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Introduction: Motivation and analytical framework

To use the terminology of classical growth theory, the period of socialism put the transition countries (TEs) off the path of “convergence” with, or “catching up” to, the mature or developed market economies (DMEs). The simplest illustration of this is the dynamics of per capita output during the socialist period in two transition countries bordering Germany. In 1938, Poland’s per capita GDP was considerably below that of Germany and hence well behind the “technological frontier”, whereas GDP per capita in Czechoslovakia was the same or higher that of Germany and hence close to the frontier. By the late 1980s, productivity and living standards in both countries were lagging far behind their Western neighbor. It was the underperformance of the centrally planned economies, including a virtual stagnation in the 1980s, that motivated the dissatisfaction with central planning and market socialism and the move from plan to market in Central and Eastern Europe and the former USSR. The expectation was that the return to the market would put these countries onto a growth path that would lead eventually to convergence with the mature market economies operating at the world technological frontier.

This paper is about convergence of the transition countries with developed market economies. The term “convergence”, however, has several distinct meanings. The above example refers to convergence as bridging the gap in per capita output between the countries. Such catching-up at the aggregate level, however, may be decomposed into changes (or convergence) at lower levels: convergence in technology and productivity, convergence in economic structure, and convergence in institutions.

Convergence in the broad sense is a concept from the macro growth literature. The neoclassical growth model of Solow (1956) and its successors predict, under certain assumptions and regardless of the initial income level, convergence of a country’s per- capita output to a steady state. In these production function models, the technological level of the economy is captured by a multiplicative productivity or technology parameter, and the steady state income level is determined by the savings/investment rate


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