Abstract
We revisit the factors of convergence and growth in Central, Eastern and South Eastern Europe (CESEE). While the key elements that were driving pre-crisis convergence – rapid export growth, propelled by low wages, capital inflows and technology import, and catalysed by the EU accession – gave a strong impetus to economic progress, these factors have been weakened after the crisis due to changes in the labour market, demographics and slowdown of capital inflows. As a consequence, potential growth in CESEE economies decelerated. To maintain an adequate speed of convergence, a prospective “new growth model” is emerging as a candidate to be the driving force of growth in CESEE. The key elements of this growth model should be based on home-grown innovation to increase productivity, policies supporting the preservation and development of the productive labour force, and a system of financial intermediation that supports domestic savings.
The views expressed in this document are those of the authors and do not necessarily reflect the position of the EIB or its shareholders.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
For the purpose of this study, we define Central, Eastern and South Eastern Europe (CESEE) as the former Eastern bloc countries that were part of the 2004 wave of EU enlargement (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia), together with those of the 2007 wave (Bulgaria and Romania), and Croatia that joined the EU in 2013. The only exception is aggregate data from the EIB CESEE Bank Lending Survey, which uses a somewhat different definition (see EIB 2018a).
- 2.
The development and convergence of the region is documented in detail, among others by Roaf et al. (2014).
- 3.
Current account deficits to GDP ratios reached double-digit GDP levels in Bulgaria, the Baltic States and Romania in the years before the crisis, and elevated to high single digit levels in other countries of the CESEE region, with the exception of the Czech Republic.
- 4.
See Atoyan et al. (2016).
- 5.
Bubbico et al. (2017) covers in detail the post-crisis development of investment in CESEE, and provide estimates of an investment gap.
- 6.
See EIB (2018b) for further discussion.
- 7.
That said, unused or underused reserves of labour still exist in most CESEE countries. However, policy actions would be necessary to access these reserves. For instance, unemployment and inactivity is still high in many rural regions, but the large mismatch in skills often prevent the affected population from engaging in the labour market. Previously relocated low-value added FDI, such as white products assembly, could give way to higher value added facilities by leaving and freeing up labour. Furthermore, the public sector employs a significant part of the highly skilled labour force, therefore improving the efficiency of the state could also help alleviating labour shortage in the private sector.
- 8.
The problem of reaching and maintaining a level of economic development that corresponds to high income is not unique to CESEE. Spence (2008) present a broad set of empirically established conditions that can be considered as prerequisites of successfully graduating from the middle-income trap. They derive these from the experience of 13 countries, mostly from the Far East. He highlights the role of high investment levels, in particular to infrastructure, human capital development, early childhood and higher education and healthcare, among others. The EU membership have been helping the countries of CESEE towards meeting these conditions, both directly through providing access to various forms of investment support (ESIF, EIB, EFSI), and indirectly through the four freedoms provided by the single market.
- 9.
- 10.
The crucial role of innovation in the future convergence of CESEE countries is discussed in detail by Correia et al. (2018).
- 11.
- 12.
Eurostat, and European Investment Bank.
- 13.
Ibid.
- 14.
For instance Astrov et al. (2018) find stronger wage dynamics for countries like Romania and Bulgaria that have been strongly affected by emigration.
- 15.
See EIB (2018b).
- 16.
Wage increases in the lower skilled occupations may reflect combinations of labour being scarce and country-specific policy measures such as minimum wage increases.
- 17.
See for instance Nickel and Nicolitsas (2000) for the effect of skill shortages on firms’ investment in R&D.
- 18.
Some countries in the region have both low female employment rates (60% or below) and a large wage gap between male and female employees (European Commission 2016).
- 19.
While Bulgaria and Romania record the lowest levels of spending on education as a share of GDP in European comparison, education investment in the rest of the group except the Czech Republic is above the EU average in 2017.
- 20.
This section builds heavily on the analysis of Gattini et al. (2019), who cover extensively the post-crisis development of cross-border banking in CESEE.
- 21.
Correia et al. (2018) show using data from the EIB Investment Survey that while leading innovators in CESEE rely more on external funding than other firms, they are also more likely to be financially constrained than other companies.
References
Astrov, V., Holzner, M., Leitner, S., Mara, I., Podkaminer, L., & Rezai, A. (2018, July). Die Lohnentwicklung in den mittel – und osteuropäischen Mitgliedsländern der EU. WIIW Research Report in German Language No. 12.
Atoyan, R., Christiansen, L., Dizioli, A., Ebeke, C., Ilahi, N., Ilyina, A., Mehrez, G., Qu, H., Raei, F., Rhee, A., & Zakharova, D. (2016). Emigration and Its Economic Impact on Eastern Europe. IMF Discussion Note. Washington, DC: International Monetary Fund.
Batsaikhan, U., Darvas, Z., & Raposo, I. (2018). People on the Move: Migration and Mobility in the European Union. Brussels: Bruegel.
Brutscher, P. B., Revoltella, D., & Wruuck, P. (2019, April 5). An EU Tax Credit to Preserve Incentives for Investment in Human Capital in the Context of Intra-EU Migration. VoxEU.
Bubbico, R. L., Gattini, L., Gereben, Á., Kolev, A., Kollar, M., & Slacik, T. (2017). Wind of Change: Investment in Central, Eastern and South Eastern Europe. EIB Regional Studies.
Correia, A., Bilbao-Osorio, B., Kollár, M., Gereben, Á., & Weiss, C. (2018, December). Innovation Investment in Central, Eastern and South-Eastern Europe: Building Future Prosperity and Setting the Ground for Sustainable Upward Convergence. EIB Regional Study.
Damijan, J., Rojec, M., Majcen, B., & Knell, M. (2013). Impact of Firm Heterogeneity on Direct and Spillover Effects of FDI: Micro-Evidence from Ten Transition Countries. Journal of Comparative Economics, 41(3), 895–922.
EBRD. (2017). Transition Report 2017–18: Sustaining Growth. London: European Bank for Reconstruction and Development.
EIB. (2016). Investment and Investment Finance in Europe. Luxembourg: European Investment Bank.
EIB. (2018a). CESEE Bank Lending Survey H2-2018. Luxembourg: European Investment Bank.
EIB. (2018b). EIB Investment Report 2018/2019: Retooling Europe’s Economy. Luxembourg: European Investment Bank.
EIF. (2018). EIF VC Survey 2018: Fund Managers’ Market Sentiment and Views on Public Intervention (EIF R&MA Working Paper 2018/48). Luxembourg: European Investment Fund.
European Commission. (2016). Employment and Social Development in Europe 2016: Annual Review 2016 (Chapter 1). Luxembourg: Publications Office of the European Union.
Gattini, L., Gereben, Á., & Revoltella, D. (2019). Cross-Border Banking in CESEE – Through the Lens of the EIB Bank Lending Survey. In Ten years of the Vienna Initiative 2009-2019. Luxembourg: European Investment Bank.
Kollár, M., Bubbico, R. L., Arsalides, N. (2018). Smart Cities, Smart Investment in Central, Eastern and South-Eastern Europe (EIB Thematic Study). Luxembourg: European Investment Bank.
Nedelkoska, L., & Quintini, G. (2018). Automation, Skills Use and Training (OECD Social, Employment and Migration Working Paper No. 202). Paris: OECD Publishing.
Nickell, S., & Nicolitsas, D. (2000). Human Capital, Investment and Innovation: What Are the Connections? In R. Barrell, G. Mason, & M. O’Mahoney (Eds.), Productivity, Innovation and Economic Performance, National Institute of Economic and Social Research Economic and Social Studies (Vol. 40, pp. 268–280). Cambridge: Cambridge University Press.
Piatkowski, M. (2014). “The Warsaw Consensus” – The New European Growth Model (TIGER Working Paper Series 131).
Pouliakas, K., & Sekmokas, M. (2018). Automation, Skills Demand and Adult Learning. In Investing in Europe’s Future: The Role of Education and Skills. Luxembourg: European Investment Bank.
Roaf, J., Atoyan, R., Joshi, B., Krogulski, K., & IMF Staff Team. (2014). 25 Years of Transition: Post-Communist Europe and the IMF. Washington, DC: International Monetary Fund.
Spence, M. (2008). The Growth Report: Strategies for Sustained Growth and Inclusive Development. Washington, DC: World Bank.
Stöllinger, R. (2019). Functional Specialisation in Global Value Chains and the Middle-Income Trap. WIIW Research Reports 441, The Vienna Institute for International Economic Studies, WIIW.
Székely, I., & Buti, M. (2019, June 28). Trade Shocks, Growth, and Resilience: Eastern Europe’s Adjustment Tale. VoxEU, CEPR.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2021 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Gattini, L., Gereben, Á., Kollár, M., Revoltella, D., Wruuck, P. (2021). Towards a New Growth Model in CESEE: Three Challenges Ahead. In: Landesmann, M., Székely, I.P. (eds) Does EU Membership Facilitate Convergence? The Experience of the EU's Eastern Enlargement - Volume I. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-57686-8_3
Download citation
DOI: https://doi.org/10.1007/978-3-030-57686-8_3
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-57685-1
Online ISBN: 978-3-030-57686-8
eBook Packages: Economics and FinanceEconomics and Finance (R0)