Globalisation and the Nature of Networks

IBM will close its plant in Hungary and move to China

The decision by IBM to move its operations from Hungary to China has raised fears that this is only the beginning of the great move eastward; it also illustrates how globalisation runs very much along the lines of a TCP/IP network

People throughout Hungary were stunned and shocked when in late October IBM decided to move its operations from Hungary further east, to China. The announcement also generated a certain amount of fear and panic, as speculation flew whether this was indeed the beginning of the end.

IBM has been in Hungary for the past 7 years, producing computer hard drives at its plant in the central Hungarian town of Szekesfehervar. IBM will now close its plant at the end of this month, leaving 3,700 employees without work. The layoffs will begin officially on January 1st of next year.

Leaving the Hungarian mecca of multinationals

Yet this isn't the first time a multinational has decided to pack up and leave; for the past few years companies have been slowly but surely moving away from the region, usually to China, but sometimes as close as Romania. Nor is it the first such high profile company to move eastward; just a couple of months previous Microsoft did the same thing, after being in the country for less than a year.

The importance of the IBM move is that it was the first such move to cost so many jobs. Moreover, they left an area that was perceived to be immune from the vicissitudes of globalisation. Szekesfehervar was the seen as the mecca of multinationals, as the city bent over backward to provide ideal conditions, namely tax breaks and other such benefits. The realisation that even this bastion of corporate capitalism has been a sobering wake up call for many. What is more, it has put a final nail in the coffin of the dream that Hungary would one day soon become a high tech hub, a silicon valley of the east, so to speak.

The implications of IBM's decision to leave the region goes far beyond the realm of economics, however. Across the political spectrum, talking heads are quite aware that such moves could damage confidence in the country's uncritical acceptance of globalisation. Hence, the government was quick at damage control and the opposition did its part by not rocking the boat. Subsequently, no sooner had the layoffs been announced that the media the next day reported 6,500 job offers were already received from various companies in the area to take up the redundant IBM workers.

For some, this was overkill and brought back memories of the way communism used to stage manage defeats into glorious victories. After the initial announcement of 6,500 job offers there was silence, leaving many to wonder what had become of these offers. A week later the silence was broken; the number of job offers was revised downwards to between only 1,500 and 2,000. Still nothing concrete, however.

Meanwhile, an electronics company, Videoton, tried to capitalise on the situation. On October 30th it offered to take on 4,000 workers. Naturally, they would only do so if they would be able to take over the entire IBM plant its production facilities intact. In other words, the company was interested in continuing the production of hard drives, taking over from where IBM left off.

Since then, it has become clear that the former workers at IBM will have a rough ride ahead of them. The main reason given for the difficulty in placing the redundant work force is because the IBM employees are too specialised. Thus, it's difficult to have them find other work in the same type of job. The government has offered retraining programs, but this is merely a stop-gap measure.

The good times are soon to be over for those countries which will join the EU

The union, meanwhile, in the grand fashion of being a corporate lapdog, has concerned itself not with worker's rights or fighting for worker's jobs, but to have them "lose their jobs with dignity." Not surprisingly, the union ended its "negotiations" with the firm after only a few days, making sure there were no obstacles in the way for IBM's quick and quiet departure.

The political establishment likewise did its best to downplay the IBM closure. What happened was explained away simply as the ways of the market, and that there's nothing wrong with the government's policies in this respect. However no mention was made about the knock-on effect the IBM closure would cause, for instance the 600 or so supportive companies which relied on IBM for a large share of their business. Nor was any consideration given to the crucial fact that the IBM announcement to relocate to China came on the heels of the confirmation that Hungary will become a likely member of the EU in 2004.

Indeed, the importance of the IBM move is that it signifies, in more ways than one, the start of a much larger process in where multinational companies, having enjoyed the preferential treatment they have received up to now, realise that the good times are soon to be over as those countries which are likely to join the EU in the first round of expansion will no longer be in any position to offer the same amount of incentives. This is the reason that countries like Hungary are increasingly seeing investment outflow after a decade of unprecedented inflow.

The IBM closure, therefore, merely represents the most visible movement of global capital that has been going on for a few years now: earlier this month a textile factory in western Hungary shutdown and shipped its production further east. And a little less than a week after the IBM announcement a supplier for Philips decided it also was time for them to move to China.

Mere nodes in an elaborate network

Realising that this may be just the tip of the iceberg, some have suggested that in order to forestall further such closures the government should reduce the social tax, which is presently at 18%, down to 12% which would still be within EU regulations. They look to the Irish example for inspiration: low taxes and an environment conducive to multinational operations.

But the "Irish miracle" was in the heyday of the late nineties. The country is also now going through some tough times, just like everybody else. Moreover, the Irish experience is different in many aspects. For one, the native language is English which makes it much easier for companies to locate in Ireland as there are minimum linguistic barriers. This applies to everything from computer programming to maintaining call centers and help lines.

In conjunction with this, what very few within Central and Eastern Europe dare admit is that they might have gotten it all wrong from the very beginning. The program of all governments within the region (with perhaps the exception of Belarus) has been one of total privatisation and the encouragement of foreign investment -- at whatever the cost. Yet in today's increasingly global economy, governments are having growing difficulty tracking down trade and investment flows. As countries compete with one another to attract and hold multinationals by offering lower taxes, they invariably lose revenue and are increasingly reluctant to introduce measures which may be interpreted negatively by the corporate sector.

In turn, this has led to the erosion of public finance, prompting governments into a vicious circle of selling more assets and reducing corporate taxes, a vital revenue stream. Yet the erosion of existing sources of public finance could have been resisted by improving resource mobilisation. Public resources needed to be more effectively secured for social development by tying revenue to outlay, or at least to the relevant level of government, and through fiscal stablisation. However, after selling off most of its assets in a privatisation scheme which failed to take such development or fiscal responsibility into account, Hungary and other countries of Central and Eastern Europe have been left holding an empty bag.

Hungary's ambitious highway building program provides a case in point. Ever since the fall of communism, Hungary has embarked on an ambitious highway building program that will see hundreds of kilometers of new highway crisscrossing the country, mainly to the east and south. Yet this highway network has little to do with making it more comfortable for Hungarians to travel to the Ukraine or Romania on their holidays (Hungarians mostly head west, anyway); rather, it is to accommodate the transit of goods through the country. In other words, it had already been established that as Hungary moves closer to the EU, multinationals would be moving further east, to places like the Ukraine, Romania, and Bulgaria, where labour is cheap and corporate legislation is lax. Hence, the need for a road network to facilitate the movement of goods and services from these countries to western markets. Highways in Hungary, therefore, are primarily constructed for the free flow of goods and services -- and not people.

In the broader scheme of things, this is all part of the intricate nature of networks, which lies at the heart of globalisation. In some ways, it can be compared to the workings of digital infrastructure. The structure of network technology, with it's packets and nodes and redundancy schemes, actually serves as a model for new, global economic structures.

What the political and economic leaders of Central and Eastern Europe fail to realise, unfortunately, is that they are mere nodes in an elaborate network. Hence, as globalisation works very much like TCP/IP, network traffic is consequently routed around problem areas or those judged to be no longer effective. Under such a framework, individual nodes don't matter that much: in other words, the ends justifies the means. This may be fine when pushing around bits and bytes; however, it's quite another thing altogether when what is being pushed around are people and places.

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