Juraj Kotianin front of Vienna Stock Exchange (photo, © Trend, Mano Štrauch)Rapid momentum. The economic transformation in the CEE region has been – and still is – remarkable in every way.

Growth prospects for the CEE region remain intact.

Guest commentary. Expert Juraj Kotian discusses the economic catch-up process in Central and Eastern Europe and how it benefits the people there.

9 November 2014 was the 25th anniversary of the fall of the Berlin Wall. Thousands of GDR citizens crowded around the Bornholm Street border crossing that day, and shortly before midnight achieved the opening of the barriers. Close to 30 years after its construction, the infamous Berlin Wall became a part of history. Almost overnight, the political regimes of many countries in Central and Eastern Europe also changed. This led to a dramatic and – from a social point of view – painful transformation process, which has had considerable success. In the last 25 years, many CEE countries have more than tripled their economic output, as measured by per capita GDP. The strongest economies in the region have now reached 70 to 80% of the level of the EU 15 and have increased the private-sector share of GDP from a meagre 10% to almost 80%.

One important driver of this change was the continual expansion of the European Union, which promoted not only economic exchange but also the structural and political transformation of these countries. Economic exchange had a rapid effect in both directions. Many Austrian companies, including Vienna Insurance Group in the first wave, recognised the moment of opportunity to expand their sphere of operations.

“The number of cars has more than doubled in most CEE countries since 1990.”

Higher standard of living and prosperity

But what were the consequences for the people of this region? Initial euphoria soon faded in many areas, as the catch-up process and improvement in the quality of life progressed too slowly for many at the beginning. The transformation was, however, truly fundamental – as shown by many economic indicators. A few examples: the number of cars has more than doubled in most CEE countries since the early 1990s, and in Poland and the Czech Republic, for example, it has nearly reached Western European levels. The improvement in the quality of life can be seen from the steady decline in the number of households without washing machines, internet and telephone access. As mundane as this might sound, it is a very important advance in the everyday life of the people there. This increase in material prosperity is also accompanied by an increasing need for insurance to protect it. There is, however, still a great deal of catch-up potential in this area. Around EUR 350 is spent on insurance each year in Poland, and close to EUR 400 per year in Slovakia, while the equivalent figure is more than EUR 2,700 in the EU 15 and slightly more than EUR 1,900 in Austria.

Economic activity generally robust

The financial and economic crisis that began in 2008 also affected the CEE region, seriously hampering economic momentum. Some CEE countries were indirectly forced to focus on their own economic stability and lay a foundation for sustainable future growth. 2014 was the first year in which broader-based and consequently more sustainable economic growth was observed. Private consumption gained momentum, and corporate readiness to invest also improved. The political crisis between the Ukraine and Russia only had a minor effect on the region. In overall terms, economic development was more robust in the CEE region than the Eurozone.

Further transformation necessary

Governments in the CEE region need to implement important changes to enable the economic catch-up process to continue. In the sense of a sustainable and competitive economic policy the focus should not be placed only on economic sectors with low labour costs. Instead, conditions should be made attractive for dynamic sectors that generate a high level of added value. Many successful companies in the IT and electronics sectors in this region are already leading the way. Investments in infrastructure, education and social welfare are what is needed to move in this direction – but that is just as true for the CEE region as it is for Western Europe.

About the author

Juraj Kotian is an economist and head of the Macroeconomic and Fixed Income Research department at Erste Group. His degrees include a degree in economics and financial mathematics from Comenius University, and he is chairman of the Slovakian Organisation for Economic Analysis.