Evaluating Economic Performance after Twenty Years

of Transition in Central and Eastern Europe

Andrew HarrisonTeesside University Business School

1. Introduction

• The paper focuses mainly on the 10 CEE countries that are EU members

• Main performance indicator used: economic growth, but productivity underpins sustained economic growth

• The paper draws on growth theory, institutional economics, varieties of capitalism and statistical data

2. Evaluating Economic Performance

• Macroeconomic performance is not the only measure of success of the transition process

• Nor is transition a purely economic process• But without economic growth, long-term

improvements in living standards are impossible

2.1 Economic Growth in the CEE Countries

• Early years of transition brought negative economic growth - lowest point around 1993 in fast-reform countries- lowest point around 1998 in slow-reform countries

• Comparison of positive effects of economic reform cannot therefore be made until the end of the 1990s

Table 1: GDP Growth Rates, 2000-08Country Average Annual Growth Rate

(%)Bulgaria 5.59Croatia 4.26Czech Republic 4.20Estonia 7.03Hungary 3.52Latvia 7.29Lithuania 6.97Poland 4.19Romania 5.88Russia 6.89Slovakia 5.68Slovenia 4.33

2.1 Economic Growth in the CEE Countries• Comparison of raw growth rates is problematic:

- countries with a more difficult transition or where reforms started later grew faster in the 2000s- countries grow faster during a ‘catch-up’ phase provided they adopt reforms (consistent with growth theory)

• Difficult to distinguish between ‘good’ and ‘bad’ performers – all performed reasonably well

• Broadly consistent with EBRD transition indicators• Even allowing for negative growth in the 1990s, CEE

economies have also achieved remarkable GDP per capita growth rates

Table 2: GDP p.c. Growth Rates, 1990-08Country Average Annual GDP Per

Capita Growth Rate (%)Bulgaria 2.7Croatia 3.0Czech Republic 2.5Estonia 5.1Hungary 3.3Latvia 4.9Lithuania 3.4Poland 4.4Romania 2.7Russia 1.7Slovakia 3.7Slovenia 3.6

2.2 The Role of Productivity in Economic Growth

• Economic growth can be achieved in two ways:- by increasing inputs- by increasing productivity

• When resources are underutilised, output can be increased relatively easily (output per worker)

• Sustained economic growth requires real improvements in productivity (output per labour hour and TFP)

• Technological development plays a key role in most growth theories [Solow (1956), Romer (1990)]

• Productivity is also affected by human capital, institutions etc.

2.2 The Role of Productivity in Economic Growth

• Total factor productivity increased at a similar rate in all main groups of CEE transition countries from 1999-2005 (World Bank, 2008) – but from different bases

• Globalisation is responsible for some of the productivity improvements

• In theory, all economies could eventually converge around the same rate of economic growth in an open global economy

2.3 Institutions and Economic Performance

• Institutions play an important role in shaping economic growth, but the precise relationship is elusive

• History, geography, politics, culture and economic philosophy create unique institutions in each country

• Particular institutions are thought to be important, e.g. World Economic Forum Global Competitiveness Report 2010-2011: ‘the legal and administrative framework within which individuals, firms, and governments interact to generate income and wealth in the economy’

Institutions and GDP Per Capita Growth Rates in the CEE-10, Croatia and Russia

2.4 Economic Performance and the Local Context

• Rodrik (2009):

‘There is increasing recognition in the economics literature that high-quality institutions can take a multitude of forms and that economic convergence need not necessarily entail convergence in institutional forms’

• Policy checklists (e.g. Washington consensus) should be seen as a guide rather than a definitive set of policies

• This view is consistent with the literature on ‘varieties of capitalism’ [Hall and Soskice (2001), Amable (2001)]

• There may be one or more variants of capitalism among the CEE countries – so no unique policy prescription

3. Conclusion• At a macroeconomic level, the EU-10 and a number of other

transition countries have made significant progress• Country comparisons of GDP or GDP per capita growth rates

provide inconclusive evidence of superior or inferior economic performance

• Economic growth rates are still important indicators, but growth depends on productivity, institutions and other factors

• Some evidence to suggest a positive relationship between quality of institutions and economic growth

• Institutions are important for sustained economic growth, but there is not necessarily a unique ‘right’ set of institutions

Thank you