The JVI was created 30 years ago to assist former centrally planned economies with their transition to market-based systems. What trajectories have these economies followed, and how do they compare 30 years later? What went right with the transition, and what did not? What mattered, and what did not? And at present, what are the main challenges facing Central and Eastern Europe? The 2022 Annual Lecture addressed all these broad questions and provide the unique perspective of Professor Marek Belka, a statesman, top economic policymaker, and a keen observer of trends faced by the region in the past 30 years.
What went right? According to Professor Belka, who focused his intervention mostly on Central and Eastern Europe (CEE), the transition from command to market economy, though painful, proved an overall a success. Price liberalization, the introduction of hard budget constraints and increased competition allowed the build-up of a stable macroeconomic framework, enabling individuals to behave according to market incentives. These foundations of the market economy were implemented via a swift reform package known as “Big Bang” in many Central European countries. It turned out, however, to be much more challenging and time-consuming to establish market institutions. Mere liberalization and privatization were insufficient for these institutions to emerge on their own. Tax systems, banking and capital markets, competition and antimonopoly laws were gradually built up in many transition economies.
What mattered, and what did not? Professor Belka stressed the importance of a consistent reform process, the quality of human capital, political stability as well as geographical and cultural proximity to Western Europe. Another factor that should not be underestimated is the prospect of EU membership. This is confirmed by the examples of Czechia, Hungary, Poland, and the Slovak Republic that were viewed as the most probable candidates for the EU membership, as well as by the Baltic countries that showed a very strong determination to close the gap with their EU neighbors. These countries managed to accomplish the transition in a more organized and comprehensive way, thanks to an orderly process of aligning their social and economic systems with European standards (‘acquis communautaire’). Other countries that did not face similar incentives have not managed to achieve similar institutional changes, which are never easy to achieve. Professor Belka also emphasized the role played by the quality of democratic institutions and the strength of the state in the transition. He referred again to the Baltic states where the governments did not hesitate to deal with the global financial crisis by implementing painful, but ultimately successful economic measures to stabilize the economy. In Professor Belka’s opinion, the currency regime and the country’s starting point did not matter much for the transition process. The latter was illustrated by the example of Czechia and Slovakia, which are currently at approximately the same level of per capita GDP but started the transition with a 20 percent gap between them.
Where did we arrive? 30 years of transition have led to substantive income convergence, which is certainly a successful outcome for the CEE economies. Many of them managed to achieve 70-90 percent of the EU’s average GDP per capita in PPP terms. But there is still a long way to go to catch up with frontier countries like Sweden, Denmark, Netherlands, and Austria, where the GDP per capita is still 30-50 percent higher. One concern is that the growth model has relied extensively on consumption, rather than investment, which remains low in the CEE. Rising income inequality in the region is another reason to worry: Key inequality indicators have come close to those observed in Western Europe. Another feature of the growth model is its export orientation. The flip side of it is a strong dependence on trade with the EU. For example, 80 percent of the Visegrad Group’s exports go to the EU, implying insufficient export diversification.
Challenges ahead. Professor Belka named demography among the key challenges for the transition economies. The projected aging and further demographic decline reduces the likelihood of further income catching up. Growing evidence of the fragility of democratic institutions in the region as well as threats to peace and stability posed by Russia are also likely to create hurdles for further development. The COVID-19 crisis and the ongoing war in Ukraine have accelerated the trends towards deglobalization and digitalization already visible in the past. These changes will be shaping the economic environments in which the CEE countries will have to continue their development. They may reap some benefits of declining globalization intensity, shortening supply chains and regionalization of trade. At the same time, they are lagging on digitalization and technological developments. Hence some of the broken long supply chains could be redirected to more advanced countries bypassing CEE economies.
Professor Belka concluded by stating that the CEE transition was certainly a success and the European Union proved to be an engine of convergence. The way forward largely depends on the extent to which the changes brought about by the latest crises are transitory or permanent.
Tatiana Evdokimova, Economist, JVI