The end of the productivity catch-up

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Convergence at risk

After the recession in the early 1990s most countries in the transition region saw their convergence towards Western income levels accelerate, but in a way that differed fundamentally from that of other fast-growing emerging markets. Physical capital growth was initially constrained by the depreciation of obsolete Soviet-era means of production. Also, saving rates had historically been low, particularly compared with Asian countries, making foreign capital an important source of investment. And unlike most emerging economies, countries in the transition region already had comparatively old populations at the start of their transition process, so they did not benefit from significant growth in the labour force. Indeed, unfavourable demographics and declining participation rates mean that, 20 years on, some countries in the region have smaller labour forces than they did in 1993. Educational attainment was also relatively high at the start of the transition process, comparable to the levels seen in advanced countries, which initially limited the scope for growth in human capital.

In short, the substantial factor accumulation which fuelled growth in many developing countries was not feasible in the transition economies. Instead, their high growth rates primarily reflected a rapid catch-up in productivity (see Chart 1.3, which shows the contribution of total factor productivity, or TFP).

Compared with other countries with similar levels of GDP per capita, transition countries were relatively unproductive in the early 1990s (see Chart 1.4a). This reflected their inherited capital-intensive economies and the fact that many goods produced by Soviet-era capital stocks held little appeal for domestic consumers or foreign importers. However, following the liberalisation of prices and the reorientation of trade patterns, some of the old capital stocks became obsolete and production shifted towards new activities and technologies. The result was sustained productivity growth.

By the mid-2000s, however, productivity was comparable to that of other emerging economies with similar income levels (see Chart 1.4b), and it has remained at that level, in relative terms, since then. This is not surprising: the price liberalisation and opening-up to the outside world were one-off effects in all but the least developed of the transition economies.¹ Once the economies had adapted to those new conditions over that 10 to 15-year period, the transition-related catching-up process came to an end. Having successfully closed the gap, economies in the region are likely to grow more slowly in future – unless there are additional, productivity-enhancing reforms.

1. 
Namely Belarus, Turkmenistan and Uzbekistan, where considerable scope for price
   and trade liberalisation remains. [back]

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