TCS Daily

Moving on Up

By Fredrik Segerfeldt - December 10, 2004 12:00 AM

A new comparison between the countries in East and Central Europe shows just how well economic reforms work. The data show that those that abandoned central planning the fastest are the best off today. In many of the more successful countries, the prospect of EU membership has been a decisive factor for enacting the reforms.

It has been 15 years since the fall of the Berlin Wall and since countries in Central and Eastern Europe (CEE) started the transition from centrally planned to market-based economies. In the beginning of the 1990s, there was a heated debate on how this transition was to be carried out: shock therapy or a slower, more careful approach. There are therefore good reasons to take stock of what has happened in the region so far. The European Bank for Reconstruction and Development (EBRD) does so in its annual transition reports.

In this year's report the Bank ranks 27 countries according to a transition index. The more reformed a country, the higher the ranking. The eight first positions are occupied by the post-communist countries that joined the EU earlier this year, headed by Hungary, the Czech Republic and Estonia. The three last positions are taken up by Turkmenistan, Belarus and Uzbekistan.

As expected, income levels between these two categories of countries differ greatly. The average GDP per capita in the three most reformed countries is $14,800, compared to $4,500 for the three least reformed countries, about three times less. It cannot be stated more clearly. The faster a country leaves command economy structures behind, the better off its population is. Reforms work.

The arguments against shock therapy emphasized that people cannot handle drastic changes too quickly. Also, some argued, money is not the only thing that matters in a country. It is therefore interesting to see how the United Nations Development Program (UNDP) ranks the two groups of countries in its Human Development Index (HDI). The least reformed countries rank on average in a not very impressive 85th position, whereas the three most reformed countries are situated 50 places higher up.

The eight first countries in EBRD's transition index are all recent EU members. It shows very clearly that accession to the European Union has had a positive effect on post-communist countries, in two ways: First, the Union required reforms as a condition for accession. Second, the future adhesion to the Union made it easier for politicians in transition countries to carry through often very difficult changes. The EU is a valuable instrument for ensuring a prosperous, democratic and stable Central Europe, well rooted in the Western Community and its market economy. This fact is all the more relevant following the recent events in Ukraine, a situation with parallels to what happened in Slovakia under Vladimir Meciar just a few years ago.

Perhaps there are things for us in Western Europe to learn from this. Reforms that may be painful in the short term can have positive effects in the longer term. Market-oriented reforms improve peoples' lives. Trying to mend dying systems only leads to misery.

The author is Senior Adviser, Confederation of Swedish Enterprise.


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