Income Convergence between Central and Eastern Europe and Western Europe Following the Cold War: A Markov Chain Analysis

Abstract

As a result of the Cold War and the isolation of East and West Europe from each other there have been sizeable income disparities between both regions with Eastern Europe ultimately lagging behind significantly. Since the fall of the Soviet Union Eastern European countries sought closer political relations and economic integration with West Europe leading to relative income convergence between both regions and to the formation of regional convergence clubs. This paper studies absolute and relative per capita income convergence between 237 Western and Central and Eastern European regions over the period 1997-2011 using a Markov chain analysis. The results confirm relative income convergence towards income classes between 40-85% and 85-115% of the average per capita income. Furthermore it shows that, hypothetically, on average it will take about 27.5 years for non-EU East European countries, 14.5 years for EU East European countries, and 5 years for Southern EU countries to catch-up with current Western European per capita income levels. In the steady-state 81% of all regions will have at least $45,000 per capita income. However, some of these results may be too optimistic or problematic and are therefore prone to criticism.