The influence of the Washington Consensus programme on the transitional economies of Eastern Europe – a firm level micro economic analysis.

Abstract

This research explores the effectiveness of the Washington Consensus (WC) programme as a mechanism for improving national welfare in transition and emerging economies. The programme, so named, by Williamson (1989) who coined the phrase to explain the influence of the International Finance Institutions (IFI) on the development of the world economic order. The view emanating from the WC is that there is a universal panacea, which improves national welfare wherever it is implemented. Research to date has tended to focus on specific regions of the world and, as a result, any analysis of the WC is limited by the distortions of different economic paradigms, cultures, religions and political ideologies. This thesis argues that, in Eastern Europe, a region exists which, coming from the same economic, political and ideological paradigms, has now split into three identifiable groups (the new member states of the European Union; the Balkans; the Commonwealth of Independent States). These countries are at different levels of transition but have adopted all or some elements of the WC programme. The internalisation of the WC paradigm by the European Union (EU) provides further justification for using these countries as an appropriate vehicle for analysis. The existence of this group transcends the normal restrictions of cultural, political and ideological beliefs and serves as a natural experiment when comparing member and non-member states. One of the key elements of economic growth is firm performance and the research uses survey data from The Business Environment and Enterprise Performance Survey, together with further descriptive statistics from the World Bank and Transparency International, to evaluate productivity and profitability of firms in transition states. Firms within and outside the European Union are compared using matching models, with key conditional variables based on the paradigms of the WC programme. The analysis is conducted on the full sample and disaggregated into the manufacturing and service sectors. The results indicate that there is a positive benefit to firms with accession to the EU, leading to productivity and profitability improvements and performance advantages over those in non-member states. Foreign direct investment directly benefitted those which became investee firms, with little evidence of spillovers to domestic companies. The vertical nature of the investment with an emphasis on international production networks which utilise significant levels of foreign inputs, infers protection of intellectual property and a reduction in value added, with results indicating a failure to achieve an export multiplier. There is evidence of substantial benefits accruing to firms in receipt of loans, but the apparent paucity of their availability may imply market failure. The gains made by innovative firms do not appear to do justice to the initiatives undertaken and may indicate a dilution of national innovative capacity. The independent study of the Balkan region reveals most of the benefits accruing to the service sector concentrating on domestically based development and a lack of focus on exporting. In terms of policy implications, the attraction of FDI led states into a competitive environment which in turn resulted in corporate state capture, gearing taxation and infrastructure to the demands of the foreign investors. The asymmetric development of infrastructure and institutions has had a detrimental effect on national welfare, which, allied to the need for improved financial intermediation, reveal key policy implications for any future European enlargement.