Central Europe must return to the path of reforms

By Beata Javorcik

Reform fuelled growth and burgeoning prosperity post-Communism

Eastern European countries risk throwing away advantages wrought from the collapse of the Iron Curtain 30 years ago if they fail to return to the path of reform that fuelled rapid growth and burgeoning economic prosperity in the post-Communist period.

Countries like Poland, the Czech Republic and Hungary were at the vanguard of post-communist reform, driven forward by the magnetic draw of European Union accession aspirations.

They responded to the early challenges of transition, exploiting built-in advantages of good levels of secondary education and low cost labour. They adopted western technologies, attracted foreign direct investment and achieved high levels of growth and convergence to western income levels.

The reforms they put in place were at times abrupt and often painful. The mantra of the time, while not universally appreciated, was that the future potential rewards would outweigh the immediate disadvantages.

The first two decades of political and economic transition were indeed very successful. But the pace of growth has now slowed, in many ways a very natural development for countries that re reaching middle income status.

As countries approach this stage, those sources of early growth are no longer sufficient to sustain rapid economic development. The process of income convergence to developed economies slows down or stops altogether.  Countries that fail to introduce further reforms become stuck in the “middle income trap”. 

At the same time however, resistance to reform has built up on the back of disillusionment. While citizens of these countries are significantly more prosperous than they were three decades ago, the gap between rich and poor has grown.

Real or even perceived inequality has raised questions about the benefits of democratic change in the minds of those who feel excluded from the rising tide of higher incomes and greater opportunity.

This means that when Central and East European countries rekindle their reformist zeal and initiate a new wave of structural and policy adjustments, the key to their success will be the ability to address the inequality of opportunity that gnaws away at the very fundaments that support democracy.

The next stage of growth will be based productivity improvements coming from innovation and entrepreneurship, development of technology-based products and services, a more sophisticated economic model that will rely to a very large extent on the quality of economic and political institutions.  

It will only succeed with the support of improved governance that strengthens the rule of law and bolsters those institutions.

South Korea, a widely cited example of successful transition to high income status is a case in point.  While its early successes in rapid growth and poverty reduction were possible even in the context of authoritarian politics, the jump to high income only happened after the country fully embraced democratic politics, reformed corporate governance and strengthened the rule of law.   

Central and Eastern European countries face a clear choice: they can get used to lower growth and limited economic prospects, or they can introduce bold new reforms, similar in scope to those introduced 30 years ago as the Berlin Wall crumbled. 

The latter will ensure that the region lives up to its potential and is ready for the dynamic world of tomorrow, the digital revolution, the green growth agenda, the changing patterns of global trade and investment, the new world of work, the challenges of growing inequality and demographic decline.  The accelerating pace of change in these areas means that the time to act is now by advancing responsive, inclusive and agile institutions and policies.