INSTITUTE FOR WORLD ECONOMICS HUNGARIAN ACADEMY OF SCIENCES REPORT ON ACTIVITIES 2004

INSTITUTE FOR WORLD ECONOMICS HUNGARIAN ACADEMY OF SCIENCES REPORT ON ACTIVITIES 2004 Budapest, 2005

INSTITUTE FOR WORLD ECONOMICS of the Hungarian Academy of Sciences REPORT ON ACTIVITIES 2004 Budapest, 2005 Institute for World Economics of the Hungarian Academy of Sciences H-1014 Budapest, Országház u. 30. Hungary P.O.Box 936, H-1535 Budapest, Hungary 224-6760, 224-6765 vki@vki.hu, www.vki.hu

Contents 1. OUTLINE OF THE INSTITUTE... 5 1.1. OBJECTIVES... 5 1.2. STRUCTURE... 6 1.3. FINANCING... 7 1.4. RESEARCH PRIORITIES... 7 1.5. LIBRARY AND SCIENTIFIC INFORMATION SERVICE... 9 1.6. PUBLICATION AND DISSEMINATION POLICIES... 9 1.7. INTERNATIONAL CONTACTS... 10 2. PRINCIPAL RESEARCH PROJECTS... 12 2.1. Global Issues... 12 2.2. EU Issues... 15 2.3. The CEECs and Hungary... 19 2.4. Selected Topics... 25 3. MAJOR RESEARCH PROJECTS PREPARED FOR HUNGARIAN POLICY MAKERS... 27 4. MAJOR PROJECTS IN PREPARATION FINANCED BY HUNGARIAN RESEARCH FUNDS... 29 5. COORDINATION OF AND PARTICIPATION IN INTERNATIONAL PROJECTS... 31 6. PUBLICATIONS... 33 6.1. IWE PUBLICATIONS IN 2004... 33 6.1.1. Working Papers... 33 6.1.2. Kihívások ( Challenges in Hungarian)... 34 6.1.3. Műhelytanulmányok ( Workshop Studies in Hungarian)... 35 6.1.4. Vélemények, Kommentárok, Információk ( Opinions, Comments, Information in Hungarian)... 37 6.1.5. Joint Publications... 39 6.1.6. Occasional Publications... 39 6.2. PUBLICATIONS BY IWE STAFF MEMBERS IN 2004... 40 7. LECTURES DELIVERED ABROAD OR AT INTERNATIONAL CONFERENCES HELD IN HUNGARY... 61 8. INTERNATIONAL CONFERENCES ORGANIZED BY IWE IN 2004... 72 9. FOREIGN GUESTS AT IWE IN 2004... 73 APPENDIX... 78

Outline of the Institute 5 1. Outline of the Institute 1.1. Objectives The Institute for World Economics (IWE), as part of the Hungarian Academy of Sciences, carries out research and formulates policy recommendations on an objective, non-partisan basis, since its establishment in 1973 on the institutional background of the former Afro-Asian Research Centre founded in 1965, three years before the first wave of economic reform in Hungary. The Institute has become one of the major policy-oriented international research institutes and economic policy think tanks in Central Europe. Its main task is to study the underlying trends and factors behind global and regional economic developments and their present and future impact on the Hungarian economy. In addition, it sets out to contribute to international research through cooperation with top research institutes throughout the world. Because of its location, history and human and material resources, the IWE is particularly well placed to be a leading centre for research on the integration of Central and Eastern Europe into the global market economy. The change of political system in Hungary, the transition to a market economy as well as the coming enlargement of the European Union and new global challenges have greatly enhanced the importance of world economic research and altered the emphasis of it. The IWE sets out to give strategic support during this historic change of course: by drawing on the Institute's long experience and extensive and effective system of international connections to build up a reformulated programme of research, and by using the techniques of comparative economic analysis and interdisciplinary investigations. The Institute's research philosophy is based on the conviction that the transition to a market economy and the accession to the European Union are not an end in themselves but a means of shifting the Hungarian economy from the periphery towards the mainstream of global economic development. Central to this is the need to modernize, in view of Hungary's modest level of economic development by comparison with Western Europe. International comparisons of the path taken to modernization and the blind alleys to be avoided are being made, in order to identify the key areas in which the Hungarian economy has to catch up and the requirements and means for doing so. Moreover the transition to a market economy is taking place in an international, and particularly a European economic environment of unprecedented upheavals and a system of relations in the process of restructuring. Whereas, on the global scale, some of the other attempts to modernize in the more recent past took place within a stable, predictable system of international relations, the forecast in Hungary's case is that the international economic environment will be uncertain, or at least multidimensional. This country has to build up a system of economic relations that takes account of its comparative advantages against a background of a moving Europe itself undergoing adjustment. The criteria for choosing the IWE's research areas have been the medium-term demands of decisive importance in terms of the processes taking place in the world economy and the adjustment that Hungary must take, coupled with the comparative advantages offered by the

6 Outline of the Institute Institute itself. This is a pioneer undertaking for the future: instead of resting on short-term, ad hoc requirements, it is built on a long-term strategic demand that must be created in part by the Institute itself with the demand-oriented nature of its researches. This we see as the way to ensure that the IWE is a professionally respected, authoritative, influential, opinion-shaping institute. These objectives can be served by the Institute's present research staff as a whole. After the appreciable staff losses of the early nineties, the internationally reputed, competitive and highly experienced research team has been replenished with ambitious and productive young researchers. The funds, however limited, granted by the Hungarian Academy of Sciences guarantee the political independence, so providing one of the fundamental external conditions for scientific activity of a high standard. * In 2004, basic conditions for substantive research at IWE were able to rely on a consolidated financial background due in part to increasing cooperation with different government institutions. * IWE, in cooperation with other research institutes (largely belonging to the Academy of Sciences), undertook a coordinative function in developing a medium-term strategy of research priorities on European integration. * Cooperation with leading international and Western European economic institutions was further strengthened. * Demand for IWE's research output by leading Hungarian banks, companies and multinational firms located in Hungary grew substantially. * A special system of fellowships managed by the Academy of Sciences provided an opportunity to employ some young researchers and cover selected basic areas of research. * Interdisciplinary research network has strengthened as the Social Sciences Research Centre came into being in the framework of the consolidation programme of the Academy of Sciences. In the Centre IWE and several other legally and financially independent institutes cooperate concerning political, social, legal, and economic issues. 1.2. Structure The IWE had a research staff of 31 at the end of 2004, and an auxiliary, service staff of 17. As of January 1996, the executive structure was changed. Based on the experience of previous years and the accomplishment of the substantially enhanced research tasks recently, IWE has eliminated the traditional structure based on research centres. In fact, organization of the research activities has never been carried out in a rigid system. In contrast to many institutes, IWE has always stressed the importance of cross-working, and provided opportunity for its staff to become acquainted with research activities of other centres within the institute. To a substantial extent, growing domestic and international competitiveness of the research staff can be explained by this flexibility. From the beginning of 1996, IWE's internal structure is based on teams organized for special topics and purposes. As a result a research network was created, in which practically each staff member is both the director of one or more research teams and member of other teams, simultaneously. This approach is expected to make research even more efficient, to use available capacities better and deal with priority tasks from different angles. A Research Council created in 1996 and consisting of 11 staff members, including talented young researchers directs and supervises research activities. In selected areas of ensuring the infrastructure of efficient research, three commissions, each of which consists of three staff members, have been acting (acquisition of books, journals and documents, computerisation, publishing activities). Since early summer 1999 a managing director has also been acting who is responsible for internal and external contacts, communications and public relations.

Structure of the Institute for World Economics Mihály Simai Research Professor Treasury Head: E. Marosi General Director: András Inotai Scientific Information Service Head: K. Förgeteg Directorial Secretariat Managing Director Éva Nagy Library Commission Computer Commission Publications' Commission Financial Group Maintenance Service Library Section Section for International Exchange Section of Documentation Section of Publication Head: Gábor Fóti Printing Section of International Cooperation and Marketing Head: Anikó Gyorgyovich Secretariat Head: Andrea Vincze Japan, East and Southeast Asia Research Centre Head: András Staff Members Various Research Teams Headed by Staff Mem-

Outline of the Institute 7 In order to appropriately cope with growing research commitments, to ensure the education and training of young researchers and to use financial resources more efficiently, a special external research work has been extended, as part of the long-term and deliberate strategy of IWE. 1.3. Financing The tasks laid down in its deed of foundation and the new demands made by the changes taking place in the world economic environment make it essential for the dominance of direct state funding in the Institute's finances to remain. This conclusion is also supported by the widespread international practice of financing institutions that conduct strategic research out of central funds as a way of ensuring a high standard of activity. While strategic research institutes are generally financed in 60 to 70% of their annual budget from central funds throughout the world, contrary tendencies prevailed in IWE's financial situation until 2002, as central funds were limited to basic salaries and their non-wage labour costs. In 2004, however, IWE's total income amounted to HUF 334 mn (about USD 1.7 mn), of which slightly less than 57 per cent of IWE's total income was provided by the Hungarian Academy of Sciences. Other major income sources included research grants provided by Hungarian funds (2 per cent), various domestic sources (9 per cent), participation in international cooperation (23 per cent) and an overhang from fiscal year 2003 (9 per cent). Total expenditure reached HUF 343 mn (about USD 1.7 mn), of which wages, income taxes and social security contributions accounted for almost 64 per cent. Additional major items of expenditure were other research supporting expenses (27 per cent) and communal services and maintenance (9 per cent). The stable and relatively favourable financial situation is the result of the high professional level of the Institute, the attractiveness and practical usefulness of its research results as well as the successful search for new resources. As a rare exception among other academic research institutes, IWE possesses a solid financial background for 2004, which enables it to carry out strategic policy-oriented research and cement longer-term development concepts during the coming years. 1.4. Research Priorities Research activities were characterised by 20 major projects during last year. Contrary to the ruling tendency of the 90s, there was a clear shift from shorter-term to longer-term research in the new decade, though it remained highly policy-oriented still. Eleven principal research projects were finished during the year (out of which only one had a duration of less than a year), and three projects were initiated in 2004. Seven research projects started earlier and spread beyond 2004. Research is fundamentally carried out on two basic levels: regional (geographic) and functional. Almost all research projects combine these two approaches, while staff members have to specialise themselves on one regional and at least on one functional topic. Priority areas of research in recent years: (a) Global economic development and transformation interrelationship of knowledge, growth and globalization; science and technology as a growth factor in smaller economies; sustainable development amid a system of terms under intensive world-market impacts; fundamental medium-term changes in the world economy and their impact on Hungary;

8 Outline of the Institute interactions and human dimensions of global demographic, political, economic, technical and social transformation; globalization and regionalization, with special reference to international capital and labour markets; relevant features and development trends of the new regionalism; role of the transnational companies in the shaping of a new global economic system; current issues of international trade and the role of WTO; interrelation between globalization and economic transformation; basic trends of consumption globally and in Central and Eastern Europe. (b) Economic developments in Europe, with special attention paid to the European Union and Eastern enlargement the development paths and modernization of selected European countries; relationship between community policies and different national policies; key integration processes in the European Union (common agricultural policy, economic and monetary union, experience of the Union's periphery with catching up, institutional reform, experience of ex-efta countries in the European Union, regional development, budgetary issues, developments in major EU member countries); the prospects for, conditions and costs of Eastern enlargement, and Hungary's preparation for full membership; main features of developmental integration and Eastern enlargement; interdependence between European integration and subregional cooperation; the major features of Germany's European policy at the beginning of the 21 st century. (c) Economic transformation in Central and Eastern Europe comparative analysis of the CEFTA countries; transformation and external trade relations, including the changing pattern of East-West division of labour; impact of foreign direct investment on the macro- and microeconomic performance of transforming countries; chances of regional cooperation; economic and political development in Southeast Europe; the accession of Hungarian agriculture and rural regions to the EU; Hungary's preparedness for EU accession in the field of infrastructure and services; Hungarian foreign trade structures in comparison with those of the EU; the structural transformation of Hungarian manufacturing industry. (d) New economic developments in the Asia-Pacific Region the lessons drawn from the Far Eastern economic development; Japan's decade-long stagnation or transformation rather than crisis; transformation patterns in China and Southeast Asia; the Chinese Diaspora and the chances of a Chinese Common Market ; constant and changing elements in the Japanese model of development; prospects of Korean Hungarian economic relations. (e) Other key research areas human development in Hungary; impact of socio-economic values on the pattern of development; possible scenarios of economic and social development in Latin America;

Outline of the Institute 9 micro-level adjustment and cooperation; the role of infrastructure and services in the modernization process; the role of clusters in regional development policy; the measuring of the efficiency impacts of foreign direct investment; sectoral studies. 1.5. Library and Scientific Information Service The IWE's library is a specialised scientific library with national scope. It contains one of Hungary's most important and most up-to-date collections of books, periodicals and statistics on international economic affairs. Since 2000 the library constitutes part of the United Library for Social Sciences together with the libraries of the Institute for Political Sciences, the Institute for Sociology, and the Institute for Minority Research. Through consistent and constant expansion of the IWE's international relations, about 70% of the books and periodicals, including most of the foreign books, have been acquired on exchange base. This is already the case with some publications of the World Bank, the IMF, the OECD and the EU. In addition, almost three-quarters of the annual increase in value of the stock is accounted for publications that arrive under exchanges schemes or as gifts. This remarkably high proportion by national standards ties in with the Institute's own publishing activity. The task of the Scientific Information Service is to obtain the information required for research work, examine it comprehensively, store it, make it available, and distribute the Institute's publications through the conduct of international publication exchanges. The enlarged library s stock contains more than 200,000 items (including 30,000 archives and 583 kinds of periodicals). Also, the establishment of a CD ROM databank was started and will be further developed in accordance with the financial possibilities of IWE. Last year the Institute was successful in creating the availability of publication distribution via e-mail among all its exchange partners who apply for it. (This may result in substantial savings of postage.) The library's cumulative catalogue can also be searched by the aid of Internet: www.etk.mtapti.hu On the WIIW's (Wiener Institut für Internationale Wirtschaftsvergleiche The Vienna Institute for Comparative Economic Studies) request IWE has joined the WIIW's "Countdown" project and become its Hungarian coordinator. The project aims at collecting in a joint database the names of Central and East European experts working on the European Union, by indicating their activities and the particulars of published as well as unpublished works on the Union prepared in the Central and East European region, mainly in Hungary and available in the library of the Institute. For information about the library please contact our information service, telephone: (36-1) 224 6759. 1.6. Publication and Dissemination Policies In 2004, the publication policy of the IWE followed in the framework of substantial changes introduced in the early 90s. The new publication policy was justified by IWE's growing reputation at home and abroad, its scientific and economy-policy objectives, and not least its aim of influencing public opinion.

10 Outline of the Institute Last year the series Working Papers, Kihívások (Challenges), and Műhelytanulmányok (Workshop Studies) appeared with 8, 10 and 12 issues, respectively. The Working Papers series in English presents the best and internationally competitive products of research by IWE staff, primarily to the professional public abroad. Kihívások, in Hungarian, is designed to inform Hungarian economic policy-makers, members of Parliament, political parties and the broader professional public about current worldeconomic issues, their impact on Hungary and the economic policy measures proposed to be taken. Most of the articles provide clear, readable summaries of significant research work undertaken in the Institute. Műhelytanulmányok, also in Hungarian, presents comprehensive and in-depth analyses, mostly summary reports of major research projects carried out or coordinated by IWE staff members, for the professional community and students of economics in Hungary. Vélemények, Kommentárok, Információk (Opinions, Comments, Information) is a concise series launched late 200l in Hungarian, and meant for the professional public as well as a wider circle interested in domestic and global issues of the day. Twenty-four of these short notices appeared in 2004. Our Newsletter (Hírfutár), available only in Hungarian so far, is designed to inform the professional public about the ongoing activities at IWE. The Institute s restructured, new homepage on the Internet offers the possibility of interactive communication in addition to the regularly updated information about IWE (www.vki.hu). The publication activities were complemented by occasional volumes reproducing the proceedings of high-level international conferences or comprehending the findings of major interntional projects run by the Institute. Last year two such independent books appeared. In 2004, staff members published 47 contributions in foreign languages, including a book and 26 papers contained in books. Fifteen contributions appeared in international journals. In order to disseminate IWE's research findings to a broad interested public as well, the Institute regularly organises open conferences on relevant and topical global and European issues. Teaching represents an increasingly important activity of most staff members. Based on the basic research results and the fundamentally policy-oriented approach of IWE, we experience a rapidly growing need for dissemination on various levels. Staff members teach regularly in universities both in Hungary (Budapest and several universities in major towns) and abroad, while its director general is a visiting professor to the College of Europe, Bruges, Belgium and Natolin, Poland. 1.7. International Contacts The IWE's international relations have traditionally been very extensive, active and useful. In recent years, the institute has taken part in an average of ten to fifteen international research programmes a year, and organized about ten bilateral and international conferences annually. There is close cooperation with some 30 research institutes, scientific institutions and universities. Staff members travel abroad frequently, and the number of visiting foreign researchers almost reached 90 in 2004. In the same year, IWE was a member of five reputed international scientific bodies (the EADI, the ECSA, the IFIAS, the UNU, and the Centre for Our Common Future). Close collaboration has been built up with the most influential international agencies (the IMF, the World Bank, OECD, WTO, Unctad, Unesco, UNDP, Unido, Uncitral, ELEC, CIPE, ECE, etc.). Similarly to recent years, in 2004 we were coordinators of and participants in several international projects. IWE has built up a special relationship with the

Outline of the Institute 11 World Bank and the Bertelsmann Foundation in launching new projects, and assumes a leading coordinating role both in research and dissemination of the findings. In 2004, staff members delivered one hundred and thirty lectures in foreign languages in different parts of the world and at international seminars held in Hungary. Seven international conferences were organized in the past year. In addition, IWE's international network includes longer-term stays of its researchers abroad, work contracts of its staff in leading foreign institutes and international institutions. The Institute's medium-term research concept envisages further significant development of its international relations with some alterations in their nature. The initiative hitherto was usually taken by the IWE, but the change of political and economic system has greatly increased the number of foreign research institutes and international organizations proposing cooperation to the IWE. In line with the main directions of Hungary's economic relations, IWE aims particularly to expand its relations with European countries, including the EU and CEFTA, the United States, Japan and the East and Southeast Asian area. The Institute has already become the centre in Central and Eastern Europe for studies of Japan and Southeast Asia, and a regular informal platform for Latin American ambassadors on Hungarian, European and Latin American issues. Extra attention is given to developing scientific ties with neighbouring countries, particularly through joint research projects, and by inviting economists from these countries in order to promote mutual understanding and the flow of information, while also reinforcing IWE's relations with leading international and Western institutions.

12 Principal Research Projects 2. Principal Research Projects 2.1. Global Issues 2.1.1. Knowledge, Growth and Globalisation; Science and Technology Policy as a Growth Factor in Smaller Economies (KNOGG) Project director: Mihály Simai Duration: 2002 2004 Summary: The KNOGG Thematic Network studies specific problems regarding science and technology policy in smaller European countries in the era of globalisation and regional integration. As a research project funded by the European Commission, it responds to the R&D Fifth Framework Programme's horizontal programme Improving Human Potential and the Socioeconomic Knowledge. The objective of the Network is to review experiences in successful small EU member states and candidate countries in regard to the role and potential of STI policies as driving forces of innovation and economic growth. Participants of KNOGG Thematic Network are comprised of leading national research and higher education institutes from small EU member countries (Finland, Ireland, Netherlands, Greece) and accession countries (Hungary and Slovenia). The Network s coordinator (VATT) and principal contractors organise national workshops and international conferences. The Network in 2002 produced three main reports and a number of country studies as background documents. During the year we also prepared three studies on Hungary. In the first one the concept of small states had to be defined, particularly in the context of science and technology policy, where traditional measures may not provide the most relevant indicators of the relative size of the state. In the second paper the technological capabilities and the innovation policy of Hungary has been analysed. In the focus of the country study was its potential for innovation, its ability to supply national technological needs from domestic sources, and its role in the global market as a supplier or purchaser of new products and processes as well as its relative international competitive position. In the third study the role of transnational corporations in the Hungarian R&D sector has been examined. In 2003 we compiled a book at IWE on the results of the Network whose findings had thematically been published previously by VATT in five volumes.

Principal Research Projects 13 2.1.2. The State of the World Economy, the New Tendencies of Globalization and Hungary after the Turn of the Millennium Project director: Participants: Péter Farkas Annamária Artner, Ágnes Bernek (ext.) Duration: 2000 2004 Summary: In the framework of this project we have worked on the interpretation of world scale economic globalisation: history, dimensions, definition, hierarchical structures, differentiating and income redistributing mechanism of world economy and its regional levels. We summarised the Hungarian literature on globalisation in the past 30 years. Studies have been prepared in connection with the worldwide movements of globalisation criticism, and their trends and goals. A study was prepared of the regional structure of world economy, based on the regional placing of investment and trade of transnational companies. One of the most important objectives of the research program was the analysis of the effects of globalisation in Hungary. We have analysed the recent tendencies and prospective trends of foreign direct investment (FDI theories, tendencies of international direct capital flows, including the role of East Europe and Hungary). A study was made of foreign-investment effects, including mergers and acquisitions, on Hungary (on its foreign trade balance, company structure, employment and consumption). In the first quarter of 2004 we finalized the analysis of the structure of international trade of goods and services in the global world, including the connection between FDI and trade. The final report of the research was comleted during 2004.

14 Principal Research Projects 2.1.3. The World Economic Environment of Hungarian Agriculture in the First Decade of the 21 st Century Project director: Judit Kiss Participants: Miklós Somai, Zoltán Tiba Duration: 2000 2004 Summary: The main aims of the research are: to reveal and study the ongoing changes and main trends in world agriculture, in agricultural supply and demand, in world agricultural trade and its regulatios, and in the agricultural policy of Hungary s main partners in the first decade of the 21 st century; to draw conclusions from the analysed changes for the benefit of Hungarian agricultural policy, by determining its adjustment possibilities and the challenges it will have to face. The work concentrates on the following areas: * the expected changes of the EU s Common Agricultural Policy; * the changes of the world agricultural system and world agricultural markets; * the performance of the Central and Eastern European countries agriculture with special regard to the CEFTA and the post-soviet agriculture; * the agricultural policy of the USA and China; * the next WTO round and its implications for regulating world agricultural trade.

Principal Research Projects 15 2.2. EU Issues 2.2.1. Challenges of the Political, Economic and Juridical Culture for Hungary in 2000 2006, with Regard to the Succesful EU Integration and the Changes of the Internal Integration Rules in the European Union Project directors: András Inotai, Margit Rácz Participants: Staff members of the Institute for World Economics, the Insitutute for Political Studies, the Institute of History and the Institute for Legal Studies Duration: 2002 2005 Summary: This interdisciplinary research project set the goal of analysing the internal development of and changes in the EU as well as the preparation for EU accession in parallel ways between 2001 and 2004. The most important research outcome can be summarised in three points: * Several internal reforms within the EU have been postponed since the 1990s until now. This fact was, however, partly dimmed by the so-called mega-accession of ten new member countries. Meanwhile the EU became suitable for the admission of the new member states as far as the institutional and decision-making conditions are concerned it did not change adequately to the new situation neither from the point of view the community budget nor its productivity improvement in the world economy. * In the course of the 20 th century, the Central Eastern European policy of Great Britain, Italy, France and Germany was determined by their several failures, and first of all by their multilateral power positions. These policies used to target such political configurations, which are suitable to create political stability in the region. The realisation of this aim failed. At the end of the 20 th century, the accession of the Central Eastern European region to the EU opened quite new perspectives to these two parts of Europe for a peaceful unification. * A successful performance of Hungary within the EU is conditioned by the following facts; first, the fulfilment of institutional tasks at high authority level, second, the strengthening of the basis of the regional policy, and third, the priorities defined in the National Development Plan should be party politics free so that the long-term interest enforcement could succeed. The 52 studies written on the subjects of the four consortium members contain serious analytic matters and recommendations on the internal development of the EU, preparation for EU accession of Hungary and the Central and Eastern European countries as well as some preconditions of a successful EU membership of Hungary. These studies are available in the United Library for Social Science of the Hungarian Academy of Sciences. Some of

16 Principal Research Projects the studies were published in newspapers or journals, first of all in the Európa 2002 quarterly. As the wind-up of the project, the four consortium leaders summarised the most important findings and wrote about some important issues of the EU membership of Hungary. All of them will be published in a volume of studies in the course of the first quarter of 2005. These studies can be utilised by the experts of all ministries and municipalities dealing with EU affairs. The studies and the summaries of the research project can be used as teaching material in the higher education. 2.2.2. The Impact of European Integration and Enlargement on Regional Structural Change and Cohesion Project director: András Inotai Participants: Andrea Szalavetz, Tamás Szemlér, Anna Wisniewski Duration: 2002 2005 Summary: The overall scientific objective of the project is to identify and explain in a cross-country analysis the impact of European integration and enlargement on regional structural change and cohesion. In particular, the project will provide empirical evidence about the relationship between industrial location, regional specialisation and regional income per capita in the context of European integration and EU enlargement. On the basis of our empirical analysis we will predict the types of potential winning and losing regions in both the current EU member states and accession countries. The research results will help identify challenges and recommendations for the regional policy at the European, national and local levels.

Principal Research Projects 17 2.2.3. Strategic Tasks before the European Union Project director: Margit Rácz Participants: Ferenc Bódi (ext.), Sándor Buzás, Kálmán Dezséri, Endre Ferenczy (ext.), Jenő Horváth (ext.), Judit Kiss, Tamás Novák, Miklós Somai, Miklós Szanyi, Tamás Szemlér Duration: 2001 2004 Summary: In 2003 we closed the second phase of a four-year interdisciplinary research programme. The researchers of the Institute for World Economics surveyed the economies of some big EU member states. Among these countries, the studies on Germany and France are remarkable not only because these two countries have central positions within the EU, but they have significant impact on the changes of the EU decision-making system as well as on the further functioning of EMU. Germany and France have come up against the other ten countries in EMU because these two countries have for a long time violated the Stability and Growth Pact and they have not had to pay any penalty since the Ecofin council exempted them from doing so. Last year greater emphasis was paid to the analysis of the tasks for the Hungarian economy. On this basis a study was written on the tasks of the income and expenditure sides of the Hungarian budget after EU accession. In a separate study the economic policy tasks of Hungarian agriculture before accession were analysed. A comprehensive study was also written on the key tasks of economic policy aiming at catching up prior to accession. Two papers were written by the Institute for Political Sciences of the HAS on some issues of public administration. One of the papers examined Hungarian country planning and regionalisation efforts while the other investigated the chances of subregional integration of Hungarian communities. In the Institute for Law of the HAS a long-range study was written on the recent reform of the EU decision-making system. This study attempts to draw up the directions of further reforms. In the Institute for History of the HAS a comprehensive study was written on Italy.

18 Principal Research Projects 2.2.4. The European Union and Its Direct Neighbourhood beyond Enlargement Project director: Tamás Szemlér Participants: Tamás Novák, Tamás Szigetvári Duration: 2000 2005 Summary: The research focuses on three major topics: * The strategic choices of the European Union (EU) to formulate its future system of international political and economic relations. * Economic and political relations, traditions, present and future priorities of the EU with Central and Eastern Europe. * Economic and political relations, traditions, present and future priorities of the EU in the Mediterranean area. The objective of the research is to formulate a strategy on the basis of the ideas of the EU concerning its future economic and political role for the desirable development of the common future of the Union and its direct neighbourhood (the countries of Central and Eastern Europe and of the southern and eastern coasts of the Mediterranean Sea). 2.2.5. The Internal Development of EMU and the Issues of Hungarian Accession Project director: Margit Rácz Participants: Kálmán Dezséri, Pál Gáspár (ext.), Anna Wisniewski Duration: 2002 2006 Summary: Our team working for the Prime Minister s Office and dealing with the Economic and Monetary Union completed the three following studies: * The participation of Hungary in ERM 2 and EMU: possibilities and problems * The EMU strategies of Central European countries: consequences for Hungary * The main experiences of the four-year functioning of Euro area

Principal Research Projects 19 2.3. The CEECs and Hungary 2.3.1. Domestic and International Trends in Consumption Project director: András Hernádi Duration: Summary: Continuously On the basis of the concept that consumption precedes and practically determines production, research was focused on whether Central-East European economies and societies, and especially Hungary, can have an identity and follow a model different from that of international trends. 2.3.2. Changes in the Quality of Infrastructure and Services in Hungarian Regions and Major Cities in the Decade of Transition, 1990 2000 Project director: Éva Ehrlich Participants: Ferenc Erdősi (ext.), Albert Faluvégi (ext.), Imre Lengyel (ext.), Iván Schmideg (ext.), Tamás Szigetvári Duration: 2001 2005 Summary: The first phase of the research included the surveying and demonstrating of models and methods for measuring competitiveness. We have elaborated a system of indices for gauging the development level of infrastructure in the regions and major settlements. The examination embraces the 19 counties of Hungary and the 9 cities with inhabitants more than 100,000. Data gained on the county and city levels are being aggregated on the level of the country's seven planning and statistical regions each. Besides some 50 macroeconomic indicators, in the field of infrastructure and services (transport, informatics and telecommunications, health care and medical equipment, housing, environmental features, education and culture, trade and tourism) approximately 120 data are being collected and processed for two years (1990 and 2000) so as to unveil changes in regional development level. By applying this great number of indicators, most of them natural (and with the help of a tried and tested method of synthesis), a multi-segmented regional investigation can also be carried out. This examination will involve such a new approach in revealing regional differences which investigates the causes of disparities and their change over time in groupings, according to the technological or social features of infrastructure. Furthermore, the indicators used in examining the counties and the major cities will render it possible to expose the differences within the regions, and between Budapest

20 Principal Research Projects sible to expose the differences within the regions, and between Budapest and the bigger settlements as well. Determining the changes that took place in the last decade may immediately be utilized in mitigating Hungarian regional disparities of infrastructural development level and in obtaining EU funds already accessible for this purpose. 2.3.3. Hungarian Infrastructure in International Comparison. The Decade of Transition (1990 2000) Project director: Éva Ehrlich Participants: Albert Faluvégi (ext.), Iván Schmideg (ext.), Tamás Szigetvári Duration: 2003 2004 Summary: We have set out to present and assess the situation of several Hungarian infrastructural spheres in the light of a constantly changing international environment (by comparison with those of long-established market economies and transitional countries) These are: * various branches of transportation, * informatics and telecommunications, * health care, * education and culture, * environmental protection. We determined the development level of the five fields examined (using the database of the Central Statistical Office as well) by 49 natural economic indicators. However, in conducting the survey we were obliged to omit the field of housing and housing equipment due to an almost complete lack of reliable international data. The questions raised to answering are the following: Does the Hungarian way of development draw closer to international trends or, on the contrary, it becomes more distinct for some reason or another? Where does Hungary stand in the international ranking of the above-mentioned spheres? How can, in this respect, processes after the change of system be described and evaluated in Hungary? We tried to put emphasis on areas of infrastructure that especially promote (may promote) or even stimulate (may stimulate) the dynamism of Hungarian economy and enhance (may enhance) its competitiveness on the one hand, and in which the joining of international networks and the EU became extremely important on the other.

Principal Research Projects 21 2.3.4. Some Major Aspects of Integrational Adjustment in the Fields of Hungarian Infrastructure Project director: Éva Ehrlich Participants: Endre Bakos (ext.), Sándor Búzás, Istvánné Csejtei (ext.), Péter Holló (ext.), Szabolcs Koppányi (ext.), Gyula Lengyel (ext.), József Lovas (ext.), Szabolcs Nyíri (ext.), Kálmán Papp (ext.), István Pálfalvy (ext.), Elemér Saslics (ext.), Iván Schmideg (ext.), Miklós Somai, Tamás Szigetvári, László Szivi (ext.), Géza Tényi (ext.), András Timár (ext.), Károly Tóth (ext.), István Valkár (ext.) Duration: 2003 2005 Summary: Each of the nine major studies being prepared within the framework of this project tackle topical issues related to EU accession: 1. The investigation into the responsibilities and regulatory powers of the central and local governments in transforming public infrastructure; the conditions, possibilities and methods of necessary decentralization. (A thorough examination in this question is especially urgent since widening the scope of action of local governments is an item on the agenda, involving the establishment of an adequate system of financing.) 2. The investigation into the finances of public infrastructure and public enterprises, including their management as well as the creation and allocation of resources; the elaboration of recommendations. 3. Factors determining the competitiveness of transportation (as a whole and its main branches); the formation of the division of labour in the sector in line with EU directives issued in the White Book (2001) on transport policy. 4. Discrepancies between maintenance and development and the reasons of their related strains; the creation of the conditions and methods of striking a balance between maintenance and development. 5. The assessment of the roles played by venture capital and private enterprises in the field of transportation, water management, logistics and postal services; the modes and potentialities of public private partnership. 6. The strategic tasks of the international shipping of goods and transport of passengers with special regard to transit. 7. The state of road safety; the making of recommendations for reducing the risks of accidents, in compliance with EU targets. 8. The security of energy supply and the effects of market-liberalizing processes with great emphasis on the domestic introduction of the new EU directive. 9. The situation of water management in neighbouring countries and its prospects; the questions and impacts of bilateral and multilateral watermanaging agreements and regulations, with special attention to the tasks to perform Hungary had been set. 10. A survey of the most necessary regulations in boosting the development of information-technology infrastructure and putting forward recommendations conform to the established rules of the European Union.

22 Principal Research Projects 2.3.5. The New Tendencies of Foreign Direct Investment and the Transfer of Technology in Hungary Project director: Participants: Péter Farkas Andrea Szalavetz and the authors of case studies Duration: 2002 2004 Summary: FDI and technology transfer exerted controversial influences on Hungarian economy in the 90s. However, at the end of the decade favourable tendencies were unfolding. These were the ones to be analysed in the project. Case studies and summaries have been prepared on the following: (1) experiences of foreign-owned companies restarting R&D, (2) new R&D bases of transnational companies, (3) orders for R&D activies from transnationals to Hungarian research centres, (4) utilisation of domestic intellectual products, and (5) the technological effect of new subcontracting contracts. Studies of the international literature of FDI have also been prepared with special regard to the effects of R&D in medium-developed countries. According to the concluding study of our research, the effect of FDI on R&D was stabilized after a period of negative influences, but a decisive positive change cannot be detected, yet. The results of this project were put under discussion once again at the beginning of 2004 and the research report was completed on the basis of the debate.

Principal Research Projects 23 2.3.6. Strengthening the Competitiveness of Hungary Project director: Andrea Szalavetz Duration: 2003 2004 Participants: Summary: Annamária Artner, Zoltán Bassa, Sándor Buzás, György Csáki (ext.), András Inotai, István Kőrösi, Gábor Lakatos, Csaba Novák (ext.), Margit Rácz The project surveyed several factors of competitiveness including the country s foreign direct investment attraction potential, the factors of social capital in general and human capital and the cohesion of society in particular, the meaning of competitiveness in the case of local subsidiaries integrated in large multinational companies, the export potential and the structural changes in exports, etc. The main findings comprehend three theses. (1) Competition for local subsidiaries can be described in terms of competing internal for additional resources. (2) Structural change and structural upgrading reflect an increase in competitiveness. However, beyond a certain threshold development level, competitiveness is manifest not by interindustry structural shifts towards more capital- and skill-intensive industries but rather by within industry structural upgrading. (3) Although modernization and world economic integration have been driven by manufacturing, economic policy also ought to allocate more importance to other economic sectors. Agriculture deserves more developmental policy interventions, since this sector has huge perspectives of productivity improvement. Services in particular knowledge-intensive business services also deserve more policy attention than before, because they offer the opportunity both for increasing the rate of local value added and for strengthening and tightening local MNCs backward linkages.

24 Principal Research Projects 2.3.7. Structural Change in Hungary. Theoretical Underpinnings and Empirical Analysis Project director: Andrea Szalavetz Duration: 2003 2004 Summary: We examined the relation between technological development and structural change. We complemented two well-known theories of structural change with the theory of technological complementarity. We showed how the theory of technological complementarity modifies and complements (1) the multi-stage theory of technological accumulation and (2) the evolutionary theory. We developed a database that makes the comparative analysis of Hungarian structural change possible. We examined the analytical value of the various structural indicators and the methodological problems connected to them. Our main finding was that in the long run it is not what countries specialize in that matters, but rather the quality properties of economic activity. 2.3.8. Development Policies and Institutions Participating in Development Policies Project director: Tamás Novák Participants: András Bakács, Zsuzsa Ludvig, Gábor Tury Duration: 2003 2004 Summary: The project is aimed at analyzing policies and institutional preparations in accession countries for supporting catching up and development after accession. With the analyses of successful models of EU countries and the drawing of conclusions from the experiences of Central European countries, a proposal is to be elaborated for the effective framing of the Hungarian development policy model with the most suitable institutional structure.

Principal Research Projects 25 2.4. Selected Topics 2.4.1. Latin American Economic Development Project director: Sándor Buzás Duration: 1999 2004 Summary: After the lost decade (the eighties), the region began to show a more encouraging and promising picture. The processes of democratization, trade liberalization, and parallel with them the growing attention given by foreign investors to the area made possible to start catching up with the developed world. But the Asian crisis, the effects of natural disasters of recent years as well as the Argentinian events made the near future uncertain. In fact, these havocs are real dangers for the promising evolution of integration processes in the region. The assignment of this project is to follow developments in Latin America, and to outline the possible scenarios of economic and social development. 2.4.2. Comparative Study and Analysis of EU and Japanese Affiliated Companies in Hungary and Other CEEs Project director: András Hernádi Participants: Zoltán Bassa, Andrea Éltető, Miklós Szanyi Duration: 2004 2006 Summary: The project deals with Japanese companies direct investments in Hungary, the Czech Republic, Poland and Slovakia. A literature review of the topic is followed by an analysis of investments by Japanese, other Asian, American and European companies in the Hungarian electronics and car industries.