27.05.2021 – 13:59
The great French historian Fernand Braudel taught us to look for longue durée in history. In the context of the past 30 years, such a wave is the widening economic gap between the countries of Central and Eastern Europe that joined the European Union and those that have not. The former are gradually catching up with other EU member states, with growth rates almost twice as high as their eastern neighbors; the latter are stuck in no one’s land between the EU and Russia.
The divergence between Poland and Ukraine illustrates the trend. According to Soviet statistics, Ukraine was slightly richer in terms of per capita than Russia and Poland in 1989, shortly before the revolutions that overthrew communism throughout Central and Eastern Europe. At that time, both countries had similar cultures and industrial structures. Today, however, GDP per capita (in current US dollars) is almost five times higher in Poland than in Ukraine. (Even in 2013, a year before Russia launched its war against Ukraine, Poland’s GDP per capita was 3.4 times higher.)
And Ukraine is not alone. The Belarusian and Russian economies have been at a standstill since 2012 and 2014, respectively. And blaming Russia’s plight on falling oil prices does not explain why Ukraine and Belarus have followed suit. Russia, of course, has been tightened by Western sanctions since its illegal annexation of Crimea in 2014. Similarly, Ukraine lost 17% of its GDP as a result of Russian military aggression, although it managed to record an annual increase. modest of 3% between 2016 and 2019.
Meanwhile, the EU countries of Eastern and Central Europe have advanced in terms of domestic entrepreneurship and foreign direct investment (FDI). During the 2014-19 boom, their economies grew by 4-5% per year, on average, while Russia’s per capita GDP fell below that of Romania and even non-EU member Turkey. Among the 27 EU member states, only Bulgaria is still poorer than Russia in terms of GDP per capita, whether measured in US dollars or purchasing power parity.
One reason that the former Soviet states are doing so poorly while Central and Eastern Europeans are doing so well is that the countries of Central and Eastern Europe successfully concluded association agreements with the EU in the early 1990s. With an excellent entry into the market EU, by the mid-1990s they had shifted two-thirds of their trade from the former Soviet Union to the EU. And using European supply chains, they were able to emerge as the leading European car manufacturers.
But the key factor in the success of these countries has been improving the quality of economic governance. To qualify for EU membership, Eastern and Central European countries were forced to adopt the body of EU law. After a long, bureaucratic grinding process, these countries adopted the legal and regulatory frameworks necessary to ensure the functioning of an open market economy.
In the Transparency International Corruption Perceptions Index, Poland, the Czech Republic, Slovakia and Hungary are now ranked 45th, 49th, 60th and 69th, respectively, while Ukraine and Russia are ranked 117th and 129th. Although the former group’s rankings are not star-studded, they have proved sufficient to attract FDI. Investors know that if something bad happens, they can seek recourse through the EU and eventually through the European Court of Justice. Unlike the former Soviet Union, property rights in Central and Eastern Europe are secure.
The secret, however, is that 3-4% of the annual GDP of Central and Eastern European countries comes from EU grants, which are a mixed blessing. On the one hand, EU structural funds are why all the capitals of the newest member states have beautiful new airports and highways. On the other hand, such projects are usually more vulnerable to corruption, hence the dubious wealth gained by many Hungarian businessmen close to Prime Minister Viktor Orban.
The question, then, is whether the economies of Central and Eastern Europe can be expected to maintain their progress. Prior to their accession, EU guards worried that these countries would improve their governance only until they joined the EU; but the reality is more complicated. All the new EU members actually continued to strengthen their governance for many years, attracting more and more FDI. And some countries are still improving. Estonia and Lithuania are now the least corrupt former communist countries.
According to Transparency International, however, some of the major transition countries are now experiencing a sharp deterioration in governance. Poland’s score peaked in 2015, followed a year later by Slovakia and the Czech Republic in 2018. Hungary peaked in 2012 and has fallen steadily since then, one that now ranks alongside Romania and Bulgaria, to which were previously considered the most corrupt EU countries. Foreign and domestic investors are now paying close attention to Hungary’s weakened adherence to international law, increasingly wavering property rights, and embracing discriminatory taxation.
For the EU, this withdrawal from good governance can become an existential issue because democracy and the rule of law go hand in hand. Although Hungary and Poland have misused the EU’s essential democratic criteria, they remain the beneficiaries of massive EU funding. And while the EU imposed special conditions on Romania and Bulgaria, these measures did not go well enough.
According to Freedom House, democracy has declined worldwide since 2005. Now more than ever, the EU must not allow the issue of governance to lag behind. Fortunately, the bloc has become more determined to impose the toughest conditions, largely through the 750 billion euros ($ 918 billion) of the EU’s Next Generation Recovery Plan for Europe. The trajectory of the former Soviet states is a sad reminder of why the EU must stand for democracy and the rule of law both inside and outside it.
* Anders lslund, senior member of the Atlantic Council in Washington. His latest book is Crony Capitalism of Russia: The Road from a Market Economy to Kleptocracy.
Translated and adapted for Konica.al by Project Syndicate