Rebuilding Central Europe’s Lost Relevance in European Integration
13 May 2021
The economies of Central and Eastern Europe have shown no signs of any development miracle or a regional category jump to high-income countries. Instead, there is the passive acceptance of low-end manufacturing, state-capture by oligarchs and regions emptying out of young people.
The author of this present piece firmly believes that the objective of economic growth should be shunned if we are to achieve the CO2 emissions goals of the Paris Treaty and reverse the environmental devastation we have caused on this planet.
The decoupling of environmental devastation from economic growth is a myth. Balkans citizens now live around the global average, Visegrad and Baltic societies above it.
We should not aim for higher GDP, in fact, Western Europe should engage in degrowth. The social problems of our region should be handled through more equitable social redistribution, not growth.
With the above caveat, let us address the question in the title on its own terms. Can we consider the region a socio-economic success story? The default go-to indicator in our growth-obsessed world would be the gross domestic product (GDP) per capita. The first comparison we can make is a long term historical one, using Angus Maddison’s famous database.
Chart 1 – GDP/capita in the Visegrad countries in comparison to Western Europe, the World Average and China (Source: The Maddison Database)
What we see on this chart is that at the end of reconstruction after the Second World War, the Visegrad region was somewhat above the world average, and at around 50 to 75 per cent of Western Europe (defined by Maddison as Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Sweden, Switzerland, United Kingdom).
Western Europe is chosen as a benchmark because it has been the age-old point of comparison in Central and Eastern Europe. As we can see, China was way below the world average at this point, at less than a quarter.
Under a Soviet-style economic system, the Visegrad countries basically preserved their advantage compared to the global average. Poland collapsed by the 1980s and even proceeded to dip below the global average. Hungary and Czechoslovakia peaked in the eighties. They have both preserved their positions compared to the global average by the end of the Soviet-style economy.
Hungary also managed to preserve its position vis-à-vis the West, but Czechoslovakia slipped in this comparison. No country in the region has achieved convergence with the West during this period. A purchasing power parity comparison (not available from Maddison) would be favourable to the Visegrad states, but would still reveal at best their maintained positions vis-à-vis the West for the group as a whole.
The rise of China begins at around this time, in the eighties, with Deng Xiaoping’s famous ‘reform and opening’. (As well shall soon see, other Asian Tigers that China was learning from, such as Singapore, Taiwan and South Korea, had by this time demonstrated even more astounding growth rates.)
The devastating consequences of economic transition are clear to see in the case of the former ‘Eastern Bloc’. Hungary dips to the world average, Poland below it.
By the time of the Visegrad Group countries’ accession to the European Union, they had, by and large, managed to regain their previous long term global position somewhat above the global average. This position is similar to the one after the Second World War, or the one in the eighties.
What is striking from this graph is that China was already approximating the global average by this time.
In sharp contrast to Visegrad, there was simply no ‘transition depression’ to speak of in the case of China, even though in spite of official rhetoric Beijing was in fact transitioning from a fully nationalised, planned economy to a partially privatised, partially planned capitalist development state, similar to the Far Eastern Development model characteristic of its wider region. This comparison of Visegrad transition with China is striking.
A comparison with Western Europe is also revealing. At the eve of EU accession, the Visegrad Group was further away than ever from Western Europe during the entire period under discussion.
As we have seen so far, the Central Eastern European region seems to be stuck in the category just above the global average.
The Visegrad group is part of an upper-middle-income group, while the Balkans are part of a lower-middle-income group, however, their global positions hardly change. There is definitely no category jump.
This contrasts sharply with the economic history of the East Asian region after the Second World War. The so-called ‘Asian Tiger’ economies were examples of exactly the kind of category leap that has been missing from Central and Eastern Europe.
Let us take a look at their achievements:
Chart 2 – The Asian Tiger economies made several category jumps in short decades, sometimes from lower-income to high-income (Source: Maddison Database)
As we can see, these tiger economies have made several category jumps, and in very brief periods of time. Perhaps the most successful country has been Singapore. It started off at levels comparable to the global average, but with gigantic hindrances: it had to be created as a brand-new state from a mostly illiterate, massively conflictual multi-ethnic and multireligious mix.
Clearly, this was a far worse starting point than in the case of any of the Visegrad states. Yet Singapore made it from the middle-income category into the high income one roughly from 1970 to around 1990, that is, in about two decades. Since then, it has become significantly richer than the Western European average.
Two other examples are Taiwan and South Korea, both of which started off in the low-income category, significantly below the world average, and even further below the Visegrad economies. Yet, they achieved a category jump from low income to middle income in the sixties, and then from middle income to high income by around the nineties.
The People’s Republic of China is the latest arrival, from extremely low income as late as the eighties, to middle income by today.
What accounts for the disparity that Visegrad has not been able to carry out a quantitative leap, whereas the Asian Tigers have achieved several? The so-called ‘Varieties of Capitalism’ literature provides us with a clear answer. Visegrad has attempted to compete with a so-called ‘Foreign Direct Investment Dependent Competition State’.
What this complicated name entails is the fact that these states have competed against each other with low wages, weak trade unions and low taxes to attract as much foreign direct investment as possible, in the process essentially becoming the economic hinterland of the German economy. They are stuck in what is called the middle-income trap.
By contrast, the developmental state model of East Asia has relied on domestically owned multinationals, state-led banks and technology policy, industrial policy, massive state investments into infrastructure and human capital.
East Asia was the only region of the world that has been able to resist Western neoliberal pressure and has achieved great success by doing so.
Let us now examine the period since European Union accession. In terms of their economic weight in the world, the Visegrad Group has pretty much managed to hold on to its position:
Chart 3 – The world share of GDP of the Visegrad Group has stayed stable since EU accession in 2004
In the same period, China’s share of global GDP increased almost four times over:
Chart 4 – From 2004 to 2018, China’s share of global GDP increased almost four times over
Where does this leave the Visegrad Group globally? This time we use GDP per capita data from the World Bank. It must be clear that this series is not comparable with Maddison’s previous ones.
Chart 5 – GDP per capita, Visegrad economies compared to Western Europe and World Average, as well as China, 2004-2019 (Source: World Bank)
What is clear from this graph is that the Visegrad group is still holding on to its ‘permanent’ position in the upper-middle-income group: just above the global average, but far below Western Europe (defined as the same group of countries that Maddison uses).
This in spite of the fact that Western Europe now entails a number of rather ‘damaged’ economies, such as Italy, France and the United Kingdom. Once again, the trends are clear to see: there has been no category jump for Visegrad since EU accession in 2004.
These are, admittedly, rather crude calculations. Many refinements can be made. One could use purchasing power adjustments for local price levels. However, these are not available for the Maddison data and, in the case of the World Bank data, they open up a pandora’s box of troublesome methodological issues.
One could also take into account the fact that different countries have different wages shares of gross domestic product, and those in Visegrad economies, unfortunately, tend to be significantly lower:
Chart 6 – The wage share in the Visegrad countries (red) and selected Western European (blue) countries (Source: ILO)
Not only is the wage share significantly higher in Western Europe than in the Visegrad Group countries, but the social welfare state is also dramatically more generous.
In fact, in several Visegrad states welfare provisions have all but disappeared. Several leading Visegrad politicians have openly declared themselves enemies of the welfare state.
There are additional complications: how do you factor in developments such as the 27,000 kilometres of clean, cheap and superfast high-speed trains that have been built in China in the matter of about a decade? By contrast, most of Central and Eastern Europe is still cut off from the Western European high-speed train network, with the exception of some lines in Poland.
Map 1 – One decade of improvement in the Chinese high-speed train network
Similar improvements have been made in the Chinese highway system, hospitals, metro systems in major urban centres, airports, etc. Public infrastructure even in Western Europe has not been able to match these.
Similar public goods abound in the East Asia region: from the famed urban infrastructure and showcase airport in Singapore, through the global trailblazer internet speed of South Korea to human capital formation and innovation in Taiwan.
The above methodological additions are important, but they do not change the overall picture significantly. The Visegrad Group countries have not achieved a category jump in the last decade and a half since EU accession, or indeed since transition three decades ago. Almost everyone acknowledges this, though some still beg for patience.
As far as ordinary people are concerned, however, politicians have been asking for patience in this part of the world for far too long. The promise of a better future has been on the horizon for long generations, and it never arrived. It did in East Asia.
The same thirty years that was available for Visegrad to make a change was enough for China to rise from one of the poorest counties in the world to a middle-income one. Three decades had been enough for Singapore, South Korea and Taiwan to rise from misery to high-income status, rivalling or even exceeding Western Europe.
Elites in Visegrad still try to claim a success story, but ordinary people have had enough. They do not see a future for themselves in this region and are increasingly voting with their feet. It has been widely reported that all ten of the fastest declining countries in the world are in Eastern Europe.
At least 11 countries in Eastern Europe have shrunk by more than ten per cent since the political and economic transition in 1989, including Ukraine, Bulgaria and Romania. Latvia has lost 27 per cent of its population, Lithuania 23 per cent, Bulgaria and Bosnia 21 per cent. But Poland and Hungary are also amongst the major losers.
Map 2 – Maps published by Eurostat show the region emptying out
Maps published by the European Commission show the entire region emptying out, except for metropolitan centres. The major gainers from this migration flood have been Germany and Austria, and before Brexit, the UK.
By contrast, it is well known that the coastal developmental regions of China are experiencing enormous migration inflow from the mainland, equivalent in scale to the entire population of the European Union. Dynamic regions can be easily recognised by people’s desire to move there, and not away.
The population of Singapore has increased sixfold since its founding. That of Taiwan tripled in the same time period, that of South Korea increase more than two and a half times.
As it was stressed at the beginning, this author believes in degrowth. However, astonishing their development miracles have been, most people in Singapore, Taiwan and South Korea are now living beyond the planetary ecological boundary.
China has managed to lift some 800 million people roughly to the level of the global average.
The situation in Central and Eastern Europe, however, is not better. Stagnation is not the same as degrowth. Degrowth is an orderly transition to no population growth and a stable state economy. There is nothing planned for the economies of Central and Eastern Europe.
These economies have come about through the passive acceptance of low-end manufacturing, primary by German firms. We are not seeing a transition here to a sustainable society, but a slow-motion collapse, where fear-mongering and hate-filled political climates hide the fact that states are captured by corrupt oligarchs, with young people slowly but surely preferring to start their lives in Western Europe.
No, the Visegrad countries have not been a success story.
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