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

1. Eastern Europe: an analysis of economic transition and the EU enlargement Margarita PIROVSKACenter for Geopolitics of Energyand Raw MaterialsUniversity Paris Dauphine24 février 2003

2. Outline Presentation History: 1945-1989 The crisis The transition period Stakes of the European integration Concluding remarks Margarita Pirovska 24/02/2003

3. Presentation: map of Europe in 2000

4. Presentation: East European candidate countries Source : Eurostat, 2002 Margarita Pirovska 24/02/2003

5. Country GDP, Millions EUR/hab., 2000 GDP/hab in PPS Presentation: economic index, 2000 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. Margarita Pirovska 24/02/2003

6. 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 Margarita Pirovska 24/02/2003

7. 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 ». Margarita Pirovska 24/02/2003

8. 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 Margarita Pirovska 24/02/2003

9. 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? Margarita Pirovska 24/02/2003

10. Country GDP:capita in 1937* GDP/capita in 1992 GDP/capita in 1992 - estimated The crisis of the 1990s 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 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. Margarita Pirovska 24/02/2003

11. Index of GDP per capita, average for EU-15 : 100, in 2000 The crisis of the 1990s Slovenia 69 Czech Republic 59 Hungary 51 Slovakia 48 Poland 40 Estonia 38 Lituania 33 Latvia 30 Bulgaria 28 Romania 23 Source : Eurostat, 2000 Margarita Pirovska 24/02/2003

12. 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. Margarita Pirovska 24/02/2003

13. The transition period: towards a reunification of the continent Margarita Pirovska 24/02/2003

14. The transition period: towards a reunification of the continent Margarita Pirovska 24/02/2003

15. 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 Margarita Pirovska 24/02/2003

16. 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 » Margarita Pirovska 24/02/2003

17. 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. Margarita Pirovska 24/02/2003

18. 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 ? Margarita Pirovska 24/02/2003

19. 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. Margarita Pirovska 24/02/2003

20. 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. Margarita Pirovska 24/02/2003

21. 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. Margarita Pirovska 24/02/2003

22. 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 Margarita Pirovska 24/02/2003

23. Thank you for your attention! Centre de Géopolitique de l’Energie et des Matières PremièresUniversité Paris Dauphinewww.dauphine.fr/cgemp Margarita Pirovska 24/02/2003