Looking Beyond GDP in Central Europe

The incomes in the hands of the people in CEE countries coincide with the declared economic capacity of their homelands more than in Western European countries.

Cheerful family going back from supermarket. Pushing shopping cart and carrying shopping bags. Mother looking at shop bill.
Photo: iStock.com / vgajic

During discussions about the state of the economy in individual countries, the most common starting point is Gross Domestic Product (GDP) – the rate at which it is growing or how it is distributed among the population of each country. Despite frequently recurring opinions pointing to the one-sidedness of GDP and successive proposals to replace it with another indicator (the most commonly proposed replacement is the Human Development Index), GDP remains the most important – or at least the best-known – tool for describing the state of the economy. Nothing better has been invented. So far.

What is AIC?

However, it is also becoming more common in this type of discussion to include other indicators besides GDP to facilitate a proper reading of the basic indicator. One of them is Actual Individual Consumption (AIC). What does it show? “AIC consists of goods and services actually consumed by households, irrespective of whether they were purchased and paid for by households directly, government, or nonprofit organizations,” explains Eurostat on its webpage.

“The AIC per capita can be considered as an indicator of the material welfare of households,” adds the European Statistical Office. It is believed that the AIC measures the financial capability of a country’s inhabitants more accurately than GDP, as it describes their consumption capacity together with the cost of public services such as education or healthcare. This provides an insight into the real financial capacity of individual households, as it does not capture the proportion of GDP that companies generate.

According to Eurostat statistics, nine EU countries recorded AIC per capita above the EU average in 2022. The highest levels were recorded in Luxembourg (138% of the EU average), Germany (119%), and Austria (118%). 18 EU countries recorded AIC per capita below the EU average in the same year. The lowest levels recorded were in Bulgaria (67%), Hungary (72%) and Slovakia (73%).

However, it is worth mentioning that all three countries have constantly increased their AIC over the years. In 2019, Bulgaria was 58% of the EU average, Hungary – 67%, Slovakia – 70%. Similarly, the value of this index in most Central European countries has increased. This best shows how consistently they are getting better off – despite the pandemic and the ongoing war in Ukraine since February 2022.

Wealth of nations

Eurostat underlines that every country’s level of AIC per capita is highly correlated with GDP per capita. However, correlation does not mean that these indicators show exactly the same thing. It is different. Their comparison allows interesting conclusions to be drawn. First of all, it can be seen that while GDP is in most cases higher than AIC in the “old Union” countries, the opposite is mostly true in the Central European states.

When GDP per capita is compared to AIC per capita, in seven of the 12 countries that make up the Three Seas Initiative, the latter indicator is higher than the former. The biggest difference is in Romania, where GDP (measured as the percentage of the EU average, which is 100%) was 77% in 2022 and AIC – 88% in the same year. In Bulgaria, AIC is eight percentage points higher than GDP, in Lithuania, Latvia and Poland – six points higher.

In the remaining 15 EU countries, only five record an AIC at a higher level than GDP, and these differences are mostly minimal. In Germany, the first indicator is two points higher than the latter, in Italy – three points higher. This difference is bigger only in France (seven points) and in Portugal (eight points). It is clear from this that in most EU countries, a certain proportion of GDP is created only in the business sector, with no real translation into the consumption capacity of its citizens.

The most extreme confirmations of this statement are Luxembourg and Ireland. In these countries, GDP per capita is 216% and 233% of the EU average, respectively. At the same time, their AIC ratio is 138% and 87%. Much higher GDP levels than the AIC are also recorded in Denmark (26 points difference), Malta (17 points), the Netherlands (13 points), and Sweden (12 points). This means that the people in these countries have less financial capacity in real terms than the high GDP figures would suggest.

A clear gap

“No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable,” wrote Adam Smith in his famous book “The Wealth of Nations.” European countries, which are among the most developed in the world, are not affected by this problem. But also, a closer look at the data that the AIC index shows demonstrates a clear gap in some countries between the real official statistics and the financial capabilities of citizens. This is one of the reasons for the growing political tension in many European countries.

It is also no coincidence that the situation in the CEE countries is much more stable, with no large street demonstrations – because the incomes in the hands of the people of the states in the region coincide with the declared economic capacity of their homelands. Although they are still noticeably poorer than Western European countries, profits are also more evenly distributed within them. Such a situation is critical because it helps to stabilize public sentiment and provides an opportunity for calm, consistent economic development. In this way, they gain the opportunity to achieve their own “better class of memories.”

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