Witold M. OrĆowski
Introduction
Although the economic transition in the post-socialist countries of Central and Eastern Europe (CEE) has by and large been concluded, the topic is still of interest for scientific research. First, a change of this scale and depth has generated many thought-provoking questions and problems reaching to the very heart of market economy functioning (cf. Ă
slund 2007; Blanchard 1997). Second, the economic impact of the transition, depending on its trajectory, is likely to have a long-lasting effect on the society and economy of the countries affected, in total populated by 400 million people (over 5% of the global population) and producing, depending on the year, between 7% and 9% of the global output (measured in purchasing power standards (PPS)). Third, some lessons about the policies connected with this transition may still have importance for other countries undergoing deep economic change, not necessarily triggered by the removal of central planning (e.g. for developing countries, cf. EBRD 2017; Bertelsmann Stiftung 2018). Fourth, the trajectories of the transition and the economic results achieved varied so deeply that analysing factors leading to such differences still poses a challenge (cf. Havrylyshyn 2006; Ă
slund 2007; OrĆowski 2010). And finally, even assessing the outcome of the transition in the most successful countries has provoked controversy â ranging from overall optimism (cf. e.g. Blanchard 1997; Ă
slund and OrĆowski 2014) to much more sceptical conclusions (cf. Nölke and Vliegenthart 2009; BĂĄtory, Cartwright and Stone 2018).
In this chapter we compare the trajectories of the transition observed in 11 countries of Central and Eastern Europe (CEE-11), which are members of the European Union (EU), and Ukraine, a country that has never had, due to internal and external reasons, any clear roadmap towards integration with the EU.
The outcome of this process varies greatly among the individual countries. In 1989, at the starting point of the transition, gross domestic product (GDP) per capita in Poland was 22% lower than in Bulgaria. However, over the last 28 years the GDP of Poland (the leader of growth among CEE-11) has increased by 145%, while the GDP of Bulgaria (one of the laggards) has increased by only 12%. As a result of this difference, the GDP per capita of Poland, measured in PPS, increased from 78% of the Bulgarian level in 1989 to 136% in 2017.1 An even bigger divergence can be seen in the case of Ukraine. Back in 1989, the GDP per capita of Poland and Ukraine were close to parity, while in 2017 the Polish level was equal to 340% of the Ukrainian GDP.
Obviously, numerous country-specific factors contributed to the final outcome. These included the historical heritage, the starting point of the transition, the internal and external political situation, social support for reforms, the quality of institutions, and the economic policies applied. Although no countryâs experience was literally copied by another, some solutions (like the Polish âbig bangâ liberalization, the Czech and Slovak âcoupon privatizationâ or the Estonian exchange rateâbased stabilization) served, to a large degree, as model policies for their followers (cf. Ă
slund and OrĆowski 2014).
Nevertheless, some common features of the transition process can be found in all the countries undergoing the change, as well as within several groups of countries. For the sake of comparison, we have divided the group of CEE-11 into four subgroups (regions), with striking similarities in the course of the transition and in the structural and macroeconomic policies applied. The regions are:
- 1 VisegrĂĄd-4 countries (Czechia, Hungary, Poland, Slovakia). These four Central European countries (until 1992 Czechia and Slovakia were united within Czechoslovakia) were the early reformers that abolished the communist political system in 1989 and started their stabilization and liberalization programs in 1990â91. While bearing in mind their differences, we can point out the common features of the transition in the VisegrĂĄd region: deep social support for market reforms, a radical approach to macroeconomic and structural policies, fast development of strong links with the Western European economy and determination to join the EU. All the VisegrĂĄd-4 countries joined the EU in 2004 but, with the exception of Slovakia, still remain reluctant to adopt the euro, despite fulfilling the necessary economic criteria.
- 2 Baltic-3 countries (Estonia, Latvia, Lithuania). The three Baltic states were forcibly included in the Soviet Union in 1940 and only regained their independence in 1990â91. The common features of the transition in the Baltic region include a huge initial shock after separating from the Soviet Union, strong social support for independence and radical economic reforms, the similar character of the countries (small open economies), a courageous approach to liberalization and determination to join the EU. Baltic-3 countries joined the EU in 2004 and, after a few years of relentless effort, concluded the integration by adopting the euro.
- 3 East Balkan-2 countries (Bulgaria, Romania). Both East Balkan countries started their political and economic transformation with a considerable delay compared to the VisegrĂĄd-4 and, at least initially, implemented the reforms with less vigour and determination. The common features of the transition in the East Balkan region include weaker initial social support for change, less clear and robust policies, a high degree of corruption and delayed efforts to build strong links with the Western European economy and join the EU. East Balkan-2 countries joined the EU in 2007 but they are still not ready to adopt the euro.
- 4 West Balkan-2 countries (Slovenia, Croatia). Until 1991, the West Balkan region was a part of the former Yugoslavia and enjoyed more economic freedom than any other CEE region. The dissolution of Yugoslavia, followed by war with Serbia (very short in the case of Slovenia; long and devastating in the case of Croatia), plunged the West Balkan region into a deep recession that Slovenia managed to overcome faster than the others. The common features of the transition in the West Balkan region include functioning market economy mechanisms at the starting point, a strong initial shock connected with the dissolution of Yugoslavia, less vigour in implementing structural reforms, and uneven determination to join the EU. Slovenia joined the EU in 2004 and swiftly introduced the euro, while the Croatian membership was not possible until 2013.
The historical roots of underdevelopment
In 1989, shortly before the economic transition started, the GDP per capita of all the CEE-11 countries was well below Western European levels, ranging from 36% of the German level in Poland to 65% in Slovenia and in Czechia (measured in PPS). The relative economic underdevelopment of this part of Europe had deep historical roots. Several important factors should be mentioned:
- 1 The first is connected with a crucial change that took place in Europe during the 16th century. In the process of creation of the early capitalist âworld economyâ, two different paths of development emerged (cf. Wallerstein 1974). The âcoreâ areas started to expand capital-intensive production, significantly increasing their labour productivity. At the same time, the âperipheralâ areas concentrated on the extensive production of food and raw materials, based on cheap labour. The borderline between two areas was the Elbe river: while Western Europe countries enjoyed intensive growth, the peripheral areas to the east of the river suffered from the phenomenon of second serfdom, which persisted until the early 19th century. The only CEE area that could be classified as a âsemi-peripheryâ (in between the core and the periphery), was modern-day Czechia. It should also be noted that, according to Wallersteinâs definition, the majority of the CEE Balkan countries did not even constitute a part of the 16th-century European world economy but, instead, acted as a periphery of the Middle Eastern (Ottoman) world economy. As a consequence of this peripheralisation, the estimated GDP per capita of the CEE region, which in medieval times was not much below that of Western Europe, by the beginning of the 19th century had diminished to about half that of Western Europe.
- 2 The second important factor that contributed to the historical underdevelopment of the CEE region was its political fate. At the beginning of the industrial âtake-offâ (according to Rostowâs terminology) in continental Europe, in the middle of the 19th century, none of the nations of the region had its own independent state. Instead, the CEE countries belonged to external empires: the majority of the VisegrĂĄd region and the West Balkan-2 countries belonged to the Habsburg (Austrian) Empire, the remaining territories of modern-day Poland were divided between Russia and Prussia, most of the Baltic region was part of the Russian Empire, and the East Balkan-2 countries were under Ottoman rule. This situation, to a large extent, deprived the CEE countries of much-needed policies supporting the industrial revolution and modern infrastructure development, especially given that the Austrian, Russian and Ottoman Empires belonged to the most socially and economically backward parts of 19th-century Europe (cf. Wallerstein 1974; OrĆowski 2010). As a result, and despite some progress towards industrializing the territories of modern-day Czechia, Poland and Hungary, the GDP per capita of the CEE region had diminished by the beginning of the 20th century to about 45% of Western European levels (ranging from 40% in Croatia to 68% in Czechia). Despite two world wars, this ratio did not change significantly until 1950.
- 3 The third crucial historical factor leading to the underdevelopment of the CEE region was the long period covered by an economic system of central planning. The system was imposed after World War II, together with a totalitarian (since mid-1950s in some countries authoritarian) political system, by the communist Soviet Union that liberated and then occupied the majority of the CEE region. The extent to which market mechanisms were suppressed varied: politically independent Yugoslavia enjoyed âmarket socialismâ, Hungary and Poland tried to experiment with some elements of the market, while other CEE countries stuck to the dogmatic central planning model and the Baltic countries were fully integrated into the Soviet economy (cf. Arnason 1993). Nevertheless, the common feature of the communist economic system (i.e. the falling efficiency of resource allocation and utilization) was observed in all the CEE countries. As a result, and despite industrialization and modernization efforts, the GDP per capita of the CEE region, according to Maddisonâs estimates, diminished well below 40% that of Western Europe in 1989 (which indicates a slower GDP growth in the CEE region, in spite of the misleading statistical data published in the socialist countries; cf. OrĆowski 2010). The fall of this ratio was only marginal in the case of the Balkan countries but significant in the VisegrĂĄd and Baltic regions. The economic fate of Czechia, which was downgraded from the first league of the European industrialized nations in 1948 to the group of Europeâs poor countries in 1989, is, arguably, the most striking example of this change (the estimated Czech GDP per capita diminished from 122% of the Austrian level in 1948 to 65% in 1989).
It is also worth noting the specific spatial characteristic of the development of CEE countries connected with history. As the core of the European economy is located to the west of the region, a typically observed pattern is that the western regions are better developed than the eastern ones. Such a pattern is clearly visible in the case of the VisegrĂĄd countries (with the distinct exception of the evenly developed Czechia), Romania, Slovenia, Latvia, and Estonia (see the chapter by Gorzelak and SmÄtkowski in this book).
The starting point of economic transition
All the CEE-11 countries started their economic transition in 1990â91, once the decline of Soviet power and the fall of the Berlin Wall made it possible to dismantle the communist political regime and to start rebuilding the market economy. However, the starting point of transition differed significantly among the four analysed/previously defined regional subgroups as well as, despite many common features, within these groups.
First, the CEE countries had different initial political and social situations. Generally speaking, the conditions were much more favourable for deep reforms in the VisegrĂĄd and the Baltic region, where political change was greeted with enthusiasm, than in the eastern and western Balkan countries. Second, the degree of integration of various countries in the pre-transition communist economic system was different. The Baltic region was a highly integrated part of the Soviet economy, and the West Balkan countries formed part of the Yugoslav economy. Therefore, the break-up of the Soviet Union and Yugoslavia led to a drastic disruption of former cooperation links, contributing to a sharp drop in economic output. It is worth noting that the well-prepared âvelvet divorceâ of Czechia and Slovakia in 1993 allowed both countries, to a great extent, to avoid such problems (cf. Blanchard 1997). Nevertheless, the evaporation of a large share of Council of Mutual Economic Assistance (COMECON) trade was a negative shock for all the CEE-11 countries, including the VisegrĂĄd and East Balkan regions (cf. WIIW 1991).
Finally, the initial economic situation of the regions and countries varied considerably. The most important differences were related to (see Table 1.1):
- 1 The income level. The highest levels of GDP per capita, measured in PPS, were observed in the West Balkan-2 countries, which had enjoyed 40 years of relatively liberal economic policies in Yugoslavia (62.5% of the German level),2 followed by the VisegrĂĄd-4 and Baltic-3 countries that inherited stronger industrial traditions from before the communist rule (52% of the German level), and with the lowest income levels observed in East Balkan-2 countries (42% of the German level). However, the regions were not homogeneous: a notable exception to the general rule within the VisegrĂĄd region was Poland, which suffered a prolonged economic crisis from the late 1970s and saw its GDP per ...
