Productivity and Income Convergence in Transition: Theory and Evidence from Central Europe

The paper examines the evolution of income per capita for a sample of high-income transition countries in the period 1991-2007. The analysis focuses on the dynamics of income per capita convergence throughout the period. We review patterns of income dispersion in Central Europe in a historical perspective and examine the evolution of convergence and divergence in a distinct perspective. We present the model of beta convergence by augmenting the basic Solow-Swan model with human capital accumulation and total fertility rate. Our evidence suggests that high-income transition countries experienced a period of robust convergence as the income per capita differential, relative to the U.S level, diminished substantially over time. In addition, the increase in the stock of human capital contributed substantially to the speed of real convergence.