Converging European Transitions

• Published date: 01 October 2000
• Author: Jorge Braga de Macedo
• Date: 01 October 2000
• DOI: http://doi.org/10.1111/1467-9701.00334

Converging European Transitions

Jorge Braga de Macedo

1. INTRODUCTION

THE implosion of the ‘second world’ provoked numerous changes in state

boundaries and drastic political, economic and social transformations

spanning two continents. It also changed the outlook for an increasingly diverse

‘third world’. The forces at work became clearer after successive financial crises

in both ‘worlds’ created perceptions of a reversal in the process of convergence

between mature democracies and so-called ‘emerging markets’, a group hiding a

lot of different national and regional circumstances.

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Meanwhile, the disciplinary boundaries between ‘comparative systems’, ‘devel-

opment studies’ and ‘growth theory’ also changed and a new field, called ‘transition

economics’, appeared. Endogenous growth theories stressed the role of human

capital while the role of institutions in maintaining policy credibility was

increasingly recognised. These, and other analytical developments, were brought

to bear in the renewed attempts to understand why growth rates differ among nations

and regions. In particular, the question of global convergence of per capita incomes

has widened to include transition economies, some of which have already joined the

OECD and NATO, while others are almost as poor as the least developed countries.

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JORGE BRAGA DE MACEDO is President of the OECD Development Centre. Earlier versions of

this paper were presented at the meeting of the Macroeconomic Research Working Group of the

European Centre for Parliamentary Research and Documentation, held in Lisbon (Portugal), 16

June, 2000, and at the 5th Conference of the European Association for Comparative Economic

Studies, held in Varna (Bulgaria), 9–12 September, 1998. The views expressed are the author’s

own, as described in www.fe.unl.pt/~jbmacedo/transition.htm

1

The current membership of the OECD includes emerging markets. Even among the founding

members, Greece is still in the Morgan Stanley Emerging Market Index and Portugal only

graduated from it in 1998. In the IFC list, both markets were still emerging when the euro was

launched. As discussed in the text, the different circumstances of OECD and emerging markets are

reflected in the indicators of appropriate responses to globalisation and governance, in particular

credit ratings and corruption indexes.

2

The category of transition countries in Eastern Europe and the former Soviet Union basically

coincides with the countries of operations of the EBRD, comprising the Commonwealth of

Independent States (CIS), the former Yugoslav republics, Albania, Mongolia and the ten applicants,

with which the EU Commission negotiated accession partnerships. The few underdeveloped

countries in Africa, Latin America and Asia where ownership of capital by domestic residents

remains outlawed do not belong to the category. In spite of its planned accession to the WTO,

China is neither a transition country nor an emerging economy. See footnote 10 below.

This paper looks at convergence, and therefore reflects developments in

emerging markets from the perspective of the growing ‘club’ of mature

democracies. The emphasis, however, is on one specific manifestation of the

process, involving the enlargement of the EU by ten countries in transition

henceforth called ‘applicants’.

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Summary macroeconomic indicators for the ten

countries are reported in Table 1.

Section 2 discusses EU enlargement as part of the global environment,

including the evidence for policy convergence worldwide. Evidence on the role

of property rights and open markets is presented, so as to motivate the ‘virtuous

cycle’ between globalisation and governance. For example, the effect on growth

and investment is seen to depend on the progress of transition rather than on

geographical proximity to the EU. Moreover, the values behind European

integration are essentially the same as the requirements for sustained growth and

development in emerging markets.

Section 3 specifies the structural dimensions of transition in the form of

principles of good government at the public and corporate levels, reflecting the

standards found in mature democracies. Corruption perceptions and credit ratings

are presented as indicators of appropriate responses to the twin challenges of

globalisation and governance in ways that are applicable more broadly to

emerging markets.

Section 4 presents a macroeconomic framework for policy sustainability – a

guide for the credibility of fiscal adjustment which has been identified as one of

the roots of convergence. The timing of a convergence programme to

macroeconomic stability is deduced from a policy matrix and the effects of the

TABLE 1

Applicants’ Macroeconomic Indicators (1999)

Country Current Account Deficit Budget Deficit GDP Growth Inflation

(%GDP) (%GDP) (% P.A.) Annual Average

Bulgaria 5.0 0.9 2.5 0.6

Czech Republic 2.4 0.6 ÿ0.2 3.6

Estonia 4.6 4.7 ÿ1.1 3.3

Hungary 4.3 4.0* 4.5 9.8

Latvia 10.0 4.0 0.1 2.4

Lithuania 11.0 7.0 ÿ4.0 0.8

Poland 7.6 3.5 4.1 7.3

Romania 3.8 3.3 3.2 45.8

Slovakia 5.8 3.6 1.9 15.6

Slovenia 2.9 0.6 4.9 6.2

Sources: EC ECFIN DG web site *IMF.

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The same principles apply to the other applicants, Cyprus, Malta and Turkey. Because of its

focus on transition from certain initial conditions, the analysis excludes these three cases. See

footnote 13 below and the Appendix, Table A1.

1336 JORGE BRAGA DE MACEDO

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