THE “ADDICTION” WITH FDI AND CURRENT ACCOUNT BALANCE

Current account deficit, initially created by the stabilization policies during transition has become a distinct feature of CEE countries. The structure of the deficit has been gradually changing and the predominant role has been taken over by the investment account deficit. This is an inevitable outcome of CEE “addiction” to FDI.

The linkage between FDI and current account balance is presented by a simple three equations model which relates FDI to the investment and trade accounts. The panel data for eight CEE countries in the 1996-2008 period are used. to estimate the rates of returns on foreign investments which determine outflows through the investment account and the effects of FDI on the trade account. The world financial crisis diminished both inflows of FDI and outflows of profits generated by FDI while severing the problems of enormous negative net financial position of the countries.

Key words: current account, factors services, foreign direct investment

JEL Clasification: F32, F21