The maquiladora syndrome: central European prospects
Marc Ellingstad
A great deal has been written about the attractiveness of investing in Central Eastern Europe (CEE) following the change of regimes in 1989 and the subsequent economic and political transformations. According to the Economist Intelligence Unit, $24.78 billion in foreign capital was invested in the four CEE countries of Hungary, Poland, the Czech Republic and Slovakia between 1990 and 1995.(1) This figure pales in comparison with other regions: an estimated $698 billion have been poured into the former GDR in revenue transfers alone by the German state since 1990;(2) France alone has received more foreign investment in the last two years than the entire former Eastern Bloc since 1989.(3) However, the CEE region has truly become a magnet for foreign capital, comparable in this regard with regions in Latin America and the Pacific Basin.
A disproportionate amount of investment has landed in Hungary, claiming $11.2 billion,(4) or a 45% share from the entire CEE region. The lion’s share has been attracted by Hungary’s extensive privatisation scheme, by far the most ambitious in the region. In particular, the sales of utilities (electricity, gas, telecommunications) have won the government revenue and praise from the international investment community. Although representing a lesser amount, estimated at $2 billion, greenfield investment in Hungary by multinational firms is extensive. New plants for companies such as Audi, GM, Ford, Suzuki, IBM, TDK, Sony, Phillips and Samsung have come on line recently, producing largely for the export market.
Tens of thousands of pages have been written on theoretical aspects of core and periphery, and uneven regional development patterns. While much of this work was done in the context of the Third World, some useful lessons may be gained by looking at what similarities and differences exist between what has become a classic core-periphery relationship (between the USA and Mexico) and the presently existing situation in Central Eastern Europe.
This brief article hopes to touch on certain questions relating to the development path such investment patterns may help create. These issues include utilisation patterns of labour, the depth and breadth of local supplier networks, and effects on regional labour markets. The changes such developments are bringing about will have far-reaching impacts on labour-management relations in general, on education and training schemes, on regional development policy and on a broad spectrum of policy instruments. The maquiladora economy of northern Mexico will be used as a general model of comparison to raise speculative questions on the future of the CEE region within the European economy and European system of industrial relations.
Brief sketch of the maquiladora economy of northern Mexico
The maquiladora economy of northern Mexico began its growth as a result of preferential tax treatment accorded by the US government to products from assembly plants in the region beginning in the early 1970s. The proximity to the US market, low wages, minimal worker and environmental protection, and low tariffs provided a powerful magnet for a variety of manufacturing firms. Originally, mostly American manufacturers participated in the scheme, but lately Asian investors have come to play an increasingly important role, with large numbers of leading-edge manufacturers such as Sony and Samsung arriving on the scene. Currently there are about 2000 maquiladora plants employing around 500 000 people.
The purpose of this article is not to promote or refute stereotypes about the maquiladora development in northern Mexico, but, briefly and very generally, commonly noted characteristics include:
* Manufacturing almost exclusively for the export market owing to lack of domestic consumer demand (largely the result of the same low wages which lure manufacturers).
* Worker productivity, skill competencies and training expenditures are lower than in the company’s home base. Low wages provide a disincentive for substituting capital investment for labour. Of interest is the fact that productivity increases are not matched by real wage increases.
* Evidence of disarticulated secondary product markets, particularly in regard to parts and sub-contracting for foreign manufacturers. High value added components are often either imported or produced in the country by other foreign-owned firms. The finished product itself can be hi-tech, high quality with a relatively high value added component, but the manufacturing processes which occur within the maquiladora plant can be independent of these variables.
* High concentration of export-oriented manufacturing within a small geographical area (often sharing the same industrial parks). Weak labour markets on the national level fuel labour migration into industrialised regions where labour markets are tighter. This dichotomy in development patterns strengthens already existing regional disparities.
The blessings of the maquiladora economy have been mixed. Levels of technology and skill utilisation in these factories have risen substantially in the past 20 years (originally maquiladora plants completed only the most basic assembly operations). Employment prospects in the dynamic northern regions are much brighter than elsewhere in Mexico. Infrastructure and administration have indeed been improved to provide for the new factories.
However, these developments have been very much limited to specific regions, even after the implementation of NAFTA, which eliminated special US tax advantages Mexican border regions enjoyed (although maquiladora manufacturing is no longer so exclusive to border regions). While wages are above the Mexican average, they do not even begin to track increases in productivity, as traditionally observed in other OECD countries. Trade unions have been systematically excluded from factories of many firms which at home have exemplary labour relations (e.g., Sony). Although Mexican labour regulations are in many cases more elaborate than those to the north of the border, enforcement is almost non-existent. Attempting to organise for a union is a routine reason for dismissal, well documented by complaints of US unions. To the extent that they can successfully organise, unions are crippled in their abilities to negotiate better conditions by weak labour markets. Maquiladora factories are notorious for their disregard of the most common environmental standards, often using substances and techniques which are illegal on the other side of the border.
Maquiladora manufacturing, despite its drawbacks, is an important part of the Mexican government’s economic strategy. It is the nation’s most important source of hard currency, and plays a vital role in Mexico’s battle for liquidity and financial stability. Even after NAFTA, the Mexican government has kept in place rules which favour maquiladora plants in northern Mexico, despite the fact that the Mexican heartland is in comparatively much worse shape. States and localities in northern Mexico add to these incentives by offering a range of benefits for investment in new factories.
Viewed as a whole, the maquiladora strategy seems to promote low-wage, low or medium-skill, low value added manufacturing, with little hope for a meaningful upgrading of skills, conditions or wages, at least in the foreseeable future. Rules which originally promoted the import of unfinished parts for assembly did much to retard the establishment of traditional manufacturing networks. Regional differences were only strengthened by this type of exogenous development. Of particular interest is the fact that, despite a net transfer of jobs from the USA to Mexico, the USA maintained a significant trade surplus (largely on the balance of value added goods) until the forced devaluation of the Mexican peso during the liquidity crisis in 1994 (similarly, the EU maintains a trade surplus with CEE states despite large wage disparities).
Of course, it must not be forgotten that Mexico, a poor country, is severely limited in its development options. There are large gaps between rich and poor, with only a small middle class, a severely underfunded educational system which is poorly equipped to train future workers needing technical and problem-solving skills, and a set of social institutions which could be described in many ways as underdeveloped. However, for our purposes it is not necessary to examine the specifics of the evolution of Mexican maquiladora manufacturing, only the effects of its presently existing status on economic development patterns in the very generic sense.
Superficial sketch of some trends in Hungarian greenfield manufacturing and effects on the labour market
While the state sector continues to shed labour (the private sector in Hungary now constitutes about 50% of GDP), the private sector, and new firms in particular, have become the engine of job growth in Hungary, albeit modest. In this category, foreign-owned firms show by far the greatest tendency towards expansion.(5) Foreign-owned firms are estimated now to account for up to 70% of Hungarian manufactured exports, up from 50% in 1993.(6) Greenfield manufacturing now accounts for about 15% of Hungarian GDP. Therefore, a cursory examination of trends apparent in greenfield manufacturing is helpful in an effort to predict future development paths and trade patterns [ILLUSTRATION FOR FIGURE 1 OMITTED].
Interestingly, Hungary has managed to increase its proportion of high value added products as a percentage of total exports in the past few years [ILLUSTRATION FOR FIGURE 2 OMITTED]. Perhaps surprisingly, Hungary’s high value added proportion of exports is greater than that of the more industrialised Czech Republic. This may reflect the slightly higher wage costs associated with production in Hungary compared with the other CEE countries, as well as the arrival of export-oriented greenfield manufacturing. In general terms of trade, however, Hungary is at a disadvantage (with a large dependence on agriculture) and following 1989 has gone from being a net exporter to a net importer (as recently has the Czech Republic).
Two interesting questions regarding greenfield manufacturing in Hungary deserve attention:
(1) To what extent are networks of local suppliers able to satisfy the needs of these growing industries within the context of the local market and given the tendency among large manufacturers to source their components globally?
(2) To what extent will the industrial relations systems predominant in the rapidly expanding greenfield sites spill over into the larger national context? How will the dynamics created by such modes of production, product markets and human resource management affect the institutional environment outside this sector?
As Hungary has been generally less concerned than Poland and the Czech Republic about foreign ownership of flagship industries (largely because of Hungary’s more extensive privatisation and restructuring schemes, fuelled in part by a much larger debt burden), and has by far the region’s highest per capita foreign direct investment, it provides an ideal model to examine these questions. In addition, the off-shore status some greenfield assembly plants in Hungary enjoy – with tax-free imports of components and five or ten-year tax holidays on profits – mirrors certain aspects of the maquiladora trading environment. (A recent Deloitte Touche Tohmatsu survey of international investors in the CEE region found that nearly half of them were offered some form of tax breaks as a lure).(7)
Evidence of disarticulated product markets leading to reduced multiplier effects
Motor vehicle manufacturing provides an exaggerated but nonetheless useful example of the complexity of manufacturing and supply networks. Industry representatives in the USA often claim that for every job in the motor industry, another 20 exist in materials and components production, sales and distribution. Multiplier effects are notoriously vague, but whatever the exact figure, the majority of jobs created as a result of motor manufacturing do fall outside the factory producing the end product.
The webs of components and unfinished materials supply to the motor industry are wide and notoriously complex, dominated by a large and diverse group of Mittelstand firms, often concentrated in certain regions, e.g. Baden-Wurttemberg, Turin, and the northern Mid-West of the USA. Price pressures, fast-paced innovation in product and manufacturing processes, and the highest demands in quality and inventory management make this sector both dynamic and in many ways even more susceptible to upturns and downturns than the motor industry itself.
Four motor manufacturers are active in Hungary – Suzuki, Ford, GM (through its Opel division) and Volkswagen (through its Audi division). All of these plants are new, having been built within the past five years. The main attractions for these investments were: a relatively well-trained labour force available for approximately one-tenth of the gross costs of German labour, a moderately well developed infrastructure with good rail and road connections to the European market, and an internal market with an average car age of over 10 years. The Hungarian government added to these attractions by offering infrastructural improvements, training schemes and tax holidays on profits in accordance with the amount invested. Two opposite extremes of component supply patterns can be observed with the Opel plant in Szentgotthard and the Magyar Suzuki plant in Esztergom.
Magyar Suzuki’s assembly plant came on-line in 1992 after years of negotiation, aimed at producing cars for the low end of the European and Hungarian markets, with the latter at that time thought to be set to expand exponentially. Hungarian investors took a 25% share in the undertaking, with Suzuki of Japan taking a majority stake.
Agreements made with the Hungarian government in return for tax concessions obligated Magyar Suzuki to meet at least 50% domestic content by 1994, and the company has since increased this to 54% (24% of value is added in the factory itself, with 30% coming from outside Hungarian firms). The Hungarian domestic car market has since proved very disappointing owing to lack of consumer demand, so Suzuki has had to rely more on the European market than it had originally planned. To this end, however, it has had to meet 60% European content requirements to avoid higher duties and falling under the EU’s Japanese quota. Of note is the fact that high-precision, high-value components such as the engine and transmission are imported from Japan(8) (the same components which Audi is able to manufacturer in Gyor for its Ingolstadt plant, although again, the engine components themselves are imported) Although nominally successful at supplying parts, Hungarian firms have found that the low production runs at the Esztergom factory (only 50 000 per year) often do not justify the investment required to become a contract supplier. For their part, Suzuki managers claim to be satisfied with the quality of the Hungarian components purchased.
GM’s Szentgotthard assembly plant came on line in 1992 with a yearly capacity of only 15 000 vehicles, and a twin plant to produce engines. The original production of 230 000 engines has since doubled. In 1996 another plant came on line to produce engine parts for supply to other Opel operations in Europe. Since 1991 GM has invested over DM 700 million in its Hungarian production and assembly operations.(9) Like Ford and Audi, Opel can import its production components duty-free.
Because it is a European firm and the vast majority of its components production is made in Europe, EU local content requirements do not affect Opel’s Szentgotthard production. Reflecting this fact, local content is quite low: 8% in assembly operations and only 5% in the engine plant.(10) Reflecting general experience in Poland and the Czech Republic, it has proved exceedingly difficult for Hungarian sub-contractors to gain a foothold in the supply chain. High quality, competitive prices and timely delivery are not the only hurdles to jump; building the trust and long-term relationships between firms which the motor industry concerns have come to favour is also a major task.
Multiplier effects as a result of GM’s investment are clearly evident, but these belie a trend which has become apparent with greenfield investment in CEE: other foreign firms moving into regions to supply these operations. For example, the German aluminum firm VAW AG recently decided upon investing DM 80 million in a new facility in Gyor to supply Opel’s Szentgotthard engine factory, signalling that Opel was unable (or unwilling) to find Hungarian producers of adequate quality. Ford uses Hungarian suppliers for only 5% of its components, and Audi a mere 3%.
The difference between Opel’s domestic content share of 8% and Magyar Suzuki’s share of 54% seems to be the external pressure put on Suzuki by its agreement with the Hungarian government and EU tariff regulations (in addition to the strong appreciation of the Japanese yen). The Suzuki example is very much the exception to the rule, however: domestic content rules are so strict on the EU side only because Suzuki is a Japanese car manufacturer. (The debate over domestic content is nothing new to the EU; it began in the mid-1980s when the Japanese started building assembly operations in the UK to avoid higher tariffs.) The supply pattern exhibited by Opel mirrors maquiladora manufacturing, at least at this (admittedly early) point in time.
Significantly, the car manufacturing plants in Hungary are no less technologically advanced than similar plants in the West. In many ways, because they were built recently, they are even more advanced – despite the temptation to substitute labour for technology, given low wages. In this way, greenfield manufacturing by foreign-owned companies seems to differ from some foreign-owned privatised production facilities, where low or middle-range production is sometimes substituted for more technologically advanced and capital-dependent production. (For example, after the Hungarian Cable Works was privatised, its German buyer signalled the intention to shift the highly profitably telephone cable production to Germany and transfer lower margin production from Germany to Hungary.)(11) Like greenfield plants, foreign-owned privatised facilities often switch from domestic to foreign suppliers after ownership transfer.
It must also be added that GM’s webs of suppliers and logistical operations are remarkably complex, and oriented not to specific plants but rather the worldwide manufacturing operations as a whole. This seems to put the capital-starved domestic firms of the CEE region – by financial necessity often focused more on survival in the short and medium term – at a distinct disadvantage in garnering orders from the industrial giants. A quick glance at comparative R&D spending reveals the danger facing the CEE region of a cementing or strengthening of technological and product lags [ILLUSTRATION FOR FIGURE 3 OMITTED]. In the past decade, R&D activities in Hungarian firms have declined precipitously, with 57% of firms claiming no R&D activity whatsoever.(12) (It must be added, however, that recently international companies such as GE and Audi have begun moving some of their product development activities to Hungary to be closer to their manufacturing activities. It remains to be seen whether this is a trend which will develop further.)(13)
Building the trust required for such models of component supply inevitably requires sufficient capital on the supplier’s side to endure losses (after the expense of re-tooling and re-training) for a period of time with the expectation of eventually recouping the initial investment. High interest rates fed by high inflation and a banking system which has been conditioned to be risk-adverse make such longer-term strategies difficult for even the largest Hungarian enterprises. Multilateral lending institutions such as the EBRD have also proved ineffective in such mundane but vitally important tasks as financing re-tooling (to be fair, however, this is not the role the EBRD has chosen to take). The Hungarian Ministry of Industry and Trade offers subsidies which can be used as bridging finance, but mostly for larger (and often declining) firms.
Impact of foreign direct investment on the Hungarian labour market
Mirroring experience in the USA, a number of European manufacturers have been reducing production in their traditional home markets and increasing investment in the CEE region. Perhaps the best known examples of this trend are found among the Bavarian manufacturers who have shipped whole factories, down to the last screw, across the border into the western regions of the nearby Czech Republic. In addition to being able to open new markets by manufacturing in the CEE, Western European companies find tremendous cost advantages: whereas ABB pays its German worker DM 24.30 per hour, the Polish or Czech ABB worker earns less than DM 2 per hour; while the German employee works 1433 hours per year, the Czech works 1910.(14) When one adds all wage and benefit-related costs, the differences are even greater.
In their original investment assumptions shortly after the tumultuous changes of 1989 many large foreign investors had originally reckoned wage scales would gradually converge towards the EU average. Except for top managers and specialists, this has generally not been the case. At General Electric’s Tungsram plant in Budapest, for example, hourly wages average between $1 and $1.50 – the same level as in 1990.(15) Hungarian real earnings have fallen significantly in recent years (with an 11% drop in 1995), with a widening gap (often invisible in official statistics) between public and private sector earnings.
This has little to do with the individual decisions of foreign employers (and/or their ability to pay) and everything to do with the effects of macroeconomic weakness (particularly Hungary’s need to finance its large foreign debt and persistently high inflation) on the labour market. According to the ILO, Hungary has experienced a 28% fall in employment between 1989 and 1995 (compared with 11.5% in the Czech Republic and 22% in Poland). The 11% unemployment rate, continual labour shedding by the state sector and the inability of the fractured trade union movement to make itself relevant have created a true buyer’s market in labour. The greatest evidence of this is the failure of wages to keep up (or often even follow the same direction!) with increases in productivity, which are often in double digits [ILLUSTRATION FOR FIGURE 4 OMITTED]. The Czech Republic, with an official unemployment rate of only 4%, is also not exempt from such trends: VW chief Ferdinand Piech threatened to move Skoda production to Mexico in 1993 unless labour costs were cut (ironically, Skoda was the only VW division that year to make a profit).(16)
A recent survey of 1048 firms active in Hungary reveals that problems with keeping and training workers rank quite low on the list of problems facing companies: only 8.5% of managers reported that labour questions of any kind limited development of their firms (compared with 50.3% complaining of the limits of the domestic market).(17) Another survey of representative Hungarian firms conducted in early 1996 for a forthcoming work sponsored by Hokkaido University found that trade unions – as viewed by top company managers – had become largely irrelevant. On questions about improvement in working conditions, dismissal of workers and privatisation, over 50% of all respondents replied that trade unions at their companies had absolutely no influence whatsoever. The same survey revealed that labour problems of any kind were hardly a factor, and the only labour-related concern expressed was over the lack of skilled employees. Again, this can be seen as expressing the dichotomies growing up in the Hungarian labour market: between highly skilled and unskilled workers, between state and private employment, between foreign and Hungarian-owned firms, and between dynamic and lagging regions (see Table 1).
TABLE 1
MANAGERS’ ANSWERS WHEN ASKED WHICH WERE THE THREE GREATEST PROBLEMS
AFFECTING BUSINESS (WEIGHTED AVERAGE)
High interest rates 16.18%
Sharp competition in the market 13.02%
Lack of capital or investors 11.74%
High prices for materials and inputs 7.31%
Unpredictable government policies 6.99%
Decrease in demand 6.37%
Other 6.36%
Government bureaucratic regulations, licensing 5.08%
Obsolete technology and equipment 4.47%
Cash flow problems due to late payments 4.46%
Heavy taxes 4.17%
Lack of skilled employees 4.16%
Narrow market 3.19%
Inadequate management skills 0.97%
Weak marketing activities 0.00%
Surplus of workforce 0.00%
Employees unmotivated or lazy 0.00%
Heavy financial burdens of in-house social welfare 0.00%
Resistance to intervention by trade union 0.00%
Source: Hokkaido research data, Hungarian Survey, January-March 1996
(Japanese team leader, Rihito Yamamura, Hungarian project
coordinator, Csaba Mako).
What leads to higher remuneration for skilled labour is not just the value it adds to the product but also its relative scarcity in the market. Seen as a whole, the Hungarian labour market has yet to develop a scarcity threshold which is strong enough to pull up wage rates in accordance with value delivered. In the absence of a meaningful coordinated force on the labour side of the equation, it may prove difficult in Hungary (as it has in Mexico with maquiladora manufacturing) to exert the upward pressure on real wages (at least in conjunction with productivity rises) to create the healthy domestic consumer product market which makes economic growth more even and self-sustaining. There is little industry-level collective bargaining because employer associations are not constituted for bargaining (nor do they feel the need to be, given labour’s weakness), despite earnest efforts by the government to promote such activity.
The extent to which greenfield economic activity can be seen as creating a separate, parallel structure to the emerging Hungarian system of industrial relations can perhaps be seen most clearly at the macro level, specifically in the Council of Interest Reconciliation (ET). The ET was constituted in 1988 as a tripartite body made up of the government, labour and business representatives, designed to consult over (and to some extent form) agreements over wages, social outlays, labour law, and taxes. There are nine (sectorally differentiated) business federations present, as well as six trade union federations. Given legitimacy concerns, the general weakness of the state and top-level organisations following 1989, and its own cumbersome internal structure, the ET’s main contributions toward policy formation and wage settlements have been primarily indirect. However, as a sounding-board and a forum where the social partners can exchange perspectives and proposals, the ET has played a useful role at a critical period of time. Notably absent from the ET are foreign-owned companies and joint ventures, which are represented by their own interest organisation, the Hungarian Association of International Companies. This has created an information asymmetry which is especially disconcerting to trade unions, and frustrates government efforts to make the ET more meaningful.
Hungarian workers are also subject to the same pressures that western European and American workers have been experiencing for the past two decades: the increasing mobility of capital and production. While Hungarian wage costs are only a fraction of German wage costs, Ukrainian wages are but 11% of Hungarian wages. This is why it is especially important that job skills and quality be improved, for there will always be someplace cheaper to move low-skill work. (Southern states in the USA were very successful in the 1970s and 1980s in convincing northern industrial firms to close their unionized plants in the north and move to the non-union, low-wage, low-skill south. Very often, the same firms that moved south subsequently discovered they could find even cheaper low-skill labour in Mexico and later abandoned their southern US firms.)
Hungarian trade unions have had mixed experience with foreign greenfield plants, with most foreign managers following the broad predicates of the local industrial relations system, and sometimes surpassing them, particularly in regard to training. A notable exception is the Suzuki plant in Esztergom, where union representatives have been systematically denied opportunities to organise workers, as the Japanese managers feel the works council (similar in structure to Japanese company unions) alone provides adequate employee interest representation.(18) Generally, unions find it more difficult to organise in a new plant than at a site which already has a history of organised labour. Recently this has caused concern among unions that ‘union-free’ zones are arising in the Hungarian economy, particularly at new foreign-owned sites.(19) In another instance, two employees were fired for having led union-organizing efforts at a 200-employee greenfield site, and the German managers have since refused to even meet with union officials. At the 1200-employee Ford plant, there is neither a union nor the legally-mandated works council. IBM’s 1500-employee factory also lacks the obligatory works council, although it is newly unionised. (It must be noted that while Hungarian unions have special difficulties organising at greenfield sites, they pale in comparison with those experienced by their Mexican counterparts in maquiladora plants, where managers have been ruthless – sometimes to the extremes of violence – in acting to prevent unionisation.)
Interestingly, trends in differing public/private sector wages are not captured by official statistics. Except for higher-level managerial staff, there is not only no large gulf reported between average state and private sector wages, but state employees apparently earn on average 10-15% more.(20) Illustrating the very weak labour market, the World Bank reports little evidence of wage pull from private sector hiring, as well as the general preference among workers – present throughout the region – for state-sector employment. Although earnings are nominally higher in the private sector, hourly wages tend to be lower, which illustrates differing patterns of labour utilisation between sectors (worked hours reported in the private sector are longer). The state sector also tends to include more non-wage benefits in remuneration packages.(21)
An unusually high number of private sector firms report paying the minimum monthly wages to employees. It is impossible to give exact figures, but a high proportion of these firms pay unofficial ‘bonuses’ to escape paying wage-based employer social security and health insurance contributions. The underreporting of labour, wages and turnover is present in all European countries, but in Hungary the ‘grey economy’ is exceptionally large, routinely reported as comprising 25-30% of GDP, with every third legal firm existing solely for tax avoidance.(22) This can be accounted for not only by the very high levels of taxation but also the continuation of practices and attitudes which were present under the old regime. Unfortunately, Hungary seems to be caught in a vicious circle because of its precarious fiscal situation: it finds it difficult to lower taxes to encourage compliance, and is forced to devise ever more innovative and expensive methods to collect revenue. Wage earners invariably pay a disproportionate amount as there are fewer opportunities for them to avoid taxation. Only 10% of industrial production is untaxed, whereas 34% of clothing products and 69% of services delivered are ‘black’.(23)
On the other hand, there are indications that rifts between the public and private sector are beginning to form based on hiring patterns. Private firms, and foreign-owned private firms in particular, have been successful in attracting a disproportionate share of employees with higher education and skill levels. Simply put, the private sector’s more dynamic and flexible hiring (and firing) patterns allow a more predatory approach in personnel matters. Whereas state firms often use group-based considerations when hiring and firing (profit and loss levels, utilisation of production capacity), private firms are thought to place greater emphasis on individual performance and abilities.(24) High-precision manufacturing firms such as Opel, Audi, Ford and IBM were lured to Hungary by the combination of low wage rates for a relatively highly skilled workforce. In today’s manufacturing environment, quality and productivity are at least as important as low wages, making skill generation and retention vital to such firms. Accordingly, as in northern Mexico, foreign manufacturing firms in Hungary often pay 20-30% above average local wages to skilled employees requiring elaborate training.(25)
Increased regional disparity
As in Mexico, most greenfield sites in Hungary are built in a few dynamic regions, particularly the industrial regions surrounding Gyor, Szekesfehervar and Budapest. About 85% of all greenfield sites in Hungary built in the past 6-8 years have settled in these regions.(26) All of these regions offer well-trained workforces, a fairly well developed infrastructure with good links to Western Europe, and, especially in the case of Szekesfehervar, investment incentives offered by local government. Labour markets in these regions are much stronger than for the nation as a whole, encouraging a certain amount of labour migration. (Hungary has a relatively low degree of labour mobility, reflecting in part the difficult housing situation, as well as the strength and necessity of informal networks in supplementing primary wages.)
Hungary’s eastern regions in particular have been left out of the foreign investment boom, and have accordingly higher (often double) unemployment rates,(27) threatening to intensify an already existing ‘Mezzogiorno effect’. As early as 1992 the World Bank found significant differences in the percentage of firms that planned to lay-off workers (20% in the west compared with 50% in eastern regions) as well as notable differences in the severity of lay-offs.(28) Invariably, the costs of sharply uneven development are borne by taxpayers and government in increased social and infrastructural development costs, as well as ineffective industrial subsidies. This is also the case in Hungary, where various aspects of regional development programmes (mostly aimed at the north-east) eat up a sizable portion of the budget.
It is beyond question, however, that uneven development is better than no development, and the issue in Hungary is not so clear-cut as in Mexico, where government policy formally favours dynamic regions over those which are lagging. Issues facing Hungarian policy makers regarding disparities in regional development include the placement of industrial parks (the construction of which is receiving considerable support from localities and the Ministry of Industry and Trade),(29) improvements in the transport infrastructure, and incentives offered by localities, which some cities can clearly not afford. The latter issue threatens to replicate the competition which has grown up between American states and localities over who can offer the juiciest subsidies and tax breaks to new investors. Finally, it must be added that although government can play a role in reducing regional disparities, the strength of the markets will ultimately have the greatest effects. Until neighbouring countries such as Ukraine, Romania and Serbia begin to improve their buying power (and their ability to buy Hungarian imports), proximity to the EU will favour the western regions.
Manufacturing in CEE and northern Mexico: is there a comparison to be made?
The question itself seems too provocative: can we compare the effects of export-led growth patterns of northern Mexico with those of the CEE region? We are, after all, speaking of Europe and future members of the European Union. Levels of education, training and infrastructural development are vastly different from those of Mexico, as are societal institutions and norms.
This brief article is obviously not meant to address questions concerning the causes of uneven development, nor whether maquiladora-type development has been a net gain or net loss to Mexico. Missing are the extensive cross-country sectoral data needed to make such a comparison serious. Yet there are some discouraging similarities between certain facets of manufacturing in the two countries which, however general and superficial, should at least be examined. These include:
* Productivity increases in both countries are not met by increases in real wages, because of high levels of unemployment and the inability of trade unions to negotiate successfully in such an environment.
* Foreign-owned, export-oriented firms in both countries may have little collective interest in seeing wages rise to the point where domestic consumers can afford to buy the products they are producing(30) (although in the case of Mexico it must be added that until the liquidity crisis of 1994 consumer demand was growing strongly). The lack of consumer buying power commonly associated with a healthy middle class has serious effects on a country’s political development as well, to the benefit of extremist forces.
* In both countries there is evidence of a disarticulated secondary product (component) market: high value added components are often either imported (sometimes tax-free) or produced in the country by other foreign-owned firms.
* Economic development by its very nature is uneven to some degree, but the tendency of foreign manufacturers to concentrate around each other in a few dynamic regions strengthens and solidifies regional inequalities.
* Finally, wage levels in both countries are about one-tenth of those of their richer neighbours. Of special note is the fact that after more than two decades of maquiladora development in Mexico, the maquiladora worker’s earning power has not improved significantly in relation to his US counterpart.
Should these similarities continue to exist over the longer term, the EU may well find itself with the functional equivalent of a Mexico on its back door as represented by the CEE nations. In addition to problems with illegal labour migration, great pressure will be exerted on the European industrial relations system which, although having helped to secure social peace and a high level of economic prosperity since World War II, is already under siege. Given ever-rising unemployment within the EU, there is the danger that member governments may seek to delay EU expansion into the CEE to protect home labour markets in the short term (just as they unilaterally impose tariffs on sensitive goods where the CEE is competitive, ie, steel and agriculture). Other (more cynical) European business and political leaders welcome the prospects of Central European ‘tigers’, seeing their low-wage manufacturing environments as a vital element of the European struggle for competitiveness with Asia and North America.
While similarities between Mexico and Hungary are worrying, it would be a mistake to take the comparison too far. The development of Mexican wage rates must be viewed within the context of the macroeconomic crisis through which the country is now passing, including a large devaluation of the peso and falls in real wages of some 30%. While extensive industrialisation in Mexico is occurring for the first time, it is nothing new to Central Europe. Given the reasonably developed educational and vocational training systems of Central Europe, there is hope that with proper market conditions (including eventual entry into the EU) and competent management, these countries will gradually be able to move up-market in both products and labour. This effort is made more difficult by the fact that all CEE countries (and the whole of Eastern Europe) are trying to pursue this path simultaneously, all competing for the same investment, all too often at the margins of the lowest cost labour and with tax holidays which can be disadvantageous to the creation of indigenous industries.
Gross profits as a proportion of GDP in Hungary have risen by some 30% since 1991, largely at the expense of wages.(31) This can be seen as following a classically Rostowian development path, where capital is accumulated and concentrated to provide for future dynamic (and more egalitarian) growth, although with painful and unsure consequences in the short term. This statistic also shows that to the extent that the wages foreign firms pay do not track productivity, they are not alone: this has become a system-wide characteristic.
JATE, Szeged, Hungary
1 ‘Magyarorszag az elen’. Magyar Hirlap, 26 March 1996.
2 Rick Atkinson, ‘Do Bonn subsidies help or hamper the east’, International Herald Tribune, 23 February 1996.
3 ‘A Kelet nyugati ujrafelfedezese’, Figyelo, 3 August 1995.
4 Magyar Hirlap, 26 March 1996.
5 ‘Hoemelkedes’, HVG, 13 January 1996.
6 ‘Thinking Global’, Business Central Europe, April 1996.
7 ‘Fontos a piac kozelsege es a szallitas’, Magyar Hirlap, 15 April 1996.
8 ‘A piramis titka’, Figyelo, 7 September 1995.
9 ‘Tartos jelenlet’, Figyelo, 30 March 1995.
10 ‘A piramis titka’, Figyelo, 7 September 1995.
11 Looking away from the motor industry, a bright spot in the Hungarian component industry is represented by the Hungarian-owned Videoton Corporation, which has been very successful at reaching long-term cooperative agreements (often through licensing) with Western and Asian firms. In this way, Videoton has been able to recover from near-bankruptcy and gradually move further and further up-market, developing an increased R&D profile in the process.
12 Figyelo, 21 September 1995.
13 ‘Kellenek-e kulfoldi befektetok, kellunk-e mi?’, Nepszabadsag, 16 April 1996.
14 ‘A Kelet nyugati ujrafelfedezese’, Figyelo, 3 August 1995.
15 Heti Vilaggazdasag, 27 January 1996.
16 Attila Havas, ‘Meghokkento tortenetek’, Figyelo, 25 May 1995.
17 ‘Hoemelkedes, HVG, 13 January 1996.
18 Csaba Mako & Peter Novoszath, ‘Employment Relations in Multinational Companies: the Hungarian Case’, in E. Dittirich, G. Schmidt & R. Whitley (eds), Industrial Transformation in Europe (London, Sage Publications, 1995).
19 ‘Szakszervezetmentes ovezetek alakultak ki a gazdasagban’, Nepszabadsag, 30 April 1996.
20 Elony az allami szektorban’, Figyelo, 27 April 1995.
21 Simon Commander, Janos Kollo. Cecilia Ugaz & Balacs Vilagi in Simon Commander & Fabrizio Coricelli (eds), Unemployment, Restructuring and the Labour Market in Eastern Europe and Russia (Washington, DC, Economic Development Institute of the World Bank, 1994).
22 ‘Minden harmadik ceg “fantom”‘, Nepszabadsag, 12 December 1995.
23 ‘Minden negyedik forint fekete’, Magyar Hirlap, 6 March 1996.
24 Commander, Kollo, Ugaz & Vilagi, 1994.
25 Mako & Novoszath, 1995.
26 ‘A toke a Dunantult celozza’, Magyar Hirlap, 6 May 1996.
27 ‘Leszakado alfoldi regiok’, Vilaggazdasag, 20 March 1996.
28 Commander, Kollo, Ugaz & Vilagi, 1994.
29 ‘Az IKM 400 millioval tamogatja az ipari parkokat’, Magyar Hirlap, 26 April 1996.
30 Harvey Feigenbaum & Jeffrey Henig, ‘Privatisation and Democracy’, Governance: an International Journal of Policy and Administration, 6, 3 July 1993.
31 Andras Simon, ‘A GDP Megoszlasa, 1989-95’, Magyar Nemzeti Bank Fuzetek, January 1996.
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