Blog Post

The convergence dream 25 years on

The 25th anniversary of the fall of the Berlin wall was widely celebrated – rightly so. The fall of communism opened the way for democracy, personal freedoms, security, lawfulness, fairness and economic efficiency, among others. The transition also raised hopes that the economies lagging behind might catch up. Such hopes were supported by efficiency gains related to the transformation to market economies, institutional development, the western-focused integration process and microeconomic factors such as the intellectual skills of the labour force, entrepreneurial abilities, and the capacity to accommodate new knowledge and technologies.

By: Date: January 6, 2015 Topic: European Macroeconomics & Governance

The 25th anniversary of the fall of the Berlin wall was widely celebrated – rightly so. The fall of communism opened the way for democracy, personal freedoms, security, lawfulness, fairness and economic efficiency, among others. The transition also raised hopes that the economies might converge to western Europe in income per capita. Such hopes were supported by efficiency gains related to the transformation to market economies, institutional development, the western-focused integration process and microeconomic factors such as the intellectual skills of the labour force, entrepreneurial abilities, and the capacity to accommodate new knowledge and technologies.

The fall of communism opened the way for democracy, personal freedoms, security, lawfulness, fairness and economic efficiency

After the dramatic economic collapse during the first years of transition, all countries in the region closed their income gaps relative to main trading partners, as documented by an IMF report. Yet as my colleague Marek Dabrowski warned some weeks ago, convergence in the 2000s has halted or even reversed since the global financial and economic crisis erupted, and there are questions about the future growth prospects of the region.

In this post I look back to 1989 (and before when possible) and consider whether the overall convergence since the mid-1990s has compensated for the dramatic reduction in per capita incomes during the transition. There are certainly data issues: the measurement of economic performance during the transition was uncertain and income levels were likely incorrectly measured during the communist era. In trying to address these concerns, I use income levels from Eurostat (for EU countries) and the IMF (for other post-communist countries) from the mid-1990s and use real GDP and population growth rates to trace back the level of per capita output in earlier years: I assumed that per capita real GDP growth relative to trading partners approximates the change in relative GDP per capita measured at purchasing power parity. Presumably, growth rates were better measured than income levels during the transition, while income levels from the mid-1990s onwards should be more reliable due to the adoption of improved statistical standards.

In the figures below I compare per capita income, measured at purchasing power parity, to the weighted average of 10 advanced EU countries. It delivers a surprising picture: of the 29 countries shown, only 14 had higher GDP per capita (at purchasing power parity) in 2014 relative to the 10 advanced EU countries as compared to before the transition, while 1 had similar and 14 had lower. I also include East Germany among the 29 countries: following the transition shock, there was a rebound from 1992-94, but this was short-lived . East German GDP per capita grew at practically the same rate as West German GDP per capita from 1996-2013, so in this period the ups and downs of East Germany indicated on the chart represent overall German development.

When I presented these charts at seminars, the typical critiques I received were that Trabants are not comparable to BMWs, and that these countries have changed and developed so much in the past two decades that it is inconceivable that in half of them relative per capita income is lower now than it was in the communist era. I have two responses.

First, per capita income of the 10 advanced EU countries grew by about 40 percent from 1989-2014. Thus, an unchanged relative per capita GDP implies an absolute growth of 40 percent. There was, therefore, improvement in income conditions even in most of those post-communist countries that did not converge during the past 25 years. The key exceptions are Georgia, Ukraine and Tajikistan, where the absolute level of real GDP per capita is still well below pre-transition values, and Montenegro, Moldova and Serbia, where GDP per capita is also somewhat below the pre-transition level.

Second, many BMW and Mercedes cars can indeed be seen in city centres and airport parking garages, where there are also many shining buildings. Foreign visitors mostly see these areas. But the suburbs of main cities, the smaller towns and villages and the countryside are not always that shiny. As I highlighted in a post I wrote for the 10th anniversary of the EU enlargement, capitals like Warsaw, Bratislava and Prague have even overtaken Vienna in terms of GDP per capita, but regional divergence has widened: there are many poor regions which converged very little in 2000-2011 (the period for which regional data is available).

There is a lot to celebrate at the 25th anniversary but one should keep in mind that convergence to western living standards is not automatic

Let me mention a few statistics on passenger cars, because Trabants are indeed not comparable to BMWs. In 2011, there were 490 cars per 1000 people on average in the 10 advanced EU countries, 379 in the 11 new EU member states, 179 in non-EU Balkan countries and around 200 in the former Soviet Union (data source: World Development Indicators of World Bank). In 2012, the share of cars older than 10 years was 36 percent in Germany, 33 percent in France and 25 percent in the United Kingdom, while in the Czech Republic it was 54 percent, in Hungary 55 percent and in Poland 71% (data source: Eurostat transport database).

In non-EU transition countries (for which I do not have data) the share of old cars is presumably very high too. Therefore, even if Trabants hardly can be seen on the streets of central and Eastern Europe now, people on average possess fewer and much older cars than citizens in Western Europe.

While half of the countries did not converge from 1989-2014, the other half did, such as Poland, Albania, Slovakia, the Baltic countries and most resource-rich former Soviet Union countries (except Russia). Clearly, some countries better exploited the opportunities offered by transition and subsequent European integration. Therefore, there is still a lot to celebrate at the 25th anniversary, even in economic terms, but one should keep in mind that convergence to western living standards is not automatic and half of the post-communist countries did not converge during the past 25 years.

GDP per capita at purchasing power parity (% of 10 advanced EU countries), 1980-2014

Source: calculations using data form Eurostat, IMF, EBRD, World Bank, Statistisches Bundesamt and DIW.

Note: the reference group of 10 advanced EU countries include Austria, Belgium, Denmark, Finland, France, Germany, Luxembourg, the Netherlands, Sweden and United Kingdom. These countries represent major trading and financial partners of post-communist countries. I did not include southern Europe and Ireland in the reference group, because they were also converging and/or diverging to the average of the other 10 former EU members.

Read more:

Central and eastern Europe: uncertain prospects of economic convergence

10 years EU enlargement anniversary: waltzing past Vienna


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article More on this topic More by this author

Blog Post

Uncertainty over output gap and structural-balance estimates remains elevated

The EU fiscal framework strongly relies on the structural budget balance indicator, which aims to measure the ‘underlying’ position of the budget. But this indicator is not observed, only estimations can be made. This post shows that estimates of the European Commission, the IMF, the OECD and national governments widely differ from each other and all estimates are subject to very large annual revisions. The EU should get rid of the fiscal rules that rely on structural balance estimates and use this opportunity to fundamentally reform its fiscal framework.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: June 17, 2019
Read article More on this topic More by this author

Blog Post

The campaign against ‘nonsense’ output gaps

A campaign against “nonsense” consensus output gaps has been launched on social media. It has triggered responses focusing on the implications of output gaps for fiscal policy under EU rules, especially for Italy. But the debate about the reliability of output-gap estimates is more wide-ranging.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: June 17, 2019
Read about event More on this topic

Past Event

Past Event

Role of national structural reforms in enhancing resilience in the Euro Area

At this event Gita Gopinath, Chief Economist at the IMF will discuss the role of national structural reforms in enhancing resilience in the Euro Area.

Speakers: Shekhar Aiyar, Maria Demertzis, Romain Duval, Gita Gopinath and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 17, 2019
Read about event More on this topic

Upcoming Event

Jun
19
12:30

What reforms for Europe's Monetary Union: a view from Spain

How is a successful European Monetary Union still possible in today's ever-shifting political landscape? What reforms need to occur in order to guarantee success of cohesive policies?

Speakers: Fernando Fernández, José Carlos García de Quevedo, Gabriele Giudice, Inês Goncalves Raposo, Javier Méndez Llera and Isabel Riaño Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
25
08:30

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: A strategic agenda for the incoming EU presidents

In this Director’s Cut of ‘The Sound of Economics’, Bruegel’s Guntram Wolff and Maria Demertzis talk through their memo to the new presidents of the European Commission, Council and Parliament, outlining the specific measures that should be implemented in order to tackle the most formidable challenges arising in the next five years.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 12, 2019
Read article Download PDF More on this topic

External Publication

Effectiveness of cohesion policy: learning from the project characteristics that produce the best results

This study by Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza, and Catarina Midões analyses the characteristics of cohesion policy projects that can contribute to successful outcomes. Their analysis is based on a literature survey, an econometric analysis and interviews with stakeholders. About two dozen project characteristics are considered, and their association with economic growth is studied using a novel methodology. Based on the findings, the study concludes with recommendations for cohesion policy reform.

By: Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Opinion

Europe’s citizens say they want a more political EU

The recent European Parliament election suggests that a growing share of European voters sees things differently from national governments. Whereas citizens clearly used their votes to express policy preferences, very few governments are ready for a more political EU leadership.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 4, 2019
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Striving for research excellence with Horizon Europe

In this episode of 'The Sound of Economics', Reinhilde Veugelers speaks about her recent Bruegel paper, requested by the European Parliament, on using public resources to improve the EU's potential to be a global centre of excellence for research in the next decade.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 4, 2019
Read article More on this topic

Blog Post

A European atlas of economic success and failure

Economic growth was diverse across EU regions, yet it is crucial to control for region-specific factors in assessing growth performance. We find that there are rather successful regions in many EU countries, suggesting that the EU can provide a good framework for growth. Yet the worst performers are more concentrated in some countries, suggesting that country-specific factors can play a major role in regional development.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 3, 2019
Load more posts