Creating the Pathways from Poverty to Prosperity

Eastern Europe: Russia holding back the region

Eastern Europe is the fourth ranking region and growth in prosperity in 2017 has exceeded the world average. Although this growth has stalled, over half of Eastern European countries continued to improve their prosperity in 2016-17. But overall regional prosperity dropped, as Russia and the Ukraine the region’s most populous countries, became less prosperous.

Prosperity is becoming more unequally distributed within the region. Improvements were concentrated amongst those countries which were already performing well, with most regional underperformers seeing their prosperity further decrease in absolute terms.

Pillar highlights: low freedom and social capital

As a region, Eastern Europe outperforms the world average in areas such as Education, Safety and Security, and the Natural Environment, but trails in Social Capital and Personal Freedom. However, across the board Eastern Europe lags significantly behind neighbouring Western Europe, especially in areas such as Education.

Pillars which have strengthened this year include Economic Quality, Natural Environment, Governance and Social Capital. But losses in prosperity have come from a large drop in Personal Freedom and decreased Health outcomes.

In the spotlight: risers and fallers

The top 10 most prosperous Eastern European countries remain unchanged from last year.

The largest gains in prosperity have come from Serbia, which has improved across every pillar, particularly its Business Environment and Economic Quality

The Czech Republic has overtaken Estonia to become the second most prosperous country in the region, reflecting its current transition from an economy focused on low-grade manufacturing, to one characterised by high-end manufacturing and a policy environment supportive of innovation.

The largest gains in prosperity have come from Serbia, which has improved across every pillar, particularly its Business Environment and Economic Quality. This partially reflects the structural reforms required for Serbia to move towards EU accession, but also demonstrates movement from a low base. For this trend to be sustained, a continued focus on creating the long-term conditions for prosperity will be required.

Poland saw its Personal Freedom score decline substantially, reflecting attempts by the governing Law and Justice (PiS) party to assert influence over institutions such as the judiciary and the press.

Ukraine has seen its Health score decline with lower vaccination rates. Public mistrust in vaccinations is widespread, with one third of parents opposing vaccinations.

Widespread and lasting reforms – the key to prosperity in Eastern Europe

Countries such as Estonia have facilitated an environment in which the economy can thrive through a combination of liberalisation and structural reforms, allowing strong institutions to take root. Other countries such as the Czech Republic are on the edge of becoming innovation economies, but require further improvements to areas like Social Capital in order to create lasting and stable prosperity. This experience has not been universal. Where reforms have only been partially implemented, such as in Romania and Ukraine, the result has been high levels of cronyism, a less dynamic economy and lower levels of trust.

Market reforms and liberalisation need to benefit the whole of society. The experience of Eastern Europe demonstrates that they must be accompanied by wider-ranging reforms for good Governance to be supported and Social Capital developed – and for gains from liberalisation not to be captured by a small and corrupt elite. Without this, there will be reduced trust in businesses and government, and a gradual erosion of the foundations required to make market reforms work.

Economic Quality is a useful barometer of the degree to which a country has effectively liberalised, as it charts factors directly related to how well economic gains have been shared: these include the levels of poverty, unemployment and economic growth. The relationship between Economic Quality and other pillars of prosperity is clear: over the past three years, as economic performance has increased, the majority of countries have seen improvements to their Education and Health, as well as to the quality of their healthcare systems. This illustrates the strong relationship between Economic Quality and the other pillars of prosperity.

The countries which have been most able to convert this improved Economic Quality into prosperity are those that have embraced clear, wide-ranging reform, often with the goal of moving towards EU membership. Those which instead have only partially reformed have created an environment that would theoretically improve economic performance, but which benefits only a small minority. This has led to greater cronyism and has driven wealth out of the economy.

This can be seen in other areas, with one dimension of Eastern Europe’s under-performing being Social Capital. Social Capital is an important precondition for prosperity as trust is key to everything, from business deals to political activism. While Social Capital has less direct impact than Economic Quality, it is a key to unlocking longer-term prosperity in the region and delivering a “prosperity surplus” beyond material wealth; the importance can be seen in the fact that countries in the region with higher Social Capital tend to perform better in other pillars as well.

There are two reasons for Eastern Europe’s challenge with Social Capital. First, the legacy of the Soviet Union appears to be the major reason that its former states see lower levels of trust in societal and state institutions: this can be seen in the case of Latvia and Lithuania, who, despite good performances elsewhere, still have low Social Capital scores, holding back their overall level of prosperity. Second, the existence of corruption and crony capitalism from partial reforms serves to reduce trust within society and therefore further erode Social Capital.

These challenges increase a risk facing Central and Eastern Europe: that of its young people leaving. Although there are some benefits to leaving, through the knowledge they acquire and benefits through remittances, the young are best able to contribute to their countries’ prosperity if they stay. But for them to stay, they need to feel that hard work pays off, that they can make a difference, that they belong, and that they have a political voice.

Overall, the picture of the region is one of strong potential, although there are still serious sub-regional challenges, including the low prosperity of post-Soviet states and differences between regions within countries. If prosperity is to improve across the region then these countries should learn from their neighbours: their path to prosperity is through full and wide-ranging structural reforms, a commitment to reducing corruption and driving out cronyism, and fostering a society where Social Capital is nurtured.