EU countries in Central and Eastern Europe now have shortcomings in essential democratic criteria, with troubling consequences
The great French historian Fernand Braudel taught us how to look for longue duree in history. In the context of the past 30 years, one such wave is the widening of the economic gap between Central and Eastern European countries that have joined the EU and those that have not, writes Anders Aslund * for Projec Syndicate.
The former are gradually catching up with other EU member states, with growth rates almost twice as high as their eastern neighbors. While the latter are stuck between the EU and Russia.
The divergence between Poland and Ukraine illustrates the current trend. According to Soviet statistics, Ukraine was slightly richer in terms of per capita than Russia and Poland in 1989, before the revolutions that overthrew communism throughout Central and Eastern Europe. At that time, both countries had similar cultures and industrial structures.
Today, GDP per capita (in US dollars) is almost five times higher in Poland than in Ukraine. Even in 2013, a year before Russia started the war against Ukraine, Poland’s GDP per capita was 3.4 times higher.
Ukraine is not alone. The Belarusian and Russian economies have been at a standstill since 2012 and 2014, respectively. Blaming falling oil prices for Russia’s plight does not explain why Ukraine and Belarus have followed a similar pattern. Russia, of course, has also been tightened by Western sanctions since the illegal annexation of Crimea in 2014.
In the same way, Ukraine lost 17% of GDP as a result of Russian military aggression, although it managed to record a modest annual growth of 3% from 2016 to 2019.
Meanwhile, the Eastern and Central European countries of the EU have advanced in domestic entrepreneurship and Foreign Direct Investment. During the 2014-2019 boom, their economies grew by an average of 4 to 5% per year, while Russia’s per capita GDP fell below that of Romania and even Turkey, which is not a member of the EU.
Among the 27 EU member states, only Bulgaria is poorer than Russia in terms of GDP per capita, whether measured in US dollars or purchasing power parity.
One reason why the former Soviet states are performing so poorly while the countries of Central and Eastern Europe are doing so well is that the latter successfully concluded association agreements with the EU in the early 1990s. With excellent market access of the EU, by the mid-1990s, they shifted two-thirds of their trade from the former Soviet Union to the EU, and by entering European supply chains, were able to become among the leading European vehicle manufacturers.
However, the main factor in the success of these countries has been the improvement of the quality of economic governance.
To qualify for EU membership, Eastern and Central European countries were forced to adopt EU legal requirements. After a long and arduous bureaucratic 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 rank 45th, 49th, 60th and 69th, respectively, while Ukraine and Russia rank 117th. and 129th.
Although the first group rankings are not ideal, they have been enough to attract foreign investment. Investors know that if something bad happens, these countries can seek help from the EU or through the European Court of Justice. Unlike the situation in the former Soviet Union, property rights in Central and Eastern Europe are secure.
The irony is that 3 to 4% of the annual GDP of Central and Eastern European countries comes from EU grants, which are both a blessing and a curse. On the one hand, EU structural funds are why all the capitals of the newest member states have new airports and highways. On the other hand, such projects are usually more susceptible to corruption – like the dubiously acquired wealth of many Hungarian businessmen who have close ties to Hungarian Prime Minister Viktor Orban.
The question is whether the economies of Central and Eastern Europe can maintain their progress. Prior to their accession, EU observers worried that these countries would only improve governance until they achieved EU membership.
The reality is more complicated. All new EU members continued to strengthen governance for many years, attracting more and more foreign investment. Some countries are still in the process of improvement. Estonia and Lithuania are now the least corrupt former communist countries.
However, according to Transparency International, some of the major transition countries are experiencing sharp declines 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, and now ranks alongside Romania and Bulgaria. , which were previously considered the most corrupt countries in the EU.
Foreign and domestic investors are paying close attention to Hungary’s weakening performance in international law, growing discrimination in property rights, and the imposition of discriminatory taxation.
For the EU, this withdrawal could become an existential issue because democracy and the rule of law are linked together. Although Hungary and Poland have lagged behind in the EU’s essential democratic criteria, they continue to benefit from massive EU funding. Although the EU imposed special conditions on Romania and Bulgaria, these measures did not go far 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 tougher, setting higher conditions for members wanting to take advantage of the 750 billion-euro ($ 914 billion) EU recovery plan, Next Generation. The trajectory of the former Soviet states is a sad reminder of why the EU should support democracy and the rule of law inside and outside the bloc.
* Anders Aslund is a member of the Atlantic Council in Washington.