A Comparison of the Rates of Growth of Post-Transformation Economies: What Can(Not) Be Expected From GDP?

Abstract

This paper suggests that real GDP is not an appropriate indicator for long-term comparisons of the performance of and post-transformation economies either with developed economies, or one with another, or across different phases of development of a single economy. We analyse the possible reasons why real GDP diverges from the theoretical concept of the objective level of value added adjusted for inflation. These reasons concern real exchange rate appreciation and overestimation of inflation due to quality changes in output after the collapse of central planning. To overcome the shortcomings of real GDP in explaining the true transformation story we develop the concept of comparable real GDP. This concept is calculated from nominal GDP, the exchange rate against the euro, and inflation in the euro area. While the differences between standard real GDP and comparable real GDP are modest and temporary in advanced economies, they are quantitatively and qualitatively significant and persistent in and post-transformation economies. On the basis of the relevant literature we introduce two modifications of comparable real GDP. They account for likely differences in productivity patterns between tradables and non-tradables and between the performance of the export and non-export segments of the economy respectively. We conclude that true convergence is proceeding at a significantly higher pace than real GDP implies and that the Czech economy is converging to the euro area somewhat faster than the Polish economy and much faster than the Hungarian economy.