30 YEARS OF TRANSITION: The East-West convergence in numbers

30 YEARS OF TRANSITION: The East-West convergence in numbers
The East-West convergence has progress rapidly in the last three decades, but at the same time a North-South gap has opened up
By Clare Nuttall in Glasgow November 9, 2019

30 years after the fall of the Berlin Wall most indicators show that the new EU members from the former Eastern Bloc haven’t yet caught up with Western Europe — but in a number of aspects they have caught up with or even overtaken the Southern European states that joined the EU in the previous wave of accessions and were battered by the international economic crisis that started a decade ago. 

Starting with the basics, a look at GDP per capita shows that there has been a remarkable catch-up by the six Central and Southeast European states that emerged from communism in 1989-1990 — Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia — compared to the West European countries that were EU members at that time. 

“It’s not full convergence — perhaps it would have been unrealistic to expect full convergence within 30 years — but enormous progress has been made,” said European Bank for Reconstruction and Development (EBRD) chief economist Beata Javorcik in an interview with bne IntelliNews for this series. "Nine Central European countries are now officially classed as high income countries by the World Bank; they have reached about two-thirds of the income level of the OECD countries.” 

A comparison of World Bank data on GDP per capita based on purchasing power parity (PPP) (constant 2011 international $) from 1992 and 2018 puts the Czech Republic, Slovakia and Poland now ahead of Portugal and Greece, while at the start of the transition period all of the West European counties were ahead of those in Central Europe. (Looking at gross national income (GNI) per capita at constant 2010 US$, however, the Central European countries are still behind as of 2018, though the Czech Republic and Slovakia at least were not far behind the poorest southern European countries.)

GDP per capita based on purchasing power parity (PPP) (constant 2011 international $). Source: World Bank databank.

A report prepared last year by the Centre for European Policy Studies (CEPS) think tank for EU finance ministers, and quoted by Reuters, looked at growth of real income per capita, also finding that while the east-west gap in the EU has narrowed, a north-south gap has opened up since the international economic crisis that started in 2008. 

“This pattern, reflecting East-West convergence but North-South divergence within the euro area, can be observed for a number of indicators, such as real wages, investment and consumption,” said the CEPS analysis. 

Impending slowdown

As another international slowdown looms, the relative lack of impact so far on Central Europe compared to Western Europe has raised speculation as to whether this could promote convergence by slowing down the western EU members relative to their peers to the East, or if all of Europe will be dragged down eventually. 

“I think right now it is actually good for convergence because there is a very severe slowdown in Western Europe, especially Germany, and our region is still growing pretty fast,” said Vasily Astrov, economist at the Vienna Institute for International Economic Studies (wiiw) in a webinar on November 6. 

Thus far, Central and Southeast European countries have continued to grow, with growth driven by the boom in domestic private consumption. “Domestic demand is not that badly affected at the moment because of the tight labour markets and rising wages. Over the medium term, though, I think it’s not very good news for convergence prospects. A lot of our region especially Visegrad and some of the Western Balkans have gone all in on this German model — manufacturing, especially automotive, is very tied in with the German economy … this is a very export reliant model and if we are really at an inflection point in trade and globalisation, if the China-US trade war goes on for years and Germany continues to suffer, our region will suffer too,” said Astrov.

There has already been some debate as to whether this model can in any case continue, as wages rise steadily across Central Europe, and unemployment falls to record lows, though there has been some easing of this trend in the last few months. 

Still, Eurostat data shows that as of 2018 every one of the CE states except for Slovenia had lower wages than every one of the older EU member states. 

Source: Eurostat.

This is despite the fact that wages are growing faster in the Central and Southeast European EU member states, especially the poorest nations, Romania and Bulgaria. According to Eurostat's latest data for Q2 this year, the highest annual increases in hourly labour costs were registered in Romania (+12.4%), Bulgaria (+11.0%), Slovakia (+10.6%) and Hungary (+10.1%). 

Source: Eurostat. 

During the November 6 webinar, wiiw’s Astrov noted the easing — or even reversal — of labour shortages recently at least in more advanced countries of CEE, and puts this down to a combination of three factors: the matching process of supply and demand in the labour market that takes time to play out; employers now have more pessimistic exceptions about the future so demand for labour has dropped recently; and finally, labour migration.

Demographic disaster

This final factor could help to some extent to address the biggest crisis facing all of Central, Southeast and Eastern Europe today, what has been termed the region’s demographic catastrophe. Millions of people have already left the region, most of them moving to Western Europe. This is set to continue, and comes on top of falling birth rates. 

According to UN long-term population projections published earlier this year, all the CEE countries are going to lose population between 2020 and 2100. The worst affected will be Bulgaria which is forecast to lose 48% of its population through to the end of the century; Czechia, the least affected country, will lose just 4%. 

By contrast, a number of countries in northern Europe are forecast to see a population increase this century. First is tiny Luxembourg (up 57%), followed by Sweden, Denmark, Ireland and the UK. 

But the population crisis isn’t limited to Central Europe. Southern European nations that were badly hit by the international economic crisis of the last decade are also heading for major population declines. Greece, Italy and Portugal are all expected to lose over 30% of their populations in the next 80 years. Germany, the Netherlands, Finland, Spain and Austria are also heading for population declines.

Long-term population forecast. Source: UN. 

The new European consumer 

As incomes rise across Central Europe, the region has been enjoying a consumer boom. Aside from setbacks during successive economic crises, consumption has been on an inexorable rise for the last three decades. Its physical manifestations have been hard to miss: the arrival of designer brands and mass market retailers setting up in newly built malls, cafes and restaurants, cinemas, gyms, and so on.

When it comes to purchasing power, however, a Gfk study finds a broad east-west divide, but its data, which is broken down by region within countries, shows that parts of Central Europe and the Baltic states have similar levels of purchasing power to consumers in Greece, Portugal, the southern two-thirds of Spain and parts of southern Italy. 

“The ten EU nations with the highest per capita purchasing power gains this past year all have below-average purchasing power and were admitted into the EU as part of or after the eastward enlargement,” says the GfK report. 

“Increasingly tight job markets in these nations have led to sizeable pay increases. For example, citizens of the growth forerunners Latvia and the Czech Republic have €8,030 (+10.3%) and €9,492 (+9.3%) at their annual disposal, respectively. This moves them closer to the European average of €16,878 (+3.0%), although continued progression in that direction is likely to require the ongoing support of the European Union.”

Despite all of these advances, consumers in the eastern EU member states are still viewed differently from their peers in the west — at least by some companies. A scandal erupted when it revealed that multinationals were selling lower quality products for the same or higher prices in eastern EU countries. This led to interventions by top government officials, and this spring the European Commission approved rules that ban identically branded products being sold with different ingredients in different markets.

The high tech divide 

In addition to manufacturing industries, Central Europe has also become an attractive location for IT and business process outsourcing. This has helped the development of local ICT sectors, and the success of this sector has also led to international businesses locating increasingly more sophisticated functions to the region. 

Nonetheless, Eurostat data shows that when it comes to basic indictors such as the number of houses in EU countries with internet access, CEE countries are clustered at the bottom of the list, along with some of the southern European countries.

The lowest number of households with internet access were in Bulgaria, Greece, Lithuania, Portugal, Slovakia, Romania. The highest ranked CEE country was Baltic tech champion Estonia in eighth place, still beaten by seven mainly northern European countries.

There has, however, been a lot of progress made in the last few years in CEE. In Bulgaria, for example, the share of households with internet access shot up from 54% in 2013 to 72% in 2018.

There is a similar pattern for online shopping, with Romanians the least likely nation to buy goods online. 

And while the ICT sector is blossoming in a number of CEE countries, especially in the region’s university towns, the number of tech jobs as a share of total employment is overwhelmingly higher in West European EU members (plus Estonia). Again, it is both Central and Southern EU members that are at the lower end of the spectrum: “ICT specialists accounted for 2.8 % of the total workforce in Italy followed by Lithuania and Cyprus with 2.7 %, 2.4 % in Portugal, 2.2 % in Romania, 1.8 %, in Greece and 1.7 % in Latvia,” Eurostat said. 

One area where the CEE countries do perform well is in gender equality in the tech sector — a legacy from the communist era. Bulgaria had the highest proportion of women among the ICT workforce, 28.3%, followed by Lithuania and Romania. Notably, in some Central European countries including Bulgaria the share of women in the tech workforce fell between 2008 and 2018.

The shift to a low-carbon economy 

As the global climate crisis threatens to snowball into a climate catastrophe, the pressure is on to convert to a low carbon economy — and for the most part the eastern EU members have further to go than their western peers. While the picture isn’t altogether clear cut, data from Eurostat on the share of energy derived from renewable sources puts the Visegrad 4 countries plus Bulgaria close to the bottom of the list.

Only Romania, which has abundant hydropower capacity, is close to the top; the increase in Romania between 2004 and 2017 indicates that the generous (now largely scrapped) incentives for wind and solar power also played a role. Poland in particular has indicated it will struggle to meet the EU’s renewable energy targets, due to its huge coal industry this shift will be politically very difficult.

The other side of the consumption coin is household waste. East European countries still produce much less municipal waste per capita than in Western Europe. In fact, all of the CEE countries produce less than the EU average of 486kg per capita a year, with the highest level of waste in the region being produced in Slovenia (471kg). In Romania the figure is just 272kg. 

This is a sign that despite recent consumption boom, CEE people are just not consuming so much, or possibly buying less packaged goods, for example Romania still has a large rural population and a high level of subsistence farming. 

“For 2017, municipal waste generation totals vary considerably, ranging from 272 kg per capita in Romania to 781 kg per capita in Denmark. The variations reflect differences in consumption patterns and economic wealth, but also depend on how municipal waste is collected and managed. There are differences between countries regarding the degree to which waste from commerce, trade and administration is collected and managed together with waste from households," said Eurostat in a note on the data. 

While CEE countries are producing less waste, along with Southern EU members they are also less likely to be relying what they do produce — with some outliers. According to 2017 Eurostat data, Germany was the best performer, with 67.6% of its waste recycled, followed by Slovenia (57.8%) and Lithuania (48.1%). The lowest recycling rates were in Malta (6.4), Romania (13.9), Cyprus (16.1), Greece (18.9) and Latvia (23.3). 

Share of household waste recycled. 

The environment has also come out as one of the important mobilising forces for Central Europe citizens, from the election of former lawyer and environmental campaigner Zuzana Caputova - dubbed “Slovakia’s Erin Brockovich” - as president of Slovakia, to the thousands-strong protests in Romania over the Rosia Montana gold mine and illegal logging. 

The governance question 

And such action is important, as the economic data only shows part of the picture. The other side — as highlighted by European Bank for Reconstruction and Development (EBRD) chief economist Beata Javorcik in an interview with bne IntelliNews for this series — is governance and the quality of the region’s institutions. 

In the interview, Javorcik pointed out that the gap between transition countries and advanced economies remains quite large when it comes to institutions such as control of corruption, rule of law, quality of regulation and effectiveness of governments, and improvement in these areas has stalled. “If half of the governance gap with the G7 countries was closed, income convergence would be brought forward by almost a generation,” she said. 

This gap is illustrated by studies such as Transparency International’s annual Corruption Perceptions Index (CPI). The index ranks 180 countries and territories by their perceived levels of public sector corruption, according to experts and businesspeople. 

This gives a somewhat similar picture to the economic data, as the highest perceptions of corruption are in the east and south of the EU, while the lowest are in the northwestern corner of the continent (Denmark was in first place in the 2018 CPI). Yet Poland and the Czech Republic now perform better than Spain and Italy, while Greece is the lowest ranked EU country except for Bulgaria. 

Similarly, three Nordic countries top Freedom House’s latest Freedom in the World ranking, and while all the EU nations except Hungary are rated “free”, by and large the West European countries still outperform the eastern EU members.

This article is part of bne IntelliNews’ series marking the 30th anniversary of the fall of the Berlin Wall. Find more articles from the series here: 

Corruption, racism and intolerance in Bulgaria

“I was 30” commercial stirs controversy in Romania

The Czech Republic divided by freedom since 1989

Poland at a crossroads

Central European automakers prepare for an electric future

A profound crisis of trust in democracy

Gabor Szeles, a self-made Hungarian success story

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