A view from Central Europe and the Baltics
Ten years ago this month the European Union expanded to include 10 new members - Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Republic and Slovenia. It was the largest expansion in the EU's history in terms of population and area, and of historic importance in that it brought into one Union countries that had formerly been on different sides of the Iron Curtain.
Given the Eurozone crisis from which the EU is slowly recovering, it is natural to ask if EU membership has benefitted the 2004 entrants.
Looking purely at income per capita, we see that the 2004 entrants have seen significant improvements in their average living standard, despite the crisis (Figure 1). Naturally, countries with lower average incomes to start with have grown more rapidly (e.g., Latvia and Lithuania, where average income grew by over 60 percent) than those with higher incomes at entry (e.g., Cyprus or Slovenia, where income growth has been in the 15-20 percent range), but all have seen income growth. Moreover, improvements in average income whether large or small have been greater than in the countries that they joined (average income in the older EU member states in Western Europe grew by an average of about 14 percent in the same time period). So, not only has expansion benefitted new entrants, it has resulted in a convergence of living standards. Viewed from the perspective of this longer term trajectory, the “class of 2004” has a lot to celebrate.
Did entry into the EU also reduce poverty? Here the picture is a little more mixed (Figure 2). The risk of poverty has fallen in six of the ten 2004 entrants. In the other four, however, the risk of poverty has increased. The poverty measure used – “At Risk of Poverty” - is a standard, multi-dimensional measure used in Europe and includes a combination of both income poverty and non-income dimensions of well-being, such as eating proteins, having shelter, owning a phone, and having a job. Although multiple dimensions muddy the tighter link between income growth and poverty reduction, the measure does capture an overall sense of well-being which arguably derives from more than just income. After all, “man does not live by bread alone.” While recognizing the role of the broader crisis, viewed from the perspective of poverty risk, the 2004 expansion is a qualified success for the former transition economies: six out of eight Central and Eastern European countries experienced a reduction in risk of poverty. In Hungary and Slovenia the risk remained broadly unchanged while for the two island economies, Cyprus and Malta, the risk of poverty increased.
Despite the success, economic challenges remain for the eight former transition economies. First, although economic growth has resumed since the 2008-9 financial crisis, it remains fragile and the job market is sluggish. Employment has not recovered to pre-crisis levels, and unemployment remains high with a rising share of long-term unemployed in most cases. Without raising employment it will be difficult to sustain growth, especially as all countries are aging rapidly and have begun to see a shrinking of their labor force. Second, while poverty has declined, there remains a core of poor people –e.g., the Roma minority in Hungary and the Czech and Slovak Republics - who have still not seen the benefits of income convergence. Integrating these populations is needed both from an economic growth perspective (the Roma are a growing share of new labor force entrants) and critical for social justice. Finally, future economic growth requires the emergence of higher value-added, innovative industries. To use the words of a senior policy maker in Poland, closing the gap with high-income countries will require going beyond being competitive on "labor cost" to becoming competitive on "brand" which would entail a better business environment and world-class research and development.
We thought that our role as a development partner in Central Europe and the Baltics was completed when these countries joined the EU; but given the economic challenges that remain (despite income convergence) and the recognition that the World Bank can help find solutions, we have stayed engaged on issues ranging from competitiveness and jobs to social inclusion. We both learn from the 2004 entrants and help them gain knowledge from our global development experience.