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across Europe, within the same MNE or among related sub-suppliers 20 . ‘Nominal’
(demand side) integration emerges when intra-industry trade is made of similar
products, of different qualities, that travel across Europe to meet the various tastes
(and income capacities) of more sophisticated consumers. The first element
supports the idea that an important component of growth is still related to the
capacity of CEE to remain competitive in some phases of production. The second
element supports the symmetric idea that growth does not need to be export-led,
and can be driven by domestic demand. The duality of this model will narrow the
scope for a Developmental State the set up the right mix between ‘market
discipline’ and the local ‘context’. I shall return to this in § 4.3 below.
4.2 Growth functions
As almost all CEE countries present a current account deficit, how do we
avoid that the higher demand created by a benevolent income policy might produce
an even greater deficit and expose the country to capital outflows, or capital
reversal? From Figure 1, it is clear that the main avenue, for a policy, is to seek
growth in itself. But which is the best possible combination between accumulation,
allocation and productivity gains to this aim, given the socio-economic condition,
and the political cycle of the country? The list of micro-economic policies to
accelerate these function is very long. Most of these measures have been already
experienced. But in setting up a proper system of incentives, discriminating
between local and foreign firms, to the advantages of the latter, presents all the
drawbacks that we have stressed above (Section 2). It is thus advisable, once
growth has took off, to reduce the incentives to attract foreign capital to the
minimum level, and let the domestic system get the most out of foreign technology
and organization.
4.3 Competitive discipline
In § 4.1 we argued that the absence of an export-led growth (to accumulate
foreign currencies and reserves via a systematic trade surplus), together with an
increasing intra-industry trade across Europe, both leave a very narrow scope for a
competitive discipline that represents a fair balance between ‘market forces’ and
the local ‘context’. The policy mix should in fact promote market competition (as
an edge for FDI), with a less uneven income policy, in order to distribute the
benefits of growth without scaring foreign capital away. If successful, this policy
mix would enhance the spill-over effect of FDI into the country, but only if
coordination and information sharing is provided by a competent and reliable
bureaucracy, which can resist, at least to some extent, lobbying and nepotism.
While some FDI would probably fly away, at this point, towards cheaper labor, the
20
See Tiberi Vipraio and Giansoldati (2008) for a discussion on Intra-industry and Intra-firm trade
during the process of ‘fragmentation’ of production cycles into the CEE.
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