Are Eastern European Countries Catching Up? Time Series Evidence for Czech Republic, Hungary and Poland

Abstract

The catching up process in Czech Republic, Hungary and Poland is analysed by investigating the integration properties of log-differences in per-capita GDP vs. the EU15 and a Mediterranean country group. We account for structural changes by using unit root tests that allow for two endogenous breaks in the level and the trend. We find that Czech Republic and Hungary are stochastically converging towards the Mediterranean group, while only Czech Republic is stochastically converging towards EU15. Remaining per capita GDP differences are only reduced by deterministic trends. Extrapolating these trends we find that catching up will take about 20 years.

Acknowledgement

This research was supported by the Deutsche Forschungsgemeinschaft though the SFB 649 ‘Ecomomic Risk'.

Notes

¹ The statistic LM _τ has been computed by using a Gauss program provided by Junsoo Lee via the web page http://www.cba.ua.edu/~jlee/gauss

² All data are available from the authors upon request. The raw per capita real GDP series are of yearly frequency. Therefore, we have interpolated the yearly series for each country into a monthly series using the respective monthly index of industrial production. This interpolation has been done with the help of the program ECOTRIM, which is used by Eurostat to compute e.g. quarterly national accounts.

³ Formulating an ARMA model for the stationary series gives very similar estimates of the deterministic terms.

⁴ One has to be careful in interpreting the trend with respect to the EU15, since Hungarian relative income vs. EU15 is not stationary. However, the first difference of the relative income series is stationary. Hence, the trend slope after the last break approximately equals the growth rate differential between Hungary and EU15.

⁵ The difference could be explained by the different sample periods covered. Carvalho and Harvey (2005) stop their analysis in 1997, after which the Mediterranean countries have experienced a large relative growth (compare Fig. 1).