A Second Economic Divide in Europe?

Abstract

The division of Europe in market and centrally planned economies after World War II was associated with an increasing divergence of per capita incomes. While per capita incomes of the present EU members and the other market economies in Europe have converged during the post-war period, the income gap between the market and the planned economies has increased continuously after World War II. Neither the forced accumulation of physical and human capital nor moderate market reforms such as the‘New Economic Mechanism’in Hungary or the‘Perestroika’under Gorbachev in the former Soviet Union did reverse this trend. The realisation of the fact that a convergence of per capita incomes to Western standards was not possible within the framework of state property and centrally planning, was one, if not the driving force behind the collapse of central planning. At the outset of transition, the population in the Central and Eastern European (CEE) countries as well as most economic experts expected that the convergence of economic systems will yield a convergence of per capita incomes. Ten years after the begin of market reforms, the record of transition and economic reforms in Central and Eastern Europe is mixed: While all transition countries experienced a deep decline in output initially, there is only a small group of countries which realised growth rates well above those of the present EU members after the end of the transitional recession. In an other group of countries the income gap to the EU has remained constant, and in a third group the transitional recession has not yet come to an end.