VOCATIONAL TRAINING NR. 11 EUROPEAN JOURNALaei.pitt.edu/44873/1/11-1997.pdftry to find and determine...

VOCATIONAL TRAINING NR. 11 EUROPEAN JOURNAL

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Perspectives from the West

Co-operation with Central and EasternEurope is the focus of this issue of theEuropean Journal for Vocational Training.Although part of the European continent,its history and its culture, these countrieshave been quite separate from the rest ofEurope for a very long time.

Since the dramatic political changes in thisregion at the end of the 80’s and the early90’s, both sides of what was known asthe ‘iron curtain’ have begun to grow to-gether although not always in a way thathas respected the customs and traditionsof each of the different countries involved.Vocational education and training is oneimportant element in this process, and isclosely related to history, culture, humanand social values as well as economic fac-tors. If this is neglected in the reformprocess, the reforms will fail - and theexamples are numerous.

What is meant by the Central and EasternEuropean countries? To a certain extentit is an artificial term invented as a para-phrase for the countries eligible to ben-efit from the European Union (EU) PHAREProgramme of co-operation and assist-ance. At present it covers: Albania, Bul-garia, the Czech Republic, Hungary, Po-land, Romania, the Slovak Republic,Slovenia, and three countries of the formerSoviet Union: Latvia, Lithuania and Esto-nia. The countries of the former Yugo-slavia - apart from Slovenia - though geo-graphically part of this region are not yetfully included due to the specific post-war conditions. Ten of these countriesnow have a concrete political perspec-tive to become members of the EU andhave signed association agreements, onlyAlbania is in a different position. Anumber of EU programmes are, in princi-ple, already open for the participation ofthese countries. For this reason, the Edi-torial Committee of the Journal has de-cided to devote this special issue to thesecountries, which remain, for many peo-ple, unknown territory as far as the stateof play, the underlying principles, trends,

perspectives, problems and requirementsof vocational training are concerned.

This issue is also special as it brings to-gether two EU institutions of major im-portance for vocational training in Europe;the European Centre for the Developmentof Vocational Training (CEDEFOP), whichhas the objective of assisting the Com-mission in promoting the development ofvocational education and continuing train-ing within the EU; and the EuropeanTraining Foundation which deals with co-operation with Central and Eastern Eu-rope, the new independent states andMongolia, in the fields of initial and con-tinuing vocational training, the re-train-ing of adults and management training.Close co-operation between these two in-stitutions is indicative of the changes inEurope and necessary to foster their mu-tual development.

We don’t claim to provide the reader witha complete survey on events in this partof Europe and we also try to avoid themistake often made by numerous west-ern ‘experts’, particularly in the early 90’s,who treated these countries as if they werea homogenous ensemble in need of auniform, proven model of the marketeconomy with relatively simple patternsof skills requirements. Although the factthat there is no ‘European model’ of avocational education and training systemwas frequently emphasised, this has of-ten proved to be empty talk and recom-mendations have been made in a rathersimplistic way. Occasionally recommen-dations were also provoked by some part-ner countries themselves being attractedby, for example, the advantages of a sys-tem with high private sector commitment- which alleviates the burden on statebudgets - without paying due attentionto the fact that such systems have theirroots in long traditions, consolidatedawareness of the importance of invest-ment in training and last but not least fi-nancial means allowing for this kind ofprivate commitment.

The difficult question of the transfer ofsystemic approaches, know-how and ex-

EditorialShort Glossary of Acronyms

The EU PHARE programme:PHARE is the European Com-munity’s economic aid pro-gramme to support economicrestructuring and democraticreform in Central and EasternEurope. Its funding is used tochannel technical, economicand infrastructure expertiseand assistance to recipientstates. The aim is to helpeconomies in transition to es-tabl ish market economiesbased on free enterprise andprivate initiative.

CEECs - Central and EasternEuropean countries: In thisissue this refers to Bulgaria,the Czech Republic, Estonia,Hungary, Lithuania, Poland,Romania, Slovenia, Latvia andSlovakia.

COMECON (Council for Mu-tual Economic Assistance)or CAEM (Conseil d’Assis-tance Économique Mutu-elle): Free trade organizationamongst socialist countriescreated in 1949 as a responseto the Marshall Plan. TheOrganization was dissolved inJune 1991. It comprised East-Germany, (ex-GDR), Bulgaria,Hungary, Poland, Romania,Czechoslovakia, the USSR,Mongolia, Cuba and Vietnam.

Leonardo da Vinci is an ac-tion programme for the imple-mentation of a European Com-munity vocational trainingpolicy. It promotes the devel-opment of innovation in vo-cational education and train-ing through pilot projects, ex-changes and surveys andanalyses, carried out by trans-national partnerships.


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perience lead those familiar with the prob-lems involved in reform and restructur-ing processes to the conclusion that thereis no way out of the need for each coun-try to find and determine its own wayindividually, using the exchange of ex-perience as a tool for clarifying lines anddirections of its own reform process,rather than for establishing a market forimport and export.

The communist systems in these countriesdid, nevertheless, have some common fea-tures, many of them linked to the economicsystem (planned economies). State minis-tries worked closely with large scale in-dustry to determine and organise trainingin vocational schools tied to particularenterprises. Specialisation was extremeand the profiles of professions narrow withlong lists of occupations. Labour marketneeds assessment was simplified (or evensuperfluous) in a system where demandwas decided by the state, small and me-dium-sized enterprises not permitted, andsocial partners unnecessary. As mobilityand flexibility of the workforce was notan economic requirement, lifelong learn-ing had quite a different meaning.

At the end of the communist era, somecountries were able to go back to pre-socialist times, revitalising, for example,the craft sector with very practically-ori-ented training. Others tried to retain as-pects of their existing systems, such asthe possibility to access higher educationthrough vocational training qualifications,which is also of interest to the EU Mem-ber States. Many countries follow school-based vocational training while at thesame time developing different lines toincrease - either simulated or real - prac-tical work placements.

Overall there is a readiness and motiva-tion for innovation on an impressive scalein this part of Europe which could welleven help to encourage reform in theEuropean Union Member States in thefuture.

Nevertheless, it is important to realise thatmajor changes will take a generationrather than a few years. The necessarydevelopment of core skills, such as learn-ing to be able to work as a member of ateam, to be creative, to feel responsible,to have the means to develop entrepre-

neurial skills (particularly in the contextof small and medium-sized enterprises)and the skills requirements for the increas-ing service sector, need time for changeand consolidation.

Regardless of the type of training system,social partners will have to play a moreactive and important role in the future.This means institution building, the de-velopment of a social dialogue culture,and improvement of skills and compet-ences. In addition, special support andencouragement is necessary for all the dif-ferent types of disadvantaged groups. InWestern Europe today almost one in fiveyoung people do not successfully com-plete their initial training.

Innovation and reform require a soundanalysis of information and data and agood research infrastructure. The re-search facilities in Central and Eastern Eu-rope have suffered and have not yet re-covered sufficiently. It is to be hopedthat this issue of the Journal will help tobring Eastern and Western research insti-tutions closer together, although at thesame time it is important to bear in mindthat exchange of experience betweenthose countries themselves is also veryvaluable in the reform process.

As mentioned previously at least ten coun-tries are moving towards European Un-ion membership. Apart from bilateral co-operation there are two programmes atEuropean level which support this proc-ess as far as vocational education andtraining is concerned. On the one handthe European Union’s Leonardo Pro-gramme can be described as a laboratoryfor innovation enabling institutions andindividuals to experiment and developnew ideas in a bottom-up and partner-ship approach. On the other hand, thePHARE Programme has provided assist-ance since 1989, gradually spreading itsscope from two countries at the begin-ning to a total of thirteen today. The pro-gramme will in future serve as the mainaccession instrument for these countries,the emphasis on partnership rather thanassistance. As far as PHARE support isconcerned, the keyword is now the ‘aquiscommunautaire’, in other words the ad-aptation to formal regulations, particularlythose governing the single market. In thefield of vocational training this term has

TEMPUS is part of the PHAREprogramme and aims to pro-mote the quality and supportthe development of highereducation systems by encour-aging their constructive inter-action with partners in the Eu-ropean Community.


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to be used in a more comprehensive senseenabling not only the adaptation of regu-lations such as the recognition of diplo-mas, but also for more structure and con-tent related measures to increase competi-tiveness in a common market, to improveaccess to training and to better providefor disadvantaged groups. It was clearfrom the beginning of the reforms thathuman resources development is a cru-cial aspect in the development of democ-racy and the reform of the economic sys-tem. It remains so in the process of be-coming a member of a unified Europewhere the institutions and networks thatsupport the functioning of training sys-tems are an integral part of society and

the “acquis communautaire” in our partof the world.

The articles in this issue of the EuropeanJournal tackle important topics: labourmarket needs assessment, standards andcurriculum reform, decentralisation, therole of the social partners - to name afew. It is hoped that they will stimulateinterest in the situation, development,problems and prospects in our neighbour-ing countries. The perspective has be-come richer and innovations have gainedconsiderable impetus. The greater Europecan only be built on partnership in thetrue sense of the word and not throughone way process.

Ulrich Hillenkamp

Let us add also a few words from theperspective of Central and Eastern Euro-pean countries (CEEC), countries “in tran-sition”. As Ulrich Hillenkamp pointed out,a system of vocational education andtraining is closely connected with thesocio-political climate of society.

In the totalitarian regime the rulers do notask the public whether to introduce a re-form or not. They are using their power toenforce the reforms without any feedback,discussions, without much responsibilityor monitoring the effects of the reform.The reform in a stable democracy is morecomplicated to implement since the pub-lic has the right to make suggestions andobjections. The preparation of reform hasto include certain criteria with regard tofuture stability and efficiency. Public opin-ion should be respected and participatingactors should be persuaded. The reformin societies in transition towards a demo-cratic system meets a lot of difficulties. Eve-ryone is eagerly expecting a fast reform.In a post-revolutionary period people donot ask “Why a reform is needed?”, butthe most frequent questions are “Why thereforms go so slowly?” or “Why the reformshave not been implemented yet?”.

But in its initial phase freedom sometimestakes the form of chaos. People are fo-

cusing on social interactions, relations,allocation of power. The short-term issuesare so enormous that many people forgetto take care of the structural long-termproblems. People are eager to act, solv-ing the problems at hand is in; thinkingabout long-term problems is out. Thereis hardly any t ime or capaci ty forconceptualisation.

The typical feature of post-revolutionaryperiod is an unstable government. Thisfact does not involve only CEECs. Forexample, Portugal in the period of itstransformation after 1974 had 12 differ-ent ministers of education within 10 years.Each new minister first criticised his pred-ecessor, then cancelled some existing pro-cedures and described his vision of re-form. At that time another minister re-placed him and the circle started again.The fact of frequent changes is more orless similar in all CEECs. Frequent gov-ernmental changes do not create condi-tions conducive to the successful reform.

The basic ideas concerning the futuredevelopment and role of education in theCEECs were clear from the very begin-ning of the transformation process. Theglobal transformation of CEECs will de-pend upon new skills and attitudes ac-quired through education. New skills can-

Perspectives from the East


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not be acquired if education remainsstructured and organised as in the timesof the centrally-planned economy.

But the realisation of goals is not as sim-ple as their formulation. It is impossibleto emerge from backwardness and toqualify as advanced by its own force only.We can learn this from successful exam-ples of countries like Korea, Taiwan orSingapore. None of them has developedin isolation. The problem of underdevel-oped countries is their lack of inner stimu-lants to advancement. Only a completeopening to the world and an intensivestruggle for integration into structures ofdeveloped countries are a preconditionof possible growth. Investment of foreigncapital brings to a country also new mod-els of management and of labour organi-sation, thereby the country also obtainsexternal stimuli of development.

For many decades the educational systemsof countries behind the ‘iron curtain’ wereisolated from the rest of the Europe. Asthe devastated economy can not recoverwithout foreign capital, the same is truewith the educational systems. Immediatelyafter 1989, all CEECs were inundated withforeign advisers, teams of experts fromdifferent international organisations, rep-resentatives of foundations, numerousWestern universities and the like. Manyof these came at the invitation of nationalauthorities and institutions, many spon-taneously and at the initiative of variousWestern bodies. There can be no doubtthat directly or indirectly, implicitly or ex-plicitly, this advice and outside modelsin general played an important role in thelaunching of education reforms in CEECs.

This does not mean that many of the ex-ternal recommendations have not beenput aside and that, in some cases, andespecially in a later period, a certain re-sistance, or even rejection of foreign mod-els and advisers has taken place. Overall,however, the maxim “return to Europe”or “catching-up” did certainly reflect a keyforce influencing the reform process, sig-nificantly helped by several large assist-ance programmes and especially the Eu-ropean Union’s PHARE Programme.

The role of foreign models and advisers issubject to an evolution, which could besimplified in terms of a transition “from

assistance to partnership”. The less devel-oped ones can communicate with the cen-tres of development in two ways: as cli-ents and petitioners or as partners. Thefirst way can bring some quick concretehelp which does not necessarilly mean alsosubstantive change of behaviour. The in-tended goal - to be accepted as a full mem-ber of a community - moves away. Thesecond approach - partnership - asks forenormous efforts. It means to work hardand to try to achieve the norms and stand-ards common in the developed countries.But only this effort can lead CEECs to thetransformation which is a condition of theirtrue European integration.

A challenge for policy making in theCEECs is to combine modernisation, struc-tural change and systemic reform. Mod-ernisation and structural changes can beobserved in west European countries aswell, but the issues related to systemicreform are particular to the transition ofthe CEECs. The successful transition intoa market economy requires “systemic”changes, as the institutions and actorshave to play new roles, enter new typesof relations, which imply different atti-tudes and different forms of behaviour.This is not something that can be orderedfrom above, but has to be learned by allthose involved. It should be seen as theoutcome of a complex and difficult learn-ing process rather than as the result of asingle legal act.

There is the famous prediction of thelength of the transition period of CEECsby Ralf Dahrendorf (1991): The establish-ment of a new political system can be re-alised in six months. The transformationof economy can be reached in six years.The change in people´s attitudes and ap-proaches will last sixty years. His hypoth-eses seem to be true, everyday life con-firms them, including the last one. It isconfirmed by a lot of frustrations and ten-sions as we cannot change human behav-iour and way of thinking overnight. Wecan only try to shorten the long period,but anyhow it cannot be done rapidly.

Articles in this issue give the readers whoare interested in “Co-operation with Cen-tral and Eastern Europe” a good pictureof the topic thanks to a balanced combi-nation of case studies and multinationalsurveys. The comparative surveys provide


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the global overview: Jacques Nagels de-scribes economic surroundings as the keyfactors for the development of vocationaleducation and training systems, AlenaNesporova analyses regional differencesin employment, unemployment and ac-tive unemployment programmes. IngeWeilnböck-Buck, Bernd Baumgartl andTon Farla from the European TrainingFoundation offer a comprehensive surveybased on information from the NationalObservatories established in CEECs withthe support of ETF. Case studies (LaszloAlex, Tadeusz Kocek, Martin Dodd, andthe interviews with Ministers from Hun-gary, Slovenia, the Czech Republic andRomania) give us deeper insight into thereality of West - East co-operation. Thanksto these articles, the reader can get a pic-ture about the situation in the majority ofCEECs. The article on social partners byJean-Marie Luttringer touches the heart of

“systemic reform” in CEECs. Tim Mawsonin his article looks at the future ways ofco-operation in the framework of EU pro-grammes Leonardo da Vinci, Socrates andYouth for Europe now starting to be ac-cessible also for CEECs.

Not just concerned only with differences,let’s finish with what we have in com-mon. No matter which part of Europe wecome from, we are all Europeans. Thiscontinent’s chance in competition with theUSA and Japan lies in the creation anddevelopment of a united Europe. If weview Europe from this perspective, itmeans overcoming a multitude of tradi-tional frictions and conflicts among Euro-pean nations, to create a unifying com-prehensive policy and strategies of co-op-eration. The European educators have theduty and chance to steer Europe in thisdirection.

Jaroslav Kalous


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Innovation and reform:training in Central andEastern Europeancountries

Economic analysis and background

The completion of the first phase of transition in Poland, Hungary,the Czech Republic and Slovakia ........................................................................... 9J. Nagels; D. SimonisIn the four countries examined, the phase of transition towards rampantcapitalism is drawing to a close.

Labour markets and training in Central and Eastern Europe ........................ 20Alena NesporovaLabour market responses to the economic decline that characterized all Centraland Eastern European countries in the first phase of their transition, havediffered greatly from country to country.

Challenges and priorities for vocational trainingin Central and Eastern European countries ....................................................... 29Inge Weilnböck-Buck; Bernd Baumgartl; Ton Farla“(…) the CEECs have embarked upon reform of their vocational education andtraining systems. New institutional arrangements have been introduced as thefirst step towards reform, but many new challenges remain.”

Institutional aspects

Political questionsMinisters from Hungary, Latvia, Slovenia and Romaniarespond to questions on the process of vocational educationand training reform in their countries ............................................................... 43Peter Kiss; Juris Celmin; Slavko Gaber; Virgil PetrescuAn understanding of the approach of the central authorities to meet thechallenges posed by the move to a democratic system and a market economy isessential to appreciate the process of change

The role of the social partners in the developmentof vocational training in countries in transition ............................................. 48Jean-Marie LuttringerHow do the social partners at European level view their role and what is thesituation in the countries “in transition”?


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International co-operation

International co-operation in curriculum developmentfor vocational education and training - Polish experience ............................. 53Tadeusz KozekEducation reform in Poland has been the result of conflicting tendencies.Revolutionary ideas would mix with evolutionary one, whilst the inertia ofexisting structures would hinder change. Foreign assistance, unable to meet allexpectations, launched some major innovations, however future success dependson how the reults are used.

German-Hungarian co-operation to support Hungarian reformsin vocational training ........................................................................................... 63Laszlo AlexThe dynamism in many social areas in Hungary has been impressive since1990, including vocational training. Several reforms have already beenimplemented or are well on the way; some would merely appear to be.

Modernisation and reform of vocational educationand training in Estonia - A case study ................................................................ 70Martin DoddInternational assistance can act as a catalyst for reform, but its success dependsupon the competence, commitment, clear vision and enthusiasm of all thoseinvolved at every level.

The opening up of the Leonardo da Vinci programmeto the countries of Central and Eastern Europe ................................................ 75Tim MawsonParticipation in the EU’s programmes in the field of education and training isnot only to help the process of developing the skills and resources to modernisetheir economies, but is also part of an overall accession strategy for the countriesof Central and Eastern Europe.

Key facts

Vocational education and training in Bulgaria ................................................. 80Vocational education and training in the Czech Republic .............................. 82Vocational education and training in Estonia ................................................... 84Vocational education and training in Hungary ................................................. 86Vocational education and training in Latvia ...................................................... 88Vocational education and training in Lithuania ............................................... 90Vocational education and training in Poland .................................................... 92Vocational education and training in Romania ................................................ 94Vocational education and training in Slovenia ................................................. 96

Economic indicators ............................................................................................. 98Map: GDP per capita as % of EU average .......................................................... 100

Reading

Reading selection ................................................................................................ 101


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J. NagelsLecturer, Free Univer-sity of Brussels

The completion of thefirst phase of transitionin Poland, Hungary, the CzechRepublic and Slovakia

General background

The transition in Eastern Europe andthe globalisation of capitalism

The process of transition in Eastern Eu-rope in the years 1989-91 can only be un-derstood within the context of a processof the geographical expansion and ex-tremely rapid deepening of capitalism asan economic system. In the south, in thosecountries which had opted for a “third-world” type road to development (rela-tively protectionist economies geared to-wards the substitution of imports), nei-ther having command economy nor a free-market economy, capitalism has spreadlike wildfire in India, south and south-east Asia, Latin America, Egypt and Alge-ria. All these countries which had estab-lished a significant public sector in thepost-decolonisation period, have wit-nessed a wave of privatisation over thelast decade, rapidly unravelling the na-tionalised sector as private - national orforeign - capital took over state-ownedenterprises.

In the OECD countries, capitalism has beendominant for a long time - indeed sincethe advent of the first industrial revolu-tion. These economies nevertheless re-tained a number of enterprises directly runor at least controlled by the state. Thesenationalised enterprises - some dating backto the nineteenth century, others to theSecond World War - were mainly found inthe commercial or quasi-commercial sec-tors of the economy - the railways, postalservices, telecommunications, airlines,water and electricity distribution - and ina number of countries in purely commer-cial enterprises such as coal mines, ironand steel works and commercial banks. InNorth America, Japan and Western Europe,Thatcherism and Reaganism and their likehave privatised these public or semi-pub-

lic enterprises or are in the process of do-ing so. This marks a deepening of capital-ism, which is eroding the nationalised baseof industry and increasingly dominatingeconomic activity.

In the east, capitalism has begun to pen-etrate an immense geographical area towhich its doors had previously been firmlyclosed: Central and Eastern Europe, in-cluding the former Soviet Union, Chinaand Vietnam. At the lowest estimate, 1,700million men and women have been car-ried away by the tidal wave of the transi-tion towards the market economy. Neverbefore in history in such a short periodof time, 1989 - 1992/3, have so manycountries swung from one economic sys-tem to another.

From the command economy to “un-bridled” capitalism

By becoming internationalised and globa-lised, capitalism has gone through a pro-found change; a “civilised” form of capi-talism has given way to an “unbridled”form of capitalism. “Civilised” capitalism,dominant for a relatively short period ofhistory, 1945 - 1975, was characterised byfull employment, a relatively fair distri-bution of national income, an advancedlevel of social security, tangible growthin the satisfaction of collective needs(health, education, culture) and marketmechanisms flanked by powerful stateintervention at both the level of labour-market and monetary regulation (theBretton Woods system and fixed parities,1945 - 1971).

The opening-up of the goods, services,currency and capital markets at interna-tional level exacerbated competition in theworld markets, triggering, among others,new forms of concentration of capital atglobal level: mergers-cum-acquisitions

The process of transition inEastern Europe in the years1989-91 can only be under-stood within the context ofa process of the geographi-cal expansion and ex-tremely rapid deepening ofcapitalism as an economicsystem. In essence, the tran-sition process in the CEECsis not a question of a switch“from the command to themarket economy”, but“from the command econ-omy to rampant capital-ism”.

D. SimonisAssistant, Free Univer-sity of Brussels


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Table 1

Indicators of development in 1938

Country Average per Workingcapita income populationin current US$ in agriculture (%)

Poland 104 67Hungary 112 54Czechoslovakia 176 30

Germany 337 28United States 521 22

Source: KASER, M.C. and RADICE, E.A., The Economic History of Eastern Europe, 1919-1975, Oxford,1985, Vol. 1, p.532.

between increasingly oligopolistic multi-nationals which, in an effort to boost theirprofits, have been restructuring their busi-ness activities, outsourcing segments ofproduction to other countries serving astheir workshops, organising “Euro-shop-ping” among the Member States of theEuropean Union and provoking competi-tion between workers from different coun-tries. This process - which has only justbegun - has come up against the resist-ance of the labour world in some coun-tries, but in global terms it is advancingand leading towards an “unbridled” capi-talism, characterised by high unemploy-ment and insecurity for workers, an in-creasingly inegalitarian distribution ofnational income in view of the growth inthe relative proportion of capital incomes,in which the mixed form of the economyis being called into question by the pri-vatisation of traditionally public sectors.

This form of capitalism which is now pre-dominant is implanting itself as the capi-talism of Eastern Europe. In essence, thetransition process in the Central and East-ern European countries (CEECs) is not aquestion of a switch “from the commandto the market economy” but “from the com-mand economy to unbridled capitalism”.

Historical background

Hungary, Poland and Czechoslovakiabefore the Second World War

With the exception of perhaps Bohemia,the economies of the CEECs were late totake off - desperately late - a good cen-

tury later than Western Europe. This cre-ated dramatic gaps between the CEECsand the more advanced economies intechnology, in theoretical and appliedresearch, in the “mechanical skills” of theworkers, in business management vis-à-vis taylorism, in the mentality of workersof recent rural origin disinclined to per-form careful work, in terms of the quali-tative requirements of the world marketfor manufactured goods. Average levelsof productivity far below the levels ofWestern Europe explain the low indus-trial wages and agricultural incomes in theregion and, as a result, the tightness ofthe domestic markets. Enterprises lackedcompetitiveness and were therefore weakin terms of exporting capacity. As dem-onstrated by Table 1, the conditions foreconomic take-off were not created.

Tabelle 1If per capita income in the USA is set atan index of 100, the corresponding ratioswere 20 for Poland, 21 for Hungary and33 for Czechoslovakia(1). The economiesof this region could therefore be describedas economies having reached an averagelevel of development.

Again with the exception of Bohemiawhose industrial development was moreadvanced, the economies of Central andEastern Europe were in general at theperiphery of a centre that was WesternEurope. The market shares of the periph-ery were also insignificant: in 1937, theCentral and Eastern European market onlyaccounted for 9.3% of the Western Eu-rope’s total volume of exports. In con-trast, 60% of Eastern European exportswent to Western Europe. In parallel, tradebetween the various countries of the east-ern periphery was negligible, accountingfor barely 16% of total exports(2). Eco-nomic integration, the international divi-sion of labour in terms of manufacturedproducts and the region’s industrial spe-cialisation all remained underdeveloped.

Export were similar to those of develop-ing countries with a predominance ofagricultural products and raw materialsand an under-representation of manufac-tured and capital goods. In contrast, asimports manufactured products had achoice position, as illustrated by Table 2.

Tabelle 2The economies of the CEECs generally,were peripheral with an average level of

1) It is generally considered that pre-war levels were surpassed by 1949.In 1950, the relative ranking of thecountries compared to the UnitedStates was as follows: Poland: 25,Hungary: 25, Czechoslovakia: 36(OECD, The World Economy 1920-1992, Paris, 1995, p. 20).

2) The lack of complementarity be-tween these economies largely ex-pla ins the la ter d i f f icu l t ies ofCOMECON in establishing an inte-grated area.

“Again with the exceptionof Bohemia (...) the econo-mies of Central and EasternEurope were in general atthe periphery of a centre,that centre being WesternEurope.”


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Table 2

Export (X) and import (M) baskets in 1937

Products Czechoslovakia Poland Hungary

X M X M X MFoodstuffs 8 13 32 9 57 6Raw materials andsemi-finished products 20 57 58 63 13 57Manufactured products 72 30 10 28 30 37(incl. capital goods) 6 9 1 14 9 8

Source: KOZMA, F., Economic Integration and Economic Strategy, Budapest, 1982, p.62

development in comparison to WesternEurope, in particular Germany which ac-counted for 88% of imports by CEECs ofchemical products, 69% of its steel and67% of its capital goods. Germany’s pre-dominance over its “hinterland” was sostrong that the United Nations referred toa “trade dictatorship”.

Socio-cultural development mirrored theeconomic development of these countries,as shown in Table 3.

Tabelle 3Thus from every point of view, the CEECslagged very far behind the United Statesand Western Europe.

Heritage

The reconstruction period in the aftermathof the Second World War was howevercharacterised by massive industrialisationand economic take-off. Growth rates wereparticularly high up to 1974-75, as illus-trated by Table 4.

Tabelle 4During this period the CEECs did, to acertain extent, catch up with the West.With an index of 100 for the United Statesin 1950, Czechoslovakia stood at 36, Hun-gary at 26 and Poland at 25. By 1973, thesefigures had climbed to Czechoslovakia 42,Hungary 32 and Poland 32. This periodof growth was, however, accompanied byserious distortions and dramatic shortcom-ings.

In the first place, heavy industry - ironand steel, metalworking, the primarychemical industry, coal-mining - were toodominant in the economy. The frequentlygigantic factories worked with obsoletetools, turning out products in decline atinternational level. In contrast, industriesproducing everyday consumer durables,and services such as retail distribution,maintenance and repair and financial serv-ices, were underdeveloped.

Secondly, the proportion of high-tech in-dustries using a high level of research andproductivity was one of the lowest inEurope. As a result, there was a particu-lar deficiency in information technology,office automation, robotics and produc-tion and assembly line automation.

Thirdly, the waste of manpower (with a15-20% rate of overemployment in the

manufacturing sectors), energy (in 1980Poland consumed four times as muchenergy per dollar output as Western Eu-rope), raw materials and natural resources(water, forest, air, etc. pollution) were“dantesque”.

From 1973-75 onwards, stagnation, fol-lowed by decline, deepened. The com-mand economy, the bureaucratic admin-istration of enterprises, the inability tofind substitutes for competitive products,etc. prevented the injection of technicalprogress into the production and trad-

Table 3

Socio-cultural indicators in 1937

Country Child Rate of Radios Carsmortality illiteracy per perper 1000 (%) 1000 inh. 1000 inh.

birthsUSA 54 - 205 196.0Czechoslovakia 122 3.0 72 6.3Poland 137 18.5 27 0.6Hungary 134 7.0 46 2.8

Source: EHRLICH, E., Infrastructure, in The Economic History.., op.cit. p.334 et seq.

Table 4

Average growth rates, 1951-1990 (%)

Annualgrowth Czechoslovakia Poland Hungary

1951-1960 7.5 7.6 6.01961-1970 4.5 6.0 6.01971-1975 5.7 9.7 6.31976-1980 3.7 1.2 2.8

Source: LAVIGNE M., The Economics of Transition, London, 1995, p.58.


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ing apparatus. Suffocation was close athand.

Economic development in the years 1950- 1973/75 undeniably meant that collec-tive needs were largely satisfied: the rightto work, the right to education, blankethealth-care coverage and access to cul-ture. These elements were counterbal-anced by the existence of a radically anti-democratic regime, the negation of themost fundamental human rights and thearrogance of a privileged nomenclatura.

Prerequisites for the intro-duction of capitalism

The first step towards the introduction ofcapitalism entailed the dismantling of allthe institutions, bodies and operatingmechanisms which ruled out the creationof goods, services and capital markets.This phase of dismantlement had alreadycommenced in Poland and Hungary un-der the auspices of the reform wing ofthe communist parties in power (Poszgayand Nyers in Hungary, Rakovski in Po-land), who dreamed of reconciling social-ism with the market economy.

It was necessary to dissolve the centralplanning agencies: the state commissionfor the plan, the central price commis-sion, the sectoral ministries in control ofindustry, the industrial combines, the cen-tral purchasing units which enjoyed amonopoly of foreign trade, the monolithicbanking system, etc. This was a swift proc-ess. Price liberalisation involving theelimination of subsidies on vital consumergoods and services (housing, food, com-mon transport, energy, etc.) progressedat a different pace in the various coun-tries. By 1997-98, with a few exceptions,prices had been, or were about to be fullyliberalised.

Moreover, the introduction of capitalismpresupposes the fulfilment of two funda-mental conditions:

❏ the availability of the means of pro-duction and trade; and❏ the availability of manpower.

Availability of the means of production hastwo implications. Firstly, private capital -

resident or non-resident - has to be allowedto set up new businesses. This requirementhad in fact been at least partially met priorto the transition period in Poland andHungary and was very quickly realised byall four countries after the demise of com-munism. Secondly, the state-owned enter-prises have to be privatised. Before beingbetrothed to private national or foreigncapital, however the bride had to be madeattractive by selling off her jewellery - andoften for a mere song since the state wasin most cases a seller in distress and ill-informed of the real value of its assets.The operation took some time but was nev-ertheless completed within a period of 5-6 years. Of course each country (even thefive new German Länder) has its lameducks no one wants - these are the dregsof the old system which will fade awaywith time; they will not prevent the rise ofcapitalism. By mid-1996, the private sec-tor accounted for 75% of GDP in the CzechRepublic, 70% in Slovakia and Hungary and60% in Poland.

The second precondition for the introduc-tion of capitalism concerns manpower.What is a budding capitalist’s dream? Adefenceless worker, “as free and as lightas air”, a fragmented source of labourmarket supply, unprotected by trade un-ion organisations. From the very begin-ning of the transition process, this condi-tion has been advanced as the sine quenon for the switch-over to a marketeconomy. The OECD, just as any otherinternational organisation of an economiccharacter, did not hesitate to comment inNovember 1989, just after the establish-ment of the first post-communist govern-ment in Poland, “Whatever the characterof the wage-setting system, be it central-ised or decentralised, it is indispensableto encourage flexibility and mobility...Enterprises must be free to employ thenumber of workers they need and mustnot be forced to take on a surplus ofmanpower”. Flexibility, mobility, wage-setting by the enterprises, the freedom tohire and fire... this is what manpoweravailability is all about. Under these con-ditions and in the absence of powerfulunions - which is currently the case forall Eastern European countries - real wagelevels are in decline. Wages in fact fell7.6% in the Czech Republic, 23.9% inSlovakia, 21.6% in Hungary and 24.6% inPoland in the years 1989 - 1995.

“The first step towards theintroduction of capitalismentailed the dismantling ofall the institutions, (. . .)which ruled out the crea-tion of goods, services andcapital markets. (...)It wasnecessary to dissolve thecentral planning agencies:the state commission forthe plan, the central pricecommission, the sectoralministries in control of in-dustry, the industrial com-bines, the central purchas-ing units which enjoyed amonopoly of foreign trade,the monolithic banking sys-tem (...). This was a swiftprocess.”


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Table 5

Macro-economic indicators, 1993-1996

Hungary Poland Czech SlovakiaRepublic

Growth a 1993 -0.6 3.8 -0.9 -3.71994 2.9 5.2 2.6 4.91995 1.5 7.0 4.8 6.81996 0.5 6.0 4.2 6.9

Inflation b 1993 22 35 21 231994 19 33 10 131995 28 27 9 101996 24 20 9 6

Unemploy- 1993 12 16 3.5 14ment c 1994 10 16 3.2 15

1995 10 15 2.9 131996 10 n.d. 3.5 13

Budgetary 1993 -6.8 -2.9 1.4 -7.6deficit d 1994 -8.2 -2.0 0.5 -1.3

1995 -6.5 -3.5 -0.8 0.11996 -3.5 -3.0 -1.1 -4.4

Source: EBRD, Transition Report Update, April 1997.Notes: a growth: annual GDP growth at constant price.

b inflation: annual price increase of consumer goods.c unemployment: full unemployment as a ratio of the working population.d budgetary deficit: public deficit as a percentage of the GDP.

In its initial phase of development, capi-talism’s low real wage levels are essentialas a means of generating high profits. Thiswas true of the first capitalist enterprisesin Europe in the 16th century; it was trueof the first industrial revolution in the 19thcentury; it was true of Japan in the fiftiesand sixties, it was true of the four dragonsin the seventies; it was true of the newAsian tigers in the eighties.... and it is trueof Central and Eastern Europe today.

In the four countries examined, the phaseof transition towards unbridled capitalismis now drawing to a close with the re-structuring or liquidation of enterprisesproducing capital equipment, the ongo-ing reform of the banking system, the lib-eralisation of interest rates and the devel-opment of the region’s stock exchangesstill outstanding.

Macro-economic develop-ment and the opening-upstrategy

Basic macro-economic indicators

At the very outset of the transition proc-ess, with the collapse of communism andthe disintegration of the Council for Mu-tual Economic Assistance (COMECON),Central and Eastern Europe went througha phase of “slumpflation”. Poland hit rockbottom in 1990 with an 11.6% contrac-tion of GDP; Czechoslovakia in 1991 -14.6% and Hungary in 1991 -11.9%. Fol-lowing this recession, which was accom-panied by double-digit rates of inflation,the four countries are gradually emerg-ing from the crisis as Table 5 illustrates.

Tabelle 5Poland was the first of the transitioneconomies to show renewed growth:2.2% in 1992. The reason for the time lagis probably the fact that Poland was thefirst country to install a post-communistgovernment before the fall of the BerlinWall in the late summer of 1989. Growthhas been relatively buoyant at 4 - 7% overthe last three years and forecasts for 1997expect this trend to continue. The excep-tion is Hungary, forced to introduce de-flationary austerity measures in March1995, a step inevitably reflected in itsgrowth rate: 0.5% in 1996; however animprovement is expected for 1997.

Poland and Slovakia return the highestgrowth rates: around 7% (3), promptingsome observers to talk of an “economicmiracle” and “Asian-style economicgrowth”. However the term “miracle” mustbe brought into perspective: Poland is theonly country to have reached the 1989levels of GDP, which it did in 1996; theother three countries stand at 85%-90%of their 1989 GDP. Moreover, the refer-ence year of 1989 was a year of weakgrowth following four other bad years.Average growth rates in the years 1986-1990 were 1% in Czechoslovakia and -0.5% in Hungary and Poland. Compari-sons with the Asian tigers must also bequalified: in terms of its growth rate, Po-land lags far behind China, Taiwan andMalaysia, Chile, Mexico and Argentina,and even behind Turkey.

The principal causes for the high infla-tionary tensions in the early nineties (priceliberalisation, budgetary deficits, monetaryoverhang, etc.) having now been largelyeliminated, inflation rates are now be-ing brought down to reasonable levels,

3) The figures for the 1990-92 reces-sion were overestimated and the fig-ures for 1994-97 growth underesti-mated. The present under-estimationhas two reasons: the impact of theparallel economy and the utilizationof GDP deflators which do not takeaccount of product quality improve-ment and product range extension(PlanEcon Report, 8 May 1997, p. 12).


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even if there is still some cause for con-cern in Poland and Hungary.

Unemployment has stabilised at rela-tively high rates (10-15%) in Hungary,Poland and Slovakia. Although lower inthe Czech Republic (3.5% in 1996), it isrising and was 4.1% in February 1997 with5% forecast for the end of 1997. This trendis welcomed by the economists fromPlanEcon who said that, “The Czech Re-public should let its unemployment ratego up to 6-7% as soon as possible to re-duce the upward pressure on salaries andto increase working discipline”. The situ-ation of the unemployed is often critical.In the early nineties, 80% of the unem-ployed received benefit. By 1995, this fig-ure had fallen to 47% in the Czech Re-public, 21.9% in Slovakia, 36% in Hun-gary and 58.9% in Poland. There are tworeasons for this: the number of those en-titled to unemployment benefit is fallingwhile the ranks of the long-term unem-ployed are swelling.

The countries in transition generally posthigh deficits in the take-off phase: stateexpenditure remains high due to pay-ments of public-sector salaries, subsidiesto enterprises, etc., whereas its revenuedeclines in the wake of recession. ThusPoland recorded a GDP deficit of 6.5% in1991 and 6.6% in 1992; Slovakia: 11.9%in 1992 and 7.6% in 1993; Hungary con-tinued to post worrying deficits in 1993,1994 and 1995, with its 1995 stabilisationplan reducing its deficit to 3.5% in 1996;in the Czech Republic the deficit was 3.3%in 1992; estimates for 1996 stand at 1.1%.

Two countries are going through a diffi-cult period in budgetary terms: Hungaryand Slovakia.

Forecasts for Hungary are based on a GDPdeficit of 4%, largely due to (internal andexternal) debt servicing, which hasreached 1/3 of current public expenditure.Even with a primary GDP surplus of 3.5%,Hungary’s overall deficit surpasses the EU3% convergence criterion.

Slovakia pushed up public financing ofnon-commercial services (health, educa-tion) in 1996, clearly a reflection of thetertiarisation of its economy. GDP roseby 7% in 1996. This result is due to a 2.1%contraction in sectors producing capital

equipment and a 13.5% growth in theservices sector (commercial and non-com-mercial).

Developments in the field of foreigntrade

In the wake of the de facto disintegrationof COMECON in mid-1990, following theintroduction of dollar-based settlements,the switch-over to world prices in intra-COMECON trade from the 1 January 1990and the economic difficulties of the formerSoviet Union, trade both between CEECsand with the former Soviet Union col-lapsed. This collapse of intra-COMECONtrade is one of the causes of the deeprecession which hit the CEECs at the be-ginning of the transition process.

The high level of trade in the COMECONarea and its specialisation made theCOMECON states highly interdependent,although this situation varied from coun-try to country. By 1989, trade with thewest already represented half of the totaltrade flows of Poland and Hungary, butonly 35% in the case of the then Czecho-slovakia. This situation was accompaniedby dependence on the Soviet Union, theprincipal supplier of energy and raw ma-terials and an important outlet for manu-factured products, machinery and capitalgoods. CEEC exports to the industrialisedcountries were concentrated on traditionalproducts, raw materials and energy-inten-sive products and raw materials.

The liberalisation of trade and the aban-donment of the t radi t ional int ra-COMECON trading system meant an endto preferential trading links and a re-ori-entation of trade towards the West. Inview of its geographical proximity, the Eu-ropean Union rapidly became the mainoutlet for CEEC exports and a source ofconsumer and capital goods supplies. EU-CEEC trade has expanded considerablysince 1990. The weight proportion of theEU in CEEC trade flows almost doubledbetween 1988-1992, whereas that of theformer Soviet Union fell dramatically; thisis illustrated in Table 6.

Tabelle 6The collapse of intra-COMECON trade in1991 was further accompanied by signifi-cant changes in the sectoral compositionof CEEC trade flows. The share of ma-chinery and capital goods in intra-

“The weight of the EU inCEEC trade flows almostdoubled between 1988 and1992, whereas the weight offormer USSR fell dramati-cally (...)”


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Table 6

Geographic structure of Hungarian, Polish andCzechoslovak trade in 1988 and 1992

% Exports Imports

Hungary 1988 1992 1988 1992Developed market-economy countries 39.5 71.3 43.3 69.7of which EC 22.1 49.7 25.1 42.7Eastern Europe 17.0 6.3 18.7 6.7Former Soviet Union 27.6 13.1 25.0 16.9Other countries 15.9 9.3 13.0 6.7Total 100.0 100.0 100.0 100.0

Poland 1988 1992 1988 1992Developed market-economy countries 41.3 71.9 43.2 72.4of which EC 27.1 57.9 26.7 53.1Eastern Europe 17.1 5.9 18.2 4.5Former Soviet Union 26.0 9.5 24.8 12.0Other countries 15.6 12.8 13.7 11.4Total 100.0 100.0 100.0 100.0

Czechoslovakia 1988 1992 1988 1992Developed market-economy countries 32.8 63.7 37.0 62.6of which EC 20.0 49.4 21.7 42.1Eastern Europe 20.8 13.7 22.1 6.7Former Soviet Union 29.8 10.9 27.5 24.6Other countries 16.6 11.7 13.4 6.1Total 100.0 100.0 100.0 100.0

Source: ECE/UN (1993), Economic Bulletin for Europe, vol.45, p.120.

COMECON trade flows plummeted. Theshare of energy and raw materials in im-ports from the former Soviet Union greatlyincreased in value, reflecting the priceincrease of these products on a dollarbasis and a certain inelasticity of domes-t ic demand. Trade with other ex-COMECON countries collapsed. The struc-ture of trade with the west remained morestable in so far as the increase in tradevolumes was a general trend, extendingacross the entire product range.

As for CEEC-EU trade in terms of productbreak-down, results for the period 1988-1992 generally indicate that no majorsectoral realignment took place, with traderemaining concentrated on exports fromsectors with a high intensity of unskilledmanpower, reflecting the CEECs’ pool ofhuman resources and underlining theimpact of their wealth of natural re-sources. In the strategy adopted by CEECs,only a massive influx of foreign invest-ment accompanied by technology trans-fer would enable their economies to drawbenefit from their manpower capital as asource of comparative advantage. Thetrade figures posted by a number of CEECs(in particular Hungary) in trade with theEU from 1992-1995 indicate a certain de-gree of export diversification.

Direct foreign investment in theCEECs

From the very beginning of the transitionprocess, alongside foreign trade, directforeign investment was regarded by thereforming governments of the countriesin transition as one of the main instru-ments of integration into the globaleconomy. Direct foreign investment (DFI)was perceived as a key element of thetransition process as a potential sourceof technology and know-how transfer anda contribution to the upgrading of organi-sational, managerial and marketing skills.The participation of foreign investors inthe privatisation process was moreoverdesigned to stimulate the development ofthe private sector, facilitate industrial re-structuring and boost exporting capacity.Finally, foreign investment was also en-couraged in view of its positive impacton the balance of payments and, giventhe limited capacity of domestic savingsin the old command economies, it repre-sented an important source of funding.

All the countries in transition thereforecreated favourable conditions to attractforeign investment by the introduction ofvarious types of incentive schemes.

DFI flows into the CEECs have increasedsince 1990. However, not all the coun-tries in transition have benefited from theliberalisation of the economy to the sameextent. An analysis of each of the CEECsas a function of its capacity to stabilise itsmacro-economic and financial situationand to carry out structural reforms helpsto explain the geographic distribution ofinvestments within the region. As a re-sult of the initially higher performance oftheir production capacities and their suc-cess in carrying out the reforms neces-sary for the implementation of the priva-tisation programmes, DFI flows are con-centrated on three of the transition econo-

“Direct foreign investment(DFI) flows into the CEECshave pointed upwardssince 1990. However, not allthe countries in transitionhave benefited from the lib-eralization of the economyto the same extent.”


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Table 7

Direct foreign investment in the CEECs

Direct foreign Total DFI Ratioinvestment flows

millions millions per per DFI/$ $ cap. $ cap. $ GDP

1994 1995 1996 1989 1989 1996 1995 (rev.) (est.) -96 -96

Bulgaria 105 98 150 450 54 18 0.8%Hungary 1,146 4,453 1,900 13,266 1,288 184 10.2%Poland 542 1,134 2,300 4,957 128 60 0.9%Czech Rep. 750 2,525 1,200 6,606 642 117 5.6%

Source: EBRD in Financial Times, April 11 1997.

programme triggered a substantial in-crease in DFI in 1995 and 1996.

In a number of CEECs, the developmentof exports from sectors with a particularlyhigh intensity of unskilled labour (cloth-ing, footwear) is substantially linked tooutward processing operations, in particu-lar within the framework of subcontract-ing from EU undertakings which controlproduction without being proprietors ofthe capital. Indeed, one source of currentdiversification of exports from the coun-tries in transition depends on investmentsbased on outsourcing operations whichresult from the advantage of extremelylow labour costs and a high level of quali-f ications. However, i t is uncertainwhether this type of investment, which islow in capital contribution, will have afavourable impact in terms of technologyand know-how transfer. Another point ofconcern is the relative mobility of this typeof investment, which is highly depend-ent on trends in wage costs.

The sharp currency devaluations carriedout by the CEECs in the early stages ofthe transition process turned these coun-tries into a source of particularly cheaplabour. Monthly wage levels in the CEECsexpressed in dollars are very low com-pared to Western levels (1 : 10) and thenewly industrialised countries (1 : 3). Thiscost advantage is an export incentive.However, CEEC wage costs are not lowerthan in the newly industrialising countriesof Asia. The generally higher level of so-cial security in the CEECs is partly due totheir level of development and their dif-ferent demographic and cultural charac-teristics compared to those of the Asiancountries.

Tabelle 8

Conclusion: what typeof development are theCEECs heading for?

Opening-up and growth

In the early stages of the process of tran-sition, the impact of the sharp initial cur-rency devaluations which accompaniedthe liberalisation of trade on the competi-tiveness of domestic manufacturers firstserved to prop-up demand in order tooffset the effects of economic recession

mies: Hungary, Poland and the CzechRepublic.

Tabelle 7As Table 7 illustrates, of all of the coun-tries in transition, Hungary has succeededin attracting most DFI in the period since1989: a cumulative total of around US$13 billion by 1996. This has played animportant role in the restructuring andmodernisation of Hungarian industry. DFIhas fluctuated with the ups and downs ofthe privatisation programme. The CzechRepublic has also successfully encouragedthe entry of foreign investment: US$ 6.6billion by 1996. DFI into Poland has beenrelatively modest in comparison with theother Visegrad states. However, the re-sults of Polish economic growth, the nor-malisation of the situation of Poland vis-à-vis its creditors with reference to its debtrescheduling and its ongoing privatisation

Table 8

Development of average monthly wage in dollars(1990-1995)

1990 1991 1992 1993 1994 1995

Bulgaria 185 78 127 148 95 127Hungary 295 281 345 365 395 376Poland 199 254 262 278 337 398Czech Republic 158 166 199 227 276 323

Source: PlanEcon (194) nos. 25-26-27 and nos. 35-36, (1995) nos. 11-12, (1996) nos 3-4 and 19-20.N.B.The figures reflect the average industrial monthly wage in December of the corresponding year.


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and facilitate the re-orientation of tradetowards the West following the collapseof intra-COMECON flows. Subsequently,the liberalisation of trade permitted im-ports of capital goods designed to restruc-ture the economy on the basis of com-parative advantages. With the develop-ment of exports towards the West, foreigntrade became the driving force of eco-nomic growth. The transition economiesof the CEECs opted for a strategy of freetrade vis-à-vis the EU, ultimately designedto open the door to full EU membership,following in the footsteps of the nationsof southern Europe (Spain, Portugal,Greece). In parallel, the CEECs’ policy ofopening up to foreign investment is de-signed as a means of reinforcing thispolicy of international re-integration.

However, as growth in CEEC exportsproves to be highly dependent on theeconomic climate of the West and trendsin wage costs as shown in Table 8, CEECimports are constantly rising and impact-ing negatively on their trade balances. Asfar as exports are concerned, the successof the CEECs’ opening-up strategy and thesustainability of the re-orientation of theirtrade flows principally depend on theircapacity to implement the necessary re-forms and profoundly restructure theirindustrial fabric on the basis of compara-tive advantages, enabling them to catchup with the industrialised economies inthe field of product and process innova-tion. Difficulties remain both at the levelof supply and demand.

In the short term, the CEECs can expectto expand their trade only on the basisof existing comparative advantages re-sulting from their cheap labour andwealth of natural resources and concen-trate on unsophisticated products utilis-ing technologies which are readily avail-able. These exports face stiff competi-tion, in particular from the newly indus-trialising countries and trade barriers onproducts regarded as “sensitive” (agricul-ture, steel and metals, textiles). On theother hand, the demand structure ischanging, both in terms of final demandcategories (less investment, more con-sumption), and within these categoriesthemselves. Since Eastern Europeanproducts are inferior to those from theWest in terms of product range and qual-ity, CEEC manufacturers run the risk of

being out-competed in their own domes-tic markets. Indeed, a preference forWestern products can be observed amonghouseholds for consumer goods andamong firms for capital goods. In thelonger term, the CEECs should exploittheir dynamic comparative advantages(resulting from economies of scale) anddevelop more trade flows of an intra-in-dustrial nature.

A determining factor in the success ofCEECs’ strategy based on integration intothe EU will be the type of trade thesecountries succeed in developing with theirmain trading partners. Essentially this istheir capacity to exploit their advantagesin terms of short-term comparative costs.Within the framework of inter-industrialtrade they will gain the time and the re-sources needed to restructure or createbusiness sectors on the basis of whichthey can participate in intra-industrialtrade flows characterised by more dy-namic growth.

These considerations prompt questions asto the advisability of a different strategy,consisting of giving a more important roleto industrial policy as a means of creat-ing new comparative advantages. Publicauthority intervention should encourageinfrastructural development, promote theco-ordination of R&D activities and up-grade the training of human resources.Economic growth should also be under-pinned by a growth in domestic invest-ment - which would require sufficientsaving ratios and an efficient financialintermediation system.

As far as the contribution of foreign in-vestment to the CEECs is concerned, it isstill too soon to draw definitive conclu-sions. Firms with foreign investment posthigher productivity levels than local busi-nesses and play an important role in thedevelopment of exports. However, thereis a risk that the expected fertilisation oflocal industries in terms of technologytransfer and higher performance may ul-timately remain confined to islands ofmodernity without spreading throughoutthe economy as a whole.

In Hungary, the country in transition hav-ing received most DFI, the strategyadopted by the authorities has been tosell the most highly performing national

“With the development ofexports towards the West,foreign trade became thedriving force of economicgrowth. The transitioneconomies of Central andEastern European coun-tries opted for a strategy offree trade vis-à-vis the Eu-ropean Union (...)

“As far as the contributionof foreign investment to theCEECs is concerned, it isstill too soon to draw de-finitive conclusions.”


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companies to multinationals and in sodoing integrate them into their globalnetwork. In Poland and the Czech Repub-lic, on the other hand, the authorities havetended to keep big business in nationalhands, attracting foreign investors of amore modest size. It is still difficult toassess which strategy will prove to be themore advantageous for CEEC economies.In view of the current context ofglobalisation, which implies highly keeninternational competition, it is uncertainwhether the role of multinationals in cre-ating a virtuous circle of industrial restruc-turing, analysed by UNCTAD in the caseof Asian countries, can be reproduced inthe CEECs; the industrialisation of theAsian tigers (Japan, Korea and Taiwan)took place with the advantage of a cer-tain degree of initial protection.

Social impact

Graph 1 plots the level of developmentof various countries represented by their

GDP per capita in parity of purchasingpower (PPP) against national income dis-tribution, represented by the Gini coeffi-cients. It shows a decline in per capitaincome in the four countries of CentralEurope in the period 1989 - 1992-94 (slidetowards the left). This process has nowbeen interrupted. By 1997-98, all thesecountries will have returned to the statusquo of 1989. During the same period,wage differentials rose considerably, withthe exception of Hungary where they haveremained stationary.

The question at the moment is whetherthese countries will follow route (1), i.e.the EU models, or route (2), i.e. the SouthAmerican model.

grafikNumerous indications suggest that it willbe route (2) as opposed to route (1). In-deed, the European social model, un-doubtedly best represented by Sweden,is based on a variety of foundations: pow-erful trade union organisations, tried and

“The question at the mo-ment is whether these coun-tries shall follow route (1),i.e. the EU model or route(2), i.e. the south Americanmodel.”

Graph 1

Level of development of countries represented byGDP per capita in PPA and national income distribu-tion represented by Gini coefficients

60

50

40

30

20

10

10 20 30 40 50 60 70 80 90 100

Pol 94

GDP./inh.

Pol 89

Venezuela

ChileBrazil

France

Italy

Sweden

USA

CzR 89

CzR 92

Hun. 94 Hun. 89

(2)

Sl. 89Sl. 94

Gini

(1)

Sources:Gini: World Bank, From the planned economy to the market economy, Report 1995, Washington.GDP/per capita: UNICEF, Children at risk ..., op. cit..

Notes:Gini: The Gini coefficients range from 0-100. Equality is perfect at “0”; the higher the Gini coefficient,the greater inequality.GDP/per capita: Estimates of GDP per capita as a purchasing power parity. GDP/per capita in theUSA: 100.


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tested conciliation bodies, both at themicro-economic level of the individualfirm and at the macro-economic level ofoverall sectors of the economy, the re-gions and the nation; a level of social se-curity which has certainly been trimmeddown but remains impressive and a tra-

UNO, Economic Bulletin for Europe, vol. 34, Ge-neva, 1985, chap. 3, p.6.

UNO, Economic Survey of Europe, Geneva, 1955,p.93.

ERBD, Transition Report 1996, London, 1996, p.11.

Marx, K. Das Kapital, book 1, section 8: primitiveaccumulation, Ed. sociales, Paris, 1950, volume III,p.155.

OECD, Eléments de la problématique polonaise,Paris, 17 November 1989.

UNICEF, Children and risk in Central and EasternEurope: Perils and Promises, Florence, Italy, Feb-ruary 1997, p.6.

The Economist, 12-18 July 1997.

PlanEcon Report, Czech Economic Monitor, n° 17-18, 8 May 1997.

PlanEcon, 16 April 1997, p.11.

dition of relatively fair distribution of na-tional income. Since the collapse of com-munism in Eastern Europe, these founda-tions have been shattered and their re-construction will take some time. Moreo-ver, three or fourfold multiplication of percapita income will take 20 - 30 years.

PlanEcon, 7 May 1997, p.17.

UNICEF, Children at risk in Central and EasternEurope, Florence, 1997, p.7.

European Economy, Reports and Studies, n°6, Eu-ropean Commission, DGII, Brussels - Luxembourg.

Lemoine F. (1995), “La dynamique des exportationsdes PECO vers l’Union européenne”, EconomieInternationale. La revue du CEPU, n°62, 2nd quar-ter, pp.145-172.

OECD (1994), Intégrer les économies de marchénaissantes dans le système commercial international,CCET, Paris, p.87.

ECE/UN (1995), Economic Bulletin for Europe,vol.47, Economic Commission for Europe, UnitedNations, New York and Geneva, p.126.

UNCTAD (1995), World Investment Report 1995:Transnational Corporations and Competitiveness,December.

Bibliography


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AlenaNesporova

International LabourOrganization (ILO)

Central and EasternEuropean Team, Bu-

dapest.

The upheavals in Centraland Eastern Europeancountries after 1989-1990were followed by shrinkingeconomic demand whichled to excessive labour sup-ply and accelerating openunemployment, a situationpractically unknown underthe communist regime. La-bour market response toeconomic decline has dif-fered greatly from countryto country.The importance of educa-tion and training in deter-mining the quality andadaptability of the work-force – the key factor of fu-ture economic prosperity ofthe economics in transi-tion – should be fully ac-knowledged.

1) Many experts claim that the GDPfall was not as deep as indicated byofficial statistics since new businessactivities occurred partly in the unof-ficial economy. For example Kauf-mann’s estimates of the shares of theunofficial economy in total GDP inthe CEECs range from 6% for Slovakiathrough 11% for the Czech Republic,12% for Estonia, 13% for Poland, 20%for Romania, 22% for Lithuania and29% for Hungary, to 35% for Latviaand 36% for Bulgaria. However, in allthese countries the unofficial econ-omy also existed before 1989 and itis difficult to estimate whether and towhat extent it increased further after1989, especially as it has gained someother forms.

Introduction

At the beginning of economic transfor-mation, Central and Eastern European la-bour markets were characterized by highparticipation rates and labour shortagesco-existing with low labour productivityand extensive labour hoarding in enter-prises. In comparison with market econo-mies on a similar level of economic de-velopment, industry and agriculture hadvery large shares in total employmentwhile services, especially personal serv-ices, trade, communications and producerservices were largely underdeveloped.

This situation rapidly changed after thepolit ical upheavals in 1989-90. Thelaunching of economic reforms, alongwith macroeconomic stabilisation policiesintroduced in order to curb inflation,brought radical economic changes, whichwere further accelerated by the disinte-gration of COMECON and the USSR. Bothexternal and internal demand for goodsand services declined very rapidly, result-ing in sharp falls in GDP and industrialproduction. Shrinking economic demandwas reflected in a new situation on thelabour markets where excessive demandfor labour changed into excessive laboursupply and open unemployment, practi-cally unknown under the communist re-gime, started to accelerate.

This article attempts to analyze recent de-velopments in the labour markets of someCentral and Eastern European countries(CEECs) and to assess policy responsesto new labour market needs. Particularattention will be devoted to training ad-dressing emerging skill mismatches.

Labour marketsand trainingin Central andEastern Europe

Developmentof employment

Economic decline was characteristic forall CEECs in the first phase of their eco-nomic transformation, but its depth andlength were different for individual coun-tries depending on their starting condi-tions, the speed of reforms and other fac-tors as shown in Table 1.1 Poland, whichlaunched a radical economic reform in1990 and was able to achieve economicrecovery already in 1992, managed to re-gain its 1989 GDP level in 1996. Othercountries remained more than 10% belowtheir 1989 level in 1995, in the case ofBulgaria even 20%. The three Baltic Stateswere much worse off due to the break-up of their close economic links withother ex-Soviet countries, reflected in GDPfalls between 35-60%.

Industry was the economic sector mostadversely affected by economic transitionin many CEECs. As a rule, industrial pro-duction declined more than GDP as thenegative developments in industry (andin many countries also in agriculture)were partly compensated for by boom-ing services.

---------Table 1----------Labour market response to economic de-cline followed after a certain delay, but itsextent differed greatly by country. Somecountries like Hungary, Poland or Sloveniareduced labour hoarding so radically thatthe employment decline much exceededthat of GDP and labour productivity ac-celerated. Another group of countries, evendespite substantial falls in employment inthe case of Bulgaria, was only able to moreor less maintain the low level of labour


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productivity prevailing at the start of eco-nomic transformation. All the Baltic States,Romania and the Czech Republic reducedemployment much less in comparison withfalls in GDP, and at least this phase of theireconomic transformation was characterizedby a further decline in labour productivityand an increase in labour hoarding.

Since 1994 (and one year later in the Bal-tic States) all these countries have wit-nessed the beginning of economic recov-ery (which unfortunately has appeared tobe only short-lived in Bulgaria). However,for most countries this economic recoveryhas not yet brought any significant increasein employment and economic growth hasa labour saving character. Although newjobs are generated, they are so far lessnumerous than the jobs lost in the restruc-turing process. The best example of this isPoland which has recorded GDP growthsince 1992, but at the same time employ-ment has continued to decline. Only veryrecently the first symptoms of an employ-ment increase have occurred but job crea-tion is not sufficient in view of demo-graphic factors which have seen the entryof strong youth cohorts in the labour mar-ket. Rather paradoxically, the Czech Re-public was among the few countries whereemployment grew in 1995-6, in spite ofthe above mentioned extensive labourhoarding.

Part of the fall in employment emergedas open unemployment, recorded in mostof these countries - with the exception ofSlovenia (where it was negligible) - forthe first time in 40 years. However, an-other part of the labour force disappearedfrom the labour market altogether. This(official) increase in economic inactivity(non-participation) even exceeded theincrease in registered unemployment incountries like Bulgaria, Hungary and theCzech Republic as shown in Table 2.

---------Table 2----------It is also important to mention that, espe-cially in the four Central European coun-tries, the recorded employment falls arecombined with the growth of the work-ing-age population which further in-creases the inactive population.

Increasing economic inactivity

There are several explanations for thisincrease in economic inactivity. First, par-

ticularly at the beginning of the economictransformation, labour market tensionstended to be relieved at the expense ofworking pensioners. Under the commu-nist regime working pensioners consti-tuted up to 10% of the national labourforce (one reason, among others, beinga rather low retirement age - 60 for menand around 55 for women2). When en-terprises began to encounter problems,pensioners were the first to be laid offas the least painful solution. All theCEECs also adopted early retirementschemes and many older workers tookadvantage (or were forced to) of this pos-sibility. Similarly, a lot of disabled work-ers were forced to leave employment be-cause of the closure or downsizing ofmany sheltered workshops, or becausethey were replaced by able-bodied work-ers in ordinary jobs. Often, disabilitypensions have remained the only optionfor them as the old rehabilitation andemployment promotion schemes col-lapsed and the new quota systems donot operate well.

Long-term unemployment is increasing.When people are unable to find a job, andtheir unemployment benefits or assistanceexpire, because the supply of employmentprogrammes is poor, many of them dropout of the unemployment register or de-register voluntarily, and become inactiveor take up some casual work.

Table 1

Production and employment in Central and EasternEurope, 1989-1995(growth rates in % over the whole period, production indicators in con-stant prices)

Country GDP Industrial Employmentproduction

Bulgaria - 23.5 - 44.5 - 24.1Czech Republic - 15.6 - 29.1 - 7.2Estonia - 35.0 - 57.2 - 19.8Hungary - 14.6 - 16.8 - 27.4Latvia - 49.5 - 61.3 - 15.5Lithuania - 61.3 - 67.0 - 13.6Poland - 1.5 - 9.6 - 13.3Romania - 15.4 - 43.4 - 8.5Slovakia - 16.3 - 30.3 - 14.6Slovenia - 11.6 - 28.2 - 20.7

Source: Economic Bulletin for Europe, Volume 48 (1996). UN/ECE, Geneva 1996.

2) The retirement age for women wasfixed at 55 in some countries whilein others it depended on the numberof raised children (e.g. in the formerCzechoslovakia it was 57 for child-less women, 56 for women who hadraised 1 child, 55 for women with twochildren and 54 for women with threeand more children).

“(…) part of the labourforce disappeared from thelabour market altogether.This (official) increase ineconomic inactivity (non-participation) even ex-ceeded the increase in reg-istered unemployment incountries like Bulgaria,Hungary and the Czech Re-public (…).”


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On the positive side, the interest of youngpeople in higher education has increasedconsiderably. This is partly a consequenceof improved remuneration of jobs requir-ing higher education, and partly to avoidunemployment problems. The rates ofenrollment in secondary schools and uni-versities among the age groups of 15-19and 20-24 has increased dramatically.

Many of those who have left the officiallabour market are, however, still activein the informal economy (whilst some areengaged in both at the same time) in or-der to avoid paying high taxes. In manytransition economies with a particularlyonerous tax burden, the use of informallabour is frankly the only way in whichmany small entrepreneurs can survive. Afact reluctantly acknowledged and toler-ated by the governments concerned. Par-ticipation in the informal economy is alsohigh among retired people and labour mi-grants from other CEECs. In many cases,migrant workers push regular workers outof their jobs, which increases job and la-bour insecurity in the labour market.

With the opening of borders, many peo-ple have sought work abroad. While somehave done so only temporarily, othershave permanently emigrated, either foreconomic reasons or because of social

Table 2

Labour resources, employment and unemployment,1989-1994

Country Population Employ- Unemploy- Unemploy-in working ment ment ment

age registered from LFS(000’s) (000’s) (000’s) (000’s)

Bulgaria - 150 - 1,130 488 740Czech Republic + 330 - 518 166 199Estonia* - 25 - 151 13 n.a.Hungary + 113 - 1,493 520 431Latvia* - 96 - 204 84 96Lithuania* - 9 - 178 78 66Poland + 563 - 2,528 2,838 2,375Romania - 55 - 934 1,224 968**Slovakia + 162 - 407 372 356Slovenia n.a. - 191 124 84***

* 1990-1994. ** First quarter of 1995. *** May 1994.Source: Employment Observatory: Central and Eastern Europe, No.8. European Commission, DG V,Brussels 1995. Statistical Handbook 1996: States of the Former USSR. The World Bank, Washington1996. Annual Report 1995, National Employment Office of Slovenia, Ljubljana 1996.

“On the positive side, the in-terest of young people inhigher education has in-creased considerably. Thisis partly a consequence ofimproved remuneration ofjobs requiring higher edu-cation, and partly to avoidunemployment problems.The rates of enrollment insecondary schools and uni-versities among the agegroups of 15-19 and 20-24has increased dramati-cally.”

tensions, military conflict or political prob-lems. Migration statistics are still inaccu-rate and incomplete. Although the offi-cial figures pertaining to those employedabroad or daily commuting to work inneighbouring countries are not high, itseems evident that they represent only afraction of the total number of Central andEastern European workers active in West-ern market economies and in more ad-vanced transition economies.

However, part of the recorded employ-ment losses is connected with statisticaldeficiencies. Firstly, private sector employ-ment is not yet properly recorded in mostCEECs. Secondly, employment statistics ofsome countries do not differentiate be-tween the number of employed persons(with one or a main job) and the numberof jobs, with the result that any decreasein the number of second jobs is recordedas a fall in overall employment. This isthe case for instance in the Czech Repub-lic where the decline in second or multi-ple jobs totalled 200,000 between 1990and 1993. The fall in the number of per-sons employed was 4 per cent less thanthe employment figures reflecting thenumber of jobs.

Finally, with increasing income differen-tials and many opportunities to acquirewealth from, to say at least, dubious ac-tivities, or from compensation and therestitution of nationalized assets in thisphase of economic transformation, agroup of rentiers has come into being,living solely or predominantly from therental or sale of property. Although thisgroup is not yet large, at least a small partof the fall in employment can be attrib-uted to its formation.

Open and hiddenunemployment

Registered unemployment

Registered unemployment accelerated inCentral Europe, in the former Yugoslaviaand, in Bulgaria immediately after the in-troduction of economic reforms in 1990-92. They were followed, after some delay,by Romania and, more recently, the BalticStates. In most countries unemploymentreached its peak in 1993 and in Romania


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in 1994. It then decreased and has recentlystabilized with some seasonal fluctuationsas shown in Table 3. In Estonia and Latviathe unemployment trend is still upwardsand since the end of 1996, it has started toincrease again in the Czech Republic andvery rapidly in Bulgaria.

-------Table 3-------As can be seen from Table 3, CEECs maybe divided into two groups. Those withdouble-figure rates are located in Centraland South-eastern Europe, with the ex-ception of the Czech Republic and Ro-mania. These two countries and the Bal-tic States have unemployment rates be-low 7%. Interesting questions are whetherthis difference between the two groupsof countries reflects the reality and whatthe reasons are for this difference.

An answer is partly given by the LabourForce Survey as shown in Table 2. Withthe exception of Bulgaria, all countriesrecording high registered unemploymenthave lower unemployment when meas-ured by the LFS, according to the ILOdefinition. It implies that some unem-ployed persons registered with labouroffices are either economically active(mostly in a form of casual work) or areinactive - uninterested in working (at leastnot in existing jobs) and registered onlyto get access to social benefits. In con-trast, some other persons deemed inac-tive by the Labour Force Survey are pas-sive unemployed (i.e. jobless persons dis-couraged from an active job search), of-ten because they belong to a disadvan-taged group and have given up job searchsince neither jobs suitable for them norappropriate employment services areavailable. In the second group of coun-tries (including Romania where registeredunemployment has recently fallen sharp-ly) unemployment measured by the LFSis somewhat higher than registered un-employment, indicating less interestamongst job seekers in registration, ormore restrictive eligibility criteria.

However, in some countries (the BalticStates, Bulgaria, Romania and even morethe Commonwealth of Independant States(CIS)) some redundant workers in enter-prises are sent on administrative leave orforced to work shorter hours while stillformally employed. These hidden unem-ployed persons are often without any payor access to social benefits

National differences in unemploy-ment

The reasons for national differences in un-employment are multiple and include:

❏ economic growth - in spite of the la-bour-saving economic growth prevailingin the region, economic growth is and, ifstrengthened and made more sustainable,will continue to be the most importantengine for employment recovery;

❏ progress in economic reform - the Bal-tic States began their economic reformlater, which partly explains a slower fallin employment and a limited increase inopen unemployment. There are also sub-stantial differences between CEECs in theextent and method of privatization. Hun-gary has privatized mostly through directsales and new owners have drasticallyreduced labour hoarding. A similar effectwas achieved by the introduction of rathertough bankruptcy procedures. In contrast,the type of voucher privatization used inthe Czech Republic had a counterproduc-tive effect on labour hoarding as discussedbelow. In other countries like Bulgaria,Romania, and Lithuania privatization ofbig state enterprises is still underwaywhile the state does not effectively playthe role of an owner in corporate gov-ernance;

❏ economic structure - countries with ahigher proportion of agriculture in total

Table 3

Registered unemployment rates, 1991-96(end-of-period rates in % of the labour force)

1991 1993 1995 Sept. ‘96

Bulgaria 11.5 16.4 11.1 10.5Czech Republic 4.1 3.5 2.9 3.2Estonia n.a. 5.0 5.0 5.3Hungary 7.4 12.1 10.4 11.0Latvia n.a. 5.8 6.5 7.0Lithuania n.a. 3.4 7.3 6.4Poland 11.8 16.4 14.9 13.5Romania 3.1 10.4 8.9 6.3Slovakia 11.8 14.4 13.1 12.2Slovenia 10.1 15.5 14.5 13.7

Source: See Table 1.


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employment (Bulgaria, Hungary, Poland)are facing higher unemployment. Further-more, some industrial sectors such asmining, metallurgy, engineering and tex-tiles were more affected by economic re-cession and those countries which hadhigher employment concentrated in thesesectors experienced larger falls in indus-trial employment. In Central Europeancountries these negative effects of therestructuring process were partly coun-terbalanced by growing services, whileother countries have yet to make progressin this direction depending much onachieved economic growth and real in-comes’ recovery;

❏ small private sector development - dif-ferent conditions prevail for small busi-nesses throughout the region. These de-pend on domestic demand and access toforeign markets, the quality of technicaland financial infrastructure and economicconditions for enterprising (interest rates,availability of credits, taxation, etc.), gov-ernment support, development of tour-ism, social attitude towards private enter-prising and the initiative to become self-employed, the extent of racketeering, etc.The better the conditions for the devel-opment of small businesses, the morepeople are involved in this type of activ-ity. Again, Central Europe is further ad-vanced in this direction;

❏ level of wages and total labour costs -although the average level of wages andlabour costs is low in the region in com-parison with Western market economies,there are substantial differences betweencountries. The highest level is in Slovenia,followed now by the Czech Republic,Poland, Hungary (until 1995 Hungary wasin second place) and Slovakia. Becausethe economies in transition compete witheach other in exports of many labour- andmaterial-intensive commodities, these dif-ferences are very important, not only fordomestic exporters, but also for Westerninvestors wishing to transfer productionto low labour cost countries.3 Larger pro-duction for domestic and foreign marketsmeans higher employment;

❏ the reasons for low unemployment inthe Czech Republic are both economicand non-economic4. Very fast “small” pri-vatization (of shops, restaurants, work-shops, etc.) combined with restitution (re-

turn of formerly nationalized property toprevious owners), promotion of smallprivate business through credit schemes,preferential taxation in crisis regions, etc.,stimulated structural changes and the re-allocation of labour to developing eco-nomic sectors, smal

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