Eastern Europe in the EU

(This originally appeared in E&T  magazine) Are the East Europeans losers from EU membership?

One view is that they are winners. Despite their non democratic histories and wealth per capita that was only a third or half of the richer members, the new arrivals in 2004 and 2008 were granted voting rights in the European parliament and a number of seats on the commission that was based on population, not on clout. Britain has had only one European commissioner, while the Baltic trio of Estonia, Latvia and Lithuania, economic and political minnows, with combined populations of less than ten million, and huge socio-economic problems, had three commissioners.

Low salaries for civil servants in Eastern Europe, and the general lack of economic opportunity for the brightest, made the clever sons and daughters of the former communist ruling class in these countries beat a path to Brussels to be part of the career structure there.

“Tammany Hall” was the name of the Democratic Party machine that helped the economic and social outsiders in American life to compensate for their inferior status to rise in American politics, and American life, generally. The Irish were the chief beneficiaries; and they formed a formidable lobby at the upper reaches of the Democratic party for a long time, culminating in the likes of the Kennedies and Tip O’Neill, House Speaker.

Are the EU institutions Tammany Halls for the Eastern European member states, privileging their interests over the core free Western Europe that, after all, won the Cold War? Certainly huge sums in agricultural and regional aid have been shovelled their way. British regions which were once among the poorest in Europe, are no longer as poor relatively as they once. So move further back in the queue for funds. And how galling it must be for the British delegate of whatever confab to be 25th in a queue of 28 speakers, behind and on equal terms with the representatives of Slovenia and Slovakia. How many Olympic medals did those Slovenians win, anyway?

That’s one side of the argument. Then there is the argument that they were losers.

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Many East Europeans, though, regret joining the EU. In many respects, indicators from cancer health survival rates to innovation indices still lag Western Europe. (These are the kinds of beauty contests that Scandinavians always win.) There is considerable nostalgia for Communism. In the most recent polls I could find, 72% of Hungarians and 63% of Romanians thought life was better under communism. Only 23% of Romanians thought life was worse then. Hungary’s prime minister, Viktor Orban, once an angry young freedom fighting anti-communist activist himself, in his re-election campaigns exploits nostalgia for a time when everyone had a job and there wasn’t graffiti everywhere. I think this whole issue, with which I have engaged since I was a young journalist working in Eastern Europe after the fall of the Wall, raises lots of interesting questions about what the good life is. I would have hated to have grown up under Communism, I think.

The 1970s Swedish nanny state was claustrophobic enough. But then, I can see how coca -cola, bananas and multichannel television – once you have had your fill of it – can begin to pall. The science of happiness – there is such a thing, and engineers ought to study it more – says that inequality makes us miserable. We measure our wealth compared to those around us. So yes, having less money with people around you being also poor is better for your psychological well being than being better off in absolute terms but worse off in relative terms. This is not Communist propaganda. Google the “science of happiness”, or “positive psychology”.

And, even as the EU opened up career paths for East European elites and their farmers benefited from EU largesse, I am not sure industry in eastern Europe benefited from the opening up of their markets. I think we can draw lessons from how East Asia developed. There has been a number papers analysing why some countries succeeded and others didn’t. Semi-closed economies did better. So did economies that planned their strategy to becoming developed states. Taiwan and South Korea did everything right and, along with Japan, are developed countries. I fear that Romania and Bulgaria, maybe even the others, such as Hungary, are more at the failed end of the scale, like the Philippines and Indonesia.

The losers in South East Asia never carried out agricultural reforms and thereby developed agriculture as a basis for continued wealth creation. The old landlords maintained their monopoly and continued down the old colonial routes of low value export of raw materials with little processing and value added. Other mistakes have included, the inability to create “export discipline”. A developing economy with ambitions to become a successful industrial nation has to export, to compete on the world markets, to create a positive trade balance and winnow out winners from losers, companies that can really mix with the best. However, there are some provisos. Wealth creation is not easy. There are balances to strike. Domestic private enterprise has to be encouraged. In a situation where the state owns and runs companies, you don’t get the beneficial, bracing effects of market competition, that mercy kills losers and promotes winners. However. joint ventures with foreign companies – much tried in Hungary – in an effort to get a leg up – are no solution: the local firm becomes dependent on the technology of its foreign partner.

The foreign collaboration partner has, naturally enough, no interest in creating a domestic competitor. So the local partner of joint venture does not get access to the latest technology and, in the worst case scenario, merely becomes an assembly plant for a foreign giant. In open markets, there is also the danger that foreign companies, instead of creating domestic companies that will create and innovate, will merely export into a country or create local affiliates. This may create jobs, but not know-how and learning. A variation of this is manufacturing under licence. Maybe that explains why the East Europeans, since they joined the EU, have fallen even further behind in innovation. There is an argument to be made that Eastern Europe has had an unhealthy colonial style relationship with Western Europe, particularly Germany. But Britain, chief propagandist and proponent for the Single Market idea, is not innocent.

Another mistake is to deregulate your capital markets before your country is ready for it. The argument for deregulation is that capital seeks the most profitable and best opportunities and so drives the economy in the right direction. But studies show that deregulation in East Asia did not lead to better allocation of capital but to the control of the banks by private interests. Since these did not have any political pressure on them to engage in industrial development or forced into a discipline to export, national development was not a principal goal. Instead, deregulation meant that weak support for agriculture weakened still further and money went for speculative and short term investment purposes, mainly property development such as shopping centres and office buildings.

The money that was not spent on property development went instead on the stock markets. It is no coincidence that the fastest growing banking sector in Asia has been in those countries where overall economic development has been weakest. Free trade is another shibboleth. All developed economies had in the beginning of their industrial development various kinds of trade barriers and tariffs, export credits and subsidies and various other methods to protect national industries under development. An industry that is not ready to take wing cannot cope with competition at too early a stage.

The upshot of this is that ideological neoliberalism and the Single European Market – neoliberalism’s European variant – wasn’t and isn’t the solution for the less developed Eastern Europe states. To take the steps needed to join the global elite of wealthy states requires a careful strategy of sovereign control, the careful nurture of conditions that will allow domestic learning process, innovation and eventually export. South Korea managed it. Hungary, to take a European example, hasn’t. That is one reason why there is nostalgia for Communism and life before the EU. It would be interesting to see what would happen if one of these countries had a referendum on the European Union.

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