Development and Finance from issue 2011/1

Iván T. Berend

Central and Eastern Europe in the World Economy: Past and Prospects

- Abstract -

Central and Eastern Europe shares important characteristics. Until the early-20th century, this region remained the agricultural half of Europe where the infrastructure and income level – GDP per capita – hardly reached more than one-third to one-half of the West European core’s. If we add the level of human capital, the health and educational standard of the region compared to the Western core, we get the full picture of Central and Eastern European backwardness. The countries of the region that regained independence after World War I turned to economic nationalism, high protective tariffs and strong state interventionism in their effort to catch-up with the West that failed before the war when they followed free trade and export-led industrialization policy. The newly independent but radically ‘redesigned’ (Poland, Hungary, and Romania) and partly newly created countries (Czechoslovakia and Yugoslavia) needed two decades between the wars to somewhat adjust to the new situation among their new borders. They preserved, in the best case, their agricultural-industrial structure.

The second half of the short 20th century was the period of communist economic experiment throughout Central and Eastern Europe. The policy of forced capital accumulation and industrialization, the brutal method that uprooted the peasantry from their land, and the authoritarian political regimes definitely had certain success in transforming the region. Most notably, the often cast like social hierarchy was eliminated and – in the first few decades – an unprecedented social mobility and a real educational revolution modernized the society. However, the content and structure of education, its’ over specialization, practical, and vocational orientation did not follow modern educational trends. From the mid-1970s, after the Oil Crisis and the emerging new structural crisis, rapid growth stopped in the region. Moreover, a serious indebtedness crisis emerged, because all of the communist countries tried to assure political stability by over bridging the crisis ridden years with foreign credits to keep full employment and living standard intact. The regions indebtedness increased from $6 billion to $100 billion in a few years, and about 80% of the credits were consumed. Altogether, in spite of the undoubtedly important social and educational modernization, the most lasting achievement of the communist experiment, in spite of successful and rapid industrialization, Central and Eastern Europe remained on the periphery of the continent, unable to catch-up with the West, moreover, even sliding further behind.

Post-communist transformation, at the immediate post-1989 period, as Joseph Stieglitz called it, was ‘mismanaged’ and a neo-liberal, ‘one-size-fits-all’ strait jacket was virtually forced to the entire region. The West applauded the ill-advised ‘shock therapy’ and the sudden opening, market and price liberalization of the countries and a fast privatization attempt led to a tragic decline of 20-25% of the GDP, about 50% decrease of agricultural and 20% to 30% decline of industrial output. The region, however, immediately received assistance from the West. The European Union soon accepted the application of several of the former communist countries, including former Soviet republics, and eight Central and Eastern European countries became member of the European Union in 2001, and then two more in 2007. All of these countries became members of the NA TO, and the new political arrangement stabilized the political and international situation of the region. After the severe decline in the first transformation years, the region’s economy gradually recuperated: from 1993 economic growth returned. While the region’s per capita GDP reached only 37% of the West European level in 1992, by 2005, reached its 46% (virtually the same level as in 1973, and exactly the same as in 1913).Central Europe reached the 1989 per capita GDP level by 2000, and surpassed that by 50% by 2010.The entire Soviet Bloc, however, recovered the 1989 level only by 2010. Meanwhile income differences significantly increased. A promising one-, one-and-half decades of gradual catching-up period with the West, faster growth rates and productivity increase, stopped in 2007-2009. What would the future bring to Central and Eastern Europe? According to one of the most authentic quantifiers, Angus Maddison, Central Europe may reach an annual 1.79% annual growth between 2003 and 2030, while Western Europe will have 1.75%. If this is the case, the existing gap would hardly change and Central and Eastern Europe remains on the European periphery. Europe as a whole, and Central and Eastern Europe is losing its share from the world economy because of the much faster rising new Asian and overseas economies. Maddison’s calculation shows a continuous sharp European decline. According to his forecast West European share in world GDP will fall to 13% from 33% of 1870.

A more realistic forecast by Nicholas Crafts, however, calculates 4% long-term economic growth per year in Central and Eastern Europe, while – according to the same calculations – the West also continues with more or less the same growth rate as before 2008, i.e. about 2%. In this case the catching-up process may continue but requires at least the greatest part of the 21st century. In full agreement with Grzegorz Kołodko, one has to add: there is not one single future for Central and Eastern Europe. Kołodko differentiates among four possible paths: 1. vanguard group of a very few countries: 7.5% annual growth; 2. Bulk of Central Europe 3-4%; 3. a group of 2-3% annual growth; 4. and at last, some Balkan countries with less than 2% growth. In this case, a small part of the region will catch-up with the West relatively fast, while some parts of the region will be unable to get closer to the West, moreover, some countries may decline further back. Historical forecast, however, are always the extrapolation of existing trends, while history is a complex process of continuity and change. Historians are not futurologists to look for the future. Looking back to the last two centuries, the picture is rather depressing. In relative terms, comparing to Western Europe, Central and Eastern Europe is far behind its 1820 relative level, and could not reach the 1870 relative level either. Varying calculations reflect less than half or even hardly more than one third of the Western level in Central and Eastern European by 2005.

Iván T. Berend, member of the Hungarian Academy of Sciences and Correspondent Fellow at the British Academy, Distinguished Professor (History department, University of California, Los Angeles)
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