2.3.1 Economic History of V4 Countries
In order to interpret the results of the EU accession, the economic history of the studied countries is briefly covered. As was previously mentioned, the V4 countries share similar background of being satellite states of the Soviet Union and this affected their economies greatly by high level of debt, low trade openness and low competition levels.
Most of the centrally planned economies crashed in 1989 with the collapse of the Berlin Wall and afterwards, their governments faced resulting issues, such as need for privatization and radical changes that mostly led to fall in recession (Berend & Berend, 2009). The studied countries started their economic transition in 1989 (Koyame-Marsh, 2011).
Baldwin (1994) indicated the V4 countries as those who may enter the EU first.
He also highlighted the differences in the economic maturity of the countries. While Czech Republic and Hungary were small and relatively rich countries, Poland was much bigger and poorer, and so was Slovakia that had even lower GDP per capita level (Baldwin, 1994). Even though the V4 countries agreed to adopt the single currency, Slovakia was the only one to join the eurozone in 2009. The V4 countries achieved significant development after their market liberalization. Currently, Poland receives the highest amount of money from the EU budget (Kovacevic, 2019). According to Ivanová and Masárová (2018), in terms of competitiveness of the countries, Slovakia reaches the lowest levels, while the Czech Republic achieved the highest level, followed by Poland and Hungary, respectively. During the world economic crisis, only Poland managed to avoid recession (Ivanová & Masárová, 2018).
Czech Republic
The above-mentioned country was officially found in 1993, when the Czechoslovakia split into two countries. After 1989 and the Velvet Revolution, the country had gone through major economic changes, including privatization and economic reforms. The liberalization of Czech economy started with price liberalization and in 1991, Czech Republic started coupon privatization and opened the domestic market to international trade. The transition in the Czech Republic was successful and turned Czech Republic into a strong export-oriented economy (Myant, 2007). During the two decades after transition, real GDP in Czech Republic grew approximately by 37% (Koyame-Marsh, 2011).
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Republic was not as large as in comparison to the other EU countries, especially due to the ability to perform monetary policies. Currently, Czech economy is the richest in terms of GDP per capita out of the studied countries. From 1991 to 2017, the level of GDP per capita was well above the rest of the V4 countries, nonetheless, it was still way below the average GDP per capita of the old fifteen EU states.Hungary
After 1989, Hungary experienced a large fall in export to the Eastern countries and faced large foreign debt, deficit of the public finance and high unemployment rate, which soon caused the economy to fall to a recession (Žídek, 2014). Four years later, Hungary received a loan from the IMF and assistance to reduce the deficits in public finance and trade balance (Réti, 1995). Soon after the reforms, Hungary experienced inflow of FDI, increase of export, and the GDP per capita level recovered (Žídek, 2014).
Just as the previous country, Hungary is export oriented country with the trade ratio in some years exceeding 100% of the Hungary’s GDP (Pintér, 2018). Compared to other post-Soviet countries, Hungary received high value of FDI per capita (Ungváry, 2018). Furthermore, Hungary was determined as the most promising EU candidate (Böröcz, 2012). Nonetheless, when Hungary joined the EU, it was not able to perform economic structural reforms as other V4 countries did and its economy faced large domestic and foreign deficit (Beacháin, Sheridan & Stan, 2012). This probably influenced its benefits from joining the EU.
During the global economic crisis in 2008, Hungary experienced recession due to the high level of government debt and increase in unemployment that exceeded 10%
(Žídek, 2014). After this, Hungary had to receive a rescue package from the IMF.
Furthermore, after the global crisis, Hungary’s GDP per capita fell sharply and the economy did not fully recover.
9 Trade openness is defined as a ratio of trade (exports plus imports) to GDP.
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Among the V4 countries, Poland is the largest, however, least developed. After 1989, Poland faced large foreign debt and hyperinflation (Gomułka, 2016). The situation in Poland was much worse compared to the other V4 countries and the government decided to implement a shock therapy reform called the Balcerowicz Plan introduced in the beginning of 1990 that implied immediate market liberalization and currency devaluation, however this also led to recession and hyperinflation (Žídek, 2011). In the following years, Poland managed to tackle down the inflation and reach surplus in government budget (Ratajczak, 2009). After the privatization until 2013, the Polish GDP was experiencing approximately growth of 4% annually (Gomułka, 2016).
Just as other post-soviet countries, Poland’s export was lacking competitiveness.
The positive economic results from joining the EU took a relatively long period, however, the economic growth during EU membership was never negative (Kolodziejczyk, 2016). Poland experienced large increase in exports, FDI inflow and improved its productivity (Kolodziejczyk, 2016). Nonetheless, the living standards in Poland are still very low compared to the western EU countries. According to Kolodziejczyk (2016) the nominal output level in Poland reached the 8th highest value from the EU countries, however, with a large gap. Poland experienced large amount of migration. The Central Statistical Office in Poland estimates the amount of Polish citizens working abroad to increase by almost one million between 2004 and 2013 (Kolodziejczyk, 2016). Furthermore, during EU membership, Poland experienced decrease in inequality and if it did not join the EU, its GDP would be probably much lower (Kolodziejczyk, 2016). Nonetheless, compared to the EU15, Polish economic development is incredibly low. The large migration of Polish workers can be considered a negative consequence of the EU membership for Poland (Kolodziejczyk, 2016).
Poland is one of few countries that did not suffer from the global economic crisis in 2008. The credit is assumed to large market and friendly and liberal environment.
During the years before the crisis, Poland had stable inflation, output level and very low current account deficits (Belka, 2013).
Slovak Republic
During the privatization, Slovakia had to overcome the consequences of the centrally planned economy, such as public finance deficit and high unemployment. It introduced
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Background
critical economic reforms. Both, Slovakia and Czech Republic experienced in 1991 recession (Koyame-Marsh, 2011). With the price liberalization, the inflation rose sharply and was fought by monetary policy (Koyame-Marsh, 2011).
After the disintegration of Czechoslovakia, Slovakia decided to switch from coupon privatization to auction, which caused that Slovak companies received large inflow of investment from foreign buyers (Koyame-Marsh, 2011). Moreover, Slovakia was mainly left with heavy and arms industries, which could not had been successfully traded with the EU countries (Koyame-Marsh, 2011). Slovakia also experienced high level of unemployment in early 1990s. During the transformation, Slovakia reached lower inflation and higher economic growth compared to Czech Republic.
Due to the 2004 enlargement, Slovakia received a great number of foreign investments, lowered its inflation level, and reached higher economic growth.
Moreover, with the EU membership, Slovakia experienced a large increase in export of goods and services. Slovak Republic is the only V4 country to adopt the EU common currency in 2009. After joining the EU, Slovakia achieved high economic growths and its GDP per capita largely increased, converging to the level of the Czech Republic.
When the economic crisis hit the European countries, Slovakia experienced a large increase in unemployment and the GDP growth slowed down. Between 1989 and 2009, real GDP grew by approximately 60% (Koyame-Marsh, 2011).
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This chapter summarizes the past research conducted on analyzing the effect of the EU accession on the economic growth of the member states. Furthermore, the differences in the method and variables used in this thesis compared to the previous research are discussed.
The previous literature on the effect of joining the EU on member countries is still insufficient. While there is a large number of research papers estimating the effect of the euro adoption on the member countries, there is only a limited amount of econometric research papers estimating the monetary benefits of the EU membership on the member countries. Furthermore, most of the previous research focuses on the past enlargements10. Also, no previous research solely focused on the V4 countries and their GDP and its components.
Nonetheless, based on past research, the EU participation mostly led to higher GDP per capita for the member countries (Badinger, 2005; Kutan & Yigit 2007; Crespo Cuaresma, Ritzberger-Grünwald & Silgoner, 2008; Campos, Coricelli & Moretti, 2014). The past literature mostly uses the Solow model or the endogenous growth theory. The Solow model builds on an exogenous growth theory, where the long-term economic growth is achieved by the exogenous rate of technological change (Solow, 1956). This means that either economic policy or integration would lead only to a level effect caused by temporarily higher economic growth rate. The Solow model introduced the diminishing returns to capital, according to which, those countries that reached lower output per capita will experience higher growth of the output level compared to those with higher values and in the long run, they would converge to the richer old member states. On the contrary, the endogenous growth theory accounts the technological change as an endogenous variable by firms investing to research to reach higher technological level (Romer, 1990). For this theory, the economic integration may cause a long-run positive effect on the economic growth of the country. Furthermore, the profits generated by higher technological levels by investing to research and innovation encourages the long-run economic growth, and the long-run economic growth boosts up with the larger size of the economy (Crespo Cuaresma et al., 2008).
10 EU enlargements that took place before year 2004.