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Large-Scale Transition of Economic Systems – Do CEECs Converge Toward Western Prototypes?

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Abstract

We analyze potential convergence of Central and Eastern European Countries’ (CEECs) economic systems toward western prototypes. The corresponding comparative capitalism literature identified four prototype economic systems among (traditional) OECD countries: Liberal, Continental, Nordic, and Mediterranean. Based on a comprehensive macroeconomic cluster approach, we are able to confirm these prototype country clusters. At the same time, our results indicate that the economic systems of CEECs have still not completely converged toward these prototypes, but complement them by independent Liberal (CEEC LME) and Continental/Nordic (CEEC CME) varieties, showing no signs of convergence toward the inconsistent and underperforming economic system of Mediterranean countries.

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Notes

  1. We define CEECs as all former socialist countries that had joined the European Union as of 2016.

  2. A CME, for example, combines industrial relations shaped by employer–employee cooperation and higher job security with a focus on firm- and industry-specific skills in their education system. The institutional configuration in one sphere of the economy (job security on labor market) enhances the efficiency of the institutions in another sphere (job security reduces sunk costs of firm/industry-specific education). In a consistent variety of capitalism, i.e., LME or CME, all institutions of the different spheres of the production system are complementary to each other, and these institutional complementarities allow for superior performance (Hall and Soskice, 2001).

  3. The nomenclature for clusters varies in the literature. Therefore, we use our own nomenclature for the clusters in our analysis.

  4. Iversen and Wren (1998) analyzed what they called the “trilemma” problem of postindustrial economies, in which employment growth is concentrated in service sectors with low productivity growth. They argue that tradeoffs involved in achieving employment, equality, and stability lead to different solutions depending on economic systems. The Liberal response allows service sector wages to decrease, which will lower relative prices and lead to growing demand and employment while maintaining budgetary restraint at the cost of increasing income inequality. The Christian democratic (Continental) response prevents service sector wages from decreasing, subsequently sustaining income equality and budgetary restraint at the cost of lower employment and demand. Finally, the social democratic (Nordic) response maintains high wages for service sector workers, which are increasingly employed in the public sector and thereby increases employment and demand while maintaining income equality at the cost of declining fiscal stability (higher taxes and/or debt).

  5. Kitschelt (2006), closer to our comprehensive analysis of economic systems, explains a different variant of the “trilemma” of macroeconomic targets. He focuses on innovation capacity, which is closely linked to employment creation/economic growth. He concludes that the Nordic is superior to the Continental model because there, redistribution is much more efficient on the macrolevel allowing for both fiscal stability and a low level of regulation supporting innovation and growth, while still upholding a comparatively equal income distribution. In achieving this, the Nordic countries have managed to escape the “trilemma” of macroeconomic targets to a certain degree, whereas the Continental countries find themselves in a state requiring reform steps either in a more Liberal or Nordic direction.

  6. Traditionally, cluster studies have figured prominently in analyses on WWS typology. Saint-Arnaud and Bernard (2003), for example, used a dataset of 36 variables on the political and social situations in 20 OECD countries and identified the three groups proposed by the WWS approach plus one cluster of Mediterranean countries. Bambra (2007), Danforth (2014), Gough (2001), Kangas (1994), Kautto (2002), Powell and Barrientos (2004) also conducted cluster analyses based on welfare state characteristics and arrived at comparable results: Esping-Andersen’s hypothesis of three distinct models of welfare state provision is supported. Only a few cluster studies on VoC typology exist, including Schneider and Paunescu (2012) and Hassel (2014). Most studies confirm the LME-CME pattern predicted by Hall and Soskice, but also identify a cluster of Mediterranean countries, whose model of production and welfare state provision apparently differ from those of other European countries.

  7. An exceptional study is provided by Pryor (2006) because only developing countries are considered in the analysis. Doing this, Pryor identifies somewhat different models: Business, Labor, Statist, and Traditional.

  8. Studies investigating the CEECs’ economic systems (not employing cluster analysis) are offered by Babos (2010), Bartlett (2007), Cernat (2006), Crowley (2008), Feldmann (2006), King (2008), Knell and Srholec (2007), Myant (2007) and Mykhnenko (2007). These studies in part arrive at differing results for several countries. Exceptions are Slovenia and Estonia, since for these two, fairly advanced, CEECs, clearer results emerged from an application of the VoC approach. Following the results of Feldmann (2008) and Buchen (2007), Slovenia (CME) and Estonia (LME) quite closely resemble VoC prototypes.

  9. Exceptions are Castles and Obinger (2008) and Schneider and Paunescu (2012), who examined more than one period for traditional OECD countries. Schneider and Paunescu (2012) conducted separate cluster analyses for five periods between 1990 and 2005. Considering the time dimension reveals some interesting and unconventional insights. Spain, Denmark, Finland, the Netherlands, and Sweden are assigned to the LME cluster in the most recent period. They interpret this as a result of liberalization efforts in these countries. Furthermore, Danforth (2014), not considering CEECs, tests the validity of the WWS grouping across time, conducting cluster analysis for each 5-year interval between 1950 and 2000. His analysis confirms the hypothesis of three distinct welfare state models among the fully developed OECD countries, which emerged in the mid-1970s and have remained stable since.

  10. Strictly speaking, we consider the 10 CEECs plus Croatia. For reasons of simplicity, we refer to this subsample as CEECs.

  11. An additional advantage of our empirical strategy is that it would allow us to extend the country sample well beyond OECD countries in future studies.

  12. While income and distribution of income are established target variables, we also tested inflation and fiscal deficit as alternative stability indicators. However, analyzing rather stable institutional designs using variables influenced by business cycles leads to distorted results.

  13. We measure innovative capacity by an aggregated indicator of the World Bank’s Knowledge Assessment Methodology based on several innovation parameters. This variable is supposed to capture a country’s "capacity” to innovate, i.e., the degree to which it is capable of producing new technologies/products/etc., which enables it to achieve economic growth in the future.

  14. The results for the PC analyses of the previous periods are available upon request. As mentioned, the correlations between PCs and initial variables remain remarkably stable for 2000–2003 and 2004–2006. The results of the principal component analysis for the first period (1995), however, have been strikingly different. In this period, CEECs still constituted extreme cases of redistribution positively correlated with both spending and regulation. At the same time, innovation has been positively correlated with transfers. Arguably, early transition of the CEECs in the mid-1990s after the disintegration of the Eastern Bloc distorted the result to a great extent because economic systems were apparently not comparable at that point in time.

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Acknowledgments

Rainer Schweickert received funding for this research from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no. 290647.

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Authors and Affiliations

  1. PFH Göttingen, Weender Landstr. 3-7, 37073, Göttingen, Germany

    Markus Ahlborn & Joachim Ahrens

  2. Kiel Institute for the World Economy, Kiellinie 66, 24105, Kiel, Germany

    Rainer Schweickert

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  1. Markus Ahlborn
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  2. Joachim Ahrens
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  3. Rainer Schweickert
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Correspondence to Markus Ahlborn.

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Appendix Table 4

Table 4 Cluster history, 1995–2009
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Ahlborn, M., Ahrens, J. & Schweickert, R. Large-Scale Transition of Economic Systems – Do CEECs Converge Toward Western Prototypes?. Comp Econ Stud 58, 430–454 (2016). https://doi.org/10.1057/s41294-016-0009-x

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