Wed. Oct 27th, 2021

Letter updates

Ruchir Sharma (“The rise of Eastern Europe is a forgotten success story for development”, Opinion, 13 September) rightly pointed out that the Eastern and Central European countries, thanks to their emphasis on the manufacturing sector “have already established themselves as the largest concentration of success stories in development since the miracles in East Asia”.

However, his analysis does not allow the high risk of stagnation to be broken, as their growth model is so dependent on low labor costs, the incentives of foreign industrial capital and a financial sector that focuses too much on consumption and too little on investment.

From the Czech Republic to Romania, aging, mass migration and broken vocational training systems face a hard wage ceiling, and even the better-performing economies belonging to the “developed” category pay net wages that are even lower than those of southern Europe. Will Poland be just as dynamic if labor costs double to close to Spain?

Second, unlike South Korea and other Asian pioneers who became rich but also remained rich, public and private spending on research and development in large parts of Eastern and Central Europe remains very low.

Governments are still reluctant to spend enough money on applied research, and the multinational manufacturing companies that dominate these countries’ export-driven growth systems have little incentive to relocate significant technical innovation systems in the region.

Finally, in contrast to the success stories in East Asia, the financial sectors of Eastern and Central Europe do not have significant venture capital, investment banking and public promotional financing aimed at more value-added sectors.

Emerging Europe certainly avoids Latin America’s experience of ‘premature deindustrialisation’ as well as southern European internal devaluation.

But its relative success seems more fragile when we look more at structural factors and less at per capita income, the share in manufacturing in the gross domestic product and some flashy successes in information and communication technology.

Cornel Ban
Associate Professor, Department of Organization,
Copenhagen Business School, Copenhagen, Denmark

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