Integration through flows of capital and labour
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Trade plays a critical role in fostering greater integration of the transition countries into the international economy. Significant progress has been made but it has been far from uniform across the transition countries (see Chapter 4). In particular, the Commonwealth of Independent States (CIS) and southeastern Europe (SEE) have achieved far lower degrees of trade integration than the EU accession countries and this is only partly due to differences in policies.
This chapter looks at how the movement of capital and labour has aided the overall process of integration. Many of the features needed for greater trade integration are also beneficial to the mobility of capital but the same may not be true for labour mobility, which remains highly regulated.
The chapter explores the role that capital inflows can play in improving economic performance and greater integration. The main emphasis is on explaining the size and distribution of foreign direct investment (FDI), the dominant form of capital inflow across the region. As with trade, the principal beneficiaries of capital inflows have been the advanced reformers of central eastern Europe and the Baltic states (CEB) and the resourcerich countries of the CIS. A significant number of transition countries, however, have failed to attract FDI to any notable degree. These are mostly in the Caucasus and Central Asia, where shortcomings in policy as well as location and other factors have hindered inward investment.
As well as examining why capital has flowed to particular countries and not to others, the chapter looks at the impact of FDI on the performance of firms, using data from the EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS). There is also a discussion of the wider benefits of FDI and the policies for realising these benefits, including steps towards greater regional cooperation (see Chapter 4).
The chapter also examines the issue of labour mobility across borders, including likely migration westwards following EU accession. The chapter looks in depth at the extent to which domestic labour markets have been integrated and the implications not only for employment but also for cross-border mobility. It concludes that labour mobility in the domestic labour markets of the transition countries remains very limited. As a consequence, movement across regions or provinces appears to play a very small part in the response to factors such as local unemployment. Unlike in the United States, for example, labour is largely immobile and this has meant that shocks to unemployment and employment have tended to persist. The reasons include lack of a functioning rental housing market and inadequate institutions for transmitting labour market information to job seekers across regions.
As well as contributing to persistent unemployment, this internal immobility has also limited cross-border mobility. Despite substantial differences in income, there has been limited movement from the transition countries to western European neighbours. This is partly due to immigration controls but it also reflects the lack of mobility in the domestic labour market. Furthermore, with such immobility, the danger isthat any crossborder movement that does happen will mainly comprise skilled workers, leading to a "brain drain" from the region.
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