The v4 countries experienced a rapid transition from state-controlled to modern market economies. The fast pace of economic reforms in the 1990s, which were partly externally induced through the various agreements with the EU, and partly due to institutional reforms, enabled deep structural changes, such as the introduction of market mechanisms, price deregulation and liberalisation of trade and capital flows. The structural changes facilitated factor movements (capital, investment and knowledge) which contributed to rapid integration of the V4 countries into the EU. In terms of transformation theory, thereafter development did resemble a series of recurrent growth curves, but external shocks (EU accession, the 2009 crisis) and international institutional changes (such as Slovakia’s 1998 change of government, or Hungary’s creation of a dependence on foreign loans in the housing market) were important turning points.
While changing flows of production factors were the economic trademarks of the post-1989 period, particular factors had distinctive mobility features. Reorientation and integration of the foreign trade was remarkably rapid in the early 1990s, and was complemented by strong influxes of FDI in 1995-2008, conditional on macroeconomic stabilisation, and the prospects of EU eastern enlargement. Most of incumbent EU member countries did not immediately open their labour markets to Central Eastern Europe, but all were obliged to do so by the early 2000s. Knowledge is the most mobile production factor, and driver of productivity, but their integration to the European Research Area was relatively slow. National systems of R&D accounted for the considerable inertia and low speed of transformation in the V4 countries.
The integration ofthe v4 countries is generally considered a success story in the history of the EU. The comparisons with Greece, Spain and Portugal demonstrate that the V4 countries started their convergence with the incumbent EU members from considerably lower levels of GDP per capita, but achieved higher growth rates. This reflects differences in their starting points, the nature of the external shocks faced, and institutional changes. The future growth of the V4 countries, however, faces risks, some of which are similar to those currently faced by the southern member countries.
First, is likely to pose a major challenge for their future development. They have the highest rates of population ageing in the EU (European Commission 2015b), as well as high rates of emigration by young people, and - until very recently - low levels of immigration. Second, demographic trends indicate that labour productivity growth, in general, and TFP (especially technology), in particular, should be a major source of economic growth in the V4 countries in the coming decades. Since the 1990s, labour productivity growth has benefited from diffusion of technology and organisational innovations by the MNCs. However, this source of growth may diminish as the MNCs relocate some of their production to even lower cost countries. This problem is exacerbated, because the V4 countries have been unable to build strong national innovation systems to support labour productivity growth from domestic resources, yet this is essential for the long-term economic growth, sustainable public finances, and for providing public social services for ageing populations.
Third, the period of the 1990s-2010s was typified by capital-intensive growth and technology transfers assisted by FDI in the V4 countries. They benefited from having an educated but affordable labour force until the mid-2010s. Rising labour costs, however, represent a likely future challenge, especially given the slow transition to knowledge-intensive growth. In this respect, the experience of Portugal may be salutary. Portugal was a favoured FDI destination in the 1980s and 1990s but, having failed to transit to knowledge intensive growth, rising labour costs made Portugal less attractive in the last decade. The V4 countries will have to concentrate more resources in high-tech industries, including making more efficient use of EU structural funds, if they are to make the transition to high value added production. Specifically, they will need to focus more on ‘soft’ infrastructure projects, such as supporting start-ups, life-long learning and on-the-job training. With wage levels rising, the V4 may also be better able to facilitate the return of their emigres. There is a considerable potential for turning brain drain to brain gain.
Fourth, overspecialisation is another problem for some V4 countries. Slovakia, for example, hosted four major car-markers and became the largest per capita car producer in the world in 2015. High specialisation in a few export products was also typical for the Czech Republic. While small open economies need to pursue their comparative advantage and specialise, overspecialisation can be problematic in economic downturns, such as that in 2009, or when a few major foreign investors relocate their investments.
Fifth, the v4 countries also are overspecialised in terms of their markets, with the EU taking the vast majority of their exports. Initially, the choice of exchange rate regime was critical for mitigating the impacts of foreign trade on macroeconomic stability. The Czech Republic, Hungary and Poland opted for an external anchor of the fixed exchange rate regime in early 1990s (Szijarto 2014), while Slovakia introduced a mixed exchange rate regime—the crawling peg. However, most CEE countries found the fixed exchange rate regimes were unsustainable during the 1998 crisis, and transited to a managed float or free-float regime. Subsequently, in what became an important turning point in the economic transition, Slovakia adopted the euro, while the three other v4 countries became less enthusiastic about the Eurozone after the outbreak of the 2008 financial crisis. Empirical evidence from the Eurozone indicates the positive effect ofcommon currencies on the intensity of bilateral international trade (Rose and Stanley 2005; Baldwin 2006). The reduction of foreign exchange rate fluctuations and of transaction costs are particularly important for a small country trading intensively with a big Eurozone member. Germany alone accounted for about one third in all V4 countries. Indeed, some studies (Cieslik et al. 2014) found evidence that Eurozone membership was positively related to the probability of exporting.
Finally, institution building is far from complete in the V4 countries. By the mid-2010s, the V4 countries had relatively low rankings in the world leagues tables of the quality of public institutions. The World Bank’s Doing Business index and/or World Economic Forum data sets, for example, point to high levels of corruption, significant administrative burdens for businesses, inefficient and corrupt judicial systems, and high shares of the informal sector in the total economy. As these institutions continue to be reshaped in the coming years, transformation theory reminds us that they will constitute important internal sources of turning points in the experiences of the four countries.