Central Europe, from Estonia through Poland to Bulgaria, is on the frontline of the war in Ukraine. Being on the frontline is nothing new for the region, including in 1989 when Poland and neighbouring countries were the battlegrounds of the successful fight to end communism. Now the whole region can be on the frontline again, this time though to create a better model of capitalism that would help guide the post-war reconstruction of Ukraine and inspire other countries in Europe and beyond.
Since 1989, Central and Eastern Europe (CEE) has achieved significant economic, political and social success. Poland, for instance, has more than tripled its GDP per capita in purchasing power terms and has become a European and global economic success story. Other countries in the region have also done well, achieving levels of income and quality of life relative to Western Europe never seen before in their history.
Poland and neighbouring EU Member States have also been successful in translating economic prosperity into social well-being. According to the OECD’s Better Life Index, Poles enjoy better quality of life than South Koreans, even though the latter have incomes one-third higher. Estonia, Czech Republic and Slovenia do even better. Unlike earlier global economic success stories, thriving democracy has underpinned the region’s prosperity, the recent backsliding in a few countries notwithstanding.
However, past success does not guarantee future success. Poland and the whole region will need to continue reforming to sustain its economic rise. In particular, they will have to face at least five key challenges, which I call the “5Ps”: productivity slowdown, population ageing, pollution and climate change, politics, and plutocracy.
To deal with these challenges, the region’s economic reform agenda should focus on five key factors, “5Is”: institutions, investments, innovation, immigration, and inclusiveness. First, high-quality institutions, largely imported from the West during the EU accession process, need to continue to be strengthened. CEE should be the champion of further institutional strengthening of the EU and help pursue the beautiful dream of building the United States of Europe. Second, all countries in CEE, but also in the EU, need to double public investment. The current level of public investment in Poland and in the EU as a proportion of GDP is less than one-third and one-fifth, respectively, of the level of public investment in, for instance, China. Most of this larger investment should be spent on green economy and energy independence. Russia’s aggression against Ukraine makes this even more urgent than before. Third, as the scope for technology absorption gradually diminishes, CEE will need to invest more in basic research and innovation to help it fully catch up with the West, while the West should double down on innovation to rejuvenate productivity growth. Fourth, opening to immigration, including to refugees from Ukraine, will be key to stopping depopulation and mitigating population ageing. Finally, the new growth model needs to be inclusive: in principle, it should give the same opportunities for success to everyone regardless of family wealth, gender, sexual orientation, strength of social networks or birthplace. This will require investment in high-quality education for everyone, strong public services and high social mobility.
The ongoing crises will end at some point. But the underlying causes of crises will not go away. We have a historical window of opportunity to create a better, more inclusive version of capitalism. Let’s not waste it. ©℗