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Feted as a cradle of new democracies after the fall of the Soviet Union, eastern Europe is now widely criticised as an incubator of reactionary populism, particularly in Poland and Hungary. But the political backsliding only makes its economic progress even more intriguing.
It’s rare for any country to make the climb from poverty to wealth. The IMF tracks 195 economies and counts just 39 as “advanced.” Only 18 nations have graduated into the advanced class since the end of the second world war, and they tend to appear in regional clusters. First came southern Europe, including Greece and Portugal, then East Asia, led by South Korea and Taiwan. Now, the hotspot is eastern Europe.
Of the last ten nations to reach the advanced class, four are micro states or territories such as Puerto Rico and San Marino. The rest are ex-communist countries of eastern Europe: the Czech and Slovak Republics, Lithuania, Latvia, Estonia, and Slovenia. The last large economy (world top 25 by GDP) to reach advanced status was South Korea in 1997, and the next one is likely to come from eastern Europe.
Though the IMF definition of “advanced” includes the quality of institutions and other subjective factors, these nations share a per capita income above $17,000. Among the few nearing that threshold, the only large nation is Poland, with a per capita income above $15,000. Hungary is a step ahead, near $16,000, and Romania is a few places back at $13,000.
The secret to development is consistently strong growth. In a typical post war decade, most emerging nations fell behind average incomes in the developed world. When they had a good decade, it was usually not followed by a second. The challenge is growing more acute in a period of deglobalisation, with trade and capital flows slowing.
Against this backdrop, eastern Europe stands out. Over the past three decades, Poland has grown at an annual average of more than 4 per cent without a single year of negative growth (before the pandemic). Like other Soviet satellites, Poland left the bloc with a highly educated and skilled workforce, which still serve it well.
Today eastern Europe shares with East Asia the one proven key to long-term growth: manufacturing prowess. Because it can generate regular export income, which can be reinvested in new factories and roads, manufacturing can become a self-sustaining growth engine.
None of the 18 economies that reached the advanced class after 1945 are exporters of oil or other commodities, which tend to whipsaw in price and destabilise growth. Four are tiny tourism or financial centres such as Macau. The rest are factory economies, in which manufacturing represents roughly 15 to 25 per cent of GDP and about 60 per cent or more of exports.
The rising eastern economies are in this class, growing on the strength of export factories close to West European markets. Many high-end German cars are made in Hungary or Romania. Poland exports everything from car parts to video displays.
The digital economy is now growing fastest in developing economies, and Poland is one of the leaders. Based on digital revenue as a share of GDP, it is already a top 20 global economy. To business travellers, Poland stands out less for conservative politics than for the capitalist energy of a nation producing world-class companies in fintech, gaming and other digital industries.
Today’s criticism of eastern Europe focuses on backsliding in the courts and media, but misses a lot of progress. Like other ex-Soviet satellites, Poland pushed institutional reforms as the price of joining the EU and continues to reap benefits in stability and subsidies.
Between 1989 and 2020, estimates based on European Central Bank data show, the six ex-communist countries that recently reached advanced status received annual subsidies from the EU amounting, on average, to more than 1 per cent of GDP. A reward of sorts for dumping Soviet communism, EU subsidies have flowed at a similar rate to Poland, Hungary and Romania. Recent projections show that, over the next five years, EU subsidies to these countries will continue at an annual rate of about 1 per cent of GDP.
If the consensus forecast is right, Poland’s per capita income will top $17,000 in 2022, and it’s probably just a matter of time before it is accepted in the advanced club. Regardless of when that moment comes, the ex-communist states of eastern Europe have already established themselves as the greatest concentration of development success stories since the East Asian miracles.
The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’