Catching up, forging ahead or falling behind? Central and Eastern European development in 1990–2005

Abstract

This paper aims to assess the economic development and development policies in the Central and Eastern European (CEE) countries in 1990–2005, from the collapse of the USSR to the enlargement of the European Union. A great number of authors have generally seen the transition as a very positive process. They have concluded that the reform policies focusing on macroeconomic and price stability have been the key to success for CEE economies. A reliable economic environment is, of course, instrumental for longer-term economic success, as exemplified by the prolonged crisis in most of the former Soviet Union. Our analysis of the economic development and competitive advantages in the region, however, leads to the conclusion that the specific approach to transition that the Central and Eastern European countries followed came at a rather high cost. Comparative neglect and weakness of a set of policies crucial for longer-term development, such as science, technology and innovation policies, has led to deterioration in the last decade rather than the strengthening of the competitive advantages of Central and Eastern European economies. Furthermore, we argue that, in most cases, CEE countries have unfortunately overlooked or misjudged a number of development challenges, and have thus implemented policies that have generated growth at the cost of rapidly increasing risks. This is how the financial fragility of several Central and Eastern European countries has recently increased drastically, and the region seems to have virtually arrived at the brink of economic collapse. Since the CEE countries joined the European Union, the CEE governments have gradually moved towards acquiring a more active role in economic development. These policies need, however, to be strengthened considerably and reinforced by macroeconomic policies that curb current excessive dependence on foreign-financed growth.

Keywords:

• Central and Eastern Europe
• industrial dynamics
• innovation policy
• financial fragility

Acknowledgements

The research for this paper was partially supported by European Commission EURO-COOP project, and Estonia Science Foundation grant no 6703.

Notes

1. In the context of this article, Central and Eastern European countries are the following 10 new member states of the European Union: Bulgaria, the Czech Republic, Hungary, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

2. Competitiveness is understood hereafter as the ability “to produce internationally competitive products and services (export), while at the same time maintaining or increasing the actual income of people” (OECD, 1992).

3. In particular, the Washington institutions (the World Bank and the IMF) have been strong advocates of such policies. However, also within academic discourse, such analysis abounds; see Broadman et al. (2005), for a recent example from numerous studies.

4. .For a more detailed account, see, for example, Havlik (2006) and Bracho and López (2005).

5. This section builds partially on Reinert and Kattel (2007).

6. As a result, the share of CEE and NIS manufacturing in world manufacturing[0] plummeted from 19.3% in 1980 to 2.7% in 2001 (UNCTAD, 2004, p. 89).

7. This is how today's developed countries benefit from globalization, by shifting manufacturing to various low-cost locations while maintaining control over product development, coordination of offshore production networks, marketing, etc. Vernon's (1966) work on interrelations of industry life cycles and evolution of international trade is a good way of explaining this.

8. We use here statistical definitions given by the World Bank WDI online database: services correspond to ISIC divisions 50–99. They include wholesale and retail trade (including hotels and restaurants), transport, and government, financial, professional and personal services such as education, health care and real estate services.

9. The calculations are based on averages. For some CEE countries, data is missing; however, most of the larger CEE economies like Hungary, Poland, Bulgaria and Romania are well represented, as are the Baltic States. East Asia includes South Korea, Singapore, Malaysia and Thailand.

10. Radoševic (1999) uses the term “gradualism without therapy”, and for some countries even “shock without therapy” to describe the patterns of restructuring of R&D systems in CEE.

11. The Czech Republic and Slovenia, with their business sector R&D investment reaching 0.9% of GDP, are exceptions here.

12. There are a number of methodological problems with the Community Innovation Survey that make cross-national comparison difficult: for a small or medium-size subcontracting company in the low end of global production networks, each new contract may bring about new products or services and virtually complete reorganization of production, which CIS would record as “innovative activity”.

13. The case study by Kattel and Kalvet (2006) reveals that, besides the problems of quantity of labour, there are also problems with quality.

14. As it current seems, the high quality of European science and education is largely a myth (Dosi et al., 2006). CEE scientific output is, in comparison to leading European countries like Sweden and Finland, dwarfed (see Must, 2006).