’s factory from Slovakia to Bosnia triumphantly lifted eyebrows of those who croaked the unstoppable and permanent eastward movement of foreign capital where the costs are irresistibly lower. According to these pessimistic prophets it was only a question of time when Central Europe cease to be interesting for foreign investors, which will result not only in its decreasing influx but also in direct relocations of multinationals’ production facilities.

The noticeable fuzz in Slovakia spurred by the announced VW’s plan to move whole production to Sarajevo was even magnified by citing no reasons for such a move. The ongoing silly season further boosted speculations on all fronts. Exorbitance of these catastrophic scenarios was refuted early on by Reuter’s refining follow-up, which confirmed only the relocation of small line that would have no direct impact on neither of VW’s two plants in Slovakia whether in terms of decreased production capacity or employment.

Panic is not justified. Not yet. Slovakia and other V4 countries in comparison to Bosnia still posses many FDI luring advantages. The decision of Europe’s biggest car manufacturer to start a new line of production in Bosnia rather than in Slovakia, however, sends a specific signal to Slovak government and other Central European countries as well. In particular, it serves as a good case for identifying persisting gaps in long-term investment promotion frameworks across the region.

Several speculative reasons why VW opted for Bosnia can be spelled out. Some argue that fundamental push factors that contributed to VW’s decision dwell in acute lack of skilled labor force, strengthening Slovak currency, sprawling anti-business rhetoric of current populist administration and end of tax holidays for the company. While others stress Bosnia’s pull factors such as incentives not subjected to strict EU limits, previous history of VW car production in Sarajevo and site’s potential to serve as testing grounds for further relocations.

Although none of the abovementioned reasons have to be directly responsible for the restart of VW’s production in the Balkans, they offer a larger picture concerning the state of current strategies to attract foreign investment in Slovakia and Central Europe. The Tatran Tiger’s economic success was largely generated by immense FDI inflows spurred by liberal reforms of Dzurinda’s governments. Most of investments came from at that time desired manufacturing industries, which helped to transform once economic laggard into the world’s biggest carmaker.

New challenges need fresh ideas. The V4 region soaked with manufacturing FDI demands new investment promotion approaches in order to move up the development ladder. Such strategy needs to be dynamic and has to reflect country’s development goals. In Slovakia, however, such scheme seems to be completely missing as can be seen on the country’s excessive and continuous reliance on automobile industry.

VW’s relocation to Bosnia certainly is not the first and will not be the last. Constantly rising wages in Slovakia and soaring world oil prices having detrimental effect on the car industry globally show obsolescence and fragility of country’s auto-industry focused investment promotion framework. Despite some indications of new winds blowing in minds of policymakers nothing like coherent, functioning and future-oriented investment promotion strategy was implemented. Although some minor diversification of FDI inflows into electronic industry occurred recently, Slovakia considerably lags behind in the amount of projects in high-tech, sophisticated services, IT or R&D. These require more brains than heavy machinery, can help transform the country into a modern service-based economy and make it less vulnerable to companies’ relocations. Slovakia’s close neighbors seemed to understand this some time ago.

The main regional leader in this respect is the Czech Republic, which continuously attracts sophisticated investments with high value added. The Hungarian investment strategy registered noticeable successes in form of highest FDI stock per capita in CEE and has a relatively better balanced structure as well. In fierce regional bidding wars for mega-investment projects, however, Hungary often does not hesitate to dig into taxpayers’ pockets in form of extra sweeteners offered to foreign investors. The case of Hankook Tire and speculations about Daimler’s recent investment are good examples of Hungarian generous aid to multinationals.

Daimler’s investment shows that V4 countries are still attractive for investors and can effectively compete with cheaper countries in the East even for large capital intensive investment projects. As Daimler is believed to be one of the last automobile investors in this region it is high time to rethink investment promotion strategy for those who did not do it yet. Czechs, Hungarians and even Poles did their homework on time and not only adjusted but also implemented their strategies oriented towards more perspective type of investments.

The age of massive capital and technology intensive manufacturing FDI inflows to the region is over. Forward looking investment promotion strategy is one of the necessary ingredients for further growth. Attracting investment in cutting edge technologies, services, R&D together with increased effectiveness of current production can become corner stone of its future economic success. Slovakia better learns this lesson quickly in order not to get caught unprepared face to face messages like that announced by VW.

August 28, 2008

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Aug 27, 2008

Energy and the South Ossetian War: the BTC as the Main Casualty?

By Vladimír Šimoňák, PERG guest author

For the first time in the nearly twenty years since it began, the events in and around South Ossetia hit the world´s media landscape, almost overshadowing even the massive spectacle posed by the beginning Beijing Olympics. A peculiar tragedy of the events consists in the fact that this one has been regarded as the „friendliest frozen conflict“ in the South Caucasus. Intermarriage rates between Ossetians and Georgians and the density of contacts between ordinary citizens on both sides, the frequency and ease of travelling between the regions had been much higher than in Abkhazia and Nagorno Karabakh. Yet, few people ever assumed any degree of hostility between the two peoples might have caused the events of August 2008. It is equally evident that NATO´s interest in Georgia is to a major degree substantiated by the hydrocarbon transport routes running through the small and poor nation.

Being a part of a prolonged and rather complicated conflict, this full-scale war broke out after a shock-and-awe onslaught by Georgian forces on Tskhinvali, the separatist capital of South Ossetia located some five kilometres away from the de facto border. Even though the swiftness of Russia´s response has been interpreted as the corpus delicti of its evil intentions, it took a less than vigilant observer to see something was to come. Over the past months, tensions between Georgia and its breakaway regions had been rising and military confrontation had become a common sight. Immediately before August 8th, South Ossetian leadership decided to evacuate a part of its population, by itself an unprecedented step. By early August, signs of immediate escalation had become ubiquitous and Russia was certainly well informed and ready for action. The initial Georgian advance was halted and reversed after some three hours. In a nutshell, more than five years of intense and costly U.S.-led foreign military aid to Georgia produced an advance by less than twenty kilometres for a couple of hours. Afterwards, with the Georgian military effectively dissolved in thin air, the Russian troops took their time to complete what business their leadership wanted to get done. Russian forces took their time to inflict as massive a damage as they could to Georgia´s strategic infrastructure, the seaport of Poti and the only trans-Georgian railway being just examples. The next occassion for the Russians to roam about freely in Georgia might take years to come. With the fog of war dissolving, what is the impact on the energy market?

Regarding the oil transport, the Baku – Tbilisi – Ceyhan (BTC) pipeline had already been put out to a halt. Two days prior to the Georgian assault on Tskhinvali, a bomb exploded near the BTC on Turkish soil, forcing the operator to shut down oil transports for weeks. The Kurdish PKK claimed responsiblity, shifting the event out of focus. During the fighting, the BTC was also allegedly targeted by Russian jets, which the Georgian side swiftly interpreted as an attempt to destroy the facility. This isolated incident may be explained rather as a sort of message to the BTC operators, as nothing could have prevented the Russian forces from destroying the pipeline, had they intended to do so. The oil transport via the Black Sea port of Supsa has come to a halt on August 12th, the operator citing „security concerns“. Russian troops making themselves at home in the narby Poti have probably been thought to be more dangerous than the intense fighting itself, as August 12th was precisely the day on which Medvedev announced the end of Russian military actions.

The Baku – Tbilisi – Erzurum gas pipeline was working until August 12th and resumed functioning only two days later. No direct threat to the pipeline has been reported, not even by hysterical Georgian officials. Rather than the weapons used in the conflict, what we may find surprising are the ones actually not used: Russia never cut its gas supply to Georgia during the fighting, albeit it had done so several times in recent years. A possible explanation is the intention not to harm natural gas supplies to Armenia, Russia´s ally already put in a difficult position by the events.

Quite remarkably, the global oil market showed no perceivable reaction, even though the events effectively stopped Azerbaijani and Kazakh oil from using the „Georgian passage“ bypassing Russia´s pipelines. Russian troops have effectively stopped this highly valued transport routes from working for weeks, and showed a good deal of reluctance to leave central Georgia, the pipelines´ most sensitive point. Despite such tangible insecurity, the world markets recorded a decline in crude prices, actually quite a sharp one, compared to the record of several recent years. The bottom line is, there is no reason at all to claim that the energy industry in the region was caught by surprise by the events and that the war affected its business-as-usual. But are there consequences in the long run?

Not only have the Russians physically occupied territories adjacent to the highly valued and strategically important pipelines, forcing them to shut down. They even declared their firm intentions to establish a permanent presence in extensive „buffer zones“ close to South Ossetia and Abkhazia. Such a step would basically remove the advantage gained by forcing Russian troops from their cherished bases of Viazani and Akhalkalaki in recent years. What had been cited as an unacceptable threat to the BTC project in construction is escaping all attention as it is functioning.

The United States have reacted in perhaps the least self-confident way since 9/11. Strong rhetorics and high-profile visits (including the quite riduculous use of a destroyer for carrying „humanitarian aid“, instead of a freighter) are clearly less than expected by anyone, including the nervous Georgian president. The lack of a clear preference regarding the future of the region in general and of Saakashvili´s leadership in particular (accentuated by the forthcoming U.S. presidential elections) remind of Shevardnadze´s last years in office. South Ossetian war may well be the point when a replacement has to be found to overcome the barrier so painfully hit by Georgia.

In the eyes of the public, the only goal not attained by the Russians was their supposed interest in removing Saakashvili from power. A feasible explanation might be the simple remark that leaders are removed from power by being replaced by another ones and the Russians clearly had not had a full-fledged “liberation“ scenario including an alternative leadership. But, is there an option to regime change when the Russians leave? Georgian society will be left in deep depression, both economically and psychologically, with its leadership´s emblematic policies having suffered the most evident and complete defeat and foreign investors´ confidence plunging into the abyss. The opposition, once suppressed by Saakashvili´s regime, might come to pose a serious alternative.

The rhetoric confrontation accompanied by a striking lack of actions may be indicative of a change in direction. As almost anybody is more acceptable to Russia than Saakashvili, it should not be difficult to find an alternative acceptable to NATO. Such a person may also prove to be more predictable and controllable in his or her (let´s not forget several important female figures of Georgian politics) actions. The sight of a ruined and defeated important U.S. ally may lead to a number of conclusions, including the one that Saakashvili has been quite more of a maverick than fitted his role. Given Saakashvili´s deep-rooted Russophobia, almost anyone can be expected to understand the simple fact of Russian neighborhood more than he had.

As a conclusion, the recent events may well result in o certain sharing of influence in Tbilisi, or rather an acknowledgement of legitimate Russian interest in the Southerm Caucasus. Under such terms, the BTC may well lose most of its political appeal to potentially independent-minded leaders around the Caspian Sea, a signal that has probably already been understood in Astana. A partial gain of influence of Russia over the BTC means more of a loss for the others, depriving the region of the only way of exporting its oil and gas (by far largest source of income for any of its governments) without Russia´s interference. The „buffer zones“ and Russian posts along the pipelines may well be just the first steps of putting this emerging reality on the map.

August 26th, 2008

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Aug 17, 2008

Reforming Slovak primary and secondary education. Or not really?

By Katka Svickova

After the summer holidays, the roughly 830 thousand Slovak pupils and secondary school students should return into a different school than the one they left at the end of June. At least this is what the new Law on Education passed by the Slovak Parliament in May 2008 envisages. And at least for a part of the pupils at first, as the law will be implemented gradually. However, what this new school will ultimately really be like, and how new it really will be, is uncertain as the real changes can only be seen in the classroom and in a few years at the earliest. In spite of this uncertainty (or perhaps facilitated by it), the reform triggered a strong critical reaction.

Main features of the Slovak educational reform

On paper, the reform goes with the freshest winds of change blowing across Europe: education should be based on new, creative approaches, explorative, project- and problem oriented methods, on own activity and participation of the pupils in their education, on new content of subjects stressing competences and capabilities rather than memorized knowledge. The number of pupils or students per class should be reduced. Schools are promised more autonomy in determining the content and the form of the subjects taught. Parents, pupils and representatives of employers´ organizations should obtain more space for direct participation in the governance of schools and in the creation of educational programs. Last but not least, the choice between schools should be free and so should be the offer of educational opportunities. So can the pupils be looking forward to an educational paradise unfolding over the next few years?

Not really, say the critics. While they agree that the educational reform is long overdue, most of them call for its further postponement – for reasons connected both to its content and to the capacity of the current system to implement it. Indeed, the reform was really fast, and there was little time for a thorough public debate: the draft was presented in September 2007, the law was passed in May 2008 and its implementation starts in September 2008. In other countries, a similar process took normally between 3 and 4 years. In the Czech Republic, for example, the educational reform, launched in September 2007, was more thoroughly debated in its preparation phase and schools got more than 2 years to get ready for it.

Given the almost astronomic speed of the reform in Slovakia, the question is how significant changes it indeed brings. And if it really signals a watershed change - breaking with the traditional centralised system oriented at pupils cramming and reproducing facts - why the scope for the discussion was deliberately so limited. Reform of the educational system turns almost all members of the society into stakeholders. One would hardly find a person today, who would doubt that education is of crucial importance for the development of the individual as well as the whole society. Yet even the short time allowed for public debate could hardly hide lack of interest from the public.

What is really in the magic box?

The critics, who raised their voice most loudly, pointed out that the new law is not a reform at all but rather a bundle of atomistic and often second-rate regulations. Moreover, its effect will be contrary to the one promised. Instdead of more autonomy, it will bring more centralization and control. Yes, individual schools should create their own educational programs. Yet according to the critics, the binding framework educational programs set by the Ministry of Education, prescribing obligatory content and conditions of education, do not give much space for schools to add their own content. As a representative of a secondary schools association said, the secondary schools will copy the ministerial framework educational programme to 95 %. And yes, the law proclaims more freedom of choice; yet at the same time, there will be always only one textbook available for free for individual subjects, approved by the Ministry. The freedom of choice of school will allegedly be limited by the power of the Ministry to set limits for the number of pupils in the individual study programs of secondary professional schools. The critics also say that the reform does not address a serious problem of inequality of chances in education. (However, besides a call for personal assistants and an improvement of the quality of elementary education, they also do not suggest any concrete proposals how to solve this complex problem). In all, despite the huge need for reform, the new law does not deviate too much from the old system.

Perhaps, the character of the law was best pronounced by the Minister of Education, Jan Mikolaj, when presenting its draft: „Do not search for liberal values in this reform, I openly say, I think that we are not in such a deep mess.“ But perhaps, the audience should look for nationalistic values instead. The Ministry of Education is in the hands of the Slovak National Party, whose leader, Jan Slota, is (in)famous for numerous anti-Hungarian statements. The Hungarian minority in Slovakia feels the limitation in the choice of schoolbooks as a measure against them. No wonder - after a statement by Slota who called Stephen, the Hungarian king and saint who is depicted on the cover of a current textbook used by the minority, “a Hungarian clown on a horse.“ In its introduction, the law also states that one of the aims of education is to enhance the respect to national traditions, values and state language by all citizens.

What can pupils expect when they return to school in September?

Based on the Czech experience, where educational reform, on paper very similar to the current Slovak one, has been implemented since last September, not much groundbreakingly new should be expected from the initial phases of the reform implementation. The Czech discussion shared some similarities with the Slovak one. Its conclusions and lessons learned from a year of implementation indicate that much more depends on the individual teachers and school directors than on what is written on paper in the Ministry. Many schools started experimenting with new methods and new teaching approaches much earlier than they were told by the law. Those which did not want to or could not do this, just produced and handed in the obligatory school programe, and (with a few cosmetic changes) continued their business as usual. This might be the case of many Slovak schools too. Since indeed, the teachers and schools got very little time to prepare for the changes.

Although the critics of the educational reform in Slovakia pointed to some pertinent (but at the moment unresolvable) issues, the attention left several other, equally if not more important ones, in the background. In particular the issue of school financing, governance and teachers´ remuneration (and the level of autonomy schools really have here), the education and motivation of teachers (ensuring that they also actually have the competences they are expected to develop among the pupils in the classroom), or active involvement of stakeholders (especially parents).

All worth, at least, of prospective blog posts ;)

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Aug 16, 2008

Nuclear Energy revival in Czech Republic, Slovakia and Hungary

By Andrej Nosko

Czech ambassador-at-large for energy Bartuska recently compared European countries' nuclear power policy to people, that want to legalize marijuana, while half of them already smoking in private, being afraid to admit it in public. In this post I look at three of these smokers - Czech Republic, Hungary and Slovakia.

Czech Republic, Slovakia as well as Hungary are experienced 'smokers.' Generating around 40%, 55% and around 40% of their electricity by nuclear respectively.

Czech Republic has two nuclear power plant (NPP) sites - Dukovany (2x WWER 440 / V213) and Temelín (2x WWER 1000). Slovakia has had two NPPs Jaslovské Bohunice (WWER 440 / V213) last two of its five units are scheduled for shutdown by the end of 2008 after the political decision during the EU accession negotiations; and Mochovce with two units functioning (WWER 440 / V213) and two more units foreseen to be completed in 2012 and 2013 respectively doubling its overall capacity. Hungary has a single NPP site at Paks, operating four WWER 440/V213 units (one of which was bought from Poland, after its nearly completed Żarnowiec NPP was abandoned)

The renewed interest in nuclear is not confined to CEE countries, whole world is reconsidering nuclear, since, although leaving many questions open, it currently is the only commercially tested and viable technology that provides CO2 free alternative to fossil fuels.

The debate was stirred-up again just before the Brussels summer holidays at July 2, 2008 conference, when Known supporter of nuclear energy, Hungarian MEP Edit Herczog (MSZP) mentioned that Hungary should increase its nuclear potential.

This comes at the same time as Czech ČEZ announced that it would double the capacity of its Temelín NPP, and Slovak PM mentioned at various occasions that political decision to close Bohunice NPP should be reconsidered, or a new NPP should be constructed at the site, as well as at other sites.

These moves are not limited to our three regional 'smokers,' Italy, country that shut down its NPPs after a referendum in 1987 has announced that it would go nuclear again. Poland, which after a local referendum suspended construction of its first NPP seems to be reconsidering its anti-nuclear stance and should join the 'smokers' club by 2020.

Map depicts NPPs only in CEE:

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Although nuclear is currently the only viable solution if EU is to stay true to its aims of cutting the CE2 emissions, it is not without problems. Most of the EU countries have not considered answers to the question of spent fuel and associated waste. Also the question of nuclear proliferation is one that needs to be taken very seriously. Nonetheless, just like with the smoking, pretending that it doesn't happen is not helpful, we need to talk about the associated problems and weight the solutions.

EDITED 18/12/2008:
On December 18, 2008 Slovak government announced its selection of Czech national energy champion CEZ, as its strategic partner for construction of the 5th unit. This should be done by a common company with shares of 49%CEZ and 51% Slovak government to be set-up next year. New NPP unit should be operational in 2020. Minister of economy Jahnatek mentioned 7 points criteria for selection, including (quoting Minister Jahnatek):
- ability and experience with building 3rd generation reactors
- whether the company is vertically established in Slovakia
- opportunities and ability in terms of dynamic stability of transport network and grid
- sufficient financial backing

Minister mentioned EdF and Enel as trailing in the second group behind CEZ, according to government information, 10 companies were in the selection process.
The event gain attention in Slovak news primarily through the voiced criticism of government for not announcing a open competition, or transparent selection of this strategic partner.

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