December 5, 2019 / 2:38 PM / 3 months ago

Rule of law concerns may hurt growth in Poland, Hungary, says EBRD

WARSAW (Reuters) - Central European countries that flout the rule of law risk hurting innovation and growth by losing out in the race to attract foreign investors, the European Bank for Reconstruction and Development’s (EBRD) chief economist said on Thursday.

While the fast-growing economies of Poland and Hungary have so far shrugged off concerns that legal processes launched by the European Union over judicial reforms would stunt growth, Beata Javorcik said things may be more difficult in future.

“Negative perceptions of how the judiciary sector works will translate into lower attractiveness of the country,” Javorcik told Reuters in an interview.

“In a global climate where the competition for FDI is intensifying anything that sends a negative message is going to hurt the attractiveness of the country as a destination for foreign direct investment (FDI) flows.”

Foreign companies such as BMW to JPMorgan Chase have made major investments in Poland or Hungary in recent years, but a changing global environment could pose challenges, according to Javorcik.

“The downward trend in global FDI flows may continue due to uncertainty over trade wars, because of automation playing a bigger role which means that wages are less important as a factor, and also because the easy gains from setting up global value chains have already been exhausted,” she said.

With gross domestic product growth of over 5% in 2018, Poland and Hungary are amongst Europe’s fastest-growing economies, with rising wages in a tight labor market driving domestic consumption.

However, the EBRD forecasts growth slowing to 3.1% in 2020 in Hungary and 3.5% in Poland as the global economy loses steam.

According to Javorcik, the first Pole and first woman to become chief economist at the organization formed at the beginning of the 1990s to aid Central and Eastern Europe’s post-communist transition, boosting innovation will be key to future growth.

Growth led by innovation “is much harder to do and here FDI plays a bigger role because foreign multinationals are creators of knowledge, they are responsible for most of global innovation they bring their knowledge to host countries”, she said.

“Firms that innovate are much more sensitive to the business climate.”

Reporting by Alan Charlish in Warsaw; Additional reporting by Marton Dunai; Editing by Giles Elgood

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