In fields ranging from pharmaceuticals to logistics, listed companies from the former Eastern bloc – such as Gedeon Richter, Krka and InPost – are now acquiring companies in Western Europe and the United States. Their goal is to become international champions in their industry. Who would have imagined this 20 years ago, when five Central European nations from the former Communist bloc joined the European Union? Renowned Polish economist, professor at Kozminski University and author of Europe’s Growth Champion: Insights from the Economic Rise of Poland, Marcin Piątkowski explains the amazing transition of these economies and the challenges that lie ahead.

Twenty years since the countries’ accession to the EU, how have the economies of Poland, Hungary, Czechia (the Czech Republic), Slovakia and Slovenia evolved?

The last two decades have been a golden age for each of these countries. Their economies have grown at a very rapid pace, converging with those of Western Europe. Nations such as Poland have more than doubled their per capita income and achieved some of the highest GDP growth rates in the EU. On average, Czechs and Slovenes are now richer than Spaniards. All five of these nations are expected reach Italy’s GDP per capita within five to 10 years. Unemployment levels have also registered an unprecedented drop, currently with very low rates of between 2.7% and 5.3%, compared with 10% to 20% in the early 2000s.

The case of Central and Eastern Europe shows that countries can become richer by being open and non-protectionist, and by attracting foreign direct investment (FDI). This is an interesting model for developing countries. It diverges from the model of Asian tigers such as Singapore, Taiwan and South Korea, whose growth has largely been based on domestic industries, with protectionist measures and direct state funding.

Has economic growth been as strong in Romania and Bulgaria, which joined the EU in 2007, and in Croatia, which joined in 2013?

Yes, all three countries have performed well since joining the European Union. It’s no surprise that the EU is described as a "convergence machine", taking in poor countries and making them rich. Romania’s GDP per capita has risen over 80% since joining in 2007, and Bulgaria’s GDP has increased by a similar rate. Croatia’s growth, which stagnated for most of the last three decades, also picked up after accession.

“Successful local companies are active in markets that will shape the future, such as e-commerce, AI and digitalisation”
 

What were the main drivers in this economic miracle?

A whole range of factors were at work, but one phenomenon, amplified by EU membership, was really crucial in my opinion. These countries have adopted institutions that had already made Western Europe a success. By this I mean secure property rights, democracy, free markets, the rule of law, institutional independence, meritocracy in public services, freedom of the press and so on. The other driving force behind this success is human capital.

First, countries in the region have a highly educated population. For example, more than 40% of people in Poland between the ages of 25 and 43 have a university degree, compared with only one-third in Germany. Second, this workforce is half as expensive as in Western Europe. And third, these countries have not made macroeconomic mistakes. They have applied a stable economic policy, with no major crises, except for the eurozone crisis and the pandemic, but these were not of their doing.

And what about the role of European Cohesion Funds and EU subsidies?

EU subsidies were obviously useful, as they went into building infrastructure: universities, roads, railways, metro systems, universities, etc. However, even if you take high estimates, this funding represents a small share of GDP and does not fully explain this tremendous growth. In Poland, the aid has contributed an average of half a percentage point of growth since accession.

That is significant, but not enough to explain why Poland’s growth has been around 2 percentage points higher than in Western Europe. Generally speaking, Eastern nations have obviously been happy to receive the funding, but it has created a win-win situation for the West as well. Millions of jobs have been created, and the market has expanded for the EU as a whole. As one example of this, German exports to Poland exceeded those to Italy.

How has this transformed the region’s stock markets? Which ones are currently the most dynamic?

Let’s take the Polish equity market as an example. It’s the largest in Central and Eastern Europe. Its total capitalisation (around €400 billion in August 2024) exceeds that of the Vienna Stock Exchange (around €150 billion). Although in a more limited way than FDI, the Warsaw Stock Exchange has contributed to the strong economic development of the last 20 to 30 years. Formerly state-owned firms have been privatised or partially privatised and gone public with IPOs, as have companies created after the Communist era. However, in recent years, despite the presence of more prosperous and sophisticated companies in the country, the number of new IPOs has remained low. Some companies have opted not to be traded publicly, while others have decided to list in Amsterdam rather than their home country. They were probably seeking more attractive conditions and locations where they could be sure of access to available capital.

You mention some prosperous and sophisticated companies in the region. Which sectors do they primarily operate in?

The region’s economy is based on a dual structure. On one hand, much of the growth is driven by FDI, with investments in growth sectors such as electric mobility and batteries. For example, Hungary and Poland are the main European countries to receive investment from Asia (China, South Korea) in these areas. On the other hand, successful local companies are active in markets that will shape the future, such as e-commerce, AI and digitalisation. These companies were founded in the 1990s or 2000s and are not “lagging” behind their Western counterparts in these emerging sectors.

Some of the most interesting cases are InPost (European parcel management giant), Allegro (Amazon’s European competitor) and CD Projekt (video game designer). Then there are more traditional industries such as food processing. You have Maspex, the regional food champion, which could eventually go public and become the Central and Eastern European equivalent of Nestlé.

“The success of companies in the region has largely been through imitation rather than innovation”
 

With three economies classified by the IMF as "advanced" (Slovenia, Slovakia and Czechia) and two as "emerging" (Poland and Hungary), what are the main challenges ahead?

I don’t think the IMF classification is credible in this case, because for example Poland, which is now richer than Portugal or Greece, is no longer an "emerging" economy. In any case, I’m not too worried about the future of these countries. Their economies have become more competitive through the factors mentioned above (institutions, human capital, stable economic policy) and will continue to grow at a rapid pace for at least another decade. Recent events, such as the conflict in Ukraine or changes in supply chains, have not adversely affected the region. Taking Poland as an example, FDI doubled between 2019 and 2023 to reach $28.7 billion. This shows that Central and Eastern Europe is poised to be a winner in this new global geopolitical layout.

That said, we must overcome three major challenges. First, accumulated capital stock per capita is still well below those of Western countries, despite all the infrastructure that has been built. This means that both public and private investment must remain high for at least another decade, especially in the energy transition. Second, the success of companies in the region has largely been through imitation rather than innovation, by harnessing technologies, concepts and capital from the West. These companies now need to develop more of their own brands and ideas if they are to maintain their position once the economies of Eastern Europe have caught up with those of the West. Third, birth rates have fallen in these countries and, despite the arrival of Ukrainian refugees, the situation is critical. Poland, for example, could lose six million workers by 2050. We’ll need to welcome more foreigners, ideally a young workforce that meets the needs of the economy.

Could the rise of populism in the region, particularly in Slovakia and Hungary, adversely affect economic policies and the investment environment?

I share concerns about the rule of law, respect for democracy and the anti-European shift. However, it’s worth noting that these countries, especially Hungary, are doing rather well economically. Even Viktor Orbán understands that growth plays an important part in his legitimacy.

Are the growing strength of China and the diversification of global supply chains making Eastern Europe less attractive as an FDI destination?

I think the region remains a safe place for Western capital, with no risk of expropriation, mistreatment of employees, etc. The highly skilled work-force, which costs less than in other countries around the world, will continue to attract investors.

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