CEE economic region: Lag behind Western Europe not decreasing

Economic balance 20 years after the political opening of the East

Even 20 years after the political opening of the East, an economic gap remains between West and East. Nor is this situation expected to change in the next 10 years, according to the current study "Twenty years of the CEE economic region – Assumptions for sustainable development" by Roland Berger Strategy Consultants. On Wednesday evening, in the context of the CE Business Club, Erste Group and IDM discussed the assumptions regarding the economic future of the region with more than 100 Austrian managers.

Today, 20 years after the fall of the Iron Curtain, the economic divide between Western and Eastern Europe has not decreased. Central and Eastern Europe have been considered a boom region since 2000, but their economies shrank an average of 8 percent annually from 1989 to1995 due to the transformation. Austria, by comparison, showed an annual increase of 2.4 percent. It wasn’t until the mid-1990s that the economies stabilized. Poland was the first country to return, in 1995, to the economic level of 1989, followed by Slovenia (1998) and Hungary (2000). Even today, Serbia and the Ukraine have reached just 70 percent of the GDP they had 20 years ago.

The CEE began to succeed economically after the turn of the century. In the past 10 years, the economy saw an average of 5 percent annual growth – around twice as high as in Western Europe. The growth leaders were Russia (6.8% per year) and the Ukraine (6.2%), followed by Bulgaria (5.5%) and Romania (5.4%). With the exception of Poland, which currently generates 177% of its 1989 GDP, no country has been able to significantly reduce the gap with Western Europe. Austria comes in at 158%, putting it ahead of all other CEE countries.

Income in Central Europe evenly distributed
The first ten years of the new century also brought the people a considerable drop in social security. Unemployment rose from nearly zero in the communist era to more than 10% in 1995. It dropped to an average of 8.4% in 2008, although Serbia had a very negative impact on these statistics with its record rate of 31%. As for purchasing power, in 1989, the most highly developed communist countries had about two-thirds the level of Austria. The most successful reformed countries reached this level again 20 years later, with Slovenia at 73% and the Czech Republic at 63%.

The income situation also improved significantly in the past ten years, and the distribution of income is particularly gratifying. In terms of the Gini coefficient, which measures the income distribution in an economy, Slovenia is second only to Sweden in a global ranking, with the Czech Republic and Slovakia coming in sixth and seventh. For comparison, Austria ranks ninth. Income is distributed especially unfairly only in Russia (78th place), and there is a relatively wide income gap in Poland, too (47th place).

CEE will lose significance as a management region
Despite the positive development, the economic gap compared with Western Europe will not shrink through 2020. However, differences within the region will grow considerably: The Central European countries are already fully developed market economies, and Poland is well on its way to becoming one. These countries now need to position themselves as high-tech locations. Hungary, however, as well as the Southeastern European countries and the Ukraine, are facing major structural and financial difficulties. Romania and Bulgaria will still be attractive countries for production in 2020, while Russia will position itself primarily as an investor.

As a result of these different developments, CEE will lose significance as a management region. Smaller countries are already being grouped into sub-regions such as Southeastern Europe (SEE) and Central Europe (CE). The CIS countries make up the CIS management region. Larger countries such as Poland and Romania will increasingly be viewed independently.