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Poznańska, Joanna; Poznański, Kazimierz Z.

Article
Comparison of patterns of convergence among
"emerging markets" of Central Europe, Eastern
Europe and Central Asia

Comparative Economic Research

Provided in Cooperation with:

Institute of Economics, University of Łódź

Suggested Citation: Poznańska, Joanna; Poznański, Kazimierz Z. (2015) : Comparison of

patterns of convergence among "emerging markets" of Central Europe, Eastern Europe and
Central Asia, Comparative Economic Research, De Gruyter, Warsaw, Vol. 18, Iss. 1, pp. 5-23,
http://dx.doi.org/10.1515/cer-2015-0001

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http://hdl.handle.net/10419/184343

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Comparative Economic Research, Volume 18, Number 1, 2015
10.1515/cer-2015-0001

JOANNA POZNAŃSKA*, KAZIMIERZ POZNAŃSKI**

Comparison Of Patterns Of Convergence Among “Emerging

Markets” Of Central Europe, Eastern Europe And Central Asia

Abstract

Based on analysis of economic growth indicators for 1989-2014, this

article distinguishes the “emerging markets” of Central and Eastern Europe
(with Russia included), from the other economies that fall in the broad
‘emerging markets’ category. Following the post–1989 reforms, the countries of
the region share many of the same typical institutional features as other
“emerging economies”, but not necessarily the associated economic outcomes.
What characterizes “emerging economies” is that they grow fast enough to
systematically close the distance dividing them from the advanced economies,
creating convergence. Departing from this pattern, Central and Eastern Europe
(and Russia) have so far fallen short in terms of the growth rates, and the region
as a whole has not made much progress in catching up. By more than doubling
its national product Poland is the only notable exception in the region, although
Slovenia may fit in the same category. At the other extreme, some of the
economies actually lost two decades in terms of reducing the gaps, and some
even fell further behind (e.g., Serbia, Ukraine). These findings have potentially
serious implications for economic theory in general and for the presumption
that globalization processes act as a unifying developmental force.

Keywords: globalization; convergence; Central and Eastern Europe; “Emerging

Markets”; “Income Distribution”, “Ownership Structure”

*
Professor, Seattle Pacific University
**
Professor, University of Washington
6 Joanna Poznańska, Kazimierz Poznański

1. Introduction

There are numerous examples of less developed economies which, once they
began to converge with more developed economies, continued on the path until they
closed the distance separating them from the developed economies. For instance,
Japan, South Korea and China are in this category (with some residual uncertainty
over China). For other economies, an initial spurt of growth reaches a low
equilibrium and convergence comes to a halt. Not long ago, Brazil was considered
almost as a textbook case of this category in international economics. During the
first few post-war decades, the countries of the Soviet bloc began a convergence,
but by mid-1980’s the catching-up lost some of its momentum. At this point, the
region was still averaging one-third of the productivity rates for Western Europe.
In 1989-90, with the collapse of the Soviet bloc, its former members
embarked on dismantling their command economies established after the war by
the Soviet Union. A market-run system, intended to imitate Western Europe, was
first phased-in in Central Europe (Kornai 2006; Poznanski, Poznanska and Liu
2012) and then what is now defined as Eastern Europe (i.e., Russia, Ukraine, and
Belarus) joined in as well. The economies of Central and Eastern Europe turned
into “emerging markets”, with typical institutional features such as: an “open”
economy with low tariffs; robust domestic competition; private, and often largely,
foreign banking systems; and limited unionization and flexible wages. Relatively
stable prices and currencies are other features of the emerging markets that
countries of the region acquired at this turning point.
These changes were undertaken with the goal of resuming the catching-up
process, particularly with Western Europe as the region’s role-model.
Characteristics associated with “emerging markets” include not only their systemic
characteristics and macroeconomic choices, but their above-the-average rates of
investment and related rates of growth of their national product. The “emerging
economies” also tend to be export-driven and show trade surpluses, or at least are
not burdened with large trade deficits. In addition, their capital balance – i.e. the
difference between inflow and outflow of capital – with respect to foreign
investment is usually positive. As a rule, these factors have allowed most of the
“emerging markets” by and large to reduce the distance separating them from the
advanced economies.
This has not been the case with Central and Eastern Europe, often called
“transition” economies. When they moved forward with their market-oriented
reforms, numerous projections were made about Central Europe eliminating its
distance behind Western Europe in two, or at the most three, decades. Now
however, over two decades later, it is evident that the early projections have not
been proven correct – with the exception of Poland and Slovenia – and no
 Comparison Of Patterns Of Convergence... 7

visible closing of the economic distance has taken place. In fact, in some
economies in the region the initial gap has expanded (e.g., in Ukraine and
Serbia) This puts Central and Eastern European economies into a special
category, where the systemic features of “emerging markets” are not associated
with “economic convergence” (e.g., Poznanski 2013).
The critics of Poland’s approach to transition have to recognize that at least in
terms of its overall performance, measured in growth rates, Poland is a success
story, with growth rates that put her on par with the Latin American emerging
economies that have been able to visibly close the gaps separating them from the
advanced economies. This is, however, a relative success, since among the
transition economies are also two Asian economies – China and Vietnam. In
pursuing liberalization, they also joined the category of “emerging markets”, with
China already producing two decades of the longest and fastest growth in post-war
history. This has allowed China to reach rates of growth four times higher than in
Poland, and another great success story, Vietnam, to reach rates nearly three times
as high as Poland, and accordingly both have reached similarly higher rates of
convergence levels.

2. Twenty-Five-Year Economic Growth Record

The year 1989 is chosen as the starting point to measure the relative
economic performance of the “emerging economies”. As has been indicated, this
is the approximate year when a full-scale liberalization started in the formerly
state-planned economies in Central and Eastern Europe, including Russia.
It should be noted that in China market-oriented reforms greatly accelerated from
1985 onward. Historical real (i.e. corrected for inflation) GDP statistics are
utilized for the calculation of growth patterns. Straight-forward indices, with the
1989 GDP level taken as 100, are calculated for selected countries in specific
regions. Averages for regions are calculated by dividing the total 2014 GDP for
the countries of the region by their 1989 GDP level. Using this methodology,
country indices are “weighted” by the size of their economies.
Table 1 below summarizes the results for 55 “emerging economies” from
five different regions, namely Asia, Latin America, Central and Eastern Europe as
well as Central Asia (encompassing the remaining former Soviet republics, however
with the Baltic States considered part of Central Europe). As a further point of
reference for Central and Eastern Europe, growth indices for thirteen countries of
Western Europe (from the “old” European Union) are included as well. This latter
8 Joanna Poznańska, Kazimierz Poznański

addition is particularly relevant for evaluating the “catching-up” record of the

Central and Eastern European economies. As previously said, Western Europe is
the target by which these countries gauge their post-1989 performance.

2.1. Long-Term Comparative Economic Growth

According to Table 1 below, the fastest region during 1989-2014 was

Asia, including a total of ten economies, with Taiwan, Singapore and South
Korea and China among them. The GDP 2014 index for this group of emerging
economies was 609, meaning that in the over 20-year period these economies
grew by almost six times. This sample includes China, which registered a 2014
GDP index of 990, or above nine times growth. The second fastest economy in
the region was Vietnam with a 519 index for 2014. Given the fact that China’s
economy accounts for about 50% of production in this region, a separate index
was calculated with China excluded. For the Asian countries other than China,
the 2014 GDP index was 411.
Measured against the above index for Asia as a benchmark, the post-1989
growth in Eastern Europe is merely a fraction. The 2014 GDP index for the
sampled ten Central European economies was on average 221. Importantly,
much of the growth came from Poland, the best performing country in the
region with a 2014 index of 238. Excluding Poland, which also happens to be
the single largest economy in the region, the average 2014 index for the
remaining countries falls to 165. This index for these nine economies of Central
Europe is roughly one-third of the above-mentioned corresponding index of 441
reported by the Asian economies other than China. Furthermore, Central
Europe’s index excluding Poland represents one-quarter of the 609 index for the
whole of Asia, with China’s economy included.
While the growth record for Central Europe is lacklustre in comparison
with the Asians, who performed at the highest level among the “emerging
economies”, in comparison to relatively less-successful countries of Latin
America the region’s performance looks respectable. This is telling, since Latin
American economies happen to have started their liberalization reforms about the
same time as Central Europe and the countries that grew up out of the collapse of
the Soviet Union in 1991, e.g. Eastern Europe and Central Asia. During 1989-
2014, while showing better performance than the rest of the region, Central
Europe including Poland grew as a group close to the rate reported by Latin
America, with its 2014 index of 209 meaning that during this time the Latin
American region doubled its production.
 Comparison Of Patterns Of Convergence... 9

If the record of Latin America is taken as the lowest threshold for

defining an “emerging economy” as growing fast enough to converge, then
among Central European economies only Poland can be said to have performed
like a typical “emerging economy” (Slovenia, with its 183 index for 2014, might
possibly be another exception,). If Poland’s economy is subtracted from the
pool, the region grew by two-third in 1989-2014, which of course is less than
the doubling of GDP reported by Latin America. In addition, among the
majority that grew below the above-mentioned threshold, at least as many as
three reported a GDP index for 2014 as low as one-quarter of the benchmark
(i.e. 119 in Latvia; 126 in Bulgaria; 125 in Hungary).
Table 1. Emerging Markets Real GDP 2014 Indices (1989=100; 2008=100)

2014 2014
Region
Index (1989=100) Index (2008 =100)
Asia 609 146
China 990 164
Vietnam 519 141
without China 411 144
Latin America 209 118
Argentina 256 126
Chile 336 125
Central Europe 221 106
Hungary 125 78
Poland 238 118
without Poland 165 100
South Central Europe 126 98
Serbia 79 105
Eastern Europe 112 138
Belarus 204 124
Russia 117 145
Ukraine 65 90
Central Asia 198 139
Kazakhstan 194 135
Western Europe 153 99
Austria 165 102
Germany 149 105
Turkey 242 111
Egypt 267 114
Morocco 220 113
Algeria 176 108

Source: Calculated from “Development Indicators. GDP and Growth Rates of GDP, 1989-2011”,
World Bank, 2012.
10 Joanna Poznańska, Kazimierz Poznański

Importantly, not counting Albania all countries of the South Central

Europe (i.e., Albania, Bosnia, Croatia, Macedonia, Montenegro and Serbia)
showed a considerably slower economic growth during the 1989-2014 period
than Central Europe, whether the fastest regional economy (Poland) is included
in the sample or not. As an extreme for this region, Serbia reported for the 1989-
2014 period a negative index of 79, this also being the extreme for all the
transition economies sampled in this quantitative study. While without Poland
the 2014 index for Central Europe was 165, for the South Central European
region the average was only 126.
Extremely low rates have been also reported by some of the former Soviet
republics that form the present Eastern Europe. Ukraine reported the negative
index of 65, and for Russia the index was 107. In contrast, Kazakhstan reported
an index of 194, which is above the average for Central Europe. The last
member of the Eastern Europe, Belarus reported an index of 204, which was
below the Central European leader Poland’s 238 index. The contrast between
Central Europe and the two fast-growing economies of the former Soviet Union
is intriguing, since both Kazakhstan and Belarus are considered relatively
conservative with respect to their market reform programs, with Belarus often
claimed to be an extreme case, alongside Uzbekistan.
However, the former Soviet republics that constitute Central Asia showed
a performance that is comparable to that of Central Europe. The 2014 index for
the eight countries was around 198, so there is only a several point difference.
Included in this group is Georgia with its 74 index, Moldova with its 69 index,
and Tajikistan with its 107 index. With such poor results they all fall in the
category of countries which lost over two decades of growth. However, within
the group are also economies that match or even exceed the record of the best
performing Central European economy, i.e. Poland. Turkmenistan reported an
index as high as 345, and Uzbekistan reported 263.
Of the 27 countries constituting Central and Eastern Europe and the
former Soviet republics of Central Asia, only six of them showed a benchmark
index of around 200 or more and were thus able to reduce their GDP-gap vis-à-
vis the advanced countries by some measurable degree. These countries are
Poland and Slovenia from Central Europe; Belarus from Eastern Europe; and
Azerbaijan, Turkmenistan and Uzbekistan from Central Asia. If the two
formerly “state-run” Asian economies - China and Vietnam - are added, then the
number of “transition economies” in the sample extends to 29 economies, with
eight of them exceeding the 200 point benchmark that separates countries with
visible convergence from those that liberalized without convergence.
 Comparison Of Patterns Of Convergence... 11

Turning to Western Europe, the 2014 GDP index for the 15 European
Union “old” members was 153. This is below the Central European 221 index
as well as the region’s index of 165 when counted without Poland. Of the 27
countries comprising Central and Eastern Europe, South Central Europe, and the
former Soviet republics of Central Asia, only eight reported 1989-2014 growth
rates higher than Western Europe as a group. Of these eight countries, three are
from Central Europe, namely Poland, Slovakia and Slovenia. The remaining
countries in this group include Albania from South Central Europe, Belarus
from Eastern Europe plus five Central Asian countries, namely Armenia,
Azerbaijan, Kazakhstan, Uzbekistan and Turkmenistan, the latter with the
fastest growing economy within the whole group of 27 economies.

2.2. Responses to the 2008 financial crisis

When the 2008 crisis shook the world, it marked the worst financial crisis
that hit the advanced economies in the post-war period. By 2014, the total
product of Western Europe (European Union – 15) still remained below the
2008 level. Specifically, the GDP 2014 index (2008=100) was 99 for the
advanced region of Europe. This was the first test for Central and Eastern Europe
to see how resistant the region is to cross-border financial shocks originating in
Western Europe. To the surprise of many, as a group the Central and Eastern
European countries showed better economic performance in terms of growth. The
respective 2014 index for Central Europe was 106, meaning it was 7 points higher
than Western Europe in the six-year time span of 2008-2014.
The most resistant economies of Western Europe showed a modest
increase in production and ended up with a GDP 2014 index around 102. This
group would include five economies, i.e., Belgium, Austria, France, Germany
and Sweden (the latter being the most successful among them, with a 108 GDP
index). Among the ten economies in this group which reported declines for
2008-2014, the most severely damaged turned out to be the economies of
Greece, with a 2014 growth index of 78, and Ireland with a respective index of
96. Portugal also experienced difficulties with a 94 growth index for 2014,
while the respective index for Spain was also 94 and for Italy the index was 93.
Proportionally speaking, the number of Central European economies that
suffered a decline from the financial shock has been lower than in Western
Europe. Of the ten sampled countries of Central and Eastern Europe, two
reported a visible increase in national product, namely Poland and Slovenia,
with Poland having the distinct status of the best-performing European
(including both West and East) economy in terms of growth. Poland’s GDP
12 Joanna Poznańska, Kazimierz Poznański

2014 growth index (with 2008=100) was 118 and that of Sweden, indicated as
the fastest growing Western European member, by a large margin. Of the
remaining eight Central and Eastern European economies that sharpest decline
was reported by Slovenia with 91 index, Hungary with 97 and Latvia with 98
index. This is less than decline reported by the worst affected Western European
economies (including Finland with 95 index in 2014).
The lesson of the 2008 crisis is that joining the European Union did not
render Central Europe immune to the financial shocks. The shocks were actually
imported from Western European economies, with many of them reporting the
most damaging downturns ever encountered in post-war Western Europe.
Further, for some Western European economies this severe decline followed
years of remarkable expansion, which had been taken as proof that liberalization
pays off handsomely. For example, Ireland was praised as an example that
globalization worked “miracles”. Its GDP index for the year 2000 (1989=100)
was 217, compared to 128 index for Western Europe as a whole. But, as already
mentioned, following four years of consecutive decline Ireland’s GDP index for
2014 was 96, among the worst in the whole of Western Europe.
Turning now to Latin America, growth statistics show that as a region
these countries proved more resistant to the 2008 financial shock, at least in the
sense that none in the sample witnessed a decline of national product through
2014. The group as a whole reported an increase that averaged to a 2014 index
equal to 118. This meant, however, that these economies considerably slowed
down compared to the long-term average index of 209 achieved during the
1989-2014 period. Some countries showed very impressive growth rates, raising
their national product during this six-year span by one-third as in Peru) or one
fourth, e.g., Argentina (whose economic performance defied those critics who
predicted a painful and protracted recovery from its own severe financial crisis
incurred by its default on foreign debt and steep devaluation).
Central Europe fell not only behind Latin America, but also behind the
“emerging economies” of Asia, which collectively enjoyed a 2014 growth index
of 146 against the 2008 GDP base level, i.e. the equivalent of nearly one-half.
This index is higher than that for Latin America and not matched even by the
best performing member of Central Europe – Poland. If China is removed from
the sample, the growth index for Asia is at 144, still higher than for any other
group of “emerging economies”; still higher than for Poland alone; and also
higher than that of the former Central Asian republics, which reported a very
strong 2014 growth index of 138.
For further comparison, Russia reported an index of 145 and Ukraine an
index of 90 for the world crisis period 2008-2014. With this data the records for
the former Soviet republics can be contrasted with that of individual “emerging
 Comparison Of Patterns Of Convergence... 13

economies”, most notably with the “transition” economies of China and

Vietnam. Not only were China and Vietnam not negatively affected by the
financial crisis, they fared better than most of the Asian “emerging economies”,
with India leading at 179, and followed by China reporting the 164 index and
Vietnam coming next at 141. Among the formerly state-run economies in
Central Asia, only Uzbekistan recorded a comparable index, namely 159 and
Turkmenistan ended up with the 179 index.
To broaden the geographic perspective, Table 1 provides information on
the economic performance of some “emerging economies” from Middle East
and North Africa, plus Nigeria. Of them, all demonstrated higher rates of growth
for the 1989-2014 period than the comparable record achieved by Central and
Eastern Europe, with Russia. The few selected countries of the Middle East and
North Africa reported an average 2014 index against 1989 at the level of 232,
which was higher than the average for Latin America and this for the economies
of Central Europe achieved in the same time frame. Their index for the period of
2008-2014 was hovering around 111, meaning comparable to Latin America
and much stronger than the countries in Central Europe, as well as Russia and
Ukraine in Eastern Europe.
The most significant lesson is that - while the Central and Eastern European
countries were more resistant to the 2008 financial shock than the advanced
economies of Western Europe - they made very little progress in catching up. The
differential in growth rates was not significant enough to allow Central and
Eastern Europe to gain any visible ground in the “convergence game.” This
lacklustre performance most stands in contrasts to the performance of the two
Asian economies which also dropped their state-run systems for a market-based
system, namely China and Vietnam. Interestingly, the Asian parts of the former
Soviet Union have also proven more resistant to the 2008 cross-border financial
shocks, which for first time in the post-war years came from the advanced world.

3. Factors behind the slow convergence

The question which arises is: How is it that the “emerging markets “of
Central and Eastern Europe, together with Russia and the former Soviet
republics, which by and large have liberalized their systems so much, have
recorded growth rates insufficient to enable convergence in a reasonably short
period of time? The existing pattern is so prevalent among these “transition
economies” that one would expect more or less the same factors to be
responsible for the pattern discerned here. At this stage of the discussion among
14 Joanna Poznańska, Kazimierz Poznański

economists no consensus has been achieved as to the sources of this – as identified

by us – paradox of these numerous cases of liberalization without convergence.
That the region has been slow in closing the distance against the advanced
economies is not in itself evidence of a failure of the “transition”. Naturally
convergence is not the only measure of economic success. The region of Central
and Eastern Europe and Russia with the former Soviet republics is better off on
many respects, with greater access to imports, more product variety, and increased
quality, all of which benefits domestic consumers. Further, opportunities have
opened up for people to try their entrepreneurial talent, start businesses, and
innovate production. The production structure has changed dramatically, and the
structure of their foreign trade is now dominated by manufactured goods that are
integrated into the structure of globally-operating multinationals.

3.1. Suppressed total consumer demand

One hypothesis concerning the possible reasons for the slow convergence is
that domestic demand doesn’t provide a sufficient stimulus for production growth;
in other words, the low rates of growth are demand-driven. This argument was
raised already at the time when the region entered the post-1989 “transition
recession” that shaved off over ¼ of the regional national product. According to
the prevailing view, this downturn was caused by structural – supply-side –
impediments, namely the presence of huge amounts of “unwanted production”
which the state planners had developed in earlier years. A dissenting argument
was raised, however, pointing to the demand side, namely a sharp decline in real
wages combined with a drastic credit squeeze and a sharp increase in the interest
charged (justified on the grounds of eradicating inflation and “strengthening” the
currencies).
The demand argument has been recently revived by Podkaminer (2013) in
the context of the ongoing debate on how to cope best with the post-2008
financial crisis and its aftermath. The prevailing view has been that austerity
(higher unemployment and wage cuts etc.) is the remedy. But a small group of
vocal Keynesian economists (e.g., Krugman in the United States, Laski in
Europe) have called for “monetary easing” by allowing increased budgetary
deficits and moderate price inflation. A retrospective examination of the real
wage trends since 1989 seems to argue for the validity of the demand argument
in explaining growth performance, both at the outset of the transition as well as
in the years that followed.
 Comparison Of Patterns Of Convergence... 15

The analysis reveals a continuous real wage repression, which by and

large didn’t allow for real wages to increase by more than one-quarter during the
1989-2012 period (Podkaminer 2013). Table 2 demonstrates that the notable
exception is the Czech Republic, where after an initial decline of real wages to
a 69.6 index in 1992, they recovered to reach an index of 154 in 2012, or by
more than one-half. In Romania real wages reached 130 index points, and in
Poland 124. Otherwise, most of the countries hovered around 110 points, or
even allowed their real wages to stay at the pre-recession level, i.e., Lithuania
with an index of 74 and Bulgaria with an index of 72. These low indices
translate into low annual rates of growth in real wages, ranging from 1.9 % in
Czech Republic and at the lower end of the positive spectrum to 1.2% in
Romania, to -1.3% for Lithuania and -1.4 % for Bulgaria.
It is instructive to compare the rates of real growth in wages with the real
growth of national product in particular economies. This helps to get a sense of
the extent to which the population at large participates in the appropriation of
the expanding “pie”, meaning the national product. In the Czech Republic and
Romania wages grew by more than their real domestic product. In the former
case the gross domestic product index for 1989–2011 was 142, but real wages
grew by 154 points. In the latter case of Romania the figures were 123 against
139; while for Poland it was reverse, with the gross domestic product growing
by 221 points while the real wages index was 124.
Table 2. Average Real Wages in Eastern Europe 1989–2012 (1989=100)

1989 1992 1994 1996 1998 2000 2002 2005 2007 2009 2012
Czech
100.0 76.7 85.5 101.4 101.3 110.1 121.3 136.7 148.2 153.8 154.0
Republic
Hungary 100.0 88.2 90.9 75.8 82.4 75.7 103.6 118.9 117.5 115.7 116.4
Poland 100.0 73.3 74.4 80.7 88.2 93.3 96.3 102.1 112.0 121.0 124.5
Slovakia 100.0 73.6 73.0 81.3 89.1 82.1 87.7 93.7 100.9 105.7 104.8
Slovenia 100.0 60.6 73.5 80.3 83.9 87.6 92.9 99.2 106.0 110.8 111.0
Estonia 100.0 40.0 45.1 48.8 56.1 63.7 72.8 88.0 111.0 108.9 110.0
Lithuania 100.0 47.6 33.1 35.4 45.4 45.1 46.6 57.1 76.7 78.4 74.8
Bulgaria 100.0 68.0 48.6 38.1 38.3 41.5 41.9 46.2 52.8 64.7 72.5
Romania 100.0 74.7 62.4 76.7 61.7 62.8 67.5 94.5 118.2 135.6 130.3

Source: Adapted from Podkaminer 2013, p. 16.

Looking at another relatively fast growing economy, that of Slovenia, the

gross national product increased by 190 index points, but real wages by only
111, so as with Poland the gap was very substantial, indicating the declining
share of wages in the total product. In Slovakia, the respective indices were 160
16 Joanna Poznańska, Kazimierz Poznański

for gross national product, and 104 for real wages, meaning that in the over
twenty years that have passed real wages in this country have basically not
increased. In the extreme case of Bulgaria, wages declined to an index value of 72,
while product increased by 122 points. In Lithuania the index for product was 119
and for wages 75, indicating another case of an enormous gap. Finally, in Hungary
the respective indices were 129 and 116.
The above described phenomena constitute a rather unprecedented case of
the distribution of gains from economic growth, certainly in light of the Chinese
transition path, where phenomenal increase in the total national product has been
accompanied by almost as rapid an increase in real wages, often 10% or more on an
annual basis. This is actually in line with the patterns detected in other Asian
economies that experienced “economic miracles”, e.g. Japan and South Korea. They
all ensured a model of so-called “shared growth”, guaranteeing that all major groups
would equally benefit from the growing national income and productivity as its
principal source.

3.2. “Labour drain” from Eastern to Western Europe

Another factor which could be of importance is that - by and large - the

countries in the region experienced a low rate of labour utilization, expressed in
both high rates of official and unofficial unemployment, as well as in the large-
scale outflow of labour abroad. Previously free of unemployment, from 1989
onward all the transition economies witnessed rapid unemployment, quickly
reaching high levels, in Poland’s case as high as 15%. While Polish unemployment
rates have measurably declined, it is not uncommon in these days to encounter such
high levels unemployment in the region.
High rates of unemployment were typically combined with an outflow of
the labour force abroad, basically to Western Europe, and the numbers are very
high by any standard. For example, in Poland at least 2 million people have left
to seek work abroad, mainly to England, Ireland, Germany and Spain. At the
same time workers from Ukraine and Russia migrate to find employment in
Poland and elsewhere in the region. This outflow is fuelled by weak labour
markets in Eastern Europe as well as by the wide-spread demographic stagnation in
Western Europe, particularly in Germany, its largest single economy.
During the recent 2008 financial crisis, both the rates of unemployment in the
region and migration from the region have intensified, leading to in some instances
to massive depopulation, mainly among the youth and skilled workers. For instance,
since 2008 Lithuania’s population declined by 10% and Romania’s population fell
 Comparison Of Patterns Of Convergence... 17

by 12%, mainly due to migration. The losses might be permanent, since migrant
workers usually intend to settle and have families in Western Europe, whose
leadership is very accommodating to this source of economic growth. This happens
also to be a source of repressed growth in Central Europe, since the wealth created
by these migrants tends to stay in the countries they move into.
The case of Poland is instructive here, with the country reporting 10.5
million persons employed in 1990, the first full year of transition. Due to initial
reductions and the weak demand for labour, the number of persons employed
declined permanently, settling at around 8.5 million people. This meant a reduction
in the use of labour factor by 2 million people. In 2013, official statistics revealed
that the unemployment rate is oscillating at around 13.5 – 14.5%, or around 2.2
million persons in absolute numbers. This was close to the level reached two
decades earlier during the 1989–1992 “transition recession” that shaved off almost
20% of the gross national product. These 2.2 million represent nearly one quarter
of the number of employed persons, meaning that after the transition and
recession the economy has been moving forward at about one-quarter below its
“potential” production growth.

3.3. Foreign ownership of banking and insurance

Another factor which might be potentially relevant is the specific

structure of the financial system and related credit access. This structure is
marked by high levels of foreign ownership, which have greatly helped to
modernize the outdated financial system left behind from the communist times.
In Central and South Central Europe banks and insurance companies are almost
exclusively foreign-owned, with the majority of countries reporting around
a 90% rate of foreign ownership of banking and insurance; Slovenia being an
exception with foreign ownership accounting for 37% of total financial assets in
2006. Importantly, the trends show these shares might actually further increase.
As Table 3 demonstrates, ownership structure in Central Europe differs
sharply from that found in the former Soviet republics or Russia itself. The level of
penetration of the financial sector that is found in Eastern Europe is replicated only
by Kyrgyzstan, and there are few former republics where this share is as high as
30%, e.g., Belarus, Moldova and Ukraine (Table 3) There many cases, where the
foreign presence is close to insignificant, as in Uzbekistan with a 1% share,
Azerbaijan with 5%, and in Russia where this share is at 13%. There is no
indication that the shares of foreign ownership of banking and insurance might
increase in these countries.
18 Joanna Poznańska, Kazimierz Poznański

For comparison purposes, not counting Great Britain foreign ownership in

Western Europe seldom exceeds 20 % and hovers around 10 % (and is as low as
5% in the financially powerful Germany). There are actually similar shares that are
to be found in many “emerging economies” other than the “transition economies”,
except for China where foreign ownership of banking is subject to strict controls
and limits, which results in keeping the foreign presence under 3-5 %. But in Latin
America, 25-30 % foreign ownership is not unusual, with only three cases that
resemble Central and Eastern Europe. These cases are El Salvador with 78 %,
Mexico with 82%, and Peru where the share is as high as 95%.
Table 3. Share of banking assets held by foreign banks with majority ownership, 2006 (in %)

Eastern Europe Former Soviet Union

Albania 93 Armenia 31
Croatia 91 Azerbaijan 5
Czech Republic 96 Belarus 30
Bosnia/Herzegovina 90 Georgia 32
Bulgaria 72 Kazakhstan 24
Hungary 94 Kyrgyzstan 75
Latvia 52 Moldova 30
Lithuania 92 Russia 13
Macedonia 80 Ukraine 28
Poland 73 Uzbekistan 1
Romania 60
Serbia 65
Slovak Republic 93
Slovenia 37
Latin America Western Europe
Argentina 25 Austria 21
Bolivia 38 Denmark 19
Brazil 25 France 10
Chile 32 Germany 5
Colombia 18 Italy 9
El Salvador 78 Netherlands 10
Guatemala 8
Mexico 82
Peru 95
Uruguay 44
Venezuela 32
 Comparison Of Patterns Of Convergence... 19

Asia Africa
Bangladesh 0 Algeria 9
Cambodia 27 Angola 53
China 0 Cameron 63
India 5 Egypt 12
Indonesia 28 Kenya 41
Malaysia 16 Madagascar 100
Mongolia 22 Morocco 18
Pakistan 25 Mozambique 100
Philippines 1 Nigeria 5
Vietnam 0 Senegal 48
Sri Lanka 0 South Africa 0
Thailand 5 Sudan 20
Swaziland 100
Middle East
Tanzania 66
Iran 0 Tunisia 22
Jordan 14 Uganda 80
Lebanon 34 Zambia 77
Turkey 4 Zimbabwe 51
Yemen 0

Source: World Bank 2008.

Few economists have tried to estimate the correlation between the level of
foreign “penetration” and the efficiency of financial sectors (se however the
review article of Estrin 2009). There is no compelling research to make the
argument that the impact is either positive or negative for economic growth.
However, it seems reasonable to argue that the higher the foreign ownership
controls, the more influence they can exert over the accessibility of means – like
credit – for the formation of capital, i.e., investment. It could well be that at least
until this point foreign banks in operation have – rationally – chosen a strategy
to restrict investment credit as opposed to other allocations. The higher foreign
ownership of banking and insurance in Central Europe might be a factor in
keeping Central and Eastern European rates of income growth below their
“potential” level.
20 Joanna Poznańska, Kazimierz Poznański

3.4. Transfer out of profits and dividends

The patterns detected in the banking/insurance sectors in Central Europe

reflect a more general pattern, since in other sectors (including also other service
sectors such as retail sales) foreign ownership also tends to enjoy a high share.
With this systemic change, the investing processes have shifted towards foreign
companies, usually belonging to major multinationals that come mainly from
Western Europe. Accordingly, the level of internal investment is largely
dependent on the inflow of foreign investment and the “strategic choices” made
by the foreign-owned companies on the role these economies play in their
operations, driven by profit margins and stock valuations (Hunya 2012).
The extent to which foreign-owned corporations affect investment activities
in Central and Eastern Europe is reflected in the rather unprecedented ratio of
cumulative stock of foreign investment and the value of the gross national product.
This ratio for the “old” 15 members of the European Union is under 25 % and is
much less for typical “emerging “economies”, including China and Vietnam. With a
stock of 530 billion dollars in 2011, foreign investment accounted for 13% of
China’s gross domestic product, and for Vietnam the corresponding ratio was less
than 10.0%. However, in Central and Eastern Europe the average ratio in 2012
exceeded 60%, reaching as high as 100% in Bulgaria and 84% in Estonia. In
Hungary, the Czech Republic and Slovakia the ratios approach 70%, and at the
lower range, Poland’s ratio was 43% and Slovenia’s 30%.
The strong reliance on foreign direct investment is reflected in the ratio of
foreign investment to fixed capital formation, which is calculated on an annual
basis. For Central and Eastern Europe the average annual ratio during 2003–2011
reached as high as 50% in Bulgaria and 33% in one of the Baltic States, Estonia.
A similarly high ratio of foreign investment in total annual investment could be
observed in Serbia. The lowest ratio was reported by Slovenia, a predictable result
given its lowest level of foreign ownership, namely 6%. In the Czech Republic the
ratio was 14 %, while Poland, Hungary and Slovakia reported a 17% ratio. Overall,
the average for all these economies was 16%.
Such a heavy dependence on foreign investment provides a link through
which the Central European economies are subjected to external shocks,
a relationship that manifested itself during the 2008 financial crisis. It is, however,
this same channel through which these countries are assisted in lifting up their
economies when Western Europe recovers. After a phenomenal increase in inward
investment, their stock, with Russia included, has increased from $30 billion in
2003 to $155 billion in 2008, or over five times (with Russia alone reporting an
 Comparison Of Patterns Of Convergence... 21

increase from $8 billion to $70 billion). In a sharp reversal, foreign direct investment
into the region collapsed to $70 billion (with as much as one-quarter of the overall
decline taking place in the real estate sector) (Podkaminer 2013).
Tapping foreign direct investment has yielded many remarkable benefits
to the region’s development, but it has also exposed the region to an outflow of
value to the host countries of foreign companies. The inflow of foreign
investment must be measured against the outflow of income earned by the
foreign companies from their operations in the Central and Eastern European
region. The macroeconomic indicator of the resultant effects is the difference
between the gross national income and gross domestic product, which tells us
the annual value generated and the value “utilized” internally.
As documented, except for the initial phase when foreign companies took
advantage of the privatization programs that made available a huge supply of
previously state-owned assets, the region has witnessed a substantial and growing
outflow of profits, rents and dividends abroad. In 2011, Czech Republic incomes
collected by the foreign companies from their subsidiaries represented 7% of the
gross domestic product, 5% in Estonia and 5% in Hungary. In Poland this share was
also high at 4.5 %. One needs to keep in mind that these are estimates and the actual
numbers could be higher. Besides, looking at the trends of the last decade these
shares are on the rise in most of the economies.
The faster growth rate in the “converging economies” has been driven by
acceleration of exports that allowed them to produce trade surpluses. China is
again a model example, while in Central Europe trade deficits are registered
almost uniformly, including in Poland, which is the fastest growing economy in
the region. Also, the stiffer import competition from Western Europe limits
employment opportunities. Another factor is that Eastern Europe’s foreign trade
is centred on Germany, which notoriously runs large surpluses with its partners.
This has a repressive impact on the region’s deficit-running economies across
Europe. Central and Eastern Europe (with Russia and Ukraine) are all still in
search of a “growth strategy” that would put them on sustainable path toward
a convergence trajectory.

4. Conclusions

Overall, during the last two decades Central and Eastern European growth
rates have not produced any visible convergence with Western Europe. Their rates
sharply contrast with the growth performance of other “emerging markets”.
During the two last decades the “emerging markets” collectively grew at a rate at
22 Joanna Poznańska, Kazimierz Poznański

least twice as high as the world average (Poznański 2011). A statistical comparison
reveals that Central Europe as a region grew at 1/3 of the rates reported by the most
robust “emerging markets” from other parts of the world, like China and Vietnam.
Poland, and to lesser extent Slovenia, are notable exceptions with growth rates
within the benchmark for convergence. However, even Poland is no match for the
fastest growing “emerging markets”, with China of course being the greatest
success story and rapidly closing the productivity and income gap. Importantly,
except for Poland, Slovenia and Slovakia, during 1989–2014 the growth rates of
the other economies of Central Europe were less than in Western Europe
combined. Those in South Central Europe (excluding Albania) were lower as
well, with some even negative, all cases indicating a lack of convergence. Such
a demand factor as wage repression might be one reason behind Central Europe’s
slower growth, as well as the continuous trade deficits. Restricted access to credit
from largely foreign-owned banking could be another culprit. Also, the large scale
emigration to seek work in Western Europe, combined with high – often double
digit – rates of unemployment might contribute as well. Understanding the Polish
exception is a challenge to economists studying the region, as is the case of
Slovenia, which is converging on Western Europe.

References

Estrin S. (2009), The effects of privatization and ownership in transition economies, ʻJournal of
Economic Literatureʼ, 47 (3).
Haiyue L. and Poznanska J., (2015), Korean FDI in China: Impact on Bilateral Trade, International
Trade and Finance Association Conference, Saratoga, FL, (conference paper).
Gabor H. (2012), Diverging patterns of FDI recovery, Vienna: WIIW.
Kornai J. (2006), The great transformation of Central Eastern Europe. Success and disappointment,
ʻEconomics of Transitionʼ.
Podkaminer L. (2013), Development patterns of Central and East European Countries, Vienna: WIIW.
Poznanska J. (2006), The Impact of Globalization on Economic Transition in China, [in:] K. Fatemi
(ed.), Globalization Opportunities and Challenges in East Asia, Binghampton: Haworth Press.
Poznanski K. (2011), Patterns of Transition, Vienna: WIIW Monthly Report, No. 3.
Poznanski K. (2012), State condition, foreign influence and alternative models of market reforms
in China, Russia and Eastern Europe, ʻInternational Critical Thoughtʼ, vol.1, No. 3.
Price & Waterhouse, 2010, “Foreign direct investment in Central and Eastern Europe” (March).
World Bank 2008, Foreign banks in the developing world, [in:] Global Development Finance:
Review, analysis and outlook, Washington D.C.: World Bank.
 Comparison Of Patterns Of Convergence... 23

Streszczenie

PORÓWNANIE PRZEBIEGU PROCESÓW KONWERGENCJI WE

„WSCHODZACYCH GOSPODARKACH” EUROPY ŚRODKOWO
-WSCHODNIEJ ORAZ AZJI ŚRODKOWEJ

W oparciu o przeprowadzoną analizę wskaźników wzrostu gospodarczego w latach

1989–2011 w artykule dokonano rozróżnienia pomiędzy „gospodarkami wschodzącymi
(„emerging markets”) z obszaru Europy Środkowo-Wschodniej (z uwzględnieniem Rosji)
a innymi gospodarkami mieszczącymi się w tej kategorii. W wyniku reform wprowadzanych od
1989 roku gospodarki tego regionu upodobniły się pod względem instytucjonalnym do innych
„gospodarek wschodzących”, jednakże bez oczekiwanego wpływu na tempo wzrostu
gospodarczego. Cechą charakterystyczną typowych „gospodarek wschodzących” jest tempo
wzrostu pozwalające na zmniejszenie dystansu dzielącego je od „gospodarek rozwiniętych”.
W odróżnieniu od tych „gospodarek wschodzących”, które weszły na ścieżkę konwergencji,
kraje Europy Środkowo-Wschodniej jak dotąd rozwijały się zbyt wolno, aby zacząć się
zbliżać do poziomu dobrobytu obserwowanego w „gospodarkach rozwiniętych”. Dzięki
podwojeniu realnego dochodu narodowego w latach 1989–2011 Polska stała się jedynym
krajem regionu, który skraca dystans rozwojowy. Drugim państwem zmniejszającym dystans
rozwojowy jest Słowenia. Natomiast wiele krajów praktycznie straciło dwie dekady bądź nie
redukując istniejącego dystansu rozwojowego bądź odnotowując jego dalsze zwiększenie
(np. Serbia, Ukraina). Wyniki przeprowadzonej analizy mogą mieć poważne implikacje dla
teorii ekonomii oraz dla zrozumienia globalizacji jako siły, która z założenia prowadzi do
unifikacji poziomu dobrobytu w skali światowej.

Słowa kluczowe: globalizacja; konwergencja; Europa Centralna i Wschodnia; gospodarki

wschodzace, podział dochodu, struktura własności