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Evaluating Economic Performance after Twenty Years of Transition in Central and Eastern Europe Andrew Harrison Teesside University Business School 1. Introduction • The paper focuses mainly on the 10 CEE countries that are EU members • Main performance indicator used: economic growth, but productivity underpins sustained economic growth • The paper draws on growth theory, institutional economics, varieties of capitalism and statistical data 2. Evaluating Economic Performance • Macroeconomic performance is not the only measure of success of the transition process • Nor is transition a purely economic process • But without economic growth, long-term improvements in living standards are impossible 2.1 Economic Growth in the CEE Countries • Early years of transition brought negative economic growth - lowest point around 1993 in fast-reform countries - lowest point around 1998 in slow-reform countries • Comparison of positive effects of economic reform cannot therefore be made until the end of the 1990s Table 1: GDP Growth Rates, 2000-08 Country Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Russia Slovakia Slovenia Average Annual Growth Rate (%) 5.59 4.26 4.20 7.03 3.52 7.29 6.97 4.19 5.88 6.89 5.68 4.33 2.1 Economic Growth in the CEE Countries • Comparison of raw growth rates is problematic: - countries with a more difficult transition or where reforms started later grew faster in the 2000s - countries grow faster during a ‘catch-up’ phase provided they adopt reforms (consistent with growth theory) • Difficult to distinguish between ‘good’ and ‘bad’ performers – all performed reasonably well • Broadly consistent with EBRD transition indicators • Even allowing for negative growth in the 1990s, CEE economies have also achieved remarkable GDP per capita growth rates Table 2: GDP p.c. Growth Rates, 1990-08 Country Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Poland Romania Russia Slovakia Slovenia Average Annual GDP Per Capita Growth Rate (%) 2.7 3.0 2.5 5.1 3.3 4.9 3.4 4.4 2.7 1.7 3.7 3.6 2.2 The Role of Productivity in Economic Growth • Economic growth can be achieved in two ways: - by increasing inputs - by increasing productivity • When resources are underutilised, output can be increased relatively easily (output per worker) • Sustained economic growth requires real improvements in productivity (output per labour hour and TFP) • Technological development plays a key role in most growth theories [Solow (1956), Romer (1990)] • Productivity is also affected by human capital, institutions etc. 2.2 The Role of Productivity in Economic Growth • Total factor productivity increased at a similar rate in all main groups of CEE transition countries from 1999-2005 (World Bank, 2008) – but from different bases • Globalisation is responsible for some of the productivity improvements • In theory, all economies could eventually converge around the same rate of economic growth in an open global economy 2.3 Institutions and Economic Performance • Institutions play an important role in shaping economic growth, but the precise relationship is elusive • History, geography, politics, culture and economic philosophy create unique institutions in each country • Particular institutions are thought to be important, e.g. World Economic Forum Global Competitiveness Report 2010-2011: ‘the legal and administrative framework within which individuals, firms, and governments interact to generate income and wealth in the economy’ Institutions and GDP Per Capita Growth Rates in the CEE-10, Croatia and Russia 2.4 Economic Performance and the Local Context • Rodrik (2009): ‘There is increasing recognition in the economics literature that highquality institutions can take a multitude of forms and that economic convergence need not necessarily entail convergence in institutional forms’ • Policy checklists (e.g. Washington consensus) should be seen as a guide rather than a definitive set of policies • This view is consistent with the literature on ‘varieties of capitalism’ [Hall and Soskice (2001), Amable (2001)] • There may be one or more variants of capitalism among the CEE countries – so no unique policy prescription 3. Conclusion • At a macroeconomic level, the EU-10 and a number of other transition countries have made significant progress • Country comparisons of GDP or GDP per capita growth rates provide inconclusive evidence of superior or inferior economic performance • Economic growth rates are still important indicators, but growth depends on productivity, institutions and other factors • Some evidence to suggest a positive relationship between quality of institutions and economic growth • Institutions are important for sustained economic growth, but there is not necessarily a unique ‘right’ set of institutions Thank you