Commentary 28 July 2017

Investing in Illiberalism

by Thorsten Benner, Wolfgang Reinicke               Foreign Affairs

“Europe,” Emmanuel Macron said last month, “isn’t a supermarket.” The French president was referring to the recent illiberal actions of some central and eastern European states, which he argued had come to rely on the bloc to “dispens[e] credit” in the form of budgetary assistance “without respecting [the EU’s] values.” Though Macron didn’t mention them by name, it was clear that he was referring to Hungary and Poland.

It is easy to understand why Macron made that statement. Hungary and Poland have profited from the EU’s common market and generous investment funds, but they have defied its core democratic norms. In Hungary, Prime Minister Viktor Orban has built what he has called an “illiberal state” by rewriting the constitution, hollowing out democratic institutions, harassing civil-society groups and universities, and pursuing hateful campaigns against migrants, Muslims, and liberal philanthropists such as George Soros. Poland’s ruling Law and Justice (PiS) party has taken similar steps: most recently, it sought to put an axe to the independence of Poland’s judiciary with four new bills (two of which have been signed by Poland’s president). Both governments have vowed to use their veto power in the European Council to protect each other from EU disciplinary measures.

As Polish and Hungarian officials have sought to defend their records on the international stage, they have used their governments’ successes in attracting foreign investment as fig leaves for their illiberalism. In May, Orban argued that chastising Hungary’s policies was “foolish”: the country, he noted, enjoys some of the highest economic growth rates in the EU. Mateusz Morawiecki, Poland’s deputy prime minister, put it more bluntly in April, as his government faced censure from Brussels over its crackdown on Poland’s judiciary. “Investors have voted with their money,” he told the German newspaper Handelsblatt.

The West’s industrial giants have done little to prevent themselves from being used in this way. To the contrary: many of them have been happy to curry the favor of Hungarian and Polish leaders. Both these officials and the firms have benefited from the EU’s economic freedoms without standing up for the political values in which those liberties are embedded. They have faced little public criticism for doing so. It is time for activist groups to demand a change.

After the fall of communism, Western companies expanded into eastern European states, taking over big chunks of their economies. Nationalist leaders in the region have long resented this fact. Kaczynski, for example, has called German investments in western Poland a “danger to Poland’s sovereignty.” Orban, too, has railed againstmultinational corporations.

Yet as Orban has gone after foreign banks, media companies, and retailers by imposing tax and regulatory burdens aimed at decreasing their market share to the benefit of Hungarian firms close to his party, he has left industrial investors mostly untouched. That is because, in many cases, Hungary lacks alternatives: it has no domestic car companies, for example. In Poland, the government has also moved against foreign-owned media companies while courting foreign investment in the industrial sector.

Industrial investors, for their part, are drawn to Hungary and Poland because of their skilled workers, low production costs, strong infrastructure, favorable tax regimes, and closeness to valuable markets. Both governments often sweeten the deal by creating special tax breaks or offering direct subsidies for large investments. Last year, the Orban government offered Daimler some $48 million in subsidies for the construction of a new plant. This month, Budapest said it would provide more than ten percent of the investment required to expand a production site of the French automobile supplier Sicta and more than 20 percent of the funding for the construction of a service center run by Bosch, a German industrial company.

It should be no surprise that some major Western companies have worked to preserve their access to top officials. In February 2014, General Electric, the largest U.S. investor in Hungary, invited Orban to give the openingspeech at its new global operations center in Budapest. In November of that year, Orban also spoke at the launch of a new Audi production line, saying, “Hungary is today inconceivable without the presence of Audi.” Audi CEO Rupert Stadler replied by saying, “We feel at home in your country.” This year, in May, Daimler made Orban the guest of honor at a large public forum for its shareholders in Budapest. As the European Parliament censured Orban’s government for its assault on Hungary’s universities and nongovernmental organizations, the prime minister shared the stage with Eckart von Klaeden, Daimler’s chief lobbyist and a former confidant of German Chancellor Angela Merkel, and spoke glowingly about the “symbol of trust” that Daimler’s investments represented. The same month, the German Business Club Hungary—of which Audi and Daimler are prominent sponsors—named one of Orban’s ministers an honorary member. It also awarded its “friendship prize” to the historian Mária Schmidt, one of the prime minister’s leading ideologists, who has railedagainst the liberal opposition as “servants of foreign interests” and has said that Hungary’s Jews look “upon their ancestors’ tragic fate as an inherited privilege.” 

There have been some apparent exceptions to this trend. The German-Hungarian Chamber of Commerce noted in April that the “escalation of the conflict with the EU is harmful for the image of Hungary as a place to do business.” Peter Baudrexl, the head of the Polish-German Chamber of Commerce and the CEO of Siemens Poland, has said that “the assessment of legal certainty has clearly gotten worse” in Poland. But those comments were about political risk, not illiberalism.

The foreign companies that have been willing to act have mostly been media outlets under pressure from the authorities. In 2014, for example, Orban imposed a special tax on the German television station RTL Klub to drive it out of the Hungarian market; in response, Bertelsmann, RTL Klub’s parent company, vowed to stick it out and intensify the station’s coverage of the Hungarian government. In the same way, the German media company Axel Springer has ruled out leaving the Polish market even though the government has pursued a campaign against foreign-owned media outlets and has already managed to dissuade some Polish companies from advertising in them.

How Western investors position themselves with respect to illiberal governments is not a challenge limited to Hungary and Poland. Consider the case of Turkey. There, the CEOs of some major multinationals—including GE, Fiat Chrysler, GlaxoSmithKline, and Toyota—recently took part in a pro-Turkey public-relations campaign, just as Turkish President Recep Tayyip Erdogan was destroying the last remnants of the rule of law by carrying out a purge of his opponents across Turkey’s government and civil society. Under the header “My Turkey Story,” firms placed advertisements in prominent international newspapers praising Turkey’s business climate. In one such ad, the CEO of Nestlé Turkey, the Swiss company’s subsidiary, lauded the country’s “clean track record.” Turkey, he noted, has “never let us down.” (Nestlé later pulled out of the campaign.)

Of course, multinational companies often cozy up to illiberal governments around the world. But they should be held to a higher standard in the EU, because the bloc is not just an integrated market but a liberal-democratic political project built on the lessons of Europe’s tragic experience with nationalist illiberalism. As the EU moves toward a more flexible model of integration, it cannot allow for an à-la-carte approach to its core political values. That is why the Western companies that enjoy the economic freedoms of the common market should not turn a blind eye when governments attack political freedoms.

Companies such as Audi and Daimler will change course only under public pressure. So far they have faced little, either from the European media or from advocacy groups. Changing that should be easy. Advocates could link firms’ products to the states in which they are made. It is easy to imagine a campaign branding an Audi model manufactured in Hungary, for example, as a product of that state’s illiberalism.  

Advocates should not call on foreign investors to pull out of Hungary and Poland, since that could unfairly hurt those countries’ workers and further inflame nationalism. Instead, civil-society groups should demand that companies take a new approach to corporate social responsibility, distancing themselves from illiberal governments and contributing to a fund that supports independent media and civil-society organizations. Because Hungary and Poland depend on investment from abroad, foreign industrial firms would take on little risk by doing so.  And by pooling their resources, companies would prevent governments from singling them out for retribution.

Of course, pushing Western companies to distance themselves from illiberal governments would not single-handedly change the political trajectory of countries like Poland and Hungary. That will require pressure from EU institutions, party groups such as the EPP (where Merkel’s party, the Christian Democratic Union, sits alongside Orban’s Fidesz), member governments, and above all, domestic opposition groups. Still, Western investors have a key role to play. Their disapproval would deprive illiberal state-builders of an important source of legitimacy, and it would affirm that defending liberal democracy within the EU is an essential responsibility of good corporate citizenship

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This commentary was originally published by Foreign Affairs on July 28, 2017. 

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