Towards a New Growth Model in CESEE: Three Challenges Ahead

Abstract

We revisit the factors of convergence and growth in Central, Eastern and South Eastern Europe (CESEE). While the key elements that were driving pre-crisis convergence – rapid export growth, propelled by low wages, capital inflows and technology import, and catalysed by the EU accession – gave a strong impetus to economic progress, these factors have been weakened after the crisis due to changes in the labour market, demographics and slowdown of capital inflows. As a consequence, potential growth in CESEE economies decelerated. To maintain an adequate speed of convergence, a prospective “new growth model” is emerging as a candidate to be the driving force of growth in CESEE. The key elements of this growth model should be based on home-grown innovation to increase productivity, policies supporting the preservation and development of the productive labour force, and a system of financial intermediation that supports domestic savings.