Economic Development and Growth in Central and Eastern Europe

Polster, Csilla Article Economic Development and Growth in Central and Eastern Europe Comparative Economic Research. Central and Eastern Europe Provided in Cooperation with: Institute of Economics, University of Łódź Suggested Citation: Polster, Csilla (2021) : Economic Development and Growth in Central and Eastern Europe, Comparative Economic Research. Central and Eastern Europe, ISSN 2082-6737, Łodz University Press, Łodz, Vol. 24, Iss. 4, pp. 69-84, https://doi.org/10.18778/1508-2008.24.31 This Version is available at: https://hdl.handle.net/10419/259287 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Central and Eastern Europe Volume 24, Number 4, 2021 https://doi.org/10.18778/1508-2008.24.31 Economic Development and Growth in Central and Eastern Europe Csilla Polster https://orcid.org/0000-0002-1174-8802 University of Győr, Faculty of Economics, Department of Leadership and Organisational Communication, Győr, Hungary e-mail: [email protected] Abstract The study investigates the economic growth in Central and Eastern Europe in the last 25 years. The economy can be regarded as a substantial topic in any country, but it is even more interesting in developing countries. One of the basic ideas of the European Union is the convergence between member states, namely the reduction of development disparities, which can be achieved through faster economic growth in less‑developed countries. Growth theory is one of the main topics in economics. Its significant importance is because the desire for development is one of the main driving forces of mankind. The aim of the study is to reveal the crucial differences and common features between the growth paths of the eleven Central and Eastern European member states of the European Union. After presenting growth theories, the growth performance of the examined Central and Eastern European member states is pinpointed. During the research, GDP per capita, population, migration, activity rate, employment rate, unemployment rate, foreign direct investment and foreign trade openness are considered. Keywords: economic indicators, labour market processes, economic growth JEL: E10 70 Csilla Polster Introduction The study aims toreveal the economic growth inCentral and Eastern Europe between 1995and2019. The economy can beregarded asamajor topic inany country, but itis even more inspiring indeveloping countries. Growth theory isone ofthe main topics ineconomics. Its significant importance isbecause the desire for development isone ofthe main driving forces ofmankind. Although economic growth isonly apiece ofthis development, inaddition toits direct impacts, itcan also contribute toother social development approaches. One ofthe basic ideas ofthe European Union isthe convergence between mem‑ ber states, namely the reduction ofdevelopment disparities, which can beacquired through faster economic growth inless‑developed countries. According toLengyel and Varga (2018), the world economy started todevelop rap‑ idly inthe 20th century, with developed countries serving asan example for develop‑ ing countries. The study ismade upof two parts. Firstly, itdiscusses general issues related togrowth theory, and secondly, itexamines the growth performance ofCentral and Eastern European member states between 1995and2019 inthe light ofthe growth theories. The surveyed countries include the eleven Central and Eastern European countries ofthe European Union: Bulgaria, the Czech Republic, Estonia, Croatia, Po‑ land, Latvia, Lithuania, Hungary, Romania, Slovakia and Slovenia. Although there are substantial differences between the growth paths ofthe individ‑ ual countries, similarities also emerge. Each ofthe surveyed economies can bedivided into three main phases over the past 25 years: 1) transformational decline, 2)conver‑ gence period, 3) recession. The study ends with asummary and conclusion inwhich Ialso cover the economic growth prospects ofthe countries. Literature review Inthis chapter, the following concepts, models and approaches are introduced: eco‑ nomic growth, general economic indicators, demographic and labour market process‑ es, foreign direct investment and foreign trade openness. Economic growth Creating new jobs and maintaining agrowing proportion ofGDP (gross domes‑ tic product) inarapidly developing market can beconsidered animportant issue inamodern economy. The high level ofprogression indeveloping countries isasig‑ nificant issue. Amodern economic model based oncontinuous progress can lead toaboom inthe economy (Wysokińska 2018). 71 Economic Development and Growth in Central and Eastern Europe Krajewska and Krajewski (2020) pointed out that insome countries, the share ofemployment‑related costs iseven above 50% ofGDP and ischaracterised byrela‑ tively high stability inthe long term. High unemployment can lead tothe spread ofun‑ ethical activities. They concluded that the current labour market situation inmany countries needs tobe changed, and there isaneed tointroduce legal solutions that strengthen the position ofemployees intheir relations with employers. Economic and demographic development are closely interrelated, and itis very difficult todetermine the cause and consequence ofthis economic and demographic development. The European population isgenerally inthe process ofdemographic ageing, with differ‑ ences from country tocountry. However, byanalysing demographic aspects, some con‑ nections between economic convergence and demographic differences can berecognised. The structure ofthe workforce and the economic population isone ofthe most impor‑ tant aspects inplanning and managing the economy (Eichenauer and Klee 2013). Two contradictory trends can beobserved innational investment policies. Onthe one hand, there are liberalisation, promotion and facilitation measures. Onthe other hand, there isthe regulation offoreign direct investment. Itwas pointed out that coun‑ tries have external powers concerning foreign direct investment and that that uncertain‑ ty can negatively affect the extent offoreign direct investment. (Witkowska 2020) Young and more qualified workers will migrate from underdeveloped regions tode‑ veloped parts ofthe country. Asaresult, age structure and educational standards will deteriorate inthese regions (Kilper and Klee 2018). The practice offoreign direct investment isfar ahead oftheoretical approaches. Gudowski and Piasecki (2020) underlined that the theories dealing with foreign di‑ rect investment deal with the cooperation ofWestern economies. Then, the growing trend ofthe open economy and globalisation emerged. Inless‑developed countries, there isasignificant demand for foreign direct investment. The countries ofCentral and Eastern Europe have undergone arapid metropolitan transformation inthe last two decades, although the process isdelayed and isstill dynamic with general and some specific features. This change was mainly reflected inthe physical and functional transformation oflarge cities, which became the pri‑ mary beneficiaries ofthe new economic and political system. Atthe national level, the development ofthe urban hierarchy has led tothe growing dominance ofcapi‑ tals. The observed parallel trends include the declining importance ofmedium‑sized cities and differentiation ofsmall settlements inrespect offunctionality and region‑ alism (Korcelli and Korcelli‑Olejniczak 2015). Outward foreign direct investments and inward foreign direct investments can bedistinguished. Outward foreign direct investments can beconsidered anegative phenomenon since they export occupations and practices toother countries, whereas inward foreign direct investments are identified with amore positive aspect since they facilitate occupations and reduce the need for imports. Bathelt and Buchholz (2019) claimed that outward investments have apositive cumulate effect inthe domestic re‑ gions since they have access toforeign markets and new knowledge. 72 Csilla Polster Central Europe shows significant differences and temporal variability inthe spatial delimitation ofthe region. Inchronological order, natural German dominance (the concept ofCentral Europe) can beperceived asatransitional zone between Germany and Russia (orthe Soviet Union) and can beconsidered anindependent third region ofEurope. Currently, the area designated asCentral Europe usually contains Austria, the Czech Republic, Germany, Hungary, Poland, Slovakia, and sometimes Slovenia and Switzerland (Bláha etal.2016). Economic and demographic development are closely interrelated, and itis very difficult todetermine the cause and consequence ofthis economic and demograph‑ ic development. The European population isgenerally inthe process ofdemographic ageing, with differences from country tocountry. However, byanalysing demograph‑ ic aspects, aconnection between economic convergence and demographic differences can berecognised. The structure ofthe workforce and the economic population isone ofthe most important aspects inplanning and managing the economy (Manić, Pop‑ ović, and Mitrović 2016). Regarding the failure ofMexico’s economic policy, Parnreiter (2013) argued that the Mexican government’s main goal with the North American Free Trade Agreement was toincrease imports ofworking capital from the U.S.and Canada and tostimulate capital inflows tohelp tocreate jobs. Hestressed that foreign capital goods also boost‑ ed private investments. However, Mexico has not been able tochange its economic and foreign trade structure, and asaresult, many Mexicans have left their homeland. Hehighlighted that Mexico’s economy could not grow. Trade liberalisation caused growth inonly afew manufacturing industries. Its foreign trade was also behind that ofthe United States, and Mexico was unable totake part inglobalisation processes. This study isrelated tothe topic because itinvestigates foreign trade. After the change ofregime, Hungary was characterised byabalance between the West and the East. Molnár and Lengyel (2016) highlighted that global production was facilitated byforeign direct investment. Based onSolow’s growth model, itcan beasserted that inmany sectors (agriculture, manufacturing, communications), the amount ofcapital per employee, orcapital in‑ tensity, increased. Capital intensity increases while technological change, natural re‑ sources, the quantity and quality ofwork remain unchanged. The increase ofcapital intensity can cause agrowth inthe output per worker (Somogyi 2016). Another variable tothe Solow model can beadded sothat the evolution ofphysi‑ cal and human capital are completely analogous. The explanatory power ofthe Solow model was substantially enhanced bythe inclusion ofhuman capital inthe model (Mankiw, Romer, and Weil 1992). Examining the fundamental causes ofeconomic growth isan important topic. Empirical research has often shown the phenomenon ofconditional convergence, i.e., iftwo countries can bedescribed with similar parameters (e.g. savings rate), the ini‑ tially poorer country will produce faster growth. However, this can have limited rele‑ vance from aneconomic policy perspective. What isimportant isthe lack ofabsolute 73 Economic Development and Growth in Central and Eastern Europe convergence. Why isthe savings rate (orother parameters) not the same indifferent countries? How can the observed income disparities bereduced bychanging them (Acemoglu 2016)? The investigation ofeconomic growth has been one ofthe key research topics ineco‑ nomics. Czárl (2005) underlined that itis one ofthe oldest fields ofstudy ineconom‑ ics, but when the concept emerged iscontroversial.Heargued that countries treat economic growth asaprimary economic and political goal, and hepinpointed that countries with rapid economic growth are moving forward inthe ranking ofnations and setting anexample for emerging ones. Heemphasised that ifthe economy grows, the country’s domestic output will expand, and anincrease inits per capita value will mean animprovement inthe living standards ofthe population. Healso pointed out that economic growth is, therefore, one ofthe most significant factors inthe long‑term economic success ofnations. Factors of economic growth: general economic indicators, demographic and labour market processes, foreign direct investment, foreign trade openness The most important factors ofeconomic growth are GDP per capita, the activity rate, the employment rate, the unemployment rate, foreign development investment (FDI) and foreign trade openness. GDP shows the total value ofgoods produced byacountry’s population and com‑ panies. Hepointed out that two types can bedistinguished: nominal GDP and real GDP. Nominal GDP shows the monetary value ofall goods produced byacountry’s population and companies, but this excludes the impact ofinflation. Incontrast, real GDP already takes inflation into account. GDP per capita isaranking for different countries, referring tothe standard ofliving ineach country. Ahigher GDP per capita means ahigher standard ofliving (The Centre for Analysis 2017). Let meintroduce the following example regarding the definition ofpurchasing pow‑ er parity. How much would the forint beworth indollars, pounds oryen inaworld without borders, where markets are not distorted and are free tooperate everywhere? Insuch aworld, everything would cost the same everywhere, aswould exchange rates. Ifthe same car costs $15,000 inNew York and £9000 inLondon, $1 isworth £0.6. But this isnot how the economy works. Exchange rates usually differ from purchasing power parity. One currency isundervalued, and the other isovervalued. Soif the $1 exchange rate is0.5 pounds, then the dollar isundervalued, and the pound isover‑ valued. The Big Mac Index isameasure ofcurrency comparison that differentiate the price ofBig Mac sandwiches indollars around the world. The Big Mac Index can then becompared toexchange rates, and then itbecomes clear which currency isunder‑ valued orovervalued (Marron 2010). The GDP per capita, the employment rate, the share offoreign direct investment will decrease, and the unemployment rate will increase in2020. Furthermore, young 74 Csilla Polster and more qualified workers will migrate from underdeveloped regions todeveloped parts ofthe country. Asaresult, age structure and educational standards will deteri‑ orate inthese regions (Barna and Molnár 2019). One ofthe biggest global social challenges ofthe 21 st century isthe continued growth ofthe world’s population, which could reach oreven exceed 9 billion by2050 (Bertalan and Sarudi 2016). Areas where foreign‑controlled companies are established can stimulate the econ‑ omy. However, there isalack ofinnovative developments oragraduate workforce inthese areas. Varga and Lengyel (2019) emphasised that itcan beconsidered anad‑ vantage ifthey bring market relations ortechnology transfer. Asignificant factor for growth performance isforeign trade openness, which isthe ratio ofexports and imports toGDP (Alotaibi and Mishra 2014). Methodology Interms ofthe data collection method, the research isconsidered secondary research, asalready available data related tothe topic was collected. First, Idemonstrate the growth performance ofthe region over the past 25 years and the characteristics ofits various phases, and then Idiscuss the topic offiscal poli‑ cy and its connections toeconomic growth. The surveyed countries include the eleven Central and Eastern European countries ofthe European Union: Bulgaria, the Czech Republic, Estonia, Croatia, Poland, Latvia, Lithuania, Hungary, Romania, Slovakia and Slovenia. Although there are substantial differences between the growth paths ofin‑ dividual countries, similarities also emerge. ThenI present the demographic and la‑ bour market processes ofthe convergence period, and finally, Iwill focus onFDI and economic openness. Research findings Inthis chapter, research findings will bediscussed inthe light ofeconomic growth, general economic indicators, demographic and labour market processes, FDI and for‑ eign trade openness. Convergence with Western Europe The similarities and differences ofthe convergence paths can beoutlined. Atthe end ofthe 1990s, there was nocoherent convergence trend, aseven more countries inthe region suffered from adecline during this period. Poland, Slovenia and the three Baltic states were already able toshow clear real convergence with Western European coun‑ tries between 1995and2000. From 2000 onwards, however, until 2007–2008, there was 75 Economic Development and Growth in Central and Eastern Europe amostly rapid convergence inthe whole region. After 2008, convergence was also typ‑ ical.Inthe Baltic States, GDP per capita inpurchasing power parity reduced between 2007and2008 compared toWestern European countries. This period was followed byarapid convergence, asaresult ofwhich all three countries have now reached and exceeded their relative position before the recession. Aslowdown ofconvergence can beidentified inBulgaria, Hungary, Romania and the Czech Republic, while segrega‑ tion can bedemonstrated inCroatia and Slovenia (Table 1). Table 1. GDP per capita as a percentage of the average of Western European EU countries on PPP in the last 25 years (%) Country/Year 1995 2000 2008 2019 Bulgaria 29.00 19.58 29.80 35.12 Czech Republic 65.30 49.50 58.79 61.03 Estonia 30.10 28.81 48.40 55.67 Croatia –33.98 44.02 43.25 Poland 36.40 32.51 38.83 48.61 Latvia 28.40 24.75 41.29 46.25 Lithuania 29.50 25.86 44.02 54.60 Hungary 43.20 36.20 44.02 48.82 Romania 27.30 18.10 35.55 46.25 Slovakia 40.30 34.72 50.04 49.04 Slovenia 63.10 55.41 62.89 58.24 Source: Eurostat, Purchasing power… (n.d.). Labour market processes Tables 2–7 show the three most crucial labour market indicators between 1997and2019 inCentral and Eastern Europe. Iexcluded 1995and1996 since the necessary data ofthe countries are not available in1995, and in1996, only the data ofHungary and Slovenia are available. Tables 2 and 3 show that the employment rate had anincreasing trend inall coun‑ tries between 1997and2019. Tables 4 and 5 demonstrate that the activity rate increased until 2008, with the ex‑ ception ofLithuania. Itshowed agrowing trend between 2008and2019 inBulgaria, Estonia, Lithuania, Hungary and Slovakia, while inother countries, adecline was ob‑ servable. Furthermore, between 1997and2019, the activity rate indicated anupward trend inall countries except Romania. Tables 6 and 7 highlight that the unemployment rate decreased until 2008, with the exception ofRomania and the Czech Republic. Itmarked adeclining trend between 2008and2019 inall countries. Furthermore, between 1997and2019, the unemploy‑ ment rate indicated adownward trend inall countries. 76 Csilla Polster Table 2. Employment rate in Central and Eastern Europe between 1997 and 2019 (%) Year Country 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Bulgaria –––34.69 34.41 35.08 36.03 37.55 38.08 39.90 41.89 43.37 Czech Republic 46.93 46.34 45.24 44.95 45.25 45.85 45.57 45.36 46.02 46.46 47.04 47.30 Estonia 41.90 42.73 40.89 40.73 40.67 41.32 41.92 42.56 43.69 46.35 47.08 47.24 Croatia – – – – – 34.21 34.47 35.32 35.06 35.38 39.27 40.02 Poland 38.22 38.86 37.95 36.98 36.36 35.33 35.03 35.15 36.25 37.60 39.34 40.82 Latvia –39.74 39.40 38.78 38.94 40.05 40.68 40.99 42.09 44.69 46.14 46.32 Lithuania –40.97 41.35 39.48 38.70 40.53 42.24 41.65 42.55 42.97 44.02 43.68 Hungary 34.59 35.29 36.75 37.03 37.70 37.87 38.50 38.28 38.45 38.76 38.51 38.03 Romania – – – – – 41.40 40.62 40.96 40.58 41.70 42.34 43.25 Slovakia –40.71 39.31 38.48 39.22 39.15 40.15 39.79 40.97 42.58 43.56 44.83 Slovenia 43.73 44.29 43.48 43.88 44.69 45.11 43.94 46.28 46.23 46.65 47.40 48.23 Source: Eurostat, Population by sex... (n.d.). Table 3. Employment rate in Central and Eastern Europe between 1997 and 2019 (%) Year Country 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Bulgaria 42.25 40.31 39.84 39.62 39.77 40.52 41.43 41.45 43.43 43.69 44.86 Czech Republic 46.30 45.73 45.69 45.77 46.10 46.40 46.80 47.48 48.10 48.43 48.28 Estonia 42.94 41.12 43.73 44.60 45.19 45.56 46.68 46.53 47.55 47.77 47.86 Croatia 39.67 38.37 36.98 35.79 35.11 36.40 37.05 37.55 38.81 39.85 40.77 Poland 40.61 39.55 39.75 39.81 39.77 40.51 41.12 41.38 41.85 42.00 41.92 Latvia 40.93 39.52 40.83 41.89 43.05 43.05 43.89 44.01 44.40 45.34 45.48 Lithuania 40.78 39.53 40.48 41.65 42.75 43.92 44.77 45.94 46.16 47.25 47.42 Hungary 37.09 37.01 37.35 38.23 39.02 41.25 42.42 43.91 44.68 45.12 45.40 Romania 43.23 41.03 40.40 40.98 40.92 41.45 41.54 41.44 42.69 43.05 43.31 Slovakia 43.50 42.49 42.67 42.86 42.82 43.35 44.36 45.51 46.01 46.52 46.65 Slovenia 46.77 45.95 44.56 44.07 43.12 43.29 43.70 43.71 45.67 46.42 46.42 Source: Eurostat, Population by sex... (n.d.). Table 4. Activity rate in Central and Eastern Europe between 1997 and 2019 (%) Year Country 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Bulgaria –––41.48 43.04 42.92 41.87 42.77 42.39 43.85 45.01 45.97 Czech Republic 49.04 49.24 49.47 49.30 49.20 49.33 49.31 49.45 50.01 50.06 49.71 49.50 Estonia 46.80 47.30 46.32 47.15 46.85 46.02 47.43 47.60 47.61 49.35 49.43 50.03 Croatia –––––40.46 40.24 41.13 40.30 39.98 43.69 43.84 Poland 43.06 43.27 43.40 44.33 44.73 44.29 43.61 43.59 44.22 43.74 43.58 43.98 Latvia –46.57 45.81 45.35 45.34 46.59 46.36 46.54 46.85 48.16 49.19 50.37 Lithuania –47.60 47.87 47.15 46.70 46.70 48.54 46.68 46.47 45.64 46.02 46.41 Hungary 38.00 38.72 39.50 39.65 39.98 40.13 40.88 40.66 41.44 41.92 41.61 41.28 Romania –––––45.38 43.87 44.58 43.88 45.13 45.41 46.05 Slovakia –46.35 46.79 47.55 48.67 48.18 48.47 48.89 48.94 49.17 49.03 49.56 Slovenia 46.93 47.92 47.02 47.22 47.45 48.02 47.04 49.31 49.52 49.68 49.87 50.48 Source: Eurostat, Population by sex... 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Central and Eastern Europe”, 21(3), pp.75–93, https://doi.org/10.2478/cer‑2018‑0020 84 Csilla Polster Rozwój i wzrost gospodarczy w Europie Środkowo‑Wschodniej Opracowanie przedstawia wyniki badania wzrostu gospodarczego w Europie Środkowo‑Wschodniej w ciągu ostatnich 25 lat. Gospodarka może być uważana za istotny temat analiz w każdym kraju, ale jest szczególnie interesująca w przypadku krajów rozwijających się. Jednym z podstawowych dążeń Unii Europejskiej jest konwergencja państw członkowskich, czyli zmniejszanie dysproporcji rozwojowych, co można osiągnąć poprzez szybszy wzrost gospodarczy krajów słabiej rozwiniętych. Teoria wzrostu jest jednym z głównych tematów w ekonomii. Jej ogromne znaczenie wynika z tego, że chęć rozwoju jest jedną z głównych sił napędowych ludzkości. Celem badania jest wskazanie istotnych różnic między ścieżkami rozwoju jedenastu krajów członkowskich Unii Europejskiej z Europy Środkowo‑Wschodniej oraz cech wspólnych. Po uprzednim przedstawieniu teorii wzrostu, pokazano osiągnięcia w obszarze wzrostu badanych państw członkowskich z Europy Środkowo‑Wschodniej. W badaniu wzięto pod uwagę PKB per capita, liczbę ludności, migracje, wskaźnik aktywności zawodowej, wskaźnik zatrudnienia, stopę bezrobocia, bezpośrednie inwestycje zagraniczne oraz otwartość handlu zagranicznego. Słowa kluczowe: wskaźniki ekonomiczne, procesy na rynku pracy, wzrost gospodarczy © by the author, licensee Łódź University – Łódź University Press, Łódź, Poland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution license CC‑BY‑NC‑ND 4.0 (https://creativecommons.org/licenses/by‑nc‑nd/4.0/) Received: 2021‑05‑25. Verified: 2021‑07‑14. Accepted: 2021‑08‑11.