Causes of Lagging Behind of New Member States of EU: Empirical Analysis by Montgomery Decomposition

We use the method of ideal Montgomery decomposition to explain differences in product per capita in new member states of EU and selected benchmark country of EU5 ? Netherlands ? on differences in total factor productivity (TFP), capital per inhabitant, rate of capacity utilization, rate of employment, average number of hours worked and in human capital. We find that in 2009 average TFP in new member countries reached only 60% of TFP of the Netherlands. Differences in TFP explain almost 80% of differences in product per capita. We investigate the role of technology and of allocative efficiency in low TFP. Our analysis suggests that unless a lag in technology is longer than 20 years, most part of low TFP is due to inferior allocative efficiency and not due to technology.