Basic Economic Characteristics and Real Convergence

The ten CEE countries are small open economies.² As a group they amount to about 21 percent of the EU-27 population and 11 percent of the EU-27 total GDP in Purchasing Power Standards (PPS). Figure 1 [ PDF 44.2KB | 1 page ] shows that the smallest among them (Estonia, Latvia, Lithuania, Slovakia, Slovenia, and Bulgaria) are comparable in economic size to Luxembourg; while the Czech Republic, Hungary, and Romania are similar in size to Ireland, and Poland is similar to the Netherlands. By European standards, Luxembourg, Ireland, and the Netherlands are also small open economies.

Trade openness, measured as total exports and imports of goods and services as a percentage of GDP is close to the trade openness of the Euro area in Romania and Poland and much higher in the rest of the CEE countries; see Figure 2 [ PDF 44.2KB | 1 page ].

In 2006, the gross fixed capital formation as percent of GDP ranged from 21.9 percent in Hungary to over 25.0 percent in the Czech Republic, Slovakia, Slovenia, Bulgaria and over 30.0 percent in Estonia and Latvia (Figure 3 [ PDF 41.9KB | 1 page ]).

These investment rates are high compared to the Euro-area average of 21.1 percent. Given the low levels of per capita income in these countries, investment rates are expected to remain high in the foreseeable future.

Over the past decade, the CEE countries experienced a strong process of real convergence to the EU in terms of real GDP per capita and productivity levels. As shown in Figure 4 [ PDF 42.8KB | 1 page ], they grew at much higher rates than the Euro area. The group's average real GDP growth rate was 3.6 percent during 1997-2001, and 5.4 percent during 2002-2006, while the Euro area grew at 2.8 percent and 1.5 percent, respectively. The three Baltic countries (Estonia, Latvia, Lithuania) experienced the highest growth rates over the past decade. Average annual growth rates were 6.2 percent in Estonia and Latvia and 5.0 percent in Lithuania during 1997-2001, and climbed to 9.0 percent in Estonia and Latvia and 8.0 percent in Lithuania during 2002- 2006. Significantly, over the past five years, real growth remained vigorous in the CEE countries even though growth in the Euro area slowed down.

Figure 5 [ PDF 42.8KB | 1 page ] shows a significant negative correlation between the level of GDP per capita in 1997 and the average annual growth rates over 1997-2006, as countries with low initial per capita income levels grew faster than richer countries. The three Baltic countries, as well as Bulgaria and Romania, which have the lowest levels of per capita income, are expected to continue to post the highest growth rates among the EU countries.

Over the past decade, labor productivity growth, measured as the increase in real GDP per person employed, has been much higher in EU-10 in comparison with the Euro area. The highest growth rates were again in the three Baltic countries (Figure 6 [ PDF 44.1KB | 1 page ]). There is a clear tendency for productivity levels to converge as countries with low initial levels of productivity enjoyed higher growth rates in comparison to countries with higher levels and the Euro area (Figure 7 [ PDF 44.1KB | 1 page ]).

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