Thursday, April 13, 2006

Central European competitiveness

Lynx economies

Apr 12th 2006
From The Economist print edition

The advanced ex-communist countries have done well—and will do even better

THE best-performing ex-communist economies are setting quite a pace: Estonia and Latvia posted 10% GDP growth in 2005, reminiscent of Asia's “tigers”. The question now is whether the new Europeans can keep it up and catch the richer half of their continent. Few worry about external shocks, though Hungary, with its big current-account and budget deficits, looks vulnerable. For most, basic competitiveness is more pertinent.

A study by the Vienna Institute for Comparative Economic Studies, a think-tank, and Bank Austria Creditanstalt paints an encouraging picture, at least for the eight ex-communist countries that joined the European Union two years ago. They are usually termed the EU-8, but “lynx economies”—in honour of the region's own fierce felines—would be catchier. Their prospects are much brighter than those of the next candidates for membership, such as Romania and Bulgaria. In particular, the lynxes look set to keep their edge against their Asian competitors in the EU market.

The study measures the EU-8's competitiveness in terms of export performance (both size and quality), economic structures (a big share for services is a strength, farming and manufacturing are not) and the friendliness of the business environment (from bureaucracy to infrastructure). On some scores, the lynxes have almost caught up. They gain 65% of their gross value-added from services, only just below rich EU countries, at 69%. The second-rank tigers (Indonesia, Malaysia, Philippines and Thailand) make only 47% through services. They have 13% of value added coming from agriculture; among the lynxes, it is 4.3%, in old Europe, 2.7%.

The growth in the lynxes' exports to rich countries (see chart) beats that of any Asian economy bar China. Those exports are fuelled by sharply rising foreign direct investment. As a share of EU-8 GDP, it was worth 29% in 2000 and 38.1% in 2004. In the second-rank Asian countries, this ratio fell, from 26% to 19%.

Even better, the quality of exports is shifting upwards. The study notes particularly fast growth in what it calls “medium high-tech” industries, which now make up the biggest category of exports. Here the lynxes are raising not only the prices they charge but also market share.

Two big weaknesses remain. One is in the quality of public institutions. The World Bank and others compile detailed scores of business-friendliness on which all European countries, rich and poor, are outshone by the likes of Singapore and Hong Kong. The EU-8 need to make sure that they emulate not stagnant old Europe but its dynamic rivals in Asia.

This is improving, slowly. A bigger problem is in research and development. Most post-communist countries devote puny amounts of money to this: the lynxes average only 0.8% of GDP, compared with 2% in western Europe. Politicians grumble that the foreigners who own most of their industries prefer to shop at home for brainpower that rich countries can afford to subsidise more generously.

That's partially true, but politicians are slow to recognise another problem: post-communist universities are still largely unreformed, complacent and introverted. There are plenty of ways that ambitious countries could pep them up—for example by paying internationally competitive salaries, teaching in English and encouraging closer links with business.

Copyright © 2006 The Economist Newspaper and The Economist Group. All rights reserved.

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