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The group of emerging European economies in this paper include: Albania, Belarus, Bosnia & Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, FYR, Moldova, Poland, Romania, Russia, Serbia, the Slovak Republic, Turkey and Ukraine.
The region shrunk by an annual average of 5 percent during the first half of the 1990s.
For empirical evidence on the rapid economic integration within Europe in recent years see IMF (2007), Part I. For empirical evidence on positive growth spillovers from integration of emerging economies with more advanced economies see Arora and Vamvakidis (2005).
See IMF (2007), Part II, Chapter 2. Although services include tourism, which is a tradable, this is relevant primarily for Croatia and, to a lesser extent, Turkey, which have large tourism sectors. Services also include outsourcing, which, although tradable, remains a relatively small share in Europe despite rapid expansion in recent years.
This is consistent with Schadler, Mody, Abiad, and Leigh (2006), who find that TFP growth in Central-eastern Europe has been higher than in other emerging economies, including in east Asia and Latin America.
For more details, see Levine and Renelt (1992); Fischer (1993); Barro and Sala-í-Martin (2004); George, Oxley, and Carlaw (2004); Helpman (2004); Aghion and Durlauf (2005); and the Economic Growth Resources website (http://www.bris.ac.uk/Depts/Economics/Growth/, updated by Jonathan Temple).
Southeastern European (SEE) countries include Albania, Bosnia and Herzegovina, Bulgaria, Macedonia, FYR, Romania, and Serbia. Central-eastern European (CEE) countries include the Czech Republic, Hungary, Poland, and the Slovak Republic. The Baltics include Estonia, Latvia, and Lithuania. The CIS countries include Belarus, Russia, Moldova, and Ukraine. Turkey is not included in these regions.
Table 2 includes factors that the literature has found to determine potential economic growth and productivity. Although the statistical and relative economic significance of many of these determinants is still subject to discussion, these factors can indicate the growth prospects of a country or region and provide guidance to policy.
Assuming the euro area is the region to which emerging Europe is converging, the convergence pace of the latter is conditional on its reform progress compared with that of the euro area.
For a detailed discussion and empirical evidence on the foreign direct investment in Southeastern Europe see Demekas, Horváth, Ribakova, and Wu (2005).
The index of economic freedom is an average of a large number of sub-indices, which are grouped as follows: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation (see Table 2). For more details, definitions, and the list of indices within the above groups, see http://www.freetheworld.com/
Causality can be difficult to determine in growth regressions (see for example Temple (2000)). Even though estimation with instrumental variables in the literature has confirmed the robustness of most of the above growth determinants (see for example Barro and Sala-I-Martin (2004)), one has to be cautious and interpret the estimates as broad correlations, which indicate an interaction with growth that may be going both ways.
Taking long-term averages allows for estimates that are not subject to the business cycle.
These results are available from the author.
The dummy variable for Africa is usually negative in growth regressions for earlier decades. The positive estimate in the above specification suggests that African countries have been growing faster than would be expected based on fundamentals in the last ten years.
A dummy variable for Turkey (not included in the above specification) has a statistically significant estimate of 1.7, which is taken into account in the range of potential growth for Turkey in Table 3.
Firm conclusions on the degree of overheating are difficult to draw as the level of potential output is hard to pin down.
There are multiple methodologies to estimate equilibrium current account deficits, with the so-called CGER approach the standard at the IMF. CGER stands for the Consultative Group on Exchange Rate Issues, which was established in the IMF in 1995 to strengthen its capacity to assess current account positions and exchange rate levels. The CGER assessments are based on three complementary approaches: the macroeconomic balance approach, the reduced-form equilibrium real exchange rate approach, and the external sustainability approach. For more details, see Isard and Faruqee (1998); Isard and Kincaid and Fetherston (2001); and IMF (2006). Recent IMF staff reports for emerging European countries have published such estimates.
Net external debt, which adjusts for private sector foreign assets, is considerably lower in most countries. In Latvia, for example, where external debt is the highest in emerging Europe, net debt was about 52 percent of GDP in 2007—the ratio of net short-term debt to foreign reserves was about 98 percent. Although a large share of foreign assets could provide some buffer during external shocks, possible mismatches between asset owners and debtors suggest that there is no immunity.
This methodology assumes no further accumulation of foreign reserves. For an application of this framework to Lithuania, see Leigh (2005).
An exchange rate depreciation is an unlikely scenario in countries with fixed exchange rate regimes in emerging Europe, including Bosnia and Herzegovina, Bulgaria, Estonia, Latvia, Lithuania, and Macedonia, FYR.
See IMF (2008), Chapter 3, for a detailed discussion of the current stance of macroeconomic policies n emerging Europe.