Eastern Europe: an analysis of economic transition and the EU enlargement

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Eastern Europe: an analysis of economic transition and the EU

enlargement

Margarita PIROVSKACenter for Geopolitics of Energy

and Raw MaterialsUniversity Paris Dauphine

24 février 2003

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Outline

Margarita Pirovska 24/02/2003

1. Presentation

2. History: 1945-1989

3. The crisis

4. The transition period

5. Stakes of the European integration

6. Concluding remarks

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Presentation: map of Europe in 2000

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Presentation: East European candidate countries

Country Population, million

inhabitants

Surface, km²

Slovenia 2 20 273

Czech Republic 10.3 78 866

Hungary 10 93 030

Slovakia 5.4 49 035

Poland 38.6 312 685

Estonia 1.4 45 227

Lithuania 3.7 64 589

Latvia 2.4 65 300

Bulgaria 8.2 110 971

Romania 22.4 238 391

Total 104.4 1 078 367

Source : Eurostat, 2002


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Presentation: economic index, 2000


Country GDP, Millions EUR/hab., 2000

GDP/hab in PPS

EU-15 8 564 503 22 603

Bulgaria 13 734 5 783

Czech Republic 55 755 12 701

Estonia 5 575 9 063

Hungary 50 571 11 227

Lituania 12 218 8 059

Latvia 7 776 6 975

Poland 170 896 8 783

Romania 40 173 5 265

Slovakia 21 333 10 357

Slovenia 19 532 15 183

Source : Eurostat : PIB régional des pays candidats, A.Behrens, Statistiques en bref, 1-2/2003.

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History: the Soviet bloc


• The socialist regime in the USSR: since 1917.

A new political philosophy rises from the writings of Marx

The « war economy » system spreads in many countries (Germany, Italy, Spain, Japan…)

• Consequences of World War II: capitalism falls into discredit.

The reconstruction of Europe calls to a new State organization

• Yalta divides Europe in two parts. Era of the Steel Curtain and the Cold War (1945 – 1989), State socialism and the Warsaw Treaty in Eastern Europe

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History: the economic model of the CMEA


• The division of Europe is also economic

Towards the « american invasion » of the Marshall Plan, creation in the Soviet Bloc of the CMEA (Counsil for Mutual Economic Assistance). It is a response to the rising idea of the European Community in the West

• What are the bases of the socialist economies?

Political hierarchy in economic decisions (planification). Nationalisation of all private assets. Primacy and unity of the State, the Communist party and the Bureau of the Plan. Massive industrialization, vertical integration and concentration of industrial structures.

• Dominance of the USSR and economic specialization in the East in the frame of the « socialist international division of labor ».

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History: why it didn’t work


• Basic conditions: the paradoxes of the socialist system

a philosophical utopia: socialism failed to transform into communism

• Industrial structures: the socialist markets unilateral domination of the USSR, no real integration, over-industrialization

• Strategies the socialist « kombinats: highly concentrated, political interference, lack of commitment, no real incentives to efficiency

• Global consequences: the grey economy shortages, price distorsions, drop of production

a parallel economic sphere appears

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The crisis of the 1990s


• A global crisis:

Economic: systemic inefficiency, drop of the industrial output, decrease in GDP

Financial : 3-4 digit inflation, huge public debt, depreciation of the nat. currency

Political : loss of faith in the State

Social : fall of revenues, shortages, unemployment

• Institutional disorganization: what solutions?

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Nota : GDP in purchase power parity, USD 1990.

Source: Fischer S., Sahay R., Vegh C. (1998). « How far is Eastern Europe from Brussels? ». IMF Working Papers #98/53.

Country GDP:capita in 1937*

GDP/capita in 1992

GDP/capita in 1992 - estimated

EU-12, average

4021 15493 -

Bulgaria 1566 4054 14000

Czechoslovakia

2882 6845 15845

Hongrie 2543 5638 15448

Poland 1915 4726 14584

Romania 1130 2565 13102

Yugoslavia 1284 3887 13446

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Index of GDP per capita, average for EU-15 : 100, in 2000

Slovenia 69

Czech Republic 59

Hungary 51

Slovakia 48

Poland 40

Estonia 38

Lituania 33

Latvia 30

Bulgaria 28

Romania 23

Source : Eurostat, 2000

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The transition period: the historical events


1989: fall of the socialist bloc in Eastern Europe (and of the Berlin Wall)

From 1990: role of the World Bank and the IMF

1993: Treaty of Maastricht, war in former Yugoslavia, Copenhagen decision

1994-96: declaration of candidacy of East European countries to the EU

1998: Luxemburg council

1999: Helsinki council (second wave)

2000: Nice summit (conditions of the future enlargement)

2001: Laeken council (enlargement agenda: eight among ten to enter in 2004)

2004, May: Estonia, Latvia, Lituania, Hungary, Poland, Czech Republic, Slovakia and Slovenia to enter the EU.

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The transition period: towards a reunification of the continent


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The transition period: towards a reunification of the continent


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The transition period: the context


• The transition process is an unprecedented phenomenon in the modern economic history

• There is a major difficulty of standard economic theory to build a pattern and to explain the evolution of centraly planned economies in transformation

• Political shocks are at the basis of the creation of the Soviet bloc in Eastern Europe. In 1989, again, a socio-political upheaval is the origin of the process of returning back to market economies

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The transition period: theoretical approaches


• Two major theories on economic transition: The Washington consensus, based on neoclassical

theory and standard micro-economic approach of stabilization, defends the « tabula rasa » technique, or shock therapy. Assumption: markets will develop spontaneously. Method: trio « liberalization – stabilization – privatization ». Precondition: to create an appropriated legal framework.

Gradualism is based on recent developments of microeconomy, on evolutionary and on institutional economics. It warns against shock therapy: nothing guarantees the spontaneous replacement of old institutions by new ones, sovereign and operational.

• These two approaches have in the end the same aim: the creation of a market economy based on private property and « libre échange »

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The transition period: the political choice


• Massive choice of the Washington consensus approach. But results are mitigated. The shock therapy has become an end itself. The « market fanatism » has more sustained corruption than ghrowth

• Liberal orientation in Eastern Europe Aim: European integration (economic criteria of Copenhagen: achieve a functionning market economy, able to face the competitive pressure of the EU single market)

• Overall, transition appears as a dilemma. Liberalization is necessary, but there is a risk of market power capturing by interest groups, and the incapacity of a competitive framework to take place.

• Fundamental difficulty in the transition process: the institutional reform which supports a real market economy.

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European integration: what stakes?


• Official breaking of the CMEA: 1991. Political

identity crisis in the region

• Political stability may be achieved by the

European integration (foundations of the EU)

• A considerable transformation was needed in

emergency to resolve the deep crisis

• The enlargement is a positive sum game:

perspective of more growth in the frame of

market opening and globalization of the

economy.

• What weight for the new Europe on the world

diplomatic scene ?

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European integration: some problems


• Fundamental question: what governance for a European Union with 27 member countries? EU authorities have limited power => debate of enlargement Vs. Deepening; role of the Convention and the future European constitution

• All Eastern countries weren’t in the same situation in 1990, some of them have been more implied in the Soviet bloc. In some cases, former political elite has perpetuated under a modern capitalist form, allowing money laundring and capital drain – reforms are thus deviated in a more or less visible way.

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European integration: main consequences


• On economic level: upsizing the internal

market, perspective of extended growth and

propsperity in the region. But: what costs of the

integration, and who will pay?

• On political level: the core of the Union goes

East: Mitteleuropa and role of Germany. New

balance towards Russia and Central Asia

• On social and cultural level: high educational

level of the new member states, great diversity

of cultures. But: European unity in question.

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Concluding remarks


• Gaps in the transition process:

– Appropriate institutional framework still lacks

– Privatization and liberalization sometimes worsened the economic situation (capital drain and money laundring)

• A new balance of power between States and the market – Will the liberalization process and the introduction of

competition be sufficient to create this institutional background? The role of the State seems to be still very important in the case of Eastern Europe, to law enforcement on national level and to political unification in the frame of the enlarged Union.

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Bibliography


Andreff W., La crise des économies socialistes – la rupture d’un système. PUG, 1993.

Blanchard O., The economics of Post-communist transition. Oxford, Clarendon Press, 1997.

Dembinski P., The logic of the planned economies: the seeds of the collapse. Oxford University Press, 1990.

Guttman R.J., (eds) Europe in the new century. Lynne Riener Publishers, London, 2001.

Kornai J., Economics of shortage. North Holland, New York, 1980.

Von Hirschhausen C., Modernizing infrastructure in Transformation economies. Edward Elgar, Cheltenham, 2001.

http://europa.eu.int

http://europa.eu.int/

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Thank you for your attention!

Centre de Géopolitique de l’Energie et des Matières Premières

Université Paris Dauphinewww.dauphine.fr/cgemp


http://www.dauphine.fr/cgemp

Eastern Europe: an analysis of economic transition and the EU enlargement

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