Friday, July 30, 2010

Convergence in Eastern Europe

Curious about growth success stories in the 2000s (pre-Great Recession), I looked at which countries experienced annualized growth of over 5% in per capita GDP—adjusted by purchasing power parity—in the period from 2000 to 2008.

In my data, hoisted from the World Bank's invaluable World Development Indicators database, there were 38 such countries. 10 of them—Equatorial Guinea, Azerbaijan, Turkmenistan, Angola, Kazakhstan, Tajikistan, Chad, Mongolia, Uzbekistan, and Sudan—were driven in large part by natural resources, and don't reflect any general success in economic growth. Meanwhile, of the remaining 28, fully 14 are in Eastern Europe. Most of the population in this sample is in the remaining 14, especially China, India, Vietnam, and Ethiopia, but the astonishing uniformity of the growth boom in Eastern Europe is still very interesting to consider.

This map shows countries in Europe broken down by their level of per capita GDP growth from 2000 to 2008. There is remarkable geographic concentration: none of the already rich nations of Western and Northern Europe grew at a fast pace, while the Easternmost nations of the old Soviet bloc were the strongest performers of all. Poland and the Czech Republic, meanwhile, didn't grow as quickly as their counterparts to the East, but they started from a relatively high level.

In this region, growth is far from an elusive mystery; decent institutions, stability, and proximity to rich nations seem to have been enough to trigger massive advancement in living standards over the past decade. (And the apparent success of Belarus, the last full autocracy in Europe, even adds a wrinkle to our understanding of "decent institutions".) Investors can now be confident that their assets won't be destroyed through war or political turmoil, and low barriers to trade and movement allow knowledge to spread from advanced nations to developing ones.

Granted, the notion that countries will "converge" in overall productivity clearly can't explain every aspect of growth across the world. Many poor countries remain mired in seemingly intractable poverty, with mutually reinforcing economic and political dysfunction. Yet it seems to have been relatively accurate in Eastern Europe over the last decade.

In the past two years, of course, many of Eastern Europe's formerly high-flying economies have suffered from a severe slump; Latvia and its 20%+ unemployment and collapse in GDP come to mind. This seems, however, to be cyclical rather than structural—countries on the European periphery had prices that needed to come down relative to Western Europe, which was either impossible (for countries using the euro), not attempted (for countries maintaining pegs to the euro or dollar), or the precursor to a crisis of fiscal confidence (for countries like Ukraine that devalued and needed IMF intervention).

It remains unclear how quickly countries will emerge from the wreckage—most are returning to positive growth, albeit not full capacity. Regardless, there's no sign that the decline itself reflected something unsustainable about Eastern Europe's growth, rather than the unfortunate double blow of a monetary adjustment and worldwide recession. Convergence in Europe remains very real.

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