Recent unrest in Latvia and Bulgaria has emphasised the economic difficulties faced by the formerly communist countries in central and eastern Europe. Indeed a new IEA study, New Europe’s Old Regions, reveals that some regions of the European Union are now poorer than parts of sub-Saharan Africa. For example, GDP per head in Botswana is higher than in large parts of Poland, Romania and Bulgaria.
“New Europe’s Old Regions” are those areas of the EU that are very poor, have high levels of unemployment, low productivity and are dominated by agriculture and/or manufacturing industries.
Yet conventional regional policies, such as those that have failed in the former East Germany, cannot bring prosperity. Attempts to “pick winners” or subsidise industries in which a region does not have a comparative advantage have only exacerbated existing problems by misallocating economic resources.
Instead, governments should focus on liberalisation, particularly within labour markets. Politically, this could be achieved through the devolution of power, which would enable regional governments to reduce impediments to employment by, for example, adjusting minimum wages, benefit rates and regulations to suit local conditions. The EU should therefore decentralise and allow countries to opt out of new legislation and regulations. The policy needs of different parts of the EU vary so greatly that a “one size fits all” approach is not realistic.