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We would like to thank colleagues at the IMF and participants in an internal seminar at the IMF for comments.
The growth accounting framework utilizes the following identity:
dY/Y = αdK/K + βdL/L + dA/A, where the production function takes the form of Y=AKαLβ, and α and β are the elasticity of output with respect to growth of capital and labor. In practice, α and β are approximated by the profit and labor shares in national income, and dA/A (total factor productivity growth) is calculated as a residual.
Between 1989 and 1999, the cumulative increase in GDP ranged from—6 percent in the Czech Republic to 28 percent in Poland (and in Hungary, the Slovak Republic, and Slovenia it was—0.8, 2, and 5.8 percent, respectively).
The fall in employment during transition led to a significant decrease in the participation rate, the ratio of employment to total population. This fall was particularly steep in Hungary: around 15 percent, compared to some 5-8 percent in the other countries. The particularly large fall in employment in Hungary has not led to a relatively large increase in measured unemployment as many laid-off people withdrew from the labor force altogether.
Ideally, these weights would be determined according to the share of capital and labor respectively in GDP. But data on these shares in the CEEC5 is weak. For example, where the share of self-employed in employment is high, as in Poland, the official estimate of profit share in national income is exaggerated. The assumption of 35 and 65 percent simply follows evidence from other countries. As noted in Box 2, however, the overall results are not sensitive to even quite large adjustments in these assumptions.
The 2000 EBRD Transition Report (Chapter 6) highlights a number of ways in which the education systems during the socialist period as well as worker experience during that era badly prepared workers for the market economy, including relatively highly educated workers. It notes that these shortcomings have not yet been overcome and will slow growth.
At the steady state, the capital output ratio will remain constant, and dY/Y=(dA/A)/β+dL/L. As a result, per capita GDP growth at the steady state will be total factor productivity growth over the labor share plus changes in the quality of the labor force.
Fischer and others (1998) estimate that it would take the CEEC5 between 11 and 24 years to catch up with the “low income EU countries” of Greece, Portugal, and Spain.
If the Balassa-Samuelson effects prove to be strong, with corresponding high inflation of non-traded prices, nominal GDP expressed in euros will rise more rapidly towards EU levels. But in the context of significant differences between tradable and non-tradable inflation, convergence of real incomes will only be apparent from income comparisons at PPP rather than market exchange rates.