Central and Eastern European Economies

1
Central and Eastern European Economies
David Chelly ESC DijonAmerican
studentsFebruary-May 2005
2
Aims of the course

• This course provides students with an
  introduction to Eastern European economic and
  social systems
• This course may interest young graduates, as
  Central and Eastern European countries offer
  excellent job opportunities for western European
  and US students in management.
• Students are introduced to specialized research
  sources, which may be useful to them in their
  careers

3
Your instructor

• David CHELLY
• Ph.D in Management Sciences, post-graduate
  diploma in Finance, degrees in Money and Banking,
  Law, Accounting and Sociology.
• Head of a consultancy firm and a website
  (http//www.centreurope.org) specialized in
  business with Central Eastern Europe
• Former expatriate in Prague and Sofia, professor
  of management in various business and engineering
  schools

contacts_at_centreurope.org
4
The courses outline

• 1. (2nd of February). Central and Eastern Europe
  basics
• A Brief History of the region, current social and
  economic realities, the gap between Central and
  Eastern Europe
• 2. (9th of February). From the socialist economic
  model to the transition process
• The failure of the socialist economic and
  political system The setting of a new
  institutional framework

5
The courses outline (continuation)

• 3. (23rd of February) An Economic overview
• Comparison of macroeconomic indicators and
  underlying socio-economic variables
• 4. (2nd of March) Restructuring and current
  situation of financial and production systems
• Privatisation of banks and companies, the new
  financing systems, evolution of industrial
  structures and specialisation

6
The courses outline (continuation)

• 5. (9th of March) The shift of the Central and
  Eastern European economies towards less industry
  and more services
• Central European industries in the new
  international division of labour, new competitive
  advantages and declining sectors
• 6. (16th of March) Nature and extent of Foreign
  Direct Investments
• The main reasons for investments in the past ten
  years, the role of FDI vs. local businesses, the
  different ways of FDI, management issues

7
The courses outline (continuation)

• 7. (23rd of March) The evolution of social
  structures winners and losers
• Labour and labour markets, unemployment, income
  and income inequalities, impact on growth
  regimes, regional discrepancies
• 8. (6th of April) Country focus doing business
  in Moldova
• 9. (6th of April) Country focus doing business
  in the Czech Republic
• 10. (30th of March) Team work (see next slide)
• 11. (13rd of April) The enlargement challenge
• The enlargement round, impact of enlargement on
  Central European economies, the euro in Central
  Europe.
• The new shape of the European continent, its
  future and its relationships to the United
  States.
• Oral presentations

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Methodology

• REQUIRED WORK AND FORM OF ASSESSMENT
• Preparatory works short assignments dealing with
  Eastern Europe leading to individual
  presentations (20 - Lecture 10)
• Team works during classes cases, text analysis
  and comments (10 - Lecture 10)
• Final examination questions and case (30 ).
• Final assignment 5-page document on a topic of
  your choice (40 ). 11th of June, 2005.
• The documents of this course will be fully
  available through the internet, in English and in
  French, at the web address http//www.centreurope.
  org

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Oral presentation (the slides)

• 1. Powerpoint slides with pictures, photographs,
  maps, sound
• 2. Slides not too dense and well presented
  (spelling, ergonomy, punctuation)
• 3. Sobriety (e.g. absence of !!!)
• 4. Synthetic and relevant information

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Oral presentation (the presentation)

• 5. Quality of the expression
• 6. Coordination between the members of the group
  
• 7. Capacity to capture the attention of the class
• 8. Technicity, use of specific sentences
• 9. The speakers must not read their notes
• 10. Prohibit laughing, puns, remarks without link
  to the subject
• 11. Respect of the assigned timing
• 12. Respect of the deadlines

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Oral presentation (the content)

• 13. Effectiveness of the introduction
• 14. Quality of the outline and of the transitions
  
• 15. Quality and exhaustiveness of the
  presentation
• 16. Quantified and recent information, indication
  of the sources
• 17. Use of examples company practices, quotes
• 18. Objectivity of the presentation
• 19. Prohibit developments not related to the
  topic and obvious information
• 20. Indication of references and complementary
  sources of information

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I. Central and Eastern European basics
13
How can we describe Central and Eastern European
countries?

• Discovering Latvia

14
Economic structures as a product of History

• History is essential to understand the
  functioning of the firms.
• Philippe D'Iribarne, who wrote The Logic of
  Honor National Traditions and Corporate
  Management , shows that the way of working and
  the corporate processes in a given country
  originate in a main historical event.
• According to him, management practices in the
  United States reflect a particular way of living
  in society, inherited from the contractual
  relationships of the religious merchants of 1620.
  
• France is marked by the logic of Honor, inherited
  from the pre 1789 times, where people used to
  fight duels in order to defend their honor. This
  tradition of social inequality is according to
  DIribarne the reason why French companies are
  still so segmented and why hierarchy is so
  present.

15
A rich and ancient history

• It is not because we (French people) dont know
  Central and Eastern Europe history that these
  countries do not have any history.
• Almost all CEE countries have played a major role
  in Europe in their history
• But they have early fallen under the domination
  of different empires, which have shaped their
  future

Cyrille and Méthode, inventors of the Cyrillic
alphabet
Charles the IVth (1346-1378), King of Rome and
Empereur of the Holy German Empire
16
The empires and their influences

• Long dominated by the Habsburg Empire, the
  history of Central Europe has been marked by
  education, art and modernism.
• While in 1789 in France only a third of the
  citizens were able to speak and read French (the
  rest spoke local dialects), education in German
  had been compulsory for a century in the whole
  Kingdom
• Eastern European countries used to live under the
  Ottoman and the Russian Empires rule, which
  prevented their economic development.

Vlad Tepes (1428-1476), a Romanian figure of the
struggle against the Ottoman Empire.
17
A rich Central Europe

• Central Europe is mainly composed of reformed
  Catholics, close to the Protestants in terms of
  seriousness and rigor.
• Central Europe comprises the former Eastern block
  countries that previously belonged to the
  Habsburg and Prussian Empires, but also Germany,
  Switzerland and Austria

According to M. Kunderas  The Stolen West or
the Tragedy of Central Europe (1983)  , Central
European countries culturally belong to Western
Europe.
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A less developed Eastern Europe

• Eastern European countries are mainly
  economically under-developed.
• None of them have successfully managed their
  economic transition to capitalism.
• The religions are orthodox and Muslim.

19
Exercise Central and Eastern European countries
on the map
20
Central and Eastern Europe map
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Preparation for lecture 2

• Browse the key economic indicators for Central
  and Eastern Europe in Centreurope.org

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II. The transformation process
23
Exercise sub-groups in Central and Eastern
Europe

• You are a consultant with the French Center for
  External Trade (CFCE). Your task is to promote
  business relationships with Central and Eastern
  European countries.
• Up to now, the CFCE had grouped the countries of
  this region in a category called  Pays de
  lEst  ( Eastern countries ).
• Until 1991, the region used to comprise eight
  countries Albania, Yugoslavia, Bulgaria,
  Romania, Hungary, Czechoslovakia, Poland, and
  USSR. But now they count up to more than twenty.
• Your mission is to split them in different
  subgroups, that should be geographically close
  and economically homogeneous. Explain your
  decisions.
• The countries are Albania Armenia Azerbaijan
  Byelorussia Bosnia-Herzegovina Bulgaria Croatia
  Estonia Georgia Hungary Latvia Lithuania
  Macedonia Moldova Poland Czech Republic Romania
  Russia Serbia-Montenegro Slovakia Slovenia Ukraine

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The influences of capitalism and communism for
Central and Eastern European economies

• Europe has given birth both to
• capitalism the Industrial Revolution started at
  the end of the XVIIIth century in Great-Britain
  and spread in Central Europe and partly in
  Eastern Europe
• communism the spirit came from philosophers such
  as the Swiss J-J. Rousseau and politicians like
  the Prussian K. Marx.
• According to some historians, Russians used the
  communist ideology as a pretext to perpetuate
  their tradition of imperialism.

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The communist era
After World War II, a Soviet-style Communist
regime was imposed to Central and Eastern
European countries. Central planning biased the
structure of employment by placing a
disproportionate emphasis on industry, to the
detriment of the services sector. Like dominos,
several revolutions brought about the downfall of
the Communist regime, and reintroduced peoples
rights.
Like Albania and Yugoslovia, Romania had its own
communist regime, independent from Moscow.
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The communist heritage

• Central and Eastern European countries have lived
  forty (seventy) years of communism, which still
  influence local behaviors and habits.

The communist heritage Corrupted civil servants,
unreliable businessmen, opportunist politicians
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Young democracies

• Central and Eastern democracies are ten year old
  or less
• Except in Czechoslovakia with the Velvet
  Revolution, the communist rule has violently been
  rejected in 1989 such as in Romania where
  thousands of people died in a civil war and
  Dictator N. Ceaucescu and some members of his
  family were executed the day of Christmas 1989.

But the political risk is limited to only a few
countries in the CIS and in the Balkans
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A lack of political maturity

• Demagogues may be elected on the basis of their
  unrealistic pledges and political scandals
  concern all parties and all countries.
• As an example, Polish President Kwasniewski, who
  was elected boasting a diploma he had never
  obtained, has recently appeared in a commercial
  for Polish agricultural machinesbecause this
  company employed two of his relatives.
• The leading coalitions are not able to keep the
  power due to a too large number of political
  parties.
• In Central and Eastern Europe, people tend not to
  vote for opinions but for the defense of certain
  categories of people a Czech pensioner will tend
  to vote for the Party of the Pensioners, a Polish
  farmer for the Party of the farmers, a Hungarian
  in Slovakia for the Parties of Hungarians in
  Slovakia, etc.

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An inefficient legal framework

• In Central and Eastern Europe, the new legal
  framework is very similar to those of Western
  Europe.
• As an example, the Czech accounting law is
  almost a copy of the French one.
• Central and Eastern European countries have done
  so because they sought to enter the European
  Union
• But in practise, the legal environment is a
  jungle. Laws are
• Incomplete (lack of case law, decrees)
• Volatile and contradictory
• Not enough enforced

On the main square in Sofia, one can buy the most
recent and expensive software CDs for a few
dollars.
30
Preparation for lecture 3

• Browse the key economic indicators for Russia,
  Estonia and Romania in Centreurope.org

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Questions Answers

• What is the main strong point and drawback of the
  Romanian, Russian and Estonian economies?
• Is unemployment a crucial figure to analyze?
• Who performs the best for public and commercial
  deficits and why?
• Why public and commercial deficits should be
  avoided ?

32
III. An economic overview
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An generalized improvement of the economic
performances

• After a deep collapse of their GDP, Central
  European countries have been achieving steady
  economic GDP growths, followed by most Eastern
  European countries
• With the example of up to 1000 inflation in one
  month in Bulgaria in February 1997,
  hyper-inflation has severely affected some CEE
  countries, namely Poland, the Baltic countries
  and Russia.
• This issue is today under control, and figures
  are even close to Western standards in Central
  Europe.

34
Consumption as the most important economic
indicator

• Demography is essential to understand consumption
  patterns, as old people do not consume the same
  products and services as young people.
• The rate of equipment helps us understand which
  goods are not possessed by households and thus
  may be purchased.
• In Central and Eastern Europe, people will turn
  to semi-durable goods, as they are still
  under-equipped.

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How GDP helps us understand consumption patterns

• The long or medium term GDP Growth is as
  important as the ratio GDP/head to understand
  commercial opportunities.
• In countries where GDP Growth is steady, such as
  Poland, people tend to buy durable goods (houses,
  cars the Polish automotive market is the 7th in
  Europe).
• In countries where GDP growth is relatively good,
  the domestic consumption will support
  semi-durable goods (ex. hi-fi), such as in
  Hungary.
• And when GDP Growth is uncertain, like in Russia,
  people prefer non durable goods (food, luxury
  products, etc.), even though their purchasing
  power would enable them to buy durable goods.

36
The challenges of competitiveness

• Commercial deficits are found in most CEE
  countries.
• The values of the currencies tend to decline,
  which impoverish these countries and put them
  under the threat of speculators
• Local consumers and companies ask for foreign
  goods and services, while the Eastern European
  quality does not export well.
• The commercial deficits tend however to narrow,
  thanks to the export successes of multinationals
  subsidiaries such as Skoda (Volkswagen Group),
  Philips, Matsushita, etc.

Georges Soros a real philanthropist ?
37
Unemployment and public deficits two persistent
weaknesses

• Impossible during the Communist times,
  unemployment has risen above average European
  standards in all countries that have started to
  restructure their local companies.
• Owing to weak fiscal revenues and uncontrolled
  expenses, public debts have dangerously grown
• The consequence is high interest rates, which
  prevent all economic development.

38
The European Monetary Union (EMU)

• The EMU belongs to the EMS. It has been
  implemented in three steps, including the
  creation of a European Central Bank, the
  convergence of European countries economic
  policies and the launch of the single currency,
  in early 2002.
• 12 countries out of 25 (the  ins ) belong to
  the EMU.
• The Entry process for the  outs  requires
  achieving a certain degree of economic
  convergence, called the Maastricht Treaty
  convergence criteria - limits on the public
  deficit and debt have been set respectively at 3
  and 60 of the GDP - inflation and interest
  rates must be kept under control (respectively
  not more than 1.5 and 2 of the average of
  the three lowest scores in Europe. - exchange
  rates must be stabilized.

39
Preparation for lecture 4

• Browse the main facts and figures for Russia,
  Poland, Ukraine and Romania in Centreurope.org

40
IV. Restructuring and current situation of
financial and production systems
41
The impact of privatizations in Central and
Eastern Europe

• Privatisations of banks and companies are well
  advanced
• But the industrial restructuring is still
  unsufficient
• The companies suffer from overemployment,
  obsolete equipment, processes and management
  models, and they are not quality-driven.
• The companies lack efficient shareholders pushing
  towards performance

42
(Eastern) European firms compared with the firms
of the other Triad powers

• Compared with Japanese management
• European management is more individualistic and
  centered around private needs, rather than on the
  country needs
• Private companies clearly differ from
  public-owned companies and trade unions defend
  individual interests
• Compared with American firms
• European firms are more conservative and less
  structured
• The decisions made by managers are less
  profit-oriented, because their strategies focus
  on the long-term.
• State intervention and corporate democracy are
  widely tolerated, whereas competition and its
  cruelty are not well accepted.
• Pay incentives are limited. Mobility occurs
  inside the company rather than outside.

43
The German model as the natural reference for
Eastern Europe

• The Rhenan model of corporate strategy has long
  been a reference, owing to the strong position of
  Germany in Eastern Europe.
• The particularities of this model are that
• Companies must serve the society, the main goal
  of the companies is not necessarily profit
• The consensus is sought at the micro level, with
  employers, trade unions, creditors and employees
  working hands in hands, and at the macro level,
  because frontal competition is avoided.

44
A marked preference for the Anglo-Saxon model of
corporate strategy

• In the Anglo-Saxon model of corporate strategy,
  the State intervention is seen as negative and
  the companies are controlled by shareholders who
  are only interested in short-term profit and
  dividends.
• The Anglo-saxon model spreads rapidly all over
  Eastern Europe
• Central and Eastern European countries value this
  model, because the USA is seen as the world
  reference for business and trade.
• The multinationals adopt similar management
  practices throughout the world
• The ERP (Enterprise Resource Planning) software,
  such as SAP or Peoplesoft, tend to impose a
  global way of management for the world, with
  minor adaptations for each country
• The consultancy firms, such as the Big 5, focus
  on the best practices, which mostly come from
  Anglo-Saxon countries

45
Industrial relations

• There are several unions traditions in Europe.
  The European Trade Union Confederation hosts
  members from almost all European countries, but
  trade unions have never managed to create
  efficient Paneuropean organizations.
• In Central and Eastern Europe, Trade Union
  memberships are quite high (over 30 ).
• But except in a few countries like Poland, Trade
  Unions have virtually no power over the
  management of the companies.
• Their action is limited to improving the work
  conditions and to the organization of social
  event

46
V. The shift of the Central and Eastern European
economies towards less industry and more services
47

• What made Republica acquire its leading position
  in Eastern Europe?
• What are the reasons of the decline of Republica
  ? Which reasons are specific to this company and
  which are common to post-communist companies?
• What future can we predict for Republica?

48
The decline of the agriculture and the industry

• The good potential of the agriculture sector has
  been destroyed by the communist choices and a
  inefficient privatization process.
• Central European traditional industrial sectors
  (textile, iron steel industry, mining,
  defence...) are not anymore competitive in the
  new international division of labour.
• Central European Countries such as Poland or
  Slovakia must focus on hi-added values industries
  because they become too expensive compared to
  their Ukrainian or Belarussian neighbors.
• But these countries have maintained a few
  industrial competitive advantage (automotive
  industry, chemistry, electronics, IT...).

49
Thriving services

• All services sectors perform great distribution,
  tourism, financial services...
• The parallel economy is also very much developped

GDP Growth in Central and Eastern Europe is
mainly driven by foreign investment and
consumption of foreign goods
50
A buoyant distribution sector

• The distribution is little concentrated in
  Central and Eastern Europe (Tesco is n1 in
  Slovakia with about 2 market share).
• There are two types of hypermarkets
• the French hypermarkets (Carrefour, Leclerc,
  Auchan) situated in the outskirts and aiming at
  generating traffic with good quality and branded
  products,
• the German hypermarkets (Metro, Lidl, Meinl),
  situated in town centers and aiming at generating
  flow with cheap products.

Each unveiling of an hypermarket is celebrated by
hours of queues of avid consumers.
51
The transportation and logistics market

• The Central and Eastern European Freight
  Transport Sector is leaded by the road haulage.
• Major Industrial Sectors Automotive, fast moving
  consumer goods (FMCG) / Retail, Healthcare /
  Pharmaceutical, High Tech Electronics Almost all
  main transport players in market come from
  Western Europe and the US.
• The local know-how, plants and equipments have
  not yet catched up with European standards
• Road Networks, Customs Issues, Security Issues
  need to be improved.
• Transportation and logistic costs are almost as
  high as in Western Europe.

52
Opportunities for US firms in offering logistic
services

• The distribution sector is very much atomized.
• Logistics and transportation is a priority for
  the EU.
• Thanks to a strategic location and a buoyant
  economy, the logistics and transportation sector
  of most Central and Eastern European countries is
  growing rapidly
• Local companies urgently need assistance from the
  West with a comprehensive updating of
  equipments/technologies and restructuring their
  organization.

53
VI. Nature and extent of Foreign Direct
Investments
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Why invest in Central and Eastern Europe ?

• Foreign direct investments in all sectors and
  from all countries are welcomed and little
  restricted.
• Central and Eastern European countries benefits
  from a cheap and qualified workforce and an
  advantage of territorial location
• Investment incentives are offered for
  Manufacturing investors.
• It is a mistake to think that delocalizing in a
  low labor cost country increase competitiveness.
  The wages are a consequence of the
  competitiveness, not a cause.
• For example, assembling cars in Poland should be
  very competitive with a skilled labor force and
  an average salary of USD 500, but in practice,
  local companies suffer from low motivation, bad
  organization, bureaucracy, insufficient national
  infrastructures, etc.
• The main reason for FDI is good access to
  domestic and foreign markets, which are growing
  and unsaturated

55
Unsaturated markets

• Local consumers ask for western products.
• They are fascinated by the consumption society
  and relatively under-equipped.
• Each unveiling of an hypermarket is celebrated by
  hours of queues of avid consumers.
• Local companies urgently need comprehensive
  updating of equipments/technologies and
  restructuring their organization.
• The local supply is unable to provide these
  services.
• Local public authorities lack of everything
• Services of public utility (environment,
  education, culture) constitute a huge market,
  often financed by the EU.

56
Where and how to invest ?

• A few Central European countries attract the
  majority of FDI
• Hungary, Poland and the Czech Republic have
  received the biggest shares, but now good
  opportunities can also be found in Eastern Europe
• In Eastern Europe, some large companies are
  scheduled for privatisation, but the best deals
  have long been done

57
Greenfield investments

• The most profitable way of investment is the
  Greenfield investment (starting up from scratch)
• Greenfield investments are the least risky,
  because the foreign investor is not constrained
  by the communist heritage and low productivity of
  the local firms
• Greenfield investments require arranging
  administrative problems.
• When Auchan wanted to invest in Prague, they
  bought from the Town hall fields that eventually
  did not belong to the Town. Auchan offered
  bribery in order to solve the problem, which
  cause a national scandal and the abandonment of
  the project and the dismissal of dozens of
  people.
• A new labor force is needed, which is not always
  available, especially in low-populated areas

58
The direct international cooperation

• Well developed in Europe, the direct
  international cooperation offers an alternative
  between simple export and delocalisations.
• In most cases, franchises and licensing
  agreements offer a win-win situation
• International joint ventures, which are an
  association between a local company and one or
  several foreign investors offer less
  opportunities
• A JV should be recommended for each unknown
  market, but in practice, the results are rarely
  positive due to cultural of financial
  disagreements.
• In some countries such as Russia, it is the only
  authorized way to invest in some sectors, because
  local governments want to access foreign
  technology without losing the control of their
  wealth.

59
... Foreign direct investment as an easier access
to foreign markets

• FDI provide easier and more efficient access to
  the markets and avoid customs barriers.
• When Asian or American companies want to access
  the European market, they can create a
  subsidiary, which can constitute a bridge for
  other markets Prague or Warsaw for the CIS,
  etc.
• One of the reasons for FDI rather than for export
  is to deal with marketing, distribution, after
  sale service, etc. which are easier on the spot
  (ex. The French optical group Essilor has a
  strong implantation worldwide).

60
Foreign direct investment as a way to avoid
Western legislation

• Some investments are offered for free to client
  with low financial means the provider gets paid
  by asking fees on revenues.
• It sometimes happens for investments that permit
  to avoid Western environmental legislations. For
  example, the serious pollution of the Danube
  River in Romania in 2000 by a subsidiary of an
  Australian gold mining company was caused by the
  use of cyanure, which is totally prohibited in
  developed countries.

61
HRM strategies

• Two HRM strategies coexist in Central and Eastern
  Europe
• A culture-free model based on the global best
  practices
• Corporate cultures must be stronger than national
  cultures.
• A cross-cultural management model based on
  contingent strategies
• Different environments, cultures and attitudes
  towards work lead to different practices
  corporate communication, pay systems, HRM

62
A qualified workforce

• The workforce is
• Qualified, especially in technical fields
• relatively cheap, especially in Eastern Europe
• respectful for hierarchy and rules and able to
  stand hard working conditions
• So how can we explain such low salaries?

In spite of a high qualification in technical
fields such as computer science, Bulgarias wages
are about 10 times less than in Western Europe
63
but a low labor productivity

• The main characteristic in Central and Eastern
  Europe is the dependency from a central structure
  of authority.
• In practice, the management is hierarchical. This
  system is not competitive and human resources
  little productive compared to European standards.
• Commitment (especially towards foreign
  investors), sense of initiative, mutual trust
  between workers, customer satisfaction, ability
  to communicate and ethics at work are low
•  pretend to pay us and we will pretend to work 
•  the one who does not steal, steals his family 
  (Czech proverbs)
• But workers tend to behave in a more productive
  way in Eastern Europe than in Central Europe.

64
How to recruit/sack people?

• Young graduates are targeted by companies
• Outsourcing recruitment is not as common as in
  Western Europe
• Assessment centers, psychological tests and even
  cvs are not as widespread as in western Europe
• Sacking employees is easy, as labour laws and
  trade unions have little influence But it is
  risky especially for seniors.

65
How to motivate? How much to pay?

• Money is generally the best incentive to motivate
  people
• Young graduates receive higher salaries than
  their older colleagues with a long experience
• Bonuses are not much widespread nor much
  effective
• Cellular phones, company car and other
  non-monetary allowances have more impact than
  salary increases
• Honors and titles are appreciated

66
What is the importance of training?

• Central and Eastern European human resources are
  eager to learn
• Training is not perceived by employers as a
  strategic investment, especially for  soft 
  skills
• Money spent on vocational training is very low

67
VIII. The evolution of social structures winners
and losers
68
Democracy is relatively well spreaded in Central
and Eastern Europe

• Parliamentary regimes dominate in Central and
  Eastern Europe, but some countries do not have a
  parliamentary but a presidential regime, such as
  Serbia and Montenegro.
• Some States are not unitary but federal. In
  Eastern Europe (Czechoslovakia, USSR, Yugoslavia)
  they have exploded and those who remain (Russia,
  Serbia and Montenegro, Bosnia and Herzegovina...)
  are politically unstable.

69
The Welfare state model is in crisis

• In Central and Eastern Europe, the social role of
  the State is decreasing.
• Most institutions (The Police, Universities,
  Hospitals) in Central and Eastern Europe are in
  crisis
• Central and Eastern Europe faces a serious
  demographic problem.
• While generations are renewed with an average of
  2,1 children by woman, the average is 1,3 for
  Eastern Europe countries with a world record for
  the Czech Republic and Latvia.
• This has direct effects on the domestic demand
  and on the national competitiveness
• Central and Eastern European states suffer from
  bureaucracy and corruption
• Income inequalities and regional discrepancies
  are widening

70
Unequalities for the local population

• Central European countries GDP / head is about
  half of the average of the EUs one, and Eastern
  European countries GDP/head about a fifth.
• The average revenue or GDP / head is not
  significant in Central and Eastern Europe, where
  revenues inequalities are high. Those countries
  are marked by a combination of few very rich
  people and many poor people, without a real
  medium class
• The poor European regions are helped by the
  European Union, but there are still huge
  differences, even between rich countries
• See human development index

71
Multiple regionalisms

• Regions have always played in Europe but their
  importance tends to increase with the
  globalization.
• Their development is financially supported by the
  European Union because of the principle of
  subsidiarity (each decision should be taken at
  the most local spot) and because regional
  identities are  allies  of the European Union
  against strong national identities..

72
Multiple regionalisms

• Borders in central and Eastern Europe have more
  been designed according to the side chosen by the
  countries during the World Wars rather than by
  the human realities of the period (see map)
• For example, Hungary, who was the ally of the
  Germans, saw at the dislocation of the
  Austro-Hungarian Empire its size reduced by three
  and its population by two.
• As a consequence neighboring countries such as
  Romania and Slovakia respectively host 1,5
  million and 500 000 Hungarians, that is to about
  10 of their total population.
• The regionalisms are also encountered in Romania,
  Poland or Ukraine with a strong east/west
  opposition.

73
Job market and educative systems in Central and
Eastern Europe

• The educative system is a key issue for the
  productivity of human resources
• Baltic countries specialize in the the Hi-tec
  industry because more than one third of their
  University graduates are specialized in this
  field.
• But in most Central and Eastern European
  countries, the educative system is in crisis
• In Eastern Europe, the fluidity of the job market
  is high thanks to an unconstraining labor law,
  but there is a high level of unemployment
• People are highly attached to their town or
  region
• Some people are officially unemployed in order to
  receive the dole
• The brain drain is strong in countries such as
  Bulgaria or Serbia and Montenegro, where a doctor
  or a University professor earns about 100 USD per
  month.

74
Other factors of competitiveness

• The tax level, costs of the workforce and of
  other factors and attitudes towards work, are
  highly varying across the region.
• Some Central and Eastern European countries rank
  high in the competitiveness rankings (IMD, WEF)

75
VIII. The enlargement challenge
76
The European identity

• There is a common ground for the European
  identity, which is opposed to the two other poles
  of the Triad (USA and South-East Asia)
• The heritage of the Greco-Roman Empire. The
  Greeks gave the name Europe to the continent, its
  first civilization and its rational spirit (the
  logos)
• The Renaissance. This period has mainly affected
  the southern catholic part of Europe, where still
  today the look may be more important than the
  essence.
• The social romanticism. The ideal of social
  justice, defended by V. Hugo and other romantic
  figures, continues to dominate the philosophy of
  a large part of Europe

77
Different aspirations for Europe

• Germany and the Netherlands propose a form of
  federalism while Brits and Scandinavians reject
  the idea of a Super State and will only accept an
  unconstrained union.
• The EU is the only supra-national structure of
  the world, which means that the European law is
  superior than national laws. The main body is the
  European Commission.
• The European Union is criticized because of its
  lack of transparency, its bureaucracy and its
  high costs, namely budgets for translations and
  funding, with little control of the use of the
  money.

78
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79
Towards a stronger Europe

• A group with 25 countries offers a stronger
  opposition to the other world powers
• The USA will endeavour make the enlargement fail
• The EU must adjust itself to the enlargement
• Is it able to ?
• How far can we go ?

80
A difficult task to achieve

• A few international disputes are not solved yet
• The first relationships between ancient and new
  EU members are marked by conflicts
• Reciprocical expectations and knowledge from
  ancient and new members strongly diverge

Will they get along together ?
81
More information
D. Chelly F. Lafargue, Guide culturel et
d_at_ffaires pour lEurope de lEst, LHarmattan,
2003
www.centreurope.org East-west business portal