Income convergence at risk

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Convergence at risk

Reforms in the transition region have stalled since the mid-2000s, and in some countries reversals have occurred in specific market sectors. Long-term growth projections suggest that unless reforms are revived, living standards in most transition economies will remain below those in mature market economies, or at best converge very slowly. However, reforms face political, social and human capital constraints. This Transition Report examines how these constraints can be relaxed or circumvented.

The transition region is experiencing a fifth consecutive year of substandard growth. Since the collapse of Lehman Brothers in 2008, central Europe and the Baltic states (CEB), south-eastern Europe (SEE) and eastern Europe and the Caucasus (EEC) have not once managed to reach their pre-crisis rates of expansion (see Chart 1.1). Growth rates have remained low, not only compared with the boom period of 2004-08, when output in the transition region as a whole expanded by 6.6 per cent a year, but also compared with the five-year period preceding the boom. In 2013 the transition region as a whole is projected to grow at an annual rate of 2 per cent, the lowest rate in 15 years (with the exception of the 2009 recession).

This low growth largely reflects the difficult external environment in the short term. As this gradually improves – and barring a resurgence of the eurozone crisis – modest growth of up to about 2.8 per cent is expected in the region in 2014 (see the “Macroeconomic development and outlook” section of this Transition Report). However, this does not dispel concerns about the long term. Some of the problems that have constrained growth in the eurozone are of a longer-term nature. And even if their major trading partners were to fully recover, it is still not clear whether the transition countries would emerge from the crisis with satisfactory long-term growth prospects.

Two decades ago per capita income in a range of countries in the transition region (excluding the least developed countries in EEC and Central Asia and the Western Balkans) was between about 15 and 45 per cent of the EU-15 average in purchasing power terms.¹ Relative incomes in most of these countries have since risen by about 20 percentage points to stand at between 35 and 65 per cent of the EU-15 average – an impressive achievement.²

This chapter looks at whether convergence can continue at a sufficient pace to push average per capita income in most of these countries above 60 per cent of the EU-15 average (and above 80 per cent in a few cases) by about 2035. It concludes that the transition region does indeed face a serious long-term growth problem and that, given the current policies, convergence with Western living standards as defined above will not be achieved in most countries. Even if convergence is eventually achieved, progress will be very slow.

What can the region do to invigorate its long-term development, both to increase growth and to make it more inclusive? The answer depends on the diagnosis of the problem. This chapter maintains that although the reduction in long-term growth prospects has coincided with the crisis, its causes are only partly related to that crisis.

The slow-down is due in part to the intrinsically temporary nature of the “productivity catch-up” that followed the initial dismantling of communism and the countries’ subsequent integration into the global economy. This cannot be remedied and can only be offset by finding new and permanent sources of growth – with continued improvements in political and economic institutions and sector-level frameworks.

However, efforts in this respect have stalled in most transition countries. This largely pre-dated the crisis and occurred before satisfactory levels of institutional development had been achieved. The crisis has made things worse by undermining support for market-oriented reform, particularly in CEB and SEE countries.

Restoring long-term growth in transition economies requires an understanding of how political and social constraints on reform can be influenced or circumvented. This question lies at the heart of the remaining chapters in this Transition Report.

1. 
“EU-15” refers to the 15 Member States of the European Union prior to its enlargement in 2004. [back]
2. The Czech Republic and Slovenia are above this range, with GDP per capita above 70 per cent of the EU-15 average. However, Ukraine is below this range. Having suffered a particularly protracted post-transitional recession and a 15 per cent decline in output in 2008-09, its per capita income is further from EU-15 levels than it was in 1993 (Source: Penn World Tables). [back]

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