Darvas, Ζ. (2015) “The convergence dream 25 years on – half of the former communist countries did not converge to advanced EU countries from 1989-2014“, Bruegel Institute, 06 January.
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.
GDP per capita at purchasing power parity (% of 10 advanced EU countries), 1980-2014
Relevant posts:
- European Commission (2014) “The 2014 Stability and Convergence Programmes: An Overview“, European Economy, Occasional Papers. 199. July 2014: Brussels.
- Bertarelli, S., Censolo, R. & Colombo, C. (2014) “Fiscal Convergence in the European Union before the Crisis“, Contemporary Economic Policy, Volume 32, Issue 4, pp. 784–801, October 2014.
- Watt, A. (2014) “Europe’s Underappreciated Success: 10 Years Of Post-Enlargement Convergence“, Social Europe Journal, 05 May.