NCPA - National Center for Policy Analysis

Eastern Europe Could Learn From Developing Countries

October 26, 1996

What must the newly capitalistic Eastern European states do to sustain high rates of economic growth? Some of their economies are growing, but it will still take decades to achieve living standards comparable to Western Europe. For example,

  • The Czech Republic, richest of the former communist states, last year produced about $8,000 per person in purchasing power.
  • This is about half the average per person in the European Union and one-third that of the United States.
  • And at their current rate of growth, the Czechs will take 23 years to raise their gross domestic product to reach just 70 percent of the EU average GDP.

Researchers at Harvard University compared three of the Eastern European states with eight developing countries that achieved rates of growth of more than 4 percent a year between 1985 and 1994: Chile, Hong Kong, South Korea, Malaysia, Mauritius, Singapore, Taiwan and Thailand.

The researchers say that while Poland, Hungary and the Czech Republic have better schools and a more educated workforce:

  • They are still not as economically free as the average fastest growing countries, compared on a scale of economic freedom used by the Heritage Foundation.
  • Whereas government consumption as a percent of gross domestic product averages about 15 percent for the fast growing countries, it is about 50 percent in the Eastern European countries.
  • The average savings rate is 30 percent of GDP in the fast-growing countries, but less than 20 percent in Eastern Europe.

Similarly, a study by the International Monetary Fund estimated that Poland could grow by 5.7 percent a year if it cut the government's share of GDP in half while maintaining current educational levels.

Another problem is the growing share of the population on government pensions in Eastern Europe. In Hungary there is one pensioner for every five people of working age. In the developing countries, this ratio is about one in 14.

Source: "Tigers or Tortoises?" Economist, October 26, 1996

 

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