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Economists: New EU Member Countries Need Time to Raise Living Standards - 2004-08-04


A discussion is under way inside the European Union as to how many years are required before its new members will match the living standards prevailing in the rest of the now 25-nation EU. Many economists predict that even those new members that have relatively strong economies will require at least 30 years to reach the per-capita income levels prevailing in Western Europe.

Of the new EU members, Slovakia and three Baltic states are generally considered to be the fastest-growing economically. Each of them aspire to match the achievement of one of the oldest members of the EU, Ireland, which in the 1990s registered economic growth rates averaging over eight percent.

Willem Buiter, chief economist at the European Bank for Reconstruction and Development in London, says Ireland is a worthy model for the new EU members.

"Ireland has done it. From being a poor west European country they are now a rich west European country, richer than the average west European country and richer even than Britain," he said. "But they had a number of factors working for them that are not present in Eastern Europe, the main thing being the demographics."

Ireland, says Mr. Buiter, had a very young, well educated population that spoke English, the world's business language. Ireland's stunning growth, he adds, stems from huge inflows of mostly U.S. foreign direct investment, mainly in high technology, that targeted Ireland as a low-cost base for European-wide operations.

Barbara Boettcher, an economist at Deutsche Bank in Frankfurt, agrees that the Ireland model won't be easy to emulate.

"You won't see that in Eastern Europe," she said. "Eastern European countries, which are designed to be winners are those that have attracted a large share of the production oriented foreign direct investment, like Slovakia, Hungary and the Czech Republic have done."

Nonetheless, the three Baltic states have been making stunning progress in recent years. In the four years ending this December, the three countries will have achieved annual growth rates in excess of six percent. And in the case of Latvia and Lithuania, growth rates have averaged nearly seven percent.

That is more than four percentage points above the average growth rates of Western Europe. Willem Buiter of the European Bank says, mathematically, that translates into catching up within 30 years, provided the Baltics can maintain at least a two percentage point growth advantage over the west.

"It could be less than 30 years if they grow by four percent faster, year by year by year," he explained. "But I think three percent superior growth performance sustained for three decades would be quite amazing."

Mr. Buiter notes that the Baltic states start from a very low base with current per capita incomes at only a fraction of what prevails in Western Europe. Barbara Boettcher of Deutsche Bank says, as they get richer, with more demands for social spending, it will be harder for the Baltics and other eastern countries to out perform Western Europe.

"This was rather easy for these countries in the last two or three years because there was hardly any substantial growth in Western Europe, in the EU 15," she said. "But now as we pick up in the EU 15 we'll see growth rates of two percent for this and the next year, it might be difficult for these countries to top that."

The consensus view is that if, in the best case scenario, the fastest-growing new members will need 30 years to catch up, the process will be much longer for slower growing economies. And pessimists say the slow growers will probably never match the high living standards that prevail on the western side of what used to be the Iron Curtain.