Introduction The role of the state in international economic competition has changed over recent decades. Trade liberalization, privatization and the shift towards supranational regulation have deprived governments of many tools they once used to control economic activity in their own jurisdictions, and have allowed capital to move freely across borders. Unable to influence the behaviour of firms directly, states have had to concentrate their efforts on manipulating other socioeconomic factors so as to best capture the interest of increasingly footloose capital. They have thus become more self-conscious participants in the economic race, vying with one another for investments from mobile private actors. At the same time, these changes have also meant that from the standpoint of public policy, ‘competitiveness’ has ceased to be the exclusive concern of individual companies and has become instead a feature of society as a whole, spanning a variety of policy domains, from taxation and labour market regulation to education, welfare and land management (Stopford and Strange, 1991; Fougner, 2006). Viewed from this perspective, interstate rivalry for capital may be seen as a special case of social dumping, in which governments are at the same time regulators and participants in the competitive process. This makes it possible to extend the definition of social dumping developed in the Introduction to this volume so as to encompass state attempts to tailor social and labour policies to the needs of foreign investors. In the EU, this gloomy vision of globalization as interstate rivalry emerged with special urgency during the accession of ten Central-Eastern Europe countries (CEECs) that appeared to be even more vulnerable to the pressures of international competition than the old EU members. The collapse of socialism had plunged these economies into recession, wiping out almost one-third of industrial output in only a few years (Kolodko, 2001). In the absence of local capital and know-how, foreign direct investment (FDI) was seen as the only force that could revive their industries and halt spiralling unemployment, and the hunt for investors soon became the cornerstone of the region’s industrial policies (Drahokoupil, 2008). In a desperate race to attract foreign capital, CEECs cut taxes and relaxed labour regulation, competing ferociously for every new investment

coming to the region. Taking advantage of this situation, investors often played the potential host states against each other so as to maximize their own gains, adding to the fears of an all-out ‘race to the bottom’ (Kolesár, 2006; Bohle, 2008; Drahokoupil, 2008). As the date of accession approached, the CEECs’ eagerness to please investors, together with their low wages and weak labour unions, began to elicit accusations of ‘unfair’ competition from the EU’s older members. It did not help that multinational corporations (MNCs) were indeed beginning to use the option of eastern relocations more explicitly to extract concessions from governments and workers elsewhere in Europe. In one of the more politically charged disputes, Spain threatened to block Slovakia’s accession to the EU after Volkswagen moved some of its Spanish production there (Lönnborg et al., 2004). This chapter examines the evidence for the claim that CEE states engage in systematic social dumping as a strategy for attracting investment. It argues that while the weakness of CEE states vis-à-vis mobile foreign capital may indeed be a threat to the standards of social protection in both the East and the West, there are equally powerful forces that limit the scope for state-led dumping practices in the CEE region. The transitional recession and high unemployment may have devastated union organizations and depressed wages in the East, but as soon as the economic situation began to improve, the demands for better pay and working conditions returned (Meardi, 2007; Mrozowicki et al., 2010). EU membership, tied from the outset to hopes of better, ‘European’ living standards, also created political expectations that made further competitive deregulation politically costly for the region’s governments. Moreover, it soon became apparent that lower wages and meagre social protection would not get these countries very far in the long run. With the emergence of even cheaper locations further east, CEE governments had to find alternative sources of competitiveness and attract more skill-and technology-intensive investments. Indeed, as wages in the region increased, even investors began to demand not only more flexible regulation but also more investment in infrastructure and a better supply of skilled workforce. Does this mean that the threat of social dumping was nothing more than a temporary scare? Yes and no. The findings of this chapter indicate that the strategy of reducing costs in order to attract mobile international capital tends to be quickly exhausted. The more successful it is in bringing economic growth, the more likely it is to generate powerful opposition forces in the shape of rising social demands and thus push governments from a simple focus on lower cost to a more complex approach to competitiveness that stresses the provision of highquality services. At the same time however, the pressure of competition does create an environment in which it is almost impossible for states to convince the owners of capital to share the burden of providing these services. Faced with the triple demand of improving social standards, providing better business services and still keeping business costs low, most governments in the region responded with a mix of two strategies: running deficits to finance the competing requirements and/or rearranging the structure of spending and taxation to make the

costs less visible. However, if the financial burden became too large, the threat of collapsing budgets also helped silence public opposition, allowing states to revert to dumping-like means of restoring competitiveness. Consequently, instead of a ‘race to the bottom’, what we observe in CEE is a series of policy oscillations as these states find themselves caught between the political pressure to move away from low-cost competition and the lack of funds to meet all the conflicting demands this shift would require. Moreover, while alternative factors of competitiveness may gain in importance during the periods of growth, social dumping and competitive deregulation remain the default options for boosting competitiveness in times of crisis. While this confirms the temporary character of dumping methods, in the long run such oscillations are likely to undermine the continuity of investments in skills and services that are necessary to escape the trap of cost-based competition. This chapter proceeds as follows. It first discusses in more detail the problem of competitiveness in CEE and the difficulties of accommodating the demands for better social standards while preserving and upgrading the investment flows that are essential to the region’s economic growth. The following section analyses the ways in which the CEE governments sought to balance these competing demands, using the examples of two new EU member states: Hungary and Slovakia. Brief conclusions follow.