16 October 2019

30 Years of Central and East European Economic Development

Finding a successful model of economic development can be a difficult task, particularly for emerging markets. In recent decades, only a small number of emerging markets have made the leap from being less-developed economies to modern and wealth economies.  Most of these successful economies are in Asia, where a combination of export-driven growth and a huge regional market resulted in a number of emerging markets making dramatic strides in terms of wealth levels and economic development. 

One region where there has been mixed results over the past few decades has been Central and Eastern Europe.  In fact, this diverse region can be broken down into three sub-regions, each of which has its own unique characteristics. First, Central Europe, a region consisting of countries such as Poland and Hungary, has made major advances since the fall of communism in the late 1980s and is now nearly as wealthy as many West European countries.  In contrast, East European economies have fallen behind their Central European neighbors in recent decades, apart from a few centers of wealth in Russia. Finally, Southeast Europe has seen mixed results since the fall of communism in that region.  Now, 30 years since communism came crashing down across much of this region, it is worth having a look at some of the lessons that can be learned from this region’s economic history.

The situation in Central and East Europe in 1989 was much different than it is today.  For some time, the region’s economy had been in serious decline and the gap between the West and this region was growing substantially.  For one, this region was unable to keep up with the technological advances that had been taking place in the West in previous decades.  Furthermore, unlike East Asia’s more successful economies, no Central or East European economy was able to develop manufacturing exports that could drive economic growth, as the region was politically isolated from potential export markets.  While the region was struggling to generate any growth by the final years of communist rule, wealth levels across the region were relatively harmonized, at least when compared with the situation today.  As communism fell, first gradually and then with a sudden collapse, Central and East Europe was a region that was in for a dramatic economic transformation.  

Central Europe: The sub-region that underwent the greatest transformation was Central Europe.  Historically, some parts of Central Europe had been among the most advanced economic regions in all of Europe.  For example, both Bohemia (now part of the Czech Republic) and Silesia (now part of Poland) were among Europe’s leading manufacturing centers. When communism fell in 1989, Central Europe had fallen well behind West Europe in terms of wealth and economic development, but it did not take long for this region to be integrated into the larger West European economy.  Thanks to major economic reforms and a surge in investment in manufacturing operations in the region, Central Europe has realized a dramatic increase in wealth and development over the past few decades.  Moreover, economic growth in this region’s main economies has been quite steady in recent years, thanks to the combination of export growth and increasing purchasing power levels on the domestic market.  In fact, it can be argued that most Central European countries can now be classified as developed economies, a great achievement that was accomplished over the span of a single generation.

East Europe: The economic development of East Europe since the fall of communism has gone down a much different path than that of Central Europe.  When communism fell, Russia was significantly wealthier than most other parts of Central and East Europe.  In fact, over the past few decades, Russia has benefitted from its vast natural resources, most notably oil and gas, in order to remain among the wealthier countries in the region.  However, a lack of economic diversification has hindered Russia’s economic growth in recent years and has left the country dangerously exposed to declines in natural resource prices.  Meanwhile, countries in East Europe such as Ukraine and Belarus have economies that are both unreformed and uncompetitive.  As a result, these countries have seen their wealth levels relative to Central Europe fall dramatically.  A good example of this is the fact that, 30 years ago, Ukraine and Poland were nearly even in terms of per capita GDP, but today, Poland is more than three times as wealthy as Ukraine.  

Southeast Europe: While Central Europe has largely succeeded in creating modern and developed economies, and while East Europe is characterized by largely under-developed and unreformed economies, Southeast Europe is mixed bag.  For those economies in this region such as Romania and Slovenia that were able to integrate with the larger European economy, there have been major gains in terms of wealth and development.  For those that have failed to integrate with the rest of the region, such as Serbia, there has been a further decline in terms of economic advancement in comparison to their more successful neighbors.  Now, the opportunities for integration, so vital in the success of many economies in this region, are beginning to decline.  As a result, the major wealth disparities that have emerged in Southeast Europe in recent years could grow larger as those economies that have been left behind struggle to make up ground due to reduced opportunities for exports and investment.

Looking back at 30 years of Central and East European economic history, we can find many lessons that have been learned with regards to what it takes for a lesser-developed economy to become a successful modern economy.  First, a country must undertake the necessary reforms that are needed to attract foreign or domestic investment, no matter how painful they may be.  Second, emerging markets, particularly smaller ones, need to integrate their economies with larger markets, such as West Europe. Third, countries need to invest in their infrastructure in order to improve their competitiveness and to facilitate exports to wealthier markets.  Fourth, attracting foreign investment is usually vital, particularly in industries and services focused on export markets.  Fifth, a modern manufacturing base is a crucial component for the economic development of most emerging markets, given what was until recently the drive to find lower-cost manufacturing locations.  Finally, political stability is an increasingly important aspect to an emerging market’s prospects for growth and development, something that is clearly evident in the performance of individual Central and East European economies in recent decades. 

Looking ahead, each of these sub-regions in Central and East Europe face uncertain futures.  Of the three, Central Europe appears to have the most secure future thanks to its integration into the West European economy and its lower degree of political instability.  Still, the outlook for the West European economy is poor and this could reduce growth opportunities for Central European economies in the coming years.  For East Europe, it remains largely its own economy and its own market.  Should commodity prices rise, Russia’s economy will rebound somewhat from its recent slump.  However, apart from that, this sub-region lacks the wealth and the scale to be a major player in the global economy and this could leave East Europe increasingly dependent upon outside influences such as China.  Finally, the economic future of Southeast Europe is largely up in the air.  There is still an opportunity for more countries in this region to integrate with the rest of Europe, but time is running out.  For those economies in Southeast Europe that fail to do so, their future is highly uncertain.