As Covid-19 spreads, causing more countries to take counter-measures, Central and Southeast Europe is no exception. ING’s latest report said that collectively it is downgrading the 2020 GDP outlook on the back of virus fears.
(Henk-Jan van der Klis, CC BY-NC-ND)
Convergence is the speed of approaching the European average level of development. One is actual individual consumption. This is a difficult-to-measure data that can contain significant errors compared to another indicator — real per capita income, or real GDP per capita. This is a per capita GDP corrected for differences in price levels by country, expressed as a percentage of the average for the entire European Union.
According to the proclaimed mission, the European Union is committed to economic, social and territorial cohesion, balanced economic growth and upward economic convergence. Convergence trends between Member States have been achieved over the last decades in both the economic and social dimensions. The crisis halted these trends and since 2008 stalling or diverging patterns marked the performance of the European Union Member States. Diverging performances among Member States and increasing inequalities within Member States warrant common concern for various reasons. Firstly, because they contradict the expectation that deepening European integration leads to growing cohesion at national and pan-European level. Secondly, because they may spread the feeling of social injustice and unfairness among citizens, fueling anti-European sentiment and undermining the European project.
The problem of regional disparities in the European Union is a matter of prime economic, political and social importance. All member states are faced with differences in level of development. The diversity of regions from the natural and social aspect can be advantage for a country if these differences are successfully used. These differences, from an economic point of view, could limit the future growth, and in the political dimension could increase instability. The promotion of a balanced regional development can be identified with the promotion of general economic development. By investing significant resources, the European Union seeks to reduce economic differences in its area. Convergence of member states thus has important political and economic implications for European Union.
The data shows how the development distance of each new member country from Central and Southeast Europe (CSE) has changed in relation to the EU average for that indicator. The good news is that all countries except Slovenia have converged from 2007 to 2018. Even the notoriously unsuccessful Croatia has managed to approach the EU average by two percentage points, moving from 61 per cent in 2017 to 63 per cent of the EU average of 2018. However, Croatia has fallen to the second worst position in the list of rankings for 11 years (only Bulgaria is at 50 per cent of the EU average, but Bulgaria is fast progressing — 11 years ago it was 40 per cent). Slovenia can hardly be happy too, because it is a relatively rich country that stagnates at a distance of 87 per cent, although the Czechs are also converging from 82 to 90 per cent of the EU average.
According to the speed of change, there are four countries with low tax burdens, privatization, attracting foreign direct investment, fiscal discipline (at least until recently), institutional progress, improving positions on business and competitiveness levels, public administration reforms. In short — countries that caused the great convergence of their economic systems to the EU’s economy standards (although, in the meantime the worst economic crisis had occurred since World War II). And all of these countries were behind Croatia in 2007 and are now far ahead: Lithuania has converged from 60 to 81 per cent of the EU average, Romania from 43 to 64 per cent, Poland from 53 to 71 per cent, and Latvia from 57 to 79 per cent.
Estonia, Slovakia and Hungary are a special category: they were more developed than Croatia in 2007, or nearly developed as Croatia (like Hungary), and today are far ahead. Moreover, Estonia is on the verge of final accession to the most developed two — Slovenia and the Czech Republic — since it is only the third country of CSE that exceeds the 80 per cent EU development threshold. If we measure the level of development and convergence rates, Croatia is the most convincingly the most unsuccessful country on the list: Bulgaria is less developed but converges rapidly, and Slovenia has not converged but is much more developed.
Neoclassical growth theory predicts long-term convergence. Traditional convergence theory is derived from Roberto Solow’s non-classic model of economic growth (1956), which speaks of savings and population growth as factors that promote capital growth and determine steady growth. However, this model does not explain the cause of ongoing growth that was then present in developed economies. It is therefore necessary to consider the role of technological changes in the model which is capable of explaining long-term economic growth and therefore uses model and beta convergence as a basis for the analysis of regional convergence. There are two concepts of convergence: β (beta) convergence and ζ (sigma) convergence.
According to beta convergence, a less developed economy (nationally or regionally) reaches a more developed economy due to higher growth rates. In other words, beta convergence implies the existence of a negative link between growth rate and initial stage of development. So, beta convergence implies that the poorer regions will grow faster than the rich, until they are caught up in the catching-up process. According to sigma convergence the dispersion of economies (countries or regions) to the degree of development decreases. While beta convergence focuses on detecting a possible catching-up process, sigma convergence simply refers to reducing the differences between regions in time. Sigma convergence is present when there is a reduction in the GDP per capita difference between different regions or states over a given period of time. These two concepts are, of course, closely linked. To measure the presence of sigma convergence, the standard deviation or coefficient of GDP variation per capita is most commonly used. For the group of regions, it is said to be characterized by sigma convergence if the dispersion or the variance of GDP per capita decreases in time, i.e. the differences in GDP per capita between regions are in absolute decline with time, which is proof of convergence. If standard deviation increases over time, the divergence process is effective.
Convergence can be associated with the households purchasing power too. According to the first estimates of the Eurostat, last year, as in 2017, only in ten EU countries the purchasing power of households was above the EU average. According to Eurostat, there are still major differences between countries. The highest level of real per capita consumption (AIC), expressed as purchasing power parity (PPP), was recorded in Luxembourg in 2018, 32 per cent above the EU average. Germany follows the standard about 20 per cent above the EU average. In the next group, Austria, Denmark, Great Britain, the Netherlands, Finland, Belgium, Sweden and France, whose actual per capita consumption, measured by PPS, ranged from about 5-15 per cent above the average. The nearest is Italy, with real per capita consumption, measured by PPP, 2 per cent below the European average. In Ireland, Spain, Lithuania and Cyprus, per capita consumption was 10 per cent below the EU average.
The Czech Republic, Portugal and Malta are a group of real-world per capita countries between 10 and 20 per cent lower than the EU average. Poland, Slovenia, Slovakia, Greece, Estonia, Latvia and Romania, which went up for the second consecutive year, accounted for 20 to 30 per cent lower, with the real per capita consumption of 30 per cent below the EU average. In 2017 it was 32 per cent below the average and in 2016 36 per cent.
In 2018, Croatia, Hungary and Bulgaria made a group of three EU countries with per capita consumption which is more than 30 per cent lower than the European average. In Eurostat, it is estimated that the actual per capita consumption measured in Croatia’s purchasing power parity in 2018 was 37 per cent below the EU average. This represents a slight improvement compared to 2017, when it was 38 per cent below the European average. Hungary also recorded an improvement in per capita consumption in 2018, 36 per cent below the Union average. The year before was 38 per cent lower. The worst is still Bulgaria, with a per capita consumption of 44 per cent below the EU average. Despite this, the country also recorded an improvement compared to the year before, when consumption was 46 per cent below the European average.
Eurostat points out significant differences between countries and in comparison of per capita GDP. Last year GDP per capita in 11 countries was higher than the European average. In the first place, Luxembourg again with GDP per capita two and a half times higher than the EU average. Below is Ireland with almost double the GDP per capita of the average. In the Netherlands, Austria, Denmark, Germany and Sweden, GDP per capita was about a quarter higher than the Union average last year. Belgium and Finland are 15 and 10 per cent above the average, and in the group of GDP per capita above the average, France has exceeded by four per cent. The closest to the average is Malta, whose GDP is two per cent below that level.
A group of countries with GDP per capita up to 10 per cent lower than the average are still Italy, Spain and Portugal. Cyprus, Lithuania, Portugal, Slovenia, Slovakia and Estonia ranked among the 10 to 20 per cent lower per capita GDP than the EU average in 2018. In Poland, Hungary, Latvia and Greece it was about one third or less. Croatia, along with Romania and Bulgaria, is back at the bottom of the chart, with GDP per capita 37 per cent below the EU average. This represents a slight improvement compared to the previous year, when it was 38 per cent below the European average. In the first Eurostat estimates for Romania in 2018, Romania had a slightly better score than Croatia with a per capita GDP of 36 per cent below the European average. The year before was 37 per cent lower. The bottom position is kept by Bulgaria with a per capita GDP of less than half below the Union average.
Vedran Obućina is an analyst and a journalist specializing in the Croatian and Middle East domestic and foreign affairs. He is the Secretary of the Society for Mediterranean Studies at the University of Rijeka and a Foreign Affairs Analyst at The Atlantic Post.