Central and East European Economies: Winners and Losers

When Communist governments were removed from power across Central, Southeast and East Europe in the late 1980s and early 1990s, the region found itself well behind the West in terms of economic development, living standards, purchasing power and technological advancement.  In the nearly three decades that have passed since then, there have been many dramatic changes in this region.  For all Central European countries and some Southeast European countries, their political, economic and military integration with the West has allowed these countries to achieve higher rates of economic growth than their less-integrated neighbors, and this has allowed these countries to close these gaps in economic development, living standards, purchasing power and technological development with their neighbors to the West. 

Since the change in political and economic systems in the region, some Southeast European countries, and all East European countries, have failed to integrate with the West, either of their own volition or due to their rejection by the West.  As a result, Central Europe, and parts of Southeast Europe, now have diversified economies that have become major manufacturing centers for the greater European market.  In contrast, Russia has relied almost solely on its resource wealth to generate economic growth, leaving it exposed to fluctuations in resource prices.  Finally, some countries in East and Southeast Europe have proven simply to be much too unstable to achieve lost-lasting economic growth and have thus fallen far behind their better-performing counterparts in Central Europe and parts of Southeast Europe.

Those countries in this region that have had the most economic success since the fall of their Communist governments share a number of characteristics.  First, these countries were able to attract significant levels of foreign investment thanks to a combination of low-cost manufacturing centers, improved connections with export markets in Europe, and governments that were pro-active in attracting foreign investors.  Over time, these countries were able to develop increasingly sophisticated manufacturing industries, allowing them to become leading manufacturing centers in Europe.  Furthermore, their manufacturing success helped them to achieve solid rates of growth on the domestic market as wage levels rose continuously over this period. 

Interestingly, nearly all of the economies that in the region that have grown faster than their counterparts were not among the wealthiest countries when Communism fell.  For example, Poland has been the most successful of the larger economies in the region over the past 25 years, even though Poland’s wealth and development levels were no higher than those of Ukraine in the early 1990s.  Likewise, Slovakia was one of the poorest countries in the region when it became independent in 1993, but today the country is a manufacturing powerhouse and one of the region’s wealthiest countries.  Finally, Estonia has outperformed all other countries that were once part of the Soviet Union thanks to its focus on fostering growth in high-tech industries and services.  Other countries that have performed well since the fall of Communism include Romania and Latvia, both of which faced major challenges in the years following Communism’s fall.

In contrast to the successful economies mentioned above, many countries in Southeast Europe and East Europe have struggled mightily since the region’s old hierarchy collapsed.  As a result, these countries have seen their level of economic development, economic growth and standards of living fall relative to their more successful counterparts in Central and Southeast Europe.  There are many reasons why these countries have not been able to replicate the success of the region’s better performing economies.  One key factor has been these countries’ inability, or unwillingness, to diversify their economies.  For example, Russia, the region’s largest economy, wasted the opportunity provided by high resource prices to diversify its economy and to invest in more high-tech and high-growth industries.  Another factor has been the low level of foreign investment that many countries in this region have been able to attract in recent decades.  Investors have been turned off by these countries’ lack of political and economic stability and generally do not trust the governments of these countries to establish a healthy climate for investment. 

Of the countries that qualify as the worst performers in the region, none has struggled more than Ukraine, who economic output today is actually well below its level when Ukraine was a part of the Soviet Union.  Another struggling economy has been Serbia, which has suffered from the dislocation caused by the conflicts in the former Yugoslavia and its lack of integration with the West.  Of those countries that have integrated with the West, none has performed worse than Bulgaria, due in part to its remote location from Europe’s key export markets and its unprecedented demographic collapse.  Meanwhile, Russia’s performance in recent years has been miserable, while other former Soviet states such as Belarus and Moldova have also under-performed most of their neighbors of late.

Central, Southeast and East Europe each have some clear advantages and disadvantages that each country in the region must confront.  Integration with the West, and the access to European export markets that this entailed, were the key factors in allowing for economies in this region to achieve higher rates of growth and development.  Furthermore, this integration boosted confidence levels and brought a higher degree of stability to those countries that were integrated with the West.  In turn, this allowed for these countries to diversify what had been relatively-undiversified economies under Communism. 

One clear disadvantage that this region has had to face is its demographic situation.  Unlike emerging markets in many other regions. Central, Southeast and East Europe all have populations that are shrinking, reducing their attractiveness as a market.  For those countries that are in demographic decline and don’t have access to the leading European export markets, they have little opportunity to attract high levels of investment and have thus struggled to achieve higher rates of economic growth. 

Overall, those countries that have performed well since the fall of Communism have been rewarded with higher levels of wealth, development and living standards, a situation that should hold.  However, those countries that have struggled during this period may be running out of time to enjoy the benefits of the growth that their counterparts have enjoyed.