Pay more, gain more

The initial gap between the West and the East was so deep that 25 years were not enough to bridge it totally

Petr Zahradník
5 June 2017

The prosperity index is higher in countries where the GDP growth matches a more cohesive society. How can we encourage social trust in Central European countries in order to meet the demands of economic growth and build-up their prosperity further?

It is undoubtedly true that in the long-run, there is a very strong correlation between the GDP per capita indicator and the rate of personal satisfaction, or some other rather socially oriented benchmark. This is also confirmed in countries where the redistribution of the newly accumulated wealth is provided fairly, correctly and transparently. But this is the issue of long-term development which is not interrupted by fatal political and societal changeovers, like those occurring in the CEE territory. On the other hand, it’s been almost 28 years since the velvet revolution, a sufficient period of time has passed to establish some standard socio-economic relations in these countries as well.

There is no doubt that, over the last 25 years, the real convergence track record in all the CEE countries, including the Visegrad ones, has been substantial. There is also no doubt that the qualitative and quantitative parameters for living standards have approved dramatically. But the initial gap between the West and the East was surprisingly so deep that 25 years were not enough to bridge it totally. We simply need some more time to complete this real convergence game and to get closer to our benchmarks set in 1989.

Another parameter connects the acceleration of income differences among different social groups and territories, a point which is not broadly accepted by substantial parts of the population.

The next steps have to be based on finalising the remaining and still necessary reform steps accompanied with better communication between the national leaders (not only politicians, but also natural and politically independent authorities) and the population as a whole. In the Visegrad countries, comprehensive regional development also has to be reformed. The already mentioned correlation between prosperity and social trust is starting to become visible in the capitals, or more generally in urban areas, but its presence is lacking still in much of the countryside. The rural areas must be intensively included into this process, much more than they currently are. In the Visegrad countries, there is still a huge difference in the level of prosperity and social reflection between the cities and the villages, which is not the case in Western countries.

Despite good economic indicators, Visegrad societies have voiced dissatisfaction with their economic standing. What can we do about it?

Perhaps, over the last several years, the situation has changed. In all Visegrad countries, the post-crisis development has been accompanied by strong private consumption as well as a very high consumer confidence, which could gradually lead to an elimination of general dissatisfaction. Owing to their post-communist heritage, the people living in the V4 still have a rather strong attachment to materialism, and this sense of ownership needs to be contented before any other kind of social satisfaction is developed. They undoubtedly need to increase their self-confidence, and this could be done through appropriately communicating with the public using best practice examples, to proudly display those good figures and achievements and compare them with those from other EU countries. This also involves being more open with our neighbours. Central Europeans travel a lot, but there are some prevailing conservative habits and communication with their regional partners is still limited. Educating the populaces could help with this issue, but, generally, it is true that some form of scepticism, or pessimism, is part of the natural character of V4 citizens, more so than for those from Western countries.

Central Europe has built up its prosperity by moving from low-skilled jobs to more complex services. But today, it is facing the problem of brain drain. How can we address this issue?

It is true that when comparing all the convergence flows and processes (real ones as well as the nominal), the adjustment of wages – to the EU average, or rather to German, or Austrian benchmark – is the slowest segment. For example, in 2016, the Czech Republic stood at 89% of GDP per capita of the EU, it is at 77% of the EU average price level, but only slightly more than 50% of the EU average wage (in comparison with Austria or Germany, it is about 30%).

Therefore, a wage adjustment has to be a very substantial and integrated part of the next convergence strategy. The policy of higher wages undoubtedly represents an element to increase the self-confidence and eliminate the process of brain drain. But the high wages have to be based on labour productivity and long-term sustainability. They have to be in line with the macro-fundamentals and not erode the business competitiveness of the region. The strategy has to be based on the improvement of business indicators where the Visegrad countries are still deeply lagging behind. It has to be based on a quantitative progress in the production value chains closer to the final costumer on the market. This is undoubtedly a move in the right direction, but it is not easy at all; it will take a lot of time and considerable effort. Perhaps, this will be one of the biggest challenges for these countries since the transition period, which started almost 30 years ago.

Petr Zahradník – Project Manager and Consultant at the EU Office of Česká spořitelna

Read more in Visegrad Insight 1 (10) 2017 ‘From golden hands to golden heads’.