Will corruption sink EU convergence?

WASHINGTON, DC — The great French historian Fernand Braudel taught us to look for the underappreciated long waves (longue durée) in history. In the context of the past 30 years, one such wave is the widening economic gap between the Central and Eastern European countries that joined the European Union and those that have not. The former are gradually catching up with the other EU member states, with growth rates nearly twice as high as their eastern neighbours; the latter are stuck in a no-man’s land between the EU and Russia.

The divergence between Poland and Ukraine illustrates the trend. According to Soviet statistics, Ukraine was slightly wealthier in per capita terms than both Russia and Poland in 1989, just before the revolutions that toppled communism across Central and Eastern Europe. Back then, both countries had similar cultures and industrial structures. Yet, today, per capita GDP (in current US dollars) is almost five times higher in Poland than in Ukraine. (Even in 2013, the year before Russia launched its war against Ukraine, Poland’s GDP per capita was 3.4 times higher.)

And Ukraine is not alone. The Belarusian and Russian economies have been stagnant since 2012 and 2014, respectively. And blaming Russia’s plight on falling oil prices doesn’t explain why Ukraine and Belarus have followed a similar pattern. Russia, of course, has also been squeezed by Western sanctions following its illegal annexation of Crimea in 2014. By the same token, Ukraine lost 17 per cent of its GDP as a result of Russia’s military aggression, though it did manage to register modest annual growth of 3 per cent between 2016 and 2019.

Meanwhile, the EU’s Eastern and Central European countries have been surging ahead on the back of domestic entrepreneurship and foreign direct investment (FDI). During the 2014-19 boom, their economies grew by 4-5 per cent per year, on average, whereas Russia’s per capita GDP fell below that of Romania and even non-EU member Turkey. Among the 27 EU member states, only Bulgaria is still poorer than Russia in per capita GDP terms, whether measured in US dollars or purchasing power parities.

One reason the ex-Soviet states are doing so poorly while Central and Eastern Europeans are doing so well is that the Central and Eastern European countries successfully concluded association agreements with the EU in the early 1990s. With excellent access to the EU market, by the mid-1990s they had shifted two-thirds of their trade from the former Soviet Union to the EU. And by tapping into European supply chains, they were able to emerge as the main European car producers.

But the key factor in these countries’ success has been the improved quality of economic governance. To qualify for EU membership, Eastern and Central European countries were compelled to adopt the body of EU law. After a long, grinding bureaucratic process, these countries adopted the legal and regulatory frameworks necessary to provide for the functioning of an open market economy.

In Transparency International’s Corruption Perceptions Index, Poland, the Czech Republic, Slovakia and Hungary now rank 45th, 49th, 60th, and 69th, respectively, while Ukraine and Russia rank 117th and 129th. Though the former group’s rankings aren’t stellar, they have proven sufficient to attract FDI. Investors know that if something bad happens, they can seek recourse through the EU, and eventually through the European Court of Justice. Unlike in the former Soviet Union, property rights in Central and Eastern Europe are secure.

The dirty secret, however, is that 3-4 per cent of Central and Eastern European countries’ annual GDP is coming from EU grants, which are a mixed blessing. On one hand, EU structural funds are why all the capitals of the newer member states have beautiful new airports and highways. On the other hand, such projects are typically more vulnerable to corruption — hence the dubiously acquired wealth of many Hungarian businessmen who are close to Prime Minister Viktor Orbán.

The question, then, is whether Central and Eastern European economies can be expected to maintain their progress. Before their accession, EU watchdogs worried that these countries would improve their governance only up until they joined the EU; but the reality is more complicated. All of the new EU members in fact continued to strengthen their governance for many years, attracting ever more FDI. And a few countries are still improving. Estonia and Lithuania are now the least corrupt former communist countries.

According to Transparency International, however, some of the leading transition countries are now undergoing a sharp deterioration in governance. Poland’s score peaked in 2015, followed a year later by Slovakia and by the Czech Republic in 2018. Hungary peaked in 2012 and has steadily declined since, such that it now ranks alongside Romania and Bulgaria, which were previously considered the most corrupt EU countries. Foreign and domestic investors are now paying close attention to Hungary’s weakening adherence to international law, increasingly shaky property rights and embrace of discriminatory taxation.

For the EU, this retreat from good governance could become an existential issue, because democracy and the rule of law go together. Even though Hungary and Poland have both run afoul of essential EU democratic criteria, they remain the beneficiaries of massive EU funding. And while the EU did impose special conditions on Romania and Bulgaria, these measures did not go far enough.

According to Freedom House, democracy has been declining around the world since 2005. Now more than ever, the EU must not allow backsliding on the issue of governance. Fortunately, the bloc has become more intent on imposing harder conditions, primarily through the 750 billion euros ($918 billion) Next Generation EU recovery plan for Europe. The trajectory of the ex-Soviet states is a sad reminder of why the EU must stand up for democracy and the rule of law both at home and abroad.

Anders Aslund is a senior fellow at the Atlantic Council in Washington. His latest book is ‘Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy’. ©Project Syndicate, 2019. 

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