Is Central and Eastern Europe Converging Towards the EU-15?
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No. No. 264 NBP Working Paper NBP Working Paper No. 264 Is Central and Eastern Europe converging towards the EU-15? Marcin Grela, Aleksandra Majchrowska, Tomasz Michałek, Jakub Mućk, Agnieszka Stążka-Gawrysiak, Grzegorz Tchorek, Marcin Wagner NBP Working Paper No. 264 Is Central and Eastern Europe converging towards the EU-15? Marcin Grela, Aleksandra Majchrowska, Tomasz Michałek, Jakub Mućk, Agnieszka Stążka-Gawrysiak, Grzegorz Tchorek, Marcin Wagner Economic Research Department Warsaw, 2017 Marcin Grela – Narodowy Bank Polski Aleksandra Majchrowska – Narodowy Bank Polski, University of Lodz Tomasz Michałek – Narodowy Bank Polski Jakub Mućk – Narodowy Bank Polski Agnieszka Stążka-Gawrysiak – Narodowy Bank Polski; [email protected] Grzegorz Tchorek – Narodowy Bank Polski, University of Warsaw Marcin Wagner – Narodowy Bank Polski We would like to thank Ryszard Kokoszczyński and Andrzej Sławiński for their valuable feedback on earlier versions of this paper. Published by: Narodowy Bank Polski Education & Publishing Department ul. Świętokrzyska 11/21 00-919 Warszawa, Poland www.nbp.pl ISSN 2084-624X © Copyright Narodowy Bank Polski, 2017 Contents List of Figures 4 List of Figures in boxes 6 List of Tables 7 List of abbreviations 8 Abstract 10 Non-technical summary 11 1. Introduction 15 2. Growth and convergence: theoretical underpinnings 17 2.1. Concepts and definitions 17 2.2. Theoretical models of economic growth 19 2.3. Factors affecting economic growth 23 3. The CEE growth model 28 3.1. The CEE facts and figures 28 3.2. The CEE economies’ growth model 31 3.3. The aftermath of the global financial crisis: has the growth model changed? 43 4. Stylised facts on growth and convergence in the CEE region 45 4.1. Economic growth 45 4.2. Real convergence 46 4.3. Structural convergence 49 5. Review of the empirical literature 56 5.1. Empirical studies of convergence in the CEE region 56 5.2. Factors driving convergence in the CEE region 57 6. Empirical analysis 72 6.1. Data and empirical approach 72 6.2. Absolute convergence 75 6.3. Conditional convergence 77 6.4. Conclusions 86 7. Summary and conclusions 88 References 92 Appendix 1. Growth accounting 102 Appendix 2. Analysis of convergence: estimation results 103 NBP Working Paper No. 264 3 List of Figures Figure 3.1 Financial account balance in major emerging market regions (% of GDP) 34 Figure 3.2 Saving and investment rate vs. net FDI in the CEE countries (% of GDP) 34 Figure 3.3 Net foreign capital inflow by type in the CEE countries (% of GDP) 34 Figure 3.4 Net foreign capital position by type as of end-2015 in the CEE countries (% of GDP) 34 Figure 3.5 Inflow of FDI into economic sectors in 2012 in the CEE countries (%) 37 Figure 3.6 Value added in manufacturing in the CEE and EU-15 countries (% of total value added) 37 Figure 3.7 Trade openness (% of GDP) and share in EU trade (%) in the CEE countries 37 Figure 3.8 Credit to non-financial private sector in the CEE countries (%, y/y, excl. Romania) 39 Figure 3.9 Dwelling prices in the CEE countries (2005=100) 39 Figure 3.10 Real effective exchange rates in the CEE countries (deflated by unit labour cost, 2004q1=100) 39 Figure 3.11 Current account balance in the CEE countries (% of GDP) 39 Figure 4.1 GDP growth in the CEE region and the EU-15 (%) 46 Figure 4.2 Individual countries’ contribution to the CEE region’s growth (percentage points) 46 Figure 4.3 GDP per capita in 1997 and 2015 (in PPS, thousands of constant 2011 international USD) 48 Figure 4.4 GDP per capita in 1997 (in PPS, thousands of constant 2011 international USD) and its average annual growth in 1997–2015 (%) 48 Figure 4.5 Decomposition of GDP per capita growth in CEE and other EMEs in 1997–2015 (%) 49 Figure 4.6 Population change in 1997–2015 (%) 49 Figure 4.7 GDP per capita in CEE countries (% of the EU-15 GDP per capita, in PPS) 49 Figure 4.8 Standard deviation of GDP per capita in CEE countries (% of CEE average) 49 Figure 4.9 Differences in value added shares between the CEE and the EU-15 by sector (% of VA) 51 Figure 4.10 Krugman index for value added for the CEE countries vs. the EU-15 51 Figure 4.11 Differences in employment shares between the CEE and the EU-15 by sector (% of employment) 53 Figure 4.12 Krugman index for employment for the CEE countries vs. the EU-15 53 Figure 4.13 Differences in consumption shares between the CEE and the EU-15 (% of total consumption expenditures) 55 Figure 4.14 Krugman index for consumption for the CEE countries vs. the EU-15 55 4 Narodowy Bank Polski Figure 5.1 Beta convergence, i.e. the relation between initial GDP per capita in 1997 and its growth in 1997–2015 57 Figure 5.2 Sigma convergence, i.e. cross-sectional coefficient of variation of GDP per capita in CEE countries in 1997–2015 57 Figure 5.3 Decomposition of GDP growth (percentage points, 1997–2014 averages) 66 Figure 5.4 GDP per capita in 1997 (log of thousand EUR in PPS, horizontal axis) and average contribution of capital deepening to GDP growth in 1997–2014 (percentage points, vertical axis) 66 Figure 5.5 Contributions to GDP growth in 1997–2014 (subsamples averages) 66 Figure 6.1 Time stability of the absolute beta convergence parameter in the EU-26 in 1997–2014 (year-by-year cross-section – left panel, five-year moving average window – right panel) 76 Figure 6.2 Stability of the absolute convergence parameter for ‘old’ and new EU member states in 1997–2014 (five-year moving average window) 77 Figure 6.3 Estimates of the conditional convergence parameter in the EU-26 countries in 1997–2014 (five-year rolling window) 79 Figure 6.4 The role of traditional growth factors in explaining the change in GDP per capita growth between 2003–2007 and 2010–2014 80 Figure 6.5 Changes in the estimated parameter by the share of employed (left panel) and employment rate (right panel) among workers with tertiary education in 1997–2014 (five-year rolling window) 84 Figure 6.6 Relation between the share of employment in high-technology and knowledge-intensive sectors (left panel) as well as high-technology patent applications (right panel) and GDP per capita growth (five-year rolling window) 84 Figure 6.7 Relation between the openness ratio (left panel) and change in the export market share (right panel) and GDP per capita growth (five-year rolling window) 85 Figure 6.8 Relation between inward and outward FDI and GDP per capita growth (five-year rolling window) 85 Figure 6.9 Relation between market capitalisation (left panel) and domestic credit to private sector (right panel) and GDP per capita growth (five-year rolling window) 85 Figure 6.10 Relation between inflation (left panel) and government consumption (right panel) and GDP per capita growth (five-year rolling window) 86 Figure 6.11 The role of various growth factors in explaining the change in GDP per capita growth between 2003–2007 and 2010–2014 86 NBP Working Paper No. 264 5 List of Figures in boxes Figure B.3.1 Real house prices in domestic currency (1999=100) 42 Figure B.3.2 Real disposable income in domestic currency (1999=100) 42 Figure B.3.3 Population at the age of 25–40 (1999=100) 42 Figure B.3.4 Average annual growth of housing loans (%) 42 Figure B.3.5 Dwellings investment (1999=100) 43 Figure B.3.6 Distribution of population by tenure status (2014) 43 Figure B 5.1 Decomposition of relative differences in GDP per capita between the CEE and the EU-15 countries in 2015 (% of the EU-15 average) 68 Figure B 5.2 Decomposition of GDP per capita growth in 2000–2015 68 Figure B 5.3 Beta convergence on the regional level in 2000–2014 70 Figure B 5.4 Sigma convergence on the regional level in 2000–2014 70 Figure B 5.5 Regional development of GDP per capita (in PPS) in 2000 (left panel) and 2014 (right panel) (% of the EU average) 71 6 Narodowy Bank Polski List of Tables Table 3.1 General information about the CEE countries (data for 2015) 30 Table 3.2 Main macroeconomic indicators 31 Table 4.1 Krugman index for value added for the CEE vs. the EU-15 and within the CEE group in 2015 compared to 2000 51 Table 4.2 Krugman index for employment for the CEE countries vs. the EU-15 and within the CEE group in 2015 compared to 2000 53 Table 4.3 Krugman index for consumption in the CEE countries vs. the EU-15 and within the CEE group in 2015 compared to 2000 55 Table 6.1 The impact of core growth factors on GDP per capita growth in the EU-26 countries in 1997–2014 79 Table A.1 Description of the variables used in the model 103 Table A.2 The results of the absolute convergence model among EU-26 countries in 1997–2014 (only lagged GDP per capita as a regressor) 105 Table A.3 The results of the absolute convergence model among EU-26 countries in 1997–2014 (dummy for 2009, trend or time dummies included) 106 Table A.4 Absolute convergence among the ‘old’ and new EU member states in 1997–2014 107 Table A.5 The impact of human capital variables and innovation activity on GDP per capita growth in EU-26 countries in 1997–2014 108 Table A.6 The impact of trade and FDI on GDP per capita growth in EU-26 countries in 1997–2014 109 Table A.7 The impact of institutions and macroeconomic environment on GDP per capita growth in EU-26 countries in 1997–2014 110 Table A.8 The relation between the financial market indicators and the GDP per capita growth in EU-26 countries in 2000–2014 111 NBP Working Paper No.