Eastern Europe: an analysis of
economic transition and the EU
enlargement
Margarita PIROVSKA
Center for Geopolitics of Energy
and Raw Materials
University Paris Dauphine
24 février 2003
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Outline
1. Presentation
2. History: 1945-1989
3. The crisis
4. The transition period
5. Stakes of the European integration
6. Concluding remarks
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Presentation: map of Europe in 2000
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Presentation: East European candidate countries
Country
Population, million
Surface, km²
inhabitants
Slovenia
2
20 273
Czech Republic
10.3
78 866
Hungary
10
93 030
Slovakia
5.4
49 035
Poland
38.6
312 685
Estonia
1.4
45 227
Lithuania
3.7
64 589
Latvia
2.4
65 300
Bulgaria
8.2
110 971
Romania
22.4
238 391
Total
104.4
1 078 367
Source : Eurostat, 2002
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Presentation: economic index, 2000
Country
GDP/hab in PPS
EU-15
GDP, Millions EUR/hab.,
2000
8 564 503
Bulgaria
13 734
5 783
Czech Republic
55 755
12 701
Estonia
5 575
9 063
Hungary
50 571
11 227
Lituania
12 218
8 059
Latvia
7 776
6 975
Poland
170 896
8 783
Romania
40 173
5 265
Slovakia
21 333
10 357
Slovenia
19 532
15 183
Source : Eurostat : PIB régional des pays candidats, A.Behrens, Statistiques en bref, 1-2/2003.
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History: the Soviet bloc
• The socialist regime in the USSR: since 1917.
 A new political philosophy rises from the writings of Marx
 The « war economy » system spreads in many countries
(Germany, Italy, Spain, Japan…)
• Consequences of World War II: capitalism falls into
discredit.
 The reconstruction of Europe calls to a new State
organization
• Yalta divides Europe in two parts. Era of the Steel
Curtain and the Cold War (1945 – 1989), State
socialism and the Warsaw Treaty in Eastern Europe
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History: the economic model of the CMEA
• The division of Europe is also economic
 Towards the « american invasion » of the Marshall Plan,
creation in the Soviet Bloc of the CMEA (Counsil for Mutual
Economic Assistance). It is a response to the rising idea of the
European Community in the West
• What are the bases of the socialist economies?
 Political hierarchy in economic decisions (planification).
Nationalisation of all private assets. Primacy and unity of the
State, the Communist party and the Bureau of the Plan.
Massive industrialization, vertical integration and concentration
of industrial structures.
• Dominance of the USSR and economic specialization in
the East in the frame of the « socialist international
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division of labor ».
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History: why it didn’t work
• Basic conditions: the paradoxes of the socialist system
 a philosophical utopia: socialism failed to transform into
communism
• Industrial structures: the socialist markets
 unilateral domination of the USSR, no real integration, overindustrialization
• Strategies
 the socialist « kombinats: highly concentrated, political
interference, lack of commitment, no real incentives to
efficiency
• Global consequences: the grey economy
 shortages, price distorsions, drop of production
 a parallel economic sphere appears
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The crisis of the 1990s
• A global crisis:
 Economic: systemic inefficiency, drop of the industrial
output, decrease in GDP
 Financial : 3-4 digit inflation, huge public debt, depreciation
of the nat. currency
 Political : loss of faith in the State
 Social : fall of revenues, shortages, unemployment
• Institutional disorganization: what solutions?
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The crisis of the 1990s
Country
GDP:capita in 1937*
GDP/capita in 1992
GDP/capita in 1992 estimated
EU-12, average
4021
15493
-
Bulgaria
1566
4054
14000
Czechoslovakia
2882
6845
15845
Hongrie
2543
5638
15448
Poland
1915
4726
14584
Romania
1130
2565
13102
Yugoslavia
1284
3887
13446
Nota : GDP in purchase power parity, USD 1990.
Source: Fischer S., Sahay R., Vegh C. (1998). « How far is
Eastern Europe from Brussels? ». IMF Working Papers #98/53.
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The crisis of the 1990s
Index of GDP per capita, average for EU-15 : 100, in 2000
Slovenia
69
Czech Republic
59
Hungary
51
Slovakia
48
Poland
40
Estonia
38
Lituania
33
Latvia
30
Bulgaria
28
Romania
23
Source : Eurostat, 2000
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The transition period: the historical events
1989: fall of the socialist bloc in Eastern Europe (and of the
Berlin Wall)
From 1990: role of the World Bank and the IMF
1993: Treaty of Maastricht, war in former Yugoslavia, Copenhagen
decision
1994-96: declaration of candidacy of East European countries to
the EU
1998: Luxemburg council
1999: Helsinki council (second wave)
2000: Nice summit (conditions of the future enlargement)
2001: Laeken council (enlargement agenda: eight among ten to
enter in 2004)
2004, May: Estonia, Latvia, Lituania, Hungary, Poland, Czech
Republic, Slovakia and Slovenia to enter the EU.
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The transition period: towards a
reunification of the continent
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The transition period: towards a
reunification of the continent
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The transition period: the context
• The transition process is an unprecedented
phenomenon in the modern economic history
• There is a major difficulty of standard economic
theory to build a pattern and to explain the
evolution of centraly planned economies in
transformation
• Political shocks are at the basis of the creation of
the Soviet bloc in Eastern Europe. In 1989, again,
a socio-political upheaval is the origin of the
process of returning back to market economies
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The transition period: theoretical approaches
•
•
Two major theories on economic transition:

The Washington consensus, based on neoclassical theory
and standard micro-economic approach of stabilization,
defends the « tabula rasa » technique, or shock therapy.
Assumption: markets will develop spontaneously. Method:
trio « liberalization – stabilization – privatization ».
Precondition: to create an appropriated legal framework.

Gradualism is based on recent developments of
microeconomy, on evolutionary and on institutional
economics. It warns against shock therapy: nothing
guarantees the spontaneous replacement of old institutions
by new ones, sovereign and operational.
These two approaches have in the end the same aim:
the creation of a market economy based on private
property and « libre échange »
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The transition period: the political choice
•
Massive choice of the Washington consensus approach.
But results are mitigated. The shock therapy has become
an end itself. The « market fanatism » has more
sustained corruption than ghrowth
•
Liberal orientation in Eastern Europe  Aim: European
integration (economic criteria of Copenhagen: achieve a
functionning market economy, able to face the
competitive pressure of the EU single market)
•
Overall, transition appears as a dilemma. Liberalization
is necessary, but there is a risk of market power
capturing by interest groups, and the incapacity of a
competitive framework to take place.
•
Fundamental difficulty in the transition process: the
institutional reform which supports a real market
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economy.
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European integration: what stakes?
• Official breaking of the CMEA: 1991. Political identity
crisis in the region
• Political stability may be achieved by the European
integration (foundations of the EU)
• A considerable transformation was needed in
emergency to resolve the deep crisis
• The enlargement is a positive sum game: perspective
of more growth in the frame of market opening and
globalization of the economy.
• What weight for the new Europe on the world
diplomatic scene ?
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European integration: some problems
• Fundamental question: what governance for a
European Union with 27 member countries? EU
authorities have limited power => debate of
enlargement Vs. Deepening; role of the Convention
and the future European constitution
• All Eastern countries weren’t in the same situation in
1990, some of them have been more implied in the
Soviet bloc. In some cases, former political elite has
perpetuated under a modern capitalist form,
allowing money laundring and capital drain –
reforms are thus deviated in a more or less visible
way.
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European integration: main consequences
• On economic level: upsizing the internal market,
perspective of extended growth and propsperity in the
region. But: what costs of the integration, and who will
pay?
• On political level: the core of the Union goes East:
Mitteleuropa and role of Germany. New balance
towards Russia and Central Asia
• On social and cultural level: high educational level of
the new member states, great diversity of cultures.
But: European unity in question.
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Concluding remarks
• Gaps in the transition process:
– Appropriate institutional framework still lacks
– Privatization and liberalization sometimes worsened the
economic situation (capital drain and money laundring)
• A new balance of power between States and the market
– Will the liberalization process and the introduction of
competition be sufficient to create this institutional
background? The role of the State seems to be still very
important in the case of Eastern Europe, to law enforcement on
national level and to political unification in the frame of the
enlarged Union.
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Bibliography
Andreff W., La crise des économies socialistes – la rupture d’un
système. PUG, 1993.
Blanchard O., The economics of Post-communist transition.
Oxford, Clarendon Press, 1997.
Dembinski P., The logic of the planned economies: the seeds of
the collapse. Oxford University Press, 1990.
Guttman R.J., (eds) Europe in the new century. Lynne Riener
Publishers, London, 2001.
Kornai J., Economics of shortage. North Holland, New York, 1980.
Von Hirschhausen C., Modernizing infrastructure in
Transformation economies. Edward Elgar, Cheltenham, 2001.
http://europa.eu.int
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Thank you for your attention!
Centre de Géopolitique de l’Energie et des
Matières Premières
Université Paris Dauphine
www.dauphine.fr/cgemp
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