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Has EU Membership Benefitted New Entrants?

Mamta Murthi's picture

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.
 

Comments

Submitted by Mustafa Onerci on

This is a well-written piece, however in order to strengthen the claim that these 10 countries benefited from the entry to EU in terms of economic expansion, it will be a good idea to compare these countries with those that did not enter the EU or those that were/are in the accession process such as Turkey, Croatia or Romania and Bulgaria who joined later. Of course these countries have their own dynamics apart from being a member/non-member, but the growth rate of Western Europe is not a really good benchmark on its own, too.

Submitted by Mamta on
Thanks for your message. You raise a good point about what is the right comparator group. The blog focuses on whether the class of 2004 has seen economic growth since entry. (From this perspective, the title of the blog could be improved.) Earlier EU expansions had been associated with income convergence. Gill and Raiser, 2012 go so far as to christen the EU as a “convergence machine” for this achievement. The class of 2004, however, experienced a severe economic shock within a few years of entry, from which the countries are now slowly recovering. Taking the longer perspective of the decade since entry, the blog asks if there has been income convergence along the lines of earlier EU expansions and whether this has reduced poverty.

To answer the larger question of whether the countries have benefitted from EU accession one would arguably need to take an even longer perspective. Some of the benefits of joining the EU flow during the accession process before entry, through the harmonisation of policies and institutions to "higher" standards, and the growth of trade and investment flows. In fact, the class of 2004 grew more rapidly in the run-up to EU entry than afterwards. The same holds for Romania and Bulgaria which joined in 2007.
 
Country Time period Growth in GDP at market prices  (PPS)
EU-10 1996-2004 60
  2004-12 45
Romania 2000-6 84
  2007-12 26
Bulgaria 2000-6 67
  2007-12 21
     

Turning specifically to countries such as Turkey and Croatia which were outside the EU during the period in question, we see that income growth is higher than in the EU-10. Income grew by 67 percent in Turkey (2004-11) and 65 percent in Croatia (2004-12). Of course, these countries have their own specific circumstances, with Turkey rebounding from the negative growth of the early 2000s, and Croatia opening EU negotiations in 2005 which could have possibly boosted growth (the recession in Croatia since 2008 would of course have dampened outcomes).

-Mamta Murthi

Submitted by Andrejs on

It's a bit sad that the story here is quite one-sided (using the change in GDP as a key measure of success). If we add to the story the changes in the countries' private debt levels, then it becomes quite different. On average the private debt in these 10 countries has increased by 47% of GDP between 2004 and 2012 according to Eurostat (sorry, these are unweighted averages, but still make a point I hope). This has generated an average of 40% increase in GDP across the 10 countries (again - unweighted average). So, the million dollar question is - if your income increases by 40% and your debt by 47% of GDP - is this success?

Sorry for bothering you, but as a former WB staff member in the region I just had to point out these few things...

Regards,
Andrejs

P.S. And, just some food for thought - could it be the case that the Risk of Poverty rate has declined just because the jobless people have left the respective countries?

Submitted by Andrejs on

Dear (former) Colleagues at the WB,

Perhaps my earlier comment did not go through, but a summary is as follows - if a group of countries achieves an average of 40% increase during 10 years and their private debt to GDP ratio increases from 87% to 134% of GDP in 2004-2012 (in other words - the burden of private debt has gone up by 47% of GDP) - do you label it as success? These are unweighted averages - did not have time for proper calculations.

And by the way, regarding the decline of risk of poverty rates - wouldn't they be easily explained by combining them with emigration? Those without jobs have simply left (the big declines in the risk of poverty for PL, LV, LT tell me exactly that).

Good luck!

Submitted by Mamta on

Thanks Andrejs. I fully agree that we need to look at multiple dimensions of well-being. Most of the writing on the tenth anniversary of the 2004 EU expansion focuses on GDP per capita alone. This is why we decided to look beyond it. Given the renewed focus on poverty reduction at the World Bank, we looked at the At Risk of Poverty (AROP) measure. As the blog suggests, when you look beyond measures of aggregate welfare, the picture is more mixed. To take one case, Hungary, while there has been income growth at the national level and some convergence with EU-15, the AROP measure has hardly changed. In this sense, people are not better off.
On the question of indebtedness, this is difficult to handle in the AROP framework. AROP is a multidimensional measure that is the sum of those who have low income, are materially deprived and have low work intensity, with the same person counted only once. The material deprivation sub-measure has nine dimensions, but none of them relates to indebtedness. (It does include ability to face unexpected expenses, which is related to having savings and not being in debt, but admittedly this is only an indirect connection.) You raise an interesting point on whether AROP has declined on account of emigration of the jobless. In principle, a decline in the joblessness (low work intensity) rate on account of emigration could lead to a decline in the AROP. In practice, for the countries where there has been a decline, it is the result of a fall in all sub-measures (low income, material deprivation and low work intensity).

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