Accelerate Change

• Author: Witold M. Orlowski
• Position: Chief Economic Advisor to the President of Poland
• Pages: 34-35

Higher saving is the key to higher growth for new EU members

Page 34

For the eight Central and Eastern European countries (CEE-8) that have just joined the European Union (EU), membership marks the fulfillment of their main political and economic goal of the past decade. Without doubt, meeting all the EU's entry conditions required an enormous modernization effort. Indeed, after the initial period of liberalization and stabilization during the transformation from centrally planned to market-based economies, their wish to join the EU was a major factor driving further adjustment and reforms.

Now that the eight-Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, and Slovenia-have joined the EU, are their problems over? Not necessarily. While membership brings with it big business opportunities and clear financial benefits, the key question remains whether the CEE-8 can really catch up with the established EU members. In my view, this question is still open.

EU membership does not change the fact that there is a big gap in the economic development, productivity levels, and living standards of the CEE-8 and Western Europe (see Chart 1). The average per capita GDP in the CEE-8 is just 46 percent that of the EU-15, measured at purchasing power parity (PPP). That is not the only difference. Their economic structure is less modern, their institutions less efficient, their technology less advanced, the skills of the population lower, and the market infrastructure much less developed. In a nutshell, the new member states need policies that will accelerate structural change and long-term GDP growth.

Chart 1

Big gap

The CEE-8 countries have an average per capita GDP less than half that of the established EU countries.

[ SEE THE GRPHIC AT THE ATTACHED PDF ]

Growth too slow

The CEE-8's performance during the past decade has been somewhat disappointing. In 1995-2003-after the recession stemming from the transition period was over-these countries recorded an average annual GDP growth rate of 3.6 percent. This was only slightly better than that of the three established EU member states that are least well off (Greece, Portugal, and Spain, or the Med-3). But the Med-3 had an initial per capita GDP almost twice as high as the CEE-8's, so the new members could have expected a much stronger growth rate.

Why was growth disappointing? Obviously, one could blame the ongoing...