Central Europe in the EU @10: the best is yet to come
Jan Cienski*
The last decade has been an enormous success for Poland, the Czech Republic, Slovakia and Hungary, which since joining the EU have become wealthier and more politically relevant than they have been in centuries. But the long race to erase the handicaps left by colonialism, war and communism and fully catch up to western Europe is still only half over – and the toughest part of the contest lies ahead.
When the CE-4 countries joined the EU amid a flash of fireworks and street parties, the region made up 13 per cent of the EU’s population, but accounted for only 3.7 per cent of its total economic output, says a new study by Erste Research. The four Visegrad countries now account for 5.4 per cent of the EU’s output, and per capita GDP at purchasing power parity has soared from 49 per cent of the EU-15 average to 65 per cent.
But a big part of that catch-up was fuelled by a particular set of circumstances which will be difficult to repeat in the future. The most crucial was that the region continued to benefit from having cheap but well qualified labour which was put to work using advanced technology from western Europe.
That was what drove crucial investments like the Volkswagen factory built on the outskirts of Bratislava, the electronics plants set up across the region by Asian manufacturers and the flood of outsourcing and shared services centres springing up on the outskirts of Polish cities. Local businesses have also benefited, borrowing everything from business models – the gourmet burger restaurants opening in Warsaw and Prague were copied from London and New York – to retail models and advanced technology.
The result has been a rapid growth of companies supplying semi-finished products to German industry, making everything from shock absorbers to window seals used in German cars – a key contributor to the region’s export growth. Added to that was a huge boost provided by EU membership itself, which probably added about a percentage point of growth a year.
EU funds have also made a noticeable difference to quality of life; instead of dodging transport trucks and bouncing along a narrow road winding through traffic-clogged villages, drivers leaving Warsaw now speed along a modern highway running all the way to the German border.
In all, the CE-4 countries have been on tap to receive euro136bn in EU cohesion funds over the last decade. With billions more in agricultural funds, it is no surprise that Polish horses have been replaced by gleaming tractors.
But even more changes are needed if the region is to complete its catch-up to the west.
The problem is that those easy gains from importing technology and coupling it with cheap labour will start to run out. As the CE-4 start to approach 80 per cent of EU per capita GDP – something the Czechs have almost achieved – they will start having to develop their own innovations. That implies much higher future levels of spending on research and development, probably at the cost of spending on social programmes. Poland now spends about 0.9 per cent of GDP on R&D, higher than a few years ago, but still only a third of the level of spending in the most advanced countries of western Europe.
Local universities will also have to become much better. The best Czech, Polish and Hungarian universities languish far down the list of most international rankings, while the bulk of post-secondary institutions are parochial, staffed with overworked professors, with few ties to business and doing very little cutting-edge research.
CEE companies are also going to have to follow in the footsteps of trailblazers like Nowy Styl, the Polish furniture manufacturer, and Pesa, a locomotive producer. Both started in the 1990s relying on being much cheaper than their rivals. The brothers who founded Nowy Styl started making chairs with the help of their mother and girlfriends. Pesa made grain cars out of abandoned Soviet tank carriers. Over the years both have scrambled up the value chain. Managements have become more professional and earnings are ploughed back into R&D as the companies have created their own brands and international presence.
That is still a minority trend, but it will have to become much more common across central Europe if the region is to take full advantage of its presence in the EU to continue its fast catch-up. That means companies, especially those in Poland which have become comfortable servicing the national market, will have to grow significantly larger and compete in Europe and around the world. The shift to innovation is going to happen at a time when public finances face strain; the region is going to see worsening demographics thanks to its ageing population, low birth-rates and negligible immigration.
The role of the EU’s funds will also diminish over time. The CE-4 stand to get euro134bn in cohesion funds from 2014-2020, but subsequent budgets are almost certain to be much less generous as the region becomes wealthier.
The final hurdle is psychological. There is a comfort in continuing to do the same thing, which has worked very well for the last quarter century. But shying away from difficult political decisions in order to keep relying on cheap labour as the main driver of growth carries the danger that expansion will eventually run out of steam.
Even the worst case scenario still finds there is almost no chance that Poland, the Czech Republic, Slovakia and Hungary will be poorer in 2024 than they are today. The question is whether governments, universities and business will have the stamina to take a series of uncomfortable small steps over the next decades – revolutions like that launched by Leszek Balcerowicz in 1990 are no longer needed – in order for the region to take advantage of its historical opportunity and continue its path to full equality with the west.
*Jan Cienski is Senior Fellow at demosEUROPA – Centre for European Strategy
