Growth and Convergence

Academic Research paper and Study of the Economy of Romania and Romanian Business

According to the development approach of integration the phenomenon of (conditional) convergence should show up in the data. Indeed, the 2004 joiners from Central and Eastern Europe exhibited on average higher growth rates than most EU-15 countries. Noteworthy outliers are Luxembourg and Ireland. Beside these two exceptions the data (cf. Figure 2‑2) looks pretty much as the first derivation of the Solow-Swan model in an economic textbook rather than the noisy pictures often to be found in the real data.

Convergence Patterns in the EU

A similar graphic is given by the EC (2006 b: 44), which sees “capital accumulation and technological progress” (ibid: 45) as the main driving forces of this convergence process. β- and σ–convergence are illustrated e.g. by Szekely & Watson (2007). Nonetheless, the large differences between the CEECs and the EU-15 persist. Likewise differences between the CEECs are considerable as not all 2004 joiners perform similarly well. Per capita GDP in 2004 (as measured in PPS) “ranged from 43.1 % in Latvia to 75 % in Slovenia” (ibid: 43). An average growth rate of 4 % and of 2 % for the EU-15 per annum would imply that convergence would not be achieved before 2040 (ibid: 45).

Image 2.2:Initial Real GDP per Capita and Growth Rates 1995 – 2004 in the EU
Conditional convergence in the EU – Initial GDP per Capita and Average Growth Rates

Source: Source: PWT 6.2; own graphic, own calculations

Drivers of Real Convergence in the EU

While the impact of capital accumulation and technological progress has been considered a positive one for GDP in the CEECs, the EC accounts the contribution of labor as “mostly … negative” (ibid: 45). However, as capital-labor ratios and productivity levels are still lower as in the EU-15 further growth potentials can be assumed.