The discussion about the patterns of EU integration in CEE countries is further confounded by the fact that there are persistent asymmetries in the relations between the Western and Eastern parts of the European Union (Epstein and Jacoby 2014). The less-than-favourable attitudes of Western Europe towards CEE states precede the moment of enlargement, the fall of communism and even the Cold War. "In some sense, the forsaking of ECE following World War II came naturally for West European and American leaders, many of whom viewed the East as politically, economically and culturally distinct—and importantly, inferior" (Epstein and Jacoby 2014, p. 3).

These patterns are painfully obvious in the recent conflict between Brussels and Poland (the "poster child of EU integration" until not long ago). It is the particular choice of words that reveals the East-West divide: innuendos on Poland's unwillingness to solve the issue by means of dialogue (Austrian Federal Minister Gernot Blümel); a power-asymmetry implied when Poland is expected to "provide explanations" (Commission vice-president Frans Timmermans), like a scolded child; the Swedish minister arguing that the issue of rule of law is about the credibility of the entire EU. Poland alludes to discrimination: "We would like member states to approach the Polish evaluation of justice reforms with the same attention, trust and impartiality" (head of Polish diplomacy, Konrad Szymański). Thirteen or ten years, respectively, after the historic reunification of Europe through EU enlargement (2004, 2007), the sources of discontent between the newcomers and the established members are neither few nor easy to solve.

Why was it so easy for the East-West divide to return? In our view, the main reason is that the two halves of the EU function in rather different socio-economic realities, leading, in turn, to different expectations regarding European integration. For the remainder of this chapter, we will analyse the East-West divide from the perspective of development gaps, arguing that while this divide has political, historical and even perceptual overtones, its main driver is developmental, being socio-economic in nature.

It is beyond doubt that NMS were able to take advantage of the many benefits created by EU enlargement: securing high volumes of foreign investment (FDI), access to markets, GDP increase, greater prosperity, modernisation of the service sector, improvements in human capital, and modernisation of part of their infrastructure. At the same time, this new openness to liberal/Western capital has brought about new challenges: vulnerability to external economic shocks (Medve-Bálint 2014), diminished capacity for autonomous innovation and efficiency of the domestic firms (Epstein 2014) and a huge displacement of the working population to the richer parts of the EU (as experienced especially by Romania and Poland).

Despite undisputable economic progress—for example, catching-up in terms of GDP per capita, as noted by Goedemé and Collado (2016)—NMS have been lagging behind in social issues such as minimum wage, expenditures on social protection, life satisfaction, poverty, deprivation, income inequality, unemployment, and mortality (Aidukaite 2011). Furthermore, the NMS of CEE and Baltic countries have the highest levels of aggregate risk of chronic relative material deprivation while Northern and Continental European countries have the lowest levels (Gábos and Goedemé 2016).

Another limitation worth discussing in relation to CEE membership to the EU is that the supranational organism is poor in its provision for distribution of wealth and prosperity—both across the EU and within member states. With respect to convergence between member states, macroeconomic data suggest that, while the EU's "convergence machine" turned many low-income and middle-income countries into high-income economies, the 2009 economic crisis turned convergence into divergence. Income differences between the EU-15 and the NMS remain substantial. The national median income of many EU-15 countries is relatively close to the EU-wide median income, whereas the median income in the NMS is generally substantially lower than the EU-wide median income (Goedemé and Collado 2016). As far as intra-national convergence is concerned, while many regions in CEE countries are likely to slowly catch up with their Western neighbours, they leave others behind in relative poverty in the process (Bosker 2009).

#### 3 The East-West Divide in Data

Our research investigates the return of the East-West divide in the EU from the perspective of development and progress. Our research is premised on the idea that the main driver of this divide is the socio-economic one and it seeks to show that CEE membership to the EU has left largely untouched development indicators such as the urban-rural ratio, level of capitalisation and savings, entrepreneurship and innovation, integration in global/European production, technology, R&D chains, the minimum wage, social expenditures, poverty, deprivation, income inequality, unemployment, and mortality.

Our research will underline the morphology of the East-West "development divide" by focusing on its socio-economic determinants. We will use institutional data sources such as Eurostat, the World Bank, and the United Nations and we will apply secondary data analysis to compare and discuss the development patterns in OMS and NMS. Specifically, our objective is to identify the differences in development based on the following interconnected (a) economic indicators: real GDP per capita, GDP per capita in Purchasing Power Standards (PPS), final consumption expenditure as a percentage of GDP, net national income, minimum wages, foreign direct investments, and (b) social indicators: migration by country of origin, life expectancy at birth, healthy life years at birth, healthy life years at the age of 65, human development index, and the world happiness report. This part of the research will seek to clarify that, in NMS and elsewhere, economic growth is not an interchangeable word for development, which is simultaneously an economic, social, political, and cultural phenomenon (Goldin 2016).

The timeframe for this empirical research is 1990–2018, covering several milestones: the fall of the communist regime in Central and Eastern European countries, the completion of the eastward enlargement, the euro crisis, the Ukraine crisis, the refugee crisis, and Brexit. The timeframe also depends on data availability at the time of writing this chapter. Throughout our chapter, we define the OMS as the founding members, plus the countries from the first, second and third enlargement waves, plus two Mediterranean countries which joined the EU in 2004 (i.e., Germany, France, Italy, Luxembourg, The Netherlands, Belgium, Denmark, the UK, Ireland, Greece, Spain, Portugal, Austria, Finland, Sweden, Cyprus, and Malta); all also referred to as the EU's Western part. By contrast, the NMS are referred to as the countries that joined the EU in 2004, 2007 and 2013—predominantly former communist countries from the EU's Eastern periphery (i.e., the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia Slovenia, Romania, Bulgaria, and Croatia). We chose to create these two clusters because they reflect, both pragmatically and symbolically, the East-West divide that is the focus of this research.

#### 3.1 Economic Development Patterns

One indicator revealing how well off a country is, and thus explaining a country's level of development, is real GDP per capita. The indicator is calculated as the ratio of real GDP to the average population of a specific year, meaning that it measures the average real income specific to a country. Figure 1 shows the average of real GDP per capita by comparatively analysing the trends of real GDP averages in NMS and OMS.

Data reveal that there is an obvious economic development gap between the NMS and the OMS. The difference in the average of real GDP per capita between NMS and OMS is consistent over time, despite European integration. In 2016, the average value of GDP per capita in NMS (12,136 €/capita) was around third times lower than that in OMS (34,835 €/capita). Ironically enough, the economic benefits of EU membership seem to be rather meagre. Although the EU structural and cohesion funds were highly available starting from 2007, and the NMS succeeded in contracting them (for an overview, see the KPMG report 2016), the economic performance of these countries did not seem to significantly improve over time.

In order to get a better image about cross-country economic performances, one should look at the volume index of GDP per capita in PPS. The indicator is expressed in relation to the European Union (EU28) average set to equal 100. If the index of a country is higher than 100, that country's level of GDP per capita is higher than the EU

Fig. 1 Average of real GDP per capita in NMS and OMS. Source: Eurostat, variable tsdec100. Retrieved from: https://ec.europa.eu/eurostat/web/products-datasets/-/tsdec100, accessed April 10th, 2018

average and vice versa. Data for 2016 show that there is a clear divide between OMS and NMS in terms of GDP per capita in PPS (Eurostat, variable tec00114, accessed 2018). OMS register values significantly higher than the EU28 average (100), while NMS register lower values. Broadly, the top part of the ranking consists of OMS while the bottom part is dominated by NMS. Specifically, the top five EU countries in terms of GDP per capita in PPS are Luxembourg (258), Ireland (183), The Netherlands (128), Austria (128), and Denmark (124), whereas the last ranked five countries are Bulgaria (49), Romania (58), Croatia (60), Latvia (65), and Hungary (67). We can notice that there is a huge difference of performance across countries—Bulgaria has an index of GDP per capita in PPS five times lower than Luxembourg's.

At first glance, a consumption boom can be considered a measure of well-being and progress for the CEE member states. What we find worrying is that consumption levels in the NMS are similar to those in the advanced economies while income levels are significantly lower. Citizens in NMS make efforts to improve their way of living to meet Western standards by collecting debt or by cutting down on savings. To analyse this trend, we turned to the indicator "final consumption expenditure as percentage of GDP" (Eurostat, variable nama\_10\_gdp, accessed 2018). Final consumption expenditure is expenditure by resident institutional units—including households and enterprises whose main economic centre of interest is in that economic territory—on goods or services that are used for the direct satisfaction of individual needs or wants or the collective needs of members of the community. In 2016, consumption levels in NMS were similar to those in OMS while having significantly lower income levels. For example, the top five NMS in terms of final consumption expenditure as percentage of GDP—Lithuania (81.5%), Latvia (79.5%), Croatia (77%), Romania (76.9%) and Bulgaria (76.55%)—have consumption levels similar to OMS whose net national incomes and GDP levels are considerably higher—for example, Italy (79.6%) and Finland (79.1%) (Eurostat, variables tsdec230 and nama\_10\_gdp, accessed 2018). This pattern in consumption expenditure is a measure suggestive of the centre-periphery relations in which the latter tries to mimic the standard of living, level of progress and innovation of the centre without actually managing to catch up in terms of economic performances.

Another important indicator of economic development is the monthly minimum wages1 in PPS and in euro (Eurostat, variable earn\_mw\_cur, accessed 2018). Figure 2 shows the average of minimum wages, as of 1 January 2018, in PPs and in euro, by comparing NMS with OMS.

Data show a significant gap between the average value of minimum wages in NMS and OMS. Bulgaria registers the lowest value of minimum wage as of 1 January 2018 (261 €), followed by nine other NMS, also located in Central and Eastern part of the EU, which register minimum wage values between 400 € and 500 €. On the other side, there are the old EU countries where the value of the minimum wage is much higher. For example, in Luxembourg, Ireland, The

1 Twenty-two out of the 28 Member States of the European Union have national minimum wages. Only Denmark, Italy, Cyprus, Austria, Finland, and Sweden do not.

#### **Average of minimum wages - as of 1 January 2018, in PPS and in euro**

Fig. 2 Average of minimum wages, as of 1 January 2018, in PPS and in euro in NMS and OMS. Source: Eurostat, variable earn\_mw\_cur. Retrieved from: http://appsso.eurostat.ec.europa.eu/nui/ show.do?dataset¼earn\_mw\_cur&lang¼en, accessed February 15th, 2018

Netherlands, and Belgium, the minimum wage values vary between 1500 € and 2000 €. Therefore, we can notice major disparities between the NMS and OMS; the average value of minimum wages is around 500 € in NMS and almost three times higher in OMS (1300 €). The situation is more dramatic if we take into consideration that the lowest minimum wage (Bulgaria, 261 €) is almost eight times lower than the highest (Luxembourg, 1999 €). When price level differences are eliminated, the divide seems to be attenuated—the average value of minimum wages in PPS is almost two times lower in NMS than in OMS (729 PPS in NMS and 1257 PPS in OMS). By eliminating price differences, minimum wages range from 546 PPS per month in Bulgaria to 1597 PPS in Luxembourg, meaning that the highest minimum wage is almost three times higher than the lowest; thus revealing a smaller gap.

The minimum wage, whose purpose is to protect employees from excessively low pay, is one way to ensure a more equitable share of the revenues and a means to overcome poverty and inequality. The aforementioned differences in minimum wages between OMS and NMS are a sign of divergence. As data suggest, while the minimum wage enforces a minimal standard of remuneration, its value largely depends on where in the EU the worker is based. This reinforces the East-West discrepancies, especially for vulnerable socio-demographic categories such as manual labourers and low-skilled workers living on minimum wages and is, in turn, linked to the economic migration fluxes from Eastern to Western countries.

In order to get a thorough understanding of the economic development gap between NMS and OMS, we will discuss foreign direct investments (FDI). If in other indicators, such as real GDP per capita and minimum wages, there is a clear divide between OMS and NMS in terms of achievements, FDI results suggest the attractiveness of CEE states for foreign investors. NMS manage to outperform some OMS as far as FDIs are concerned, as we will elaborate below. Data from 2016 show that some OMS (Luxembourg—45.81%, Ireland—25.97%, Malta—22.17%, The Netherlands—19.81%, Cyprus—13.01%, and United Kingdom—11.07%) register significantly higher values of foreign direct investment as a percentage of GDP than NMS (foreign direct investment, net inflows (% of GDP), World Bank, variable BX. KLT.DINV.WD.GD.ZS, accessed 2018). According to the 2017 World Investment Report, the UK and The Netherlands are among the top five host economies in the world (together with the United States, Canada and Australia) in terms of FDI flows. In general, top countries attracting foreign investment are mainly situated in the OMS cluster. We notice as an exception the situation of Hungary, ranking first in 2016 in terms of highest foreign direct investment (54.6%), mainly due to the support of the Hungarian Investment Promotion Agency (HIPA)2 . Generally, NMS register values between 2.2% and 4%, thus outweighing OMS such as Denmark (2.09%), Greece (1.59%), Germany (1.51%), France (1.43%), Italy (0.99%), Finland (-4%3 ) and Austria (-7.66%) in terms of foreign direct investment in 2016.

Nevertheless, high levels of foreign direct investment in NMS countries do not seem to have led to indirect long-term benefits. While direct effects—upgrades in receiving foreign capital—are visible for NMS, indirect effects—including increasing competitiveness and the development of nationally-based companies that could compete with foreign-owned ones—are still flimsy. As Epstein (2014, p. 25) argues, "Indirect effects are arguably more important for the question of backwardness, since they affect a recipient country's capacity to develop autonomous innovation". In more general terms, the overall benefits did not transpose into higher levels of social equity and hence did not really contribute to lower levels of inequality; overall performances registered by NMS are still modest in comparison with those from OMS. Furthermore, as shown in previous sections, local firms are unable to compete with multi-national ones since they did not build the pathways for research and development, innovation, and human capital improvement. Excessive reliance on foreign capital damages a country's development by maintaining a dependency on an external "centre".

Data stemming from the economic development indicators we considered confirm the sources of what Janos (2000) called the "economic backwardness" of CEE. Here, multiple issues overlap, from the inability to take full advantage of foreign investments to lagging behind in terms of GDP or in the capacity of the economy to support a certain level of minimum wage without increasing unemployment or bankruptcies.

Furthermore, there is a subtler hierarchy (or development gap) inside NMS as well, a multi-tier pattern which is becoming more evident as one travels from Western Europe to the Czech Republic and Poland, and then further east and south. In other words, the development divide is not only between the OMS and

2 For more details, see Hungarian Investment Promotion Agency (2017). Retrieved from: https:// hipa.hu/foreign-investors-continue-to-trust-in-hungary, accessed February 27, 2018.

3 According to Eurostat, 2017, negative FDI values indicate where outflows of investment exceed inflows. This may indicate, for example, disinvestment, or reinvestment outside the country, discharges of liabilities, advance and redemption of inter-company loans, short-term credit movements, company dividends exceeding recorded income over a given period, or company operations being at a loss.

NMS but also within the NMS cluster. For example, in 2016, Slovenia (18,500 €/ capita) and the Czech Republic (16,500 €/capita) had a real GDP per capita almost three times higher than Bulgaria (6000 €/capita) and over two times higher than Romania (7700 €/capita). In terms of minimum wages in euros on 1 January 2018, we can notice that in Slovenia (843 €) the minimum wage is the highest among the NMS, this value being over three times higher than that in Bulgaria (261 €) and around two times higher than that in Lithuania (400 €), Romania (408 €) and Latvia (430 €). One explanation for this intra-NMS divide could be that the proximity to the core of Northwest Europe facilitated the accession and use of technological innovation and, therefore, reduced the vulnerabilities of backwardness experienced by South-Eastern European countries (Epstein 2014). Our view is also supported by the findings of the project The State of the Nation. The development of an innovative instrument for grounding the development of public policies in Romania, which relies on evidence-based comparisons within Romania's peer group (other CEE countries) in order to signal regional similarities and certain development patterns as a result of EU membership.4

#### 3.2 Social Development Patterns

This section of our contribution is dedicated to social development indicators. By far, one of the most significant indicators explaining the development gap between OMS and NMS is the number of migrants. Figure 3 shows the total number of migrants by countries of origin by comparatively analysing migration stock across EU countries.

It is observable from the chart that soon after the fall of the communist regimes in Eastern Europe (1990), the European migratory routes were mainly from OMS to other OMS. Not surprisingly, migrants chose to establish in other OMS in order to feel at home in a place similar to their own in terms of economic development. In 1990, there was insignificant migration from OMS to NMS and between countries in the CEE cluster. Fifteen years later, after the successive waves of eastward enlargement, the patterns are completely different. The number of people moving from OMS to similar countries from OMS decreased to around 2 million (from 9,826,714 in 1990 to 7,667,937 in 2015). Instead, citizens from NMS prefer to move to OMS; in 2015, almost 9 million people from NMS moved to OMS (six times more than in 1990). The freedom of movement and residence for persons in the EU, which is the cornerstone of Union citizenship, established by the Treaty of Maastricht in 1992, made it possible for citizens from CEE to move to the more attractive EU-15 states (OMS).

4 For further details, see the official webpage of the Project The State of the Nation. The development of an innovative instrument for grounding the development of public policies in Romania: http:// starea-natiunii.ro/en/, accessed March 8th, 2017.

**Total number of migrants by countries of origin comparison 1990-2015**

Fig. 3 Total number of migrants by countries of origin—comparison 1990–2015. Source: United Nations, Department of Economic and Social Affairs (2015). Trends in International Migrant Stock: Migrants by Destination and Origin (United Nations database, POP/DB/MIG/Stock/Rev.2015). Retrieved from: http://www.un.org/en/development/desa/population/migration/data/estimates2/esti mates15.shtml, accessed March 8th, 2018

Data show that, in general, NMS are not a favourite destination for people living in NMS or for those living in OMS. One explanation is income disparity, one of the main factors contributing to socio-economic inequality—for an overview, see the data explained above on minimum wages. Another explanation is that people are seeking stable, prosperous economies to work and live in (with high rates of GDP per capita and low unemployment rates). Hence, OMS seem the best choice.

The data are worrying, mainly because the movement of these high numbers of people from NMS to OMS entails long-term effects. Pensions, which take up about half of social spending in Eastern European countries, are the biggest worry. An article in The Economist (2017) reveals that in 2013, Latvia had 3.3 working-age adults for each person older than 65—a similar number to Britain and France. By 2030 that number is estimated to fall to just over two, a level that the UK and France will not reach until 2060.

NMS are not only lagging behind in economic terms but also concerning health and life expectancy. Life expectancy at birth represents the mean number of years that a person can expect to live if subjected to current mortality conditions throughout the rest of his or her life. Healthy life years (also called disability-free life expectancy) measure the number of remaining years that a person of a certain age should live without disability. It is a solid indicator to monitor health as a productivity/economic factor, being used to distinguish between years of life free of any activity limitation and years with at least one activity limitation. The emphasis is not exclusively on the length of life, as is the case for life expectancy, but also on the quality of life.

In general, data show that indicators related to life expectancy at birth have been on the increase during the past decade. For example, life expectancy at birth in the EU-28 increased by 2.9 years, from 77.7 to 80.6 years; the increase was 2.4 years for women and 3.4 years for men (Eurostat, variable demo\_mlexpec, accessed 2018). This increase is due to a number of factors, including a reduction in infant mortality, rising living standards, improved lifestyles, and better education as well as advances in healthcare and medicine. However, data on healthy life years at birth (Eurostat, variable hlth\_hlye, accessed 2018) are not so optimistic. Rather, the countries where healthy life years at birth increased during the last decade are exceptions. Therefore, we notice that even though life expectancy at birth increased, the number of years a person lives in good health remained similar or, even worse, decreased. Figure 4 shows a comparison between OMS and NMS in terms of life expectancy at birth and healthy life years at birth according to gender.

Data reveal that in OMS both life expectancy at birth and healthy life years at birth register higher values than in NMS. Life expectancy at birth for females is 3.5 years higher in OMS than in NMS, and for males it is 6.4 years higher in OMS than in NMS. While registering significantly lower values, healthy life years at birth registers similar differences (in years) when comparing OMS with NMS. These data, coupled with projection data on retirement age5 showing that the average age of retirement will be around 68–70 years by 2050, are worrying. These projections take into account the increase in life expectancy at birth and the old-age dependency while ignoring data on healthy life years at birth. In several cases, the retirement age is significantly higher than the average value of healthy life years at birth, especially for men. Even more alarming is the data on healthy life years at the age of 65 (Eurostat, variable hlth\_hlye, accessed 2018). While people from OMS expect to live around ten more years in good health after the age of 65, those from NMS expect to live only around six more years.

**Life expectancy at birth vs. Healthy life years in absolute value at birth - data for 2015**

Healthy life years in absolute value at birth

Fig. 4 Average of life expectancy at birth vs. Healthy life years in absolute value at birth according to gender—data for 2015. Source: Eurostat, variables demo\_mlexpec and hlth\_hlye. Retrieved from: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset¼demo\_mlexpec&lang¼en, and http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset¼hlth\_hlye&lang¼en, accessed March 8th, 2018

5 For details, see Finnish Center for Pensions https://www.etk.fi/en/the-pension-system-2/the-pen sion-system/international-comparison/retirement-ages/, accessed February 28th, 2018.

These data could be linked to other interesting statistics on the human development index, particularly created to emphasise that people and their capabilities should be the ultimate criteria for assessing the development of a country rather than economic growth alone. The human development index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable, and having a decent standard of living. In terms of HDI, 1990–2015, accessed 2018), data show that there were no significant differences between the average values of HDI in OMS and in NMS. However, data for 2015 reveal that four countries from the old EU member states are in the top ten highest ranked on HDI (very high human development): Germany (4), Denmark (5), The Netherlands (7), and Ireland (8). All the other EU countries, except Bulgaria (which ranks high on human development), are ranked as having very high human development. Despite this ranking, the divide between OMS and NMS on the other key indicators of human development is starkly visible.

#### 4 The East-West Divide: Consequences for the Future of the EU

While eastward enlargement was framed as a great victory for the EU's model of development, it actually failed to reduce the disparities between OMS and NMS. More than 10 years after accession, the socio-economic differences between the Western and the Eastern states of the EU are problematic, enduring realities.

The re-emergence of the East-West divide in the EU, in even starker terms than those at the height of the Cold War, is a worrisome phenomenon. Our research was premised on the idea that the major driver of the East-West divide is that of development and sought to draw attention to the socio-economic development indicators that have been left untouched, in some situations even aggravated, by the process of European integration. We consider that a sober, critical, evidencebased acknowledgement of the European Union's failure to make significant contributions to close this development divide is worth our attention. In our view, the success or failure of the project of European integration needs to be discussed in economic terms since prosperity—shared prosperity—was the foundational value of the EU: peace and prosperity, peace as a result of prosperity to be more specific. Given its developmental, socio-economic nature, this divide is difficult to overcome since the results of major developmental, transformative projects are difficult to achieve in the short term. Besides, the EU appears to have had no such large pan-European transformative projects in hindsight.

To further confound the problem, this development divide is reframed as a political divide ("liberal" vs. "illiberal") or a civilisational one (the "cultural backwardness" of the East vs. the "moral superiority" of the West), a fact that obliterates its root causes. Besides, we are dealing with a geopolitically sensitive area, a crossroads of major geopolitical interests and trends, and the consequences of this socio-economic development divide, reframed as a political or even a civilisational divide, are felt in the geopolitical strategic field.

The temptation to reframe this development gap in political, cultural, or even civilisational terms is big; just as equally big appears to be the temptation to leave CEE behind and consider the eastward enlargement a geopolitical blunder. No matter how alluring this scenario might be for some short-sighted leaders, leaving CEE behind, in practical as well as in symbolic terms, may well create the greatest vulnerability for the EU and the international liberal order in the following years.

#### References

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## New Frontiers in Sovereign Wealth Fund Capitalization

Juergen Braunstein and Asim Ali

#### 1 Introduction

This contribution takes its place alongside a small but growing literature that identifies new funding streams for the creation of SWFs (e.g. see, Schena et al. 2018; Gamlen et al. 2016; Braunstein and Caoili 2016; Braunstein et al. 2016; Atkinson and Hamilton 2016). While in the past it was primarily commodity wealth or current account surpluses that funded the creation of SWFs, policy makers are increasingly looking at non-traditional sources, such as taxes, immigrant investor programs and intellectual property rents (see Clarke 2016). Reflecting this change in potential funding sources, the actors involved in the debate are becoming more diverse. While in the past it was primarily the Ministry of Finance or Central Bank that was involved in the debate, other government departments and ministries, such as innovation departments, migration ministries, state-owned enterprise (SOE) ministries, and economic and development ministries, are increasingly getting involved. The objective of this chapter is to systematize existing research and identify promising but overlooked funding sources for future SWFs.

SWFs are large state investment funds that have become important actors in the international finance arena. SWFs have traditionally been established to recycle oil/gas, budget current account surpluses, and address a number of macroeconomic issues; for example, smoothing fiscal revenues, mitigating the Dutch disease or saving for future generations, protecting against capital supply shocks, stabilizing budgets, saving for future generations, and developing financial markets (Braunstein 2018). Mirroring these objectives, SWFs have tended to invest primarily into foreign

J. Braunstein (\*)

A. Ali (\*)

Harvard Kennedy School's Belfer Center, Cambridge, MA, USA e-mail<EMAIL_ADDRESS>
The Fletcher Network for Sovereign Wealth and Global Capital, The Fletcher School of Law and Diplomacy, Tufts University, Medford, MA, USA

assets. Following years of exponential growth, the number and size of new SWFs are uncertain, mainly because the key traditional drivers of SWF growth—notably oil price and current account surpluses—have slowed down.

SWFs are emerging in an international environment, and changes in this environment are reflected in the seemingly changing form and function of various SWFs (Clark and Monk 2010). The first generation of SWFs was strongly related to petrodollar flows, with the recycling of oil surpluses into the international financial system and intermediation thereafter of these financial flows via western financial institutions. The emergence of the SWF-mirrored international environment of liberalization of capital accounts and trade and industrialization provided further windfalls from the oil boom. The second generation of SWFs was strongly associated with emerging economies such as BRICS when countries with large trade surpluses started translating sizeable foreign reserves by investing in international equities and alternative financial instruments for attractive financial returns on their investments. The third generation of SWFs, this contribution suggests, are no longer being funded by the proceeds of hydrocarbon exports or export surpluses. Instead, with a focus on socio-economic and development objectives—when economic nationalism is surging and migration, trade, and foreign investment are increasingly becoming contested political issues—developing countries are finding innovative and alternative ways to mobilize foreign capital/aid flows and international financial markets. For example, while Turkey is following the footsteps of earlier examples such as Temask (Singapore) and Kazannah (Malaysia) but with new elements (raising significant amounts of capital on the international market), Bangladesh is trying something quite new, namely, the use of remittances. The possibility of using remittances as a source of funding would bring a number of hitherto non-mentioned countries, such as Armenia, into the SWF debate. However, a more nuanced picture has to be drawn in this emerging category of SWFs to account for varying political, economic, and institutional constraints. The paper is structured as follows: it provides a brief empirical overview on SWFs that were created with non-traditional sources of funding. Then it looks at remittances as a potential funding and revenue stream for creating new SWFs. Thereby it looks at Bangladesh, which discussed in early 2017 the creation of a remittance-funded SWF, and contrasts it with Armenia—a country which is even more dependent on remittance flows. It reveals important nuances that have to be taken into account when creating such a fund. Finally it looks at Turkey's and Indonesia's announced SWFs, which follow the footsteps of a number of well-established older SWFs but have interesting new elements.

#### 2 Overview

A recent and increasingly prominent phenomenon in the SWF world relates to the creation of SWFs with development and strategic investment mandates that are designed to leverage and channel foreign direct investments into the domestic

Table 1 Sovereign development funds

Source: Sovereign Wealth Center (2017)

economy (Schena and Ali 2016; see Table 1). Some of the most recent examples include the Fondo Strategico Italiano, the Russian Direct Investment Fund, and the Ireland Strategic Investment Fund but the idea of creating such funds is also increasingly gaining momentum in low and lower middle-income countries. Private equity capital seems particularly attractive for countries with underdeveloped public equity markets and shallow debt markets. Sovereign private equity seed funds serve as state-sponsored private equity entities (e.g. Senegal's FONSIS). In 2011 Morocco created Ithmar Capital as a strategic investment fund with the purpose of mobilizing national and international investment into the tourism sector. Financed by the government, Ithmar Captial co-invests in Moroccan projects with other SWFs, and partners with international financial institutions such as the World Bank (Schena and Ali 2016).

Countries with no macroeconomic justifications, such as Senegal or Italy, have already created SWFs. Others, such as Lebanon and Indonesia, are planning to create SWFs. Some of these countries have used government seed funding in the form of capital injections from other government departments or loans to create SWFs (e.g. Senegal, Italy, Panama, France). Others have used asset transfers, such as state enterprise reconfigurations, and merging of existing state investment firms/ funds (e.g. Singapore, Vietnam, Bahrain, Palestine). A number of countries, such as Panama and Luxembourg, have introduced or increased taxes, which then served as a revenue stream for their SWFs. Some countries that could not use the tax instruments for mobilizing funds leveraged their diaspora population for funding, which could then be channeled into a sovereign development fund (e.g., Rwanda). Interestingly, a few economies borrowed funds from the international capital market and re-channeled it into SWFs, which in turn invest in domestic projects (e.g. Ras-al Khaimah, UAE) (Reuters 2017). A thus-far unexplored territory is the study of remittances in the creation of SWFs as a possible funding channel to meet development finance objectives.

#### 3 New Sources of Funding and Revenue Streams

The absence of commodity wealth or current account surpluses is driving many governments away from traditional paths of SWF creation and towards new ways. Such new ways (see Table 2) include leveraging immigrant investor programs,

Table 2 Potential funding and revenue streams

Sources: Clarke (2016); Gamlen et al. (2016); Braunstein and Caoili (2016); Braunstein et al. (2016); Atkinson and Hamilton (2016); ClimateChangeNews(2016); Agarico (2018); FONSIS (homepage); Fondoahorropanama (homepage); The Financial Times (07.02.2017); Bloomberg (02.08.2016; 07.02.2017); Ho and Y-Sing (2015); SWFInstitute (2017); Sovereign Wealth Center (2017) a E.g. energy storage technology and high-tech equipment require rare earths b Projected

borrowing from international finance institutions, and using the proceeds from special taxes/levies. With regard to the latter, Luxembourg aims to gather at least EUR 50mn per year from e-commerce VAT and a residual part from excise duties, and to reach EUR 1bn over a 20-year period for the 2015-created "wealth fund for intergenerational generations" (Braunstein et al. 2016). This fund was created in order to cover a part of future pension liabilities.

In a similar fashion, the Indian government created the National Clean Environment Fund with revenues from an increase in the coal tax (Climate Change News 2016). In order to increase confidence in the non-fossil fuel sector, the Modi government doubled the carbon tax on coal. The revenue flows into the National Clean Environment Fund, which then invests in clean energy projects (Climate Change News 2016). A consortium consisting of Turkey, Indonesia, and Saudi Arabia, backed by the Jeddah-based Islamic Development Bank, plans to raise financing and underwriting loans for the creation of the Islamic Infrastructure Investment Bank (Vizcaino 2015). In discussing the importance of intellectual property for national development, Clarke (2016) explores the creation of Sovereign Patent Funds (SPFs), which are new applications of SWFs in the global patent market. Once these SPFs are established, governments can support and protect their national champions in terms of litigation and gain additional revenue streams from patent rights. These so-called intellectual rents then become more important in smart societies. Thus far such funds have been mainly created in highly industrialized countries, such as Japan and France, with seed funding from other national finance vehicles (e.g. France's Sovereign Patent Fund was funded by the Caisse de Depot) (Clarke 2016). Similarly, the idea has arisen of leveraging immigrant investor programs (IIPs)—programs that involve the sale of national membership privileges to wealthy foreigners—and using finance capital that was exchanged for residency or citizenship rights to create immigrant investment funds. Structured like SWFs, such funds might be useful tools to invest in critical refugee and migrant infrastructure (Gamlen et al. 2016). An interesting but little-noticed move by a low-income country was made by Rwanda in 2012 when the president launched the Agaciro Development Fund (Agarico 2018). Its funding source also included voluntary donations from Rwanda's diaspora.

Other sources of SWF funding relate to large state enterprises and commodities, such as rare earth or shale gas. Inspired by the well-established oil-funded Norwegian SWF, Atkinson and Hamilton (2016) proposed the creation of a UK SWF, which could be funded by the proceeds from the export of shale gas. According to Atkinson and Hamilton (2016), the UK could have accumulated about GBP 280 billion by 2010 if they had created such a commodity fund in 1975 when they discovered oil in the North Sea. Likewise, the idea of using SWFs as vehicles to transform large SOE sectors is not novel (Kumar 1992). It reaches back to the 1970s when Singapore's government aimed to decrease the SOEs' dependence on the government budget. Singapore's government transferred the stakes of the Ministry of Finance Incorporation into Temasek—Singapore's SWF created in 1974 (Braunstein 2017). It created Temasek as a state-holding company. Whilst improving the fiscal situation, this was also intended to increase efficiency and eliminate redundancies through better coordination among SOEs. It could then even raise money on behalf of its companies via the market via issuance of bonds.

The idea of transforming SOEs into large state finance holding companies/SWFs experienced a revival in 2016, when Indonesia's government announced the creation of a US\$320bn SWF which will replace Indonesia's SOE Ministry.

Out of these 13 potential sources, two sources attracted significant attention in 2016 and 2017: SWF capitalization via remittances and SWF creation via stateowned enterprise restructuration. In order to get some more detailed information, the following part explores SWF capitalization via remittances in the pilot cases of Bangladesh and Armenia. Section 4 concludes with an overview of the most recent announcements of SOE restructuring and SWF creation in Turkey and Indonesia.

#### 4 Remittance Inflows: Challenges and Opportunities

Migration and global diaspora resources are an integral part of the development process in many developing countries and an important lever of socio-economic development. Remittances refer to personal funding flows from expatriates to their friends and families back home. According to the World Bank Migration and Remittances Factbook 2016, global remittance flows are estimated to have exceeded US\$601bn, of which developing countries are estimated to receive over US\$441bn. Remittances have been a relatively stable source of external financing—more stable than foreign investment or development aid (Worldbank 2003). Around 247 million people, or 3.4% of the world population, according to the latest World Bank figures, live in a different country from that of their birth.

Interesting patterns of remittance growth can be observed across countries at different income levels. The rise in remittance flows reflects the steady increase in annual labor migration. While average remittance inflows in low-income countries remained low between 2000–2015, upper middle-income countries experienced on average a remittance inflow of US\$3bn in 2015, up from US\$500mn in 2000 (calculated with World Bank data 2016). Interestingly, the most dynamic growth in remittance inflows occurred in lower middle-income countries. On average, lower middle-income countries experienced a remittance inflow of more than US\$5trn in 2015, up from approximately US\$700mn in 2000 (calculated with World Bank data 2016). Many of the lower-middle-income countries, such as Bangladesh, have experienced a dynamic growth in population. At the same time, most of these countries are lacking in social and economic infrastructure.

In many countries at different income levels, remittances constitute a critical part of their respective GDPs. Remittances are often critically important to bolstering foreign exchange reserves and meeting current spending needs. The rationale behind channeling a portion of remittance flows into a sovereign development fund is to insure more efficient management and investment in critical infrastructure (Schena and Ali 2016). A key objective or function of such a fund—e.g. FONSIS—would be to catalyze DFI by global investors so as to amplify the impact of local capital.

Remittances as sources of foreign exchange are particularly important for small open economies. For some low-income countries, for example, Nepal and the Comoros, remittances represent more than 25% of GDP (calculated with World Bank data 2016). For many developing countries, remittances constitute a large part of their FEX inflows and national income. In Tajikistan, for example, remittances represented around 50% of the GDP in 2013 (calculated with World Bank data 2016). Interestingly, in upper middle-income countries, such as Lebanon, Albania and Bosnia, remittance flows have experienced a continuous decline between 2000 and 2015. In Bosnia and Herzegovina, for example, remittances represented around 10% of GDP in 2015, down from around 30% in 2000 (calculated with World Bank data 2016).

Bangladesh and Armenia, too, rely on remittances as part of their budgetary needs but serve as examples of countries with similar remittance levels but with different implications for SWF creation.

#### 5 Bangladesh

Bangladesh is a lower middle-income country. Given the myriad of economic challenges, Bangladesh will continue to record budget deficits between the fiscal years 2016/2017 and 2020/2021. The government is facing numerous challenges, ranging from the need to invest in power and water infrastructure to the necessity of raising spending on education and healthcare and reducing poverty to meet the targets of the Sustainable Development Goals (SDGs). The tax collection base remains low and thus the government will continue to struggle with funding, increasing fiscal deficits. For 2016/2017, according to Economic Intelligence Unit (EIU); the government forecasts that progress on widening the tax base will remain slow, weighing on revenue inflows and resulting in a budget deficit of 5.3% of GDP in that year. The fiscal shortfall will narrow to 4.6% of GDP by 2020/2021 as the tax base expands, although revenue as a proportion of GDP will average 10.6% in 2016/2017–2020/2021, one of the lowest levels in Asia (calculated with World Bank data 2016). However, there is hope, in addition to preferential market access to the EU and US markets, that a continuous growth in inflows of worker remittances will compensate for the persistent deficits in the trade, services and primary income accounts, enabling the current account to remain in surplus in 2017–2021.

SWFs were established with one or more objectives, whether to insulate the budget and the economy from excess volatility in revenues; help monetary authorities sterilize unwanted liquidity; build up savings for future generations; or for economic and social development. Bangladesh is one such example of a developing state that is considering deploying a fund for economic and domestic infrastructure development; herein are some ideas for other developing countries, with similar socio-economic profiles, that are trying to balance competing budgetary priorities. India, too, just launched an SWF—the National Investment and Infrastructure Fund (NIIF)—with the idea of a national development fund with a focus on natural resource/energy and infrastructural development sectors (Livemint 2016). In the Middle East, countries like Qatar and Kuwait, which suffer from arid land, for example, are strategically deploying their respective SWFs to acquire biotechnology and bio-agricultural technology from European states to manage water and food scarcities. Bahrain is using its fund to harness domestic human capital through a focus on engineering, education, and management sectors.

#### 6 Purpose of a Bangladeshi SWF: Remittances as a Funding Channel

In 2015, Bangladesh's central bank chief, Atur Rahman, disclosed that the government is planning to establish an SWF through excess foreign exchange reserves to focus on national infrastructural development projects. In early 2017, the Bangladesh government announced the establishment of a possible \$10bn SWF that would be used for "any purposes in the public interest" (Asia Nikkei 2015). The fund is being floated via sequestering part of the FEX reserves, which had exceeded \$30bn due primarily to the inflow of steady remittances (Xinhuanet 2017).

Bangladesh is correct to consider innovative options to meet its financial and development needs. With its steady flow of remittances, which in 2016 accounted for 65% of the country's foreign exchange reserve, Bangladesh is right to invest its reserves for long-term development objectives instead of borrowing or issuing sovereign bonds. According to the central bank of Bangladesh, the remittance inflow for the year 2014–2015 was US\$15.31bn, while the remittance inflow in 2013–2014 was US\$14.23bn—a steady jump from the approx. US\$7.9bn inflow in 2007–2008 (calculated with World Bank data 2016). By contrast, FDI (net inflows) was US \$3.38bn and US\$2.5bn in 2014 and 2013, respectively, according to World Bank data (calculated with World Bank data 2016). The steadily increasing inflow of remittance has to do with the central bank's efforts to facilitate the inflows through formal banking channels. As the structure and mandate of the Bangladeshi SWF are formalized, the creation of an SWF based on excess reserves derived principally via remittance inflows would be a novel idea and one that offers some stylistic lessons for other developing countries.

#### 7 Economic and Political Rationale for a Bangladeshi SWF

A Bangladeshi sovereign development fund capitalized via remittances would be a preferable alternative to foreign aid dependency or favorable trade access to leading markets (subject to the vagaries of the host country's political economic compulsions). Assuming a clearly defined financial-legal and political-economic mandate undergirding such a development fund, a remittance-based SWF provides the necessary funding sources for infrastructural development in a developing country like Bangladesh.

In the case of Bangladesh, an impoverished country with a large migratory labour force working in the Gulf Cooperation Council countries and other parts of the world, remittances are the bread and butter of most Bangladeshi families back home. As indicated earlier, international remittances in Bangladesh in 2015 stood at around \$15bn, covering almost 65% of the country's foreign exchange reserve for this period (calculated with World Bank data 2016). However, the success of a remittance-based SWF will be contingent upon the government—as the central bank of Bangladesh has been debating—creating a fund that can be sequestered for the broader development of the economy.

Once a remittance-based SWF fund is established, Bangladesh could develop an institutional mechanism to smartly co-invest the proceeds from inflows in national development projects and become less exposed, over time, to the vagaries of international capital and financial markets. Bangladesh is ideally positioned to leverage its strong development cooperation with non-traditional donors such as China, India, Iran, Kuwait, Malaysia, Saudi Arabia, Turkey, and the UAE incidentally, all southern states with SWFs of their own—and deepen its South-South financial-economic engagement. It will also help mitigate sovereign and exchange rate risk as Bangladesh would be channeling its remittance-based SWF into tangible and long-term projects that would yield meaningful socio-economic and financial returns.

#### 8 Armenia

Remittances have been the single-most critical external source of capital in Armenia in relative GDP terms, even larger than Bangladesh. Between 2008 and 2015, remittance inflows into Armenia were considerably higher than FDI inflows. As of 2015, about US\$1.6bn in remittances (around 15% of Armenia's GDP) were sent to Armenia from other countries (calculated with World Bank data 2016). As of 2015, remittances were about the size of Armenia's total export revenues, almost nine times as high as FDI inflows and more than twice as high as portfolio investment inflows. In 2014, remittances were even significantly higher than Armenia's total export revenues. With an emigrant remittance stock of 785,740 as of 2015, approximately one-third of Armenia's population works abroad (World Bank, database 2016). On an annual average, each of the emigrants sends about US\$2000 back to Armenia. This is a considerable amount given the average monthly income in Armenia of US\$350 average in 2015 (Armstat 2017).

Yet the structural features in Armenia show that it is not only the size of remittances that matter for the creation of an SWF but also economic factors. If some remittances are formally allocated to a separate legal structure and invested in long-term projects, they will not qualify as FEX reserves under the IMF's definition. Armenia is extremely exposed to the political and economic vagaries of a single economy—Russia. The generation of remittances is out of the hands of the country, making it particularly vulnerable to sudden stops or decreases in remittance flows. As of 2015, about 60% of remittance flows to Armenia came from Russia (calculated with World Bank data 2016) so any economic downturn in Russia translates into reduced remittance inflows or remittance supply shocks in Armenia, leading to a decline in FEX reserves. This would leave the central bank and the Armenian currency vulnerable and encourage raiding the fund to backfill reserves (e.g., similar to what happened in Azerbaijan). Hence, Armenia's economy is closely linked to the business cycles of the Russian economy, which is a major reason why remittancerelated reserves are kept in the central bank.

Another promising route for SWF creation among many countries relates to the restructuration process of state-owned enterprise sectors. Countries with large SOE sectors, in particular, which do not want to privatize their SOEs, might choose the SWF route. This follows earlier models of state-holding companies—where governments try to separate ownership and management functions in order to permit the companies greater operational freedom from the state—combined with modern elements of attracting foreign capital via the issuance of bonds or for co-investments (Kumar 1992, Wall Street Journal, 17.02.2017).

#### 9 Capitalizing a Fund Through Restructuring State-Owned Enterprises (SOEs): Cases of Indonesia and Turkey

Indonesia's announcement that it was creating an SWF in May 2016 was followed in February 2017 by Turkey's statement that it was creating a Turkish Wealth Fund. Turkey and Indonesia are following in Singapore's footsteps. It was in the early 1970s when the government of Singapore made the first move by transferring the stakes of the Ministry of Finance Incorporation into Temasek Holding—Singapore's SWF created in 1974. Singapore's other ministries followed suit by transferring their assets into similar holdings, such as the Sheng-Li Holding (defense-related industries) and the Ministry of National Development Holding (housing development and land corporations). Then, in the early 1980s, most of the assets were merged into Temasek's portfolio (Braunstein 2017).

Indonesia's new SWF will be modeled after Malaysia's Khazannah Nasional and will reportedly control US\$320bn worth of assets by 2019 (Bloomberg, 17 May 2016). To accelerate the process, the government plans to create four sector-specific sub-holdings, starting with the energy sector (Braunstein and Caoili 2016) The new SWF will replace Indonesia's SOE ministry and act as the parent for 199 of the largest SOEs. In a similar fashion, the Turkish government announced the transfer of government stakes in a number of high-profile companies, such as Turkish Airlines, a Turkish oil company, Halkbank, and Turk Telekom, into an SWF (The Financial Times, 07.02.2017). The size of a Turkish SWF could reach US\$200bn (Bloomberg, 07.02.2017).

The creation of the Turkish Wealth Fund and the announcement of an Indonesian SWF reflect the latest developments in the evolution of SWFs created with the proceeds of large-scale state-owned enterprise restructuration. The rationale behind divesting state assets and putting the proceeds into an SWF is driven—partly at least—by the consideration to leverage national assets to raise money on the international capital market. Unlike earlier SWFs, notably Temasek, which issue bonds to get a rating and increase transparency, Turkey aims to raise money via its SWF on the international market for a number of high-profile infrastructure projects (The Financial Times, 07.02.2017). In the case of Indonesia, the aim of restructuring the SOE sector via the creation of an SWF is to decrease the SOEs' dependence on the government budget. While improving the fiscal situation, this should also increase efficiency and eliminate redundancies through better coordination among SOEs (Braunstein and Caoili 2016). In an age of increasing budget deficits and the need to reform large SOE sectors, other potential candidates for SWFs might also follow suit, including Pakistan and Iran.

#### 10 Conclusion

The recent proliferation of SWFs among countries with no macroeconomic justification should not be surprising given their pledge of supporting national development agendas.

SWFs increasingly serve as an important dimension of the domestic political imperatives and economic policy considerations (i.e., economic diversification, economic development, macroeconomic stability) in the sponsoring states. This is reflected in their mandates, which have grown beyond their initial functions of stabilizing budgets and saving for future generations—via international portfolio investments—to include objectives related to domestic development purposes. These funds are increasingly integrated into the overall economic development strategy of the countries and can help generate long-term economic value and sustainability.

This contribution highlights—through four representative examples (Bangladesh, Armenia, Indonesia, and Turkey)—the need for more in-depth research into new frontiers in sovereign wealth fund capitalization in order to understand novel forms of state-driven financial engineering. Academics and policy makers are confronted with a new set of questions: What do these innovations mean for long and wellestablished SWFs, as well as their underlying theories? Recent examples of SWF formation show that the creation of such new SWFs not only depends on the availability of budget-, commodity-, and FEX surpluses. New capitalization channels are identified for creating SWFs, allowing governments without surpluses to create SWFs in order to leverage international capital for domestic policy purposes. What is the role of emulation and policy learning in the adaptation of these new forms of investment institutions? Does financial engineering in the SWF area occur on a continuum from less disruptive to radical innovation of institutions? If yes, what are the implications and unintended consequences?

For practitioners and scholars, financial engineering in the SWF arena offers the opportunity to identify creative ways of leveraging national assets and linking them to domestic and regional development agendas. Given the myriad socio-economic challenges facing these developing countries (water, electricity, population bulge, dilapidated infrastructure), sequestering a portion of revenues—derived via remittances or FDIs or exports—in a financial vehicle that could be deployed strategically for national economic development projects should be a national priority. However, this would tie significant amounts of FEX into long-term projects, which could become a problem in countries that have high exposure to single markets that are highly volatile.

A combination of increasing budgetary constraints and increasing domestic demand for basic services/infrastructure put increasing pressure on governments with large SOE sectors towards financial innovation. Here, financial engineering is about finding organizational formats that allow the leverage of existing national assets for the purpose of financing public goods and basic infrastructure services. SWFs will play an increasingly prominent role and as such they are expected to continue growing. However, establishing a depoliticized institutional mechanism for the management of such a fund would be a monumental task—as seen when the rentier proclivities of the ruling elite drained Nigerian and Libyan funds—for developing countries like Bangladesh. Many other countries with such funds from liberal democracies (Norway Oil Fund) to the Gulf States (Qatar, Kuwait, UAE) to Southeast Asian countries (Malaysia, South Korea, China) to countries in Africa (Ghana)—among others—offer some successful lessons in how to deploy a national wealth fund.

#### References

Agarico. (2018). Overview. Accessed January 1, 2018, from http://www.agaciro.rw/index.php? id¼34

Armstat. (2017). Armenia statistics [homepage]. Accessed May 2, 2017, from http://www.armstat. am/en/?nid¼126&id¼0800>1

Xinhuanet. (2017). Bangladesh cabinet approves proposal to set up sovereign wealth fund. Accessed February 6, 2016, from http://news.xinhuanet.com/english/2017-02/06/c\_ 136035956.htm

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## The Impact of Macroeconomic Factors on FDI Attractiveness: Romania, Slovakia and Greece in Comparison

Kalliopi Kasapi, Andriana Lampou, George Economakis, George Androulakis, and Ioannis Zisimopoulos

#### 1 Introduction

The aim of this contribution is to investigate the key macroeconomic factors that may affect inward FDI in rather small European economies, such as Romania, Slovakia and Greece, which are all at a different level in their process of European integration. Romania and Slovakia are both economies in transition. Romania is a member of the EU but still not a member of the EMU while Slovakia and Greece are both members of the EU and the EMU.

The main macroeconomic factors evaluated are inward FDI, GDP growth, real unit labor costs (ULC), trade balance, exchange rate, sectoral distribution of exports, and economic complexity.

#### 2 Theoretical Frameword

FDI can contribute to an economy's growth through being a source of capital formation and through technology transfer, "externalities" or "spillover effects" (Fan and Dickie 2000, p. 314) and GDP growth deriving from the improvement of the host country's trade balance. This contribution focuses on the latter.

I. Zisimopoulos (\*)

K. Kasapi (\*) · A. Lampou (\*) · G. Economakis (\*) · G. Androulakis (\*) ·

University of Patras, Patras, Greece e-mail<EMAIL_ADDRESS><EMAIL_ADDRESS>
#### 2.1 Main FDI Categories

The following FDI categories can be distinguished according to their effect on the host country's trade balance.

1. FDI for producing goods for the domestic market that could operate either as a substitute for investors' exports or equivalently for the host country's imports ("market-seeking" FDI) (Iammarino and Pitelis 1999, pp. 4–5; Lim 2001, pp. 11–12).

This FDI category includes "market-oriented theories for FDI" (Busch 1992, pp. 201–208). It is argued that market-seeking FDI could replace the imports of products of the host country (Iammarino and Pitelis 1999, p. 4; Busch 1992, p. 204; Lim 2001, p. 11) and therefore, ceteris paribus, an improvement of its trade balance is expected. The main incentives of this FDI category are related to the reduction of costs necessary for supplying the domestic market (and thus to increased capital profitability); these costs come from the imposition of duties on the imported goods (Lim 2001, p. 11), national currency devaluation (Busch 1992, pp. 204–205), or from transport costs (Busch 1992, p. 202; Lim 2001, p. 11). Economic growth, as it is expressed by GDP growth, is an indicator of an augmenting domestic market and may explain the increase of marketseeking FDI.

2. FDI for producing goods for the global market (Giannitsis 1983, pp. 300–355; Milios and Ioakeimoglou 1990, pp. 158–159; Iammarino and Pitelis 1999, pp. 4–5; Lim 2001, pp. 11–12; Economakis et al. 2005).

This FDI category includes the "cost-oriented theories for FDI" or the "theories of mobility/allocation of production for cost reasons" (Busch 1992, pp. 201–208). FDI is connected to the "decentralization of stages of production" (Iammarino and Pitelis 1999, p. 4) and the "relocation of the chain in a low-cost location" (Lim 2001, p. 11). The main incentives of this FDI category are related to the reduction of production costs for supplying the global market, such as the reduction of labor costs and the costs of raw materials as well as the opportunity to access to certain "externalities" (e.g. "cluster of FDI in one location", which is referred as "agglomeration") (Lim 2001, p. 11). The transport costs and the proximity of the markets to which the investor's products are exported should be taken under consideration (Economakis et al. 2005) while the market size of the host country does not seem to play a key role (Lim 2001, pp. 11–12). This FDI category is, ceteris paribus, positively related to the improvement of the host country's trade balance since FDI tends to increase the host country exports.

It must be noted that FDI of the first category could be interconnected with the FDI of the second category as inputs that reinforce the export-oriented FDI.

However, the increasing FDI of both categories may cause an increase of imports due to the export orientation of foreign industries in the supply of intermediate inputs, especially if the sectors in which foreign investment activity is concentrated are weakly interconnected with other sectors of the host economy (Giannitsis 1983, p. 353).

The following analysis is restricted to the investigation of FDI of the first and second categories.

#### 2.2 FDI and Economic Complexity

Economic complexity, which depicts the level of economic development, may influence inward FDI. Economic complexity is "a measure of the knowledge in a society as expressed in the products it makes and is calculated based on the diversity of a country's goods exports and their ubiquity, or the number of the countries able to produce them" and it is measured by the Economic Complexity Index (ECI) (Atlas of Economic Complexity)". "Complex economies are those that can weave vast quantities of relevant knowledge together, across large networks of people, to generate a diverse mix of knowledge-intensive products. Simpler economies, in contrast, have a narrow base of productive knowledge and produce fewer and simpler products which require smaller webs of interaction" (Hausmann et al. 2011). Since "webs of interaction" is another name for "externalities", "complex economies" are, ceteris paribus, attractive destinations for FDI, especially those directed to high-tech sectors.

#### 3 FDI in the Context of European Integration

The incentives of the first two FDI categories will be assessed considering their possible positive effect on the host country's trade balance. The imposition of duties, the devaluation of national currency, the geographic position of the country, and

1 Electricity, construction, transportation and storage services, telecommunication services, wholesale and retail trade, and other services (Gibson 2010, p. 340).

GDP growth will be evaluated according to their effect on FDI of the first category. Moreover, the ULC and the proximity of markets will be evaluated according to their effect on FDI of the second category.

#### 3.1 The Case of Romania

#### 3.1.1 Market-Seeking FDI: Tariffs, GDP, and National Currency

As it can be seen from Fig. 1 Romania's FDI stock as a percentage of the world total (FDI-w.t.percentage) had an upward trend until 2008. In 2008, 1 year after Romania's accession to the EU, the country attracted a record amount of FDI. Between the years 2000 and 2008, large multinational companies invested in the country, while between 2003 and 2005, Romania received the highest rates of FDI inflows in Eastern Europe (Andrei 2014). However, after 2008, the relative position of the country as a receiver of FDI deteriorated significantly, since FDI stock in Romania diminished from 0.42% of the world total in 2008 to 0.27% in 2016 (UNCTAD).

Romania embarked on its journey towards EU membership in 1993 with the signing of the Europe Agreement, whose purpose was to prepare the country for accession to the EU (1995–2005). The Agreement was asymmetric in nature, with the EU willing to eliminate its trade barriers for Romanian exports over the first half of the period and Romania doing the same for EU exports over the second half. This concession given by the EU together with the preferential fiscal regime for Romanian exporters brought results in terms of a solid increase in Romanian exports

Fig. 1 FDI stock of Romania (% of total world), 1991–2016. Source: UNCTAD & IMF

(Marinescu and Szeles 2010). After 1995 the phasing out of tariffs began, a course necessary before the country's accession to the EU. Taking into account the high dependence on Romania's FDI coming from the EU members (NBR), a negative effect on attracting FDI of the first category would be expected. However, FDI was not affected negatively by the tariffs phasing out, which continued to increase during the same period. The same does not apply after the country accession to the EU in 2007.

Another incentive for attracting market-seeking FDI is the country's national currency exchange rate. Between the years 1995 and 2008, FDI in Romania had an upward trend and the currency showed a trend of devaluation in real terms (IMF). Part of the increase of FDI could be explained by the devaluation of the Romanian national currency, i.e. FDI in order to circumvent the exchange rate protection. Therefore, although the incentive to circumvent tariff protectionism for attracting FDI has faded out, the incentive to circumvent the exchange rate protection remains for foreign firms.

A rising GDP could be another possible incentive for attracting FDI. Romania's FDI-w.t.percentage and GDP increased almost simultaneously between the years 1994 and 2008, decreased between 2008 and 2009, and after 2009 they disconnected (AMECO). The two variables have a weak positive relationship (ρ ¼ 0.44) between the years 1994 and 2016. Romania's FDI and GDP common rising trend until 2008 probably indicates that the market size is related to the increased FDI. However, after 2009, FDI and GDP disconnect, indicating that market size changes don't affect market-seeking FDI.

The geographical distance between the investor's country and the host country and the transportation costs don't seem to play a significant role in attracting marketseeking FDI since Romania's main investors (NBR) and trade partners are nearby countries of the EU (UNCTAD).

#### 3.1.2 Export-Oriented FDI: Wage-Productivity Relationship and Geographic Proximity

Romania's ULC constantly decreased between the years 1990 and 2016 (AMECO). This downward trend could explain, to some extent, the increase of FDI inflows over the same period. However, the same factor does not seem to be strong enough to reverse the decline of FDI in the Romanian economy after 2008. The strong negative correlation of FDI-w.t.percentage and ULC between the years 1990 and 2016 (ρ ¼ -0.76) means that the level of ULC may influence the level of export-oriented FDI attracted by Romania.

The geographic proximity of Romania with the other EU counties, which are its main investors, could also be an incentive for export-oriented FDI.

#### 3.1.3 FDI and Trade Balance of Romania

Figure 2 depicts Romania's FDI-w.t.percentage as well as the rate of coverage of imports (M) by exports (X) of goods (exports/imports).

Between the years 1994 and 2008, Romanian FDI constantly increased while the trade balance deteriorated. On the contrary, after 2009, the Romanian trade balance improved despite the downturn of FDI, which indicates that FDI is strongly negatively related to external trade. FDI-w.t.percentage and X/M have a strong negative relationship between the years 1994 and 2016 (ρ ¼ -0.96), indicating a disconnection between FDI and external trade.

In an attempt for further analysis, exports and FDI-w.t.percentage have a strong positive correlation (ρ ¼ 0.77) between the years 1994 and 2016, which could indicate the presence of export-oriented FDI. Imports and FDI-w.t.percentage have a strong positive correlation (ρ ¼ 0.87) for the same period. Romanian FDI inflows don't seem to have significantly replaced imports. Nevertheless, the increase of imports could be partly explained as a result of FDI inflows in Romania since FDI can create import-demands necessary for the production process. The trade balance improved after 2009, which could be related to the current account crisis of the Romanian economy and the implementation of restrictive policy measures that led to an import decrease and an improved trade balance (Economakis et al. 2016).

Fig. 2 FDI stock (% total world) and exports/imports of goods of Romania (1994–2016). Source: UNCTAD & AMECO

Summarizing, the received FDI of the first and second category were not strong enough to significantly affect the trade balance, throughout the period examined, despite the presence of FDI of the second category. FDI in Romania is mostly attracted by non-tradable sectors or sectors that are not connected to external trade. In 2004 the service sector was absorbing 46% and the industry sector 54% of the total FDI received by Romania while in 2016 the service sector absorbed 55% and the industry sector 45% (NBR, Annual reports 2004–2016). This confirms that an important part of FDI is attracted by non-tradable sectors (trade, telecommunications) or sectors with an unclear impact on trade balance (financial intermediation, real estate). In 2007 financial intermediation absorbed 23% and trade 14% of the total FDI received by the country (NBR, Annual reports 2004–2016).

#### 3.1.4 Romania's FDI Positions by Industry & Exports and Imports Structure

Figure 3 depicts the distribution of Romanian FDI by industry between 2004 and 2016 (NBR, Annual reports 2004–2016). By comparing the distribution of Romanian FDI by industry with the distribution of the country's imports and exports some conclusions can be derived about the FDI category received. The composition of Romanian exports has changed over time. Textiles and clothing represented the major export products (about one-fourth of all exports) but they lost their top spot after 2003. More specifically, the exports of the industry decreased from 27% of

Fig. 3 FDI distribution by industry (2004–2016), (% of total FDI positions of Romania). Source: NBR

the total Romanian exports in 2007 to 7% in 2016, while the industry's imports decreased to 7% of the total imports in 2016 from 19% in 1997 (UNCTAD). The textile industry has also experienced a decline in FDI, which suggests that the industry is generally unattractive; it also indicates disinvestment. Since there is a major decline in the exports, imports, and FDI of textile products, there is evidence that the FDI attracted could be of the second category.

There is also a significant increase in the Romanian export of vehicles and transport equipment, which seems to be directly related to the FDI attracted in this sector, especially after Renault acquired the Romanian automaker Dacia in 1999 and Ford Motor Co. made major investments in Romania in 2008 (Marinescu and Szeles 2010). Moreover, the industry's export increased from 5% of the total exports in 1999 to 17% in 2016 (UNCTAD). FDI also increased, reaching 6.7% of the total FDI in 2016 (NBR, Annual reports 2004–2016), indicating that the FDI attracted is mainly of the second category.

There is also a major development of exports of mechanical products, mainly triggered by automotive parts and components. Romania's strong presence in the automotive industry is illustrated by the fact that "there is virtually no car producer in Europe that does not use spare parts produced in Romania, in other words, the assembly lines in Europe are supported by exports of Romania" (Dobreanu 2014). The exports of mechanical products increased from 9% of the total exports in 1995 to 29% in 2016, while the imports of the industry also increased from 21% in 1991 to 27% in 2016 (UNCTAD). Thus, there is evidence that the increasing exports came with an increasing import-demand, such as inputs for the production process. Therefore, the FDI attracted by Romania in the sector could be possibly exportdriven (second category).

In the case of the food industry, FDI dropped, exports increased, and imports stayed relatively stable throughout the period examined, indicating that the declining FDI was probably of the first category.

Other sectors in which the FDI in the Romanian economy seem to be of the first category are the fuel industry and the cement-ceramics industry. In both cases, FDI increased while exports and imports decreased.

In the metal products industry, FDI and exports decreased but imports slightly increased. More specifically, the exports of metal products decreased from 15% of total Romanian exports in 1995 to 6% in 2016 while the imports of these products increased from 5% in 1995 to 7% in 2016 of the total imports (UNCTAD). This could mean that these products were export-oriented and the FDI attracted was of the second category. Therefore, a downtrend in FDI led to a decrease of exports. Additionally, metal products could be significant inflows for other industries, such as mechanical products and vehicles, whose exports increased, and some of the FDI could be an intermediate category of FDI between the first and the second.

Therefore, Romanian FDI in the manufacturing industry between the years 2004 and 2016 is both market-seeking (first category) and export-oriented (second category).

#### 3.2 The Case of Slovakia

#### 3.2.1 Market-Seeking FDI: Tariffs, GDP, And National Currency

As it can be seen from Fig. 4, Slovakia's FDI-w.t.percentage had an upward trend until 2008. After Slovakia's accession to the EU in 2004 and until 2008, FDI stock increased but at a decreasing pace. After 2008, 1 year before the country's accession to the EMU, Slovakia's FDI stock started to decrease. The relative position of the country as a receiver of FDI deteriorated since FDI stock in Slovakia diminished from 0.33% of the world total in 2008 to 0.16% in 2016 (UNCTAD).

In 1994, the application of high tariffs on imports (WTO 1995) was an incentive for attracting FDI of the first category in order to overcome the costs that resulted from the imposition of duties on the imported goods. The country started to phase out tariffs in 1995, a course necessary before the country's accession to the EU (Slovak Republic.org n.d.). This process was carried out by a number of agreements (EEFTA, EFTA, EEA). In 2004 Slovakia continued its course to a free market economy by accessing the EU, which did not negatively affect FDI attraction. Taking into account the high dependence on Slovakia's FDI coming from the EU members (OECD), a negative effect on attracting FDI of the first category would be expected. However, this fact did not influence the FDI attracted, which continued to increase.

Between 1993 and 2009, Slovakia's national currency depreciated in real terms (IMF), which was an incentive for attracting FDI of the first category in order to bypass exchange rate barriers and may explain, to some extent, the increased FDI.

Fig. 4 FDI stock of Slovakia (% of total world), 1993–2016. Source: UNCTAD & IMF

Therefore, although the incentive to circumvent tariff protectionism for attracting FDI had faded, the incentive to circumvent the exchange rate protection remained for foreign firms until 2009. After 2009, Slovakia accessed the EMU and there is no national currency under which FDI inflows can be explained, while FDI decreased considerably.

The geographical distance between the investor's country and the host country, as well as the transportation costs, don't seem to benefit the FDI of the first category since Slovakia's main investors (OECD) and trade partners (UNCTAD) are nearby countries of the EU.

Moreover, both GDP and FDI-w.t.percentage increased between the years 1994 and 2008 (AMECO). The two variables have a strong positive relationship (ρ ¼ 0.82) between 1994 and 2016, which indicates that the growth of the Slovakian economy is positively related to market-seeking FDI. However, this is confirmed until 2009 since after that year the two variables seemed to disconnect.

#### 3.2.2 Export-Oriented FDI: Wage-Productivity Relationship and Geographic Proximity

There was a decrease in Slovakia's ULC between the years 1997 and 2008 (AMECO), which could theoretically explain, to some extent, the increase of FDI. However, between the years 2008 and 2016, ULC increased. The weak negative correlation (ρ ¼ -0.52) between FDI-w.t.percentage and the ULC for the period 1995–2016 means that the cost competitiveness of Slovakia's economy has a weak relationship with the attraction of FDI.

An advantage of Slovakia, as a host country of FDI of the second category, is its geographical location. According to the three major car industries invested in the country, Slovakia was selected mostly because of its geographical location, great infrastructure, proximity to EU member states and growing economy in comparison with another member of V4 (Bratscht 2012, pp. 10–16).

#### 3.2.3 FDI and Trade Balance of Slovakia

As can be seen from Fig. 5, Slovakian trade balance improves with some fluctuations after 1998. Slovakia's FDI-w.t.percentage has an upward trend until 2008 and the country's trade balance improves simultaneously. After 2008, Slovakia's trade balance continuous to improve while FDI-w.t.percentage starts to decrease. In particular, Slovakia has a trade surplus after 2009, while FDI falls significantly. FDI-w.t.percentage and X/M have a weak positive relationship (ρ ¼ 0.56) between the years 1994 and 2016, which means that FDI is connected only to some extent to the external trade.

Moreover, Slovakia's trade balance continuous to improve after the country's accession to both the EU and the EMU. Nevertheless, after the country's accession to the EMU, X/M and FDI follow opposite directions.

Fig. 5 FDI stock (% total world) and exports/imports of goods of Slovakia (1994–2016). Source: UNCTAD & AMECO

The relationship between exports and FDI-w.t.percentage has a positive correlation (ρ ¼ 0.64) between 1994–2016, indicating the probable presence of FDI of the second category. Τhe relationship between imports and FDI-w.t.percentage was strong and positive (ρ ¼ 0.70) between the years 1994 and 2016. As in the case of Romania, the increase of Slovakian imports could be partly explained as a result of import-demands necessary for the production process created by increased FDI. In any case, Slovakia's FDI (like Romania's) doesn't seem to have significantly substituted imports.

Given the above, the trade surplus after 2009 cannot be attributed to the rising FDI of the first or second category, despite the evidence about the presence of FDI of the second category for the whole period examined. Between the years 1998 and 2003, FDI attracted by the service sector is higher than FDI attracted by the industrial sector absorbing about 55% and 36% of FDI, respectively. After 2004 and until 2007, FDI in the industrial sector accounted for almost 50% of the Slovakian FDI, more than the service sector, while during the same period Slovakia's trade balance was improving (OECD). The high increase of FDI-w.t.percentage between 2002 and 2004 is related with the establishment of the two car industries, Peugeot and KIA (Bratscht 2012, pp. 10–16). However, after 2009, FDI inflows in Slovakia are again mostly attracted by service sector, which absorbed approximately the 50% of Slovakia's FDI and in particular by non-tradable sectors or sectors that are not directly connected to external trade and have unknown impact to the trade balance.

Thus, to the extent of any influence of FDI on trade balance, the improved trade balance, despite the decline of FDI after 2008, could only be due to the positive effect of earlier FDI, especially the one of the second category.

#### 3.2.4 Slovakia's FDI Positions by Industry & Exports and Imports Structure

As it can be seen from Fig. 6, the automotive industry is a leading sector of FDI attracted by Slovakia. In particular, three major car industries invested in the country: Volkswagen Slovakia, KIA Motors and PSA Peugeot Citroen (Bratscht 2012, pp. 10–16). Volkswagen Slovakia was founded in 1991, while the other two companies invested in Slovakia shortly before its accession to the EU. It should be noted that these two investments had a determining role in the rapid rise of the FDI of this sector, while FDI significantly increased from almost 0% in 2002 to 9% in 2006 and finally reached approximately 6% in 2016. There is a major increase in exports of vehicles and transport equipment accounting 29% of the Slovakian exports in 2016 (UNCTAD) which were related to FDI that has taken place. It can be concluded that FDI attracted is mainly directed to the world market (second category).

In the food products sector there is a decrease in FDI from 8.8% in 1998 to 2% in 2016, while exports and imports remained relatively stable, constituting approximately 5% of the Slovakian imports and exports respectively (UNCTAD). This could mean that FDI of this sector has an unclear orientation (first or second category).

Fig. 6 FDI distribution by industry (1998–2011), (% of total FDI positions of Slovakia). Source: OECD

In mechanical products industry there was a major increase in both exports and imports for the whole period (UNCTAD) occupying almost the 33% of Slovakian exports and imports respectively in 2016, while FDI remained stable at about 3% of the total Slovakian FDI. This probably means that FDI attracted is directed to both domestic and world market (first and second category). Moreover, a part of this sector may constitute inflows for other industries, such as Vehicles and Transport Equipment, whose exports also increase (first category).

Another major sector is the one of metal products. FDI had an upward trend until 2000 but diminished from 17.8% in 2000 to 5.8% in 2016 of the total FDI received, while exports and imports remained stable constituting approximately 10% of the Slovakian imports and exports respectively (UNCTAD). This could mean that part of this FDI is export-oriented (second category). Moreover, FDI of the sector of metal products could be significant inflows for other industries, such as mechanical products and vehicles, whose exports also increase (first category).

Slovakia's FDI, between the years 1998 and 2011, is mainly export-oriented (second category) while market-seeking FDI, apart from covering domestic needs, also consists important inflows for production for other industries.

#### 3.3 The Case of Greece

#### 3.3.1 Market-Seeking FDI: Tariffs, GDP and National Currency

As it can be seen from Fig. 7 Greece's FDI-w.t.percentage has an overall downfall trend while some fluctuations over some sub-periods can be noted. The FDI's downfall starts after 1984, i.e. 3 years after the country's accession to the European Economic Community (EEC). During the 1990's FDI continues to decline. The relative position of the country as a receiver of FDI deteriorated since FDI-w.t. percentage diminished from 0.84% of the world total in 1984 to 0.31% in 1995, 2 years after Greek accession to the Single Market and even more to 0.18% in 2000, finally reaching 0.10% of the world total in 2016 (UNCTAD). Therefore, it seems that the accession to the EU and the EMU has negatively affected FDI inflows. Moreover, FDI's course confirms the view that Greece is not an attractive country for FDI in the global economic environment.

After 1981, Greece had to accept the abolition of tariffs and capital control up to 1985, while the whole process was completed in 1993. Since Greece's main trading partners are EU countries (UNCTAD), the incentive of bypassing trade barriers for attracting market-seeking FDI does not seem to apply.

Moreover, the drachma's general appreciation in real terms during the 1990s (AMECO) ("pre-euro" era) could, to some extent, explain the non-attracting FDI. After 2001, the year that Greece accessed to the EMU, FDI stock remains on a low level and since Greece's main investors are EU countries FDI for exchange rate protection could not exist.

Fig. 7 FDI stock of Greece (% of total world), 1980–2016. Source: UNCTAD & IMF

Greece's geographical position like Romania's and Slovakia's, is not an incentive for attracting market-seeking FDI, taking into account that Greece's main investors (OECD) and trade partners are nearby countries of the EU (UNCTAD).

Greece's GDP and FDI-w.t.percentage have different directions until 2007 (AMECO). The correlation of the two variables is ρ ¼ 0.12 between the years 1994 and 2016, indicating that GDP changes are not an incentive for attracting market-seeking FDI. It must be noted that the continuous decline of GDP after 2008 is related to the global economic crisis and the austerity measures undertaken by the Greek government (Economakis et al. 2016).

#### 3.3.2 Export-Oriented FDI: Wage-Productivity Relationship and Geographic Proximity

There is a sharp decrease in the Greece's ULC during the period 1983–1996 and for the years to follow, despite some fluctuations, it remains on low level. The correlation between FDI-w.t.percentage and ULC for the period 1981–2016 is strong and positive (ρ ¼ 0.70), indicating that the improving cost competitiveness does not influence the level of FDI attracted by Greece.

Like Romania and Slovakia, the geographic proximity of Greece with the other EU countries, which are its main countries investors, could be an incentive for export-oriented FDI. However, this incentive is not activated in the case of Greece given the collapse of FDI.

#### 3.3.3 FDI and Trade Balance of Greece

As it can be seen from Fig. 8, Greece's trade balance deteriorates, especially between the years 2002 and 2003, after the country's accession to the EMU. Greece's FDI-w. t.percentage had a downfall trend after 1984 with the only exception between the years 2002 and 2007 that had a small upward trend, which coincides for the years 2003–2005 with the trade balance amelioration. FDI-w.t.percentage and X/M have a strong negative relationship (ρ ¼ -0.74), for the period 1994–2016 which means that FDI is not connected to the external trade. After 2008, Greece's trade balance improves as a result of the economic crisis and the restrictive measures which led to decreasing imports (Economakis et al. 2016) and FDI and trade balance are completely disconnected.

The FDI-w.t.percentage and exports have a strong negative correlation (ρ ¼ -0.74) between the years 1994 and 1016 indicating that FDI does not connect with exports. The relationship between imports and FDI-w.t.percentage is insignificant (ρ ¼ -0.08) between the years 1994 and 1016.

FDI in Greece is mostly attracted by non-tradable sectors or sectors that are not connected to the external trade. It is worth mentioning that in 2001 the service sector was absorbing the 60% and the industry sector the 35% of the total FDI received by

Fig. 8 FDI stock (% total world) and exports/imports of goods of Greece (1994–2016). Source: UNCTAD & AMECO

Greece and in 2011 these percentages were almost the same (OECD), a fact that explains the trade balance deficit.

#### 3.3.4 Greece's FDI Positions by Industry & Exports and Imports Structure

As it can be seen from Fig. 9 FDI attracted by the Greece's manufacturing sector is lower than 40% of the total FDI received between the years 2001 and 2011 (OECD).

FDI attracted by the food products sector has a decrease from 19% in 2005 to 13.7% in 2016 (OECD). Moreover, the exports of the sector diminished from 30% in 1995 to 17.4% in 2014, and finally reached 22.7% in 2016, while imports seem to have remained relatively stable constituting 13% of the Greek imports during the years examined (UNCTAD). Therefore, FDI in this sector has an unclear orientation (first or/and second category).

As far as the pharmaceutical products are concerned, FDI also has an unclear orientation.

FDI of the fuel industry had fluctuations, absorbing 10.7% in 2005 and 6.3% in 2016 of the total FDI attracted (UNCTAD). Moreover, fuel imports could, by their nature, consist of inputs for other industries. Greece's fuel imports and exports also increased by approximately 30% between the years 1995 and 2013, which means that this industry's products are both export-oriented and for domestic use as well.

Given the above, FDI in Greece's manufacturing sector remained low during the period 2001–2011.

Fig. 9 FDI distribution by industry (2001–2011), (% of total FDI positions of Greece). Source: OECD

#### 4 Complexity

Figure 10 presents the ECI of the three countries examined and also ECI of Germany as a benchmark, since "Germany is the second-most complex economy in the world after Japan and it is the second most diversified country after Italy" (Felipe and Kumar 2011, p. 10).

For Slovakia, ECI remains high throughout the period examined compared to the other two countries. Romania's ECI presents a clear upward trend during the recent years. Greece has a lower ECI compared to both Slovakia and Romania, and after 2010, i.e. during the ongoing Greek economic crisis, ECI turned negative.

From the definition of "economic complexity", Slovakia's export product mix is expected to be dominated by more "complex products", i.e. products of a higher technological level, while Greece's negative index indicates exports of low-tech products (OECD; Di Mauro et al. 2010).

Although primary and low technology products are Romania's main export products (UNCTAD), the downturn of exports of low technology products and the significant increase of exports of medium technology products since the mid-1990s (UNCTAD) can explain the upward trend of ECI during the recent years. Romania's FDI has followed the same trend. In particular, vehicles and transport equipment, which is a leading sector attracting Romanian FDI in recent years, is classified as sector of medium-high technological level, which indicates that ECI could be related, to some extent, to Romanian FDI.

Medium-tech products have dominated Slovakian exports since the mid-1990s while primary and low-tech export products have declined (UNCTAD), which

Fig. 10 Economic Complexity Intex (ECI) of Germany, Greece, Romania, Slovakia (1964–2016). Source: Atlas of Economic Complexity

explains Slovakia's higher ECI. Given that the technological level of exports is positively related to the income elasticity of demand for exports and the latter is positively related to the amelioration of the trade of balance (Thirlwall 1991), Slovakian trade balance amelioration since 1998 is connected to the improving technological level of its exports. Moreover, there has been a significant increase of FDI in the sector of vehicles and transport equipment (medium-high technology level) but a decrease in the sectors of food products and metal products (low technology and low-medium technology, respectively). Consequently, Slovakia's relatively high economic complexity attracts specific FDI categories, especially the ones with a relatively higher level of economic complexity.

Finally, in the case of Greece, after the mid-1990s, the overwhelming dominance of primary product exports (UNCTAD) is linked to the low ECI of the country. The dominance of FDI in low-tech food products indicates that the country is classified as a simpler economy and therefore the economic complexity is not an incentive for attracting FDI.

#### 5 Conclusions

Summarizing, the process of European integration does not seem to have had the same effect on the FDI attracted by Romania, Slovakia and Greece; however, it seems to be connected with a general downgrading of all countries as receivers of FDI. In the case of Romania and Greece, this deterioration is connected to the accession of the countries to the EU while in the case of Slovakia to the accession of the country to the EMU.

The effect of FDI on the trade balance for all countries examined in the context of European integration is rather vague. Throughout the period examined, FDI is either weakly connected (Slovakia) or disconnected (Romania and Greece) to the external trade. This indicates the limited impact of FDI of the first and second category on the total FDI in these countries despite the evidence of presence of FDI of the second category for Romania and Slovakia. It is worth noting that for Romania and Slovakia, FDI and trade balance followed opposite directions after the accession to the EU and the EMU, respectively. Greece's trade balance deteriorated or ameliorated independently of FDI after the country's accession to the EEC/EU.

For both Romania and Slovakia, although the incentive to circumvent tariff protectionism for attracting FDI has faded, the incentive to circumvent the exchange rate protection remains for foreign firms. In the case of Greece, the phasing out of tariffs and the exchange rate have had an effect on FDI attractiveness.

The size of the market has a positive relationship with FDI in the case of Romania and Slovakia but has no relationship with FDI in the case of Greece. Moreover, the low ULC seemed to attract FDI in the case of Romania and Slovakia but played no role in the case of Greece.

Greece's, Romania's, and Slovakia's geographical positions is not an incentive for attracting market-seeking FDI, taking into account that their main investors and trade partners are nearby countries of the EU. However, the geographic proximity of the three countries could be an incentive for export-oriented FDI.

Finally, economic complexity seems to explain, to some extent, the relative attractiveness of FDI of the three countries examined, and especially of FDI directed to more advanced technological sectors.

#### References

#### Online Sources

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## Health Care and Migration: What Data Can Tell Us of the Hard-to-Measure Impact of Migrants on the European Health Systems

Guidi Caterina Francesca and Alessandro Petretto

#### 1 Background Framework

One of the most fascinating aspects of health as a good is the different perspectives from which it can be studied since it has direct effect in the quality of life of individuals: guaranteeing its coverage and provision is a question of both equity and humanity. According to the consolidate literature of the Public Choice Theory (Samuelson 1954), health is a merit good (Musgrave 1959) with certain characteristics (Arrow 1963) present in both the demand and supply sides—such as externalities, information asymmetry, good experience, doctor-patient relationship, moral hazard, the adverse selection phenomenon (linked to uncertainty), and paternalistic public supply (Petretto 2017). Given these economic characteristics, health should be provided according to individuals' needs, a concept more related to the sphere of equity, rather than their ability or willingness to pay linked to the efficiency dimension. By its own nature, healthcare is an input into a productive process: medical treatment has a consumption effect—individuals feel better when they are healthier—and is an investment—the healthier you are, the more active in the labour market you are (Grossman 1972).

On the supply side, the two magisterial aspects are the provision model and pricesquantity of healthcare treatments available in the market, while on the demand side the three very important characteristics that we aim to investigate are access,

G. Caterina Francesca (\*)

The original version of this chapter was revised. A correction to this chapter is available at https://doi.org/10.1007/978-3-030-11361-2\_14.

European University Institute, Fisole, Florence, Italy e-mail<EMAIL_ADDRESS>
A. Petretto (\*) University of Florence, Florence, Italy e-mail<EMAIL_ADDRESS>
utilization, and quality of the outcome. In this chapter, we want to deepen the first two aspects—access and use—and study them according to the European welfare system provision towards migrants, one of the most vulnerable groups in European societies. We concentrate our study on what data and empirical evidence can tell us of the hardto-measure impact of migrants on European health systems.

One of the most compelling challenges is the adaptation of the health systems to migration's and mobility's new needs. Worldwide around 70% of people still lack social protection coverage (ILO 2014) and about 400 million people do not have access to health services (WHO and WB 2015); among them the most vulnerable are migrants (OECD 2017). The adaptation of health systems to the migration phenomenon implies costs that can generate sustainability problems in the provision of services for nationals.

International migration represents 3.4% of the global population; considered as a whole, it would constitute the fifth-largest population in the world after China, India, the European Union (EU), and the United States of America (USA) (UNDESA 2017). Nearly two-thirds of all international migrants, around 76 million people, live in Europe (UNDESA 2017), establishing the continent as a recent migration destination. Indeed, between the Age of Discoveries and the mid-twentieth century, some 70 million people left their European homeland for overseas destinations and only in the last three decades has the number of third-country nationals entering the EU been greater than the number of EU citizens leaving for overseas destinations (Münz 2017). Today, almost 57.3 million citizens born outside their country of origin, accounting for 11% of the total population, equal to approximately 512 million people on 1 January 2017, in turn composed of 36% intra-EU migrants and 64% of foreign-born (Eurostat 2017). Around 6% of the latter group is represented by a growing second generation of migrants who have one or two foreign parents (Münz 2017).

To this we should add the so-called "humanitarian crisis", which has been worsened after the geopolitical imbalance post-9/11 and the Arab Spring uprising (Dustmann et al. 2016). In the years 2014–2016, about 1.8 million people (IOM 2017) entered EU ports in an irregular manner, mainly through the Mediterranean and the Western Balkans. More than 35% arrived for humanitarian reasons, asking for asylum in various Northern and Western EU countries, creating a pressure never felt before on the European reception system (UNHCR 2017). This extra inflow—in addition to some 2 million first-residency permits issued to third-country nationals yearly—was unprecedented in size. In fact, in the years 2000–2013, the EU countries had only admitted fewer than 4 million asylum seekers and refugees altogether; on average fewer than 300,000 per year (Münz 2017).

The EU MS present different situations in terms of healthcare models, taxation systems, and the integration of foreign nationals. Compared to other countries with longer migration histories, such as Canada and the USA, the differences in access and use of health systems for foreigners are further differentiated according to their legal status—such as asylum seekers, refugees, long-term residents and so on.

In this chapter, we will analyze the health care provision for the European migrant population, underlining the differences between healthcare systems. Migration, indeed, may create more pressure on consolidated services or require new ones and can affect the demand and supply of health goods and care. In the next paragraph, we will consider the terms in which economic analysis addresses the complexity of migrant health needs. In the third paragraph, we will present the main themes for adapting the concept of health inequalities to the phenomenon of migration in Europe. The fourth paragraph is devoted to a concise review of the main types of healthcare and welfare systems in Europe. Concluding, the fifth paragraph contains some final considerations. The extensive bibliography we propose provides an idea of how much attention in this historical phase economic and econometric analyses have devoted to the implications of the migration phenomenon.

It is not possible to draw unequivocal and definitive conclusions from this review: The impact of migration on the welfare of industrialized countries is broad and heterogeneous, especially with regards to consolidated public economics and requires more in-depth and innovative theoretical reflections. Migration is a complex human phenomenon that imposes an arduous challenge to all social sciences, and public economics will certainly not come out of this without an inevitable methodological revision.

#### 2 Complexity of Migrant Health Needs and an Economic Analysis

The classic Economics of Migration is focused on neoclassical models (Bencivenga and Smith 1997; Harris and Todaro 1970; Todaro 1969) and based on maximizing utility function and the New Labour Economics theories (Stark 1991, 1978). In the mainstream literature, the push and pull factors of migratory processes—such as expected salary, income, investment in human and social capital—have been analyzed in several contributions (Massey et al. 1993; Sjaastad 1962), particularly in Europe (Fouarge and Ester 2007; Hatton and Williamson 2002). The risk diversification in the choice of countries of destination (Simon 1983; Katz and Stark 1986) as the reason for the different investment in capital—cultural, financial, symbolic, and social capital (Bourdieu 1986)—tried to give an exhaustive portrait of migration economics, describing particularly what happens on the demand side of migration. In addition, the recent contributions to behavioural economics (Bertoli et al. 2015; Czaika 2015; Mankiw 1998; Kahneman and Tversky 1979), enrich the theoretical reference framework addressing the migrant perspective. In fact, the individual as the ethnic group beliefs towards destination countries and the functioning of the social networks are studied and considered to define the migratory investment or the aversion for status quo loss.

However, attention to the impact of migrants on destination country welfare systems is still scarce, especially in Europe. Some scholars, most notably Borjas (1994, 1999), argue that the various model of European welfare serves as a magnet for migrants given its average generosity and the high vulnerability suffered by people in transit, who are escaping from poverty, wars, and natural disasters. Brücker et al. (2002) have shown that, although it persists after controlling for migration characteristics, the effects of welfare attraction on migration composition are very moderate, and much more relevant than those exercised by wage levels or the expected unemployment rate in the destination countries (De Giorgi and Pellizzari 2009). Boeri (2009) found that less-skilled migrants are over-represented in the countries with more generous welfare and a higher probability to receive non-contributory benefits than natives, such as in Denmark, Finland, Norway, and Sweden, while the opposite happens in countries such as Austria, Germany, Spain, and the United Kingdom. However, this effect was not proven during the current refugee crisis in Europe: referring to a previous study (Pedersen et al. 2008), only a small proportion of asylum seekers declared they had chosen France due to the generosity of its welfare system. The analyses that utilize the level of public social expenditures out of the Gross Domestic Product (GDP)—in particular, public health care expenditure as a proxy for social state attractivity—do not support the magnet hypothesis (Gubert and Senne 2016).

Borjas and Trejo (1991) studied the public reception and assistance system of migrants in the USA and suggested that during the 1970s their increased utilization of assistance services may have been assessed by a change in the composition of cohorts of immigrants in terms of nationalities and time spent in the country. As also affirmed by Borjas and Hilton (1996), immigrants were more likely to be part of the Medicaid program in the 1980s and 1990s than the latest demographic cohorts. Implicitly, therefore, an increase in migration flows would add pressure on health resources (Preston 2014).

Hansen and Lofstrom (2003) looked at the use of the welfare system by migrants in Sweden, concluding that they are more likely to make use of its services than natives, but the effect decreases with the length of stay, as confirmed by Sarvimäki (2011) in Finland. Bratsberg et al. (2010, 2014), on the contrary, found migrants in Norway performed worse in the labour and social security market.

Barrett and McCarthy (2008) summarized most of the existing literature focusing on the nature of welfare systems in the destination countries and the use intensity made by migrants. They found that in Ireland immigrants are less welfare-dependent than natives, while in the United Kingdom they are more likely to use it: this effect, however, depends entirely on the higher dependence of Irish citizens on their welfare system. On the other hand, Dustmann et al. (2010) showed that there is a net benefit for the UK produced by migrants from countries entering the European Union in 2004. In fact, migrants from the A81 countries are much younger and then more likely to join the workforce and, therefore, less likely to benefit from social benefits, taking into account the eligibility criteria that non-EU migrants face. Dustmann and Frattini (2014) extended their analysis to immigrants from all countries, demonstrating once again the low levels of receiving benefits and the use of social housing in comparison with natives.

Grönqvist et al. (2012), studying the residential placement of asylum seekers in Sweden, analyzed the causal effects of health ethnic segregation and found that a positive association is observed between ethnic concentration and poor health outcomes—including hospital admissions—but this disappears when controlling for residence status.

1 Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia.

However, the health of migrants is one of the biggest challenges for public health, causing serious problems of inequality and social exclusion in the destination countries. Understanding variables—founders and co-founders—is a fundamental exercise for studying the determinants of access, use, and quality of health services. Migrant health poses the central issue of public finance emerging from the social inclusion process: defending the sustainability of healthcare systems on the financial side is a prerequisite for tackling and winning this great challenge in Europe.

#### 3 Migrant Health Status in the Health Care Debate: From the Healthy Migrant Effect to the Exhausted Migrant Effect

According to their specific framing, countries provide various levels of health coverage for different migratory groups and have different criteria for what is considered as a medical emergency (Stanciole and Huber 2009; Cuadra 2011; FRA 2011). The literature devoted to health, ethnic, and social inequalities is increasingly popular and explores several aspects of this topic, such as the higher risk of certain diseases among ethnic minorities (Hadjar and Backes 2013; Smith Nielsen and Krasnik 2010), the adopted behaviours, and the differences in the organization of health systems (Blom et al. 2016) as in the healthcare consumption for asylum seekers (Essink-Bot et al. 2012) and irregular migrants (Suess et al. 2014).

Historically, the hypothesis of the healthy migrant effect (HME) states that migrants have a better health status than non-migrants in the country of origin (Abraído-Lanza et al. 2000) thanks to a sort of comparative advantage (Acevedo-Garcia et al. 2010), confirming that immigrants are not a sample of the population of origin but a positive health-based selection (Giuntella et al. 2016). Migrants from low-income countries have been described as "travellers of time" from the past and therefore have been exposed to fewer health risks, particularly for non-communicable diseases (Razum and Twardella 2002). However, it has recently been shown that being a migrant can be a decisive factor that negatively determines their health (Rechel et al. 2011), from arrival to stay in the destination countries (Marmot 2005; Marmot et al. 2012; Davies et al. 2009; Malmusi 2014; Giuntella and Stella 2017). Concurrent mechanisms such as poverty, discrimination in the labor market, travel, and living conditions in the host countries can influence migrants' opportunities in terms of healthcare received and suffered diseases, affecting the deterioration of their health over time (Acevedo-Garcia et al. 2010; Rechel et al. 2013). This is also known as the exhausted migrant effect, which also affects the health of second-generation migrants (Devillanova and Frattini 2016): a natural regression process towards the average health of the population (Giuntella 2013), an unhealthy assimilation process (Antecol and Bedard 2006; Giuntella and Stella 2017), and more likely to do dangerous work (Orrenius and Zavodny 2013; Giuntella and Mazzonna 2015). Additionally, adversities may be the cause of an increased incidence of mental disorders such as schizophrenia (Ingleby et al. 2012), anxiety, and depression (Lindert et al. 2009) among migrants. In some European countries, social exclusion and marginalization, which have also occurred since the second generation, seem to have a devastating effect.

Recently, Moullan and Jusot (2014) found that the differences in the health status of migrants and natives in Europe could be attributed to the large variation in health status of citizens in different European MS and countries. It has also shown that in times of economic crisis—given the high levels of unemployment and retirement uncertainty—migrants prefer to return to their country of origin for the salmon bias effect (Razum 2006).

The theory of acculturation—rather than the adoption of norms, values, and behaviours of the host countries—has been used to explain the changes in migrant health behaviours in the United Kingdom (Jayaweera and Quigley 2010) and in the USA (Giuntella 2016). Migrants present higher smoking levels than nationals, lower breastfeeding levels, and more high-fat diets, with a consequent increase in diabetes, cardiovascular disease, and cancer or, as in the case of Germany (Sander 2007), adverse mental health (Brand et al. 2017). If this theory is true, second or third generations of migrants may have similar health habits, like the local population of origin, as proved recently in the USA (Giuntella and Stella 2017) with the acceleration of obesity rates in the most recent migrant cohorts.

While the definition of who is an immigrant is recognized at the international level, it is still not very clear after how many years migrants can be considered part of the local population and their health risks like those of the local population (Grosser et al. 2016). In some countries, the second generation acquires the reception country's citizenship at birth—jus soli—while in others migrants remain "foreign" or "aliens" until the legal age (18 or 16 years old) or after some years of permanent residence—jus sanguinis (WHO 2010).

As stated by Razum (2006), an ideal migrant study should follow individuals before they migrate to the country of destination and, in the event of a return migration, back to the country of origin to better understand the direction of these effects and provide a real measurement.

#### 4 The Organization of the European Welfare Systems: Some Evidence

#### 4.1 The Different European Welfare Systems Typologies

The depth of health coverage, together with spending patterns and funding targets, are fundamental factors in determining the cost of the protection protection of the health for a country's citizens (Balabanova et al. 2013) as for the most vulnerable groups. Although health variability is linked to individual factors, the country of residence determines the quantity and supply of health services: In some European countries, populations are healthier due to the health coverage or levels of commodity of healthcare services (Bambra 2006; Mackenbach 2012; Eikemo et al. 2008a, b). Therefore, the famous distinction between countries based on welfare systems (Esping-Andersen 1990; Ferrera 1996; Petretto 2017) is central and differentiates countries into five groups: Anglo-Saxons, Bismarckian, Eastern, Scandinavian, and Southern, according to the liberal, conservative, post-socialist, or social-democratic policies pursed in the public sector. In Europe, countries are divided as follows:

The social-democratic systems try to ensure wealth redistribution through laws and social security institutions, while the conservative systems present a low threshold of finance redistribution and a lower level of social welfare, but they respect the principle of subsidiarity. In contrast, liberal welfare regimes support a free-market economy with occasional interventions by the state and an average level of wellbeing guaranteed by the market while the post-socialist regimes have different mechanisms to produce welfare in their transition economies.

The idea is that the welfare system is central for migrant integration in terms of coverage and resources (Hadjar and Backes 2013). In addition, European healthcare systems differ from one country to another in various aspects such as the type of financial contribution, which influences the medical care provided to citizens and migrants. In summary (Thomson et al. 2009):

Although there is a positive trend in increasing funds for health spending and social protection (Honorati et al. 2015), comparing EU MS with other non-EU countries, some selected health expenditure flows present very high variability, as illustrated in Fig. 1.

Current health expenditure, as a proportion of GDP, has increased over the past decades in most EU countries: for the EU as a whole, it has increased from 7.9% in

Fig. 1 Trends in current and private healthcare expenditure in EU MS, Canada, Norway, Switzerland, USA—2015. Source: Authors' elaboration based on data provided by World Bank—World Development Indicators (2018)

Fig. 2 Growth rates in currentand private health expenditure from 2001 to 2015 in the EU. Source: Authors' elaboration based on data provided by World Bank—World Development Indicators (2018)

2000 to 9.9% in 2015, while the share of OOP out of THE has substantially decreased in some countries and increased in others. As shown in Fig. 2, from the comparison between total and OOP health expenditure growth rates from 2001 to 2015, it can be noted that a decrease in the first corresponds an increase in the other and the current European trend is a progressive increase of OOP proportion of the private health expenditure (OECD and WB data 2017).

As shown in Fig. 3, assuming 2010 as the worst year in the panel of time crisis, in countries where the proportion of OOP expenditure out of the private health expenditure (PHE) increases, the Gini Index, which measures inequality in income distribution, follows the same path, determining a higher effect of health inequalities.

Fig. 3 Health inequality EU MSs, Canada, Norway, Switzerland, USA—2010. Source: Authors' elaboration based on data provided by World Bank—World Development Indicators (2018)

However, it is not easy to determine its final effect on health (European Commission 2013). The proportion of individuals covered by a private insurance varies widely among MS (Thomson et al. 2009): close to zero in CZ, ES, IC, LT, RO, and SV while FR, BE, LU, Sl, and NL present half of the population with access to private insurance, given that it can be complementary, supplementary, or duplicative to their health systems. Indeed, in more than one-third of EU countries, healthcare systems are financed by a mix of taxation and social contributions.

This does not lead to a unique impact on migrants in an EU characterized by deep structural differences and oppressed by a global economic and financial crisis (Dustmann et al. 2016). In addition, the socioeconomic inequalities of mortality and morbidity are no smaller in Scandinavian and SSN welfare countries than in the liberal Anglo-Saxon countries or those characterized by a Southern system or with more family-oriented public policies (Eikemo et al. 2008a, b).

Certainly, the educational gradient plays a central role since countries with the lowest average years of education—such as the Southern and Eastern European countries—present the largest overall prevalence rates of illness, while the Anglo-Saxon countries have the lowest ones (Eikemo et al. 2008b). In general, first Scandinavian and then Anglo-Saxon regimes were observed to have better selfassessment (SAH) than Bismarckian, Southern, and Eastern European welfare regimes given that the variety of cultural factors may influence the rational expectations of citizens (Navarro et al. 2003, 2006; Bambra 2006; Borrell et al. 2007; Eikemo et al. 2008a; Bambra and Eikemo 2009; Bergqvist et al. 2013).

#### 4.2 Healthcare Expenditure and Reduction of Ethnic Inequalities

The study of the impact of healthcare expenditure on reducing ethnic inequalities has recently received more attention since it might amplify differences between migrants and natives, especially first-generation immigrants (Blom et al. 2016). Taking for granted the hypothesis of the material deprivation and intersectionality of different disadvantages affecting migrants, it has been proved that language and cultural barriers impede the access and use of services despite the percentage of health expenditure dedicated (Ingleby 2012). Therefore, policies on socioeconomic deprivation may reach the lower quintiles of income but mostly native residents rather than migrants (Palencia 2014); while specific policy measures targeted to migrant health may really reduce these disadvantages (Mladovsky 2011), they may lead to friction between the poor with unforeseeable outcomes.

A further element of difference between the countries is the migrant integration policy model, based on the Migrant Integration Policy Index (MIPEX) scores produced by the Migrant Policy Group (Meuleman and Reeskens 2008). The main categories of countries are as follows:

The number of studies utilizing MIPEX in their analyses to characterize the healthcare provision to different classes of citizens in European countries is considerable. A relationship between MIPEX and depression levels in migrants has been proven (Levecque and Van Rossem 2015), while it has not been found so explicative for comparing the subjective wellbeing of migrants and natives (Hadjar and Backes 2013) Malmusi (2014). Giannoni et al. (2016) demonstrated the impact of the migration policy on migrants' SAH: indeed, unsufficient integration policies worsen socioeconomic and health outcomes. As expected, countries that rely on the OOP system and adopt exclusionist policies also present lower percentages of public health expenditure while the majority of those with the NHS system also present a multicultural policy, asking their citizens lower percentages of out-of-pocket tax contributions.