Predicting the GDP growth rates in the CEE-10
The results of our projection are presented in two variants: a low growth (pessimistic) and a high growth (optimistic) scenarios. The words “low”/”high” and “pessimistic”/“optimistic” are used in relation to the growth rates of GDP in the CEE countries. A relatively high growth of GDP in the period 2000–2010, especially if associated by the strengthening of the currencies and reduction in the exchange rate deviation index, should lead to the smaller income differences vis-à-vis Austria. That should reduce the propensity to emigrate generally,- and to Austria as well. Conversely, in the case of relatively lower growth rates of GDP and lower real level of personal income more people will emigrate to find better paid employment abroad. The difference between scenarios is relatively large. Under the optimistic assumption, by the year 2010 the income relation may improve to 30% for Central Europe, 20% for Baltic countries, and 10% for Balkan countries. Under the pessimistic scenario the relations will be, respectively, 25%, 15% and 7%. Higher growth rates under the optimistic scenario are generally linked to the higher saving rates (as a result of more saving-promoting macroeconomic and structural policies, including privatization and restructuring of state-ownef firms), more spending on the human capital development, and the assumed higher degree of the political and social stability (partly due to the faster track towards the EU membership). The assumed rate of the real appreciation of currencies is based on the productivity diffenetials vis-à-vis the EU countries in the tradable sector (higher productivity growth under the optimistic scenario allows for the faster real appreciation).
The macroeconomic forecast is based on the endogenous growth theory, which has been, for some time now, the most popular way of thinking about growth of nations1. The theory links the long-term economic growth mainly to such factors as the human capital development, economic and political stability, economic freedom and the good legal framework for the economic activity, the private entrepreneurship and the growth-supporting policies of the State. The theory broadly predicts the convergence. of the economies at the different levels of development - provided proper policies are implemented in the catching-up countries.
Real convergence, meaning a gradual reduction of GDP gaps between less developed economies (or regions) and the more developed ones, has been observed in the USA (convergence of individual states), Japan (prefectures) - and within the EU (regions). In all these cases the index of convergence was at about 2% level, meaning that over a longer period of time, the growth rate in poor regions is higher than the growth rate in rich regions, and the gap in economic development decreases by an average of 2% annually.
A characteristic feature of the real convergence process is that the growth of a country is the faster, the lower is the development level (obviously, if the right policies are applied). That leads to a slowdown – over time – of the growth rates when the countries approach the level of the developed countries.
The core of the forecasts underlying our two scenarios – i.e. the GDP per capita growth rates - are based on the endogenous growth model of Barro and Sala-i-Martin, adjusted for the specifics of the transition economies. The estimations of the GDP growth rates were based on the cross-country sample of 97 countries, for a 10-years period.
Specifically, the following formula was used for calculating the average yearly growth rates of the per capita GDP in the period 2000-2010:
GDP growth= –0.025 ln GDP-1 +0.0138 ENRsec +0.055 ENRtert +0.058 ln
LEXP
–0.315ln (GDP/HC) +0.06 GEdu/GDP +0.07 Inv/GDP –0.06 G/GDP
–0.03 INSTALecon –0.03 INSTABpol
where:
GDP-1 – GDP per capita level at the beginning of the period (log),
ENRsec – net enrollment rate, secondary education,
ENRtert – net enrollment rate, tertiary education,
LEXP – life expectancy at birth (log),
GDP/HC – GDP to the human capital ratio (log, human capital measured according
to the UNIDO Human development Index, excluding the GDP per capita level),
GEdu/GDP – Government spending on education as % of GDP,
Inv/GDP – investment as % of GDP,
G/GDP – governmental consumption as % of GDP,
INSTALecon – economic instability indicator (measured by the Economic Freedom Index
of the Heritage Foundation)
INSTABpol – political instability indicator (constructed by NOBE).
