Prosperity in the Visegrad Region: The Good, the Bad, and the Ugly

Past excellence does not guarantee future well-being

Dalibor Rohac
13 April 2017

By any metric, the Czech Republic, Slovakia, Hungary and Poland have witnessed extraordinary progress since the fall of their communist regimes at the end of the 1980s. Real per-capita income in Poland, for example, has almost tripled since 1991. Life expectancy in the Czech Republic has gone up by seven years, from 71 years in 1990 to 78 years today. And even if air pollution in Warsaw is still bad, the region has become incomparably cleaner and eco-friendlier than it was in the 1980s.

If one believes that the economic transitions that have taken place in this part of the world should have proceeded differently – more gradually perhaps – it is only necessary to look east (towards Ukraine, Moldova or Belarus) to see an alternative to Visegrad’s “shock therapy” with its rush to join the West. And today, the region’s economies offer a few additional reasons for optimism. All four economies are growing. All have falling, single-digit unemployment rates. Their public finances are mostly sound and in good standing, with budget deficits well within the limits imposed by the Maastricht criteria.

It’s not all roses

But that does not mean that all is well in Central Europe. For one, the current rates of economic growth, while positive, are disappointingly low. From 2005-2008, Slovakia’s economy expanded at an annual rate of 7.8 percent. Between 2013 and 2016, it was a meagre 2.7 percent. Similar slowdowns can be seen elsewhere, with the exception of Hungary, where the growth rates in the second half of the 2000s were low to begin with – in part due to the severity of its financial crisis.

The four countries face similar structural challenges as well. First, the long-term demographic trends are not favourable and are going to be further exacerbated by the outflows of the young and well-qualified in search of better opportunities abroad. Second, the four countries have seen a fall in investment rates, which are now below the EU average of 28 percent of GDP. Even Poland, where the last year’s Morawiecki Plan promised a boost to both public and private investment, saw a fall in investment as a proportion of GDP to just over 18.5 percent. In the Polish case, a part of the blame can be attributed to the new tax imposed on bank assets, which has incentivized banks to restructure their portfolios away from investing into the private sector and instead towards just sitting on a growing pile of government debt.

Finally, the future of the global economy might not be kind to Visegrad. According to a recent OECD study, Slovakia and the Czech Republic are leading in the share of jobs that are at risk of being lost to automation, with almost 50 percent of all workers facing medium-to-high risk of being displaced by robots. Slovakia with its large industrial base organized around automobile manufacturing, will face a challenge of not becoming the Detroit of the European Union. The challenge is not only automation but also the advent of driverless cars, which will likely place the traditional automobile industry on the defensive.

The Visegrad countries are not doing a satisfactory job of investing in the necessary human capital for their labour force to thrive in the globalized and increasingly-automated world economy. While Poland’s PISA scores have been steadily growing, placing the country above the OECD average in science, reading, and mathematics, the same cannot be said of its neighbours, which have seen a fall in their performance. This is especially pronounced in the case of Hungary and Slovakia, which have both seen dramatic declines in their test scores, placing both countries well below the OECD average in each of the three subjects.

Weak institutions undermine good governance

While the challenges related to low investment rates, poor demographics, and the future of industrial manufacturing are real, they are not the most serious problem facing the region. The long-term prosperity of nations, a large body of research shows, is determined by the quality of institutions – the rules of the economic game. Societies that reward economic activity, entrepreneurship and innovation outperform societies where substantial resources are dedicated to rent-seeking, finding loopholes around cumbersome legal rules or to predatory behaviour by self-seeking political actors. In short, good, inclusive institutions in both the economic and political spheres are the most fundamental prerequisite for growth and shared prosperity.

Needless to say, such institutions are anathemas to the way economic and political life was organized during the communist era. Since 1989, all four countries have made dramatic strides towards becoming liberal democracies, upholding the rule of law, and protecting economic actors from arbitrary and unpredictable policies. By and large, those efforts were successful, unlike in other parts of post-communist Eastern Europe, most notably Russia.

Yet those institutional advances cannot be taken for granted. In fact, the current political trends in the region suggest that the good rules of the economic game, built painstakingly after 1989, might in be in danger.

With the advent of authoritarian populism in Hungary and more recently in Poland, the Visegrad countries have seen a gradual deterioration of the rule of law and a rise in corruption. The World Bank’s Worldwide Governance Indicators (WGI), for example, show that in absolute terms the quality of rule of law declined in Hungary between 2005 and 2015. ‘Control of Corruption’, another measure of institutional quality from the WGI dataset deteriorated across the Czech Republic, Slovakia and Hungary between 2005 and 2015.

There are indications that those trends might continue. The Czech Republic is holding an election in the fall of this year. There is a good chance that Andrej Babiš, a successful businessman and the largest private-sector employer in the country, will lead the next government, creating an extraordinary conflict of interest unseen in European politics. Although – unlike Fidesz in Hungary and the Law and Justice party in Poland – his amorphous political movement, ANO (meaning “yes” in Czech), cannot be described as nationalist, Mr. Babiš appears to have little patience for the traditional constraints presented by democratic politics, which he sees as preventing high-ability individuals from “getting things done.” And like many other authoritarian populists, Mr. Babiš represents a personified stream of politics, in which good policies are direct results of extraordinary ability of highly successful people (in this case, himself), rather than of good and stable rules of the political game.

Neither is Slovakia immune to the temptations of authoritarian populism. First, Robert Fico himself – currently restrained by coalition politics – has entrenched high-level cronyism and corruption in Slovakia, not unlike that practiced by Fidesz in Hungary. The perception of government as being simply a vehicle for special interests has contributed to an atmosphere of nihilism that fuels support for anti-systemic (‘We Are Family’) and Neo-nazi (Kotleba – People’s Party Our Slovakia) political movements, which can be expected to grow in importance ahead of the country’s general election scheduled for 2020.

If the current political trends continue, the region as a whole will soon be at risk of a wholesale political rollback of the progress achieved since 1989. This risk is compounded by the Kremlin’s deliberate efforts to undermine liberal democracy in Europe, particularly on its Eastern flank, by the shift of the focus of US foreign policy away from the region – which predates Donald Trump’s presidency but will likely be accelerated by it – and by the genuinely difficult political decisions that the four countries will face if they want to remain in the integrated ‘core’ of the European Union. Hopefully, it is not too late to reverse course.

Dalibor Rohac is a research fellow at the American Enterprise Institute in Washington DC.

This article was first published in Visegrad Insight 1 (10) 2017.