Evaluating Economic Performance after Twenty Years of Transition in Central and Eastern Europe Andrew Harrison Teesside University Business School.

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